-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UjI//lA2I5487RSxJvAGtZzdF1qkNhuJO1FD94v6Dp97uic2tjmxpU9bHQlBZmxd AtTdsrOQZR9ew2kMubsc9A== 0001125282-05-001712.txt : 20050331 0001125282-05-001712.hdr.sgml : 20050331 20050331163814 ACCESSION NUMBER: 0001125282-05-001712 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050331 DATE AS OF CHANGE: 20050331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WILSHIRE OIL CO OF TEXAS CENTRAL INDEX KEY: 0000107454 STANDARD INDUSTRIAL CLASSIFICATION: OPERATORS OF APARTMENT BUILDINGS [6513] IRS NUMBER: 840513668 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-04673 FILM NUMBER: 05720961 BUSINESS ADDRESS: STREET 1: 921 BERGEN AVE CITY: JERSEY CITY STATE: NJ ZIP: 07306-4204 BUSINESS PHONE: 2014202796 MAIL ADDRESS: STREET 1: 921 BERGEN AVENUE CITY: JERSEY CITY STATE: NJ ZIP: 07306 10-K 1 b405718_10k.txt CURRENT REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 Or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to __________ Commission file number 1-4673 WILSHIRE ENTERPRISES, INC. (Exact name of registrant as specified in its charter) DELAWARE 84-0513668 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 921 BERGEN AVENUE JERSEY CITY, NEW JERSEY 07306-4204 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (201) 420-2796 Securities registered pursuant to section 12(b) of the Act: Name of each exchange Title of each class on which registered ------------------- ------------------- Common Stock, $1 par value American Stock Exchange Securities registered pursuant to section 12(g) of the Act: None --------------------- (Title of each class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes No x ----- ----- The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter (June 30, 2004), was $22,039,000. The number of shares outstanding of each of the registrant's $1 par value common stock, as of March 21, 2005 was 7,780,230. DOCUMENTS INCORPORATED BY REFERENCE Registrant's Proxy Statement for its 2005 Annual Meeting of Stockholders (Part III). 2 WILSHIRE ENTERPRISES, INC. INDEX
Page No. -------- Part I Item 1. Business 4 Item 2. Properties 8 Item 3. Legal Proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Item 4A. Executive Officers of the Registrant 11 Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 12 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 30 Item 8. Financial Statements and Supplementary Data 32 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 58 Item 9A. Controls and Procedures 59 Item 9B. Other Information 59 Part III Item 10. Directors and Executive Officers of the Registrant 60 Item 11. Executive Compensation 60 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 60 Item 13. Certain Relationships and Related Transactions 60 Item 14. Principal Accountant Fees and Services 60 Part IV Item 15. Exhibits and Financial Statement Schedules 61 Signatures 66
3 PART I ITEM 1. BUSINESS This report contains "forward-looking statements" within the meaning of the federal securities laws. These statements relate to future economic performance, plans and objectives of management for future operations and projections of revenues and other financial items that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The words "expect," "estimate," "anticipate," "believe" and similar expressions are intended to identify forward-looking statements. Those statements involve risks, uncertainties and assumptions, including industry and economic conditions, competition and other factors discussed in this and our other filings with the SEC. If one or more of these risks or uncertainties materialize or underlying assumptions prove incorrect, actual outcomes could vary materially from those indicated. We have made forward-looking statements in Items 1, 2, 5, 7 and 7A of this report. See "Disclosure Regarding Forward-Looking Statements" at the end of Item 7 for a description of some of the important factors that may affect actual outcomes. Background Wilshire Enterprises, Inc. ("Wilshire" or the "Company") is a Delaware corporation founded on December 7, 1951. The Company changed its name from Wilshire Oil Company of Texas to its current name on June 30, 2003. As of the date of filing this report, the Company's principal executive offices are located at 921 Bergen Avenue, Jersey City, New Jersey 07306, (201) 420-2796. The Company has signed a lease and expects to relocate its corporate offices in May 2005 to One Gateway Center, Newark, New Jersey 07102. Wilshire maintains a website at www.wilshireenterprisesinc.com. Wilshire is principally engaged in acquiring, owning and managing real estate properties. As further described below, the Company currently owns multi-family properties, office space, retail space, and land located in the states of Arizona, Texas, Florida, Georgia and New Jersey. In July 2003 the Company committed to the sale of its oil and gas operations and to either reinvest the net proceeds in its ongoing real estate business or otherwise utilize the proceeds to maximize shareholder value. As of June 2004, the Company had completed its divestiture of its oil and gas operations receiving gross proceeds of $28.1 million. See Note 2 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. As part of its efforts to maximize shareholder value, effective July 2004 the Company employed a new senior management team with Daniel C. Pryor as President & Chief Operating Officer and Seth H. Ugelow as Chief Financial Officer. The new senior management team reports to Sherry Wilzig Izak, Chairman & Chief Executive Officer. The Company remains committed to maximizing shareholder value and is continually exploring all possible alternatives to accomplish this goal. The Company remains receptive to negotiating acceptable bids to sell the entire Company, while at the same time is prepared to pursue the expansion of its real estate portfolio by completing corporate mergers or acquisitions regardless if Wilshire is the acquirer or acquiree and by investing in real estate properties or securities. In the interim, the Company's goal is to increase the value of its real estate portfolio by implementing improvements to its existing properties and completing the opportunistic divestiture of select real estate assets. The Company cannot assure investors of any actions or of the timing of potential actions. 4 REAL ESTATE OPERATIONS Wilshire is engaged principally in acquiring, owning and managing real estate properties. As of December 31, 2004, Wilshire owned the properties described below: CORE OPERATING ASSETS. Wilshire has identified certain of its properties that it believes to be well situated in their respective markets and have attractive cash flow or valuation characteristics. These include:
Name City State Asset Class Size - ---- ---- ----- ----------- ---- Alpine Village Sussex NJ Apartments 132 units Biltmore Club (a) Phoenix AZ Apartments 378 units Summercreek San Antonio TX Apartments 180 units Sunrise Ridge Tucson AZ Apartments 340 units Van Buren Tucson AZ Apartments 70 units Wellington San Antonio TX Apartments 228 units Galsworthy Arms (b) Long Branch NJ Condominiums 45 units Jefferson Gardens Jefferson NJ Condominiums 20 units Royal Mall Plaza Mesa AZ Office & retail 66,552 SF Tamarac Office Plaza Tamarac FL Office 26,990 SF Tempe Corporate Tempe AZ Office 50,700 SF
(a) The Company entered into an agreement to sell Biltmore Club for $21.0 million on February 2, 2005. This action has caused the Company to classify this asset as discontinued. See Note 11 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. (b) The Company sold one 2-bedroom unit on January 26, 2005. OTHER ASSETS. The Company has other assets that currently do not generate the cash flow typically expected by the Company. These include:
Name City State Asset Class Size - ---- ---- ----- ----------- ---- Amboy Tower (a) Perth Amboy NJ Office & Retail 75,000 SF Twelve Oaks (a)(d) Atlanta GA Apartments 72 Wilshire Grand Hotel & 89 rooms; Banquet Facility West Orange NJ Triple Net Lease (b) 50,000 SF Rutherford Bank Rutherford NJ Triple Net Lease (b) 0.1727 acres Alpine Village (c) Sussex NJ Land 0.51 acres Alpine Village (c) Wantage NJ Land 17.32 acres Lake Hopatcong (a) Lake Hopatcong NJ Land 1.8 acres West Orange (a) West Orange NJ Land 0.6 acre
(a) Classified by the Company as Discontinued Operations. See Note 2 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. (b) Wilshire leases the land and improvements to others on a triple net lease basis. (c) Alpine Village land parcels are adjacent to the Alpine Village Apartments listed as a Core Operating Asset. (d) The Company entered into an agreement on March 23, 2005 to sell Twelve Oaks for $1.7 million, net of expenses. See Note 11 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. 5 In addition, the Company held a mortgage receivable with a gross carrying value of $1,165,000 and unearned income of $727,000 as of December 31, 2004. Security for the mortgage was a first lien on in excess of 100 condominium units in two contiguous buildings located in Jersey City, New Jersey. On February 22, 2005, the Company entered into an agreement with the mortgagee to settle and satisfy the mortgage for $1,100,000, which was paid to the Company during the first quarter of 2005. (See Note 11 to the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K.) BUSINESS STRATEGY Wilshire's principal investment objective is to increase the net asset value of its investment portfolio through effective management, growth, financing and investment strategies. Wilshire is currently focused on optimizing the valuation potential and cash flow from its Core Operating Assets and repositioning or selling its Other Assets. The Company is also focused on increasing long-term growth in cash and cash equivalents generated from operations and cash and cash equivalents available for distribution per share. The Company does not currently pay a dividend. Wilshire believes that it is part of its ongoing business strategy to initiate or entertain corporate transaction discussions, such as acquiring other companies for cash and/or stock or selling/merging the Company for cash and/or stock. The Company also intends to selectively acquire assets that offer attractive financial returns. In general, it seeks multifamily properties with 200 units or more in geographic regions in which the Company or its contracted property management company (see below) has operations. However, the Company is actively evaluating other asset classes such as office buildings, retail centers and real estate securities and other geographic regions and may invest in one or more of these asset classes in lieu of a multifamily property. ACQUISITION OF ASSETS Wilshire did not acquire any real estate properties in 2004. DIVESTITURE OF ASSETS The Company divested of the following real estate properties in 2004.
Taxes Name (State) Net Book Mortgage Payable on (asset class) Date Sold Selling Price Value Value Sale Net Proceeds (a) - ------------- --------- ------------- -------- -------- ---------- ---------------- Jersey City (NJ) (13 residential properties) Various $14,750,000 $8,925,000 $3,870,000 $2,332,000 $8,427,000 Montville (NJ) (land) 8/26/04 $1,000,000 $629,000 $-0- $142,000 $833,000 Jefferson Gardens (NJ) (1-bedroom condominium) 9/27/04 $140,000 $36,000 $75,000 $38,000 $17,000 (b) Jefferson Gardens (NJ) (1-bedroom condominium) 10/18/04 $136,000 $39,000 $126,000 $35,000 $(25,000) (b) Schalk Station (NJ) (land) 12/22/04 $3,950,000 $3,072,000 $-0- $335,000 $3,557,000
(a) Net proceeds = selling price less mortgage value and transaction costs such as commissions, legal fees, taxes and other expenses. (b) At the time of sale, the Company elected to repay a larger portion of the underlying mortgage for Jefferson Gardens than required. If a pro-rata amount of the mortgage had been repaid, the Company would have realized net proceeds of approximately $65,000 on the September 27, 2004 sale and approximately $64,000 on the October 18, 2004 sale. 6 The Company divested or entered into an agreement to sell the following real estate properties and securities in 2005.
Taxes Name (State) Net Book Mortgage Payable on (asset class) Date Sold Selling Price Value Value Sale Net Proceeds (a) - ------------- --------- ------------- -------- -------- ---------- ---------------- Biltmore Club (b) 12/23/05 $20,956,000 $4,152,000 $9,103,000 $5,900,000 $10,000,000 Galsworthy Arms (NJ) (2-bedroom condominium) 1/26/05 $269,500 $57,000 $251,000 $79,000 $(79,000) (c) Mortgage Receivable (d) 3/23/05 $1,100,000 $438,000 $-0- $276,000 $824,000 Twelve Oaks (e) 3/23/05 $1,725,000 $939,000 $1,609,000 $240,000 $(230,000)
(a) Net proceeds = selling price less mortgage value and transaction costs such as commissions, legal fees, taxes and other expenses. (b) The Company has entered into a definitive agreement to sell the asset with the closing date scheduled for no later than December 23, 2005. (c) At the time of sale, the Company elected to repay a larger portion of the underlying mortgage for Galsworthy Arms than required. If a pro-rata amount of the mortgage had been repaid, the Company would have realized net proceeds of approximately $136,000 on the sale. (d) The Company has entered into a definitive agreement to sell the asset and the selling price was received during the first quarter of 2005. (e) The Company has entered into a definitive agreement to sell the asset with the closing date scheduled as soon as practicable from the March 23, 2005 signing of the contract. EMPLOYEES As of December 31, 2004, the Company had a total of six full-time employees in its corporate office. Wilshire also employed two employees to manage its real estate assets in New Jersey and two part-time consultants who were previously employees of the Company to assist as needed in financial reporting. PROPERTY MANAGEMENT Wilshire contracts with a property management company (the "PMC") located in Phoenix, Arizona to assist in the management of the Company's properties including providing onsite personnel, regional supervision, and bookkeeping functions. The PMC has managed nearly all of Wilshire's properties located outside of New Jersey since 1998. In January of 2005 Wilshire contracted with the PMC to assist in the management of the Company's New Jersey properties obligating the PMC to provide onsite personnel and bookkeeping functions but not regional supervision for the New Jersey properties. Wilshire believes that the PMC can provide cost-efficient bookkeeping functions in part because it is located in Arizona, a state that generally has lower wage expense than that experienced in New Jersey. As of December 31, 2004 the PMC employed 259 full time and 32 part time people and managed property on behalf of Wilshire and others in the states of Arizona, New Mexico, Colorado, Texas, Florida and Georgia. The PMC does not currently own real estate assets for its own investment purposes. In 2004, Wilshire accounted for approximately 18% of PMC's total revenues and was its largest customer. INSURANCE The Company carries comprehensive property, general liability, fire, extended coverage and rental loss insurance on all of its existing properties, with policy specifications, insured limits and deductibles customarily carried for similar properties. The Terrorism Risk Insurance Act of 2002 was signed into law on November 26, 2002. The law provides that losses resulting from certified acts of terrorism will be partially reimbursed by the United States after the insurance company providing coverage pays a statutory deductible amount. The law also requires that the insurance company offer coverage for terrorist acts for an additional premium. We accepted the offer to include this coverage in our property and casualty policies. 7 We believe that our properties are adequately covered by insurance. There are, however, some types of losses (such as losses arising from acts of war) that are not generally insured because they are either uninsurable or not economically insurable. If an uninsured loss or a loss in excess of insured limits occurs, we could lose our capital invested in a property, as well as the anticipated future revenues from the property, and we would continue to be obligated on any mortgage indebtedness or other obligations related to the property. Any loss of that kind could materially adversely affect us. COMPETITION All of the properties owned by the Company are in areas where there is substantial competition with other multifamily properties, with single-family housing that is either owned or leased by potential tenants and with other commercial properties. The principal method of competition is to offer competitive rental rates. In order to maintain occupancy rates and attract quality tenants, the Company may also offer rental concessions, such as free rent to new tenants for a stated period. The Company also competes by offering properties in attractive locations and providing residential and commercial tenants with amenities such as covered parking, recreational facilities, garages and pleasant landscaping. The Company intends to continue upgrading and improving the physical condition of its existing properties and will consider selling existing properties, which the Company believes have realized their potential, and re-investing in properties that may require renovation but that offer greater appreciation potential. ENVIRONMENTAL MATTERS The Company believes that each of its properties is in compliance, in all material respects, with federal, state and local regulations regarding hazardous waste and other environmental matters and is not aware of any environmental contamination at any of its properties that would require any material capital expenditure by the Company for the remediation thereof. No assurance can be given that environmental regulations will not, in the future, have a materially adverse effect on the Company's operations. INVESTMENT IN MARKETABLE SECURITIES The Company holds investments in certain marketable securities. From time to time, the Company buys and sells securities in the open market. The Company's investments in marketable securities are accounted for as securities available for sale. ITEM 2. PROPERTIES The executive and administrative office of the Company consists of approximately 2,000 square feet, located at 921 Bergen Avenue, Jersey City, New Jersey. Wilshire leased this office on a month-to-month basis at a monthly rental of $2,683. In December 2004, the 921 Bergen Avenue building was sold by a major bank and the new owner increased the monthly rental to $5,350 in January 2005. The Company expects to relocate its corporate offices to newly leased space in April 2005. The Company maintained its principal office for its now discontinued United States oil and gas operations in Oklahoma City, Oklahoma, leasing 3,618 square feet on a month-to-month basis, at a monthly cost of $2,345. With the sale in April 2004 of the United States oil and gas assets, this lease was terminated in June 2004. The Company's Canadian subsidiary maintained an exploration office in Calgary, Alberta, Canada. The Company leased 1,583 square feet on a month-to-month basis at a monthly rental of $3,408 Canadian. With the sale of the Canadian oil and gas assets in April 2004, this lease was terminated in April 2004. The following table provides summary information regarding the Company's apartment properties and condominium properties. 8
Apartment Unit Type --------------------------------------------- Date No. of Studio / Rentable Name (State) Acquired Units Efficiencies 1 BR 2 BR 3 BR Acreage Sq. Ft. - ------------ -------- ----- ------------ ---- ---- ---- ------- ------- APARTMENTS: Alpine Village (NJ) 10/29/95 132 - 48 84 - 13.73 101,724 Biltmore Club (AZ) (a)(b) 10/23/97 378 192 186 - - 8.08 193,716 Summercreek (TX) 3/29/01 180 - 84 96 - 8.17 142,452 Sunrise Ridge (AZ) 10/24/97 340 - 144 196 - 17.73 291,674 Twelve Oaks (GA) (b) 4/10/96 72 - - 42 30 10.04 91,404 Van Buren (AZ) 6/11/98 70 - 42 28 - 1.41 81,404 Wellington (TX) 7/30/98 228 24 60 116 28 8.69 214,744 CONDOMINIUMS: Galsworthy Arms (c) 3/31/94 45 - 31 14 - - 38,026 Jefferson Gardens (d) 3/31/94 20 - 16 4 - - 15,843
(a) The Company has entered into a definitive agreement to sell the property in February 2005 for $21.0 million. (b) Classified by the Company as Discontinued Operations. See Note 2 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. (c) Galsworthy Arms has a total of 64 units, 44 one bedroom and 20 two bedroom. (d) Jefferson Gardens has a total of 50 units, 34 one bedroom and 16 two bedroom. The following table provides summary information regarding the Company's commercial properties.
Name (State) Date Acquired Rentable Sq. Ft. Acreage - ------------ ------------- ---------------- ------- OFFICE & RETAIL: Amboy Tower (NJ) (a) 3/31/98 75,000 Royal Mall Plaza (AZ) 3/31/94 66,552 Tamarac Office Plaza (FL) 12/31/92 26,990 Tempe Corporate (AZ) 12/31/92 50,700 TRIPLE NET LEASE: Rutherford Bank (NJ) 3/31/94 - 0.17 Wilshire Grand Hotel & Banquet Facility (NJ) 12/31/97 89 hotel rooms; 50,000 12.29 SF banquet facility LAND: Alpine Village , Sussex (NJ) 10/28/98 - 0.51 Alpine Village , Wantage (NJ) 2/16/01 - 17.32 Lake Hopatcong (NJ) (a) 3/31/94 - 1.81 West Orange (NJ) (a) 3/31/94 - 0.60
(a) Classified by the Company as Discontinued Operations. See Note 2 to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. The following table provides summary financial information for the Company's properties that are not carried as discontinued operations. Discontinued operations contain properties that either are under contracts for sale or the Company has identified as properties potentially for sale depending on market conditions including Biltmore Club (AZ), Twelve Oaks (GA), Amboy Tower (NJ) and the West Orange and Lake Hopatcong New Jersey land parcels. 9
As of 12/31/04 For the Year 2004 ---------------------------- -------------------------------------------- Net Net Book Mortgage Operating Interest Capital Name (State) Value Principal Income Expense Expenditures - ------------ ----------- ----------- ---------- -------- ------------ APARTMENTS: Alpine Village (NJ) $ 3,465,000 $ 4,889,000 $536,000 $297,000 $ 85,000 Summercreek (TX) 5,328,000 4,117,000 443,000 310,000 207,000 Sunrise Ridge (AZ) 5,651,000 10,463,000 1,139,000 627,000 258,000 Van Buren (AZ) 1,792,000 2,054,000 229,000 130,000 126,000 Wellington (TX) 3,974,000 4,303,000 543,000 265,000 257,000 CONDOMINIUMS: Galsworthy Arms 2,130,000 1,544,000 169,000 98,000 424,000 Jefferson Gardens 750,000 403,000 60,000 36,000 13,000 OFFICE & RETAIL: Royal Mall Plaza (AZ) 1,408,000 - 442,000 - 50,000 Tamarac Office Plaza (FL) 775,000 608,000 136,000 39,000 4,000 Tempe Corporate (AZ) 2,548,000 3,887,000 337,000 261,000 278,000 TRIPLE NET LEASE: Wilshire Grand Hotel (NJ) 4,868,000 3,421,000 63,000 224,000 - Rutherford Bank (NJ) 604,000 463,000 110,000 33,000 - ----------- ----------- ---------- -------- ------------ Total: $33,293,000 $36,152,000 $4,207,000 $2,320,000 $1,702,000 =========== =========== ========== ========== ==========
ITEM 3. LEGAL PROCEEDINGS At December 31, 2004, the Company was not a party to any actions or proceedings which management believes are reasonable likely to have a material adverse effect upon the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2004. 10 ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth the name and age of each executive officer of the Company. Each officer is appointed by the Company's Board of Directors. Unless otherwise indicated, the persons named below have held the position indicated for more than the past five years.
Officer of The Company Position with the Company Name and Age Since and Business Experience S. Wilzig Izak, Age 46 1987 Chairman of the Board of the Company since September 20, 1990; Chief Executive Officer since May 1991; Executive Vice President (1987-1990); prior thereto, Senior Vice President Daniel C. Pryor, Age 44 June, 2004 President and Chief Operating Officer of the Company since June 2004; Investment Banker from 1993 - 2004 including at D&T Corporate Finance (2001 - 2004), Lehman Brothers (1999 - 2001), and Salomon Smith Barney (Citigroup) (1993 - 1999); developer, property manager and investor in the real estate industry (1985 - 1991) Seth H. Ugelow, Age 52 June, 2004 Chief Financial Officer of the Company since June 2004; Senior Vice President and Controller of The Trust Company of New Jersey (January 2003 - June 2004); Consultant (June 2002 - January 2003); Vice President and Head of Accounting at The Bank of Tokyo-Mitsubishi (New York Office) (June 2001 - June 2002); Vice President and Controller of Credit Agricole Indosuez (New York Office ) (April 1995 - June 2001)
11 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company's common stock is traded on the American Stock Exchange. The following table indicates the high and low sales prices of the Company's common stock for the quarters indicated during the years ended December 31, 2004 and 2003:
Quarter 1 Quarter 2 Quarter 3 Quarter 4 --------------------- -------------------- ------------------- --------------------- High - Low High - Low High - Low High - Low ------- -------- -------- ------- -------- ------- -------- -------- 2004 $ 6.80 - 5.25 $ 5.86 - 4.61 $ 5.30 - 4.90 $ 7.60 - 5.00 2003 4.00 - 3.51 5.00 - 3.37 5.95 - 4.50 7.09 - 5.31
As of March 21, 2005, there were 4,480 common shareholders of record. The Company has not paid any dividends to shareholders during the past two years. Based on a primary objective of increasing shareholder value, the Board of Directors will consider the payment of dividends from time to time in the future based on the Company's capital requirements and results of operations. In June 2004, the Company's Board of Directors authorized management to conduct a buyback of up to 1,000,000 common shares. Under this authorization, the Company conducted an odd-lot share repurchase program, which offered shareholders who owned a small number of common shares the opportunity to sell their shares without paying a broker's commission. The Company also benefited under the odd-lot share repurchase program by lowering its administrative costs through the closing of approximately 1,900 shareholder accounts. Under the Board authorization, the Company also allowed other shareholders the opportunity to sell their shares to the Company. The following table presents the total share repurchase activity under the Board's authorization. No repurchase activity took place from the date of the announcement of the Board's authorization through June 30, 2004. The authorization to repurchase common shares has no expiration date and the Company has not determined when, or if, the program will be discontinued.
(c) Total number of shares (or units) (d) Maximum number (or approximate (a) Total number of (b) Average purchased as part of dollar value) of shares (or units) of shares (or units) price paid per publicly announced that may yet be purchased Period purchased share (or unit) plans or programs under the plans or programs - ------ --------- --------------- ----------------- ---------------------------------- July 1 - 31, 2004 2,080 $5.03 2,080 997,920 common shares August 1 - 31, 2004 18,029 $5.08 18,029 979,891 common shares September 1 - 30, 2004 10,322 $5.08 10,322 969,569 common shares October 1 - 31, 2004 6,600 $5.14 6,600 962,969 common shares November 1 - 30, 2004 400 $6.09 400 962,569 common shares December 1 - 31, 2004 1,047 $6.84 1,047 961,522 common shares
12 EQUITY COMPENSATION PLAN INFORMATION The following table provides information as of December 31, 2004 with respect to shares of the Company's common stock that may be issued under the Company's existing equity compensation plans, which consist of the (i) 1995 Stock Option and Incentive Plan, (ii) 1995 Non-Employee Director Stock Option Plan, (iii) 2004 Stock Option and Incentive Plan, and (iv) 2004 Non-Employee Director Stock Option Plan, each of which has been approved by the Company's shareholders.
(c) Number of (a) (b) Securities Number of Weighted Remaining Available Securities To Be Average Exercise For Future Issuance Issued Upon Price Of Under Equity Exercise Of Outstanding Compensation Plans Outstanding Options, (Excluding) Options, Warrants Warrants and Securities Reflected Plan Category and Rights Rights In Column (a)) - -------------------- --------------------- ---------------------- --------------------------- Equity compensation plans approved by security holders 457,460 $3.81 695,471 Equity compensation plans not approved by security holders - - - ------- ----- ------- Total 457,460 $3.81 695,471 ======= ===== =======
ITEM 6. SELECTED FINANCIAL DATA The selected consolidated financial data for the Company for each of the five (5) fiscal years in the period ended December 31, 2004 are derived from the consolidated financial statements that have been audited. J.H. Cohn LLP Independent Registered Public Accounting Firm for Wilshire has reported upon the consolidated financial statements as of and for the year ended December 31, 2004. The consolidated financial statements as of and for the years ended December 31, 2003 and 2002 have been reported upon by Ernst & Young LLP, Independent Registered Public Accounting Firm. Ernst & Young LLP, Independent Registered Public Accounting Firm has also reported upon the consolidated statements of income, cash flows and changes in stockholders' equity for the year ended December 31, 2001. The consolidated balance sheet as of December 31, 2001 and the consolidated financial statements as of and for the year ended December 31, 2000 have been reported upon by Arthur Andersen LLP. The following table sets forth the Company's selected financial data and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Item 8, "Financial Statements and Supplementary Data" and Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report on Form 10-K. 13
As of December 31 --------------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- (In thousands of dollars except per share amounts) BALANCE SHEET DATA AT YEAR-END: Total assets $87,553 $98,997 $107,920 $107,903 $98,541 Long-term debt 46,855 58,494 65,706 67,948 61,543 Stockholders' equity 29,111 24,527 24,239 23,693 21,428 Weighted average shares outstanding: Basic 7,796 7,810 7,832 7,914 8,161 Diluted 7,955 7,930 7,832 7,914 8,161 For the Year Ended December 31, --------------------------------------------------------------------------------------- 2004 2003 2002 2001 2000 ---- ---- ---- ---- ---- (In thousands of dollars except per share amounts) INCOME STATEMENT DATA: Revenues $ 9,706 $ 9,257 $ 9,143 $ 8,413 $ 7,434 --------- --------- ---------- ---------- ---------- Costs and expenses: Operating expenses 5,499 5,453 5,260 4,559 3,878 Depreciation 1,673 1,647 1,541 1,320 1,271 General and administrative 2,143 2,349 2,131 1,690 1,689 --------- --------- ---------- ---------- ---------- Total costs and expenses 9,315 9,449 8,932 7,569 6,838 --------- --------- ---------- ---------- ---------- Dividend and interest income 685 743 877 867 - Sale of marketable securities - 2,621 711 (1,684) - Life insurance proceeds - 1,000 - - - Other income 629 232 540 87 192 Interest expense including amortization of deferred financing costs (2,343) (3,408) (2,226) (2,995) (1,729) --------- --------- ---------- ---------- ---------- Income (loss) before provision for taxes (638) 996 113 (2,881) (941) Income taxes (221) (107) (47) (1,129) (350) --------- --------- ---------- ---------- ---------- Income (loss) from continuing operations (417) 1,103 160 (1,752) (591) Discontinued operations - real estate 3,766 702 (92) 363 (579) Discontinued operations - oil & gas (711) (3,178) 1,008 1,841 2,394 --------- --------- ---------- ---------- ---------- Net income (loss) $ 2,638 $(1,373) $ 1,076 $ 452 $ 1,224 ========= ========= ========== ========== ========== Basic earnings (loss) per share: Continuing operations $(0.05) $0.14 $0.02 $(0.22) $(0.07) Discontinued operations 0.39 (0.32) 0.12 0.28 0.22 --------- --------- ---------- ---------- ---------- Net income (loss) per share $0.34 $(0.18) $0.14 $0.06 $0.15 ========= ========= ========== ========== ========== Diluted earnings (loss) per share: Continuing operations $(0.05) $0.14 $0.02 $(0.22) $(0.07) Discontinued operations 0.38 (0.32) 0.12 0.28 0.22 --------- --------- ---------- ---------- ---------- Net income (loss) per share $ 0.33 $(0.18) $0.14 $ 0.06 $ 0.15 ========= ========= ========== ========== ==========
14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Wilshire's business has been comprised of three sets of activities - the real estate business, the oil and gas business (which was sold in April 2004) and corporate. The real estate business consists of residential and commercial properties in Arizona, Florida, Georgia, New Jersey and Texas. Within this portfolio of properties, certain properties have been designated as being held for sale and have been classified as discontinued operations. The following discussion takes an income statement approach and discusses the results of operations first for the properties comprising "continuing operations" and then discusses the discontinued operations. The assets comprising Wilshire's oil and gas business were sold in April 2004, effective March 1, 2004. Oil and gas operations for all periods presented in this report have been classified as discontinued operations. Corporate activities include investments in marketable securities, management of Wilshire's short-term cash positions and administrative functions. All three activities are reviewed and analyzed in the following discussion, which should be read in conjunction with the financial statements and notes contained in Item 8 of this Form 10-K. Certain statements in this discussion may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements reflect Wilshire's current expectations regarding future results of operations, economic performance, financial condition and achievements of Wilshire, and do not relate strictly to historical or current facts. Wilshire has tried, wherever possible, to identify these forward looking statements by using words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or words of similar meaning. Although Wilshire believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, such statements are subject to risks and uncertainties, which may cause the actual results to differ materially from those projected. Such factors include, but are not limited to, the following: general economic and business conditions, which will, among other things, affect demand for rental space, the availability of prospective tenants, lease rents and the availability of financing; adverse changes in Wilshire's real estate markets, including among other things, competition with other real estate owners, risks of real estate development and acquisitions; governmental actions and initiatives; and environmental / safety requirements. CRITICAL ACCOUNTING POLICIES Pursuant to the Securities and Exchange Commission ("SEC") disclosure guidance for "Critical Accounting Policies," the SEC defines Critical Accounting Policies as those that require the application of Management's most difficult, subjective, or complex judgments, often because of the need to make estimates about the effects of matters that are inherently uncertain and may change in subsequent periods. Wilshire's discussion and analysis of its financial condition and results of operations are based upon Wilshire's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires Wilshire to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Wilshire bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. 15 IMPAIRMENT OF PROPERTY AND EQUIPMENT On a periodic basis, management assesses whether there are any indicators that the value of its real estate properties may be impaired. A property's value is considered impaired if management's estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property is less than the carrying value of the property. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property. Management does not believe at December 31, 2004 and 2003 that the value of any of its properties is impaired. REVENUE RECOGNITION Revenue from real estate properties is recognized during the period in which the premises are occupied and rent is due from tenants. For commercial properties, rental revenue is recognized on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in accounts receivable. For residential properties where lease agreements are almost exclusively for one- year terms, rental revenue is recognized in accordance with the contractual terms of the underlying leases. The Company follows a policy of aggressively pursuing its rental tenants to ensure timely payment of amounts due. When a tenant becomes 30 days in arrears on paying rent, the amount is written-off and turned over to a collection agency for action. Accordingly, no allowance for uncollectible accounts is maintained for the Company's real estate tenants. An allowance for uncollectible accounts was maintained based on the Company's estimate of the inability of its joint interest partners in the oil and gas division to make required payments. With the sale of the oil and gas division, the Company no longer maintains an allowance for uncollectible accounts. FOREIGN OPERATIONS The assets and liabilities of Wilshire's Canadian subsidiary have been translated at year-end exchange rates. The related revenues and expenses have been translated at average annual exchange rates. The aggregate effect of translation losses is included as a component of accumulated other comprehensive income (loss) until the sale or liquidation of the underlying foreign investment. As a result of the sale of the Canadian oil and gas assets in 2004 and the anticipated distribution of net proceeds to the United States parent company in 2005, Wilshire has provided $2.1 million of United States taxes and $900,000 of Canadian taxes that are expected to be incurred upon such remittance. See Note 1 of the Notes to the Consolidated Financial Statements in Item 8 of this Annual Report on Form 10-K. STOCK-BASED COMPENSATION Wilshire follows the disclosure-only provisions of SFAS 123 and SFAS 148. The provisions of SFAS 123R will be adopted commencing January 1, 2006. EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 153, " Exchanges of Nonmonetary Assets an amendment of APB Opinion No. 29." SFAS 153 amends Opinion 29 to eliminate the exception for non monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. The provisions of SFAS 153 are effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. Adoption of the provisions of SFAS 153 is not expected to have a material impact on the Company's consolidated financial condition. 16 In December 2004, the FASB issued SFAS No. 123R, "Accounting for Stock-Based Compensation." SFAS 123R establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123R requires that the fair value of such equity instruments be recognized as an expense in the historical financial statements as services are performed. Prior to SFAS 123R, only certain pro forma disclosures of fair value were required. SFAS 123R shall be effective for Wilshire as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. The adoption of this new accounting pronouncement is not expected to have a material impact on Wilshire's consolidated financial statements. In December 2003, the FASB issued revised Financial Accounting Interpretation ("FIN") 46R, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51." FIN 46R requires the consolidation of an entity in which an enterprise absorbs a majority of the entity's expected losses, receives a majority of the entity's expected residual returns, or both, as a result of ownership, contractual or other financial interests in the entity (variable interest entities, or "VIEs"). Currently, entities are generally consolidated by an enterprise when it has a controlling financial interest through ownership or a majority voting interest in the entity. Application of FIN 46R is required in financial statements of public entities that have interests in VIEs or potential VIEs commonly referred to as special-purpose entities for periods ending after December 31, 2003. Application by public entities (other than small business issuers) for all other types of entities is required in financial statements for periods ending after March 15, 2004. Application by small business issuers to entities other than special-purpose entities and by nonpublic entities to all types of entities is required at various dates in 2004 and 2005. In some instances, enterprises have the option of applying or continuing to apply Interpretation 46 for a short period of time before applying Interpretation 46(R). As of December 31, 2004, the Company does not have any variable interest entities that fall within the provisions of FIN 46(R). In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." This Statement requires that an issuer classify financial instruments that are within its scope as a liability. Many of those instruments were classified as equity under previous guidance. Most of the guidance in SFAS 150 was effective for all financial instruments entered into or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. As of December 31, 2004, the Company did not have any financial instruments outstanding that were within the scope of Statement No. 150. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." The adoption of the provisions of SFAS 149 did not have any impact on Wilshire's consolidated financial statements. 17 RESULTS OF OPERATIONS The following table presents the increases (decreases) in each major statement of income category for the year ended December 31, 2004 ("2004") compared with the year ended December 31, 2003 ("2003") and 2003 compared with the year ended December 31, 2002 ("2002").
