As filed with the Securities and Exchange Commission on December 28, 2006
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
WELLSFORD REAL PROPERTIES, INC.
(Exact name of registrant as specified in its charter)
Maryland | 6798 | 13-3926898 | ||
(State or Other Jurisdiction of Incorporation or Organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification No.) |
535 Madison Avenue, 26th Floor
New York, New York 10022
(212) 838-3400
(Address, including zip
code, and telephone number, including area code, of registrants principal
executive offices)
Jeffrey H. Lynford
Chief Executive Officer
Wellsford Real Properties, Inc.
535 Madison Avenue, 26th Floor
New York, New York 10022
(212) 838-3400
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Stephen M. Wiseman, Esq. King & Spalding LLP 1185 Avenue of the Americas New York, New York 10036 (212) 556-2100 |
Renée E. Frost, Esq. Bryan Cave LLP 1290 Avenue of the Americas New York, New York 10104 (212) 541-2000 |
|
Approximate date of commencement of proposed sale to the public: At the effective time of the merger referred to herein.
If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.
CALCULATION OF REGISTRATION FEE
Title of each class of securities to be registered |
Amount to be registered |
Proposed maximum offering price per share |
Proposed maximum aggregate offering price(2) |
Amount of registration fee(2) |
Common stock, par value $0.02 per share |
6,795,266 (1) | N/A | $14,890,377.00 | $1,593.27 |
(1) | This registration statement relates to common stock, par value $0.02 per share, of Wellsford Real Properties, Inc. (Wellsford) issuable to holders of common stock, Series A preferred stock, Series B preferred stock, Series C preferred stock and Series D preferred stock of Reis,
Inc. (Reis) in the proposed merger of Reis with and into Reis Services LLC, a wholly-owned subsidiary of Wellsford. The amount of Wellsford common stock to be registered is based on the estimated number of shares that are expected to be issued pursuant to the merger. |
(2) | Estimated solely for purposes
of calculating the registration fee required by Section 6(b) of
the Securities Act of 1933 (the Securities Act)
and calculated pursuant to Rules 457(f)(2) and 457(f)(3) of the Securities
Act based on the aggregate book value of Reis securities that may be
cancelled in the merger, less the cash consideration to be paid in
the merger. Reis is a private company and no market exists for its
securities. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act, or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this joint proxy statement/prospectus is not complete and may be changed. Wellsford may not sell these securities until the registration statement filed with the Securities and Exchange Commission, of which this joint proxy statement/prospectus is a part, is declared effective. This joint proxy statement/prospectus is not an offer to sell these securities and Wellsford is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to Completion, dated December 28, 2006
Special Meetings of Stockholders
Merger Proposed Your Vote Is Very Important
To the Stockholders of Wellsford Real Properties, Inc. and Reis, Inc.:
We are pleased to inform you that the boards of directors of Wellsford Real Properties, Inc., which we refer to as Wellsford, and Reis, Inc., which we refer to as Reis, have each approved the strategic merger of Reis with and into Reis Services, LLC, a limited liability company and a wholly-owned subsidiary of Wellsford, which we refer to as Merger Sub, and for periods following consummation of the merger, is referred to as Reis, except as expressly provided otherwise in this joint proxy statement/prospectus. Upon consummation of the merger, Merger Sub will be the surviving company and will remain a wholly-owned subsidiary of Wellsford. References to the combined company mean Wellsford and Reis together. If the merger is consummated, Wellsford intends to change its name to Reis, Inc. and Reis Services, LLC will remain the name of the surviving company in the merger.
At the effective time of the merger, Reis stockholders will be entitled to receive, in the aggregate, approximately $34,579,414 in cash and 4,237,673 shares of newly issued Wellsford common stock, not including shares to be issued to Wellsford Capital, a wholly-owned subsidiary of Wellsford. Reis stockholders, other than Wellsford Capital, Lloyd Lynford, and Jonathan Garfield, the Chief Executive Officer and Executive Vice President, respectively, of Reis, may elect to receive 100% of their merger consideration in shares of Wellsford common stock, subject to the limitation that the aggregate merger consideration paid to all Reis stockholders, other than Wellsford Capital, consists of 50% cash and 50% shares of Wellsford common stock. Reis stockholders who do not make an election will be entitled to receive 50% of their merger consideration in cash and 50% in shares of Wellsford common stock. Any additional shares of Wellsford common stock issued to electing stockholders as merger consideration will reduce the number of shares of Wellsford common stock to be received by each of Lloyd Lynford and Mr. Garfield and will increase their cash consideration, subject to the limitations described in this joint proxy statement/prospectus. The merger agreement does not provide for any of the Reis stockholders, other than Lloyd Lynford and Mr. Garfield, to receive more than 50% of their merger consideration in cash. Reis stockholders who elect to receive 100% of their merger consideration in shares of Wellsford common stock may ultimately receive a portion of their merger consideration in cash depending upon the elections of all Reis stockholders entitled to make an election. The cash portion of the merger consideration is to be funded in part by a loan extended through the Bank of Montreal, as administrative agent, to Reis, which we refer to as the Bank Loan.
Through its wholly-owned subsidiary, Wellsford Capital, Wellsford currently holds shares of Reis convertible preferred stock equivalent to an approximate 23% ownership interest in Reis. Pursuant to the merger agreement, Wellsford Capital will be entitled to receive 100% of its merger consideration (approximately 2,557,592 shares) in shares of Wellsford common stock and will not be entitled to receive any portion of the merger consideration in cash. The shares of Reis convertible preferred stock held by Wellsford Capital will not be taken into account in determining the allocation of the merger consideration to all other Reis stockholders, but will be converted solely into the right to receive Wellsford common stock in the merger. In accordance with Maryland corporate law, the shares of Wellsford common stock that will be held by Wellsford Capital after the consummation of the merger cannot be voted and will not be considered outstanding for quorum purposes.
If the merger is consummated, Wellsford will terminate its previously adopted plan of liquidation, which we refer to as the Plan, but will continue with its program to dispose of its remaining real estate assets over a period of years through development and/or sale.
Special meetings of Wellsfords and Reiss stockholders are being held to approve, among other things, the issuance of Wellsford common stock, the adoption of the merger agreement and the approval of the certificate of amendment to Reiss amended and restated certificate of incorporation. Information about these meetings and the merger is contained in this document. We encourage you to read carefully this entire joint proxy statement/prospectus, including the annexes.
The Wellsford board of directors has approved the merger agreement and the transactions contemplated by it and recommends that the Wellsford stockholders vote FOR the proposal to approve the issuance of the Wellsford common stock, which is necessary to effect the merger. The Reis board of directors has approved and declared advisable the merger agreement and the transactions contemplated by it and recommends that the Reis stockholders vote FOR the proposals to adopt the merger agreement, which is necessary to effect the merger, and to approve the amendment to its amended and restated certificate of incorporation, which is a condition to the consummation of the merger.
For a discussion of the risks relating to the merger, see Risk Factors beginning on page 23.
On ________, 2007, the closing sales price of Wellsford common stock, which trades under the symbol WRP on the American Stock Exchange, which we refer to as the AMEX, was $____ per share.
Your vote is very important. Whether or not you plan to attend your companys special meeting, please take the time to ensure your shares are voted by completing and mailing the enclosed proxy card.
Jeffrey H. Lynford |
Lloyd Lynford | ||
Chief Executive Officer |
Chief Executive Officer | ||
Wellsford Real Properties, Inc. | Reis, Inc. |
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the merger described in this joint proxy statement/prospectus or the securities to be issued pursuant to the merger or determined that this joint proxy statement/prospectus is accurate or complete. Any representation to the contrary is a criminal offense.
This joint proxy statement/prospectus is dated ________, 2007 and is first being mailed to the stockholders of Wellsford and Reis on or about ________, 2007.
WELLSFORD REAL PROPERTIES, INC.
535 Madison Avenue, 26th Floor
New York, New York 10022
(212) 838-3400
www.wellsford.com
Notice of Special Meeting of Stockholders
Time:
10:00 a.m., Eastern Standard Time, on __________, 2007
Place:
King & Spalding LLP
1185 Avenue of the Americas
34th Floor
New York, New York 10036
(212) 556-2100
Purpose:
| To approve the issuance
of Wellsford common stock pursuant to the Agreement and Plan of Merger,
dated as of October 11, 2006, by and among Wellsford, Merger Sub
and Reis, a copy of which is attached as Annex A to this joint proxy
statement/prospectus, pursuant to which Reis will merge with and into
Merger Sub and will become a wholly-owned subsidiary of Wellsford.
We refer to this as Proposal No. 1. |
| To approve any motion to
adjourn the Wellsford special meeting to another time or place to permit,
among other things, further solicitation of proxies if necessary to
establish a quorum or to obtain additional votes in favor of the foregoing
proposal. We refer to this as Proposal No. 2. |
This joint proxy statement/prospectus, including the annexes, contains further information with respect to the business to be transacted at the Wellsford special meeting.
Record Date:
You may vote if you were a Wellsford stockholder of record on __________, 2007.
Votes Required:
To approve Proposal No. 1 above, the affirmative vote of a majority of the total votes cast by the holders of Wellsford common stock at the Wellsford special meeting (in person or by proxy), assuming there is a quorum represented at the Wellsford special meeting, is required.
To approve Proposal No. 2 above, the affirmative vote of a majority of the shares of Wellsford common stock present in person or represented by proxy and entitled to vote at the Wellsford special meeting, whether or not a quorum is represented, is required.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE WELLSFORD SPECIAL MEETING, PLEASE PROMPTLY COMPLETE, SIGN, DATE AND RETURN YOUR PROXY CARD IN THE ENCLOSED ENVELOPE.
By order of the Board of Directors of Wellsford,
__________, 2007 | James J. Burns |
New York, New York | Secretary |
Notice of Special Meeting of Stockholders
Time: |
10:00 a.m., Eastern Standard Time, on ____________, 2007
Place: |
Reis, Inc. 530 Fifth Avenue 5th Floor New York, New York 10036 |
Purpose: |
| To adopt the Agreement
and Plan of Merger, dated as of October 11, 2006, by and among
Wellsford, Merger Sub and Reis, a copy of which is attached as Annex A
to this joint proxy statement/prospectus, providing for the merger
of Reis with and into Merger Sub. Approval of this proposal will also
constitute approval of the transactions contemplated by the Agreement
and Plan of Merger including, without limitation, the appointment of
stockholder representatives and certain indemnification obligations
relating to them. We refer to this as Proposal
No. 1. |
| To approve the certificate
of amendment to Reiss amended and restated certificate of incorporation
to eliminate the requirement to mail to the holders of Reis preferred
stock a written notice of the merger at least 45 days prior to its
consummation and to clarify the consideration that the holders of
Reis preferred stock will be entitled to receive in connection with
the merger. We refer to this as Proposal No. 2. |
| To approve any motion to
adjourn the Reis special meeting, if necessary, to permit, among other
things, further solicitation of proxies to obtain additional votes
in favor of the foregoing proposals. We refer to this as Proposal
No. 3. |
| To conduct any other business that properly comes before the Reis special meeting, including any adjournment or postponement of the Reis special meeting. |
Record Date: |
You may vote if you were a Reis stockholder of record on ______, 2007.
Each holder of Reis common stock and Reis preferred stock has the right to dissent from the merger and seek appraisal of his or her shares. In order to assert appraisal rights, Reis stockholders must comply with the requirements of Delaware law as described under The MergerAppraisal Rights beginning on page 72.
Votes Required: |
To approve Proposal No. 1 above, the affirmative vote of holders of a majority in voting power of the outstanding shares of (1) Reis common stock and Reis preferred stock, on an as converted to common stock basis and voting together as a single class, (2) Reis Series C preferred stock, on an as converted to common stock basis and voting as a separate class, and (3) Reis Series D preferred stock, on an as converted to common stock basis and voting as a separate class, is required.
To approve Proposal No. 2 above, the affirmative vote of holders of a majority in voting power of the outstanding shares of (1) Reis common stock and Reis preferred stock, on an as converted to common stock basis and voting together as a single class, (2) Reis Series A preferred stock, Series B preferred stock, Series C preferred stock and Series D preferred stock, on an as converted to common stock basis and voting together as a single class, and (3) Reis Series A preferred stock, Series B preferred stock, Series C preferred stock, and Series D preferred stock, each on an as converted to common stock basis and with each series voting as a separate class, is required.
To approve Proposal No. 3 above, the affirmative vote of holders of a majority in voting power of the Reis common stock and Reis preferred stock, on as converted to common stock basis and voting together as a single class, present in person or by proxy at the Reis special meeting, is required.
YOUR VOTE IS IMPORTANT. WHETHER OR NOT YOU PLAN TO ATTEND THE REIS SPECIAL MEETING, PLEASE PROMPTLY COMPLETE, SIGN, DATE AND RETURN YOUR PROXY CARD IN THE ENCLOSED ENVELOPE.
By order of the Board of Directors of Reis, | ||||
New York, New York |
Jonathan Garfield | |||
______________, 2007 |
Secretary | |||
WHO CAN HELP ANSWER YOUR QUESTIONS
If you would like additional copies of this joint proxy statement/prospectus, or if you have questions about either the Wellsford special meeting or the Reis special meeting, or if you need assistance voting, you should contact:
If you are a Wellsford stockholder, you may contact:
MacKenzie Partners, Inc.
105 Madison Avenue, 14th Floor
New York, NY 10016
Telephone: (800) 322-2885
Email: proxy@mackenziepartners.com
Wellsford Real Properties, Inc.
535 Madison Avenue, 26th Floor
New York, NY 10022
Attention: Investor Relations
Telephone: (212) 838-3400
Email: wrpny@Wellsford.com
If you are a Reis stockholder, you may contact:
Reis, Inc.
530 Fifth Avenue
New York, NY 10036
Attention: Investor Relations
Telephone: (212) 921-1122, extension 444
Email: investorrelations@Reis.com
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WF-1 | |
RF-1 | |
Annex A Agreement and Plan of Merger | |
Annex B Fairness Opinion of Lazard Frères & Co. LLC | |
Annex C Fairness Opinion of Houlihan, Lokey, Howard & Zukin Financial Advisors, Inc. | |
Annex D Section 262 of the General Corporation Law of the State of Delaware | |
Annex E Amendment to Reiss Amended and Restated Certificate of Incorporation |
iv
QUESTIONS AND ANSWERS ABOUT THE MERGER
Q: | What is the proposed transaction for which I am being asked to vote? |
A: | Wellsford and Reis, which sometimes are referred to together as we, are proposing to merge Reis with and into Merger Sub, a limited liability company and a wholly-owned subsidiary of Wellsford formed for the purpose of the merger. Merger Sub will be the surviving entity and
will remain a wholly-owned subsidiary of Wellsford. Following the merger, Wellsford intends to change its name to Reis, Inc. |
Wellsford stockholders are being asked to vote to approve the issuance of shares of Wellsford common stock in the merger. |
Reis stockholders are being asked to vote to adopt the merger agreement and to approve the amendment of Reiss amended and restated certificate of incorporation. Pursuant to the terms of the merger agreement, both the approval of the amendment to Reiss amended and
restated certificate of incorporation and adoption of the merger agreement must be obtained in order for the merger to be consummated. |
Q: | Why am I receiving this document? |
A: | We are delivering this document to you, because it is serving as both a joint proxy statement of Wellsford and Reis and a prospectus of Wellsford. It is a joint proxy statement, because it is being used by our respective boards of directors to solicit the proxies of our respective
stockholders. It is a prospectus, because Wellsford is offering shares of its common stock in exchange for shares of Reis common stock and Reis preferred stock, which we refer to collectively as the Reis capital stock, if the merger is consummated. |
Q: | What do I need to do now? |
A: | After carefully reading and considering the information contained in this joint proxy statement/prospectus, please submit a proxy to vote your shares as soon as possible so that your shares will be represented at your companys special meeting. Please follow the instructions set
forth on the proxy card or on the voting instruction form provided by the record holder if your shares are held in the name of your broker or other nominee. |
Q: | If my shares of Wellsford common stock are held in street name by a broker or other nominee, will my broker or nominee vote my shares for me? |
A: | If you hold your shares of Wellsford common stock in street name and do not provide voting instructions to your broker or other nominee, your shares will not be voted on any proposal on which your broker or other nominee does not have discretionary authority to vote. If you
are a Wellsford stockholder, your broker or other nominee does not have discretionary authority to vote on the issuance of Wellsford common stock in the merger. Accordingly, your broker or other nominee will vote your shares held by it in street name with respect to these
matters only if you provide instructions to it on how to vote. You should follow the directions your broker or other nominee provides. |
Q: | What vote of Reis stockholders is required to adopt the merger agreement and to approve the amendment to Reiss amended and restated certificate of incorporation? |
A: | To adopt the merger agreement, the affirmative vote of the holders of a majority in voting power of the outstanding shares of (1) Reis common stock and preferred stock, on an as converted to common stock basis and voting together as a single class, (2) Reis Series C preferred
stock, on an as converted to common stock basis and voting as a separate class, and (3) Reis Series D preferred stock, on an as converted to common stock basis and voting as a separate class, is required. |
To approve the amendment to Reiss amended and restated certificate of incorporation, the affirmative vote of holders of a majority in voting power of the outstanding shares of (1) Reis common stock and preferred stock, on an as converted to common stock basis and voting
together as a single class, (2) Reis |
1
Series A preferred stock, Series B preferred stock, Series C preferred stock and Series D preferred stock, on an as converted to common stock basis and voting together as a single class,
and (3) Reis Series A preferred stock, Series B preferred stock, Series C preferred stock, and Series D preferred stock, each on an as converted to common stock basis and with each series
voting as a separate class, is required. |
Q: | Have any Reis stockholders agreed to vote their shares in favor of the proposals to adopt the merger agreement and to approve the amendment to Reiss amended and restated certificate of incorporation? |
A: | Yes. Lloyd Lynford and Jonathan Garfield, the Chief Executive Officer and Executive Vice President, respectively, of Reis have agreed, pursuant to a voting agreement described elsewhere in this joint proxy statement/prospectus, to vote their shares of Reis capital stock in favor
of the proposals to adopt the merger agreement and to approve the amendment to Reiss amended and restated certificate of incorporation. In addition, Wellsford Capital, Jeffrey Lynford, a director of Wellsford, and Edward Lowenthal, a director of both Wellsford and Reis, are
expected to vote the shares of Reis capital stock that they own or control in favor of these proposals. The table below presents the voting power held or controlled by each of Lloyd Lynford, Mr. Garfield, Jeffrey Lynford, Mr. Lowenthal, and Wellsford Capital: |
Stockholder |
Reis Common Stock |
Reis Series A Preferred Stock* |
Reis Series B Preferred Stock* |
Reis Series C Preferred Stock* |
Reis Series D Preferred Stock* |
Reis Series A, B, C and D Preferred Stock* |
Reis Common Stock and Series A, B, C and D Preferred Stock* |
|||||||||||||||
Lloyd Lynford and Jonathan Garfield |
84.4 | % | | % | | % | | % | 1.7 | % | | %** | 37.2 | % | ||||||||
Wellsford Capital |
| % | 51.1 | % | 51.1 | % | 30.4 | % | 31.5 | % | 41.4 | % | 23.2 | % | ||||||||
Jeffrey Lynford and Edward Lowenthal |
5.9 | % | | % | | % | 0.5 | % | 1.0 | % | 0.2 | % | 2.7 | % | ||||||||
Lloyd Lynford, Jonathan Garfield, Edward Lowenthal, Jeffrey Lynford and Wellsford Capital, collectively |
90.3 | % | 51.1 | % | 51.1 | % | 30.9 | % | 34.2 | % | 41.6 | % | 63.1 | % |
* | On an as converted to common stock basis |
** | Denotes an amount that is less than 1/10th of 1% |
Consequently, your vote is very important. Although Lloyd Lynford, Mr. Garfield, Jeffrey Lynford, Mr. Lowenthal and Wellsford Capital hold a significant portion of the voting power of Reis capital stock, they do not hold sufficient voting power either to adopt the merger
agreement or to approve the amendment to Reiss amended and restated certificate of incorporation by the requisite vote without additional shares of Reis capital stock voting in favor of the proposals. |
Q: | What vote of Wellsford stockholders is required to approve the issuance of Wellsford common stock necessary to effect the merger? |
A: | The affirmative vote of a majority of the total votes cast by the holders of Wellsford common stock at the Wellsford special meeting (in person or by proxy) is required to approve the issuance of the Wellsford common stock to Reis stockholders in the merger, assuming that there
is a quorum represented at the Wellsford special meeting. |
Q: | What if I dont vote? |
A: | If you are a Wellsford stockholder and attend the special meeting but do not vote, either in person or by proxy, or you submit a proxy but abstain from voting on either or both proposals, you will be counted in determining whether a quorum exists, but your failure to vote or
abstention will have no effect on the |
2
vote with respect to the proposal(s) on which you abstain, unless there is not a quorum for the meeting, in which case, it will have the effect of a vote against the adjournment. If you do
not attend the meeting and do not submit a proxy, you will not be considered present for purposes of determining whether a quorum exists and your shares will have no effect on the vote
with respect to either of these proposals. If a proxy is returned without indication as to how to vote, the returned proxy will grant the individuals named as proxies the discretionary
authority to vote the shares represented by the proxy as to all proposals. |
If you are a Reis stockholder and you fail to submit a proxy or otherwise fail to appear at the Reis special meeting to vote on the proposals to adopt the merger agreement or approve the amendment to the amended and restated certificate of incorporation of Reis, it will have the
same effect as a vote against each of these matters. If you submit a proxy but do not indicate in your proxy how you want your shares to be voted on these proposals the shares represented by the proxy will be counted as a vote in favor of these proposals. If you submit a proxy and
indicate that you are abstaining from voting, your proxy will have the same effect as a vote against these proposals. |
Q: | Can I change my vote after I have delivered my proxy or voting instruction card? |
A: | Yes. You can change your vote at any time before your proxy is voted at your companys special meeting. You can do this in one of the following ways: |
| by sending a notice of revocation to the corporate secretary of either Wellsford (if you are a Wellsford stockholder) or Reis (if you are a Reis stockholder and have not executed a voting agreement), as applicable; |
| by sending a completed proxy card bearing a later date than your original proxy; or |
| by attending your companys special meeting and voting in person. Your attendance alone will not revoke any proxy. |
If you choose either of the first two methods, you must take the described action no later than the beginning of the special meeting. If your Wellsford or Reis shares are held in an account at a broker or other nominee, you should contact your broker or other nominee to change
your vote. |
Q: | Should I send in my stock certificates with my proxy card? |
A: | No. Please DO NOT send your stock certificates with your proxy card. If you are a holder of Reis common stock or Reis preferred stock you have received, together with this joint proxy statement/prospectus, a form of election allowing you to elect to receive the merger
consideration to which you will be entitled 100% in shares of Wellsford common stock instead of receiving your merger consideration 50% in cash and 50% in shares of Wellsford common stock, subject to the adjustments as described in the merger agreement and this joint
proxy statement/prospectus. The process for making this election is described in the answer to the question immediately below and elsewhere in this joint proxy statement/prospectus. If you intend to make an election, you should carefully review and follow the instructions set
forth in the form of election and return it accompanied by the certificates representing your shares of Reis capital stock, duly endorsed in blank or in another form acceptable for transfer on the books of Reis. |
If you are a Wellsford stockholder, you will keep your existing shares of Wellsford common stock, which will remain outstanding and unchanged following the merger. |
Q: | If I am a Reis stockholder, when must I elect whether I would prefer to receive the merger consideration to which I am entitled 100% in shares of Wellsford common stock instead of receiving the merger consideration 50% in cash and 50% in shares of Wellsford common
stock? |
A. | If you are a Reis stockholder and wish to elect to receive the merger consideration to which you will be entitled 100% in shares of Wellsford common stock pursuant to the merger agreement, and subject to the adjustments described in this joint proxy statement/prospectus, the
election date is expected to be |
3
__________, 2007, which is the second business day prior to the date that Reis estimates will be the date of the Reis special meeting. If the closing date of the merger is to be more than
five business days after the date of the Reis special meeting, then the election date will be extended and announced in a press release delivered to Dow Jones News Service, which date will
be at least five business days following the date of the press release. Wellsford must receive your form of election, which you received together with this joint proxy statement/prospectus,
on or before 5:00 p.m., Eastern Standard Time, on the election date in order to give effect to the election, at the address provided on the election form. |
Q: | What will happen to Wellsford if the proposed merger is not consummated? |
A: | Wellsford will continue with the Plan as previously announced. |
Q: | Is Wellsford holding back any of the merger consideration payable to Reis stockholders in an escrow account? |
A: | Yes. Of the merger consideration to be paid as of the effective date of the merger, Wellsford will deliver to an escrow agent $2,593,456 in cash and 317,825 shares of Wellsford common stock to be held in one escrow account, and $1,500,000 in cash and 183,824 shares of
Wellsford common stock to be held in a second escrow account, in each case to be distributed pursuant to the terms and conditions of the merger agreement. The amounts in the escrow accounts may be used to offset claims, if any, that Wellsford could have for indemnification
under the terms and conditions of the merger agreement. Except for claims based on fraud, Reis stockholders will not be liable for indemnification claims in excess of these two escrow accounts. In addition, $250,000 in cash and 30,637 shares of Wellsford common stock of the
aggregate merger consideration will be held in a third escrow account for the purposes described below. |
Q: | Who will represent the interests of Reis stockholders with respect to the escrow accounts and other matters after the effective time of the merger? |
A: | Pursuant to the merger agreement, Lloyd Lynford and Jonathan Garfield, each a stockholder, director and executive officer of Reis who, together hold approximately 37.2% of Reis capital stock (on an as converted to common stock basis), will be appointed as stockholder
representatives and will be authorized to make all decisions and to take all actions for and on behalf of all the Reis stockholders with respect to their rights and obligations under the merger agreement, including, without limitation, claims on the escrow accounts and
indemnification rights. All decisions made and actions taken by the stockholder representatives will be binding on all of the Reis stockholders. The stockholder representatives will be indemnified by all Reis stockholders for all costs and expenses incurred in discharging their
obligations on behalf of the Reis stockholders, other than Wellsford Capital, which indemnification obligations are secured by a third escrow account consisting of $250,000 in cash and 30,637 shares of Wellsford common stock. The liability of the Reis stockholders with respect
to these obligations is not limited to the amount held in the third escrow account. |
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SUMMARY
This summary highlights selected information contained in this joint proxy statement/prospectus and may not contain all the information that is important to you. Wellsford and Reis urge you to read carefully this joint proxy statement/prospectus in its entirety, including the annexes.
Unless the context otherwise requires, references in this joint proxy statement/prospectus to Wellsford are to Wellsford Real Properties, Inc. and its subsidiaries. References to Wellsford common stock are to Wellsfords common stock, par value $0.02 per share; references to Reis common stock are to Reiss common stock, par value $0.01 per share; references to Reis Series A preferred stock, Series B preferred stock, Series C preferred stock and Series D preferred stock are to Reiss Series A preferred stock, Series B preferred stock, Series C preferred stock and Series D preferred stock, in each case, par value $0.01 per share; references to the Reis preferred stock are to all of the series of Reis preferred stock, collectively; and references to Reis capital stock are to the Reis common stock and the Reis preferred stock, collectively.
The Companies
Wellsford Real Properties, Inc.
535 Madison Avenue, 26th Floor
New York, New York 10022
(212) 838-3400
Wellsford was formed as a Maryland corporation on January 8, 1997, as a corporate subsidiary of Wellsford Residential Property Trust, which we refer to as the Residential Property Trust, to operate as a real estate merchant banking firm to acquire, develop, finance and operate real properties and invest in private and public real estate companies. On May 30, 1997, the Residential Property Trust merged with Equity Residential, which we refer to as EQR. Immediately prior to that merger, the Residential Property Trust contributed certain of its assets to Wellsford and Wellsford assumed certain of its liabilities. Immediately after the contribution of assets to Wellsford and immediately prior to that merger, the Residential Property Trust distributed to its common stockholders all of its outstanding shares of Wellsford.
On May 19, 2005, Wellsfords board of directors approved the Plan and on November 17, 2005, Wellsfords stockholders ratified the Plan. The Plan contemplates the orderly sale of each of Wellsfords remaining assets, which are either owned directly or through Wellsfords joint ventures, the collection of all outstanding loans from third parties, the orderly disposition or completion of construction of development properties, the discharge of all outstanding liabilities to third parties and, after the establishment of appropriate reserves, the distribution of all remaining cash to stockholders. The Plan also permits Wellsfords board of directors to acquire more Reis shares and/or discontinue the Plan without further stockholder approval.
After the approval of the Plan by the stockholders, Wellsford completed the sale of its largest asset, the three residential rental phases of its Palomino Park project for $176,000,000 and on December 14, 2005, Wellsford made the initial liquidating distribution of $14.00 per common share, aggregating approximately $90,597,000, to its stockholders.
If the proposed merger with Reis is consummated, Wellsford will terminate the Plan, but will continue with its program to dispose of its remaining real estate assets through development and/or sale. If the merger is not consummated, Wellsford will not terminate the Plan and will continue to operate under it. The merger represents a significant change in strategy for Wellsford which may be unsuccessful. See Risk FactorsRisk Factors Relating to the Merger, The MergerImpact on Wellsfords Plan of Liquidation and Wellsfords Business beginning on pages 23, 44 and 131, respectively.
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Reis, Inc. |
530 Fifth Avenue
New York, New York 10036
(212) 921-1122
Reis is a leading provider of commercial real estate market information to investors, lenders and other professionals in the debt and equity capital markets. Reiss proprietary database has been developed over the past 25 years and contains detailed historical and current information on over 250,000 properties in over 1,800 neighborhoods and 81 metropolitan markets in the U.S. This database contains information on approximately 20 billion square feet of space, consisting primarily of 7.9 million apartment units, 5.4 billion square feet of office space, and 4.2 billion square feet of retail space and information on select industrial properties throughout the U.S.
Founded in 1980, Reis provides web-based information products and related analytical tools using this database. Reis products support a variety of strategic business activities, including loan origination, due diligence, asset management, appraisals and dispositions by sale or securitization. Reiss flagship product, Reis Subscriber Edition, or Reis SE, incorporates hundreds of building level data points including occupancy rates, rents, rent discounts, rent allowances, lease terms and operating expenses. Since launching the flagship product in February 2001, Reis has approximately 14,800 users at 600 subscribing organizations. Reiss customers download more than 35,000 reports each month for use in deal books, presentations and research reports and include investment banks, insurance companies, lenders and real estate investment trusts, or REITs.
Reis employs a large group of real estate market researchers. Researchers survey properties on an ongoing basis, and also track property sales and new construction activities in each of the covered markets. Information is subject to rigorous validation and quality assurance procedures. Reis economists synthesize this data into quarterly advisory reports, and develop forecasts at the neighborhood and city level which are available to subscribers. Reis data is cited frequently in The Wall Street Journal and real estate industry publications.
Merger Sub |
535 Madison Avenue, 26th Floor
New York, New York 10022
(212) 838-3400
Merger Sub was formed as a Maryland limited liability company, with Wellsford as its sole member, on October 2, 2006 and exists solely for the purpose of entering into the merger agreement with Wellsford and Reis and consummating the merger. Upon completion of the merger, Merger Sub will be the surviving company and will remain a wholly-owned subsidiary of Wellsford. Merger Sub has not carried on any activities to date other than those incident to its formation and to the signing of the merger agreement.
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The Merger
A copy of the Agreement and Plan of Merger, dated as of October 11, 2006, which we refer to as the merger agreement, is attached as Annex A to this joint proxy statement/prospectus. The following section summarizes the proposed merger and related transactions. We encourage you to read the entire merger agreement carefully because it is the principal document governing the merger. Statements made in this joint proxy statement/prospectus with respect to the terms and conditions of the merger and related transactions are qualified by reference to the merger agreement and the other agreements attached as exhibits to the registration statement on Form S-4, of which this joint proxy statement/prospectus is a part.
Consideration to be Received in the Merger by Reis Stockholders |
At the effective time of the merger, Reis stockholders will be entitled to receive, in the aggregate, approximately $34,579,414 in cash and 4,237,673 shares of newly issued Wellsford common stock, not including shares to be issued to Wellsford Capital. Reis stockholders, other than Wellsford Capital, Lloyd Lynford, and Jonathan Garfield, the Chief Executive Officer and Executive Vice President, respectively, of Reis, may elect to receive 100% of their merger consideration in shares of Wellsford common stock, subject to the limitation that the aggregate merger consideration paid to all Reis stockholders, other than Wellsford Capital, consists of 50% cash and 50% shares of Wellsford common stock. Reis stockholders who do not make an election will be entitled to receive 50% of their merger consideration in cash and 50% in shares of Wellsford common stock. The merger agreement does not provide for any of the Reis stockholders, other than Lloyd Lynford and Mr. Garfield, to receive more than 50% of their merger consideration in cash. Reis stockholders who elect to receive 100% of their merger consideration in shares of Wellsford common stock may ultimately receive a portion of their merger consideration in cash depending upon the elections of all Reis stockholders entitled to make an election. Lloyd Lynford and Mr. Garfield will receive a portion of their merger consideration in shares of Wellsford common stock and a portion in cash depending upon the elections of all other Reis stockholders. Any additional shares of Wellsford common stock paid to electing stockholders as merger consideration will reduce the number of shares of Wellsford common stock to be received by each of Lloyd Lynford and Mr. Garfield as merger consideration (and increase their respective cash consideration in an amount equal to the value of the stock consideration that each of them would have otherwise been entitled to receive). However, the merger agreement provides that each of Lloyd Lynford and Mr. Garfield may receive a maximum of 2/3 of his merger consideration in cash. Wellsford Capital will be entitled to receive 100% of its merger consideration in shares of Wellsford common stock and will not be entitled to receive any portion of its merger consideration in cash. If no Reis stockholders elect to receive 100% of their merger consideration in shares of Wellsford common stock, Lloyd Lynford and Mr. Garfield will receive 50% of their merger consideration in cash and 50% in shares of Wellsford common stock. Only merger consideration to be received by Lloyd Lynford, Mr. Garfield, and the Reis stockholders electing to receive 100% of their merger consideration in shares of Wellsford common stock, will be subject to adjustment.
Under the terms of the merger agreement and subject to the election rights and the terms and limitations described above (including that each Reis stockholder (other than Lloyd Lynford and Mr. Garfield) receive at least 50% of their merger consideration in shares of Wellsford common stock), at the effective time of the merger:
| each outstanding share of Reis common stock will be converted into the right to receive either 1.0 share of Wellsford common stock or $8.16 in cash; |
| each outstanding share of Reis Series A preferred stock will be converted into the right to receive either 56.75 shares of Wellsford common stock or $463.11 in cash; |
| each outstanding share of Reis Series B preferred stock will be converted into the right to receive either 33.33 shares of Wellsford common stock or $272.00 in cash; |
| each outstanding share of Reis Series C preferred stock will be converted into the right to receive either 25.20 shares of Wellsford common stock or $205.65 in cash; and |
| each outstanding share of Reis Series D preferred stock will be converted into the right to receive 31.06 shares of Wellsford common stock or $253.42 in cash. |
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Wellsford will not issue any fractional shares of Wellsford common stock in the merger but will pay cash instead of issuing fractional shares that Reis stockholders otherwise would have received. In no event will the aggregate merger consideration exceed $34,579,414 in cash and 6,795,266 shares of Wellsford common stock to be issued to Reis stockholders, including the approximately 2,557,592 shares of Wellsford common stock to be issued to Wellsford Capital. Upon consummation of the merger, an aggregate of $4,343,456 in cash and 532,286 shares of Wellsford common stock otherwise payable to the Reis stockholders (other than Wellsford Capital) will be held in three escrow accounts. See The Merger AgreementIndemnification beginning on page 95 and The Merger AgreementOther AgreementsEscrow Agreement beginning on page 102.
For a more complete discussion of consideration to be received in the merger, including the election and allocation procedures, see The Merger AgreementConsideration to be Received in the Merger beginning on page 80 and The Merger AgreementElections beginning on page 82.
At the effective time of the merger, all options granted under the Reis 1999 Stock Option Plan and all outstanding options granted outside of this plan to purchase shares of Reis common stock, whether vested or unvested, will be converted into the right to receive a cash payment from Reis aggregating $4,714,386.
Wellsfords Reasons for the Merger |
Wellsfords management and board of directors has determined that the merger is in the best interests of Wellsford and its stockholders for numerous reasons, including but not limited to:
| the belief that the continuing influx of domestic and international capital into U.S. commercial real estate and significant growth in the issuance of collateralized real estate debt instruments and the re-emergence of REITs as a popular equity investment has caused current
and comprehensive real estate market information to become an increasingly valuable tool for institutional investors, and the belief that investors desire access to this data on a daily basis in order to make informed buy/sell investment or lending decisions
aggregating billions of dollars and that Reis has a prominent position in this marketplace as a high quality data provider, making the acquisition of Reis a mechanism to provide additional incremental value for the Wellsford stockholders; |
| the experience that Wellsford has gained from its continuing investment in Reis since 1998 and the expectation that Reiss demonstrated performance since 2003 of revenue growth and increasing margins will continue; |
| the Reis founders would retain a significant ownership interest in the combined company; |
| the belief that the merger enhances Wellsfords ability to maximize the value of its investment in Reis because: |
| the merger offers Wellsford an opportunity to preserve and enhance the approximately $20,000,000 recorded value (liquidation basis) for its investment in Reis because this amount represents a value that would be retained by Wellsfords stockholders (with no discount
for minority investment or illiquidity) which is based on several bids submitted to Reis by third parties; if a transaction with a third party did not close, absent the merger, Wellsford could be required to sell its investment in Reis at a substantially reduced value reflecting
its illiquid minority position in a private company; and |
| the exchange ratio negotiated for the merger reflects price multiples that are appropriate for private company transactions in the real estate information sector, but as a public company the applicable price multiples could increase over time, as indicated by trading
multiples of companies comparable to Reis. |
| Wellsford will be acquiring the approximate 77% of Reis that it does not own for approximately $34,579,414 in cash and 4,237,673 shares of newly issued Wellsford common stock (valued at $8.16 per share), thereby transforming its approximate 23% passive ownership
interest in Reis into a 100% ownership interest for approximately $9,600,000 of its existing cash (exclusive of transaction costs and proceeds from the Bank Loan); |
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| the approximate $10,000,000 cash position of the combined company (after reserving an additional $10,000,000 to meet minimum liquidity requirements for certain of Wellsfords indebtedness) following the merger may provide funds necessary to acquire and invest in
additional capacity for operations and other potential acquisitions; |
| if the combined company satisfies the applicable requirements with respect to the survival and use of net operating losses, or NOLs, some portion of Wellsfords NOLs could effectively provide additional funding by reducing taxes from future operations and these NOLs
might not otherwise have a value for Wellsford stockholders; and |
| by closing the merger in the first quarter of 2007, Wellsfords stockholders would be able to receive the benefit of growth in Reiss value since the execution of the merger agreement. |
For a complete description of Wellsfords reasons for the merger, see The MergerWellsford Board of Directors Recommendation and Reasons for the Merger beginning on page 45.
Reiss Reasons for the Merger |
Reiss management and board of directors believe that the merger presents a unique opportunity to create liquidity and potentially to maximize value for Reis stockholders. A review of Reiss business, operations, assets, financial condition and operating results have led to the conclusion that financing and access to capital is required in order to continue growth. To that end, Wellsford is attractive as a merger partner given its current cash resources and potential access to additional cash flow through the sale of its real estate assets, its increased access to capital markets as a result of its status as a public company, and the fact that Reis stockholders will be entitled to receive 50% of the merger consideration in cash and 50% in shares of Wellsford common stock, thereby providing some immediate liquidity while also allowing Reis stockholders to continue to participate in any future growth and any increase in value of the combined company. For a complete description of Reiss reasons for the merger, see The MergerReis Board of Directors Recommendation and Reasons for the Merger beginning on page 46.
Impact on Wellsfords Plan of Liquidation |
Wellsford stockholders ratified the Plan on November 17, 2005. If the proposed merger is consummated, the Plan will be terminated. The Plan contemplates the orderly sale of each of Wellsfords remaining assets, which are either owned directly or through Wellsfords joint ventures, the collection of all outstanding loans from third parties, the orderly disposition or completion of construction of development properties, the discharge of all outstanding liabilities to third parties and, after the establishment of appropriate reserves, the distribution of all remaining cash to stockholders. The Plan also permits Wellsfords board of directors to acquire more Reis shares and/or discontinue the Plan without further stockholder approval.
If Wellsfords stockholders approve the issuance of additional shares in connection with the Reis acquisition and the proposed merger is consummated, then Wellsford will change its basis of accounting from a liquidation basis, adopted as of the close of business on November 17, 2005, back to a going-concern basis in accordance with generally accepted accounting principles. Reis will be the primary continuing business activity and the development and/or sale of the remaining real estate properties will be a continuing but diminishing activity as homes and/or land is sold. Under the liquidation basis of accounting, assets are stated at their estimated net realization value and liabilities are stated at their estimated settlement amounts. Wellsfords assets and liabilities will be presented on a going concern basis of accounting with assets being reported at the lower of historical cost, as adjusted for activity, or market value as of the date of termination of the Plan.
The termination of the Plan would result in the retention by the combined entity of Wellsfords cash balances (after the payment of transaction costs and the cash portion of the merger consideration that is not being funded by the Bank Loan) and subsequent cash flow from the sales of residential development assets, after operating costs, for working capital and re-investment purposes. Such cash would not be distributed to Wellsford stockholders in the form of a liquidating distribution as had been contemplated under the Plan.
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Wellsford has determined that, as a consequence of the consummation of the proposed merger and termination of the Plan, it would be necessary to recharacterize a portion of the December 14, 2005 cash distribution of $14.00 per share from what may have been characterized as a return of capital for Wellsford stockholders at that time to taxable dividend income. Wellsford estimates that $1.15 of the $14.00 per share cash distribution will be recharacterized as taxable dividend income. See Risk FactorsRisk Factors Relating to the MergerThe merger represents a significant change in strategy for Wellsford which may be unsuccessful on page 23. For further discussion of the U.S. Federal income tax treatment of the December 2005 distribution, see Material U.S. Federal Income Tax Consequences beginning on page 76.
Recommendations of the Boards of Directors Relating to the Merger |
Wellsford |
The Wellsford board of directors has approved the merger and the merger agreement. It recommends that holders of Wellsford common stock vote FOR the issuance of shares of Wellsford common stock in the merger.
For a more complete description of Wellsfords reasons for the merger and the recommendation of the Wellsford board of directors, see The MergerWellsford Board of Directors Recommendation and Reasons for the Merger beginning on page 45.
Reis |
The Reis board of directors has declared advisable and adopted and approved the merger and the merger agreement and recommends that Reis stockholders vote FOR the adoption of the merger agreement and FOR the approval of the amendment to its amended and restated certificate of incorporation.
For a more complete description of Reiss reasons for the merger and the recommendation of the Reis board of directors, see The MergerReis Board of Directors Recommendation and Reasons for the Merger beginning on page 46.
Opinions of Financial Advisors |
Wellsford |
On October 11, 2006, Lazard Frères & Co. LLC, which we refer to as Lazard, rendered its oral opinion to Wellsfords board of directors, which Lazard subsequently confirmed in writing by delivery of its written opinion, dated October 11, 2006, that, as of that date and based upon and subject to the assumptions, qualifications, limitations and other matters described in its written opinion, the aggregate merger consideration payable in connection with the merger was fair to Wellsford from a financial point of view.
For a more complete description, see The MergerOpinion of Financial Advisor to the Wellsford Board of Directors beginning on page 49. See also Annex B of this joint proxy statement/prospectus for the full text of Lazards written opinion, dated October 11, 2006, to Wellsfords board of directors, which sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Lazard in preparing its opinion.
Reis |
On October 11, 2006, Houlihan Lokey Howard & Zukin Financial Advisors, Inc., which we refer to as Houlihan Lokey, rendered its oral opinion to Reiss board of directors, which Houlihan Lokey subsequently confirmed in writing by delivery of its written opinion, dated October 11, 2006, that, as of that date and based upon and subject to the assumptions, qualifications, limitations and other matters described in its written opinion, the merger consideration to be received by the holders of Reis common stock (other than Wellsford Capital, and treating Reis preferred stock on an as converted to common stock basis) in the merger was fair to them from a financial point of view.
For a more complete description, see The MergerOpinion of Financial Advisor to the Reis Board of Directors beginning on page 56. See also Annex C of this joint proxy statement/prospectus for the full text
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of Houlihan Lokeys written opinion, dated October 11, 2006, to Reiss board of directors, which sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion.
Reasons for the Amendment of Reiss Amended and Restated Certificate of Incorporation |
Reiss amended and restated certificate of incorporation requires Reis to mail to the holders of Reis preferred stock written notice of certain events not less than 45 days prior to the consummation of certain transactions, including a merger. The proposed amendment provides that no such notice will be required with respect to the merger, but will not affect this requirement with respect to any other transaction to which it would apply.
The proposed amendment will also clarify Article Fourth, I.B, Section 6 of Reiss amended and restated certificate of incorporation. The proposed amendment clarifies that holders of Reis preferred stock will be entitled to receive consideration in connection with the merger that would have been payable to them if the Reis preferred stock had been converted into Reis common stock prior to the merger and that this consideration will be subject to adjustment and all escrow, indemnification and other obligations applicable to the consideration that will be paid to Reis stockholders pursuant to the merger agreement. This summary of the proposed amendment is qualified in its entirety by reference to the full text of the proposed amendment, which is attached to this joint proxy statement/prospectus as Annex E. For a more complete description of the reasons for the amendment to Reiss amended and restated certificate of incorporation, see The MergerAmendment to Reiss Amended and Restated Certificate of Incorporation beginning on page 66.
Directors and Executive Officers Following the Merger |
After consummation of the proposed merger, it is contemplated that the board of directors of Wellsford will be composed of ten members, including the six existing Wellsford directors, as well as Lloyd Lynford, Jonathan Garfield, and another two individuals who have not been identified at this time, but who will meet the appropriate independence standards.
Pursuant to both the merger agreement and employment agreements among Wellsford, Merger Sub, and each of Lloyd Lynford and Mr. Garfield that will become effective as of the effective time of the merger, Lloyd Lynford will serve as Chief Executive Officer and President of Wellsford and Merger Sub and Mr. Garfield will serve as the Executive Vice President of Wellsford and Merger Sub. Each employment agreement has a three-year term, which commences on the closing date of the merger. Jeffrey Lynford will remain as Chairman of the board of directors of Wellsford. Before the effective time of the merger, Wellsford expects to enter into employment agreements, or amended employment agreements, as applicable, with Jeffrey Lynford, Mark Cantaluppi, Wellsfords Chief Financial Officer and a Vice President, and certain other senior officers currently employed by Wellsford or Reis.
For a more complete discussion of the management of Merger Sub and Wellsford, including expected directors and senior management, see The MergerInterests of Wellsford and Reis Directors and Executive Officers in the Merger beginning on page 67.
Interests of Wellsford and Reis Directors and Executive Officers in the Merger |
Wellsford |
In considering the recommendation of the Wellsford board of directors with respect to issuing shares of Wellsford common stock in connection with the merger and the other matters to be acted upon by Wellsford stockholders at the Wellsford special meeting, Wellsford stockholders should be aware that certain members of the board of directors and executive officers of Wellsford have interests in the merger that may be different from, or in addition to, interests they may have as Wellsford stockholders. For example, Edward Lowenthal and Jeffrey Lynford, two of Wellsfords directors, are direct or indirect stockholders of Reis. Since the third quarter of 2000, Mr. Lowenthal has represented Wellsfords approximate 23% ownership interest in Reis by serving on the board of directors of Reis.
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Jeffrey Lynford is the brother of Lloyd Lynford, the Chief Executive Officer and a stockholder of Reis. See Wellsford Special MeetingCertain Relationships and Related Transactions beginning on page 123.
For a further discussion, see The MergerInterests of Wellsford and Reis Directors and Executive Officers in the Merger and Wellsford Special MeetingCertain Relationships and Related Transactions beginning on pages 67 and 123, respectively.
Reis |
In considering the recommendation of the Reis board of directors with respect to adopting the merger agreement, Reis stockholders should be aware that certain members of the Reis board of directors and executive officers, as well as several other members of Reis senior management, have interests in the merger that may be different from, or in addition to, interests they may have as Reis stockholders. For example, following the effective time of the merger, Lloyd Lynford and Jonathan Garfield will serve on the board of directors and will be executive officers of Wellsford and Merger Sub. Lloyd Lynford and Mr. Garfield have entered into or will be entering into, effective as of the time of the merger, certain agreements with Wellsford and Merger Sub, including a registration rights agreement and employment agreements. In addition, certain of Reiss directors and all of Reiss executive officers hold options to purchase shares of Reis common stock, which options will convert to a right to receive cash payments at the effective time of the merger. Also, as described above, Edward Lowenthal is a member of the board of directors of Wellsford and Reis (representing Wellsfords ownership interest in Reis) and Lloyd Lynford is the brother of Jeffrey Lynford, the Chairman and Chief Executive Officer of Wellsford.
For a further discussion, see The MergerInterests of Wellsford and Reis Directors and Executive Officers in the Merger beginning on page 67.
Regulatory Matters |
Under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which we refer to as the Hart-Scott-Rodino Act, and the related rules, the merger may not be consummated until certain information and materials have been furnished to the Antitrust Division of the U.S. Department of Justice, which we refer to as the Antitrust Division, and the applicable waiting period has been terminated or has expired.
Wellsford and Reis filed the required notification and report forms under the Hart-Scott-Rodino Act with the Antitrust Division on November 15, 2006, and received notice from the Antitrust Division on November 27, 2006, that early termination of the applicable waiting period had been granted.
For a more complete discussion of regulatory matters relating to the merger, see The MergerRegulatory Approvals Required for the Merger beginning on page 71.
Conditions to Consummation of the Merger |
Each partys obligation to effect the merger is subject to the satisfaction or waiver of various conditions, including the following:
| the stockholders of Wellsford must approve the issuance of shares of Wellsford common stock in connection with the merger and the stockholders of Reis must adopt the merger agreement and approve the amendment to Reiss amended and restated certificate of
incorporation; |
| there must not be any action by any governmental entity or the existence of any law or regulation challenging or preventing the merger; |
| each of the parties must have performed in all material respects each of its covenants and obligations contained in the merger agreement to be performed prior to the effective time of the merger, and the representations and warranties of each party contained in the merger
agreement must generally be true and correct except as would not in the aggregate have a material adverse effect on the party making the applicable representation; |
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| counsel to each party must have rendered a legal opinion stating that the merger will qualify as a reorganization under the Internal Revenue Code of 1986, which we refer to as the Code; |
| the Securities and Exchange Commission, which we refer to as the SEC, must have declared effective the registration statement covering the Wellsford common stock issuable in the merger; and |
| no more than 5% of the total outstanding shares of Reis common stock and Reis preferred stock (on an as converted to common stock basis, together as a single class), will be subject to appraisal under Section 262 of the DGCL. |
For a more complete discussion of the conditions to the merger, see The Merger AgreementPrincipal Conditions to Consummation of the Merger beginning on page 92.
Timing of the Merger |
The merger is expected to be consummated in the first quarter of 2007, subject to the receipt of necessary regulatory approvals and the satisfaction or waiver of other closing conditions.
For a discussion of the timing of the merger, see The Merger AgreementClosing and Effective Time of the Merger beginning on page 80.
Termination of the Merger |
The merger agreement may be terminated by Wellsford or Reis before consummation of the merger under the circumstances specified in the merger agreement, including, but not limited to, if a change of control of Wellsford occurs prior to the consummation of the merger. The merger agreement provides that if it is terminated under specified circumstances, (1) Reis may be required to pay a termination fee to Wellsford and to reimburse Wellsford for its out-of-pocket expenses related to the merger up to a specified amount, and (2) Wellsford may be required to reimburse Reis for certain expenses related to obtaining the Bank Loan.
See The Merger AgreementTermination Events and Termination Fees beginning on page 94 for a discussion of the circumstances under which the parties may terminate the merger agreement and under which expenses and a termination fee will be required to be paid.
Appraisal Rights |
Record holders of Reis capital stock who comply with the applicable requirements of Delaware law will be entitled to seek an appraisal of the fair value of their shares of Reis capital stock in connection with the merger. Wellsford stockholders are not entitled to appraisal rights.
This joint proxy statement/prospectus constitutes notice to holders of Reis capital stock of their right to exercise appraisal rights.
For a more complete description of the appraisal rights and procedures, see The MergerAppraisal Rights beginning on page 72. For the full text of Section 262 of the General Corporation Law of the State of Delaware, which we refer to as the DGCL, see Annex D.
Accounting Treatment |
Wellsford will account for the merger, only to the extent of the interests in Reis being acquired, under the purchase method of accounting for business transactions as Wellsford is the acquiror for accounting purposes in accordance with accounting principles generally accepted in the U.S., or GAAP.
Material U.S. Federal Income Tax Consequences |
The merger is intended to qualify as a reorganization within the meaning of Section 368(a) of the Code. The merger is conditioned on, among other things, the receipt by Wellsford and Reis of a legal opinion from their respective counsel, to the effect that the merger will constitute a reorganization within the meaning of Section 368(a) of the Code and that each of Wellsford and Reis will be a party to such reorganization as described in and pursuant to Section 368(b) of the Code.
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Assuming the merger qualifies as a reorganization, (1) a Reis stockholder that receives only Wellsford common stock in the merger generally will not recognize any gain or loss, and (2) a Reis stockholder that receives Wellsford common stock and cash in the merger generally will recognize gain (but not loss) in an amount not to exceed the amount of cash received.
Tax matters are very complicated and the consequences of the merger to any particular stockholder will depend on that stockholders particular facts and circumstances. You are urged to consult your own tax advisor to determine your own tax consequences from the merger.
For a more complete description of the material U.S. Federal income tax consequences of the merger, including a discussion of certain consequences to Wellsford stockholders that would result from Wellsfords termination of the Plan in connection with the merger, see Material U.S. Federal Income Tax Consequences beginning on page 76.
Comparison of Stockholder Rights |
Currently, the rights of Reis stockholders are governed by Delaware law. Upon consummation of the merger, Reis stockholders will become stockholders of Wellsford and their rights will be governed by Maryland law. Stockholder rights under Maryland and Delaware law are different. In addition, the articles of amendment and restatement and bylaws of Wellsford contain provisions that are different from the amended and restated certificate of incorporation and by-laws of Reis.
For a summary of certain differences between the rights of stockholders of Wellsford and Reis under the laws of the states of Maryland and Delaware, respectively, and the articles of amendment and restatement and bylaws of Wellsford and the amended and restated certificate of incorporation and by-laws of Reis, respectively, see Comparison of Rights of Stockholders of Wellsford and Reis beginning on page 201.
Voting |
Wellsford has entered into a voting agreement with Lloyd Lynford and Jonathan Garfield pursuant to which they have agreed to vote their shares of Reis capital stock in favor of the approval of the amendment to Reiss amended and restated certificate of incorporation and the adoption of the merger agreement and all actions that could reasonably be expected to facilitate, or are in furtherance of, the merger and other transactions contemplated by the merger agreement. Each of them also agreed to waive his rights of appraisal, pursuant to the DGCL or otherwise, with respect to the merger. The voting agreement does not limit Lloyd Lynfords or Mr. Garfields actions as directors of Reis. The voting agreement will terminate if the merger agreement is terminated.
See The Merger AgreementOther AgreementsVoting Agreement beginning on page 101.
Additionally, Wellsford Capital holds approximately 23% of the voting power of Reis capital stock, on an as converted to common stock basis, and it is expected that it will vote its shares of Reis preferred stock in favor of the proposals to adopt the merger agreement and to approve the amendment to Reiss amended and restated certificate of incorporation.
See Questions and Answers about the Merger beginning on page 1.
As of November 30, 2006, directors and executive officers of Wellsford and their affiliates owned approximately 9% of the shares of Wellsford common stock outstanding on that date. To Wellsfords knowledge, the directors and executive officers of Wellsford intend to vote their shares of Wellsford common stock in favor of the issuance of Wellsford common stock pursuant to the merger agreement.
Lock-up Agreement |
In connection with the consummation of the merger, Lloyd Lynford and Jonathan Garfield will enter into a lock-up agreement with Wellsford, pursuant to which each will agree for a period of nine months beginning at the effective time of the merger, among other things, not to sell (with certain limited exceptions and subject to certain conditions), any shares of Wellsford common stock without the prior written consent of Wellsford. The lock-up agreement also provides that Lloyd Lynford and Mr. Garfield may not exercise,
14
during the lock-up period, their registration rights (as more fully described below) with respect to any Wellsford common stock.
See The Merger AgreementOther AgreementsLock-up Agreement beginning on page 102.
After the expiration of the lock-up period, Lloyd Lynford and Mr. Garfield will be subject to other restrictions on resale in compliance with securities laws. See The MergerRestrictions on Sales of Shares of Wellsford Common Stock Received in the Merger beginning on page 71.
The Registration Rights Agreement |
As an inducement to Lloyd Lynford and Jonathan Garfield to enter into the voting agreement and the lock-up agreement, Wellsford will enter into a registration rights agreement, effective as of the effective time of the merger, pursuant to which Wellsford will grant to each of them rights, under certain circumstances and subject to various conditions, to (1) demand that Wellsford prepare a shelf registration statement or other registration statement covering the shares of Wellsford common stock that each receives in the merger and (2) have the shares of Wellsford common stock that each receives in the merger included in certain registration statements prepared and filed by Wellsford for its own account or the account of third parties. Lloyd Lynford and Mr. Garfield may not exercise the rights described in clause (1) until the third anniversary of the effective date of the Registration Rights Agreement.
See The Merger AgreementOther AgreementsRegistration Rights Agreement beginning on page 103.
Listing of Wellsford Common Stock |
Shares of Wellsford common stock are currently listed on the AMEX under the symbol WRP. Wellsford has agreed to use its reasonable best efforts to cause the shares of Wellsford common stock to be issued in the merger to be authorized for listing on the AMEX. Wellsford has also agreed to use its reasonable best efforts to cause the Wellsford common stock to be approved for listing on the NASDAQ Stock Market LLC, which we refer to as NASDAQ, as soon as practicable after the consummation of the merger. When the Wellsford common stock has been approved for listing on NASDAQ, Wellsford will delist its common stock from the AMEX. On ________, 2007, the last trading day before the date of this joint proxy statement/prospectus, the closing sale price of Wellsford common stock on the AMEX was $____ per share.
See The Merger AgreementListing of Wellsford Common Stock beginning on page 96.
15
Matters to be Considered at the Special Meetings
Wellsford | Wellsford stockholders will be asked to vote on the following proposals: |
| to approve the issuance of Wellsford common stock pursuant to the merger agreement, a copy of which is attached as Annex A to this joint proxy statement/prospectus, pursuant to which Reis will merge with and into
Merger Sub and will become a wholly-owned subsidiary of Wellsford; and |
| to approve any motion to adjourn the Wellsford special meeting to another time or place to permit, among other things, further solicitation of proxies if necessary to establish a quorum or to obtain additional votes in
favor of the foregoing proposal. |
Recommendation of Wellsfords Board of Directors: |
The Wellsford board of directors recommends that Wellsford stockholders vote to approve both of the proposals set forth above, each of which is more fully described under Wellsford Special Meeting
beginning on page 109. |
Reis | Reis stockholders will be asked to vote on the following proposals: |
| to adopt the merger agreement (if approved, this approval will constitute approval of the transactions contemplated by the merger agreement); |
| to approve the certificate of amendment to Reiss amended and restated certificate of incorporation to eliminate the requirement to mail to the holders of Reis preferred stock a written notice of the merger at least 45
days prior to its consummation and to clarify the consideration that the holders of Reis preferred stock will be entitled to receive in connection with the merger; |
| to approve any motion to adjourn the Reis special meeting, if necessary, to permit, among other things, further solicitation of proxies to obtain additional votes in favor of the foregoing proposals; and |
| to conduct any other business that properly comes before the Reis special meeting, including any adjournment or postponement of the Reis special meeting. |
Recommendation of Reiss Board of Directors: |
The Reis board of directors recommends that Reis stockholders vote to approve all of the proposals set forth above, each of which is more fully described under Reis Special Meeting beginning on page 125. |
16
Market Prices and Dividends
Stock Prices |
The table below presents the closing sales price per share of Wellsford common stock, which trades on the AMEX under the symbol WRP. These prices are presented on two dates:
| October 10, 2006, the date immediately before the public announcement of the signing of the merger agreement; and |
| _________, 2007, the latest practicable date before the date of this joint proxy statement/prospectus. |
Wellsford Common Stock |
||||
October 10, 2006 |
$ | 7.43 | ||
, 2007 |
$ |
We urge you to obtain current market quotations for Wellsford common stock. We cannot give any assurance as to the future prices or markets for Wellsford common stock.
Reiss capital stock is not listed for trading on any exchange or automated quotation service.
Dividends |
Wellsford |
Wellsford made its initial liquidating distribution, pursuant to the Plan, of $14.00 per share on December 14, 2005. It did not declare or distribute any other dividends during 2006, 2005 or 2004. Wellsford does not currently intend to declare or distribute any dividends after the consummation of the merger. All decisions regarding the declaration and payment of dividends will be at the discretion of Wellsfords board of directors and will be evaluated from time to time by the board in light of Wellsfords financial condition, earnings, cash flows, growth prospects, funding requirements, applicable law and other factors that Wellsfords board of directors deems relevant.
Reis |
Reis did not declare or distribute any dividends on any shares of Reis capital stock during 2006, 2005 or 2004.
See Market Prices and Dividend Information beginning on page 105.
17
Selected Historical Consolidated Financial Data of Wellsford
The following tables set forth selected historical consolidated financial data for Wellsford and should be read in conjunction with Wellsfords consolidated financial statements and the notes related to those financial statements and the Wellsfords BusinessWellsford Managements Discussion and Analysis of Financial Condition and Results of Operations, both of which are included as separate sections of this joint proxy statement/prospectus. As further described in Footnotes 1 and 2 in the accompanying consolidated financial statements of Wellsford, also included in this joint proxy statement/prospectus, the information set forth below is not necessarily indicative of the results of future operations. Wellsford adopted the liquidation basis of accounting effective as of the close of business on November 17, 2005. Information prior to that date is presented on the going concern basis of accounting.
(amounts in thousands, except per share data) |
Consolidated Statement of Changes in Net Assets (Liquidation Basis) |
Summary Consolidated Statement of Operations Data (Going Concern Basis) (A) | |||||||||||||||||||||||
For the Nine Months Ended September 30, |
For the Period November 18 to December 31, |
For the Nine Months Ended September 30, |
For the Period January 1 to November 17, |
For the Years Ended December 31, |
|||||||||||||||||||||
2006 | 2005 | 2005 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||||||||||||
Net assets in liquidation beginning of period |
$ | 56,569 | $ | 146,889 | |||||||||||||||||||||
Distributions to stockholders (B) |
| (90,597 | ) | ||||||||||||||||||||||
Changes in net real estate assets under development, net of minority interest and estimated income taxes |
1,748 | | |||||||||||||||||||||||
Provision for option cancellation reserve |
(4,227 | ) | | ||||||||||||||||||||||
Change in option cancellation reserve due to market price fluctuations |
848 | | |||||||||||||||||||||||
Exercise of stock options |
| 56 | |||||||||||||||||||||||
Operating income |
1,273 | 221 | |||||||||||||||||||||||
Changes in net assets in liquidation |
(358 | ) | (90,320 | ) | |||||||||||||||||||||
Net assets in liquidation end of period |
$ | 56,211 | $ | 56,569 | |||||||||||||||||||||
Revenues |
$ | 12,570 | $ | 14,710 | $ | 27,649 | $ | 35,602 | $ | 30,512 | $ | 40,166 | |||||||||||||
Costs and expenses (C) (D) |
(20,169 | ) | (23,623 | ) | (37,580 | ) | (37,903 | ) | (33,750 | ) | (45,559 | ) | |||||||||||||
Income (loss) from joint ventures (E)(F)(G) |
11,515 | 11,850 | (23,715 | ) | (34,429 | ) | (209 | ) | 4,564 | ||||||||||||||||
Minority interest benefit (expense) |
109 | 172 | 88 | 85 | 43 | (283 | ) | ||||||||||||||||||
Income (loss) before income taxes, Convertible Trust Preferred Securities and discontinued operations |
4,025 | 3,109 | (33,558 | ) | (36,645 | ) | (3,404 | ) | (1,112 | ) | |||||||||||||||
Income tax (expense) benefit (G) |
(70 | ) | (91 | ) | 130 | (7,135 | ) | 1,322 | (513 | ) | |||||||||||||||
Convertible Trust Preferred Securities distributions, net of tax benefit of $720 in 2002 and 2001 (D) |
| | | (2,099 | ) | (1,380 | ) | (1,380 | ) | ||||||||||||||||
Income (loss) from continuing operations |
3,955 | 3,018 | (33,428 | ) | (45,879 | ) | (3,462 | ) | (3,005 | ) | |||||||||||||||
Income
from discontinued operations, net of
taxes (H) |
| | 725 | 20 | 90 | 280 | |||||||||||||||||||
Net income (loss) |
$ | 3,955 | $ | 3,018 | $ | (32,703 | ) | $ | (45,859 | ) | $ | (3,372 | ) | $ | (2,725 | ) | |||||||||
Per share amounts, basic and diluted: |
|||||||||||||||||||||||||
Income (loss) from continuing operations |
$ | 0.61 | $ | 0.47 | $ | (5.17 | ) | $ | (7.11 | ) | $ | (0.53 | ) | $ | (0.42 | ) | |||||||||
Income from discontinued operations (H) |
| | 0.11 | | 0.01 | 0.04 | |||||||||||||||||||
Net income (loss) |
$ | 0.61 | $ | 0.47 | $ | (5.06 | ) | $ | (7.11 | ) | $ | (0.52 | ) | $ | (0.38 | ) | |||||||||
Cash dividends declared per common share (B) |
$ | | $ | 14.00 | $ | | $ | | $ | | $ | | $ | | $ | | |||||||||
Weighted average number of common shares outstanding: |
|||||||||||||||||||||||||
Basic |
6,468 | 6,468 | 6,460 | 6,454 | 6,437 | 7,213 | |||||||||||||||||||
Diluted |
6,477 | 6,470 | 6,460 | 6,454 | 6,437 | 7,213 | |||||||||||||||||||
18
Selected Historical Consolidated Financial Data of Wellsford (continued)
Consolidated Net Assets in Liquidation (Liquidation Basis) |
Summary Consolidated Balance Sheet Data (Going Concern Basis) |
||||||||||||||||||
September 30, | December 31, | ||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||
(Unaudited) | |||||||||||||||||||
Real estate assets, at cost |
$ | | $ | | $ | 151,275 | $ | 147,357 | $ | 156,676 | $ | 164,916 | |||||||
Accumulated depreciation |
| | (21,031 | ) | (16,775 | ) | (12,834 | ) | (9,386 | ) | |||||||||
Real estate assets under development, at estimated value |
49,606 | 44,233 | | | | | |||||||||||||
Notes receivable |
158 | 158 | 1,190 | 3,096 | 28,612 | 34,785 | |||||||||||||
Assets held for sale (H) |
| | | 2,335 | 6,256 | 5,844 | |||||||||||||
Investment in joint ventures |
20,453 | 20,453 | 13,985 | 53,760 | 94,181 | 95,807 | |||||||||||||
Cash and cash equivalents |
38,001 | 41,027 | 65,864 | 55,378 | 38,582 | 36,092 | |||||||||||||
Investments in U.S. Government securities |
| | 27,551 | 27,516 | | | |||||||||||||
Total assets, at cost |
| | 254,637 | 285,827 | 332,775 | 345,838 | |||||||||||||
Total assets, at estimated value |
115,442 | 126,670 | | | | | |||||||||||||
Reserve for estimated costs during the liquidation period |
20,837 | 24,057 | | | | | |||||||||||||
Reserve for option cancellations |
2,711 | | | | | | |||||||||||||
Mortgage notes payable |
23,584 | 19,250 | 108,853 | 109,505 | 112,233 | 121,731 | |||||||||||||
Debentures (D) |
| | 25,775 | | | | |||||||||||||
Convertible Trust Preferred Securities (D) |
| | | 25,000 | 25,000 | 25,000 | |||||||||||||
Total shareholders equity |
| | 98,783 | 131,274 | 176,567 | 178,079 | |||||||||||||
Net assets in liquidation |
56,211 | 56,569 | | | | | |||||||||||||
Other balance sheet information: |
|||||||||||||||||||
Common shares outstanding |
6,471 | 6,471 | 6,467 | 6,456 | 6,451 | 6,405 | |||||||||||||
Equity per share |
$ | 15.28 | $ | 20.33 | $ | 27.37 | $ | 27.80 | |||||||||||
Net assets in liquidation per share |
$ | 8.69 | $ | 8.74 | |||||||||||||||
(A) | See Wellsfords BusinessWellsford Managements Discussion and Analysis of Financial Condition and Results of Operations beginning on page 143 for significant changes in revenues and expenses of Wellsford. |
(B) | Initial liquidating distribution. |
(C) | Includes a restructuring charge of $3,527 during the year ended December 31, 2001, with no similar charges in other periods presented. |
(D) | During the first quarter of 2004, Wellsford de-consolidated the entity that issued the convertible trust preferred securities as required by the Financial Accounting Standards Board Interpretation No. 46R, which we refer to as FIN46R. Accordingly, Wellsford presents the $25,775
of debentures instead of $25,000 of convertible trust preferred securities on its balance sheet at December 31, 2004. The expense for the debentures of approximately $824 and $2,100 is included with interest expense as a component of costs and expenses for the period
January 1, 2005 to November 17, 2005 and the year ended December 31, 2004, respectively, instead of as distributions, net of tax benefit as it had been presented for the years ended December 31, 2003, 2002 and 2001. In April 2005, Wellsford completed the redemption of
the debentures. |
(E) | During 2005, Wellsford realized income of $11,148 from Wellsford/Whitehall, L.L.C., which we refer to as Wellsford/Whitehall, including a $5,986 gain on redemption of its interest and approximately $6,000 from its share of net gains from property sales. |
(F) | The loss in the 2004 period is primarily attributable to (1) a $9,000 impairment charge recorded by Wellsford at September 30, 2004 related to the sale of its interest in Second Holding Company, LLC, which we refer to as Second Holding, (2) Wellsfords net $6,606 share of a
write-down of one of Second Holdings investments during the first quarter of 2004 and (3) Wellsfords share of losses aggregating $10,437 from Wellsford/Whitehall. |
(G) | During the fourth quarter of 2003, Wellsford/Whitehall recorded an impairment charge of approximately $114,700 related to 12 assets in the portfolio. Wellsfords share of this impairment charge was approximately $37,377 in 2003 and as a result, Wellsford wrote-off related
unamortized warrant costs on Wellsfords books of approximately $2,644 related to Wellsford/Whitehall and determined at that time that it was not appropriate to carry the balance of the net deferred tax asset attributable to NOL carryforwards and recorded a valuation allowance
of $6,680 in the fourth quarter of 2003. |
(H) | Relates to the classification of two properties in the Debt and Equity Activities strategic business unit as a discontinued operation effective as of June 30, 2003. |
19
Selected Historical Financial Data of Reis
The following tables set forth selected historical financial data for Reis and should be read in conjunction with Reiss financial statements and the notes related to those financial statements and the Reiss BusinessReis Managements Discussion and Analysis of Financial Condition and Results of Operations, both of which are included in this joint proxy statement/prospectus. As further described in Footnote 1 in the accompanying financial statements of Reis, also included in this joint proxy statement/prospectus, the information set forth below is not necessarily indicative of the results of future operations.
For the Nine Months Ended July 31, |
For the Years Ended October 31, | |||||||||||||||||||||
(amounts in thousands) |
2006 | 2005 | 2005 | 2004 | 2003 | 2002 | 2001 | |||||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||||||||
Statement of Operations Data |
||||||||||||||||||||||
Revenues |
$ | 13,829 | $ | 12,189 | $ | 16,515 | $ | 12,451 | $ | 9,293 | $ | 5,778 | $ | 3,898 | ||||||||
Cost of revenues |
2,637 | 2,440 | 3,270 | 3,204 | 2,767 | 2,150 | 2,241 | |||||||||||||||
Gross profit |
11,192 | 9,749 | 13,245 | 9,247 | 6,526 | 3,628 | 1,657 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||||
Sales and marketing |
2,487 | 2,634 | 3,454 | 2,974 | 2,284 | 1,943 | 2,246 | |||||||||||||||
Product development |
1,193 | 895 | 1,311 | 1,065 | 1,136 | 1,540 | 1,499 | |||||||||||||||
General and administrative |
4,647 | 3,769 | 5,105 | 3,957 | 3,391 | 3,800 | 3,331 | |||||||||||||||
Total operating expenses |
8,327 | 7,298 | 9,870 | 7,996 | 6,811 | 7,283 | 7,076 | |||||||||||||||
Income (loss) before other income (expenses) |
2,865 | 2,451 | 3,375 | 1,251 | (285 | ) | (3,655 | ) | (5,419 | ) | ||||||||||||
Other income (expenses): |
||||||||||||||||||||||
Interest income |
228 | 90 | 134 | 56 | 68 | 75 | 250 | |||||||||||||||
Interest expenses |
(79 | ) | (9 | ) | (13 | ) | (14 | ) | (16 | ) | | (3 | ) | |||||||||
Loss on lease termination . |
(1,253 | ) | | | | | | | ||||||||||||||
Total other income (expenses) |
(1,104 | ) | 81 | 121 | 42 | 52 | 75 | 247 | ||||||||||||||
Income (loss) before income taxes |
1,761 | 2,532 | 3,496 | 1,293 | (233 | ) | (3,580 | ) | (5,172 | ) | ||||||||||||
(Provision for) benefit from taxes: |
||||||||||||||||||||||
Current |
(151 | ) | (91 | ) | (123 | ) | (84 | ) | (6 | ) | | | ||||||||||
Deferred |
(429 | ) | 5,336 | 4,970 | | | | | ||||||||||||||
Net tax (provision) benefit |
(580 | ) | 5,245 | 4,847 | (84 | ) | (6 | ) | | | ||||||||||||
Net income (loss) |
$ | 1,181 | $ | 7,777 | $ | 8,343 | $ | 1,209 | $ | (239 | ) | $ | (3,580 | ) | $ | (5,172 | ) | |||||
20
Selected Historical Financial Data of Reis (continued)
July 31, | October 31, |
||||||||||||||||||
2006 | 2005 | 2004 | 2003 | 2002 | 2001 | ||||||||||||||
(Unaudited) | |||||||||||||||||||
Consolidated Balance Sheet Data |
|||||||||||||||||||
Cash and cash equivalents |
$ | 9,550 | $ | 8,064 | $ | 5,066 | $ | 2,846 | $ | 1,351 | $ | 2,966 | |||||||
Total current assets |
14,863 | 14,150 | 8,471 | 4,778 | 2,943 | 3,230 | |||||||||||||
Total
assets |
23,382 | 22,075 | 11,628 | 7,329 | 5,433 | 6,240 | |||||||||||||
Deferred revenue |
8,635 | 9,470 | 8,348 | 4,982 | 3,584 | 1,756 | |||||||||||||
Total liabilities including deferred revenues |
12,222 | 12,096 | 9,992 | 6,902 | 4,722 | 2,560 | |||||||||||||
Total stockholders equity |
11,152 | 9,979 | 1,636 | 427 | 711 | 3,680 |
21
Summary Unaudited Condensed Consolidated Pro Forma Financial Data
The following tables set forth selected financial data on a pro forma basis as if the merger is consummated, the proceeds from the Bank Loan are used to pay part of the cash portion of the merger consideration, and Wellsford has terminated the Plan and thereby changed the presentation of its historical financial information from the liquidation basis of accounting to the going concern basis of accounting. The unaudited pro forma operating data for the nine months ended September 30, 2006 is presented as if the merger had been consummated, the proceeds from the Bank Loan had been received, and Wellsford terminated the Plan on January 1, 2006. The unaudited pro forma operating data for the year ended December 31, 2005 is presented as if the merger had been consummated, the proceeds from the Bank Loan had been received, and Wellsford terminated the Plan on January 1, 2005. The unaudited pro forma balance sheet as of September 30, 2006 is presented as if the merger had been consummated, the proceeds from the Bank Loan had been received, and Wellsford terminated the Plan on September 30, 2006.
The pro forma information is based on the assumptions that are included in the notes to the pro forma financial statements included elsewhere in this joint proxy statement/prospectus. The pro forma information is unaudited and is not necessarily indicative of what the financial position and results of operations would have been as of and for the dates and periods indicated, nor does it purport to represent the financial position and results of operations for future dates and periods.
Pro Forma (Unaudited) | |||||||
For the Nine Months Ended September 30, 2006 |
For the Year Ended December 31, 2005 |
||||||
(amounts in thousands, except for per share data) | |||||||
Statement
of Operations Data |
|||||||
Total revenue |
$ | 35,500 | $ | 17,003 | |||
Total cost of sales |
$ | (21,626 | ) | $ | 4,455 | ||
Gross profit |
$ | 13,874 | $ | 12,548 | |||
(Loss) income from continuing operations |
$ | (6,581 | ) | $ | 3,378 | ||
Average number of shares of common stock outstanding: |
|||||||
Basic |
10,579 | 10,576 | |||||
Diluted |
10,579 | 10,579 | |||||
(Loss) income per share from continuing operations: |
|||||||
Basic |
$ | (0.63 | ) | $ | 0.32 | ||
Diluted |
$ | (0.63 | ) | $ | 0.32 | ||
As of September 30, 2006 |
|||||||
(Unaudited) | |||||||
Balance
Sheet Data |
|||||||
Cash and cash equivalents |
$ | 21,983 | |||||
Total assets |
$ | 160,847 | |||||
Long-term debt, current and non-current |
$ | 48,787 | |||||
Total stockholders equity |
$ | 85,773 |
22
RISK FACTORS
In addition to the other information contained in this joint proxy statement/prospectus, you should carefully consider the risks described below in evaluating whether to vote for the proposals relating to the merger. If any of the events described below actually occur, the business, financial condition, results of operations or cash flows of the combined company could be materially adversely affected. Additional risks and uncertainties not presently known to Wellsford and Reis or that Wellsford believes are now immaterial may also adversely affect the merger and the combined company. Because Wellsford is in the process of disposing of its real estate assets, Wellsfords primary business immediately following the merger will be the business conducted by Reis immediately prior to the merger, and the development and/or sale of Wellsfords remaining real estate properties will be a diminishing activity as homes and land are sold. As a result, the risks described below under Risk Factors Relating to Reisand Risk Factors Relating to the Merger are the most significant risks to the combined company if the merger is consummated.
Risk Factors Relating to the Merger |
The merger represents a significant change in strategy for Wellsford which may be unsuccessful. |
If the proposed merger is consummated, Wellsford will terminate the Plan, but will continue to dispose of its remaining real estate assets through development and/or sale. Reiss business will be the primary continuing business activity and the development and/or sale of the remaining real estate properties will be a diminishing activity as homes and/or land is sold. As a result, Wellsford will change its basis of accounting from a liquidation basis to a going-concern basis. Under the liquidation basis of accounting, assets are stated at their estimated net realization value and liabilities are stated at their estimated settlement amounts. Wellsfords assets and liabilities will be presented on a going concern basis of accounting with assets being reported at the lower of historical cost, as adjusted for activity, or market value as of the date of termination of the Plan.
This change in strategy may be unsuccessful and may result in lower returns to Wellsford stockholders than they may have received under the Plan.
The termination of the Plan would result in the retention by the combined entity of Wellsfords cash balances (after the payment of transaction costs and the cash portion of the merger consideration that is not being funded by the Bank Loan) and subsequent cash flow from the sales of residential development assets, after operating costs, for working capital and re-investment purposes. Such cash would not be distributed to stockholders in the form of a liquidating distribution as had been contemplated under the Plan.
Wellsford has determined that, as a consequence of the consummation of the proposed merger and termination of the Plan, it would be necessary to recharacterize a portion of the December 14, 2005 cash distribution of $14.00 per share from what may have been characterized as a return of capital for Wellsford stockholders at that time to taxable dividend income. Wellsford estimates that $1.15 of the $14.00 per share cash distribution will be recharacterized as taxable dividend income. For further discussion of the U.S. Federal income tax treatment of the December 2005 distribution, see Material U.S. Federal Income Tax Consequences beginning on page 76.
Wellsford may be subject to litigation as a result of terminating the Plan. |
Historically, extraordinary corporate actions, such as terminating the Plan, have occasionally led to securities class action lawsuits being filed against a company. As of December 22, 2006, Wellsford was not aware of any pending securities class action lawsuits relating to the Plan or its prospective termination. However, in the event such litigation should occur, it is likely to be expensive and, even if Wellsford ultimately prevails, the process will be time consuming and will divert managements attention from integrating Wellsford and Reis and otherwise operating the business. Wellsford cannot predict the outcome or the amount of expenses and damages but the amounts could have a material adverse effect on the combined companys business, results of operations and financial condition.
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Wellsfords common stock is thinly traded and there may be little or no liquidity for the shares of Wellsford common stock to be issued in connection with the proposed merger. |
Historically, Wellsfords common stock has been thinly traded and an active trading market for Wellsford common stock may not develop after the merger. In the absence of an active public trading market, an investor may be unable to sell his or her shares of common stock. In view of the additional shares that will become eligible for sale in the public market upon consummation of the merger, investors trying to sell their shares may find it difficult to find buyers for their shares at prices quoted in the market or at all. Although Wellsford has agreed in the merger agreement to use reasonable best efforts to cause its common stock to be approved for listing on NASDAQ as promptly as practicable after the merger, there can be no guarantee that Wellsford will meet NASDAQs initial listing requirements and that its shares will be accepted for such listing or that the shares will be more actively traded on NASDAQ than they are on the AMEX.
The number of shares of Wellsford common stock that holders of Reis common stock and Reis preferred stock will receive in the merger will be based upon a fixed exchange ratio of one-to-one. The value of the shares of Wellsford common stock at the time Reis stockholders receive
them will likely vary from the value of those shares today. |
In the merger, each Reis stockholder, other than Wellsford Capital, initially will have the right to receive the merger consideration to which that stockholder is entitled 50% in cash and 50% in shares of Wellsford common stock, with each eligible stockholder having the right to elect to receive, subject to certain limitations, all of the merger consideration to which that stockholder is entitled in shares of Wellsford common stock. Wellsford and Reis will not adjust the one-to-one fixed exchange ratio as a result of any change in the market price of Wellsford common stock between the date of this joint proxy statement/prospectus and the date the Reis stockholders receive shares of Wellsford common stock in exchange for their shares of Reis common stock or Reis preferred stock. The market price of Wellsford common stock on the date Reis stockholders receive shares of Wellsford common stock will likely be different than the market price of shares of Wellsford common stock on October 11, 2006 (the date the merger agreement was signed), as a result of changes in the business, operations or prospects of Wellsford, market reactions to the proposed merger, general market and economic conditions and other factors. Because Wellsford will complete the merger only after Wellsford and Reis hold their respective special meetings of stockholders and the other conditions to closing are satisfied, the price of the Wellsford common stock on the dates of the Wellsford and Reis special meetings will not necessarily be indicative of the price of the Wellsford common stock at the time Wellsford consummates the merger. See The Merger AgreementConsideration To Be Received in the Merger beginning on page 80.
A portion of the merger consideration that Reis stockholders, other than Wellsford Capital, would otherwise be entitled to receive will be held in escrow for up to two years. |
Pursuant to the terms of the merger agreement, upon the consummation of the merger Wellsford will deliver to the escrow agent a portion of the merger consideration otherwise payable to the Reis stockholders, other than Wellsford Capital, consisting of (A) $2,593,456 in cash and 317,825 shares of Wellsford common stock, to be held for 18 months following the effective time of the merger, to serve as security for indemnification obligations arising out of breaches of Reiss representations, warranties, and covenants made in the merger agreement, and (B) $1,500,000 in cash and 183,824 shares of Wellsford common stock, to be held for 24 months following the effective time of the merger, as additional security for breaches of certain representations and warranties made by Reis that the parties to the merger agreement have designated as fundamental. If Wellsford successfully asserts a claim while the escrowed shares and cash remain in escrow, Reis stockholders may not receive part or all of the escrowed shares and cash.
Additionally, Lloyd Lynford and Jonathan Garfield will be appointed as stockholder representatives and will be authorized to make all decisions and to take all actions for and on behalf of all the Reis stockholders with respect to their rights and obligations under the merger agreement, including, without limitation, claims on the escrow accounts and indemnification rights. All decisions made and actions taken by the stockholder representatives will be binding on all of the Reis stockholders. The stockholder representatives are indemnified by all Reis stockholders for all costs and expenses incurred in discharging their obligations on
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behalf of the Reis stockholders, which indemnification is secured by a third escrow account consisting of $250,000 in cash and 30,637 shares of Wellsford common stock otherwise payable to the Reis stockholders, other than Wellsford Capital, as merger consideration. If the stockholder representatives are required to take any action with respect to the interests of the Reis stockholders, Reis stockholders will not receive all, and may not receive any part, of the funds in the third escrow account and will be liable for costs and expenses of the stockholder representatives in excess of the funds held in the third escrow account.
Failure to consummate the merger could negatively impact the stock price of Wellsford, because of, among other things, the disruption in the market that would occur as a result of uncertainties relating to a failure to consummate the merger and resulting in Wellsford incurring
significant costs without the benefit of the merger. |
If the proposed merger is not consummated, the price of Wellsford common stock may decline to the extent that the current market price of that stock reflects a market assumption that the merger will be consummated and that the related benefits will be realized, or as a result of the markets perceptions that the merger was not consummated due to an adverse change in Wellsfords business. In addition, Wellsford will have incurred significant costs and expenses related to the merger without realizing any of the expected benefit of having consummated the merger.
Failure to consummate the merger could negatively impact Reiss liquidity and cash flows. |
If the proposed merger is not consummated, under certain circumstances, Reis would be required to reimburse Wellsfords costs and expenses related to the merger of up to $3,500,000 and to pay a termination fee of $500,000 if Reis accepts a superior proposal; see The Merger AgreementTermination Events and Termination Fees beginning on page 94.
Some of the directors and executive officers of Wellsford and Reis have interests in the merger that are different from Wellsford and Reis stockholders. |
When considering the recommendation of each of the Wellsford and Reis boards of directors with respect to the merger proposals, stockholders should be aware that some directors and executive officers of Wellsford and Reis have interests in the merger that may be different from, or are in addition to, the interests of the stockholders of Wellsford and Reis. These interests include, with respect to certain individuals, their designation as directors or executive officers of Wellsford and the fact that the consummation of the transaction results in the acceleration of vesting and cashing-out of Reis options for officers of Reis, including Lloyd Lynford and Jonathan Garfield, the potential payments of severance upon termination in specified circumstances and retention and other payments pursuant to existing plans, agreements and arrangements. In addition, Lloyd Lynford, the Chief Executive Officer of Reis, is the brother of Jeffrey Lynford, the Chief Executive Officer of Wellsford. Pursuant to the merger agreement, Lloyd Lynford will serve as Chief Executive Officer, President and a director of Wellsford and Mr. Garfield will serve as the Executive Vice President and a director of Wellsford. Each of these officers will have three year employment agreements. Further, Edward Lowenthal, one of Wellsfords directors, is a beneficial owner of Reis preferred stock and, since the third quarter of 2000, has represented Wellsfords ownership interest in Reis by serving on the board of directors of Reis.
These interests may have influenced the officers and directors of Wellsford and Reis to support the merger. See The Merger Interests of Wellsford and Reis Directors and Executive Officers in the Merger beginning on page 67.
If Wellsfords stockholders do not approve the issuance of Wellsford common stock in connection with the merger, Wellsford will be required to pay certain of Reiss expenses. |
The merger agreement and the rules of the AMEX require Wellsford to obtain stockholder approval of the issuance of Wellsford common stock as part of the merger consideration. The merger agreement also provides for the payment by Wellsford of certain of Reiss expenses in connection with obtaining the Bank Loan if Wellsford or Reis terminate the merger agreement as a result of Wellsfords failure to obtain
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stockholder approval. See The Merger AgreementTermination Events and Termination FeesTermination Fees beginning on page 94.
If the combined company does not realize the anticipated benefits from the merger, Wellsford and Reis stockholders may not realize a benefit from the merger commensurate with the ownership dilution they will experience in connection with the merger. |
As a result of the merger, outstanding shares of Reis common stock and Reis preferred stock will be automatically converted into the right to receive shares of Wellsford common stock and cash upon the consummation of the merger. Accordingly, Wellsford stockholders who, prior to the consummation of the merger owned 100% of the outstanding Wellsford common stock, will own approximately 61% of the outstanding shares of Wellsford immediately following the consummation of the merger. Likewise, Reis stockholders, other than Wellsford Capital, who prior to the consummation of the merger owned 100% of the outstanding Reis capital stock, will own approximately 39% of the outstanding Wellsford common stock immediately following the consummation of the merger. Consequently, if Wellsford is unable to realize the strategic and financial benefits currently anticipated from the merger, Wellsford and Reis stockholders will have experienced substantial dilution of their ownership interest without receiving any commensurate benefit, except for Reis stockholders receiving cash in the merger. In addition, this dilution could reduce the market price of Wellsford common stock. There can be no assurance that the combined company will achieve revenue growth, profitability and cost savings from the merger.
The preferential rights of the holders of Reis preferred stock will terminate upon the merger. |
Upon the consummation of the proposed merger, holders of Reis preferred stock will become holders of Wellsford common stock and will lose their preferential rights, which include separate voting rights, cumulative dividends, and liquidation preferences. See Comparison of Rights of Stockholders of Wellsford and Reis beginning on page 201.
Because the lack of a public market for Reiss capital stock makes it difficult to evaluate the fairness of the merger, the stockholders of Reis may receive consideration in the merger that is greater than or less than the fair market value of Reiss capital stock. |
The outstanding capital stock of Reis is privately held and is not traded in any public market. The lack of a public market makes it difficult to determine the fair market value of Reis. Since the percentage of Wellsford equity to be issued to Reis stockholders was determined based on negotiations between the parties, it is possible that the value of Wellsford common stock and cash to be issued in connection with the merger will be greater than the fair market value of Reis. Alternatively, it is possible that the value of the merger consideration to be issued in connection with the merger will be less than the fair market value of Reis.
