UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-Q

 

 

Commission File Number 001-12917

 

REIS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

(212) 838-3400

(Registrant’s Telephone Number, Including Area Code)

 

Wellsford Real Properties, Inc.

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

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 and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer o     Accelerated filer o     Non-accelerated filer þ

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o     No þ

 

The number of the Registrant’s shares of common stock outstanding was 10,984,517 as of August 10, 2007.

 

 

TABLE OF CONTENTS

 

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

CONSOLIDATED BALANCE SHEET
(GOING CONCERN BASIS)

 

 

See Notes to Consolidated Financial Statements

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

CONSOLIDATED STATEMENT OF NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)

 

 

See Notes to Consolidated Financial Statements

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

CONSOLIDATED STATEMENT OF OPERATIONS
(GOING CONCERN BASIS)
(Unaudited)

 

 

See Notes to Consolidated Financial Statements

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS IN LIQUIDATION
(LIQUIDATION BASIS)
(Unaudited)

 

 

See Notes to Consolidated Financial Statements

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

 

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Period May 31, 2007 to June 30, 2007
(Going Concern Basis)
(Unaudited)

 

 

See Notes to Consolidated Financial Statements

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (Continued)

 

See Notes to Consolidated Financial Statements

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

 

 

Organization and Business

 

Reis, Inc. and subsidiaries, collectively, the “Company” or “Reis” (formerly Wellsford Real Properties, Inc. (“Wellsford”)) is a Maryland corporation. The name change from Wellsford to Reis occurred in June 2007, after the completion of the merger of the privately held company, Reis, Inc. (“Private Reis”) with and into Reis Services, LLC (“Reis Services”), a wholly-owned subsidiary of Wellsford (the “Merger”).

 

Private Reis’s Historic Business

 

Private Reis was founded in 1980 as a provider of commercial real estate market information and today is a leader in that field. Reis maintains a proprietary database containing detailed information on commercial real properties in neighborhoods and metropolitan markets throughout the U.S. The database contains information on apartment, retail, office and industrial properties and is used by real estate investors, lenders and other professionals to make informed buying, selling and financing decisions. Reis currently provides its information services to many of the nation’s leading lending institutions, equity investors, brokers and appraisers.

 

Reis’s flagship product is Reis SE, which provides online access to information and analytical tools designed to facilitate both debt and equity transactions. In addition to trend and forecast analysis at neighborhood and metropolitan levels, the product offers detailed building-specific information such as rents, vacancy rate and lease terms, property sale information, new construction listings and property valuation estimates. Reis SE is designed to meet the demand for timely and accurate information to support the decision-making of property owners, developers and builders, banks and non-bank lenders, and equity investors, all of whom require access to information on both the performance and pricing of assets, including detailed data on market transactions, supply and absorption. This information is critical to all aspects of valuing assets and financing their acquisition, development, and construction.

 

Reis’s revenue model is based primarily on annual subscriptions that are paid in advance. Reis recognizes revenue from its contracts on a ratable basis; for example, one-twelfth of the value of a one-year contract is recognized each month. Reis continues to develop and introduce new products, expand and add new data, and re-package existing information to meet and anticipate client demand.

 

Wellsford’s Historic Business

 

The Company was originally formed as a Maryland corporation on January 8, 1997 as a corporate subsidiary of Wellsford Residential Property Trust (the “Residential Trust”). On May 30, 1997, Residential Trust merged (the “EQR Merger”) with Equity Residential (“EQR”) at which time Residential Trust contributed certain of its assets to the Company and the Company assumed certain liabilities of Residential Trust and distributed to its common stockholders all of its outstanding shares of the Company. Prior to the Merger, the Company was operating as a real estate merchant banking firm which acquired, developed, financed and operated real properties and invested in private and public real estate companies. The Company’s primary operating activities immediately prior to the Merger were the development, construction and sale of three residential projects and its approximate 23% ownership interest in Private Reis.

 

See Note 3 for additional information regarding the Company’s operating activities by segment.

 

Merger with Private Reis

 

On October 11, 2006, the Company announced that it and Reis Services entered into a definitive merger agreement with Private Reis to acquire Private Reis and that the Merger was approved by the independent

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

members of the Company’s board of directors (the “Board”). The Merger was approved by the stockholders of both the Company and Private Reis on May 30, 2007 and was completed later that day. The previously announced Plan of Liquidation (the “Plan”) (see below) of the Company was terminated as a result of the Merger and the Company returned to the going concern basis of accounting from the liquidation basis. For accounting purposes, the Merger was deemed to have occurred at the close of business on May 31, 2007 and the statement of operations reflects the operations of Reis Services effective June 1, 2007.