INCREASE (DECREASE) IN CONSOLIDATED STATEMENTS OF INCOME CATEGORIES FOR THE PERIODS: 2004 v. 2003 2003 v. 2002 ------------------------------------ ---------------------------------------- Amount ($) % Amount ($) % ---------- - ---------- - REVENUES $ 449,000 4.9 % $ 114,000 1.2 % ---------- ---------- COSTS AND EXPENSES Operating expenses 46,000 0.8 193,000 3.7 Depreciation expense 26,000 1.6 106,000 6.9 General and administrative (206,000) (8.8) 218,000 10.2 --------- --------------- Total costs and expenses (134,000) (1.4) 517,000 5.8 --------- --------------- INCOME (LOSS) FROM OPERATIONS 583,000 303.6 (403,000) (191.0) OTHER INCOME Dividend and interest income (58,000) (7.8) (134,000) (15.3) Gain on sale of marketable securities (2,621,000) (100.0) 1,910,000 268.6 Insurance proceeds (1,000,000) (100.0) 1,000,000 100.0 Other income 397,000 171.1 (308,000) (57.0) INTEREST EXPENSE (1,065,000) (31.3) 1,182,000 53.1 ----------- --------------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (1,634,000) (164.1) 883,000 781.4 INCOME TAX EXPENSE (BENEFIT) 114,000 106.5 60,000 (127.7) ----------- --------------- INCOME (LOSS) FROM CONTINUING OPERATIONS (1,520,000) (137.8) 943,000 589.4 ----------- --------------- DISCONTINUED OPERATIONS - REAL ESTATE, NET OF TAXES LOSS FROM OPERATIONS (89,000) (23.5) (137,000) (56.6) GAIN FROM SALES 2,975,000 275.2 931,000 620.7 DISCONTINUED OPERATIONS - OIL & GAS, NET OF TAXES INCOME (LOSS) FROM OPERATIONS 1,900,000 59.8 (4,186,000) (415.3.) GAIN FROM SALES 567,000 100.0 - (A) ---------- --------------- NET INCOME (LOSS) $4,011,000 292.1 $(2,449,000) (227.6) ========== =============== BASIC EARNINGS (LOSS) PER SHARE: Income (loss) from continuing operations $(0.19) (135.7) $ 0.12 600.0 Income (loss) from discontinued operations 0.71 229.0 (0.44) (366.7) ------ ------ Net income (loss) applicable to common stockholders $ 0.52 288.9 $(0.32) 228.6 ======= ======= DILUTED EARNINGS (LOSS) PER SHARE: Income (loss) from continuing operations $(0.19) (135.7) $ 0.12 600.0 Income from discontinued operations 0.70 218.8 (0.44) (366.7) ------- ------- Net income (loss) applicable to common stockholders $ 0.51 283.3 $(0.32) (228.6) ======= =======
(A) There was no gain from the sale of the oil and gas business in either 2003 or 2002. 18 RESULTS OF OPERATIONS - 2004 V. 2003 OVERVIEW Net income for 2004 amounted to $2,638,000 or $0.33 per diluted share, an improvement of $4,011,000 from the net loss of $1,373,000 or $0.18 per diluted share reported for 2003. Results of operations are shown as continuing and discontinued, with discontinued operations comprised of the results of operations from the Company's oil and gas businesses, the results of the sale of the oil and gas properties, the operating results from real estate properties held for sale and the gain from real estate properties held for sale that were sold during the period. CONTINUING OPERATIONS: Loss from continuing operations was $417,000 in 2004 compared with income of $1,103,000 in 2003. Results per diluted share from continuing operations amounted to $(0.05) in 2004 and $0.14 in 2003. The 2003 period included $1,550,000 of after tax ($2,621,000 before taxes) gains on the sale of marketable securities and $1,000,000 after tax income from death benefits received from an insurance policy on the life of the Company's former Senior Consultant. Without these two special transactions, the Company would have incurred a loss from continuing operations of $1,447,000 in 2003. Reported income from continuing operations in 2004 compared with 2003 reflects a higher level of income from operations (defined as revenues reduced by operating expenses, depreciation and general and administrative expenses), a lower level of interest expense and an increased income tax benefit, that was offset by lower other income. These factors are discussed below. SEGMENT INFORMATION Wilshire presently conducts business in the residential (including condominiums that it owns and rents) and commercial real estate segments. The following table sets forth comparative data for Wilshire's real estate segments in continuing operations.
Residential Real Estate Commercial Real Estate Total ---------------------------------- ------------------------------- ------------------------------- Year ended Increase Year ended Increase Year ended Increase December 31 (Decrease) December 31 (Decrease) December 31 (Decrease) ----------- ---------- ----------- ---------- ----------- ---------- 2004 2003 $ % 2004 2003 $ % 2004 2003 $ % ---- ---- - - ---- ---- - - ---- ---- - - (In 000s of $) (In 000s of $) (In 000s of $) Rental income $6,920 $6,839 $81 1.2 $2,179 $1,908 $271 14.2 $9,099 $8,747 $352 4.0 Tenant fees 5 1 4 - 6 3 3 100.0 11 4 7 - Vending income 75 62 13 21.0 - - - - 75 62 13 21.0 Other 456 411 45 10.9 65 33 32 97.0 521 444 77 17.3 ------ ------ ----- ------ ------ ---- ------ ------- ---- Total revenues 7,456 7,313 143 2.0 2,250 1,944 306 15.7 9,706 9,257 449 4.9 Operating expenses 4,337 4,405 (68) (1.5) 1,162 1,048 114 10.9 5,499 5,453 46 0.8 ------ ------ ----- ------ ------ ---- ------ ------- ---- Net operating income $3,119 $2,908 $211 7.3 $1,088 $ 896 $192 21.4 $4,207 $3,804 $403 10.6 ====== ====== ==== ===== ====== ====== ==== ==== ====== ====== ==== ==== Average occupancy % 91.2 91.6 60.5 55.7 84.1 84.1 Reconciliation to consolidated income (loss) from continuing operations: Net operating income $4,207 $3,804 Depreciation expense (1,673) (1,647) General and administrative expenses (2,143) (2,349) Other income 1,314 4,596 Interest expense (2,343) (3,408) Income tax benefit 221 107 ------ ------ Income (loss) from continuing operations $ (417) $1,103 ====== ======
19 The above table details the comparative net operating income ("NOI") for Wilshire's residential and commercial real estate segments, and reconciles the combined NOI to consolidated income (loss) from continuing operations. NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes depreciation and interest expense. Wilshire assesses and measures segment operating results based on NOI, which is a direct measure of each property's contribution to the results of the Company before considering revenues from treasury activities, overhead expenses and other costs that are not directly related to the performance of a property. The Company believes NOI is a more descriptive measure of the Company's performance than income (loss) from continuing operations. NOI is not a measure of operating results or cash flow as measured by accounting principles generally accepted in the United States of America and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. RESIDENTIAL SEGMENT During 2004 revenues increased $143,000 or 2.0% to $7,456,000 and NOI increased $211,000 or 7.3% to $3,119,000. Wilshire's properties in Texas (Summercreek and Wellington) contributed NOI increases of $212,000, while the Arizona properties (Sunrise Ridge and Van Buren) contributed NOI increases of $59,000. The New Jersey properties (Alpine Village, Galsworthy Arms and Jefferson Gardens) had a NOI decrease of $60,000. These results are partially reflective of the relative strengths of the rental markets in these areas. In addition, the condominiums owned by Wilshire at Galsworthy Arms were intentionally left vacant for portions of 2004 so that upgrades, repairs and maintenance work could be performed. Similarly, condominium units at Jefferson Gardens were intentionally left vacant while the Company evaluated the sale of these units. In addition to the work Wilshire is undertaking in the units that it owns at Galsworthy Arms, the condominium association, in which Wilshire is the majority owner, has commenced work to upgrade the common areas of the Galsworthy Arms complex, including the parking lot, awnings, doorways, lighting and landscaping. During 2004, Wilshire has paid to the association a special assessment of $315,000 for its share of these improvements. The Company believes these expenditures will strengthen the competitive position of the property and potentially enhance the value of the condominiums. COMMERCIAL SEGMENT During 2004 revenues increased $306,000 or 15.7% to $2,250,000 and NOI increased $192,000 or 21.4% to $1,088,000. The primary factor in the increased NOI was the Wilshire Grand Hotel where increased rental income in 2004 resulted in a $175,000 improvement in NOI. This improvement was partly offset by a decline in NOI at Tempe Corporate Center which experienced lower rental income in 2004 due to tenants moving out not being replaced and higher operating costs. During the second half of 2004, and continuing into 2005, the Company has undertaken a program to upgrade the common areas of the Tempe Corporate Center. Through February 2005, in excess of $300,000 has been spent on this program. Partially as a result of this upgrade program and increased marketing efforts, the Company has entered into several leases with new tenants and the building has an improved occupancy percentage in February 2005 as compared to September 2004, when the increased marketing efforts commenced. 20 REVENUES
Years Ended December 31, ------------------------------ 2004 2003 Increase (Decrease) ---- ---- ------------------- Alpine Village, New Jersey $1,120,000 $1,141,000 $(21,000) Galsworthy Arms, New Jersey 481,000 485,000 (4,000) Jefferson Gardens, New Jersey 200,000 229,000 (29,000) Summercreek, Texas 1,091,000 1,031,000 60,000 Sunrise Ridge, Arizona 2,388,000 2,341,000 47,000 Van Buren Apartments, Arizona 588,000 561,000 27,000 Wellington, Texas 1,588,000 1,525,000 63,000 --------- --------- ------ Sub-total - Condominium & Residential Properties 7,456,000 7,313,000 143,000 --------- --------- ------- Royal Plaza, Arizona 655,000 619,000 36,000 Rutherford, New Jersey 110,000 110,000 - Tamarac, Florida 313,000 281,000 32,000 Tempe Corporate Center, Arizona 684,000 692,000 (8,000) Wilshire Grand Hotel, New Jersey 488,000 242,000 246,000 --------- --------- ------- Sub-total - Commercial Properties 2,250,000 1,944,000 306,000 --------- --------- ------- Total Revenues $9,706,000 $9,257,000 $449,000 ========== ========== ========
Revenues from rental properties amounted to $9,706,000 in 2004, an increase of $449,000 or 4.9%, from $9,257,000 in 2003. The majority of the increase for the 2004 period is attributable to higher rent and reimbursement of real estate tax expenses applicable to the Wilshire Grand Hotel, the Company's triple net leased hotel and conference facility located in New Jersey. The remainder of the increase is related to improved occupancy and market conditions at the Company's properties located outside of New Jersey. Excluding the Wilshire Grand Hotel, revenues were lower at the Company's New Jersey properties mainly due to building improvements and enhanced maintenance that required a number of the rental units to remain vacant. OPERATING EXPENSES
Years Ended December 31, ------------------------------- 2004 2003 Increase (Decrease) ---- ---- ------------------- Alpine Village, New Jersey $ 584,000 $587,000 $(3,000) Galsworthy Arms, New Jersey 312,000 324,000 (12,000) Jefferson Gardens, New Jersey 140,000 119,000 21,000 Summercreek, Texas 648,000 671,000 (23,000) Sunrise Ridge, Arizona 1,249,000 1,244,000 5,000 Van Buren Apartments, Arizona 359,000 349,000 10,000 Wellington, Texas 1,045,000 1,111,000 (66,000) --------- --------- -------- Sub-total - Condominium and Residential Properties 4,337,000 4,405,000 (68,000) --------- --------- -------- Royal Plaza, Arizona 213,000 228,000 (15,000) Rutherford, New Jersey - (1,000) 1,000 Tamarac, Florida 177,000 137,000 40,000 Tempe Corporate Center, Arizona 347,000 330,000 17,000 Wilshire Grand Hotel, New Jersey 425,000 354,000 71,000 --------- --------- ------ Sub-total - Commercial Properties 1,162,000 1,048,000 114,000 --------- --------- ------- Total Operating Expenses $5,499,000 $5,453,000 $ 46,000 ========== ========== ========
Operating expenses were $5,499,000 in 2004, $46,000, or 0.8% higher than $5,453,000 in 2003. The majority of the increase for the 2004 period is primarily attributable to higher real estate tax expenses applicable to the Wilshire Grand Hotel. 21 Depreciation expense amounted to $1,673,000 in 2004, an increase of 1.6% from the $1,647,000 in 2003, reflecting increased capital expenditures throughout the Company's network of residential and commercial properties. These expenditures were undertaken as part of a program to reposition and strengthen the Company's properties within their targeted markets. Depreciation expense is not included in the operating expenses included in the preceding table and discussion. General and administrative expense decreased $206,000, or 8.8%, to $2,143,000 in 2004 from $2,349,000 in 2003. The decrease was related largely to an increased allocation of expenses to discontinued operations - real estate, reflecting the increased management time and expense associated with managing and selling these properties. This decrease was partly offset by a non-cash charge of $114,000 related to stock options for the former president of the Company who retired June 30, 2004 and whose services has been retained under a three-year consulting agreement. The stock option expense will be amortized over the three-year term of the consulting agreement. At December 31, 2004, $431,000 remained to be amortized into expense. Other income decreased $3,282,000 to $1,314,000 in 2004 from $4,596,000 in 2003, principally related to $2,621,000 of gains in 2003 from the sale of marketable securities and the receipt of $1,000,000 by the Company in 2003 as a beneficiary of life insurance policies on the life of the Company's former Chairman and President Siggi B. Wilzig, who had been serving as its Senior Consultant up to his death on January 7, 2003. The receipt of the life insurance proceeds was not taxable to the Company. No securities were sold in the 2004 period. These 2003 events were partly offset by a $181,000 gain in 2004 on the sale of two condominium units at the Company's Jefferson Gardens, New Jersey, property. The Company intends to continue to operate the remaining units. Interest expense decreased to $2,343,000 from $3,408,000 in 2003, mainly related to the payoff of approximately $6.4 million of mortgage debt related to real estate properties sold and the impact of the Company's refinancing of certain real estate properties in 2003. Due to the refinancing that was generally effective March 1 2003, 2003 interest expense includes a one-time prepayment penalty of $469,000 and $383,000 of amortization expense applicable to a write-off of unamortized mortgage costs associated with approximately $31.5 million of debt that was refinanced. This refinancing of the mortgage notes payable reduced the effective rate paid by the Company from 7.36% to 6.22% and extended its maturity and terms. The impact of the refinancing was reflected in a reduction of interest expense for ten months of 2003 and the full year 2004. The provision for income taxes amounted to a tax benefit of $221,000 in 2004 compared to a tax benefit of $107,000 in 2003. The change in the provision for income taxes is related to the level of income from continuing operations in 2004 compared to 2003 and the change in the mix between taxable and tax-exempt income. In 2004, the Company earned approximately $194,000 of tax-exempt interest income compared to none earned in 2003, while in 2003, the $1,000,000 of insurance proceeds received was exempt from taxation. DISCONTINUED OPERATIONS, NET OF TAXES: REAL ESTATE Income from discontinued operations amounted to after tax income of $3,766,000 in 2004 and $702,000 in 2003. The increased income reflects the high level of sales of properties in 2004 compared to 2003. During 2004, the Company sold land in Montville, New Jersey, and South Brunswick, New Jersey for gross proceeds of $1,000,000 and $3,950,000, respectively, that resulted in after-tax gains of $205,000 and $485,000, respectively. The Company also sold thirteen residential properties located in Jersey City, New Jersey for gross proceeds of $14,750,000 that resulted in an after-tax gain of $3,366,000. In 2003, three properties in Florida were sold for gross proceeds of $3,190,000 that resulted in an after-tax gain of $1,081,000. 22 The loss on operating discontinued real estate properties declined in 2004 to $290,000 in 2004 from $379,000 in 2003, reflecting the sale of thirteen residential properties in Jersey City, New Jersey, during the first quarter of 2004. OIL AND GAS The Company announced in July 2003 its intention to sell its oil and gas businesses. The Canadian oil and gas business was sold in April 2004 to Addison Energy Inc., a wholly owned subsidiary of Exco Resources, Inc., for $15 million in gross proceeds. The United States oil and gas business was sold in April 2004 to Crow Creek Energy LLC, a Tulsa, Oklahoma based privately held portfolio company of Natural Gas Partners of Dallas, Texas, for $13.3 million in gross proceeds. During 2004 and 2003, respectively, the Company recorded losses, net of taxes, from its oil and gas businesses of $1,278,000 and $3,178,000, respectively. The net loss from operating the oil and gas business in 2004 includes the operating results of the oil and gas business for January and February and the continuing reconciliation process between the Company and its partners for periods prior to the effective dates of the sales. The Company received gross proceeds from the sale of its oil and gas assets in the United States and Canada of $28.3 million and recorded a net after-tax gain of $567,000 on the sale. RESULTS OF OPERATIONS - 2003 V. 2002 OVERVIEW Net income for 2003 amounted to a loss of $1,373,000 or $0.18 per diluted share, compared to net income of $1,076,000 or $0.14 per diluted share reported for 2002. CONTINUING OPERATIONS: Income from continuing operations was $1,103,000 in 2003 compared with $160,000 in 2002. Results per diluted share from continuing operations amounted to $0.14 in 2003 and $0.02 in 2002. The 2003 period included $1,550,000 of after tax ($2,621,000 before taxes) gains from the sale of marketable securities and $1,000,000 after tax income from death benefits received from an insurance policy on the life of the Company's former senior consultant. The 2002 period included $421,000 of after tax ($711,000 before taxes) gains from the sale of marketable securities. Without these special transactions, the Company would have incurred losses from continuing operations of $1,447,000 in 2003 and $308,000 in 2002. Reported income from continuing operations in 2003 compared with 2002 reflects a higher level of other income that included the previously mentioned gains from the sale of marketable securities and the proceeds from an insurance policy on the life of the Company's former Senior Consultant and a higher income tax benefit. This positive factor was offset by reduced income from operations and higher interest expense. 23 SEGMENT INFORMATION The following table sets forth comparative data for Wilshire's real estate segments in continuing operations.
Residential Real Estate Commercial Real Estate Total --------------------------------- ----------------------------------- -------------------------------------- Year ended Increase Year ended Increase Year ended Increase December 31 (Decrease) December 31 (Decrease) December 31 (Decrease) ----------- ---------- ----------- ---------- ----------- ---------- 2003 2002 $ % 2003 2002 $ % 2003 2002 $ % ---- ---- - - ---- ---- - - ---- ---- - - (In 000s of $) (In 000s of $) (In 000s of $) Rental income $6,839 $6,817 $22 0.3 $1,908 $1,842 $ 66 3.6 $8,747 $8,659 $88 1.0 Tenant fees 1 3 (2) - 3 2 1 50.0 4 5 (1) (20.0) Vending income 62 57 5 8.8 - - - - 62 57 5 8.8 Other 411 395 16 4.1 33 27 6 22.2 444 422 22 5.2 ------ ------ ------ ------ ------ ----- ------ ------ ----- Total revenues 7,313 7,272 41 0.6 1,944 1,871 73 3.9 9,257 9,143 114 1.2 Operating expenses 4,405 4,096 309 7.5 1,048 1,164 (116) (10.0) 5,453 5,260 193 3.7 ----- ----- ------ ----- ----- ----- ----- ----- --- Net operating income $2,908 $3,176 $(268) (8.4) $ 896 $ 707 $ 189 26.7 $3,804 $3,883 $(79) (2.0) ====== ====== ====== ===== ====== ====== ===== ===== ====== ====== ===== ====== Average occupancy % 91.6 91.5 55.7 53.6 84.1 83.8 Reconciliation to consolidated income (loss) from continuing operations: Net operating income $3,804 $3,883 Depreciation expense (1,647) (1,541) General and administrative expenses (2,349) (2,131) Other income 4,596 2,128 Interest expense (3,408) (2,226) Income tax benefit 107 47 ------ ------- Income (loss) from continuing operations $1,103 $ 160 ====== =======
The above table details the comparative net operating income ("NOI") for Wilshire's residential and commercial real estate segments, and reconciles the combined NOI to consolidated income (loss) from continuing operations. NOI is based on operating revenue and expenses directly associated with the operations of the real estate properties, but excludes depreciation and interest expense. Wilshire assesses and measures segment operating results based on NOI, which is a direct measure of each property's contribution to the results of the Company before considering revenues from treasury activities, overhead expenses and other costs that are not directly related to the performance of a property. The Company believes NOI is a more descriptive measure of the Company's performance than income (loss) from continuing operations. NOI is not a measure of operating results or cash flow as measured by generally accepted accounting principles, and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. RESIDENTIAL SEGMENT During 2003 revenues increased $41,000 or 0.6% to $7,313,000 and NOI decreased $268,000 or 8.4% to $2,908,000. Excluding Sunrise Ridge which had a NOI increase of $16,000, all properties had a decline in NOI. The decline was attributable to generally weak rental markets across all of the communities served by Wilshire. In addition, operating expenses increased primarily due to higher utility, maintenance and insurance costs. In particular, energy costs have increased substantially in the Southwest. COMMERCIAL SEGMENT During 2003 revenues increased $73,000 or 3.9% to $1,944,000 and NOI increased $189,000 or 26.7% to $896,000. NOI improved at all properties except for Tempe Corporate Center which had a NOI decline of $89,000 due to reduced rental income. NOI in 2003 was improved by the first time inclusion of revenue from the Company's triple net lease with a major bank at Rutherford, New Jersey. 24 REVENUES
Years Ended December 31, ---------------------------------- 2003 2002 Increase (Decrease) ---- ---- ------------------- Alpine Village, New Jersey $1,141,000 $1,061,000 $ 80,000 Galsworthy Arms, New Jersey 485,000 472,000 13,000 Jefferson Gardens, New Jersey 229,000 217,000 12,000 Summercreek, Texas 1,031,000 1,055,000 (24,000) Sunrise Ridge, Arizona 2,341,000 2,356,000 (15,000) Van Buren Apartments, Arizona 561,000 583,000 (22,000) Wellington, Texas 1,525,000 1,528,000 (3,000) ---------- ---------- ---------- Sub-total - Residential Properties 7,313,000 7,272,000 41,000 ---------- ---------- ---------- Royal Plaza, Arizona 619,000 571,000 48,000 Rutherford, New Jersey 110,000 - 110,000 Tamarac, Florida 281,000 270,000 11,000 Tempe Corporate Center, Arizona 692,000 850,000 (158,000) Wilshire Grand Hotel, New Jersey 242,000 180,000 62,000 ---------- ---------- ---------- Sub-total - Commercial Properties 1,944,000 1,871,000 73,000 ---------- ---------- ---------- Total Rental Revenues $9,257,000 $9,143,000 $ 114,000 ========== ========== ==========
Revenues amounted to $9,257,000 in 2003, an increase of $114,000 or 1.2%, from $9,143,000 in 2002. The majority of the increase is related to the triple net leases the Company holds with the Wilshire Grand Hotel and the Company's newly leased bank branch in Rutherford, New Jersey and Alpine Village, New Jersey. These increases were partly offset by a decline in revenue at Tempe Corporate Center, Arizona, which experienced a lag in leasing up vacant office space. OPERATING EXPENSES
Years Ended December 31, --------------------------------- 2003 2002 Increase (Decrease) ---- ---- ------------------- Alpine Village, New Jersey $587,000 $ 481,000 $ 106,000 Galsworthy Arms, New Jersey 324,000 241,000 83,000 Jefferson Gardens, New Jersey 119,000 99,000 20,000 Summercreek, Texas 671,000 629,000 42,000 Sunrise Ridge, Arizona 1,244,000 1,275,000 (31,000) Van Buren Apartments, Arizona 349,000 350,000 (1,000) Wellington, Texas 1,111,000 1,021,000 90,000 ---------- ---------- ---------- Sub-total - Residential Properties 4,405,000 4,096,000 309,000 ---------- ---------- ---------- Royal Plaza, Arizona 228,000 261,000 (33,000) Rutherford, New Jersey (1,000) 8,000 (9,000) Tamarac, Florida 137,000 148,000 (11,000) Tempe Corporate Center, Arizona 330,000 399,000 (69,000) Wilshire Grand Hotel, New Jersey 354,000 348,000 6,000 ---------- ---------- ---------- Sub-total - Commercial Properties 1,048,000 1,164,000 (116,000) ---------- ---------- ---------- Total Operating Expenses $5,453,000 $5,260,000 $ 193,000 ========== ========== ==========
25 Operating expenses were $5,453,000 in 2003, $193,000, or 3.7% higher than $5,260,000 in 2002. The operating expense increase was centered in the Company's New Jersey properties that experienced higher property taxes, insurance and maintenance charges in 2003. Depreciation expense amounted to $1,647,000 in 2003, an increase of 6.9% from $1,541,000 in 2002, reflecting the capital improvements incurred during 2002 and 2003. General and administrative expense increased $218,000, or 10.2%, to $2,349,000 in 2003 from $2,131,000 in 2002. The 2003 expense level included a full year of compensation expense for a senior executive officer hired in mid-2002. The remainder of the increase was attributable to higher corporate insurance expenses and legal and accounting fees. Other income increased $2,450,000 to $4,596,000 in 2003 from $2,128,000 in 2002. This increase included $1,000,000 received by the Company in 2003 as a beneficiary of life insurance policies on the life of the Company's Senior Consultant. The receipt of the life insurance proceeds was not taxable to the Company. Also included in other income for 2003 were gains from the sale of securities of $2,621,000, which exceeded the gains reported in 2002 by $1,910,000. Interest expense in 2003 increased to $3,408,000 from $2,226,000 in 2002. Interest expense in 2003 includes a one time prepayment penalty of $469,000 and $383,000 of amortization expense applicable to a write-off of unamortized mortgage costs associated with approximately $31.5 million of debt that was refinanced. This refinancing of the mortgage notes payable reduced the effective rate paid by the Company from 7.36% to 6.22% and extended its maturity and terms. The provision for income taxes amounted to a tax benefit of $107,000 in 2003 compared to a tax benefit of $47,000 2002. The change in the provision for income taxes is related to the level of income from continuing operations in 2003 compared to 2002 and the change in the mix between taxable and tax-exempt income. In 2003, $1,000,000 of insurance proceeds received was exempt from taxation. DISCONTINUED OPERATIONS, NET OF TAXES: REAL ESTATE Income from discontinued operations amounted to after tax income of $702,000 in 2003 and a loss of $92,000 in 2002. The increased income reflects the higher level of sales of properties in 2003 compared to 2002. During 2003, the Company sold three properties in Florida for gross proceeds of $3,190,000 that resulted in an after-tax gain of $1,081,000. In 2002, the Company sold several smaller residential properties in New Jersey for an after-tax gain of $150,000. The loss on operating discontinued real estate properties increased to $379,000 in 2003 from $242,000 in 2002 mainly due to additional properties being classified as discontinued in 2004 with the resulting reclassification of their operating results out of continuing operations into discontinued operations for the 2003 and 2002 periods. OIL AND GAS During 2003 the Company recorded a loss, net of taxes, from its oil and gas businesses of $3,178,000, which included a $4.4 million after tax charge resulting from the difference between the carrying value and estimated market value of the Company's Canadian oil and gas properties. Excluding this non-cash charge, the Company would have reported after-tax earnings in 2003 of $1,222,000. In 2002, the Company reported after-tax earnings from operating its oil and gas properties of $1,008,000. 26 EFFECTS OF INFLATION The effects of inflation on the Company's financial condition are not considered to be material by management. LIQUIDITY AND CAPITAL RESOURCES At December 31, 2004, the Company had working capital of $34.6 million, compared to a working capital deficiency of $7.2 million at December 31, 2003. The change reflects the receipt of approximately $28.1 million from the sale of the oil and gas business and approximately $20.0 million from the sale of real estate properties, partly offset by the payment of a portion of the income taxes related to those sales and the repayment of $5.3 million of debt related to the real estate properties sold. The Company has $35.0 million of cash and cash equivalents at December 31, 2004. This balance is comprised of working capital accounts for its real estate properties and corporate needs and short-term investments in government and corporate securities and money market funds. The Company estimates that it has approximately $5.6 million of taxes remaining to be paid relating to the sale of the oil and gas business, including U.S. and Canadian taxes on the repatriation of earnings from its Canadian subsidiary, and the sales of real estate properties. These obligations will be satisfied in the first half of 2005, partly through the application of an approximate $2.9 million estimated overpayment of 2004 U.S. Federal taxes. After considering the tax payments previously described, Wilshire will have $32.3 million of cash and cash equivalents for working capital and other purposes. The Company continues to explore corporate and real estate property acquisitions as they arise. The timing of such acquisitions, if any, will depend upon, among other criteria, economic conditions and the favorable evaluation of specific opportunities presented to the Company. In the short-term, the Company will continue to invest these funds in high quality investments that are consistent with its investment policy. Management considers its liquidity position adequate to fulfill the Company's current business plans. Net cash used in operating activities amounted to $10.2 million in 2004, while in 2003 and 2002 operating activities provided net cash of $7.4 million and $4.9 million, respectively. The 2004 use of cash resulted from net income of $2.6 million, the sale of the oil and gas business and the sale of real estate properties with their related changes in receivables, payables and current and deferred tax accounts. The 2003 provision of cash was mainly related to a net loss of $1.4 million and non-cash charges for depreciation and amortization expense ($6.2 million) and an impairment loss related to Wilshire's Canadian oil and gas operations ($7.0 million), partly offset by changes in other current asset and liability and income tax accounts related to normal business activity. The 2002 provision of cash was mainly related to a net income of $1.1 million and non-cash charges for depreciation and amortization expense ($3.9 million). Net cash provided by investing activities amounted to $43.6 million in 2004 and $2.1 million in 2003. In 2002, investing activities used net cash of $3.3 million. The cash provided by investing activities in 2004 is due mainly to the sale of real estate assets and oil and gas assets in 2004, partly offset by an increase in restricted cash related to the IRS Section 1031 exchange that the Company has entered into with the proceeds from the sale of land at Schalk Station, New Jersey. The 2003 provision of cash from investing activities is related to proceeds from the sale of real estate properties and marketable securities, partly offset by capital expenditures on real estate properties and oil and gas activities. The 2002 use of cash from investing activities relates to the purchase of marketable securities and capital expenditures on real estate properties and oil and gas activities, partly offset by proceeds from the sale of marketable securities. Net cash used in financing activities amounted to $11.8 million in 2004, $7.7 million in 2003 and $2.6 million in 2002. The 2004 use of cash reflects the repayment of long term debt due to the sales of real estate properties and the oil and gas assets and normal annual amortization of long term debt from monthly debt service payments. The 2003 use of cash reflects the net of repayments of long term debt due to the refinancing of various mortgage loans, the sale of real estate properties and normal annual amortization of long term debt from monthly debt service payements, partly offset by the issuance of new mortgage loans from the previously mentioned refinancing. The 2002 use of funds is related to the repayment of long term debt partly offset by the issuance of new debt. 27 In addition to the generation of funds from its operations, the Company had a $2.0 million line of credit with a major financial institution that expired in January 2005 and was not renewed. The Company believes it has adequate capital resources to fund its operations for the foreseeable future and is investigating the renewal of this line of credit, but is not committed to doing so. The Company is committed to investing in its properties to maintain their competitiveness within their markets and for the purposes of upgrading and repositioning in more upscale markets. The following table sets forth the amounts of capital expenditures made in each property within the past three years, exclusive of those properties which were sold.