Because Reiss business will constitute a substantial portion of the business of the combined company after the consummation of the merger, if any of the events described in Risk Factors Relating to the Merger and Risk Factors Relating to Reis occur, those events could cause the
potential benefits of the merger not to be realized. |
If the merger is consummated, Wellsford will terminate the Plan, but will continue with its program to dispose of its remaining real estate assets and Wellsfords business immediately following the merger will primarily be the business conducted by Reis immediately prior to the merger. As a result, the risks described above under Risk Factors Relating to the Merger are the most significant risks to the combined company if the merger is consummated. To the extent any of the events in the risks described above under Risk Factors Relating to the Merger occur, those events could cause the potential benefits of the merger not to be realized and the market price of the combined companys common stock to decline.
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The combined companys ability to use the net operating loss carryforwards of Wellsford and Reis will be subject to limitation and, under certain circumstances, may be eliminated. |
Generally, a change of more than 50% in the ownership of a corporations stock, by value, over a three-year period constitutes an ownership change under Section 382 of the Code. In general, Section 382 imposes an annual limitation on a corporations ability to use its net operating losses from taxable years or periods ending on or before the date of an ownership change to offset U.S. Federal taxable income in any post-change year. Reis will and Wellsford will likely experience an ownership change as a result of the merger, in which case the combined company will be subject to the limitation under Section 382 with respect to pre-change net operating losses of Wellsford and Reis. Section 382 imposes significant limitations of the use of Wellsfords net operating loss carryforwards. During 2005 Wellsford experienced an ownership change under Section 382. That change resulted in an annual limitation of approximately $4,700,000. It is expected that the merger will result in another ownership change and that the annual limitation on Wellsfords use of net operating losses through 2024 will, as a result of such ownership change, be reduced to approximately $2,000,000 per year (based on current interest rates and market prices for Wellsford common stock).
Moreover, if a corporation experiences an ownership change and does not satisfy the continuity of business enterprise requirement (which generally requires that the corporation continue its historic business or use a significant portion of its historic business assets in a business for the two-year period beginning on the date of the ownership change), it cannot, subject to certain exceptions, use any net operating loss from a pre-change period to offset taxable income in post-change years. There can be no assurance that this requirement will be met with respect to any ownership change of Wellsford. As a result of the rules described above, the extent (if any) to which the combined company will be able to utilize the net operating losses of Wellsford from any pre-change period to offset taxable income (and thus reduce tax liability) for post-change periods is uncertain.
If the combined company is not able to successfully identify or integrate future acquisitions, its business operations and financial condition could be adversely affected, and future acquisitions may divert its managements attention and consume significant resources. |
The combined company may in the future attempt to further expand its markets and services in part through acquisitions of other complementary businesses, services, databases and technologies. Mergers and acquisitions are inherently risky, and Reis and Wellsford cannot assure you that its acquisitions will be successful. The successful execution of any future acquisition strategy will depend on its ability to identify, negotiate, complete and integrate such acquisitions and, if necessary, obtain satisfactory debt or equity financing to fund those acquisitions. Failure to manage and successfully integrate acquired businesses could harm the combined companys business. Acquisitions involve numerous risks, including the following:
| difficulties in integrating the operations, technologies, and products of the acquired companies; |
| diversion of managements attention from normal daily operations of the business; |
| inability to maintain the key business relationships and the reputations of acquired businesses; |
| entry into markets in which the combined company has limited or no prior experience and in which competitors have stronger market positions; |
| dependence on unfamiliar affiliates and partners; |
| insufficient revenues to offset increased expenses associated with acquisitions; |
| reduction or replacement of the sales of existing services by sales of products or services from acquired lines of business; |
| responsibility for the liabilities of acquired businesses; |
| inability to maintain internal standards, controls, procedures and policies; |
| inability to utilize Federal, state, and local net operating loss carryforwards; and |
| potential loss of key employees of the acquired companies. |
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In addition, if the combined company finances or otherwise completes acquisitions by issuing equity or convertible debt securities, existing stockholders ownership may be diluted.
Following the consummation of the merger, Wellsfords executive officers and directors will own a significant percentage of Wellsfords stock and will continue to have significant control of the combined companys management and affairs, and they may take actions which
adversely affect the trading price of Wellsfords common stock. |
Immediately following the consummation of the merger, the executive officers and directors of Wellsford, and entities that are affiliated with them, will beneficially own, depending upon the proportion of cash and share consideration that Lloyd Lynford and Jonathan Garfield receive in the merger, between approximately 18% and 25% of Wellsfords outstanding common stock. The ownership percentage, when including options to purchase shares of Wellsford common stock held by Wellsfords executive officers and directors, increases to between approximately 27% and 33% of Wellsfords expected outstanding common stock and stock options. Following consummation of the merger, Lloyd Lynford and Mr. Garfield will own between approximately 11% and 18% of Wellsfords expected outstanding common stock, or between approximately 11% and 17% of Wellsfords expected outstanding common stock and options to purchase shares of Wellsford common stock. This significant concentration of share ownership may adversely affect the trading price of Wellsfords common stock because investors often perceive disadvantages in owning stock in companies where management holds a significant percentage of the voting power. Consequently, this concentration of ownership may have the effect of delaying or preventing a change of control, including a merger, consolidation or other business combination involving the combined company, or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control, even if such a change of control would benefit the combined companys stockholders other than the group of directors and officers described above.
The Bank Loan documents contain financial and operating restrictions that limit Reiss access to credit. If, following the consummation of the merger, Reis fails to comply with the covenants in the Bank Loan documents, Reis may be required to repay the indebtedness on an
accelerated basis. |
Provisions in the Bank Loan impose restrictions on Reiss ability, following the merger, to, among other things:
| incur additional debt; |
| change its fiscal year end; |
| amend its organizational documents; |
| pay dividends and make distributions; |
| redeem or repurchase outstanding equity; |
| make certain investments; |
| create liens; |
| enter into transactions with stockholders and affiliates; |
| undergo a change of control; and |
| make certain fundamental changes, including engaging in a merger or consolidation. |
The credit agreement also contains other customary covenants, including covenants which will require Reis to meet specified financial ratios and financial tests. Reis may not be able to comply with these covenants in the future and failure to do so may result in the declaration of an event of default and cause Reis to be unable to borrow under the Bank Loan documents. Furthermore, certain events related to Wellsford, such as the delisting of Wellsford from a national stock exchange or the voluntary or involuntary filing by Wellsford under any bankruptcy, insolvency or similar law (which is not stayed or dismissed within certain time periods), will cause an event of default. In addition, an event of default, if not cured or waived,
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may result in the acceleration of the maturity of indebtedness outstanding under these agreements, which would require Reis to pay all amounts outstanding. If an event of default occurs, Reis may not be able to cure it within any applicable cure period, if at all. If the maturity of this indebtedness is accelerated, Reis may not have sufficient funds available for repayment or may not have the ability to borrow or obtain sufficient funds to replace the accelerated indebtedness on terms acceptable to Reis or to Wellsford, or at all. Furthermore, the Bank Loan is secured by Reiss assets and, therefore, these assets will not be available to secure additional credit.
The success of the combined company depends on retaining key executive officers and personnel and attracting and retaining capable management and operating personnel. |
Jeffrey H. Lynford has been Chairman of Wellsfords board of directors since its formation in 1997 and has been Wellsfords President and Chief Executive Officer since April 1, 2002. Jeffrey Lynfords employment agreement with Wellsford expires on December 31, 2007. Wellsford also depends on the services of David M. Strong, its Senior Vice President for Development, specifically with respect to the Gold Peak project. Mr. Strongs employment agreement with Wellsford also expires on December 31, 2007. The loss of the services of either Jeffrey Lynford or Mr. Strong could have a material adverse effect on Wellsfords business, operations, and financial condition, including the terms and conditions under which Wellsford disposes of its assets and continued availability of construction loans. Furthermore, Jeffrey Lynfords contract provides that since Wellsford has disposed of all or substantially all of two of its business units, he is no longer required to devote substantially all of his time, attention and energies during business hours to Wellsfords business activities. He may now perform services for and engage in business activities with other persons so long as such services and activities do not prevent him from fulfilling his fiduciary responsibilities to Wellsford. Wellsfords business operations could be negatively impacted if it is unable to retain the services of Jeffrey Lynford and Mr. Strong, as well as other key personnel, or hire suitable replacements. Reiss success also depends in large part on the continued service of key personnel. Reiss business plan was developed, in large part, by its senior-level officers, including Reiss President and Chief Executive Officer, Lloyd Lynford, Executive Vice President, Jonathan Garfield, and Chief Operating Officer, William Sander. The continued implementation and development of Reiss business plan, and the business of the combined company after the merger, requires their skills and knowledge. Reis may not be able to offset the impact of the loss of the services of Lloyd Lynford, Mr. Garfield, Mr. Sander or other key officers or employees because its business requires skilled management, as well as technical, product and technology, and sales and marketing personnel, who are in high demand and are often subject to competing offers. Competition for qualified employees is intense in the information industry, and the loss of a substantial number of qualified employees, or an inability to attract, retain and motivate additional highly skilled employees could have a material adverse impact on Reis and the combined company after the merger. Although Wellsford and Reis each use various incentive programs to retain and attract key personnel, these measures may not be sufficient to either attract or retain, as applicable, the personnel required to ensure the success of the combined company.
Risk Factors Relating to Wellsford |
Wellsford is subject to the risks that affect real estate investors and developers generally. |
The value of Wellsfords real estate assets are subject to certain risks applicable to Wellsfords assets and inherent in the real estate industry which, if they materialize, could have a material adverse effect on Wellsfords business, results of operations and financial condition and include:
| downturns in the national, regional and local economies where Wellsfords properties are located; |
| macroeconomic as well as specific regional and local market conditions; |
| competition from other for-sale housing developments; |
| local real estate market conditions, such as oversupply of, or reduction in demand for, residential homes and condominium units; |
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| increased operating and construction costs, including insurance premiums, utilities, building materials, labor and real estate taxes; |
| increases in interest rates; and |
| cost of complying with environmental, zoning, and other laws. |
Wellsford is subject to risks associated with construction and development. |
Wellsford currently intends to continue to develop residential projects at Gold Peak, East Lyme and Claverack (each as defined under Wellsfords BusinessBusiness and Plan of LiquidationResidential Activities) through the subdivision, construction, and sale of condominium units or single family homes. Alternatively, or in combination, Wellsford may sell the East Lyme project to another developer and sell its joint venture interest in Claverack to its partner in that venture, thus foregoing potential development profits associated with these properties. Wellsfords development and construction activities give rise to additional risks, which, if they materialize, could have a material adverse effect on its business, results of operations and financial condition and include:
| the possibility that Wellsford may discontinue development opportunities after expending significant resources to determine feasibility, to perform infrastructure construction, or to build, in certain instances; |
| the possibility that Wellsford may not obtain an increased number of building lots for the Claverack project, which would affect the number of single family homes Wellsford can build and sell; |
| the possibility that Wellsford may not obtain construction financing on reasonable terms and conditions, or be able to refinance or extend existing financing on similar terms; |
| the possibility that development, construction, and the sale of Wellsford projects, may not be completed on schedule resulting in increased debt service expense, construction costs and general and administrative expenses; |
| the inability to obtain, or costly delays in obtaining, zoning, land-use, building, occupancy and other required governmental permits and authorizations, which could delay or prevent commencement of development activities or delay completion of such activities; |
| the fact that properties under development or acquired for development usually generate little or no cash flow until completion of development and sale of a significant number of homes or condominium units and may experience operating deficits after the date of
completion and until such homes or condominium units are sold; |
| increases in the cost of construction materials; and |
| the inability to obtain proceeds from borrowings on terms financially advantageous to Wellsford or to raise alternate equity capital. |
Wellsfords development and construction activities expose it to risks associated with the sale of residential units. |
Risks associated with the sale of residential properties which, if they materialize, could have a material adverse effect on Wellsfords business, results of operations and financial condition and include:
| lack of demand by prospective buyers; |
| inability to find qualified buyers; |
| inability of buyers to obtain satisfactory financing; |
| the inability to close on sales of properties under contract; and |
| dissatisfaction by purchasers with the homes purchased from Wellsford, which may result in remediation costs or warranty expenses. |
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Wellsford could change its intent with regard to the development and sale of its residential development projects.
Wellsford currently intends to continue to develop residential projects at Gold Peak, East Lyme and Claverack through the subdivision, construction, and sale of condominium units or single family homes. However, if a determination were made by Wellsfords board of directors to accelerate the sale of certain or all of these projects in a bulk disposition, as a result of a prolonged period of negative market factors related to construction and development or the inability to sell residential units (as described immediately above), there could be a material adverse effect on Wellsfords results of operations, financial condition and cash flows. Accelerated bulk dispositions are not indicative of Wellsfords current intent with respect to these assets and are not reflected in the set of assumptions that Wellsfords senior management used in its determination of net assets in liquidation during the period November 18, 2005 through December 31, 2005 and the nine months ended September 30, 2006.
Wellsford may not be able to generate sufficient cash flow to meet its debt service obligations. |
Wellsfords ability to make scheduled payments of principal or interest on its indebtedness will depend on its future performance, which, to a certain extent, is subject to general economic conditions, financial, competitive, legislative, regulatory, political, business, and other factors. Wellsford believes that cash generated by its business will be sufficient to enable Wellsford to make its debt payments as they become due. However, if Wellsfords business does not generate sufficient cash flow, or future borrowings are not available in an amount sufficient to enable Wellsford to service its indebtedness or to fund its other liquidity needs, Wellsford may not be able to fulfill its debt service obligations.
Some of Wellsfords development projects have incurred, and may incur, debt, in which case a third party lender would be entitled to cash flow generated by such investments until that debt is repaid. |
As a result of its borrowings, Wellsford would be subject to certain risks normally associated with debt financing which, if they materialize, could have a material adverse effect on Wellsfords business, results of operations and financial condition, including the risk that cash flow from sales of homes or condominium units will be insufficient to meet required payments of principal and interest, the risk that existing debt will not be able to be refinanced, the risk that the terms of such refinancings will not be as favorable to Wellsford. In addition, Wellsford may not be able to obtain modifications to increase borrowing capacity on existing construction loans. Such borrowings will increase the risk of loss on an investment which utilizes borrowings. If Wellsford defaults on secured indebtedness, the lender may foreclose and Wellsford could lose its entire investment in the security for such loan.
The restrictive covenants associated with Wellsfords outstanding indebtedness under construction and development loans may limit Wellsfords ability to operate its business. |
Wellsfords debt obligations require Wellsford to comply with a number of financial and other covenants on an ongoing basis. Some of those obligations may restrict Wellsfords ability to incur additional debt and engage in certain transactions and make certain types of investments and take other actions. In other cases, failure to comply with covenants may limit Wellsfords ability to borrow funds or cause a default under one or more of its then existing loans, possibly requiring Wellsford to either prepay a portion of the outstanding principal or provide additional cash collateral.
Increases in interest rates could materially increase Wellsfords interest expense or could reduce Wellsfords revenues. |
As of September 30, 2006, Wellsford had approximately $23,584,000 of variable rate debt. Wellsford may incur additional variable rate indebtedness in the future. Accordingly, if interest rates increase, so will Wellsfords interest costs, which may have a material adverse effect on its business, results of operations, cash flows and financial condition. Wellsford has limited its exposure to existing variable rate debt by purchasing interest rate caps. The expiration dates of these interest rate caps occur before the estimated completion dates of construction.
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Neither Wellsfords organizational documents nor those of the entities in which it invested contain any limitation on the amount of debt incurred. Accordingly, Wellsford and such entities could incur significant amounts of debt, resulting in increases in debt service payments which could increase the risk of default on indebtedness.
The market for construction and development of real estate is highly competitive. |
Developers and builders compete for, among other things, desirable properties, financing, raw materials, and skilled labor. Wellsford competes with large homebuilding companies, some of which have greater financial, marketing, and sales resources than Wellsford does, and with smaller local builders. The consolidation of some homebuilding companies may create additional competitors that have greater financial, marketing, and sales resources than Wellsford does and thus are able to compete more effectively against Wellsford. In addition, there may be new entrants in the markets in which Wellsford currently conducts business.
Property ownership through partnerships and joint ventures generally limits Wellsfords control of those investments and entails other risks. |
Wellsford has co-invested with third parties through partnerships, joint ventures or other entities including ventures where decisions require shared approval with third parties. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks that would not be present were a third party not involved, including: the possibility that Wellsfords partners or co-venturers might become bankrupt or otherwise fail to fund their share of required capital contributions; that such partners or co-venturers might at any time have economic or other business interests or goals which are inconsistent with Wellsfords business interests or goals; that such partners or co-venturers may be in a position to take action contrary to Wellsfords instructions, requests, policies or objectives; that Wellsford cannot agree with its partners on the sale of properties; and that Wellsford will not be able to exercise sole decision-making authority. In addition, Wellsford may in certain circumstances be liable for the actions of third-party partners or co-venturers.
Increased insurance costs and reduced insurance coverage may affect Wellsfords results of operations and increase its potential exposure to liability. |
Partially as a result of the September 11 terrorist attacks, the cost of insurance has risen, deductibles and retentions have increased, and the availability of insurance has diminished. Significant increases in Wellsfords cost of insurance coverage or significant limitations on coverage could have a material adverse effect on Wellsfords business, financial condition, and results of operations from such increased costs or from liability for significant uninsurable or underinsured claims.
In addition, there are some risks of loss for which Wellsford may be unable to purchase insurance coverage. For example, losses associated with landslides, earthquakes, and other geologic events may not be insurable, and other losses, such as those arising from terrorism, wars, or acts of God may not be economically insurable. A material uninsured loss could adversely affect Wellsfords business, results of operations and financial condition and Wellsford may nevertheless remain obligated for any mortgage debt or other financial obligations related to that property or asset.
Wellsford is subject to environmental laws and regulations, and Wellsfords properties may have environmental or other contamination. |
Wellsford is subject to various Federal, state, and local laws, ordinances, rules and regulations concerning protection of public health and the environment. These laws may impose liability on property owners or operators for the costs of removal or remediation of hazardous or toxic substances on real property, without regard to whether the owner or operator knew of, or was responsible for, the presence of the hazardous or toxic substances. The presence of, or the failure to properly remediate, such substances may adversely affect the value of a property, as well as Wellsfords ability to sell the property or individual condominium units or apartments, or to borrow funds using that property as collateral. Costs associated with
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the foregoing could be substantial and in extreme cases could exceed the value of the contaminated property. Environmental claims are generally not covered by Wellsfords insurance programs.
The particular environmental laws that apply to any given homebuilding site vary according to the sites location, its environmental condition, and the present and former uses of the site, as well as adjoining properties. Environmental laws and conditions may result in delays, may cause Wellsford to incur substantial compliance and other costs, and can prohibit or severely restrict homebuilding activity in environmentally sensitive regions or areas, which could negatively affect Wellsfords results of operations. In addition, applicable environmental laws create liens on contaminated sites in favor of the government for damages and costs it incurs in connection with a contamination. The one environmental condition of which Wellsford is aware relates to a portion of the East Lyme project. This land requires remediation of pesticides used on the property when it was an apple orchard, the cost of which has been considered in evaluating the carrying amount of the property at December 31, 2005 and September 30, 2006.
Wellsfords properties are subject to various Federal, state and local regulatory requirements, such as state and local fire and life safety requirements and the Americans with Disabilities Act. |
If Wellsford fails to comply with regulatory requirements, Wellsford could incur fines or be subject to private damage awards. Compliance with requirements may require significant unanticipated expenditures by Wellsford. Such expenditures could have a material adverse effect on Wellsfords business, results of operations and financial condition.
Wellsfords governing documents and Maryland law contain anti-takeover provisions that may discourage acquisition bids or merger proposals, which may adversely affect the market price of Wellsfords common stock. |
Wellsfords articles of amendment and restatement contain provisions designed to discourage attempts to acquire control of Wellsford by merger, tender offer, proxy contest, or removal of incumbent management without the approval of Wellsfords board of directors. These provisions may make it more difficult or expensive for a third party to acquire control of Wellsford even if a change of control would be beneficial to the interests of its stockholders. These provisions could discourage potential takeover attempts and could adversely affect the market price of Wellsfords common stock. Wellsfords governing documents:
| provide for a classified board of directors, which could discourage potential acquisition proposals and could delay or prevent a change of control; and |
| authorize the issuance of blank check stock that could be issued by Wellsfords board of directors to thwart a takeover attempt. |
In addition, under Maryland law, certain business combinations (including certain issuances of equity securities) between a Maryland corporation and any person who beneficially owns 10% or more of the voting power of the corporations shares or an affiliate thereof are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. Wellsfords board of directors has exempted from the Maryland statute any business combinations with Jeffrey Lynford and Edward Lowenthal or any of their affiliates or any other person acting in concert or as a group with any of such persons and, consequently, the five-year prohibition and the supermajority vote requirements will not apply to business combinations between such persons and Wellsford. For more information regarding Maryland anti-takeover law, see Comparison of Rights of Stockholders of Wellsford and ReisRestrictions on Business Combinations beginning on page 209.
Risk Factors Relating to Reis |
Reis must continue to attract and retain customers, and any failure to increase the number of customers or retain existing customers would harm Reiss business. |
Reiss customers include subscribers to Reis SE. In addition to subscribers who typically pay for their annual service in advance, customers also include those who purchase Reiss service on an ad hoc and pay as you go basis. Either category of customer may decide not to continue to use Reis SE because of budget or
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other competitive reasons. If subscribers choose not to renew their contracts or decrease their use of Reiss information, or if Reis is unable to attract new subscribers, its revenues and profitability could be adversely affected.
To grow the business, Reis must convince prospective subscribers and existing customers to expand their use of Reis SE and Reiss other products. Prospective customers may not be familiar with Reiss service and may be accustomed to using other methods of conducting commercial real estate market research and property valuations. There can be no assurance that it will be successful in continuing to acquire additional customers. Moreover, it is difficult to estimate the total number of active, prospective customers in the U.S. during any given period. As a result, Reis does not know the extent to which it has penetrated this market. If Reis reaches the point at which it has attempted to sell Reiss services to a significant majority of commercial real estate professionals in the U.S., the ability to increase its customer base could be limited.
Reiss revenues are concentrated among certain key customers. |
Reis has approximately 600 customers, but derives approximately 30% of its revenues from 25 customers. If Reis were to experience a reduction or loss of business from many of its 25 largest customers, it could have a material adverse effect on Reiss revenues and, depending on the significance of the loss, its financial condition, cash flows and profitability.
Reis may be unable to compete successfully with its current or future competitors. |
Reis has competition from both local companies that prepare commercial real estate research with respect to their specific geographic areas and national companies that prepare national commercial real estate research. Specifically, certain of Reiss products compete with those of Torto Wheaton, a wholly-owned subsidiary of CB Richard Ellis, Property and Portfolio Research, a subsidiary of the Daily Mail Group, and Costar Group, Inc. New competitors, as well as Reiss traditional competitors, could launch new websites quickly and inexpensively as Internet commerce has few barriers to entry. Such online competition could negatively impact Reiss revenues and profitability.
Reis may not be able to sustain its revenue growth and future financial performance may be difficult to assess. |
Although Reis was formed it 1980, it first offered services online in 1996. Profitable since fiscal 2004, Reis experienced losses from the introduction of online service in 1996 through fiscal 2003. Reis may incur additional expenses, such as marketing and product development expenses, with the expectation that revenues will grow in the future. However, such expectations may not be realized.
Reis must continue to obtain information from multiple sources. |
The quality of Reis SE depends substantially on information provided by a large number of commercial real estate brokers, agents, and property owners. If these sources choose not to continue providing information to Reis, its product could be negatively affected, potentially resulting in an increase in customer cancellation and a failure to acquire new customers.
Reiss revenues, expenses and operating results could be affected by general economic conditions or by changes in commercial real estate markets, which are cyclical. |
Reiss business is sensitive to trends in the general economy and trends in local, regional and national commercial real estate markets, which are unpredictable. Therefore, operating results, to the extent they reflect changes in the broader commercial real estate industry, may be subject to significant fluctuations. A number of factors could have an effect on Reiss revenues, expenses, operating results or cash flows, such as:
| periods of economic slowdown or recession in the U.S. or locally; |
| inflation; |
| flows of capital into or out of real estate investment in the U.S. or various regions of the U.S.; |
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| changes in levels of rent or appreciation of asset values; |
| changing interest rates; |
| tax and accounting policies; |
| the cost of capital; |
| costs of construction; |
| increased unemployment; |
| lower consumer confidence; |
| lower wage and salary levels; |
| war, terrorist attacks or natural disasters; or |
| the public perception that any of these conditions may occur. |
If Reiss customers choose not to use Reis SE because of economic conditions, and Reis is not successful at attracting new customers, its revenues, expenses, operating results, cash flows or stock price could be negatively affected.
A primary source of new customers for Reis is the commercial real estate professional community, which may be reluctant to adopt Reiss products and services. |
Reiss success has depended on its ability to convince commercial real estate professionals that Reis SE is superior to other traditional methods of conducting commercial real estate market research and valuation. Many commercial real estate professionals are used to conducting market research and valuation through the traditional means of relying on a network of contacts in a local market. Commercial real estate professionals may prefer to continue to use traditional methods or may be slow to adopt Reiss products and services. If Reis is unable to continue to persuade commercial real estate professionals that Reis SE is a superior alternative to traditional means of conducting market research and valuation, operating results and profitability may be negatively affected.
Reiss success depends on its ability to introduce new or upgraded services or products. |
To continue to attract new customers to Reis SE, Reis may need to introduce new products or services. Reis may choose to develop new products and services independently or choose to license or otherwise integrate content and data from third parties. The introduction of new products and services could impose costs on Reiss business and require the use of resources, and there is no guarantee that it will continue to be able to access new content and technologies on commercially reasonable terms or at all. If customers or potential customers do not recognize the value of Reiss new services or enhancements to existing services, operating results could be negatively affected. Reis may incur significant costs and experience difficulties in developing and delivering these new or upgraded services or products.
Efforts to enhance and improve the ease of use, responsiveness, functionality and features of Reiss existing products and services have inherent risks, and it may not be able to manage these product developments and enhancements successfully or in a cost effective manner. If Reis is unable to continue to develop new or upgraded services or products, then customers may choose not to use its products and services. Reiss growth would be negatively impacted if it is unable to successfully market and sell any new services or upgrades.
If Reis fails to protect confidential information against security breaches, or if customers are reluctant to use products because of privacy concerns, Reis might experience a loss in profitability. |
Pursuant to the terms and conditions of use on Reiss website, as part of its customer registration process, Reis collects and uses personally identifiable information. Industry-wide incidents or incidents with respect to Reiss websites, including theft, alteration, deletion or misappropriation of information, security breaches, computer hackers, viruses or anything else manifesting contaminating or destructive properties, or
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changes in industry standards, regulations or laws could deter people from using the Internet or Reiss website to conduct transactions that involve the transmission of confidential information, which could harm its business. Under the laws of certain jurisdictions, if there is a breach of Reiss computer systems and it knows or suspects that unencrypted personal customer data has been stolen, Reis is required to inform any customers whose data was stolen, which could harm its reputation and business.
Reiss business could be harmed if it is unable to maintain the integrity and reliability of its data. |
Reiss success depends on its customers confidence in the comprehensiveness, accuracy, and reliability of the data it provides. Reis believes that it takes adequate precautions to safeguard the completeness and accuracy of its data and that the information is generally current, comprehensive and accurate. Nevertheless, data is susceptible to electronic malfeasance including, theft, alteration, deletion, viruses and computer hackers. If Reis cannot maintain the quality of its data, demand for its services could diminish and Reis may be exposed to lawsuits claiming damages resulting from inaccurate data.
Reis may be unable to enforce or defend its ownership or use of intellectual property. |
Reiss business depends in large measure on the intellectual property utilized in its methodologies, software and database. Reis relies on a combination of trademark, trade secret and copyright laws, a Federal trademark registration, registered domain names, contracts which include non-disclosure provisions, work-for-hire provisions, and technical security measures to protect its intellectual property rights. However, Reis does not own Federal registrations covering all of its trademarks and copyrightable materials. Reis also does not own any U.S. patents or patent applications. Reiss business could be significantly harmed if it does not continue to protect its intellectual property. The same would be true if claims are made against Reis alleging infringement of the intellectual property rights of others. Any intellectual property claims, regardless of merit, could be expensive to litigate or settle, and could require substantial amounts of time and expenditures.
If Reiss website or other services experience system failures or malicious attacks, its customers may be dissatisfied and its operations could be impaired. |
Reiss business depends upon the satisfactory performance, reliability and availability of its website. Problems with the website could result in reduced demand for Reiss services. Furthermore, the software underlying Reiss services is complex and may contain undetected errors. Despite testing, Reis cannot be certain that errors will not be found in its software. Any errors could result in adverse publicity, impaired use of Reiss services, loss of revenues, cost increases or legal claims by customers.
Additionally, Reiss services substantially depend on systems provided by third parties, over whom it has little control. Interruptions in service could result from the failure of data providers, telecommunications providers, or other third parties, including computer hackers. Reis depends on these third-party providers of Internet communication services to provide continuous and uninterrupted service. Reis also depends on Internet service providers that provide access to its services. Any disruption in the Internet access provided by third- party providers or any failure of third-party providers to handle higher volumes of user traffic could harm Reiss business.
Reiss internal network infrastructure could be disrupted or penetrated, which could materially impact both its ability to provide services and customers confidence in services. |
Reiss operations depend upon its ability to maintain and protect its computer systems, most of which are redundant and independent systems in separate locations. While Reis believes that its systems are adequate to support operations, its systems may be vulnerable to damage from break-ins, unauthorized access, computer viruses, vandalism, fire, floods, earthquakes, power loss, telecommunications failures, terrorism, acts of war, and other similar events. Although Reis maintains insurance against fires, floods, and general business interruptions, the amount of coverage may not be adequate in any particular case. Furthermore, any damage or disruption could materially impair or prohibit Reiss ability to provide services, which could significantly impact its business.
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Experienced computer programmers, or hackers, may attempt to penetrate Reiss network security from time to time. Although it has not experienced any security breaches to date and Reis maintains a firewall, a hacker who penetrates network security could misappropriate proprietary information or cause interruptions in services. Reis might be required to further expend significant capital and resources to protect against, or to alleviate, problems caused by hackers. Reis also may not have a timely remedy against a hacker who is able to penetrate its network security. In addition to purposeful security breaches, the inadvertent transmission of computer viruses or anything else manifesting contaminating or destructive properties could expose Reis to litigation or to a material risk of loss. Any of these incidents could materially impact Reiss ability to provide services as well as materially impact the confidence of its customers in its services, either of which could significantly and adversely impact its business.
Reis may be subject to regulation of advertising and customer solicitation or other newly-adopted laws and regulations. |
As part of Reiss customer registration process, its customers agree to receive emails and other communications from Reis. However, Reis may be subject to restrictions on its ability to communicate with customers through email and phone calls. Several jurisdictions have proposed or adopted privacy-related laws that restrict or prohibit unsolicited email or spam. These laws may impose significant monetary penalties for violations. In addition, laws or regulations that could harm Reiss business could be adopted, or reinterpreted so as to affect its activities, by the government of the U.S., state governments, regulatory agencies or by foreign governments or agencies. This could include, for example, laws regulating the source, content or form of information provided on Reiss website, the information or services it provides or its transmissions over the Internet. Violations or new interpretations of these laws or regulations may result in penalties or damage Reiss reputation or could increase its costs or make its services less attractive.
Reis may be subject to tax audits or other procedures concerning its tax collection policies. |
Reis does not collect sales or other similar taxes in states other than New York. However, one or more states (other than New York) may seek to impose sales tax collection obligations on out-of-state companies, such as Reis, which engage in online commerce. A successful assertion that Reis should collect sales, use or other taxes on the sale of merchandise or services into these states could harm its business.
Reiss revenue, expenses, operating results and cash flows are subject to fluctuations. |
Reiss revenues, expenses, operating results and cash flows have fluctuated in the past and are likely to continue to do so in the future. These fluctuations could negatively affect Reiss results of operations during that period and future periods. Reiss revenues, expenses, operating results and cash flows may fluctuate from quarter to quarter due to factors including, among others, those described below:
| obtaining new customers and retaining existing customers; |
| changes in Reiss marketing or other corporate strategies; |
| Reiss introduction of new products and services or changes to existing products and services; |
| the amount and timing of Reiss operating expenses and capital expenditures; |
| costs related to acquisitions of businesses or technologies; and |
| other factors outside of Reiss control. |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements in this joint proxy statement/prospectus. These forward-looking statements relate to Wellsfords or Reiss outlook or expectations for earnings, revenues, expenses, asset quality or other future financial or business performance, strategies or expectations, or the impact of legal, regulatory or supervisory matters on Wellsfords or Reiss business operations or performance. Specifically, forward-looking statements may include:
| statements relating to the benefits of the merger; |
| statements relating to future business prospects, revenue, income and cash flows of Wellsford and Reis individually; |
| statements relating to revenues of the resulting company after the merger; and |
| statements preceded by, followed by or that include the words estimate, plan, project, intend, expect, anticipate, believe, seek, target or similar expressions. |
These statements reflect Wellsfords or Reiss managements judgment based on currently available information and involve a number of risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. With respect to these forward-looking statements, each of Wellsfords and Reiss management has made assumptions regarding, among other things, bookings, revenues, operating costs and general economic conditions.
Future performance cannot be ensured. Actual results may differ materially from those in the forward-looking statements. Some factors that could cause Wellsfords and Reiss actual results to differ include:
| expected benefits from the merger may not be fully realized or at all; |
| revenues following the merger may be lower than expected; |
| the possibility of litigation arising as a result of terminating the Plan; |
| adverse changes in the real estate industry and the markets in which the combined company will operate; |
| the inability to retain and increase the number of customers; |
| competition; |
| difficulties in protecting the security, confidentiality, integrity and reliability of the data; |
| legal and regulatory issues; |
| changes in accounting policies or practices; and |
| the risk factors listed in this joint proxy statement/prospectus under Risk Factors beginning on page 23. |
You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this joint proxy statement/prospectus. Except as required by law, neither Wellsford nor Reis undertakes any obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this joint proxy statement/prospectus or to reflect the occurrence of unanticipated events.
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THE MERGER
The following is a discussion of the merger and the material terms of the merger agreement. You are urged to read carefully the merger agreement in its entirety, a copy of which is attached as Annex A to this joint proxy statement/prospectus and incorporated by reference herein. You are also urged to read the opinions of Wellsfords and Reiss financial advisors which are attached as Annexes B and C, respectively, to this joint proxy/statement prospectus.
Background of the Merger |
In the spring of 2005, senior management of Reis, in the course of its periodic review of Reiss operations, financial condition, projections and growth strategies, determined that it would be appropriate to consider the strategic alternatives available to Reis and various means that could be used to continue Reiss growth and maximize stockholder value. After several months of consideration and informal discussions between management and members of the Reis board of directors, Reis decided to explore a possible sale.
On August 17, 2005, Reis retained Veronis Suhler Stevenson, which we refer to as Veronis, an investment banking firm specializing in media and information companies, to assist Reis in evaluating and assessing the market for Reis.
In November 2005, Veronis began marketing Reis to potential purchasers, including, among others, media and information companies, financial buyers, credit bureau and public record providers, business information services companies, and real estate information companies. Veronis contacted 35 potential strategic and financial acquirers resulting in 14 initial offers to acquire Reis. Management presentations to potential purchasers began in January 2006 and final bids were submitted by three potential purchasers in February 2006.
Throughout the spring of 2006, Reis considered three final bids. One bidder offered to acquire Reis for an amount in cash that did not meet Reiss expectations, assumed that Reis would be debt-free, and required a working capital adjustment to the purchase price. A second bidder made an offer that was contingent on a financing structure that contained a high level of uncertainty. After considering the terms and conditions of each of the final bids and further discussions with each potential purchaser, the Reis board of directors determined that it was in the best interest of the stockholders to pursue further discussions with the third bidder, which we refer to as the Potential Buyer, on an exclusive basis.
On March 6, 2006, a special meeting of the Reis board of directors was held at which it authorized entering into a letter of intent with the Potential Buyer, which Reis did on March 17, 2006.
From March 17, 2006 through mid-May 2006, Reis and the Potential Buyer engaged in discussions and negotiations until it became clear that they were unable to agree on the material terms and conditions of a transaction. During this period, Reiss senior management continued to have informal discussions with members of Reiss board of directors regarding the status of the negotiations and material terms and conditions of a potential transaction.
During May 2006, after it became apparent that disagreements had emerged with the Potential Buyer, Jeffrey Lynford, Chief Executive Officer of Wellsford, began informal discussions with Lloyd Lynford to gauge interest in a possible strategic transaction between Wellsford and Reis. Although Wellsford was proceeding with the Plan at this time, Jeffrey Lynford believed that a transaction with Reis might be advantageous to Wellsford, considering the then-current status of the negotiations with the Potential Buyer, the potential value of Reis, and the investments that Wellsford had made in Reis to date.
On May 18, 2006, Jeffrey Lynford updated the Wellsford board of directors on the status of negotiations between Reis and the Potential Buyer and the possible opportunity for a strategic transaction between Wellsford and Reis in the event that the transaction with the Potential Buyer did not move forward. At this meeting, Wellsfords board of directors determined, in view of the relationship between Jeffrey Lynford and Lloyd Lynford and the fact that Edward Lowenthal is a director of both Reis and Wellsford, to form a committee of independent directors of Wellsford to assess the advisability of pursuing discussions with Reis
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regarding a strategic transaction between it and Wellsford and guiding future negotiations between the parties. Among other things, Wellsfords board of directors discussed the consequences of terminating the Plan.
In late May 2006, in light of the breakdown of the discussions between Reis and the Potential Buyer, the investment division of Veronis also approached Reis concerning a possible transaction. Shortly thereafter, Wellsford, which owned, directly and indirectly, approximately an aggregate 23% interest in Reis, approached Reis formally regarding a potential strategic transaction with Wellsford. After discussions between Reis and Wellsford, discussions between Reis and Veronis, and informal discussions between Reiss management and Reiss board of directors, Reis determined to postpone further discussion of the Veronis initiative and to focus on further discussions with Wellsford. Over the course of the following several weeks, management and legal representatives of Reis and Wellsford continued to have discussions regarding each companys strategic interests and financial condition and resources. During this period, Wellsfords board of directors continued to discuss the consequences of terminating the Plan. At approximately the same time, Wellsford began discussions with Lazard regarding its engagement as a financial advisor to Wellsford with respect to a strategic transaction with Reis, including providing a fairness opinion to the Wellsford board of directors in connection with the transaction. Given the family relationship between Jeffrey Lynford and Lloyd Lynford, the board authorized Mark Cantaluppi and James Burns, each an executive officer of Wellsford, to represent Wellsford in its negotiations with Reis and to execute any agreements or other documents and instruments related to the potential transaction with Reis.
On May 23, 2006, Bryan Cave LLP, legal counsel to Reis, provided Wellsford and King & Spalding LLP, Wellsfords legal advisors, with the form of merger agreement that Reis had been using for negotiations with the Potential Buyer.
On June 5, 2006, Reis and Wellsford entered into confidentiality agreements.
On June 5, 2006, Wellsford and King & Spalding commenced legal due diligence of materials provided by Reis through an electronic data room and began to discuss potential issues discovered in due diligence and issues apparent from the draft merger agreement provided by Reis. King & Spalding periodically briefed members of Wellsfords independent board committee regarding the status of the legal due diligence. Throughout June 2006, Wellsford engaged in multiple internal discussions and discussions with Lazard and King & Spalding with respect to the form and structure of the proposed merger. At this time, Reis and Bryan Cave also began legal and other due diligence with respect to Wellsford.
On June 12, 2006, Wellsfords board of directors held a special meeting to review the discussions that had been held between Wellsford and Reis and their respective representatives since the May 18, 2006 meeting. At this meeting the board determined that it would be in the best interests of Wellsford to continue to pursue a potential transaction with Reis and authorized the independent committee to engage Lazard as Wellsfords financial advisor.
In mid-June 2006, Lazard began its financial due diligence of Wellsford and Reis.
On June 15, 2006, Reis and Wellsford received a draft term sheet from the Bank of Montreal regarding a credit facility to be obtained from it for purposes of providing a portion of the cash consideration to be paid to the Reis stockholders in the merger and for general working capital needs of Reis and subsequently began discussions with the Bank of Montreal regarding the term sheet. Also on this date, Lloyd Lynford and Jonathan Garfield met with Houlihan Lokey to discuss the possibility of engaging it to act as Reiss financial advisor.
On June 21, 2006, Bryan Cave provided Wellsford and King & Spalding with a draft of the merger agreement among Reis, Wellsford and Merger Sub.
On July 5, 2006, Bryan Cave and King & Spalding discussed by telephone the structure of the merger and issues relating to the draft merger agreement.
On July 7, 2006, Wellsford signed an engagement letter to retain Lazard as its financial advisor with respect to the possible transaction with Reis, including providing a fairness opinion to Wellsfords board of directors in connection with such a transaction.
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On July 12, 2006, representatives of Lazard and Wellsfords senior management held a meeting with Reiss senior management. During this meeting, Reis presented its database and discussed Reiss business model, target market, and other related business and financial information, while Lazard provided an overview of the process and the information required for financial due diligence. Between July 12 and July 17, 2006, Reis provided additional financial and business materials to Lazard and Wellsford.
On July 14, 2006, King & Spalding provided Reis and Bryan Cave with proposed revisions to the draft merger agreement in response to the initial draft provided by Bryan Cave, and Wellsford, Reis, King & Spalding and Bryan Cave thereafter engaged in several discussions negotiating the terms and conditions of the merger agreement and began to regularly exchange and revise drafts of both the merger agreement and other related transaction documents.
Throughout July and August 2006, Reis, Wellsford and the Bank of Montreal, together with each of their respective outside legal advisors, engaged in negotiations regarding the credit agreement and related documentation, including repayment terms, interest rates, use of proceeds, representations and warranties, affirmative and negative covenants, financial covenants, closing conditions, funding conditions, security and fees.
Additionally, representatives of Lazard met with Wellsfords senior management, one of the independent members of Wellsfords board of directors, and King & Spalding to discuss the transaction structure, Wellsfords financial projections, and other valuation issues. Lazard continued to discuss financial due diligence issues with the management of Reis and Wellsford. During this period, the independent members of Wellsfords board of directors continued to consider the ramifications for Wellsfords stockholders of terminating the Plan in favor of pursuing a combination with Reis and were briefed on the status of due diligence and negotiations with Reis.
On July 20, 2006, representatives of Lazard and members of Wellsfords senior management met with members of Reiss senior management to discuss Reiss customer base, cash flow assumptions, and management projections.
On July 27, 2006, Reis had further discussions with Houlihan Lokey regarding its engagement as a financial advisor to Reis with respect to a strategic transaction with Wellsford, including providing a fairness opinion to the Reis board of directors in connection with such transaction. Shortly thereafter, Houlihan Lokey began its financial due diligence on Wellsford and Reis.
Between July 27, 2006 and August 17, 2006, independent members of Wellsfords board of directors met with Reiss senior management in order to discuss and further understand Reiss business and the history of Reiss development. Also during this time, Wellsford and Lazard provided due diligence materials to Houlihan Lokey.
On August 17, 2006, Wellsfords board of directors met to discuss the status and findings of Wellsford and its advisors regarding their ongoing due diligence investigation of Reis, as well as the various risks involved in consummating a merger with Reis. At this meeting, the board of directors discussed a proposed timeline for closing a merger and valuation matters related to Reis. Also at this meeting, the board of directors reviewed with King & Spalding the material terms of the then-current draft of the merger agreement and continued to discuss the consequences to Wellsfords stockholders of terminating the Plan. Representatives of Lazard presented an overview of Reis, the transaction structure and a preliminary perspective on the valuation of Reis. Wellsfords board of directors directed Lazard to conduct discussions with Houlihan Lokey with respect to an exchange ratio related to the transaction. Following the discussions at this meeting, independent members of Wellsfords board of directors indicated general support for senior managements assessment that a merger with Reis continued to be an attractive potential strategic transaction for Wellsford, and directed Wellsfords senior management to continue negotiations with Reis. Also at this time, Wellsford engaged Frederic W. Cook & Co., whom we refer to as Cook, an independent executive compensation consulting firm, to advise Wellsford with respect to executive compensation for certain employees of the combined company, assuming the merger would be consummated.
Between August 17 and August 27, 2006, Wellsford and Lazard provided additional due diligence materials to Houlihan Lokey.
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On August 27, September 5 and September 14, 2006, the senior management of Wellsford and Reis met with their financial and legal advisors to continue negotiating the material terms of the merger agreement, including termination rights and fees, pre-closing covenants, and indemnification of Wellsford post-closing. At these meetings, the parties also discussed and negotiated the terms of employment agreements with Lloyd Lynford and Mr. Garfield, the escrow agreement, and the registration rights agreement and worked to resolve questions that the parties had discovered during the legal and financial due diligence process. During this period, the senior management of Wellsford and Reis, King & Spalding and Bryan Cave continued to negotiate the terms of the Bank Loan with the Bank of Montreal.
On September 5, 2006, the board of managers of Reis Capital Holdings, LLC, which we refer to as Reis Capital, an entity in which Wellsford Capital held an approximate 51% ownership interest, held a special meeting, during which it determined that it was in the best interests of its members to dissolve and distribute its assets, which consisted solely of shares of Reis preferred stock, and voted to do so.
On September 6, 2006, representatives of Lazard and Houlihan Lokey held preliminary discussions on the exchange ratio in the merger. Reis and Houlihan Lokey executed a formal engagement letter regarding Houlihan Lokey providing an opinion to the Reis board of directors as to whether the consideration to be received by holders of Reis common stock (other than Wellsford Capital and treating Reis preferred stock on an as converted to common stock basis) in the potential merger with Wellsford would be fair to them from a financial point of view.
From September 7 through October 6, 2006, representatives of Lazard and Houlihan Lokey held several discussions with Wellsfords and Reiss management on the exchange ratio in the merger.
On September 25, 2006, Reiss board of directors held a special meeting to discuss the status of negotiations with Wellsford and the terms and conditions of the proposed transaction. Prior to this meeting, Reiss board of directors was provided, among other things, with the most recent draft of the merger agreement, a draft of the Houlihan Lokey fairness opinion and report, financial information regarding Reis and Wellsford, the most recent draft of the documentation for the Bank Loan, and a draft of a proposed amendment to Reiss amended and restated certificate of incorporation. At the special meeting, Reiss board of directors reviewed in detail, with Reiss senior management, representatives of Bryan Cave, and Houlihan Lokey, the proposed merger transaction with Wellsford, the fairness opinion and report that Houlihan Lokey expected to give in connection with the merger, the merger agreement, and the related agreements, as well as the proposed amendment to Reiss amended and restated certificate of incorporation and the proposed terms and conditions of the Bank Loan. Houlihan Lokey also reported on due diligence regarding the business, financial condition and assets of Wellsford and the status of the exchange ratio discussions. Lloyd Lynford reviewed with Reiss board of directors the historical background of the merger, the financial condition of Reis, and reasons for and against the merger. Jeffrey Lynford joined the meeting to make a presentation to Reiss board of directors regarding the business and financial status of Wellsford. Bryan Cave reviewed with Reiss board of directors its fiduciary duties in connection with the proposed transaction. Following these presentations and after further discussion, Reiss board of directors directed Reis senior management to continue negotiating the merger agreement and other transaction documents with Wellsford.
On September 26, 2006, members of Wellsfords management and its board of directors met to discuss the status of the merger agreement, the proposed composition of the board of directors of the combined company following the merger, and to discuss with Cook a compensation plan for the senior management team of the combined company. Prior to this meeting, Wellsfords board of directors was provided, among other things, with the most recent draft of the merger agreement. King & Spalding provided an overview of the current draft of the merger agreement and a summary of the outstanding issues and status of negotiations of the merger agreement, the related transaction documents and the Bank Loan documentation. Representatives of Lazard provided an overview of the contemplated transaction structure and the historical and projected financial performance of Reis and updated the board of directors on the status of financial due diligence and ongoing valuation analysis of Reis. At this meeting, Wellsfords board of directors also discussed the allocation between Wellsford and Reis of fees and expenses related to the Bank Loan. A representative from Cook joined the meeting to further discuss executive compensation plans for the combined company, assuming the merger would be consummated. Following these presentations and after
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further discussion, Wellsfords board of directors directed Wellsfords senior management to continue negotiations and discussions with Reis.
From September 26, 2006 until October 11, 2006, representatives of Reis and Wellsford continued negotiations and due diligence and drafting of the merger agreement and other relevant agreements and documents. During this period, senior management of Reis continued informal discussions with members of Reiss board of directors regarding the status of the negotiations and the material terms and conditions of the proposed transaction.
On September 28, 2006, Lazard met with Reiss senior management to discuss Reiss current financial performance, financial projections, budgets, subscribers, and other related matters.
On September 29 and October 3, 2006, Wellsfords compensation committee of its board of directors met to discuss compensation plans for Lloyd Lynford and Mr. Garfield. During the September 29 meeting, the committee reviewed and discussed the preliminary analysis made by Cook in its written report. At the October 3 meeting a representative from Cook presented its final analysis and summarized its recommendations with respect to Lloyd Lynfords and Mr. Garfields compensation packages. At this time, the compensation committee, voted to approve the recommended compensation and authorized Douglas Crocker, a member of the committee, to negotiate and approve the final forms of employment agreements with Lloyd Lynford and Mr. Garfield.
On October 2, 2006, Merger Sub was formed in Maryland.
On October 4, 2006, the certificate of dissolution of Reis Capital was filed with the Secretary of State of the State of Delaware and Reis Capital commenced distribution of its assets to its members.
On October 6, 2006, Wellsfords board of directors held a telephonic meeting to discuss the proposed merger with Reis. Prior to this meeting, Wellsfords board of directors was provided, among other things, with the most recent draft of the merger agreement. Wellsfords senior management, together with King & Spalding, summarized the status of the substantially final draft merger agreement and the related documents and discussed resolution of issues noted during their prior meeting, including the scope of registration rights to be granted to Lloyd Lynford and Mr. Garfield after the effective time of the merger. During the meeting, representatives of Lazard discussed the status of the exchange ratio negotiations and the financial performance of Reis.
On October 11, 2006, Reiss board of directors held a special meeting. Edward Lowenthal did not attend the meeting. Prior to this meeting, Reiss board of directors was provided with, among other things, a substantially final draft of the merger agreement and other transaction documents, an updated draft of the Houlihan Lokey fairness opinion and report, a substantially final draft of the Bank Loan documentation, and resolutions to be considered for adoption. At the special meeting, Reiss senior management and representatives of Bryan Cave updated Reiss board of directors on the status of negotiations with Wellsford and the terms and conditions of the merger agreement and other transaction documents and revisions thereto, as well as the Bank Loan and related documentation. Senior management and Bryan Cave also advised Reiss board of directors as to the resolution of certain open items discussed at the September 25, 2006 special meeting.
Also at the October 11, 2006 meeting, representatives of Houlihan Lokey made a presentation to Reiss board of directors and delivered Houlihan Lokeys oral opinion that, as of that date, and based upon and subject to the assumptions, qualifications, limitations and other matters to be described in its written opinion, the consideration to be received by the holders of Reis common stock (other than Wellsford Capital and treating Reis preferred stock on an as converted to common stock basis) in the proposed merger was fair to them from a financial point of view. The Houlihan Lokey written opinion was delivered to Reis on October 11, 2006, following the meeting. Following discussion, Reiss board of directors approved and declared advisable the proposed merger agreement, each of the related transaction documents, including the Bank Loan documentation and the proposed amendment to Reiss amended and restated certificate of incorporation, and resolved to recommend adoption of the merger agreement and approval of the amendment to Reiss amended and restated certificate of incorporation.
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Also on October 11, 2006, Wellsfords board of directors and members of its senior management held a special meeting by teleconference. Edward Lowenthal did not attend the meeting. Representatives of Lazard rendered an oral opinion, subsequently confirmed in writing, that as of such date, based upon and subject to the considerations and assumptions set forth in its opinion, the aggregate merger consideration to be paid by Wellsford in the merger was fair, from a financial point of view. King & Spalding presented the material terms of the final draft of the merger agreement, the employment agreements with Lloyd Lynford and Mr. Garfield, the registration rights agreement, the other related transaction documents, and the documentation related to the Bank Loan. At this meeting, Jeffrey Lynford recused himself from voting and Wellsfords board of directors, including all of its independent members, then approved and declared advisable the proposed merger agreement and each of the related transaction documents and resolved to recommend to Wellsfords stockholders that they approve the issuance of Wellsford common stock necessary to pay the merger consideration to Reiss stockholders.
On the evening of October 11, 2006, Reis and Wellsford executed the merger agreement and other related agreements, including the voting agreement and the employment agreements with Lloyd Lynford and Mr. Garfield, which were also executed by them. Reis also executed the Bank Loan documents.
Impact on Wellsfords Plan of Liquidation |
Wellsford stockholders ratified the Plan on November 17, 2005. If the proposed merger is consummated, the Plan will be terminated. The Plan contemplates the orderly sale of each of Wellsfords remaining assets, which are either owned directly or through Wellsfords joint ventures, the collection of all outstanding loans from third parties, the orderly disposition or completion of construction of development properties, the discharge of all outstanding liabilities to third parties and, after the establishment of appropriate reserves, the distribution of all remaining cash to stockholders. The Plan also permits Wellsfords board of directors to acquire more Reis shares and/or discontinue the Plan without further stockholder approval.
If Wellsfords stockholders approve the issuance of additional shares in connection with the Reis acquisition and the proposed merger is consummated, then Wellsford will change its basis of accounting from a liquidation basis, adopted as of the close of business on November 17, 2005, back to a going-concern basis in accordance with generally accepted accounting principles. Reis will be the primary continuing business activity and the development and/or sale of the remaining real estate properties will be a diminishing activity as homes and/or land is sold. Under the liquidation basis of accounting, assets are stated at their estimated net realization value and liabilities are stated at their estimated settlement amounts. Wellsfords assets and liabilities will be presented on a going concern basis of accounting with assets being reported at the lower of historical cost, as adjusted for activity, or market value as of the date of termination of the Plan.
The termination of the Plan would result in the retention by the combined entity of Wellsfords cash balances (after the payment of transaction costs and the cash portion of the merger consideration that is not being funded by the Bank Loan) and subsequent cash flow from the sales of residential development assets, after operating costs, for working capital and re-investment purposes. Such cash would not be distributed to stockholders in the form of a liquidating distribution as had been contemplated under the Plan.
As a consequence of the consummation of the proposed merger and termination of the Plan, it would be necessary to recharacterize a portion of the December 14, 2005 cash distribution of $14.00 per share from what may have been characterized as a return of capital for Wellsford stockholders at that time to taxable dividend income. Wellsford management has conducted an earnings and profit study covering the period from inception of Wellsford through December 31, 2005, and concluded that it had approximately $7,400,000 of current and accumulated earnings and profits at the time of the distribution; accordingly, Wellsford estimates that $1.15 of the $14.00 per share cash distribution will be recharacterized as taxable dividend income. See Risk FactorsRisk Factors Relating to the MergerThe merger represents a significant change in strategy for Wellsford which may be unsuccessful on page 23.
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Wellsford Board of Directors Recommendation and Reasons for the Merger |
The Wellsford board of directors has approved and declared advisable the merger and the merger agreement. It recommends that holders of Wellsford common stock vote FOR the issuance of shares of Wellsford common stock in the merger.
In reaching its determination to approve the merger, Wellsfords board of directors identified and considered a number of the potential benefits of the merger, including the following:
| the belief that the continuing influx of domestic and international capital into U.S. commercial real estate and significant growth in the issuance of collateralized real estate debt instruments and the re-emergence of REITs as a popular equity investment has caused current
and comprehensive real estate market information to become an increasingly valuable tool for institutional investors, and the belief that investors desire access to this data on a daily basis in order to make informed buy/sell investment or lending decisions aggregating
billions of dollars and that Reis has a prominent position in this marketplace as a high quality data provider, making the acquisition of Reis a mechanism to provide additional incremental value for the Wellsford stockholders; |
| the experience Wellsford has gained from its continuing investment in Reis since 1998 and the expectation that Reiss demonstrated performance since 2003 of revenue growth and increasing margins will continue; |
| the Reis founders would retain a significant ownership interest in the combined company; |
| the belief that the merger enhances Wellsfords ability to maximize the value of its investment in Reis because: |
| the merger offers Wellsford an opportunity to preserve and enhance the approximately $20,000,000 recorded value (liquidation basis) for its investment in Reis because this amount represents a value that would be retained by Wellsfords stockholders (with no
discount for minority investment or illiquidity), which is based on several bids submitted to Reis by third parties; if a transaction with a third party did not close, absent the merger, Wellsford could be required to sell its investment in Reis at a substantially reduced
value reflecting its illiquid minority position in a private company; and |
| the exchange ratio negotiated for the merger reflects price multiples that are appropriate for private company transactions in the real estate information sector, but as a public company the applicable price multiples could increase over time as indicated by trading
multiples of companies comparable to Reis. |
| Wellsford will be acquiring the approximate 77% of Reis that it does not own for approximately $34,579,414 in cash and 4,237,673 shares of newly issued Wellsford common stock (valued at $8.16 per share), thereby transforming its approximate 23% passive ownership
interest in Reis into a 100% ownership interest for approximately $9,600,000 of its existing cash (exclusive of transaction costs and proceeds from the Bank Loan); |
| the approximate $10,000,000 cash position of the combined company (after reserving an additional $10,000,000 to meet minimum liquidity requirements for certain of Wellsfords indebtedness) following the merger may provide funds necessary to acquire and invest in
additional capacity for operations and other potential acquisitions; |
| if the combined company satisfies the applicable requirements with respect to the survival and use of net operating losses, some portion of Wellsfords NOLs (estimated to be usable at approximately $2,000,000 per year after the consummation of the merger through 2024,
together with Reiss estimated NOLs of approximately $10,100,000 and tax deduction transaction costs of approximately $5,500,000) could effectively provide additional funding by reducing taxes from future operations and these NOLs might not otherwise have a value
for Wellsford stockholders; |
| by closing the merger in the first quarter of 2007, Wellsford stockholders would be able to receive the benefit of growth in Reiss value since the execution of the merger agreement; and |
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| the opinion of Lazard that, as of October 11, 2006, and on the basis of and subject to the assumptions, qualifications, limitations and other matters set forth in their opinion, the aggregate merger consideration payable in connection with the merger was fair from a
financial point of view to Wellsford, as more fully described below under Opinion of Financial Advisor to the Wellsford Board of Directors beginning on page 49. |
In the course of its deliberations concerning the merger, the Wellsford board of directors reviewed with Wellsford management, King & Spalding, and Lazard a number of additional factors that the Wellsford board of directors deemed relevant to the merger, including, but not limited to:
| the terms of the merger agreement, including the valuation of Wellsford common stock, the structure of the merger and the size and nature of the escrow; and |
| information concerning Wellsfords and Reiss current businesses, prospects, financial performance and condition, results of operations, management and competitive position. |
During the course of its deliberations concerning the merger, the Wellsford board of directors also identified and considered a variety of potentially negative factors that could materialize as a result of the merger, including, but not limited to:
| the risk that the potential benefits sought in the merger might not be fully realized; |
| the transaction costs involved in connection with the merger and the potential expenses for which Wellsford could be liable if the merger agreement were terminated; |
| the possibility that the merger might not be consummated and the effect of the public announcement of the merger on Wellsfords business relationships and employee relations; |
| it would likely be necessary to recharacterize a portion of the December 14, 2005 cash distribution of $14.00 per share from what may have been characterized as a return of capital for Wellsford stockholders at that time to taxable dividend income; |
| Reis would have incurred additional indebtedness because of the Bank Loan, thereby leveraging the combined company; |
| the risk that, despite the efforts of Wellsford and Reis, key personnel might leave the combined company; and |
| the risk that the approvals required to consummate the merger might not be obtained. |
The foregoing discussion of the information and factors considered by the Wellsford board of directors is not intended to be exhaustive but is believed to include all of the material factors considered by the Wellsford board of directors. In reaching its determination to approve the merger and merger agreement and the transactions contemplated thereby, including the issuance of Wellsford common stock, the Wellsford board of directors did not assign any relative or specific weight to the foregoing factors, and individual directors may have given differing weights to different factors.
Reis Board of Directors Recommendation and Reasons for the Merger |
The Reis board of directors has approved and declared advisable the merger and the merger agreement and recommends that Reis stockholders vote FOR the adoption of the merger agreement and FOR the approval of an amendment to its amended and restated certificate of incorporation.
In reaching its determination to approve the merger, after considering Reiss possible strategic alternatives, Reiss board of directors identified and considered a number of the potential benefits of the merger, including the following:
| the relative certainty of the dollar amount of and timing of access to capital through a merger with Wellsford, compared to other strategic and financing options considered; |
| Wellsfords attractiveness as a merger partner, including its current cash resources and potential access to additional cash through the sale of its real estate assets; |
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| the result of the auction process conducted by Reis with Veronis, which sought interest in Reis from a substantial number of potential acquirers, was that no other buyer (including potential buyers contacted during the auction process) would be likely to provide a superior
value to the Reis stockholders and be able to consummate a transaction in a timely manner; |
| the likelihood that the proposed merger would be consummated on a timely basis, based on, among other things, the fact that Lloyd Lynford and Jonathan Garfield, the two largest Reis stockholders, support the merger and have committed to vote all of their shares in favor
of adoption of the merger agreement and approval of the amendment to Reiss amended and restated certificate of incorporation; |
| the likelihood that the merger will receive all necessary regulatory approvals; |
| the understanding that Reiss business, operations, assets, financial condition, operating results, cash flows and prospects, including Reiss need for financing in order to continue to growth, would be enhanced by Wellsfords status as a public company due to increased
access to capital markets and a likely wider range of options available to a public company; |
| the fact that Reis stockholders will be entitled to receive 50% of the merger consideration in cash, thereby providing immediate liquidity to Reis stockholders, and the remainder in shares of Wellsford common stock, thereby allowing Reis stockholders to continue to
participate in any future earnings growth and any increase in the value of the combined company; |
| the opinion of Houlihan Lokey that, as of October 11, 2006, and on the basis of and subject to the assumptions, qualifications, limitations and other matters described in its written opinion, the merger consideration to be received by the holders of Reis common stock
(other than Wellsford Capital and treating Reis preferred stock on an as converted to common stock basis) in the merger was fair to them from a financial point of view, as more fully described below under Opinion of Financial Advisor to the Reis Board of Directors
beginning on page 56; |
| the fact that shares of Wellsford common stock issued to Reis stockholders will be registered on Form S-4 and will be freely tradable by Reis stockholders (except in certain circumstances with respect to affiliates of the companies) following the merger; |
| the reasonableness of the terms and conditions of the merger agreement, including the following: |
| the ability of Reis to consider unsolicited acquisition proposals and, in certain circumstances, to terminate the merger agreement to accept a superior proposal after payment of a termination fee; |
| the ability of Reiss board of directors to change its recommendation to Reis stockholders if it concludes in good faith that the failure to do so would result in a breach of its fiduciary duties to the Reis stockholders; and |
| the reasonableness of the covenants, representations and warranties required to be made by Reis. |
| the fact that a substantial percentage of the cash portion of the merger consideration is being financed by the Bank Loan preserving cash of the combined company and that the Bank Loan includes a facility for Reiss working capital that will be available after the merger;
and |
| the belief that, as a public company, Reiss ability to consider and consummate strategic transactions will be enhanced. |
In addition, in its deliberations concerning the merger, Reiss board of directors also considered a variety of potentially negative factors, including:
| of the aggregate merger consideration: (1) $2,593,456 of the cash consideration and 317,825 of the shares from the share consideration will be held in escrow for 18 months after consummation of the merger in order to provide a source from which Wellsford may recover
funds for a breach by Reis of its representations and warranties; (2) $1,500,000 of the cash consideration and 183,824 shares from the share consideration will be held in escrow for 24 months after consummation of the merger to provide a source from which Wellsford
may recover funds for a breach by Reis of representations and warranties designated by the parties as fundamental; and (3) $250,000 of the cash consideration and |
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30,637 of the shares from the share consideration will be held in escrow as security for the obligations to indemnify the stockholder representatives for costs and expenses incurred in
discharging their obligations on behalf of the Reis stockholders; |
| a Reis stockholder that receives cash in the merger generally will recognize taxable gain in an amount equal to the lesser of (1) the excess, if any, of the sum of the fair market value of the Wellsford stock plus cash received over its adjusted basis in Reis stock and (2) the
amount of cash received by such stockholder; |
| the cash consideration portion of the transaction is being partially financed by the Bank Loan, which will be debt that Reis will be required to service; |
| Wellsford has historically had limited trading activity and it is unclear whether this transaction will increase that trading activity, and it may continue to have limited trading on AMEX or the NASDAQ, as applicable, and, therefore, the Wellsford shares received by Reis
stockholders in the merger may not be liquid; and |
| certain terms and conditions of the merger agreement, including the following: |
| the possibility that certain provisions of the merger agreement, including the non-solicitation, termination rights, termination fee, and other protective provisions, might have the effect of discouraging other persons potentially interested in acquiring Reis from
pursuing such an opportunity; |
| the restrictions on the conduct of Reiss business during the period between the signing of the merger agreement and the consummation of the merger; |
| the appointment of Lloyd Lynford and Mr. Garfield as stockholder representatives of the Reis stockholders and the fact that they may find it necessary to take action on behalf of the Reis stockholders with which the stockholders may not agree; |
| as stockholder representatives, Lloyd Lynford and Mr. Garfield are fully indemnified by the Reis stockholders and $250,000 of the cash portion and 30,637 shares of the stock portion of the aggregate merger consideration otherwise payable to Reis stockholders,
other than Wellsford Capital, will be held in escrow for purposes of the indemnification; this escrowed amount is not the sole recourse for indemnification of the stockholder representatives; |
| the risk of diverting the attention of Reiss senior management from other strategic priorities in order to implement the merger, and combine the companies and their operations and infrastructure following the merger; |
| the fact that Wellsford historically has been in the real estate merchant banking business and so its prior business and its current real estate asset base differs from Reiss and may affect the stock price of the combined company; |
| current Reis stockholders will own approximately 39% of Wellsford, whose business will consist primarily of Reiss current business; and |
| each of the factors described in Risk FactorsRisk Factors Relating to the Merger beginning on page 23. |
The foregoing information and factors considered by Reiss board of directors in its decision to declare advisable and approve and adopt the merger agreement and the merger and to recommend the approval of the merger and the adoption of the merger agreement by Reiss stockholders are not intended to be exhaustive but are believed to include each of the material factors considered by Reiss board of directors. In view of the wide variety of factors considered with its evaluation of the merger and the complexity of these matters, the Reis board of directors did not find it useful, and did not attempt, to quantify, rank or otherwise assign relative weights to these factors. In considering the factors described above, individual members of the Reis board of directors may have given different weight to different factors. Reiss board of directors conducted an overall analysis of the factors described above, including through discussions with, and questioning of, Reiss
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senior management and Reiss legal and financial advisors, and considered the factors overall to be favorable to, and to support, its determination. If the merger is not consummated, Reis intends to continue to operate its business substantially in the manner it is operated today. From time to time, it will evaluate and review its business operations, dividend policy and capitalization, and make such changes as it deems appropriate, and continue to seek to identify strategic transactions and financial alternatives to maximize its stockholder value.
Opinion of Financial Advisor to the Wellsford Board of Directors |
The description of the fairness opinion of Lazard, Wellsfords financial advisor in connection with the merger is set forth below. This description is qualified in its entirety by reference to the full text of the opinion included as Annex B to this joint proxy statement/ prospectus. You may read the opinion for a discussion of the assumptions made, procedures followed, matters considered and limitations on the reviews undertaken by Lazard in rendering its opinion.
Opinion of Lazard Frères & Co. LLC |
Lazard was engaged by Wellsford as its financial advisor with respect to an acquisition of, or a merger involving, Reis. In connection with the consideration by the Wellsford board of directors of the merger agreement, Lazard delivered its written and oral opinion to Wellsfords board of directors, dated October 11, 2006, that, as of such date, based upon and subject to the considerations and assumptions set forth in its opinion, the aggregate merger consideration to be paid by Wellsford in the merger was fair to Wellsford from a financial point of view.
The full text of the Lazard opinion is attached as Annex B to this joint proxy statement/prospectus and is incorporated herein by reference. The description of the Lazard opinion set forth below is qualified in its entirety by reference to the full text of the Lazard opinion. Wellsford stockholders are urged to read the Lazard opinion in its entirety for a description of the procedures followed, assumptions made, matters considered and qualifications and limitations on the review undertaken by Lazard in connection with rendering its opinion. Lazards written opinion is directed to Wellsfords board of directors and only addresses the fairness to Wellsford of the aggregate merger consideration to be paid in the merger from a financial point of view as of the date of the opinion. Lazards written opinion does not address any other aspect of the merger and does not constitute a recommendation to any Wellsford stockholder as to how the stockholder should vote on any matter relating to the merger. The following is only a summary of the Lazard opinion. Wellsford stockholders are urged to read the entire opinion.
Procedures Followed |
In connection with its opinion, Lazard made the reviews and inquiries and performed the analyses that it deemed necessary and appropriate under the circumstances. Among other things, Lazard:
1. | reviewed the financial terms and conditions of the merger agreement; |
2. | analyzed certain historical business and financial information relating to Wellsford and Reis; |
3. | reviewed various financial forecasts and other data provided to Lazard by Wellsford and Reis relating to their respective businesses; |
4. | held discussions with members of the senior management of both Wellsford and Reis with respect to the business and prospects of Wellsford and Reis, respectively, and the strategic objectives of each; |
5. | reviewed public information with respect to certain other companies in lines of businesses it believes to be generally comparable to the businesses of Wellsford and Reis; |
6. | reviewed the financial terms of certain business combinations involving companies in lines of businesses it believes to be generally comparable to those of Reis; |
7. | reviewed the historical stock prices and trading volume of Wellsford common stock; and |
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8. | conducted additional financial studies, analyses and investigations, as deemed appropriate. |
Material Assumptions Made and Qualifications and Limitations on the Review Undertaken |
Lazard relied upon the accuracy and completeness of the foregoing information and did not assume any responsibility for any independent verification of this information or an independent valuation or appraisal of any of the assets or liabilities of Wellsford or Reis, or with respect to the solvency or fair value of Wellsford or Reis. With respect to financial forecasts, Lazard assumed that they were reasonably prepared on bases reflecting the best currently available estimates and judgments of management of Wellsford or Reis as to the future financial performance of Wellsford and of Reis, respectively. Lazard assumed no responsibility for and expressed no view as to these forecasts or the assumptions on which they were based.
Lazard noted that its opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to Lazard as of, the date of its opinion. Lazard assumed no responsibility for updating or revising its opinion based on circumstances or events occurring after the date of its opinion. Further, Lazard did not express any opinion as to the price at which the common stock of Wellsford may trade subsequent to the announcement of the merger.
Lazard also assumed that the merger would be consummated on the terms and subject to the conditions described in the merger agreement, without any waiver or modification of any material terms or conditions by Wellsford or Reis, and that obtaining the necessary regulatory approvals for the merger would not have an adverse effect on Wellsford or Reis. In addition, Lazard also assumed that
| the aggregate amount of cash payable as consideration for the Reis common stock, Reis Series A preferred stock, Reis Series B preferred stock, Reis Series C preferred stock and Reis Series D preferred stock was no greater than $34,579,414; |
| the aggregate number of shares of Wellsford common stock payable as consideration for the Reis common stock, Reis Series A preferred stock, Reis Series B preferred stock, Reis Series C preferred stock, and Reis Series D preferred stock (other than to Wellsford
Capital) was no greater than 4,237,549; and |
| the aggregate amount of the consideration payable with respect to outstanding options of Reis was no greater than $4,714,356. |
REIS Valuation |
The following is a brief summary of the material financial and comparative analyses with respect to Reis which Lazard deemed to be appropriate for this type of transaction and that were performed by Lazard in connection with rendering its opinion. As part of the analysis to consider fairness of the transaction, Lazard reviewed several valuation methodologies and metrics to evaluate the purchase price of Reiss equity and per share value as follows:
Public Market Valuation Analysis |
Lazard performed a public market valuation analysis based on financial multiples of selected comparable companies in order to derive a range of equity values for Reis and a range of implied per share values for Reis common stock and options, assuming conversion to Reis common stock of all outstanding shares of Reis preferred stock. In performing this analysis, Lazard reviewed certain financial information for Reis and compared this information to corresponding financial information for thirteen other information services companies (including two commercial real estate information services companies) and twelve market research companies.
The information services companies included in this analysis were:
| CoStar Group (a commercial real estate information services company) |
| LoopNet (a commercial real estate information services company) |
| Choicepoint Inc |
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| Dow Jones & Co Inc |
| Dun & Bradstreet Corp |
| Equifax Inc |
| Factset Research Systems Inc |
| Fimalac |
| Interactive Data Corp |
| McGraw-Hill Companies |
| Moodys Corp |
| Reuters Group |
| Thomson Corp |
The market research companies included in this analysis were:
| Advisory Board |
| Arbitron |
| Datamonitor |
| Forrester Research |
| Gartner |
| GfK |
| Greenfield Online |
| Harris Interactive |
| IMS Health |
| Ipsos |
| Jupitermedia |
| Taylor Nelson |
Using publicly available information and market data as of October 6, 2006, Lazard calculated the enterprise value of each of the comparable companies as a multiple of their respective 2006 and 2007 estimated earnings before interest, tax, depreciation and amortization, or EBITDA:
Low | High | ||||||
Enterprise Value as a Multiple of 2006E EBITDA |
13.0x | 29.0x | |||||
Enterprise Value as a Multiple of 2007E EBITDA |
12.0x | 20.0x |
For the purposes of calculating the amounts set forth in the foregoing table, the high-end of the range was determined based on the commercial real estate information services companies and the low-end of the range was determined based on the other information services companies and the market research companies.
By multiplying the enterprise value to EBITDA multiples for 2006E and 2007E, calculated in the public market valuation analysis, by the financial forecasts of 2006E and 2007E EBITDA for Reis, based on projections provided by Reis management (adjusted for estimated costs associated with being a public company, as estimated by Wellsford management), and adjusting the result for net cash, the tax benefit of net operating losses and other adjustments, Lazard derived a range of implied per share values of $6.91 to $12.00 for the Reis common stock and options, assuming conversion to Reis common stock of all outstanding shares of Reis preferred stock.
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Precedent Transaction Analysis |
Lazard performed a precedent transactions analysis in order to derive a range of equity values for Reis and a range of implied per share values for Reis common stock and options, assuming conversion to Reis common stock of all outstanding shares of Reis preferred stock. The precedent transactions analysis is based on multiples of transaction values of each of the selected comparable merger transactions to the target companies latest 12-month-period, or LTM EBITDA. In connection with this analysis, Lazard reviewed the following transactions involving companies in information services, which include both U.S. and international companies, and market research sectors:
Acquiror |
Target | |||
Information Services Sector |
||||
U.S. Transactions |
||||
Vestar Capital Partners |
MediMedia USA | |||
Bankrate |
MMIS | |||
LexisNexis Group |
Seisint | |||
Thomson |
Information Holdings | |||
infoUSA |
OneSource Information Services | |||
Dow Jones & Co |
Alternative Investor Group | |||
International Transactions |
||||
Apax |
Incisive Media | |||
Emap |
Worth Global Style Network | |||
Numis |
Centaur Media | |||
McGraw-Hill |
Crisil | |||
Market Research Sector |
||||
infoUSA |
Opinion Research Corp | |||
Private Equity Consortium |
VNU | |||
VNU |
IMS Health | |||
GfK |
NOP World | |||
Gartner |
META Group Inc |
Using publicly available information, Lazard compared the transaction value of the selected precedent transactions as a multiple of the LTM EBITDA in such transactions:
Transaction Value as a Multiple of LTM EBITDA |
|||||
Low | High | ||||
12.0x | 17.0x |
Using the transaction values to LTM EBITDA multiples from the selected precedent transactions, the financial forecasts of 2006 EBITDA for Reis, based on projections provided by Reis management, and adjustments for net cash, net operating losses and other adjustments, Lazard derived a range of implied per share values of $7.84 to $10.59 for Reis common stock and options, assuming conversion to Reis common stock of all outstanding shares of Reis preferred stock.
Discounted Cash Flow Analysis |
Lazard performed a discounted cash flow analysis in order to derive a range of equity values for Reis and a range of implied per share values for Reis common stock and options, assuming conversion to Reis common stock of all outstanding shares of Reis preferred stock. The discounted cash flow analysis is based on the present value of the projected unlevered free cash flow of Reis between July 1, 2006 and
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December 31, 2011 and the present value of the terminal value of Reis, based on its projected 2012 EBITDA. The discounted cash flow analysis was based on financial forecasts for Reis, based on projections provided by Reis management, and on a range of discount rates from 12% to 16% and exit multiples of 10.0x to 12.0x 2012 EBITDA. The range of discount rates used in this analysis was chosen to reflect Reiss weighted average cost of capital. Lazard calculated a range of implied enterprise values for Reis by adding the present values calculated for the unlevered projected free cash flow, net operating losses and other adjustments, and terminal values (calculated by using exit multiples described in the preceding sentence), in each case using the discount rates described in the preceding sentence. A range of implied equity values was calculated by adding net cash to each of the derived implied enterprise values. Using the ranges of the discount rates (12% to 16%) and EBITDA exit multiples (10.0x to 12.0x), Lazard derived a range of implied per share values of $13.76 to $18.65 for Reis common stock and options, assuming conversion to Reis common stock of all outstanding shares of Reis preferred stock.
Wellsford Valuation |
Lazard also reviewed several valuation methodologies and metrics, as summarized below, to evaluate the implied value of the per share stock consideration to be paid by Wellsford as part of the transaction, which is referred to as the Reference Value:
Liquidation Valuation Analysis |
Lazard performed a liquidation valuation analysis of Wellsford common stock by summing the liquidation values of its non-operating assets and liabilities and the values of Wellsford development projects in Gold Peak, East Lyme, East Lyme Land and Claverack, referred to collectively as the development projects. The liquidation values of Wellsfords assets and liabilities are based on Wellsfords reported liquidation accounting values and other estimates. As part of this analysis, Lazard assumed that Wellsfords investment in Reis is valued at $8.16 per share, excluding any non-liquidity discount of a minority stockholder. Lazard performed two variations of liquidation valuation analysis.
The first liquidation valuation was a project-level discounted cash flow analysis. Lazard derived an implied per share Reference Value of Wellsford common stock by adding the liquidation values for Wellsfords non-operating assets and liabilities and the values of its development projects. Lazard used a discounted cash flow analysis, based on cash flow projections provided by Wellsford management, to value Gold Peak, East Lyme and Claverack. Lazard used a ratio of price to tangible book value, based on comparable homebuilders that have a market capitalization of less than $750,000,000 to value East Lyme Land. The high-end of the valuation range calculated by Lazard used Wellsfords June 30, 2006 reported liquidation values and other estimates for non-operating assets and liabilities to which Lazard added the values of Wellsfords development projects. The values of Wellsfords development projects (except for East Lyme Land) were estimated using a discounted cash flow analysis, based on cash flows for East Lyme , Claverack and Gold Peak, discounted at 18%, 20% and 12%, respectively. East Lyme Land was valued at 1.35x GAAP book value, based on the high-end range of price to tangible book values for comparable homebuilders that have a market capitalization of less than $750,000,000. The low-end of the valuation range calculated by Lazard used Wellsfords June 30, 2006 reported liquidation values and other estimates for Wellsfords non-operating assets and liabilities to which Lazard added the values of Wellsfords development projects. The values of Wellsfords development projects (except for East Lyme Land) were estimated using a discounted cash flow analysis, assuming a 15% reduction to estimated sales prices in East Lyme , Claverack, and Phase III of Gold Peak discounted at 20%, 22% and 15% (with respect to all Phases of Gold Peak), respectively. East Lyme Land was valued at 0.55x GAAP book value, based on the low-end range of price to tangible book values for comparable homebuilders that have a market capitalization of less than $750,000,000. Using this analysis, Lazard derived a range of implied per share Reference Values of $7.09 to $9.39 for the Wellsford common stock.
The second liquidation valuation was a project-level public market analysis. Lazard derived an implied per share Reference Value of Wellsford common stock by summing the liquidation value for Wellsfords non-operating assets and liabilities and the values of its development projects, based on multiples of price to tangible book value. The high-end of the valuation range calculated by Lazard used Wellsfords June 30, 2006 reported liquidation values and other estimates for non-operating assets and liabilities. Wellsfords
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development projects were valued at 1.35x GAAP book value, based on the high-end range of price to tangible book values for comparable homebuilders that have a market capitalization of less than $750,000,000. The low-end of the valuation range calculated by Lazard used Wellsfords June 30, 2006 reported liquidation values and other estimates for non-operating assets and liabilities. Wellsfords development projects valued at 0.55x GAAP book value based on the low-end range of price to tangible book values for comparable homebuilders that have a market capitalization of less than $750,000,000. Using this analysis, Lazard derived a range of implied per share Reference Values of $7.19 to $9.53 for the Wellsford common stock.
Corporate Level Discounted Cash Flow Valuation |
Lazard performed a discounted cash flow analysis in order to derive a range of implied per share Reference Values for the Wellsford common stock using the present values of Wellsfords projected free cash flow between July 1, 2006 and December 31, 2010. Cash flow projections were based on Wellsford managements projections for the orderly liquidation of the companys non-operating assets and development projects. As part of this analysis, Lazard assumed Wellsfords investment in Reis is valued at $8.16 per share, excluding any non-liquidity discount of a minority stockholder. Lazard calculated the implied equity value of Wellsford by adding the sum of the present values of Wellsfords projected free cash flow to the cash it had on its balance sheet as of June 30, 2006 and subtracting transaction fees relating to the transaction, which have been incurred, according to Wellsford management, regardless of the outcome of the transaction. Lazard calculated a range of implied equity values for Wellsford by applying a range of discount rates of 15% to 19%, based on Wellsfords estimated cost of capital, and a reduction of 0% to 15% in sales prices at East Lyme, Claverack and phase III of Gold Peak and in net cash flow of East Lyme Land. Using this analysis, Lazard derived a range of implied per share Reference Values of $7.30 to $9.18 for the Wellsford common stock.
Illustrative Dividend Discount Valuation Analysis |
Lazard developed an illustrative dividend discount model in order to derive a range of implied per share Reference Values for the Wellsford common stock based on the present value of Wellsfords projected liquidating dividend distributions. Lazard calculated the projected free cash flow generated by Wellsford between July 1, 2006 and December 31, 2010, based on Wellsford managements projections for the orderly liquidation of the companys non-operating assets and development projects. As part of this analysis, Lazard assumed Wellsfords investment in Reis is valued at $8.16 per share, excluding any non-liquidity discount of a minority stockholder. Lazard calculated the companys year-end cash balance before liquidating dividend distributions by adding Wellsfords annual free cash flow to the cash that Wellsford had on its balance sheet in the beginning of each period (adjusted for payments related to transaction fees that have been incurred, according to Wellsford management, regardless of the outcome of the transaction). Lazard assumed, as directed by Wellsford management, that Wellsford will distribute all cash over $35 million to its stockholders at the end of each year starting in the second half of 2006 through 2010 and that the remaining cash will be distributed as a liquidating dividend at the end of 2010. Lazard calculated the implied equity value for Wellsford by summing the present values of Wellsfords projected liquidating dividend distributions. Lazard calculated a range of implied equity values for Wellsford by applying a range of discount rates of 15% to 19%, based on Wellsfords estimated cost of capital, and a reduction of 0% to 15% in sales prices at East Lyme, Claverack and phase III of Gold Peak and in net cash flow of East Lyme Land. Using this analysis, Lazard derived a range of implied per share Reference Values of $5.28 to $7.45 for the Wellsford common stock.
Stock Price Analysis |
Lazard reviewed the per share prices of the Wellsford common stock on the close of December 15, 2005 (one day after Wellsford made its initial liquidating distribution, pursuant to the Plan, of $14.00 per share), the average closing price since December 15, 2005, the intra-day high and low share prices since December 15, 2005, the per share price on the close of October 6, 2006, the 10-day closing average, 20-day closing average and 60-day closing average share price as of October 6, 2006 and the 2006 average closing share price. The following table illustrates the stock prices during these periods:
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Period |
Price | |||
Close at December 15, 2005 |
$ | 5.85 | ||
Closing average since December 15, 2005 |
$ | 6.86 | ||
Intra-day high since December 15, 2005 |
$ | 8.50 | ||
Intra-day low since December 15, 2005 |
$ | 5.50 | ||
Closing at October 6, 2006 |
$ | 7.49 | ||
10-day closing average as of October 6, 2006 |
$ | 7.43 | ||
20-day closing average as of October 6, 2006 |
$ | 7.28 | ||
60-day closing average as of October 6, 2006 |
$ | 7.05 | ||
2006 closing average |
$ | 6.92 |
Lazard observed that the Wellsford Reference Value of $8.16 per share implies a premium of 8.9% to Wellsfords closing share price on the close of October 6, 2006, a premium of 15.7% to its 60-day average as of October 6, 2006 and a premium of 19.0% to the average share price since December 15, 2005.
Summary and Qualification of Analyses |
Lazard performed a variety of financial and comparative analyses solely for the purpose of providing its opinion to Wellsford board of directors that the consideration to be offered in the merger was fair to Wellsford from a financial point of view. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to a partial analysis or summary description. Accordingly, notwithstanding the separate analyses summarized above, Lazard believes that its analyses must be considered as a whole and that selecting portions of the analyses or factors considered by it, without considering all applicable factors or analyses, or attempting to ascribe relative weights to some or all these analyses and factors could create an incomplete view of the evaluation process underlying the Lazard opinion.
In its analyses, Lazard made numerous assumptions with respect to industry performance, general business, economic, market and financial conditions and other matters, many of which are beyond the control of Wellsford or Reis. The estimates contained in these analyses and the valuation ranges resulting from any particular analysis do not necessarily indicate actual values or predict future results or values, which may be significantly more or less favorable than those suggested by these analyses. Lazard did not assign any specific weight to any of the analyses described above and did not draw any specific conclusions from or with regard to any one method of analysis. In addition, analyses relating to the value of the businesses or securities are not appraisals and do not reflect the prices at which the businesses or securities may actually be sold or the prices at which their securities may trade. As a result, these analyses and estimates are inherently subject to substantial uncertainty.
No company or transaction used in any of the analyses is identical to Wellsford, Reis or the merger. Accordingly, an analysis of the results of the foregoing necessarily involves complex considerations and judgments concerning financial and operating characteristics of Wellsford and Reis and other factors that could affect the public trading values or the announced transaction values, as the case may be, of Wellsford and Reis and the companies to which the comparison is being made. Mathematical analysis (such as determining the mean or median) is not in itself a meaningful method of using comparable transaction data or comparable company data.
Other Matters |
Lazard was not asked to consider, and Lazards opinion did not address, the relative merits of the merger, any alternative potential transaction or Reiss underlying decision to effect the merger. Lazards opinion and financial analyses were not the only factors considered by Wellsford board of directors in its evaluation of the merger and should not be viewed as determinative of the views of Wellsford board of directors or management. Lazard has consented to the inclusion of and references to its opinion in this joint proxy statement/ prospectus.
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Under the terms of Lazards engagement, Wellsford has agreed to pay Lazard a fee for its services, a majority of which is contingent on the consummation of the merger. Wellsford has also agreed to reimburse Lazard for travel and other out-of-pocket expenses incurred in performing its services, including the fees and expenses of its legal counsel. In addition, Wellsford agreed to indemnify Lazard against certain liabilities, including liabilities under the Federal securities laws relating to or arising out of Lazards engagement.
Lazard is an internationally recognized investment banking firm and is continually engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of listed and unlisted securities, private placements, leveraged buyouts, and valuations for real estate, corporate and other purposes. In the ordinary course of their business, affiliates of Lazard and LFCM Holdings LLC (an entity indirectly owned in large part by managing directors of Lazard) may actively trade securities of Wellsford for their own accounts and for the accounts of their customers and, accordingly, may at any time hold a long or a short position in such securities. In the past, Lazard has provided investment banking services to Wellsford for which it has received customary fees.
Opinion of Financial Advisor to the Reis Board of Directors |
The description of the fairness opinion of Houlihan Lokey, Reiss financial advisor in connection with the merger, is set forth below. The description is qualified in its entirety by reference to the full text of the opinion included as Annex C to this joint proxy statement/ prospectus. You may read the opinion for a discussion of the assumptions made, procedures followed, matters considered and limitations on the reviews undertaken by Houlihan Lokey.
Opinion of Houlihan Lokey Howard & Zukin Financial Advisors, Inc. |
Houlihan Lokey was engaged by Reis to provide an opinion to Reiss board of directors regarding the fairness from a financial point of view to holders of Reis common stock (other than Wellsford Capital, and treating Reis preferred stock on an as converted to common stock basis) of the merger consideration to be received by them in the merger.
On October 11, 2006, Houlihan Lokey rendered its oral opinion to Reiss board of directors, which Houlihan Lokey subsequently confirmed in writing by delivery of its written opinion, dated October 11, 2006, that, as of that date and based upon and subject to the assumptions, qualifications, limitations and other matters described in its written opinion, the merger consideration to be received by holders of Reis common stock (other than Wellsford Capital, and treating Reis preferred stock on an as converted to common stock basis) in the merger was fair to them from a financial point of view.
The full text of Houlihan Lokeys written opinion, dated October 11, 2006, to Reiss board of directors, which sets forth the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in preparing its opinion is included as Annex C to this joint proxy statement/prospectus.
Houlihan Lokey directed its opinion to, and provided its opinion for the use and benefit of, Reiss board of directors in connection with its evaluation of the merger. The opinion addresses only the fairness from a financial point of view of the merger consideration to be received by the holders of Reis common stock (other than Wellsford Capital, and treating Reis preferred stock on an as converted to common stock basis) in the merger and does not address any other aspect of the merger. Houlihan Lokeys opinion also does not address the merits of the merger as compared to other business strategies or transactions that might be available to Reis or any underlying business decision of Reis in connection with the merger or any other matter. This summary of Houlihan Lokeys opinion in this joint proxy statement/ prospectus is qualified in its entirety by reference to the full text of its written opinion, which is incorporated by reference in this joint proxy statement/prospectus. Reiss stockholders are encouraged to carefully read the full text of Houlihan Lokeys written opinion. However, Houlihan Lokeys written opinion and this summary are not intended to be, and do not constitute, advice or a recommendation to any stockholder as to how such stockholder should act or vote with respect to the merger.