 

The merger agreement provided for half of the aggregate consideration to be paid in Company stock and the remaining half to be paid in cash to all Private Reis stockholders, except the Company’s subsidiary which owned a 23% preferred interest and which received only Company stock. The Company issued 4,237,074 shares of common stock to Private Reis stockholders, other than Wellsford Capital, a subsidiary of the Company, with $25,000,000 of the cash consideration being funded by a $27,000,000 bank loan (the “Bank Loan”), the commitment for which was obtained by Private Reis in October 2006 and was drawn upon just prior to the Merger, and approximately $9,573,000 provided by the Company. The per share value of the Company’s common stock, for purposes of the exchange of stock interests in the Merger, had been previously established at $8.16 per common share.

 

The Company’s acquisition costs, excluding assumed liabilities, is summarized as follows:

 

Value of shares of Company stock		$	30,083,225
Cash paid for Private Reis shares			9,573,452
Capitalized merger costs			5,231,494
Historical cost of Company’s 23% interest in Private Reis			6,790,978
Total before officer loan settlement			51,679,149
Officer loan settlement (see below)			(1,304,572	)
Total		$	50,374,577

 

The value of the Company’s stock for purposes of recording the acquisition was based upon the average closing price of the Company’s stock for a short period near the date that the merger agreement was executed of $7.10 per common share, as provided for under relevant accounting literature.

 

Upon the completion of the Merger and the settlement of certain outstanding loans, Lloyd Lynford and Jonathan Garfield, both executive officers and directors of Private Reis, became the Chief Executive Officer and Executive Vice President, respectively, of the Company and both became directors of the Company. The Company’s former Chief Executive Officer and Chairman, Jeffrey Lynford, remained Chairman of the Company. The merger agreement provided that the outstanding loans to Lloyd Lynford and Mr. Garfield aggregating approximately $1,305,000 be simultaneously satisfied with 159,873 of the Company’s shares received by them in the Merger. Lloyd Lynford and Jeffrey Lynford are brothers.

 

As the Company is the acquiror for GAAP accounting purposes, the acquisition of the remaining interests in Private Reis not currently owned by the Company will be accounted for as a purchase by the Company. Accordingly, the acquisition price of the remainder of Private Reis acquired in this transaction combined with the historical cost basis of the Company’s historical investment in Private Reis has been allocated to the tangible and intangible assets acquired and liabilities assumed based on respective fair values.

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

The following summarizes management’s preliminary allocation of the fair value of the assets acquired and liabilities assumed at the date of the acquisition (May 31, 2007) after the settlement of the officer loans:

 

Current assets:
Cash and cash equivalents		$	3,046,471
Accounts receivable and other current assets			3,773,109
Total current assets			6,819,580
Non-current assets:
Furniture, fixtures, and equipment			2,211,683
Leasehold value			3,400,000
Database			7,900,006
Web site			1,705,144
Customer relationships			5,600,000
Goodwill			61,892,682
Other assets			719,215
Total assets			90,248,310
Current liabilities:
Accounts payable and accrued expenses			1,608,863
Current portion of long term debt			1,304,061
Deferred revenues			10,512,165
Total current liabilities			13,425,089
Long term debt:
Bank Loan payable			23,875,000
Other long term debt obligations			506,644
Deferred income taxes, net			2,067,000
Total liabilities			39,873,733
Net acquisition cost		$	50,374,577

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

The following unaudited pro forma combined statement of operations is presented as if the Merger had been consummated, the proceeds from the Bank Loan had been received, and the Plan had been terminated as of January 1, 2006. The pro forma combined statement of operations is unaudited and is not necessarily indicative of what the actual financial results would have been had the Merger been consummated, the proceeds from the Bank Loan had been received and the Plan had been terminated as of January 1, 2006, nor does it purport to represent the future results of operations.