Years Ended December 31, ----------------------------------- Name of property 2004 2003 2002 - ---------------- ---- ---- ---- Residential continuing operations: Alpine Village $ 85,000 $ 177,000 $ 49,000 Summercreek 207,000 88,000 84,000 Sunrise Ridge 258,000 204,000 234,000 Van Buren 126,000 107,000 91,000 Wellington 257,000 575,000 161,000 Galsworthy Arms 424,000 87,000 44,000 Jefferson Gardens 13,000 18,000 14,000 Commercial continuing operations: Royal Mall Plaza 50,000 22,000 299,000 Tamarac Office Plaza 4,000 4,000 82,000 Tempe Corporate 278,000 97,000 115,000 Wilshire Grand Hotel & Banquet Facility - 316,000 722,000 Rutherford Bank - - - Discontinued operations - residential: Biltmore Club 195,000 55,000 299,000 Twelve Oaks 56,000 90,000 37,000 Discontinued operations - commercial: Amboy Towers 298,000 55,000 54,000 ---------- ---------- ---------- Total capital expenditures $2,251,000 $1,895,000 $2,285,000 ========== ========== ==========
On June 3, 2004, the Company's Board of Directors approved the repurchase of up to 1,000,000 shares of its common stock on the open market, in privately negotiated transactions or otherwise. This purchasing activity may occur from time to time, in one or more transactions. At December 31, 2004, the Company had purchased 38,478 shares at an aggregate cost of $198,000 under this program. The majority of the shares acquired were from stockholders who at the time owned less than 100 shares of the Company's common stock. During March 2005, Wilshire negotiated a long-term lease for new offices in Newark, New Jersey. The lease is for a 65 month term with two renewal options each for a five-year term and covers 4,502 rentable square feet at a base rate of $29.00 per square foot. The Company has an option to early terminate the lease after two years, subject to a termination fee described in note 5 to the Notes to the Consolidated Financial Statements in Item 8 of this Form 10-K. The Company has concluded negotiations with the city of Perth Amboy, New Jersey concerning the redevelopment zone status of its office building (Amboy Towers). The City has agreed to exclude Amboy Towers from the redevelopment zone and the Company has agreed to invest $750,000 in capital improvements in the building over the next 18 months. 28 In January 2005, the Company sold one 2-bedroom condominium at Galsworthy Arms, New Jersey, for gross proceeds of $269,500. After payment of closing costs and taxes, the Company will realize net income in the first quarter 2005 of approximately $115,000. In February 2005, the Company signed an agreement to sell its Biltmore Club apartment complex (Phoenix, Arizona) to GDG Partners L.L.C. an independent third party, for $20,956,000. The agreement is expected to close no later than December 23, 2005. GDG Partners L.L.C. has paid Wilshire a nonrefundable deposit of $100,000 and additional nonrefundable deposits of $150,000 and $250,000 are required by April 3, 2005 and July 2, 2005, respectively. We expect to report a gain on the sale after taxes of approximately $8.5 million and have net proceeds after transaction costs and paying off the mortgage of approximately $10.0 million. Also in February 2005, the Company entered into an agreement to accept $1,100,000 in settlement of its mortgage receivable, which was paid during the first quarter of 2005. Security for the mortgage was a first lien on in excess of 100 condominium units in two contiguous buildings located in Jersey City, New Jersey. At December 31, 2004, the mortgage receivable had a gross carrying value of $1,165,000 and $727,000 of unearned income. As a result of this transaction, the Company recognized a gain of approximately $400,000 in the first quarter of 2005. In March 2005, the Company signed an agreement to sell its Twelve Oaks apartment complex (Atlanta, Georgia) to Interstate East Management, Inc., an independent third party, for $1,725,000. The agreement contains a "time is of the essence clause" and is expected to close as soon as practicable. We expect to report a gain on the sale after taxes of approximately $440,000. The property had been highly leveraged and the transaction will generate net proceeds after transaction costs and taxes of approximately $1,379,000, which will be used to repay the outstanding mortgage balance of approximately $1,609,000. The shortfall in the net proceeds will be made up from general corporate sources of funds. Also in March 2005 the Company was evaluating alternatives for optimizing its investment in the Wilshire Grand Hotel and Banquet Facility (the "Wilshire Hotel"). The Company leases the Wilshire Hotel under two 25-year operating leases, one for the hotel and one for the banquet facility, to an experienced hotel operator (the "Hotel Operator"). The Hotel Operator has encountered financial adversity and in 2004 ceased payment on its mortgage obligations, which are held by a third party (the "Mortgagor"). As of March 2005, the Hotel Operator was also delinquent on lease payments to Wilshire for the months of January, February and March 2005. The Mortgagor is required to cure any defaults of the Hotel Operator (i.e., pay any amounts due Wilshire under the lease) in order to protect its mortgage and cannot impair Wilshire's ownership interest in the property. As a result of the Hotel Operator's delinquency, Wilshire is evaluating alternatives for its investment including: a) declaring the Hotel Operator in default and pursuing tenant eviction proceedings and b) assisting in the consummation of a settlement agreement by which Wilshire would assume operational control of the Wilshire Hotel and in the event of a subsequent sale of the hotel, would receive an agreed upon value prior to any proceeds being distributed to the Mortgagor or Hotel Operator. At this time, Wilshire does not expect to incur a loss on this property. FORWARD-LOOKING STATEMENTS This Report on Form 10-K for the year ended December 31, 2004 contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements included herein other than statements of historical fact are forward-looking statements. Although the Company believes that the underlying assumptions and expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. The Company's business and prospects are subject to a number of risks which could cause actual results to differ materially from those reflected in such forward-looking statements, including uncertainties inherent in any attempt to sell a portion or all of the business or to acquire or merge into other companies at an acceptable price, environmental risks relating to the Company's real estate properties, competition, the substantial capital expenditures required to fund the Company's real estate operations, market and economic changes in areas where the Company holds real estate properties, interest rate fluctuations, government regulation, and the ability of the Company to implement its business strategy. 29 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has an investment in the common stock of one publicly traded real estate company in the United States in which the Company has exposure to the risk of market value fluctuation. The Company accounts for this investment as securities that are available for sale and marks them to market at each period-end. The change in value in the investment, net of tax impact, is reported in Accumulated Other Comprehensive Income, a separate component of stockholders' equity. The Company also evaluates its investment to determine if it has suffered a decline in market value that is permanent, which would require a charge to the Statement of Income. At December 31, 2004, in the opinion of management, there has been no permanent decline in value in the Company's holdings of equity securities. After the sale of its Canadian oil and gas assets, the Company has cash and cash equivalents at its Canadian subsidiary whose value is exposed to fluctuations in the value of the Canadian dollar / U.S. dollar exchange rate. The change in value in the Canadian dollar denominated accounts is reported in Accumulated Other Comprehensive Income, a separate component of stockholders' equity. The Company will be repatriating all assets, net of liabilities, of its Canadian subsidiary during 2005. At that time, the foreign exchange component previously reported in Accumulated Other Comprehensive Income will be recognized as a component of net income. At December 31, 2004, the unrealized foreign exchange component of Accumulated Other Comprehensive Income was a gain of $26,000. Long-term debt as of December 31, 2004 and December 31, 2003 consists of the following -
2004 2003 ----------- ----------- Mortgage notes payable $46,855,000 $53,824,000 Note payable - 2,700,000 Revolving demand loan - 1,970,000 ----------- ----------- Total 46,855,000 58,494,000 Less-current portion (1) 729,000 7,148,000 ----------- ----------- Long term portion (2) $46,126,000 $51,346,000 =========== ===========
(1) Includes mortgage debt associated with discontinued operations of $156,000 in 2004 and $3,654,000 in 2003. (2) Includes mortgage debt associated with discontinued operations of $10,547,000 in 2004 and $14,514,000 in 2003. The aggregate maturities of the long-term debt in each of the five years subsequent to December 31, 2004 and thereafter are - Year Amount - ---- ------ 2005 $ 729,000 2006 785,000 2007 845,000 2008 906,000 2009 4,797,000 Thereafter 38,793,000 ----------- $46,855,000 =========== 30 The Company is not exposed to changes in interest rates. At December 31, 2004, the Company had no floating rate debt outstanding under its $2.0 million U.S. credit line. At December 31, 2004, the Company had $46,855,000 of mortgage debt outstanding which all bears interest at an average fixed rate of 6.098% and an average remaining life of approximately 7.9 years. The fixed rate mortgages are subject to repayment (amortization) schedules that are longer than the term of the mortgages. As such, the approximate amount of balloon payments for all mortgage debt that will be required is as follows: Year Amount - ---- ------ 2009 $3,853,000 2013 35,421,000 ------------ $39,274,000 =========== Wilshire expects to re-finance the individual mortgages with new mortgages when their terms expire. To this extent, we have exposure to interest rate risk on our fixed rate mortgage debt obligations. If interest rates, at the time any individual mortgage note is due, are higher than the current fixed interest rate, higher debt service may be required, and/or re-financing proceeds may be less than the amount of mortgage debt being retired. We believe that the values of our properties will be adequate to command re-financing proceeds equal to, or higher than the mortgage debt to be re-financed. 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Wilshire Enterprises, Inc. We have audited the accompanying consolidated balance sheet of Wilshire Enterprises, Inc. and Subsidiaries as of December 31, 2004, and the related consolidated statements of operations, changes in stockholders' equity and cash flows and financial statement schedule for the year then ended. These consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audit. We conducted our audit 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 consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wilshire Enterprises, Inc. and Subsidiaries as of December 31, 2004, and their results of operations and cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. /s/ J.H. Cohn LLP Roseland, New Jersey March 26, 2005 32 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders Wilshire Enterprises, Inc. We have audited the accompanying consolidated balance sheet of Wilshire Enterprises, Inc. and subsidiaries as of December 31, 2003 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the two year period ended December 31, 2003. These financial statements are the responsibility of Wilshire's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with 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 provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wilshire Enterprises, Inc. and Subsidiaries as of December 31, 2003, and their results of operations and cash flows for each of the two years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. New York, New York March 26, 2004 /s/ Ernst & Young LLP 33 WILSHIRE ENTERPRISES, INC. CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2004 AND 2003 ASSETS 2004 2003 ------------- ------------- Current assets: Cash and cash equivalents $ 31,110,000 $ 7,763,000 Restricted cash 4,082,000 327,000 Marketable securities, available for sale, at fair value 2,754,000 1,996,000 Accounts receivable, net of allowance for doubtful accounts of $65,000 in 2003 189,000 1,802,000 Income taxes receivable 4,389,000 544,000 Prepaid expenses and other current assets 1,827,000 1,326,000 ------------- ------------- Total current assets 44,351,000 13,758,000 ------------- ------------- Noncurrent assets: Mortgage notes receivable 957,000 2,504,000 ------------- ------------- Other assets 208,000 860,000 ------------- ------------- Property and equipment: Oil and gas properties, using the full cost method of accounting - Held for sale - 143,601,000 Real estate properties 46,769,000 45,119,000 Real estate properties - Held for sale 12,168,000 26,950,000 ------------- ------------- 58,937,000 215,670,000 Less: Accumulated depreciation and amortization 13,292,000 11,619,000 Accumulated depreciation, depletion and amortization - Property held for sale 3,608,000 122,176,000 ------------- ------------- 42,037,000 81,875,000 ------------- ------------- Total Assets $ 87,553,000 $ 98,997,000 ============= ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 573,000 $ 3,494,000 Accounts payable 1,624,000 1,628,000 Income taxes payable 3,623,000 154,000 Deferred income taxes 2,465,000 10,489,000 Accrued liabilities 606,000 800,000 Deferred income 373,000 382,000 Current liabilities associated with discontinued operations 521,000 3,974,000 ------------- ------------- Total current liabilities 9,785,000 20,921,000 Noncurrent liabilities: Long-term debt, less current portion 35,579,000 37,023,000 Deferred income taxes 1,855,000 1,058,000 Deferred income 621,000 868,000 Noncurrent liabilities associated with discontinued operations 10,602,000 14,600,000 ------------- ------------- Total liabilities 58,442,000 74,470,000 ------------- ------------- Commitments and Contingencies Stockholders' equity: Preferred stock, $1 par value, 1,000,000 shares authorized; none issued and outstanding in 2004 and 2003 - - Common stock, $1 par value, 15,000,000 shares authorized; issued 10,013,544 shares in 2004 and 2003 10,014,000 10,014,000 Capital in excess of par value 9,524,000 9,029,000 Retained earnings 19,905,000 17,267,000 Unearned compensation (431,000) - Treasury stock, 2,234,732 and 2,210,713 shares at 2004 and 2003, respectively, at cost (10,491,000) (10,355,000) Accumulated other comprehensive income (loss) 590,000 (1,428,000) ------------- ------------- Total stockholders' equity 29,111,000 24,527,000 ------------- ------------- Total Liabilities and Stockholders' Equity $ 87,553,000 $ 98,997,000 ============= =============
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 34 WILSHIRE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002 ----------- ----------- ----------- REVENUES $ 9,706,000 $ 9,257,000 $ 9,143,000 ----------- ----------- ----------- COSTS AND EXPENSES Operating expenses 5,499,000 5,453,000 5,260,000 Depreciation expense 1,673,000 1,647,000 1,541,000 General and administrative 2,143,000 2,349,000 2,131,000 ----------- ----------- ----------- Total costs and expenses 9,315,000 9,449,000 8,932,000 ----------- ----------- ----------- INCOME (LOSS) FROM OPERATIONS 391,000 (192,000) 211,000 OTHER INCOME Dividend and interest income 685,000 743,000 877,000 Gain on sale of marketable securities - 2,621,000 711,000 Insurance proceeds - 1,000,000 - Other income 629,000 232,000 540,000 INTEREST EXPENSE (2,343,000) (3,408,000) (2,226,000) ----------- ----------- ----------- INCOME (LOSS) BEFORE PROVISION FOR INCOME TAXES (638,000) 996,000 113,000 INCOME TAX EXPENSE (BENEFIT) (221,000) (107,000) (47,000) ----------- ----------- ----------- INCOME (LOSS) FROM CONTINUING OPERATIONS (417,000) 1,103,000 160,000 ----------- ----------- ----------- DISCONTINUED OPERATIONS - REAL ESTATE, NET OF TAXES LOSS FROM OPERATIONS (290,000) (379,000) (242,000) GAIN FROM SALES 4,056,000 1,081,000 150,000 DISCONTINUED OPERATIONS - OIL & GAS, NET OF TAXES INCOME (LOSS) FROM OPERATIONS (1,278,000) (3,178,000) 1,008,000 GAIN FROM SALES 567,000 - - ----------- ----------- ----------- NET INCOME (LOSS) $ 2,638,000 $(1,373,000) $ 1,076,000 =========== =========== =========== BASIC EARNINGS (LOSS) PER SHARE: Income (loss) from continuing operations $(0.05) $0.14 $0.02 Income (loss) from discontinued operations - Real estate - loss from operations (0.04) (0.05) (0.03) Real estate - gain on sales 0.52 0.14 0.02 Oil and gas - income (loss) from operations (0.16) (0.41) 0.13 Oil and gas - gain on sale 0.07 - - ----- ----- ------ Net income (loss) applicable to common stockholders $0.34 $(0.18) $0.14 ===== ====== ====== DILUTED EARNINGS (LOSS) PER SHARE: Income (loss) from continuing operations $(0.05) $0.14 $0.02 Income (loss) from discontinued operations - Real estate - loss from operations (0.04) (0.05) (0.03) Real estate - gain on sales 0.51 0.14 0.02 Oil and gas - income (loss) from operations (0.16) (0.41) 0.13 Oil and gas - gain on sale 0.07 - - ----- ----- ------ Net income (loss) applicable to common stockholders $0.33 $(0.18) $ 0.14 ===== ====== ======
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 35 WILSHIRE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY DECEMBER 31, 2004, 2003 AND 2002
PREFERRED STOCK COMMON STOCK CAPITAL IN --------------- ------------ EXCESS OF UNEARNED RETAINED TREASURY SHARES AMOUNT SHARES AMOUNT PAR VALUE COMPENSATION EARNINGS STOCK ------ ------ ------ ------ --------- ------------ -------- ----- BALANCE, December 31, 2001 - $ - 10,013,544 $10,014,000 $9,029,000 $ - $17,564,000 $(10,179,000) Net income 1,076,000 Foreign currency translation adjustment Change in unrealized loss on marketable securities, net of income tax benefit of $361,000 Comprehensive income Purchase of treasury stock (176,000) --- ---- ---------- ----------- ---------- ---- ----------- ------------ BALANCE, December 31, 2002 - - 10,013,544 10,014,000 9,029,000 - 18,640,000 (10,355,000) Net income (1,373,000) Foreign currency translation adjustment Change in unrealized loss on marketable securities, net of income tax benefit of $89,000 Comprehensive income --- ---- ---------- ----------- ---------- ---- ----------- ------------ BALANCE, December 31, 2003 - - 10,013,544 10,014,000 9,029,000 - 17,267,000 (10,355,000) Net income 2,638,000 Foreign currency translation adjustment Change in unrealized loss on marketable securities, net of income tax benefit of $301,000 Comprehensive income Issuance of shares of common stock for services (24,000) 28,000 Compensation associated with stock options 495,000 (495,000) Amortization of compensation associated with stock and stock option awards 88,000 Exercise of stock options 34,000 Purchase of treasury stock (198,000) --- ---- ---------- ----------- ---------- ---- ----------- ------------- BALANCE, December 31, 2004 - $ - 10,013,544 $10,014,000 $9,524,000 $(431,000) $19,905,000 $ (10,491,000) ==== ==== ========== =========== ========== ========= =========== ============= ACCUMULATED OTHER TOTAL COMPREHENSIVE COMPREHENSIVE STOCKHOLDERS' INCOME (LOSS) INCOME (LOSS) EQUITY ------------- ------------- ------ BALANCE, December 31, 2001 $(2,735,000) $23,693,000 Net income $1,076,000 $1,076,000 Foreign currency translation adjustment 88,000 88,000 88,000 Change in unrealized loss on marketable securities, net of income tax benefit of $361,000 (442,000) (442,000) (442,000) ---------- Comprehensive income $722,000 ========== Purchase of treasury stock (176,000) ----------- ----------- BALANCE, December 31, 2002 (3,089,000) 24,239,000 Net income $(1,373,000) (1,373,000) Foreign currency translation adjustment 2,206,000 2,206,000 2,206,000 Change in unrealized loss on marketable securities, net of income tax benefit of $89,000 (545,000) (545,000) (545,000) ---------- Comprehensive income $288,000 ----------- ========== ----------- BALANCE, December 31, 2003 (1,428,000) 24,527,000 Net income 2,638,000 2,638,000 Foreign currency translation adjustment 1,562,000 1,562,000 1,562,000 Change in unrealized loss on marketable securities, net of income tax benefit of $301,000 456,000 456,000 456,000 ---------- Comprehensive income $4,656,000 ========== Issuance of shares of common stock for services 4,000 Compensation associated with stock options - Amortization of compensation associated with stock and stock option awards 88,000 Exercise of stock options 34,000 Purchase of treasury stock (198,000) ----------- ----------- BALANCE, December 31, 2004 $ 590,000 $29,111,000 ========= ===========
The accompanying notes to consolidated financial statements are an integral part of these financial statements. 36 WILSHIRE ENTERPRISES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002 ---- ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 2,638,000 $ (1,373,000) $1,076,000 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities - Depreciation, depletion and amortization 1,687,000 6,244,000 3,884,000 Amortization of compensation expense 88,000 - - Impairment loss on oil and gas assets - 7,000,000 - Deferred income tax (benefit) provision (7,329,000) (594,000) 762,000 Increase (decrease) in deferred income 146,000 (445,000) 1,627,000 Gain on sales of real estate assets (7,039,000) (1,693,000) (263,000) Gain on sale of oil and gas properties (768,000) - - Gain on sale of marketable securities - (2,621,000) (711,000) Changes in operating assets and liabilities: Decrease (increase) in accounts receivable 1,613,000 (897,000) (262,000) Decrease (increase) in income taxes (3,845,000) 83,000 (626,000) receivable Decrease (increase) in prepaid expenses and other current assets 154,000 539,000 (462,000) Increase (decrease) in accounts payable, accrued liabilities and other liabilities (403,000) 1,058,000 (77,000) Increase (decrease) in taxes payable 2,939,000 119,000 (15,000) ------------ ------------ ------------ Net cash provided by (used in) operating activities (10,119,000) 7,420,000 4,933,000 ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures - real estate (2,295,000) (2,415,000) (2,500,000) Capital expenditures - oil & gas - (8,705,000) (5,028,000) Proceeds from sale of oil and gas properties 28,131,000 - - Proceeds from sale of real estate properties 19,874,000 3,107,000 737,000 Proceeds on mortgage notes receivable 1,673,000 531,000 3,162,000 Proceeds from sales and redemptions of marketable securities - 9,494,000 2,336,000 Purchases of marketable securities - - (1,930,000) (Increase) decrease in restricted cash (3,755,000) 78,000 (45,000) ------------ ------------ ------------ Net cash provided by (used in) investing activities 43,628,000 2,090,000 (3,268,000) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments of long-term debt (11,639,000) (47,868,000) (11,400,000) Loan payable to stockholder - (500,000) (200,000) Proceeds from issuance of debt - 40,656,000 9,158,000 Purchase of treasury stock (185,000) - (176,000) Proceeds from exercise of stock options 21,000 - - ------------ ------------ ------------ Net cash used in financing activities (11,803,000) (7,712,000) (2,618,000) ------------ ------------ ------------ EFFECT OF EXCHANGE RATE CHANGES ON CASH 1,641,000 2,206,000 88,000 ------------ ------------ ------------ Net increase (decrease) in cash and cash equivalents 23,347,000 4,004,000 (865,000) CASH AND CASH EQUIVALENTS, beginning of year 7,763,000 3,759,000 4,624,000 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, end of year $ 31,110,000 $ 7,763,000 $ 3,759,000 ============ ============ ============ SUPPLEMENTAL DISCLOSURES TO THE STATEMENTS OF CASH FLOWS: Cash paid during the year for - Interest $ 3,025,000 $ 4,716,000 $ 4,683,000 ============ ============ ============ Income taxes $ 7,567,000 $ 543,000 $ 352,000 ============ ============ ============
The accompanying notes to condensed consolidated financial statements are an integral part of these financial statements. 37 WILSHIRE ENTERPRISES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: Wilshire Enterprises, Inc. ("Wilshire" or "the Company") is engaged in acquiring, owning and managing real estate properties and real estate related securities. The Company's real estate holdings are located in the states of Arizona, Florida, Georgia, New Jersey and Texas. The Company's real estate holdings are owned both in its own name and through holding companies and limited liability companies. The Company also maintains investments in marketable securities, which are classified as available for sale. The Company had also been engaged in oil and gas exploration and production in the United States and Canada. In April 2004, the Company sold its oil and gas operations and received net proceeds of $28,131,000. An escrow holdback of $600,000 was established to allow for any potential post closing adjustments relating to its United States operations. This escrow was paid in full to the Company on June 22, 2004 and the consolidated statements of operations include a gain of $567,000 (after taxes) on the transaction. Since the sale was effective as of March 1, 2004, the financial statements as presented reflect in discontinued operations oil and gas operations for the first two months of 2004, compared to full years being included in discontinued operations in the statements of operations for 2003 and 2002. PRINCIPLES OF CONSOLIDATIONS: The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany account balances and transactions have been eliminated in consolidation. At December 31, 2004, the Company does not have any affiliates that require consolidation under the provisions of FIN 46R, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin No. 51." USE OF ESTIMATES: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: Financial instruments that potentially subject Wilshire to concentrations of credit risk consist primarily of cash and cash equivalents. Wilshire considers all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Wilshire maintains its cash in the United States in bank accounts ($6,207,000) and brokerage accounts ($12,444,000). The balances maintained in bank accounts may, at times, exceed Federally insured limits. At December 31, 2004, cash balances in banks that exceeded Federally insured limits amounted to $5,384,000, of which $3,905,000 represents cash deposited with a qualified exchange agent for a Section 1031 exchange the Company is investigating with the proceeds from the sale of the land at Schalk Station. The funds must remain with the qualified exchange agent and are not available for use by the Company until the time period for executing a Section 1031 exchange expires (180 days from the closing date of the initiating transaction). Under the contemplated transaction, the funds will be released to the Company in June 2005. Investments in accounts maintained at brokerage houses consist of short-term, mainly tax-exempt or tax advantaged, investments that are subject to the Company's investment policy guidelines concerning credit rating, concentrations and size of transaction. The Company also has $16,541,000 in cash with its Canadian subsidiary that is being invested in short-term deposits at a major Canadian bank. The funds at the Canadian subsidiary will be repatriated to the United States during 2005, and represent principally the only assets currently held outside of the United States. 38 Restricted cash represents the $3,905,000 of funds on deposit with the qualified exchange agent and $177,000 of residential tenant deposits for Company properties located in New Jersey and Georgia. MARKETABLE SECURITIES: As of December 31, 2004 and 2003, the marketable securities held by the Company consist of equity securities in one real estate company in the United States, which is classified as available for sale. These securities are carried at fair value based upon quoted market prices of $2,754,000 at December 31, 2004 and $1,996,000 at December 31, 2003, which exceeded their cost of $1,799,000 by $955,000 at December 31, 2004 and $197,000 at December 31, 2003. Unrealized gains and losses, representing the difference between an investment's cost and its fair value, are charged (credited) directly to shareholders' equity, net of related income taxes, as a component of accumulated comprehensive income (loss). The cost of securities sold is determined on a specific identification basis. The Company periodically reviews available for sale securities for impairment that is other than temporary. At December 31, 2004 and 2003, no write down was required to record other than temporary impairment of securities. DEFERRED LOAN COSTS: Prepaid expenses and other current assets include deferred loan costs of $540,000 at December 31, 2004 and $631,000 at December 31, 2003. Deferred loan costs are amortized on the straight-line method by annual charges to operations over the terms of the loans. Amortization of such costs is included in interest expense and amounted to approximately $86,000 in 2004, $394,000 in 2003 and $57,000 is 2002. The 2003 expense amount includes the write-off of unamortized deferred loan costs related to loans that were refinanced in 2003. REAL ESTATE AND OTHER PROPERTIES: Real estate properties and other property and equipment are stated at cost. Costs incurred to maintain and repair the property are expensed as incurred. Depreciation is provided on the straight-line method using an estimated useful life of 30 to 35 years for real estate buildings and seven years for furniture, fixtures and equipment at the properties, which approximates their estimated useful life. The Company has designated certain real estate properties as held for sale and reports results of operating the properties, including interest expense, and the gain or loss on the sale of such real estate properties as "Discontinued Operations". The Company ceases depreciating a property when it is designated as held for sale. 39 The composition of the Company's real estate and other properties follows:
December 31, ------------------------------------ 2004 2003 ------------- ------------- Real estate and other properties: Land $ 8,092,000 $ 8,061,000 Building 30,889,000 29,797,000 Furniture, fixtures and equipment 7,788,000 7,261,000 Accumulated depreciation (13,292,000) (11,619,000) ------------- ------------- Net real estate and other properties 33,477,000 33,500,000 ------------- ------------- Real estate held for sale: Land 1,751,000 7,622,000 Building 8,086,000 15,923,000 Furniture, fixtures and equipment 2,331,000 3,405,000 Accumulated depreciation (3,608,000) (6,112,000) ------------- ------------- Net real estate held for sale 8,560,000 20,838,000 ------------- ------------- Oil and gas properties held for sale: Gross oil and gas properties - 143,601,000 Accumulated depreciation, depletion and amortization - (116,064,000) ------------- ------------- Net oil and gas properties held for sale - 27,537,000 ------------- ------------- Net property, furniture, fixtures and equipment $ 42,037,000 $ 81,875,000 ============= =============
On a periodic basis, management assesses whether there are any indicators that the value of the real estate properties may be impaired. A property's value is considered impaired if management's estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property are less than the carrying value of the property. To the extent impairment has occurred, the loss shall be measured as the excess of the carrying amount of the property over the fair value of the property. Management does not believe at December 31, 2004 and 2003 that the value of any of its properties is impaired. REVENUE RECOGNITION: Revenue from real estate properties is recognized during the period in which the premises are occupied and rent is due from tenants. For commercial properties, rental revenue is recognized on a straight-line basis over the term of the lease. The excess of rents recognized over amounts contractually due pursuant to the underlying leases are included in accounts receivable. For residential properties where lease agreements are almost exclusively for one-year terms, rental revenue is recognized in accordance with the contractual terms of the underlying leases. The Company follows a policy of aggressively pursuing its rental tenants to ensure timely payment of amounts due. When a tenant becomes 30 days in arrears on paying rent, the amount is generally written-off and turned over to a collection agency for action. Accordingly, no allowance for uncollectible accounts is maintained for the Company's real estate tenants. An allowance for uncollectible accounts was maintained based on the Company's estimate of the inability of its joint interest partners in the oil and gas division to make required payments. With the sale of the oil and gas division, the Company no longer maintains an allowance for uncollectible accounts. 40 INCOME TAXES: Deferred taxes are provided for the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The primary temporary differences are those related to tax over book depreciation and unrealized gains and losses on marketable securities. In addition, the Company has provided $2.1 million of deferred U.S. taxes for the repatriation of earnings from its Canadian subsidiary and $0.9 million of Canadian withholding taxes. Deferred tax benefits are evaluated for realizability and a determination is made, taking into account tax planning strategies, on whether the deferred tax benefit is more likely than not to be realized. Based upon this evaluation, a valuation allowance is established to reduce the deferred tax benefit to the level where it is more likely than not to be ultimately realized. At December 31, 2004 and 2003 the Company had a zero valuation allowance. FOREIGN OPERATIONS: The assets and liabilities of the Company's Canadian subsidiary have been translated at year-end exchange rates. The related revenues and expenses have been translated at average annual exchange rates. The aggregate effect of translation losses are reflected as a component of accumulated other comprehensive income (loss) until the sale or liquidation of the underlying foreign investment. Realized foreign exchange gain (loss) of $(528,000), $(179,000) and $29,000, net of taxes, are included in the statements of operations for the years ended December 31, 2004, 2003, and 2002, respectively. The 2004 transaction relates to the settlement of an intercompany loan from the Canadian subsidiary to Wilshire. The 2003 and 2002 foreign exchange gain (loss) related to the conversion of the proceeds of maturing U.S. dollar denominated Certificate of Deposit accounts to Canadian dollars. These amounts are included in Discontinued Operations - Oil and Gas. See Note 2 for additional information on the sale of the Canadian oil and gas assets in 2004. EARNINGS (LOSS) PER SHARE: Basic earnings (loss) per share are calculated by dividing net income (loss) by the weighted average number of shares outstanding during each period. The calculation of diluted earnings (loss) per share is similar to that of basic earnings (loss) per share, except that the denominator is increased to include the number of additional shares that would have been outstanding if all potentially dilutive shares, such as those issuable upon the exercise of stock options and warrants, were issued during the period. In computing diluted earnings (loss) per share for the years ended December 31, 2004 and 2002, the assumed exercise of all of Wilshire's outstanding stock options, adjusted for application of the treasury stock method, would have increased the weighted average number of shares outstanding as shown in the earnings (loss) per share calculation table below. Diluted earnings (loss) per share for the year ended December 31, 2003 has not been presented, since the Company incurred a loss and the assumed exercise of the 438,740 stock options outstanding would have been anti-dilutive. 41
2004 2002 ---- ---- Numerator- Net income (loss) - Basic and Diluted $2,638,000 $1,076,000 ========== ========== Denominator- Weighted average common shares outstanding - Basic 7,795,843 7,831,817 Incremental shares from assumed conversions of stock options 159,242 234 ---------- ---------- Weighted average common shares outstanding - Diluted 7,955,085 7,832,051 ========== ========== Basic earnings (loss) per share: $ 0.34 $ 0.14 ========== ========== Diluted earnings (loss) per share: $ 0.33 $ 0.14 ========== ==========
STOCK-BASED COMPENSATION: In accordance with the provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," Wilshire will recognize compensation cost as a result of the issuance of stock options to employees, including directors, based on the excess, if any, of the fair value of the underlying shares at the date of grant or award (or at an appropriate subsequent measurement date) over the amount the employees must pay to acquire the shares (the "intrinsic value method"). However, Wilshire will not be required to recognize compensation expense as a result of any grants to employees at an exercise price that is equal to or greater than fair value. The Company will also make pro forma disclosures, as required by Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), and Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosures" ("SFAS 148"), of net income or loss as if a fair value based method of accounting for stock options had been applied if such amounts differ materially from the historical amounts. In accordance with the provisions of SFAS 123, all other issuances of shares, options or other equity instruments to employees and non-employees as the consideration for goods or services received by Wilshire are accounted for based on the fair value of the equity instruments issued (unless the fair value of the consideration received can be more reliably measured). The fair value of any options or similar equity instruments issued will be estimated based on the Black-Scholes option-pricing model, which meets the criteria set forth in SFAS 123, and the assumption that all of the options or other equity instruments will ultimately vest. Such fair value is measured as of an appropriate date pursuant to EITF Issue No. 96-18 (generally, the earlier of the date the other party becomes committed to provide goods or services or the date performance by the other party is complete) and capitalized or expensed as if Wilshire had paid cash for the goods or services. All outstanding stock options were granted at exercise prices that equaled the fair value of the underlying stock at the date of grant. Accordingly, no compensation expense has been recognized for stock option plans. The pro forma impact of expensing stock options for the years ended December 31, 2004, 2003 and 2002 would have reduced reported net income for the year ended December 31, 2004 and 2002 by approximately $21,000 and $11,000, respectively. The net loss reported in the year ended December 31, 2003 would have increased by approximately $61,000. The per share impact, basic and diluted, would have been less than $0.01 per share for the years ended December 31, 2004 and 2002 and $0.01 per share for the year ended December 31, 2003. 42 The fair value of stock options was estimated using the Black-Scholes option-pricing model based on the variables presented in the following table.