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Procedures Followed |
In connection with its opinion, Houlihan Lokey made such reviews and inquiries and performed such analyses as it deemed necessary and appropriate under the circumstances. Among other things, Houlihan Lokey:
1. | reviewed Reiss audited financial statements for the fiscal years ended October 31, 2003, October 31, 2004 and October 31, 2005, and company-prepared interim financial information for the eight-month period ended June 30, 2006, which Reiss management has
identified as being the most current information available; |
2. | reviewed Wellsfords annual reports to stockholders on Form 10-K for the fiscal years ended December 31, 2004 and December 31, 2005, and quarterly report on Form 10-Q for the quarter ended June 30, 2006, which Wellsfords management has identified as being
the most current financial statements available; |
3. | reviewed Reiss Confidential Information Memorandum, dated November 2005, and certain offer letters from bidders; |
4. | reviewed Reiss management presentation dated July 2006; |
5. | reviewed the historical market prices and trading volume for Wellsfords publicly traded stock for the nine months ending October 6, 2006; |
6. | reviewed various analyses and documentation related to Wellsfords financial projections and nonoperating assets and liabilities including, but not limited to: |
a. | financial models and related loan documents for the Claverack, East Lyme, and Gold Peak development projects; and |
b. | internal memos regarding the valuation of Claiborne Fordham dated July 27, 2006, Mantua asset dated July 28, 2006, and Telecom asset dated July 31, 2006; |
7. | conducted site visits to the Gold Peak and East Lyme development projects; |
8. | reviewed a pro forma balance sheet reflecting the merger as of June 30, 2006, prepared by Wellsford, received on September 21, 2006; |
9. | reviewed financial forecasts and projections (a) of Reis prepared by Reiss management, (b) of Wellsford prepared by Wellsfords management, and (c) of the combined company, in each case for the calendar years ended December 31, 2006 through 2011; |
10. | met and spoke with the management of Reis and of Wellsford regarding the operations, financial condition, future prospects and projected operations and performance of Reis and Wellsford, and regarding the merger; |
11. | reviewed the following documents in connection with the merger: |
a. | Bank of Montreal term sheet for the senior secured credit facilities in the amount of $27,000,000, draft dated September 18, 2006; |
b. | the merger agreement; and |
c. | the Bank Loan documents; |
12. | reviewed certain other publicly available financial data for certain companies that Houlihan Lokey deemed relevant and publicly available transaction prices and premiums paid in other change of control transactions that Houlihan Lokey deemed relevant for companies in
industries related to Reis; and |
13. | conducted such other studies, analyses and inquiries as Houlihan Lokey has deemed appropriate. |
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Material Assumptions Made and Qualifications and Limitations on the Review Undertaken |
Houlihan Lokey has relied upon and assumed, without independent verification, the accuracy and completeness of all data, material and other information furnished, or otherwise made available, to it, discussed with or reviewed by it, or publicly available, and does not assume any responsibility with respect to such data, material and other information. In addition, management of Reis and of Wellsford have advised Houlihan Lokey, and Houlihan Lokey has assumed, that the financial forecasts and projections have been reasonably prepared on bases reflecting the best currently available estimates and judgments of such management as to the future financial results and condition of Reis and of Wellsford, and Houlihan Lokey expresses no opinion with respect to such forecasts and projections or the assumptions on which they are based. Houlihan Lokey has relied upon and assumed, without independent verification, that there has been no material change in the assets, liabilities, financial condition, results of operations, business or prospects of Reis and Wellsford since the date of the most recent financial statements of Reis and Wellsford provided to Houlihan Lokey, and that there are no information or facts that would make any of the information reviewed by Houlihan Lokey incomplete or misleading. Houlihan Lokey has not considered any aspect or implication of any transaction to which Reis or Wellsford is a party (other than the merger).
Houlihan Lokey has relied upon and assumed, without independent verification, that
| the representations and warranties of all parties to the merger agreement and all other related documents and instruments that are referred to therein are true and correct; |
| each party to all such agreements will fully and timely perform all of the covenants and agreements required to be performed by such party; |
| all conditions to the consummation of the merger will be satisfied without waiver thereof; and |
| the merger will be consummated in a timely manner in accordance with the terms described in the agreements provided to Houlihan Lokey, without any amendments or modifications thereto or any adjustment to the aggregate consideration (through offset, reduction,
indemnity claims, post-closing purchase price adjustments or otherwise). |
Houlihan Lokey also has relied upon and assumed, without independent verification, that all governmental, regulatory, and other consents and approvals necessary for the consummation of the merger will be obtained and that no delay, limitations, restrictions or conditions will be imposed that would result in the disposition of any material portion of the assets of Reis or Wellsford, or otherwise have an adverse effect on Reis or Wellsford or any expected benefits of the merger. In addition, Houlihan Lokey has relied upon and assumed, without independent verification, that the final forms of the draft documents identified above will not differ in any material respect from such draft documents.
Furthermore, other than conducting site visits as identified above, Houlihan Lokey has not been requested to make, and has not made, any physical inspection or independent appraisal of any of the assets, properties or liabilities (contingent or otherwise) of Reis, Wellsford or any other party, nor was Houlihan Lokey provided with any such appraisal. Furthermore, Houlihan Lokey has undertaken no independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which Reis or Wellsford is or may be a party or is or may be subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which Reis or Wellsford is or may be a party or is or may be subject.
Houlihan Lokey has not been requested to, and did not, (a) initiate any discussions with, or solicit any indications of interest from, third parties with respect to the merger or any alternatives to the merger, or (b) advise Reiss board of directors or any other party with respect to alternatives to the merger. Houlihan Lokeys opinion is necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Houlihan Lokey as of, the date of the opinion. Houlihan Lokey has not undertaken, and is under no obligation, to update, revise, reaffirm or withdraw its opinion, or otherwise comment on or consider events occurring after the date of the opinion. Houlihan Lokey has not considered, nor is it expressing any opinion with respect to, the prices at which the common stock of Wellsford has traded or may trade subsequent to the disclosure or consummation of the merger.
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Houlihan Lokeys opinion was furnished solely for the use and benefit of Reiss board of directors in connection with its consideration of the merger and is not intended to, and does not, confer any rights or remedies upon any other person, and is not intended to be used, and may not be used, for any other purpose, without Houlihan Lokeys express, prior written consent. Houlihan Lokeys opinion should not be construed as creating any fiduciary duty on Houlihan Lokeys part to any party. Houlihan Lokeys opinion is not intended to be, and does not constitute, a recommendation to any security holder as to how such security holder should act or vote or tender their shares with respect to the merger. Houlihan Lokeys opinion may not be disclosed, reproduced, disseminated, quoted, summarized or referred to at any time, in any manner or for any purpose, nor will any references to Houlihan Lokey or any of its affiliates be made by any recipient of the opinion, without the prior written consent of Houlihan Lokey.
Houlihan Lokey has not been requested to opine as to, and Houlihan Lokeys opinion does not address:
| the underlying business decision of Reis, Wellsford, their respective security holders or any other party to proceed with or effect the merger; |
| the fairness of any portion or aspect of the merger not expressly addressed in Houlihan Lokeys opinion; |
| the fairness of any portion or aspect of the merger to the holders of any class of securities, creditors or other constituencies of Reis, Wellsford or any other party other than those set forth in Houlihan Lokeys opinion; |
| the relative merits of the merger as compared to any alternative business strategies that might exist for Reis, Wellsford or any other party or the effect of any other transaction in which Reis, Wellsford or any other party might engage; |
| the tax or legal consequences of the merger to either Reis, Wellsford, their respective security holders, or any other party; |
| the fairness of any portion or aspect of the merger to any one class or group of Reiss or any other partys security holders vis-à-vis any other class or group of Reiss or such other partys security holders; |
| whether or not Reis, Wellsford, their respective security holders or any other party is receiving or paying reasonably equivalent value in the merger; or |
| the solvency, creditworthiness or fair value of Reis, Wellsford or any other participant in the merger under any applicable laws relating to bankruptcy, insolvency or similar matters. |
Furthermore, no opinion, counsel or interpretation is intended in matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. Houlihan Lokey has assumed that such opinions, counsel or interpretations have been or will be obtained from the appropriate professional sources. Furthermore, Houlihan Lokey has relied, with Reiss consent, on advice of the outside counsel and the independent accountants to Reis, and on the assumptions of the management of Reis and Wellsford, as to all legal, regulatory, accounting, insurance and tax matters with respect to Reis and Wellsford.
Summary of Analyses |
In preparing its opinion to Reiss board of directors, Houlihan Lokey performed a variety of analyses, including those described below. The preparation of a fairness opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytic methods employed and the adaptation and application of these methods to the unique facts and circumstances presented. As a consequence, neither a fairness opinion nor its underlying analyses is readily susceptible to partial analysis or summary description. Houlihan Lokey arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, analytic method or factor. Houlihan Lokey made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. Accordingly, Houlihan Lokey believes that its analyses must be considered as a
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whole and that selecting portions of its analyses, analytic methods and factors or focusing on information presented in tabular format, without considering all analyses and factors or the narrative description of the analyses as a whole, would create a misleading or incomplete view of the processes underlying its analyses and opinion.
No limitations or restrictions were imposed by us on the scope of Houlihan Lokeys investigation or the procedures to be followed by Houlihan Lokey in rendering its opinion. In performing its analyses, Houlihan Lokey considered general business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of the written opinion. Subsequent developments in those conditions could require a reevaluation of such analyses. However, Houlihan Lokey does not have an obligation to update, revise or reaffirm its opinion based on such developments, or otherwise. No company or business used in Houlihan Lokeys analyses for comparative purposes is identical to Reis and no transaction used in Houlihan Lokeys analyses for comparative purposes is identical to the proposed merger. While the results of each analysis were taken into account in reaching its overall conclusion with respect to fairness, Houlihan Lokey did not make separate or quantifiable judgments regarding individual analyses. The estimates contained in Houlihan Lokeys analyses and the reference value ranges indicated by any particular analysis are illustrative and not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond Reiss control and the control of Houlihan Lokey. Much of the information used in, and accordingly the results of, Houlihan Lokeys analyses are inherently subject to substantial uncertainty and, therefore, none of Reis, Wellsford, Houlihan Lokey or any other person assumes any responsibility if future results are different from those estimated.
Houlihan Lokeys opinion was provided to Reiss board of directors in connection with its consideration of the proposed merger and was only one of many factors considered by Reiss board of directors in evaluating the proposed merger. Neither Houlihan Lokeys opinion nor its analyses were determinative of the merger consideration or of the views of Reiss board of directors or management with respect to the merger.
The merger consideration was determined through arms-length negotiations between Reis and Wellsford. Houlihan Lokey did not recommend any specific merger consideration to the board of directors or advise the board of directors that any specific merger consideration constituted the only appropriate merger consideration for the merger.
The following is a brief summary of the material analyses underlying Houlihan Lokeys opinion rendered on October 11, 2006. The order of the analyses does not represent relative importance or weight given to those analyses by Houlihan Lokey. The fact that any specific analysis has been referred to in the summary below is not meant to indicate that such analysis was given greater weight than any other analysis. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying and the assumptions, qualifications and limitations affecting each analysis, would create a misleading or incomplete view of Houlihan Lokeys analyses.
For purposes of its analyses, Houlihan Lokey reviewed a number of financial metrics including:
| Enterprise Value the value of the relevant companys outstanding common equity securities (taking into account its outstanding warrants and other convertible securities) plus the value of its net debt (the value of its outstanding indebtedness, preferred stock and capital
lease obligations less the amount of cash on its balance sheet) as of a specified date. |
| EBITDA the amount of the relevant companys earnings before interest, taxes, depreciation, and amortization for a specified time period and adjusted for certain non-recurring items as Houlihan Lokey has deemed appropriate. |
| EBIT the amount of the relevant companys earnings before interest and taxes for a specified time period and adjusted for certain non-recurring items as Houlihan Lokey has deemed appropriate. |
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| Revenue the amount of the relevant companys revenue. |
Unless the context indicates otherwise, enterprise values used in the selected companies analysis described below were calculated using the closing price of the common stock of the selected information services companies listed below as of October 6, 2006, and the enterprise values for the target companies used in the selected transactions analysis described below were calculated as of the announcement date of the relevant transaction based on the purchase prices paid in the selected transactions. Accordingly, this information does not necessarily reflect current or future market conditions. Estimates of EBITDA, EBIT and Revenue for the fiscal year ending during calendar year 2006, which we refer to as the NFY Period, and for the fiscal year ending during calendar year 2007, which we refer to as the NFY+1 Period, for Reis were based on estimates provided by Reiss management. Estimates of EBITDA, EBIT and Revenue for the NFY Period and the NFY+1 Period for the selected information services companies listed below were based on publicly available I/B/E/S research analyst estimates for those information services companies.
REIS Valuation |
Selected Companies Analysis |
Houlihan Lokey calculated multiples of enterprise value and considered certain financial data of Reis and selected information services companies.
The calculated multiples included:
| Enterprise value as a multiple of estimated Revenue for the NFY Period. |
| Enterprise value as a multiple of estimated Revenue for the NFY+1 Period. |
| Enterprise value as a multiple of estimated EBITDA for the NFY Period. |
| Enterprise value as a multiple of estimated EBITDA for the NFY+1 Period. |
| Enterprise value as a multiple of estimated EBIT for the NFY Period. |
| Enterprise value as a multiple of estimated EBIT for the NFY+1 Period. |
The selected information services companies were:
| Costar Group, Inc. |
| LoopNet, Inc. |
| Dun & Bradstreet Corp. |
| ChoicePoint Inc. |
| Getty Images Inc. |
| Navteq Corporation |
| Factset Research Systems Inc. |
| Gartner, Inc. |
| Interactive Data Corporation |
| Move, Inc. |
| Edgar Online, Inc. |
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The selected companies analysis indicated the following:
Multiple Description |
High | Low | Mean | Median | |||||||||
Enterprise Value as a multiple of: |
|||||||||||||
NFY Period Revenue |
9.47X | 2.18X | 4.36X | 3.73X | |||||||||
NFY+1 Period Revenue |
6.87X | 2.03X | 3.69X | 3.33X | |||||||||
NFY Period EBITDA |
25.8X | 9.2X | 14.6X | 11.9X | |||||||||
NFY+1 Period EBITDA |
20.6X | 8.4X | 12.4X | 9.8X | |||||||||
NFY Period EBIT |
35.1X | 10.5X | 18.1X | 14.1X | |||||||||
NFY+1 Period EBIT |
30.3X | 10.6X | 16.3X | 14.3X |
Houlihan Lokey applied risk-adjusted multiple ranges based on the selected companies analysis to corresponding financial data for Reis, including estimates provided by Reiss management. The risk analysis incorporates both quantitative and qualitative risk factors which relate to, among other things, the nature of the industry in which Reis and other comparable companies are engaged. The selected companies analysis indicated an implied reference range enterprise value of approximately $83.4 million to $89.5 million.
The foregoing companies were compared to Reis for purposes of the selected companies analysis because they are companies with operations that for purposes of analysis may be considered similar to certain operations of Reis. However, Houlihan Lokey noted that no company utilized in this analysis is identical to Reis because of differences between the business mix, product mix, target end-market, regulatory environment, growth profile, operations and other characteristics of Reis and the comparable companies. Houlihan Lokey made judgments and assumptions with regard to industry performance, general business, economic, regulatory, market and financial conditions and other matters, many of which are beyond the control of Reis, such as the impact of competition on the business of Reis and on the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of Reis or the industry or in the markets generally. Houlihan Lokey believes that mathematical analyses (such as determining average and median) are not by themselves meaningful methods of using comparable company data and must be considered together with qualities, judgments and informed assumptions to arrive at sound conclusions.
Selected Transactions Analysis |
Houlihan Lokey calculated multiples of enterprise value to certain financial data based on the purchase prices in selected publicly-announced information services company transactions.
The calculated multiples included:
| Enterprise value as a multiple of EBITDA during the 12-month period ended June 30, 2006, or LTM EBITDA |
| Enterprise value as a multiple of EBIT during the 12-month period ended June 30, 2006, or LTM EBIT |
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The selected information services company transactions were:
Acquiror |
Target | |||
United Business Media plc |
Commonwealth Business Media, Inc. | |||
Bankrate, Inc. |
Mortgage Market Information Services, Inc. | |||
First Advantage Corp. |
The First American CREDCO | |||
SS&C Technologies Inc. |
Financial Models Company Inc. | |||
Gartner, Inc. |
META Group, Inc. | |||
eBay, Inc. |
Rent.com, Inc. | |||
Standard & Poors, a division of The McGraw-Hill Companies, Inc. |
Capital IQ, Inc. | |||
Factset Research Systems Inc. |
JCF Group, Inc. | |||
Marsh & McLennan Companies, Inc. |
Kroll Inc. | |||
InfoUSA.com, Inc. |
OneSource Information Services, Inc. | |||
Acxiom Corporation |
Consodata S.A. | |||
The Thomson Corporation |
Elite Information Group, Inc. | |||
Reuters Group PLC |
Multex.com, Inc. | |||
Dun & Bradstreet Corp. |
Hoovers, Inc. | |||
Moodys Corp. |
KMV, L.L.C. |
The selected transactions analysis indicated the following:
Multiple Description |
High | Low | Mean | Median | |||||||||
Enterprise Value as a multiple of: |
|||||||||||||
LTM EBITDA |
25.1X | 8.0X | 14.1X | 13.2X | |||||||||
LTM EBIT |
43.0X | 9.5X | 19.0X | 15.4X |
Houlihan Lokey applied multiple ranges based on the selected transactions analysis to corresponding financial data for Reis. The selected transactions analysis indicated an implied reference range enterprise value of approximately $83.7 million to $89.1 million.
None of the transactions utilized in the selected transactions analysis are identical to the merger. In evaluating these transactions, Houlihan Lokey made judgments and assumptions with regard to industry performance, general business, economic, regulatory, market and financial conditions and other matters, many of which are beyond the control of Reis, such as the impact of competition on the business of Reis and on the industry generally, industry growth and the absence of any adverse material change in the financial condition and prospects of Reis or the industry or in the markets generally, which could affect the public trading value of Reis and the aggregate value of the transactions to which it is being compared. Houlihan Lokey believes that mathematical analyses (such as determining average and median) are not by themselves meaningful methods of using comparable company data and must be considered together with qualities, judgments and informed assumptions to arrive at sound conclusions.
Discounted Cash Flow Analysis |
Houlihan Lokey also calculated the net present value of Reiss after-tax, debt-free cash flows based on estimates provided by Reiss management. In performing this analysis, Houlihan Lokey used discount rates ranging from 17% to 21% based on Reiss estimated weighted average cost of capital and terminal value multiples ranging from 8.0x to 12.0x based on the EBITDA multiples calculated from the selected companies analysis. The discounted cash flow analysis indicated an implied reference range enterprise value of approximately $100.0 million to $128.4 million.
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Wellsford Valuation |
Liquidation Analysis |
Houlihan Lokey calculated the liquidation value of Wellsford to be $55.8 million by subtracting Wellsfords total liabilities from total assets (in each case based upon Wellsfords balance sheet as of June 30, 2006 as filed by Wellsford with the SEC on its quarterly report on Form 10-Q).
Sum-of-the-Parts Analysis |
Houlihan Lokey calculated the net present value of cash available for distribution of each of the Gold Peak project, the East Lyme project, the East Lyme Land project and the Claverack project, in each case based on estimates provided by Wellsfords management. In performing this analysis, Houlihan Lokey used the following ranges of discount rates for each of its analyses, in each case based on an estimated required rate of equity return, based on, but not limited to, the percentage of completion of the project, market condition, competitive landscape and additional information provided by Wellsfords management and deemed appropriate for consideration by Houlihan Lokey:
Component Part | Range of Discount Rates | |||
Gold Peak |
14.5% 20.5 | % | ||
East Lyme |
22.0% 28.0 | % | ||
East Lyme Land |
23.0% 29.0 | % | ||
Claverack |
23.0% 29.0 | % |
After taking into account general and administrative expenses and other nonoperating assets and liabilities and Wellsfords current 23.18% equity ownership of Reis (taking into account the range of values described above), the sum-of-the-parts analysis indicated an implied reference range aggregate equity value of approximately $49.8 million to $56.0 million, or approximately $7.70 to $8.66 per share.
Discounted Cash Flow Analysis |
Houlihan Lokey also calculated the net present value of Wellsfords after-tax debt-free cash flows based on estimates provided by Wellsfords management. In performing this analysis, Houlihan Lokey used discount rates ranging from 22.0% to 28.0% based on an estimated required rate of equity return, which also represented the high end of the range of discount rates used in the sum-of-the-parts analysis. The discounted cash flow analysis indicated an implied reference range aggregate equity value of approximately $55.6 million to $60.6 million, or $8.60 to $9.36 per share.
Stock Price Information |
As of October 6, 2006, the following chart sets forth the average closing stock price of Wellsfords common stock for the periods indicated:
Period |
Average Closing Stock Price | |||
1 Day |
$ | 7.49 | ||
1 Week |
$ | 7.38 | ||
1 Month |
$ | 7.28 | ||
3 Months |
$ | 7.05 | ||
6 Months |
$ | 7.25 |
Combined Company Valuation |
Sum-of-the-Parts Analysis |
Houlihan Lokey calculated the net present value of cash available for distribution of each of the Gold Peak project, the East Lyme project, the East Lyme Land project and the Claverack project, in each case based on estimates provided by Wellsfords management. In performing this analysis, Houlihan Lokey used the following ranges of discount rates for each of its analyses, in each case based on an estimated required
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rate of equity return, based on, but not limited to, the percentage of completion of the project, market condition, competitive landscape and additional information provided by Wellsfords management and deemed appropriate for consideration by Houlihan Lokey:
Component Part |
Range of Discount Rates | |||
Gold Peak |
14.5% 20.5 | % | ||
East Lyme |
22.0% 28.0 | % | ||
East Lyme Land |
23.0% 29.0 | % | ||
Claverack |
23.0% 29.0 | % |
After taking into account (1) general and administrative expenses and other nonoperating assets and liabilities of the combined company, and (2) a range of enterprise value from operations for Reis, the sum-of-the-parts analysis indicated an implied reference range aggregate equity value of approximately $72.7 million to $86.6 million (or approximately $65.5 million to $78.6 million if the net present value of unlevered free cash flows from Wellsfords net operating loss, valued between approximately $7.3 million and $8.0 million using discount rates ranging from 18.0% to 21.0% based on an estimated required rate of equity return calculated from the cost of equity of the selected comparable companies listed above, is excluded).
Discounted Cash Flow Analysis |
Houlihan Lokey also calculated the net present value of the combined companys cash flows available to equity holders based on estimates provided by Reiss management and Wellsfords management. In performing this analysis, Houlihan Lokey used discount rates ranging from 16.5% to 22.5% based on an estimated required rate of equity return calculated from the cost of equity of the selected comparable companies listed above. The discounted cash flow analysis indicated an implied reference range aggregate equity value of approximately $98.1 million to $125.2 million.
Other Matters |
Reis engaged Houlihan Lokey based on Houlihan Lokeys experience and reputation. Houlihan Lokey is regularly engaged to render financial opinions in connection with mergers and acquisitions, financial restructuring, tax matters, and employee stock option plan matters, matters related to the Employee Retirement Income Security Act of 1974, corporate planning, and for other purposes. Reis and Houlihan Lokey entered into a letter agreement on September 6, 2006 to provide an opinion to Reiss board of directors regarding the fairness from a financial point of view to the holders of Reis common stock (other than Wellsford Capital, and treating Reis preferred stock on an as converted to common stock basis) of the merger consideration to be received by the holders of Reis common stock (other than Wellsford Capital, and treating Reis preferred stock on an as converted to common stock basis) in the merger. Pursuant to the engagement letter, Reis will pay Houlihan Lokey a customary fee for its services, a portion of which became payable upon the execution of Houlihan Lokeys engagement letter, a portion of which became payable upon the delivery of Houlihan Lokeys opinion, regardless of the conclusion reached therein and a portion of which became payable upon Houlihan Lokey consenting to the inclusion of the description of its opinion and the text of the opinion in this joint proxy statement/prospectus. Reis has also agreed to reimburse Houlihan Lokey for certain expenses, including attorneys fees and disbursements, and to indemnify Houlihan Lokey and certain related parties against certain liabilities and expenses, including certain liabilities under the Federal securities laws arising out of or relating to Houlihan Lokeys engagement.
In the ordinary course of business, certain of Houlihan Lokeys affiliates may acquire, hold or sell, long or short positions, or trade or otherwise effect transactions, in debt, equity, and other securities and financial instruments (including bank loans and other obligations) of Reis, Wellsford and any other party that may be involved in the merger.
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Amendment of Reiss Amended and Restated Certificate of Incorporation |
Reis stockholders are being asked to consider and vote upon a proposal to approve an amendment to Reiss amended and restated certificate of incorporation. The proposed amendment will amend Reiss amended and restated certificate of incorporation in two respects.
First, currently Reis is required to mail to holders of Reis preferred stock written notice of certain events, including a merger, not less than 45 days prior to the consummation of certain transactions, including a merger. In order to expedite consummation of the merger, Reiss board of directors is recommending that Reiss stockholders approve amending the amended and restated certificate of incorporation to eliminate this notice requirement with respect to the merger (but not with respect to any other transaction to which this requirement applies).
Second, Reiss stockholders are also being asked to consider and vote upon a proposal to amend the amended and restated certificate of incorporation to clarify the basis for calculating the merger consideration to be received in the merger by Reiss preferred stockholders and to clarify that they will not have any right to their payment of the merger consideration prior to or in preference of Reiss common stockholders. Currently, the amended and restated certificate of incorporation provides that Reiss preferred stockholders are entitled to receive upon a liquidating event such as the merger the greater of (1) the liquidation amount of each share of preferred stock plus all accrued but unpaid dividends on each of these shares and (2) the amount each share of Reis preferred stock would have been entitled to receive if it had been converted into Reis common stock at the conversion price applicable to each share. The liquidation amount for each share of Reis Series A preferred stock, B preferred stock, and C preferred stock is $100.00, and the liquidation amount for each share of Reis Series D preferred stock is $200.00.
Reiss board of directors has calculated the amount of merger consideration to be received by holders of Reis preferred stock in the case of each scenario described above and has determined that the liquidation amount is less than the amount of merger consideration payable by treating the Reis preferred stock as if it had been converted to Reis common stock immediately prior to the merger. For more information regarding how this calculation was made, see The Reis Special MeetingSolicitation of Proxies beginning on page 128.
Since the amended and restated certificate of incorporation provides for both a general priority of payment to Reiss preferred stockholders over Reis common stockholders upon a liquidating event, such as the merger, and an entitlement to receive at least the amount payable to the holders of Reis preferred stock that would be payable if the preferred stock had been converted into Reis common stock prior to the merger, Reiss board of directors seeks to amend the amended and restated certificate of incorporation to clarify that with respect to the merger, preferred stockholders will be entitled to receive merger consideration equal to the amount each share of Reis preferred stock would have been entitled to receive had it been converted into Reis common stock at the applicable conversion price, and that the merger consideration will be subject to all the escrow, indemnification and other obligations applicable to the Reis common stock under the terms of the merger agreement. Reiss board of directors believes that the amendment reflects an appropriate interpretation of the above described provisions and is consistent with the intent of Reis stockholders at the time the amended and restated certificate of incorporation became effective.
Accordingly, the proposed amendment reflects that holders of Reis preferred stock will be entitled to receive the merger consideration they would have received if their shares of Reis preferred stock had been converted into Reis common stock immediately prior to the merger. Additionally, although the amended and restated certificate of incorporation currently provides that Reiss preferred stock has priority over Reiss common stock in a liquidation event such as the merger, Reiss preferred stockholders, as a result of the proposed amendment, will nevertheless be subject to the obligations of the merger agreement, including the escrow and indemnification and all other related provisions, to which Reiss common stockholders are subject and will not have priority with respect to payment of the merger consideration.
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Interests of Wellsford and Reis Directors and Executive Officers in the Merger |
Governance Structure and Management Positions |
The articles of organization and the limited liability company agreement of Merger Sub in effect immediately before the effective time of the merger will be the articles of organization and the limited liability company agreement of the surviving company.
After consummation of the proposed merger, it is contemplated that the board of directors of Wellsford will be composed of ten members, including the six existing Wellsford directors, as well as Lloyd Lynford, Jonathan Garfield, and another two individuals who have not been identified at this time, but who will meet the appropriate independence standards. Wellsfords board of directors is classified into three classes. Lloyd Lynford and Mr. Garfield will be appointed to the class of directors whose term expires at the 2007 annual meeting of Wellsfords stockholders. One of the additional independent members will be appointed to the class of directors whose term expires at the 2009 annual meeting of stockholders. It has not yet been determined to which class the tenth director will be appointed.
Pursuant to both the merger agreement and employment agreements among Wellsford, Merger Sub, and each of Lloyd Lynford and Mr. Garfield that will become effective as of the effective time of the merger, Lloyd Lynford will serve as Chief Executive Officer and President of Wellsford and Merger Sub and Mr. Garfield will serve as the Executive Vice President of Wellsford and Merger Sub. Each of the employment agreements has a three-year term. Before the effective time of the merger, Wellsford expects to enter into employment agreements, or amended employment agreements, as applicable, with Jeffrey Lynford, Mark Cantaluppi, Wellsfords Chief Financial Officer and a Vice President, and certain other current executive officers of each of Wellsford and Reis.
After consummation of the proposed merger, the officers of Wellsford will be:
Name |
Position |
|||
Lloyd Lynford |
President and Chief Executive Officer | |||
Jonathan Garfield |
Executive Vice President | |||
Jeffrey H. Lynford |
Chairman of the Board | |||
David Strong |
Senior Vice President of Development | |||
Mark P. Cantaluppi |
Vice President, Chief Financial Officer and Assistant Secretary | |||
James J. Burns |
Vice Chairman and Secretary |
After consummation of the proposed merger, the officers of Reis will be:
Name |
Position |
|||
Lloyd Lynford |
President and Chief Executive Officer | |||
Jonathan Garfield |
Executive Vice President and Secretary | |||
Jeffrey H. Lynford |
Chairman of the Board | |||
William Sander |
Chief Operating Officer and Assistant Secretary | |||
Mark P. Cantaluppi |
Chief Financial Officer and Assistant Secretary | |||
Michael Richardson |
Vice President, Sales |
However, neither Lloyd Lynford nor Mr. Garfield will be appointed to the positions indicated until their respective loans from Reis have been settled in full. It is anticipated that these loans will be settled immediately after the merger is consummated through the delivery of shares of Wellsford common stock received in the merger.
For additional information on these directors and officers, including their biographies, compensation and certain relationships and related transactions, see The Merger AgreementOther AgreementsEmployment Agreements, Wellsford Special Meeting and Reis Special Meeting beginning on pages 99, 109, and 125, respectively.
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Interests of Wellsford Directors and Executive Officers in the Merger |
In considering the recommendation of the Wellsford board of directors with respect to issuing shares of Wellsford common stock in connection with the merger and the other matters to be acted upon by Wellsford stockholders at the Wellsford special meeting, Wellsford stockholders should be aware that certain members of the board of directors and executive officers of Wellsford have interests in the merger that may be different from, or in addition to, interests they may have as Wellsford stockholders. Each of the Wellsford board of directors and the Reis board of directors was aware of these potential conflicts of interest and considered them, among other matters, in reaching the decision to adopt the merger agreement and the merger, and, in the case of each board of directors, to recommend that its stockholders approve the Reis and Wellsford proposals, as applicable, set forth in this joint proxy statement/prospectus and to be presented to its stockholders for consideration at its special meeting.
Ownership Interests in Wellsford of Wellsford Directors and Executive Officers |
As of December 22, 2006, all directors and officers of Wellsford, together with their respective affiliates, beneficially owned approximately 9% of the outstanding shares of Wellsford common stock. Wellsford may not issue the shares of Wellsford common stock necessary to pay the share portion of the merger consideration unless it obtains the affirmative vote of a majority of the total votes cast by the holders of Wellsford common stock at the Wellsford special meeting (in person or by proxy).
Ownership Interests in Reis of Wellsford Directors and Executive Officers |
As of December 22, 2006, Jeffrey Lynford, a director and Chairman of the Board of Wellsford and the Chief Executive Officer of Wellsford, beneficially owned approximately 5.9% of the outstanding shares of Reis common stock and approximately 0.5% of the outstanding shares of Reis Series D preferred stock, or approximately 2.6% of Reis capital stock on an as converted to common stock basis. Edward Lowenthal, a director and stockholder of both Wellsford and of Reis beneficially owned approximately 0.5% of Reis Series C preferred stock and approximately 0.5% of Reis Series D preferred stock through a family holding company, or less than 1% of Reis capital stock on an as converted to common stock basis. See Interests of Reis Directors and Officers in the MergerOwnership Interests below for a complete discussion of the vote required by Reis stockholders in connection with the proposals set forth in this joint proxy statement/prospectus, which are to be presented to the Reis stockholders for consideration at the Reis special meeting. Wellsford Capital owns approximately 51.1%, 51.1%, 30.4%, and 31.5% of Reis Series A preferred stock, Reis Series B preferred stock, Reis Series C preferred stock, and Reis Series D preferred stock, respectively, or approximately 23% of Reis capital stock on an as converted to common stock basis.
Wellsfords Directors and Executive Officers After the Merger |
The six current directors of Wellsford will continue to be directors of Wellsford as of the effective time of the merger and all of its executive officers will continue to be executive officers of Wellsford after the effective time of the merger. In addition, Lloyd Lynford and Jonathan Garfield will become directors and executive officers of Wellsford as of the effective time of the merger. See Governance Structure and Management Positions above.
Interests of Reis Directors and Executive Officers in the Merger |
In considering the recommendation of the Reis board of directors with respect to adopting and approving the merger agreement, Reis stockholders should be aware that certain members of the Reis board of directors and executive officers, as well as several other members of Reis senior management have interests in the merger that may be different from, or in addition to, the interests of the Reis stockholders generally. Each of the Reis board of directors and the Wellsford board of directors was aware of these potential conflicts of interest and considered them, among other matters, in reaching the decision to approve the merger agreement and the merger, and, in the case of each board of directors, to recommend that its stockholders approve the Reis and Wellsford proposals, as applicable, set forth in this joint proxy statement/prospectus and to be presented to their stockholders for consideration at its special meeting.
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Ownership Interests in Reis of Reis Directors and Executive Officers |
As of December 22, 2006, all directors and executive officers of Reis, together with their respective affiliates, beneficially owned approximately 84.4% of the shares of Reis common stock. As of December 22, 2006, directors and officers of Reis, together with their affiliates, beneficially owned none of the shares of the outstanding Reis Series A preferred stock or Reis Series B preferred stock, 1.6% of the outstanding shares of Reis Series C preferred stock and 3.3% of the outstanding shares of Reis Series D preferred stock, each series on an as converted to common stock basis. Reis cannot complete the merger unless (x) the merger agreement is adopted by an affirmative vote of holders of a majority in voting power of (1) the outstanding shares of common stock and preferred stock, on an as converted to common stock basis, voting together as a single class, (2) the outstanding shares of Reis Series C preferred stock, on an as converted to common stock basis and voting as a separate class, and (3) the outstanding shares of Reis Series D preferred stock, on an as converted to common stock basis and voting as a separate class, and (y) the amendment to Reiss amended and restated certificate of incorporation is approved by the holders of a majority in voting power of (A) the outstanding shares of Reis common stock and Reis preferred stock, on an as converted to common stock basis, voting together as a single class, (B) the outstanding shares of Reis Series A preferred stock, Series B preferred stock, Series C preferred stock, and Series D preferred stock, on an as converted to common stock basis, voting together as a single class, and (C) the outstanding shares of Reis Series A preferred stock, Series B preferred stock, Series C preferred stock, and Series D preferred stock, each series on an as converted to common stock basis, and each series voting as a separate class.
With regard to adopting the merger agreement and approving the amendment to Reiss amended and restated certificate of incorporation, Lloyd Lynford, Mr. Garfield and Mr. Lowenthal hold voting power as follows:
Stockholder |
Reis Common Stock |
Reis Series A Preferred Stock* |
Reis Series B Preferred Stock* |
Reis Series C Preferred Stock* |
Reis Series D Preferred Stock* |
Reis Series A, B, C and D Preferred Stock* |
Reis Common Stock and Series A, B, C and D Preferred Stock* |
|||||||||||||||
Lloyd Lynford |
50.7 | % | | % | | % | | % | 0.5 | % | | %** | 22.3 | % | ||||||||
Jonathan Garfield |
33.7 | % | | % | | % | | % | 1.2 | % | | %** | 14.9 | % | ||||||||
Edward Lowenthal |
| % | | % | | % | 0.5 | % | 0.5 | % | 0.2 | % | 0.1 | % | ||||||||
Lloyd
Lynford, Jonathan Garfield, Edward Lowenthal and all other Reis directors,
collectively |
84.4 | % | | % | | % | 1.6 | % | 3.3 | % | 0.8 | % | 37.6 | % |
* | On an as converted to common stock basis |
** | Denotes an amount that is less than 1/10th of 1% |
Consequently, although the directors and executive officers of Reis hold a significant portion of the voting power of Reis capital stock, they do not hold enough voting power to either adopt the merger agreement or to approve the amendment to Reiss amended and restated certificate of incorporation without additional shares of Reis capital stock voting in favor of the foregoing.
Lloyd Lynford and Mr. Garfield have entered into a voting agreements in connection with the merger and have agreed to vote in favor of the proposals to be presented to the Reis stockholders in connection with the merger. For a more detailed discussion of the voting agreement, see The MergerOther AgreementsVoting Agreement beginning on page 101.
Mr. Lowenthal has indicated that he will vote the shares of Reis preferred stock over which he has voting power in favor of the proposals presented to the Reis stockholders.
Stock Options |
Under the terms of the merger agreement, at the effective time of the merger, each outstanding and unexercised option to purchase shares of Reis common stock, whether vested or unvested or part of or outside of the Reis stock option plan, will convert to the right to receive a cash payment equal to the product of (1)
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the amount, if any, by which $8.16 exceeds the per share exercise price of the option, multiplied by (2) the number of shares of Reis common stock into which the option is exercisable. At the effective time of the merger, each option will be cancelled and the holder will only be entitled to receive from the combined company, as soon as reasonably practicable after the surrender of the option, the cash payment. The merger consideration will not be used to make this cash payment to the holders of options in Reis common stock but will come from the cash assets of the combined company. At November 30, 2006, there were 985,066 Reis options outstanding, which would result in cash payments aggregating $4,714,356.
The table below sets forth, as of November 30, 2006, information with respect to options held by each of Reiss current executive officers. No members of Reiss board of directors (other than Lloyd Lynford and Mr. Garfield) held any options.
Name |
Total Options Outstanding |
Options Vested | Options Unvested | Weighted Average Exercise Price |
Cash Payment to be Received |
|||||||||||
Lloyd Lynford |
244,926 | 244,926 | | $ | 2.34 | $ | 1,425,469 | |||||||||
Jonathan Garfield |
163,284 | 163,284 | | $ | 2.34 | 950,313 | ||||||||||
William Sander |
317,356 | 277,356 | 40,000 | $ | 3.48 | 1,485,939 | ||||||||||
Michael J. Richardson |
100,000 | 59,000 | 41,000 | $ | 4.36 | 379,600 | ||||||||||
825,566 | 744,566 | 81,000 | $ | 3.02 | $ | 4,241,321 | ||||||||||
Agreements with Lloyd Lynford and Jonathan Garfield |
Lloyd Lynford and Mr. Garfield have entered into employment agreements with Wellsford and Merger Sub, as employers, which are to become effective immediately after the occurrence of both (1) the effective time of the merger and (2) the settlement of all amounts due and payable under certain loans, aggregating $1,304,572 at November 30, 2006, made to each of them by Reis. It is anticipated that Lloyd Lynford and Mr. Garfield will settle these loans with an aggregate of 159,874 shares of Wellsford common stock that they receive in the merger (valued at $8.16 per share). Under the terms of the employment agreements, on their effective dates, Lloyd Lynford and Mr. Garfield will be awarded 100,000 and 46,000, respectively, restricted stock units of Wellsford that will vest annually in three equal tranches, subject to certain conditions, and will be entitled to a salary of $375,000 and a minimum annual bonus of $270,000 and $125,000, respectively, with additional incentive bonuses payable under certain circumstances. Additionally, the employment agreements provide for certain payments if their employment is terminated without cause or resigns for good reason within two years following a change of control, including the merger. For a complete discussion of the employment agreements see The Merger AgreementOther Agreements Employment Agreements beginning on page 99.
As an inducement to Lloyd Lynford and Mr. Garfield to enter into the voting agreement and the lock-up agreement, Wellsford will enter into a registration rights agreement with them, effective as of the effective time of the merger, pursuant to which Wellsford will agree, for Lloyd Lynfords and Mr. Garfields benefit, to register their shares of Wellsford common stock under certain circumstances and allow them to participate in registrations that Wellsford undertakes for its own account or persons other than either of them. For a complete discussion of the registration rights agreement, the voting agreement, and the lock-up agreement see The Merger AgreementOther AgreementsVoting Agreement, Lock-Up Agreement, and Registration Rights Agreement beginning on page 101.
Indemnification of and Insurance for Officers and Directors of Reis |
The merger agreement provides that, from and after the effective time of the merger, Wellsford and Merger Sub will, to the full extent permitted by applicable law, and Reiss amended and restated certificate of incorporation and by-laws, indemnify and hold harmless all present and former directors and officers of Reis against all claims, liabilities, losses, damages, costs or expenses, whenever asserted or claimed, based in whole or in part on, or arising in whole or in part out of, any matter existing or occurring at or prior to the effective time of the merger and to advance expenses to any such indemnified party for the defense by such party of any such claim, liability, loss, damage, cost or expense upon receipt of an undertaking by or on
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behalf of such indemnified party to repay such amount if it is ultimately determined that such party is not entitled to indemnification under applicable law.
The merger agreement also provides that, for a period of six years following the consummation of the merger, Wellsford will cause the combined company to purchase and maintain in effect a directors and officers liability insurance policy covering the then former directors and officers of Reis, which insurance will contain coverage and other terms and conditions that are mutually acceptable to Wellsford and the stockholder representatives, with respect to matters existing or occurring on or prior to the effective time of the merger, provided that the combined company will not be obligated to pay premiums on the insurance of more than $65,000 annually.
Other Employees |
Before the effective time of the merger, Wellsford expects to consider either new or amended incentive plans for the non-executive employees of Wellsford and Reis.
Form of the Merger |
The merger agreement provides that at the effective time of the merger, Reis will be merged with and into Merger Sub. Upon consummation of the merger, Merger Sub will continue as the surviving company and will be a wholly-owned subsidiary of Wellsford. After consummation of the merger, Wellsford will be renamed Reis, Inc. Wellsford common stock is currently listed for trading on the AMEX, however, the merger agreement provides that Wellsford will use its reasonable best efforts to list Wellsford common stock for trading on the NASDAQ, as promptly as practicable following consummation of the merger, under the symbol REIS, subject to official notice of issuance. When the Wellsford common stock has been approved for listing on NASDAQ, Wellsford will delist its common stock from the AMEX.
Regulatory Approvals Required for the Merger |
U.S. Antitrust Laws |
Under the Hart-Scott-Rodino Act and the rules promulgated under that Act by the Federal Trade Commission, which we refer to as the FTC, the merger may not be consummated until notifications have been given and information furnished to the FTC and to the Antitrust Division and the specified waiting period has been terminated or has expired. Wellsford and Reis each filed notification and report forms under the Hart-Scott-Rodino Act with the FTC and the Antitrust Division on November 15, 2006. Wellsford and Reis received notice on November 27, 2006, from the Antitrust Division that early termination of the applicable waiting period had been granted. At any time before or after consummation of the merger, the FTC or the Antitrust Division could take any action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin consummation of the merger or seeking divestiture of substantial assets of Wellsford or Reis.
Restrictions on Sales of Shares of Wellsford Common Stock Received in the Merger |
Wellsford common stock issued in the merger will not be subject to any restrictions on transfer arising under the Securities Act of 1933, which we refer to as the Securities Act, except (1) Wellsford common stock issued to any Reis stockholder who may be deemed to be an affiliate of Wellsford or Reis for purposes of Rule 145 under the Securities Act and (2) as provided for by the lock-up agreement and the registration rights agreement. See The Merger AgreementOther AgreementsLock-Up Agreement andRegistration Rights Agreement beginning on page 102.
Under Rule 145, former Reis stockholders who were affiliates of Reis at the time of the Reis special meeting and who are not affiliates of Merger Sub or Wellsford after the consummation of the merger may sell their Wellsford common stock at any time subject to the volume and sale limitations of Rule 144 under the Securities Act. In addition, so long as former Reis affiliates are not affiliates of Merger Sub or Wellsford following the consummation of the merger, and a period of at least one year has elapsed from the consummation of the merger, the former Reis affiliates may sell their Wellsford common stock without regard
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to the volume and sale limitations of Rule 144 under the Securities Act if there is adequate current public information available about Wellsford in accordance with Rule 144. After a period of two years has elapsed following the consummation of the merger, and so long as former Reis affiliates are not affiliates of Merger Sub or Wellsford and have not been for at least three months before any sale, they may freely sell their Wellsford common stock. Former Reis stockholders who become affiliates of Merger Sub or Wellsford after consummation of the merger will still be subject to the volume and sale limitations of Rule 144 under the Securities Act until they are no longer affiliates of Merger Sub or Wellsford. This joint proxy statement/prospectus does not cover resales of Wellsford common stock received by any person upon consummation of the merger, and no person is authorized to make any use of this joint proxy statement/prospectus in connection with any resale.
Appraisal Rights |
Holders of shares of Reis capital stock who do not vote in favor of the adoption of the merger agreement and who properly demand appraisal of their shares will be entitled to appraisal rights in connection with the merger under Section 262 of the DGCL.
The following discussion is not a complete statement of the law pertaining to appraisal rights under the DGCL and is qualified in its entirety by the full text of Section 262 which is attached to this joint proxy statement/prospectus as Annex D. The following summary does not constitute any legal or other advice nor does it constitute a recommendation that stockholders exercise their appraisal rights, if any, under Section 262. All references in Section 262 and in this summary to a stockholder are to the record holder of the shares of Reis capital stock as to which appraisal rights are asserted. A person having a beneficial interest in shares of Reis capital stock of held of record in the name of another person, such as a broker, fiduciary, depositary or other nominee, must act promptly to cause the record holder to follow the steps summarized below properly and in a timely manner to perfect appraisal rights, if available.
Holders of shares of Reis capital stock who do not vote in favor of the adoption of the merger agreement and who otherwise follow the procedures set forth in Section 262 will be entitled to have their shares appraised by the Delaware Court of Chancery and to receive payment in cash of the fair value of the shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, if any, as determined by the court.
Under Section 262, where a merger agreement is to be submitted for adoption at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, must notify each of its stockholders entitled to appraisal rights that appraisal rights are available and include in the notice a copy of Section 262. This joint proxy statement/prospectus constitutes the notice, and the full text of Section 262 is attached to this joint proxy statement/prospectus as Annex D. Any holder of Reis capital stock who wishes to exercise appraisal rights, or who wishes to preserve such holders right to do so, should review the following discussion and Annex D carefully because failure to timely and properly comply with the procedures specified will result in the loss of appraisal rights. Because of the complexity of the procedures for exercising the right to seek appraisal of shares of capital stock, Reis believes that if a stockholder considers exercising these rights, the stockholder should seek the advice of legal counsel.
Filing Written Demand |
Any holder of Reis capital stock wishing to exercise appraisal rights must deliver to Reis, before the vote on the adoption of the merger agreement at the special meeting at which the proposal to adopt the merger agreement will be submitted to the stockholders, a written demand for the appraisal of the stockholders shares, and that stockholder must not vote in favor of the adoption of the merger agreement. A holder of shares of Reis capital stock wishing to exercise appraisal rights must hold the shares of record on the date the written demand for appraisal is made and must continue to hold the shares of record through the effective time of the merger, since appraisal rights will be lost if the shares are transferred prior to the effective time of the merger. A proxy that is submitted and does not contain voting instructions will, unless revoked, be voted in favor of the adoption of the merger agreement, and it will constitute a waiver of the stockholders right of appraisal and will nullify any previously delivered written demand for appraisal.
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Therefore, a stockholder who submits a proxy and who wishes to exercise appraisal rights must submit a proxy containing instructions to vote against the adoption of the merger agreement or abstain from voting on the adoption of the merger agreement. Neither voting against the adoption of the merger agreement, nor abstaining from voting or failing to vote on the proposal to adopt the merger agreement will in and of itself constitute a written demand for appraisal satisfying the requirements of Section 262. The written demand for appraisal must be in addition to and separate from any proxy or vote on the adoption of the merger agreement. The demand must reasonably inform Reis of the identity of the holder as well as the intention of the holder to demand an appraisal of the fair value of the shares held by the holder. A stockholders failure to make the written demand prior to the taking of the vote on the adoption of the merger agreement at the Reis special meeting of stockholders will constitute a waiver of appraisal rights.
Only a holder of record of shares of Reis capital stock is entitled to assert appraisal rights for the shares registered in that holders name. A demand for appraisal in respect of shares of Reis capital stock should be executed by or on behalf of the holder of record, fully and correctly, as the holders name appears on the holders stock certificates, should specify the holders name and mailing address and the number of shares registered in the holders name and must state that the person intends thereby to demand appraisal of the holders shares in connection with the merger. If the shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of the demand should be made in that capacity, and if the shares are owned of record by more than one person, as in a joint tenancy and tenancy in common, the demand should be executed by or on behalf of all joint owners. An authorized agent, including an agent for two or more joint owners, may execute a demand for appraisal on behalf of a holder or record; however, the agent must identify the record owner or owners and expressly disclose that, in executing the demand, the agent is acting as agent for the record owner or owners. If the shares are held in street name by a broker, bank or nominee, the broker, bank or nominee may exercise appraisal rights with respect to the shares held for one or more beneficial owners while not exercising the rights with respect to the shares held for other beneficial owners; in that case, however, the written demand should set forth the number of shares as to which appraisal is sought and where the number of shares is not expressly mentioned the demand will be presumed to cover all shares of Reis capital stock held in the name of the record owner. Stockholders who hold their shares in brokerage accounts or other nominee forms and who wish to exercise appraisal rights are urged to consult with their brokers to determine the appropriate procedures for the making of a demand for appraisal by such a nominee.
All written demands for appraisal pursuant to Section 262 should be sent or delivered to: Corporate Secretary, Reis, Inc., 530 Fifth Avenue, New York, New York 10036.
Any holder of Reis capital stock may withdraw his, her or its demand for appraisal and accept the consideration offered pursuant to the merger agreement by delivering to Merger Sub, as the surviving entity, a written withdrawal of the demand for appraisal. However, any attempt to withdraw the demand more than 60 days after the effective date of the merger will require written approval of the surviving entity. No appraisal proceeding in the Delaware Court of Chancery will be dismissed without the approval of the Delaware Court of Chancery, and such approval may be conditioned upon such terms as the Court deems just. If the surviving entity does not approve a request to withdraw a demand for appraisal when that approval is required, or if the Delaware Court of Chancery does not approve the dismissal of an appraisal proceeding, the stockholder will be entitled to receive only the appraised value determined in any such appraisal proceeding, which value could be less than, equal to or more than the consideration being offered pursuant to the merger agreement.
Notice by the Surviving Entity |
Within ten days after the effective time of the merger, the surviving entity must notify each holder of Reis capital stock who has made a written demand for appraisal pursuant to Section 262, and who has not voted in favor of the adoption of the merger agreement, that the merger has become effective.
Filing a Petition for Appraisal |
Within 120 days after the effective time of the merger, but not thereafter, the surviving entity or any holder of Reis capital stock who has so complied with Section 262 and is entitled to appraisal rights under
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Section 262 may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares held by all dissenting holders. The surviving entity is under no obligation to and has no present intention to file a petition and holders should not assume that the surviving entity will file a petition. Accordingly, it is the obligation of the holders of Reis capital stock to initiate all necessary action to perfect their appraisal rights in respect of shares of Reis capital stock within the time prescribed in Section 262.
Within 120 days after the effective time of the merger, any holder of Reis capital stock who has complied with the requirements for exercise of appraisal rights will be entitled, upon written request, to receive from the surviving entity a statement setting forth the aggregate number of shares not voted in favor of the adoption of the merger agreement and with respect to which demands for appraisal have been received and the aggregate number of holders of those shares. The statement must be mailed within ten days after a written request therefor has been received by the surviving entity or within ten days after the expiration of the period for delivery of demands for appraisal, whichever is later.
If a petition for an appraisal is timely filed by a holder of shares of Reis capital stock and a copy of the petition is served on the surviving entity, the surviving entity will then be obligated within 20 days to file with the Delaware Register in Chancery a duly verified list containing the names and addresses of all stockholders who have demanded an appraisal of their shares and with whom agreements as to the value of their shares have not been reached. After notice to the stockholders as required by the court, the Delaware Court of Chancery is empowered to conduct a hearing on the petition to determine those stockholders who have complied with Section 262 and who have become entitled to appraisal rights. The Delaware Court of Chancery may require the stockholders who demanded payment for their shares to submit their stock certificates to the Register in Chancery for notation on the stock certificates of the pendency of the appraisal proceeding; and if any stockholder fails to comply with the direction, the Delaware Court of Chancery may dismiss the proceedings as they relate to their stockholder.
Determination of Fair Value |
After determining the holders of Reis capital stock entitled to appraisal, the Delaware Court of Chancery will appraise the fair value of their shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, if any, to be paid on the amount determined to be the fair value. In determining fair value and, if applicable, a fair rate of interest, the Delaware Court of Chancery will take into account all relevant factors. In Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that could be considered in determining fair value in an appraisal proceeding, stating that proof of value by any techniques or methods that are generally considered acceptable in the financial community and otherwise admissible in court should be considered, and that fair price obviously requires consideration of all relevant factors involving the value of a company. The Delaware Supreme Court stated that, in making this determination of fair value, the court must consider market value, asset value, dividends, earnings prospects, the nature of the enterprise and any other facts that could be ascertained as of the date of the merger that throw any light on future prospects of the merged corporation. Section 262 provides that fair value is to be exclusive of any element of value arising from the accomplishment or expectation of the merger. In Cede & Co. v. Technicolor, Inc., the Delaware Supreme Court stated that such exclusion is a narrow exclusion [that] does not encompass known elements of value, but which rather applies only to the speculative elements of value arising from such accomplishment or expectation. In Weinberger, the Delaware Supreme Court also stated that elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered.
Stockholders considering seeking appraisal should be aware that the fair value of their shares as so determined could be more than, the same as or less than the consideration they would receive pursuant to the merger if they did not seek appraisal of their shares and that an investment banking opinion as to fairness from a financial point of view is not necessarily an opinion as to fair value under Section 262. Although Reis believes that the merger consideration is fair, no representation is made as to the outcome of the appraisal of fair value as determined by the Delaware Court of Chancery, and stockholders should recognize that such an appraisal could result in a determination of a value higher or lower than, or the same as, the merger consideration. Neither Reis nor Wellsford anticipate offering more than the applicable merger consideration to
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any stockholder of Reis exercising appraisal rights, and reserve the right to assert, in any appraisal proceeding, that for purposes of Section 262, the fair value of a share of Reis capital stock is less than the applicable merger consideration, and that the methods which are generally considered acceptable in the financial community and otherwise admissible in court should be considered in the appraisal proceedings. In addition, Delaware courts have decided that the statutory appraisal remedy, depending on factual circumstances, may or may not be a dissenters exclusive remedy. The Delaware Court of Chancery will also determine the amount of interest, if any, to be paid on the amounts to be received by persons whose shares of Reis capital stock have been appraised. If a petition for appraisal is not timely filed, then the right to an appraisal will cease. The costs of the action (which do not include attorneys fees or the fees and expenses of experts) may be determined by the Court and imposed upon the parties as the Court deems equitable under the circumstances. The Court may also order that all or a portion of the expenses incurred by a stockholder in connection with an appraisal, including, without limitation, reasonable attorneys fees and the fees and expenses of experts utilized in the appraisal proceeding, be charged pro rata against the value of all the shares entitled to be appraised.
If any stockholder who demands appraisal of shares of Reis capital stock under Section 262 fails to perfect, or successfully withdraws or loses, such holders right to appraisal, the stockholders shares of Reis capital stock will be deemed to have been converted at the effective time of the merger into the right to receive the merger consideration applicable to shares of Reis Capital stock for which no election was made. A stockholder will fail to perfect, or effectively lose or withdraw, the holders right to appraisal if no petition for appraisal is filed within 120 days after the effective time of the merger or if the stockholder delivers to the surviving entity a written withdrawal of the holders demand for appraisal and an acceptance of the merger consideration in accordance with Section 262.
From and after the effective time of the merger, no dissenting stockholder will have any rights of a stockholder of Reis with respect to that holders shares for any purpose, except to receive payment of fair value and to receive payment of dividends or other distributions on the holders shares of Reis capital stock, if any, payable to stockholders of Reis of record as of a time prior to the effective time of the merger; provided, however, that if a dissenting stockholder delivers to the surviving company a written withdrawal of the demand for an appraisal within 60 days after the completion of the merger or subsequently with the written approval of the surviving company, then the right of that dissenting stockholder to an appraisal will cease and the dissenting stockholder will be entitled to receive only the merger consideration. Once a petition for appraisal is filed with the Delaware Court of Chancery, the appraisal proceeding may not be dismissed as to any stockholder of Reis without the approval of the Court.
Failure to comply strictly with all of the procedures set forth in Section 262 will result in the loss of a stockholders statutory appraisal rights. Consequently, any stockholder wishing to exercise appraisal rights is urged to consult legal counsel before attempting to exercise those rights.
Accounting Treatment |
As Wellsford is the acquiror for GAAP accounting purposes, the acquisition of the remaining interests in Reis not currently owned by Wellsford will be accounted for as a purchase by Wellsford under accounting principles generally accepted in the U.S. Accordingly, the acquisition price of the 77% of Reis acquired in this transaction combined with the historical cost basis of Wellsfords current investment in Reis will be allocated to the tangible and intangible assets acquired and liabilities assumed based on respective fair values. Reported financial condition and results of operations of Wellsford issued after the consummation of the merger will reflect Reiss balances and results after the consummation of the merger, but Wellsfords financial statements will not be restated retroactively to reflect the historical financial position or results of operations of Reis. Following the consummation of the merger, the earnings of the combined company will reflect purchase accounting adjustments, including increased depreciation and amortization expense for acquired tangible and intangible assets in excess of recorded book amounts. At the effective time, Wellsfords balance sheet will be changed from the liquidation basis of accounting to the going concern basis of accounting and going forward all of Wellsfords financial statements will be on a going concern basis of accounting.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
The following discussion summarizes the anticipated material U.S. Federal income tax consequences of the merger to U.S. holders (as defined below) of Reis capital stock. In addition, this discussion summarizes certain U.S. Federal income tax consequences to U.S. holders of Wellsford common stock that would result from Wellsfords termination of the Plan in connection with the merger. This discussion addresses only those Reis and Wellsford stockholders who hold their Reis capital stock or Wellsford common stock as a capital asset within the meaning of Section 1221 of the Code and does not address all the U.S. Federal income tax consequences that may be relevant to particular stockholders in light of their individual circumstances or to stockholders that are subject to special rules, including, without limitation:
| financial institutions, insurance companies, regulated investment companies or real estate investment trusts; |
| pass-through entities or investors in such entities; |
| tax-exempt organizations; |
| dealers in securities or currencies, or traders in securities that elect to use a mark-to-market method of accounting; |
| persons that hold Reis capital stock or Wellsford common stock as part of a straddle or as part of a hedging, integrated, constructive sale or conversion transaction; |
| persons who are not U.S. holders; |
| persons that have a functional currency other than the U.S. dollar; |
| persons who acquired their shares of Reis capital stock or Wellsford common stock through the exercise of an employee stock option or otherwise as compensation; |
| persons whose Reis capital stock is qualified small business stock for purposes of Section 1202 of the Code; and |
| persons who are subject to the alternative minimum tax. |
For purposes of this discussion, the term U.S. holder means a beneficial owner of Reis capital stock or Wellsford common stock, as the case may be, that is:
| a citizen or resident of the U.S.; |
| a corporation (or other entity treated as a corporation for U.S. Federal income tax purposes) created or organized under the laws of the U.S. or any of its political subdivisions; |
| a trust that (1) is subject to the supervision of a court within the U.S. and the control of one or more U.S. persons or (2) has a valid election in effect under applicable U.S. Treasury regulations to be treated as a U.S. person; or |
| an estate that is subject to U.S. Federal income tax on its income regardless of its source. |
The following discussion is based upon the Code, its legislative history, existing and proposed regulations thereunder and published rulings and decisions, all as currently in effect as of the date hereof, and all of which are subject to change or to differing interpretations, possibly with retroactive effect. Tax considerations under state, local and foreign laws, or Federal laws other than those pertaining to the income tax, are not addressed in this document. You should consult with your own tax advisor as to the tax consequences of the merger to you in your particular circumstances, including the applicability and effect of the alternative minimum tax and any state, local or foreign and other tax laws and of changes in those laws.
Tax Consequences of the Merger Generally |
The consummation of the merger is conditioned on, among other things, the receipt by each of Reis and Wellsford of tax opinions from Bryan Cave LLP and King & Spalding LLP, respectively, that for U.S.
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Federal income tax purposes (1) the merger will be treated as a reorganization within the meaning of Section 368(a) of the Code, and (2) Wellsford and Reis will each be a party to that reorganization within the meaning of Section 368(b) of the Code. These opinions will be based on certain assumptions and on representation letters to be provided by Reis and Wellsford at the time of consummation. Neither of these tax opinions will be binding on the Internal Revenue Service. Neither Wellsford nor Reis intends to request any ruling from the Internal Revenue Service as to the U.S. Federal income tax consequences of the merger.
If the merger qualifies for U.S. Federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code, the material U.S. tax consequences of the merger to Reis, Wellsford and Reis stockholders will be as follows:
| no gain or loss will be recognized by Wellsford or Reis as a result of the merger; |
| gain (but not loss) will be recognized by stockholders of Reis who receive shares of Wellsford common stock and cash in exchange for shares of Reis capital stock pursuant to the merger, in an amount equal to the lesser of (1) the amount by which the sum of the fair
market value of the Wellsford common stock on the closing date of the merger and cash received by a stockholder of Reis (other than cash received instead of being issued a fractional share of Wellsford common stock) exceeds the stockholders basis in its Reis capital
stock, and (2) the amount of cash received by the stockholder of Reis (other than cash received instead of being issued a fractional share of Wellsford common stock); |
| no gain or loss will be recognized by stockholders of Reis who receive only Wellsford common stock in the merger, except with respect to any cash paid instead of a fractional share of Wellsford common stock, the treatment of which is discussed below under Cash
Received For Fractional Shares of Wellsford Common Stock; |
| the aggregate basis of the Wellsford common stock received in the merger by a Reis stockholder will be the same as the aggregate basis of the Reis capital stock for which it is exchanged, decreased by the amount of any cash received in the merger by the stockholder
(other than cash received instead of a fractional share of Wellsford common stock) and decreased by any basis attributable to fractional shares of Wellsford common stock for which cash is received, and increased by the amount of gain recognized on the exchange
(regardless of whether the gain is characterized as capital gain or as ordinary dividend income, as discussed below under Additional ConsiderationsRecharacterization of Gain as a Dividend); and |
| the holding period of Wellsford common stock received in exchange for Reis capital stock will include the holding period of the Reis capital stock for which it is exchanged. |
Any gain or loss will be determined separately with respect to each class of Reis capital stock exchanged by a Reis stockholder in the merger. In addition, gain or loss will be determined separately with respect to each block of the same class of Reis capital stock if the stockholder acquired different blocks of such class of stock at different times or at different prices, and the cash and shares of Wellsford common stock received will be allocated proportionately among each block of stock.
Taxation of Capital Gain |
Except as described under Additional ConsiderationsRecharacterization of Gain as a Dividend below, gain that Reis stockholders recognize in connection with the merger generally will constitute capital gain and will constitute long-term capital gain if those stockholders have held (or are treated as having held) their Reis capital stock for more than one year as of the date of the merger. For Reis stockholders that are non-corporate holders of Reis capital stock, long-term capital gain generally will be taxed at a maximum U.S. Federal income tax rate of 15%.
Additional Considerations Recharacterization of Gain as a Dividend |
All or part of the gain that a particular Reis stockholder recognizes could be treated as dividend income rather than capital gain if (1) that Reis stockholder is a significant stockholder of Wellsford or (2) that Reis
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stockholders percentage ownership, taking into account constructive ownership rules, in Wellsford after the merger is not meaningfully reduced from what its percentage ownership would have been if it had received solely shares of Wellsford common stock rather than a combination of cash and shares of Wellsford common stock in the merger. This could happen, for example, because of ownership of additional shares of Wellsford common stock by such Reis stockholder or ownership of shares of Wellsford common stock by a person related to that Reis stockholder. The Internal Revenue Service has indicated in rulings addressing stock redemptions that any reduction in the interest of a minority stockholder that owns a small number of shares in a publicly and widely held corporation and that exercises no control over corporate affairs would result in capital gain as opposed to dividend treatment. Because the possibility of dividend treatment depends primarily upon such Reis stockholders particular circumstances, including the application of certain constructive ownership rules, which can be highly complex, Reis stockholders should consult their own tax advisors regarding the potential tax consequences of the merger to them.
Cash Received For Fractional Shares of Wellsford Common Stock |
A Reis stockholder who receives cash instead of a fractional share of Wellsford common stock will be treated as having received the fractional share pursuant to the merger and then as having exchanged the fractional share for cash in a redemption by Wellsford. As a result, a Reis stockholder will generally recognize gain or loss equal to the difference between the amount of cash received and the basis in his or her fractional share interest as set forth above. This gain or loss will generally be capital gain or loss, and will be long-term capital gain or loss if, as of the effective date of the merger, the holding period for such shares is greater than one year. The deductibility of capital losses is subject to limitations. Notwithstanding the above, under the circumstances described in the section entitled Additional ConsiderationsRecharacterization of Gain as a Dividend, the receipt of cash instead of a fractional share could instead be taxed as a dividend.
Backup Withholding and Information Reporting |
Payments of cash to a holder of Reis capital stock pursuant to the merger may, under certain circumstances, be subject to information reporting and backup withholding unless the holder provides proof of an applicable exemption or furnishes its taxpayer identification number, and otherwise complies with all applicable requirements of the backup withholding rules. Any amount withheld from payments to a holder under the backup withholding rules is not an additional tax and will be allowed as a refund or credit against the holders U.S. Federal income tax liability, provided the required information is timely furnished to the Internal Revenue Service.
Reporting Requirements |
A U.S. holder of Reis capital stock who receives Wellsford common stock as a result of the merger may be required to attach to its U.S. Federal income tax return for the taxable year in which the merger occurs a statement, and will be required to maintain a permanent record, of certain facts relating to the exchange of stock in connection with the merger, including the holders adjusted tax basis in the Reis capital stock transferred in the merger, the fair market value of the Wellsford common stock received and the amount of cash received by that holder, if any, pursuant to the merger.
Termination of Plan of Liquidation |
On December 14, 2005, Wellsford distributed cash of $14.00 per share to its stockholders in connection with the Plan. If the proposed merger is consummated, the Plan will be terminated. In that case, Wellsford intends to treat the distribution in accordance with the rules governing non-liquidating distributions. Under these rules, the distribution would be taxable to U.S. holders of Wellsford common stock as a dividend to the extent paid out of Wellsfords current or accumulated earnings and profits. If the distribution exceeds Wellsfords earnings and profits, it would be recharacterized as a non-taxable return of capital to the extent of the stockholders basis in Wellsford common stock and thereafter as capital gain. Wellsford estimates that $1.15 of the $14.00 per share cash distribution will be recharacterized as taxable dividend income under these rules. In the case of a corporate U.S. holder, the portion of the distribution that is treated as a dividend would be eligible for the dividends-received deduction provided the holder meets certain holding period and other
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applicable requirements. In the case of a non-corporate U.S. holder, the portion of the distribution that is treated as a dividend would be subject to a maximum Federal income tax rate of 15% provided the holder meets certain holding period and other applicable requirements. U.S. holders of Wellsford common stock that received the December 14, 2005 cash distribution of $14.00 per share and that have filed their tax returns for the taxable year in which the distribution was received should consult their own tax advisors regarding the filing of an amended tax return for that taxable year.
If the dividend received by a U.S. holder with respect to a share of Wellsford common stock equals or exceeds 10% of the holders adjusted tax basis in the share (or 10% of the fair market value of the share as of the day before the ex-dividend date if the holder makes the election provided for under Section 1059(c)(4) of the Code) and certain other requirements are met, the dividend would be subject to the rules governing extraordinary dividends. In the case of a non-corporate U.S. holder, any loss on the sale or exchange of Wellsford common stock would be treated as a long-term capital loss to the extent of any extraordinary dividends received on that stock, regardless of the holders holding period for the stock. In the case of a corporate U.S. holder which has held its shares of Wellsford common stock for less than two years (taking into account the holding period rules set forth in Section 1059 of the Code) the basis of the holder in Wellsford common stock generally would be reduced by the amount of any extraordinary dividends that are not subject to tax as a result of the dividends received deduction, and the holder would recognize capital gain to the extent, if any, such untaxed amount exceeds the holders basis in the stock. U.S. holders of Wellsford common stock that received the December 14, 2005 cash distribution of $14.00 per share are urged to consult their own tax advisors regarding the tax consequences to them of the termination of the Plan, including the potential application of the rules governing extraordinary dividends.
THE FOREGOING DISCUSSION OF U.S. FEDERAL INCOME TAX CONSEQUENCES IS NOT INTENDED TO CONSTITUTE A COMPLETE DESCRIPTION OF ALL TAX CONSEQUENCES RELATING TO THE MERGER AND THE TERMINATION OF THE PLAN. TAX MATTERS ARE VERY COMPLICATED AND THE TAX CONSEQUENCES OF THE MERGER AND THE TERMINATION OF THE PLAN TO YOU WILL DEPEND UPON THE FACTS OF YOUR PARTICULAR SITUATION. BECAUSE INDIVIDUAL CIRCUMSTANCES MAY DIFFER, WE URGE YOU TO CONSULT WITH YOUR TAX ADVISOR REGARDING THE APPLICABILITY TO YOU OF THE RULES DISCUSSED ABOVE AND THE PARTICULAR TAX CONSEQUENCES TO YOU OF THE MERGER AND THE TERMINATION OF THE PLAN, INCLUDING THE APPLICATION OF STATE, LOCAL, OR FOREIGN AND OTHER TAX LAWS.
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THE MERGER AGREEMENT
The following is a summary of certain material provisions of the merger agreement, a copy of which is attached to this joint proxy statement/prospectus as Annex A and is incorporated into this joint proxy statement/prospectus by reference. This summary is subject to and qualified in its entirety by reference to the merger agreement. We urge you to read carefully this entire joint proxy statement/prospectus, including the annexes and the other documents to which we have referred you.
The merger agreement attached as Annex A to this joint proxy statement/prospectus has been included to provide you with information regarding its terms. It is a commercial document that establishes and governs the legal relations between Wellsford and Reis with respect to the transactions described in this joint proxy statement/prospectus. It is not intended to be a source of factual, business or operational information about Wellsford or Reis. The representations, warranties and covenants made by Wellsford and Reis are qualified and subject to important limitations agreed to by Wellsford and Reis in connection with negotiating the terms of the merger agreement. Furthermore, the representations and warranties may be subject to standards of materiality applicable to Wellsford and Reis that may be different from those which are applicable to you. These representations and warranties may or may not have been accurate as of any specified date and do not purport to be accurate as of the date of this joint proxy statement/prospectus. Accordingly, you should not rely on the representations and warranties as characterizations of the actual state of facts at the time they were made or otherwise.
Structure of the Merger |
The merger agreement provides for the merger of Reis with and into Merger Sub. At the effective time of the merger, the separate corporate existence of Reis will cease and Merger Sub will continue as the surviving entity and a direct wholly-owned subsidiary of Wellsford.
Closing and Effective Time of the Merger |
Unless the merger agreement has been terminated and the proposed merger has been abandoned, the closing of the merger will be held as promptly as practicable, but in no event later than 10:00 a.m., Eastern Standard Time, on the business day following the satisfaction or waiver of all of the conditions set forth in the merger agreement (other than those conditions that by their nature will be satisfied at the closing), unless another time, date and/or place is agreed to in writing by the parties.
Subject to the provisions of the merger agreement, on the closing date, Reis and the Merger Sub will cause (1) an appropriate certificate of merger to be executed and filed with the Secretary of State of the State of Delaware and (2) appropriate articles of merger to be executed and filed with the Department of Assessments and Taxation of the State of Maryland. The merger will become effective on the date and at the time when the certificate of merger has been duly filed with the Secretary of State of the State of Delaware pursuant to the DGCL and the articles of merger have been accepted for record by the State Department of Assessments and Taxation pursuant to the Maryland Limited Liability Company Act, which we refer to as the MLLCA, or, subject to the DGCL and the MLLCA, a later time as agreed upon by the parties and specified in the certificate of merger and the articles of merger (but in no event earlier than the closing date). We refer to this date and time as the effective time.
Consideration To Be Received in the Merger |
At the effective time of the merger, Reis stockholders will be entitled to receive, in the aggregate, approximately $34,579,414 in cash and 4,237,673 shares of newly issued Wellsford common stock, not including shares to be issued to Wellsford Capital. Reis stockholders, other than Wellsford Capital, Lloyd Lynford, and Jonathan Garfield, may elect to receive 100% of their merger consideration in shares of Wellsford common stock, subject to the limitation that the aggregate merger consideration paid to all Reis stockholders consists of 50% cash and 50% shares of Wellsford common stock. Reis stockholders who do not make an election will be entitled to receive 50% of their merger consideration in cash and 50% in shares of Wellsford common stock. The merger agreement does not provide for any of the Reis stockholders, other
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than Lloyd Lynford and Mr. Garfield, to receive more than 50% of their merger consideration in cash. Reis stockholders who elect to receive 100% of their merger consideration in shares of Wellsford common stock may ultimately receive a portion of their merger consideration in cash depending upon the elections of all Reis stockholders other than Lloyd Lynford and Mr. Garfield. Lloyd Lynford and Mr. Garfield will receive a portion of their merger consideration in shares of Wellsford common stock and a portion in cash depending upon the elections of all other Reis stockholders. Any additional shares of Wellsford common stock paid to electing stockholders as merger consideration will reduce the number of shares of Wellsford common stock to be received by each of Lloyd Lynford and Mr. Garfield as merger consideration (and increase their respective cash consideration in an amount equal to the value of the stock consideration that each of them would have otherwise been entitled to receive). However, the merger agreement provides that each of Lloyd Lynford and Mr. Garfield may receive a maximum of 2/3 of his merger consideration in cash. If no Reis stockholders elect to receive 100% of their merger consideration in shares of Wellsford common stock, Lloyd Lynford and Mr. Garfield will receive merger consideration 50% in cash and 50% in shares of Wellsford common stock. Only merger consideration to be received by Lloyd Lynford, Mr. Garfield, and the Reis stockholders electing to receive 100% of their merger consideration in shares of Wellsford common stock, will be subject to adjustment.
Conversion of Reis Common Stock |
Under the terms of the merger agreement and subject to the limitations described above (including that each Reis stockholder other than Lloyd Lynford and Mr. Garfield receive at least 50% of their merger consideration in shares of Wellsford common stock), at the effective time of the merger, each issued and outstanding share of Reis common stock will be converted into the right to receive either (1) 1.0 fully paid, nonassessable share of Wellsford common stock, which is referred to as the common stock share consideration, or (2) $8.16 in cash, which is referred to as the common stock cash consideration, subject to the election and allocation procedures described below.
Conversion of Reis Series A Preferred Stock |
Under the terms of the merger agreement and subject to the limitations described above (including that each Reis stockholder other than Lloyd Lynford and Mr. Garfield receive at least 50% of their merger consideration in shares of Wellsford common stock), at the effective time of the merger, each issued and outstanding share of Reis Series A preferred stock will be converted into the right to receive either (1) 56.75 fully paid, nonassessable shares of Wellsford common stock, which is referred to as the Series A share consideration, or (2) $463.11 in cash, which is referred to as the Series A cash consideration, subject to the election and allocation procedures described below.
Conversion of Reis Series B Preferred Stock |
Under the terms of the merger agreement and subject to the limitations described above (including that each Reis stockholder other than Lloyd Lynford and Mr. Garfield receive at least 50% of their merger consideration in shares of Wellsford common stock), at the effective time of the merger, each issued and outstanding share of Reis Series B preferred stock will be converted into the right to receive either (1) 33.33 fully paid, nonassessable shares of Wellsford common stock, which is referred to as the Series B share consideration, or (2) $272.00 in cash, which is referred to as the Series B cash consideration, subject to the election and allocation procedures described below.
Conversion of Reis Series C Preferred Stock |
Under the terms of the merger agreement and subject to the limitations described above (including that each Reis stockholder other than Lloyd Lynford and Mr. Garfield receive at least 50% of their merger consideration in shares of Wellsford common stock), at the effective time of the merger, each issued and outstanding share of Reis Series C preferred stock will be converted into the right to receive either (1) 25.20 fully paid, nonassessable shares of Wellsford common stock, which is referred to as the Series C share consideration, or (2) $205.65 in cash, which is referred to as the Series C cash consideration, subject to the election and allocation procedures described below.
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Conversion of Reis Series D Preferred Stock |
Under the terms of the merger agreement and subject to the limitations described above (including that each Reis stockholder other than Lloyd Lynford and Mr. Garfield receive at least 50% of their merger consideration in shares of Wellsford common stock), at the effective time of the merger, each issued and outstanding share of Reis Series D preferred stock will be converted into the right to receive either (1) 31.06 fully paid, nonassessable shares of Wellsford common stock, which is referred to as the Series D share consideration, or (2) $253.42 in cash, which is referred to as the Series D cash consideration, subject to the election and allocation procedures described below.
Cancellation |
Each share of Reis common stock or Reis preferred stock held by Reis as treasury shares or owned by Wellsford, other than Wellsford Capital, or Merger Sub (excluding shares in trust accounts, managed accounts, custodial accounts and the like that are beneficially owned by third parties) will be canceled and no exchange or payment will be made with respect to these shares.
Fractional Shares |
Wellsford will not issue any fractional shares of Wellsford common stock in the merger. Instead, a Reis stockholder who otherwise would have received a fraction of a share of Wellsford common stock will receive an amount in cash. This cash amount will be determined by multiplying the fraction of a share of Wellsford common stock to which each holder would otherwise be entitled by $8.16.
Elections |
Stock Election |
All Reis stockholders, other than Wellsford Capital, Lloyd Lynford, and Jonathan Garfield, will be entitled to elect to receive 100% of their merger consideration in shares of Wellsford common stock. The shares held by Reis stockholders electing to receive their merger consideration in shares of Wellsford common stock will be deemed to be stock election shares. Regardless of the election made by a Reis stockholder to designate all of its shares as stock election shares, the actual mix of cash consideration and share consideration received by a Reis stockholder in exchange for its shares of Reis capital stock will be subject to possible adjustment as described below. The amount of cash consideration and share consideration any Reis stockholder electing to receive all of his merger consideration in shares of Wellsford common stock will be entitled to receive will depend on the elections made by all Reis stockholders other than Wellsford Capital, Lloyd Lynford and Mr. Garfield. Any additional shares of Wellsford common stock paid with respect to stock election shares will reduce the number of shares of Wellsford common stock to be received by Lloyd Lynford and Mr. Garfield as merger consideration and increase the amount of cash to be received by them by an amount equal to $8.16 multiplied by the number of shares of Wellsford common stock by which the merger consideration is reduced, subject to the limitations that (1) each of them must receive a minimum of 1/3 of his merger consideration in shares of Wellsford common stock, and (2) the aggregate merger consideration paid to all Reis stockholders consists of 50% in cash and 50% in shares of Wellsford common stock, not taking into account the Reis preferred stock held by Wellsford Capital.
Non-Election |
If a Reis stockholder does not complete a form of election, if the stockholders form of election is not received by Wellsford by the election date, or if the stockholders form of election is improperly completed or is not signed, then the shares held by that stockholder that were not subject to a valid election and, consequently, will be deemed to be non-election shares. Each holder of non-election shares in each series or class of Reis capital stock will be entitled to receive 50% of its merger consideration in cash and 50% of its merger consideration in shares of Wellsford common stock and will receive cash consideration with respect to 50% of the holders non-election shares and share consideration for 50% of the holders non-election shares.
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Form of Election |
Holders of record of shares of Reis capital stock on the record date for the Reis special meeting will have received a form of election together with this joint proxy statement/prospectus. An election made by a Reis stockholder will be deemed effective when the form of election is properly completed, signed and submitted to Wellsford, c/o Wellsford Real Properties, Inc., 535 Madison Avenue, 26th Floor, New York, NY 10022, by 5:00 p.m., Eastern Standard Time, on the election date, as described below, and accompanied by certificates representing shares of Reis capital stock, duly endorsed in blank, or in another form acceptable for transfer on the books of Reis.
The election date will be the date that is the second business day prior to the date that Reis estimates will be the date of the Reis special meeting. If the closing date of the merger is to be more than five business days after the date of the Reis special meeting, then the election date will be extended and announced in a press release delivered to Dow Jones News Service, which date will be at least five business days following the date of the press release.
A holder of shares of Reis capital stock may change or revoke his or her election at any time on or before the election date by submitting a written notice to Wellsford prior to 5:00 p.m., New York City time, on the election date. If a form of election is revoked, the certificate or certificates (or guarantees of delivery, as applicable), for the Reis capital stock to which a revoked form of election relates will be held by Wellsford for processing after the effective time of the merger.
Election Adjustments |
The aggregate merger consideration paid to all Reis stockholders will be 50% in cash and 50% in shares of Wellsford common stock, not taking into account the shares of Reis preferred stock held by Wellsford Capital, which will be converted into the right to receive shares of Wellsford common stock. However, each Reis stockholder will have the right to receive 100% of its merger consideration in shares of Wellsford common stock. The Reis stockholders who do not make such election and the Reis stockholders deemed to have non- election shares will receive their merger consideration 50% in cash and 50% in shares of Wellsford common stock. Each of Lloyd Lynford and Mr. Garfield has agreed to accept the cash portion of his merger consideration in any proportion varying between a maximum of 2/3 and a minimum of 50% in order to accommodate the holders of stock election shares. Only the Reis capital stock held by Lloyd Lynford and Mr. Garfield and the stock election shares will be subject to an election adjustment. Since there are several different classes of Reis capital stock, the allocation formula is complex. If there are more shares of Wellsford common stock elected than are available because the number of available shares are capped by the limitation that Lloyd Lynford and Mr. Garfield must receive at least 1/3 of their merger consideration in shares of Wellsford common stock, each Reis stockholder electing to receive 100% of its merger consideration in shares of Wellsford common stock will have the number of shares of Wellsford common stock that it is entitled to receive reduced pro rata relative to the other Reis stockholders making a stock election. The proration is based on the number of shares of Wellsford common stock that a Reis stockholder would receive if no allocations were necessary. The aggregate share merger consideration is limited to 6,795,266 shares of Wellsford common stock (including the shares to be issued to Wellsford Capital) and the aggregate cash merger consideration is limited to $34,579,414.
The allocation among the holders of stock election shares and Lloyd Lynford and Mr. Garfield will be made as follows:
If 50% of the number of shares of Wellsford common stock into which the number of stock election shares would be converted, assuming that each stock election share was converted into the right to receive the applicable share consideration (these shares being referred to as additionally-elected shares), is less than or equal to one-sixth of the aggregate number of shares of Wellsford common stock into which the shares of Wellsford common stock held by Lloyd Lynford and Mr. Garfield together as of the election date, these shares being referred to as the LG shares, would be converted, assuming that each of the LG shares was converted into the right to receive the applicable share consideration, then the stock election shares and the LG shares will be converted into the right to receive merger consideration as follows:
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| each stock election share will be converted into the right to receive the share consideration applicable to that share; |
| the number of LG shares equal to the sum of (A) the number of additionally-elected shares and (B) one-half of the total number of LG shares will be converted into the right to receive the common stock cash consideration, these shares being referred to as the LG cash
shares; and |
| the number of LG shares equal to the total number of LG shares minus the number of LG cash shares will be converted into the right to receive the common stock share consideration, these shares being referred to as the LG stock shares. |
If the total number of LG shares is an odd number, then the number of LG cash shares will be increased by 0.5. The total number of LG cash shares and LG stock shares will be allocated to Lloyd Lynford and Mr. Garfield pro rata based upon the number of LG shares held by each of them relative to the other.
If the number of additionally-elected shares is greater than one-sixth of the aggregate number of shares of Wellsford common stock into which the LG shares would be converted, assuming that each LG share was converted into the right to receive the applicable share consideration, then the LG shares will be converted into the right to receive merger consideration as follows:
| two-thirds of the LG shares will be converted into the right to receive the common stock cash consideration, referred to as the maximum LG cash shares, and the maximum LG cash shares will be allocated to Lloyd Lynford and Mr. Garfield pro rata based upon the
number of shares of Reis common stock held by each of them relative to the other and, if necessary, each may be allocated one more or one less of the maximum LG cash shares; and |
| one-third of the LG shares will be converted into the right to receive the common stock share consideration, referred to as the minimum LG stock shares, and the minimum LG stock shares will be allocated to Lloyd Lynford and Mr. Garfield pro rata based upon the
number of shares of Reis common stock held by each of them relative to the other and, if necessary, each may be allocated one more or one less of the minimum LG stock shares. |
If the number of additionally-elected shares is greater than one-sixth of the aggregate number of shares of Wellsford common stock into which the LG shares would be converted, assuming that each LG share was converted into the right to receive the applicable share consideration, then the stock election shares will be converted into the right to receive merger consideration as follows:
| all stock election shares equal to the stock election ratio of (A) the stock election shares that are Reis common stock, (B) the stock election shares that are Reis Series A preferred stock, (C) the stock election shares that are Reis Series B preferred stock, (D) the stock
election shares that are Reis Series C preferred stock, and (E) the stock election shares that are Reis Series D preferred stock will be converted into the right to receive the applicable share consideration, these shares being referred to collectively as the maximum election
stock shares; and |
| all stock election shares that are not maximum election stock shares will be converted into the right to receive the applicable cash consideration, these shares being referred to collectively as the minimum election cash shares. |
Each holder of stock election shares in each series or class of Reis stock will be allocated (x) a number of maximum election stock shares in the applicable series or class equal to the stock election ratio multiplied by the total number of the holders stock election shares in the applicable series or class and (y) the remainder of the holders stock election shares in the applicable series or class will be minimum election cash shares. If necessary, holders may be allocated one more or less maximum election stock shares or minimum election cash shares.
The term stock election ratio as used above means the ratio found by dividing (1) (A) the total number of shares of Wellsford common stock comprising the share portion of the aggregate merger consideration minus (B) the number of shares of Wellsford common stock issuable to Wellsford Capital and to the holders of non-election shares and to the Reis stockholders electing to receive their merger consideration one-half in
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cash and one-half in shares of Wellsford common stock minus (C) the number of minimum LG stock shares by (2) the total number of shares of Wellsford common stock comprising the share portion of the aggregate merger consideration.
The following are examples of how the allocation provisions described above operate. The share totals are used for illustrative purposes only and do not reflect actual share totals. In addition, the examples, for simplicity, only show what happens to shares of Reis common stock. With respect to shares of Reis preferred stock, the allocation would work in an identical manner but the per share consideration would vary depending upon the applicable series of Reis preferred stock.
EXAMPLE 1
Reis Stockholder X owns 11 shares of Reis common stock. If Reis Stockholder X does not make an election to receive his merger consideration 100% in shares of Wellsford common stock or improperly completes the election form then: |
| Five shares will convert into the right to receive the common stock cash consideration ($8.16 per share, or $40.80 in the aggregate) and five shares will convert into the right to receive the common stock share consideration (one share of Wellsford common stock for each
share of Reis common stock, or five shares of Wellsford common stock in the aggregate). |
| The remaining share would convert into either the right to receive either the common stock cash consideration or the common stock share consideration at the option of Wellsford, in order for the aggregate merger consideration paid to Reis stockholders, other than
Wellsford Capital, to be as close as possible to 50% in cash and 50% in shares of Wellsford common stock. |
EXAMPLE 2
Reis Stockholder Y owns ten shares of Reis common stock. If Reis Stockholder Y makes an election to receive his merger consideration 100% in shares of Wellsford common stock and the other Reis stockholders have made their elections such that, if Wellsford were to
accommodate the elections of all Reis stockholders, Lloyd Lynford and Mr. Garfield would each receive at least 1/3 of his aggregate merger consideration in shares of Wellsford common stock then, with respect to the 10 shares of Reis common stock, all ten shares will convert
into the right to receive the common stock share consideration (one share of Wellsford common stock for each share of Reis common stock, or ten shares of Wellsford common stock in the aggregate). |
EXAMPLE 3
Reis Stockholder Z owns ten shares of Reis common stock. If Reis Stockholder Z makes an election to receive his merger consideration 100% in shares of Wellsford common stock and the other Reis stockholders have made elections to receive 100% of their merger
consideration in shares of Wellsford common stock such that, if Wellsford were to accommodate all Reis stockholders electing to receive their merger consideration 100% in shares of Wellsford common stock, Lloyd Lynford and Mr. Garfield would each receive less than 1/3 of
his aggregate merger consideration in shares of Wellsford common stock, then of the ten shares of Reis common stock, five shares will convert into Wellsford common stock and the remaining five shares will convert into: |
| (A) a number of shares of Wellsford common stock resulting from multiplying five by the ratio of |
(x) the aggregate number of shares of Wellsford common stock that may be issued in the merger (that is, 6,795,266 shares), less the sum of the shares of Wellsford common stock to be issued to Wellsford Capital, the shares of Wellsford common stock to be issued
in respect of the non-election shares, and the number of shares of Wellsford common stock to be issued to Lloyd Lynford and Mr. Garfield, over |
(y) the total number of shares of Wellsford common stock that may be issued in the merger (that is, 6,795,266 shares); and |
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| (B) the common stock cash consideration per share for those shares that are not converted into Wellsford common stock by clause (A). |
Exchange of Shares |
Merger Sub will act as exchange agent with respect to the exchange of Reis capital stock pursuant to the merger. Immediately prior to the effective time of the merger, Wellsford will deposit in an account designated by Reis, less the deposits in the escrow accounts as described below, (1) a certificate representing the aggregate number of shares of Wellsford common stock to be issued to Reis stockholders in the merger and (2) subject to the deposit by Reis of the proceeds of the Bank Loan in the same account, an amount in cash equal to the amount by which the aggregate cash consideration to be paid in the merger plus an amount equal to any payments required to be made instead of fractional shares of Wellsford common stock exceeds the proceeds of the Bank Loan. The portion of the cash consideration and share consideration otherwise payable to the Reis stockholders to be held in escrow as security for the indemnification obligations of Reis and the Reis stockholders will be deposited in two separate escrow accounts with the Bank of New York and one escrow account with Bryan Cave and will be deducted ratably from each Reis stockholders merger consideration, except the stock received by Wellsford Capital will not be subject to deduction. See The Merger AgreementIndemnification on page 95.