 

		Pro Forma
		For the Six Months Ended June 30,
		2007				2006
Revenue:
Subscription revenue		$	10,926,446			$	9,258,863
Revenue from sales of residential units			13,628,229				12,403,957
Total revenue			24,554,675				21,662,820
Cost of sales:
Cost of sales of subscription revenue			2,617,296				2,414,845
Cost of sales of residential units			11,844,766				10,684,621
Impairment loss on real estate assets under development			2,740,384				—
Total cost of sales			17,202,446				13,099,466
Gross profit			7,352,229				8,563,354
Operating costs and expenses:
Sales and marketing			2,713,658				1,953,516
Product development			850,287				795,876
Property operating expenses			405,257				271,181
General and administrative			12,848,946				10,268,343
Total operating expenses			16,818,148				13,288,916
Total other income (expenses)			(1,126,679	)			(675,115	)
(Loss) before income taxes and discontinued operations			(10,592,598	)			(5,400,677	)
Income tax expense (benefit)			103,711				(354,750	)
(Loss) from continuing operations			(10,696,309	)			(5,045,927	)
Income from discontinued operations, net of taxes			—				32,474
Net (loss)		$	(10,696,309	)		$	(5,013,453	)
Per share amounts:
Net (loss), basic		$	(0.92	)		$	(0.48	)
Net (loss), diluted		$	(0.92	)		$	(0.48	)
Weighted average number of common shares outstanding:
Basic			11,675,036				10,548,380
Diluted			11,675,036				10,548,380

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

Plan of Liquidation and Return to Going Concern Accounting

 

On May 19, 2005, the Board approved the Plan and on November 17, 2005, the Company’s stockholders ratified the Plan. The Plan contemplated the orderly sale of each of the Company’s remaining assets, which are either owned directly or through the Company’s joint ventures, the collection of all outstanding loans from third parties, the orderly disposition or completion of construction of development properties, the discharge of all outstanding liabilities to third parties and, after the establishment of appropriate reserves, the distribution of all remaining cash to stockholders. The Plan also permitted the Board to acquire more Private Reis shares and/or discontinue the Plan without further stockholder approval. The initial liquidating distribution of $14.00 per share was made on December 14, 2005 to stockholders of record on December 2, 2005. Upon consummation of the Merger the Plan was terminated. Consequently, it will be necessary to recharacterize a portion of the December 14, 2005 cash distribution of $14.00 per share from what may have been characterized at that time as a return of capital for Company stockholders to taxable dividend income. The Company estimates that $1.15 of the $14.00 per share cash distribution will be recharacterized as taxable dividend income.

 

For all periods preceding stockholder approval of the Plan on November 17, 2005, the Company’s financial statements were presented on the going concern basis of accounting. As required by Generally Accepted Accounting Principles (“GAAP”), the Company adopted the liquidation basis of accounting as of the close of business on November 17, 2005. Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts, which estimates have been periodically reviewed and adjusted as appropriate.

 

The Company’s net assets in liquidation at May 31, 2007 (prior to the Merger and the return to going concern accounting), March 31, 2007 and December 31, 2006 were:

 

		May 31,				March 31,				December 31,
		2007				2007				2006
Net assets in liquidation		$	51,922,617			$	57,504,451			$	57,595,561
Per share		$	7.76			$	8.65			$	8.67
Common stock outstanding at each respective date			6,695,246				6,646,738				6,646,738

 

The reported amounts for net assets in liquidation presented development projects at estimated net realizable values at each respective date after giving effect to the present value discounting of estimated net proceeds therefrom. All other assets were presented at estimated net realizable value on an undiscounted basis. The amount also included reserves for future estimated general and administrative expenses and other costs and for cash payments on outstanding stock options during the liquidation. The primary reasons for the decline in net assets in liquidation of approximately $5,582,000 from March 31, 2007 to May 31, 2007 are the increase in the reserve for stock options due to the increase in the price of the Company’s stock from $7.83 to $11.00 per share, accounting for approximately $4,205,000 of the decrease, and the decline in the value of real estate assets under development.

 

The Company has returned to the going concern basis of accounting effective at the close of business on May 31, 2007.

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

Basis of Presentation

 

Liquidation Basis of Accounting

 

With the approval of the Plan by the stockholders, the Company adopted the liquidation basis of accounting effective as of the close of business on November 17, 2005. The liquidation basis of accounting was used through May 31, 2007 when the Merger was completed and at the same time the Plan was terminated.