2004 2003 2002 ---- ---- ---- Weighted average market price $5.18 $3.60 $3.32 Risk free interest rate 3.97% 3.00% 3.87% Volatility 37.4% 33.1% 33.1% Dividend yield -% -% -% Expected option life 5 years 5 years 5 years
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) includes net income (loss), unrealized gain (loss) on available for sale securities and foreign currency translation adjustments. Changes in the components of Accumulated other Comprehensive Income (Loss) for the years 2004, 2003 and 2002 are as follows -
Unrealized Gains Cumulative Accumulated (Losses) on Foreign Currency Other Available-for-Sale Translation Comprehensive Securities Adjustment Income (Loss) ---------- ---------- ------------- BALANCE, December 31, 2001 $ 1,095,000 $(3,830,000) $(2,735,000) Change for the year 2002 (442,000) 88,000 (354,000) ----------- ----------- ----------- BALANCE, December 31, 2002 653,000 (3,742,000) (3,089,000) Change for the year 2003 (545,000) 2,206,000 1,661,000 ----------- ----------- ----------- BALANCE, December 31, 2003 108,000 (1,536,000) (1,428,000) Change for the year 2004 456,000 1,562,000 2,018,000 ----------- ----------- ----------- BALANCE, December 31, 2004 $ 564,000 $ 26,000 $ 590,000 =========== =========== ===========
The change in unrealized gains (losses) on available for sale securities in 2003 includes a transfer to realized gain of $822,000. ADVERTISING EXPENSE: The Company advertises for tenants for its properties through various media, including print and internet. Advertising costs are expensed as incurred and amounted to $252,000 in 2004, $269,000 in 2003 and $273,000 in 2002. RECLASSIFICATIONS: Certain amounts in the 2003 and 2002 consolidated financial statements have been reclassified to conform to the 2004 presentation. 43 2. DISCONTINUED OPERATIONS: During 2004, the Company sold 13 residential properties located in Jersey City, New Jersey and parcels of land in South Brunswick, New Jersey, and Montville, New Jersey, for gross proceeds of $19,700,000 and an after-tax gain of $4,056,000. In 2003, three residential properties in Florida were sold for gross proceeds of $3,190,000, yielding an after-tax gain of $1,081,000. In 2002, two condominium units and one parcel of unimproved land in New Jersey were sold for gross proceeds of $745,000, $150,000 after-tax gain. The Company has designated certain of its properties as held for sale, which under accounting principles generally accepted in the United States requires that the Company report the results of operating these properties as discontinued operations. At December 31, 2004, the Company's residential apartment complexes known as Biltmore Club (Phoenix, Arizona) and Twelve Oaks (Atlanta, Georgia) and its office building Amboy Towers (Perth Amboy, New Jersey) and several parcels of undeveloped land in New Jersey have been classified as discontinued operations. The Company has entered into an agreement to sell Biltmore Club. See Note 11 to Notes to Consolidated Financial Statements for additional information. The Company announced in July 2003 its intention to sell its oil and gas businesses. The Canadian oil and gas business was sold in April 2004 to Addison Energy Inc., a wholly owned subsidiary of Exco Resources, Inc., for $15 million in gross proceeds. The United States oil and gas business was sold in April 2004 to Crow Creek Energy LLC, a Tulsa, Oklahoma based privately held portfolio company of Natural Gas Partners of Dallas, Texas, for $13.3 million in gross proceeds. After closing adjustments, the proceeds were reduced to $28,131,000. The Company recorded a net gain on the sale of its oil and gas assets of $567,000. During 2004 and 2003, respectively, the Company recorded losses, net of taxes from operating its oil and gas businesses of $1,278,000 and $3,178,000, respectively. The net loss from operating the oil and gas business in 2004 includes the operating results of the oil and gas business for January and February and the continuing reconciliation process between the Company and its partners for periods prior to the effective date of the sale. The Company reported net income from operating its oil and gas business in 2002 of $1,008,000. 44 3. LONG-TERM DEBT: Long-term debt as of December 31 consists of the following:
2004 2003 ---- ---- Mortgage notes payable (a) $11,935,000 $18,467,000 Mortgage notes payable (b) 30,802,000 31,195,000 Mortgage notes payable (c) 4,118,000 4,162,000 Note payable (d) - 2,700,000 Revolving demand loan (e) - 1,970,000 ----------- ----------- Total 46,855,000 58,494,000 Less current portion 729,000 7,148,000 ----------- ----------- Long term portion $46,126,000 $51,346,000 =========== =========== Long-term debt applicable to discontinued operations: (a)(b) Included in current liabilities $ 156,000 $ 3,654,000 Included in noncurrent liabilities 10,547,000 14,514,000 ----------- ----------- Total $10,703,000 $18,168,000 =========== ===========
(a) Mortgage notes payable to North Fork Bank (formerly The Trust Company of New Jersey) payable in monthly installments, bearing interest at a weighted average effective rate of 7.53%. These mortgage notes were secured by a first mortgage interest in various residential and commercial real estate properties in Arizona, Florida, Georgia, and New Jersey and matured at various dates through 2010. On March 1, 2003, the notes were modified to reflect an effective interest rate of 6.375% for the next five years and a revised maturity of February 2013. At December 31, 2004, the properties securing the notes had an approximate net book value of $12,766,000. (b) Mortgage notes payable to five real estate mortgage conduits arranged by Merrill Lynch that are payable in monthly installments of principal and interest, bearing interest at a weighted average effective rate of 5.75%, a 30-year amortization and a ten year term, maturing in March 2013. The residential properties securing the mortgage conduit loans are located in Arizona, New Jersey and Texas and at December 31, 2004 had an approximate net book value of $19,727,000. (c) Mortgage note payable to Orix Real Estate Capital Markets that is payable in monthly installments of principal and interest, bears interest at 7.9% and matures in June 2009. The note is secured by residential property located in Texas that at December 31, 2004 had an approximate net book value of $5,329,000. (d) During December 2003, the Company obtained a note payable of $2,700,000 to The Trust Company of New Jersey. This loan bore interest at the prime lending rate and matured in March 2004 and was paid in full. The note was secured by a certificate of deposit in the same amount. (e) In August 2002, the Company's Canadian subsidiary entered into a maximum $5,088,000 ($8,000,000 Canadian) revolving operating demand loan with the National Bank of Canada (the "Bank"). The loan bears interest at the Bank's prime lending rate (4.5% at December 31, 2003) plus 0.25% and is paid monthly. The loan was obtained to fund the Company's capital requirements with respect to the drilling of 211 development wells in Canada. The loan provisions requires the Company to repay the outstanding debt solely from available cash generated from its Canadian operations until the debt is paid in full. At December 31, 2003, the Company owed the Bank $1,970,000 ($2,550,000 Canadian) under the loan. The loan was paid in full in April 2004 from the proceeds from the sale of the Canadian oil and gas operations. 45 The aggregate maturities of the long-term debt in each of the five years subsequent to December 31, 2004 and thereafter are - Year Amount ---- ------ 2005 $ 729,000 2006 785,000 2007 845,000 2008 906,000 2009 4,797,000 Thereafter 38,793,000 ----------- $46,855,000 =========== 4. MORTGAGE NOTES RECEIVABLE: During June 2000, the Company acquired mortgage notes receivable collateralized by underlying property from The Trust Company of New Jersey for $3,500,000. The Company subsequently advanced the borrower an additional $2,790,000. The mortgage notes receivable and subsequent advances are due 2007 and bear interest at 9.75%. In connection with the mortgage note receivable the Company will earn a $2,500,000 financing fee. The fee is being recognized in income by the effective interest method over the term of the mortgage receivable. Under this agreement, the Company has the right to receive a portion of the proceeds from the sale of the underlying property. During the years 2004 and 2003, the Company received amortization and financing fees in the amount of $471,000 and $650,000, respectively. In February 2005, the Company and the borrower negotiated a settlement of the outstanding mortgage notes receivable for $1.1 million, which was paid during the first quarter of 2005. The Company recognized a gain in the first quarter 2005 of approximately $400,000 after taxes on this transaction. 5. COMMITMENTS AND CONTINGENCIES: COMMERCIAL LEASES: Wilshire leases commercial space to tenants for periods of up to five years. Most of the leases contain clauses for reimbursement of real estate taxes, maintenance, insurance and certain other operating expenses of the properties. Minimum rental income to be received from non-cancelable operating leases in years subsequent to December 31, 2004 are as follows: Year ending December 31, Amount (1) 2005 $1,303,000 2006 820,000 2007 580,000 2008 305,000 2009 143,000 Thereafter 890,000 ---------- $4,041,000 ========== (1) Excludes rental income from the Wilshire Grand Hotel, which has a triple net lease. The above amounts assume that all leases which expire are not renewed and, accordingly, neither minimal rentals nor rentals from replacement tenants are included. Minimum future rentals do not include contingent rentals, which may be received under certain leases on the basis of percentage of reported tenants' sales volume or other factors. Rental income that is contingent on future events is not included in income until the contingency is resolved. Contingent rentals included in income for each of the three years in the period ended December 31, 2004 were not material. 46 RESIDENTIAL LEASES: Lease terms for residential tenants are usually one year or less. CITY OF PERTH AMBOY, NEW JERSEY: Wilshire achieved a settlement agreement with the City of Perth Amboy, New Jersey, regarding the redevelopment zone status of its office building Amboy Towers. In an agreement signed in February 2005, the City has agreed to exclude Amboy Towers from the redevelopment zone and Wilshire has agreed to invest $750,000 in capital improvements in the building over the 18-month period commencing with the signing of the agreement. HEADQUARTERS LEASE: Wilshire has entered into an agreement to lease office space for its headquarters at One Gateway Center in Newark, New Jersey. The effective date of the lease is April 1, 2005 and it is for a 65 month period with two renewal options each for a five-year period. Wilshire has the right to cancel the lease after 24 months subject to reimbursing the landlord for certain unamortized costs associated with tenant improvements and real estate commissions. The base rent in the lease is $29.00 per square foot, with Wilshire receiving in the third year of the lease agreement five months of free rent. Base rental expense will be recognized on a straight-line basis and will amount to $121,000 per year. The Company is currently leasing space on a month-to-month basis in Jersey City, New Jersey, and does not anticipate any penalty from the termination of this lease. The Company also leased space on month to month leases in Calgary, Canada and Oklahoma City, Oklahoma for its oil and gas business. The lease in Calgary, Canada was terminated in April 2004 with the sale of the Canadian oil and gas assets. The lease in Oklahoma City, Oklahoma was terminated in June 2004 after the final settlement of the sale of the United States oil and gas assets. Rental expense for all of the Company's offices amounted to approximately $60,000 in 2004 and $101,000 in 2003 and 2002. RIGHTS PLAN: In June 1996, the Company's Board of Directors adopted the Stockholder Protection Rights Plan (the "Rights Plan"). The Rights Plan provides for issuance of one Right for each share of common stock outstanding as of July 6, 1996. The Rights are separable from and exercisable upon the occurrence of certain triggering events involving the acquisition of at least 15% (or, in the case of certain existing stockholders, 25%) of the Company's common stock by an individual or group, as defined in the Rights Plan (an "Acquiring" Person) and may be redeemed by the Board of Directors at a redemption price of $0.01 per Right at any time prior to the announcement by the Company that a person or group has become an Acquiring Person. On and after the tenth day following such triggering events, each Right would entitle the holder (other than the Acquiring Person) to purchase $50 in market value of the Company's Common Stock for $25. In addition, if there is a business combination between the Company and an Acquiring Person, or in certain other circumstances, each Right (if not previously exercised) would entitle the holder (other than the Acquiring Person) to purchase $50 in market value of the common stock of the Acquiring Person for $25. As of December 31, 2004 and 2003, 7,778,812 and 7,802,831, respectively, of Rights were outstanding. Each Right entitles the holder to purchase, for an exercise price of $25, one one-hundredth of a share of Series A Participating Preferred Stock. Each one one-hundredth share of Series A Participating Preferred Stock is designed to have economic terms similar to those of one share of common stock but will have one one-hundredth of a vote. Because the Rights are only exercisable under certain conditions, none of which were in effect as of December 31, 2004 and 2003, the outstanding Rights are not considered in the computation of basic and diluted earnings per share. 47 SHARE REPURCHASE AUTHORIZATION: On June 3, 2004, the Company announced that the Board of Directors had authorized the purchase of up to 1,000,000 shares of its common stock on the open market, in privately negotiated transactions or otherwise. This purchasing activity may occur from time to time, in one or more transactions. Through December 31, 2004, the Company had purchased 38,478 shares under this program at an approximate cost of $198,000 or $5.15 per share. 6. STOCK OPTION PLANS: In June 2004, the Company's stockholders approved the 2004 Stock Option and Incentive Plan (the "2004 Incentive Plan"). The purpose of the 2004 Incentive Plan is to encourage stock ownership by key employees and consultants of the Company, to provide additional incentive for them to promote the successful business operations of the Company, to encourage them to continue providing services to the Company, and to attract new employees and consultants to the Company. Awards under the 2004 Incentive Plan may be granted in any one or all of the following forms, as those terms are defined under the 2004 Incentive Plan: (i) incentive stock options; (ii) non-qualified stock options; (iii) stock appreciation rights; (iv) restricted shares of common stock; (v) performance shares; (vi) performance units; and (vii) unrestricted shares of common stock. The maximum aggregate number of shares of common stock available for award under the 2004 Incentive Plan is 600,000, subject to adjustment under the terms of the 2004 Incentive Plan. In June 2004, the Company's stockholders approved the 2004 Non-Employee Director Stock Option Plan (the "2004 Director Plan"). The purpose of the 2004 Director Plan is to attract qualified personnel to accept positions of responsibility as directors of the Company, to provide incentives for persons to remain on the Board and to induce such persons to maximize the Company's performance during the terms of their options. Only non-qualified stock options may be granted under the 2004 Director Plan. The maximum aggregate number of shares of common stock available for grant under the 2004 Director Plan is 150,000, subject to adjustment under the terms of the 2004 Director Plan. Upon adoption of the 2004 Director Plan, each non-employee director was granted 10,000 options to purchase common shares of the Company and on each anniversary date of the 2004 Director Plan's adoption will receive an additional 5,000 options to purchase common shares of the Company. In June 1995, the Company adopted two stock-based compensation plans (1995 Stock Option and Incentive Plan "Incentive Plan"; and 1995 Non-employee Director Stock Option Plan "Director Plan") under which, up to 450,000 and 150,000 shares, respectively are available for grant. In 2002, 339,750 options were granted under the Incentive Plan. No options were granted under the Director Plan in 2002. In 2003, 50,000 options were granted under the Incentive Plan and 5,000 options were granted under the Director Plan. In 2004, 5,000 options were granted under the Director Plan and 50,000 options were granted under the 2004 Director Plan. No options were granted under the 2004 Incentive Plan. The number and terms of the options granted under these plans are determined by the Company's Stock Option Committee (the Committee) based on the fair market value of the Company's common stock on the date of grant. The period during which an option may be exercised varies, but no option may be exercised after ten years from the date of grant. 48 The following table summarized stock option activity for 2004, 2003 and 2002:
2004 2003 2002 -------------------- --------------------- ----------------------- Price Price Price Shares Low-High Shares Low-High Shares Low-High ------ -------- ------ -------- ------ -------- Options outstanding at beginning of year 438,740 $3.32-6.12 383,740 $3.32-6.12 111,954 $3.94-6.51 Options granted 55,000 5.15-5.48 55,000 3.51-4.55 339,750 3.32 Options exercised (9,330) 3.32-5.95 - - - - Options terminated and expired (26,950) 3.32 - - (67,964) 5.53-6.51 ------- ------- ------- Options outstanding at end of year 457,460 $3.32-6.12 438,740 $3.32-6.12 383,740 $3.32-6.12 ======= =========== ======== ========== ======== ========== Options exercisable at end of year 364,760 $3.94-6.12 185,940 $3.94-6.12 40,990 $3.94-6.12 ======= =========== ======== ========== ======== ==========
The fair value of the options granted during 2004 was $112,000. The remaining weighted average contractual life of the options outstanding at December 31, 2004 was 7.4 years. During 2004, 4,529 shares of common stock were granted to employees under the 2004 Incentive Plan. The employee's right to receive these restricted shares vest serially over a three-year period. Compensation expense for the year ended December 31, 2004 includes an insignificant amount related to the issuance of these shares. During 2004, 600 shares of common stock were granted under the 2004 Incentive Plan to non-employees who are involved with managing the Company's real estate properties. The shares were valued at their fair value on the date of grant and had an insignificant impact on the Company's financial condition. At the time of his retirement on June 30, 2004, the former President of the Company had 300,000 stock options outstanding with a weighted average exercise price of $3.35 per share. As part of the three year consulting arrangement between the former President and the Company, the life of his stock options were extended for the length of his consulting arrangement. This arrangement has resulted in the Company valuing his stock options at $495,000, which is the difference between the intrinsic value of the stock options at their date of grant and the market value of the Company's common stock at June 30, 2004. This value has been recorded as an increase to capital in excess of par value and an increase to unearned compensation, both separate components of stockholders' equity. The unearned compensation amount is being amortized into general and administrative expense over the term of the three year consulting arrangement. At December 31, 2004, $431,000 was remaining to be amortized into general and administrative expense over the next 2 1/2 years and $82,000 had been recognized in expense in 2004. 7. INCOME TAXES The components of income before income taxes is as follows:
2004 2003 2002 ---- ---- ---- United States operations $ 2,662,000 $ 2,440,000 $ 1,366,000 Operations outside the United States 1,866,000 (2,770,000) 40,000 ----------- ----------- ----------- Total $ 4,528,000 $ (330,000) $ 1,406,000) =========== =========== ===========
49 Provision (benefit) for income taxes consist of the following:
2004 2003 2002 ---- ---- ---- Continuing Operations Federal Current $ (594,000) $ (788,000) $ (351,000) Deferred 189,000 681,000 304,000 ----------- ----------- ----------- (405,000) (107,000) (47,000) ----------- ----------- ----------- State Current 670,000 - - Deferred (486,000) - - ----------- ----------- ----------- 184,000 - - ----------- ----------- ----------- Total Continuing $ (221,000) $ (107,000) $ (47,000) =========== =========== =========== Discontinued Operations Real Estate Federal Current $ 2,275,000 $ 402,000 $ 221,000 Deferred (247,000) (41,000) (368,000) ----------- ----------- ----------- 2,028,000 361,000 (147,000) ----------- ----------- ----------- State Current 222,000 - - Deferred (176,000) - - ----------- ----------- ----------- 46,000 - - ----------- ----------- ----------- Total Real Estate $ 2,074,000 $ 361,000 $ (147,000) =========== =========== =========== Oil and Gas Federal Current $ 2,598,000 $ 68,000 $ 161,000 Deferred (3,488,000) (569,000) 326,000 ----------- ----------- ----------- (890,000) (501,000) 487,000 ----------- ----------- ----------- State Current 3,000 42,000 38,000 Deferred - - - ----------- ----------- ----------- 3,000 42,000 38,000 ----------- ----------- ----------- Foreign Current 4,044,000 635,000 (501,000) Deferred (3,120,000) (1,987,000) 500,000 ----------- ----------- ----------- 924,000 (1,352,000) (1,000) ----------- ----------- ----------- Total Oil & Gas 37,000 $(1,811,000) $ 524,000 =========== =========== =========== Total $ 1,890,000 $(1,557,000) $ 330,000 =========== =========== ===========
50 A reconciliation of the differences between the effective tax rate and the statutory U.S. income tax rate is as follows:
Amount % Amount % Amount % Federal income tax provision (benefit) at statutory rate $ 1,585,000 35.0% $(1,376,000) (35.0)% $ 478,000 34.0% State income tax net of Federal impact 152,000 3.3 27,000 0.7 25,000 1.8 Impact of foreign operations 271,000 6.0 408,000 10.4 (87,000) (6.2) Dividend exclusion (50,000) (1.1) (91,000) (2.3) (86,000) (6.1) Tax-exempt interest (68,000) (1.5) - - - - Liquidating dividend from foreign operations - - 2,075,000 52.8 - - Impairment tax benefit - - (2,600,000) (66.2) - - ----------- ---- ----------- ---- ----------- ---- Total tax expense (benefit) / Effective tax rate (benefit) $ 1,890,000 41.7% $(1,557,000) (39.6)% $ 330,000 23.5% =========== ==== =========== ==== =========== ====
Significant components of deferred tax liabilities as of December 31, 2004 and 2003 were as follows -
2004 2003 ---- ---- Tax over book depreciation, depletion and amortization - Oil and gas and real estate properties - U.S. $ 1,485,000 $ 5,837,000 Oil and gas properties - Canada 0 5,734,000 Deferred gains on sales of real estate properties - U.S. 370,000 412,000 U.S. tax on liquidating dividend from Canada 2,075,000 2,075,000 Reserve for impairment - oil and gas - (2,600,000) Unrealized gain on marketable securities 390,000 89,000 ------------ ------------ Net deferred tax liability 4,320,000 11,547,000 Deferred tax liability included in current (2,465,000) (10,489,000) ------------ ------------ Noncurrent deferred tax liability $ 1,855,000 $ 1,058,000 ============ ============
8. SEGMENT INFORMATION: SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," established standards for reporting financial information about operating segments in interim and annual financial reports and provides for a "management approach" in identifying the reportable segments. Wilshire has determined that it has two reportable segments within its continuing operations: residential properties and commercial properties. These reportable segments have different types of customers and are managed separately because each requires different operating strategies and management expertise. The residential property segment has seven separate properties and the commercial segment has five properties. The accounting policies of the segments are the same as those described in Note 1. 51 The chief operating decision-making group of Wilshire's residential and commercial real estate segments and corporate/other activities is comprised of Wilshire's Chairman & Chief Executive Officer, President & Chief Operating Officer and Chief Financial Officer. Wilshire assesses and measures segment operating results based on NOI, which is a direct measure of each property's contribution to the results of the Company before considering revenues from treasury activities, overhead expenses and other costs that are not directly related to the performance of a property. The Company believes NOI is a more descriptive measure of the Company's performance than income (loss) from continuing operations. NOI is not a measure of operating results or cash flow as measured by generally accepted accounting principles, and is not necessarily indicative of cash available to fund cash needs and should not be considered an alternative to cash flows as a measure of liquidity. Continuing real estate revenue, operating expenses, NOI and recurring capital improvements for the reportable segments are summarized below and reconciled to consolidated net income (loss) from continuing operations for each of the three years in the period ended December 31, 2004. Asset information is not reported since Wilshire does not use this measure to assess performance.
2004 2003 2002 ---- ---- ---- Real estate revenue: Residential $ 7,456,000 $ 7,313,000 $ 7,272,000 Commercial 2,250,000 1,944,000 1,871,000 ----------- ----------- ----------- Total $ 9,706,000 $ 9,257,000 $ 9,143,000 ----------- ----------- ----------- Real estate operating expenses: Residential $ 4,337,000 $ 4,405,000 $ 4,096,000 Commercial 1,162,000 1,048,000 1,164,000 ----------- ----------- ----------- Total $ 5,499,000 $ 5,453,000 $ 5,260,000 ----------- ----------- ----------- Net operating income: Residential $ 3,119,000 $ 2,908,000 $ 3,176,000 Commercial 1,088,000 896,000 707,000 ----------- ----------- ----------- Total $ 4,207,000 $ 3,804,000 $ 3,883,000 ----------- ----------- ----------- Capital improvements: Residential $ 1,369,000 $ 1,255,000 $ 678,000 Commercial 333,000 460,000 1,218,000 ----------- ----------- ----------- Total $ 1,702,000 $ 1,715,000 $ 1,896,000 ----------- ----------- ----------- Reconciliation of NOI to consolidated income (loss) from continuing operations: Segment NOI $ 4,207,000 $ 3,804,000 $ 3,883,000 Total other income, including net investment income 1,314,000 4,596,000 2,128,000 Depreciation expense (1,673,000) (1,647,000) (1,541,000) General and administrative expense (2,143,000) (2,349,000) (2,131,000) Interest expense (2,343,000) (3,408,000) (2,226,000) Income tax benefit 221,000 107,000 47,000 ----------- ----------- ----------- Income from continuing operations $ (417,000) $ 1,103,000 $ 160,000 =========== =========== ===========
9. PREFERRED STOCK The Company is authorized to issue up to 1,000,000 shares of preferred stock, par value $1.00 per share. At December 31, 2004 and 2003, there were no shares of preferred stock outstanding. The preferred stock may be issued in one or more series, from time to time, with each such series to have such designation, powers, preferences and relative participating, optional or other special rights, and qualifications, limitations or restriction thereof, as shall be stated and expressed in the resolution or resolutions providing for the issue of such series adopted by the Board of Directors of the Company, subject to the limitations prescribed by law and in accordance with the provisions set forth in the Certificate of Incorporation of the Company. 52 10. FAIR VALUE OF FINANCIAL INSTRUMENTS The following disclosures of estimated fair value were determined by management, using available market information and appropriate valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair values. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. Cash equivalents, accounts receivable, accounts payable, and revolving credit facilities balances reasonably approximate their fair values due to the short maturities of these items. The mortgage receivable is valued at $1.1 million, which equals the settlement price agreed to with the borrower in February 2005 and exceeds its carrying value by $662,000. Mortgage notes payable have an estimated fair value based on discounted cash flow models of approximately $46.0 million, which is lower than the carrying value by $0.9 million. Disclosure about fair value of financial instruments is based on pertinent information available to management as of December 31, 2004. Although management is not aware of any factors that would significantly affect the reasonable fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since that date and current estimates of fair value may differ significantly from the amounts presented herein. 11. SUBSEQUENT EVENTS In January 2005, the Company sold one 2-bedroom condominium at Galsworthy Arms, New Jersey, for gross proceeds of $269,500. After payment of closing costs and taxes, the Company will realize net income in the first quarter 2005 of approximately $115,000. In February 2005, the Company signed an agreement to sell its Biltmore Club apartment complex (Phoenix, Arizona) to GDG Partners L.L.C. for $20,956,000. The agreement is expected to close no later than December 23, 2005. GDG Partners L.L.C. has paid Wilshire a nonrefundable deposit of $100,000 and additional nonrefundable deposits of $150,000 and $250,000 are required by April 3, 2005 and July 2, 2005, respectively. We expect to report a gain on the sale after taxes of approximately $8.5 million and have net proceeds after transaction costs and paying off the mortgage of approximately $10.0 million. The Company held a mortgage receivable with a gross carrying value of $1,165,000 and $727,000 of unearned income as of December 31, 2004. Security for the mortgage was a first lien on in excess of 100 condominium units in two contiguous buildings located in Jersey City, New Jersey. On February 22, 2005, the Company entered into an agreement with the mortgagee to settle and satisfy the mortgage for $1,100,000, which was paid in the first quarter of 2005. At the conclusion of this transaction, the Company will recognize a gain of approximately $400,000 in the first quarter of 2005. In March 2005, the Company signed an agreement to sell its Twelve Oaks apartment complex (Atlanta, Georgia) to Interstate East Management, Inc. for $1,725,000. The agreement contains a "time is of the essence clause" and is expected to close as soon as practicable. We expect to report a gain on the sale after taxes of approximately $440,000. The property had been highly leveraged and the transaction will generate net proceeds after transaction costs and taxes of approximately $1,379,000, which will be used to repay the outstanding mortgage balance of approximately $1,609,000. The shortfall in the net proceeds will be made up from general corporate sources of funds. 53 Also in March 2005 the Company was evaluating alternatives for optimizing its investment in the Wilshire Grand Hotel and Banquet Facility (the "Wilshire Hotel"). The Company leases the Wilshire Hotel under two 25-year operating leases, one for the hotel and one for the banquet facility, to an experienced hotel operator (the "Hotel Operator"). The Hotel Operator has encountered financial adversity and in 2004 ceased payment on its mortgage obligations, which are held by a third party (the "Mortgagor"). As of March 2005, the Hotel Operator was also delinquent on lease payments to Wilshire for the months of January, February and March 2005. The Mortgagor is required to cure any defaults of the Hotel Operator (i.e., pay any amounts due Wilshire under the lease) in order to protect its mortgage and cannot impair Wilshire's ownership interest in the property. As a result of the Hotel Operator's delinquency, Wilshire is evaluating alternatives for its investment including: a) declaring the Hotel Operator in default and pursuing tenant eviction proceedings and b) assisting in the consummation of a settlement agreement by which Wilshire would assume operational control of the Wilshire Hotel and in the event of a subsequent sale of the hotel, would receive an agreed upon value prior to any proceeds being distributed to the Mortgagor or Hotel Operator. At this time, Wilshire does not expect to incur a loss on this property. 54 12. QUARTERLY DATA (UNAUDITED) The following represents the Company's results of operations for each quarter for the years ended December 31, 2004 and 2003. The amounts presents are different from amounts presented in the Company's quarterly reports on Form 10-Q due to the reclassification of certain amounts of revenue and expense to discontinued operations - real estate to reflect the designation of additional properties as discontinued.
Quarter ended ----------------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 2004: Revenues $ 2,429,000 $ 2,479,000 $ 2,445,000 $ 2,353,000 ----------- ----------- ----------- ----------- Costs and expenses: Operating expenses 1,388,000 1,332,000 1,416,000 1,363,000 Depreciation 427,000 398,000 398,000 450,000 General and administrative 329,000 543,000 752,000 519,000 ----------- ----------- ----------- ----------- Total costs and expenses 2,144,000 2,273,000 2,566,000 2,332,000 ----------- ----------- ----------- ----------- Income (loss) from operations 285,000 206,000 (121,000) 21,000 Dividend and interest income 194,000 46,000 192,000 253,000 Other income 53,000 185,000 206,000 185,000 Interest expense including amortization of deferred financing costs (616,000) (583,000) (579,000) (565,000) ----------- ----------- ----------- ----------- Income (loss) before provision for taxes (84,000) (146,000) (302,000) (106,000) Income taxes (53,000) (79,000) (115,000) 26,000 ----------- ----------- ----------- ----------- Income (loss) from continuing operations (31,000) (67,000) (187,000) (132,000) Discontinued operations - real estate 2,887,000 248,000 (1,000) 632,000 Discontinued operations - oil & gas (257,000) 842,000 (390,000) (906,000) ----------- ----------- ----------- ----------- Net income (loss) $ 2,599,000 $ 1,023,000 $ (578,000) $ (406,000) =========== =========== =========== =========== Basic earnings (loss) per share: Continuing operations $ - $(0.01) $(0.02) $(0.02) Discontinued operations 0.34 0.14 - (0.04) ----- ----- ------ ------ Net income (loss) $0.34 $0.13 $(0.02) $(0.06) ===== ===== ====== ====== Diluted earnings (loss) per share: Continuing operations $ - $(0.01) $(0.02) $(0.02) Discontinued operations 0.34 0.14 - (0.04) ----- ----- ------ ------ Net income (loss) $0.34 $0.13 $(0.02) $(0.06) ===== ===== ====== ======
55
Quarter Ending ----------------------------------------------------------------- March 31 June 30 September 30 December 31 -------- ------- ------------ ----------- 2003: Revenues $ 2,268,000 $ 2,286,000 $ 2,336,000 $ 2,367,000 ----------- ----------- ----------- ----------- Costs and expenses: Operating expenses 1,313,000 1,327,000 1,419,000 1,394,000 Depreciation 418,000 415,000 415,000 399,000 General and administrative 444,000 537,000 427,000 941,000 ----------- ----------- ----------- ----------- Total costs and expenses 2,175,000 2,279,000 2,261,000 2,734,000 ----------- ----------- ----------- ----------- Income (loss) from operations 93,000 7,000 75,000 (367,000) Dividend and interest income 224,000 145,000 176,000 198,000 Sale of marketable securities 261,000 - 2,360,000 - Life insurance proceeds 1,000,000 - - - Other income 126,000 127,000 (6,000) (15,000) Interest expense including amortization of deferred financing costs (1,270,000) (694,000) (769,000) (675,000) ----------- ----------- ----------- ----------- Income (loss) before provision for taxes 434,000 (415,000) 1,836,000 (859,000) Income taxes (185,000) (181,000) 580,000 (321,000) ----------- ----------- ----------- ----------- Income (loss) from continuing operations 619,000 (234,000) 1,256,000 (538,000) Discontinued operations - real estate (252,000) 43,000 452,000 459,000 Discontinued operations - oil & gas 646,000 457,000 39,000 (4,320,000) ----------- ----------- ----------- ----------- Net income (loss) $ 1,013,000 $ 266,000 $ 1,747,000 $(4,399,000) =========== =========== =========== =========== Basic earnings (loss) per share: Continuing operations $0.08 $(0.03) $0.16 $(0.07) Discontinued operations 0.05 0.06 0.06 (0.49) ----- ------ ----- ------ Net income (loss) $0.13 $0.03 $0.22 $(0.56) ===== ===== ===== ====== Diluted earnings (loss) per share: Continuing operations $0.08 $(0.03) $0.16 $(0.07) Discontinued operations 0.05 0.06 0.06 (0.49) ----- ------ ----- ------ Net income (loss) $0.13 $0.03 $0.22 $(0.56) ===== ===== ===== ======
56 SCHEDULE XI - REAL ESTATE AND ACCUMULATED DEPRECIATION DECEMBER 31, 2004 ($ IN 000S)
Column E Column D Gross Amount Costs Capitalized At Which Column C Subsequent To Carried as of Column A Column B Initial Cost Acquisition December 31, 2004 - -------- -------- ------------ ----------- ----------------- Building & Building & Building & Description Encumbrances Land Improvements Land Improvements Land Improvements Total - ----------- ------------ ---- ------------ ---- ------------ ---- ------------ ----- Arizona 378 unit $9,103 $600 $4,050 $-0- $3,125 $600 $7,175 $7,775 garden apartment complex 340 unit $10,473 $800 $5,600 $-0- $2,888 $800 $8,488 $9,288 garden apartment complex 53,000 square $3,887 $313 $2,384 $-0- $1,702 $313 $4,086 $4,399 foot office building Texas 228 unit $4,307 $620 $3,015 $-0- $2,721 $620 $5,736 $6,356 apartment complex 180 unit $4,121 $805 $4,450 $-0- $658 $805 $5,108 $5,913 apartment complex New Jersey 45 unit $1,544 $517 $1,533 $-0- $622 $517 $2,155 $2,672 condominium complex 132 unit $4,894 $480 $3,541 $-0- $566 $480 $4,107 $4,587 apartment complex Hotel & banquet facility $3,421 $3,057 $1,031 $-0- $1,298 $3,057 $2,329 $5,386 Other residential $4,065 $470 $3,365 $-0- $1,545 $470 $4,910 $5,380 Other office/retail $1,040 $654 $2,610 $-0- $2,372 $654 $5,001 $5,655 Land held for development $-0- $1,526 $-0- $-0- $-0- $1,526 $-0- $1,526 $46,855 $9,842 $31,579 $-0- $17,497 $9,842 $49,095 $58,937 ======= ====== ======= ==== ======= ====== ======= ======= Column A Column F Column H Column I - -------- -------- -------- -------- Life on Which Accumulated Date Depreciation Description Depreciation Acquired is Computed - ----------- ------------ -------- ----------- Arizona 378 unit $2,931 1992 Various garden apartment complex 340 unit $3,636 1992 Various garden apartment complex 53,000 square $1,851 1992 Various foot office building Texas 228 unit $2,382 1992 Various apartment complex 180 unit $585 2001 Various apartment complex New Jersey 45 unit $565 1993 Various condominium complex 132 unit $1,122 1997 Various apartment complex Hotel & $497 1997 Various banquet facility Other $1,514 Various Various residential Other $1,817 Various Various office/retail Land held for $-0- Various Various development $16,900 =======
57 The changes in real estate for the three years ended December 31, 2004, are as follows:
2004 2003 2002 ---- ---- ---- ($ in 000s) Balance at beginning of year $72,069 $71,355 $69,161 Property acquisitions - - - Improvements 2,251 2,415 2,679 Retirements/disposals (15,383) (1,701) (485) ------- ------ ---- Balance at end of year $58,937 $72,069 $71,355 ======= ======= =======
The aggregate cost of land, buildings and improvements, before depreciation, for Federal income tax purposes at December 31, 2004 was approximately $58,012. The changes in accumulated depreciation, exclusive of amounts relating to equipment, autos, and furniture and fixtures, for the three years ended December 31, 2004, are as follows:
2004 2003 2002 ---- ---- ---- ($ in 000s) Balance at beginning of year $17,731 $15,504 $13,108 Depreciation for year 1,928 2,547 2,410 Retirements/disposals (2,759) (320) (14) ------- ------- ------- Balance at end of year $16,900 $17,731 $15,504 ======= ======= =======