Promptly after the effective time of the merger, and in any event no later than two business days following the effective time, each record holder of shares of Reis capital stock who has not properly made an election to receive Wellsford common stock for 100% of the stockholders shares of Reis capital stock will be sent a letter of transmittal and instructions for effecting the surrender of the certificates representing shares of Reis capital stock in exchange for the stockholders allocated portion of cash consideration and share consideration.
After the effective time of the merger, Reis stockholders who surrendered certificates representing their shares of Reis capital stock to Wellsford along with:
| a properly made election to receive share consideration or a combination of cash consideration and share consideration and such other documents as the exchange agent may reasonably require, or |
| a properly executed letter of transmittal and such other documents as the exchange agent may reasonably require, |
will be entitled to receive in exchange therefor a certificate representing that number of whole shares of Wellsford common stock and/or the cash consideration which such holder has the right to receive in respect of the certificate(s) surrendered, and the certificate(s) so surrendered will be cancelled.
If there is a transfer of ownership of Reis capital stock which is not registered in the transfer records of Reis, a certificate representing the proper number of shares of Wellsford common stock may be issued or, as applicable, the cash consideration may be paid, to a transferee if the Reis certificate representing such Reis capital stock is presented to the exchange agent, accompanied by all documents required to evidence and effect such transfer and by evidence that any applicable stock transfer taxes have been paid.
No interest will be paid or accrue on any merger consideration except as contemplated by the escrow agreement and provisions of the merger agreement governing the holdback of merger consideration as security for the indemnification obligations of the Reis stockholders. See The Merger Agreement Indemnification beginning on page 95 and The Merger AgreementOther AgreementsEscrow Agreement beginning on page 102.
Treatment of Reis Stock Options |
Plan Options |
Reis has agreed, pursuant to the merger agreement, to take all necessary action prior to the effective time of the merger, to cause each Plan Option (as defined in this paragraph) to convert to the right to receive as a result of the occurrence of the merger a cash payment pursuant to Reiss 1999 Stock Option Plan, as amended, which we refer to as the Reis Option Plan, such that at the effective time of the merger, each Plan
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Option outstanding immediately before the effective time, whether or not then exercisable, will be canceled and will only entitle its holder to receive as soon as reasonably practicable after the surrender of the Plan Option, cash in an amount equal to the product of:
| the amount, if any, by which $8.16 exceeds the per share exercise price of such Plan Option, times |
| the number of shares of Reis common stock into which that Plan Option is exercisable; |
provided that any payment will be net of all withholding taxes required by law to be withheld by Reis. For purposes of this joint proxy statement/prospectus, Plan Option means an outstanding option to purchase Reis common stock granted under the Reis Option Plan. All Plan Options are held by employees of Reis and an aggregate of $2,338,574 will be paid to them by the combined company and not from the cash portion of the merger consideration.
After the surrender to Merger Sub of a holders Plan Options, the holder will be entitled to receive from Merger Sub, in exchange for the Plan Options, the payment as provided above. Following payment to the holder, the holder will not be entitled to any further payments with respect to any Plan Option, including, without limitation, by reason of any distribution of the holdback or any other escrowed funds.
Non-Plan Options |
Reis has agreed, pursuant to the merger agreement, to take all necessary action prior to the effective time of the merger, to cause each Non-Plan Option (as defined in this paragraph) to convert to the right to receive as a result of the occurrence of the merger a cash payment pursuant to the terms of each respective Non-Plan Option so that immediately after the effective time, each Non-Plan Option outstanding immediately before the effective time, whether or not then exercisable, will be canceled and will only entitle its holder to receive as soon as reasonably practicable after the surrender of the Non-Plan Option, cash in an amount equal to the product of:
| the amount, if any, by which $8.16 exceeds the per share exercise price of the Non-Plan Option, times |
| the number of shares of Reis common stock into which the Non-Plan Option is exercisable. |
For purposes of this joint proxy statement/prospectus, Non-Plan Option means an outstanding option to purchase Reis common stock which has been granted outside of the Reis Option Plan. All Non-Plan Options are held by Lloyd Lynford and Jonathan Garfield and an aggregate amount of $2,375,782 will be paid to them by the combined company and not from the cash portion of the merger consideration.
After the surrender to Merger Sub of a holders Non-Plan Options, the holder will be entitled to receive from Merger Sub, in exchange for the Non-Plan Options, the payment as provided above. Following payment to the holder, the holder will not be entitled to any further payments with respect to any Non-Plan Option, including, without limitation, by reason of any distribution of the holdback or any other escrowed funds.
Representations and Warranties |
By Reis |
The representations and warranties made by Reis to Wellsford relate, among other things, to:
| corporate organization and other similar matters; |
| capital structure; |
| authorization, execution, delivery, performance and enforceability of the merger agreement and related matters; |
| noncontravention of law and agreements and receipt of consents and approvals from governmental entities and third parties with respect to the merger agreement and related matters; |
| the conformity of financial statements with applicable accounting principles, and the absence of undisclosed financial liabilities; |
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| ownership of subsidiaries; |
| ownership and validity of intellectual property; |
| compliance with applicable laws and reporting requirements and possession of all permits, licenses and regulatory or other approvals required to conduct business; |
| validity, effect and absence of defaults under material contracts; |
| validity of leases of real property; |
| ownership of and title to personal property; |
| insurance policies; |
| employees, employee benefits, the Employee Retirement Income Security Act of 1974, and employment agreements; |
| absence of material pending or threatened legal proceedings; |
| filing of tax returns, payment of taxes and other tax matters; |
| environmental matters; |
| brokers fees; |
| relationships with affiliated parties; |
| relationships with material customers; |
| absence of undisclosed liabilities or certain material changes or events and conduct of business in the ordinary course since October 31, 2005; |
| approval of the merger and related transactions by the board of directors and the vote necessary by stockholders to adopt the merger agreement and related transactions; |
| the truthfulness and accuracy of information provided for inclusion in this joint proxy statement/prospectus; and |
| receipt of a fairness opinion from an independent financial advisor. |
By Wellsford |
The representations and warranties made by Wellsford to Reis relate, among other things, to:
| corporate organization and other similar matters; |
| authorization, execution, delivery, performance and enforceability of the merger agreement and related matters; |
| capital structure; |
| ownership of subsidiaries; |
| noncontravention of law and agreements and receipt of consents and approvals from governmental entities and third parties with respect to the merger agreement and related matters; |
| documents filed with the SEC, the accuracy and sufficiency of information contained in those documents, the conformity of financial statements with applicable accounting principles, and the absence of undisclosed financial liabilities; |
| sufficiency of internal controls; |
| the conformity of financial statements with applicable accounting principles, and the absence of undisclosed financial liabilities; |
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| the truthfulness and accuracy of information provided for inclusion in this joint proxy statement/prospectus; |
| absence of undisclosed liabilities or certain material changes or events and conduct of business in the ordinary course since June 30, 2006; |
| compliance with applicable laws and reporting requirements and possession of all permits, licenses and regulatory or other approvals required to conduct business; |
| absence of material pending or threatened legal proceedings; |
| relationships with affiliated parties; |
| the availability of sufficient funds to pay the merger consideration; |
| receipt of a fairness opinion from an independent financial advisor; |
| brokers fees; |
| approval of the merger and related transactions by the board of directors and the vote necessary by stockholders to approve the issuance of Wellsford common stock necessary to pay the stock portion of the aggregate merger consideration; |
| certain tax matters; |
| ownership of and title to real property; and |
| environmental matters. |
Significant portions of the representations and warranties of the parties in the merger agreement are qualified as to materiality or material adverse effect. For purposes of the merger agreement, material adverse effect means, with respect to Wellsford or Reis, as the case may be, any change, effect or event that is or would reasonably be expected to be materially adverse to the business, assets, results of operations, or financial condition of the applicable party, or materially impair or delay the ability of the applicable party to perform its obligations under the merger agreement or to consummate the merger, excluding, however, any such change, effect or event that arises out of or in connection with or resulting from:
| changes affecting general national, international or regional political, economic, financial or capital market conditions; |
| changes relating to the applicable partys industry, so long as such change does not disproportionately affect the applicable party or its business; |
| in the case of Wellsford, any breach of the merger agreement by Reis, and in the case of Reis, any breach of the merger agreement by Wellsford or Merger Sub; |
| disclosures in and described by each of the parties in disclosure letters which set forth exceptions to the representations and warranties made by the parties; or |
| actions taken by any party or its affiliates at the written request of another party. |
Principal Covenants and Agreements |
Conduct of Business of Reis Pending the Merger |
Except as otherwise expressly contemplated or permitted by the merger agreement or the Reis disclosure letter delivered in connection with the merger agreement, as required by applicable law or contracts, or with the prior written consent of Wellsford or Merger Sub, Reis has agreed to carry on its business in the usual, regular and ordinary course, consistent with past practice, including using all reasonable efforts to preserve intact its present business organizations and maintaining its existing relationships with customers, suppliers, employees, and creditors. Except as contemplated by the merger agreement, Reis has also agreed to refrain from doing, or making any commitment or agreement to do, any of the prohibited actions described below
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during the period commencing on the date of the merger agreement and continuing until the effective time of the merger:
| amend its certificate of incorporation or bylaws; |
| split, combine, reclassify or recapitalize any of its capital stock or declare or pay any dividends on or make other distributions in respect of any of its capital stock, or redeem, purchase or otherwise acquire any of its capital stock; |
| issue, deliver, sell, transfer, encumber or dispose of any additional shares of its capital stock, or any securities convertible into or exercisable or exchangeable for, or any rights, warrants or options to acquire any such shares, other than the issuance of common stock
pursuant to securities, options, warrants, calls, commitments, or rights existing or outstanding on the date of the merger agreement; |
| incur, create or assume any long-term or short-term indebtedness for borrowed money other than (1) under credit facilities existing on the date of the merger agreement, (2) financing or equipment leases entered into in the ordinary course of business, or (3) in connection
with paying the cash portion of the merger consideration and cash payable in connection with the merger to holders of options to purchase Reis stock; |
| grant, create, or incur any liens (other than certain permitted liens) that did not exist on the date of the merger agreement; |
| grant or announce any material general or individual increase in compensation to any employees or directors except in accordance with existing agreements and for bonuses or promotions granted in the ordinary course of business consistent with past practice; |
| adopt, amend or otherwise increase or accelerate the payment or vesting of amounts payable under existing, or create any new, bonus, incentive compensation, deferred compensation, severance, profit sharing, stock option, stock appreciation rights, restricted stock
purchase, insurance, pension, retirement or other employee benefit plan or arrangement; |
| enter into or amend in any material respect any existing employment or severance agreement or grant any severance or termination payments except in accordance with existing agreements; |
| pay, loan or advance or agree to pay, loan, or advance any amount to, or sell, transfer or lease any properties or assets to any of its officers or directors; |
| other than purchasing inventory or other items in the ordinary course of business, acquire or agree to acquire directly or indirectly, by merging or consolidating with, or by purchasing any equity interest in, or any portion of the assets of, any person or business; |
| change their methods of accounting, except as required by changes in generally accepted accounting principles; |
| enter into any agreement with respect to the disposition of any of, or license, lease or other encumbrance of any of, its assets or any release or relinquishment of any rights granted in material contracts, other than those entered into the ordinary course of business; |
| enter into, terminate or make any change to any existing material contract or agreement, except in the ordinary course of business consistent with past practice and renewals or extensions of any contracts existing on the date of the merger agreement; |
| make or change any tax election or change its method of tax accounting, release, settle or compromise any tax liability, change any tax accounting period, file any amended tax returns, enter into any closing agreement or waive any statute of limitations for any tax claim or
assessments except as required by changes in applicable law or regulations; |
|
| dispose of or permit to lapse any rights in material intellectual property rights of Reis, make any disclosures of trade secrets or know-how of Reis that is not made pursuant to confidentiality agreements or is of information not publicly known prior to disclosure, or fail to
enter into |
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confidentiality agreements with employees or consultants as is necessary to protect trade secrets, know-how, or the like; |
| incur or commit to incur any capital expenditures other than capital expenditures incurred or committed to in the ordinary course of business consistent with past practice or included in Reiss current budget; or |
| other than in the ordinary course of business, makes loans or advances or assume, guarantee, endorse or otherwise become responsible for the obligations of others. |
Other Actions To Be Taken Pending the Merger |
The parties have agreed to do the following in an effort to consummate the merger:
| Wellsford and Reis will each use all commercially reasonable efforts to facilitate and expedite the identification and resolution of any issues arising under, and to promptly obtain any clearance required under, the Hart-Scott-Rodino Act; |
| Wellsford and Reis will cooperate with one another to obtain as promptly as practicable all other approvals and permits from any governmental entities required by the parties to consummate the merger and to obtain any consent, authorization, order or approval of, or any
exemption by, any governmental entity and/or any other public or private third party which is required to be obtained in connection with the merger and the transactions contemplated by the merger agreement; |
| Reis will cooperate in a reasonable manner with Wellsford in giving notice of the transactions contemplated by the merger agreement to certain third parties to contracts with Reis and obtaining consents and waivers from the third parties where necessary; however, the
merger agreement provides that Reis is not required to spend money, participate in or defend any litigation, or offer or grant any sort of accommodation to any third party in connection with these obligations; |
| Reis will use reasonable best efforts to work toward enabling Wellsford to satisfy its obligations under the Sarbanes-Oxley Act after the effective time of the merger, including, among other things, implementing, to the extent practicable, the reasonable recommendations
of Wellsford to progress towards documenting internal controls over financial reporting and disclosure controls and procedures; and |
| Wellsford and Reis will cooperate to take any action necessary to cause Wellsfords name to be changed to Reis, Inc. immediately following the consummation of the merger. |
No Solicitation |
The merger agreement provides that, as of the date of its execution, Reis will cease immediately and terminate, and use its best efforts to cause its officers, directors, agents, and representatives to cease, any and all existing activities, discussions or negotiations with any third parties conducted prior to the date of the merger agreement with respect to any takeover proposal. Additionally, the merger agreement provides that Reis will not, directly or indirectly, do any of the following and, further, Reis will use its reasonable best efforts to prevent its officers, directors, employees, agents and representatives from doing, directly or indirectly, any of the following:
| initiate, solicit, or knowingly encourage any action designed to, or which would reasonably be expected to, facilitate any inquiries or the making of any takeover proposal; |
| approve or recommend or propose to approve or recommend, or enter into any agreement, arrangement or understanding with respect to, any takeover proposal; or |
| participate in any discussions or negotiations regarding, or furnish or disclose to any person other than the parties to the merger agreement any non-public information or data with respect to Reis in connection with any inquiries or the making of any proposal that
constitutes, or reasonably could constitute, a takeover proposal. |
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The merger agreement provides that the term takeover proposal means, other than the transactions contemplated by the merger agreement, any bona fide written proposal or offer with respect to:
| a merger, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving Reis; |
| any direct or indirect lease, acquisition or purchase of all or substantially all of the assets of Reis; or |
| any direct or indirect acquisition or purchase of, or tender or exchange offer for, voting securities of Reis that, if consummated, would result in any person beneficially owning securities representing 50% or more of the total voting power of Reis. |
The merger agreement provides further that, notwithstanding the restrictions described above, at any time prior to the adoption of the merger agreement by the stockholders of Reis, the board of directors is permitted to engage in discussions and negotiations with, and provide nonpublic information (subject to certain confidentiality restrictions provided in the merger agreement) and/or data to, any person that has made a bona fide unsolicited written takeover proposal. However, such discussions and negotiations may occur only if:
| the Reis board of directors determines in good faith, after consultation with its outside legal advisors, that a bona fide unsolicited written takeover proposal is, or is reasonably likely to be, a superior proposal (as defined below); and |
| written notice has been delivered to Wellsford, which notice must include the material terms of the takeover proposal and the identity of the person or entity making it. |
The merger agreement provides that the term superior proposal means a takeover proposal which the board of directors of Reis concludes in good faith, after consultation with its outside legal advisor, and taking into account all legal, financial, regulatory and other aspects of the proposal and the person making the proposal (including any break up fees, expense reimbursement provisions and conditions to consummation), is:
| more favorable to the Reis stockholders from a financial point of view than the merger and the other transactions contemplated by the merger agreement; and |
| financed, to the extent required, or may reasonably be expected to be fully financed and is reasonably likely to receive all required governmental approvals to consummate the merger on a timely basis. |
Principal Conditions to Consummation of the Merger |
The respective obligations of each party to effect the merger are subject to the satisfaction prior to the effective time of the merger of the following conditions, unless waived by both Wellsford and Reis:
| Reis and Wellsford will have each obtained the required vote from their stockholders; |
| any waiting period applicable to the merger under the Hart-Scott-Rodino Act will have expired or been terminated; |
| other than the filing of the articles of merger in accordance with the MLLCA and the certificate of merger in accordance with the DGCL, all authorizations, consents, or approvals of, any governmental entity which are necessary for the consummation of the merger or
those the failure of which to be obtained would reasonably be expected to have, either individually or in the aggregate, a material adverse effect on the parties to the merger agreement, have been obtained; |
| the registration statement of which this joint proxy statement/prospectus forms a part will have become effective under the Securities Act and no stop order or proceedings seeking a stop order will be initiated; |
| no governmental entity will have enacted, issued, enforced or entered any law or order which has the effect of making the merger illegal or prohibiting the consummation of the merger, and there will be no suit, action or proceeding by a governmental entity seeking to
enjoin or prohibit the merger; |
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| no order, law, or prohibition will be in effect, and there will be no suit, action or proceeding pending by any governmental entity preventing the consummation of the merger or which is reasonably likely to have a material adverse effect on either Wellsford or Reis; and |
| Wellsford and Reis will each have received written opinions from their outside legal counsel to the effect that the merger will constitute a reorganization within the meaning of Section 368(a) of the Code and that each of Wellsford and Reis will be a party to the
reorganization as described in and pursuant to Section 368(b) of the Code. |
The obligation of Reis to effect the merger is subject to the satisfaction or waiver by Reis of the following conditions:
| the representations and warranties of Wellsford and Merger Sub set forth in the merger agreement, disregarding all qualifications and exceptions therein relating to materiality or material adverse effect, will be true and correct as of the date of the merger agreement and
(except to the extent such representations and warranties speak as of an earlier date) as of the effective time of the merger, subject to such exceptions as do not have and would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on
Wellsford; |
| Wellsford and Merger Sub will have performed or complied in all material respects with all obligations and covenants required to be performed by them pursuant to the merger agreement at or prior to the effective time of the merger; |
| the escrow agreement will have been signed by Wellsford and the escrow agent; |
| Lloyd Lynford and Jonathan Garfield will have been unconditionally released from certain guaranties described in the Reis disclosure letter; and |
| Wellsford will have entered into the registration rights agreement with Lloyd Lynford and Mr. Garfield. |
The respective obligations of Wellsford and Merger Sub to effect the merger are subject to the satisfaction or waiver by Wellsford of the following conditions:
| the representations and warranties of Reis set forth in the merger agreement, disregarding all qualifications and exceptions therein relating to materiality or material adverse effect, will be true and correct as of the date of the merger agreement and (except to the extent
such representations and warranties speak as of an earlier date) as of the effective time of the merger, subject to such exceptions as do not have and would not reasonably be expected to have, individually or in the aggregate, a material adverse effect on Reis; |
| Reis will have performed or complied in all material respects with all obligations and covenants required to be performed by it pursuant to the merger agreement at or prior to the effective time of the merger; |
| the escrow agreement will have been signed by Lloyd Lynford, Mr. Garfield and the escrow agent; |
| Reis will have certified that no class or series of Reis stock constitutes a U.S. real property interest; |
| no more than 5% of the outstanding shares of Reis common stock and Reis preferred stock (on an as-converted to common stock basis), together as a single class, will be subject to appraisal rights; |
| Lloyd Lynford and Mr. Garfield will have each executed a lock-up agreement, pursuant to which they each agree not to sell the shares of Wellsford common stock received in the merger for nine months following the effective time of the merger; and |
| proceeds of the loan made to Reis by a syndicate of lenders through the Bank of Montreal, as administrative agent, in order to finance the cash portion of the merger consideration will have been obtained. |
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Termination Events and Termination Fees |
Termination Events |
The merger agreement provides that it may be terminated by the parties under the following circumstances:
| by mutual written agreement of Wellsford and Reis; |
| by either Wellsford or Reis, upon written notice to the other, if: |
| any governmental entity has issued an order, decree or ruling or taken any other action permanently restraining, enjoining or otherwise prohibiting the merger and such order, decree, ruling or other action has become final and unappealable; |
| the merger has not been consummated on or before April 30, 2007 (provided that neither Wellsford nor Reis may terminate the merger agreement under this clause if its failure to comply with any provision of the merger agreement has been the cause of, or has
resulted in, the failure of the merger to occur on or before that date); |
| if there is a breach of (1) a representation or warranty of the other party such that a material adverse effect has occurred with respect to that party or (2) an obligation to perform any covenant or agreement contained in the merger agreement, and it is not possible to
cure such breach within a 30-day period or has not been cured within 30 days of notice of such breach by the non-breaching party; |
| the necessary vote by Reis stockholders to adopt the merger agreement and approve the amendment to Reiss amended and restated certificate of incorporation has not been obtained; or |
| Wellsford failed to obtain the necessary vote from its stockholder to issue shares of Wellsford common stock as contemplated by the merger agreement; |
| by Reis if it has received a superior proposal before the date of the Reis special meeting; |
| by Reis if there is a change in control of Wellsford; or |
| by Wellsford if Reiss board of directors fails to recommend the adoption of the merger agreement and approval of the merger at the Reis special meeting, or withdraws or changes its recommendation to Reiss stockholders to adopt the merger agreement at the Reis
special meeting. |
The merger agreement provides that the term change in control as used above means the occurrence of any of the following: (1) there has been a change in control of Wellsford of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, (2) any merger or consolidation of Wellsford in which Wellsford is not the continuing or surviving corporation or pursuant to which shares of Wellsfords common stock would be converted into cash, securities or other property, other than a merger of Wellsford in which the holders of its common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger, (3) any sale, lease, exchange or other transfer of all, or substantially all, the assets of Wellsford, or the liquidation or dissolution of Wellsford, (4) any tender offer or exchange offer that if consummated would result in any person beneficially owning equity securities of Wellsford representing 50% or more of its combined voting power or (5) a change in the composition of Wellsfords board of directors, as a result of which fewer than a majority of the directors are incumbent directors. An incumbent director is a director who either (A) is a director of Wellsford as of the date of the merger agreement, or (B) is elected, or nominated for election, to Wellsfords board of directors with the affirmative votes of at least a majority of the incumbent directors at the time of such election or nomination.
Termination Fees |
If the merger agreement is validly terminated, all future obligations of the parties will terminate without further liability except as provided below or as described in The Merger AgreementFees and Expenses on page 97:
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| If Reis terminates the merger agreement because it has received a superior proposal before the date of the Reis special meeting, then Reis must pay Wellsford a fee of $500,000 and reimburse Wellsford for its out-of-pocket fees and expenses incurred in connection with
the merger, the merger agreement, and the other transactions contemplated by the merger agreement, referred to as Wellsfords merger expenses, up to a maximum of $3,500,000. |
| If either party terminates the merger agreement because Wellsford failed to obtain the necessary vote from its stockholder to issue shares of Wellsford common stock as contemplated by the merger agreement, then Wellsford must pay certain costs and expenses incurred
by Reis in connection with obtaining the Bank Loan, referred to as loan expenses; however, if the merger agreement is terminated by either party for any other reason, each party will be responsible for one-half of the loan expenses. |
| If (1) Wellsford terminates the merger agreement because Reiss board of directors fails to recommend adoption of the merger agreement at the Reis special meeting, or withdraws or changes its recommendation to Reiss stockholders to adopt the merger agreement at the
Reis special meeting, or (2) Reis terminates the merger agreement because of a change in control of Wellsford, then Reis must reimburse Wellsford for merger expenses up to a maximum of $3,500,000; and, if within six months of the date of termination of the merger
agreement pursuant to clauses (1) and (2) above, Reis consummates a transaction that would have qualified as a takeover proposal prior to termination of the merger agreement, then Reis must pay a $500,000 fee to Wellsford at the time such other transaction is
consummated. |
Indemnification |
Of Wellsford |
The merger agreement provides that, for a period of 18 months following the effective time of the merger, $2,593,456 of the cash portion and 317,825 shares of the stock portion of the aggregate merger consideration otherwise payable to Reis stockholders, other than Wellsford Capital, will be held in an escrow account at the Bank of New York, which is acting as the escrow agent, as the sole and exclusive source of recovery by Wellsford for breaches of Reiss representations, warranties and covenants, provided, that the escrowed funds are not the sole and exclusive remedy (1) in the case of damages resulting from fraud and (2) for breaches of certain representations and warranties designated by the parties as fundamental representations. For a period of 24 months following the effective time, $1,500,000 of the cash portion and 183,824 shares of the stock portion of the aggregate merger consideration will be held in a second escrow account with The Bank of New York as the sole additional source of recovery (if the funds held in the first escrow account have been exhausted or released) for breaches of the fundamental representations. The aggregate amounts of cash consideration and share consideration described above which are to be held in escrow accounts with The Bank of New York pursuant to the merger agreement will be deducted ratably from each Reis stockholders allocated cash consideration and share consideration. See The Merger AgreementOther AgreementsEscrow Agreement beginning on page 102.
Wellsford, the combined company, and their respective officers, directors and employees are entitled to make claims against, and recover from, the escrowed funds so long as, with respect to claims that are related to fundamental representations, the claim is submitted prior to the 24 month anniversary of the effective time of the merger and, with respect to all other claims, the claim is submitted prior to the 18 month anniversary of the effective time of the merger. Payments will be made to indemnified persons from the escrowed funds only after the amount to be paid exceeds $900,000, in which event all amounts in excess of $900,000 will be due and payable in respect of claims made against the escrowed funds. All amounts paid will consist of 50% cash and 50% Wellsford common stock, with each share of common stock being valued at $8.16. At the end of these escrow periods, subject to any then-existing claims, the escrowed funds remaining in the escrow accounts will be released and distributed ratably to the Reis stockholders (other than Wellsford Capital).
Recoveries received by indemnified persons from third parties or insurance will reduce the amounts payable from the escrowed funds.
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Of Stockholder Representatives |
The adoption of the merger agreement by the requisite vote of Reis stockholders will:
| constitute the irrevocable appointment of Lloyd Lynford and Jonathan Garfield as representatives of all Reis stockholders and the waiver of any claim or conflict of interest arising out of or related to the stockholder representatives appointment as officers and/or directors
of the combined company or Wellsford; |
| authorize the stockholder representatives to take actions or make decisions, which will be binding on all Reis stockholders, as are deemed by them as necessary or desirable in connection with matters arising under the merger agreement or the escrow agreement with the
Bank of New York, including, among other things, the right to defend or settle claims made against the escrowed funds; and |
| constitute the consent of Reis stockholders to severally indemnify on a pro rata basis the stockholder representatives from all costs, expenses, obligations, or damages incurred in their capacity as stockholder representatives. |
As security for the Reis stockholders obligation to indemnify the stockholder representatives as described above, $250,000 of the cash portion and 30,637 shares of the stock portion of the aggregate merger consideration (collectively, $500,000) otherwise payable to Reis stockholders, other than Wellsford Capital, will be held in an escrow account with Bryan Cave; however, the amount held in escrow with Bryan Cave is not an exclusive or sole source of recovery for damages suffered or expenses incurred by the stockholder representatives. In the event that claims of the stockholder representatives exceed $500,000, they have the right to pursue additional recourse against the Reis stockholders for claims exceeding $500,000. The $250,000 in cash and the 30,637 shares to be held in an escrow account with Bryan Cave pursuant to the merger agreement will be deducted ratably from each Reis stockholders allocated cash consideration and share consideration. All amounts paid will consist of 50% in cash and 50% in shares of Wellsford common stock, with each share of common stock being valued at $8.16. At the end of the escrow period, subject to any then-existing claims, the escrowed funds remaining in the escrow accounts will be released and distributed ratably to the Reis stockholders (other than Wellsford Capital).
Director and Officer Indemnification and Insurance |
The merger agreement provides that, following consummation of the merger, Wellsford and the surviving company will indemnify and hold harmless, and provide advancement of claims-related expenses to all past and present directors and officers of Reis to the fullest extent permitted by applicable law and by Reiss amended and restated certificate of incorporation and by-laws for the period up to and including the effective time of the merger.
The merger agreement also provides that, for a period of six years following consummation of the merger, Wellsford will cause the combined company to maintain policies of (A) directors and officers liability insurance with respect to matters existing or occurring before, or at, the effective time of the merger and (B) liability insurance for Lloyd Lynford and Jonathan Garfield, as stockholder representatives with respect to matters existing or occurring after the effective time of the merger, which policies will contain coverage mutually acceptable to Wellsford and the stockholder representatives. However, in no event will the combined company be required to pay premiums for these policies in excess of $65,000 per year.
Listing of Wellsford Common Stock |
Shares of Wellsford common stock are currently listed on the AMEX under the symbol WRP. Wellsford has agreed to use its reasonable best efforts to cause the shares of Wellsford common stock to be issued in the merger to be authorized for listing on the AMEX as promptly as practicable, but in any case prior to the effective time of the merger, subject to official notice of issuance. Wellsford has also agreed to use its reasonable best efforts to cause the Wellsford common stock to be approved for listing on NASDAQ as soon as practicable after the consummation of the merger. When the Wellsford common stock has been approved for listing on NASDAQ, Wellsford will delist its common stock from the AMEX.
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Resales of Wellsford Common Stock |
The shares of Wellsford common stock to be issued to Reis stockholders have been registered under the Securities Act. These shares may be traded freely and without restriction by those stockholders not deemed to be affiliates of Reis as that term is defined under the Securities Act. An affiliate of a corporation, as defined by the rules promulgated under the Securities Act, is a person who directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, that corporation. Any subsequent transfer by an affiliate of Reis must be one permitted by the resale provision of Rule 145 promulgated under the Securities Act or as otherwise permitted under the Securities Act. See The MergerRestrictions on Sales of Shares of Wellsford Common Stock Received in the Merger beginning on page 71.
Corporate Governance |
The merger agreement requires that Wellsford amend its articles of amendment and restatement upon consummation of the merger to effectuate the name change described above under Other Actions To Be Taken Pending the Merger.
Fees and Expenses |
Whether or not the merger is consummated, all costs and expenses incurred in connection with the merger agreement will be paid by the party incurring such expense, except (1) as otherwise provided with respect to the payment of any termination fees as described above, (2) each of Wellsford and Reis will pay 50% of any fees and expenses incurred in connection with the filing, printing and mailing of this joint proxy statement/prospectus and the registration statement of which this joint proxy statement/prospectus forms a part, and (3) each of Wellsford and Reis will pay 50% of the expenses incurred in connection with the Bank Loan if the merger agreement is terminated for any reason other than failure of Wellsford to obtain the necessary vote of its stockholders to issue its common stock in the merger, in which case Wellsford will be responsible for 100% of these expenses; however, the merger agreement provides that if the merger has been terminated for any reason and Reis draws or has previously drawn on the funds available from the bank loan (described below) for any reason other than the payment of cash consideration in connection with the merger, then Wellsford is not responsible for any loan expenses and must be reimbursed for any expenses incurred in connection with the Bank Loan that it has previously paid.
Bank Loan |
In connection with the proposed merger, Reis has entered into a credit agreement, dated October 11, 2006, with the Bank of Montreal, Chicago Branch, as administrative agent, BMO Capital Markets, as lead arranger, and certain other lenders. The credit agreement provides for a term loan of up to an aggregate of $20,000,000 and revolving loans up to an aggregate of $7,000,000. The loan proceeds are to be used to finance up to $25,000,000 of the cash portion of the merger consideration and the remaining $2,000,000 may be utilized for future working capital needs of Reis. Reis has the ability to borrow the $2,000,000 for working capital needs both before and after the merger. If the merger is not consummated, Reis may borrow funds under the credit agreement for certain permitted uses. The loans are secured by a security interest in substantially all of the assets, tangible and intangible, of Reis, and a pledge by Wellsford, to become effective as of the effective time of the merger, of its membership interests in Merger Sub as the surviving company of the merger.
Reis is required to (1) make principal payments on the term loan on a quarterly basis commencing on June 30, 2007 in increasing amounts pursuant to the payment schedule provided in the credit agreement, provided, that if the merger is not consummated, the amount of these quarterly payments will be reduced by a certain percentage, and (2) permanently reduce the revolving loan commitments on a quarterly basis commencing on March 31, 2010. The final maturity date of all amounts borrowed pursuant to the credit agreement is September 30, 2012, provided, that if consummation of the merger does not occur and on January 1, 2008, the sum of the amount of funds then borrowed plus the undrawn portion of the revolving loan commitment is less than $10,000,000, then all amounts then borrowed under the credit agreement must be repaid on January 2, 2008.
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Interest on the term loan and the revolving loans maintained as Base Rate loans accrue at floating rates equal to the sum of the Base Rate plus the applicable margin. The Base Rate is the higher of the prime lending rate of Bank of Montreal or 1/2 of 1% in excess of the weighted average of the overnight federal funds rate as published for such day by the Federal Reserve Bank of New York. Interest on the term loans and the revolving loans maintained as LIBOR Rate loans accrue at floating rates equal to the sum of the applicable margin plus the applicable rate determined on Page 3750 of the Telerate screen or, if such page is not available, the arithmetic average of the rate offered by Bank of Montreal for dollar deposits in the interbank Eurodollar market.
For the period from October 11, 2006 through the consummation of the merger, the applicable margin for both the term loan and the revolving loans shall be based on the leverage ratio of Reis calculated on the financial results for the consecutive twelve-month period ending on June 30, 2006. Immediately after the consummation of the merger, the applicable margin will be recalculated based on the leverage ratio of Reis Services (the Merger Sub before the merger and the surviving company in the merger) for the most recent trailing four quarter period for which quarterly financial statements are available. The applicable margin for the term loans and the revolving loans will be reset quarterly based on the leverage ratio of (1) Reis, prior to the consummation of the merger, or (2) Reis Services (the Merger Sub before the merger and the surviving company in the merger) after the consummation of the merger. Reis must also comply with certain financial and other covenants in the credit agreement, including certain restrictions on Reis Servicess ability, among other things, to:
| incur additional debt; |
| change its fiscal year end; |
| amend its organizational documents; |
| pay dividends and make distributions; |
| redeem or repurchase outstanding equity; |
| make certain investments; |
| create liens; |
| enter into transactions with stockholders and affiliates; |
| undergo a change of control; and |
| make certain fundamental changes, including engaging in a merger or consolidation. |
The merger is expressly allowed by the credit agreement and is not a restricted activity or transaction.
At the time of the execution of the Bank Loan on October 11, 2006, the interest rate was LIBOR plus 3.00% if the loans are designated as LIBOR Rate loans or Base Rate plus 2.00% if the loans are designated as Base Rate loans. These spreads are based on a leverage ratio, as defined in the credit agreement, greater than or equal to 4.50 to 1.00. Interest spreads could be reduced if the leverage ratio decreases as follows:
Applicable Margin | |||||||
Total Leverage Ratio |
Base Rate Loan |
LIBOR Rate Loan |
|||||
Greater than or equal to 4.50 to 1.00 |
2.00% | 3.00% | |||||
Greater than or equal to 3.75 to 1.00 but less than 4.50 to 1.00 |
1.50% | 2.50% | |||||
Greater than or equal to 2.75 to 1.00 but less than 3.75 to 1.00 |
1.00% | 2.00% | |||||
Less than 2.75 to 1.00 |
0.50% | 1.50% |
The credit agreement requires interest rate protection in an aggregate notional principal amount of not less than 50% of the outstanding balance of the Bank Loan, which does not have to exceed $12,500,000. The term of any interest rate protection must be for a minimum of three years.
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Amendments; Waivers |
Subject to applicable law, any provision of the merger agreement may be amended or waived if the amendment or waiver is in writing and signed, in the case of an amendment, by each party to the merger agreement or, in the case of a waiver, by each party against whom the waiver is to be effective.
Governing Law |
The merger agreement is governed by and is to be interpreted in accordance with the laws of the State of New York.
Other Agreements |
The following are summaries of the material provisions of the employment agreements, the voting agreement, the lock-up agreement, the registration rights agreement and the escrow agreement. However, the following is not a complete description of all the provisions of these agreements. We urge you to read the agreements in their entirety, or the forms of agreements, as applicable, which are filed as exhibits to the registration statement on Form S-4 of which this joint proxy statement/prospectus is a part. See Where You Can Find More Information on page 216.
Employment Agreements |
Wellsford and Merger Sub, as employers, have entered into employment agreements with Lloyd Lynford and Jonathan Garfield which are to become effective immediately after the occurrence of both (1) the effective time of the merger and (2) the repayment of all amounts due and payable under certain loans made to each of them by Reis, and will remain effective for a term of three years from their effective date. These agreements will supersede their current agreements with Reis and provide, in material part, as follows:
| Lloyd Lynford will serve as President and Chief Executive Officer, and Mr. Garfield will serve as Executive Vice President, of both Wellsford and Merger Sub; |
| Lloyd Lynford and Mr. Garfield each will be entitled receive an annual base salary of $375,000 and a minimum annual bonus of $270,000 and $125,000, respectively, and additional incentive bonuses under certain circumstances; |
| on the effective date of their employment agreements, Lloyd Lynford and Mr. Garfield will be issued 100,000 and 46,000, respectively, restricted stock units of Wellsford, respectively, which will vest annually in three equal tranches on each anniversary of the effective
date of the employment agreements, subject to the condition that certain levels of EBITDA growth are met each year or certain cumulative EBITDA targets are met; provided, however, if (A) a change of control occurs prior to the third anniversary date, all restricted stock
units will vest on the effective date of the change of control, or (B) the employment of Lloyd Lynford or Mr. Garfield, as applicable, is terminated other than for cause or either resigns for good reason, all of his restricted stock units will vest on the date of that termination
or resignation; |
| the employment of Lloyd Lynford or Mr. Garfield, as applicable, may be terminated prior to expiration of the three-year term for death, disability or cause, and Lloyd Lynford or Mr. Garfield, as applicable, may terminate his employment agreement for good reason,
which includes (A) a material diminution in duties or responsibilities for either employer or a demotion or change in direct reporting relationship to the Wellsford board of directors, (B) being removed from, not nominated for re-election to, or not re-elected to the board of
directors of Wellsford, (C) a material breach of the applicable employment agreement which is not cured within 20 days after notice of the breach, or (D) requiring Lloyd Lynford or Mr. Garfield, as applicable, to report to work on a regular basis at a location outside of a
30-mile radius from 530 Fifth Avenue, New York, New York; |
|
| upon termination of employment for death or disability, Lloyd Lynford or Mr. Garfield, as applicable, or his estate or other beneficiaries, will be paid his salary through the date of termination, accrued vacation pay, unpaid bonuses for prior years, unreimbursed business
expenses and an additional |
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amount equal to the excess of $810,000, in the case of Lloyd Lynford, and $375,000, in the case of Mr. Garfield, over the sum of his minimum annual bonuses paid in years prior to the
date of termination; |
| upon termination of employment for cause by the employers or without good reason by Lloyd Lynford or Mr. Garfield, as applicable, he will not receive any payments other than salary through the date of termination, accrued vacation pay, unpaid bonuses for prior years
and unreimbursed business expenses payable to him as of the date of termination; |
| if, within two years following a change of control, the employers terminate the employment of Lloyd Lynford or Mr. Garfield, as applicable, without cause or if either resigns for good reason, then he will be paid an amount equal to (1) salary through the date of
termination, accrued vacation pay, unpaid bonuses for prior years and unreimbursed business expenses payable to him as of the date of termination, and (2) an amount equal to (A) 2.5 times his gross annual base salary for the year during which termination occurs, plus
(B) a pro rata portion (based on the number of days employed during the year in which termination occurs) of the annual bonus received in the preceding year that was in excess of the minimum annual bonus amount, plus (C) the sum of the present value of any unpaid
minimum annual bonuses for the three-year term; further, in the case of Lloyd Lynford only, he may resign within 30 days after a six-month period beginning on the effective date of a change of control and the resignation will be treated as a resignation for good reason; |
| if at any time during the three-year term (except during the two years following a change of control), the employers terminate the employment of Lloyd Lynford or Mr. Garfield, as applicable, for a reason other than cause, death or disability or either resigns for good
reason, then he will be paid (1) salary through the date of termination, accrued vacation pay, unpaid bonuses for prior years and unreimbursed business expenses payable to him as of the date of termination, (2) the greater of the sum of (x) his gross annual base salary for
each year remaining through the end of the three-year term and (y) $375,000 plus (2) the sum of the present value of any unpaid minimum annual bonuses for the three-year term plus (3) a pro rata portion (based on the number of days employed during the year in which
termination occurs) of the annual bonus received in the preceding year that was in excess of the minimum annual bonus amount; and |
| for the period during which Lloyd Lynford or Mr. Garfield, as applicable, is employed pursuant to his employment agreement and, in certain cases for up to one year following termination, each is subject to confidentiality, non-competition and non-solicitation
restrictions. |
If any payment to Lloyd Lynford or Mr. Garfield would be an excess parachute payment, which would be subject to an excise tax under Section 4999 of the Code, then Lloyd Lynford or Mr. Garfield, as applicable, will be paid either (1) the full amount as described above or (2) a reduced amount so that he will not owe any excise tax under Section 4999 if payment of the reduced amount will result in greater after-tax proceeds to Lloyd Lynford or Mr. Garfield.
The term cause as used above means the applicable employees (1) breach of the restrictive covenants set forth in the employment agreements, (2) material breach of any other terms of the employment agreement which is not cured within 20 days of notice of the breach, (3) fraud or dishonesty in the course of employment, (4) continued gross neglect of duties for reasons other than disability, or (4) conviction, a plea of guilty or nolo contendre to any felony charge.
The term change of control as used above means the occurrence of any of the following, whether directly or indirectly, voluntarily or involuntarily, whether as part of a single transaction or a series of transactions:
| during any period of 12 consecutive months or less, individuals who at the beginning of that period constitute the Wellsford board of directors cease, for any reason, to constitute at least a majority of the board, unless the election or nomination for election of each new
director was approved by at least two-thirds of the directors then still in office who were directors at the beginning of the period; or |
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| the sale, transfer or other disposition of all or substantially all of the assets of either employer (other than to a wholly-owned direct or indirect subsidiary of either employer or a benefit plan of either employer); or |
| any person or entity or group of affiliated persons or entities (other than Lloyd Lynford, Mr. Garfield or a group including either of them) acquiring beneficial ownership (as that term is used in Rules 13d-3, 13d-5 or 16a-1 under the Exchange Act of 1934) of 30% or more
of the shares of capital stock or other equity of either employer, having by the terms thereof voting power to elect the members of the Wellsford board of directors, or, convertible into shares of such capital stock or other equity of either employer; or |
| the stockholders or members of either employer adopting a plan of liquidation or approving the dissolution of either employer; or |
| the merger, consolidation, or reorganization of either employer or any similar transaction which results in (1) the beneficial owners of the voting power of either employer immediately prior to the merger, consolidation, reorganization or transaction beneficially owning,
after giving effect to such merger, consolidation, reorganization or transaction, interests or securities of the surviving or resulting entity representing 50% or less of the shares of capital stock or other equity of the surviving or resulting entity having by the terms thereof
voting power to elect the members of the board or directors (or equivalent thereof) or convertible into shares of such capital stock or other equity of such entity or (2) any person or entity or group of affiliated persons or entities (other than Lloyd Lynford, Mr. Garfield or
a group including either of them) owning, after giving effect to such merger, consolidation, reorganization or transaction, interests or securities of the surviving or resulting entity, acquiring beneficial ownership of 30% or more of the shares of capital stock or other equity
of the surviving or resulting entity having by the terms thereof voting power to elect the members of the Wellsford board of directors (or equivalent thereof) or convertible into shares of such capital stock or other equity of such entity. |
Voting Agreement |
In connection with the merger agreement and as an inducement to Wellsford to enter into the merger agreement, Wellsford has entered into a voting agreement, dated October 11, 2006, with Lloyd Lynford and Jonathan Garfield, solely in their capacity as stockholders of Reis and not as directors or officers of Reis, to vote their shares of Reis capital stock in favor of the approval of the amendment to Reiss amended and restated certificate of incorporation, and the adoption of the merger agreement and all actions that could reasonably be expected to facilitate, or are in furtherance of, the merger and other transactions contemplated by the merger agreement, and against any other proposal or action that is intended to or could reasonably be expected to (1) result in any change in the Reis board of directors, the current capitalization of Reis, or Reiss amended and restated certificate of incorporation or by-laws other than as specifically contemplated by the merger agreement, (2) result in any breach of the merger agreement by Reis, (3) impair in any material respect the ability of Reis to perform its obligations under the merger agreement, or (4) prevent, materially delay or interfere with the consummation of the transactions contemplated by the merger agreement. Each of them also agreed to waive their rights of appraisal, pursuant to the DGCL or otherwise, with respect to the merger.
Lloyd Lynford and Mr. Garfield may vote in their sole discretion on all issues other than those specified in the voting agreement that may come before the Reis stockholders. The voting agreement does not limit or restrict Lloyd Lynfords or Mr. Garfields acts or omissions undertaken as an officer or director of Reis.
Subject to certain limited exceptions, Lloyd Lynford and Mr. Garfield have also agreed not to sell, transfer, assign or dispose of, or grant any proxy to or encumbrance of, or enter into any other voting arrangement with respect to, their Reis capital stock.
As of the date of the voting agreement, Lloyd Lynford and Mr. Garfield collectively owned 4,103,446 shares of Reis common stock and 116 shares of Reis Series D preferred stock, representing approximately 37.2% of the outstanding voting stock of Reis. Additionally, if either of them acquires any additional shares,
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directly or beneficially, of Reis capital stock after the date of the voting agreement, those shares automatically become subject to the voting agreement. The voting agreement will terminate on the earlier of (1) the effective time of the merger or (2) the termination of the merger agreement.
Although Wellsford Capital is not party to a voting agreement, it is expected that it will vote its shares of Reis preferred stock, representing approximately 23% of the outstanding voting stock of Reis, in favor of the adoption of the merger agreement and the approval of the amendment to Reiss amended and restated certificate of incorporation. See The MergerInterests of Wellsford and Reis Directors and Executive Officers in the MergerInterests of Reis Directors and Executive Officers in the Merger beginning on page 68.
Lock-up Agreement |
In connection with the consummation of the merger, Lloyd Lynford and Mr. Garfield will enter into a lock-up agreement with Wellsford, pursuant to which each will agree for a period of nine months beginning at the effective time of the merger not to offer, sell, contract to sell, pledge (with certain limited exceptions and subject to certain conditions), or dispose of, directly or indirectly, any shares of Wellsford common stock or securities convertible into or exchangeable or exercisable for any shares of Wellsford common stock, or enter into any swap, hedge or other arrangement that transfer, in whole or in part, any economic consequences of ownership of Wellsford common stock without the prior written consent of Wellsford. Lloyd Lynford and Mr. Garfield have also agreed during the lock-up period not to make any demand for or exercise any right with respect to the registration of any Wellsford common stock.
After the expiration of the lock-up period, Lloyd Lynford and Mr. Garfield will be subject to the volume and sale limitations of Rule 144 under the Securities Act and other restrictions on resale in compliance with securities laws. See The MergerRestrictions on Sales of Shares of Wellsford Common Stock Received in the Merger beginning on page 71.
Escrow Agreement |
Generally |
The merger agreement provides for the establishment of three escrow accounts, two of which are governed by the terms of an escrow agreement among The Bank of New York, as escrow agent, Wellsford, and Lloyd Lynford and Mr. Garfield, in their capacity as stockholder representatives. For more information regarding the third escrow account, see IndemnificationOf Stockholder Representatives on page 96. The cash and shares of Wellsford common stock held in these two escrow accounts will be Wellsfords exclusive source of recovery for indemnification claims made pursuant to the terms of the merger agreement, other than those based on fraud. Pursuant to the terms of the merger agreement, Wellsford will deliver to the escrow agent out of the merger consideration otherwise payable to Reis stockholders:
| $2,593,456 in cash and 317,825 shares of Wellsford common stock to be held for 18 months in an interest-bearing escrow account to serve as security for indemnification obligations arising out of breaches of Reiss representations, warranties, and covenants made in the
merger agreement including those representations and warranties that the parties to the merger agreement have designated as fundamental; and |
| $1,500,000 in cash and 183,824 shares of Wellsford common stock to be held for 24 months in a second interest-bearing escrow account which provides the sole additional source of recovery (if the funds in the first escrow account have been exhausted or released) for
breaches of certain representations and warranties made by Reis that the parties to the merger agreement have designated as fundamental. |
This cash and Wellsford common stock will be held in the escrow accounts described above subject to the terms of the escrow agreement. The escrowed cash and Wellsford common stock in each escrow account will be released to the Reis stockholders, other than Wellsford Capital, as promptly as practicable after the expiration of the respective escrow periods, subject to existing claims and the terms of the escrow agreement. In order to fully understand the indemnification obligations of the Reis stockholders and the purposes of the
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escrow account, you should read this description of the escrow agreement together with the section of this joint proxy statement/prospectus entitled Indemnification on page 95.
Procedure for Claims against the Escrow Account |
The escrow agreement provides a specific process for contesting any indemnification claims made by Wellsford or any other indemnified parties. If an indemnification claim arises, Wellsford is required to give written notice of the claim to both the escrow agent and the stockholder representatives prior to the expiration of the applicable escrow period. The escrow period with respect to the account containing $2,593,456 in cash and 317,825 shares of Wellsford common stock will expire 18 months following the effective time of the merger and the escrow period with respect to the account containing $1,500,000 in cash and 183,824 shares of Wellsford common stock will expire 24 months following the effective time of the merger. The claim notice must state the facts and circumstances giving rise to the claim, the estimated amount of damages, and the basis for concluding that the claim qualifies for disbursements from the escrow accounts. If the stockholder representatives object to any part of the claim notice, they must deliver a written notice stating their objections within 20 business days following delivery of the claim notices. If an objection notice is not received, the stockholder representatives will be deemed to have agreed to the payment of the claim in full and the escrow agent will disburse the amount requested in the claim notice 50% in cash and 50% in shares of Wellsford common stock (based on a value of $8.16 per share). If a claim is disputed in part, the escrow agent will disburse the undisputed amount in an identical manner. Any disputed amounts will remain in the applicable escrow account until the escrow agent receives joint written instructions from one of the stockholder representatives and Wellsford or until the disputed amounts are deposited with a court having jurisdiction over the disputed claims.
Distributions |
At the expiration of the above described escrow periods, the escrow agent will deliver the balance of the escrow accounts to Merger Sub (as the surviving company in the merger), including any dividends or interest earned on the escrowed funds, for distribution to the Reis stockholders in the same proportion and manner as the cash and stock portions of the merger consideration were distributed, provided, that if at the expiration of either escrow period any amounts remain in dispute pursuant to any claim notice against the applicable escrow account, then the disputed amounts will remain in the escrow accounts until the time when the claim is resolved.
Termination |
The escrow agreement will terminate when all cash and shares of Wellsford common stock held in the escrow accounts has been distributed pursuant to the terms of the escrow agreement.
Registration Rights Agreement |
Generally |
In connection with the merger agreement, and as an inducement to Lloyd Lynford and Mr. Garfield to enter into the voting agreement and the lock-up agreement, Wellsford will enter into a registration rights agreement, effective as of the effective time of the merger, pursuant to which Wellsford will agree, for the benefit of Lloyd Lynford and Mr. Garfield:
| to prepare and file a shelf registration statement under the Securities Act, covering all or any part of Lloyd Lynfords and Mr. Garfields shares of Wellsford common stock issued in the merger and any additional securities issued or distributed in respect of those shares,
which we refer to as registrable shares, no later than 90 days after receipt of the request by them to do so, and will maintain the effectiveness of the shelf registration statement until the earliest of (A) the distribution of all registrable shares covered by the shelf registration
statement, (B) the distribution of all registrable shares covered by the shelf registration statement pursuant to Rule 144 under the Securities Act, (C) the second anniversary of the date the shelf registration became effective, and (D) the date on which Lloyd Lynford and
Mr. Garfield collectively hold less than 10% of the registrable shares they held on |
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the effective date of the merger agreement; provided, that (1) the request to prepare and file a shelf registration statement may not be made until 90 days prior to the third anniversary of
the effective date of the merger agreement and (2) Wellsford will not be required to effect a shelf registration if at the time of the request Wellsford is not eligible to use a registration
statement on Form S-3 under the Securities Act; |
| to prepare, at the request of either Lloyd Lynford or Mr. Garfield, or both of them, a registration statement covering all or any part of their respective registrable shares, which we refer to as a demand registration statement, and to use commercially reasonable efforts to
file each demand registration statement within 60 days after a request is made and to cause each to become effective as promptly as possible and remain effective for at least 120 days; provided, that Lloyd Lynford and Mr. Garfield are entitled to make these requests if,
and only if, Wellsford is not required to file a shelf registration statement because it is not eligible to use a Form S-3, or the shelf registration statement becomes ineffective prior to the expiration of the period described above, and, provided further, that Wellsford will not
be required to (1) accommodate more than two requests for a demand registration statement, with each request covering at least 250,000 registrable shares or (2) file more than one demand registration statement in any 12-month period or any demand registration statement
within 120 days following the effective date of the previous demand registration statement; and |
| to allow Lloyd Lynford and Mr. Garfield to participate in any registration of Wellsfords common stock that Wellsford undertakes for its own account or for any persons other than Lloyd Lynford and Mr. Garfield, except for registrations made on Forms S-4, S-8 or other
forms not available for registering securities for sale to the public; provided, that if an underwriter of any offering of securities included in a piggyback registration statement determines that the number of securities included in the applicable offering will exceed the
number that should be included, then the securities to be included by Wellsford will have priority over the registrable shares requested for inclusion by either Lloyd Lynford or Mr. Garfield or both of them. |
In addition to the provisions set forth above, the registration rights agreement contains other terms and conditions including those customary in agreements of this kind, such as indemnification provisions.
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MARKET PRICES AND DIVIDEND INFORMATION
Wellsford common stock is listed on the AMEX under the symbol WRP. The following table presents, for the periods indicated, the range of high and low closing sales prices per share of Wellsford common stock as reported on the AMEX for each of the periods set forth below. Reis is a private company and its common stock and preferred stock are not publicly traded.
Wellsford Common Stock |
High | Low | ||||||
Year Ended December 31, 2004 |
|||||||
First Quarter |
$ | 19.50 | $ | 16.51 | |||
Second Quarter |
$ | 18.50 | $ | 15.25 | |||
Third Quarter |
$ | 15.90 | $ | 14.63 | |||
Fourth Quarter |
$ | 16.00 | $ | 14.42 | |||
Year Ended December 31, 2005 |
|||||||
First Quarter |
$ | 15.00 | $ | 13.85 | |||
Second Quarter |
$ | 17.83 | $ | 13.91 | |||
Third Quarter |
$ | 19.23 | $ | 17.70 | |||
Fourth Quarter |
(A) | (A) | |||||
Year Ending December 31, 2006 |
|||||||
First Quarter |
$ | 7.91 | $ | 5.55 | |||
Second Quarter |
$ | 8.05 | $ | 7.06 | |||
Third Quarter |
$ | 7.70 | $ | 6.71 | |||
Fourth
Quarter (through December 27, 2006) |
$ | 7.60 | $ | 6.47 | |||
(A) | On December 15, 2005, Wellsfords common stock began trading ex-dividend after a $14.00 per share initial liquidating distribution. The high and low closing prices of the common stock from October 1, 2005 to December 14, 2005 were $19.85 and $18.81, respectively,
and from December 15, 2005 to December 31, 2005 were $6.00 and $5.70, respectively. |
On October 10, 2006, the date immediately before the public announcement of the merger, the closing price of Wellsford common stock was $7.43 per share, for an aggregate value of Wellsford of approximately $48,000,000. Because the market price of Wellsford common stock is subject to fluctuation, the market value of the shares of Wellsford common stock that holders of Reis capital stock will be entitled to receive in the merger may increase or decrease. We urge you to obtain current market quotations for Wellsford common stock. We cannot give any assurance as to future prices or markets for Wellsford common stock.
Following the consummation of the merger, Wellsford common stock will continue to be listed on the AMEX. Pursuant to the merger agreement, Wellsford has agreed to use its reasonable best efforts to cause the Wellsford common stock to be approved for listing on NASDAQ. When the Wellsford common stock has been approved for listing on NASDAQ, Wellsford will delist its common stock from the AMEX.
As of ________, 2007, Wellsford had approximately ___ holders of record of its common stock and Reis had approximately eight holders of record of its common stock and approximately 33 holders of record of its preferred stock.
Dividends |
Wellsford |
Wellsford made its initial liquidating distribution, pursuant to the Plan, of $14.00 per share on December 14, 2005. Wellsford did not declare or distribute any other dividends during 2006, 2005 or 2004. Wellsford does not currently intend to declare or distribute any dividends after consummation of the merger. All decisions regarding the declaration and payment of dividends will be at the discretion of Wellsfords board of directors and will be evaluated from time to time by the board in light of Wellsfords financial
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condition, earnings, cash flows, growth prospects, funding requirements, applicable law and other factors that Wellsfords board of directors deems relevant.
Reis |
Reis did not declare or distribute any dividends on Reis capital stock during 2006, 2005 or 2004.
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INFORMATION ABOUT THE COMPANIES
Wellsford Real Properties, Inc. |
535 Madison Avenue, 26th Floor
New York, New York 10022
(212) 838-3400
Wellsford was formed as a Maryland corporation on January 8, 1997, as a corporate subsidiary of the Residential Property Trust, to operate as a real estate merchant banking firm to acquire, develop, finance and operate real properties and invest in private and public real estate companies. On May 30, 1997, the Residential Property Trust merged with EQR. Immediately prior to that merger, the Residential Property Trust contributed certain of its assets to Wellsford and Wellsford assumed certain of its liabilities. Immediately after the contribution of assets to Wellsford and immediately prior to that merger, the Trust distributed to its common stockholders all of its outstanding shares of Wellsford.
On May 19, 2005, Wellsfords board of directors approved the Plan, and on November 17, 2005, Wellsfords stockholders ratified the Plan. The Plan contemplates the orderly sale of each of Wellsfords remaining assets, which are either owned directly or through Wellsfords joint ventures, the collection of all outstanding loans from third parties, the orderly disposition or completion of construction of development properties, the discharge of all outstanding liabilities to third parties and, after the establishment of appropriate reserves, the distribution of all remaining cash to stockholders. The Plan also permits Wellsfords board of directors to acquire more Reis shares and/or discontinue the Plan without further stockholder approval.
After the approval of the Plan by the stockholders, Wellsford completed the sale of its largest asset, the three residential rental phases of its Palomino Park project for $176,000,000 and on December 14, 2005, Wellsford made the initial liquidating distribution of $14.00 per common share, aggregating approximately $90,597,000, to its stockholders.
If the proposed merger with Reis is consummated, Wellsford will terminate the previously adopted Plan, but will continue with its program to dispose of its remaining real estate assets through development and/or sale. If the merger is not consummated, Wellsford will not terminate the Plan and will continue to operate under it. The merger represents a significant change in strategy for Wellsford which may be unsuccessful. See RiskRisk Factors Relating to the Merger, The MergerImpact on Wellsfords Plan of Liquidation and Wellsfords Business beginning on pages 23, 44 and 131, respectively.
Reis, Inc. |
530 Fifth Avenue
New York, New York 10036
(212) 921-1122
Reis is a leading provider of commercial real estate market information to investors, lenders and other professionals in the debt and equity capital markets. Reiss proprietary database has been developed over the past 25 years and contains detailed historical and current information on over 250,000 properties in over 1,800 neighborhoods and 81 metropolitan markets in the U.S. This database contains information on approximately 20 billion square feet of space, consisting primarily of 7.9 million apartment units, 5.4 billion square feet of office space, and 4.2 billion square feet of retail space and information on select industrial properties throughout the U.S.
Founded in 1980, Reis provides web-based information products and related analytical tools using this database. Reis products support a variety of strategic business activities, including loan origination, due diligence, asset management, appraisals and dispositions by sale or securitization. Reiss flagship product, Reis SE, incorporates hundreds of building level data points including occupancy rates, rents, rent discounts, rent allowances, lease terms and operating expenses. Since launching the flagship product in February 2001, Reis has approximately 14,800 users at 600 subscribing organizations. Reiss customers download more than
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35,000 reports each month for use in deal books, presentations and research reports. Clients include investment banks, insurance companies, lenders and REITs.
Reis employs a large group of real estate market researchers. Researchers survey properties on an ongoing basis, and also track property sales and new construction activities in each of the covered markets. Information is subject to rigorous validation and quality assurance procedures, resulting in some of the most reliable and comprehensive market data commercially available. Reis economists synthesize this data into quarterly advisory reports, and develop forecasts at the neighborhood and city level which are available to subscribers. Reis data is cited frequently in The Wall Street Journal and real estate industry publications.
Wellsford has been an investor in Reis since 1998 and currently holds convertible preferred shares equivalent to an approximate 23% ownership interest in the company. The other stockholders who hold the remaining approximately 77% of Reis are corporate, institutional and high net worth investors and Reis co-founders Lloyd Lynford and Jonathan Garfield.
Merger Sub |
535 Madison Avenue, 26th Floor
New York, New York 10022
(212) 838-3400
Merger Sub was formed as a Maryland limited liability company, with Wellsford as its sole member, on October 2, 2006 and exists solely for the purpose of entering into the merger agreement with Wellsford and Reis and consummating the merger. Upon consummation of the merger, Merger Sub will be the surviving company and will remain a wholly-owned subsidiary of Wellsford. Merger Sub has not carried on any activities to date other than those incident to its formation and to the signing of the merger agreement.
Material Contracts Between Wellsford and Reis |
Before October 31, 2004, Reis provided information to Second Holding, an entity in which Wellsford had an approximate 51.09% non-controlling interest. Such information was used by Second Holding for due diligence procedures on certain real estate related investment opportunities through October 31, 2004. Second Holding paid Reis fees of $200,000 and $240,000 in connection with such information and services for the years ended December 31, 2004 and 2003, respectively. Wellsfords share of such fees was $100,000 and $120,000 for the years ended December 31, 2004 and 2003, respectively.
On April 25, 2000, Reis entered into an Investor Rights Agreement with Reis Capital and the other holders of Reis Series A preferred stock, Series B preferred stock, Series C preferred stock, and Series D preferred stock. This agreement contains restrictions on dispositions of shares of Reis preferred stock, but allows transfers of Reis preferred stock to other Reis stockholders. Although Reis Capital has been dissolved, the provisions of the Investor Rights Agreement survived the dissolution of Reis Capital and its members who received shares of Reis preferred stock in the dissolution now have these rights and obligations. This agreement also includes registration rights, rights of co-sale and preemption and first offer rights applicable to the holders of Reis preferred stock, none of which are implicated by the merger. The Investor Rights Agreement will not survive the consummation of the merger.
Other than the aforementioned information and services to Second Holding, the documents related to the merger and Wellsfords direct and indirect ownership in Reis, there are and have been no other past, present or proposed material contracts, arrangements, understandings, relationships, negotiations or transactions during the last three fiscal years between Wellsford and Reis.
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WELLSFORD SPECIAL MEETING
Date, Time and Place |
These proxy materials are delivered in connection with the solicitation by Wellsfords board of directors of proxies to be voted at the Wellsford special meeting, which is to be held at King & Spalding LLP, 1185 Avenue of the Americas, New York, New York, at 10:00 a.m., Eastern Standard Time, on ________, 2007. On ____________, 2007, Wellsford commenced mailing this joint proxy statement/prospectus and the enclosed form of proxy to its stockholders entitled to vote at the meeting.
Purpose of the Wellsford Special Meeting |
At the Wellsford special meeting, Wellsford stockholders will be asked:
| to approve the issuance of Wellsford common stock pursuant to the merger agreement, which is attached as Annex A to this joint proxy statement/prospectus, under which Reis will merge with and into Merger Sub and will become a wholly-owned subsidiary of
Wellsford; and |
| to approve any motion to adjourn the Wellsford special meeting to another time or place to permit, among other things, further solicitation of proxies if necessary to establish a quorum or to obtain additional votes in favor of the foregoing proposal. |
Wellsford Record Date; Stock Entitled to Vote |
The close of business on_________, 2007, which we refer to as the Wellsford special meeting record date, has been fixed as the record date for the determination of stockholders entitled to notice of, and to vote at, the Wellsford special meeting or any adjournments or postponements of the Wellsford special meeting.
As of the Wellsford special meeting record date, ______________ shares of Wellsford common stock were outstanding and entitled to one vote per share.
Quorum |
In order to carry on the business of the meeting, Wellsford must have a quorum. A quorum requires the presence, in person or by proxy, of the holders of a majority of the votes entitled to be cast at the meeting. Wellsford counts abstentions and broker non-votes as present and entitled to vote for purposes of determining a quorum, provided, that in the case of broker non-votes that the record holder is present or has provided a proxy with respect to those shares on at least one item. A broker non-vote occurs when a stockholder fails to provide voting instructions to its broker for shares it holds in street name. Under those circumstances, a stockholders broker may be authorized to vote for it on some routine items but is prohibited from voting on other items. Those items for which a stockholders broker cannot vote result in broker non-votes.
Votes Required |
Required Vote to Approve the Issuance of Wellsford Common Stock in the Merger (Proposal 1 on the Proxy Card) |
The affirmative vote of a majority of the total votes cast by the holders of Wellsford common stock at the Wellsford special meeting (in person or by proxy), is required to approve the issuance of the Wellsford common stock in the merger to Reis stockholders, assuming that there is a quorum represented at the Wellsford special meeting.
Required Vote to Approve an Adjournment of the Wellsford Special Meeting (Proposal 2 on the Proxy Card) |
If necessary, approval of a proposal to adjourn the Wellsford special meeting for the purpose of, among other things, establishing a quorum or soliciting additional proxies requires the affirmative vote of the holders of a majority of the shares of Wellsford common stock present in person or represented by proxy and entitled
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to vote at the Wellsford special meeting, if a quorum is not present, but the proposal to adjourn will require the affirmative vote of a majority of the votes cast at the special meeting if a quorum is present.
Treatment of Abstentions, Not Voting and Incomplete Proxies |
If a Wellsford stockholder attends the special meeting and does not vote, either in person or by proxy, or submits a proxy but abstains from voting on either or both proposals, that stockholder will be counted in determining whether a quorum exists, but the stockholders failure to vote or abstention will have no effect on the vote with respect to the proposal(s) on which the stockholder abstains, unless there is not a quorum at the special meeting, in which case, it will have the effect of a vote against the adjournment. If a Wellsford stockholder does not attend the meeting and does not submit a proxy, that stockholder will not be considered present for purposes of determining whether a quorum exists and the stockholders shares will have no effect on the vote with respect to either of proposals. If a proxy is returned without indication as to how to vote, the returned proxy will grant the individuals named as proxies the discretionary authority to vote the shares represented by the proxy as to all matters. The individuals named as proxies intend to vote the shares represented in favor of the proposal to approve the issuance of Wellsford common stock in the merger and to otherwise vote or not vote in accordance with the recommendation of Wellsfords board of directors.
Voting by Wellsford Directors and Executive Officers |
On the Wellsford record date, directors and executive officers of Wellsford and their affiliates owned and were entitled to vote ________ shares of Wellsford common stock, or approximately ___% of the shares of Wellsford common stock outstanding on that date. To Wellsfords knowledge, the directors and executive officers of Wellsford intend to vote their shares of Wellsford common stock in favor of both proposals.
Voting of Proxies |
Giving a proxy means that a Wellsford stockholder authorizes the persons named in the enclosed proxy card to vote its shares at the Wellsford special meeting in the manner it directs. A Wellsford stockholder may vote by proxy or in person at the meeting. To vote by proxy, a Wellsford stockholder, if it is a registered holder (that is, it holds its stock in its own name), should complete and return the proxy card in the enclosed envelope. The envelope requires no additional postage if mailed in the U.S.
Wellsford requests that Wellsford stockholders complete and sign the accompanying proxy and return it to Wellsford as soon as possible in the enclosed postage-paid envelope. When the accompanying proxy is returned properly executed, the shares of Wellsford common stock represented by it will be voted at the Wellsford special meeting in accordance with the instructions contained on the proxy card.
If any proxy is returned without indication as to how to vote, the returned proxy will grant the individuals named as proxies the discretionary authority to vote the shares represented by the proxy as to all matters. The individuals named as proxies intend to vote the shares represented in favor of the proposal to approve the issuance of Wellsford common stock in the merger and otherwise to vote in accordance with the recommendation of Wellsfords board of directors.
If a Wellsford stockholders shares are held in street name by a broker or other nominee, the stockholder should check the voting form used by that firm.
Every Wellsford stockholders vote is important. Accordingly, each Wellsford stockholder should sign, date and return the enclosed proxy card whether or not it plans to attend the Wellsford special meeting in person.
Revocability of Proxies and Changes to a Wellsford Stockholders Vote |
A Wellsford stockholder has the power to revoke its proxy or change its vote at any time before its proxy is voted at the Wellsford special meeting. A Wellsford stockholder can revoke its proxy or change its vote in one of the following ways:
| it can send a signed notice of revocation to the corporate secretary of Wellsford to revoke its proxy; |
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| it can send a completed proxy card bearing a later date than its original proxy to Wellsford indicating the change in its vote; or |
| it can attend the Wellsford special meeting and vote in person, which will automatically cancel any proxy previously given, or it may revoke its proxy in person, but its attendance alone will not revoke any proxy that it has previously given. |
If a Wellsford stockholder chooses either of the first two methods, it must take the described action no later than the beginning of the Wellsford special meeting. Once voting on a particular matter is completed at the Wellsford special meeting, a Wellsford stockholder will not be able to revoke its proxy or change its vote as to that matter. If a Wellsford stockholders shares are held in street name by a broker, bank or other financial institution, the stockholder must contact them to change its vote.
Solicitation of Proxies |
This solicitation is made on behalf of the Wellsford board of directors. Wellsford will pay the costs of soliciting and obtaining the proxies, including the cost of reimbursing brokers, banks and other financial institutions for forwarding proxy materials to their customers. Proxies may be solicited, without extra compensation, by Wellsfords officers and employees by mail, telephone, fax, personal interviews or other methods of communication. Wellsford has engaged the firm of MacKenzie Partners, Inc. to assist Wellsford in the distribution and solicitation of proxies and will pay MacKenzie Partners, Inc. an estimated fee of $10,000 plus out-of-pocket expenses for its services. Reis will pay the costs of soliciting and obtaining its proxies and all other expenses related to the Reis special meeting.
Proposal No. 1. Issuance of Wellsford Common Stock in the Merger
It is a condition to consummation of the merger that Wellsford issue shares of its common stock to Reis stockholders in the merger. Under the rules of the AMEX, a company listed on the AMEX is required to obtain stockholder approval before the issuance of common stock, or securities convertible into or exercisable for common stock, if the common stock issued in the merger exceeds 20% of the shares of common stock of the corporation outstanding immediately before the effectiveness of the merger. If the merger is consummated, Wellsford will issue approximately 4,237,673 shares of its common stock in the merger, not including the shares issued to Wellsford Capital. The aggregate number of shares of Wellsford common stock to be issued in the merger will be approximately ___% of the shares of Wellsford common stock outstanding on the Wellsford special meeting record date, and for this reason Wellsford must obtain the approval of Wellsford stockholders for the issuance of these securities to Reis stockholders in the merger.
Wellsford is asking its stockholders to approve the issuance of its common stock in the merger. The issuance of these securities to Reis stockholders is necessary to effect the merger.
The Wellsford board of directors recommends a vote FOR Proposal No. 1.
Proposal No. 2. Possible Adjournment
of the Wellsford Special Meeting
The Wellsford special meeting may be adjourned to another time or place for the purpose of, among other things, permitting further solicitation of proxies by Wellsford in favor of each of the proposals or establishing a quorum.
The Wellsford board of directors recommends a vote FOR Proposal No. 2.
Other Matters to Come Before the Meeting
No other matters are intended to be brought before the meeting by Wellsford, and Wellsford does not know of any matters to be brought before the meeting by others. If, however, any other matters properly come before the meeting, the persons named in the proxy will vote the shares represented thereby in accordance with the recommendation of Wellsfords board of directors.
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Security Ownership of Certain Beneficial Owners and Management of Wellsford and Related Stockholder Matters |
The following table sets forth information regarding the beneficial ownership of Wellsford common stock by each person known by Wellsford to be the beneficial owner of more than 5% of Wellsfords outstanding common stock, by each director, each executive officer of Wellsford and by all directors and executive officers of Wellsford as a group, as of November 30, 2006. Each person named in the table has sole voting and investment power with respect to all shares of Wellsford common stock shown as beneficially owned by such person, except as otherwise set forth in the notes to the table.
Name and Address of Beneficial Owner (1) |
Amount and Nature of Beneficial Ownership |
Percentage of Class (2) |
|||||
Jeffrey H. Lynford (3) |
1,111,642 | 13.8 | % | ||||
David M. Strong (4) |
264,356 | 3.3 | % | ||||
Mark S. Germain (5) |
218,158 | 2.7 | % | ||||
6 Olmsted Road Scarsdale, New York 10583 |
|||||||
Edward Lowenthal (6) |
132,845 | 1.6 | % | ||||
Douglas Crocker II (7) |
115,504 | 1.4 | % | ||||
c/o DC Partners LLC 71 South Wacker Drive 34th Floor Chicago, Illinois 60606 |
|||||||
Meyer S. Frucher (8) |
44,310 | * | |||||
324 West 101st Street, #2 New York, New York 10025 |
|||||||
Mark P. Cantaluppi (9) |
26,201 | * | |||||
William H. Darrow II (10) |
22,161 | * | |||||
James J. Burns |
15,936 | * | |||||
Bonnie R. Cohen |
2,552 | * | |||||
c/o B.R. Cohen Consultancy 1824 Phelps Place, NW, Unit 1810 Washington, DC 20008 |
|||||||
All Directors and Executive Officers of Wellsford as a group (10 persons) (11) |
1,953,665 | 24.2 | % | ||||
Davidson Kempner Partners (12) |
847,870 | 10.5 | % | ||||
885 Third Avenue New York, New York 10022 |
|||||||
S. Muoio & Co. LLC (12) |
493,100 | 6.1 | % | ||||
509 Madison Avenue, Suite 406 New York, New York 10022 |
|||||||
Caroline Hunt Trust Estate (12) |
405,500 | 5.0 | % | ||||
500 Crescent Court, Suite 300 Dallas, Texas 75201 |
* | Less than 1.0% |
(1) | Unless otherwise indicated, the address of each person is c/o Wellsford Real Properties, Inc., 535 Madison Avenue, 26th Floor, New York, New York 10022. |
(2) | Assumes the total number of shares outstanding on November 30, 2006 is 6,646,738, plus the conversion or exercise at November 30, 2006 of options to acquire 1,432,599 shares of common stock (all of which are exercisable at November 30, 2006). |
(3) | Includes 909,261 shares of common stock issuable upon the exercise of options, all of which are exercisable at November 30, 2006. Options to purchase 757,728 of these shares represent replacement options for Trust share options. Also includes 163,787 shares of common
stock held in a non-qualified deferred compensation trust with respect to which Jeffrey Lynford will not have voting power until the |
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shares of common stock are distributed from the deferred compensation account. Also includes 17,956 shares of common stock held by the Lynford Family Charitable Trust; Jeffrey
Lynford disclaims beneficial ownership of such shares. Also includes 3,554 shares of common stock held by Jeffrey Lynfords Keogh account and 310 shares of common stock held in his
401(k) account. |
(4) | Includes 63,098 shares of common stock issuable upon the exercise of options, all of which are exercisable at November 30, 2006. Options to purchase 42,816 of these shares represent replacement options for Trust share options. |
(5) | Includes 214,922 shares of common stock issuable upon the exercise of options, all of which are exercisable at November 30, 2006. Options to purchase 68,259 of these shares represent replacement options for Trust share options. |
(6) | Includes 92,700 shares of common stock held in a non-qualified deferred compensation trust with respect to which Mr. Lowenthal will not have voting power until the shares of common stock are distributed from the deferred compensation account. Also includes 145 shares of
common stock held by Mr. Lowenthals wife; Mr. Lowenthal disclaims beneficial ownership of such shares. Also includes 1,000 shares of common stock held by Mr. Lowenthals Keogh account. |
(7) | Includes 108,778 shares of common stock issuable upon the exercise of options, all of which are exercisable at November 30, 2006. |
(8) | Includes 44,310 shares of common stock issuable upon the exercise of options, all of which are exercisable at November 30, 2006. |
(9) | Includes 17,723 shares of common stock issuable upon the exercise of options, all of which are exercisable at November 30, 2006. |
(10) | Includes 17,723 shares of common stock issuable upon the exercise of options, all of which are exercisable at November 30, 2006. Also includes 1,250 shares of common stock held in Mr. Darrows IRA account. |
(11) | Includes the shares of common stock referred to in footnotes (3) through (10) above. |
(12) | This information is based solely upon our review of the most recent Schedule 13G filings, or amendments thereof, or Form 4 filed by such filer with the SEC by November 30, 2006. |
Directors |
Bonnie R. Cohen, age 64, has been a director of Wellsford since June 2003. Ms. Cohen has been a principal of B R Cohen and Associates, a consulting firm, since January 2002. From 1998 to 2002, Ms. Cohen served as Under Secretary for Management of the U.S. Department of State where she was responsible for the day-to-day operations of the State Department including all embassies, personnel, finance, budget, information systems and consultant affairs. Prior to assuming the position at the State Department, Ms. Cohen was Assistant Secretary for Policy, Management and Budget at the U.S. Department of the Interior. Ms. Cohen is also a director of Cohen and Steers Investment Company, a manager of over 15 real estate mutual funds, Moriah Fund and the Posse Foundation. She is chair of the Global Heritage Fund. Ms. Cohen received a Masters in Business Administration from Harvard Business School where she is on the visiting committee.
Douglas Crocker II, age 66, has been a director of Wellsford since May 1997. Mr. Crocker was Chief Executive Officer, President and a Trustee of EQR from March 1993 until December 31, 2002, and also served as Vice Chairman of EQR from January 1, 2003 through May 2003. EQR is a REIT that owns and operates residential properties and is the general partner of ERP Operating Limited Partnership. Mr. Crocker remains very active in the multifamily housing industry, serving on boards or committees of various multifamily housing associations. Mr. Crocker is a past Trustee of the Multifamily Council of the Urban Land Institute and former member of the Board of Governors of NAREIT. Mr. Crocker is past chairman of the National Multi Housing Council and on the Advisory Board of the DePaul University Real Estate School. Mr. Crocker also serves as a director of the following companies in the real estate industry: Reckson Associates, an office building REIT specializing in the New York metropolitan area; Ventas, Inc., a leading healthcare related REIT; Post Properties, a multifamily REIT; and Acadia Realty Trust, a REIT which owns and operates shopping centers.
Meyer Sandy Frucher, age 60, has been a director of Wellsford since June 2000. Mr. Frucher has served as Chairman and Chief Executive Officer of the Philadelphia Stock Exchange since June 1998 after
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serving on its Board of Governors since September 1997. From 1988 to 1997, Mr. Frucher was Executive Vice President-Development of Olympia & York Companies (U.S.A.) and coordinated and oversaw all of Olympia & Yorks development projects in the U.S. From 1988 to 1999, Mr. Frucher was Trustee and then Chairman of the New York City School Construction Authority. From 1984 to 1988, he was President and Chief Executive Officer of Battery Park City Authority.
Mark S. Germain, age 56, has been a director of Wellsford since May 1997. Mr. Germain served as a trustee of the Real Properties Trust from November 1992 until the consummation of its merger with EQR in May 1997. For more than the past five years, he has been employed by Olmsted Group L.L.C., which is a consultant to biotechnology and other high technology companies. Mr. Germain also serves as a director of several privately-held biotechnology companies and of Stem Cell Innovations, Inc., a publicly traded company. He is a graduate of NYU School of Law, cum laude, and Order of the Coif, and was previously a partner in a New York law firm.
Edward Lowenthal, age 62, has been a director of Wellsford since its formation in January 1997. Mr. Lowenthal served as the President and Chief Executive Officer of Wellsford from its formation until his retirement on March 31, 2002. Mr. Lowenthal served as the President and Chief Executive Officer and as a trustee of the Residential Property Trust from its formation in July 1992 until consummation of the merger with EQR in May 1997. Mr. Lowenthal is President of Ackerman Management LLC, a real estate advisory and investment firm. Mr. Lowenthal currently serves as a director of Reis, Omega Healthcare, Inc., a healthcare REIT, American Campus Communities, a student housing REIT, Homex, a Mexican home builder, and Ark Restaurants, Inc., an owner/operator of restaurants. He is also a trustee of the Manhattan School of Music.
Jeffrey H. Lynford, age 59, has been the Chairman of the Board and a director of Wellsford since its formation in January 1997. Mr. Lynford has also been the President and Chief Executive Officer of Wellsford since April 1, 2002. Jeffrey Lynford previously served as Chief Financial Officer of Wellsford from June 2000 until December 2000 and as Secretary of Wellsford from January 1997 to March 2002. Jeffrey Lynford served as the Chairman of the board and Secretary of the Residential Property Trust from its formation in July 1992 until consummation of the merger with EQR in May 1997. Jeffrey Lynford served as the Chief Financial Officer of the Real Properties Trust from July 1992 until December 1994. Jeffrey Lynford currently serves as a trustee and vice-chairman of Polytechnic University and is a trustee emeritus of the National Trust for Historic Preservation and the Caramoor Center for Music and the Arts.
Audit Committee Financial Expert |
The Audit Committee acts pursuant to the Audit Committee Charter adopted by the board on April 20, 2000, as amended on March 10, 2003, a copy of which is posted on Wellsfords website at www.Wellsford.com/CompanyInfo/BoardCommittees.html. Ms. Cohen and Messrs. Crocker, Frucher and Germain were Audit Committee members for all of 2005 and continue to be members through the date of this Proxy Statement.
Each member of the Audit Committee is required to be financially literate or must become financially literate within a reasonable time after appointment to the Audit Committee, and at least one member of the Audit Committee must have accounting or related financial management expertise. The board believes that each of the current members of the Audit Committee has such accounting or financial management expertise. The board has also determined that Mr. Crocker is an audit committee financial expert, as such term is defined under the regulations of the SEC and that all of the Audit Committee members are independent as defined under the AMEXs standards and Section 10A(m)(3) of the Exchange Act.
Compensation of Directors |
During 2005, Wellsford paid to each of its non-employee directors (1) an annual fee of $20,000, payable quarterly in cash and (2) a fee of $3,800 payable in cash for each board meeting at which such director was present in person or by teleconference. Also during 2005, members of the Audit Committee received a fee of $1,000 payable in cash for each Audit Committee meeting at which such Audit Committee member was present in person or by teleconference and annual compensation of $10,000, payable quarterly in cash to each
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Audit Committee member, except for Mr. Germain, who received annual compensation of $15,000, payable quarterly in cash for his role as chairman of the Audit Committee. Jeffrey Lynford, the only director who is a full time employee of Wellsford, was not paid any directors fees during 2005. In addition, Wellsford reimbursed the directors for travel expenses incurred in connection with their activities on behalf of Wellsford. All fees paid to David J. Neithercut, who resigned from his position as director on April 8, 2005, were paid in cash to a subsidiary of EQR.
Effective January 1, 2005, the board eliminated the annual stock payments and grant of options to its directors. Instead of the stock payments, which aggregated $16,000 per annum, and option grants, the board agreed to pay annual fees of $20,000, payable quarterly in cash to each non-employee director as described above.
Executive Officers |
Each executive officer of Wellsford holds office at the pleasure of its board of directors. The executive officers of Wellsford are as set forth below:
Jeffrey H. Lynford, Chairman of the Board, President and Chief Executive Officer. Biographical information regarding Jeffrey Lynford is set forth above under Directors.
James J. Burns, age 67, has been the Vice Chairman of Wellsford since March 21, 2006 and Secretary of Wellsford since April 2002. As Vice Chairman of Wellsford, Mr. Burns is not entitled to be a member of its board of the directors. Previously, Mr. Burns was Chief Financial Officer of Wellsford since December 2000 and a Senior Vice President of Wellsford since October 1999. Mr. Burns served as Chief Accounting Officer of Wellsford from October 1999 until December 2000. Mr. Burns was previously a Senior Audit Partner with Ernst & Youngs E&Y Kenneth Leventhal Real Estate Group where he was employed for 25 years, including 23 years as a partner. Mr. Burns is a director of One Liberty Properties, Inc. and of Cedar Shopping Centers, Inc., both of which are REITs. Mr. Burns is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.
David M. Strong, age 48, has been the Senior Vice President Development of Wellsford since October 2004. Mr. Strong previously served as Vice President Development of Wellsford from its formation in January 1997 until October 2004. Mr. Strong served as a Vice President of the Trust from July 1995 until consummation of the Merger in May 1997. From July 1994 until July 1995, he was Acquisitions and Development Associate of the Trust. From 1991 to 1994, Mr. Strong was President and owner of LPI Management, Inc., a commercial real estate company providing management and consulting services. From 1984 to 1991, he was a senior executive with the London Pacific Investment Group, a real estate development, investment and management firm active in Southern California and Western Canada. From 1979 through 1984, Mr. Strong worked for Arthur Young and Company (currently known as Ernst & Young), a public accounting firm where he attained the level of manager. Mr. Strong is a member of the Canadian Institute of Chartered Accountants.
Mark P. Cantaluppi, age 36, has been Chief Financial Officer since March 21, 2006 and Vice President since November 1999. Previously, Mr. Cantaluppi was Chief Accounting Officer and Director of Investor Relations of Wellsford since December 2000. He joined Wellsford in November 1999 as Vice President, Controller and Director of Investor Relations. From January 1998 to November 1999, he was the Assistant Controller of Vornado Realty Trust, a diversified REIT. From 1993 to 1998, Mr. Cantaluppi worked for Ernst & Young, a public accounting firm, where he attained the level of manager. Mr. Cantaluppi is a Certified Public Accountant and a member of the American Institute of Certified Public Accountants.