 

Under the liquidation basis of accounting, assets are stated at their estimated net realizable value and liabilities are stated at their estimated settlement amounts, which estimates will be periodically reviewed and adjusted as appropriate. The Statement of Net Assets in Liquidation and a Statement of Changes in Net Assets in Liquidation are the principal financial statements presented under the liquidation basis of accounting. The valuation of assets at their net realizable value and liabilities at their anticipated settlement amounts represented estimates, based on present facts and circumstances, of the net realizable values of assets and the costs associated with carrying out the Plan and dissolution based on the assumptions set forth below. The actual values and costs associated with carrying out the Plan were expected to differ from the amounts shown herein because of the inherent uncertainty and would be greater than or less than the amounts recorded. Such differences may be material. In particular, the estimates of the Company’s costs vary with the length of time it operated under the Plan. In addition, the estimate of net assets in liquidation per share, which except for projects under development, did not incorporate a present value discount.

 

Valuation Assumptions

 

Under the liquidation basis of accounting, the carrying amounts of assets as of the close of business on November 17, 2005, the date of the approval of the Plan by the Company’s stockholders, were adjusted to their estimated net realizable values and liabilities, including the estimated costs associated with implementing the Plan, were adjusted to estimated settlement amounts. Value estimates were updated by the Company as of May 31, 2007 and December 31, 2006, as well as for each reporting period since the Plan was adopted. The following are the significant assumptions utilized by management in assessing the value of assets and the expected settlement amounts of liabilities included in Net Assets in Liquidation at May 31, 2007 (prior to the Merger) and December 31, 2006.

 

Net Assets in Liquidation

 

Real estate assets under development were primarily reflected at net realizable value which is based upon the Company’s budgets for constructing and selling the respective project in the orderly course of business. Sales prices are based upon contracts signed to date and budgeted sales prices for the unsold units, homes or lots. Sales prices are determined in consultation with the respective third party companies who are the sales agent for the project, where applicable. Costs and expenses are based upon the Company’s budgets. In certain cases, construction costs are subject to binding contracts. The Company has assumed that existing construction financing will remain in place during the respective projects’ planned construction and sell out. Anticipated future cost increases for construction are assumed to be funded by the existing construction lenders and the Company at the present structured debt to equity capitalization ratios. The Company would be required to make additional equity contributions. For one project, the Company has assumed that construction loans will be obtained at currently existing LIBOR spreads and customary industry debt to equity capitalization levels. With respect to another project, it is expected that existing loan extensions will be granted by the bank even though minimum home sales requirements will not be met. The expected net sales proceeds are discounted on a quarterly basis at 17.5% to 26% annual rates to determine the estimated net realizable value of the Company’s

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

equity investment. The effect of changes in values of real estate assets under development was a net decrease of approximately $1,693,000 from March 31, 2007 to May 31, 2007 and $968,000 from December 31, 2006 to March 31, 2007. The net decreases resulted primarily from changes in the projected timing of sales, sale proceeds from condominium units and homes and changes in the values of real estate under development, partially offset by the shortening of the discount period due to the passage of time.

 

The Company reported operating income on the Consolidated Statements of Changes in Net Assets in Liquidation which is comprised primarily of interest and other income earned on invested cash during the reporting periods through May 31, 2007.

 

The estimated net realizable value of the Company’s interests in Private Reis were derived from an approximate $90,000,000 equity value of Private Reis, based upon the Merger terms for valuation purposes at May 31, 2007 and December 31, 2006 and offers Private Reis received from potential purchasers during prior reporting periods.

 

Cash, deposits and escrow accounts were presented at face value. The Company’s remaining assets were stated at estimated net realizable value which is the expected selling price or contractual payment to be received, less applicable direct costs or expenses, if any. The assets that have been valued on this basis include receivables, certain joint venture investments and other investments.

 

Mortgage notes and construction loans payable, construction payables, accrued expenses and other liabilities and minority interests were stated at settlement amounts.

 

Reserve for Estimated Costs During the Liquidation Period

 

Under the liquidation basis of accounting, the Company was required to estimate and accrue the costs associated with implementing and completing the Plan. These amounts can vary significantly due to, among other things, the timing and realized proceeds from sales of the projects under development and sale of other assets, the costs of retaining personnel and others to oversee the liquidation, including the cost of insurance, the timing and amounts associated with discharging known and contingent liabilities and the costs associated with cessation of the Company’s operations including an estimate of costs subsequent to that date (which would include reserve contingencies for the appropriate statutory periods). As a result, the Company accrued the projected costs, including corporate overhead and specific liquidation costs of severance and retention bonuses, professional fees, and other miscellaneous wind-down costs, expected to be incurred during the projected period required to complete the liquidation of the Company’s remaining assets. Also, the Company did not record any liability for any cash operating shortfall that could result at the projects under development during the anticipated holding period because management expected that projected operating shortfalls could be funded from the overall operating profits derived from the sale of homes, condominium units and lots and interest earned on invested cash. These projections could have changed materially based on the timing of any such anticipated sales, the performance of the underlying assets and changes in the underlying assumptions of the cash flow amounts projected as well as other market factors. These accruals were adjusted from time to time as projections and assumptions changed.