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Ernst & Young LLP ("E&Y") informed the Company and its Audit Committee that it would decline to stand for re-election as the Company's Independent Registered Public Accounting Firm for the fiscal year ending December 31, 2004 due to the economics of the engagement. E&Y's reports on the Company's consolidated financial statements for each of the years ended December 31, 2003 and 2002 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2003 and 2002 and through July 5, 2004, the date that J.H. Cohn LLP was appointed as the Company's new Independent Registered Public Accounting Firm for the fiscal year ended December 31, 2004, there were no disagreements with E&Y on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which if not resolved to E&Y's satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company's consolidated financial statements for such years. There were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K, except that a material weakness in internal controls was identified in connection with the Company's 2003 audit relating to its oil and gas business, which was addressed prior to finalizing the year end audit and had no effect on any previously filed financial statements. The oil and gas business has now been sold. The Company has provided E&Y with a copy of the foregoing statements. Attached as Exhibits 16.1 and 16.2 is a copy of E&Y's letters dated June 25, 2004 and July 19, 2004, stating its agreement with such statements. 58 ITEM 9A. CONTROLS AND PROCEDURES Disclosure controls and procedures. As of the end of the period covered by this report, we carried out an evaluation of the effectiveness of the design and operation of Wilshire's disclosure controls and procedures. This evaluation was carried out under the supervision and with participation of Wilshire's management, including Wilshire's Chairman and Chief Executive Officer and Chief Financial Officer, who concluded that the Company's disclosure controls and procedures are effective. There have been no significant changes in Wilshire's internal controls subsequent to the date we carried out our evaluation. Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in Wilshire's reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in Wilshire's reports filed under the Exchange Act is accumulated and communicated to management, including Wilshire's Chief Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. During the quarter there was a material weakness in our recording of a transaction involving equity compensation for one former employee, which was brought to our attention by our independent registered public accounting firm and was corrected prior to the finalization of our consolidated financial statements. Management believes it has taken the necessary actions to ensure the appropriate accounting treatment for this type of transaction if it occurs in the future. ITEM 9B. OTHER INFORMATION None 59 PART III Certain information required by Part III is incorporated by reference to Wilshire's 2005 definitive proxy statement (the "Proxy Statement") to be filed with the Securities and Exchange Commission no later than 120 days after the end of Wilshire's fiscal year covered by this Annual Report. Only those sections of the Proxy Statement that specifically address the items set forth in this Annual Report are incorporated by reference from the Proxy Statement into this Annual Report. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information concerning Wilshire's Board of Directors required by this item is incorporated herein by reference to the sections titled "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act" in Wilshire's Proxy Statement for its Annual Meeting to be held in June 2005. The information concerning Wilshire's executive officers required by this item is included in Item 4A of this Annual Report on Form 10-K. The Company has adopted a Code of Conduct for its officers and employees. A copy of the Code of Conduct is available on the Company's website (http://www.wilshireenterprisesinc.com) under the caption "Corporate Policies." ITEM 11. EXECUTIVE COMPENSATION The information pertaining to executive compensation required by this item is incorporated herein by reference to the section titled "Election of Directors - Executive Compensation" in Wilshire's Proxy Statement for its Annual Meeting to be held in June 2005. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 403 of Regulation S-K to be included as part of this item is incorporated herein by reference to the section titled "Voting Securities and Principal Holders Thereof" and "Election of Directors" in Wilshire's Proxy Statement for its Annual Meeting to be held in June 2005. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference to the section titled "Compensation Committee Interlocks and Insider Participation; Other Transactions" in Wilshire's Proxy Statement for its Annual Meeting to be held in June 2005. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES The information required in response to this item is incorporated by reference to the information contained in Wilshire's Proxy Statement for its Annual Meeting to be held in June 2005 under the caption "Audit Fees and Related Matters." 60 PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES (a) Financial Statements (i) Reports of Independent Registered Public Accounting Firm (ii) Consolidated Balance Sheets as of December 31, 2004 and 2003 (iii) Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002 (iv) Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2004, 2003 and 2002 (v) Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002 (vi) Notes to Consolidated Financial Statements Financial Statement Schedules: (i) Real Estate and Accumulated Depreciation December 31, 2004 (b) Exhibits EXHIBIT # DESCRIPTION - --------- ----------- 3.1 Restated Certificate of Incorporation of Wilshire Enterprises, Inc., as amended. (Incorporated by reference to Exhibit 3.1 of Item 14 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992.) 3.2 Amended By-Laws, as of June 11, 1998, of Wilshire Enterprises, Inc. (Incorporated by reference to Exhibit 3 of the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.) 4.1 Stockholder Protection Rights Agreement, dated as of June 21, 1996, between Wilshire Enterprises, Inc. and Continental Stock Transfer & Trust Company, as Rights Agent. (Incorporated by reference to Exhibit 1 to the Company's Current Report on Form 8-K dated June 21, 1996.) 4.2 Reference is made to Exhibits 10.7 through 10.27. 4.3 The Company agrees to furnish the Commission upon request any agreements with respect to long-term debt not referenced herein. 10.1 General Assignments and Assignments of Leases dated March 31, 1992 with respect to the purchase of income producing real estate properties. (Incorporated by reference to Exhibit 1 and 2 of Form 8 dated December 9, 1992 filed with the Commission.) 10.2 General Assignments, Assignments of Leases, and Escrow Agreements and Early Possession Agreements with respect to the purchase of four income producing real estate properties. (Incorporated by reference to Exhibits 1(a) through 4(c) on the Company's Form 8-K dated December 31, 1992 filed with the Commission.) 10.3 Wilshire Enterprises, Inc. 1995 Stock Option and Incentive Plan. (Incorporated by reference to Exhibit A of the Registrant's Definitive Proxy Statement for its 1995 Annual Meeting of Stockholders.) 10.4 Wilshire enterprises, Inc. 1995 Non-Employee Director Stock Option Plan. (Incorporated by reference to Exhibit B of the Registrant's Definitive Proxy Statement for its 1995 Annual Meeting of Stockholders.) 61 10.5 Wilshire Enterprises, Inc. 2004 Stock Option and Incentive Plan. (Incorporated by reference to Appendix C of the Registrant's Definitive Proxy Statement for its 2004 Annual Meeting of Stockholders.) 10.6 Wilshire Enterprises, Inc. 2004 Non-Employee Director Stock Option Plan. (Incorporated by reference to Appendix D of the Registrant's Definitive Proxy Statement for its 2004 Annual Meeting of Stockholders.) 10.7 Environmental Indemnity Agreement between Biltmore Club Apartments, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.8 Promissory Note given by Biltmore club Apartments, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.9 Indemnity and Guaranty Agreement between Biltmore Club Apartments, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.10 Multifamily Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing between Biltmore club Apartments, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.11 Promissory Note given by Alpine Village Apartments, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 28, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.12 Environmental Indemnity Agreement between Alpine Village Apartments, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 28, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.13 Indemnity and Guaranty Agreement between Alpine Village Apartments, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 28, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.14 Multifamily Mortgage, Security Agreement, Assignment of Rents and Fixture Filing between Alpine Village Apartments, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 28, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 62 10.15 Promissory Note given by Sunrise Ridge, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.16 Environmental Indemnity Agreement between Sunrise Ridge, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.17 Indemnity and Guaranty Agreement between Sunrise Ridge, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.18 Multifamily Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing between Sunrise Ridge, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.19 Promissory Note given by Van Buren, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.20 Environmental Indemnity Agreement between Van Buren, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.21 Indemnity and Guaranty Agreement between Van Buren, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.22 Multifamily Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing between Van Buren, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.23 Promissory Note given by Wellington Apartments, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.24 Environmental Indemnity Agreement between Wellington Apartments, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.25 Indemnity and Guaranty Agreement between Wellington Apartments, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 63 10.26 Multifamily Deed of Trust, Security Agreement, Assignment of Rents and Fixture Filing between Wellington Apartments, L.L.C., a subsidiary of Wilshire Enterprises, Inc., and Merrill Lynch Mortgage Lending, Inc. dated February 27, 2003. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2002.) 10.27 The Company agrees to furnish to the Commission upon request any other agreements with respect to long term debt. 10.28 Agreement dated March 17, 2004 between Wilshire Enterprises, Inc. and Crow Creek Energy L.L.C. to sell the U.S. Oil and Gas business. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2003.) 10.29 Contract of sale dated January 23, 2004 between Wilshire Enterprises, Inc. and Economic Properties 2004 L.L.C. for the sale of eleven properties in Jersey City, New Jersey. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2003.) 10.30 Employment agreement between the Company and Philip Kupperman dated as of July 1, 2002. (Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K dated September 4, 2002.) 10.31 Severance Letter Agreement between the Company and Sherry Wilzig Izak dated as of March 29, 2004. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2003.) 10.32 Employment agreement between the Company and Daniel C. Pryor dated as of April 24, 2004. 10.33 Employment letter between the Company and Seth H. Ugelow dated as of June 1, 2004. 10.34 Purchase agreement and escrow instructions between Biltmore Club Apartments, L.L.C. (a subsidiary of Wilshire Enterprises, Inc.) and GDG Partners L.L.C. dated February 2, 2005. 10.35 Purchase agreement between Wilshire Enterprises, Inc. and Interstate East Management, Inc. dated March 23, 2005. 16.1 Letter from E&Y to the Securities and Exchange Commission dated June 25, 2004. (Incorporated by reference to Exhibit 16.1 to the Company's Current Report on Form 8-K dated May 14, 2004.) 16.2 Letter from E&Y to the Securities and Exchange Commission dated July 19, 2004. (Incorporated by reference to Exhibit 16.1 to the Company's Current Report on Form 8-K dated July 19, 2004.) 21 List of significant subsidiaries of the Registrant. (Incorporated by reference to the similarly numbered exhibit to the Company's Annual Report on Form 10-K for the year ended December 31, 2003.) 23.1 Consent of J.H. Cohn LLP, Independent Registered Public Accounting Firm. 23.2 Consent of Ernst & Young, LLP, Independent Registered Public Accounting Firm. 24 Power of attorney. 64 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 65 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WILSHIRE ENTERPRISES, INC. (Registrant) Date: March 31, 2005 /s/ S. Wilzig Izak -------------- --------------------------------------------- By: S. Wilzig Izak Chairman of the Board and Chief Executive Officer /s/ Seth H. Ugelow ------------------ By: Seth H. Ugelow Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. DIRECTORS: By: * Date: March 31, 2005 -------------------------------------- Miles Berger By: * Date: March 31, 2005 --------------------------------------- Milton Donnenberg By: /s/ S. Wilzig Izak Date: March 31, 2005 -------------------------------------- S. Wilzig Izak By: * Date: March 31, 2005 -------------------------------------- Eric J. Schmertz, Esq. By: * Date: March 31, 2005 -------------------------------------- Ernest Wachtel By: * Date: March 31, 2005 -------------------------------------- Martin Willschick OFFICERS: By: /s/ S. Wilzig Izak Date: March 31, 2005 -------------------------------------- S. Wilzig Izak Chairman of the Board and Chief Executive Officer By: /s/ Daniel C. Pryor Date: March 31, 2005 -------------------------------------- Daniel C. Pryor President and Chief Operating Officer By: /s/ Seth H. Ugelow Date: March 31. 2005 -------------------------------------- Seth H. Ugelow Chief Financial Officer
* Signed under power of attorney dated March 30, 2005 and filed herewith as Exhibit 24. 66 EXHIBIT INDEX EXHIBIT # DESCRIPTION - --------- ----------- 10.32 Employment agreement between the Company and Daniel C. Pryor dated as of April 24, 2004. 10.33 Employment letter between the Company and Seth H. Ugelow dated as of June 1, 2004. 10.34 Purchase agreement and escrow instructions between Biltmore Club Apartments, L.L.C. (a subsidiary of Wilshire Enterprises, Inc.) and GDG Partners L.L.C. dated February 2, 2005. 10.35 Purchase agreement between Wilshire Enterprises, Inc. and Interstate East Management, Inc. dated March 23, 2005. 16.1 Letter from E&Y to the Securities and Exchange Commission dated June 25, 2004. (Incorporated by reference to Exhibit 16.1 to the Company's Current Report on Form 8-K dated May 14, 2004.) 16.2 Letter from E&Y to the Securities and Exchange Commission dated July 19, 2004. (Incorporated by reference to Exhibit 16.1 to the Company's Current Report on Form 8-K dated July 19, 2004.) 23.1 Consent of J.H. Cohn LLP, Independent Registered Public Accounting Firm. 23.2 Consent of Ernst & Young, LLP, Independent Registered Public Accounting Firm. 24 Power of attorney. 31.1 Certification of the Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 67 EX-10.32 2 b405718ex10_32.txt EMPLOYMENT AGREEMENT EXHIBIT 10.32 EMPLOYMENT AGREEMENT BETWEEN THE COMPANY AND DANIEL C. PRYOR THIS EMPLOYMENT AGREEMENT ("Agreement"), is made as of April 24, 2004 by and BETWEEN Wilshire Enterprises, Inc., a Delaware corporation with an office located at 921 Bergen Avenue, Jersey City, New Jersey (the "Company"), AND Daniel C. Pryor, residing in Mercer County, New Jersey ("Employee"), W I T N E S S E T H T H A T: WHEREAS, the Company is engaged in the business of conducting real estate investment operations; and WHEREAS, it is a condition of Employee's employment hereunder that Employee agree to be bound by the noncompetition, nonsolicitation and confidentiality provisions hereof; and WHEREAS, it is a condition of Employee's acceptance of employment hereunder that Employer agree to be bound by the terms hereof, including those relating to indemnification and severance payment upon certain terminations of employment; WHEREAS, the Company desires to employ Employee, and Employee desires to be employed by the Company, on the terms and conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the premises and the mutual covenants hereinafter set forth, the parties agree as follows: 1. EMPLOYMENT. The Company hereby employs Employee, and Employee accepts employment by the Company, on the terms and conditions herein set forth. 2. TERM AND TERMINATION. 2.1 TERM AND VESTING. (a) The term of Employee's employment under this Agreement shall be for a period commencing on the date hereof and ending on June 30, 2006 (the "Expiration Date"), subject to earlier termination as provided herein and subject to extension for one additional year as provided herein. In the event that neither party notifies the other party on or before June 30, 2005 that such party does not intend to extend the term of this Agreement beyond June 30, 2006, then the term of this Agreement shall be extended to June 30, 2007 and, in that event, the phrase "Expiration Date" shall mean June 30, 2007. The period from the date hereof until the Expiration Date is referred to herein as the "Term". (b) In the event that the Company elects not to extend or renew this Agreement beyond the Expiration Date, then all of Employee's Options that have not yet vested shall fully vest as of the Expiration Date. For purposes of this Agreement, the term "Options" shall mean any stock options granted to the Employee pursuant to any benefit plan adopted by the Company, and any stock options otherwise granted to the Employee by the Company. Additionally, "Options" shall also include any other equity based compensation granted to the Employee by the Company including, but not limited to, stock appreciation rights and restricted stock awards. 1 2.2 TERMINATION FOR CAUSE. The Company may terminate Employee's employment prior to the Expiration Date for Cause (as defined below), with such notice as is specified below. For this purpose, "Cause" means (i) the commission by Employee of any material act of dishonesty with respect to the Company, or the commission by Employee of any act of moral turpitude, in either case which could, in the judgment of the Board of Directors of the Company, adversely and materially affect the Company, or its businesses or assets (ii) the conviction of any crime of theft or dishonesty, or any felony, (iii) a determination by a court that the Employee has willfully violated any law in the course of performing his duties hereunder (excluding misdemeanors), the effect of which could, in the judgment of the Board of Directors, adversely and materially affect the Company or its businesses or assets, (iv) a determination by a regulatory body with oversight over the Company that the Employee willfully violated a material regulatory obligation of the Company, the effect of which could, in the judgment of the Board of Directors of the Company, adversely and materially affect the Company or its businesses or assets, and which violation was within the reasonable control of the Employee, (v) a material breach of any of the provisions of Sections 6 (confidentiality), 7 (noncompetition), 8 (nonsolicitation) and 9 (records and other material), or (vi) Employee's habitual gross negligence or willful misconduct in the performance of his duties or Employee's failure to perform in any material respect any material policy of the Company (provided, however, that with respect to items v and vi above, Employee is given written notice of such breach, failure or violation and fails to cure such breach, failure or violation within thirty (30) calendar days after his receipt of such notice, and provided further, that if Employee is diligently pursuing a cure at the expiration of such 30-day period, then he shall have an additional ten (10) days in which to effect the cure). 2.3 TERMINATION UPON DEATH OR DISABILITY. Employee's employment pursuant to this Agreement shall automatically terminate in the event of, and on the date of, Employee's death. In the event that Employee is unable to perform his duties under this Agreement due to illness, physical or mental incapacity or disability and fails to perform such duties for periods aggregating ninety (90) days, whether or not continuous, in any continuous period of three hundred sixty (360) days ("Disability"), the Company has the right, subject to applicable law, to terminate Employee's employment upon at least thirty (30) days prior written notice. 2.4 VOLUNTARY TERMINATION. The Employee may terminate this Agreement without Good Reason (as defined herein), provided that the Employee provides the Company with not less than sixty (60) days prior written notice of such termination. 2.5 TERMINATION WITHOUT CAUSE. The Company may terminate Employee's employment prior to the Expiration Date without Cause at and for the Company's sole convenience and in its sole discretion upon not less than 30 days' prior written notice; provided, however, that in the event that Employee notifies the Company prior to the end of such 30 day period that he has elected to exercise his right to terminate this Agreement pursuant to Section 2.7 (assuming such right then exists), then the provisions of this Section 2.5 shall be inapplicable and the provisions of Section 2.7 shall govern such termination. In the event of a termination pursuant to this Section 2.5, the Company shall pay Employee his salary in accordance with the terms of this Agreement from the date of such termination until the Expiration Date. The Company also shall waive the premium cost of COBRA coverage until the Expiration Date should Employee elect rider coverage, provided, however, that in no event shall the COBRA coverage period exceed eighteen (18) months. All of Employee's Options that have not yet vested shall fully vest as of the date of such termination. As a condition to the continuation of payments and benefits hereunder and acceleration of vesting of Employee's Options, Employee shall execute and deliver (a) an effective general release and agreement not to sue in a form reasonably acceptable to the Company pursuant to which Employee agrees, among other things, (i) to release all claims against the Company and certain related parties (excluding claims for any severance benefits payable hereunder), (ii) not to maintain any action, suit, claim or proceeding against the Company and certain related parties and (iii) to be bound by certain confidentiality and non-disparagement covenants specified therein, and (b) Employee's resignation from all positions which Employee then holds with the Company. 2 2.6 TERMINATION WITH GOOD REASON. The Employee may terminate his employment prior to the Expiration Date for Good Reason (as hereinafter defined) upon not less than 30 days' prior written notice advising the Company that the Employee is effecting a termination pursuant to this Section 2.6. In such event, the Company shall pay Employee his salary in accordance with the terms of this Agreement from the date of such termination until the Expiration Date. The Company also shall waive the premium cost of COBRA coverage until the Expiration Date should Employee elect rider coverage, provided, however, that in no event shall the COBRA coverage period exceed eighteen (18) months. All of Employee's Options that have not yet vested shall fully vest as of the date of such termination. As a condition to the continuation of payments and benefits hereunder and acceleration of vesting of Employee's Options, Employee shall execute and deliver (a) an effective general release and agreement not to sue in a form reasonably acceptable to the Company pursuant to which Employee agrees, among other things, (i) to release all claims against the Company and certain related parties (excluding claims for any severance benefits payable hereunder), (ii) not to maintain any action, suit, claim or proceeding against the Company and certain related parties and (iii) to be bound by certain confidentiality and non-disparagement covenants specified therein, and (b) Employee's resignation from all positions which Employee then holds with the Company. For purposes of this Agreement, the term "Good Reason" shall mean (x) a determination by the Company to move its corporate headquarters to a location that is outside of New Jersey and outside of the New York City metropolitan area or (y) a material breach by the Company of any of its agreements hereunder (provided, however, that with respect to item (y) above, the Company is given written notice of such breach and fails to cure such breach within thirty (30) calendar days after its receipt of such notice, and provided further, that if the Company is diligently pursuing a cure at the expiration of such 30-day period, then it shall have an additional ten (10) days in which to effect the cure). The Company shall not be deemed to have breached this Agreement in the event that the Company requires the Employee to perform responsibilities other than the responsibilities described herein, provided that such responsibilities are consistent with Employee's role as an executive officer of the Company. 2.7 TERMINATION UPON A CHANGE IN CONTROL. The Employee may terminate his employment if, prior to the Expiration Date, a Change in Control (as hereinafter defined) is consummated, provided that the Employees notifies the Company within 60 days after the consummation of such Change in Control that he intends to terminate this Agreement pursuant to this Section 2.7, such termination to take effect 15 days after such notice is delivered. In such event, the Company shall pay Employee, simultaneously with such termination and in lieu of any other payment hereunder (with respect to the period subsequent to the date of termination), a lump sum equal to the lesser of (x) 200% of the Employee's then current annual salary and (y) the maximum amount which the Company is entitled to pay to the Employee without there being an "excess parachute payment" to the Employee within the meaning of Section 280G(b)(1) of the Internal Revenue Code, as amended. All of Employee's Options that have not yet vested shall fully vest as of the date of such termination. For purposes of this Agreement, a "Change in Control" shall mean the occurrence of any of the following events with respect to the Company: (a) the acquisition of the beneficial ownership, as defined under the Securities Exchange Act of 1934, of 50% or more of the Company's voting securities or all or substantially all of the assets of the Company by a single person or entity or group of affiliate persons or entities (other than an employee benefit plan or trust maintained for the benefit of the Company's employees); (b) the merger, consolidation or combination of the Company with an unaffiliated corporation unless, immediately after such transaction, the stockholders of the Company immediately prior to such transaction continue to own more than 50% of the outstanding voting securities of the Company or any entity that controls the Company; or 3 (c) during any period of two consecutive calendar years, individuals who at the beginning of such period constitute the Board of Directors of the Company ("Beginning Directors") cease for any reason to constitute at least two-thirds thereof, unless the election or nomination for the election by the Company's stockholders of each new director was approved by a vote of at least two-thirds of the Beginning Directors who remain in office at the time such new director is so elected (any such director who is elected by such vote being thereafter included within the definition of the term "Beginning Director"); or (d) the transfer of all or substantially all of the Company's real estate assets. 2.8 PAYMENTS UPON TERMINATION. Upon termination of the employment of Employee with the Company for any reason or no reason (including non-renewal at the end of the term), the Company shall pay to Employee Employee's unpaid salary up to and including the date of termination and any unpaid reimbursement of expenses outstanding as of the date of termination. Except as otherwise provided in Sections 2.5, 2.6 and 2.7, to the extent applicable, any benefits to which Employee or his beneficiaries may be entitled under the benefit plans and programs provided pursuant to Section 4.5 as of the date of termination will be determined in accordance with the terms of such plans and programs, and in accordance with federal and applicable state laws. Except as provided in this Section 2.8, and to the extent applicable, Sections 2.5, 2.6 and 2.7, the Company shall have no further liability to Employee or Employee's heirs, beneficiaries or estate for compensation, benefits, severance or similar obligations arising out of the employment relationship. 3. POSITION AND DUTIES. Employee shall serve full-time initially as the Vice President-Business Development of the Company and subsequent to June 30, 2004 as President, Chief Financial Officer and Chief Operating Officer of the Company and will have such powers and duties as are commensurate with such positions and as may be conferred upon him from time to time by the Chief Executive Officer and the Board of Directors of the Company. Employee shall report to the Chief Executive Officer and the Board of Directors of the Company. During Employee's employment with the Company under this Agreement, Employee shall devote his entire business time, attention and energies to the business of the Company, shall perform his duties honestly, diligently, competently, in good faith and in what Employee reasonably believes to be in the best interests of the Company and shall not undertake any other employment or business association which requires the rendering of personal services, except that Employee may serve on the boards of charitable nonprofit organizations and, with the prior written consent of the Board of Directors of the Company, on the boards of other organizations, provided, however that in either case, such service does not interfere with his duties hereunder. Employee's employment under this Agreement is subject to the Company's employment policies, procedures and practices generally applicable to executive officers which are not contrary to the express provisions of this Agreement. 4. COMPENSATION AND BENEFITS. 4.1 SALARY. For all services rendered by Employee under this Agreement, the Company will pay to Employee a fixed base salary at the rate of Two Hundred Fifty Thousand Dollars ($250,000) on an annualized basis, payable in accordance with the customary payroll practices of the Company, as they may be in effect from time to time, but in any event not less frequently than once per month. 4.2 BONUS. Employee shall be entitled to receive such bonuses as shall be determined from time to time by the Board of Directors of the Company (or any committee thereof) in its discretion.. 4 4.3 STOCK OPTIONS. Employee shall be entitled to participate in any stock option plan or stock incentive plan, or other equity based benefit maintained by the Company for the benefit of its senior executives or its employees generally; provided, however, that the grant of any Options or other benefit shall be in the discretion of the committee or committees administering such plans. 4.4 WITHHOLDING. Payments of compensation pursuant to this Agreement are subject to applicable payroll withholding requirements. 4.5 BENEFITS. Employee is entitled to participate in any health, insurance, disability and other benefit plans that the Company from time to time maintains generally for the benefit of its senior executives, subject to eligibility requirements and other terms and provisions of such plans. Any or all of the benefit policies or plans may be modified, amended or terminated by the Company at any time and from time to time in its discretion. The amount of employer/employee contributions is also subject to change in the Company's discretion. 4.6 AUTOMOBILE ALLOWANCE. The Company shall provide Employee with an automobile allowance of $1,000 per month during the term of this Agreement. 4.7 VACATION AND HOLIDAYS. Employee is entitled to paid vacation and holidays in accordance with the Company's policies for senior executives, as they may exist from time to time; provided, however, that in any event, Employee shall be entitled to four weeks paid vacation per year (to be taken at mutually agreeable times and for no more than two weeks at a time), in addition to any other paid holidays which are customarily observed by the Company. 5. EXPENSES. The Company will pay or reimburse Employee for all reasonable travel or other business expenses that Employee incurs in performing his duties and obligations to the Company, subject to the Company's policies and procedures from time to time in effect and to presentation of appropriate vouchers in accordance with such policies and procedures. 6. CONFIDENTIALITY. 6.1 While employed by the Company, acting as a consultant to the Company or otherwise acting in another capacity for the Company, Employee has and may necessarily acquire knowledge of Confidential Information (defined below). At all times, both during the term of Employee's employment or other affiliation and thereafter for a period of three (3) years (the "Covered Period"), Employee will keep all Confidential Information in strictest confidence and trust. Employee hereby acknowledges and agrees that the Company has expended, and will continue to expend, considerable time, effort and expense to develop trade secrets and other Confidential Information and that the Company's Confidential Information is unique and constitutes valuable property of the Company. Employee further acknowledges and agrees that at all times the Confidential Information is owned by the Company (or disclosed to the Company by third parties) with an expectation of confidentiality and that Employee does not have any ownership or other proprietary interest in or to the Confidential Information, notwithstanding that it is necessary for the Company to disclose some or all of the Confidential Information to Employee in confidence in order for Employee to perform his duties for the Company. 6.2 With respect to Confidential Information, Employee agrees that during the Covered Period: (a) Employee will use Confidential Information only in the performance of his duties for the Company, and Employee will not use it at any time (during or after employment or other affiliation with the Company) for personal benefit, for the benefit of any other person or entity, or in any manner adverse to the interests of the Company; and 5 (b) Employee will not disclose any Confidential Information at any time (during or after employment or other affiliation with the Company) except to authorized personnel of the Company unless (i) such action is consistent with the performance of Employee's duties hereunder, (ii) the Chief Executive Officer, the General Counsel or the Board of Directors of the Company authorizes such disclosure in advance in writing or (iii) the information becomes generally of public knowledge through no act or omission of Employee. For purposes hereof, "Confidential Information" means all trade secrets and all other confidential non-public or proprietary information, data, "know-how" or technology with respect to the business of the Company or any of its affiliates or any of the activities, services, products, customers, suppliers, objectives or strategies of the Company or any of its affiliates, including without limitation information and materials relating to the financial condition, operations or performance of the Company or any of its affiliates and appraisals relating to the Company's existing properties and prospective properties. 6.3 The provisions of this Section 6 shall not apply to information (i) that has been or hereafter is generally known in the Company's industry or is or becomes otherwise in the public domain through no fault of Employee, (ii) that was known to Employee prior to his consulting engagement or employment with the Company and prior to the engagement by the Company of any employer of the Employee and which he is under no obligation to keep confidential, (iii) that has become available on a non-confidential basis from a source other than the Company or any of its affiliates or representatives which Employee reasonably believes is entitled to disclose it, or (iv) the disclosure of which is required by law or pursuant to court order or determined by Employee in good faith to be necessary or appropriate to comply with any legal, administrative or regulatory order, regulation, governmental investigation or requirement. 7. COVENANT NOT TO COMPETE. During the period (the "Restricted Period") commencing on the date hereof and terminating on the date that is two (2) years after the date of termination of Employee's employment under this Agreement for any reason or no reason (including non-renewal at the end of the term), Employee agrees that he will not, unless he obtains the prior written consent of the Chief Executive Officer or the Board of Directors of the Company, engage in or carry on, directly or indirectly, with or without compensation, the business of investing in, owning, leasing or licensing any real property which the Company or any subsidiary invested in, owned, leased or licensed or evaluated (with Employee's knowledge) for purposes of investing, owning, leasing or licensing during the period commencing on the date hereof and ending on the date of the termination of Employee's employment under this Agreement, either for himself or as a member, partner or manager of a partnership, limited partnership, limited liability company or joint venture or as a shareholder (other than as a holder of less than two percent (2%) of the issued and outstanding stock of a publicly held corporation), investor, officer or director of a corporation or as an employee, agent, member, manager, associate, independent contractor or consultant of any individual, partnership, corporation, limited liability company or other entity. 8. NO SOLICITATION OF CUSTOMERS OR EMPLOYEES. During the Restricted Period, Employee agrees that he will not, unless he obtains the prior written consent of the Company's Board of Directors or Chief Executive Officer, directly or indirectly (whether as an owner, partner, shareholder, agent, member, manager, officer, director, employee, independent contractor, consultant, or otherwise): 8.1 Undertake, solicit or assist any third party in undertaking or soliciting, or divert or attempt to divert away from the Company, the business of any person or entity that is or was at any time within the six (6) months prior to the solicitation, a customer of the Company; or 6 8.2 Hire, solicit or induce or assist any third party in hiring, soliciting or inducing any employee, agent, consultant or independent contractor of Company to leave its employ or work for anyone in competition with the Company. 9. RECORDS AND OTHER MATERIAL. Employee agrees that all records, files, memoranda, reports, customer lists, programs, or any other similar records or documents relating to the business of the Company (including without limitation those which may have been used or prepared by Employee, whether or not part of the Confidential Information), remain the sole personal property of the Company (except for programs owned by third parties) and remain at all times, both during and after Employee's employment or other affiliation with the Company, in the control of the Company. Employee hereby agrees that upon the termination of his employment or other affiliation with the Company for any reason whatsoever, Employee shall immediately surrender all such records and documents, and all copies thereof, together with any other Company property in Employee's possession, to the Company at its principal business office or such other location as directed by the Company. 10. NON-DISPARAGEMENT. 10.1 Employee hereby agrees that, during the course of Employee's employment with the Company and thereafter during the Covered Period, he will not disparage or defame the Company's business or capabilities, plans or management to any client, business partner, employee, media, other entity or competitor with the effect of adversely impacting the goodwill of the Company. Anything herein to the contrary notwithstanding, there shall be no restriction whatsoever on Employee's communications with regulators, law enforcement officials, government administrators or officials, or on any communication which in Employee's good faith judgment is appropriate in the performance of his duties (including in discussions with analysts and shareholders), or which is otherwise undertaken in a good faith belief that such communication is required under the relevant legal or regulatory environment. 10.2 The Company hereby agrees that, during the course of Employee's employment with the Company and thereafter during the Covered Period, neither the Company nor its executive officers and directors shall, directly or indirectly, in any way, comment (orally or in writing) negatively about Employee to any individual or entity, disparage or defaming Employee's capabilities to any potential employer or business partner, any client, media or any other entity, or doing anything else to affect adversely the reputation of Employee. Anything herein to the contrary notwithstanding, there shall be no restriction whatsoever on the Company's communications with regulators, law enforcement officials, government administrators or officials, or on any communication which in the good faith judgment of the Company's Chief Executive Officer or General Counsel is appropriate (including in discussions with analysts and shareholders), or which is otherwise undertaken in a good faith belief that such communication is required under the relevant legal or regulatory environment. 11. INTERPRETATION OF COVENANTS. Each of the covenants in Sections 6 through 10 are to be construed as independent of any other covenants or other provisions of this Agreement. If any court of competent jurisdiction at any time deems the Restricted Period unreasonably lengthy or any of the covenants set forth in Sections 6 through 10 (or any of the provisions of this Agreement in general) not fully enforceable, the other provisions of Sections 6 through 10, and this Agreement in general, shall nevertheless stand and to the full extent consistent with law continue in full force and effect, and it is the intention and desire of the parties that such court treat any provisions of this Agreement which are not fully enforceable as having been modified to the extent deemed necessary by the court to render them reasonable and enforceable and that the court enforce them to such extent (for example, that the Restricted Period be deemed to be the longest period permissible by law, but not in excess of the length provided for in Section 7). In the event the Employee breaches any of the covenants of Sections 7 or 8, the Restricted Period for any such covenant shall be extended by that amount of time in which the Employee is in breach of said covenant. 7 12. REASONABLE RESTRICTIONS. Employee acknowledges and agrees that the restrictions on the activities in which he may engage that are set forth in Sections 6 through 10 of this Agreement, and the period of time and geographic area for which such restrictions apply are reasonable and necessary to protect the Company's legitimate business interests. Employee acknowledges that the existence of such restrictions during the Restricted Period will not prevent him from earning a livelihood. 13. DAMAGES INADEQUATE REMEDY. Employee understands and agrees that if he breaches or threatens to breach any of the provisions in Sections 6 through 10 of this Agreement, Company would suffer irreparable harm and damages would be an inadequate remedy. Accordingly, Employee agrees that, in the event of his breach or threatened breach, the Company shall have the right to seek injunctive relief and other equitable relief in addition to any other remedies that may be available without the posting of a bond. 14. INSURANCE AND INDEMNIFICATION. The Company shall indemnify and defend Employee from and against any threatened or pending action, suit, or proceeding arising out of the performance of Employee's duties or his service as a director, officer, employee or agent of the Company, to the fullest extent allowed by the least restrictive of law, the Company's certificate of incorporation and the Company's by-laws (as each may be amended from time to time), except to the extent that the Board of Directors determines that indemnification is not proper due to Employee having failed to meet the applicable standard of conduct set forth in Section 145 of the General Corporation Law of the State of Delaware. The Company shall have the right to defend Employee against any such action, suit or proceeding with counsel of its choice, subject to the requirements of the applicable rules of professional conduct for attorneys. In the event that the Company is unable to assume the defense of Employee, then during the pendency of any such proceeding the Company shall, to the fullest extent allowed by the least restrictive of law, the Company's certificate of incorporation and the Company's by-laws (as each may be amended from time to time), advance reasonable expenses that are incurred, from time to time, by Employee in connection with any threatened or pending action, suit or proceeding arising out of the performance of Employee's duties or his service as a director, officer, employee or agent of the Company, subject to the receipt by the Company of an undertaking to the extent required by law, the Company's certificate of incorporation and the Company's by-laws (as each may be amended from time to time). In any event, the Company shall indemnify Employee only for expenses actually and necessarily incurred by him in connection with the defense of any such action, suit or proceeding. Notwithstanding the foregoing, it is understood that the provisions of this Section 14 shall not extend to any action, suit, or proceeding commenced by the Employee against the Company. 15. NOTICES. Any notice required or permitted to be given pursuant to this Agreement shall be in writing and shall be deemed given (i) if by hand delivery or by facsimile, upon delivery thereof, (ii) if by a recognized national overnight courier service, one (1) day after it has been deposited with such service, or (iii) if mailed, three (3) days after it has been deposited in the U.S. mails, postage prepaid, certified mail, return receipt requested. All notices shall be addressed to the parties at the respective addresses indicated herein or such other address as either party may in the future specify in writing to the other. A copy of any notice addressed to the Company shall also be delivered to Lowenstein Sandler PC, 65 Livingston Avenue, Roseland, NJ 07068, Attention: Peter H. Ehrenberg, Esq. 16. HEADINGS. Headings used in this Agreement are for convenience of reference only and do not affect the meaning of any provision. 