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Executive Compensation |
Summary Compensation Table |
The following table sets forth certain information concerning the compensation of the Chief Executive Officer and the four other most highly compensated executive officers of Wellsford as measured by salary and bonus for the year ended December 31, 2005, which we refer to as our Named Executive Officers:
Long-Term Compensation | |||||||||||||||||||||||||
Annual Compensation | Awards | Payouts | |||||||||||||||||||||||
Name and Principal Position |
Year | Salary (A) | Bonus (B) | Other Annual Compensation (C) |
Restricted Stock Award(s) (D) |
Securities Underlying Options/ SARs (E) |
LTIP Payouts (F) |
All Other Compensation (G) |
|||||||||||||||||
Jeffrey H. Lynford Chairman of the board, Chief Executive Officer and President |
2005 | $ | 375,000 | $ | 1,661,000 | $ | 35,348 | (H) | $ | | | $ | | $ | 2,500 | ||||||||||
2004 | $ | 318,800 | $ | 968,000 | $ | 35,348 | (H) | $ | | | $ | | $ | 2,500 | |||||||||||
2003 | $ | 318,800 | $ | 325,000 | $ | 35,348 | (H) | $ | | | $ | | $ | 2,500 | |||||||||||
James J. Burns Vice Chairman of Wellsford and Secretary |
2005 | $ | 204,824 | $ | 300,000 | $ | 47,845 | (I) | $ | | | $ | 297,845 | (I) | $ | 2,500 | |||||||||
2004 | $ | 214,324 | $ | 175,000 | $ | | $ | | | $ | | $ | 2,500 | ||||||||||||
2003 | $ | 222,790 | $ | 175,000 | $ | | $ | | | $ | | $ | 2,500 | ||||||||||||
William H. Darrow II** Vice President Managing Director |
2005 | $ | 225,101 | $ | 185,000 | $ | | $ | | | $ | 44,600 | (J) | $ | 2,500 | ||||||||||
2004 | $ | 218,545 | $ | 175,000 | $ | | $ | | | $ | 48,622 | (J) | $ | 2,500 | |||||||||||
2003 | $ | 212,180 | $ | 175,000 | $ | 3,120 | (J) | $ | | | $ | 53,120 | (J) | $ | 2,500 | ||||||||||
David M. Strong Senior Vice President Development |
2005 | $ | 205,449 | $ | 758,831 | $ | 136,342 | (K) | $ | | | $ | 736,342 | (K) | $ | 2,500 | |||||||||
2004 | $ | 199,465 | $ | 150,000 | $ | | $ | | | $ | | $ | 2,500 | ||||||||||||
2003 | $ | 191,853 | $ | 150,000 | $ | | $ | | | $ | | $ | 2,500 | ||||||||||||
Mark P. Cantaluppi Vice President Chief Financial Officer |
2005 | $ | 187,000 | $ | 225,000 | $ | 34,705 | (L) | $ | | | $ | 167,705 | (L) | $ | 2,500 | |||||||||
2004 | $ | 177,000 | $ | 160,000 | $ | | $ | | | $ | | $ | 2,500 | ||||||||||||
2003 | $ | 168,000 | $ | 110,000 | $ | | $ | | | $ | | $ | 2,500 |
** | Mr. Darrow was an executive officer of Wellsford until June 30, 2006. |
(A) | Amounts shown are actual payments by Wellsford. |
(B) | Bonus amounts include each Named Executive Officers minimum bonus pursuant to their respective employment agreement, plus any discretionary incentive bonus as described herein. The bonus amounts for Jeffrey Lynford include his contractual bonus awards of $375,000 in 2005 and $325,000 in each of 2004 and 2003. The 2005 award was paid to Mr. Jeffrey Lynford in January
2006 and the amounts awarded for 2004 and 2003 were paid in January 2005 and January 2004, respectively. The 2005 amount includes $1,286,000, of which $643,000 was paid to Jeffrey Lynford in June 2005 and $643,000 was paid in January 2006. The 2004 amount includes $643,000 which was paid to Jeffrey Lynford in December 2004. Each $643,000 payment was triggered upon
achieving certain sales goals as defined in his Second Amended and Restated Employment Agreement. The bonus amounts for Mr. Strong include his contractual bonus award of $154,086 in 2005 and an additional contractual payment of $604,745 which became due to him upon reaching certain incentive hurdles based on the performance of Wellsfords Palomino Park project pursuant
to his Third Amended and Restated Employment Agreement, as amended. These amounts were paid to Mr. Strong in January 2006. All other bonus amounts presented above, which were awarded for 2005, were paid in January 2006. The bonus amounts awarded for 2004 and 2003 not specifically identified and discussed in this footnote were paid in January 2005 and January 2004,
respectively. |
(C) | No Named Executive Officer received perquisites or other personal benefits aggregating more than the lesser of 10% of his total annual salary and bonus or $50,000 other than provided in the table and footnotes. Also see footnotes (H) (I) (J) (K) (L). |
(D) | There were no restricted share grants to Named Executive Officers during the years ended December 31, 2005, 2004 and 2003. |
(E) | See Management Incentive Plans regarding certain other options issued by Wellsford. |
(F) | LTIP Payouts refers to long-term incentive plan payouts. |
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(G) | The amounts set forth include contributions to Wellsfords defined contribution savings plan pursuant to Section 401 of the Code. Contributions of $2,500 were made by Wellsford on behalf of Messrs. Jeffrey Lynford, Burns, Darrow, Strong and Cantaluppi for 2005, 2004 and 2003. |
(H) | Such amounts represent additional payments to Jeffrey Lynford for him to make premium payments under a split dollar life insurance program as provided for in Jeffrey Lynfords Second Amended and Restated Employment Agreement. |
(I) | During December 2000, Mr. Burns was awarded restricted shares with a market value of $250,000 at the date of grant, which were placed into Wellsfords non-qualified deferred compensation trust. During 2005, all of the assets held for the benefit of Mr. Burns in the non-qualified deferred compensation trust aggregating $297,845 were distributed to him of which (1) $119,359 was
the market value of the shares of Wellsford common stock and (2) $178,486 was cash which arose from the $14.00 per share initial liquidating distribution paid by Wellsford for all shares of Wellsford common stock on December 14, 2005. The $47,845 in the Other Annual Compensation column reflects the earnings and gains realized in excess of the original restricted shares
awarded in the amount of $250,000. |
(J) | During December 2000, Mr. Darrow was awarded restricted shares with a market value of $200,000 at the date of grant, which were placed into Wellsford non-qualified deferred compensation trust. Mr. Darrow elected to have distributed to him 25% of the shares of Wellsford common stock during May of each year commencing May 2002. The amounts distributed to Mr. Darrow
reflect the market value of the shares of Wellsford common stock on the respective distribution dates. The $3,120 in the Other Annual Compensation column reflects the gains realized in 2003 in excess of the $50,000 pro rata portion for 2003 of the original restricted shares awarded in the amount of $200,000. The 2005 and 2004 periods do not reflect any amount in the Other Annual
Compensation column as the market value of the shares of Wellsford common stock at the time of each distribution was less than the $50,000 pro rata portion for 2005 and 2004 of the original restricted shares awarded. |
(K) | During 2001 and prior years, Mr. Strong was awarded restricted shares with a market value of $250,000 and cash bonuses aggregating $350,000 which he elected to have placed into Wellsfords non-qualified deferred compensation trust. During 2005, all of the assets held for the benefit of Mr. Strong in the non-qualified deferred compensation trust aggregating $736,342 were
distributed to him of which (1) $85,315 was the market value of the shares of Wellsford common stock, (2) $207,004 was cash which arose from the $14.00 per share initial liquidating distribution paid by Wellsford for all shares of Wellsford common stock on December 14, 2005 and (3) $444,023 was cash and other investments. The $136,342 in the Other Annual Compensation
column reflects the earnings and gains realized in excess of the original aggregate restricted shares awarded and deferred cash bonuses of $600,000. |
(L) | During December 2000, Mr. Cantaluppi was awarded restricted shares with a market value of $133,000 at the date of grant, which were placed into Wellsfords non-qualified deferred compensation trust. During 2005, all of the assets held for the benefit of Mr. Cantaluppi in the non-qualified deferred compensation trust aggregating $167,705 were distributed to him of which (1)
$48,918 was the market value of the shares of Wellsford common stock and (2) $118,787 was cash which arose from the $14.00 per share initial liquidating distribution paid by Wellsford for all shares of Wellsford common stock on December 14, 2005. The $34,705 in the Other Annual Compensation column reflects the earnings and gains realized in excess of the original restricted
shares awarded in the amount of $133,000. |
The following table sets forth certain information concerning the value of unexercised options as adjusted (see below) held by the Named Executive Officers as of December 31, 2005:
Aggregated Option/SAR Exercises In Last Fiscal Year and Fiscal Year-End Option/SAR Values |
Number of Securities Underlying Unexercised Options/SARs at Fiscal Year End (A) |
Value of Unexercised In-The-Money Options/SARs at Fiscal Year End (B) |
||||||||||||||||||
Shares Acquired on |
Value | ||||||||||||||||||
Name |
Exercise | Realized (C) | Exercisable | Unexercisable | Exercisable | Unexercisable | |||||||||||||
Jeffrey H. Lynford |
| $ | | 909,261 | | $ | 172,760 | $ | | ||||||||||
James J. Burns (D) |
| $ | | 88,616 | | $ | 72,665 | $ | | ||||||||||
William H. Darrow II |
| $ | | 17,723 | | $ | | $ | | ||||||||||
David M. Strong |
3,540 | $ | 11,186 | 238,657 | | $ | 91,337 | $ | | ||||||||||
Mark P. Cantaluppi |
| $ | | 17,723 | | $ | 25,698 | $ | | ||||||||||
(A) | The right to receive reload options was given in connection with certain options. The reload options enable the Named Executive Officer to purchase a number of shares of Wellsford common stock equal to the number of shares of Wellsford common stock delivered by him to exercise the underlying option. The effective date of the grant of the reload options, which we refer to as the
Reload Effective Date, will be the date the underlying option is exercised by delivering shares of Wellsford common stock to Wellsford. The reload options have the same expiration date as the underlying options and will have an exercise price equal to the fair market value of the shares of Wellsford common stock on the Reload Effective Date. |
(B) | The fair market value on December 31, 2005 of the shares of Wellsford common stock underlying the options was $6.00 per share of common stock. |
(C) | Value realized is based on the fair market price of the shares of Wellsford common stock on the respective dates of exercise, minus the applicable exercise price and does not necessarily indicate that the Named Executive Officer sold stock on that date, at that price, or at all. |
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(D) | On April 5, 2006, Mr. Burns elected to receive a net cash payment of $252,998 to cancel these options. See below. |
As permitted by Wellsfords Plan, and in accordance with the provisions of Wellsfords option plans, applicable accounting and the AMEX rules and Federal income tax laws, Wellsfords outstanding stock options have been adjusted to prevent a dilution of benefits to option holders arising from a reduction in value of Wellsford common stock as a result of the $14.00 per share initial liquidating cash distribution made to stockholders. The adjustment reduces the exercise price of the outstanding options by the ratio of the price of a common share immediately after the distribution ($5.60 per share) to the stock price immediately before the distribution ($19.85 per share) and increases the number of shares of Wellsford common stock subject to outstanding options by the reciprocal of the ratio. As a result of this adjustment, the 520,665 options outstanding as of December 31, 2005 have been converted into options to acquire 1,845,584 shares of Wellsford common stock and the weighted average exercise price of such options has decreased from $20.02 per share to $5.65 per share. The board approved these option adjustments on January 26, 2006. At the same time, the board authorized amendments to outstanding options to allow an option holder to elect to receive from Wellsford, in cancellation of the holders option, a cash payment with respect to each cancelled option equal to the amount by which the fair market value of the share of stock underlying the option exceeds the exercise price of such option. Additionally, certain non-qualified out of the money options which had original maturity dates prior to December 31, 2008, were extended by the board to the later of December 31 of the year of original expiration or the 15th day of the third month following the date of the original expiration.
Employment Agreements |
Jeffrey Lynford |
In August 2004, Wellsford and Jeffrey Lynford entered into a Second Amended and Restated Employment Agreement which provides, among other things, that Jeffrey Lynford receive, through December 31, 2004, a base salary of $318,000 per year and a minimum annual bonus of $325,000 and, after December 31, 2004 and until the expiration of the agreement, a base salary of $375,000 per year and a minimum annual bonus of $375,000. The agreement expires on December 30, 2007. In addition, Jeffrey Lynford was entitled to receive a payment of $1,929,000 on January 1, 2008, unless such payment was accelerated in the event that:
| his employment was terminated by reason of his death or disability; |
| his employment was terminated by Wellsford other than for proper cause (as defined in the agreement); |
| his employment was terminated by him for good reason (as defined in the agreement, the definition of which includes the adoption of a plan of liquidation); or |
| Wellsford was liquidated or the assets of Wellsford were distributed to a liquidating trust. |
In addition, upon the sale of the assets of each of the three strategic business units of Wellsford having a value of Wellsfords financial statements equal to or in excess of 80% of the June 30, 2004 value of all assets of any such strategic business unit, Jeffrey Lynford was entitled to receive $643,000 following each sale. Any such payment was to be credited against the $1,929,000 amount as described above. In 2004, Jeffrey Lynford received $643,000 related to the sale of 100% of Wellsfords investment in Second Holding and in June 2005, Jeffrey Lynford received an additional $643,000 related to the cumulative sales and reduction of assets of more than 80% of the value of all assets of Wellsford/Whitehall. In January 2006, Jeffrey Lynford received the remaining $643,000 payment related to the sale of the three rental phases of Palomino Park in November 2005.
Jeffrey Lynfords employment agreement entitles him to certain benefits and payments, including but not limited to health, dental and life insurance benefits, in the event he terminates his employment agreement following a change in control (as defined in his employment agreement). Accordingly, if Jeffrey Lynford elects to terminate his employment with Wellsford following such a change in control, he would be entitled to an amount equal to the balance of his salary and minimum annual bonus (each payable at a rate of $375,000 per year) due to him through December 30, 2007, plus the continued payment by Wellsford of certain other benefits such as health, dental and life insurance premiums through December 30, 2007.
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Other Executive Officers |
Wellsford has also entered into employment agreements with Mr. Strong (which expires on December 30, 2007, with automatic extensions of six months to one year unless either party gives notice of termination), Mr. Burns (which expires on December 31, 2008), Mr. Cantaluppi (which expires on June 30, 2007, with automatic one-year extensions unless either party gives notice of termination) and Mr. Darrow (which expired on June 30, 2006). Pursuant to these employment agreements, the aforementioned executive officers are entitled to, among other things, a minimum salary, a minimum annual bonus and consideration by the Compensation Committee for incentive compensation.
Wellsford and Mr. Strong entered into a Third Amended and Restated Employment Agreement in October 2004, and an Amendment to Third Amended and Restated Employment Agreement in March 2006. Mr. Strongs employment agreement provides, among other things, that Mr. Strong receive, effective January 1, 2005, a base salary of $205,500 per year, increased at the rate of 3% for 2006, and a minimum annual bonus of 75% of his base salary. The agreement expires on December 30, 2007, subject to automatic renewal for one- year periods (or shorter periods of not less than six months) unless either party elects to terminate not less than 30 days prior to the expiration of the then current term. Pursuant to the agreement, Mr. Strong will be entitled to additional compensation in an aggregate amount equal to two times his then effective annual base salary upon the earlier of (1) December 31, 2008, (2) the expiration or termination of his employment agreement for any reason other than as a result of his disability, his termination by Wellsford for cause (as defined therein) or his termination of the employment agreement and (3) the sale of all condominium units with respect to Wellsfords Gold Peak project. Mr. Strong would also be entitled to receive a special bonus payment which is based upon the level of Wellsfords return on its investment in the Palomino Park project above certain defined thresholds. In January 2006, $604,745 was paid to Mr. Strong as a result of Wellsfords sale of the Palomino Park rental operations during 2005 which met certain of the defined thresholds of the special bonus arrangement. Mr. Strong will also be entitled to receive an additional lump sum bonus payment based upon the number of units sold (at $1,000 per unit) and Wellsfords profits, as defined, if any, in the Gold Peak portion of the Palomino Park project following the construction of the project and the sale of all condominium units. Mr. Strong will also be entitled to additional payments on overall returns of the Palomino Park project, if earned.
Wellsford and Mr. Cantaluppi entered into an employment agreement in May 2005, which was amended in March 2006. Pursuant to his employment agreement, Mr. Cantaluppi will receive a minimum annual base salary of $187,000 and a minimum annual bonus of 50% of his base salary. The agreement expires on June 30, 2007, subject to automatic renewal for one-year periods unless either party elects to terminate not less than 60 days prior to the expiration of the then current term. If Wellsford terminates Mr. Cantaluppi other than by reason of cause (as defined therein) or in the event of Mr. Cantaluppis death, he will be entitled to receive a lump sum payment equal to the sum of twice the amount of his annualized salary for the full calendar year in which the termination occurs, a pro rata portion of any minimum bonus payable with respect to that calendar year and all accrued and previously unused vacation time, instead of any salary, bonus or other compensation to which he would otherwise be entitled. If Mr. Cantaluppi terminates his employment following a change in control of Wellsford (as defined therein) and provided he has not been offered comparable employment (as defined therein) within 15 days after the event resulting in such change in control of Wellsford, Mr. Cantaluppi will be entitled to receive a lump sum payment equal to the sum of (1) twice the amount of his annualized salary for the full calendar year in which the event occurs, (2) a pro rata portion of a bonus equal to 50% of his annual salary for the calendar year in which the event occurs, and (3) previously unused vacation time, instead of any salary, bonus or other compensation to which he would otherwise be entitled.
In March 2006, Wellsford and Mr. Burns entered into an employment agreement pursuant to which Mr. Burns is appointed Vice Chairman of Wellsford and will devote approximately two days per week to the performance of his duties to Wellsford. As Vice Chairman of Wellsford, Mr. Burns is not entitled to be a member of the board. Pursuant to such agreement, Mr. Burns will be entitled to an annual base salary of at least $125,000, as well as a minimum bonus of 50% of his then base salary for 2006, 2007 and 2008 (which will be prorated for partial years of service so long as Mr. Burns is not terminated for cause (as defined therein)). In addition, upon the earlier of December 31, 2008 and his termination without cause (as defined therein) or as a result of his death or disability, Mr. Burns will be entitled to additional compensation in an
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aggregate amount equal to $75,000 for each full calendar year of service since January 1, 2006, up to an aggregate of $225,000 for service through December 31, 2008.
Wellsford and Mr. Darrow entered into an agreement in January 2006, pursuant to which Mr. Darrow was employed by Wellsford as an executive officer through June 30, 2006. For the period beginning on January 1, 2006 and ending on June 30, 2006, Mr. Darrow was entitled to an aggregate salary of $115,927 and a bonus of $87,500. In addition, Mr. Darrow received a lump sum severance payment in the amount of $445,281 during 2006.
Management Incentive Plans |
Wellsford has a 1997 Management Incentive Plan and a 1998 Management Incentive Plan, which we refer to collectively as the Management Incentive Plans, and a Rollover Stock Option Plan, which we refer to as the Rollover Plan; which we refer to, together with the Management Incentive Plans, as the Incentive Plans, for the purpose of aligning the interests of Wellsfords directors, executive officers and employees with those of the stockholders and to enable Wellsford to attract, compensate and retain directors, executive officers and employees and provide them with appropriate incentives and rewards for their performance. The existence of the Management Incentive Plans should enable Wellsford to compete more effectively for the services of such individuals. The Rollover Plan was established for the purpose of granting options and corresponding rights to purchase regular shares of Wellsford common stock in replacement of former Trust share options. Each Incentive Plan provides for administration by a committee of two or more non-employee directors established for such purpose.
Awards to directors, executive officers and other employees under the Incentive Plans may take the form of stock options, including corresponding stock appreciation rights and reload options. Under the Management Incentive Plans, Wellsford may also provide restricted stock awards and stock purchase awards.
As permitted by the Plan and in accordance with the provisions of Wellsfords option plans, applicable accounting and the AMEX rules and Federal income tax laws, Wellsfords outstanding stock options have been adjusted to prevent a dilution of benefits to option holders arising from a reduction in value of shares of Wellsford common stock as a result of the $14.00 per share initial liquidating cash distribution made to stockholders. The adjustment reduces the exercise price of the outstanding options by the ratio of the price of a common share immediately after the distribution ($5.60 per share) to the stock price immediately before the distribution ($19.85 per share) and increases the number of shares of Wellsford common stock subject to outstanding options by the reciprocal of the ratio. As a result of this adjustment, the 520,665 options outstanding as of December 31, 2005 have been converted into options to acquire 1,845,584 shares of Wellsford common stock and the weighted average exercise price of such options has decreased from $20.02 per share to $5.65 per share. The board approved these option adjustments on January 26, 2006. At the same time, the board authorized amendments to outstanding options to allow an option holder to receive from Wellsford, in cancellation of the holders option, a cash payment with respect to each cancelled option equal to the amount by which the fair market value of the share of stock underlying the option exceeds the exercise price of such option. Additionally, certain non-qualified out of the money options which had original maturity dates prior to December 31, 2008, were extended by the board to the later of December 31 of the year of original expiration or the 15th day of the third month following the date of the original expiration.
Compensation Committee Interlocks and Insider Participation |
Ms. Cohen and Messrs. Crocker, Frucher and Germain were Compensation Committee members for all of 2005. None of the Compensation Committee members is, or has been, an officer or employee of Wellsford. Jeffrey Lynford, Wellsfords Chairman of the Board, and Edward Lowenthal, Wellsfords former President and Chief Executive Officer, were members of the EQR board of trustees from the date of the merger with EQR in May 1997 through their retirements from the EQR board in May 2003. In addition, the former President and Vice-chairman of EQR, Mr. Crocker, is a member of Wellsfords board of directors. David J. Neithercut, the Executive Vice President Corporate Strategy of EQR served on Wellsfords board of directors from January 1, 2004 through April 8, 2005.
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Compensation Committee Report on Executive Compensation |
The Compensation Committee reviews and adopts compensation plans, programs and policies and monitors the performance and compensation of executive officers.
The key elements of Wellsfords executive compensation package are base salary, minimum bonus, incentive bonus and long-term incentives. The policies with respect to each of these elements are discussed below.
Compensation Philosophy |
The Compensation Committee seeks to enhance the profitability of Wellsford, and thus stockholder value, by aligning closely the financial interests of Wellsfords executive officers with those of its stockholders. The Compensation Committee believes that Wellsfords compensation program should:
| emphasize stock ownership and, thereby, tie long-term compensation to increases in stockholder value; |
| enhance Wellsfords ability to attract and retain qualified executive officers; and |
| stress teamwork and overall company results. |
Base Salary and Minimum Bonuses |
Base salaries and minimum bonuses for executive officers are, in each case, subject to employment contracts and have been determined by evaluating the responsibilities of the position held and the experience and qualifications of the individual, with reference to the competitive marketplace for executive officers at certain other similarly situated companies. Wellsford believes that the base salaries and minimum bonuses for its executive officers are equal to or less than the average minimum compensation for executive officers at such other similar companies.
Annual Incentive Bonus |
Pursuant to their respective employment agreements, in addition to base salaries and minimum bonuses, each of the executive officers is entitled to be considered for incentive compensation amounts to be determined by the Compensation Committee. For each of the last three years (2003 through 2005), the Chief Executive Officer, Jeffrey Lynford, did not receive any incentive bonus payments, other than amounts contractually required.
Incentive bonuses awarded to other executive officers for fiscal 2005 reflect the financial and strategic business accomplishments which Wellsford achieved from its assets and businesses in 2005, as well as each respective executive officers time and efforts during the year. Mr. Strongs incentive bonus was contractual based upon Wellsford achieving certain returns on its investment in the Palomino Park project.
Long-Term Incentive |
Long-term incentives are designed to align the interests of the executive officers with those of the stockholders. In awarding options to purchase shares of Wellsford common stock to executive officers, consideration is given to the long-term incentives previously granted to them.
Options to purchase shares of Wellsford common stock will generally be granted with an exercise price equal to the fair market value of the shares of Wellsford common stock and vest and become exercisable over a period of years based upon continued employment. This is intended to create stockholder value over the long term since the full benefit of the compensation package cannot be realized unless share price appreciation occurs over a number of years. In making grants of options to purchase shares of Wellsford common stock, the Compensation Committee will consider and give approximately equal weight to an individuals scope of responsibilities, experience, past contributions to Wellsford and anticipated contributions to Wellsfords long-term success.
Grants of restricted shares of Wellsford common stock also form a part of Wellsfords long-term incentive package. Typically, some portion of such grants will vest annually over a period of several years if the Executive Officer remains employed by Wellsford. In making grants of restricted shares of Wellsford
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common stock, the Compensation Committee will consider and give approximately equal weight to an individuals scope of responsibilities, experience, past contributions to Wellsford and anticipated contributions to Wellsfords long-term success.
The Compensation Committee believes that options to purchase shares of Wellsford common stock and grants of restricted shares of Wellsford common stock promote loyalty to Wellsford and encourage the recipients to coordinate their interests with those of the stockholders. The Compensation Committee may consider additional types of long-term incentives in the future.
Other than adjustments to the terms of existing options during January 2006, there were no option or restricted share grants made as part of 2005 annual compensation considerations and employment agreements that are currently in effect.
Compensation of Chief Executive Officer and Chairman of the Board |
Jeffrey Lynfords compensation as set forth in his 2001 Amended and Restated Employment Agreement was fixed until December 31, 2004. During 2004, the Compensation Committee engaged a compensation consultant to review Jeffrey Lynfords expiring contract and provide comparable market information and suggestions for structuring his future compensation. In August 2004, Jeffrey Lynfords compensation was established through December 31, 2007 by his Second Amended and Restated Employment Agreement. Specific consideration has been given to his qualifications, responsibilities and experience in the real estate industry, and the compensation package awarded to the most senior executive officers of other comparable companies with similar market capitalization. The Compensation Committee believes that Jeffrey Lynfords compensation was equal to or less than the average base salary for a comparable senior officer of such other similar companies. In addition, the Compensation Committee considered additional factors, including the fact that Wellsford was considering various strategic alternatives, the fact that Wellsford would have to pay a third party a premium in compensation to agree to employment in an uncertain environment (i.e. to agree to be employed for what may be a limited time if Wellsford adopts one of its strategic alternatives), and Jeffrey Lynfords unique knowledge of Wellsfords assets and joint ventures and other agreements.
It is the responsibility of the Compensation Committee to address the issues raised by the tax laws which make certain non-performance based compensation to executives of public companies in excess of $1 million non-deductible to Wellsford. In this regard, the Compensation Committee must determine whether any actions with respect to this limit should be taken by Wellsford. At this time, other than the payments to Jeffrey Lynford and David Strong for certain amounts due under their respective employment agreements or deferred compensation agreements, it is not generally anticipated that any other Executive Officer will receive any such compensation in excess of this limit during fiscal year 2006. However, in light of the amount of Wellsfords net operating losses, the Compensation Committee believes that any increase in income tax liability arising from payments to Jeffrey Lynford exceeding $1 million will be offset by such net operating losses. In the unlikely event that net operating losses are unavailable, the Compensation Committee has deemed any increase in income tax liability to be a reasonable expense to retain an executive of Jeffrey Lynfords caliber. Therefore, the Compensation Committee has not taken any action to comply with the limit.
Conclusion |
Through the programs described above, a significant portion of Wellsfords executive compensation is linked to individual and Wellsford performance and the creation of stockholder value. However, periodic business cycle fluctuations may result in an imbalance for a particular period.
The foregoing report has been furnished by the Compensation Committee.
April 13, 2006
Douglas Crocker II, Chairman | Mark
S.
Germain |
||
Meyer S. Frucher | Bonnie R. Cohen |
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Common Share Price Performance Graph |
The following graph compares the cumulative total stockholder return on the shares of Wellsford common stock for the period commencing December 31, 2000 through December 31, 2005, with the cumulative total return on the Russell 2000 Index, which we refer as the Russell 2000, and the S&P 500 Index, which we refer to as the S&P 500, for the same period. Total return values were calculated based on cumulative total return assuming (1) the investment of $100 in the Russell 2000, the S&P 500 and in the shares of Wellsford common stock on December 31, 2000, and (2) reinvestment of dividends, which in the case of Wellsford includes the December 14, 2005 initial liquidating distribution of $14.00 per share of Wellsford common stock. The total return for the shares of Wellsford common stock from December 31, 2000 to December 31, 2005, was approximately 29.3% versus approximately 48.9% for the Russell 2000 and 2.8% for the S&P 500.
Certain Relationships and Related Transactions |
The following table details revenues and expenses for transactions with affiliates:
For the Nine Months Ended September 30, 2006 |
For the Period November 18 to December 31, 2005 |
For the Period January 1 to November 17, 2005 |
||||||||
(Liquidation Basis) | (Going Concern Basis) | |||||||||
Revenues: |
||||||||||
WP Commercial fees (A): |
||||||||||
Asset disposition fee revenue |
$ | | $ | | $ | 518,000 | ||||
$ | | $ | | $ | 518,000 | |||||
Costs and expenses: |
||||||||||
EQR credit enhancement |
$ | | $ | | $ | 9,000 | ||||
Fees to our partners, or their affiliates, on residential development projects |
450,000 | 83,000 | 595,000 | |||||||
$ | 450,000 | $ | 83,000 | $ | 604,000 | |||||
(A) | Wellsford/Whitehall, was a joint venture by and among Wellsford, various entities affiliated with the Whitehall Funds, which we refer to as Whitehall, private real estate funds sponsored by The Goldman Sachs Group, Inc. The managing member, which we refer to as WP Commercial, is a Goldman Sachs and Whitehall affiliate. Wellsfords investment in Wellsford/Whitehall was
redeemed in September 2005. |
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Wellsford currently has direct equity investments in Reis. At September 30, 2006 and December 31, 2005, the carrying amount of Wellsfords aggregate investment in Reis was approximately $20,000,000 (liquidation basis). This investment represents approximately 23% of Reiss equity on an as converted to common stock basis at December 31, 2005. Such investment, which had previously been accounted for on a cost basis, amounted to $6,790,000 at December 31, 2004. The President, Chief Executive Officer, and largest common stockholder of Reis is the brother of Jeffrey Lynford, the Chairman of the Board, President and Chief Executive Officer of Wellsford. Edward Lowenthal, Wellsfords former President, who currently serves on the Wellsfords board of directors, has served on the board of directors of Reis since the third quarter of 2000. Jeffrey Lynford and Mr. Lowenthal have and will continue to recuse themselves from any investment decisions made by Wellsford pertaining to Reis, including the vote of Wellsfords board of directors to approve the merger and the merger agreement.
A portion of the Wellsford investment in Reis is held directly by Wellsford and the remainder was held by Reis Capital. Wellsford owned an approximate 51.09% non-controlling interest in Reis Capital. An affiliate of a significant stockholder of Wellsford, the Caroline Hunt Trust Estate (which owns 405,500 shares of common stock of Wellsford at September 30, 2006 and at December 31, 2005 and 2004, and which we refer to as the Hunt Trust), who, together with other Hunt Trust related entities, owned an approximate 39% interest in Reis Capital. In September 2006, the members of Reis Capital approved the dissolution of Reis Capital and in October 2006 distributed the shares of Reis preferred stock that it held to its members, including Wellsford Capital.
Jeffrey Lynford and Edward Lowenthal were members of the EQR board of directors from the date of the merger with EQR in May 1997 through their retirements from the EQR board in May 2003. In addition, the former President and vice chairman of EQR, Mr. Crocker, is a member of Wellsfords board of directors. David J. Neithercut, the current President and Chief Executive Officer of EQR, was elected to Wellsfords board on January 1, 2004 to represent EQRs interests in Wellsford. Mr. Neithercut resigned as a director in April 2005. EQR had a 7.075% and a 14.15% interest in Wellsfords residential project in Denver, Colorado at December 31, 2005 and 2004, respectively, and provided credit enhancement through May 2005. A subsidiary of EQR was the holder of $25,000,000 of Convertible Trust Preferred Securities and the 169,903 shares of class A-1 common stock of Wellsford. On January 25, 2006, EQR, the sole holder of the outstanding class A-1 common shares, converted its 169,903 class A-1 shares to common shares.
With respect to EQRs 14.15% interest at December 31, 2004 in the corporation that owns Palomino Park, there existed a put/call option between Wellsford and EQR related to one-half of such interest (7.075%). In February 2005, Wellsford informed EQR of its intent to exercise this option at a purchase price of $2,087,000. This transaction was completed in October 2005. Aggregate distributions from the subsidiary corporations available cash and sales proceeds of approximately $4,080,000 were made to EQR during the fourth quarter of 2005.
In January 2006, a company which is owned by Jeffrey Lynford and Mr. Lowenthal, the principal of Wellsfords joint venture partner in Wellsfords East Lyme, Connecticut project and others acquired from Wellsford a 10 acre parcel and a contract to acquire a contiguous 14 acre parcel in Beekman, New York, which we refer to as Beekman, at Wellsfords aggregate cost of approximately $1,297,000. This was accomplished through a sale of the entities that owned the Beekman project. As part of this transaction, the balance of the deferred compensation assets aggregating approximately $14,721,000 held for the benefit of Jeffrey Lynford and Mr. Lowenthal, including 256,487 shares of common stock held in such accounts, were also acquired. Wellsford was relieved of the remaining deferred compensation liability which amounted to approximately $14,721,000 at December 31, 2005.
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REIS SPECIAL MEETING
Date, Time and Place |
Reis is furnishing this joint proxy statement/prospectus to holders of Reis common stock and Reis preferred stock in connection with the solicitation of proxies by the Reis board of directors for use at the Reis special meeting of stockholders to be held on ________ and at any adjournment or postponement thereof. This joint proxy statement/prospectus is first being furnished to stockholders of Reis on or about _______. The special meeting of Reis stockholders will be held on the above date at 10:00 a.m., Eastern Standard Time, at the offices of Reis, Inc., 530 Fifth Avenue, New York, New York 10036.
Purpose of the Reis Special Meeting |
At the Reis special meeting, Reis stockholders will be asked:
| to adopt the merger agreement providing for the merger of Reis with and into Merger Sub; approval of this proposal will also constitute approval of the transactions contemplated by the merger agreement, including, without limitation, the appointment of stockholder
representatives and certain indemnification obligations relating to them; |
| to approve the certificate of amendment to Reiss amended and restated certificate of incorporation to eliminate the requirement to mail to the holders of Reis preferred stock a written notice of the merger at least 45 days prior to its consummation and to clarify the
consideration that the holders of Reis preferred stock will be entitled to receive in connection with the merger; |
| to approve any motion to adjourn the Reis special meeting, if necessary, to permit, among other things, further solicitation of proxies to establish a quorum or further solicitation of proxies to obtain additional votes in favor of the foregoing proposals; and |
| to conduct any other business that properly comes before the Reis special meeting, including any adjournment or postponement of the Reis special meeting. |
Reis Special Meeting Record Date; Stock Entitled to Vote |
The close of business on ______, 2007, which we refer to as the Reis special meeting record date, has been fixed as the record date for the determination of the holders of Reis common stock and Reis preferred stock entitled to notice of, and to attend and vote at, the Reis special meeting or at any adjournment or postponement thereof.
As of December 22, 2006, Reis had 4,860,705 shares of common stock outstanding, 49,180 shares of Series A preferred stock outstanding, which shares are convertible into 2,791,166 shares of common stock, 14,754 shares of Series B preferred stock outstanding, which shares are convertible into 491,804 shares of common stock, 106,431 shares of Series C preferred stock outstanding, which shares are convertible into 2,682,245 shares of common stock, and 6,666 shares of Series D preferred stock outstanding, which shares are convertible into 207,019 shares of common stock. Each share of Reis common stock entitles its holder to one vote at the Reis special meeting on all matters properly presented at the Reis special meeting. Each share of preferred stock has the number of votes at the Reis special meeting on all matters properly presented at the Reis special meeting equal to the number of shares of common stock into which such preferred stock is convertible.
Quorum |
In order to carry on the business of the meeting, Reis must have a quorum. The presence, in person or by proxy, at the Reis special meeting of the holders of a majority in voting power of the shares of Reis common stock and Reis preferred stock, treated on an as converted to common stock basis for this purpose, issued and outstanding and entitled to vote at the Reis special meeting is necessary to constitute a quorum at the Reis special meeting. If a quorum is not present at the Reis special meeting, Reis expects that the meeting will be adjourned to solicit additional proxies.
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Votes Required |
Required Vote to Adopt the Merger Agreement (Proposal No. 1 on the Proxy Card) |
The affirmative vote of holders of a majority in voting power of the issued and outstanding shares of (1) Reis common stock and Reis preferred stock, on an as converted to common stock basis and voting together as a single class, (2) Reis Series C preferred stock, on an as converted to common stock basis and voting as a separate class, and (3) Reis Series D preferred stock, on an as converted to common stock basis and voting as a separate class, is required for adoption of the merger agreement.
Required Vote to Approve Amendment to Amended and Restated Certificate of Incorporation (Proposal No. 2 on the Proxy Card) |
The affirmative vote of holders of a majority in voting power of the issued and outstanding shares of (1) Reis common stock and Reis preferred stock, on an as converted to common stock basis and voting together as a single class, (2) Reis Series A preferred stock, Reis Series B preferred stock, Reis Series C preferred stock and Reis Series D preferred stock, on an as converted to common stock basis and voting together as a single class, and (3) Reis Series A preferred stock, Reis Series B preferred stock, Reis Series C preferred stock, and Reis Series D preferred stock, each on an as converted to common stock basis and with each series voting as a separate class, is required for approval of the amendment to Reiss amended and restated certificate of incorporation.
Required Vote to Approve an Adjournment of the Reis Special Meeting (Proposal No. 3 on the Proxy Card) |
Approval of a proposal to adjourn the Reis special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the adoption of the merger agreement and approval of the amendment to the amended and restated certificate of incorporation requires the affirmative vote of the holders of a majority in voting power of Reis capital stock having voting power present in person or by proxy at the Reis special meeting with the shares of Reis preferred stock voting on an as converted to common stock basis.
Treatment of Abstentions |
Abstentions count as being present for the purpose of establishing a quorum and will have the same effect as votes against the adoption of the merger agreement, the approval of amendment to the amended and restated certificate of incorporation and the adjournment of the Reis special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the adoption of the merger agreement and the approval of the amendment to the amended and restated certificate of incorporation.
Voting by Reis Officers and Directors |
Lloyd Lynford is the beneficial owner of (1) 2,464,399, or approximately 50.7%, of the 4,860,705 outstanding shares of common stock, and (2) 33, or approximately 0.5%, of the 6,666 outstanding shares of Reis Series D preferred stock of Reis. Jonathan Garfield is the beneficial owner of (1) 1,639,047, or approximately 33.7%, of the 4,860,705 outstanding shares of Reis common stock, and (2) 83, or approximately 1.2%, of the 6,666 outstanding shares of Reis Series D preferred stock. Each of Lloyd Lynford and Mr. Garfield has entered into a voting agreement with Wellsford pursuant to which, among other things, he has agreed, subject to the terms and conditions therein, to vote or deliver written consents with respect to all shares of Reis capital stock owned by him in favor of the adoption of the merger agreement and approval of the transactions contemplated thereby and in favor of approving the amendment to the Reiss amended and restated certificate of incorporation. Lloyd Lynford and Mr. Garfield will also vote with respect to all shares of Reis capital stock owned by him in favor of adjourning the Reis special meeting to another time or place, if necessary, for the purpose of, among other things, permitting further solicitation of proxies by Reis in favor of each of the proposals or establishing a quorum. To Reiss knowledge, the other directors and executive officers of Reis intend to vote their shares of Reis capital stock in favor of all three proposals.
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For a complete description of the voting agreement and voting by Reis officers and directors, see The Merger AgreementOther AgreementsVoting Agreement beginning on page 101 and The MergerInterests of Wellsford and Reis Directors and Executive Officers in the MergerInterests of Reis Directors and Executive Officers in the Merger beginning on page 68.
Wellsford indirectly owns, through Wellsford Capital, (1) 25,127 of the 49,180 outstanding shares of Reis Series A preferred stock, (2) 7,538 of the 14,754 outstanding shares of Reis Series B preferred stock, (3) 32,345 of the 106,431 outstanding shares of Reis Series C preferred stock, and (4) 2,098 of the 6,666 outstanding shares of Reis Series D preferred stock, and has indicated that it will vote its shares in favor of the adoption of the merger agreement and in favor of approving the amendment to Reiss amended and restated certificate of incorporation. Wellsford has also indicated that it will vote with respect to all shares of Reis capital stock owned by it in favor of adjourning the Reis special meeting, if necessary, to permit, among other things, further solicitation of proxies to establish a quorum or further solicitation of proxies to obtain additional votes in favor of the proposals.
If you do not submit a proxy card or vote at the Reis special meeting, your shares of Reis stock will not be counted as present for the purpose of determining a quorum and will have the same effect as votes against the adoption of the merger agreement and the approval of the amendment to the amended and restated certificate of incorporation, but will not be counted for any purpose in determining whether to adjourn the Reis special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the adoption of the merger agreement and the approval of the amendment to the amended and restated certificate of incorporation.
Voting of Proxies |
Reis requests that its stockholders complete, date and sign the accompanying proxy and promptly return it in the accompanying envelope or otherwise mail it to Reis. All properly executed proxies that Reis receives prior to the vote at the Reis special meeting, and that are not properly revoked, will be voted in accordance with the instructions indicated on the proxies or, if no instruction is indicated, to adopt the merger agreement and to approve the amendment to the amended and restated certificate of incorporation and to adjourn the Reis special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of the adoption of the merger agreement and the approval of the amendment to the amended and restated certificate of incorporation. Reiss board of directors does not currently intend to bring any other business before the Reis special meeting and, to the knowledge of Reiss board of directors, no other matters are to be brought before the special meeting. If, however, any other matters properly come before the meeting, the persons named in the proxy will vote the shares represented thereby in accordance with the judgment of management on any additional matter.
Revocability of Proxies and Changes to a Reis Stockholders Vote |
Reis stockholders have the power to revoke their proxy or change their vote at any time before the shares represented by their proxy are voted at the Reis special meeting. A Reis stockholder may revoke its proxy or change its vote in one of three ways:
(1) | it can send a signed notice of revocation to the corporate secretary of Reis to revoke its proxy; |
(2) | it can send a completed proxy card bearing a later date than its original proxy to Reis indicating the change in its vote; or |
(3) | it can attend the Reis special meeting and vote in person, which will automatically cancel any proxy previously given, or it may revoke its proxy in person, but attendance alone will not revoke any proxy that it has previously given. |
If a Reis stockholder chooses either of the first two methods, it must take the described action no later than the beginning of the Reis special meeting. Once voting on a particular matter is completed at the Reis special meeting, a Reis stockholder will not be able to revoke its proxy or change its vote as to that matter.
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Solicitation of Proxies |
Proxies are being solicited by and on behalf of the Reiss board of directors. Reis will bear the cost of soliciting the proxies, including the cost of printing and mailing the proxy materials. In addition to solicitation by mail, directors, officers and regular employees of Reis may solicit proxies from stockholders by telephone, facsimile, personal interview or otherwise. These directors, officers and employees will not receive additional compensation, but may be reimbursed for out-of-pocket expenses in connection with the solicitation.
Proposal No. 1
The adoption of the merger agreement providing for the merger of Reis with and into Merger Sub, with Merger Sub continuing as the surviving entity, is required prior to consummation of the merger. Approval of this proposal will also constitute approval of all other transactions contemplated under the merger agreement including, without limitation, the specific approval of each of the following:
| the appointment by each Reis stockholder of Lloyd Lynford and Jonathan Garfield as stockholder representatives to act on behalf of the stockholders with respect to all matters requiring any action or decision by the stockholders in connection with the merger and the
merger agreement after the consummation of the merger, and to take all actions and make all decisions necessary or desirable arising out of the merger agreement and the escrow agreement, including the defense or settlement of certain claims against Reis for breach of
representations and warranties made by it under the merger agreement and the agreement by each Reis stockholder to be bound by the provisions of the merger agreement with respect to the stockholder representatives; and |
| the agreement by Reis stockholders to indemnify each of the stockholder representatives against any and all claims liabilities, obligations, costs, expenses, deficiencies, and damages incurred, sustained, suffered, paid or payable by the stockholder representatives in
connection with acting as a stockholder representative and any action or inaction taken by him under the merger agreement and escrow agreement, and the agreement to the deposit in escrow of the initial amount of $250,000 in cash and 30,637 shares of Wellsford
common stock to secure the indemnification obligations, including the execution of a related escrow agreement. |
Adoption of the merger agreement requires the consent of the holders of a majority in voting power of the issued and outstanding shares of (1) Reis common stock and Reis preferred stock, on an as converted to common stock basis and voting together as a single class, (2) Reis Series C preferred stock, on an as converted to common stock basis and voting as a separate class, and (3) Reis Series D preferred stock, on an as converted to common stock basis and voting as a separate class.
The Reis board of directors recommends a vote FOR Proposal No. 1.
Proposal No. 2
The approval of the amendment to Reiss amended and restated certificate of incorporation is a condition to consummation of the merger. Upon approval of this proposal, Reiss amended and restated certificate of incorporation will be amended such that (1) holders of Reis preferred stock will waive the requirement that they be given not less than 45 days notice prior to the consummation of the merger, and (2) holders of each series of Reis preferred stock will be entitled to receive in connection with the merger, the consideration that these holders would receive if their shares of preferred stock had been converted into shares of common stock at the applicable conversion price for the applicable series of preferred stock immediately prior to the effective time of the merger (which the Reis board of directors has determined would be greater than the consideration these holders would receive if calculated based on the share liquidation value of the applicable series of preferred stock), subject to all adjustments, and escrow, indemnification and other obligations applicable thereto under the merger agreement.
The amended and restated certificate of incorporation of Reis provides that in connection with the merger each share of Reis preferred stock is entitled to receive the greater of (1) the liquidation amount of
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that share and all accrued or declared but unpaid dividends on that share, referred to here as the liquidation calculation, and (2) the amount that share would be entitled to receive if it had been converted into Reis common stock at the conversion price applicable to it, referred to here as the conversion calculation. Based on the foregoing, the Reis board of directors has calculated the amount of merger consideration to be received by holders of Reis preferred stock under each of the liquidation calculation, as set forth below, and the conversion calculation ($8.16 per share of Reis common stock), and has determined that the amount receivable by holders of Reis preferred stock under the liquidation calculation is less than they would receive under the conversion calculation. Accordingly, the merger consideration payable to holders of Reis preferred stock, as set forth above, is based on the conversion calculation.
Under the liquidation calculation holders of shares of Reis Series D preferred stock would have been entitled to receive (1) an amount equal to the $200 liquidation amount for each share of Reis Series D preferred stock, or an aggregate of $1,333,200, and (2) all accrued or declared but unpaid dividends on each share, which equals $38.03 per share, or an aggregate of $253,491, assuming the merger is consummated on April 1, 2007. Holders of Reis Series A preferred stock, Series B preferred stock and Series C preferred stock would have been entitled to receive (1) an amount equal to the $100 liquidation amount for each such share of preferred stock, or an aggregate of $17,036,700, and (2) all accrued or declared but unpaid dividends on each share, which equals $56.02 per share for each of Reis Series A preferred stock, Series B preferred stock and Series C preferred stock, or an aggregate of $9,544,286, assuming the merger is consummated on April 1, 2007. For a description of the merger consideration to be received by stockholders of each series of Reis preferred stock based on the conversion calculation pursuant to the merger agreement, see The Merger AgreementConsideration to be Received in the Merger beginning on page 80.
To approve the amendment to Reiss amended and restated certificate of incorporation, the affirmative vote of holders of a majority in voting power of the outstanding shares of (1) Reis common stock and Reis preferred stock, on an as converted to common stock basis and voting together as a single class, (2) Reis Series A preferred stock, Series B preferred stock, Series C preferred stock and Series D preferred stock, on an as converted to common stock basis and voting together as a single class, and (3) Reis Series A preferred stock, Series B preferred stock, Series C preferred stock, and Series D preferred stock, each on an as converted to common stock basis and with each series voting as a separate class, is required.
For a complete description of the amendment to Reiss amended and restated certificate of incorporation, see The MergerAmendment of Reiss Amended and Restated Certificate of Incorporation beginning on page 66.
The Reis board of directors recommends a vote FOR Proposal No. 2.
Proposal No. 3
If there are insufficient votes at the time of the Reis special meeting to adopt the merger agreement or to approve the amendment to Reiss amended and restated certificate of incorporation, Reis may propose to adjourn the Reis special meeting for the purpose of permitting further solicitation of proxies by Reis in favor of each of the proposals or establishing a quorum.
If the proposal to adjourn the Reis special meeting for the purpose of soliciting additional proxies is submitted to the Reis stockholders, the affirmative vote of holders of a majority in voting power of the Reis common stock and Reis preferred stock having voting power present in person or by proxy at the Reis special meeting is necessary to adjourn the Reis special meeting.
The Reis board of directors recommends a vote FOR Proposal No. 3.
Other Matters to Come Before the Meeting
No other matters are intended to be brought before the meeting by Reis, and Reis does not know of any matters intended to be brought before the meeting by others. If, however, any other matters properly come before the meeting, the persons named in the proxy will vote the shares represented thereby in accordance with the judgment of management on any additional matter.
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Directors |
The current directors of Reis who will be directors of Wellsford and who will continue to be directors of Reis after the merger are as set forth below:
Lloyd Lynford, age 50, a founder of Reis, has been the President, Chief Executive Officer and Treasurer of Reis and a member of the Reis board of directors since 1981 and is primarily responsible for the firms strategic direction. Lloyd Lynford served on the board of the Real Estate Research Institute from 1993 to 1997 and served as its President from 1996 to 1997 and also served on the Editorial Board of the Journal of Real Estate Portfolio Management. He has lectured at The Wharton School, Berkeley, MIT, New York University, Columbia University, and Cambridge University (England). Lloyd Lynford graduated magna cum laude from Brown University.
Jonathan Garfield, age 50, a founder of Reis, has been the Executive Vice President and Secretary of Reis and a member of the Reis board of directors since 1981. Mr. Garfield created and maintains the applications and database which contains Reiss time series data on the property, metropolitan and neighborhood levels. He led the initial transition to electronic delivery of Reiss information products by managing the design, production, testing and maintenance of Reis SE. Mr. Garfield oversees Reiss corporate reporting, including legal, accounting, audit, tax and financing issues. Mr. Garfield graduated cum laude from Pomona College.
Executive Officers |
Each executive officer of Reis holds office at the pleasure of its board of directors. The following executive officers of Reis, in addition to Lloyd Lynford and Mr. Garfield, will continue to serve as executive officers of Reis after the merger:
William Sander, age 38, has been the Chief Operating Officer of Reis since 2001. Mr. Sander has overall responsibility for the day to day operations of Reis and supervision of all divisions of Reis. Prior to joining Reis, Mr. Sander was a Senior Vice President of Product Management for Primark Corporation, a company that provides content and software to the financial services industry. Mr. Sander is a graduate of Marietta College.
Michael Richardson, age 43, has been the Senior Vice President of Sales for Reis since 2002. Mr. Richardson has overall responsibility for sales and marketing. From 2001 to 2002, Mr. Richardson was Director of Sales at Openpages, Inc., a content management software company. Prior to joining Openpages, Mr. Richardson held various senior sales management positions, including Managing Director, Nexis National Accounts at LexisNexis, a publisher of business and legal information, and Director of Sales at Bolt, Beranek and Newman, a technology company providing research and development services. Mr. Richardson graduated with honors from Wittenberg University.
Paul Grier, age 38, has been the Senior Vice President-Technology since 2001. Prior to joining Reis, Mr. Grier served as Chief Technology Officer at Next Jump, Inc. and Vice President of Human Resources Information Systems at Deutsche Bank. Mr. Grier is a graduate of Adelphi University.
Dr. Sameer Chandan, age 33, has been the Chief Economist and Senior Vice President of Economic Research since 2004. He has overall responsibility for the firms applied econometric models. Dr. Chandan joined Reis as a senior economist in 2003. Prior to joining Reis, Dr. Chandan worked at JPMorgan Chase from 2002 to 2003 as an analyst in its Municipal Bond Finance group. He taught microeconomic theory at the Wharton School from 2000 to 2004. He holds a PhD in Applied Economics from the Wharton School of the University of Pennsylvania. An alumnus of Penn and Princeton University, he also holds a MA in Economics, a MSc in Engineering, and a BSc in Economics and Finance.
See The MergerInterests of Wellsford and Reis Directors and Executive Officers in the Merger on page 67.
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WELLSFORDS BUSINESS
Business and Plan of Liquidation |
Organization |
Wellsford was formed as a Maryland corporation on January 8, 1997, as a corporate subsidiary of the Residential Property Trust. On May 30, 1997, the Residential Property Trust merged with EQR. Immediately prior to the EQR Merger, the Residential Property Trust contributed certain of its assets to Wellsford and Wellsford assumed certain liabilities of the Residential Property Trust. Immediately after the contribution of assets to Wellsford and immediately prior to the EQR Merger, the Residential Property Trust distributed to its common stockholders all of the outstanding shares of Wellsford owned by the Residential Property Trust.
Business |
Wellsford was originally formed to operate as a real estate merchant banking firm to acquire, develop, finance and operate real properties and invest in private and public real estate companies. Wellsfords remaining primary operating activities are the development, construction and sale of three residential projects and its approximate 23% ownership interest in Reis. Previously, Wellsfords activities had been categorized into three strategic business units, or SBUs, within which it executed its business plans: (1) Commercial Property Activities; (2) Debt and Equity Activities; and (3) Residential Activities.
Merger with Reis |
On October 11, 2006, Wellsford announced that it had entered into a definitive merger agreement with Reis and Merger Sub and the merger had been approved by the independent members of Wellsfords board of directors. At the effective time of the merger, Reis stockholders will be entitled to receive, in the aggregate, approximately $34,579,414 in cash and 4,237,673 shares of newly issued Wellsford common stock, not including shares to be issued to Wellsford Capital. The per share value of Wellsford common stock, for purposes of the merger, has been established at $8.16 per share, resulting in an implied equity value for Reis of approximately $90,000,000, including Wellsfords 23% ownership interest in Reis.
Under the rules of the AMEX, a company listed on the AMEX is required to obtain stockholder approval before the issuance of common stock if the common stock issued in the merger exceeds 20% of the shares of common stock of the company outstanding immediately before the effectiveness of the merger. The merger is expected to be consummated in the first quarter of 2007, subject to the receipt of necessary regulatory approvals and the satisfaction or waiver of other closing conditions.
If the merger is consummated, Wellsford will terminate the Plan, but will continue with its program to dispose of its remaining real estate assets through development and/or sale.
The cash portion of the merger consideration is to be funded in part by the Bank Loan, which consists of $27,000,000 (of which $25,000,000 may be used to pay the cash portion of the merger consideration and the payment of related merger costs; the remaining $2,000,000 may be utilized for Reiss working capital needs). The remainder of the merger consideration will be funded with cash from Reis and Wellsford. On the consummation of the merger, Wellsford will have approximately 10,700,000 shares of common stock outstanding (excluding the shares held by Wellsford Capital, which will not be considered outstanding) and will change its corporate name to Reis, Inc. Following the consummation of the merger, current Reis stockholders will own approximately 39% of Wellsford.
Plan of Liquidation |
On May 19, 2005, the board of directors approved the Plan and on November 17, 2005, Wellsfords stockholders ratified the Plan. The Plan contemplates the orderly sale of each of Wellsfords remaining assets, which are either owned directly or through Wellsfords joint ventures, the collection of all outstanding loans from third parties, the orderly disposition or completion of construction of development properties, the discharge of all outstanding liabilities to third parties and, after the establishment of appropriate reserves, the distribution of all remaining cash to stockholders. The Plan also permitted Wellsfords board of directors to
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acquire more Reis shares and/or discontinue the Plan without further stockholder approval. The initial liquidating distribution of $14.00 per share was made on December 14, 2005, to stockholders of record on December 2, 2005. If the merger is consummated and the Plan is terminated, it will be necessary to recharacterize a portion of the December 14, 2005, cash distribution of $14.00 per share from what may have been characterized as a return of capital for Company stockholders at that time to taxable dividend income. Wellsford estimates that $1.15 of the $14.00 per share cash distribution will be recharacterized as taxable dividend income.
Wellsford contemplated that approximately 36 months after the approval of the Plan, any remaining assets and liabilities would be transferred into a liquidating trust. The liquidating trust would continue in existence until all liabilities have been settled, all remaining assets have been sold and proceeds distributed and the appropriate statutory periods have lapsed. The creation and operation of a liquidating trust will only occur if the merger does not close and the Plan is not terminated.
For all periods preceding stockholder approval of the Plan on November 17, 2005, Wellsfords financial statements are presented on the going concern basis of accounting. As required by GAAP, Wellsford adopted the liquidation basis of accounting as of the close of business on November 17, 2005. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts, which estimates will be periodically reviewed and adjusted as appropriate.
Wellsfords net assets in liquidation at September 30, 2006, June 30, 2006, March 31, 2006 and December 31, 2005, respectively, were:
September 30, 2006 |
June 30, 2006 |
March 31, 2006 |
December 31, 2005 |
||||||||||
Net assets in liquidation |
$ | 56,211,000 | $ | 55,844,000 | $ | 53,384,000 | $ | 56,569,000 | |||||
Per share |
$ | 8.69 | $ | 8.63 | $ | 8.25 | $ | 8.74 | |||||
Common stock outstanding at each respective date |
6,471,179 | 6,471,179 | 6,471,179 | 6,471,179 |
The reported amounts for net assets in liquidation present development projects at estimated net realizable values at each respective date after giving effect to the present value discounting of estimated net proceeds therefrom. All other assets are presented at estimated net realizable value on an undiscounted basis. The amount also includes reserves for future estimated general and administrative expenses and other costs and for cash payments on outstanding stock options during the liquidation. There can be no assurance that these estimated values will be realized or that future expenses and other costs will not be greater than recorded estimated amounts. Such amounts should not be taken as an indication of the timing or amount of future distributions to be made by Wellsford if the merger is not consummated and if the Plan were to continue.
If the Plan is not terminated, the timing and amount of interim liquidating distributions (if any) and the final liquidating distribution will depend on the timing and amount of proceeds Wellsford will receive on the sale of the remaining assets and the extent to which reserves for current or future liabilities are required. Accordingly, there can be no assurance that there will be any interim liquidating distributions before a final liquidating distribution if the Plan were not terminated.
The termination of the Plan would result in the retention by the combined company of Wellsfords cash balances and subsequent cash flow from the sales of residential development assets for working capital and re-investment purposes. Such cash would not be distributed to stockholders in the form of a liquidating distribution as had been contemplated under the Plan.
The following paragraphs summarize certain of the material actions and events which have occurred regarding the Plan and certain decisions of the board of directors.
In March 2004, Wellsford reported that its board of directors authorized and retained Lazard to advise Wellsford on various strategic financial and business alternatives available to it to maximize stockholder value. The alternatives included a recapitalization, acquisitions, disposition of assets, liquidation, the sale or merger of Wellsford and other alternatives that would keep Wellsford independent.
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In March 2005, the Wellsford board of directors authorized the marketing of the three residential rental phases of Palomino Park. In the second quarter of 2005, Wellsford engaged a broker to market these phases. In August 2005, Wellsford entered into an agreement to sell these phases for $176,000,000, subject to, among other things, stockholder approval of the Plan. The sale closed on November 22, 2005.
The following transactions, which are consistent with the intent of the Plan, occurred prior to the November 17, 2005 approval of the Plan by Wellsford stockholders:
| in September 2005, Wellsfords interest in its Wellsford/Whitehall joint venture was redeemed for approximately $8,300,000; |
| by May 2005, Wellsford retired $12,680,000 of tax exempt bond financing; |
| in April 2005, Wellsford redeemed its outstanding $25,775,000 of debentures; and |
| in November 2004, Wellsford received $15,000,000 for its interest in a joint venture which purchased debt instruments, which we refer to as the Second Holding. |
Wellsfords executive offices are located at 535 Madison Avenue, New York, New York, 10022; telephone, (212) 838-3400; web address, www.wellsford.com; e-mail, wrpny@wellsford.com. To access Wellsfords other documents filed with the SEC, visit www.wellsford.com. Please note that information on Wellsfords website is not part of this joint proxy statement/prospectus. Wellsford had 16 employees as of December 31, 2005.
Commercial Property Activities |
Wellsfords primary commercial property activities and its sole activity in this SBU consisted of its interest in Wellsford/Whitehall, a joint venture by and among Wellsford, various entities affiliated with Whitehall and private real estate funds sponsored by The Goldman Sachs Group, Inc., which we refer to as Goldman Sachs. Wellsfords interest in Wellsford/Whitehall was 35.21% at December 31, 2004. The managing member was an affiliate of Goldman Sachs and Whitehall.
Wellsford/Whitehall was originally organized as a private real estate operating company which leased and re-leased space, performed construction for tenant improvements, expanded buildings, re-developed properties and based on general and local economic conditions and specific conditions in the real estate industry, sold properties for an appropriate price.
In September 2005, Wellsford ceased its Commercial Property Activities when its equity interest in Wellsford/Whitehall was redeemed for approximately $8,300,000 plus certain modest contingent payments to be received in the future. Approximately $141,000 was received in December 2005. Wellsford realized an aggregate gain on the redemption of its interests of $5,986,000, which amount was primarily recognized during the three and nine months ended September 30, 2005. Wellsford will not receive any additional payments from its investment in Wellsford/Whitehall. At the time of the redemption of Wellsfords interest in September 2005, Wellsford/Whitehall owned one office building and a parcel of land, both located in New Jersey.
Wellsfords investment in Wellsford/Whitehall, which was accounted for on the equity method, was approximately $4,229,000 at December 31, 2004.
Since the beginning of 2001, Wellsford/Whitehall has completed the following number of property sales or transfers:
Year |
Number of Properties | |||
2005 |
15 | |||
2004 |
8 | |||
2003 |
11 | |||
2002 |
1 | |||
2001 |
11 |
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In May 2005, Wellsford/Whitehall completed the sale of a building in Ridgefield Park, New Jersey, for $31,400,000. Approximately $10,500,000 of the net proceeds and $8,000,000 of restricted cash were used to retire all outstanding mortgage indebtedness, leaving Wellsford/Whitehall without any mortgage debt. Wellsford/Whitehall reported a gain of approximately $10,100,000 on this transaction, of which Wellsfords share was approximately $3,500,000.
In April 2005, Wellsford/Whitehall completed the sale of a building in Needham, Massachusetts, for $37,500,000. Approximately $18,400,000 of the net proceeds were used to pay existing debt. Wellsford/Whitehall reported a gain of approximately $7,000,000 on this transaction, of which Wellsfords share was approximately $2,500,000.
In January 2005, Wellsford/Whitehall completed the sale of a portfolio of seven office properties and a land parcel for approximately $72,000,000, after selling and other costs. The properties are all located in New Jersey. Substantially all of the net proceeds from the sale and unrestricted cash and certain related reserve funds aggregating approximately $5,000,000 were used to retire existing debt. Additionally, in January 2005, Wellsford/Whitehall completed the sale of five retail stores for an aggregate sales price of $17,100,000, after selling costs. The net proceeds from the sale of the retail stores of approximately $1,300,000, after payment of related debt, were available to be used by Wellsford/Whitehall for working capital purposes. During the fourth quarter of 2004, Wellsford/Whitehall recorded an impairment loss provision of approximately $21,069,000 relating to the January 2005 sales (of which Wellsfords share was approximately $7,419,000).
During July 2004, Wellsford/Whitehall completed a transaction whereby it transferred six of its Massachusetts properties, which were subject to mortgage debt of approximately $64,200,000, along with a land parcel, related restricted cash balances aggregating $6,428,000, cash and certain other consideration to a newly formed partnership which includes the New England family, or the Family, that, at that time, owned an aggregate 7.45% equity interest in Wellsford/Whitehall, or the Family Partnership, in redemption of the Familys equity interests in Wellsford/Whitehall, which we refer to as the Redemption Transaction. As a result of this transaction, Wellsford/Whitehall recorded a loss of approximately $4,306,000 during the third quarter of 2004, of which Wellsfords share was approximately $1,403,000. At the time of the Redemption Transaction, there was an elimination of an existing tax indemnity which Wellsford/Whitehall had to the Familys members. The economic effect of this tax indemnity restricted most future asset sales through 2007 and required a minimum amount of non-recourse debt on Wellsford/Whitehalls balance sheet. As these restrictions no longer remained, Wellsford/Whitehall was allowed to proceed with its sales program as described above.
During 2003, Wellsfords share of impairment provisions recorded by Wellsford/Whitehall amounted to $37,377,000. In addition, Wellsford wrote off $2,644,000 of related unamortized warrant costs on its books in 2003.
WP Commercial provided management, construction, development and leasing services to Wellsford/Whitehall based on an agreed upon fee schedule. WP Commercial received an administrative management fee of 93 basis points on a predetermined value for each asset in the Wellsford/Whitehall portfolio. As Wellsford/Whitehall sold assets, the basis used to determine the fee was reduced by the respective assets predetermined value six months after the completion of such sales. During the years ended December 31, 2005, 2004 and 2003, respectively, Wellsford/Whitehall paid the following fees to WP Commercial or one of its affiliates, including amounts reflected in discontinued operations of Wellsford/Whitehall:
For the Years Ended December 31, | ||||||||||
2005 | 2004 | 2003 | ||||||||
Administrative management |
$ | 1,834,000 | $ | 3,715,000 | $ | 4,604,000 | ||||
Construction, construction management, development and leasing |
$ | 75,000 | $ | 784,000 | $ | 1,925,000 | ||||
Financing fee |
$ | 750,000 | $ | | $ | | ||||
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Whitehall paid Wellsford fees with respect to assets disposed of by Wellsford/Whitehall and for certain acquisitions of real estate made by certain other affiliates of Whitehall. These fees aggregated $163,000 and $518,000 for the three and nine months ended September 30, 2005, respectively, and $518,000, $46,000 and $430,000 for the years ended December 31, 2004 and 2003, respectively.
Debt and Equity Activities |
Wellsford, through the Debt and Equity Activities SBU, primarily made debt investments directly, or through joint ventures, in real estate related assets and investments.
At September 30, 2006 and December 31, 2005, Wellsford, on the liquidation basis of accounting, had the following investments in the Debt and Equity Activities SBU:
| approximately $453,000 at each date in Clairborne Fordham, a company initially organized to provide $34,000,000 of mezzanine construction financing for a high-rise condominium project in Chicago, which currently owns and is selling the remaining two unsold
residential units; |
| approximately $20,000,000 for Reis; and |
| approximately $291,000 and $666,000, respectively, in Wellsford Mantua, a company organized to purchase land parcels for rezoning, subdivision and creation of environmental mitigation credits. |
Debt Investments |
The following table presents information regarding Wellsfords debt investments, none of which was outstanding at September 30, 2006 and December 31, 2005:
Balance at December 31, |
Annual | ||||||||||||||||||
Collateral | 2005 | 2004 | Interest Rate | Stated Maturity Date | Prepayment Date | ||||||||||||||
Guggenheim Loan |
(A) | $ | | $ | 1,032,000 | 8.25 | % | December 2005 | September 2005 | ||||||||||
277 Park Loan |
(B) | $ | | $ | | 12.00 | % | May 2007 | September 2003 | ||||||||||
Interest Revenue |
|||||||||||||||||||
For the Three Months Ended |
For the Nine Months Ended |
For the Years Ended December 31, | |||||||||||||||||
September 30, 2005 | 2005 | 2004 | 2003 | ||||||||||||||||
Guggenheim Loan |
$ | 15,000 | $ | 58,000 | $ | 58,000 | $ | 173,000 | $ | 259,000 | |||||||||
277 Park Loan |
$ | | $ | | $ | | $ | | $ | 6,643,000 | (C) | ||||||||
(A) | The loan represented the balance of proceeds from a sale of a 4.2% interest in The Liberty Hampshire Company, L.L.C., which we refer to as Liberty Hampshire. The loan was secured by partnership interests in Guggenheim. |
(B) | Secured by a pledge of equity interests in the entity which owned an office property in midtown Manhattan, New York. |
(C) | Includes a yield maintenance penalty of $4,368,000. |
Equity Investments |
Second Holding |
Second Holding is a special purpose finance company organized to purchase investment and non-investment grade rated real estate debt instruments and investment grade rated other asset-backed securities. The other asset-backed securities that Second Holding purchased may have been secured by, but not limited to, leases on aircraft, truck or car fleets, bank deposits, leases on equipment, fuel/oil receivables, consumer receivables, pools of corporate bonds and loans and sovereign debt. It was Second Holdings intent to hold all securities to maturity. Many of the securities owned by Second Holding were obtained through private placements.
Wellsfords initial net contribution to Second Holding was approximately $24,600,000 to obtain an approximate 51.09% non-controlling interest in Second Holding, with Liberty Hampshire owning 10% and an affiliate of a significant stockholder of Wellsford, the Hunt Trust, together with other Hunt Trust related entities, owning the remaining approximate 39% interest.
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During the latter part of 2000, an additional partner was admitted to the venture who committed to provide credit enhancement. The parent company of this partner announced during 2003 that its subsidiary (the partner of Second Holding) would no longer write new credit enhancement business, however, it would continue to support its existing book of credit enhancement business. This partner was entitled to 35% of net income as defined by agreement, while the other partners, including Wellsford, shared in the remaining 65%. Wellsfords allocation of income was approximately 51.09% of the remaining 65%.
During the second quarter of 2004, the partner providing the credit enhancement requested that the management of Second Holding not purchase any further long-term investments and Second Holding accordingly suspended such acquisitions. During the third quarter of 2004, the partners evaluated alternatives available to Second Holding in addition to holding existing assets through their respective maturities and then retiring the related debt. As a consequence of not purchasing additional assets, operating income, fees earned and cash flows received by Wellsford from such fees declined during 2004.
In November 2004, Wellsford completed the sale of its interest in Second Holding for $15,000,000 in cash. Since Wellsford was willing to entertain and execute an agreement at this price, and based upon the evaluation of other alternatives, Wellsford determined it was appropriate, under the accounting literature for equity method investees, to record a $9,000,000 impairment charge to the carrying amount of its investment in Second Holding during the third quarter of 2004.
Wellsford accounted for its investment in Second Holding on the equity method of accounting as its interests were represented by two of eight board seats with one-quarter of the vote on any major business decisions. Wellsfords investment was approximately $29,167,000 at December 31, 2003. Wellsfords share of (loss) income from Second Holdings operations was approximately $(4,790,000) and $1,640,000 for the eleven months ended November 30, 2004 (which was the date of sale) and for the year ended December 31, 2003. The loss in the year ended December 31, 2004 is the result of a $12,930,000 net impairment charge taken by Second Holding, of which Wellsfords share was $6,606,000, related to the write-down of one of its investments during the first quarter of 2004, offset by a partial recovery when the investment was sold in the second quarter of 2004. The net fees earned by Wellsford, which were based on total assets of Second Holding, amounted to approximately $751,000 and $930,000 for the years ended December 31, 2004 and 2003, respectively.
Clairborne Fordham |
In October 2000, Wellsford and Prudential Real Estate Investors, which we refer to as PREI, an affiliate of Prudential Life Insurance Company, organized Clairborne Fordham, a venture in which Wellsford has a 10% interest. Wellsfords investment in Clairborne Fordham, which is accounted for on the equity method, was approximately $453,000 at September 30, 2006 and December 31, 2005 on a liquidation basis and approximately $2,190,000 on a going concern basis at December 31, 2004.
Upon its organization, Clairborne Fordham provided an aggregate of $34,000,000 of mezzanine construction financing, which we refer to as the Mezzanine Loan, for the construction of Fordham Tower, a 50-story, 227 unit, luxury condominium apartment project to be built on Chicagos near northside, which we refer to as the Fordham Tower. The Mezzanine Loan, which matured in October 2003, bore interest at a fixed rate of 10.50% per annum with provisions for additional interest to PREI and Wellsford and was secured by a lien on the equity interests of the owner of Fordham Tower. Wellsford could have earned fees from PREIs additional interest based on certain levels of returns on the project; however, additional interest was not accrued by Wellsford or Clairborne Fordham through the maturity of the Mezzanine Loan, nor did Wellsford accrue any fees.
The Mezzanine Loan was not repaid at maturity and as of October 2003, an amended loan agreement was executed. The amended terms provided for extending the maturity to December 31, 2004, the placement of a first mortgage lien on the project, no interest to be accrued after September 30, 2003 and for the borrower to add to the existing principal amount the additional interest due to Clairborne Fordham at September 30, 2003 of approximately $19,240,000. Instead of interest after September 30, 2003, Clairborne Fordham was to participate in certain additional cash flows, as defined, if earned from net sales proceeds of the Fordham Tower project.
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The amended loan agreement provided for a $3,000,000 additional capital contribution by the borrower and use of an existing cash collateral account to pay off an existing construction loan and any unpaid construction costs. Also, the amended loan agreement provided for an initial principal payment and all proceeds after project costs to be first applied to payment in full of the loan and the additional interest to Clairborne Fordham before any sharing of project cash flow with the borrower. Payments of $5,125,000 and $7,823,000 were made to Clairborne Fordham during the fourth quarter of 2003 and for the period January 1, 2004 to September 15, 2004, respectively, of which Wellsfords share was $510,000 and $782,000, respectively.
On September 15, 2004, Clairborne Fordham executed an agreement with the owners of Fordham Tower pursuant to which Clairborne Fordham obtained title to the remaining unsold components of the project (which at that time included 18 unsold residential units, the 188 space parking garage and 12,000 square feet of retail space). Additionally, Clairborne Fordham agreed to distribute the first $2,000,000 of sale proceeds to the former owner. No gain or loss was recognized by Clairborne Fordham or Wellsford as a result of the transfer. During the period from September 15, 2004 to December 31, 2004, Clairborne Fordham sold the retail space and three residential units and realized approximately $8,677,000 of net proceeds before the $2,000,000 payment to the former owner. Clairborne Fordham distributed approximately $5,655,000 to the venture members including approximately $566,000 to Wellsford during the period from September 15, 2004 to December 31, 2004. Undistributed proceeds were retained by Clairborne Fordham for working capital purposes. During the year ended December 31, 2005, Clairborne Fordham sold the parking garage and 13 residential units for aggregate net proceeds of approximately $26,812,000, of which approximately $2,645,000 was distributed to Wellsford during 2005. Wellsford received distributions of approximately $436,000 and $2,011,000 during the three and nine months ended September 30, 2005, respectively. No distributions were received by Wellsford during the comparable 2006 periods. Clairborne Fordham intends to continue the orderly sale of the remaining two residential units in 2006, one of which was under contract at September 30, 2006.
The following table details Wellsfords share of income from Clairborne Fordham:
For the Three Months Ended |
For the Nine Months Ended |
For the Period January 1 to November 17, |
For the Years Ended December 31, |
|||||||||||||
September 30, 2005 | 2005 | 2004 | 2003 | |||||||||||||
Contractual interest from Mezzanine Loan |
$ | | $ | | $ | | $ | | $ | 269,000 | ||||||
Additional interest income pursuant to the October 2003 amended loan agreement |
| | | 314,000 | 136,000 | |||||||||||
Net income from sales of components and operations subsequent to the September 15, 2004 transaction |
129,000 | 508,000 | 702,000 | 198,000 | | |||||||||||
$ | 129,000 | $ | 508,000 | $ | 702,000 | $ | 512,000 | $ | 405,000 | |||||||
Other Investments |
Reis |
Wellsford currently has a preferred equity investment in Reis through Wellsford Capital. At September 30, 2006 and December 31, 2005, the carrying amount of Wellsfords aggregate investment in Reis was approximately $20,000,000 on a liquidation basis, as described below. Wellsfords investment represents approximately 23% of Reiss equity on an as converted to common stock basis at September 30, 2006 and December 31, 2005. Such investment, which had previously been accounted for on a cost basis, amounted to approximately $6,790,000 at December 31, 2004, of which approximately $2,231,000 was held by Wellsford Capital and approximately $4,559,000 represented Wellsfords share held through Reis Capital. Such interests were distributed to Wellsford in October 2006. Prior to the approval of the Plan, the cost basis method was used to account for Reis as Wellsfords ownership interest is shares in non-voting Reis preferred stock and Wellsfords interests are represented by one member of Reiss seven member board of directors. The adjustment to report Reis at estimated net realizable value is reflected in the adjustment to net realizable value of $72,485,000 on the Consolidated Statement of Changes in Net Assets in Liquidation at November 17, 2005.
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The President and primary common stockholder of Reis is Lloyd Lynford, the brother of Jeffrey Lynford, the Chairman, President and Chief Executive Officer of Wellsford. Edward Lowenthal, Wellsfords former President and Chief Executive Officer, who currently serves on Wellsfords board of directors, has also served on the board of directors of Reis since the third quarter of 2000. Jeffrey Lynford and Mr. Lowenthal have and will continue to recuse themselves from any investment decisions made by Wellsford pertaining to Reis, including the the board of directors approval of the merger.
In the first quarter of 2006, Reis was considering offers from potential purchasers ranging between $90,000,000 and $100,000,000 to acquire 100% of Reiss capital stock. Based on these offers, in estimating the net proceeds in valuing Reis, if Reis were to be sold at that amount, Wellsford would have received approximately $20,000,000 of proceeds, subject to escrow holdbacks. These potential sale proceeds are reflected in Wellsfords net realizable value presentation. As of March 13, 2006, Reis entered into a letter of intent with one of the potential purchasers and was negotiating a contract with that potential purchaser. During the second quarter of 2006, negotiations with that potential purchaser were terminated. However, prior to such termination, Reis commenced discussions with another interested party from whom Reis also received an offer which it was evaluating at that time. The economic terms of the latter offer were within the range listed above and supported Wellsfords $20,000,000 valuation of its interest in Reis at June 30, 2006.
During May 2006, Wellsfords board of directors established a committee composed of the independent members to evaluate a possible transaction with Reis. In June 2006, Lazard and King & Spalding LLP were retained to advise with respect to a possible transaction with Reis.
On October 11, 2006, Wellsford announced that it had entered into a definitive merger agreement with Reis and Merger Sub and that the merger had been approved by the independent members of Wellsfords board of directors. At the effective time of the merger, Reis stockholders will be entitled to receive, in the aggregate, approximately $34,579,414 in cash and 4,237,673 shares of newly issued Wellsford common stock, not including shares to be issued to Wellsford Capital. The per share value of Wellsford common stock, for purposes of the merger, has been established at $8.16 per share in the merger agreement, resulting in an implied equity value for Reis of approximately $90,000,000, including Wellsfords 23% ownership interest in Reis. It is expected that this transaction will be tax-free to Reis stockholders except with respect to the cash portion of the consideration received. The cash portion of the merger consideration is to be funded in part by the Bank Loan, which consists of $27,000,000 (of which $25,000,000 may be used to pay the cash portion of the merger consideration and the payment of related merger costs; the remaining $2,000,000 may be utilized for Reiss working capital needs). The remainder of the merger consideration will be funded with cash from Reis and Wellsford.
On October 11, 2006, Wellsford received a fairness opinion from Lazard stating that, subject to the qualifications and limitations set forth therein, as of that date, the aggregate consideration to be paid by Wellsford in connection with the merger was fair to Wellsford from a financial point of view. The full text of Lazards opinion is included as Annex B to this joint proxy statement/prospectus. Stockholders are urged to read the entire opinion.
After considering a range of values, including the current market price for Wellsfords stock on the stock portion of the consideration and the per share price as established for the merger agreement, Wellsford determined that it is appropriate to continue to value its investment in Reis at $20,000,000 at September 30, 2006.
Value Property Trust |
During 2004 and 2003, Wellsford sold the remaining properties acquired as part of the February 1998 merger with Value Property Trust, which we refer to as VLP. In July 2003, the Salem, New Hampshire property was sold for a net sales price of approximately $4,200,000 and Wellsford utilized $22,000 of an existing impairment reserve recorded in 2000. During April 2004, Wellsford sold the Philadelphia, Pennsylvania property for net proceeds of approximately $2,700,000. As a result of the sale of the Philadelphia, Pennsylvania property, Wellsford reversed approximately $625,000 of impairment reserves recorded in 2000. During June 2004, Wellsford recognized approximately $184,000 of proceeds which had been placed in escrow from the sale of the Salem, New Hampshire property, as a result of the expiration of a
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contingency period. The contingent proceeds and the reversal of the impairment reserve were reflected in income from discontinued operations during the second quarter of 2004 and the year ended December 31, 2004. These transactions were the completion of the sales process of the VLP properties owned by Wellsford.
Wellsford Mantua |
During November 2003, Wellsford made an initial $330,000 investment in the form of a loan in a company organized to purchase land parcels for rezoning, subdivision and creation of environmental mitigation credits. The loan is secured by a lien on a leasehold interest in a 154 acre parcel in West Deptford, New Jersey, which includes at least 64.5 acres of wetlands and a maximum of 71 acres of developable land. Wellsford consolidates Wellsford Mantua at September 30, 2006 and December 31, 2005 and 2004. Wellsfords investment in Wellsford Mantua was approximately $291,000 and $666,000 on a liquidation basis at September 30, 2006 and December 31, 2005, respectively, and approximately $533,000 on a going concern basis at December 31, 2004.
Residential Activities |
Palomino Park |
Wellsford has been the developer and managing owner of Palomino Park, a five phase, 1,707-unit multifamily residential development in Highlands Ranch, a southern suburb of Denver, Colorado. Three phases (Blue Ridge, Red Canyon and Green River) aggregating 1,184 units were operated as rental property until they were sold in November 2005, as described below. The 264 unit Silver Mesa phase was converted into condominiums (sales commenced in February 2001 and by August 2005 Wellsford had sold all 264 units). The Gold Peak phase is under construction as a 259 unit for-sale condominium project. At December 31, 2005, Wellsford had a 92.925% interest in the final phase of Palomino Park and a subsidiary of EQR owned the remaining 7.075% interest. At December 31, 2004, Wellsfords interest was 85.85% and EQRs interest was 14.15%.
With respect to EQRs 14.15% interest at December 31, 2004 in the corporation that owns Palomino Park, there existed a put/call option between Wellsford and EQR related to one-half of such interest (7.075%). In February 2005, Wellsford informed EQR of its intent to exercise this option at a purchase price of $2,087,000. This transaction was completed in October 2005. Aggregate distributions from the subsidiary corporations available cash and sales proceeds of approximately $4,080,000 were made to EQR during 2005.
In November 2005, Wellsford sold the Blue Ridge, Red Canyon and Green River rental phases for $176,000,000 to a national financial services organization and realized a gain of approximately $57,202,000 after EQRs interest, specific bonuses paid to executives of Wellsford related to the sale and estimated state and Federal taxes. This amount is reflected in the adjustment to net realizable value of $72,485,000 on the Consolidated Statement of Changes in Net Assets in Liquidation. Wellsford repaid an aggregate of approximately $94,035,000 of mortgage debt and paid approximately $4,600,000 of debt prepayment costs from the sale proceeds, among other selling costs.
In December 1995, the Trust marketed and sold $14,755,000 of tax-exempt bonds, which we refer to as the Palomino Park Bonds, to fund construction at Palomino Park. Initially, all five phases of Palomino Park were collateral for the Palomino Park Bonds. The Palomino Park Bonds had an outstanding balance of $12,680,000 at December 31, 2004 and were collateralized by four phases at Palomino Park. In January 2005, the Palomino Park Bonds were paid down by $2,275,000 in order to release the Gold Peak phase from the bond collateral. A five-year letter of credit from Commerzbank AG had secured the Palomino Park Bonds and a subsidiary of EQR had guaranteed Commerzbank AGs letter of credit. Wellsford retired the $10,405,000 balance of this obligation prior to the expiration of the letter of credit and EQRs guarantee in May 2005.
In December 1997, Phase I, the 456 unit phase known as Blue Ridge, was completed at a cost of approximately $41,600,000. At that time, Wellsford obtained a $34,500,000 permanent loan secured by a first mortgage on Blue Ridge, which we refer to as the Blue Ridge Mortgage. The Blue Ridge Mortgage had a
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maturity date in December 2007 and bore interest at a fixed rate of 6.92% per annum. Principal payments were 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, Wellsford acquired the Red Canyon improvements and the related construction loan was repaid with the proceeds of a $27,000,000 permanent loan secured by a first mortgage on Red Canyon, which we refer to as the Red Canyon Mortgage. The Red Canyon Mortgage had a maturity date in December 2008 and bore interest at a fixed rate of 6.68% per annum. Principal payments were based on a 30-year amortization schedule.
In October 2000, Phase III, the 264-unit phase known as Silver Mesa, was completed at a cost of approximately $44,200,000. Wellsford made the strategic decision to convert Silver Mesa into condominium units and sell them to individual buyers. In conjunction with this decision, Wellsford prepared certain units to be sold and continued to rent certain of the remaining unsold units during the sell out period until the inventory available for sale had been significantly reduced and additional units were required to be prepared for sale. Wellsford 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 and obtained a $32,000,000 loan, which we refer to as the Silver Mesa Conversion Loan, which was collateralized by the unsold Silver Mesa units and matured in December 2003. During May 2003, Wellsford repaid the remaining unpaid principal balance of the Silver Mesa Conversion Loan with proceeds from Silver Mesa unit sales and available cash.
Sales of condominium units at the Silver Mesa phase of Palomino Park commenced in February 2001 and by August 2005 all of the 264 units were sold. The following table provides information regarding sales of Silver Mesa units:
For the Three Months Ended |
For the Nine Months Ended |
For the Years Ended December 31, |
|||||||||||
September 30, 2005 | 2005 | 2004 | |||||||||||
Number of units sold |
1 | 2 | 2 | 53 | |||||||||
Gross proceeds |
$ | 210,000 | $ | 488,000 | $ | 488,000 | $ | 12,288,000 | |||||
Principal paydown on Silver Mesa Conversion Loan |
$ | | $ | | $ | | $ | | |||||
For the Years Ended December 31, |
Project | ||||||||||||
2003 | 2002 | 2001 | Totals | ||||||||||
Number of units sold |
56 | 48 | 105 | 264 | |||||||||
Gross proceeds |
$ | 12,535,000 | $ | 10,635,000 | $ | 21,932,000 | $ | 57,878,000 | |||||
Principal paydown on Silver Mesa Conversion Loan |
$ | 4,318,000 | $ | 9,034,000 | $ | 18,648,000 | $ | 32,000,000 |
As Wellsford sold Silver Mesa units, rental revenue, the corresponding operating expenses and cash flow from the units being rented diminished. Rental revenue from the Silver Mesa phase was approximately $51,000 and $702,000 for the years ended December 31, 2004 and 2003, respectively.
In December 2001, Phase IV, the 424 unit phase known as Green River, was completed at a cost of approximately $56,300,000. In February 2003, Wellsford obtained a $40,000,000 permanent loan secured by a first mortgage on Green River, which we refer to as the Green River Mortgage. The Green River Mortgage had a maturity date in March 2013 and bore interest at a fixed rate of 5.45% per annum. Principal payments were based on a 30 year amortization schedule. The proceeds of the Green River Mortgage were used to repay the construction loan for the Green River phase.
In 2004, Wellsford commenced the development of Gold Peak, the final phase of Palomino Park. Gold Peak will be comprised of 259 condominium units to be built in three sections on the remaining 29 acre land parcel at Palomino Park.
In April 2005, Wellsford obtained development and construction financing for Gold Peak in the aggregate amount of approximately $28,800,000, which bear interest at LIBOR + 1.65% per annum and mature in May 2007 with respect to the development loan and in November 2009 with respect to the construction loan, which we refer to as the Gold Peak Construction Loan, both of which have additional
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extension options upon satisfaction of certain conditions being met by the borrower. Principal repayments are made as units are sold. The balance of the Gold Peak Construction Loan was approximately $11,875,000 and $11,575,000 at September 30, 2006 and December 31, 2005, respectively. Wellsford has purchased a 5% LIBOR cap expiring in June 2008 for the Gold Peak Construction Loan.
Gold Peak unit sales commenced in January 2006. At September 30, 2006, there were 55 Gold Peak units under contract with nominal down payments. The following table provides information regarding Gold Peak sales:
For the Three Months Ended September 30, 2006 |
For the Nine Months Ended September 30, 2006 |
||||||
Number of units sold |
34 | 75 | |||||
Gross sales proceeds |
$ | 9,266,000 | $ | 21,021,000 | |||
Principal paydown on Gold Peak Construction Loan |
$ | 6,890,000 | $ | 16,753,000 |
Other Developments |
East Lyme |
Wellsford has a 95% ownership interest as managing member of a venture which originally owned 101 single family home lots situated on 139 acres of land in East Lyme, Connecticut upon which it is constructing houses for sale. Wellsford purchased the land for $6,200,000 in June 2004.
After purchasing the land, Wellsford executed an agreement with a homebuilder, or the Homebuilder, who will construct and sell the homes for this project and is a 5% partner in the project along with receiving other consideration. Wellsford extended a loan to the Homebuilder of $157,500 at a rate of 6% per annum which was used by the Homebuilder to finance one-half of his 5% investment in East Lyme. The loan matures upon the termination of the development agreement.
Wellsford obtained construction financing for East Lyme in the aggregate amount of $21,177,000, which we refer to as the East Lyme Construction Loan, to be drawn upon as costs are expended and which bears interest at LIBOR + 2.15% per annum and matures in December 2007 with two one-year extensions at Wellsfords option upon satisfaction of certain conditions being met by the borrower. The balance of the East Lyme Construction Loan was approximately $11,019,000, $7,226,000 and $361,000 at September 30, 2006, December 31, 2005 and 2004, respectively. Wellsford has purchased a 4% LIBOR cap expiring in July 2007 for this loan.
During the fourth quarter of 2005, the model home was completed. The initial sale closed in June 2006. At September 30, 2006, six East Lyme homes were under contract. The following table provides information regarding East Lyme sales:
For the Nine Months Ended September 30, 2006 |
||||
Number of homes sold |
1 | |||
Gross sales proceeds |
$ | 649,000 | ||
Principal paydown on East Lyme Construction Loan |
$ | 584,000 |
Wellsford executed an option to purchase the East Lyme Land, a contiguous 85 acre parcel of land which can be used to develop 60 single family homes and subsequently acquired the East Lyme Land in November 2005 for $3,720,000, including future costs which were the obligation of the seller. The East Lyme Land requires remediation of pesticides used on the property when it was an apple orchard, the cost of which has been considered in evaluating the carrying amount of the property at September 30, 2006 and December 31, 2005.
Claverack |
Wellsford has a 75% ownership interest in a joint venture that owns two land parcels aggregating approximately 300 acres in Claverack, New York. Wellsford acquired its interest in the joint venture for $2,250,000 in November 2004. One land parcel is subdivided into seven single family home lots on
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approximately 65 acres upon which Claverack intends to build and sell homes. The remaining 235 acres, known as The Stewardship, are currently subdivided into six single family home lots with the intent to obtain an increase in the number of developable residential lots, improve the land, obtain construction financing and construct and sell 48 single family homes.
Claverack is capitalized with $3,000,000 of capital, Wellsfords share of which was contributed in cash and the 25% partners contribution was the land, subject to liabilities, at a net value of $750,000. The land was subject to a $484,000 mortgage which was assumed by the joint venture (the balance of this mortgage was $465,000 at December 31, 2004, bore interest at a rate of 7% per annum and had a maturity of February 2010). At the closing, an aggregate of approximately $866,000 owed to affiliates of the 25% partner was paid from the amount contributed by Wellsford.
In December 2005, Claverack obtained a line of credit construction loan in the aggregate amount of $2,000,000, which we refer to as the Claverack Construction Loan, which was used to retire an existing mortgage and was drawn upon as needed to construct a custom design model home until permanent construction financing is obtained. The Claverack Construction Loan bears interest at LIBOR + 2.20% per annum and matures in December 2006 with a six-month extension at Wellsfords option upon satisfaction of certain conditions being met by the borrower. The balance of the Claverack Construction Loan was approximately $690,000 and $449,000 at September 30, 2006 and December 31, 2005, respectively.
In January 2006, the Claverack venture partners contributed additional capital aggregating approximately $701,000, of which Wellsfords share was approximately $526,000.
Effective April 2006, Wellsford executed a letter agreement with its venture partner to enable Wellsford to make advances instead of requesting funds from the Claverack Construction Loan at the same terms and rate as the Claverack Construction Loan. Wellsford advanced approximately $690,000 during the nine months ended September 30, 2006 to Claverack.
During July 2006, the initial home was completed and in October 2006, the home and a contiguous lot were sold for approximately $1,200,000. At September 30, 2006, there were no additional houses under construction on either parcel. The completion of additional homes and closings of additional sales is expected to occur in 2007.
Beekman |
In February 2005, Wellsford acquired a 10 acre parcel in Beekman, New York for a purchase price of $650,000. Wellsford also entered into a contract to acquire a contiguous 14 acre parcel, the acquisition of which was conditioned upon site plan approval to build a minimum of 60 residential condominium units, collectively referred to as Beekman. Wellsfords $300,000 deposit in connection with this contract was secured by a first mortgage lien on the property.
As a result of various uncertainties, including that governmental approvals and development processes may take an indeterminate period and extend beyond December 31, 2008, Wellsfords board of directors authorized the sale of the Beekman to Jeffrey Lynford and Edward Lowenthal, or a company in which they have ownership interests, at the greater of Wellsfords costs or the appraised values. In January 2006, a company which is owned by Jeffrey Lynford, Mr. Lowenthal, the principal of Wellsfords joint venture partner in the East Lyme project, and others acquired the Beekman project at Wellsfords aggregate cost of approximately $1,297,000 in cash. This was accomplished through a sale of the entities that owned the Beekman assets.
Segment Financial Information |
See Footnote 11 to Wellsfords consolidated financial statements, which is included in a separate section of this joint proxy statement/prospectus, for additional information regarding Wellsfords segments.
Properties |
The following property information is presented by SBU.
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Debt and Equity Activities |
Clairborne Fordham |
On September 15, 2004, Clairborne Fordham obtained title to the remaining unsold components of Fordham Tower and at December 31, 2004, these components consisted of 15 residential units and the 188 space parking garage. Only two residential units remain unsold at September 30, 2006 and December 31, 2005. Clairborne Fordham intends to continue the orderly sale of the remaining two residential units in 2006, one of which was under contract at September 30, 2006.