8 17. COUNTERPARTS. This Agreement may be executed as of the same effective date in one or more counterparts, each of which is deemed to be an original. 18. BINDING AGREEMENT; ASSIGNMENT. This Agreement shall be binding upon, and shall inure to the benefit of, Employee and the Company and their respective permitted successors, assigns, heirs, beneficiaries and representatives. This Agreement is personal to Employee and may not be assigned by him. Any attempted assignment in violation of this Section 18 shall be null and void. 19. NO WAIVER. No waiver of any kind by the Company of any past, present or future conduct of Employee shall be valid unless it is made in writing executed and delivered by the Company. No failure or delay on the part of the Company to exercise any right, remedy, power or privilege in connection with this Agreement shall preclude or limit in any way the exercise of any other right, remedy, power or privilege by the Company. 20. GOVERNING LAW. This Agreement shall be governed by, and construed in accordance with, the internal laws of the State of New Jersey, without reference to the choice of law principles thereof. The state and federal courts of the State of New Jersey shall be the exclusive courts within which to bring a dispute relating to this Agreement and the subject matter hereof. 21. ENTIRE AGREEMENT. This Agreement shall constitute the entire agreement between the parties with respect to the matters covered hereby and shall supersede all previous written, oral or implied understandings among them with respect to such matters. 22. AMENDMENTS. This Agreement may only be amended or otherwise modified by a writing executed by all of the parties hereto. 23. COOPERATION AND FACILITATION OF TRANSITION MATTERS. Employee agrees to cooperate both during and after his employment with the Company, at the Company's sole cost and expense, with the investigation by the Company involving the Company or any employee of the Company. If this Agreement is terminated for any reason other than by the Company due to Employee's death or Disability, Employee will for a period of nine (9) months after the termination, at the Company's sole cost and expense, take all reasonable actions as may be reasonably requested by the Company from time to time to maintain for the Company the business, goodwill, and business relationships of any such entity's clients or matters with which or about which Employee worked during the term of Employee's employment by the Company or any predecessor or successor. By way of illustration, (and not as an exhaustive list), in order to carry out Employee's obligations under this Section 23, if requested by the Company (and in the manner so requested) Employee shall (i) notify clients or other business contacts of Employee's departure, (ii) introduce such clients or others to successor contacts designated by the Company, and (iii) provide the Company with all information relevant to Employee's work for the Company and the servicing of such matters and clients. The Company shall cooperate with Employee to reasonably limit the time to be expended by Employee to carry out his obligations under this Section 23 so as to not interfere in any material respect with the time needed by Employee to perform his duties of employment with third parties or to seek other employment following the termination of his employment with the Company. 24. NO ATTACHMENT. Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void and of no effect; provided, however, that nothing in this Section 24 shall preclude the assumption of such rights by executors, administrators or other legal representatives of Employee or his estate and their assigning any rights hereunder to the person or persons entitled thereto. 9 25. SOURCE OF PAYMENT. All payments provided for under this Agreement shall be paid in cash from the general funds of Company. Company shall not be required to establish a special or separate fund or other segregation of assets to assure such payments, and, if Company shall make any investments to aid it in meeting its obligations hereunder, Employee shall have no right, title or interest whatever in or to any such investments except as may otherwise be expressly provided in a separate written instrument relating to such investments. Nothing contained in this Agreement, and no action taken pursuant to its provisions, shall create or be construed to create a trust of any kind, or a fiduciary relationship, between Company and Employee or any other person. To the extent that any person acquires a right to receive payments from Employee hereunder, such right, without prejudice to rights which employees may have, shall be no greater than the right of an unsecured creditor of Company. 26. SURVIVAL. Sections 2.5, 2.6 and 6 through 26 of this Agreement shall survive the termination of this Agreement. 27. NO CONFLICT. Employee warrants and represents to the Company that he is not subject to any contractual obligation which precludes him from executing and performing this Agreement or which would limit in any respect the responsibilities which Employee may perform hereunder. 28. WAIVER OF JURY TRIAL. Each party hereto (each, a "Party") hereby waives to the fullest extent permitted by applicable law, any right it may have to a trial by jury in respect to any suit, action or other proceeding directly or indirectly arising out of, under or in connection with this Agreement. Each Party (a) certifies that no representative of the other Party has represented, expressly or otherwise, that such other party would not, in the event of any suit, action or other proceeding, seek to enforce that foregoing waiver and (b) acknowledges that it and the other Party have been induced to enter into this Agreement, by, among other things, the mutual waivers and certifications in this Section 28. [signature page follows] ______________________________________ 10 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written. ------------------------------- DANIEL C. PRYOR WILSHIRE ENTERPRISES, INC. By:____________________________ Name: Title: 11 EX-10.33 3 b405718ex10_33.txt EMPLOYMENT LETTER EXHIBIT 10.33 EMPLOYMENT LETTER BETWEEN THE COMPANY AND SETH H. UGELOW June 1, 2004 Mr. Seth Ugelow 13 Bridle Path Roslyn, NY 11576 Dear Seth: This letter extends an offer of employment with Wilshire Enterprises, Inc., (the "Company") and sets forth the terms and conditions of that employment. The Company hereby offers you full-time employment as Chief Financial Officer (and Principal Accounting Officer as defined by the Securities and Exchange Commission) of the Company commencing on or about June 21, 2004 with a salary of $150,000 on an annualized basis. You will receive a performance review at least annually during which your annual salary may be adjusted. You will also be eligible to receive a cash bonus, in the Company's discretion, on July 1, 2005 for one year or more of service to the Company. The amount of the bonus, if any, shall be determined in the discretion of the Company's Board of Directors (the "Board"), based on the Company's performance, your performance and certain other factors as determined by the Company with reference to prior bonuses granted to you in connection with your former employment with The Trust Company of New Jersey. In order to receive the bonus, you must be employed by the Company both at the time the bonus, if any, is determined and at the time it is payable. In addition, you are eligible to participate in the Company's stock-based compensation plans. Awards granted under these plans shall be determined at the discretion of the Board. Although we hope that your employment with us is mutually satisfactory, employment at the Company is "at will." This means that, just as you may resign from the Company at any time with or without cause, the Company has the right to terminate this employment relationship with or without cause at any time. Neither this letter nor any other communication, either written or oral, should be construed as a contract of employment, unless it is signed by both you and the CEO of the Company and such agreement is expressly acknowledged as an employment contract. Notwithstanding your status as an at will employee, if the Company terminates your employment without Cause (as defined below) within 120 days of your employment commencement date and provided that you execute and deliver to the Company (and do not revoke) a general release in favor of the Company, its affiliates and their respective officers, directors and employees in a form reasonably satisfactory to the Company, you will be entitled to the greater of x) ten (10) weeks of severance pay (based upon your base salary at the time of termination), or y) severance benefits accorded to you under the Company's severance policy in effect at the time of your termination for similarly situated employees, if any. If the Company terminates your employment without cause after 120 days of your employment commencement date, you will be entitled to the greater of z) sixteen (16) weeks of severance pay (based upon your base salary at the time of termination), or y) severance benefits accorded to you under the Company's severance policy in effect at the time of your termination for similarly situated employees, if any. For purposes of this letter, "Cause" shall mean: (a) a material failure to meet your performance obligations as determined by the Company or its affiliates; (b) your conviction of a felony or a crime involving moral turpitude; or (c) your commission of acts or omissions which, in the reasonable opinion of the Company, involve dishonesty or disloyalty to the Company or its affiliates. This definition of "Cause" only relates to the Company's agreement to pay severance under the circumstances described in this paragraph and does not alter your status as an at will employee of the Company. Further, as a matter of professional courtesy (except as provided in the paragraph below) it is expected that you will give the Company at least sixty (60) days prior written notice of your intention to resign; provided, however, the Company reserves the right to accept your notice of resignation and to accelerate such notice and make your resignation effective immediately, or on any other dates prior to your intended last day of work that the Company deems appropriate. 1 In the event a Change in Control (as hereinafter defined) occurs during the period of your employment by the Company, provided that you notify the Company within 30 days of the consummation of such Change in Control that you intend to terminate your employment (such termination to take effect 15 days after such notice is delivered) and provided further that you execute and deliver to the Company (and do not revoke) a general release in favor of the Company, its affiliates and their respective officers, directors and employees in a form reasonably satisfactory to the Employer, the Company shall pay you a lump sum amount equal to the sum of six (6) months of salary (based upon your salary in effect at the time of your termination) plus 50% of any cash bonus paid to you during the previous 12 month period. For purposes of this Agreement, a "Change in Control" shall mean the occurrence of any of the following events with respect to the Company: (a) the acquisition of the beneficial ownership, as defined under the "Exchange Act" (as defined herein), of 50% or more of the Company's voting securities or all or substantially all of the assets of the Company by a single person or entity or group of affiliate persons or entities (other than an employee benefit plan or trust maintained for the benefit of the Company's employees); (b) the merger, consolidation or combination of the Company with an unaffiliated corporation unless, immediately after such transaction, the stockholders of the Company immediately prior to such transaction continue to own more than 50% of the outstanding voting securities of the Company or any entity that controls the Company; (c) during any period of two consecutive calendar years, individuals who at the beginning of such period constitute the Board of Directors of the Company ("Beginning Directors") cease for any reason to constitute at least two-thirds thereof, unless the election or nomination for the election by the Company's stockholders of each new director was approved by a vote of at least two-thirds of the Beginning Directors who remain in office at the time such new director is so elected (any such director who is elected by such vote being thereafter included within the definition of the term "Beginning Director"); or (d) the transfer of all or substantially all of the Company's real estate assets. During your employment with the Company you will be entitled to participate in all of our then current customary employee benefits, subject to plan eligibility requirements and enrollment criteria, including, but not limited to, the Company's medical and dental plans. The Company reserves the right to change or rescind its benefit plans and programs and alter employee contribution levels in its discretion. If the Company moves to Newark, you will be entitled to a commuting allowance of up to $100.00 per month for using New Jersey Transit to commute between Penn Station New York and Penn Station Newark. You will accrue four weeks vacation annually with vacation schedules being subject to prior approval from the CEO. The Company acknowledges that your vacation previously scheduled for August 11, 2004 is acceptable on the condition that the 10-Q for the three-month period ended June 30, 2004 is filed with the Securities and Exchange Commission prior to your departure for vacation. 2 During your employment with the Company, you shall: (a) report to the CEO of the Company and the Board; (b) have such powers and duties as are commensurate with your position and as may be conferred upon you from time to time by the CEO and the Board; (c) devote your entire business time, attention and energies to the business of the Company; (d) perform your duties honestly, diligently, competently, in good faith and in the best interests of the Company; and (e) not undertake any other employment or business association that requires the rendering of personal services, except that you may serve, with the prior written consent of the Board, on the boards of other organizations, provided, however that in either case, such service does not interfere with your duties hereunder. Your employment with the Company will be subject to the Company's employment policies, procedures and practices in place from time to time generally applicable to executive officers that are not contrary to the express provisions of this letter. This offer of employment with the Company is contingent upon our satisfactory completion of proof of your authorization to work in the United States and your ability to commence employment no later than July 15, 2004. While employed by the Company, acting as a consultant to the Company or otherwise acting in another capacity for the Company, you have and may necessarily acquire knowledge of Confidential Information (defined below). At all times, both during the period of your employment, or other affiliation and thereafter, you will keep all Confidential Information in strictest confidence and trust. You will use Confidential Information only in the performance of your duties for the Company, and you will not use it at any time (during or after employment or other affiliation with the Company) for your personal benefit, for the benefit of any other person or entity, or in any manner adverse to the interests of the Company. You will not disclose any Confidential Information at any time (during or after employment or other affiliation with the Company) except to authorized personnel of the Company unless the Board authorizes such disclosure in advance in writing or unless the information becomes generally of public knowledge through no act or omission of on your part. For purposes hereof, "Confidential Information" means all trade secrets and all other non-public or proprietary information, data, or any of the activities, services, products, customers, tenants, suppliers, objectives or strategies of the Company or any of its affiliates, including without limitation information and materials relating to the financial condition, operations or performance of the Company or any of its affiliates and appraisals relating to the Company's existing properties and prospective properties. During the period (the "Restricted Period") commencing on the first day of your employment by the Company and terminating on the date that is six (6) months after the date of termination of your employment by the Company (for any reason or no reason), you agree that you will not, unless you obtain the prior written consent of the Board, engage in or carry on, directly or indirectly, with or without compensation, the business of investing in, owning, leasing or licensing any real property which the Company or any subsidiary invested in, owned, leased or licensed or evaluated for purposes of investing, owning, leasing or licensing during the period commencing on first day of your employment by the Company and ending on the date of the termination of your employment by the Company, either for yourself or as a member, partner or manager of a partnership, limited partnership, limited liability company or joint venture or as a shareholder (other than as a holder of less than two percent (2%) of the issued and outstanding stock of a publicly held corporation), investor, officer or director of a corporation or as an employee, agent, member, manager, associate, independent contractor or consultant of any individual, partnership, corporation, limited liability company or other entity. During the Restricted Period, you agree that you will not, unless you obtain the prior written consent of the Board, directly or indirectly (whether as an owner, partner, shareholder, agent, member, manager, officer, director, employee, independent contractor, consultant, or otherwise): (a) undertake, solicit or assist any third party in undertaking or soliciting, or divert or attempt to divert away from the Company, the business of any person or entity that is or was at any time within the six (6) months prior to the solicitation, a customer or tenant of the Company; or (b) hire, solicit or induce or assist any third party in hiring, soliciting or inducing any employee, agent, consultant or independent contractor of Company to leave its employ or cease performing services for the Company. 3 The Company agrees that the terms and conditions in this offer of employment will be reviewed on or before your one (1) year anniversary of employment and on your annual anniversary thereafter and will review providing severance in the event that the Company moves to a location that is not readily accessible by New Jersey Transit or the PATH. Seth, on behalf of Wilshire it is a pleasure to extend you this offer. Kindly sign your name at the end of this letter to signify your understanding and acceptance of these terms and that no one at the Company has made any other representation to you. As we are interested in concluding our near-term efforts to strengthen the Company's management team, we kindly request that this offer be accepted on or before June 1, 2004 and will be deemed to have been withdrawn if your executed acceptance of this offer is not received by me on or before the above referenced date. We welcome you as an employee and look forward to a successful relationship in which you will find your work both challenging and rewarding. Sincerely, ------------------------------------- Sherry W. Izak Chairman and Chief Executive Officer Agreed to and Accepted by: Date: - --------------------- ------------------------------- Seth Ugelow 4 EX-10.34 4 b405718ex10_34.txt PURCHASE AGREEMENT EXHIBIT 10.34 PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS BETWEEN BILTMORE CLUB APARTMENTS, L.L.C. (A SUBSIDIARY OF WILSHIRE ENTERPRISES, INC.) AND GDG PARTNERS L.L.C. DATED FEBRUARY 2, 2005 PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS (ALL CASH) CONTRACT DATE: February 1, 2005 SELLER: Biltmore Club Apartments, L.L.C. c/o Wilshire Enterprises, Inc. of New Jersey 921 Bergen Avenue Jersey City, New Jersey 07306 Attention: Dan Pryor Telephone: 201-420-2796 Facsimile: 201-420-6012 BUYER: GDG Partners L.L.C. c/o Gray Development Group 2555 East Camelback Road, Suite 1050 Phoenix, Arizona 85016 Attention: Bruce W. Gray Telephone: 602-954-0109 Facsimile: 602-954-9308 with a copy to: Kutak Rock LLP 8601 North Scottsdale Road, Suite 300 Scottsdale, Arizona 85253-2742 Attention: Lynn T. Ziolko, Esq. Telephone: 480-429-5000 Facsimile: 480-429-5001 ESCROW AGENT: Lawyers Title of Arizona, Inc. 2425 East Camelback Road, Suite A-700 Phoenix, Arizona Attention: Judy Sorensen Telephone: 602-954-6774 Facsimile: 602-954-7006 ESCROW NO.: 01417571 REAL PROPERTY: The property that is legally described on the attached EXHIBIT "A". THE TERMS LISTED IN BOLD ABOVE ARE DEFINED TERMS THAT ARE REFERRED TO THROUGHOUT THIS PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS. 1 ARTICLE I AGREEMENT, PROPERTY, AND PRICE SECTION 1.01. AGREEMENT. Upon the Opening of Escrow, this Purchase Agreement and Escrow Instructions (referred to as either the "CONTRACT" or "AGREEMENT") will constitute a binding and effective agreement of Seller to sell the Property to Buyer and will constitute a binding and effective agreement of Buyer to purchase the Property from Seller. SECTION 1.02. INCLUSIONS IN PROPERTY. Seller agrees to sell to Buyer, and Buyer agrees to purchase from Seller, all of Seller's interest in the Property upon the terms and conditions of this Contract. The term "PERSONALTY" means Seller's interest in all furnishings (except as identified in Section 1.05 below), furniture, appliances, tools, equipment, machinery, computers, computer hardware, marketing materials, telephone systems, office equipment, pool and patio furniture, supplies, inventory, and other tangible personal property owned by Seller that are located on or used in connection with the operation of the Property as an apartment project. The term "CONTRACT RIGHTS" means all Approved Project Contracts, Tenant Deposits, prepaid rents (for periods after the Closing Date), tenant leases, tenant records, tenant files, permits, certificates of occupancy, occupancy and operations licenses, and all rights, if any, to any telephone numbers used for the Property. The term "IMPROVEMENTS" means all buildings, improvements, fixtures, pools, parking areas, sidewalks, landscaping, and similar structures and improvements located on the Real Property. The term "OTHER RIGHTS" means Seller's interest in all logos, designs, trade names, trademarks, service marks, plans and specifications, warranties, guaranties, all electronic records applicable to the Property and its operation, and all additional rights, easements, and appurtenances pertaining to the use, ownership, or operation of the Improvements, including all right, title, and interest of Seller in and to any land lying in the bed of any street, road, highway, or alley adjoining the Real Property and any strips and gores adjoining the Real Property. The term "PROPERTY" means collectively the Real Property, Improvements, Personalty, Contract Rights, and Other Rights. SECTION 1.03. DEFINITIONS. Capitalized terms used in this Contract, including the terms listed on the cover page of this Contract, will have the meanings ascribed in this Contract. For ease of reference only, the location of various defined terms used in this Contract is identified on the attached SCHEDULE OF DEFINITIONS. SECTION 1.04. ESCROW INSTRUCTIONS. The Contract consists of the main text and all exhibits to the Contract including the Additional Escrow Instructions attached as EXHIBIT "B". All exhibits supplement the Contract. This Contract will constitute the sole escrow instructions of Buyer and Seller to the Escrow Agent, and the standard form escrow instructions of Escrow Agent will not be used for this Escrow. If there is a conflict between the main text of this Contract and the exhibits, the main text controls in all instances. SECTION 1.05. EXCLUDED ASSETS. The Property does not include the furnishings for any of the apartment models ("EXCLUDED MODEL FURNISHINGS"), all of which will remain the property of Seller. After the Closing Date, however, Seller agrees that Buyer may continue to use (free of charge) the Excluded Model Furnishings in the model units until the earlier of Buyer's commencement of demolition or one year. Buyer agrees to advise Seller as and when Buyer no longer needs to use the Excluded Model Furnishings, and Seller will have the right to re-enter the Property to remove the Excluded Model Furnishings on a reasonably prompt basis. ARTICLE II PRICE, ESCROW, AND PRORATIONS SECTION 2.01. PURCHASE PRICE. The total purchase price ("PRICE") for the Property is $20,956,080. The Price will be paid by Buyer to Seller as follows: (a) Concurrent with Seller's delivery of an executed original of this Contract to Buyer (including the Acknowledgement of Receipt), Buyer will pay directly to Seller in Good Funds an initial earnest money deposit in the amount of $100,000 ("INITIAL EARNEST MONEY"). 2 (b) By no later than the date that is 60 days after the Opening of Escrow, Buyer will deposit with Escrow Agent in Good Funds an additional earnest money deposit of $150,000 ("FIRST ADDITIONAL EARNEST MONEY"). (c) By no later than 150 days after the Opening of Escrow, Buyer will deposit with Escrow Agent in Good Funds a second additional earnest money deposit of $250,000 ("SECOND ADDITIONAL EARNEST MONEY") (with the First Additional Earnest Money and the Second Additional Earnest Money being referred to, as applicable, as the "ADDITIONAL EARNEST MONEY"). (d) On or before the Closing Date, all additional amounts ("CLOSING CASH") required of Buyer to pay the Price, after credit for the Earnest Money, will be paid by Buyer to Seller in Good Funds. SECTION 2.02. EARNEST MONEY. As used in this Contract, the term "EARNEST MONEY" means, to the extent applicable under this Contract, the Initial Earnest Money, the Additional Earnest Money, and all interest that may accrue on the Additional Earnest Money from time to time, and the term "GOOD FUNDS" means in cash, by confirmed wire transfer, by certified check drawn on any Bank, or by cashier's check issued by any Bank representing good, sufficient, and immediately available U.S. funds. Except to the extent paid directly to Seller, the Earnest Money will be held by Escrow Agent in accordance with the terms and conditions of this Contract in a fully federally insured or federally backed investment approved by Buyer and Seller. At the Close of Escrow, the Earnest Money will be applied by Escrow Agent for the benefit of Buyer to the Price and Buyer's share of any closing costs and prorations. The Initial Earnest Money is nonrefundable upon its delivery to Seller in all instances except in the case of a Seller default. The Additional Earnest Money is nonrefundable upon its deposit with Escrow Agent in all instances except in the case of a Seller default. SECTION 2.03. BROKER'S COMMISSION. Except Colliers International (Duane Jones, Agent) ("EMPLOYED BROKER"), Buyer and Seller represent to each other that neither has dealt with any broker or any other person concerning this purchase and sale of the Property in a manner that would give rise to a claim for the payment of a fee or commission. Each party agrees, on demand, to indemnify, defend, and hold harmless the other party for, from, and against any claim, damage, loss, liability, or expense, (including attorney fees in a reasonable amount) arising out of any act or omission of the party or its representatives that forms the basis for any claim for commissions, fees, or any similar charge. As used in this Contract, the term "BROKER" means any real estate broker, salesperson, agent, finder, or any other person entitled to a real estate commission, fee, or any similar charge. If and only if the Escrow closes in accordance with the terms of this Contract, Seller will pay to Employed Broker a brokerage commission in the amount specified in the separate brokerage agreement between Seller and Employed Broker. The brokerage indemnity described above will survive the cancellation or termination of this Contract and the related Escrow and the Close of Escrow. If the sale contemplated by this Contract is not consummated for any reason whatsoever, no commission or any portion of the Earnest Money will be paid to the Employed Broker, and the consent, approval, or joinder of the Employed Broker is not be required to modify or cancel this Contract. Seller understands that certain principals and/or affiliates of Buyer are licensed real estate and/or sales person in the State of Arizona. SECTION 2.04. TIME PERIODS. (a) This Contract constitutes an enforceable obligation of Seller to sell and Buyer to purchase the Property on the terms and conditions of this Contract when the Contract is signed by both Buyer and Seller. The date of the Opening of Escrow ("OPENING OF ESCROW") will be the date on which Escrow Agent has received this Contract executed by Buyer and Seller; and has accepted this Contract as its escrow instructions by executing this Contract on the signature page. Escrow Agent is instructed to insert the date of opening in the signature portion of this Contract. Notwithstanding anything to the contrary in this Contract or any purchase offer, Seller's acceptance, negotiation, and/or deposit of Buyer's cashier's check (No. 004167681) dated January 14, 2005, drawn on Bank of America in the amount of $100,000 ("BUYER'S CASHIER CHECK") for the Initial Earnest Money will constitute Seller's irrevocable acceptance of the terms and conditions of this Contract and entitle Buyer to the rights and benefits under this Contract. (b) The "INSPECTION PERIOD" will commence with the Opening of Escrow and will expire on the date that is 60 days after the Opening of Escrow. 3 (c) The completion of the purchase and sale transaction described in this Contract ("CLOSE OF ESCROW") will occur on or before December 23, 2005 ("OUTSIDE CLOSING DATE") on a date mutually agreed upon by Buyer and Seller. At any time prior to September 23, 2005, Buyer may elect to accelerate the Close of Escrow by delivering written notice to Seller and Escrow Agent a minimum of 90 days before the desired date of closing, and the closing will then occur on a date established in the notice. As used in this Contract, the term "CLOSING DATE" means the actual date established for closing under the Contract. SECTION 2.05. CLOSING COSTS AND PRORATIONS. Escrow Agent will prorate the following items between Seller and Buyer at Close of Escrow (and Buyer and Seller agree to pay their respective portions): (a) Real property taxes will be prorated between Seller and Buyer as of the Close of Escrow, based upon the actual amount of taxes that are attributable to the Property for the year in which the closing occurs (even if payable, in whole or in part, in the following year) and, if the actual amount is not available, an estimate of the taxes based upon the best available information to Escrow Agent. If any prorations are based upon estimates, then re-prorations will be made post-closing when tax bills for the year in which the Closing Date occurs are received. Seller will be responsible for the payment of all real property taxes that are attributable to the period of time on and prior to the Close of Escrow, and Buyer will be responsible for the payment of all real property taxes that are attributable to the period of time after the Close of Escrow. (b) With respect to any special assessments, improvement district assessments, municipal assessment districts, and the like that are a financial obligation on the Property or an owner of the Property (referred to collectively as "PROPERTY ASSESSMENTS"), Buyer and Seller agree as follows: (i) all Property Assessments that are collected as part of the real property taxes will be prorated as established above along with (and on the same basis as) the real property taxes; and (ii) all Property Assessments that are collected/paid separate from the real property taxes but that exist as of the Close of Escrow also will be prorated in the same manner as real estate taxes. (c) All Tenant Deposits will be delivered to Buyer at the Close of Escrow or, alternatively, will be credited toward the Price. The "TENANT DEPOSITS" consist of all security deposits made by tenants at the Property as of the Closing Date and all security deposits made by future tenants for which there exists a signed lease for the Property but whose occupancy does not commence until after the Closing Date, whether refundable or nonrefundable and however designated (such as, for example, last month's rent, key deposit, redecorating fee, pet deposit, etc.). Tenant Deposits may be returned to the applicable tenants and/or applied to any lease payments in the ordinary course of business by Seller. (d) All prepaid rents paid to Seller by tenants of the Property for periods subsequent to the Close of Escrow will be paid by Seller to Buyer at the Close of Escrow or, alternatively, will be credited toward the payment of the Price. All rental payments actually collected for the month in which the Closing Date occurs will be prorated as of the Close of Escrow. Seller will not be entitled to any credit or payment for rents due and unpaid as of the Close of Escrow, and Seller is not entitled to apply any Tenant Deposits in reduction of any unpaid rents in the 30 days prior to the Closing Date. Buyer, after the Close of Escrow, will use its good faith efforts to collect past due rents and other damages that are owed to Seller from delinquent tenants as of the Close of Escrow, but Buyer's good faith efforts will not require it to incur any expense to collect past due rents and other damages. If Buyer collects any money from tenants who, as of the Close of Escrow, have past due rents, Seller agrees that the first money received by Buyer from these tenants will be applied to then-current rents and damages until all such amounts are fully paid, and subsequently, Buyer agrees to use good-faith efforts to promptly remit to Seller any additional amounts collected from these delinquent tenants to tenant arrearages as of the Close of Escrow. Seller acknowledges that Buyer will not be required to institute any litigation or eviction proceedings or incur any cost to collect any arrearages owed to Seller. (e) All operating expenses for the Property during the period of time prior to and including the Close of Escrow will be paid by Seller. Any bills for operating expenses that apply to the period of time prior to the Close of Escrow but are received by Seller or Buyer after the Close of Escrow will be paid by Seller through the post-closing adjustment mechanism described below. Buyer will be responsible for all operating expenses for the Property incurred after the Closing Date. All utility deposits posted by Seller will remain the property of Seller and will not be prorated. To the extent possible, utility prorations will be handled by meter readings on the day immediately preceding the Closing Date; otherwise, they will be based on prior months' bills and re-prorated on receipt of the actual bills. To the extent not prorated through escrow on the Closing Date, all operating expenses will be prorated and paid (adjusted), if applicable, under the post-closing adjustment mechanism established below. 4 (f) Seller will pay all lease taxes and sales and use taxes for rents collected by Seller on and prior to the Close of Escrow and past-due rents collected by Buyer after the Closing Date and remitted to Seller, and Buyer will pay all lease taxes and sales and use taxes for rents collected ands retained by Buyer subsequent to the Close of Escrow. (g) Any rental or leasing commissions attributable to leases under which the tenant first took possession (or was first required to pay rent) prior to the Close of Escrow will be paid by Seller, and any rental or leasing commissions attributable to leases under which the tenant first was required to pay rent after the Close of Escrow will be paid by Buyer. (h) All prorations must be made by Escrow Agent through the Closing Date (with the Seller being deemed the owner of the Property on Closing Date). All proration items and closing costs that are not specifically dealt with under the terms of this Contract will be allocated by Escrow Agent in accordance with the Additional Escrow Instructions or, if not dealt with there, in accordance with Escrow Agent's standard custom and practice. (i) To the extent the items established above cannot be accurately prorated by Escrow Agent on the Closing Date, adjustments to the prorations will be made from time to time after the Close of Escrow by Buyer and Seller directly to take account of final information as to taxes and other expenses estimated as of the Close of Escrow or to adjust rents or expenses that were not included in the prorations done at the Close of Escrow. Buyer or Seller, as applicable, will pay the other on demand all amounts as may be appropriate based on the post-closing adjustments, together with interest at 10% per annum on any amount due from the date of written demand if the amount remains unpaid more than 30 days after written demand. Adjustments to prorations (other than prorations for taxes) must be completed within 90 days after the Close of Escrow and adjustments to tax prorations must be completed within 30 days after tax bills are received by both Buyer and Seller (Buyer and Seller each agreeing to provide the other with a copy of any property tax bill received by it) after the Closing Date. These post-closing adjustment provisions (and the other provisions to which it applies) will survive the Closing. ARTICLE III DUE DILIGENCE AND BUYER CONTINGENCIES SECTION 3.01. DUE DILIGENCE DOCUMENTS. Within five business days after the Opening of Escrow and to the extent available to Seller or readily obtainable by Seller, Seller will deliver or make available to Buyer at the Property copies of the documents listed on EXHIBIT "C" (collectively, the "DUE DILIGENCE DOCUMENTS"). If any of the Due Diligence Documents are unavailable or are not reasonably obtainable, Seller, along with delivery of the Due Diligence Documents, will notify Buyer in writing of their unavailability. Additionally, at all times during the term of the Escrow, Seller agrees to cooperate on a commercially reasonable basis with Buyer's request for additional due diligence documents that may be in Seller's possession or readily obtainable by Seller. SECTION 3.02. TITLE AND SURVEY. As soon as reasonably possible after the Opening of Escrow, Escrow Agent will deliver to Buyer a commitment for an extended owner's policy of title insurance ("TITLE REPORT") and copies of all non-standard exceptions to the Title Report. The Title Report must have an effective date after the Opening of Escrow. Buyer will obtain at its expense prior to the end of the Inspection Period an update to the Current Survey prepared to Buyer's specifications ("SURVEY"). Buyer will have until the end of the Inspection Period, within which to notify Seller and Escrow Agent, in writing, of Buyer's disapproval ("TITLE OBJECTIONS") of any title exceptions or other matters that are contained in the Title Report or the Survey. Buyer's failure to make its Title Objections on a timely basis will be deemed a waiver of its title contingency under Sections 3.02(a) and (b) below. Except for those matters that Seller is obligated to discharge or remove from title on or before the Closing Date (i.e., Monetary Liens described below) and disapproved Project Contracts) under the terms of this Contract, Buyer agrees to accept title to the Property subject to those matters described as title exceptions in First American Title Insurance Company of Arizona, Pro Forma Policy No. 4062756, dated February 14, 2003 ("APPROVED PRO FORMA POLICY") and disclosed on ALTA/ACSM Survey prepared by O'Neil Engineering, Inc., dated February 2003, Revision date February 24, 2003 (Job No. 3475) ("EXISTING SURVEY"). 5 (a) If Buyer makes any Title Objections on or before the end of the Title Review Period, Seller may elect, by delivering written notice to Buyer and Escrow Agent, to: (i) attempt to cure all or any of the Title Objections, in which case any Title Objections cured by Seller will be considered to have been approved by Buyer; or (ii) not attempt to cure all or any of the title Objections. Seller may cure the Title Objections only by causing the removal of record of the Title Objections, modifying of record the Title Objections, obtaining a commitment from Escrow Agent to eliminate the Title Objections from the Title Policy, or causing Escrow Agent to issue an endorsement insuring Buyer against loss or damage from the Title Objections or to provide other affirmative assurances to Buyer with regard to the Title Objections. All such cures (other than formal removal of record) must be in a form and content acceptable to Buyer, in its sole discretion. All endorsements representing a cure of a Title Objection will be paid for by Seller, unless otherwise agreed in writing. Seller's election under subsection (i) or (ii) above must be made within 10 days after Seller's receipt of the Title Objections. Seller's failure to make a timely election under subsection (i) or (ii) above will be deemed an election to not to attempt to cure under subsection (ii) above. Seller will have no obligation or duty to cure the Title Objections or to incur any expense in curing the Title Objections, except the Money Liens described below. (b) If Seller has elected to attempt to cure any of the Title Objections pursuant to Section 3.02(a)(i) above and does not or cannot cure those objections within 30 days after the end of the Inspection Period (or otherwise deliver sufficient evidence within that time of Seller's ability to cure the matter at the closing), or if Seller has elected or is deemed to have elected not to attempt to cure pursuant to Section 3.02(a)(ii) above, Buyer, as its sole and exclusive remedy, may elect to: (i) waive its Title Objections and complete the purchase of the Property at the Price (without any price adjustment and without any right or claim to damages, credit, or offset for the Title Objections, except removal of the Money Liens, which will be paid from Seller's proceeds of sale); or (ii) cancel this Contract. Buyer's failure to make the election described in the previous sentence within 10 days after the earlier to occur of the expiration of Seller's cure period described above or Buyer's receipt (or deemed receipt) of Seller's election not to attempt to cure will be deemed an acceptance of title as described in the Title Report and Survey (except for the items that Escrow Agent has agreed to delete or modify) and a waiver of Buyer's right to cancel this Contract for a failure of Buyer's title contingency. (c) If Escrow Agent, after the expiration of the Title Review Period, updates, adds to, or amends the Title Report (by endorsement, amendment, or otherwise) to include a new title exception resulting from any new matters or facts that became known or were revealed to Escrow Agent after the Opening of Escrow and that were not caused by Buyer's acts, Buyer will have until the earlier of two days prior to the Closing Date or five business days following Buyer's receipt of the amended Title Report (including legible and complete copies of all new title exceptions) to notify Seller in writing of its objections (with all new objections being considered as additional "TITLE OBJECTIONS"). If Buyer timely objects to any new title exception, the timing and cure provisions outlined in Sections 3.02(a) and (b) will apply. Notwithstanding the preceding portions of this Section 3.02(c), the Closing Date will not be extended as a result of the application of Sections 3.02(a), (b), and (c), and all decisions of Buyer must be made on or prior to the Closing Date. (d) Notwithstanding anything to the contrary in this Contract, Seller, at its cost on or before the Close of Escrow, will discharge, defease, and release the Property from all deeds of trust, mortgages, installment land contracts, mechanic's liens, and consensual liens applicable to the Property (including the payment of any so-called prepayment, defeasance, or other fee) (called collectively the "MONETARY LIENS"). 6 SECTION 3.03. INSPECTION. (a) During the term of the Escrow and at Buyer's sole cost, Buyer and its designated agents will be permitted reasonable access to the books and records of Seller related to the operation of the Property, including tenant files and operating records (collectively, the "BOOKS AND RECORDS"). Specifically, Buyer will be permitted to review and copy, at Buyer's expense, all tenant applications and leases as well as all other Books and Records available at the Property. Buyer will provide notice to Seller of the date and time the Buyer desires to access, review, and copy Books and Records. Seller agrees to cooperate on a commercially reasonable basis (and to cause its current property manager to cooperate) in providing operational and financial reports, etc. with respect to the operation of the Property as a commercially reasonable purchaser would require. (b) During the term of the Escrow, Buyer and its designated agents and independent contractors may access the Property, including meeting with and interviewing the tenants, during normal business hours to investigate the physical and environmental condition of the Property and its major components including heating, plumbing, air conditioning, electricity, etc. and to conduct all tests that Buyer may deem necessary, including tests for termite infestation. Buyer, by its execution of this Contract, specifically acknowledges that Seller has advised Buyer that termite infestation exists at the Property. All investigations and tests must be conducted in a manner that does not unreasonably interfere with Seller's maintenance, ownership, or operation of the Property or the use and enjoyment of the Property by any tenant or tenant's guest. Any inspections of individual units at the Property must be accomplished in accordance with the notice provisions of the Arizona Residential Landlord and Tenant Act. Written notification of the date and time of Buyer's investigations and test must be sent to Seller at least 48 hours before entry on the Property. (c) Buyer's obligation to Close the Escrow and consummate the purchase of the Property is not conditioned on Buyer's approval of the physical condition of the Property, and Buyer expressly acknowledges that Buyer is acquiring the Property in an "as is" physical condition. (d) Buyer agrees to indemnify, defend, and hold harmless Seller for, from, and against all damages, claims, and liabilities resulting from any tests and inspections performed on the Property by Buyer or its consultants, including personal injury and property damage. Specifically, Buyer agrees to restore the Property to its condition immediately prior to any invasive testing. Buyer also agrees to name Seller as an additional insured on Buyer's commercial liability insurance (with aggregate coverages of at least $1,000,000) insuring against liability for Buyer's entry on the Property. SECTION 3.04. REDEVELOPMENT ENTITLEMENTS. Although not a condition to Buyer's obligation to close this Escrow and consummate the purchase of the Property, Buyer is expressly authorized to make any and all investigations, inquiries, and applications from, to, or of the City of Phoenix and/or any applicable municipal, county, state, or federal agencies or authorities (collectively, the "GOVERNMENTAL AUTHORITIES") to redevelopment of the Property including a rezoning approval, height and density waivers or variances, site plan approval, development approval, land use entitlements, permits, development agreements, and the like (collectively called the "REDEVELOPMENT ENTITLEMENTS"). Seller agrees to cooperate in a commercially reasonable manner with Buyer in seeking the Redevelopment Entitlements including, whenever necessary, providing appropriate letters of authority evidencing Buyer's authority to make any necessary or desirable applications with the Governmental Authorities. ARTICLE IV DEED AND REPRESENTATIONS SECTION 4.01. DEED. Seller will convey fee simple title to the Property to Buyer at Close of Escrow by a special warranty deed ("DEED") in the form that is attached as EXHIBIT "D". SECTION 4.02. SELLER REPRESENTATIONS. As of the Opening of Escrow and at all times during the Escrow through and including the Closing Date, the representations and warranties made by Seller to Buyer as detailed on EXHIBIT "E" (collectively, the "SELLER CONTRACT REPRESENTATIONS") must be true and correct. 7 SECTION 4.03. REPRESENTATION BREACH. (a) Buyer's obligation to purchase the Property is conditioned upon the truth and accuracy, in all respects, of the Seller Contract Representations. If Seller obtains actual knowledge of an error in or breach of any of the Seller Contract Representations prior to Closing, Seller promptly will give written notice to Buyer. Upon receipt of Seller's notice, Buyer will have until the later of the end of the Inspection Period of 10 days after Seller's notice of error or breach to cancel the Contract and declare Seller in breach. If Buyer declares a breach, Seller will return the Initial Earnest Money to Buyer, and Escrow Agent will deliver the Additional Earnest Money to Buyer, both as Buyer's sole remedy. If the breach, however, is caused by the intentional, willful, or grossly negligent acts or misrepresentations of Seller, Buyer will be entitled to exercise its remedies established under Section 6.03 below. Unless Buyer declares a breach, the applicable Seller Contract Representation will be deemed amended by Seller's notice, and Buyer will be deemed to have elected to accept the change and proceed to close this transaction with no modification of the Price or claim on Seller. (b) If, after the Close of Escrow, Buyer first discovers a breach of Seller's representations and warranties, Buyer will be entitled to bring an action against Seller for the actual and direct damages incurred by Buyer as a result of the breach taking into account Buyer's proposed redevelopment plans. Any award of damages will not include punitive damages (except to the extent of fraud of Seller) or consequential damages, whether or not foreseeable. SECTION 4.04. SURVIVAL. The Seller Contract Representations will survive the Close of Escrow and the delivery of the deed for: (i) in the case of the Seller Authority Reps, a period of two years; and (ii) in the case of the Notice Reps, Physical Condition Reps, and Operational Reps, a period of one year; however, these limitations will not apply to any representation that Buyer claims has been breached in a written notice to Seller delivered prior to the end of the applicable period but not settled prior to the end of the applicable period (a "TIMELY CLAIMED BREACH"). None of the foregoing limitations will apply to any action of Buyer against Seller for intentional misrepresentations, the cause of action for which will be limited solely by any applicable statute of limitations under Arizona law. SECTION 4.05. NO OTHER WARRANTY. Except as expressly set forth in this Contract or any of the documents to be executed pursuant to this Contract ("ADDITIONAL DOCUMENTS"), Buyer acknowledges that Seller is selling the Property "AS IS" and that neither Seller nor its representatives or agents have made any warranties or representations, express or implied, oral or written, regarding any matter pertaining to the Property or its use including: (i) the physical condition, environmental condition, zoning, use, valuation, intended use, or other condition of the Property; (ii) its merchantability; (iii) its fitness for a particular purpose; or (iv) the physical condition, environmental condition, zoning, use, valuation, intended use, or other condition of any neighboring property. SECTION 4.06. PROPERTY CONDITION; OPERATING POLICIES. (a) Between the Opening of Escrow and the Close of Escrow, Seller will use its reasonable efforts to operate and maintain the Property in substantially the same manner, condition, and repair (subject to only ordinary wear and tear) as Seller has operated the Property prior to the Opening of Escrow. During the term of this Escrow, Seller will not sell or otherwise dispose of any of the items comprising the Property or mortgage or create liens or encumbrances against the Property, except the use of regular operating inventory in the ordinary course of business and, to the extent Seller would otherwise replace any disposed of item in the normal course of its operations, Seller will replace the disposed of items. (b) After the Opening of Escrow and except for tenant leases, Seller agrees that it will not enter into, terminate, or amend Project Contract affecting the Property, including those for the furnishing of goods or services to or for the benefit of the Property, except for the entering into Project Contracts that are terminable without penalty upon not more than 30 days notice or unless Seller first obtains Buyer's written consent, whose consent will not be unreasonably withheld. 8 (c) Seller will maintain property, casualty, and liability insurance on the Property until the Close of Escrow. Prior to the Close of Escrow, Seller will not market the Property for sale or otherwise accept, solicit or negotiate any offers for sale or refinance. (d) On or before the expiration of the Inspection Period, Buyer may give written notice to Seller of Buyer's disapproval of any business leases and all project, service, advertising, locater service, and management contracts affecting the use or operation of the Property including laundry, telephone, signage, cable television, broadband, internet, cell towers, and antennae contracts (collectively, the "PROJECT CONTRACTS"). If Buyer disapproves any of the Project Contracts, Seller, without adjustment to the Price, must cause the Project Contracts to be cancelled as of the Closing Date and, notwithstanding anything to the contrary, must cause all recorded memorandum, security interests, or other written and recorded instruments evidencing the Project Contracts to be fully released of record. All Project Contracts not disapproved by Buyer are called "APPROVED PROJECT CONTRACTS." (e) Seller will keep all vacant and unleased residential units in generally the same condition as vacant units as of the Opening of Escrow. (f) After Buyer's deposit of the Second Additional Earnest Money, Seller upon the written request of Buyer agrees to cooperate on a commercially reasonable basis to manage all lease expirations, renewals, and new leases so as to minimize the unexpired terms of tenant leases in existence on the Closing Date. This obligation to cooperate includes Seller's discussion with Buyer and formulation of a joint plan as to these matters and the implementation of that plan. ARTICLE V CLOSING DOCUMENTS SECTION 5.01. SELLER'S CLOSING DOCUMENTS AND ITEMS. By no later than the Closing Date, Seller will deliver to Escrow Agent the following documents and items (all in form reasonably acceptable to Buyer, to the extent not in agreed form as an exhibit to this Contract): (a) The Deed; (b) A Bill of Sale transferring Seller's interest in the Personalty in the form attached as EXHIBIT "F"; (c) The Assignment and Assumption of Contracts, Leases and Other Rights ("ASSIGNMENT") in the form attached as EXHIBIT "G"; (d) The most current rent roll for the Property, not dated more than three days prior to Close of Escrow and certified as true and complete by Seller; (e) All keys, combinations, tenant leases, tenant histories, and the like pertaining to the Property that are in Seller's possession; (f) Authorizations and resolutions from Seller authorizing the consummation of this sale; (g) An Affidavit of Property Value; (h) A Non-Foreign Affidavit; (i) Evidence of termination of all Project Contracts required to be terminated by Seller pursuant to other provisions of this Contract; (j) Title affidavits, undertakings and any and all other documents reasonably required by the Escrow Agent to issue the Title Policy; 9 (k) A letter jointly signed by Seller and Buyer notifying the tenants that the Property has been sold to Buyer, advising the tenants to pay all rent to Buyer and containing other similar information reasonably required by Buyer; (l) Letters to all vendors under agreements to be assigned to Buyer at Close of Escrow advising them of the transfer of the Property to Buyer and containing other related information reasonably required by Buyer; (n) Originals (or certified copies to the extent that originals are unavailable) of all warranties, guaranties, licenses, permits, leases, service contracts and other documents related to the ownership, construction, operation and leasing of the Property; and (m) Any other documents that may be reasonably necessary or appropriate to perform and satisfy the obligations of Seller under this Contract (including the release, discharge, and/or defeasance of the Monetary Liens). SECTION 5.02. BUYER'S CLOSING DOCUMENTS AND ITEMS. By no later than the Closing Date, Buyer will deliver to Escrow Agent the following documents and items: (a) The Closing Cash; (b) The Assignment; (c) An Affidavit of Property Value; (d) Appropriate evidence of due authorization and proper formation of Buyer; and (e) Any other documents that may be reasonably necessary or appropriate to perform and satisfy the obligations of Buyer under this Contract. SECTION 5.03. TITLE POLICY. Concurrent with the Close of Escrow, Escrow Agent will irrevocably commit to issue to Buyer a commitment to issue Escrow Agent's extended coverage owner's policy of title insurance ("TITLE POLICY") in the amount of the Price, subject only to Escrow Agent's standard conditions and stipulations of the policy and those matters approved or deemed approved by Buyer in accordance with Section 3.02. The cost of the Title Policy will be split by Buyer and Seller as established in the Additional Escrow Instructions. SECTION 5.04. CLOSING. When Escrow Agent holds each of the closing documents listed under Sections 5.01 and 5.02 and is committed to issue the Title Policy, Escrow Agent is authorized to complete the Close of Escrow by: (a) Recording and delivering to Buyer the Deed and the Affidavit of Property Value after paying off, releasing, discharging, or defeasing the Monetary Liens; (b) Issuing or irrevocably committing to issue the Title Policy to Buyer; (c) Delivering to Buyer and Seller a final closing settlement statement in a form and content approved by Buyer and Seller; (d) Paying from Buyer's Earnest Money and any other Buyer deposits Buyer's share of closing costs and expenses (as allocated and prorated in this Contract); (e) Delivering to Seller, in immediately available funds, the Price, less only Seller's closing costs and expenses (as allocated and prorated in this Contract) with the balance of the Earnest Money to be applied to the Price; and 10 (f) Delivering to Seller and Buyer fully executed originals (where applicable) or copies of the closing documents. SECTION 5.05. POSSESSION. On the Closing Date, Seller will deliver exclusive possession of the Property to Buyer, subject to those title matters approved by Buyer, the tenant leases, and the Approved Project Contracts. ARTICLE VI GENERAL PROVISIONS SECTION 6.01. INDEMNITY FOR ENTRY. Buyer, on demand, must indemnify, defend, and hold harmless Seller for, from, and against any and all loss, cost, damage, claim, liability, or expense, including court costs and attorney fees in a reasonable amount, arising out of Buyer's or its agent's or its independent contractor's entry on the Property for the purposes of its inspections and tests; however, Buyer will have no liability for any punitive damages or for or with respect to pre-existing conditions. The foregoing indemnity includes any repairs necessary to restore the Property to its condition prior to the entry and to remove and release any mechanic's and materialman's liens. SECTION 6.02. DEFAULT OF BUYER. If Buyer breaches this Contract, Seller, as its sole remedy, will be entitled to deliver a notice of immediate cancellation to Buyer and Escrow Agent and be paid the sum of $500,000, as full, liquidated, and agreed-upon damages for Buyer's breach or default, against which by Buyer will be created the Initial Earnest Money and any Additional Earnest Money deposits made by Buyer and released to Seller. With the fluctuation in land values, the unpredictable state of the economy, the fluctuating money market for real estate loans, and other factors that affect the marketability of the Property, Buyer and Seller agree that it would be impractical and extremely difficult to estimate the actual damages that Seller may suffer in the event of a default by Buyer. This remedy provision has been agreed-upon after specific negotiation, keeping in mind the difficulties in estimating actual damages. Buyer and Seller agree that the Earnest Money represents a reasonable estimate of the total damages. SECTION 6.03. DEFAULT BY SELLER. If Seller breaches this Contract, Buyer, as Buyer's sole and exclusive remedy, may elect to: (i) cancel this Contract and the Escrow and receive a refund of its Earnest Money; (ii) enforce specific performance of this Contract without any right whatsoever against Seller to any offset or credit against the Price or to any other equitable or legal remedies or monetary damages; (iii) if specific performance is not available, commence an action for actual damages; or (iv) elect to waive the breach and close the transaction. Buyer's cancellation notice under subsection (i) above will be deemed effective immediately upon delivery of written notice of the cancellation to Seller and Escrow Agent. If Buyer fails to file suit for its remedy of specific performance within 90 days following the scheduled Closing Date, Buyer will be deemed to have waived its specific performance remedy. SECTION 6.04. ATTORNEY'S FEES. If any action is brought by either Buyer or Seller regarding its rights under this Contract, the prevailing party will be entitled to attorney fees in a reasonable amount, expenses, and court costs both at trial and on appeal. SECTION 6.05. NOMINATION AND ASSIGNMENT. Buyer may assign its rights under this Contract to an Affiliated Entity by providing notice of the assignment to Seller and to Escrow Agent at least two days prior to the effective date of the assignment. Except for permitted assignment to an Affiliated Entity as described in the preceding sentence, Buyer may not assign or otherwise transfer any of its rights under this Contract without the prior written consent of Seller, whose consent may be given or withheld in Seller's commercially reasonable discretion. The term "AFFILIATED ENTITY" means any entity that is owned, managed, or controlled by Buyer or by an affiliate of Buyer. Any assignee of Buyer, by accepting an assignment, will be deemed to have assumed all of the obligations of Buyer under this Contract; however, in the case of any assignment, the original Buyer will not be released from its obligations under the Contract but will remain liable for all obligations under the Contract that are the obligations of the Buyer. Subject to the limitation contained above in this paragraph, this Contract is binding on and will inure to the benefit of the successors or assigns of Buyer and Seller. No person other than Buyer, Seller, and Escrow Agent is a party to this Contract, and no person will be deemed or is intended to be a third-party beneficiary to this Contract. 11 SECTION 6.06. CASUALTY AND CONDEMNATION. Seller will promptly provide notice to Buyer of any loss, damage, or taking ("LOSS") prior to Close of Escrow. If the amount of the Loss exceeds $100,000 (or the Loss involves the taking of access, parking or other material benefits, or facilities), then, within 15 days of Buyer's receipt of Seller's notice of the Loss, Buyer may elect to either: (i) terminate this Contract, in which case Buyer will be entitled to a return of all Earnest Money; or (ii) proceed with the purchase of the Property. If Buyer fails to timely provide notice of its election or if the amount of the Loss does not exceed $100,000 (and does not involves the taking of access, parking, or other material benefits or facilities), then Buyer and Seller will proceed under subsection (ii). If Buyer and Seller proceed, the Price will be adjusted downward by the amount of all awards and payments actually paid to Seller by the insurer or the condemning authority plus any deductible amounts under any applicable policies of insurance and other uninsured amounts. If Seller has not actually received the entire award or payment from the insurer or the condemning authority at the Close of Escrow, Seller also will assign to Buyer all of its rights to any further awards or payments (including, without limitation, all casualty and rent loss proceeds). SECTION 6.07. GOVERNING LAW AND EXCLUSIVE JURISDICTION. This Contract is to be governed by and construed and enforced in accordance with the laws of the State of Arizona. Any action brought to interpret, enforce, or construe any provision of this Contract must be commenced and maintained in the Superior Court of the State of Arizona, Maricopa County, or in the United States District Court for the District of Arizona. All parties irrevocably consent to this jurisdiction and venue and agree not to transfer or remove any action commenced in accordance with this Contract. SECTION 6.08. CONSTRUCTION. The terms and provisions of this Contract represent the results of negotiations between Seller and Buyer, neither of which have acted under any duress or compulsion, whether legal, economic, or otherwise. Consequently, the terms and provisions of this Contract will be interpreted and construed in accordance with their usual and customary meanings, and Seller and Buyer each waive the application of any rule of law which states that ambiguous or conflicting terms or provisions are to be interpreted or construed against the party whose attorney prepared the Contract or any earlier draft of the Contract. SECTION 6.09. ENTIRE AGREEMENT. This Contract constitutes the entire understanding between the parties pertaining to the subject matter of this Contract, and all prior agreements, representations, and understandings of the parties, whether oral or written, are superseded and merged in this Contract. No supplement, modification, or amendment of this Contract will be binding unless in writing and executed by the parties. No waiver of any of the provisions of this Contract will be deemed or will constitute a waiver of any other provisions, whether or not similar, nor will any waiver be a continuing waiver. No waiver will be binding unless executed in writing by the party making the waiver. Time is of the essence in the performance of each and every term of this Contract. SECTION 6.10. MISCELLANEOUS DEFINITIONS AND STANDARDS. Whenever the terms "SOLE DISCRETION", "SOLE AND ABSOLUTE DISCRETION", or "SOLE OPTION" are used, these terms will mean that the act or decision of the party may be made in the party's independent and individual choice of judgment, without regard to any objective or other standard of consideration. Except for those acts or decisions that may be made in a party's "sole discretion" etc., all acts or decisions of any party to this Contract must be exercised with reasonable discretion. Whenever the phrase "TO SELLER'S KNOWLEDGE" or any variation of either phrase is used, the phrase will mean that the matter represented is made based upon the actual knowledge of Dan Pryor and Sherry Wilzig Izak, without any duty of investigation or verification of the matter on a current or ongoing basis and subject to all information given and disclosures made pursuant to this Contract. The term "WILL" denotes a mandatory obligation, and the term "MAY" is a permissive word denoting an option. All references in this Contract to the "ESCROW AGENT" will be deemed to include the applicable title insurance underwriter for the Title Policy. SECTION 6.11. COUNTERPARTS. This Contract and any amendments may be executed in any number of original or telecopy counterparts, each of which will be effective on delivery and all of which together will constitute one binding agreement of the parties. Any signature page of the Contract may be detached from any executed counterpart of the Contract without impairing the legal effect of any signatures and may be attached to another counterpart of the Contract that is identical in form to the document signed (but that has attached to it one or more additional signature pages). SECTION 6.12. SEVERABILITY. If any one or more of the provisions of this Contract or the applicability of any provision to a specific situation is held invalid or unenforceable, the provision will be modified to the minimum extent necessary to make it or its application valid and enforceable in a manner consistent with the intent of this Contract, and the validity and enforceability of all other provisions of this Contract and all other applications of the enforceable provisions will not be affected by the invalidity or unenforceability of any provision, so long as the Contract may still be enforced in a manner consistent with the intent of Buyer and Seller. 12 SECTION 6.13. CONFIDENTIALITY. Without the prior written approval of Buyer and Seller, neither Seller, Buyer, nor Escrow Agent will make, authorize, or confirm any public announcement of this transaction or discuss this transaction or otherwise disclose any portion of the Due Diligence Documents, Books and Records (including all operating information) or results of environmental reports and assessments performed by Buyer, except as required by law or, as for Buyer, with those persons directly involved in the transaction including attorneys, advisors, partners, investors, consultants, accountants, and prospective lenders, without the prior written or oral consent of Seller. SECTION 6.14. TAX DEFERRED EXCHANGE. Seller and Buyer agree to cooperate in a commercially reasonable manner with each other and any designated exchange intermediary or exchange accommodation titleholder in order to effectuate a tax deferred exchange of the Property under Section 1031 of the Internal Revenue Code. This obligation to cooperate does not include requiring the other party to take title to any other property to complete the exchange, to issue any legal opinions, to increase the potential liability of the non-exchange party, or to expand legal fees to review exchange documents in other than a diminimus (less than $1,000) amount. [THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK] 13 Executed as of the Contract Date. "BUYER" "SELLER" GDG Partners L.L.C., an Arizona limited Biltmore Club Apartments, L.L.C., liability company a Delaware limited liability company By: By: ----------------------------------------------- ------------------------------------------ Name: Name: ----------------------------------------------- ------------------------------------------ Title: Title: ----------------------------------------------- ------------------------------------------
- -------------------------------------------------------------------------------- ESCROW AGENT'S ACCEPTANCE - -------------------------------------------------------------------------------- By its execution below, Escrow Agent accepts this Contract as its escrow instructions and acknowledges receipt of the Contract executed by Buyer and Seller. Upon its execution, Escrow Agent agrees to: (i) insert the relevant escrow number on the first page of this Contract; (ii) insert the date of the Opening of Escrow below; and (iii) return one fully executed counterpart of the Contract to Buyer and Seller and retain one for Escrow Agent's files. Lawyers Title of Arizona, Inc. By: -------------------------------- Its: Authorized Agent Date of "OPENING OF ESCROW" 14 - -------------------------------------------------------------------------------- ACKNOWLEDGEMENT OF RECEIPT - -------------------------------------------------------------------------------- By its execution below, Seller acknowledges to Buyer and Escrow Agent that Seller has received directly from Buyer the Initial Earnest Money in Good Funds and has accepted the terms and conditions of the Contract and has agreed that this Contract is a binding contract and agreement of Seller. Biltmore Club Apartments, L.L.C., a Delaware limited liability company By: ----------------------------------------------------- Name: --------------------------------------------------- Title: -------------------------------------------------- 15 SCHEDULE OF DEFINITIONS FOR PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS (ALL CASH) TERM SECTION LOCATION IN CONTRACT Additional Documents 4.05 Additional Earnest Money 2.01(c) First Additional Earnest Money 2.01(b) Second Additional Earnest Money 2.01(c) Affiliated Entity 6.05 Agreement 1.01 Approved Pro Forma Policy 3.02 Approved Project Contracts 4.06(d) Assignment 5.01(c) Books and Records 3.03(a) Broker 2.03 Buyer Cover page Buyer's Cashier Check 2.04(a) Closing Cash 2.01(d) Closing Date 2.04(c) Close of Escrow 2.04(c) Contract 1.01 Contract Date Cover page Contract Rights 1.02 Deed 4.01 Due Diligence Documents 3.01 Earnest Money 2.02 Employed Broker 2.03 Escrow Cover page Escrow Agent Cover page and 6.10 Excluded Model Furnishings 1.05 Existing Environmental Report Exhibit "E" Existing Survey 3.02 Good Funds 2.02 Governmental Authorities 3.04 Improvements 1.02 Initial Earnest Money 2.01(a) Inspection Period 2.04(b) Loss 6.06 May 6.10 Monetary Liens 3.02(d) Notice Reps Exhibit "E" Opening of Escrow 2.04(a) Operational Reps Exhibit "E" Other Rights 1.02 Outside Closing Date 2.04(c) Personalty 1.02 Physical Condition Reps Exhibit "E" Price 2.01 Project Contracts 4.06(d) Property 1.02 Property Assessments 2.05(b) Property Condition Report Exhibit "E" 16 Real Property Cover page Redevelopment Entitlements 3.04 Seller Cover page Seller Contract Representations 4.02 Seller Authority Reps Exhibit "E" Sole discretion 6.10 Sole and absolute discretion 6.10 Sole option 6.10 Survey 3.02 Tenant Deposits 2.05(c) Timely Claimed Breach 4.04 Title Objections 3.02 and 3.02(c) Title Policy 5.03 Title Report 3.02 To Seller's knowledge 6.10 Will 6.10 THIS SCHEDULE OF DEFINITIONS HAS BEEN ATTACHED AND PROVIDED FOR CONVENIENCE AND EASE OF REFERENCE ONLY. OTHER DEFINED TERMS MAY APPEAR IN THE PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS. 17 EXHIBIT "A" TO PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS (ALL CASH) (Legal Description of the Real Property) A-1 EXHIBIT "B" TO PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS (ALL CASH) (Additional Escrow Instructions) ADDITIONAL ESCROW INSTRUCTIONS (COMMERCIAL) Buyer and Seller instruct Escrow Agent to allocate all closing prorations and to pay all closing costs as follows:
- ------------------------------------------------------------------------------------- -------------- --------------- ITEM SELLER BUYER - ------------------------------------------------------------------------------------- -------------- --------------- CLOSING COSTS o Escrow charges 1/2 1/2 o Recordation cost of Deed and Affidavit X o Recordation cost of Releases/Reconveyance required under Contract X o Recordation cost of New Encumbrances o Owner title policy (Form: Standard) X o Lender title policy (Form: Extended) X Ext. X - ------------------------------------------------------------------------------------- -------------- ---------------
"Contract" means the Purchase Agreement and Escrow Instructions to which these Additional Escrow Instructions are attached. "COE" means the Close of Escrow, as defined in the Contract. "NA" means not applicable. Fire insurance will be provided by Buyer at the COE under a new policy, if applicable. Unless otherwise indicated above or in the Contract, the COE will be used as the proration date for all prorations. Buyer and Seller further agree that: 1. Buyer and Seller: (i) will deposit with Escrow Agent the necessary documents to complete the sale as established by the terms of the Contract; (ii) authorize Escrow Agent to deliver or record all documents at the time designated by the Contract; and (iii) authorize Escrow Agent to pay, from funds held by it under the Contract, all charges and obligations necessary to consummate this transaction. 2. Buyer and Seller will indemnify and hold harmless Escrow Agent from all costs, damages, attorney fees, expenses, and liabilities that Escrow Agent may incur or sustain in connection with the Contract, including any interpleader action brought by Escrow Agent, except for those matters arising out of the negligent acts or omissions, willful misconduct, breach contract, or breach of fiduciary duty of Escrow Agent. 3. When the Contract has been complied with by all parties, Escrow Agent will deliver, by recording in the appropriate public office, all necessary documents, disburse all funds, and issue the title insurance policies described in the Contract. 4. If conflicting demands are made upon Escrow Agent concerning the Contract, Buyer and Seller agree that Escrow Agent may hold any money and documents deposited under this Contract until Escrow Agent receives mutual instructions from Buyer and Seller or until a civil action has been finally concluded in a court of competent jurisdiction determining the rights of Buyer and Seller. In the alternative and at its discretion, Escrow Agent may commence a civil action to interplead any conflicting demands in a court of competent jurisdiction. Escrow Agent's deposit with the court of all documents and funds concerning this Escrow will relieve Escrow Agent of all further liability and responsibility under the Contract, except for those matters arising out of the negligent acts or omissions of Escrow Agent. 5. Buyer and Seller instruct Escrow Agent to execute, on behalf of the Seller and Buyer, the affidavit of value, using the total consideration for the established value, unless instructed by Seller and Buyer to the contrary. 6. All title insurance policies will be issued by an underwriter approved by Buyer and Seller. 7. All disbursement of funds by Escrow Agent will be made by wire transfer of funds or Escrow Agent's check, as directed by Buyer or Seller as applicable. B-1 8. Buyer and Seller agree to pay all escrow charges at the lesser of the rates identified in Escrow Agent's filed fee schedule as of the date of the Contract or as of the COE. 9. The time for performance of any obligation or for the taking of any action under the Contract will be deemed to expire at 5:00 p.m. (Arizona time) on the last day of the applicable time period established in this Agreement. In calculating any time period under the Contract that commences upon the receipt of any notice, request, demand, or document, or upon the happening of any event, the date upon which the notice, request, demand, or document is received or the date the event occurs (or is deemed to have occurred) is not included within the applicable time period, but the applicable time period will commence on the day immediately following. If the time for performance of any obligation or for taking any action under the Contract expires on a Saturday, Sunday, legal holiday, or any date Escrow Agent is not open for business, the time for performance or for taking such action will be extended to the next succeeding day which is not a Saturday, Sunday, or legal holiday and during which Escrow Agent is open for business. 10. Escrow Agent is designated as the "Reporting Person" within the meaning of Treasury Regulation Section 1.6045-4(e)(5) with respect to the closing of the transactions contemplated by the Contract. Escrow Agent acknowledges that it is an eligible person for reporting this transaction under Treasury Regulation Section 1.6045-4(e)(5)(ii) and agrees: (i) to comply on a timely basis with all reporting and filing requirements of Internal Revenue Code Section 6045(e); and (ii) to utilize the information in this Contract, as amended, for the purposes of supplying any required information to the Internal Revenue Service such as, for example, the identity of the transferee and transferor, and the description of the Land. Buyer and Seller agree to cooperate with Escrow Agent's requests related to any required reporting or filing under Internal Revenue Code Section 6045(e), and Escrow Agent is authorized to disclose any information contained in the Contract to the Internal Revenue Service for the purposes of complying with Escrow Agent's obligations under this paragraph. Escrow Agent agrees to be liable for all penalties and liabilities imposed by the Internal Revenue Service as a result of Escrow Agent's failure to comply with its obligations under this paragraph. 