Residential Activities |
Wellsford owns or has ownership interests in the following residential development projects at September 30, 2006 and December 31, 2005:
Units Currently |
Expected Initial Delivery of |
Encumbrance at |
|||||||||||||||||
Property/Location |
Year Acquired |
Zoned For |
Completed Units |
Type | September 30, 2006 |
December 31, 2005 |
|||||||||||||
Gold Peak/Denver, CO (A) |
1999 | 259 | 2006 | Condominiums | $ | 11,875,000 | $ | 11,575,000 | |||||||||||
The Orchards/East Lyme, CT (B) |
2004 | 101 | 2006 | Single family home | $ | 11,019,000 | $ | 7,226,000 | |||||||||||
East Lyme Land/East Lyme, CT |
2005 | 60 (C | ) | | Single family home lots | N/A | N/A | ||||||||||||
The Stewardship/Claverack, NY |
2004 | 6 (D | ) | 2008 | Single family home | N/A | N/A | ||||||||||||
Custom design homes/Claverack, NY |
2004 | 7 (D | ) | 2007 | Single family home | $ | 690,000 | $ | 449,000 | ||||||||||
Poughquag Condominiums/ Beekman, NY |
2005 | (E | ) | (E | ) | Condominium | N/A | N/A | |||||||||||
(A) | At September 30, 2006, 75 units were sold and 55 units were under contract with nominal down payments. At December 31, 2005, there were 84 units under contract with nominal down payments. Initial unit deliveries commenced in January 2006. |
(B) | At September 30, 2006, one home was sold and six homes were under contract. |
(C) | The East Lyme Land is contiguous to the previously purchased East Lyme property. |
(D) | The Claverack project is two land parcels aggregating 300 acres. One land parcel is subdivided into seven single family home lots on approximately 65 acres upon which Claverack intends to build and sell custom designed homes. The remaining 235 acres, known as The Stewardship, are currently subdivided into six single family home lots with the intent to
obtain an increase in the number of developable residential lots to 49 lots, improve the land, obtain construction financing and construct and sell single family homes. In October 2006, a house and a contiguous lot were sold. At September 30, 2006, there were no additional houses under construction on either period. |
(E) | As a result of various uncertainties including that the governmental approval and development processes may take an indeterminate period and extend beyond December 31, 2008, the Beekman interests were sold in January 2006. |
Legal Proceedings |
Wellsford is not presently a party in any material litigation. |
Selected Financial Data |
See SummarySelected Historical Consolidated Financial Data of Wellsford beginning on page 18.
Wellsford Managements
Discussion and Analysis of Financial Condition and Results of Operations |
Overview |
The following discussion should be read in conjunction with the Selected Historical Consolidated Financial Data of Wellsford and Wellsfords Consolidated Financial Statements and Notes thereto appearing elsewhere in this joint proxy statement/prospectus.
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Business and Plan of Liquidation |
Recent Events |
As discussed above, on October 11, 2006 Wellsford announced that it entered into a definitive merger agreement with Reis and Merger Sub and the merger was approved by the independent members of Wellsfords board of directors. At the effective time of the merger, Reis stockholders will be entitled to receive, in the aggregate, approximately $34,579,414 in cash and 4,237,673 shares of newly issued Wellsford common stock, not including shares to be issued to Wellsford Capital. The per share value of Wellsford common stock, for purposes of the merger, has been established at $8.16 per share, resulting in an implied equity value for Reis of approximately $90,000,000, including Wellsfords 23% ownership interest in Reis.
Plan of Liquidation |
On May 19, 2005, the board of directors approved the Plan and on November 17, 2005, Wellsfords stockholders ratified the Plan. The Plan contemplates the orderly sale of each of Wellsfords remaining assets, which are either owned directly or through Wellsfords joint ventures, the collection of all outstanding loans from third parties, the orderly disposition or completion of construction of development properties, the discharge of all outstanding liabilities to third parties and, after the establishment of appropriate reserves, the distribution of all remaining cash to stockholders. The Plan also permitted Wellsfords board of directors to acquire more Reis shares and/or discontinue the Plan without further stockholder approval. The initial liquidating distribution of $14.00 per share was made on December 14, 2005 to stockholders of record at December 2, 2005. If the merger is consummated and the Plan is terminated, it would be necessary to recharacterize a portion of the December 14, 2005 cash distribution of $14.00 per share from what may have been characterized as a return of capital for Company stockholders at that time to taxable dividend income. Wellsford estimates that $1.15 of the $14.00 per share cash distribution will be recharacterized as taxable dividend income.
Wellsford contemplated that approximately 36 months after the approval of the Plan, any remaining assets and liabilities would be transferred into a liquidating trust. The liquidating trust would continue in existence until all liabilities have been settled, all remaining assets have been sold and proceeds distributed and the appropriate statutory periods have lapsed. The creation and operation of a liquidating trust would only occur if the merger does not close and the Plan is not terminated.
For all periods preceding stockholder approval of the Plan on November 17, 2005, Wellsfords financial statements are presented on the going concern basis of accounting. As required by GAAP, Wellsford adopted the liquidation basis of accounting as of the close of business on November 17, 2005. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts, which estimates will be periodically reviewed and adjusted as appropriate.
Wellsfords net assets in liquidation at September 30, 2006, June 30, 2006, March 31, 2006 and December 31, 2005 were:
September 30, 2006 |
June 30, 2006 |
March 31, 2006 |
December 31, 2005 |
||||||||||
Net assets in liquidation |
$ | 56,211,000 | $ | 55,844,000 | $ | 53,384,000 | $ | 56,569,000 | |||||
Per share |
$ | 8.69 | $ | 8.63 | $ | 8.25 | $ | 8.74 | |||||
Common stock outstanding at each respective date |
6,471,179 | 6,471,179 | 6,471,179 | 6,471,179 |
The reported amounts for net assets in liquidation present development projects at estimated net realizable values at each respective date after giving effect to the present value discounting of estimated net proceeds therefrom. All other assets are presented at estimated net realizable value on an undiscounted basis. The amount also includes reserves for future estimated general and administrative expenses and other costs and for cash payments on outstanding stock options during the liquidation. There can be no assurance that these estimated values will be realized or that future expenses and other costs will not be greater than recorded estimated amounts. Such amounts should not be taken as an indication of the timing or amount of future distributions to be made by Wellsford if the merger is not consummated and if the Plan were to continue (see the Liquidation Basis of Accounting disclosure below).
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If the Plan is not terminated, the timing and amount of interim liquidating distributions (if any) and the final liquidating distribution will depend on the timing and amount of proceeds Wellsford will receive upon the sale of the remaining assets and the extent to which reserves for current or future liabilities are required. Accordingly, there can be no assurance that there will be any interim liquidating distributions prior to a final liquidating distribution if the Plan were not terminated.
The termination of the Plan would result in the retention by the combined company of Wellsfords cash balances and subsequent cash flow from the sales of residential development assets for working capital and re-investment purposes. Such cash would not be distributed to stockholders in the form of a liquidating distribution as had been contemplated under the Plan.
The following paragraphs summarize certain of the material actions and events which have occurred regarding the Plan and certain decisions of Wellsfords board of directors.
In March 2004, Wellsford reported that the board of directors authorized and retained Lazard, to advise Wellsford on various strategic financial and business alternatives available to it to maximize stockholder value. Such alternatives included a recapitalization, acquisitions, disposition of assets, liquidation, the sale or merger of Wellsford and other alternatives that would keep Wellsford independent.
In March 2005, the board of directors authorized the marketing of the three residential rental phases of Palomino Park. In the second quarter of 2005, Wellsford engaged a broker to market these phases. In August 2005, Wellsford entered into an agreement to sell these phases for $176,000,000, subject to, among other things, stockholder approval of the Plan. The sale closed on November 22, 2005.
The following transactions, which are consistent with the intent of the Plan, occurred prior to the November 17, 2005 approval of the Plan by the Wellsford stockholders: (i) in September 2005, Wellsfords interest in its Wellsford/Whitehall joint venture was redeemed for approximately $8,300,000, (ii) by May 2005, Wellsford retired $12,680,000 of tax exempt bond financing, (iii) in April 2005, Wellsford redeemed its outstanding $25,775,000 of Debentures and (iv) in November 2004, Wellsford received $15,000,000 for its interest in Second Holding.
Selected Significant Accounting Policies |
Management has selected the following accounting policies which it believes are significant in understanding Wellsfords activities, financial position and operating results.
Basis of Presentation |
Liquidation Basis of Accounting |
With the approval of the Plan by the stockholders, Wellsford adopted the liquidation basis of accounting effective as of the close of business on November 17, 2005. The liquidation basis of accounting will continue to be used by Wellsford until such time that the Plan is terminated, if at all. If the stockholders of Wellsford approve the issuance of additional shares of Wellsfords common stock and the merger is consummated, then Wellsford would change from the liquidation basis of accounting to the going concern basis of accounting upon the effective termination of the Plan.
Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts, which estimates will be periodically reviewed and adjusted as appropriate. A Statement of Net Assets in Liquidation and a Statement of Changes in Net Assets in Liquidation are the principal financial statements presented under the liquidation basis of accounting. The valuation of assets at their net realizable value and liabilities at their anticipated settlement amounts represent estimates, based on present facts and circumstances, of the net realizable values of assets and the costs associated with carrying out the Plan and dissolution based on the assumptions set forth below. The actual values and costs associated with carrying out the Plan are expected to differ from the amounts shown herein because of the inherent uncertainty and will be greater than or less than the amounts recorded. Such differences may be material. In particular, the estimates of Wellsfords costs will vary with the length of time it operates. In addition, the estimate of net assets in liquidation per share, which except for projects under
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development, does not incorporate a present value discount. Accordingly, it is not possible to predict the aggregate amount or timing of future distributions to stockholders, as long as the Plan is in effect, and no assurance can be given that the amount of liquidating distributions to be received will equal or exceed the estimate of net assets in liquidation presented in the accompanying Statement of Net Assets in Liquidation, or the price or prices at which Wellsfords common stock has traded or is expected to trade in the future. If the Plan is terminated, no additional liquidating distributions will be made.
If the merger with Reis is consummated, Wellsfords assets and liabilities will be presented on a going concern basis of accounting with assets being reported at the lower of historical cost, as adjusted for activity, or market.
Valuation Assumptions |
Under the liquidation basis of accounting, the carrying amounts of assets as of the closing of business on November 17, 2005, the date of the approval of the Plan by Wellsfords stockholders, were adjusted to their estimated net realizable values and liabilities, including the estimated costs associated with implementing the Plan, were adjusted to estimated settlement amounts. Such value estimates were updated by Wellsford as of September 30, 2006. The following are the significant assumptions utilized by management in assessing the value of assets and the expected settlement values of liabilities included in the Statements of Net Assets in Liquidation at September 30, 2006 and December 31, 2005.
Net Assets in Liquidation |
Real estate assets under development are primarily reflected at net realizable value which is based upon Wellsfords budgets for constructing and selling the respective project in the orderly course of business. Sales prices are based upon contracts signed to date and budgeted sales prices for the unsold units or homes. Sales prices are determined in consultation with the respective third party companies who are the sales agent for the project, where applicable. Costs and expenses are based upon Wellsfords budgets, which have been reviewed with the respective third party construction company or joint venture partner. In certain cases, construction costs are subject to binding contracts. Wellsford has assumed that existing construction financing will remain in place during the respective projects planned construction and sell out. Anticipated future cost increases for construction are assumed to be funded by the existing construction lenders and Wellsford at the present structured debt to equity capitalization ratios, in which event Wellsford will make additional equity contributions. For one project, Wellsford has assumed that a construction loan will be obtained at currently existing LIBOR spreads and customary industry debt to equity capitalization levels. The expected net sales proceeds are discounted on a quarterly basis at 17.5% to 26% annual rates to determine the estimated net realizable value of Wellsfords equity investment. The effect of changes in values of real estate assets under development was a net increase of approximately $394,000 and $1,747,000 during the three and nine months ended September 30, 2006, respectively. The net increase results primarily from changes in the net realizable value estimates including the shortening of the discount periods due to the passage of time and sales of condominium units and homes.
Wellsford reports operating income on the Consolidated Statements of Changes in Net Assets in Liquidation which is comprised primarily of interest and other income earned on invested cash during the reporting periods.
The estimated net realizable value of the East Lyme Land parcel acquired in November 2005 is stated at Wellsfords cost which Wellsford believes approximates fair value.
The estimated net realizable value of Wellsfords interests in Reis is derived from an approximate $90,000,000 equity value of Reis, based upon the merger terms for valuation purposes at September 30, 2006 and offers Reis received from potential purchasers during prior reporting periods.
Assets of Wellsfords deferred compensation plan were included in restricted cash and investments and were primarily stated at their respective market values, which equaled the related deferred compensation liability. The assets and liabilities were transferred as part of the Beekman transaction in January 2006.
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For the period November 18, 2005 to December 31, 2005, the Beekman assets were presented at Wellsfords aggregate cost which equals its net realizable value. On January 27, 2006, a company which is owned by Jeffrey Lynford, Edward Lowenthal, the principal of Wellsfords joint venture partner in the East Lyme project, and others acquired the Beekman project for an amount equal to costs and expenses incurred by Wellsford.
Cash, deposits and escrow accounts are presented at face value. Wellsfords remaining assets are stated at estimated net realizable value which is the expected selling price or contractual payment to be received, less applicable direct costs or expenses, if any. The assets that have been valued on this basis include receivables, joint venture investments and other investments.
Mortgage notes and construction loans payable, construction payables and accrued expenses and other liabilities are stated at settlement amounts.
Reserve for Estimated Costs During the Liquidation Period |
Under the liquidation basis of accounting, Wellsford is required to estimate and accrue the costs associated with implementing and completing the Plan. These amounts can vary significantly due to, among other things, the timing and realized proceeds from sales of the projects under development and sale of other assets, the costs of retaining personnel and others to oversee the liquidation, including the cost of insurance, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with cessation of Wellsfords operations including an estimate of costs subsequent to that date (which would include reserve contingencies for the appropriate statutory periods). As a result, Wellsford has accrued the projected costs, including corporate overhead and specific liquidation costs of severance and retention bonuses, professional fees, and other miscellaneous wind-down costs, expected to be incurred during the projected period required to complete the liquidation of Wellsfords remaining assets. Also, Wellsford has not recorded any liability for any cash operating shortfall that may result at the projects under construction during the anticipated holding period because management currently expects that projected operating shortfalls could be funded from the overall operating profits derived from the sale of homes and condominium units and interest earned on invested cash. These projections could change materially based on the timing of any such anticipated sales, the performance of the underlying assets and changes in the underlying assumptions of the cash flow amounts projected. These accruals will be adjusted from time to time as projections and assumptions change.
The following is a summary of the changes in the Reserve for Estimated Costs During the Liquidation Period:
For the Three Months Ended September 30, 2006 |
||||||||||
Balance at June 30, 2006 |
Adjustments and Payments |
Balance at September 30, 2006 |
||||||||
Payroll, benefits, severance and retention costs |
$ | 10,432,000 | $ | (349,000 | ) | $ | 10,083,000 | |||
Professional fees |
4,405,000 | (75,000 | ) | 4,330,000 | ||||||
Other general and administrative costs |
6,790,000 | (366,000 | ) | 6,424,000 | ||||||
Total |
$ | 21,627,000 | $ | (790,000 | ) | $ | 20,837,000 | |||
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For the Nine Months Ended September 30, 2006 |
||||||||||
Balance at December 31, 2005 |
Adjustments and Payments |
Balance at September 30, 2006 |
||||||||
Payroll, benefits, severance and retention costs |
$ | 11,963,000 | $ | (1,880,000 | ) | $ | 10,083,000 | |||
Professional fees |
4,715,000 | (385,000 | ) | 4,330,000 | ||||||
Other general and administrative costs |
7,379,000 | (955,000 | ) | 6,424,000 | ||||||
Total |
$ | 24,057,000 | $ | (3,220,000 | ) | $ | 20,837,000 | |||
For the Period November 18, 2005 to December 31, 2005 |
||||||||||
Balance at November 18, 2005 |
Transfers and Payments |
Balance at December 31, 2005 |
||||||||
Payroll, benefits, severance and retention costs |
$ | 12,368,000 | $ | (405,000 | ) | $ | 11,963,000 | |||
Professional fees |
4,837,000 | (122,000 | ) | 4,715,000 | ||||||
Other general and administrative costs |
7,562,000 | (183,000 | ) | 7,379,000 | ||||||
Total |
$ | 24,767,000 | $ | (710,000 | ) | $ | 24,057,000 | |||
Reserve for Option Cancellations |
At March 31, 2006, Wellsford accrued a liability for cash payments that could be made to option holders for the amount of the market value of Wellsfords common stock in excess of the adjusted exercise prices of outstanding options as of March 31, 2006. This liability has been adjusted to reflect the net cash payments to option holders made during the period from March 31, 2006 through September 30, 2006 and the change in the market price of Wellsfords common stock during such period. The remaining reserve for option cancellations reported at September 30, 2006 on the Consolidated Statement of Net Assets in Liquidation of approximately $2,711,000 is net of all payments made during the nine months ended September 30, 2006 related to option cancellations.
Going Concern Basis of Accounting |
For all periods preceding the approval of the Plan on November 17, 2005, Wellsfords financial statements are presented on the going concern basis of accounting. Such financial statements reflect the historical basis of the assets and liabilities as of December 31, 2004 and the historical results of operations related to Wellsfords assets and liabilities for the three and nine months ended September 30, 2005, the period from January 1, 2005 to November 17, 2005 and the years ended December 31, 2004 and 2003, as well as all preceding years.
Principles of Consolidation |
The accompanying consolidated financial statements include the accounts of Wellsford and its majority-owned and controlled subsidiaries and include the assets and liabilities contributed to and assumed by Wellsford from the Residential Properties Trust, from the time such assets and liabilities were acquired or incurred, respectively, by the Residential Properties Trust. Investments in entities where Wellsford does not have a controlling interest were accounted for under the equity method of accounting. These investments were initially recorded at cost and are subsequently adjusted for Wellsfords proportionate share of the investments income (loss) and additional contributions or distributions through the adoption of the liquidation basis of accounting. Investments in entities where Wellsford does not have the ability to exercise significant influence are accounted for under the cost method. All significant inter-company accounts and transactions among Wellsford and its subsidiaries have been eliminated in consolidation.
Variable Interests |
During 2003, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 46R Consolidation of Variable Interest Entities, or FIN46R. Wellsford evaluates its investments and subsidiaries to determine if an entity is a voting interest entity or a variable interest entity, or VIE, under the provisions of FIN46R. An entity is a VIE when (1) the equity investment at risk is not sufficient to permit the entity
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from financing its activities without additional subordinated financial support from other parties or (2) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity or investment is deemed to be a VIE, an enterprise that absorbs a majority of the expected losses of the VIE or receives a majority of the residual returns is considered the primary beneficiary and must consolidate the VIE. The following table and footnotes identify Wellsfords VIEs:
VIE at September 30, |
VIE at December 31, |
Requires | |||||||||||
Entity (a) |
2006 | 2005 | 2004 | Consolidation | |||||||||
WRP Convertible Trust I |
N/A | N/A | Yes | No (b) | |||||||||
Non-qualified deferred compensation trust |
N/A | Yes | Yes | Yes (c) | |||||||||
Reis |
Yes | Yes | Yes | No (d) | |||||||||
Second Holding |
N/A | N/A | (e | ) | No (f) | ||||||||
Wellsford Mantua, LLC |
Yes | Yes | Yes | Yes (g) | |||||||||
Claverack Housing Ventures, LLC |
Yes | Yes | Yes | Yes (h) | |||||||||
Beekman |
N/A | Yes | Yes | No (i) | |||||||||
(a) | For additional information regarding these entities, see Footnote 11 of Wellsfords Consolidated Financial Statements appearing elsewhere in this joint proxy statement/prospectus. |
(b) | The entity that issued the convertible trust preferred securities was a VIE, however, it was not appropriate to consolidate this entity under the provisions of FIN46R as equity interests are variable interests only to the extent that the investment is considered to be at risk. Since Wellsfords investment was funded by WRP Convertible Trust I, it was not considered to be at risk. Accordingly,
Wellsford de-consolidated the entity during the first quarter of 2004. The entity ceased operations when the convertible trust preferred securities were redeemed in April 2005. |
(c) | The non-qualified deferred compensation trust, which we refer to as the Rabbi Trust or Deferred Compensation Plan, was a VIE as it does not have its own equity. Wellsford was the primary beneficiary of the Rabbi Trust as the assets would be subject to attachment in a bankruptcy. Wellsford consolidated the assets and liabilities of the Rabbi Trust at December 31, 2005 and 2004, as
well as for periods prior to the issuance of FIN46R as appropriate under other existing accounting literature. During the first quarter of 2006, the assets and liabilities of the Rabbi Trust were transferred upon the sale of Beekman (see footnote (i) below). |
(d) | Reis is a VIE because as of the last capital event for that entity in 2002 (the triggering event for VIE evaluation purposes), it was determined that Reis did not have sufficient capital to support its business activities at that time. Consolidation of Reis is not required by Wellsford as it would not be the primary beneficiary. |
(e) | Wellsford sold its investment in Second Holding in November 2004. |
(f) | Second Holding was a VIE at December 31, 2003, however, Wellsford was not the primary beneficiary because it would not expect that it would absorb a majority of Second Holdings probability-weighted expected losses, nor would it ever receive a majority of the residual returns. Therefore, consolidation was not required under FIN46R nor was consolidation appropriate under then
existing accounting literature. Wellsford used the equity method of accounting to account for this investment. |
(g) | Wellsford Mantua is a VIE as the venture does not have sufficient equity to support its operations as Wellsford provides 100% of the financing to this entity and the owners have deminimus equity in the entity. Wellsford is the primary beneficiary and consolidates this entity. |
(h) | Claverack, an entity in which Wellsford owns a 75% interest in equity and profits (except if returns exceed 35% per annum as defined) is considered a VIE, since the original capital is insufficient to support its contemplated activities. Claverack is consolidated, even though the two members share business decisions equally, since Wellsford would be the primary beneficiary of profits or
absorber of losses. At September 30, 2006 and December 31, 2005, Claverack had $181,000 and $62,000, respectively, of restricted cash and was subject to $690,000 and $449,000, respectively, of construction debt which was jointly guaranteed by Wellsford and the principal of its joint venture partner. |
(i) | Beekman was a VIE, however, since Wellsfords investment was a mortgage interest, Wellsford has no GAAP equity in the entity and would not be the primary bearer of losses, consolidation was not appropriate. Wellsford sold Beekman in January 2006. |
Real Estate, Other Investments, Depreciation, Amortization and Impairment |
Costs directly related to the acquisition, development and improvement of real estate are capitalized, including interest and other costs incurred during the construction period. Costs incurred for significant repairs and maintenance that extend the usable life of the asset or have a determinable useful life are capitalized. Ordinary repairs and maintenance are expensed as incurred. Wellsford expensed all lease turnover costs for its residential units such as painting, cleaning, carpet replacement and other turnover costs as such costs were incurred.
Depreciation was computed over the expected useful lives of depreciable property on a straight-line basis, principally 27.5 years for residential buildings and improvements and two to twelve years for
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furnishings and equipment. Depreciation and amortization expense was approximately $1,106,000, $3,316,000, $3,887,000, $4,637,000 and $8,537,000 during the three and nine months ended September 30, 2005, the period January 1, 2005 to November 17, 2005 and for the years ended December 31, 2004 and 2003, respectively, and included approximately $238,000 and $4,021,000 of amortization during the years ended December 31, 2004 and 2003, respectively, of certain costs capitalized to Wellsfords investments in joint ventures. No amortization was recorded in 2005 as such capitalized costs related to the investments in joint ventures were fully amortized in 2004.
Wellsford has historically reviewed its real estate assets, investments in joint ventures and other investments for impairment (1) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable for assets held for use and (2) when a determination is made to sell an asset or investment. Under the liquidation basis of accounting, Wellsford will evaluate the fair value of real estate assets owned and under construction and make adjustments to the carrying amounts when appropriate.
Revenue Recognition |
Commercial properties were leased under operating leases. Rental revenue from office properties was recognized on a straight-line basis over the terms of the respective leases. Residential units were leased under operating leases with typical terms of six to fourteen months and such rental revenue was recognized monthly as tenants were billed. Interest revenue is recorded on an accrual basis. Fee revenues were recorded in the period earned, based upon formulas as defined by agreement for management services or upon asset sales and purchases by certain joint venture investments. Sales of real estate assets, including condominium units and single family homes, and investments are recognized at closing subject to receipt of down payments and other requirements in accordance with applicable accounting guidelines.
Income Taxes |
Wellsford accounts for income taxes under SFAS No. 109 Accounting for Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between financial reporting, including the liquidation basis of accounting and tax basis of assets and liabilities, and are measured using the enacted tax rates and laws that are estimated to be in effect when the differences are expected to reverse. Valuation allowances with respect to deferred income tax assets are recorded when deemed appropriate and adjusted based upon periodic evaluations.
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.
Changes in Net Assets and Results of Operations |
Changes in net assets in liquidation for the three and nine months ended September 30, 2006 |
During the three months ended September 30, 2006, net assets in liquidation increased approximately $367,000. This increase is attributable to (1) operating income of approximately $442,000 which primarily represents interest income earned from cash and cash equivalents and (2) the increase in real estate assets under development of $394,000, which results primarily from changes in the net realizable value estimates for Gold Peak due to the shortening of the discount period as a result of the passage of time, offset by (3) the recording of a $469,000 increase to the reserve for option cancellations to reflect the increase in the market price of Wellsford common stock between June 30, 2006 and September 30, 2006.
During the nine months ended September 30, 2006, net assets in liquidation decreased $359,000. This decrease is primarily attributable to the recording of a $4,227,000 provision upon the adoption by the board
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of directors of modifications in the terms of Wellsfords stock option plans during the first quarter of 2006. The provision resulted from the modification to allow for cash payments that would be made to option holders, at their election, as consideration for the cancellation of their options in the amount of the fair value of Wellsford common stock in excess of the adjusted exercise prices of outstanding options as of March 31, 2006. This liability has been decreased by $848,000 to reflect the changes in the market price of Wellsfords common stock between March 31, 2006 and September 30, 2006. The net decrease was offset by (1) a net increase in value of real estate assets under development of $1,747,000 which results primarily from changes in the net realizable value estimates, including the shortening of the discount periods as a result of the passage of time and sales of condominium units and homes and (2) operating income of approximately $1,273,000 which primarily represents interest income earned from cash and cash equivalents.
Results of operations for the three and nine months ended September 30, 2005 |
During the three and nine months ended September 30, 2005, Wellsfords net income aggregated $3,777,000 and $3,955,000, respectively.
The 2005 period included the rental operations of Palomino Park, a 1,707 unit multifamily residential development in Highlands Ranch, a southern suburb of Denver, Colorado. In November 2005, Wellsford sold the three operating rental phases of this project. During the three and nine months ended September 30, 2005, these rental operations accounted for all of the rental revenues of Wellsford and accounted for primarily all of the reported property operating and maintenance expenses, real estate taxes, depreciation expense, property management expenses and interest on mortgage notes payable of Wellsford.
Wellsford sold the remaining two condominium units at the Silver Mesa phase of Palomino Park during the nine months ended September 30, 2005 and reported sales revenue of $488,000 and cost of sales of $386,000. One of the two condominium units was sold during the third quarter of 2005 for which Wellsford reported sales revenue of $210,000 and cost of sales of $167,000.
Interest expense, other than what was expensed related to debt on Palomino Park rental operations, included interest related to the unpaid balance of bonds on the Palomino Park project and on the outstanding convertible junior subordinated debentures. Both of these debt obligations were retired in the second quarter of 2005.
The income from joint ventures of $5,602,000 and $11,515,000 during the three and nine months ended September 30, 2005, respectively, was primarily comprised of gains upon the sale of properties from Wellsfords investment in Wellsford/Whitehall. In September 2005, Wellsfords interest in this venture was redeemed and subsequent to final distributions in the fourth quarter of 2005, Wellsford has no other investment in this venture.
Changes in net assets in liquidation from November 18, 2005 to December 31, 2005 |
During the period from November 18, 2005 through December 31, 2005, Wellsford realized operating income of $221,000 which primarily represents interest income earned from cash and cash equivalents offset in part by operating costs of properties under development.
On November 22, 2005, Wellsford completed the sale of its major asset, the three residential rental phases of the Palomino Park development for $176,000,000, before closing and other costs. At this time, Wellsford retired debt of approximately $94,035,000 and paid interest and debt prepayment costs of approximately $5,012,000.
On December 14, 2005, Wellsford made the initial liquidating distribution of $14.00 per common share, aggregating approximately $90,597,000, to its stockholders.
Comparison of the results of operations from January 1, 2005 through November 17, 2005 to the year ended December 31, 2004 |
Wellsford had net income of $3,018,000, or $0.47 per share for the period January 1, 2005 to November 17, 2005, whereas Wellsford had a net (loss) of $(32,703,000) or $(5.06) per share for the year ended December 31, 2004. The results for the 2005 period were positively impacted by Wellsfords share of
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income from the sale of properties by Wellsford/Whitehall during the second quarter of 2005 and the gain of approximately $5,986,000 from the redemption of Wellsfords interest in Wellsford/ Whitehall. The loss in the 2004 period is primarily attributable to (1) a $9,000,000 impairment charge recorded by Wellsford at September 30, 2004 related to the sale of its interest in Second Holding, (2) Wellsfords net $6,606,000 share of a write-down of one of Second Holdings investments during the first quarter of 2004 and (3) Wellsfords share of losses aggregating $10,437,000 from Wellsford/Whitehall, including impairment provisions recorded at December 31, 2004 related primarily to classifying assets as held for sale and writing down the assets to expected selling prices, less closing costs ($7,419,000) and losses from operations ($3,307,000) net of net gains from 2004 asset disposition transactions ($289,000).
As described above, Wellsford sold its largest asset on November 22, 2005 and thereby ceased all rental operations, eliminating all rental income and property operating expenses, management, real estate taxes, depreciation and certain other costs for these assets. In addition, as described above, the liquidation basis of accounting requires Wellsford to establish a liability for all costs expected to be incurred in executing the Plan. Accordingly, effective November 18, 2005, all subsequent general and administrative costs incurred are charged against this liability.
Other than as described below, the Palomino Park sale and the adoption of the liquidation basis of accounting accounts for the differences between the 2005 period and the 2004 period.
The final two Silver Mesa condominium units were sold during the 2005 period. Revenue from these sales and the associated cost of sales were $488,000 and $386,000, respectively, during the 2005 period. During the 2004 period revenues from sales of residential units and the associated cost of sales from such units were $12,288,000 and $10,131,000, respectively, from 53 Silver Mesa unit sales. Closing of sales of individual homes and condominium units at Wellsfords East Lyme and Gold Peak development projects commenced in 2006.
Interest revenue increased $354,000. Although the 2005 period reflects earnings through November 17, 2005, interest revenue was greater in 2005 primarily due to higher interest rates during that period.
Fee revenue decreased $279,000. The decrease is primarily attributable to fees earned from Second Holding in 2004 of $751,000, with no 2005 equivalent as this investment was sold in November 2004. This decrease was partially offset by an increase of $472,000 in asset disposition fees payable by Whitehall derived from Wellsford/Whitehall sales as such fees were $46,000 during 2004, as compared to fees of $518,000 earned in the 2005 period. As a result of the redemption of Wellsfords interest in Wellsford/Whitehall, fee revenue will no longer be earned by Wellsford.
Depreciation expense decreased $750,000. This decrease primarily relates to the impact of a full years worth of depreciation expense on the Palomino Park assets in 2004 ($522,000) as well as the amortization related to the Clairborne Fordham venture recorded in the 2004 period ($170,000) and the write-off of unamortized Second Holding costs in November 2004 as a result of the sale of that investment, with no 2005 equivalent expense.
Interest expense for mortgages decreased $1,490,000. The decrease is primarily attributable to net capitalized interest of $974,000 in 2005 as compared to $489,000 in 2004 as the 2005 period includes interest capitalization on projects with construction financing and on Wellsfords invested capital as capitalization on these projects commenced in the later part of 2004. In addition, the outstanding principal balances with respect to the Palomino Park phases amortizing loans were retired upon the sale of these assets in November 2005 ($653,000) as well as the $12,680,000 of Palomino Park Bonds during 2005 ($352,000).
Interest expense for Debentures decreased $1,276,000 as a result of the redemption in April 2005 ($1,512,000), offset in part by a write-off of the related balance of the unamortized deferred debt costs in excess of normal amortization ($236,000).
General and administrative expenses increased $614,000 based upon prorated 2004 expenses, primarily due to increases in salaries and incentive payments based upon contractual obligations, increases in accruals for legal and accounting based upon higher costs in these categories and transaction costs in excess of 2004 amounts to accomplish the Plan. Such increases were partially offset by reductions in certain other expense
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categories including the expensing of stock options for directors in the 2004 period with no such expense during the 2005 period.
Wellsford recognized income of $11,850,000 during the 2005 period from its joint venture investments as compared to a loss of $(23,715,000) in 2004. An analysis of the change follows:
For the Period January 1 to November 17, 2005 |
For the Year Ended December 31, 2004 |
Increase | ||||||||
Wellsford/Whitehall (A) (B) |
$ | 11,148,000 | $ | (10,437,000 | ) | $ | 21,585,000 | |||
Second Holding (C) |
| (13,790,000 | ) | 13,790,000 | ||||||
Clairborne Fordham |
702,000 | 512,000 | 190,000 | |||||||
Income (loss) from joint ventures |
$ | 11,850,000 | $ | (23,715,000 | ) | $ | 35,565,000 | |||
(A) | The 2005 period reflects an aggregate gain of approximately $5,986,000 upon redemption of Wellsfords 35.21% equity interest during September 2005 (for approximately $8,300,000 of proceeds) and receipt of $141,000 of additional proceeds in December 2005. Fifteen properties were sold during the 2005 period for a net gain of which Wellsfords share was approximately $6,000,000.
Operations during the 2005 period were impacted by these sales. |
(B) | The 2004 period was primarily impacted by (1) impairment provisions recorded at December 31, 2004 related primarily to classifying assets as held for sale and writing down the assets to expected selling prices, less closing costs ($7,419,000) and (2) losses from operations ($3,307,000) net of (3) net gains from 2004 asset disposition transactions ($289,000). |
(C) | The loss for 2004 is the result of (1) a $12,930,000 net impairment charge taken by Second Holding (of which Wellsfords share was $6,606,000) related to the write-down of one of its investments during the first quarter of 2004, offset by a partial recovery when the investment was sold in the second quarter of 2004 and (2) a $9,000,000 impairment charge recorded by Wellsford at
September 30, 2004 related to the ultimate sale of its interest in the venture in November 2004. |
Income tax expense of $91,000 in the 2005 period is net of a net deferred tax credit of $109,000. The 2004 tax credit of $130,000 is after $300,000 of deferred tax credits. The current taxes relate to minimum state and local taxes based on capital.
Income from discontinued operations after taxes reflects the reclassification of the revenue and expenses from property in the Debt and Equity Activities SBU as a result of the change in classification to held for sale at June 30, 2003. The income from discontinued operations of $725,000 for the year ended December 31, 2004, is primarily attributable to the sale of the remaining property during April 2004, at which time Wellsford recognized a reversal of an impairment reserve upon the completion of that sale and recognized contingent proceeds from a 2003 property sale during the nine months ended September 30, 2004, the sum of which aggregated $809,000. This amount was partially offset by the effect of state income taxes.
Comparison of the results of operations for the year ended December 31, 2004 to the year ended December 31, 2003 |
The change in net (loss) per share, basic and diluted from a (loss) in 2003 of $(7.11) per share to a (loss) in 2004 of $(5.06) per share, is attributable to a current period (loss) of $(32,703,000), whereas in the 2003 period, the (loss) was $(45,859,000).
The loss in the 2004 period is primarily attributable to (1) a $9,000,000 impairment charge recorded by Wellsford at September 30, 2004 related to the sale of its interest in Second Holding, (2) Wellsfords net $6,606,000 share of a write-down of one of Second Holdings investments during the first quarter of 2004 and (iii) Wellsfords share of losses aggregating $10,437,000 from Wellsford/Whitehall, including impairment provisions recorded at December 31, 2004 related primarily to classifying assets as held for sale and writing down the assets to expected selling prices, less closing costs ($7,419,000) and losses from operations ($3,307,000) net of net gains from 2004 asset disposition transactions ($289,000).
The 2003 loss is primarily attributable to an impairment provision by the Wellsford/Whitehall venture and related charges during the fourth quarter of 2003. Annually, after the preparation of budgets for the following year and as part of the financial statement closing process, Wellsford/Whitehall performs evaluations for impairment on all of its real estate assets. As part of the fiscal 2003 evaluation, Wellsford/Whitehall recorded an impairment charge of approximately $114,700,000 related to 12 assets in the portfolio during the fourth quarter of 2003. The provision was not the result of a change in the intended use
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of such assets. However, it was the result of several factors including, but not limited to, a continued deterioration of and outlook for the suburban office submarkets where Wellsford/Whitehalls properties are situated. Specifically, these included decreasing market rents, slower absorption trends and greater tenant concession costs. Wellsfords share of this impairment charge was approximately $37,377,000 in 2003. Additionally, as a result of the Wellsford/Whitehall charge, Wellsford wrote-off the balance of unamortized warrant costs of $2,644,000 related to Wellsford/ Whitehall and determined at that time that it was not appropriate to carry the balance of the net deferred tax asset attributable to NOL carryforwards and recorded a valuation allowance of $6,680,000 in the fourth quarter of 2003.
Rental revenue decreased $890,000. This decrease is due to the impact of rent concessions in excess of the 2003 period at all phases of Palomino Park ($992,000) and the gradual elimination of rental operations at the Silver Mesa phase resulting from unit sales and all units being classified as sales inventory by December 31, 2003, whereas more units were being rented during the 2003 period as compared to the 2004 period ($651,000), offset by increased average physical occupancy of 93% for 2004 from 90% for 2003 at the Blue Ridge, Red Canyon and Green River phases at Palomino Park ($753,000).
Revenues from sales of residential units and the associated cost of sales from such units were $12,288,000 and $10,131,000, respectively, from 53 Silver Mesa unit sales during 2004 and were $12,535,000 and $10,708,000, respectively, from 56 sales during the corresponding 2003 period. The average pre-tax income from 2004 unit sales was approximately $8,100 greater per unit than in the corresponding 2003 period as a result of a reduced commission rate on the units sold, revised downward estimates of total project costs in 2004 and no interest costs included in cost of sales in 2004 as the outstanding debt balance was repaid in May 2003.
Interest revenue decreased $6,254,000. This decrease is due to reduced interest of $6,729,000 on loans from lower average outstanding loan balances in the 2004 period as compared to the 2003 period (including $2,275,000 related to the loss of revenue during the 2004 period and the receipt of a $4,368,000 yield maintenance penalty from the 277 Park Loan prepayment in September 2003) and $40,000 of non-recurring income earned in 2003 in excess of 2004 amounts, offset by increased interest earned on cash and U.S. Government securities of $515,000 from a higher average outstanding investable cash and securities balance during the current period versus the comparable 2003 period.
Fee revenue decreased $563,000. Asset disposition fees payable by Whitehall derived from Wellsford/Whitehall sales amounted to $46,000 during 2004, as compared to fees of $430,000 earned in the 2003 period. Wellsfords management fees for its role in the Second Holding investment decreased $179,000 for the 2004 period from the 2003 period. Fee revenue during the current period was impacted by changes in the amount of assets under management by Second Holding as a result of the 2004 decision not to purchase any new assets and allow the run-off of existing investments and by the sale of Wellsfords interest in the venture in November 2004.
Property operating and maintenance expense decreased $108,000. This decrease is primarily the result of a decline in operating expenses for the Silver Mesa phase from continuing unit sales during 2003 and 2004 of $427,000 (see sales discussion above), offset by the effect of net increases for property operating and maintenance expenses at the other phases of Palomino Park of $246,000 (including increases in replacements, advertising, payroll and utility costs, offset by decreases in certain maintenance cost categories) and period costs in 2004 for the consolidated development projects of $73,000.
The decrease in real estate taxes of $106,000 is primarily attributable to reduced taxes from fewer Silver Mesa units from continuing sales ($77,000) and reduced taxes on the Gold Peak land from a lower assessment and the commencement in September 2004 of capitalizing taxes to the project basis during development ($35,000).
Depreciation and amortization expense decreased $3,900,000. This decrease is primarily attributable to Wellsford expensing $4,021,000 of unamortized warrant costs in 2003, including the remaining unamortized balance of $2,644,000 which was written-off at December 31, 2003 in connection with the impairment charge recorded by Wellsford/Whitehall with no comparable expense in the 2004 period. The decrease is additionally impacted by no depreciation expense recorded on the Silver Mesa units as all of the units were transferred
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from operations to residential units available for sale during 2003 ($103,000), offset by additional amortization related to the Clairborne Fordham venture recorded during 2004 ($160,000) and the write-off of unamortized Second Holding basis differences of $68,000 upon the sale of Wellsfords investment in November 2004.
Aggregate interest expense increased $1,665,000. This increase is attributable to interest expense and deferred cost amortization on $25,775,000 of Debentures during the period ($2,100,000) as a result of the adoption of FIN46R and the de-consolidation of the Convertible Trust Preferred Securities, as previously described, whereas such expense was treated as a distribution in the 2003 period. The increase is also attributable to the Green River phase as the 2004 period includes interest for the entire period at a higher fixed rate on a larger average outstanding balance on the permanent financing, whereas during the 2003 period, there was a lower variable interest rate on a lower amount of construction financing until the permanent financing was in place in February 2003 ($62,000). In addition, the 2004 period had a higher average base interest rate on the Palomino Park Bonds as compared to the 2003 period ($50,000) due to rising interest rates during 2004. These increases were offset by lower average outstanding principal balances with respect to the other Palomino Park phases loans ($60,000) and capitalized interest of $490,000 in 2004 with only $3,000 capitalized in the 2003 period. Wellsford began the capitalization of interest on its new residential developments upon the determination that such developments would be commenced (East Lyme capitalization began in June 2004 upon acquisition of the land, Gold Peak capitalization began in September 2004 and Claverack capitalization began in November 2004 upon formation of the venture when our 25% partner contributed the land).
General and administrative expenses increased $2,680,000 as described below:
For the Years Ended December 31, |
||||||||||
2004 | 2003 | Increase (Decrease) |
||||||||
General and administrative expense per Statements of Operations |
$ | 8,270,768 | $ | 5,590,971 | $ | 2,679,797 | ||||
Less non-cash component of general and administrative expenses for: |
||||||||||
Amortization of stock generally issued into deferred compensation plan |
| 277,664 | (277,664 | ) | ||||||
Expensing of stock options |
71,500 | 93,600 | (22,100 | ) | ||||||
Total non-cash component of general and administrative expenses |
71,500 | 371,264 | (299,764 | ) | ||||||
Cash component of general and administrative expenses |
$ | 8,199,268 | $ | 5,219,707 | $ | 2,979,561 | ||||
The principal reasons for the increase in the cash component of general and administrative expenses are the costs to retain an investment banker ($1,000,000), increased fees for both the 2004 annual audit and the new Sarbanes-Oxley Act internal control evaluation requirements to our principal independent accountants ($660,000), a contractual payment to the Wellsfords Chairman of the Board upon the sale of Second Holding ($643,000) and other additional costs for compliance with the Sarbanes-Oxley Act, including the costs of another accounting firm to assist Wellsford in this process.
Wellsford recognized a (loss) of $(23,715,000) during the year ended December 31, 2004 from its joint venture investments as compared to a loss of $(34,429,000) in 2003. An analysis of the change follows:
For the Years Ended December 31, |
||||||||||
2004 | 2003 | (Decrease) Increase |
||||||||
Wellsford/Whitehall: |
||||||||||
(Loss) from operations (A) |
$ | (3,307,000 | ) | $ | (2,126,000 | ) | $ | (1,181,000 | ) | |
Net gain from asset disposition transactions (B) |
289,000 | 3,030,000 | (2,741,000 | ) | ||||||
Impairment provisions (C) |
(7,419,000 | ) | (37,377,000 | ) | 29,958,000 | |||||
(Loss) from Wellsford/Whitehall |
(10,437,000 | ) | (36,473,000 | ) | 26,036,000 | |||||
Second Holding (D) |
(13,790,000 | ) | 1,640,000 | (15,430,000 | ) | |||||
Clairborne Fordham |
512,000 | 405,000 | 107,000 | |||||||
Other |
| (1,000 | ) | 1,000 | ||||||
(Loss) from joint ventures |
$ | (23,715,000 | ) | $ | (34,429,000 | ) | $ | 10,714,000 | ||
(A) The periods were impacted by the sale of properties during 2004 and 2003, lower average occupancy and declines in rental rates. |
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(B) Amounts reflect the net gains from the disposition of eight properties in 2004 and eleven properties in 2003. |
(C) Impairment provisions recorded at December 31, 2004 relate primarily to classifying assets as held for sale and writing down the assets to expected selling prices, less closing costs. The 2003 impairment primarily related to significant declines in the economics of the properties as previously described herein. |
(D) The loss for 2004 is the result of (1) a $12,930,000 net impairment charge taken by Second Holding (of which Wellsfords share was $6,606,000) related to the write-down of one of its investments during the first quarter of 2004, offset by a partial recovery when the investment was sold in the second quarter of 2004 and (2) a $9,000,000 impairment charge recorded by Wellsford at
September 30, 2004 related to the ultimate sale of its interest in the venture in November 2004. |
Minority interest changed $3,000 to a benefit of $88,000 in the 2004 period from a benefit of $85,000 in the 2003 period, primarily attributable to the formation of two development entities with minority partners who share in each respective development projects current period losses ($32,000) and a minority interest benefit related to the consolidation of an entity in accordance with the provisions of FIN46R ($29,000), offset by a reduction in the minority interest benefit for Palomino Park ($58,000).
The change in income tax expense to a benefit of $130,000 in 2004 compared to an expense of $7,135,000 in 2003 results primarily from Wellsford recording an increased valuation allowance against deferred tax assets in 2003.
The change in after tax cost of the Convertible Trust Preferred Securities results from classifying this expense for the 2004 period into interest expense as a result of the adoption of FIN46R (see interest expense discussion).
Income from discontinued operations, after taxes, reflects the reclassification of the revenue and expenses from the two VLP properties in the Debt and Equity Activities SBU as a result of the change in classification to held for sale at June 30, 2003. The income from discontinued operations, net of taxes, was $725,000 and $20,000 for the years ended December 31, 2004 and 2003, respectively. The change between the two periods is primarily attributable to the sale of the remaining property during April 2004, at which time, Wellsford recognized a reversal of an impairment reserve upon the completion of that sale and recognized contingent proceeds from a 2003 property sale during 2004, the sum of which aggregated $809,000. That amount was partially offset by the loss of operating income between the periods and the effect of state income taxes.
Income Taxes |
Wellsford has recorded net deferred tax liabilities of approximately $583,000, $581,000 and $248,000 at September 30, 2006, December 31, 2005 and 2004, respectively, which are included in accrued expenses and other liabilities in the accompanying Consolidated Statements of Net Assets in Liquidation and Consolidated Balance Sheet, respectively. The primary reason for the increases in 2006 and 2005 was the adoption of the liquidation basis of accounting for assets and liabilities which caused a net $443,000 increase in net deferred tax liabilities, offset by a $109,000 reduction from the realization for tax purposes of certain timing differences in 2005.
Management has determined that valuation allowances of approximately $26,641,000, $33,984,000 and $53,628,000 at September 30, 2006, December 31, 2005 and 2004, respectively, are necessary. The valuation allowance primarily relates to reserving a substantial portion of the NOLs, the impact of deferred compensation arrangements in 2005 and 2004 and alternative minimum tax credit carryforwards. The 2005 amount also includes reserving all of the assets where the tax basis is greater than the liquidation value and a portion of the reserve for estimated liquidation costs. The 2004 amount also includes reserving the differences in the basis of Wellsfords investment in Wellsford/Whitehall. As a result of the significant tax gain on the sale of Wellsfords Palomino Park rental project together with the realization for tax purposes of almost all of the Wellsford/Whitehall tax basis differences and the utilization of a portion of available NOLs to offset the Palomino Park gain, Wellsford was able to reduce the valuation allowance from the 2004 amount. This accounts for the $19,644,000 net reduction in the allowance during the year ended December 31, 2005. The reduction in the allowance in 2006 relates primarily to the transfer of the deferred compensation plan assets and a reduction in the available NOLs upon completion of Wellsfords total return for 2005. All such amounts were fully reserved.
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Wellsford has NOL carryforwards, for Federal income tax purposes, resulting from Wellsfords merger with Value Property Trust in 1998 and its operating loss in 2004. The NOLs aggregate approximately $57,664,000 at December 31, 2005, expire in the years 2007 through 2024 and are subject to an annual and aggregate limit on utilization of NOLs after an ownership change, pursuant to Section 382 of the Code. An ownership change occurred under Section 382 during 2005, resulting in an estimated annual limitation of approximately $4,700,000. It is expected that the consummation of the merger will result in an additional ownership change which will reduce the annual usable amount of NOLs to approximately $2,000,000 (based on current interest rates and market prices for Wellsford common stock) per year through 2024.
Liquidity and Capital Resources |
Consolidated for Wellsford |
Wellsford expects to meet its short-term liquidity requirements, such as operating costs, construction and development costs, the potential purchase of EQRs remaining interest in the Palomino Park project, cancellation of outstanding stock options, debt repayments or additional collateral for construction loans, generally through its available cash, sales of condominium units and single family homes, the sale or realization of other assets, releases from escrow reserves and accounts, distributions from Clairborne Fordham, interest revenue and proceeds from construction financings, refinancings, modifications to borrowing capacity on existing construction loans and the ability to extend maturity dates on existing construction financings through the use of available extension options.
Wellsford expects to meet its long-term liquidity requirements such as future operating costs, construction and development costs, cancellation of outstanding stock options and debt service on construction notes payable through the use of available cash, sales of condominium units, single family homes and land, proceeds from construction financing, refinancings, modifications to borrowing capacity on existing construction loans and the ability to extend maturity dates on existing construction financings through the use of available extension options.
The cash portion of the merger consideration is to be funded in part by the Bank Loan, which consists of $27,000,000 (of which $25,000,000 may be used to pay the cash portion of the merger consideration and the payment of related merger costs; the remaining $2,000,000 may be utilized for Reiss working capital needs). The remainder of the merger consideration will be funded with cash from Reis and Wellsford.
The East Lyme Construction Loan and Gold Peak Construction Loan require Wellsford to have a minimum net worth, as defined, of $50,000,000. Wellsford may be required to make an additional $2,000,000 cash collateral deposit for the East Lyme Construction Loan and a $2,000,000 paydown of the Gold Peak Construction Loan if Wellsfords net worth, as defined, is below $50,000,000. Wellsford is required to maintain minimum liquidity levels at each quarter end for the East Lyme and Gold Peak Construction Loans, the most restrictive of which is $10,000,000.
The lender for the East Lyme Construction Loan has also provided a $3,000,000 letter of credit to a municipality in connection with the East Lyme project. Wellsford has posted $1,300,000 of restricted cash as collateral for this letter of credit.
Wellsfords cash and cash equivalents aggregated approximately $38,001,000 at September 30, 2006. Wellsford considers such amount to be adequate and expects it to continue to be adequate to meet operating and lender liquidity requirements both in the short and long terms during the liquidation period and if the Plan is terminated as a result of the merger, such amounts will be adequate to meet any cash needs at closing in excess of amounts provided by loan proceeds extended to Reis for the merger and Reiss cash on hand.
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Material Contractual Obligations |
The following table summarizes Wellsfords material contractual obligations as of September 30, 2006:
(amounts in thousands) |
Payments Due | |||||||||||||||
For the Three Months Ended |
For the Years Ended December 31,
|
|||||||||||||||
Contractual Obligations |
September 30, 2006 | 2007 and 2008 | 2009 | Aggregate | ||||||||||||
Principal payments for mortgage notes and construction loans payable |
$ | 690 | $ | 11,019 | $ | 11,875 | $ | 23,584 | ||||||||
Operating lease for office |
204 | 1,495 | | 1,699 | ||||||||||||
Total contractual obligations |
$ | 894 | $ | 12,514 | $ | 11,875 | $ | 25,283 | ||||||||
Capital Expenditures for Operating Assets and Development Projects |
Gold Peak |
In 2004, Wellsford commenced the development of Gold Peak, the final phase of Palomino Park. Gold Peak will be comprised of 259 condominium units to be built in three sections on the remaining 29 acre land parcel at Palomino Park.
In April 2005, Wellsford obtained development and construction financing for Gold Peak in the aggregate amount of approximately $28,800,000, which bear interest at the London Inter-Bank Offer Rate, or LIBOR + 1.65% per annum and mature in May 2007 with respect to the development loan and in November 2009 with respect to the construction loan, both of which have additional extension options upon satisfaction of certain conditions being met by the borrower. Principal repayments are made as units are sold. The balance of the Gold Peak Construction Loan was approximately $11,875,000 and $11,575,000 at September 30, 2006 and December 31, 2005, respectively. Wellsford has purchased a 5% LIBOR cap expiring in June 2008 for this loan.
Gold Peak unit sales commenced in January 2006. At September 30, 2006, there were 55 Gold Peak units under contract with nominal down payments. The following table provides information regarding Gold Peak sales:
For the Three Months Ended September 30, 2006 |
For the Nine Months Ended September 30, 2006 |
||||||
Number of units sold |
34 | 75 | |||||
Gross sales proceeds |
$ | 9,266,000 | $ | 21,021,000 | |||
Principal paydown on Gold Peak Construction Loan |
$ | 6,890,000 | $ | 16,753,000 |
East Lyme |
Wellsford has a 95% ownership interest as managing member of a venture which originally owned 101 single family home lots situated on 139 acres of land in East Lyme, Connecticut upon which it is constructing houses for sale. Wellsford purchased the land for $6,200,000 in June 2004. During the fourth quarter of 2005, the model home was completed. The initial sale closed in June 2006. At September 30, 2006, six East Lyme homes were under contract. The following table provides information regarding East Lyme sales:
For the Nine Months Ended September 30, 2006 |
||||
Number of homes sold |
1 | |||
Gross sales proceeds |
$ | 649,000 | ||
Principal paydown on East Lyme Construction Loan |
$ | 584,000 |
Wellsford obtained construction financing for East Lyme in the aggregate amount of $21,177,000 (to be drawn upon as costs are expended), which bears interest at LIBOR + 2.15% per annum and matures in December 2007 with two one-year extensions at Wellsfords option upon satisfaction of certain conditions being met by the borrower. The balance of the East Lyme Construction Loan was approximately $11,019,000,
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$7,226,000 and $361,000 at September 30, 2006, December 31, 2005 and 2004, respectively. Wellsford has purchased a 4% LIBOR cap expiring in July 2007 for this loan.
Wellsford executed an option to purchase the East Lyme Land, a contiguous 85 acre parcel of land which can be used to develop 60 single family homes and subsequently acquired the East Lyme Land in November 2005 for $3,720,000, including future costs which were the obligation of the seller. The East Lyme Land requires remediation of pesticides used on the property when it was an apple orchard, the cost of which has been considered in evaluating the carrying amount of the property at September 30, 2006 and December 31, 2005.
Claverack |
Wellsford has a 75% ownership interest in a joint venture that owns two land parcels aggregating approximately 300 acres in Claverack, New York. Wellsford acquired its interest in the joint venture for $2,250,000 in November 2004. One land parcel is subdivided into seven single family home lots on approximately 65 acres upon which Claverack intends to build and sell homes. The remaining 235 acres, known as The Stewardship, are currently subdivided into six single family home lots with the intent to obtain an increase in the number of developable residential lots, improve the land, obtain construction financing and construct and sell 48 single family homes. At September 30, 2006, there were no additional houses under construction on either parcel. The completion of additional homes and closings of additional sales is expected to occur in 2007.
Claverack is capitalized with $3,000,000 of capital, Wellsfords share of which was contributed in cash and the 25% partners contribution was the land, subject to liabilities, at a net value of $750,000. The land was subject to a $484,000 mortgage which was assumed by the joint venture (the balance of this mortgage was $465,000 at December 31, 2004, bore interest at a rate of 7% per annum and had a maturity of February 2010). At the closing, an aggregate of approximately $866,000 owed to affiliates of the 25% partner was paid from the amount contributed by Wellsford.
In December 2005, Claverack obtained the Claverack Construction Loan, which was used to retire an existing mortgage and was drawn upon as needed to construct a custom design model home until permanent construction financing is obtained. The Claverack Construction Loan bears interest at LIBOR + 2.20% per annum and matures in December 2006 with a six-month extension at Wellsfords option upon satisfaction of certain conditions being met by the borrower. The balance of the Claverack Construction Loan was approximately $690,000 and $449,000 at September 30, 2006 and December 31, 2005, respectively.
In January 2006, the Claverack venture partners contributed additional capital aggregating approximately $701,000, of which Wellsfords share was approximately $526,000.
Effective April 2006, Wellsford executed a letter agreement with its venture partner to enable Wellsford to make advances instead of requesting funds from the Claverack Construction Loan at the same terms and rate as the Claverack Construction Loan. Wellsford advanced approximately $690,000 during the nine months ended September 30, 2006 to Claverack.
During July 2006, the initial home was completed and in October 2006, the home and a contiguous lot were sold for approximately $1,200,000. At September 30, 2006, there were no additional houses under construction on either parcel. The completion of additional homes and closing of additional sales is expected to occur in 2007.
Beekman |
In February 2005, Wellsford acquired a 10 acre parcel in Beekman, New York for a purchase price of $650,000. Wellsford also entered into a contract to acquire a contiguous 14 acre parcel, the acquisition of which was conditioned upon site plan approval to build a minimum of 60 residential condominium units. Wellsfords $300,000 deposit in connection with this contract was secured by a first mortgage lien on the property.
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As a result of various uncertainties, including that governmental approvals and development processes may take an indeterminate period and extend beyond December 31, 2008, Wellsfords board of directors authorized the sale of the Beekman interests to Jeffrey Lynford and Edward Lowenthal, or a company in which they have ownership interests, at the greater of Wellsfords costs or appraised values. In January 2006, a company which is owned by Jeffrey Lynford and Mr. Lowenthal, the principal of Wellsfords joint venture partner in the East Lyme project, and others acquired the Beekman project at Wellsfords aggregate cost of approximately $1,297,000 in cash. This was accomplished through a sale of the entities that owned the Beekman assets.
Reis |
Wellsford currently has a preferred equity investment in Reis through Wellsford Capital. At September 30, 2006 and December 31, 2005, the carrying amount of Wellsfords aggregate investment in Reis was approximately $20,000,000 on a liquidation basis, as described below. Wellsfords investment represents approximately 23% of Reiss equity on an as converted to common stock basis at September 30, 2006 and December 31, 2005. Such investment, which had previously been accounted for on a cost basis, amounted to approximately $6,790,000 at December 31, 2004 of which approximately $2,231,000 was held by Wellsford Capital and approximately $4,559,000 represented Wellsfords share held through Reis Capital. Such interests were distributed to Wellsford in October 2006. Prior to the approval of the Plan, the cost basis method was used to account for Reis as Wellsfords ownership interest is in shares of non-voting Reis preferred stock and Wellsfords interests are represented by one member of Reiss seven member board of directors. The adjustment to report Reis at estimated net realizable value is reflected in the adjustment to net realizable value of $72,485,000 on the Consolidated Statement of Changes in Net Assets in Liquidation at November 17, 2005.
The President and primary common shareholder of Reis is the brother of Jeffrey Lynford, the Chairman, President and Chief Executive Officer of Wellsford. Edward Lowenthal, Wellsfords former President and Chief Executive Officer, who currently serves on Wellsfords board of directors, has served on the board of directors of Reis since the third quarter of 2000. Jeffrey Lynford and Mr. Lowenthal have and will continue to recuse themselves from any investment decisions made by Wellsford pertaining to Reis, including the authorization by Wellsfords board of directors to approve the merger.
In the first quarter of 2006, Reis was considering offers from potential purchasers, ranging between $90,000,000 and $100,000,000, to acquire 100% of Reiss capital stock. Based on these offers, in estimating the net proceeds in valuing Reis, if Reis were to be sold at that amount, Wellsford would have received approximately $20,000,000 of proceeds, subject to escrow holdbacks. These potential sale proceeds are reflected in Wellsfords net realizable value presentation. Subsequent to March 13, 2006, Reis entered into a letter of intent with one of the potential purchasers and was negotiating a contract with the potential purchaser. During the second quarter of 2006, negotiations with the initial potential purchaser were terminated. However, prior to such termination, Reis commenced discussions with another interested party from whom Reis also received an offer which it was evaluating. The economic terms of the latter offer were within the range listed above and supported Wellsfords $20,000,000 valuation of its interest in Reis at June 30, 2006.
During May 2006, Wellsfords board of directors established a committee composed of the independent members to evaluate a possible transaction with Reis. In June 2006, Lazard and King & Spalding were retained to advise with respect to a possible transaction with Reis.
On October 11, 2006, Wellsford announced that it entered into a definitive merger agreement with Reis and Merger Sub and the merger was approved by the independent members of Wellsfords board of directors. At the effective time of the merger, Reis stockholders will be entitled to receive, in the aggregate, approximately $34,579,414 in cash and 4,237,673 shares of newly issued Wellsford common stock, not including shares to be issued to Wellsford Capital. The per share value of Wellsford common stock, for purposes of the merger, has been established at $8.16 per share in the merger agreement, resulting in an implied equity value for Reis of approximately $90,000,000, including Wellsfords 23% ownership interest in Reis. It is expected that this transaction will be tax-free to Reis stockholders except with respect to the cash
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portion of the consideration received. The cash portion of the merger consideration is to be funded in part by the Bank Loan, which consists of $27,000,000 (of which $25,000,000 may be used to pay the cash portion of the merger consideration and the payment of related merger costs; the remaining $2,000,000 may be utilized for Reiss working capital needs). The remainder of the merger consideration will be funded with cash from Wellsford.
On October 11, 2006, Wellsford received a fairness opinion from Lazard stating that, subject to the qualifications and limitations set forth therein, as of that date, the aggregate consideration to be paid by Wellsford in connection with the merger was fair to Wellsford from a financial point of view. A full text of Lazards opinion is included in this joint proxy statement/prospectus. Stockholders are urged to read the entire opinion.
After considering a range of values, including the current market price for Wellsfords stock on the stock portion of the consideration and the per share price as established for the merger agreement, Wellsford determined that it is appropriate to continue to value its investment in Reis at $20,000,000 at September 30, 2006.
Palomino Park |
With respect to EQRs 7.075% interest in the corporation that owns the remaining Palomino Park assets, any transaction for such interest to be acquired by Wellsford would be subject to negotiation between Wellsford and EQR.
Stock Option Plans |
As permitted by the Plan and in accordance with the provisions of Wellsfords option plans, applicable accounting, the AMEX rules and Federal income tax laws, Wellsfords outstanding stock options have been adjusted to prevent a dilution of benefits to option holders arising from a reduction in value of Wellsfords common stock as a result of the $14.00 per share initial liquidating distribution made to Wellsfords stockholders. The adjustment reduces the exercise price of the outstanding options by the ratio of the price of a common share immediately after the distribution ($5.60 per share) to the stock price immediately before the distribution ($19.85 per share) and increases the number of common shares subject to outstanding options by the reciprocal of the ratio. As a result of this adjustment, the 520,665 options outstanding as of December 31, 2005 were converted into options to acquire 1,845,584 common shares and the weighted average exercise price of such options decreased from $20.02 per share to $5.65 per share. Wellsfords board of directors approved these option adjustments on January 26, 2006. These adjustments do not result in a new grant and would not have any financial statement impact. At the same time, Wellsfords board of directors authorized amendments to outstanding options to allow an option holder to receive from Wellsford, in cancellation of the holders option, a cash payment with respect to each cancelled option equal to the amount by which the fair market value of the share of stock underlying the option exceeds the exercise price of such option. Additionally, certain non-qualified out of the money options which had original maturity dates prior to December 31, 2008, were extended by the board of directors to the later of December 31 of the year of original expiration or the 15th day of the third month following the date of the original expiration.
As a result of the approval process, Wellsford determined that it was appropriate to record a provision during the first quarter of 2006 aggregating approximately $4,227,000 to reflect the modification permitting an option holder to receive a net cash payment in cancellation of the holders option based upon the fair value of an option in excess of the exercise price. The reserve will be adjusted through a change in net assets in liquidation at the end of each reporting period to reflect the settlement amounts of the liability and the impact of changes to the market price of the stock at the end of each reporting period.
During the nine months ended September 30, 2006, Wellsford made cash payments aggregating approximately $668,000 related to 237,426 options cancelled for option holders electing this method resulting in 1,608,158 options remaining outstanding at September 30, 2006. The weighted average exercise price of the options outstanding at September 30, 2006 is $5.72. During the three months ended September 30, 2006, Wellsford did not make any cash payments as none of the option holders elected this method. The remaining reserve for option cancellations reported at September 30, 2006 on the Consolidated Statement of Net Assets
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in Liquidation of approximately $2,711,000 is net of all payments made during the nine months ended September 30, 2006 related to option cancellations. The liability was reduced by approximately $848,000 during the nine months ended September 30, 2006 to reflect the decrease in the market price of Wellsfords common stock during that period. For the three months ended September 30, 2006, the stock price increased which resulted in an increase to the liability from June 30, 2006 to September 30, 2006 of approximately $469,000. The estimate for option cancellations could materially change from quarter to quarter based upon (i) an option holder either exercising the options in a traditional manner or electing the net cash payment alternative and (ii) the changes in the market price of Wellsfords common stock. At each quarter end, an increase in Wellsfords common stock price would result in a decline in net assets in liquidation, whereas a decline in the stock price would increase Wellsfords net assets in liquidation.
In November 2006, an officer of Wellsford exercised options for 175,559 shares and Wellsford received proceeds of approximately $1,008,000. Had such exercise taken place prior to October 1, 2006, the reserve for option cancellations would have been reduced by approximately $418,000.
Other Items Impacting Wellsfords Liquidity and Resources |
Clairborne Fordham |
In October 2000, Wellsford and PREI organized Clairborne Fordham, a venture in which Wellsford has a 10% interest. Wellsfords investment in Clairborne Fordham was approximately $453,000 at September 30, 2006 and December 31, 2005 (liquidation basis) and approximately $2,190,000 (going concern basis) at December 31, 2004. Clairborne Fordham intends to continue the orderly sale of the remaining two residential units in 2006, one of which was under contract at September 30, 2006.
The Effects of Inflation/Declining Prices and Trends on the Sale of Condominiums and Homes |
As of December 31, 2005, Wellsford completed the sell-out of the 264 unit Silver Mesa condominium project. For 2005, Wellsford did not report any meaningful revenue and cost of sales of residential units and will not until Wellsford commences closings on the sale of condominiums and homes at the Gold Peak and East Lyme development projects in 2006. The impact on cash flows to Wellsford will be minimal during the early years of development and sales as substantially all of the net sales proceeds from these projects will be utilized to repay related construction loans.
The continuing increases in energy costs, construction materials (such as concrete, lumber and sheetrock) and interest rates could adversely impact our home building businesses. As these costs increase, our product becomes more expensive to build and profit margins could deteriorate. In order to maintain profit margin levels, we may need to increase sale prices of our condominiums and homes. The continuing rise in energy costs and interest rates may negatively impact our marketing efforts and the ability for buyers to afford our homes at any price level, which could result in the inability to meet targeted sales prices or cause sale price reductions. Wellsford has limited its exposure from the effects of increasing interest on its construction loans by purchasing interest caps for the East Lyme and Gold Peak projects. The East Lyme cap of LIBOR at 4% and the Gold Peak cap of LIBOR at 5% have both been met at September 30, 2006.
The number and timing of future sales of any residential units by Wellsford or by its joint ventures could be adversely impacted by increases in interest rates and the availability of credit to potential buyers in 2006, whereas during 2005 and 2004, historically low interest rates may have benefited sales results.
As the softening of the national housing market continues into the fourth quarter of 2006, Wellsfords operations relating to residential development and the sale of homes has been negatively impacted in markets where Wellsford owns property. Demand at certain of Wellsfords projects and sales of inventory are lower than expected resulting in price concessions and/or additional incentives being offered, a slower pace of construction, building only homes which are under contract and the consideration of selling home lots either individually or in bulk instead of building homes. Wellsfords Gold Peak project has not been affected to the same extent as in other markets where Wellsford conducts business. The volume of visitors to Gold Peak is down, but it has not negatively affected pricing or sales pace at this time and construction is continuing for individual condominium buildings.
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Changes in Cash Flows |
Comparison of the nine months ended September 30, 2006 to the nine months ended September 30, 2005 |
Cash flows used in operating activities changed $2,641,000 from $10,428,000 used in the 2005 period to $7,787,000 used in the 2006 period. The significant components of this change related to cash used in the continuing construction activities and the reductions in liabilities and reserves.
Cash flows from investing activities changed $34,893,000 from $35,860,000 provided in the 2005 period to $967,000 provided in the 2006 period. The significant components of the 2005 amounts related to the redemption of $22,500,000 of U.S. Government securities in 2005 (whereas there were no redemptions in the 2006 period as all of these securities were fully redeemed in the fourth quarter of 2005), the return of capital and redemption proceeds from investments in joint ventures of $12,352,000 (primarily from sales of assets by Wellsford/Whitehall during the 2005 period and the redemption of our interest in that venture in September 2005) and the repayment of a note receivable of $1,032,000 in September 2005. During the 2006 period, the investing activities included the January 2006 sale of the Beekman assets for $1,297,000, offset by deferred Merger costs paid during the period of $330,000.
Cash flows from financing activities changed $30,983,000 from $27,189,000 used in the 2005 period to $3,794,000 provided in the 2006 period primarily from the net effect of borrowings and repayments in 2006. Borrowings on the East Lyme, Gold Peak and Claverack construction loans aggregated $21,671,000 during the 2006 period as compared to $12,504,000 in the 2005 period as a result of continuing construction activities at these projects. During the 2006 period, approximately $16,753,000 was repaid on the Gold Peak Construction Loan from 75 Gold Peak condominium unit sales and $584,000 on the East Lyme Construction Loan from one East Lyme home sale. During the 2005 period, repayments included (1) the redemption of $2,275,000 of Palomino Park Bonds in January 2005 with the remaining balance of $10,405,000 redeemed in May 2005, (2) the redemption of the Debentures aggregating $25,775,000 in May 2005 and (3) amortized principal on Wellsfords other mortgages of $1,238,000. The 2006 period also reflects the use of cash for the payment of option cancellations of $668,000.
During the period November 18, 2005 to December 31, 2005 |
During the period November 18, 2005 to December 31, 2005, Wellsford sold its largest asset, the Palomino Park rental phases, and realized net cash of approximately $70,109,000 after debt payments, debt prepayment costs, sales expenses, closing costs, EQRs interest in the sales proceeds and estimated state and Federal taxes. Such amount plus available cash was used to pay the initial liquidating distribution of $14.00 per common share to stockholders (aggregating approximately $90,597,000) on December 14, 2005. Additionally, Wellsford incurred construction costs of approximately $4,021,000 which was funded in part by approximately $2,423,000 of construction loan proceeds.
Comparison of January 1, 2005 through November 17, 2005 to the year ended December 31, 2004 |
Cash flows used in operating activities increased $7,347,000 from $9,249,000 used in the year ended December 31, 2004 to $16,596,000 used in the period January 1, 2005 to November 17, 2005. The significant components of this change related to (1) a net (loss) of $32,703,000 in the 2004 period primarily due to impairment charges of $15,606,000 from Wellsfords investment in Second Holding and $7,419,000 from Wellsfords investment in Wellsford/Whitehall (as previously described in Results of Operations), (2) net income of $3,018,000 in the 2005 period which included a gain of $5,986,000 from the redemption of Wellsfords interest in Wellsford/Whitehall, (3) the effects of selling 51 fewer condominium units at Silver Mesa in 2005 as compared to 2004 ($8,529,000) and (4) an increase in construction in process, net of construction payables, of $9,156,000 (primarily from continuing construction at Wellsfords Gold Peak and East Lyme development projects and the 2005 land acquisitions for Beekman and the additional East Lyme land parcel, whereas the 2004 period included the acquisition of the initial East Lyme land parcel and other pre-construction costs at East Lyme and Gold Peak.
Cash flows provided by investing activities increased $16,098,000 from $20,616,000 provided during the year ended December 31, 2004 to $36,714,000 provided during the period January 1, 2005 to
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November 17, 2005. The increase is primarily the redemption of $25,000,000 of U.S. Government securities during 2005. Such increase was offset by the following decreases between the periods: (1) return of capital and proceeds from sales and redemptions of investments in joint ventures decreased $3,141,000 (the 2004 period included $15,000,000 of proceeds from the sale of Wellsfords Second Holding interests and the 2005 period included net proceeds of $8,193,000 from the September 2005 redemption of Wellsfords interest in Wellsford/Whitehall with the remaining change due to returns of capital during 2005 in excess of 2004), (2) the 2004 period included the proceeds from the sale of a real estate asset by Wellsford in April 2004 ($2,694,000), (3) the 2005 purchase of half of EQRs minority interest in the Palomino Park project ($2,087,000) and (4) a decrease in the amount of proceeds from the repayment of mortgage notes receivable between the periods ($1,032,000).
Cash flows used in financing activities increased $23,557,000 from $881,000 used in the year ended December 31, 2004 to $24,438,000 used in the period January 1, 2005 to November 17, 2005. This increase is primarily attributable to the $25,775,000 redemption of Debentures during April 2005 and the retirement of $12,680,000 of Palomino Park Bonds ($2,275,000 in January 2005 and $10,405,000 in May 2005). Such increases were offset in part by an increase in aggregate borrowings of $15,771,000 under the Gold Peak and East Lyme Construction Loans.
Comparison of the year ended December 31, 2004 to the year ended December 31, 2003 |
Cash flow from operating activities changed $26,341,000 from $17,190,000 provided in 2003 to $9,151,000 used in 2004. The primary reasons for the change in operating cash flows from 2003 to 2004 include (1) an increase in construction in process of $10,299,000 from the acquisition of the East Lyme land and development costs capitalized on Wellsfords residential development projects during 2004, (2) increases to restricted cash primarily for deposits related to development projects ($1,695,000) and cash restricted for use by joint ventures ($1,178,000), (3) $6,842,000 for deferred tax provisions in 2003 with a $300,000 benefit in 2004 and (4) reduced depreciation in 2004 of $4,012,000 primarily from fully depreciated unamortized warrant costs for Wellsford/Whitehall. Operating cash flows will continue to be negatively impacted by increases to construction in process until such time as sales of homes and condominiums commence.
Cash provided by investing activities increased $17,862,000 from 2003 to 2004. The increase between these periods is primarily from proceeds from the sale of Wellsfords investment in Second Holding in November 2004 for $15,000,000. During 2003, the 277 Park Loan of $25,000,000 was repaid and Wellsford utilized those proceeds, plus additional cash to purchase $27,500,000 of U.S. Government securities.
Cash flow used in financing activities decreased $2,170,000 from 2003 to 2004. The primary financing activity in 2003 was the $40,000,000 Green River Mortgage, the proceeds from which were used to repay $37,111,000 for a maturing construction loan on the Green River property. Additionally in 2003, the remaining $4,318,000 Silver Mesa Conversion Loan balance was repaid with available cash. During 2004, Wellsford obtained the East Lyme Construction Loan of which $361,000 was advanced by December 31, 2004.
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Quantitative and Qualitative Disclosures about Market Risk |
One of Wellsfords primary market risk exposures has been to changes in interest rates. Wellsford and its joint venture investments each generally managed this risk by offsetting its investments and financing exposures to the extent possible as well as by strategically timing and structuring its transactions. The investments described below were generally made for long-term investing and not for trading purposes. The following table presents the effect of a 1.00% increase in the base rates at December 31, 2004 on all variable rate notes receivable, investments in U.S. Government securities and debt and its impact on annual net income (loss):
(amounts in thousands, except per share amounts) |
Balance at December 31, 2004 |
Effect of 1% Increase in Base Rate on Income (Expense) |
|||||
Consolidated assets and liabilities: |
|||||||
Notes receivable; fixed rate |
$ | 1,190 | $ | | |||
Investment in U.S. Government securities: |
|||||||
Fixed rate |
$ | 27,551 | | ||||
Mortgage notes payable: |
|||||||
Variable rate (A) |
$ | 13,041 | (127 | ) | |||
Fixed rate |
95,812 | | |||||
$ | 108,853 | (127 | ) | ||||
Debentures/Convertible Trust Preferred Securities: |
|||||||
Fixed rate |
$ | 25,775 | | ||||
Proportionate share of assets and liabilities from investments in joint ventures: |
|||||||
Wellsford/Whitehall: |
|||||||
Debt: |
|||||||
Variable rate |
$ | 40,100 | (401 | ) | |||
Fixed rate |
5,569 | | |||||
$ | 45,669 | ||||||
Effect from Wellsford/Whitehall |
(401 | ) | |||||
Net
decrease in annual income, before minority interest benefit and income
tax benefit |
(528 | ) | |||||
Minority interest benefit |
18 | ||||||
Income tax benefit |
| ||||||
Net decrease in annual net income |
$ | (510 | ) | ||||
Per share, basic and diluted |
$ | (0.08 | ) | ||||
(A) | Excludes the effect of a 1% change on variable rate construction financing as such interest is capitalized to the basis of the project and does not have a current impact on income (loss). |
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At September 30, 2006, Wellsfords only exposure to interest rates was for variable rate based construction loans. Such exposure was minimized through the use of interest rate caps. The following table presents the effect of an increase in interest rates on construction loans at September 30, 2006:
(amounts in thousands) |
Balance at September 30, 2006 |
Notional Amount at September 30, 2006 |
LIBOR Cap |
LIBOR at September 30, 2006 |
Additional Interest Incurred |
|||||||||||
Construction loans payable: |
||||||||||||||||
With interest rate caps: |
||||||||||||||||
Gold Peak Construction Loan |
$ | 11,875 | $ | 18,500 | 5.00 | % | 5.32 | % | $ | | (A)(C) | |||||
East Lyme Construction Loan |
11,019 | $ | 8,300 | 4.00 | % | 5.32 | % | 27 | (A)(C) | |||||||
22,894 | 27 | |||||||||||||||
Without interest rate cap: |
||||||||||||||||
Claverack Construction Loan |
690 | | 5.32 | % | 7 | (B)(C) | ||||||||||
$ | 23,584 | $ | 34 | |||||||||||||
(A) | Reflects additional interest which could be incurred on the loan balance amount in excess of the notional amount at September 30, 2006 for the effect of a 1% increase in LIBOR. |
(B) | The Claverack Construction Loan can be drawn upon up to $2,000. The effect of a 1% increase in LIBOR on this loan if the entire balance were outstanding would be $20 per year. This table presents the effect of a 1% increase on the September 30, 2006 outstanding balance. |
(C) | An increase in interest incurred would result primarily in additional interest being capitalized into the basis of this project. |
At December 31, 2005, Wellsfords only exposure to interest rates was for variable rate based construction loans. Such exposure was minimized through the use of interest rate caps. The following table presents the effect of an increase in interest rates on construction loans at December 31, 2005:
(amounts in thousands) |
Balance at December 31, 2005 |
LIBOR Cap |
LIBOR at December 31, 2005 |
Interest Rate Exposure |
Additional Interest Incurred |
|||||||||||
Construction loans payable: |
||||||||||||||||
With interest rate caps: |
||||||||||||||||
Gold Peak Construction Loan |
$ | 11,575 | 5.00 | % | 4.39 | % | 0.61 | % | $ | 71 | (A)(B) | |||||
East Lyme Construction Loan |
7,226 | 4.00 | % | 4.39 | % | | | |||||||||
18,801 | 71 | |||||||||||||||
Without interest rate cap: |
||||||||||||||||
Claverack Construction Loan |
449 | | 4.39 | % | (C) | 4 | (B)(C) | |||||||||
$ | 19,250 | $ | 75 | |||||||||||||
(A) | Represents an increase in LIBOR up to the interest rate cap. |
(B) | An increase in interest incurred would result in additional interest being capitalized into the basis of this project. |
(C) | The Claverack Construction Loan can be drawn upon up to $2,000. The effect of a 1% increase in LIBOR on this loan if the entire balance were outstanding would be $20 per year. This table presents the effect of a 1% increase on the December 31, 2005 outstanding balance. |
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
Policy With Respect to Certain Activities |
As Wellsford is in liquidation, it does not have a policy with respect to any of the following types of activities: issuing senior securities; borrowing money; making loans to other persons; investing in the securities of other issuers for the purpose of exercising control; underwriting securities of other issuers; engaging in the purchase and sale (or turnover) of investments; offering securities in exchange for property; or repurchasing or otherwise reacquiring its shares or other securities. Wellsford does not currently intend to
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engage in any of these activities. Any decision to engage in any of these activities is at the discretion of the Wellsford board of directors and would not require a vote of Wellsford stockholders.
During the past three years, Wellsford has purchased and sold government-issued securities, purchased and sold joint venture interests, borrowed money and refinanced these borrowings, purchased and sold real property, and purchased and sold investments. It is Wellsfords policy to bring any strategic or material business decision, including but not limited to those related to acquisitions and dispositions of assets, investments in or disposition of interests in joint ventures, and entering into financing arrangements, to the Wellsford board of directors (or an appropriate committee of the board) before taking strategic or material actions. Wellsford sends its annual report on Form 10-K containing financial statements certified by its independent public accounting firm to its stockholders.
Investment Policy of Registrant |
Wellsford was originally formed to operate as a real estate merchant banking firm to acquire, develop, finance and operate real properties and invest in private and public real estate companies. Previously, Wellsfords activities had been categorized into three strategic business units within which it executed its business plans: (1) Commercial Property Activities; (2) Debt and Equity Activities; and (3) Residential Activities. Wellsford had objectives for the assets and operations of each of its business units including the real estate assets (primarily commercial office, residential rental and residential for sale properties), joint venture investments and debt and equity investments.
On May 19, 2005, the Wellsford board of directors approved the Plan and on November 17, 2005, Wellsfords stockholders adopted the Plan. The Plan contemplates the orderly sale of each of Wellsfords remaining assets, which are either owned directly or through Wellsfords joint ventures, the collection of all outstanding loans from third parties, the orderly disposition or completion of construction of development properties, the discharge of all outstanding liabilities to third parties and, after the establishment of appropriate reserves, the distribution of all remaining cash to stockholders. The Plan also permits Wellsfords board of directors to acquire more Reis shares and/or discontinue the Plan without further stockholder approval.
In March 2005, the Wellsford board of directors authorized the marketing of the three residential rental phases of Palomino Park. In the second quarter of 2005, Wellsford engaged a broker to market these phases. In August 2005, Wellsford entered into an agreement to sell these phases for $176,000,000, subject to, among other things, stockholder approval of the Plan. The sale closed on November 22, 2005.
The following transactions, which are consistent with the intent of the Plan, occurred prior to the November 17, 2005 adoption of the Plan by the stockholders: (1) in September 2005, Wellsfords interest in its Wellsford/Whitehall joint venture was redeemed for approximately $8,300,000, (2) by May 2005, Wellsford retired $12,680,000 of tax exempt bond financing, (3) in April 2005, Wellsford redeemed its outstanding $25,775,000 of Debentures and (4) in November 2004, Wellsfords interest in Second Holding, a joint venture which purchased debt instruments, was redeemed for $15,000,000.
As a result of the aforementioned transactions, Wellsfords remaining primary operating activities are the development, construction and sale of three residential projects and its approximate 23% ownership interest in Reis. If the merger is consummated, Wellsford will terminate its previously adopted Plan, but would continue with its program of disposing of its remaining real estate assets through development and/or sale.
For discussion of Wellsfords Plan and its former investment policies, see Business and Plan of Liquidation, Business and Plan of LiquidationCommercial Property Activities Debt and Equity Activities and Residential Activities beginning on pages 131, 133, 143 and 143, respectively.
Description of Real Estate |
For a description of Wellsfords real estate properties, see Business and Plan of Liquidation, Properties and Residential Activities beginning on pages 131, 142 and 143, respectively.
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Operating Data |
For information regarding Wellsfords operating data, see Selected Financial Data beginning on page 143.
Tax Treatment of Wellsford and Its Stockholders |
For information regarding the tax treatment of Wellsford and its stockholders, see Material U.S. Federal Income Tax Consequences, beginning on page 76.
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REISS BUSINESS
Business |
Founded in 1980, Reis is a leading provider of commercial real estate market information. Reiss proprietary database contains detailed information on over 250,000 properties in over 1,800 neighborhoods and 81 metropolitan markets in the U.S. The database contains information on apartment, retail, office and industrial properties and is used by real estate investors, lenders and other professionals to make informed buying, selling and financing decisions.
Reiss flagship product is Reis SE, which provides online access to information and analytical tools designed to facilitate both debt and equity transactions. In addition to trend and forecast analysis at neighborhood and city levels, the product offers detailed building specific information such as rents, vacancy rate and lease terms, property sale information, new construction listings and property valuation estimates.
Reis SE was launched in February 2001. Reis currently has signed contracts with 600 organizations to use this product, including major commercial banks and lending institutions, resulting in approximately 14,800 entitled users of Reis SE.
All of Reiss data and analytics are subjected to rigorous validation and quality assurance procedures resulting in reliable commercial real estate decision support systems.
Industry Background |
Commercial real estate represents a significant share of the overall business activity and national wealth in the U.S. As reported by Real Estate Roundtable (2005), the combined stock of U.S. commercial real estate accounts for over $5 trillion of the nations domestic assets, and is equivalent to approximately 35% of the total market capitalization of U.S. stock markets. Thousands of commercial real estate properties are sold, purchased, financed and securitized each year, hundreds of millions of square feet of new construction projects are completed, and a similar number of square feet are signed to new leases.
The liquidity of commercial real estate markets has increased measurably in recent years. According to the Mortgage Bankers Association (2005), commercial real estate sales transactions in 2005 amounted to $270 billion dollars, representing over 2% of U.S. gross domestic product. Meanwhile, construction spending on commercial properties in 2005 represented 17% of U.S. gross private domestic investment. As a result, commercial real estate mortgage loan originations set a new record in 2005, rising by approximately 50% from the previous year, to approximately $345 billion.
The combined capitalization of REITs has also increased measurably in recent years. The National Association of Real Estate Investment Trusts reported that the 197 publicly-traded REITs at the end of 2005 had a combined market capitalization of $330.7 billion, 8.4% higher than the previous year and more than double the REIT market capitalization of $161.9 billion in 2002.
The varied participants in U.S. commercial real estate demand timely and accurate information to support their decision-making. Participants in the asset market, such as property owners, developers and builders, banks and non-bank lenders, and equity investors, require access to information on both the performance and pricing of assets, including detailed data on market transactions, supply, and absorption. This information is critical to all aspects of valuing assets and financing their acquisition, development, and construction. Additionally, brokers, operators and lessors require access to detailed information concerning current and historical rents, vacancies, concessions, operating expenses, and other market and property-specific performance measures.
As commercial real estate markets have grown in size and complexity, Reis has invested in the areas critical to supporting the information needs of real estate professionals in both the asset market and the space leasing market. In particular, Reis has:
| developed expertise in data collection across multiple markets and property types; |
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| invested in the analytical expertise to develop decision support systems around property valuations, credit analytics and transaction support; |
| created product development expertise to collect market feedback and translate it into new products and reports; and |
| invested in a robust technology infrastructure to disseminate these tools to the wide variety of market participants. |
Reis believes that these investments have established it as a leading provider of commercial real estate information and analytical tools to the investment community. The depth and breadth of Reiss data and expertise will be critical in allowing Reis to grow its business.
Reiss Business: Strengths and Strategies |
Reis benefits from a revenue model that is based primarily on annual subscriptions that are paid in advance. Reis recognizes revenue from its contracts on a ratable basis; for example, one-twelfth of the value of a one-year contract is recognized each month.
Reis continues to develop and introduce new products, add new data, and re-package existing information to meet and anticipate client demands. In 2003, Reis introduced a Sales Comparables product which tracks apartment, industrial, office and retail transactions valued at over $2,000,000. In 2005, Reis launched its Portfolio Valuation product, a new valuation and credit risk tool designed to facilitate the collection, storage and analysis of real estate asset and loan information for both mortgage lenders and property owners with large commercial real estate holdings.
Reis management has also identified several longer-term growth opportunities, including the addition of new markets and property types, the expansion of the industrial property component of the database, international expansion to meet foreign demand for commercial real estate information and the aggregation of many local and regional data providers through strategic acquisitions.
Proprietary Databases |
Over the last 25 years, Reis has developed expertise in collecting, screening and organizing volumes of data into its proprietary databases. Reiss property database contains information on approximately 20 billion square feet of space across four main property types, consisting primarily of 7.9 million apartment units, 5.4 billion square feet of office space, and 4.2 billion square feet of retail space and selected industrial properties.
Reiss databases currently include research on over 250,000 properties. Each quarter a rotating sample of building owners, leasing agents, and managers are surveyed to obtain key building performance statistics including, among others, occupancy rates, rents, rent discounts, free rent allowances, tenant improvement allowances, lease terms and operating expenses. All survey responses are subjected to an established quality assurance and validation process. At the property level, surveyors compare the data reported by building contacts with the previous record for the property and question any unusual changes in rents and vacancies. Whenever necessary, follow-up calls are placed to building contacts for verification or clarification of the results. All aggregate market data at the neighborhood and city levels are also subjected to comprehensive quality controls.
In addition to the core property database, Reis maintains a new construction database that monitors projects that are being added to the market. The database reports relevant criteria such as project size, property type and location for planned and proposed projects, projects under construction, and projects nearing completion.
Finally, Reis also maintains a sales comparables database of all property sales transactions of greater than $2,000,000 in 81 metropolitan markets across the four main property types (apartment buildings, office buildings, shopping centers, and industrial buildings). Information such as buyer, seller, purchase price, capitalization rate and financing details are captured for each transaction. By monitoring and analyzing press stories and web sites, and by speaking with brokers, Reis is frequently able to publish synthesized transactional information before the transaction is publicly recorded.
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Products and Services |
Reis SE is a website that serves as a delivery platform for the thousands of reports containing Reiss primary research data and forecasts. Access to the core system is by secure password only and can be customized to accommodate the needs of various customers. For example, the product can be tailored to provide access to all or only certain markets, property types and report combinations. The Reis SE interface has been refined over the past six years to accommodate real estate professionals who need to perform market-based trend and forecast analysis, property specific research, comparable property analysis, and generate valuation and credit analysis estimates at the single property and portfolio levels.
On a quarterly basis, Reis updates over 14,000 neighborhood and city level reports that cover historical trends, current observations and five year forecasts on all key real estate market indicators. These updates reflect all individual property, city, and neighborhood data gathered over the previous 90 days in all 81 markets.
Reports are retrievable by street address, property type (office, apartment, retail, and industrial) or market. Users can easily navigate to any one of Reiss 81 city pages to view reports at the city and neighborhood level. For example, Reiss Los Angeles office market page offers seven reports at the metropolitan level and 63 additional reports for 21 distinct Los Angeles neighborhoods.
Reports are available as presentation quality documents or in spreadsheet formats. These reports are used by Reiss customers to assist in due diligence and to support commercial real estate transactions such as loan originations, underwriting, acquisitions, risk assessment, portfolio monitoring and management, asset management, appraisal, and market analysis.
Other significant elements of Reis SE include:
| real estate news stories chosen by Reis analysts to provide information relevant to a particular market and property type; |
| quarterly first glance reports that provide an early assessment of the office, apartment, and retail sectors across the U.S. and preliminary commentary on new construction activity; and |
| the quarterly briefing a conference call hosted by Lloyd Lynford and Reiss chief economist, Dr. Sameer Chandan, during which they provide an analysis of the latest Reis findings. |
Reis is continuously enhancing Reis SE by developing new products and applications. Examples of recently developed analytical tools include:
| CMBS | Deal Analyst (August 2006), a new report offering loan-by-loan and aggregate analysis of each new CMBS (commercial mortgage backed securities) issue to come to market; |
| New Construction Valuation and Credit Risk (June 2006), an extension of Reiss Single Property Valuation and Credit Risk Analysis tools (which values commercial real estate properties and provides measures of credit risk) that leverages Reiss New Construction
database and market forecasts to value prospective properties at a future date; and |
| Portfolio Valuation (August 2005), as described above, is an aggregation of Reiss Single Property Valuation and Credit Risk Analysis tools. |
Cost of Service and Renewal Rates |
Reiss data is available for sale in four main ways: (1) annual and multi-year subscriptions to Reis SE, (2) corporate accounts allowing customers to purchase reports individually, (3) online credit card purchases and (4) custom data requests. Annual subscription fees range from $1,000 to $500,000 depending on the combination of markets, property types and reports subscribed to and allow the client to download an unlimited number of reports over a 12-month period. Corporate accounts range from $1,000 to $25,000 and allow clients to lock in a discount from retail report prices for up to one year. The larger the corporate account, the larger the discount the client receives. Individual report sales range from $150 to $2,500 per report and are available to anyone that visits Reiss retail website or contacts Reis via telephone, fax or email. However, certain reports are only available by a subscription or corporate account. Finally, custom
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deliverables range in price from $1,000 for a specific data element to $100,000 for custom portfolio valuation and credit analysis.
Subscription renewal rates are an important measure of customer satisfaction. Over the past four years, Reis has renewed an average of 94% of its subscription revenue (94% in fiscal 2006, 94% in fiscal 2005, 93% in fiscal 2004 and 93% in fiscal 2003).
Customer Service and Training |
Reis focuses heavily on proactive training and customer support. Reiss dedicated customer service team offers customized on-site training and web-based and telephonic support to promote usage, maximize product knowledge, and solicit customer input for future product enhancements. The corporate training team meets regularly with a large proportion of Reiss customers to identify opportunities for product adoption and increased usage. Additional points of customer contact include mid-year service reviews, a web-based customer feedback program and account manager visits.
Sales and Marketing |
Reiss sales group reports to a Senior Vice President of Sales and Marketing. The group is divided into three subgroups, each headed by a dedicated sales manager:
| Field Sales: this group focuses exclusively on new customer acquisitions of $20,000 or greater. Each member of the group has a geographic-based territory and contacts clients primarily through telephonic and face-to-face meetings. |
| Account Management: this group focuses on renewing and growing the existing customer base through expanded usage, additional content sales and the introduction of new functionality. Each member of the group is assigned a specific number of customers and is
responsible for meeting with them throughout the year to promote product usage and customer satisfaction. |
| Telesales: this group focuses on new business acquisition and renewals of customers spending less than $20,000. Each member of the group has a geographic-based territory and contacts both current and potential customers primarily through the telephone, email or the
Internet. |
Each sales professional on each team has a monthly quota and is carefully managed in an effort to accomplish that goal. Managers review potential customer prospects to validate that each representatives prospects are appropriately balanced between short-term and long-term opportunities. Compensation plans are developed with corporate goals and objectives in mind and are used to focus the sales team on these priorities.
To encourage interest in Reis products and services, Reis participates in industry trade shows, actively pursues speaking engagements and article placements in both industry press and the general business press, advertises online and distributes a quarterly new data release announcement to nearly 41,000 real estate professionals.
Reis also has an internal lead identification and tracking process in which research analysts and sales management work together to identify and track prospective customer leads.
Technology |
In order to ensure reliable telecommunications and network accessibility, Reiss technology infrastructure has built-in redundancy and backup systems. Reiss disaster recovery plan includes a mix of redundancy, backup and fail-safe techniques to provide a layered approach to maintaining its infrastructure and the operation of core products.
To sustain a fault-tolerant network, Reis incorporates multiple network and telecommunication routes over independent providers for connectivity. Each critical system has a backup system, meaning that information is spread across various hardware and software configurations that allow Reis to ensure customer access to the system at all times.
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Reis also maintains separate copies of its website, with a backup site hosted in its main offices and the primary site hosted at a well-established hosting facility. All critical systems are supported by continuous backup power from uninterruptible power supplies and additional electrical generators are provided in case of longer term power outages at the hosting facility. Scheduled backups of each of Reiss critical systems are made nightly which are stored offsite in a secured facility.
These strategies assist Reis in preventing small local disasters such as hardware failure, short-term power outages or network outages from being noticed by its customers. Continuous 24-hours per day, seven days per week monitoring alerts Reis to any system failures or security threats in real time.
Reis has a staff of product development and information technology professionals focusing on developing and creating new products and enhanced services, designing systems to ensure continuous improvement in data quality, improving the speed of data delivery, and maintaining an infrastructure capable of supporting Reiss comprehensive database.
Competition |
Real estate transactions involve multiple participants who require accurate historical and current market information. Key factors that influence the competitive position of commercial real estate information vendors include: the depth and breath of underlying databases; ease of use, flexibility and functionality of the software; the ability to keep the data up to date; scope of coverage by geography and property-type; customer training and support; adoption of the service by industry leaders; price; consistent product innovation and recognition by business trade publications.
Reiss senior management believes that, on a national level, only a small number of firms serve the needs of commercial real estate investors.
Reis competes directly and indirectly for customers with online services or web sites targeted to commercial real estate professionals such as Costar, Real Capital Analytics, Torto Wheaton Research, Property and Portfolio Research, Loopnet, as well as with in-house real estate research departments.
Intellectual Property and Proprietary Data |
Reis relies on a combination of trademark, copyright and trade secret laws in the U.S., as well as contractual provisions, to protect its proprietary technology and brand. Reis currently has common law trademarks in the U.S. for the Reis name and certain other words and phrases used in the course of business, and a registered U.S. trademark for the mark Reis.com and for the mark A Window Onto the Real Estate Market. Reis also relies on copyright laws to protect computer programs relating to its web sites and proprietary technologies and data. Reis has registered numerous Internet domain names related to its business in order to protect proprietary interests, and also enters into confidentiality and invention assignment agreements with its employees and consultants and confidentiality agreements with other third parties. Reis actively monitors access to its proprietary technology and information.
Employees |
As of November 30, 2006, Reis had 118 employees, all of whom are based in the corporate headquarters in New York, New York. None of Reiss employees are covered by a collective bargaining agreement. Reis has never experienced employee-related work stoppages and considers its relationship with its employees to be good.
Facilities |
Reiss headquarters are located in New York, New York where it leases approximately 33,500 square feet of office space under a lease that expires in 2016. Reis also leases approximately 22,500 square feet of space at a separate location in New York, New York, pursuant to a lease that expires in 2008. Currently, 15,000 square feet of that space has been sublet to third parties.
Legal Proceedings |
Reis is not currently party to any material legal proceedings.
Selected Financial Data |
See SummarySelected Historical Financial Data of Reis beginning on page 20.
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Reis Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview |
Founded in 1980, Reis is a leading provider of commercial real estate market information. Reiss proprietary database contains detailed trend and forecast information on over 250,000 properties in over 1,800 neighborhoods and 81 metropolitan markets in the U.S. The database contains information on apartment, retail, office and industrial properties and is used by real estate investors, lenders and other professionals to make informed buying, selling and financing decisions.
Reiss flagship product is Reis SE, which provides online access to information and analytical tools designed to facilitate both debt and equity transactions. In addition to trend and forecast analysis at neighborhood and metropolitan levels, the product offers detailed building specific information, such as rents, vacancy rate and lease terms. Reis SE also offers property sale information, new construction listings and property valuation estimates.
The Reis and Wellsford boards of directors have each approved the merger. Upon consummation of the merger, Merger Sub will be the surviving company and a wholly-owned subsidiary of Wellsford, and Wellsford intends to change its name to Reis, Inc. Wellsford was originally founded to operate as a real estate merchant banking firm to acquire, develop, finance and operate real properties and invest in private and public real estate companies. On November 17, 2005, Wellsfords stockholders ratified the Plan. The Plan will be terminated if the merger is consummated.
Historically, Reiss fiscal year starts November 1 and ends October 31.
Revenues and Expenses |
Reiss sources of revenues are:
| annual and multi-year subscriptions to Reis SE; |
| corporate accounts allowing customers to purchase reports individually; and |
| custom data requests. |
Reiss revenues have grown significantly in the past five years from $3,898,000 in fiscal 2001 to $16,515,000 in fiscal 2005. Reis has been cash flow positive and profitable since fiscal 2004. The key factors influencing Reiss growth in revenue have been Reiss increased use of the Internet to expand the delivery of its real estate market information and the expansion of its sales force. Revenues from subscriptions are recognized ratably on a monthly basis over the contractual period, which is typically one year.
Salaries, benefits, incentive compensation and commissions account for approximately 70% of Reiss expenses. These costs are included in the Statement of Operations within the categories of Cost of Revenues, Sales and Marketing, Product Development and General and Administrative, based on each employees principal function.
Critical Accounting Policies and Estimates |
Reiss consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires Reiss management to make estimates and assumptions that affect the reported amounts of assets and liabilities, 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 periods. Accordingly, actual results could differ from those estimates. Reis believes the following policies are the most critical for understanding and evaluating its financial condition and results of operations.
Revenue Recognition |
Reis derives approximately 80% of its revenues from customers who renew annually and pay in advance for access to Reis SE and other Reis products. Subscription fees are payable when billed and recognized as revenue ratably on a monthly basis over the related contractual period, which is typically one year. Revenues from custom reports are recognized when completed and delivered to the customers, provided that no significant Reis obligations remain.
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Income Taxes |
Income taxes are accounted for using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that the tax change occurs. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
As of October 31, 2004, Reis recorded a full valuation allowance against its deferred tax assets. During the year ended October 31, 2005, the valuation allowance against its deferred tax assets was reduced to zero. The reduction in the valuation allowance is due to managements evaluation of Reiss ability to generate future taxable income and, accordingly, to fully utilize its deferred tax assets.
Web Site Development and Database Costs |
Reis has adopted Emerging Issues Task Force (EITF) Issue No. 00-2, Accounting for Web Site Development Costs as of October 31, 2000. EITF Issue No. 00-2 requires that costs of developing a web site should be accounted for in accordance with AICPA Statement of Position 98-1, Accounting for the Costs of Computer Software Developed for Internal Use (SOP 98-1). Reis expenses all internet web site costs incurred during the preliminary project stage. Thereafter, all direct external and internal development and implementation costs are capitalized and amortized using the straight-line method over their remaining estimated useful lives, not exceeding three years.
Database costs represent the costs incurred by Reis for research information on new real estate properties and sale transactions added to its database. These costs include payroll and related benefits for Reiss employees in its survey, analytical and sales comparable departments. Database costs are amortized using the straight-line method over the estimated useful lives of the database, either three or five years.
Reconciliation of GAAP Net Income to EBITDA |
EBITDA is defined as earnings before interest, taxes, amortization and depreciation. Although EBITDA is not a measure of performance calculated in accordance with GAAP, Reis senior management uses EBITDA to measure operational and management performance. Reis believes that EBITDA is an appropriate metric that may be used by investors as a supplemental financial measure to be considered in addition to the reported GAAP basis financial information. Reis believes that an EBITDA measure will assist investors in evaluating and understanding Reiss business from year to year or period to period, as applicable. Reis believes that EBITDA provides the reader with the ability to understand Reiss continuing operational performance while isolating non-cash charges, such as depreciation and amortization, as well as other non-operating items, such as interest income, interest expense and income taxes. Reis also believes that disclosing EBITDA will provide better comparability to other companies in Reiss type of business. However, investors should not consider this measure in isolation or as a substitute for net income, operating income, or any other measure for determining Reiss operating performance that is calculated in accordance with GAAP. In addition, because EBITDA is not calculated in accordance with GAAP, it may not necessarily be comparable to similarly titled measures employed by other companies. A reconciliation of EBITDA to the most comparable GAAP financial measure, net income, follows:
For the Three Months Ended July 31, |
For the Nine Months Ended July 31, |
For the Years Ended October 31, |
||||||||||||||||||||
2006 | 2005 | 2006 | 2005 | 2005 | 2004 | 2003 | ||||||||||||||||
(amounts in thousands) |
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | ||||||||||||||||||
Reconciliation of GAAP Net Income to EBITDA |
||||||||||||||||||||||
Net Income |
$ | 739 | $ | 6,840 | $ | 1,181 | (1) | $ | 7,777 | $ | 8,343 | $ | 1,209 | $ | (239 | ) | ||||||
Add back: |
||||||||||||||||||||||
Amortization and depreciation expense |
465 | 301 | 1,355 | 1,026 | 1.442 | 1,377 | 1,205 | |||||||||||||||
Interest expense (income), net |
(84 | ) | (45 | ) | (149 | ) | (81 | ) | (121 | ) | (42 | ) | (52 | ) | ||||||||
Income tax expense (benefit), net |
397 | (5,722 | ) | 580 | (5,245 | ) | (4,847 | ) | 84 | 6 | ||||||||||||
EBITDA (Unaudited) |
$ | 1,517 | $ | 1,374 | $ | 2,967 | $ | 3,477 | $ | 4,817 | $ | 2,628 | $ | 920 | ||||||||
(1) | Net income of $739 and
$1,181 for the three months and the nine months ended July 31,
2006, respectively, include non-recurring losses in the amounts of
$64 and $1,253 during such periods associated with vacating Reiss
former office space. |
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Results of Operations |
The following table summarizes Reiss results of operations for the three months ended July 31, 2006 and 2005, the nine months ended July 31, 2006 and 2005, and the years ended October 31, 2005, 2004 and 2003:
For the Three Months Ended July 31, |
For the Nine Months Ended July 31, |
For the Years Ended October 31, |
||||||||||||||||||||
(amounts in thousands) |
2006 | 2005 | 2006 | 2005 | 2005 | 2004 | 2003 | |||||||||||||||
(Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||||||||
Results of Operations |
||||||||||||||||||||||
Revenues |
$ | 4,658 | $ | 4,227 | $ | 13,829 | $ | 12,189 | $ | 16,515 | $ | 12,451 | $ | 9,293 | ||||||||
Cost of revenues |
898 | 787 | 2,637 | 2,440 | 3,270 | 3,204 | 2,767 | |||||||||||||||
Gross profit |
3,760 | 3,440 | 11,192 | 9,749 | 13,245 | 9,247 | 6,526 | |||||||||||||||
Operating expenses: |
||||||||||||||||||||||
Sales and marketing |
768 | 797 | 2,487 | 2,634 | 3,454 | 2,974 | 2,284 | |||||||||||||||
Product development |
375 | 453 | 1,193 | 895 | 1,311 | 1,065 | 1,136 | |||||||||||||||
General and administrative |
1,501 | 1,117 | 4,647 | 3,769 | 5,105 | 3,957 | 3,391 | |||||||||||||||
Total operating expenses |
2,644 | 2,367 | 8,327 | 7,298 | 9,870 | 7,996 | 6,811 | |||||||||||||||
Income (loss) from operations |
1,116 | 1,073 | 2,865 | 2,451 | 3,375 | 1,251 | (285 | ) | ||||||||||||||
Interest income, net |
84 | 45 | 149 | 81 | 121 | 42 | 52 | |||||||||||||||
Loss on lease termination |
(64 | ) | | (1,253 | ) | | | | | |||||||||||||
Income (loss) before taxes |
1,136 | 1,118 | 1,761 | 2,532 | 3,496 | 1,293 | (233 | ) | ||||||||||||||
Net (provision) tax benefit |
(397 | ) | 5,722 | (580 | ) | 5,245 | 4,847 | (84 | ) | (6 | ) | |||||||||||
Net income (loss) |
$ | 739 | $ | 6,840 | $ | 1,181 | $ | 7,777 | $ | 8,343 | $ | 1,209 | $ | (239 | ) | |||||||
Comparison of the Three Months Ended July 31, 2006 and 2005 |
Revenues |
Revenues grew 10% from $4,227,000 for the three months ended July 31, 2005, to $4,658,000 for the three months ended July 31, 2006. This increase in revenue was the result of: (1) new major accounts; (2) fee increases for existing Reis SE subscribers; (3) a continuing high renewal rate; (4) increased penetration of small and mid-sized clients by the recently established telesales operation; and (5) increased sale of new products such as sales comparables.
Cost of Revenues |
Cost of revenues increased 14% from $787,000 for the three months ended July 31, 2005, to $898,000 for the three months ended July 31, 2006. Cost of revenues consists of the expenses associated with producing and supporting the content that is sold to Reis subscribers and other customers. These expenses include salaries and benefits associated with survey operations, analytical research, customer support, writing and editing of web content, quality control and depreciation of the development costs associated with the previously capitalized database.
Sales and Marketing |
Sales and marketing expenses primarily consist of the compensation and associated costs for sales and marketing personnel. Total sales and marketing expenses declined 4% from $797,000 for the three months ended July 31, 2005, to $768,000 for the three months ended July 31, 2006, due to turnover in the sales department. The hiring of new sales people in the second and third quarters of fiscal 2006 will result in an increase in commission costs and total sales and marketing expenses during the fourth quarter of fiscal 2006 and in future periods.
Product Development |
Product development expenses include costs for the research and development of new products and services as well as the maintenance of existing products and services. These costs include salaries and benefits associated with product development and technology personnel, website hosting and maintenance costs, and depreciation of capitalized website development costs. Product development expenses decreased 17% from $453,000 for the three months ended July 31, 2005, to $375,000 for the three months ended July 31, 2006, as a result of fewer expensable hours being allocated to product development. Reis expects
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product development expenses to increase in absolute dollar amounts, but to remain relatively constant as a percentage of revenues.
General and Administrative |
General and administrative expenses consist primarily of salaries and related expenses for executive, accounting, human resources, and econometric personnel. These costs also include insurance and professional fees, rent, telecommunication costs, computer and office equipment maintenance, and other related expenses. General and administrative expenses increased 34% from $1,117,000 for the three months ended July 31, 2005, to $1,501,000 for the three months ended July 31, 2006. The increase in general and administrative expenses was primarily due to increases in executive, econometrics and administrative payroll and related costs, as well as an increase in office rent resulting from its move to new and larger offices in November 2005.
Interest Income |
Interest income increased from $47,000 for the three months ended July 31, 2005, to $113,000 for the three months ended July 31, 2006. This increase was primarily the result of higher base interest rates and a higher average cash balance. As of July 31, 2006, Reis held $9,550,000 in cash, cash equivalents and short term investments, compared to approximately $6,370,000 in cash, cash equivalents and short term investments as of July 31, 2005.
Income Taxes |
Reis reported a provision for income taxes of $397,000 for the three months ended July 31, 2006. In the three months ended July 31, 2005 Reis reported a net tax benefit of $5,722,000, reflecting the reversal of reserves of its deferred tax asset based upon the determination of the expected future usability of Reiss NOLs.
Comparison of the Nine Months Ended July 31, 2006 and 2005 |
Revenues |
Revenues grew 13% from $12,189,000 for the nine months ended July 31, 2005, to $13,829,000 for the nine months ended July 31, 2006. This increase in revenue was the result of: (1) new major accounts; (2) fee increases for existing Reis SE subscribers; (3) a continuing high renewal rate; (4) increased penetration of small and mid-sized clients by the recently established telesales operation; and (5) increased sale of new products such as sales comparables.
Cost of Revenues |
Cost of revenues increased 8% from $2,440,000 for the nine months ended July 31, 2005, to $2,637,000 for the nine months ended July 31, 2006. Historically, cost of revenues as a percentage of total revenues has been declining. This decrease is attributable to Reiss subscription model in which approximately 80% of its revenues are derived from customers who renew annually with lower associated sales costs.
Sales and Marketing |
Total sales and marketing expenses declined 6% from $2,634,000 for the nine months ended July 31, 2005, to $2,487,000 for the nine months ended July 31, 2006, as a result of turnover in the sales department. The hiring of new sales people in the second, third and fourth quarters of fiscal 2006 will result in an increase in commission costs and total sales and marketing expenses during the fourth quarter of 2006 and in future periods.
Product Development |
Product development expenses increased 33% from $895,000 for the nine months ended July 31, 2005, to $1,193,000 for the nine months ended July 31, 2006. This increase is largely the result of increased payroll costs due to the launch of new products in fiscal 2006 and the commencement of amortization on the capitalized costs for such new products.
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General and Administrative |
General and administrative expenses increased 23% from $3,769,000 for the nine months ended July 31, 2005, to $4,647,000 for the nine months ended July 31, 2006. The increase in general and administrative expenses was due primarily to increases in executive, econometrics and administrative payroll and related costs, as well as an increase in office rent resulting from Reiss move to new and larger offices in November, 2005.
Interest Income |
Interest income increased from $90,000 for the nine months ended July 31, 2005, to $229,000 for the nine months ended July 31, 2006. This increase was primarily due to higher base interest rates and a higher average cash balance.
Loss on Lease Termination |
During the nine months ended July 31, 2006 Reis recorded a non-recurring loss in the amount of $1,253,000 with respect to its vacated office space.
Income Taxes |
Reis reported a provision for income taxes of $580,000 for the nine months ended July 31, 2006. In the nine months ended July 31, 2005, Reis reported a net tax benefit of $5,245,000, reflecting the reversal of reserves for its deferred tax asset based upon the determination of the expected future usability of Reiss NOLs.
Comparison of the Years Ended October 31, 2005 and 2004 |
Revenues |
Revenues grew 33% from $12,451,000 for the year ended October 31, 2004, to $16,515,000 for the year ended October 31, 2005. This increase in revenue was the result of: (1) a significant increase in new major accounts; (2) fee increases for existing Reis SE subscribers; (3) a continuing high renewal rate; and (4) increased sale of new products such as sales comparables.
Cost of Revenues |
Cost of revenues increased 2% from $3,204,000 for the year ended October 31, 2004, to $3,270,000 for the year ended October 31, 2005. Historically, however, cost of revenues as a percentage of total revenues has been declining because Reiss subscription-driven business model has generated a significant amount of incremental revenue without a commensurate increase in cost of revenue expenses.
Sales and Marketing |
Total sales and marketing expenses increased 16% from $2,974,000 for the year ended October 31, 2004, to $3,454,000 during the year ended October 31, 2005. The increase in sales and marketing expense was primarily the result of an increase in payroll costs due to the expansion in the sales force and a commensurate increase in training and recruiting costs.
Product Development |
Product development expenses increased 23% from $1,065,000 for the year ended October 31, 2004, to $1,311,000 for the year ended October 31, 2005. This increase is largely the result of increased payroll costs due to the launch of new products in fiscal 2005 and the commencement of amortization on the capitalized costs for such new products.
General and Administrative |
General and administrative expenses increased 29% from $3,957,000 for the year ended October 31, 2004, to $5,105,000 for the year ended October 31, 2005. The increase in general and administrative expenses was primarily the result of increases in payroll and related costs due to the expansion of the econometrics department to support new product research and development, increases in office rents, including annual
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escalations as well as a period of one and a half months of double rent incurred before Reiss move to its new office, an increase in executive incentive bonuses based on company performance, and increases in legal and accounting costs.
Interest Income |
Interest income increased from $56,000 for the year ended October 31, 2004, to $134,000 for the year ended October 31, 2005. This increase was primarily due to higher base interest rates and a higher average cash balance.
Income Taxes |
Reis reported a provision for income taxes of $84,000 for the year ended October 31, 2004. For the year ended October 31, 2005 Reis reported a net tax benefit of $4,847,000, reflecting the recognition of its deferred tax asset based upon the determination of the expected future usability of Reiss NOLs.
Comparison of the Years Ended October 31, 2004 and 2003 |
Revenues |
Revenues grew 34% from $9,293,000 for the year ended October 31, 2003, to $12,451,000 for the year ended October 31, 2004. This increase in revenue was the result of: (1) a significant increase in new major accounts; (2) fee increases for existing Reis SE subscribers; and (3) high renewal rates.
Cost of Revenues |
Cost of revenues increased 16% from $2,767,000 for the year ended October 31, 2003, to $3,204,000 for the year ended October 31, 2004. Historically, however, cost of revenues as a percentage of total revenues has been declining because Reiss subscription-driven business model has generated a significant amount of incremental revenue, without a commensurate increase in cost of revenue expenses.
Sales and Marketing |
Total sales and marketing expenses increased 30% from $2,284,000 for the year ended October 31, 2003, to $2,974,000 during the year ended October 31, 2004. The increase in sales and marketing expense is in line with the percentage increase in sales and results primarily from increases in payroll and commission costs.
Product Development |
Product development expenses decreased 6% from $1,136,000 for the year ended October 31, 2003, to $1,065,000 for the year ended October 31, 2004. This decrease is primarily the result of capitalizing payroll costs for new product development during the year ended October 31, 2004, at a greater amount than the increase in payroll costs compared to the 2003 year.
General and Administrative |
General and administrative expenses increased 17% from $3,391,000 for the year ended October 31, 2003, to $3,957,000 for the year ended October 31, 2004. The increase in general and administrative expenses was primarily the result of increases in payroll and related costs due to the expansion of the econometrics department to support new product research and development, increases in office rent, including annual escalations, an increase in executive incentive bonuses based on company performance, and increases in legal costs.
Income Taxes |
Reis reported a provision for income taxes of $84,000 for the year ended October 31, 2004, compared to $6,000 for the year ended October 31, 2003. The increase resulted from Reis realizing income before taxes in 2004 compared to a loss in 2003, and having to pay Federal alternative minimum taxes and increased state and local taxes during the 2004 period.
179
Liquidity and Capital Resources |
Sources of Liquidity |
From 1998 through 2002, Reis financed its operations through private placements of its capital stock. Since 2003, Reis has financed its operations through cash flow that it generates from its operations. As of July 31, 2006, its cash, cash equivalents and short-term investments totaled approximately $9,550,000, which consist of money market funds, savings and checking accounts.
Reis will incur significant cash requirements in connection with the merger with Wellsford, including paying a majority of the cash for the purchase of its outstanding stock pursuant to the terms of the merger agreement, including preferred stock, as well as stock option buyouts aggregating approximately $4,714,000 and other transaction costs approximating $5,500,000. Such costs will be funded utilizing $25,000,000 of the $27,000,000 Bank Loan and available cash, with the balance to be provided by Wellsford.
Reis expects to meet its other short-term liquidity requirements, such as operating costs, product development and enhancements, the current portion of long term debt, operating and capital leases, and costs related to the merger generally through its available cash, cash equivalents and short-term investments, cash generated by operations, and the availability of $2,000,000 for working capital purposes under the Bank Loan arrangements.
Reis expects to meet its long-term liquidity requirements, such as product development and enhancement, acquisitions, obligations under long term debt, including the Bank Loan, and operating and capital leases generally through cash generated by operations and availability under the Bank Loan.
Reiss future capital requirements will depend on many factors, including its rate of revenue growth, the expansion of its marketing and sales activities, the timing and extent of spending to support product development efforts, the timing of introductions of new products and services and enhancements to existing products and services, and the continuing market acceptance of its products and services. Reis may need to raise additional capital through future debt financing to the extent necessary to fund such activities. Additional financing may not be available at all or on terms favorable to Reis. Although Reis is currently not a party to any agreement or letter of intent with respect to investments in, or acquisitions of, complementary businesses, products, services or technologies, it may enter into these types of arrangements in the future, which could also require Reis to seek additional debt financing.
The following table summarizes Reiss cash flows:
For the Nine Months Ended July 31, | For the Years Ended October 31, | |||||||||||||||
(amounts in thousands) |
2006 | 2005 | 2005 | 2004 | 2003 | |||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Cash provided by operating activities |
$ | 3,462 | $ | 3,306 | $ | 5,243 | $ | 4,056 | $ | 2,643 | ||||||
Cash (used in) investing activities |
$ | (2,365 | ) | $ | (1,926 | ) | $ | (2,903 | ) | $ | (1,746 | ) | $ | (1,083 | ) | |
Cash provided by (used in) financing activities |
$ | 389 | $ | (72 | ) | $ | 658 | $ | (88 | ) | $ | (66 | ) | |||
Operating Activities |
Net cash provided by operating activities primarily consists of net income adjusted for certain non-cash items, including depreciation, amortization, deferred tax credits applicable to net tax operating loss carryforwards, and the effect of changes in working capital. Net cash provided by operating activities was $5,243,000, $4,056,000 and $2,643,000 in the years ended October 31, 2005, 2004 and 2003, respectively. Net cash provided by operating activities was $3,462,000 and $3,306,000 in the nine months ended July 31, 2006 and 2005, respectively. The increase in cash provided by operating activities in 2005 and 2004 and the nine month period ended July 31, 2006 was primarily due to increased net income generated by Reis and increases in deferred revenue related to prepaid subscriptions. The increase in deferred revenue is primarily related to an increase in the number of customers who have prepaid annual subscriptions.
180
Investing Activities |
The change in cash used in investing activities in the nine months ended July 31, 2006 of $2,365,000 compared to $1,926,000 in the 2005 period was primarily attributable to capital expenditures for leasehold improvements and office furniture and equipment at Reiss new 530 Fifth Avenue, New York, New York office.
Cash used in investing activities increased from $1,746,000 during the year ended October 31, 2004, to $2,903,000 for the year ended October 31, 2005. The increase is also primarily attributable to furniture and equipment for the new office, as well as a $216,000 security deposit for the new office lease. During the years ended October 31, 2004 and 2003, cash used for investing activities of $1,746,000 and $1,083,000, respectively, was primarily for capitalized web site and database costs.
Financing Activities |
Cash provided by financing activities in the nine months ended July 31, 2006 of $389,000 was primarily from entering into capital leases for equipment and of $658,000 during the year ended October 31, 2005 was from proceeds of a bank loan. Such amounts are net of repayments under such agreements.
Material Contractual Obligations |
As of July 31, 2006, Reiss principal commitment consists of obligations under a lease for its current office at 530 Fifth Avenue in New York, New York. This office is currently leased under an operating lease agreement which commenced in September, 2005 and expires in September, 2016. During the nine months ended July 31, 2006, Reis recorded an expense of $1,253,000 associated with the early termination of its lease for office space at 5 West 37th Street in New York, New York, which lease expires on March 31, 2008.
(amounts in thousands) |
Total as of July 31, 2006 |
Less Than One Year |
1-3 Years | 3-5 Years | More Than 5 Years |
|||||||||||
Loan obligation |
$ | 484 | $ | 105 | $ | 379 | $ | | $ | | ||||||
Capital lease obligation |
$ | 735 | $ | 177 | $ | 315 | $ | 243 | $ | | ||||||
Operating lease obligation530 Fifth Avenue |
$ | 13,672 | * | $ | 1,078 | $ | 2,232 | $ | 2,780 | $ | 7,582 | |||||
37th Street Lease |
$ | 761 | $ | 422 | $ | 339 | $ | | $ | | ||||||
* | Includes $442 of deferred straight line rent at July 31, 2006 |
Net Operating Loss Carryforwards |
As of July 31, 2006, Reis has NOL carryforwards for Federal income tax purposes of approximately $10.1 million. There can be no assurance that Reis will realize the benefit of its NOL carryforwards. The Federal NOL carryforwards are available to offset future taxable income and expire at various dates through 2022, if not utilized. The change of ownership brought about by the merger transaction is not expected to significantly limit the amount and overall utilization of Reiss NOL carryforwards.
Quantitative and Qualitative Disclosures About Market Risk |
The primary objective of Reiss investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, Reis invests in short-term, high-quality, interest-bearing securities and bank deposits. To minimize its exposure to an adverse shift in interest rates, Reis invests in short-term securities and maintains an average maturity of one year or less.
181
UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL INFORMATION
Unaudited Pro Forma Combined Balance Sheet As of September 30, 2006
The following unaudited Pro Forma Combined Balance Sheet is presented as if the merger had been consummated, the proceeds from the Bank Loan had been received and Wellsford had terminated the Plan on September 30, 2006. This Pro Forma Combined Balance Sheet should be read in conjunction with the Pro Forma Combined Statement of Operations and the historical financial statements and notes thereto of Wellsford and Reis included elsewhere in this joint proxy statement/prospectus. The Pro Forma Combined Balance Sheet is unaudited and is not necessarily indicative of what the actual financial results would have been had the merger been consummated, the proceeds from the Bank Loan had been received and Wellsford had terminated the Plan on September 30, 2006 nor does it purport to represent the future financial position of Wellsford and Reis on a combined basis.
182
Unaudited Pro Forma Combined Balance Sheet
As of September 30, 2006
(Continued)
Wellsford Real Properties, Inc. at September 30, 2006
|
Pro Forma Adjustments
|
|||||||||||||||||||||||||||
Liquidation Basis |
Reversal of Liquidation Adjustments |
Going Concern Basis |
Reclassification Adjustments |
Classified Balance Sheet |
Reis, Inc. at July 31, 2006 |
Loan Proceeds |
Acquisition and Consolidation |
Pro Forma Combined |
||||||||||||||||||||
A | B | J | K | L | M | N | O | S | ||||||||||||||||||||
Assets |
||||||||||||||||||||||||||||
Real estate assets under development |
$ | 49,606,070 | $ | (5,132,103 | ) C | $ | 44,473,967 | $ | (44,473,967 | ) | $ | | $ | | $ | | $ | | $ | | ||||||||
Investment in Reis |
20,000,000 | (13,209,022 | ) D | 6,790,978 | (6,790,978 | ) | | | | | | |||||||||||||||||
Investment in joint venture |
453,074 | (230,208 | ) E | 222,866 | (222,866 | ) | | | | | | |||||||||||||||||
Total real estate and investments |
70,059,144 | (18,571,333 | ) | 51,487,811 | (51,487,811 | ) | | | | | | |||||||||||||||||
Cash and cash equivalents |
38,000,641 | | 38,000,641 | | 38,000,641 | 9,549,894 | 23,810,988 | (49,378,133 | ) P | 21,983,390 | ||||||||||||||||||
Restricted cash and investments |
4,609,931 | | 4,609,931 | | 4,609,931 | 220,796 | | | 4,830,727 | |||||||||||||||||||
Receivables, prepaid and other assets |
1,307,599 | 106,219 | F | 1,413,818 | (727,967 | ) | 685,851 | 3,062,602 | | | 3,748,453 | |||||||||||||||||
Deferred merger costs |
1,465,112 | | 1,465,112 | (1,465,112 | ) | | | | | | ||||||||||||||||||
Deferred tax asset |
| | | | | 2,251,000 | | (2,251,000 | ) Q | | ||||||||||||||||||
Total current assets |
115,442,427 | (18,465,114 | ) | 96,977,313 | (53,680,890 | ) | 43,296,423 | 15,084,292 | 23,810,988 | (51,629,133 | ) | 30,562,570 | ||||||||||||||||
Other assets |
| | | | | | | | | |||||||||||||||||||
Investment in Reis |
| | | 6,790,978 | 6,790,978 | | | (6,790,978 | ) Q | | ||||||||||||||||||
Deferred merger costs |
| | | 1,465,112 | 1,465,112 | 480,364 | | (1,945,476 | ) Q | | ||||||||||||||||||
Investment in joint venture |
| | | 222,866 | 222,866 | | | | 222,866 | |||||||||||||||||||
Database |
| | | | | 1,443,340 | | 4,000,000 | Q | 5,443,340 | ||||||||||||||||||
Website |
| | | | | 1,729,866 | | | 1,729,866 | |||||||||||||||||||
Customer relationship |
| | | | | | | 5,200,000 | Q | 5,200,000 | ||||||||||||||||||
Leasehold interest |
| | | | | | | 3,150,000 | Q | 3,150,000 | ||||||||||||||||||
Goodwill |
| | | | | | | 66,277,739 | Q | 66,277,739 | ||||||||||||||||||
Other assets |
| | | 157,500 | 157,500 | 196,746 | 705,000 | | 1,059,246 | |||||||||||||||||||
Furniture, fixtures and equipment |
| | | 570,467 | 570,467 | 2,156,930 | | | 2,727,397 | |||||||||||||||||||
Real estate assets under development |
| | | 44,473,967 | 44,473,967 | | | | 44,473,967 | |||||||||||||||||||
Deferred tax asset |
| | | | | 2,290,000 | | (2,290,000 | ) Q | | ||||||||||||||||||
Total assets |
$ | 115,442,427 | $ | (18,465,114 | ) | $ | 96,977,313 | $ | | $ | 96,977,313 | $ | 23,381,538 | $ | 24,515,988 | $ | 15,972,152 | $ | 160,846,991 | |||||||||
183
Unaudited Pro Forma Combined Balance Sheet
As of September 30, 2006
(Continued)
Wellsford Real Properties, Inc. at September 30, 2006 |
Pro Forma Adjustments |
|||||||||||||||||||||||||||
Liquidation Basis |
Reversal of Liquidation Adjustments |
Going Concern Basis |
Reclassification Adjustments |
Classified Balance Sheet |
Reis, Inc. at July 31, 2006 |
Loan Proceeds |
Acquisition and Consolidation |
Pro Forma Combined |
||||||||||||||||||||
A | B | J | K | L | M | N | O | S | ||||||||||||||||||||
Liabilities
and Stockholders Equity |
||||||||||||||||||||||||||||
Current liabilities |
||||||||||||||||||||||||||||
Mortgage notes and construction loans
payable |
$ | 23,584,254 | $ | | $ | 23,584,254 | $ | (22,894,678 | ) | $ | 689,576 | $ | | $ | | $ | | $ | 689,576 | |||||||||
Current portion of loans and other debt |
| | | | | 307,488 | (104,811 | ) | | 202,677 | ||||||||||||||||||
Current portion of Bank Loan |
| | | | | | 750,000 | | 750,000 | |||||||||||||||||||
Construction payables |
4,126,017 | | 4,126,017 | | 4,126,017 | | | | 4,126,017 | |||||||||||||||||||
Accrued expenses and other liabilities |
6,544,496 | (444,062 | ) G | 6,100,434 | 2,036,702 | 8,137,136 | 1,559,855 | | (1,209,010 | ) Q | 8,487,981 | |||||||||||||||||
Reserve for estimated costs during liqui-
dation |
20,837,482 | (18,800,780 | ) H | 2,036,702 | (2,036,702 | ) | | | | | | |||||||||||||||||
Reserve for option cancellations |
2,711,000 | | 2,711,000 | | 2,711,000 | | | | 2,711,000 | |||||||||||||||||||
Deferred revenues |
| | | | | 8,635,348 | | | 8,635,348 | |||||||||||||||||||
Total current liabilities |
57,803,249 | (19,244,842 | ) | 38,558,407 | (22,894,678 | ) | 15,663,729 | 10,502,691 | 645,189 | (1,209,010 | ) | 25,602,599 | ||||||||||||||||
Other liabilities |
||||||||||||||||||||||||||||
Non-current portion of Bank Loan |
| | | | | | 24,250,000 | | 24,250,000 | |||||||||||||||||||
Non-current portion of mortgage notes
and construction loans payable |
| | | 22,894,678 | 22,894,678 | | | | 22,894,678 | |||||||||||||||||||
Other long term liabilities |
| | | | | 1,718,756 | (379,201 | ) | (441,653 | ) Q | 897,902 | |||||||||||||||||
Minority interests |
1,428,544 | | 1,428,544 | | 1,428,544 | | | | 1,428,544 | |||||||||||||||||||
Total liabilities and minority interests |
59,231,793 | (19,244,842 | ) | 39,986,951 | | 39,986,951 | 12,221,447 | 24,515,988 | (1,650,663 | ) | 75,073,723 | |||||||||||||||||
Commitments and contingencies |
| | | | | | | | | |||||||||||||||||||
Preferred stock |
| | | | | 1,785 | | (1,785 | ) R | | ||||||||||||||||||
Common stock |
| 129,424 | I | 129,424 | | 129,424 | 48,607 | | 32,949 | R | 210,980 | |||||||||||||||||
Additional paid in capital |
| 65,572,513 | I | 65,572,513 | | 65,572,513 | 24,439,985 | | 4,261,365 | R | 94,273,863 | |||||||||||||||||
Retained earnings (deficit) |
| (8,711,575 | ) I | (8,711,575 | ) | | (8,711,575 | ) | (13,330,286 | ) | | 13,330,286 | R | (8,711,575 | ) | |||||||||||||
Total stockholders equity |
| 56,990,362 | 56,990,362 | | 56,990,362 | 11,160,091 | | 17,622,815 | 85,773,268 | |||||||||||||||||||
Net assets in liquidation |
56,210,634 | (56,210,634 | ) I | | | | | | | | ||||||||||||||||||
Total liabilities and stockholders equity |
$ | 115,442,427 | $ | (18,465,114 | ) | $ | 96,977,313 | $ | | $ | 96,977,313 | $ | 23,381,538 | $ | 24,515,988 | $ | 15,972,152 | $ | 160,846,991 | |||||||||
184
Notes to Pro Forma Combined Balance Sheet as of September 30, 2006 (unaudited):
A. | Reflects Wellsfords historical consolidated statement of net assets in liquidation as of September 30, 2006 prepared on the liquidation basis of accounting (unaudited). |
B. | Represents adjustments necessary to change from the liquidation basis of accounting (estimated net realizable value basis) to the going concern basis of accounting (historical cost basis) at September 30, 2006 to reflect the termination of the Plan. |
C. | The adjustment to real estate assets under development of $5,132,103 represents recording Wellsfords development projects at the lower of historical cost or market value. |
D. | The $13,209,022 adjustment to Wellsfords investment in Reis is to reduce the liquidation value of $20,000,000 down to Wellsfords historical cost basis for Reis of $6,790,978. |
E. | The $230,208 adjustment to investment in joint ventures is to reduce the liquidation value for Wellsfords investment in Clairborne Fordham to its historical cost basis under the equity method of accounting. |
F. | The $106,219 adjustment to receivables, prepaid and other assets reflects recording of furniture, fixtures and equipment at depreciated cost at September 30, 2006. |
G. | The $444,062 reduction to accrued expenses and other liabilities reduces the deferred tax liability recorded on the assets where the liquidation basis was greater than the historical cost. |
H. | The reduction in the reserve for estimated costs during the liquidation period reflects the reversing of all expected future general and administrative costs that were recorded at estimated settlement amounts on a liquidation basis. The remaining balance reflects the re-
establishment of items that should be accrued at September 30, 2006 on a going concern basis. The following summarizes the net change by general and administrative expense category: |
|
(amounts in thousands) |
Liquidation Basis Reserve at September 30, 2006 |
Net Adjustment |
Going Concern Basis Accrual at September 30, 2006 |
|||||||
Payroll, benefits, severance and retention costs |
$ | 10,083 | $ | 9,002 | $ | 1,081 | ||||
Professional fees |
4,330 | 3,596 | 734 | |||||||
Other general and administrative costs |
6,424 | 6,202 | 222 | |||||||
Total |
$ | 20,837 | $ | 18,800 | $ | 2,037 | ||||
I. | Adjustments to equity are to eliminate the net assets in liquidation reporting and present the appropriate components including common stock, additional paid in capital and retained earnings, including the net effect on retained earnings from the adjustments in C to H
above. |
J. | Wellsfords consolidated balance sheet as of September 30, 2006 prepared on the going concern basis of accounting (unaudited). |
K. | Reclassification adjustments to Wellsfords balance sheet for a classified balance sheet presentation in accordance with GAAP and SEC regulations for the combined company. |
L. | Wellsfords classified balance sheet on a going concern basis. |
M. | Reis historical balance sheet as of July 31, 2006 (unaudited). In accordance with SEC regulations, the fiscal quarter end of Reis is utilized in preparing this pro forma presentation as the respective balance sheet date is not greater than 90 days from the date of the
Wellsford September 30, 2006 consolidated balance sheet. |
185
N. | Bank Loan proceeds aggregating $25,000,000 will be used as follows: |
|
Cash proceeds | $ | 25,000,000 | ||||
Less: | ||||||
Bank Loan costs
and fees, and interest cap costs
|
(705,000 | ) | ||||
Repayment of current
portion of other Reis debt
|
(104,811 | ) | ||||
Repayment of non-current
portion of other Reis debt
|
(379,201 | ) | ||||
Cash available for acquisition | $ | 23,810,988 | ||||
The Bank Loan is presented with a current balance of $750,000, based upon the repayment schedule, and the non-current balance of $24,250,000.
|
O. | To reflect the acquisition of Reis by Wellsford and the allocation of purchase price to assets acquired and liabilities assumed and related consolidation entries. |
P. | Cash used at the acquisition is comprised of the following: |
|
Cash portion
of the merger consideration
|
$ | 34,579,414 | |||
Payment of Wellsford
estimated merger costs
|
4,584,363 | ||||
Payment of Reis
estimated merger costs
|
5,500,000 | ||||
Reis stock option
cancellation payments
|
4,714,356 | ||||
$ | 49,378,133 | ||||
Q. | The total acquisition price to be allocated to acquired tangible and intangible assets including goodwill and assumed liabilities is as follows: |
|
Cash portion
of merger consideration.
|
$ | 34,579,412 | |||
Stock portion
of merger consideration as valued for accounting purposes (see R below)
|
30,087,478 | ||||
Wellsford merger
costs paid
|
4,584,365 | ||||
Merger costs
deferred
|
1,945,476 | ||||
Merger costs
accrued
|
(1,209,010 | ) | |||
Wellsfords
cost basis of 23% preferred ownership interest in Reis
|
6,790,978 | ||||
Net
adjustment to eliminate Reiss stockholders equity, representing
excess of liabilities assumed and Reis transaction costs over the adjusted
book value of Reiss assets acquired
|
1,849,040 | ||||
Total remaining
costs to allocate
|
$ | 78,627,739 | |||
Goodwill
|
$ | 66,277,739 | |||
Database
|
4,000,000 | ||||
Customer relationship
|
5,200,000 | ||||
Leasehold interest
|
3,150,000 | ||||
$ | 78,627,739 | ||||
The net deferred tax assets have been adjusted to equal the Federal, state and local tax liability arising from the differences in book basis of the assets, excluding Goodwill, acquired over the respective tax basis. |
R. | The adjustments to common and preferred stock and paid in capital reflect the issuance of the Wellsford stock portion of the merger consideration of 4,237,673 shares of Wellsfords common stock at $0.02 par value per share, or $84,753, and additional paid in capital of
$30,002,725 assuming a price of $7.10 per share which is Wellsfords average closing stock price for the period October 5, 2006 to October 18, 2006. This is the determination of value in accordance with existing accounting literature. Such issuance was offset by the
reversal of Reiss equity for the par value of preferred stock of $1,785, Reiss common stock of $48,607, and Reiss additional paid in capital of $24,439,985. The outstanding balance of loans to Lloyd Lynford and Jonathan Garfield aggregating $1,304,572 which is
reflected as a reduction of Reis stockholders equity in the Reis balance sheet at July 31, 2006, is to be settled under the terms of their employment contracts using Wellsford common stock received by Lloyd Lynford and Jonathan Garfield in the merger. Accordingly,
$3,197 is a reduction to common stock and the remainder is applied against paid in capital. |
186
Impact to Wellsfords Stockholders Equity: | Wellsford Common Stock |
Additional Paid in Capital |
Retained Earnings (Deficit) |
Total Stockholders Equity |
Wellsford Common Stock Outstanding* |
|||||||||||||
Balances prior to pro forma entities | $ | 129,424 | $ | 65,572,513 | $ | (8,711,575 | ) | $ | 56,990,362 | 6,471,179 | ||||||||
Issued stock component of merger consideration | 84,753 | 30,002,725 | | 30,087,478 | 4,237,673 | |||||||||||||
Settlement of Reis officers loans | (3,197 | ) | (1,301,375 | ) | | (1,304,572 | ) | (159,874 | ) | |||||||||
Pro forma stockholders equity | $ | 210,980 | $ | 94,273,863 | $ | (8,711,575 | ) | $ | 85,773,268 | 10,548,978 | ||||||||
* | Excludes 175,559 options
exercised subsequent to September 30,
2006. Total outstanding shares, on a pro forma basis, when considering
this exercise of options, aggregate 10,724,537 shares of Wellsford
common stock. |
S. | Combined pro forma balance sheet as of September 30, 2006 of Wellsford and Reis (unaudited). |
187
Unaudited Pro Forma Combined Statement of Operations
For the Nine Months Ended September 30, 2006
The following unaudited pro forma condensed combined statement of operations is presented as if the merger had been consummated, the proceeds from the Bank Loan had been received, and Wellsford terminated the Plan on January 1, 2006. This unaudited pro forma condensed combined statement of operations should be read in conjunction with the pro forma condensed combined balance sheet of Wellsford and the historical financial statements and notes thereto of Wellsford and Reis included elsewhere in this joint proxy statement/ prospectus for the nine months ended September 30, 2006 and July 31, 2006, respectively. The pro forma condensed combined statement of operations is unaudited and is not necessarily indicative of what the actual financial results would have been had the merger been consummated and the proceeds from the Bank Loan had been received and Wellsford terminated the Plan as of January 1, 2006, nor does it purport to represent the future results of operations of Wellsford and Reis on a combined basis.
188
Unaudited Pro Forma Combined Statement of Operations
For the Nine Months Ended September 30, 2006
(Continued)
Wellsford Real Properties, Inc. |
Pro Forma Adjustments |
||||||||||||||||||||||||
Liquidation
Basis For the Nine Months Ended September 30, 2006 |
Conversion
to a Going Concern Basis For the Nine Months Ended September 30, 2006 |
Going
Concern Basis For the Nine Months Ended September 30, 2006 |
Reis,
Inc. For the Nine Months Ended July 31, 2006 |
Interest
Income Adjustment and Financing Cost |
Acquisition Entries |
Incentive Award Cost |
Pro
Forma Combined for the Nine Months Ended September 30, 2006 |
||||||||||||||||||
A | B | H | I | M | O | P | |||||||||||||||||||
Consolidated Statement of Changes in Net Assets in Liquidation |
|||||||||||||||||||||||||
Net asset in liquidation January 1, 2006 |
$ | 56,569,414 | $ | (56,569,414 | ) | $ | | ||||||||||||||||||
Operating income |
1,272,765 | (1,272,765 | ) C | | |||||||||||||||||||||
Changes in net real estate assets under development, net of minority interest and estimated income taxes |
1,747,042 | (1,747,042 | ) | | |||||||||||||||||||||
Provision for option cancellation reserve |
(4,226,938 | ) | 4,226,938 | | |||||||||||||||||||||
Change in option cancellation reserve due to market price fluctuations |
848,351 | (848,351 | ) | | |||||||||||||||||||||
Net change in net assets in liquidation January 1, 2006 to September 30, 2006 |
(358,780 | ) | 358,780 | | |||||||||||||||||||||
Net assets in liquidation September 30, 2006 |
$ | 56,210,634 | $ | (56,210,634 | ) | $ | | ||||||||||||||||||
Consolidated Statements of Operations |
|||||||||||||||||||||||||
Revenue |
|||||||||||||||||||||||||
Revenue from sales of residential units |
$ | 21,670,178 | D | $ | 21,670,178 | $ | | $ | | $ | | $ | | $ | 21,670,178 | ||||||||||
Reis subscription revenue |
| | 13,829,956 | | | | 13,829,956 | ||||||||||||||||||
Total revenue |
21,670,178 | 21,670,178 | 13,829,956 | | | | 35,500,134 | ||||||||||||||||||
Cost of sales |
|||||||||||||||||||||||||
Cost of sales of residential units |
18,388,381 | D | 18,388,381 | | | | | 18,388,381 | |||||||||||||||||
Cost of sales of Reis subscription revenue |
| | 2,637,340 | | 600,000 | | 3,237,340 | ||||||||||||||||||
Total cost of sales |
18,388,381 | 18,388,381 | 2,637,340 | | 600,000 | | 21,625,721 | ||||||||||||||||||
Gross profit |
3,281,797 | 3,281,797 | 11,192,616 | | (600,000 | ) | | 13,874,413 | |||||||||||||||||
189
Unaudited Pro Forma Combined Statement of Operations
For the Nine Months Ended September 30, 2006
(Continued)
Wellsford Real Properties, Inc. |
Pro Forma Adjustments |
||||||||||||||||||||||||
Liquidation
Basis For the Nine Months Ended September 30, 2006 |
Conversion
to a Going Concern Basis For the Nine Months Ended September 30, 2006 |
Going
Concern Basis For the Nine Months Ended September 30, 2006 |
Reis,
Inc. For the Nine Months Ended July 31, 2006 |
Interest
Income Adjustment and Financing Cost |
Acquisition Entries |
Incentive Award Cost |
Pro
Forma Combined for the Nine Months Ended September 30, 2006 |
||||||||||||||||||
A | B | H | I | M | O | P | |||||||||||||||||||
Operating costs and expenses |
|||||||||||||||||||||||||
Sales and marketing |
| | 2,487,089 | | 390,000 | | 2,877,089 | ||||||||||||||||||
Product development |
| | 1,193,211 | | | | 1,193,211 | ||||||||||||||||||
Property operating and maintenance |
436,508 | E | 436,508 | | | | | 436,508 | |||||||||||||||||
Property management |
79,950 | E | 79,950 | | | | | 79,950 | |||||||||||||||||
General and administrative |
8,018,206 | F | 8,018,206 | 4,647,237 | | 236,250 | 493,175 | 13,394,868 | |||||||||||||||||
Total operating expenses |
8,534,664 | 8,534,664 | 8,327,537 | | 626,250 | 493,175 | 17,981,626 | ||||||||||||||||||
Other income (expenses) |
|||||||||||||||||||||||||
Income (loss) from joint ventures |
(19,817 | ) | (19,817 | ) | | | | | (19,817 | ) | |||||||||||||||
Interest income |
1,198,885 | C | 1,198,885 | 228,908 | (584,848 | ) J | | | 842,945 | ||||||||||||||||
Interest expense |
(122,621 | ) E | (122,621 | ) | (79,403 | ) | (1,672,689 | ) K | | | (1,874,713 | ) | |||||||||||||
Minority interest benefit |
66,895 | 66,895 | | | | | 66,895 | ||||||||||||||||||
Loss on lease termination |
| | (1,253,260 | ) | | | | (1,253,260 | ) | ||||||||||||||||
Income (loss) before income taxes and discontinued operations |
(4,129,525 | ) | (4,129,525 | ) | 1,761,324 | (2,257,537 | ) | (1,226,250 | ) | (493,175 | ) | (6,345,163 | ) | ||||||||||||
Income tax expense (benefit) |
121,750 | 121,750 | 580,629 | (467,000 | ) L | | N | | N | 235,379 | |||||||||||||||
Income (loss) from continuing operations |
(4,251,275 | ) | (4,251,275 | ) | 1,180,695 | (1,790,537 | ) | (1,226,250 | ) | (493,175 | ) | (6,580,542 | ) | ||||||||||||
Discontinued operations |
|||||||||||||||||||||||||
Gain on sale |
762,529 | G | 762,529 | | | | | 762,529 | |||||||||||||||||
Income (loss) from operations |
81,485 | G | 81,485 | | | | | 81,485 | |||||||||||||||||
Provision for income taxes |
(41,000 | ) G | (41,000 | ) | | | | | (41,000 | ) | |||||||||||||||
Income from discontinued operations |
803,014 | 803,014 | | | | | 803,014 | ||||||||||||||||||
Net (loss) income |
$ | (3,448,261 | ) | $ | (3,448,261 | ) | $ | 1,180,695 | $ | (1,790,537 | ) | $ | (1,226,250 | ) | $ | (493,175 | ) | $ | (5,777,528 | ) | |||||
Per share amounts, basic and diluted: |
|||||||||||||||||||||||||
(Loss) income from continuing operations |
$ | (0.65 | ) | $ | (0.63 | ) | |||||||||||||||||||
(Loss) income from discontinued operations |
0.12 | $ | 0.08 | ||||||||||||||||||||||
Net (loss) income |
$ | (0.53 | ) | $ | (0.55 | ) | |||||||||||||||||||
Weighted average number of common shares outstanding: |
|||||||||||||||||||||||||
Basic |
6,471,179 | 10,548,978 | |||||||||||||||||||||||
Diluted |
6,471,179 | 10,548,978 | |||||||||||||||||||||||
190
Notes to Pro Forma Combined Statement of Operations for the Nine Months Ended September 30, 2006 (unaudited):
A. | Wellsfords historical consolidated statement of changes in net assets in liquidation for the nine months ended September 30, 2006 prepared on the liquidation basis of accounting (unaudited). |
B. | Represents adjustments necessary to change from the liquidation basis of accounting to the going concern basis of accounting for the nine months ended September 30, 2006 to reflect the termination of the Plan. Such adjustments include the reversal of activity in the
historical consolidated statement of changes in net assets in liquidation and presenting the periods activity in a going concern statement of operations. |
C. | Operating income as presented in the statement of changes in net assets in liquidation of $1,272,765 is primarily comprised of interest income of $1,198,885 during the period. |
D. | The sales and cost of sales during the period reflects reporting sales of homes and condominiums on a going concern basis. Under the liquidation basis of accounting, these items were included in the determination of liquidation value. |
E. | Amounts represent operational expenses primarily related to the development of Wellsfords residential projects which are not capitalizable into the basis of any of Wellsfords projects. Under the liquidation basis of accounting, these costs were included in the
determination of liquidation value. |
F. | General and administrative expenses reflect the change in the reserve for estimated costs during the period as reported on a liquidation basis of $3,219,597 which amount primarily represents cash paid for such reserved items during that period. Additionally, the general
and administrative expense includes accruals for certain annual expenses to be paid after September 30, 2006 for contractual obligations such as salary and bonus arrangements and certain annual professional fees of $1,924,202. Upon the March 2006 adoption of
amendments to Wellsfords stock option plans which require option settlement to be marked to fair value, Wellsford recorded, for the going concern basis of accounting, compensation expense of $2,711,000 for the nine months ended September 30, 2006. The remainder
of the general and administrative expenses reflects depreciation expense on furniture and equipment of $163,407. |
G. | The statement of operations includes a gain on the sale of telecommunication equipment and related net operating income prior to such sale, net of income taxes, aggregating $803,014 which is reported as a discontinued operation. |
H. | Wellsfords consolidated statement of operations for the nine months ended September 30, 2006 prepared on the going concern basis of accounting (unaudited). |
I. | Reiss consolidated statement of operations for the nine months ended July 31, 2006 (unaudited). In accordance with SEC regulations, the nine month fiscal interim period of Reis is utilized in preparing this pro forma presentation. |
J. | To eliminate interest income earned on cash used to pay for the acquisition and transaction costs paid for by Wellsford and for the transaction costs paid for by Reis. |
K. | Reflects interest expense of $1,560,353 on $25,000,000 of borrowings at LIBOR +3.00% (reflects LIBOR at September 30, 2006 of 5.32%), amortization of loan costs, annual fees and interest rate cap costs of $155,750, offset by Reis interest
incurred on loans repaid with proceeds from the Bank Loan of $43,414. |
L. | Reflects adjustment to Reis tax provision
for pro forma entries J and K. |
|
M. | Reflects amortization of acquisition amounts in excess of amounts already recorded on Reis books and records, if any: |
|
Amortization expense for: |
||||
Leasehold interest |
$ | 236,250 | ||
Customer relationship |
390,000 | |||
Database |
600,000 | |||
Total |
$ | 1,226,250 | ||
The leasehold fair market value adjustment is amortized over the 10 year life of the lease, the customer relationship intangible asset is amortized over its estimated 10 year life on a straight-line |
191
basis and the database intangible asset is amortized over its estimated five year life on a straight-line basis. |
N. | No income tax benefit has been provided for the acquisition and incentive award cost pro forma adjustments. |
O. | Reflects amortization of restricted stock units to be issued to Lloyd Lynford and Jonathan Garfield upon consummation of merger. Restricted stock units aggregating 146,000 units vest over three years based upon Reiss performance (as described in the respective
employment agreements) and reflect a fair value equal to Wellsfords closing stock price of $7.37 per common share at September 30, 2006. |
P. | Combined pro forma statement of operations for the nine months ended September 30, 2006 of Wellsford and Reis (unaudited). |
192
Unaudited Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 2005
The following unaudited pro forma condensed combined statement of operations is presented as if the merger had been consummated, the proceeds from the Bank Loan had been received, and Wellsford terminated the Plan on January 1, 2005. This unaudited pro forma condensed combined statement of operations should be read in conjunction with the pro forma condensed combined balance sheet of Wellsford and the historical financial statements and notes thereto of Wellsford and Reis included elsewhere in this joint proxy statement/ prospectus for the years ended December 31, 2005 and October 31, 2005, respectively. The pro forma condensed combined statement of operations is unaudited and is not necessarily indicative of what the actual financial results would have been had the merger been consummated and the proceeds from the Bank Loan had been received and Wellsford terminated the Plan as of January 1, 2005, nor does it purport to represent the future results of operations of Wellsford and Reis on a combined basis.
193
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2005
(Continued)
Wellsford Real Properties, Inc. |
|||||||||||||||||||||||||||||||
2005 | Conversion to a Going Concern |
Reis, Inc. | Pro Forma Adjustments | ||||||||||||||||||||||||||||
Pro Forma | |||||||||||||||||||||||||||||||
For
the Period November 18 to December 31, |
For
the Period January 1 to November 17, |
For the Period November 18 to December 31, 2005 |
Reclassification Adjustments |
For
the Year Ended December 31, 2005 |
For the Year Ended October 31, 2005 |
Interest Income Adjustment and Financing Cost |
Acquisition Entries |
Incentive Compensation Award Cost |
Combined for the Year Ended December 31, 2005 |
||||||||||||||||||||||
(liquidation basis) | (going concern) | (going concern) | |||||||||||||||||||||||||||||
A | B | C | H | I | J | N | P | Q | |||||||||||||||||||||||
Consolidated
Statement of Changes in Net Assets in Liquidation |
|||||||||||||||||||||||||||||||
Net assets in liquidation November 18, 2005 |
$ | 146,889,002 | $ | (146,889,002 | ) | $ | | $ | | ||||||||||||||||||||||
Operating income |
220,942 | (220,942 | ) D | | | ||||||||||||||||||||||||||
Exercise of stock options |
56,074 | (56,074 | ) | | | ||||||||||||||||||||||||||
Distributions to stockholders |
(90,596,604 | ) | 90,596,604 | | | ||||||||||||||||||||||||||
Net change in net assets in liquidation November 18, 2005 to December 31, 2005 |
(90,319,588 | ) | 90,319,588 | | | ||||||||||||||||||||||||||
Net assets in liquidation December 31, 2005 |
$ | 56,569,414 | $ | (56,569,414 | ) | $ | | $ | | ||||||||||||||||||||||
Consolidated Statements of Operations |
|||||||||||||||||||||||||||||||
Revenue |
|||||||||||||||||||||||||||||||
Rental revenue |
$ | 12,153,235 | $ | | $ | (12,153,235 | ) | $ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
Revenue from sales of residential units |
488,075 | | | 488,075 | | | | | 488,075 | ||||||||||||||||||||||
Reis subscription revenue |
| | | | 16,514,593 | | | | 16,514,593 | ||||||||||||||||||||||
Total revenue |
12,641,310 | | (12,153,235 | ) | 488,075 | 16,514,593 | | | | 17,002,668 | |||||||||||||||||||||
Cost of sales |
|||||||||||||||||||||||||||||||
Cost of sales of residential units |
385,631 | | | 385,631 | | | | | 385,631 | ||||||||||||||||||||||
Cost of sales of Reis subscription revenue |
| | | | 3,269,468 | | 800,000 | | 4,069,468 | ||||||||||||||||||||||
Total cost of sales |
385,631 | | | 385,631 | 3,269,468 | | 800,000 | | 4,455,099 | ||||||||||||||||||||||
Gross profit |
12,255,679 | | (12,153,235 | ) | 102,444 | 13,245,125 | | (800,000 | ) | | 12,547,569 | ||||||||||||||||||||
194
Unaudited Pro Forma Combined Statement of Operations
For the Year Ended December 31, 2005
(Continued)
Wellsford Real Properties, Inc. |
|||||||||||||||||||||||||||||||
2005 | Conversion to a Going Concern |
Reis, Inc. | Pro Forma Adjustments | ||||||||||||||||||||||||||||
Pro Forma | |||||||||||||||||||||||||||||||
For
the Period November 18 to December 31, |
For
the Period January 1 to November 17, |
For the Period November 18 to December 31, 2005 |
Reclassification Adjustments |
For
the Year Ended December 31, 2005 |
For the Year Ended October 31, 2005 |
Interest Income Adjustment and Financing Cost |
Acquisition Entries |
Incentive Compensation Award Cost |
Combined for the Year Ended December 31, 2005 |
||||||||||||||||||||||
(liquidation basis) | (going concern) | (going concern) | |||||||||||||||||||||||||||||
A | B | C | H | I | J | N | P | Q | |||||||||||||||||||||||
Operating costs and expenses |
|||||||||||||||||||||||||||||||
Sales and marketing |
| | | | 3,454,407 | | 520,000 | | 3,974,407 | ||||||||||||||||||||||
Product development |
| | | | 1,310,912 | | | | 1,310,912 | ||||||||||||||||||||||
Property operating and maintenance |
4,806,411 | 761,902 | E | (4,827,356 | ) | 740,957 | | | | | 740,957 | ||||||||||||||||||||
Real estate taxes |
842,811 | | (842,378 | ) | 433 | | | | | 433 | |||||||||||||||||||||
Depreciation and amortization |
3,886,889 | 25,052 | E | (3,911,941 | ) | | | | | | | ||||||||||||||||||||
Property management |
331,261 | 31,640 | E | (262,901 | ) | 100,000 | | | | | 100,000 | ||||||||||||||||||||
General and administrative |
7,887,820 | 479,201 | F | 118,662 | 8,485,683 | 5,104,550 | | 315,000 | 657,566 | 14,562,799 | |||||||||||||||||||||
Total costs and expenses |
17,755,192 | 1,297,795 | (9,725,914 | ) | 9,327,073 | 9,869,869 | | 835,000 | 657,566 | 20,689,508 | |||||||||||||||||||||
Other income (expense) |
|||||||||||||||||||||||||||||||
Income (loss) from joint ventures |
11,849,733 | (4,202 | ) | | 11,845,531 | | | | | 11,845,531 | |||||||||||||||||||||
Interest revenue |
1,551,165 | 348,218 | D | | 1,899,383 | 134,159 | (501,116 | ) K | | | 1,532,426 | ||||||||||||||||||||
Fee revenue |
518,000 | | | 518,000 | | | | | 518,000 | ||||||||||||||||||||||
Interest expense |
(5,482,269 | ) | (6,898 | ) E | 5,489,167 | | (13,299 | ) | (2,286,623 | ) L | | | (2,299,922 | ) | |||||||||||||||||
Minority interest benefit |
172,176 | 11,257 | (110,705 | ) | 72,728 | | | | | 72,728 | |||||||||||||||||||||
Income (loss) before income taxes and discontinued
operations |
3,109,292 | (949,420 | ) | 2,951,141 | 5,111,013 | 3,496,116 | (2,787,739 | ) | (1,635,000 | ) | (657,566 | ) | 3,526,824 | ||||||||||||||||||
Income tax expense (benefit) |
91,000 | | | 91,000 | (4,847,118 | ) | (65,000 | ) M | 4,970,000 | O | | O | 148,882 | ||||||||||||||||||
Income (loss) from continuing operations |
3,018,292 | (949,420 | ) | 2,951,141 | 5,020,013 | 8,343,234 | (2,722,739 | ) | (6,605,000 | ) | (657,566 | ) | 3,377,942 | ||||||||||||||||||
Discontinued operations |
| ||||||||||||||||||||||||||||||
Gain on sale |
| 66,926,589 | G | | 66,926,589 | | | | | 66,926,589 | |||||||||||||||||||||
Loss from operations including mortgage prepayment
penalties |
| | | | | | | | | ||||||||||||||||||||||
of $4,568,964 upon sale |
| (5,554,448 | ) G | (3,061,846 | ) | (8,616,294 | ) | | | | | (8,616,294 | ) | ||||||||||||||||||
Provision for income taxes |
| (750,000 | ) G | | (750,000 | ) | | | | | (750,000 | ) | |||||||||||||||||||
Minority interest share of net income |
| (2,768,248 | ) G | 110,705 | (2,657,543 | ) | | | | | (2,657,543 | ) | |||||||||||||||||||
Income from discontinued operations |
| 57,853,893 | (2,951,141 | ) | 54,902,752 | | | | | 54,902,752 | |||||||||||||||||||||
Net income (loss) |
$ | 3,018,292 | $ | 56,904,473 | $ | | $ | 59,922,765 | $ | 8,343,234 | $ | (2,722,739 | ) | $ | (6,605,000 | ) | $ | (657,566 | ) | $ | 58,280,694 | ||||||||||
Per share amounts, basic and diluted: | |||||||||||||||||||||||||||||||
Income from continuing operations |
$ | 0.47 | $ | 0.32 | |||||||||||||||||||||||||||
Income from discontinued operations |
5.19 | ||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||
Net income |
$ | 0.47 | $ | 5.51 | |||||||||||||||||||||||||||
Weighted average number of common shares outstanding: |
|||||||||||||||||||||||||||||||
Basic |
6,467,639 | 10,575,855 | |||||||||||||||||||||||||||||
Diluted |
6,470,482 | 10,579,329 | |||||||||||||||||||||||||||||
195
Notes to Pro Forma Combined Statements of Operations for the Year Ended December 31, 2005 (unaudited):
A. | Wellsfords consolidated statement of changes in net assets in liquidation for the period November 18, 2005 to December 31, 2005 prepared on the liquidation basis of accounting. |
B. | Wellsfords consolidated statement of operations for the period January 1, 2005 to November 17, 2005 prepared on the going concern basis of accounting. |
C. | Represents adjustments necessary to change from the liquidation basis of accounting to the going concern basis of accounting for the period November 18, 2005 to December 31, 2005 to reflect the termination of the Plan. Such adjustments include the reversal of
activity in the historical consolidated statement of changes in net assets in liquidation and presenting the periods activity in a going concern statement of operations. |
D. | Operating income as presented in the statement of changes in net assets in liquidation of $220,942 is primarily comprised of interest income of $348,218 during the period, offset by certain operating expenses. |
E. | Amounts represent operational expenses primarily related to the development of Wellsfords residential projects which are not capitalizable into the basis of any of Wellsfords projects. Under the liquidation basis of accounting, these costs were included in the
determination of liquidation value. |
F. | The adjustment to general and administrative expenses primarily reflects the change in the reserve for estimated costs during the period. |
G. | Discontinued operations reflect the operations of Wellsford rental operations in Colorado which were sold in November 2005. |
H. | Represents the adjustments necessary to reclassify certain historical operations to discontinued operations, primarily related to the operating activities of the Palomino Park rental villages. |
I. | Wellsfords consolidated statement of operations for the year ended December 31, 2005 prepared on the going concern basis of accounting (unaudited). |
J. | Reiss consolidated statement of operations for the year ended October 31, 2005. In accordance with SEC regulations, the annual fiscal year of Reis is utilized in preparing this pro forma presentation. |
K. | To eliminate interest income earned on cash used to pay for the acquisition and transaction costs paid for by Wellsford and for the transaction costs paid for by Reis. |
L. | Reflects interest expense of $2,080,470 on $25,000,000 of borrowings at LIBOR +3.00% (reflects LIBOR at September 30, 2006 of 5.32%) and amortization of loan costs, annual fees and interest rate cap costs of $206,153 with the balance of the
proceeds available for the acquisition. |
M. | Reflects adjustment to Reis tax provision for pro forma entries K and L. | |
N. | Reflects amortization of acquisition amounts in excess of amounts already recorded on Reis books and records, if any: |
|
Amortization expense for: |
||||
Leasehold interest |
$ | 315,000 | ||
Customer relationship |
520,000 | |||
Database |
800,000 | |||
Total |
$ | 1,635,000 | ||
The leasehold fair market value adjustment is amortized over the 10 year life of the lease, the customer relationship intangible asset is amortized over its estimated 10 year life on a straight-line basis and the database intangible asset is amortized over its estimated five
year life on a straight-line basis. |
196
O. | Reflects the adjustment
of the deferred tax asset to equal the Federal, state and local tax
liability arising from the difference in the book basis of the assets,
excluding Goodwill, acquired over the respective tax basis. No income
tax benefit has been provided for the acquisition and incentive award
cost pro forma
adjustments.
|
|
P. | Reflects amortization of restricted stock units to be issued to Lloyd Lynford and Jonathan Garfield upon consummation of merger. Restricted stock units aggregating 146,000 units vest over three years based upon Reiss performance (as described in the respective
employment agreements) and reflect a fair value equal to Wellsfords closing stock price of $7.37 per common share at September 30, 2006. |
Q. | Combined pro forma statement of operations for the year ended December 31, 2005 of Wellsford and Reis (unaudited). |
197
AUTHORIZED CAPITAL STOCK OF WELLSFORD
We have summarized below the material terms of Wellsfords capital stock. You are encouraged to read the Wellsford articles of amendment and restatement and bylaws for greater detail on the provisions that may be important to you. Copies of Wellsfords articles of amendment and restatement and bylaws are filed as exhibits to the registration statement on Form S-4 filed by Wellsford of which this joint proxy statement/prospectus is a part. See Where You Can Find More Information.
The Wellsford articles of amendment and restatement provide that the total number of shares of capital stock which may be issued by Wellsford is 101,000,000 shares of common stock, par value $0.02 per share, of which 6,646,138 were issued and outstanding on November 30, 2006.
Description of Wellsford Common Stock |
Dividends and Liquidation Rights |
Subject to the preferential rights of any other class or series of stock, holders of shares of Wellsford common stock are entitled to receive dividends on their common stock if, as and when authorized by the board of directors of Wellsford and declared by Wellsford out of assets legally available therefor and to share ratably in the assets of Wellsford legally available for distribution to its stockholders in the event of its liquidation, dissolution or winding up after payment of or adequate provision for all known debts and liabilities of Wellsford and payment of liquidation preferences to holders of preferred stock, if any.
Voting Rights |
Votes Per Share |
Each outstanding share of Wellsford common stock entitles the holder to one vote on all matters submitted to a vote of stockholders, including the election of directors. If Wellsford was to authorize and issue shares of capital stock other than common stock, those shares also would be entitled to one vote per share on all matters submitted to a vote of stockholders unless the charter provisions establishing such shares of class of capital stock provide otherwise.
Cumulative Voting |
Holders of Wellsford common stock are not entitled to cumulative voting in the election of directors.
Preference, Conversion, Redemption, Appraisal and Preemptive Rights |
Holders of shares of Wellsford common stock have no preference, conversion, exchange, sinking fund, or redemption rights and have no preemptive rights to subscribe for any securities of Wellsford. Shares of Wellsford common stock have equal dividend, liquidation and other rights.
Dissolution and Other Corporate Transactions |
Under the Maryland General Corporation Law, which we refer to as the MGCL, a Maryland corporation generally may not dissolve, amend its charter, merge, sell all or substantially all of its assets, engage in a share exchange or engage in similar transactions outside the ordinary course of business unless approved by the affirmative vote of stockholders holding at least two-thirds of the shares entitled to vote on the matter unless a lesser percentage (but not less than a majority of all of the votes entitled to be cast on the matter) is set forth in the corporations charter. The Wellsford articles of amendment and restatement provide for approval of consolidations, share exchanges, mergers in which Wellsford is not the successor, and amendments to the charter (except amendments to the provisions relating to the classification and removal of directors or any amendment reducing supermajority voting requirements) by the affirmative vote of holders of shares entitled to cast a majority of the votes entitled to be cast on the matter.
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Anti-takeover Provisions |
The MGCL and the Wellsford articles of amendment and restatement and bylaws contain provisions which could discourage or make more difficult a change in control of the company without the support of the board of directors. A summary of these provisions follows.
Classification or Reclassification of Common Stock |
The Wellsford articles of amendment and restatement authorize the board of directors to classify or reclassify any unissued stock by setting or changing the numbers, designations, preferences, conversion or other rights, voting powers, restrictions, limitations as to distributions, qualifications or terms or conditions of redemption of any of such shares.
The additional classes or series, as well as the common stock, will be available for issuance without further action by Wellsfords stockholders, unless such action is required by applicable law or the rules of any stock exchange or automated quotation system on which Wellsfords securities may be listed or traded. Although the board of directors has no intention at the present time of doing so, it could authorize Wellsford to issue a class or series that could, depending on the terms of that class or series, delay, defer or prevent a transaction or a change of control of Wellsford that might involve a premium price for holders of common stock or otherwise be in their best interest.
Business Combinations |
Under the MGCL business combinations between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
| any person who beneficially owns ten percent or more of the voting power of the corporations shares; or |
| an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of ten percent or more of the voting power of the then outstanding voting stock of the corporation. |
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board.
After the five-year prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
| eighty percent of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and |
| two-thirds of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested
stockholder. |
These super-majority vote requirements do not apply if the corporations common stockholders receive a minimum price, as defined in the MGCL, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The statute permits various exemptions from its provisions. Wellsfords board of directors has exempted from the Maryland statute any business combinations with Jeffrey Lynford and Edward Lowenthal or any of their affiliates or any other person acting in concert or as a group with any of these persons and, consequently, the five-year prohibition and the supermajority vote requirements will not apply to business combinations between such persons and
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Wellsford. However, the statute continues to apply to all other persons and therefore could impede or prevent a merger, tender offer or other business combination that some, or a majority, of Wellsfords stockholders might believe to be in their best interest.
Transfer Agent and Registrar |
The transfer agent and registrar for the Wellsford common stock is Computershare Trust Company, N.A.
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COMPARISON OF RIGHTS OF STOCKHOLDERS
OF WELLSFORD AND REIS
Wellsford is a Maryland corporation and is governed by the MGCL. Reis is a Delaware corporation and is governed by the DGCL. Upon consummation of the merger, Reis stockholders will become stockholders of Wellsford, and their rights will be governed by the MGCL, the articles of amendment and restatement and the amended and restated bylaws of Wellsford.
The following is a summary of the material differences between the rights of Wellsford stockholders and the rights of Reis stockholders. These differences arise from the differences between the MGCL and the DGCL, and each companys respective certificate or articles of incorporation and bylaws. As a condition to the merger, Reiss current amended and restated certificate of incorporation will be amended immediately prior to the time of consummation of the merger. This summary presents the rights of Reis stockholders as they currently exist, and does not include any changes to the rights of Reis stockholders that will occur as a result of the proposed amendment to Reiss amended and restated certificate of incorporation. For a description of the proposed amendment to Reiss amended and restated certificate of incorporation, see The MergerAmendment of Reiss Amended and Restated Certificate of Incorporation beginning on page 66.
This summary may not contain all of the information that is important to you. This summary is not intended to be a complete discussion of the respective rights of Wellsford and Reis stockholders and is qualified in its entirety by reference to the MGCL, the DGCL and the various documents of Wellsford and Reis that are referred to in this summary. You should carefully read this entire joint proxy statement/prospectus and the other documents referred to in this joint proxy statement/prospectus for a more complete understanding of the differences between your rights as a stockholder of Wellsford and as a stockholder of Reis. Wellsford is filing copies of its articles of amendment and restatement and bylaws as exhibits to the registration statement of which this joint proxy statement/prospectus is a part, and will send copies of these documents to you upon your request. Reis will also send copies of its documents referred to herein to you upon your request. See the section entitled Where You Can Find More Information on page 216.
Capitalization |
Wellsford |
The total number of shares of all classes of capital stock authorized under Wellsfords articles of amendment and restatement is 101,000,000 shares of common stock, par value $0.02 per share.
Reis |
The total number of shares of all classes of capital stock authorized under Reiss amended and restated certificate of incorporation is 15,300,000 shares, which is divided into:
| 15,000,000 shares of common stock, $0.01 par value per share; |
| 300,000 shares of preferred stock, $0.01 par value per share, initially issued in the following series: |
| 50,000 shares of Series A preferred stock, $0.01 par value per share; |
| 15,000 shares of Series B preferred stock, $0.01 par value per share; |
| 150,000 shares of Series C preferred stock, $0.01 par value per share; and |
| 20,000 shares of Series D preferred stock, $0.01 par value per share. |
Voting Rights |
Wellsford |
The MGCL provides that, unless otherwise provided in a corporations articles of incorporation:
| each share of its capital stock is entitled to one vote; |
| the presence in person or by proxy of stockholders entitled to cast a majority of all the votes entitled to be cast at a meeting constitutes a quorum; and |
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| in matters other than the election of directors or the approval of extraordinary transactions, a majority of all the votes cast at a meeting at which a quorum is present is sufficient to approve a matter which properly comes before a stockholder meeting. |
The MGCL limits the voting rights of control shares held by persons who, directly or indirectly, have the power to exercise:
| one-tenth or more, but less than one-third of all voting power in the election of directors; |
| one-third or more, but less than a majority of all voting power in the election of directors; or |
| a majority or more of all voting power in the election of directors. |
Wellsfords bylaws exempt holders of Wellsfords capital stock from the limitations on the voting rights of control shares. Subject to the MGCL, each holder of Wellsford common stock is entitled to one vote per share. Wellsfords articles of amendment and restatement permit the board of directors to classify and issue Wellsford preferred stock in one or more series that may have voting rights that differ from that of Wellsfords common stock. See the discussion of voting rights under Authorized Capital Stock of Wellsford beginning on page 198.
Reis |
The DGCL provides that a corporation may designate the voting rights of each class of stock and must specify the voting rights of such class of stock in the certificate of incorporation or the board resolutions authorizing a certificate of designation providing for the issuance of stock and filed with the Secretary of State of the State of Delaware. Unless otherwise provided in a corporations certificate of incorporation, each stockholder is entitled to one vote per share.
Reiss amended and restated certificate of incorporation provides that each holder of Reis common stock is entitled to one vote per share. Reiss amended and restated certificate of incorporation further provides that, except as otherwise expressly provided elsewhere in the amended and restated certificate of incorporation or as otherwise required by law, the holders of shares of preferred stock and common stock shall vote together as a single class on all matters submitted to the stockholders of Reis. Each holder of preferred stock is entitled to vote on all matters submitted to a vote of the stockholders and shall be entitled to a number of votes equal to the largest number of whole shares of common stock in which such holders shares of preferred stock could be converted.
Advance Notice Provision |
Wellsford |
The MGCL provides that not less than 10 nor more than 90 days before each stockholders meeting, the secretary of a corporation shall give notice in writing of the meeting to each stockholder entitled to vote at the meeting and each other stockholder entitled to notice of the meeting. The notice must state (1) the time of the meeting, the place of the meeting, if any, and the means of remote communication, if any, by which stockholders and proxy holders may be deemed to be present in person and may vote at the meeting and (2) the purpose of the meeting if the meeting is a special meeting or if notice of the purpose is required by any other provision of the MGCL.
The MGCL further provides that the articles of incorporation or bylaws of a corporation may require any stockholder proposing a nominee for election as a director or any other matter for consideration at a meeting of the stockholders to provide advance notice of the nomination or proposal to the corporation of not more than (1) 90 days before the date of the meeting, or (2) in the case of an annual meeting, 90 days before the first anniversary of the mailing date of the notice of the preceding years annual meeting or 90 days before the first anniversary of the preceding years annual meeting, or (3) another time specified in the charter or bylaws.
The Wellsford bylaws provide that nominations of persons for election to the board of directors and the proposal of business to be considered by stockholders may be made at an annual meeting of stockholders:
| pursuant to Wellsfords notice of the meeting; |
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| by the board of directors; or |
| by a stockholder who is entitled to vote at the meeting and has given notice to Wellsfords secretary at the principal executive office of Wellsford not earlier than 120 days or less than 90 days prior to the first anniversary of the date of mailing of the notice for the
preceding years annual meeting. |
Only the business specified in the notice of meeting may be brought before a special meeting of stockholders.
Nominations of persons for election to the board of directors may be made at a special meeting of stockholders:
| pursuant to the notice of meeting; |
| by the board of directors; or |
| provided that the board of directors has determined that directors will be elected at the special meeting, by a stockholder who is entitled to vote at the meeting and has given notice to Wellsfords secretary at the principal executive office of Wellsford not earlier than 120
days nor less than 90 days prior to such special meeting or the tenth day following the date on which the public announcement is first made of the date of the special meeting and of the nominees proposed by the board of directors to be elected at such meeting. |
Reis |
Under the DGCL, a written notice stating the place, if any, date and hour of a stockholders meeting, the means of remote communications, if any, by which stockholders may be deemed to be present in person and vote at the meeting, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, must be delivered, except as otherwise provided by the DGCL, not less than 10 nor more than 60 days before the date of the meeting to each stockholder entitled to vote at the meeting.
Reiss by-laws provide that written notice of a stockholders meeting stating the place, date and hour of the meeting, and with respect to a special meeting of stockholders, the purpose or purposes for which the special meeting is called, shall be given to each stockholder entitled to vote at such meeting not less than ten nor more than 50 days before the date of the meeting.
Number of Directors |
Wellsford |
Under the MGCL, a corporation must have at least one director at all times. Subject to this provision, a corporations bylaws may alter the number of directors and authorize a majority of the entire board of directors to alter within specified limits the number of directors set by the corporations articles of incorporation or its bylaws. Wellsfords articles of amendment and restatement provide that the number of directors shall initially be seven, which number can be increased or decreased pursuant to the bylaws. Wellsfords bylaws provide that at any regular meeting or any special meeting called for that purpose, a majority of the entire board of directors may increase or decrease the number of directors, provided that the number shall at no time be less than the minimum number required by the MGCL, nor more than 15 unless changed by an amendment to Wellsfords bylaws.
Reis |
Under the DGCL the number of directors may be fixed by, or in the manner provided in, the bylaws, unless the certificate of incorporation fixes the number of directors, in which case a change in the number of directors shall be made only by amendment to the certificate of incorporation. Reiss by-laws provide that the number of directors shall be seven and Reis amended and restated certificate of incorporation provides that so long as any Reis preferred stock of the applicable class remains outstanding Reis board of directors will consist of seven members.
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Classification of the Board of Directors |
Wellsford |
Under the MGCL, except as otherwise provided by the MGCL, at each annual meeting of the stockholders, the stockholders must elect directors to hold office until the earlier of the next annual meeting of stockholders and until their successors are elected and qualify or the time provided in the terms of any class or series of stock pursuant to which such directors are elected. If the directors are divided into classes, the term of office may be provided in the bylaws, except that the term of office of a director may not be longer than five years or, except in the case of an initial or substitute director, shorter than the period between annual meetings, and the term of office of at least one class must expire each year.
Wellsfords amended and restated certificate of incorporation provides that the board of directors is divided into three classes: Class I, Class II and Class III. Each director serves a term ending on the date of the third annual meeting following the annual meeting at which such director was elected. Consequently, members of the board of directors serve staggered three-year terms.
Reis |
Under the DGCL, directors are elected at each annual stockholders meeting, unless the board of directors is classified. The certificate of incorporation may authorize the election of directors by one or more classes or series of stock, and the certificate of incorporation, an initial bylaw or a bylaw adopted by a vote of the stockholders may provide for a classified board of directors with staggered terms under whch one-half or one-third of the directors are elected for terms of two or three years, respectively. Reis does not have a classified board of directors and Reiss by-laws provide that all the directors of Reis are elected at each annual stockholders meeting.
Election of the Board of Directors |
Wellsford |
The MGCL provides that a corporations directors will be elected by a plurality of the votes cast at a meeting at which a quorum is present, but allows a corporation to provide for cumulative voting in the election of directors in its articles of incorporation. Wellsfords bylaws provide that unless otherwise provided in the articles of incorporation, a plurality of all the votes cast at a meeting of stockholders duly called at which a quorum is present shall be sufficient to elect a director. Wellsfords articles of amendment and restatement does not grant cumulative voting rights with respect to the election of directors to holders of Wellsford common stock. See Authorized Capital Stock of Wellsford.
The MGCL permits the bylaws of the corporation to provide for the term of office a director may serve, except that (1) the term of office of a director may not be longer than five years or, except in the case of an initial or substitute director, shorter than the period between annual meetings and (2) the term of office of at least one class of directors will expire each year. Wellsfords articles of amendment and restatement provides that the directors shall be classified into three classes, with approximately one-third of the directors elected by the stockholders annually.
Reis |
The DGCL provides that a corporations directors will be elected by a plurality of the votes cast at a meeting at which a quorum is present unless otherwise provided in the certificate of incorporation or bylaws. Reiss amended and restated certificate of incorporation and by-laws do not provide for a different voting standard. Under the DGCL, stockholders do not have cumulative voting rights unless the certificate of incorporation so provides. Reiss amended and restated certificate of incorporation does not grant cumulative voting rights to holders of Reis stock.
Reiss amended and restated certificate of incorporation provides that so long as any preferred stock of the respective class is outstanding, the board of directors shall consist of seven members, of which:
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| two members of the board of directors shall be elected by the holder of Series A preferred stock, voting their underlying shares of common stock on an as-converted basis; |
| two members of the board of directors shall be elected by the holders of Series C preferred stock voting their underlying shares of common stock on an as-converted basis; |
| two members of the board of directors shall be elected by holders of common stock; and |
| one member shall be nominated by the holders of common stock and approved by a majority of the holders of preferred stock voting their underlying shares of common stock on an as-converted basis together as a single class, which approval shall not be unreasonably
withheld. |
Removal of Directors |
Wellsford |
Under the MGCL, unless the corporations articles of incorporation provides otherwise, the stockholders of a corporation with a classified board of directors may remove a director, only for cause, by the affirmative vote of a majority of all the votes entitled to be cast for the election of directors. Wellsfords articles of amendment and restatement provide that directors may be removed, but only for cause, by the affirmative vote of the holders of at least two-thirds of the votes entitled to be cast in the election of the directors.