11. All notices, requests, demand, and other communications required or permitted under this Contract must be in writing and will be deemed to have been delivered, received, and effective: (i) on the date of service, if served by hand-delivery or by facsimile telecopy on the party to whom notice is to be given; or (ii) on the date that is one business day after deposit of the notice properly addressed to the party at the address shown on the cover page to this Contract, if sent by national overnight delivery; or (iii) three days after deposit of the notice properly addressed, if sent by U.S. certified mail, return-receipt requested. The addresses, telephone numbers, and telecopy numbers shown on the first page of this Contract are the places and numbers for delivery of all notices. Any party may change the place or number for delivery of notice by notifying all other parties. B-2 EXHIBIT "C" TO PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS (ALL CASH) (Due Diligence Documents) The Due Diligence Documents consist of the following: (a) Monthly and yearly operating statements and income and expense statements for the Property for calendar year 2004, which Seller will update with current monthly statements for 2005 as they are prepared; (b) 2003, 2004, and 2005 (when available) capital and operating budgets; (c) A current rent roll for the Property, together with information on concessions currently in effect, an aged receivables report, and a security deposit report, all of which will be updated when requested by Buyer on a monthly basis during the term of the Escrow by Seller; (d) The most current inventory list of all Personalty; (e) Real estate tax or special assessment statements for the years 2003 and 2004, including any correspondence related to property tax appeals; (f) Copies of all Project Contracts; (g) A representative example of the form of all residential leases affecting the Property and any corporate unit agreements; (h) Any recent appraisals of the Project that are in Seller's possession; (i) The Approved Pro Forma Policy, Existing Survey, Property Condition Report, and Existing Environmental Report, true copies of which have been provided by Seller to Buyer as of the Contract Date; (j) Copies of all warranties, plans, specifications, building permits, operating licenses, ADA compliance information, permits, governmental notices, notices regarding litigation, fair housing notices, notices of ADA violations or non-compliance, warranties, guaranties, bonds, certificates of occupancy, geotechnical (soils) reports, and engineering reports for the Property that are available (if any) and in Seller's possession. (k) A certificate of insurance showing the amounts of casualty and liability insurance maintained by Seller with respect to the Property together with a summary and explanation of all insurance claims made within the 24 months prior to the Contract Date; (l) Any notices of current or prior (last 24 months) code violations and any non-privileged correspondence with government agencies regarding the notices or cure; and (m) All correspondence from tenants or vendors/service providers under the Project Contracts that allege a default or breach by Seller under the terms of any lease or Project Contract or that otherwise could have a material impact on the Property and its condition or operation. C-1 EXHIBIT "D" TO PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS (ALL CASH) (Deed) WHEN RECORDED RETURN TO: Lynn T. Ziolko Kutak Rock LLP 8601 North Scottsdale Road, Third Floor Scottsdale, Arizona 85253-2742 SPECIAL WARRANTY DEED For valuable consideration, the receipt and sufficiency of which are acknowledged, ________________________, a(n) __________________________________ ("GRANTOR"), conveys to ___________________, a(n) ___________________ ("GRANTEE"), the following real property situated in Maricopa County, Arizona, together with all appurtenant interests, benefits, rights, and privileges and any improvements located on the following real property (collectively, the "PROPERTY"). See EXHIBIT "A" attached hereto and incorporated by this reference Subject to all current and non-delinquent taxes and assessments and all matters of record in the Official Records of Maricopa County, Arizona, Grantor agrees to warrant and defend Grantee's title to the Property against the acts of Grantor, but none other. DATED as of , 20 ---------------- ------ a(n) --------------------------------------- By: --------------------------------------- Name: --------------------------------------- Title: --------------------------------------- STATE OF ARIZONA ) ) ss. County of Maricopa ) The foregoing instrument was acknowledged before me this ___ day of ________________, 20__, by ___________________________, the ______________________ of ___________________________, a(n)____________________, for the purposes therein contained. ------------------------------ Notary Public My Commission Expires: D-1 EXHIBIT "E" TO PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS (ALL CASH) (Seller representations and warranties) E-1 -- As to those matters related to the power and authority of Seller to sell the Property to Buyer under this Contract (collectively called the "SELLER AUTHORITY REPS"), Seller represents and warrants to Buyer as follows: (a) Seller is not prohibited from consummating the transaction contemplated by any law, regulation, agreement, order, or judgment. (b) Seller is legally capable and properly authorized to perform all of its obligations as described in this Contract. No additional shareholder, director, member, or partner approvals are required to make this Contract a binding agreement of Seller once Seller has signed the Contract or deposited, negotiated, or otherwise accepted Buyer's Cashier Check. (c) Seller is not party to any other current contracts for the sale, exchange, or transfer of all or any portion of the Property. (d) The person signing this Contract on behalf of Seller is legally and properly authorized and empowered to sign the Contract and bind Seller to its terms and conditions. (e) The existing first position loan on the Property can be defeased, and Seller will undertake, at its sole cost, all actions necessary to cause the defeasance to occur. E-2 -- As to those matters with respect to the condition of the Property disclosed or referred to in third party notices (collectively called the "NOTICE REPS"), Seller represents and warrants to Buyer as follows: (a) Seller has no knowledge of any pending or threatened condemnation or similar proceedings affecting the Property or any portion. (b) Seller has no knowledge and has received no notifications from any Governmental Authorities having jurisdiction over the Property: (i) requiring any work to be done on the Property; or (ii) alleging any violation of an applicable ordinance, rule, regulation, or law with respect to the Property. (c) Seller has received no notices by from any tenant claiming that Seller is in material default of its obligations as landlord. (d) Seller has received no notice and has no knowledge of any actual or threatened claim, demand, damage, action, cause of action, litigation or other proceedings affecting the Property other than for rent collection or eviction related matters that have been disclosed to Buyer in writing. E-3 -- As to those matters related to the legal or physical condition of the Property (collectively called the "PHYSICAL CONDITION REPS"), Seller represents and warrants to Buyer as follows: (a) The Property Conditions Assessment dated January 13, 2002, prepared by Property Solutions Incorporated (Project No. 20023437) ("PROPERTY CONDITION REPORT"), as provided to Buyer, is a true copy of the original report, and the current condition of the Property is substantially the same as described in the Property Condition Report, subject to ordinary wear and tear. (b) Seller has no knowledge of the existence of any past or present environmental condition (including, without limitation, mold, PCBs and other hazardous or toxic waste or substance) or hazardous substance on the Property, except as set forth in the Phase I Environmental Site Assessment report dated January 5, 2002, prepared by Property solutions Incorporated (Project No. 20023436) ("EXISTING ENVIRONMENTAL REPORT"), a true copy of which has been provided to Buyer. E-1 (c) Seller owns marketable fee simple title to the Property subject only to: (i) those matters set forth in the Approved Pro Forma Policy, a true copy of which has been provided to Buyer; and (ii) those matters disclosed by the Existing Survey, a true copy of which has been provided to Buyer. E-4 -- As to those matters related to the financial or operational status or condition of the Property (collectively called the "OPERATIONAL REPS"), Seller represents and warrants to Buyer as follows: (a) All rent rolls of the Property delivered to Buyer pursuant to this Contract accurately set forth the lease status of the Property and all information established in the rent rolls is true and complete in all material respects as of the respective dates. (b) To Seller's knowledge, all Due Diligence Documents provided by Seller to Buyer are true and complete copies in all material respects of the Due Diligence Documents in Seller's possession. (c) Other than tenants in possession as disclosed in the rent roll delivered to Buyer or as otherwise disclosed in the Title Report, no one other than Seller is in possession of the Property. (d) There are no property agreements or contracts affecting the Property or its use or operation or to which Seller is a party other than as disclosed in the Due Diligence Documents. To Seller's knowledge, there are no material defaults in existence with respect to any Project Contracts. There are no locator agreements, leasing brokerage agreements or other similar agreements affecting the Property or to which Seller is a party that will be binding on Buyer after Close of Escrow. E-2 EXHIBIT "F" TO PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS (ALL CASH) (Bill of Sale) BILL OF SALE ______________________________, a(n) _______________________________ ("SELLER"), for and in consideration of the payment of a portion of the amounts described in the Purchase Agreement and Escrow Instructions dated ________________, 2005 (as amended, the "CONTRACT"), sells and delivers to _____________________________________ a(n) ____________________________ ("BUYER"), and its successors and assigns, all equipment, furnishings, appliances, and items of personal property that are located on or used in connection with the improved real property known as "Biltmore Club Apartments," including, without limitation, those items described on APPENDIX ONE ("PERSONAL PROPERTY"). Seller represents and warrants to Buyer that: (i) Seller is the sole owner of all of the Personal Property; (ii) Seller has all requisite power and authority to transfer and convey the Personal Property to Buyer; (iii) to the extent necessary, Seller has obtained all consents and approvals required to transfer the Personal Property to Buyer; and (iv) the Personal Property is free and clear from all pledges, liens, claims, and encumbrances of any type or nature. Seller, at its sole cost and expense, agrees to defend title to the Personal Property against all claims and demands of any type or nature. Seller transfers and assigns to Buyer any and all representations or warranties (express or implied) and other rights, claims, and causes of action of Seller relating to the Personal Property that may be enforceable against manufacturers, distributors, suppliers, vendors, or servicers of the Personal Property (collectively, the "WARRANTIES"). Seller, at its sole cost and expense, agrees to perform, execute, and/or deliver (or to cause to be performed, executed, and/or delivered) any additional documents and/or assurances that Buyer may reasonably request to insure, secure, or perfect Buyer's interest in any item transferred to Buyer by this Bill of Sale or to otherwise fully and effectively carry out the intent and purpose of this Bill of Sale or the Contract. EXCEPT FOR THOSE WARRANTIES AND REPRESENTATIONS, IF ANY, MADE BY SELLER IN THIS BILL OF SALE OR UNDER THE CONTRACT, SELLER: (I) HAS SOLD AND DELIVERED THE PERSONAL PROPERTY TO BUYER IN AN "AS-IS" AND "WHERE-IS" CONDITION, SUBJECT TO ALL FAULTS AND DEFECTS, AND WITHOUT ANY IMPLIED WARRANTIES OF ANY NATURE INCLUDING ANY IMPLIED WARRANTIES OF FITNESS OR MERCHANTABILITY; (II) HAS MADE NO WARRANTIES OR REPRESENTATIONS THAT EXTEND BEYOND THE DESCRIPTION IN THIS BILL OF SALE OR THE CONTRACT; AND (III) HAS MADE NO REPRESENTATION OR WARRANTY REGARDING THE PHYSICAL OR OPERATING CONDITION OF THE PERSONAL PROPERTY. This Bill of Sale will be effective as to the transfer of all of the above-described Personal Property as of ___________, 20__. a(n) -------------------------------------------- By: --------------------------------------------- Its: --------------------------------------- F-1 EXHIBIT "G" TO PURCHASE AGREEMENT AND ESCROW INSTRUCTIONS (ALL CASH) (Assignment of Leases, Contracts, and Other Rights) G-1 ASSIGNMENT OF LEASES, CONTRACTS, AND RIGHTS This Assignment of Leases, Contracts, and Rights, ("ASSIGNMENT") is executed and delivered as of [INSERT CLOSING DATE], 20___ ("EFFECTIVE DATE") by _______________________, a ________________________ ("SELLER") to ________________________________ ("BUYER"). BACKGROUND A. Seller, by Special Warranty Deed ("DEED") executed concurrently with this Assignment, has sold and conveyed to Buyer the residential apartment complex ("PROJECT") commonly known as "Biltmore Club Apartments," located at _________________________________, in the City of Phoenix, County of Maricopa, State of Arizona, as more particularly described in the Deed. B. The terms and provisions of the contracts and agreements in effect between Seller and Buyer relating to the sale/purchase of the Project (collectively, the "PURCHASE CONTRACT") require, among other things, that Seller execute this Assignment transferring and assigning to Buyer Seller's rights in the Contract Rights (including all tenant leases) and Other Rights (collectively, the "ASSIGNED ITEMS"). C. Capitalized terms that are used in this Assignment but are not defined specifically in this Assignment will be ascribed the meanings contained in the Purchase Contract. TRANSFER AND ASSIGNMENT In consideration of the closing of the purchase of the Project by Buyer and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged, Seller makes the following assignments to Buyer: 1. Assignment of Rents, Tenant Leases, and Contracts. (a) Seller transfers, assigns, and conveys to Buyer, and its successors and assigns, all of the right, title, interest, powers, and privileges of Seller in and under all tenant leases applicable to the Project ("TENANT LEASES"), all of which are referred to in the Rent Roll attached as APPENDIX ONE ("RENT ROLL"). This assignment of Tenant Leases includes the right of Buyer to collect all rents due or payable under the Tenant Leases for periods commencing on or following the Effective Date of this Assignment. (b) Seller certifies that the information shown on the Rent Roll is true and correct as of the date of this Assignment, and there is no rent or other concessions given to any occupant of an apartment unit in the Project, except as accurately reflected in the Rent Roll. (c) Seller further represents and warrants to Buyer that: (i) Seller is the lawful owner of all of the Tenant Leases; (ii) all Tenant Leases are in full force and effect and, after the date of this Assignment, will be enforceable by Buyer in accordance with their terms; (iii) except as otherwise disclosed to Buyer in writing, there are no defaults by Seller (or its agents or representatives) or any tenant under the Tenant Leases; and (iv) all future rights and obligations assumed by Buyer under the Tenant Leases are accurately established in the Tenant Leases, true, correct, and complete copies of which were previously furnished by Seller to Buyer. 2. ASSIGNMENT OF SECURITY DEPOSITS. Seller transfers and assigns to Buyer all Tenant Deposits. [SELLER REPRESENTS AND WARRANTS TO BUYER THAT THE AGGREGATE SUM OF THE TENANT DEPOSITS IS $____.] 3. ASSIGNMENT OF PROJECT CONTRACTS. (a) Seller transfers and assigns to Buyer, and its successors and assigns, all of the right, title, interest, powers, and privileges of Seller under only the Project Contracts listed on APPENDIX TWO to this Assignment. No other Project Contracts are transferred or assigned to Buyer. (b) Seller represents and warrants to Buyer that: (i) all right, title, interest, powers, and privileges being assigned to and assumed by Buyer and all rights and options of third parties relating to the Approved Project Contracts are accurately established in their entirety in the Approved Project Contracts attached as APPENDIX TWO; and (ii) no contracts or agreements relating to management, maintenance, ownership, or operation of the Project, other than those listed on APPENDIX TWO, have been entered by Seller which will remain in effect or become effective after the Effective Date of this Assignment. G-2 4. ASSIGNMENT OF MISCELLANEOUS ITEMS. Without limitation of Section 1 above, Seller transfers, assigns, and conveys to Buyer, its successors and assigns, all Contract Rights and Other Rights owned by Seller and located on the Project that have not otherwise been conveyed by a concurrently executed Bill of Sale from Seller to Buyer. 5. ASSIGNMENT OF WARRANTIES, CLAIMS AND CAUSES OF ACTION. Seller transfers and assigns to Buyer, and its successors and assigns, all of Seller's right, title, and interest in all representations or warranties (express or implied) and all other rights, causes of action, or all claims of any kind (collectively, the "WARRANTIES") arising out of the Assigned Items. Without intending to limit the generality of the foregoing, Seller assign to Buyer all rights, claims, and causes of action which Seller may have against any contractor, materialman, supplier, distributor, or vendor relating to any work, materials, or equipment furnished for the Project prior to the date of this Assignment. 6. MISCELLANEOUS. (a) Seller agrees, at its sole cost and expense, to perform, execute, and/or deliver (or to cause to be performed, executed, and/or delivered) any additional documents and/or assurances as Buyer may reasonably request to insure, secure, or perfect Buyer's interest in any of the items assigned to Buyer by this Assignment or to otherwise fully and effectively carry out the intent and purpose of this Assignment or the Contract. (b) Seller warrants and represents to Buyer that the rights and interests of Seller intended to be assigned under this Assignment are not subject to any prior assignment, pledge, or encumbrance. (c) Seller and Buyer warrant and represent to each other that they have the requisite power and authority to enter this Assignment and have performed all acts and secured all approvals necessary to make this Assignment effective and legally binding on such party in accordance with its terms. Each person executing this instrument on behalf of either party, as agent or otherwise, personally warrants that he or she is duly authorized and empowered to do so and that all signatures and approvals of persons with an ownership interest in such party have been obtained so as to make this Assignment legally enforceable and effective against such party. (d) This Assignment is binding upon the successors and assigns of Seller and will inure to the benefit of the successors and assigns of Buyer, and all warranties and representations of Seller contained in this Assignment shall survive the Effective Date of this Assignment, the recordation of the Deed, and the delivery of this Assignment. (e) This Assignment shall be governed by and interpreted under the laws of the State of Arizona. (f) Seller, on demand, agrees to indemnify and hold harmless Buyer for, from, and against any and all loss, cost, damage, claim, liability, or expense (including court costs and attorney fees in a reasonable amount) arising out of the acts or omissions of Seller or its agents prior to the Effective Date with respect to the Assigned Items. Buyer, on demand, agrees to indemnify and hold harmless Seller for, from, and against any and all loss, cost, damage, claim, liability, or expense (including court costs and attorney fees in a reasonable amount) arising out of the acts or omissions of Seller or its agents after the Effective Date with respect to the Assigned Items. The foregoing indemnities include loss, cost, damage, claim, liability, or expense from any injury or damage of any kind whatsoever (including death) to persons or property. The indemnity described in this Assignment is intended to be separate and distinct from any obligations of the Seller or the Buyer under the terms of the Purchase Contract. This Assignment has been executed and delivered as of the Effective Date. G-3 "SELLER" ---------------------------------------------- a ---------------------------------------------- By: -------------------------------------------- Name: ------------------------------------------ Title: ----------------------------------------- "BUYER" ---------------------------------------------- a ---------------------------------------------- By: -------------------------------------------- Name: ------------------------------------------ Title: ----------------------------------------- G-4 APPENDIX ONE TO ASSIGNMENT OF LEASES, CONTRACTS, AND RIGHTS (Rent Roll) [TO BE PROVIDED ON THE CLOSING DATE] APPENDIX TWO TO ASSIGNMENT OF LEASES, CONTRACTS, AND RIGHTS (list and copies of approved Business Leases and Project Contracts) [TO BE PROVIDED ON THE CLOSING DATE] EX-10.35 5 b405718ex10_35.txt PURCHASE AGREEMENT EXHIBIT 10.35 PURCHASE AGREEMENT BETWEEN WILSHIRE ENTERPRISES, INC. AND INTERSTATE EAST MANAGEMENT, INC. DATED MARCH 23, 2005. [GRAPHIC] PURCHASE AGREEMENT PURCHASE AND SALE: As a result of the efforts of Southeast Apartment Partners LLC ("Broker"), a licensed real estate broker, the undersigned purchaser ("Purchaser"), agrees to buy, and the undersigned seller ("Seller"), agrees to sell, as of this date, March 8th, 2005, subject to the terms and conditions set forth herein, all that tract of land known as 72 units known as TWELVE OAKS APARTMENTS, 634 Roy Huie Road, Riverdale, GA 30274, Property ID: 13-139a-00b-0022 (See Attached Legal Description "Exhibit A") attached hereto and by this reference made a part hereof, together with all improvements now located thereon, including, but not limited to, all electrical, mechanical, plumbing and other systems and all fixtures located therein and thereon, and all personal property owned by Seller used specifically for the use of this property and also all that property that is used by the tenants and owned by Seller and located therein, as well as plants, trees and shrubbery thereon and the related tenant leases and all rights under those leases with respect to the period from and after Closing (collectively, the "Property"). PURCHASE PRICE AND METHOD OF PAYMENT: The purchase price of the Property shall be TWO MILLION FOUR HUNDRED SIXTY-EIGHT THOUSAND SEVEN HUNDRED FIFTY & 00/100 DOLLARS (U.S.) ($2,468,750.00) (the "Purchase Price"), to be paid in cash or immediately available funds at Closing. TITLE EXAMINATION: For purposes of this Agreement, "good and marketable fee simple title" shall mean such title as is insurable by a title insurance company licensed to do business in Georgia, under its standard form of ALTA Owner's Policy of Title Insurance, 1992 Form B, at its standard rates, subject only to the Permitted Exceptions (defined below). Fee simple title to the Property shall be conveyed to Purchaser by Seller pursuant to a limited warranty deed executed and delivered by Seller at the Closing subject to the following (collectively, the "Permitted Title Exceptions"): (a) taxes for the year in which the Closing shall occur, the payment of which Purchaser shall assume at the Closing, subject to the provisions of this Agreement; (b) any and all zoning ordinances, rules and regulations; (c) those matters set forth in the Title Commitment (defined below) to be obtained by Purchaser pursuant to the terms of this Agreement, with the exception of those objections as set forth in Purchaser's Title Notice (defined below); (d) all matters shown by a current survey of the Property, with the exception of those objections as set forth in Purchaser's Title Notice (defined below) to the extent Seller has elected to cure same; and (e) other matters as disclosed in this Agreement. At Closing, Seller shall also execute usual and customary documents to facilitate the closing of the transaction, including without limitation, settlement statements and seller's affidavits. 1 Purchaser agrees, during the Financing Contingency, to cause a title examination of the Property to be conducted by a title company mutually acceptable to both Purchaser and Seller (the "Title Company") and to cause such title company to issue an owner's title commitment for the benefit of Purchaser on its standard form of ALTA Form B owner's policy (the "Title Commitment"). If the Title Commitment discloses any defects in title or objections, as determined in the sole discretion of Purchaser or Purchaser's lender, Purchaser shall notify Seller in writing of such defects or objections no later than the end of Inspection Period ("Purchaser's Title Notice"). Within FIVE (5) days after receipt of Purchaser's Title Notice, Seller shall deliver to Purchaser a written notice specifying which, if any, items contained in Purchaser's Title Notice Seller shall cure prior to or at Closing (the "Seller's Cure Notice"). Notwithstanding anything contained herein, Seller shall have no obligation or duty to cure any title objection(s) other than those items that Seller agrees to cure in Seller's Cure Notice. In the event Seller is unable to cure or unwilling to cure all objections raised in Purchaser's Title Notice, Purchaser's only remedy is (i) within two (2) business days after receipt of Seller's Cure Notice, to terminate this Agreement as provided herein and receive, within five (5) days of delivery of such termination notice and with or without consent of the Seller, the return of the Earnest Money, including all interest thereon, less $100.00 which shall be paid over to Seller, or (ii) to waive such objection and close the transaction contemplated by this Agreement. Seller is to pay for title examination. At closing, purchaser shall reimburse seller for the cost of the title examination. WARRANTIES: Seller represents that to the best of Seller's knowledge, (A) Seller has good and marketable fee simple title to the Property; (B) The Property will be in substantially the same condition upon Closing as on the date of Seller's execution hereof; (C) There is no planned or pending rezoning affecting the Property; (D) There are no assessments, condemnations, or eminent domain proceedings or governmental orders pending or threatened against the Property or any portion thereof; (E) There is no option to purchase, right of first refusal to purchase or agreement for the sale and purchase of the Property or any portion thereof to any person or entity; (F) No consent or approval of any other person or entity is required in order for this Agreement to be legal, valid and binding upon Seller; (G) There are no pending or threatened suits, proceedings, judgments, bankruptcies, or liens of claim thereof that might affect the title to the Property or executions against the present or former owners thereof, either in the county in which the Property is located or any other county in the State of GEORGIA that might affect title to the Property; and (H) Seller has not received any written notice from any tenant at the Property that a tenant has asserted any defense, set-off, or counterclaim with respect to its tenancy or its obligation to pay rent and other charges pursuant to its lease. If, prior to Closing, Seller or Purchaser shall become aware of any past or present matters that may cause any of the warranties or representations set forth in this Section 6 to be or become false, inaccurate, or misleading in any material respect (whether or not Seller has had knowledge thereof), Purchaser shall have the right to terminate this Agreement without further recourse by Seller and receive refund of the Earnest Money. The warranties stated herein shall survive the Closing for a period of NINETY (90) DAYS. Any claim for a breach of warranty must be filed during such NINETY (90) DAY period or shall be forever waived. CONDITION OF PROPERTY: Purchaser acknowledges and agrees that upon Closing, Seller shall sell and convey to Purchaser and Purchaser shall accept the Property "AS IS, WHERE IS, WITH ALL FAULTS," except to the extent expressly warranted or provided otherwise in this Agreement and any document executed by Seller and delivered to Purchaser at Closing. Purchaser acknowledges that it will have the opportunity to inspect the Property during the Inspection Period. Purchaser acknowledges that during such Inspection Period it will have the opportunity to observe the physical characteristics and existing conditions of the Property and to conduct such investigation and study on and of the Property and adjacent areas as Purchaser deems necessary. It is understood and agreed that Seller has not at any time made, is not now making and specifically disclaims any warranties or representations of any kind or character, express or implied, with respect to the presence or absence of Hazardous Materials, in, on, under or in the vicinity of the Property. Until Closing, Seller shall, at Seller's expense, maintain in full force and affect the same fire and extended coverage insurance carried by Seller on the Property on the date of this Agreement. However, should the Property be destroyed or substantially damaged before Closing, then at the election of Purchaser: (A) this Agreement may be immediately canceled by Purchaser, and Seller shall refund the Earnest Money within five (5) days of the notice of cancellation; or (B) Purchaser may consummate this Agreement and receive such insurance proceeds as are paid on the claim of loss. The election to terminate or consummate this Agreement, if not earlier terminated, must be exercised within TEN (10) days after Seller provides Purchaser written notice of the casualty. 2 SURVEY: Within SIXTY (60) DAYS of acceptance of this Agreement, Purchaser shall update the Seller's survey to be made by a Georgia Registered Land Surveyor showing actual boundaries of the Property and all easements, roads, and rights-of-ways on the ground or evidenced of record (the "Survey"). Seller agrees that Purchaser must determine prior to the end of the Inspection Period that the Survey is acceptable to Purchaser, in Purchaser's sole discretion, in order for Purchaser to have the obligation to close the transaction contemplated herein. Upon receipt of the Survey, Purchaser shall deliver a copy of the Survey to Seller. The Survey shall conform as closely as possible to the property lines and acreage depicted on Exhibit "A". If Purchaser accepts the results of the Survey, the Survey shall become a part of this Agreement and Seller shall execute and deliver at Closing a quitclaim deed using said description from the Survey. Purchaser shall object to any defects on other deficiencies in the Property shown by the Survey to Seller as part of Purchaser's Title Notice, and the same notice and termination provisions as stated in Section 5 above shall apply to this Section 9. In the event Seller does not have a survey of the Property, Purchaser and Seller shall equally split the cost of the new survey. AGENCY DISCLOSURE: Purchaser and Seller acknowledge that Broker has acted as an agent for Seller. Broker shall not owe any duty to Seller greater than what is set forth in the Brokerage Relationships in Real Estate Transaction Act, Official Code of Georgia Annotated Section 10-6A-1 et seq. REAL ESTATE COMMISSION: In negotiating this Agreement, Broker has rendered a valuable service and shall be paid a Commission in cash at Closing by Seller per a separate agreement. DISCLAIMER: Seller and Purchaser acknowledge that they have not relied upon the advise or representations, if any, of Brokers, or their associate brokers or salespersons, concerning: (A) the legal and tax consequences of this Agreement in the sale of the Property: (B) the terms and conditions of financing; (C) the purchase and ownership of the Property; (D) the structural condition of the Property (E) the operating condition of any business; (F) the operating condition of the electrical, heating, air conditioning, plumbing, water heating systems and appliances on the Property; (G.) the availability of utilities to the Property; (H) the investment potential or resale value of the Property; (I) the financial ability of Purchaser, (J) any conditions existing off the Property which may affect the Property; or (K) any matter which could have been revealed through a survey, title search or inspection of the Property. Seller and Purchaser both acknowledge that if such matters have been a concern to them, they have sought and obtained independent advice relative thereto. ASSIGNMENT: This Agreement and the rights and obligations hereunder may be assigned by Purchaser to an entity owned by Purchaser or under Purchaser's control, but not otherwise. Notwithstanding anything contained herein to the contrary, any such assignee shall assume in writing all of the obligations and liabilities of Purchaser hereunder, and a copy of such assignment shall be provided to Seller in writing within two (2) days after it is signed by Purchaser and assignee. BINDING EFFECT: THIS AGREEMENT SHALL BIND AND INURE TO THE BENEFIT OF SELLER, PURCHASER AND BROKERS, AND THEIR RESPECTIVE HEIRS, EXECUTORS, LEGAL REPRESENTATIVES, SUCCESSORS AND ASSIGNS. 3 RESPONSIBILITY TO COOPERATE: SELLER AND PURCHASER AGREE THAT SUCH DOCUMENTATION AS IS REASONABLY NECESSARY TO CARRY OUT THE TERMS OF THIS AGREEMENT SHALL BE PRODUCED, EXECUTED AND/OR DELIVERED BY SUCH PARTIES WITHIN THE TIME REQUIRED TO FULFILL THE TERMS AND CONDITIONS OF THIS AGREEMENT. DEFAULT; REMEDIES: In the event the sale is not closed because of Seller's inability, failure or refusal to perform any of Seller's obligations herein, and if Seller fails to cure any default within TEN (10) days after Seller's receipt of written notice of such default from Purchaser, then Purchaser may elect to either terminate this Agreement, in which event Escrow Agent shall return the Earnest Money to Purchaser and the parties shall have no further rights or obligations hereunder except for any provisions of this Agreement surviving termination, or to seek specific performance of Seller's obligations under this Agreement, Purchaser specifically acknowledging that the remedy at law for damages is excluded and Purchaser hereby specifically waives any right to sue for damages. Purchaser agrees that if the sale is not closed because of Purchaser's inability, failure or refusal to perform any of Purchaser's obligations herein, and if Purchaser fails to cure any default within ten (10) days after Purchaser's receipt of written notice of such default from Seller, Seller may elect to terminate this Contract in which event the Earnest Money shall be paid to Seller as liquidated damages and Seller's sole and exclusive remedy for such default, the parties hereby acknowledging that the actual damages of Seller would be difficult if not impossible to ascertain and the amount of the Earnest Money constitutes a reasonable estimate of such damages. Notwithstanding anything in this Agreement to the contrary, in the event that the transaction contemplated by the Agreement does not close for any reason whatsoever, Broker shall not be entitled to receive any commission with respect to the purchase and sale of the Property, and in such event neither Seller nor Purchaser shall be obligated to pay any commission to Broker. NOTICES: Except as may otherwise be provided for in this Agreement, all notices required or permitted to be given hereunder shall be in writing and shall be deemed delivered either (A) in person, (B) by overnight delivery service prepaid, (C) by facsimile (FAX) transmission, or (D) US. Postal Service, postage prepaid, registered or certified, return receipt requested, to the party being given such notice at the appropriate address set forth below.
AS TO PURCHASER: AS TO SELLER: Name: Interstate East Management, Inc. Name: Wilshire Enterprises, Inc Address: 1560 Brookhaven Hills, NE Address: 921 Bergen Avenue City, State, ZIP: Atlanta, GA 30319 City, State, ZIP: Jersey City, NJ 07306 Attn: Mike Furr Attn: Daniel Pryor, President/COO Fax No: 404-995-0998 Fax No.: 201-420-6012 Telephone No.: 404-664-8000 Telephone No.: 201-420-2769 E-mail: mikefurr@comcast.net AS TO BROKER: AS TO ESCROW AGENT: Name: Southeast Apartment Partners, LLC Name: Calloway Title and Escrow Address: 3390 Peachtree Road, Suite 300 Address: 2400 Ashfd Dnwdy Road, S-240 City, State, ZIP: Atlanta, GA 30326 City, State, Zip: Atlanta, GA 30338 Attn: Joshua Goldfarb Attn: Kendra Huckabee Fax No: 404-442-5601 Fax No.: 770-798-8999 Telephone No.: 404-442-5604 Telephone No.: 678-406-8921 E-mail: jgoldfarb@seaptpartners.com E-mail: KendraH@titlelaw.com
Such notices shall be deemed to have been given as of the date and time actually received by the receiving party. In the event no address for purpose of notice is specified with respect to a particular party as required by this paragraph, any other party may direct notices to such party at any business or resident address known to such other party. Any such notice to an unspecified address shall be effective when delivered personally or with respect to mailed notices, upon actual receipt by the party to whom such notice is directed, as shown on the return receipt therefore. 4 TIME: TIME IS OF THE ESSENCE OF THIS AGREEMENT. ENTIRE AGREEMENT; AMENDMENT; SURVIVAL: THIS AGREEMENT CONSTITUTES THE SOLE AND ENTIRE AGREEMENT BETWEEN THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF, AND NO MODIFICATION OF THIS AGREEMENT SHALL BE BINDING UNLESS SIGNED BY ALL PARTIES TO THIS AGREEMENT. NO REPRESENTATION, PROMISE OR INDUCEMENT NOT INCLUDED IN THIS AGREEMENT SHALL BE BINDING UPON ANY PARTY HERETO. EXCEPT AS EXPRESSLY PROVIDED HEREIN, NONE OF THE PROVISIONS OF THIS AGREEMENT SHALL SURVIVE THE CLOSING OF THE TRANSACTION CONTEMPLATED HEREIN. MISCELLANEOUS/CLOSING: Real estate taxes and utilities, including all sanitary taxes and charges applicable to the Property, for the calendar year in which the sale is closed shall be prorated as of the date of Closing. Seller shall provide the Purchaser a Rent Roll listing the tenant's names, unit numbers, the commencement date of the lease, the amount of the monthly rent, and the termination date of the lease within five (5) days after the execution date of this Agreement. Collected Rents shall be prorated as of the date of Closing. Any uncollected rents will be transferred to Purchaser and any rents collected by Purchaser from those tenants will first go to the payment of current rents due and only after all current rents are paid will the payments be applied to rents due to seller and shall be paid to Seller. All tenant security deposits shall be delivered by Seller to Purchaser at Closing. Seller shall provide to the extent they exist or can be obtained with reasonable effort, Tenant Estoppel Certificates like the ones attached hereto as Exhibit B from all Tenants in addition to the originals of all associated leases at or prior to the Closing. A. Seller shall pay the State of Georgia property transfer tax and, where applicable, Purchaser shall pay the Georgia intangible taxes, title examination fees and title insurance premiums, cost of survey and recording fees. Each party shall pay its own attorneys' fees. B. Seller agrees to provide a standard termite clearance letter at Closing. C. The sale of the Property shall be closed (the "Closing") on or before SIXTY (60) DAYS from the execution of purchase agreement, at a time and location acceptable to Purchaser and Seller. If required by the lender, Closing can be extended an additional THIRTY (30) days. If the time period by which any right, option or election provided under this Agreement must be exercised, or by which any act required hereunder must be performed, or by which the Closing must be held, expires on a Saturday, Sunday or legal holiday, then such time period shall be automatically extended to the close of business on the next regular business day. D. Conditions precedent to the obligation of either party to close hereunder, if any, are for the benefit of such party only, and any and all of said conditions may be waived in the discretion of the party benefited thereby. E. Seller and Purchaser agree to comply with and to execute and delivery such certifications, affidavits and statements as are required at the Closing in order to meet the requirements of Internal Revenue Code Section 1445 (Foreign/Non-Foreign Sellers). F. This Agreement shall be construed under the laws of the State of Georgia. 5 G. The Seller shall grant possession of the Property to Purchaser no later than the Closing Date, subject to the Permitted Title Exceptions and the rights of the tenants occupying the Property. H. Personal Property: A Bill of Sale containing only a limited warranty of title for all air conditioners, water heaters, ovens, stoves, refrigerators, washers, dryers, office furniture, fixtures, bank operating account, and any and all other personal property owned by the Seller which is located and used as a part of the business of the operation of the property will be conveyed to Buyer. The price of these items are included in the Purchase Price for the Property, and Buyer agrees to accept all such personal property in "as is" condition. LEAD-BASED PAINT DISCLOSURE Every purchaser of any interest in residential real property built prior to 1978 is notified that such property may present exposure to lead from lead-based paint that may place young children at risk of developing lead poisoning. Lead poisoning also poses a particular risk to pregnant women. A risk assessment or inspection for possible lead-based hazards is recommended prior to purchase. Purchaser and Seller agree to execute a "Lead-Based Paint Disclosure Addendum" that will be annexed to this Agreement. SPECIAL STIPULATIONS: THE FOLLOWING SPECIAL STIPULATIONS SHALL, IF CONFLICTING WITH THE FOREGOING, CONTROL: A. Tax-Free Exchange. Both Seller and Purchaser shall have the right to cause the Closing to occur as part of a "like-kind" exchange pursuant to the provisions of Section 1031 of the Internal Revenue Code of 1986, as amended, and the regulations thereunder. Seller and Purchaser agree to cooperate with each other in effecting a qualifying like-kind exchange; provided, however, if either party (the "Electing Party") elects to affect a qualifying like-kind exchange: (1) The other party shall not be obliged to incur any costs, expenses, losses, liabilities or damages greater than such party would have incurred had the Electing Party not elected to effect a like-kind exchange, subject to any provisions contained in this Agreement, and the Electing Party shall indemnify the other party against same; (2) In no event shall the other party be required to acquire title to any other property, whether by deed or contract right, for the benefit of the Electing Party or it assignee. (3) The Closing shall not be delayed as a result of such like kind exchange. (4) Agreement is subject to Purchaser obtaining satisfactory financing. Seller and Purchaser make no representations to each other that the sale or purchase, respectively, of the Property will qualify for tax-free exchange treatment. B. Once this Agreement becomes effective, (a) Seller agrees not to enter into any new service contracts on the Property which Purchaser will be required to assume without Purchaser's consent, and (b) Seller agrees not enter into any leases with tenants with an expiration date greater than one year, without Purchaser's consent. C. Purchaser's obligation to consummate the transaction contemplated herein shall be subject to Purchaser's lender's approval of Purchaser's financial ability to qualify for a loan, subject property financial information, and the environmental conditions on the Property on or before the end of the Inspection Period. If Purchaser's lender shall fail to approve any of the aforementioned on or before the expiration of the Inspection Period, Purchaser may terminate this Agreement by delivery of a written notice of termination to Seller prior to the end of such period in which event the Earnest Money shall be delivered to Purchaser and the parties shall have no further rights or obligations hereunder except for these that survive termination as set forth herein. 6 This instrument shall be regarded as an offer by the first party to sign it and is open for acceptance by the other party until 5:00 O'CLOCK P.M. ON _________________, 2005, by which time written acceptance of such offer must have been actually received by Broker, who shall promptly notify the other party of such acceptance. Purchaser acknowledges that Purchaser has read and understood the terms of this Agreement and has received a copy of it. The date of this Agreement shall be deemed the date that this Agreement has been fully executed by Purchaser and Seller. IN WITNESS WHEREOF, Purchaser, Seller and Broker have hereunto set their hands and seals as of the date indicated below. PURCHASER: SELLER: - --------- ------ Mike Furr Daniel C. Pryor __________________________(SEAL) ____________________________(SEAL) Wilshire Enterprises, Inc. Interstate East Management, Inc. Date: __________________ Date:__________________ BROKER: Joshua Goldfarb By: __________________________(SEAL) Southeast Apartment Partners, LLC Date: __________________ 7 EX-23.1 6 b405718ex23_1.txt CONSENT EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statement Form S-8, No. 33-60845, of Wilshire Enterprises, Inc. of our report dated March 26, 2005 with respect to the consolidated financial statements and schedule of Wilshire Enterprises, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2004. /s/ J.H. Cohn LLP Roseland, New Jersey March 26, 2005 EX-23.2 7 b405718ex23_2.txt CONSENT EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in this Registration Statement on Form S-8 of Wilshire Enterprises, Inc. of our report dated March 26, 2004 with respect to the consolidated financial statements and schedule of Wilshire Enterprises, Inc. included in the Annual Report (Form 10-K) for the year ended December 31, 2003, filed with the Securities and Exchange Commission. New York, New York March 29, 2005 /S/ Ernst & Young LLP EX-24 8 b405718ex_24.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY WHEREAS, the undersigned officers and directors of Wilshire Enterprises, Inc. (the "Company") desire to authorize Daniel C. Pryor and Seth H. Ugelow to act as their attorneys-in-fact and agents, for the purpose of executing and filing the registrant's Annual Report on Form 10-K, including all amendments and supplements thereto, NOW, THEREFORE, KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Daniel C. Pryor and Seth H. Ugelow and each of them, his or her true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, to sign the Company's Annual Report on Form 10-K for the year ended December 31, 2004, including any and all amendments to such Annual Report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully and to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, the undersigned have executed this power of attorney in the following capacities as of the 30 day of March, 2005. DIRECTORS: By: /s/ Miles Berger Date: March 30, 2005 ---------------------------- Miles Berger By: /s/ Milton Donnenberg ` Date: March 30, 2005 ---------------------------- Milton Donnenberg By: /s/ S. Wilzig Izak Date: March 30, 2005 ---------------------------- S. Wilzig Izak By: /s/ Eric J. Schmertz, Esq. Date: March 30, 2005 ---------------------------- Eric J. Schmertz, Esq. By: /s/ Ernest Wachtel Date: March 30, 2005 ---------------------------- Ernest Wachtel By: /s/ Martin Willschick Date: March 30, 2005 ---------------------------- Martin Willschick OFFICERS: By: /s/ S. Wilzig Izak Date: March 30, 2005 ---------------------------- S. Wilzig Izak Chairman of the Board and Chief Executive Officer By: /s/ Daniel C. Pryor Date: March 30, 2005 ---------------------------- Daniel C. Pryor President and Chief Operating Officer By: /s/ Seth H. Ugelow Date: March 30, 2005 ---------------------------- Seth H. Ugelow Chief Financial Officer EX-31.1 9 b405718ex31_1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATION I, S. Wilzig Izak, certify that: 1. I have reviewed this report on Form 10-K of Wilshire Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2005 /s/ S. Wilzig Izak - ------------------ S. Wilzig Izak Chief Executive Officer EX-31.2 10 b405718ex31_2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATION I, Seth H. Ugelow, certify that: 1. I have reviewed this report on Form 10-K of Wilshire Enterprises, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: March 31, 2005 /s/ Seth H. Ugelow - ------------------ Seth H. Ugelow Chief Financial Officer EX-32.1 11 b405718ex32_1.txt CERTIFICATION PAGE> EXHIBIT 32.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of Wilshire Enterprises, Inc. (the "Company") on Form 10-K for the year ended December 31, 2004 (the "Report"), I, S. Wilzig Izak, Chief Executive Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, 15 U.S.C. Section 78m(a) or 78o(d); and (2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company. Dated: March 31, 2005 By: /s/ S. Wilzig Izak ----------------------- S. Wilzig Izak Chief Executive Officer EX-32.2 12 b405718ex32_2.txt CERTIFICATION EXHIBIT 32.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the annual report of Wilshire Enterprises, Inc. (the "Company") on Form 10-K for the year ended December 31, 2004 (the "Report"), I, Seth H. Ugelow, Chief Financial Officer of the Company, do hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, 15 U.S.C Section 78(a) or 78o(d); and (2) The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and consolidated results of operations of the Company. Dated: March 31, 2005 By: /s/ Seth H. Ugelow ---------------------- Seth H. Ugelow Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----