Reis |
Under the DGCL, a director can be removed with or without cause by the holders of a majority of shares entitled to vote in an election of directors unless: (i) the corporation has a classified board of directors, in which case removal of directors is only permissible for cause unless a corporation has a provision in its certificate of incorporation to the contrary; or (ii) the corporation provides for cumulative voting and less than the entire board is to be removed, in which case there are certain limitations to this rule. Reis has neither a classified board nor provides for cumulative voting. The DGCL further provides that where the holders of any class or series are entitled to elect one or more directors by the certificate of incorporation, the vote of the holders of the outstanding shares of that class or series and not the vote of the outstanding shares as a whole shall be the applicable vote with respect to the removal without cause of a director. Accordingly, the Reis directors elected by specified classes or series of stock provided above may be removed without cause only by a vote of such specified classes or series of stock.
Filling Vacancies |
Wellsford |
The MGCL provides that the stockholders of a corporation may elect a successor to fill a vacancy on the board of directors which results from the removal of a director. The MGCL also provides that, unless the articles of incorporation or bylaws provide otherwise, (1) a majority of the remaining directors, whether or not sufficient to constitute a quorum, may fill a vacancy on the board of directors which results from any cause except an increase in the number of directors; and (2) a majority of the entire board of directors may fill a vacancy which results from an increase in the number of directors.
Wellsfords articles of incorporation and bylaws provide that, except as may be provided by the board of directors in setting the terms of any class or series of preferred stock, any vacancy on the board of directors for any cause other than an increase in the number of directors shall be filled by a majority of the remaining directors, even if the remaining directors do not constitute a quorum. Directors elected by the board of directors to fill a vacancy serve until the next annual meeting and until their successors are elected and qualified.
Reis |
Under the DGCL, unless the certificate of incorporation or bylaws provide otherwise, any vacancies, including vacancies resulting from an increase in the number of directors, may be filled by a majority of the directors then in office or a sole remaining director (even though less than a quorum) and, whenever the
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holders of any class or series of capital stock are entitled by the certificate of incorporation to elect one or more directors, vacancies and newly created directorship may be filled by a majority of the directors elected by such class or series then in office, or by the sole remaining director.
Reiss by-laws provide that any vacancy in the office of a director designated by a series of the preferred stock shall be filled by the holders of that series of preferred stock; provided, however, that if such series of preferred stock is no longer outstanding, including by way of conversion, the designated board member for that series of preferred stock shall be elected by the holders of common stock. Any vacancy in the office of a director designated by the holders of common stock shall be elected by the holders of common stock.
Liability of Directors; Indemnification of Directors and Officers |
Wellsford |
The MGCL requires a corporation, unless its articles of incorporation provides otherwise, to indemnify a director or officer who has been successful, on the merits or otherwise, in the defense of any proceeding to which he is made a party by reason of his service in that capacity. The MGCL permits a corporation to indemnify its present and former directors and officers, among others, in connection with any proceeding to which they may be made a party by reason of their service in those or other capacities unless it is established that:
| the act or omission of the director or officer was material to the matter giving rise to the proceeding and was committed in bad faith or was the result of active and deliberate dishonesty; |
| the director or officer actually received an improper personal benefit in money, property or services; or |
| in the case of any criminal proceeding, the director or officer had reasonable cause to believe that the act or omission was unlawful. |
The indemnity may include judgments, penalties, fines, settlements and reasonable expenses actually incurred by the director or officer in connection with the proceeding; provided, however, that if the proceeding is one by or in the right of the corporation, indemnification is not permitted with respect to any proceeding in which the director or officer has been adjudged to be liable to the corporation. In addition, a director or officer may not be indemnified with respect to any proceeding charging improper personal benefit to the director or officer in which the director or officer was adjudged to be liable on the basis that personal benefit was improperly received. The termination of any proceeding by conviction or upon a plea of nolo contendere or its equivalent or an entry of an order of probation prior to judgment creates a rebuttable presumption that the director or officer did not meet the requisite standard of conduct required for permitted indemnification. The termination of any proceeding by judgment, order or settlement, however, does not create a presumption that the director or officer failed to meet the requisite standard of conduct for permitted indemnification.
In addition, the MGCL requires Wellsford, as a condition to advancing expenses, to obtain a written affirmation by the director or officer of his good faith belief that he has met the standard of conduct necessary for indemnification by Wellsford and a written statement by or on his behalf to repay the amount paid or reimbursed by Wellsford if it is ultimately determined that the standard of conduct was not met.
Wellsfords articles of amendment and restatement provide that the corporation shall have the power, to the maximum extent permitted by Maryland law, to indemnify and advance expenses to its present and former directors and officers on account of any proceeding to which they are a party, by reason of the fact that such person is or was a director or officer of Wellsford, or is or was serving any other entity at the request of Wellsford.
Reis |
The DGCL provides that a corporation shall have the power to indemnify any person made a party or threatened to be made a party to any type of proceeding, other than an action by or in the right of the corporation, because he or she is or was an officer, director, employee or agent of the corporation or is or was serving at the request of the corporation in that capacity for another entity, against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such proceeding if:
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| he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and |
| in the case of a criminal proceeding, he or she had no reasonable cause to believe that his or her conduct was unlawful. |
A corporation shall have the power to indemnify any person made a party or threatened to be made a party to any threatened, pending or completed action or suit brought by or in the right of the corporation because he or she was an officer, director, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation or other entity, against expenses actually and reasonably incurred in connection with such action or suit if he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation.
A corporation must indemnify a present or former director or officer who successfully defends himself or herself in a proceeding to which he or she was a party because he or she was a director or officer of the corporation against expenses actually and reasonably incurred by him or her. Expenses incurred by an officer or director, or other employees or agents as deemed appropriate by the board of directors, in defending a civil or criminal proceeding may be paid by the corporation in advance of the final disposition of such proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he or she is not entitled to be indemnified by the corporation.
The indemnification and expense advancement provisions of the DGCL are not exclusive of any other rights which may be granted by bylaws, a vote of stockholders or disinterested directors or otherwise. Under the DGCL, termination of any proceeding by conviction or upon a plea of nolo contendere or its equivalent shall not, of itself, create a presumption that such person is prohibited from being indemnified.
The Reis by-laws provide that each director, officer, employee and agent of the corporation shall be indemnified by the corporation to the fullest extent permitted by Section 145 of the DGCL.
Limitation of Personal Liability of Directors and Officers |
Wellsford |
The MGCL permits a Maryland corporations articles of incorporation to include a provision expanding or limiting the liability of its directors and officers to the corporation or its stockholders for money damages, except for liability resulting from:
| actual receipt of an improper benefit or profit in money, property, or services, in which case recovery is limited to the actual amount of the benefit or profit actually received; or |
| a judgment or other final adjudication adverse to the person that is entered in a proceeding based on a finding in the proceeding that the persons action, or failure to act, was the result of active and deliberate dishonesty and was material to the cause of action adjudicated in
the proceeding. |
The Wellsford articles of amendment and restatement provide that, to the maximum extent permitted by Maryland law, Wellsford directors and officers are not liable to Wellsford or its stockholders for money damages. However, such provisions do not limit the availability of equitable relief to Wellsford or its stockholders.
Reis |
As permitted under the DGCL, Reiss amended and restated certificate of incorporation eliminates the personal liability of directors for monetary damages for breach of such directors fiduciary duty, except liability for:
| any breach of the directors duty of loyalty to the corporation or its stockholders; |
| acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; |
| liability under Section 174 of the DGCL for unlawful payment of dividends or stock purchases; or |
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| any transaction from which the director derived an improper personal benefit. |
The amended and restated certificate of incorporation provides for the elimination or limitation of a directors liability to Reis to the fullest extent permitted by the DGCL.
Inspection of Books and Records |
Wellsford |
The MGCL provides that persons who together have been stockholders of record for more than six months and own at least 5% of the outstanding stock of any class of a Maryland corporation on written request may inspect and copy during usual business hours the corporations books of account and stock ledger, request and receive a statement of the corporations affairs and in the case of a corporation which does not maintain the original or a duplicate stock ledger at its principal office, request and receive a list of its stockholders. In addition, any stockholder of a Maryland corporation may inspect and copy during usual business hours the bylaws, minutes of the proceedings of stockholders and annual statements of affairs of a corporation and request the corporation to provide a sworn statement showing all stock and other securities issued during a specified period of not more than 12 months before the date of the request, the consideration received by the corporation per share, and the value of any consideration received by the corporation, other than money, as set in a resolution of the board. Wellsfords articles of amendment and restatement and bylaws do not amend the rights of stockholders to inspect the books and records of Wellsford.
Reis |
The DGCL allows any stockholder, upon written demand under oath stating the purpose thereof, the right during usual business hours to inspect for any proper purpose the corporations stock ledger, a list of its stockholders, and its other books and records, and to make copies or extracts therefrom. A proper purpose means a purpose reasonably related to such persons interest as a stockholder.
Amendment of Charter and Bylaws |
Wellsford |
The MGCL allows amendment of a corporations articles of incorporation if its board of directors adopts a resolution setting forth the amendment proposed, declaring it advisable and directing that the proposed amendment be submitted for consideration at either an annual or special meeting of the stockholders. Unless a lesser or greater proportion of votes is specified in a corporations articles of incorporation, the proposed amendment must be approved by two-thirds of all votes entitled to vote on the matter at any such meeting. Under most circumstances, Wellsfords articles of amendment and restatement require the affirmative vote of a majority of all the votes entitled to be cast to be amended.
The MGCL provides that the power to amend the bylaws of a corporation is vested with the stockholders except to the extent the articles of incorporation or the bylaws vest such power with the corporations board of directors. Wellsfords bylaws provide that the board of directors shall have the exclusive power to adopt, alter or repeal any provision of the bylaws and to make new bylaws.
Reis |
The DGCL generally provides that unless a higher vote is required in the certificate of incorporation, an amendment to the certificate of incorporation of a corporation may be approved by a majority in voting power of the outstanding shares. Reiss amended and restated certificate of incorporation does not modify the statutory vote requirement; however, it provides that, so long as the shares of any series of Reiss preferred stock are outstanding, any amendment or modification to Reiss amended and restated certificate of incorporation will be approved by holders of a majority of the voting power of such series, voting on an as converted to common stock basis and as a separate class.
The DGCL also provides that the power to amend the bylaws resides in the stockholders entitled to vote, provided that the corporation may, in its certificate of incorporation, confer the power to amend the bylaws upon the directors. The fact that such power has been conferred on the directors does not divest or limit the
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power of the stockholders to amend the bylaws. Reiss amended and restated certificate of incorporation provides that the board of directors is authorized to amend the by-laws with a vote at a duly held meeting of at least a majority of the members of the board of directors or with the written consent of all of the members of the board of directors in lieu of a meeting, subject to any rights of holders of preferred stock. The Reis by-laws provide that the stockholders may amend the by-laws by the affirmative vote of the holders of a majority of the outstanding capital stock entitled to vote.
Mergers, Consolidations and Other Transactions |
Wellsford |
Under the MGCL, the board must adopt a resolution that declares a merger, consolidation, share exchange, or sale of all or substantially all of a corporations assets advisable and direct that the proposed transaction be submitted for consideration at either an annual or special meeting of the corporations stockholders. At such meeting, unless the articles of incorporation states otherwise, the holders of two-thirds of the shares of the corporation entitled to vote are required to approve such actions.
Wellsfords articles of amendment and restatement provide that a consolidation or share exchange or a merger in which Wellsford is the successor must be approved only by the affirmative vote of a majority of all the votes entitled to be cast on the matter.
The MGCL also provides that the vote of the stockholders of a surviving corporation is not required to approve a merger if (1) the merger does not reclassify or change its outstanding stock or otherwise amend the corporations articles of incorporation and (2) the number of shares of capital stock to be issued in the merger does not increase by more than 20% the number of shares of the same class or series outstanding immediately before the merger becomes effective.
Reis |
The DGCL provides that, unless otherwise specified in a corporations certificate of incorporation, a sale or other disposition of all or substantially all of the corporations assets, a merger or consolidation of the corporation with another corporation or a dissolution of the corporation requires the affirmative vote of the board of directors (except in limited circumstances) plus, with exceptions, the affirmative vote of a majority of the outstanding stock entitled to vote thereon. Reiss amended and restated certificate of incorporation does not contain any exceptions to this provision, but it does require the separate class vote by Reis Series C preferred stock and Reis Series D preferred stock to approve cetain sales of all or substantially all of Reiss assets, mergers involving Reis, and certain other significant transactions.
Restrictions on Business Combinations |
Wellsford |
Under the MGCL business combinations between a Maryland corporation and an interested stockholder or an affiliate of an interested stockholder are prohibited for five years after the most recent date on which the interested stockholder becomes an interested stockholder. These business combinations include a merger, consolidation, share exchange, or, in circumstances specified in the statute, an asset transfer or issuance or reclassification of equity securities. An interested stockholder is defined as:
| any person who beneficially owns ten percent or more of the voting power of the corporations shares; or |
| an affiliate or associate of the corporation who, at any time within the two-year period prior to the date in question, was the beneficial owner of ten percent or more of the voting power of the then outstanding voting stock of the corporation. |
A person is not an interested stockholder under the statute if the board of directors approved in advance the transaction by which he otherwise would have become an interested stockholder. However, in approving a transaction, the board of directors may provide that its approval is subject to compliance, at or after the time of approval, with any terms and conditions determined by the board of directors. After the five-year
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prohibition, any business combination between the Maryland corporation and an interested stockholder generally must be recommended by the board of directors of the corporation and approved by the affirmative vote of at least:
| 80% of the votes entitled to be cast by holders of outstanding shares of voting stock of the corporation; and |
| 2/3 of the votes entitled to be cast by holders of voting stock of the corporation other than shares held by the interested stockholder with whom or with whose affiliate the business combination is to be effected or held by an affiliate or associate of the interested stockholder. |
These super-majority vote requirements do not apply if the corporations common stockholders receive a minimum price, as defined under the MGCL, for their shares in the form of cash or other consideration in the same form as previously paid by the interested stockholder for its shares. The statute permits various exemptions from its provisions. Wellsfords board of directors have previously adopted a resolution exempting from the MGCL any business combinations with Jeffrey Lynford or Edward Lowenthal or any other person acting in concert or as a group with such persons, and consequently, the five-year prohibition and the supermajority vote requirements will not apply to business combinations between such persons and Wellsford.
Reis |
Under the business combination statute of the DGCL, a corporation is prohibited from engaging in any business combination with an interested stockholder who, with or through its affiliates or associates, owns, or who is an affiliate or associate of the corporation and within a three-year period did own, 15% or more of the corporations voting stock for a three-year period following the time the stockholder became an interested stockholder, unless:
| prior to the time the stockholder became an interested stockholder, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; |
| the interested stockholder owned at least 85% of the voting stock of the corporation, excluding specified shares, upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder; or |
| at or subsequent to the time the stockholder became an interested stockholder, the business combination is approved by the board of directors of the corporation and authorized by the affirmative vote, at an annual or special meeting and not by written consent, of at least 66
2/3% of the outstanding voting shares of the corporation, excluding shares held by that interested stockholder. |
The provisions of this business combination statute do not apply to a corporation if, subject to certain requirements, the certificate of incorporation or by-laws of the corporation contain a provision expressly electing not to be governed by the provisions of the statute or the corporation does not have a class of voting stock listed on a national securities exchange, authorized for quotation on the NASDAQ or held of record by more than 2,000 stockholders.
Reis does not have a class of voting stock that is listed on a national securities exchange, authorized for quotation on the NASDAQ, or held of record by more than 2,000 stockholders of record. Accordingly, the business combination statute does not apply to Reis.
Control Share Acquisition Statute |
Wellsford |
The MGCL provides that control shares of a Maryland corporation acquired in a control share acquisition have no voting rights except to the extent approved by a vote of two-thirds of the votes entitled to be cast by stockholders on the matter, excluding shares of stock as to which the acquiring person, officers of the corporation, and directors of the corporation who are employees of the corporation are entitled to exercise or direct the exercise of the voting power of the shares in the election of directors. Control shares
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are voting shares of stock which, if aggregated with all other shares of stock previously acquired by a person, would entitle the acquirer to exercise voting power in electing directors within one of the following ranges of voting power: (1) one-tenth or more but less than one-third, (2) one-third or more but less than a majority, or (3) a majority of all voting power. Control shares do not include shares that the acquiring person is entitled to vote as a result of having previously obtained stockholder approval. A control share acquisition means the acquisition, directly or indirectly, of control shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon satisfaction of certain conditions (including an undertaking to pay expenses), may compel the board of directors to call a special meeting of stockholders to be held within 50 days of such demand to consider the voting rights of the shares.
If voting rights are not approved at the meeting or if the acquirer does not deliver an acquiring person statement as required by the statute, then, within 60 days of the meeting and subject to certain conditions and limitations, the corporation may redeem any or all of the control shares, except those for which voting rights have previously been approved, for fair value determined, without regard to voting rights, as of the date of the last control share acquisition or of any meeting of stockholders at which the voting rights of such shares are considered and not approved. If voting rights for control shares are approved at a stockholders meeting and the acquirer becomes entitled to vote a majority of the shares entitled to vote, all other stockholders may exercise appraisal rights. The fair value of the shares as determined for purposes of such appraisal rights may not be less than the highest price per share paid by the acquiring person in the control share acquisition, and certain limitations and restrictions generally applicable to the exercise of appraisal rights do not apply in the context of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a merger, consolidation, or share exchange if the corporation is a party to the transaction or to acquisitions approved or exempted by the charter or the bylaws of the corporation.
Wellsfords bylaws exempt holders of Wellsfords capital stock from the limitations on the voting rights of control shares.
Reis |
Delaware has no control share acquisition statute comparable to that in effect in Maryland.
Stockholder Meetings |
Wellsford |
The MGCL provides that a corporation shall hold an annual meeting of its stockholders to elect directors and transact any other business within its powers.
Wellsfords bylaws provide that an annual meeting of stockholders for the election of directors and the transaction of any business within the powers of Wellsford shall be held on a date and at the time set by Wellsfords board of directors during the month of June in each year.
Under the MGCL, a special meeting of stockholders may be called by the President, the board of directors or any other person specified in the corporations articles of incorporation or bylaws.
Under Wellsfords bylaws, a special meeting of the stockholders of Wellsford may be called at any time by:
| the Chairman of the Board, |
| the President, |
| the Chief Executive Officer or |
| the board of directors. |
Additionally, any stockholder may request a special meeting by sending written notice to the secretary of Wellsford signed by stockholders of record entitled to cast at least a majority of all of the votes entitled to be cast at such meeting. The stockholder request must state the purpose of the meeting and matters proposed to be acted on. The stockholders calling a special meeting are required to pay Wellsford for the costs of
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preparing and mailing a notice of the meeting to the stockholders prior to the mailing of any such notice. The Wellsford bylaws contain provisions that set forth the procedures that a Wellsford stockholder must follow to call a special meeting, including requesting a record date to determine the stockholders entitles to make the request for a special meeting.
Reis |
The DGCL provides that unless directors are elected by written consent in lieu of an annual meeting as permitted by the DGCL, an annual meeting of stockholders shall be held for the election of directors on a date and at a time designated by or in the manner provided in the bylaws. Reiss by-laws provide that an annual meeting of stockholders for the election of directors and for the transaction of any other proper business shall be held within five months after the close of the fiscal year of Reis.
The DGCL further provides that special meetings of the stockholders may be called by the board of directors or by such person or persons as may be authorized by the certificate of incorporation or the bylaws of a corporation. Under Reiss by-laws, subject to the rights of the holders of any series of preferred stock or any other series or class of stock as set forth in Reiss amended and restated certificate of incorporation to elect additional directors under specified circumstances, a special meeting of the stockholders may be called by the chairman, the President or any Vice President, and shall be called by any such officer at the request in writing of a majority of the issued and outstanding stock entitled to vote, on the basis that all voting preferred stock of Reis convertible into common stock shall be treated as if converted to common stock. Any request of stockholders for a special meeting shall state the purpose or purposes of the proposed special meeting.
Corporate Action without a Meeting |
Wellsford |
Under the MGCL, and except as provided below or otherwise provided in the MGCL, any action required or permitted to be taken at a meeting of stockholders may be taken without a meeting if (1) a unanimous written consent setting forth the action and signed by each stockholder entitled to vote on such matters and (2) a written waiver of any right to dissent signed by each stockholder entitled to notice of the meeting but not entitled to vote at it, are filed with the records of the stockholders meeting. The holders of common stock entitled to vote generally in the election of directors may take action by written consent of the stockholders entitled to vote and not less than the minimum number of votes necessary to authorize the action at a stockholders meeting if the corporation gives notice of the action to each holder of the class not later than 10 days after the effective date of the action, but only if authorized by the articles of incorporation, while the holders of any class of stock other than common stock may take action by written consent unless such action by written consent is prohibited or restricted by the articles of incorporation.
Reis |
Under the DGCL, unless otherwise restricted in the certificate of incorporation of Reis, any action required by statute to be taken at any annual or special meeting of the stockholders, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent in writing, setting forth the action taken is signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted.
Due to the absence of a provision relating to stockholder action without a meeting in Reiss amended and restated certificate of incorporation, the holders of Reis capital stock may take action or consent to any action by written consent.
Dividends |
Wellsford |
Under the MGCL, the board of directors has the power to authorize and cause the corporation to pay, out of funds legally available therefor, distributions in cash, property or securities of the corporation unless
212
the declaration of such distributions would be restricted by the articles of incorporation. The MGCL further provides that no distribution may be made (1) if the corporation would become unable to pay its debts as they become due in the usual course of business or (2) the corporations total assets would be less than the sum of its liabilities plus, unless the articles of amendment and restatement permits otherwise, the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of stockholders whose preferential rights on dissolution are superior to those receiving the distribution.
Reis |
Subject to any restrictions contained in a corporations certificate of incorporation, the DGCL generally provides that a corporation may declare and pay dividends out of its surplus, which means the excess of net assets over capital, or when no surplus exists, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. Dividends may not be paid, however, out of net profits if, after the payment of the dividends, the capital of the corporation is less than the amount of capital represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets. In accordance with the DGCL, capital is determined by the board of directors and may not be less than the aggregate par value of the outstanding capital stock of the corporation having par value.
Under Reiss amended and restated certificate of incorporation, the holders of Series D preferred stock are entitled to receive, when, as and if declared by the board of directors, out of assets of Reis legally available therefor, prior and in preference to any declaration or payment of any dividend on the Series A preferred stock, Series B preferred stock and Series C preferred stock, cumulative, non-compounding dividends at the rate of 8% annually per share. The holders of Series A preferred stock, Series B preferred stock and Series C preferred stock are entitled to receive, when, as and if declared by the board of directors, out of assets of Reis legally available therefor, prior and in preference to any declaration or payment of any dividend on the common stock, cumulative, non-compounding dividends at the rate of 8% per annum per share. Subject to all of the preferential rights of holders of the preferred stock, the holders of common stock are entitled to receive, when, as and if declared by the board of directors and out of assets of Reis which are legally available therefor, dividends payable either in cash, shares of common stock or other property.
Appraisal Rights |
Wellsford |
Under the MGCL, stockholders of a corporation are entitled to appraisal rights in connection with a:
| merger or consolidation; |
| share exchange; |
| transfer of assets requiring stockholder approval; |
| amendment of articles of incorporation which alters the contract rights of any outstanding stock and substantially adversely affects stockholder rights if the right to do so is not reserved in the articles of incorporation; or |
| business combination transaction. |
However, except with respect to business combination transactions involving an interested stockholder, stockholders generally have no appraisal rights with respect to their shares if:
| the shares are listed on a national securities exchange or are designated as a national market system security on an interdealer quotation system by the NASD or are designated for trading on the NASDAQ Small Cap Market; and |
| the shares are that of the successor in the merger, unless (1) the merger alters the contractual rights of the shares as expressly set forth in the articles of incorporation and the articles of incorporation does not reserve the right to do so or (2) the shares are to be changed or
converted in whole or in part in the merger into something other than either shares in the successor or cash, scrip, or other rights or interests arising out of provisions for the treatment of fractional shares in the successor. |
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Accordingly, Wellsford stockholders are not generally entitled to appraisal rights.
Reis |
The DGCL provides that dissenting stockholders have appraisal rights in connection with specified mergers and consolidations, provided the stockholder complies with certain procedural requirements. However, unless otherwise provided in the certificate of incorporation, and except as otherwise provided in the DGCL, this right to demand appraisal does not apply to stockholders if a vote of stockholders of such corporation is not required to authorize the merger or consolidation.
In addition, except as otherwise provided in the DGCL, the right to demand appraisal does not apply if the shares held by the stockholders are of a class or series listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the NASD or are held of record by more than 2,000 stockholders, in each case on the record date set to determine the stockholders entitled to vote on the merger or consolidation.
Notwithstanding the above, appraisal rights are available for the shares of any class or series of stock of a Delaware corporation if the holders thereof are required by the terms of an agreement of merger or consolidation to accept for their stock anything except:
| shares of stock of the surviving corporation; |
| shares of stock of any other corporation which at the effective date of the merger or consolidation will be listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the NASD or held of record by more
than 2,000 stockholders; |
| cash instead of fractional shares described in either of the above; or |
| any combination of the shares of stock and cash instead of fractional shares described in any of the three above. |
A Delaware corporation may provide in its certificate of incorporation that appraisal rights shall be available for the shares of any class or series of its stock as the result of an amendment to its certificate of incorporation, any merger or consolidation to which the corporation is a party or a sale of all or substantially all of the assets of the corporation. Reiss amended and restated certificate of incorporation does not provide for the availability of such rights.
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LEGAL MATTERS
Venable LLP will pass upon the validity of the Wellsford common stock offered by this joint proxy statement/prospectus. Certain U.S. Federal income tax consequences relating to the merger will be passed upon for Wellsford by its tax counsel, King & Spalding LLP, and for Reis by its tax counsel, Bryan Cave LLP.
EXPERTS
The consolidated financial statements and schedule of Wellsford Real Properties, Inc. and subsidiaries as of December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, appearing in this joint proxy statement/prospectus, have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report appearing elsewhere herein which, as to the years 2004 and 2003 with respect to Wellsford Real Properties, Inc. and subsidiaries, are based in part on the reports of KPMG, LLP, independent registered public accountants. The financial statements referred to above are included in reliance upon such report given on the authority of Ernst & Young LLP as experts in accounting and auditing.
The consolidated financial statements of Wellsford/Whitehall Group, L.L.C. and subsidiaries at December 31, 2005 and 2004, and for each of the three years in the period ended December 31, 2005, appearing in this joint proxy statement/prospectus, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report appearing elsewhere herein, and are included in reliance upon such report given on the authority of Ernst & Young LLP as experts in accounting and auditing.
The financial statements of Reis at October 31, 2005 and 2004, and for each of the years in the three-year period ended October 31, 2005, included in this joint proxy statement/prospectus, have been audited by Marks Paneth & Shron LLP, independent public accounting firm, as set forth in their report, appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
FUTURE STOCKHOLDER PROPOSALS
The deadline for stockholders to submit proposals to be considered for inclusion in Wellsfords proxy statement for its 2007 annual meeting of stockholders is March 14, 2007.
In addition, nominations by stockholders of candidates for election as a director or submission of new business proposals must be submitted in compliance with the Wellsfords current bylaws. Wellsfords bylaws currently provide that in order for a stockholder to nominate a candidate for election as a director at an annual meeting of stockholders or propose business for consideration at such a meeting, notice must be given to the Secretary of Wellsford no more than 120 days nor less than 90 days prior to the first anniversary of the date of the mailing of the notice for the preceding years annual meeting. Accordingly, under the current bylaws, for a stockholder nomination or business proposal to be considered at the 2007 annual meeting of stockholders, a notice of such nominee or proposal must be received not earlier than February 12, 2007 and not later than March 14, 2007. However, in the event that the date of the annual meeting is advanced or delayed by more than 30 days from the first anniversary of the date of the preceding years annual meeting, notice by the stockholder to be timely must be delivered not earlier than the 120th day prior to the date of the preceding years annual meeting and not later than the 90th day prior to the date of mailing of the notice for that annual meeting or the tenth day following the day on which public announcement of the date of that meeting is first made. For additional requirements, a stockholder may refer to Wellsfords bylaws, a current copy of which may be obtained without charge upon request from Wellsfords Secretary.
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OTHER MATTERS
As of the date of this joint proxy statement/prospectus, neither the Wellsford board of directors nor the Reis board of directors knows of any matters that will be presented for consideration at either the Wellsford special meeting or the Reis special meeting other than as described in this joint proxy statement/prospectus. If any other matters come before either of the meetings or any adjournments or postponements of the meetings and are voted upon, the enclosed proxies will confer discretionary authority on the individuals named as proxies to vote the shares represented by the proxies as to any other matters. The individuals named as proxies intend to vote in accordance with their best judgment as to any other matters.
Information on Wellsfords Website |
Information on Wellsfords website is not part of this joint proxy statement/prospectus and you should not rely on that information in deciding whether to approve any of the proposals described in this joint proxy statement/prospectus, unless that information is also in this joint proxy statement/prospectus.
Information on Reiss Website |
Information on Reiss website is not part of this joint proxy statement/prospectus and you should not rely on that information in deciding whether to approve any of the proposals described in this joint proxy statement/prospectus, unless that information is also in this joint proxy statement/prospectus.
WHERE YOU CAN FIND MORE INFORMATION
Wellsford files annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any of this information at the SECs public reference room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800- SEC-0330 for further information on the public reference room. The SEC also maintains an Internet website that contains reports, proxy statements and other information regarding issuers, including Wellsford, who file electronically with the SEC. The address of that site is http://www.sec.gov. The information contained on the SECs website is expressly not incorporated by reference into this joint proxy statement/prospectus.
Wellsford has filed with the SEC a registration statement on Form S-4 of which this joint proxy statement/prospectus forms a part. The registration statement registers the shares of Wellsford common stock to be issued to Reis stockholders in connection with the merger. The registration statement, including the attached exhibits and annexes, contains additional relevant information about the Wellsford common stock. The rules and regulations of the SEC allow Wellsford to omit certain information included in the registration statement from this joint proxy statement/prospectus.
Reis is a private company and, accordingly, does not file reports or other information with the SEC.
Wellsford has supplied all information contained in this joint proxy statement/prospectus relating to Wellsford and Reis has supplied all information in this joint proxy statement/prospectus relating to Reis.
If you would like to request documents from Wellsford or Reis, please send a request in writing or by telephone to either Wellsford or Reis at the following address:
Wellsford Real Properties,
Inc. 535 Madison Avenue, 26th Floor New York, NY 10022 (212) 838-3400 Attn: Investor Relations |
Reis, Inc. 530 Fifth Avenue New York, NY 10036 (212) 921-1122 Attn: Investor Relations |
This document is a prospectus of Wellsford and is a joint proxy statement of Wellsford and Reis for their respective meetings. Neither Wellsford nor Reis has authorized anyone to give any information or make any representation about the merger or Wellsford or Reis that is different from, or in addition to, that contained in this joint proxy statement/prospectus. Therefore, if anyone does give you information of this sort, you should not rely on it. The information contained in this document speaks only as of the date of this document unless the information specifically indicates that another date applies.
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WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm |
WF-2 | ||
Consolidated Statements of Net Assets in Liquidation (liquidation basis) at September 30, 2006 (unaudited) and December 31, 2005 |
WF-3 | ||
Consolidated Statements of Changes in Net Assets in Liquidation (liquidation basis) for the Three and Nine Months Ended September 30, 2006 (unaudited) and for the Period November 18, 2005 to December 31, 2005 |
WF-4 | ||
Consolidated Balance Sheet (going concern basis) at December 31, 2004 |
WF-5 | ||
Consolidated Statements of Operations (going concern basis) for the Three and Nine Months Ended September 30, 2005 (unaudited), for the Period January 1, 2005 to November 17, 2005 and for the Years Ended December 31, 2004 and 2003 |
WF-6 | ||
Consolidated Statements of Changes in Shareholders Equity (going concern basis) for the Period January 1, 2005 to November 17, 2005 and for the Years Ended December 31, 2004 and 2003 |
WF-7 | ||
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 (unaudited) and for the Period November 18, 2005 to December 31, 2005 (liquidation basis), and for the Nine Months Ended September 30, 2005 (unaudited), for the
Period January 1, 2005 to November 17, 2005 and for the Years Ended December 31, 2004 and 2003 (going concern basis) |
WF-8 | ||
Notes to Consolidated Financial Statements |
WF-11 | ||
Wellsford/Whitehall Group, L.L.C. Consolidated Financial Statements and Notes |
WF-52 |
FINANCIAL STATEMENT SCHEDULES
III. Real Estate and Accumulated Depreciation |
S-1 |
All other schedules have been omitted because the required information for such other schedules is not present, is not present in amounts sufficient to require submission of the schedule or because the required information is included in the consolidated financial statements.
WF-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Wellsford Real Properties, Inc.
We have audited the accompanying consolidated statement of net assets in liquidation (liquidation basis) of Wellsford Real Properties, Inc. and subsidiaries (the Company) as of December 31, 2005, and the related consolidated statements of changes in net assets in liquidation (liquidation basis) and cash flows (liquidation basis) for the period from November 18, 2005 to December 31, 2005. We have also audited the consolidated balance sheet of the Company as of December 31, 2004 and the consolidated statements of operations, changes in shareholders equity and cash flows for the period from January 1, 2005 to November 17, 2005 and each of the two years in the period ended December 31, 2004. Our audits also included the financial statement schedule listed in the Index. These financial statements and schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. The financial statements of Second Holding Company, LLC (a joint venture in which the Company had a 51.09% interest until such interest was sold on November 30, 2004), have been audited by other auditors whose report has been furnished to us; insofar as our opinion on the consolidated financial statements relates to the amounts included for Second Holding Company, LLC, it is based solely on their report. In the consolidated financial statements, the Companys equity in net (loss) income of Second Holding Company, LLC is stated at $(4,790,262) and $1,639,879, respectively, for the two years in the period ended December 31, 2004.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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.
As described in Note 1 to the consolidated financial statements, the shareholders of the Company approved a plan of liquidation on November 17, 2005 and the Company commenced liquidation shortly thereafter. As a result, the Company has changed its basis of accounting for periods subsequent to November 17, 2005 from the going-concern basis to a liquidation basis.
In our opinion, based on our audits and the 2004 and 2003 report of other auditors, the financial statements referred to above present fairly, in all material respects, the consolidated net assets in liquidation (liquidation basis) of the Company and subsidiaries at December 31, 2005 and the related changes in consolidated net assets in liquidation (liquidation basis) and cash flows (liquidation basis) for the period from November 18, 2005 to December 31, 2005 and the consolidated financial position of the Company at December 31, 2004, and the consolidated results of its operations and its cash flows for the period from January 1, 2005 through November 17, 2005 and each of the two years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Companys internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 13, 2006 (not provided herein) expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
March 13, 2006
WF-2
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Net Assets in Liquidation
(Liquidation Basis)
September 30, 2006 | December 31, 2005 | ||||||
(Unaudited) | |||||||
Assets |
|||||||
Real estate assets under development |
$ | 49,606,070 | $ | 44,233,031 | |||
Investment in Reis, Inc. |
20,000,000 | 20,000,000 | |||||
Investments in joint ventures |
453,074 | 453,074 | |||||
Total real estate and investments |
70,059,144 | 64,686,105 | |||||
Cash and cash equivalents |
38,000,641 | 41,027,086 | |||||
Restricted cash and investments |
4,609,931 | 18,953,325 | |||||
Receivables, prepaid and other assets |
1,307,599 | 2,003,635 | |||||
Deferred merger costs |
1,465,112 | | |||||
Total assets |
115,442,427 | 126,670,151 | |||||
Liabilities and Net Assets in Liquidation |
|||||||
Liabilities: |
|||||||
Mortgage notes and construction loans payable |
23,584,254 | 19,250,344 | |||||
Construction payables |
4,126,017 | 3,878,872 | |||||
Accrued expenses and other liabilities (including merger costs of $1,135,000 at September 30, 2006) |
6,544,496 | 6,977,182 | |||||
Reserve for estimated costs during the liquidation period |
20,837,482 | 24,057,079 | |||||
Reserve for option cancellations |
2,711,000 | | |||||
Deferred compensation liability |
| 14,720,730 | |||||
Total liabilities |
57,803,249 | 68,884,207 | |||||
Minority interests at estimated value |
1,428,544 | 1,216,530 | |||||
Total liabilities and minority interests |
59,231,793 | 70,100,737 | |||||
Commitments and contingencies |
|||||||
Net assets in liquidation |
$ | 56,210,634 | $ | 56,569,414 | |||
See notes to Consolidated Financial Statements
WF-3
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Net Assets in Liquidation
(Liquidation Basis)
For the Three Months Ended September 30, 2006 |
For the Nine Months Ended September 30, 2006 |
For the Period November 18, 2005 to December 31, 2005 |
||||||||
(Unaudited) | (Unaudited) | |||||||||
Shareholders equity November 17, 2005 (going concern basis) |
$ | 101,817,561 | ||||||||
Adjustments relating to adoption of liquidation basis of accounting: |
||||||||||
Adjustment of real estate investments and other assets to net realizable value, net of liability for income taxes |
72,485,014 | |||||||||
Accrual of estimated costs of liquidation and termination |
(24,767,375 | ) | ||||||||
Adjustment of carrying amounts of minority interests |
(2,646,198 | ) | ||||||||
Net assets in liquidation beginning of period |
$ | 55,844,106 | $ | 56,569,414 | 146,889,002 | |||||
Operating income |
441,917 | 1,272,765 | 220,942 | |||||||
Exercise of stock options |
| | 56,074 | |||||||
Changes in net real estate assets under development, net of minority interest and estimated income taxes |
393,765 | 1,747,042 | | |||||||
Provision for option cancellation reserve |
| (4,226,938 | ) | | ||||||
Change in option cancellation reserve due to market price fluctuations |
(469,154 | ) | 848,351 | | ||||||
Distributions to stockholders |
| | (90,596,604 | ) | ||||||
Changes in net assets in liquidation |
366,528 | (358,780 | ) | (90,319,588 | ) | |||||
Net assets in liquidation end of period |
$ | 56,210,634 | $ | 56,210,634 | $ | 56,569,414 | ||||
See notes to Consolidated Financial Statements
WF-4
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet (Going Concern Basis)
December 31, 2004
Assets |
||||
Real estate assets, at cost: |
||||
Land |
$ | 18,735,969 | ||
Buildings and improvements |
113,575,359 | |||
132,311,328 | ||||
Less: |
||||
Accumulated depreciation |
(21,030,744 | ) | ||
111,280,584 | ||||
Residential units available for sale |
353,702 | |||
Construction in process |
18,609,685 | |||
130,243,971 | ||||
Notes receivable |
1,189,500 | |||
Investments in joint ventures |
13,984,968 | |||
Total real estate and investments |
145,418,439 | |||
Cash and cash equivalents |
65,863,790 | |||
Restricted cash and investments |
13,534,175 | |||
Investments in U.S. Government securities |
27,551,254 | |||
Prepaid and other assets |
2,269,652 | |||
Total assets |
$ | 254,637,310 | ||
Liabilities and Shareholders Equity |
||||
Liabilities: |
||||
Mortgage notes and construction loans payable |
$ | 108,852,625 | ||
Junior subordinated debentures (Debentures) |
25,775,000 | |||
Accrued expenses and other liabilities |
6,646,117 | |||
Deferred compensation liability |
10,156,667 | |||
Total liabilities |
151,430,409 | |||
Minority interests |
4,423,632 | |||
Total liabilities and minority interests |
155,854,041 | |||
Commitments and contingencies |
||||
Shareholders equity: |
||||
Series A 8% convertible redeemable preferred stock, $.01 par value per share, 2,000,000 shares authorized, no shares issued and outstanding |
| |||
Common stock, 98,825,000 shares authorized, $.02 par value per share, 6,296,620 shares issued and outstanding |
125,933 | |||
Class A-1 common stock, 175,000 shares authorized, $.02 par value per share, 169,903 shares issued and outstanding |
3,398 | |||
Paid in capital in excess of par value |
162,848,758 | |||
Retained earnings (deficit) |
(57,945,686 | ) | ||
Treasury stock, 302,062 shares |
(6,249,134 | ) | ||
Total shareholders equity |
98,783,269 | |||
Total liabilities and shareholders equity |
$ | 254,637,310 | ||
See notes to Consolidated Financial Statements
WF-5
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations (going concern basis)
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
For the Period January 1 to November 17, |
For the Years Ended December 31, |
|||||||||||||
2005 | 2005 | 2005 | 2004 | 2003 | ||||||||||||
(Unaudited) | (Unaudited) | |||||||||||||||
Revenues |
||||||||||||||||
Rental revenue |
$ | 3,419,873 | $ | 10,315,055 | $ | 12,153,235 | $ | 13,366,695 | $ | 14,256,344 | ||||||
Revenue from sales of residential units |
209,900 | 488,075 | 488,075 | 12,288,483 | 12,535,481 | |||||||||||
Interest revenue |
438,541 | 1,248,854 | 1,551,165 | 1,197,531 | 7,451,199 | |||||||||||
Fee revenue |
162,850 | 518,000 | 518,000 | 796,617 | 1,359,408 | |||||||||||
Total revenues |
4,231,164 | 12,569,984 | 14,710,475 | 27,649,326 | 35,602,432 | |||||||||||
Costs and expenses |
||||||||||||||||
Cost of sales of residential units |
166,513 | 385,631 | 385,631 | 10,130,861 | 10,708,448 | |||||||||||
Property operating and maintenance |
1,272,956 | 3,824,377 | 4,806,411 | 4,786,558 | 4,894,726 | |||||||||||
Real estate taxes |
279,346 | 846,549 | 842,811 | 1,191,282 | 1,296,883 | |||||||||||
Depreciation and amortization |
1,106,417 | 3,315,601 | 3,886,889 | 4,636,684 | 8,537,016 | |||||||||||
Property management |
91,378 | 275,502 | 331,261 | 316,479 | 292,102 | |||||||||||
Interest: |
||||||||||||||||
Mortgage notes payable |
1,239,174 | 3,855,366 | 4,658,626 | 6,148,762 | 6,583,411 | |||||||||||
Debentures |
| 823,643 | 823,643 | 2,099,815 | | |||||||||||
General and administrative |
1,933,158 | 6,842,237 | 7,887,820 | 8,270,768 | 5,590,971 | |||||||||||
Total costs and expenses |
6,088,942 | 20,168,906 | 23,623,092 | 37,581,209 | 37,903,557 | |||||||||||
Income (loss) from joint ventures |
5,601,729 | 11,514,752 | 11,849,733 | (23,715,114 | ) | (34,429,066 | ) | |||||||||
Income (loss) before minority interest, income taxes, accrued distributions and amortization of costs on Convertible Trust Preferred Securities and discontinued operations |
3,743,951 | 3,915,830 | 2,937,116 | (33,646,997 | ) | (36,730,191 | ) | |||||||||
Minority interest benefit |
42,802 | 109,083 | 172,176 | 88,478 | 85,337 | |||||||||||
Income (loss) before income taxes, accrued distributions and amortization of costs on Convertible Trust Preferred Securities and discontinued operations |
3,786,753 | 4,024,913 | 3,109,292 | (33,558,519 | ) | (36,644,854 | ) | |||||||||
Income tax expense (benefit) |
10,000 | 70,000 | 91,000 | (130,000 | ) | 7,135,000 | ||||||||||
Income (loss) before accrued distributions and amortization of costs on Convertible Trust Preferred Securities and discontinued operations |
| | 3,018,292 | (33,428,519 | ) | (43,779,854 | ) | |||||||||
Accrued distributions and amortization of costs on Convertible Trust Preferred Securities |
| | | | 2,099,815 | |||||||||||
Income (loss) from continuing operations |
3,776,753 | 3,954,913 | 3,018,292 | (33,428,519 | ) | (45,879,669 | ) | |||||||||
Income from discontinued operations, net of income tax expense of $80,000 and $16,000 in 2004 and 2003, respectively |
| | | 725,069 | 20,348 | |||||||||||
Net income (loss) |
$ | 3,776,753 | $ | 3,954,913 | $ | 3,018,292 | $ | (32,703,450 | ) | $ | (45,859,321 | ) | ||||
Per share amounts, basic and diluted: | ||||||||||||||||
Income (loss) from continuing operations |
$ | 0.58 | $ | 0.61 | $ | 0.47 | $ | (5.17 | ) | $ | (7.11 | ) | ||||
Income from discontinued operations |
| | | 0.11 | | |||||||||||
Net income (loss) |
$ | 0.58 | $ | 0.61 | $ | 0.47 | $ | (5.06 | ) | $ | (7.11 | ) | ||||
Weighted average number of common shares outstanding: |
||||||||||||||||
Basic |
6,467,639 | 6,467,639 | 6,467,639 | 6,460,129 | 6,454,236 | |||||||||||
Diluted |
6,476,698 | 6,470,949 | 6,470,482 | 6,460,129 | 6,454,236 | |||||||||||
See notes to Consolidated Financial Statements
WF-6
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders Equity (going concern basis)
For the period January 1, 2005 to November 17, 2005 and
For the years ended December 31, 2004 and 2003
Common Shares* |
Paid in | Retained Earnings |
Accumulated Other Comprehensive (Loss) |
Deferred | Total Shareholders |
Comprehensive | |||||||||||||||||||
Shares | Amount | Capital** | (Deficit) | Income | Compensation | Equity | (Loss) Income | ||||||||||||||||||
Balance, January 1, 2003 |
6,450,586 | $ | 129,012 | $ | 156,352,364 | $ | 20,617,085 | $ | (253,500 | ) | $ | (277,664 | ) | $ | 176,567,297 | ||||||||||
Director share grants |
5,408 | 108 | 85,225 | | | | 85,333 | $ | | ||||||||||||||||
Amortization of deferred compensation |
| | | | | 277,664 | 277,664 | | |||||||||||||||||
Share of unrealized income on interest rate protection contract purchased by joint venture investment, net of income tax benefit of
$135,381 |
| | | | 203,071 | | 203,071 | 203,071 | |||||||||||||||||
Net (loss) |
| | | (45,859,321 | ) | | | (45,859,321 | ) | (45,859,321 | ) | ||||||||||||||
Balance, December 31, 2003 |
6,455,994 | 129,120 | 156,437,589 | (25,242,236 | ) | (50,429 | ) | | 131,274,044 | $ | (45,656,250 | ) | |||||||||||||
Director share grants |
3,836 | 77 | 63,923 | | | | 64,000 | $ | | ||||||||||||||||
Stock option exercises |
6,693 | 134 | 98,112 | | | | 98,246 | | |||||||||||||||||
Share of unrealized income on interest rate protection contract |
| | | | 50,429 | | 50,429 | 50,429 | |||||||||||||||||
Net (loss) |
| | | (32,703,450 | ) | | | (32,703,450 | ) | (32,703,450 | ) | ||||||||||||||
Balance, December 31, 2004 |
6,466,523 | 129,331 | 156,599,624 | (57,945,686 | ) | | | 98,783,269 | $ | (32,653,021 | ) | ||||||||||||||
Director share grants |
1,116 | 22 | 15,978 | | | | 16,000 | $ | | ||||||||||||||||
Net income for the period January 1 to November 17, 2005 |
| | | 3,018,292 | | | 3,018,292 | 3,018,292 | |||||||||||||||||
Balance, November 17, 2005 |
6,467,639 | $ | 129,353 | $ | 156,615,602 | $ | (54,927,394 | ) | $ | | $ | | $ | 101,817,561 | $ | 3,018,292 | |||||||||
* | Includes 169,903 class A-1 common shares. |
** | Net of shares held in the deferred compensation trust and treated as treasury stock. |
See notes to Consolidated Financial Statements
WF-7
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, |
2005 |
Going Concern Basis |
|||||||||||||||||
|
Liquidation | Going Concern | For the Years Ended | ||||||||||||||||
2006 | 2005 | Basis | Basis | December 31, | |||||||||||||||
Liquidation Basis |
Going Concern Basis |
November 18 to December 31 |
January 1 to November 17 |
2004 | 2003 | ||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||||||
Cash flows from operating activities: |
|||||||||||||||||||
Change in net assets in liquidation from: |
|||||||||||||||||||
Interest and other income and expense, net |
$ | 1,272,765 | $ | 220,942 | |||||||||||||||
Operating activities of real estate assets under development, net |
1,747,042 | | |||||||||||||||||
3,019,807 | 220,942 | ||||||||||||||||||
Net income (loss) (period prior to liquidation accounting) |
| $ | 3,954,913 | | $ | 3,018,292 | $ | (32,703,450 | ) | $ | (45,859,321 | ) | |||||||
Adjustments to reconcile to net cash (used in) provided by operating activities: |
|||||||||||||||||||
Gain on redemption of joint venture interest |
| (5,845,556 | ) | | (5,986,396 | ) | | | |||||||||||
Impairment charges and transaction losses from investments in joint ventures |
| | | | 24,427,684 | 37,376,500 | |||||||||||||
Gain on sale of assets and release of contingent liability |
| | | | (808,856 | ) | | ||||||||||||
Deferred tax (credit) provision |
| | | (61,000 | ) | (300,000 | ) | 6,842,000 | |||||||||||
Depreciation and amortization |
512 | 3,589,244 | 11,846 | 4,160,532 | 4,673,999 | 8,685,996 | |||||||||||||
Amortization of deferred compensation |
| | | | | 277,664 | |||||||||||||
Net amortization of premiums/discounts on U.S. Government securities |
| 787 | 356 | 898 | 23,047 | | |||||||||||||
Non-cash increase in value of real estate assets under development, net |
(324,742 | ) | | | | | | ||||||||||||
Undistributed joint venture income |
| | | | | (1,282,797 | ) | ||||||||||||
Undistributed minority interest (benefit) |
(66,895 | ) | (109,083 | ) | (11,257 | ) | (172,176 | ) | (88,478 | ) | (85,337 | ) | |||||||
Stock issued for director compensation |
| 16,000 | | 16,000 | 64,000 | 85,333 | |||||||||||||
Value of option grants for director compensation |
| | | | 71,500 | 93,600 | |||||||||||||
Changes in assets and liabilities: |
|||||||||||||||||||
Restricted cash and investments |
1,265,062 | (603,429 | ) | (3,830,272 | ) | (688,878 | ) | (3,323,770 | ) | (666,471 | ) | ||||||||
Residential units available for sale |
| 353,702 | | 353,702 | 8,882,268 | 9,342,643 | |||||||||||||
Assets held for sale |
| | | | 449,057 | (356,001 | ) | ||||||||||||
Real estate assets under development |
(6,001,637 | ) | (16,196,832 | ) | (4,021,343 | ) | (22,900,464 | ) | (10,660,002 | ) | (360,551 | ) | |||||||
Prepaid and other assets |
824 | (49,359 | ) | 347,116 | (328,450 | ) | 500,852 | 2,126,663 | |||||||||||
Accrued expenses and other liabilities |
(2,707,944 | ) | (125,130 | ) | (215,741 | ) | 1,339,441 | (547,718 | ) | 62,157 | |||||||||
Reserve for estimated costs during the liquidation period |
(3,219,597 | ) | | (710,296 | ) | | | | |||||||||||
Construction payables |
247,145 | 3,055,374 | 794,525 | 3,084,347 | | | |||||||||||||
Deferred compensation liability |
| 1,531,820 | 2,995,746 | 1,568,317 | 408,180 | 814,880 | |||||||||||||
Liabilities attributable to assets held for sale |
| | | | (317,486 | ) | 93,479 | ||||||||||||
Net cash (used in) provided by operating activities |
(7,787,465 | ) | (10,427,549 | ) | (4,418,378 | ) | (16,595,835 | ) | (9,249,173 | ) | 17,190,437 | ||||||||
Cash flows from investing activities: |
|||||||||||||||||||
Purchase of U.S. Government securities |
| | | | (2,608,090 | ) | (27,516,211 | ) | |||||||||||
Redemption of U.S. Government securities |
| 22,500,000 | 2,550,000 | 25,000,000 | 2,550,000 | | |||||||||||||
Investments in real estate assets |
| (23,944 | ) | | (23,944 | ) | (18,407 | ) | (19,558 | ) | |||||||||
Return of capital and redemption proceeds from sales and investments in joint ventures |
| 12,352,087 | | 12,792,662 | 15,934,134 | 509,963 | |||||||||||||
Repayments of notes receivable |
| 1,032,000 | | 1,032,000 | 2,064,000 | 25,516,000 | |||||||||||||
Proceeds from the sale of real estate assets |
1,296,883 | | 166,912,078 | | 2,694,334 | 4,165,467 | |||||||||||||
Deferred merger costs |
(330,112 | ) | | | | | | ||||||||||||
Purchase of minority interest |
| | | (2,087,000 | ) | | | ||||||||||||
Net cash provided by investing activities |
966,771 | 35,860,143 | 169,462,078 | 36,713,718 | 20,615,971 | 2,655,661 | |||||||||||||
WF-8
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Nine Months Ended September 30, |
2005 |
Going Concern Basis |
|||||||||||||||||
|
Liquidation | Going Concern | For the Years Ended | ||||||||||||||||
2006 | 2005 | Basis | Basis | December 31, | |||||||||||||||
Liquidation Basis |
Going Concern Basis |
November 18 to December 31 |
January 1 to November 17 |
2004 | 2003 | ||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||||||
Cash flows from financing activities: |
|||||||||||||||||||
Borrowings from mortgage notes and construction loans payable |
21,671,058 | 12,504,221 | 2,817,622 | 16,071,903 | 360,820 | 40,000,000 | |||||||||||||
Deferred financing costs |
| | | | | (316,881 | ) | ||||||||||||
Repayments of mortgage notes and construction loans payable |
(17,337,148 | ) | (13,918,342 | ) | (94,429,482 | ) | (14,062,324 | ) | (1,496,584 | ) | (42,728,268 | ) | |||||||
Redemption of Debentures |
| (25,775,000 | ) | | (25,775,000 | ) | | | |||||||||||
Proceeds from option exercises |
| | 56,074 | | 98,246 | | |||||||||||||
Payments for option cancellation |
(667,587 | ) | | | | | | ||||||||||||
Minority interest investment |
175,176 | | | | 157,500 | | |||||||||||||
Distributions to minority interest |
(47,250 | ) | | (3,408,351 | ) | (672,125 | ) | (505 | ) | (5,275 | ) | ||||||||
Distributions to shareholders |
| | (90,596,604 | ) | | | | ||||||||||||
Net cash provided by (used in) financing activities |
3,794,249 | (27,189,121 | ) | (185,560,741 | ) | (24,437,546 | ) | (880,523 | ) | (3,050,424 | ) | ||||||||
Net (decrease) increase in cash and cash equivalents |
(3,026,445 | ) | (1,756,527 | ) | (20,517,041 | ) | (4,319,663 | ) | 10,486,275 | 16,795,674 | |||||||||
Cash and cash equivalents, beginning of period |
41,027,086 | 65,863,790 | 61,544,127 | 65,863,790 | 55,377,515 | 38,581,841 | |||||||||||||
Cash and cash equivalents, end of period |
$ | 38,000,641 | $ | 64,107,263 | $ | 41,027,086 | $ | 61,544,127 | $ | 65,863,790 | $ | 55,377,515 | |||||||
Supplemental information: |
|||||||||||||||||||
Cash paid during the period for interest including interest on Debentures of $979,688, $979,688 and $2,063,000 for the nine months ended September 30, 2005, the period January 1 to
November 17, 2005 and for the year ended December 31, 2004, respectively, and excluding interest funded by construction loans |
$ | | $ | 5,165,325 | $ | 5,016,192 | $ | 6,153,093 | $ | 8,613,174 | $ | 6,556,762 | |||||||
Cash paid during the period for income taxes, net of tax refunds (refunds in excess of income taxes paid) |
$ | 100,120 | $ | 54,461 | $ | 671,714 | $ | 54,461 | $ | 440,968 | $ | (1,795,490 | ) | ||||||
Supplemental schedule of non-cash investing and financing activities: |
|||||||||||||||||||
Release of shares held in deferred compensation plan |
$ | 5,181,985 | $ | 100,000 | $ | 633,000 | $ | 100,000 | $ | 50,000 | $ | 100,000 | |||||||
Provision for option cancellation reserve |
$ | 4,226,938 | |||||||||||||||||
Reduction in option cancellation reserve due to market price fluctuation |
$ | 848,351 | |||||||||||||||||
Net transfer of deferred compensation assets and related liability |
$ | 14,720,730 | |||||||||||||||||
Accrual of estimated merger costs through September 30, 2006 |
$ | 1,135,000 | |||||||||||||||||
Sale of other assets: |
|||||||||||||||||||
Restricted cash |
$ | 1,642,398 | |||||||||||||||||
Other assets |
$ | (694,700 | ) | ||||||||||||||||
Accrued expenses and other liabilities |
$ | 947,698 | |||||||||||||||||
Other comprehensive income (loss); share of unrealized income (loss) on interest rate protection contract purchased by joint venture investment, net of tax |
$ | 50,429 | $ | 203,071 | |||||||||||||||
WF-9
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
For the Nine Months Ended September 30, |
2005 |
Going Concern Basis |
|||||||||||||||||
|
Liquidation | Going Concern | For the Years Ended | ||||||||||||||||
2006 | 2005 | Basis | Basis | December 31, | |||||||||||||||
Liquidation Basis |
Going Concern Basis |
November 18 to December 31 |
January 1 to November 17 |
2004 | 2003 | ||||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||||||||
The effect of deconsolidating $25,000,000 of Convertible Trust Preferred Securities and recording $25,775,000 of junior subordinated debentures and related joint venture investment |
$ | 775,000 | |||||||||||||||||
Note issued for minority interest investment |
$ | 157,500 | |||||||||||||||||
Assets and liabilities arising upon formation of joint venture: |
|||||||||||||||||||
Construction in process, including land of $2,000,000 |
$ | 2,121,230 | |||||||||||||||||
Mortgage assumed |
$ | 483,827 | |||||||||||||||||
Accrued expenses and other liabilities assumed |
$ | 887,403 | |||||||||||||||||
Minority interest contributed |
$ | 750,000 | |||||||||||||||||
Reclassification of Silver Mesa units from land, building and improvements and accumulated depreciation to residential units available for sale in 2003 |
$ | 4,036,979 | |||||||||||||||||
Value of land, net other assets and minority interest assumed on consolidated investment |
$ | 100,100 | |||||||||||||||||
See notes to Consolidated Financial Statements
WF-10
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The Information as of September 30, 2006 and For The Three and Nine Months Ended
September 30, 2006 and 2005 is Unaudited)
1. Organization, Business and Plan of Liquidation
Organization |
Wellsford Real Properties, Inc. (and subsidiaries, collectively, the Company) was formed as a Maryland corporation on January 8, 1997, as a corporate subsidiary of Wellsford Residential Property Trust (the Trust). On May 30, 1997, the Trust merged (the EQR
Merger) with Equity Residential (EQR). Immediately prior to the EQR 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 EQR Merger, the Trust distributed to its common stockholders all of the outstanding shares of the Company owned by the Trust. |
Business |
The Company was originally formed to operate as a real estate merchant banking firm to acquire, develop, finance and operate real properties and invest in private and public real estate companies. The Companys remaining primary operating activities are the development,
construction and sale of three residential projects and its approximate 23% ownership interest in Reis, Inc., a real estate information and database company (Reis). Previously, the Companys activities had been categorized into three strategic business units (SBUs) within
which it executed its business plans: (i) Commercial Property Activities; (ii) Debt and Equity Activities; and (iii) Residential Activities. See Footnote 11 for information regarding the Companys remaining primary operating activities. |
Merger with Reis |
On October 11, 2006 the Company announced that it entered into a definitive merger agreement to acquire Reis (the Merger). The Merger was approved by the independent members of the Companys Board of Directors (the Board) on that date. Reis stockholders,
excluding the Company, will receive, in the aggregate, approximately $34,600,000 in cash and approximately 4,200,000 shares of newly issued common stock of the Company which, for purposes of the Merger, has been established at $8.16 per share resulting in an implied
equity value for Reis of approximately $90,000,000, including Wellsfords 23% interest in Reis. |
The rules of the American Stock Exchange (the AMEX) require the Companys stockholders to approve the issuance of shares of common stock of the Company to Reis stockholders, since such an issuance would be greater than 20% of the common shares currently
outstanding. The transaction, which is also subject to the approval of the Reis stockholders, regulatory approvals and other customary closing conditions, is expected to close in the first quarter of 2007. |
If the Merger is consummated, the Company would abandon its previously adopted Plan of Liquidation (the Plan, as described below), but would continue with its program of disposing of its remaining real estate assets through development and/or sale. |
The cash portion of the purchase price is to be funded by a loan extended to Reis by a financial institution aggregating $27,000,000 (of which $25,000,000 can be used for Merger consideration and the payment of related Merger costs and the remaining $2,000,000 can be utilized
for future working capital needs) with the remainder to be funded with cash on hand from Reis and Wellsford. Upon completion of the Merger, the Company would have approximately 10,700,000 shares of common stock outstanding and change its corporate name to Reis, Inc.
Following the closing of the Merger, Reis stockholders would own approximately 40% of the combined company. |
There can be no assurance that the Reis stockholders will vote to approve the Merger and adopt the Merger agreement or that the Companys stockholders will vote to issue shares of the Companys common stock in connection with the Merger. Furthermore, there can be no
assurance following a vote |
WF-11
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The Information as of September 30, 2006 and For The Three and Nine Months Ended
September 30, 2006 and 2005 is Unaudited) (Continued)
Organization, Business and Plan of Liquidation (Continued)
in favor of the Merger and such issuance of the Companys common stock that the Merger will be consummated. |
Plan of Liquidation |
On May 19, 2005, the Board approved the Plan and on November 17, 2005, the Companys stockholders adopted the Plan. The Plan contemplates the orderly sale of each of the Companys remaining assets, which are either owned directly or through the Companys joint
ventures, the collection of all outstanding loans from third parties, the orderly disposition or completion of construction of development properties, the discharge of all outstanding liabilities to third parties and, after the establishment of appropriate reserves, the distribution of all
remaining cash to stockholders. The Plan also permitted the Board to acquire more Reis shares and/or discontinue the Plan without further stockholder approval. The initial liquidating distribution of $14.00 per share was made on December 14, 2005 to stockholders of record at
December 2, 2005. If the Merger is consummated and the Plan is terminated, it would be necessary to recharacterize a portion of the December 14, 2005 cash distribution of $14.00 per share from what may have been classified as a return of capital for Company stockholders at
that time to taxable dividend income. The Company estimates that $1.15 of the $14.00 per share cash distribution will be recharacterized as taxable dividend income. |
The Company contemplated that approximately 36 months after the approval of the Plan, any remaining assets and liabilities would be transferred into a liquidating trust. The liquidating trust would continue in existence until all liabilities have been settled, all remaining assets
have been sold and proceeds distributed and the appropriate statutory periods have lapsed. The creation and operation of a liquidating trust would only occur if the Merger does not close and the Plan is not terminated. |
For all periods preceding stockholder approval of the Plan on November 17, 2005, the Companys financial statements are presented on the going concern basis of accounting. As required by generally accepted accounting principles, the Company adopted the liquidation basis
of accounting as of the close of business on November 17, 2005. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts, which estimates will be periodically reviewed and
adjusted as appropriate. |
The Companys net assets in liquidation at September 30, 2006, June 30, 2006, March 31, 2006 and December 31, 2005 were: |
September 30, 2006 |
June 30, 2006 |
March 31, 2006 |
December 31, 2005 |
|||||||||||
Net assets in liquidation |
$ | 56,211,000 | $ | 55,844,000 | $ | 53,384,000 | $ | 56,569,000 | ||||||
Per share |
$ | 8.69 | $ | 8.63 | $ | 8.25 | $ | 8.74 | ||||||
Common stock outstanding at each respective date |
6,471,179 | 6,471,179 | 6,471,179 | 6,471,179 |
The reported amounts for net assets in liquidation present development projects at estimated net realizable values at each respective date after giving effect to the present value discounting of estimated net proceeds therefrom. All other assets are presented at estimated net
realizable value on an undiscounted basis. The amount also includes reserves for future estimated general and administrative expenses and other costs and for cash payments on outstanding stock options during the liquidation. There can be no assurance that these estimated
values will be realized or that future expenses and other costs will not be greater than recorded estimated amounts. Such amounts should not be taken as an indication of the timing or amount of future distributions to be made by the Company if the Merger is not consummated
and if the Plan were to continue (see the Liquidation Basis of Accounting disclosure in Footnote 2 below). |
WF-12
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The Information as of September 30, 2006 and For The Three and Nine Months Ended
September 30, 2006 and 2005 is Unaudited) (Continued)
Organization, Business and Plan of Liquidation (Continued)
If the Plan is not terminated, the timing and amount of interim liquidating distributions (if any) and the final liquidating distribution will depend on the timing and amount of proceeds the Company will receive upon the sale of the remaining assets and the extent to which reserves
for current or future liabilities are required. Accordingly, there can be no assurance that there will be any interim liquidating distributions prior to a final liquidating distribution if the Plan were not terminated. |
The termination of the Plan would result in the retention by the combined entity of the Companys cash balances and subsequent cash flow from the sales of residential development assets for working capital and re-investment purposes. Such cash would not be distributed to
stockholders in the form of a liquidating distribution as had been contemplated under the Plan. |
The following paragraphs summarize certain of the material actions and events which have occurred regarding the Plan and certain decisions of the Board. |
In March 2004, the Company reported that the Board authorized and retained the financial advisory firm, Lazard Ltd (Lazard), to advise the Company on various strategic financial and business alternatives available to it to maximize stockholder value. Such alternatives
included a recapitalization, acquisitions, disposition of assets, liquidation, the sale or merger of the Company and other alternatives that would keep the Company independent. |
In March 2005, the Board authorized the marketing of the three residential rental phases of Palomino Park. In the second quarter of 2005, the Company engaged a broker to market these phases. In August 2005, the Company entered into an agreement to sell these phases for
$176,000,000, subject to, among other things, stockholder approval of the Plan. The sale closed on November 22, 2005. |
The following transactions, which are consistent with the intent of the Plan, occurred prior to the November 17, 2005 adoption of the Plan by the stockholders: (i) in September 2005, the Companys interest in its Wellsford/Whitehall joint venture was redeemed for
approximately $8,300,000, (ii) by May 2005, the Company retired $12,680,000 of tax exempt bond financing, (iii) in April 2005, the Company redeemed its outstanding $25,775,000 of Debentures and (iv) in November 2004, the Company received $15,000,000 for its interest
in a joint venture which purchased debt instruments (Second Holding). |
2. Summary of Significant Accounting Policies
Basis of Presentation. |
Liquidation Basis of Accounting |
With the approval of the Plan by the stockholders, the Company adopted the liquidation basis of accounting effective as of the close of business on November 17, 2005. The liquidation basis of accounting will continue to be used by the Company until such time that the Plan is
terminated, if at all. If the stockholders of the Company approve the issuance of additional shares of the Companys common stock and the Merger is consummated, then the Company would change from the liquidation basis of accounting to the going concern basis of accounting
upon the effective termination of the Plan. |
Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts, which estimates will be periodically reviewed and adjusted as appropriate. A Statement of Net Assets in Liquidation
and a Statement of Changes in Net Assets in Liquidation are the principal financial statements presented under the liquidation basis of accounting. The valuation of assets at their net realizable value and liabilities at their anticipated settlement amounts represent estimates, based
on present facts and circumstances, of the net realizable values of assets and the costs associated with carrying out the Plan and dissolution based on the assumptions set forth below. The actual values and costs associated with carrying out the Plan are |
WF-13
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The Information as of September 30, 2006 and For The Three and Nine Months Ended
September 30, 2006 and 2005 is Unaudited) (Continued)
Summary of Significant Accounting Policies (Continued)
expected to differ from the amounts shown herein because of the inherent uncertainty and will be greater than or less than the amounts recorded. Such differences may be material. In
particular, the estimates of the Companys costs will vary with the length of time it operates. In addition, the estimate of net assets in liquidation per share, which except for projects under
development, does not incorporate a present value discount. Accordingly, it is not possible to predict the aggregate amount or timing of future distributions to stockholders, as long as the
Plan is in effect, and no assurance can be given that the amount of liquidating distributions to be received will equal or exceed the estimate of net assets in liquidation presented in the
accompanying Statement of Net Assets in Liquidation, or the price or prices at which the Companys common stock has traded or is expected to trade in the future. If the Plan is
terminated, no additional liquidating distributions will be made. |
If the Merger with Reis is consummated, the Companys assets and liabilities will be presented on a going concern basis of accounting with assets being reported at the lower of historical cost, as adjusted for activity, or market. |
Valuation Assumptions |
Under the liquidation basis of accounting, the carrying amounts of assets as of the date of the adoption of the Plan by the stockholders (November 17, 2005) were adjusted to their estimated net realizable values and liabilities, including the estimated costs associated with
implementing the Plan, were adjusted to estimated settlement amounts. Such value estimates were updated by the Company as of September 30, 2006. The following are the significant assumptions utilized by management in assessing the value of assets and the expected
settlement values of liabilities included in the Statements of Net Assets in Liquidation at September 30, 2006 and December 31, 2005. |
Net Assets in Liquidation |
Real estate assets under development are primarily reflected at net realizable value which is based upon the Companys budgets for constructing and selling the respective project in the orderly course of business. Sales prices are based upon contracts signed to date and budgeted
sales prices for the unsold units or homes. Sales prices are determined in consultation with the respective third party companies who are the sales agent for the project, where applicable. Costs and expenses are based upon the Companys budgets, which have been reviewed with
the respective third party construction company or joint venture partner. In certain cases, construction costs are subject to binding contracts. The Company has assumed that existing construction financing will remain in place during the respective projects planned construction
and sell out. Anticipated future cost increases for construction are assumed to be funded by the existing construction lenders and the Company at the present structured debt to equity capitalization ratios, in which event the Company will make additional equity contributions. For
one project, the Company has assumed that a construction loan will be obtained at currently existing LIBOR spreads and customary industry debt to equity capitalization levels. The expected net sales proceeds are discounted on a quarterly basis at 17.5% to 26% annual rates to
determine the estimated net realizable value of the Companys equity investment. The effect of changes in values of real estate assets under development was a net increase of approximately $394,000 and $1,747,000 during the three and nine months ended September 30, 2006,
respectively. The net increase results primarily from changes in the net realizable value estimates including the shortening of the discount periods due to the passage of time and sales of condominium units and homes. |
The Company reports operating income on the Consolidated Statements of Changes in Net Assets in Liquidation which is comprised primarily of interest and other income earned on invested cash during the reporting periods. |
WF-14
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The Information as of September 30, 2006 and For The Three and Nine Months Ended
September 30, 2006 and 2005 is Unaudited) (Continued)
Summary of Significant Accounting Policies (Continued)
The estimated net realizable value of a land parcel acquired in November 2005 (the East Lyme Land) is stated at the Companys cost which the Company believes approximates fair value. |
The estimated net realizable value of the Companys interests in Reis, Inc. is derived from an approximate $90,000,000 equity value of Reis based upon the Merger terms for valuation purposes at September 30, 2006 and offers Reis received from potential purchasers during
prior reporting periods. See Footnote 11 for additional disclosure regarding Reis. |
Assets of the Companys deferred compensation plan were included in restricted cash and investments and were primarily stated at their respective market values, which equaled the related deferred compensation liability. The assets and liabilities were transferred as part of the
Beekman transaction in January 2006 (see Footnote 11). |
For the period November 18, 2005 to December 31, 2005, the Beekman assets (collectively, Beekman) were presented at the Companys aggregate cost which equals its net realizable value. On January 27, 2006, a company which is owned by Messrs. Lynford and
Lowenthal, the principal of the Companys joint venture partner in the East Lyme project and others, acquired the Beekman project for an amount equal to costs and expenses incurred by the Company. |
Cash, deposits and escrow accounts are presented at face value. The Companys remaining assets are stated at estimated net realizable value which is the expected selling price or contractual payment to be received, less applicable direct costs or expenses, if any. The assets that
have been valued on this basis include receivables, joint venture investments and other investments. |
Mortgage notes and construction loans payable, construction payables and accrued expenses and other liabilities are stated at settlement amounts. |
Reserve for Estimated Costs During the Liquidation Period |
Under the liquidation basis of accounting, the Company is required to estimate and accrue the costs associated with implementing and completing the Plan. These amounts can vary significantly due to, among other things, the timing and realized proceeds from sales of the
projects under development and sale of other assets, the costs of retaining personnel and others to oversee the liquidation, including the cost of insurance, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with cessation
of the Companys operations including an estimate of costs subsequent to that date (which would include reserve contingencies for the appropriate statutory periods). As a result, the Company has accrued the projected costs, including corporate overhead and specific liquidation
costs of severance and retention bonuses, professional fees, and other miscellaneous wind-down costs, expected to be incurred during the projected period required to complete the liquidation of the Companys remaining assets. Also, the Company has not recorded any liability
for any cash operating shortfall that may result at the projects under construction during the anticipated holding period because management currently expects that projected operating shortfalls could be funded from the overall operating profits derived from the sale of homes and
condominium units and interest earned on invested cash. These projections could change materially based on the timing of any such anticipated sales, the performance of the underlying assets and changes in the underlying assumptions of the cash flow amounts projected. These
accruals will be adjusted from time to time as projections and assumptions change. |
WF-15
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The Information as of September 30, 2006 and For The Three and Nine Months Ended
September 30, 2006 and 2005 is Unaudited) (Continued)
Summary of Significant Accounting Policies (Continued)
The following is a summary of the changes in the Reserve for Estimated Costs During the Liquidation Period: |
|
For the Three Months Ended September 30, 2006 | ||||||||||
Balance at June 30, 2006 |
Adjustments and Payments |
Balance at September 30, 2006 |
||||||||
Payroll, benefits, severance and retention costs |
$ | 10,432,000 | $ | (349,000 | ) | $ | 10,083,000 | |||
Professional fees |
4,405,000 | (75,000 | ) | 4,330,000 | ||||||
Other general and administrative costs |
6,790,000 | (366,000 | ) | 6,424,000 | ||||||
Total |
$ | 21,627,000 | $ | (790,000 | ) | $ | 20,837,000 | |||
For the Nine Months Ended September 30, 2006 | ||||||||||
Balance at December 31, 2005 |
Adjustments and Payments |
Balance at September 30, 2006 |
||||||||
Payroll, benefits, severance and retention costs |
$ | 11,963,000 | $ | (1,880,000 | ) | $ | 10,083,000 | |||
Professional fees |
4,715,000 | (385,000 | ) | 4,330,000 | ||||||
Other general and administrative costs |
7,379,000 | (955,000 | ) | 6,424,000 | ||||||
Total |
$ | 24,057,000 | $ | (3,220,000 | ) | $ | 20,837,000 | |||
For the Period November 18, 2005 to December 31, 2005 |
||||||||||
Balance at November 18, 2005 |
Transfers and Payments |
Balance at December 31, 2005 |
||||||||
Payroll, benefits, severance and retention costs |
$ | 12,368,000 | $ | (405,000 | ) | $ | 11,963,000 | |||
Professional fees |
4,837,000 | (122,000 | ) | 4,715,000 | ||||||
Other general and administrative costs |
7,562,000 | (183,000 | ) | 7,379,000 | ||||||
Total |
$ | 24,767,000 | $ | (710,000 | ) | $ | 24,057,000 | |||
If the Merger is consummated, a substantial portion of the reserve for Estimated Costs During the Liquidation Period will be reversed upon the reinstatement of the going concern basis of accounting. |
Reserve for Option Cancellations |
At March 31, 2006, the Company accrued a liability for cash payments that could be made to option holders for the amount of the market value of the Companys common stock in excess of the adjusted exercise prices of outstanding options as of March 31, 2006. This liability
has been adjusted to reflect the net cash payments to option holders made during the period from March 31, 2006 through September 30, 2006 and the change in the market price of the Companys common stock during such period. The remaining reserve for option
cancellations reported at September 30, 2006 on the Consolidated Statement of Net Assets in Liquidation of approximately $2,711,000 is net of all payments made during the nine months ended September 30, 2006 related to option cancellations. |
Going Concern Basis of Accounting |
For all periods preceding the approval of the Plan on November 17, 2005, the Companys financial statements are presented on the going concern basis of accounting. Such financial statements reflect the historical basis of the assets and liabilities as of December 31, 2004 and
the historical results of operations related to the Companys assets and liabilities for the three and nine months ended |
WF-16
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The Information as of September 30, 2006 and For The Three and Nine Months Ended
September 30, 2006 and 2005 is Unaudited) (Continued)
Summary of Significant Accounting Policies (Continued)
September 30, 2005, the period from January 1, 2005 to November 17, 2005 and the years ended December 31, 2004 and 2003, as well as all preceding years. |
Principles of Consolidation |
The accompanying consolidated financial statements include the accounts of the Company and its majority-owned and controlled subsidiaries and 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. Investments in entities where the Company does not have a controlling interest were accounted for under the equity method of accounting. These investments were initially recorded at cost and are subsequently
adjusted for the Companys proportionate share of the investments income (loss) and additional contributions or distributions through the adoption of the liquidation basis of accounting. Investments in entities where the Company does not have the ability to exercise significant
influence are accounted for under the cost method. All significant inter-company accounts and transactions among the Company and its subsidiaries have been eliminated in consolidation. |
Quarterly Reporting |
The accompanying consolidated financial statements and notes of the Company for the three and nine months ended September 30, 2006 and 2005 and the summarized consolidated quarterly information as presented in Footnote 13 have been prepared in accordance with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. In the opinion of management, all adjustments considered necessary for a fair presentation of the Companys net assets in liquidation, changes in net assets in liquidation, results of operations and cash flows have
been included and are of a normal and recurring nature. The results of operations and cash flows for the three and nine months ended September 30, 2006 and 2005 are not necessarily indicative of a full year results. |
Variable Interests |
During 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46R Consolidation of Variable Interest Entities (FIN46R). The Company evaluates its investments and subsidiaries to determine if an entity is a voting interest entity or a variable
interest entity (VIE) under the provisions of FIN46R. An entity is a VIE when (i) the equity investment at risk is not sufficient to permit the entity from financing its activities without additional subordinated financial support from other parties or (ii) equity holders either (a)
lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity if they occur. If an entity or investment is deemed to be a VIE, an enterprise
that absorbs a majority of the expected losses of the VIE or receives a majority of the residual returns is considered the primary beneficiary and must consolidate the VIE. The following table and footnotes identify the Companys VIEs: |
WF-17
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The Information as of September 30, 2006 and For The Three and Nine Months Ended
September 30, 2006 and 2005 is Unaudited) (Continued)
Summary of Significant Accounting Policies (Continued) | |||||||||||||||||
VIE at September 30, |
VIE at December 31, |
Requires | |||||||||||||||
Entity (a) |
2006 | 2005 | 2004 | Consolidation | |||||||||||||
WRP Convertible Trust I |
N/A | N/A | Yes | No | (b) | ||||||||||||
Non-qualified deferred compensation trust |
N/A | Yes | Yes | Yes | (c) | ||||||||||||
Reis. |
Yes | Yes | Yes | No | (d) | ||||||||||||
Second Holding |
N/A | N/A | (e) | No | (f) | ||||||||||||
Wellsford Mantua, LLC |
Yes | Yes | Yes | Yes | (g) | ||||||||||||
Claverack Housing Ventures, LLC |
Yes | Yes | Yes | Yes | (h) | ||||||||||||
Beekman |
N/A | Yes | Yes | No | (i) | ||||||||||||
|
(a) | For additional information regarding these entities, see Footnote 11. |
(b) | The entity that issued the Convertible Trust Preferred Securities was a VIE, however, it was not appropriate to consolidate this entity under the provisions of FIN46R as equity interests are variable interests only to the extent that the investment is considered to be at risk. Since the Companys investment was funded by WRP Convertible Trust I, it was not considered to be at risk.
Accordingly, the Company de-consolidated the entity during the first quarter of 2004. The entity ceased operations when the Convertible Trust Preferred Securities were redeemed in April 2005. |
(c) | The non-qualified deferred compensation trust (Rabbi Trust or Deferred Compensation Plan) was a VIE as it does not have its own equity. The Company was the primary beneficiary of the Rabbi Trust as the assets would be subject to attachment in a bankruptcy. The Company consolidated the assets and liabilities of the Rabbi Trust at December 31, 2005 and 2004, as well
as for periods prior to the issuance of FIN46R as appropriate under other existing accounting literature. During the first quarter of 2006, the assets and liabilities of the Rabbi Trust were transferred upon the sale of Beekman (see i). |
(d) | Reis is a VIE because as of the last capital event for that entity in 2002 (the triggering event for VIE evaluation purposes), it was determined that Reis did not have sufficient capital to support its business activities at that time. Consolidation of Reis is not required by the Company as it would not be the primary beneficiary. |
(e) | The Company sold its investment in Second Holding in November 2004. |
(f) | Second Holding was a VIE at December 31, 2003, however, the Company was not the primary beneficiary because it would not expect that it would absorb a majority of Second Holdings probability-weighted expected losses, nor would it ever receive a majority of the residual returns. Therefore, consolidation was not required under FIN46R nor was consolidation appropriate
under then existing accounting literature. The Company used the equity method of accounting to account for this investment. |
(g) | Wellsford Mantua, LLC (Wellsford Mantua) is a VIE as the venture does not have sufficient equity to support its operations as the Company provides 100% of the financing to this entity and the owners have deminimus equity in the entity. The Company is the primary beneficiary and consolidates this entity. |
(h) | Claverack Housing Ventures, LLC (Claverack), an entity in which the Company owns a 75% interest in equity and profits (except if returns exceed 35% per annum as defined) is considered a VIE, since the original capital is insufficient to support its contemplated activities. Claverack is consolidated, even though the two members share business decisions equally, since the
Company would be the primary beneficiary of profits or absorber of losses. At September 30, 2006 and December 31, 2005, Claverack had $181,000 and $62,000, respectively, of restricted cash and was subject to $690,000 and $449,000, respectively, of construction debt which was jointly guaranteed by the Company and the principal of its joint venture partner. |
(i) | Beekman was a VIE, however, since the Companys investment was a mortgage interest, the Company has no GAAP equity in the entity and would not be the primary bearer of losses, consolidation was not appropriate. The Company sold Beekman in January 2006. |
Cash and Cash Equivalents. The Company considers all demand and money market accounts and short term investments in government funds with a maturity of three months or less at the date of purchase to be cash and cash equivalents. |
Investment in U.S. Government Securities. Investments in U.S. Government securities were classified as held-to-maturity and carried at amortized cost. |
Real Estate, Other Investments, Depreciation, Amortization and Impairment. Costs directly related to the acquisition, development and improvement of real estate are capitalized, including interest and other costs incurred during the construction period. Costs incurred for
significant repairs and maintenance that extend the usable life of the asset or have a determinable useful life are capitalized. Ordinary repairs |
WF-18
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The Information as of September 30, 2006 and For The Three and Nine Months Ended
September 30, 2006 and 2005 is Unaudited) (Continued)
Summary of Significant Accounting Policies (Continued)
and maintenance are expensed as incurred. The Company expensed all lease turnover costs for its residential units such as painting, cleaning, carpet replacement and other turnover costs as
such costs were incurred. |
Depreciation was computed over the expected useful lives of depreciable property on a straight-line basis, principally 27.5 years for residential buildings and improvements and two to twelve years for furnishings and equipment. Depreciation and amortization expense was
approximately $1,106,000, $3,316,000, $3,887,000, $4,637,000 and $8,537,000 during the three and nine months ended September 30, 2005, the period January 1, 2005 to November 17, 2005 and for the years ended December 31, 2004 and 2003, respectively, and included
approximately $238,000 and $4,021,000 of amortization during the years ended December 31, 2004 and 2003, respectively, of certain costs capitalized to the Companys Investments in Joint Ventures. No amortization was recorded in 2005 as such capitalized costs related to
the Investments in Joint Ventures were fully amortized in 2004. |
The Company has historically reviewed its real estate assets, investments in joint ventures and other investments for impairment (i) whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable for assets held for use and (ii)
when a determination is made to sell an asset or investment. Under the liquidation basis of accounting, the Company will evaluate the fair value of real estate assets owned and under construction and make adjustments to the carrying amounts when appropriate. |
Deferred Financing Costs. Deferred financing costs consist of costs incurred to obtain financing or financing commitments. Such costs were amortized by the Company as a going concern over the expected term of the respective agreements or, if related to development assets,
is included in the basis of the project to be expensed as homes/units are sold. |
Revenue Recognition. Commercial properties were leased under operating leases. Rental revenue from office properties was recognized on a straight-line basis over the terms of the respective leases. Residential units were leased under operating leases with typical terms of six
to fourteen months and such rental revenue was recognized monthly as tenants were billed. Interest revenue is recorded on an accrual basis. Fee revenues were recorded in the period earned, based upon formulas as defined by agreement for management services or upon asset
sales and purchases by certain joint venture investments. Sales of real estate assets, including condominium units and single family homes, and investments are recognized at closing subject to receipt of down payments and other requirements in accordance with applicable
accounting guidelines. |
Share Based Compensation. SFAS No. 123 Accounting for Stock-Based Compensation establishes a fair value based method of accounting for share based compensation plans, including share options. Registrants may have elected to continue accounting for share option
plans under Accounting Principles Board Opinion (APB) No. 25, but were required to provide pro forma net income and earnings per share information as if the fair value approach had been adopted. The Company previously elected to account for its share based
compensation plans under APB No. 25, resulting in no impact on the Companys consolidated financial statements through December 31, 2002. |
In December 2002, SFAS No. 148 Accounting for Stock-Based CompensationTransition and Disclosure was issued as an amendment to SFAS No. 123. The Company has used the prospective method of transition to account for stock-based compensation on a fair value
basis during 2004 and 2003. This method resulted in the Company applying the provisions of SFAS No. 123 to all 2004 and 2003 grants and, if applicable, to significant modifications to the terms of previously granted options, by expensing the determined fair value of the
options over the future vesting periods. |
In December 2004, the Financial Accounting Standards Board issued SFAS No. 123 (revised 2004), Share-Based Payment, which is a revision of SFAS No. 123 (SFAS No. 123R). SFAS No. 123R |
WF-19
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The Information as of September 30, 2006 and For The Three and Nine Months Ended
September 30, 2006 and 2005 is Unaudited) (Continued)
Summary of Significant Accounting Policies (Continued)
requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. The Company does not
anticipate that adoption of SFAS No. 123R on January 1, 2006 will have a material impact to reported Net Assets in Liquidation as it has previously adopted the prospective method of
transition under SFAS No. 148 and all options outstanding have fully vested by December 31, 2004. |
The Company had a Rabbi Trust which was available to its employees and officers who could voluntarily contribute compensation awarded as either (a) shares of the Companys stock or (b) bonuses paid in cash. The Rabbi Trust does not permit diversification of Company
stock contributed into it and all distributions to employees were to be made in kind to the employee/beneficiary for such Company stock contributions. The Companys stock held by the Rabbi Trust was classified in equity and recorded for accounting purposes in a manner
equivalent to treasury stock. Any changes in the fair value of the stock was not recognized in the consolidated financial statements. Contributions made in cash to the Rabbi Trust were classified as restricted cash and investments with a corresponding liability within the
consolidated balance sheets of the Company. In January 2006, the Rabbi Trust was acquired by an entity owned by Messrs. Lynford and Lowenthal and others along with the acquisition of the Beekman asset. |
Stock awarded as compensation by the Company was recorded at the market price on the date of issuance and amortized to expense over the respective vesting periods. |
Income Taxes. The Company accounts for income taxes under SFAS No. 109 Accounting for Income Taxes. Deferred income tax assets and liabilities are determined based upon differences between financial reporting, including the liquidation basis of accounting and tax
basis of assets and liabilities, and are measured using the enacted tax rates and laws that are estimated to be in effect when the differences are expected to reverse. Valuation allowances with respect to deferred income tax assets are recorded when deemed appropriate and adjusted
based upon periodic evaluations. |
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 and shares held in the Rabbi Trust. 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, if any. |
WF-20
WELLSFORD REAL PROPERTIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(The Information as of September 30, 2006 and For The Three and Nine Months Ended
September 30, 2006 and 2005 is Unaudited) (Continued)
Summary of Significant Accounting Policies (Continued)
The following table details the computation of earnings per share, basic and diluted: |
|
For the Three Months Ended September 30, |
For the Nine Months Ended September 30, |
For the Period January 1 to November 17, |
For the Years Ended December 31, |
|||||||||||||
2005 |
2005 |
2005 |
2004 |
2003 |
||||||||||||
Numerator: |
||||||||||||||||
Income (loss) from continuing operations |
$ | 3,776,753 | $ | 3,954,913 | $ | 3,018,292 | $ | (33,428,519 | ) | $ | (45,879,669 | ) | ||||
Income from discontinued operations, net of income tax expense of $80,000 and $16,000 in 2004 and 2003, respectively |
| | | 725,069 | 20,348 | |||||||||||
Net income (loss) |
$ | 3,776,753 | $ | 3,954,913 | $ | 3,018,292 | $ | (32,703,450 | ) | $ | (45,859,321 | ) | ||||
Denominator: |
||||||||||||||||
Denominator for net income (loss) per common share, basic weighted average common shares |
6,467,639 | 6,467,639 | 6,467,639 | 6,460,129 | 6,454,236 | |||||||||||
Effect of dilutive securities: |
||||||||||||||||
Stock options |
9,059 | 3,310 | 2,843 | | | |||||||||||
Denominator for net income (loss) per common share, diluted weighted average common shares |
6,476,698 | 6,470,949 | 6,470,482 | 6,460,129 | 6,454,236 | |||||||||||
Per share amounts, basic and diluted: |
||||||||||||||||
Income (loss) from continuing operations |
$ | 0.58 | $ | 0.61 | $ | 0.47 | $ | (5.17 | ) | $ | (7.11 | ) | ||||
Income from discontinued operations |
| | | 0.11 | | |||||||||||
Net income (loss) |
$ | 0.58 | $ | 0.61 | $ | 0.47 | $ | (5.06 | ) | $ | (7.11 | ) | ||||