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

The following is a summary of the changes in the Reserve for Estimated Costs During the Liquidation Period:

 

		For the Two Months Ended May 31, 2007
		Balance at				Adjustments and				Balance at
		March 31, 2007				Payments				May 31, 2007(A)
Payroll, benefits, severance and retention cost		$	8,594,000			$	(1,872,000	)		$	6,722,000
Professional			3,460,000				(589,000	)			2,871,000
Other general and administrative costs			5,393,000				(319,000	)			5,074,000
Total		$	17,447,000			$	(2,780,000	)		$	14,667,000

 

		For the Five Months Ended May 31,2007
		Balance at				Adjustments and				Balance at
		December 31, 2006				Payments				May 31, 2007(A)
Payroll, benefits, severance and retention costs		$	8,982,000			$	(2,260,000	)		$	6,722,000
Professional fees			3,560,000				(689,000	)			2,871,000
Other general and administrative costs			5,760,000				(686,000	)			5,074,000
Total		$	18,302,000			$	(3,635,000	)		$	14,667,000

 

 

 

Going Concern Basis of Accounting

 

Effective with the close of business on May 31, 2007, the Company returned to the going concern basis of accounting whereby (1) assets were stated at the lower of historical cost or market value, (2) the reserve for estimated costs, net of liabilities requiring accrual under the going concern basis of accounting, was reversed and (3) liabilities were stated on a going concern basis.

 

The adjustments to net assets in liquidation as of May 31, 2007 is summarized as follows:

 

Balance of net assets in liquidation as of May 31, 2007		$	51,922,617
Adjustment of the Company’s investment in Private Reis from $20,000,000 on a liquidation basis to historical cost of $6,790,978 on a going concern basis			(13,209,022	)
Adjustment of real estate investments and other assets from net realizable value to lower of historical cost or market value (primarily for the Gold Peak project)			(4,555,480	)
Reversal of previously accrued liquidation costs net of accrued liabilities			14,667,431
Balance of total stockholders’ equity, going concern basis, as of May 31, 2007, prior to Merger		$	48,825,546

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

Total stockholders’ equity prior to the Merger is comprised of the following components:

 

Common stock, 101,000,000 shares authorized $.02 par value per share, 6,695,246 shares issued and outstanding		$	133,905
Additional paid in capital			66,857,898
Retained earnings (deficit)			(18,166,257	)
Total stockholders’ equity		$	48,825,546

 

Reserve for Option Cancellations

 

At March 31, 2006, the Company accrued a liability for cash payments that could be made to option holders for the amount of the market value of the Company’s common stock in excess of the adjusted exercise prices of outstanding options as of March 31, 2006. This liability has been adjusted to reflect (1) the net cash payments to option holders made during each period subsequent to March 31, 2006, (2) the impact of the exercise of options and (3) the changes in the market price of the Company’s common stock during those periods. The remaining reserve for option cancellations was approximately $1,459,000, $7,269,000 and $2,633,000 at June 30, 2007, May 31, 2007 and December 31, 2006, respectively.

 

At June 30, 2007, of the 987,454 outstanding options, 403,523 options are accounted for as a liability as these awards provide for settlement in cash or in stock at the election of the option holder. The liability for option cancellations could materially change from period to period based upon (1) an option holder either (a) exercising the options in a traditional manner or (b) electing the net cash settlement alternative and (2) the changes in the market price of the Company’s common stock. At each period end, an increase in the Company’s common stock price would result in an increase in compensation expense, whereas a decline in the stock price would reduce compensation expense.

 

See Note 9 for activity with respect to stock options.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company and its majority-owned and controlled subsidiaries. Investments in entities where the Company does not have a controlling interest were accounted for under the equity method of accounting. These investments were initially recorded at cost and were subsequently adjusted for the Company’s proportionate share of the investment’s income (loss) and additional contributions or distributions through the date of adoption of the liquidation basis of accounting. Investments in entities where the Company does not have the ability to exercise significant influence are accounted for under the cost method. All significant inter-company accounts and transactions among the Company and its subsidiaries have been eliminated in consolidation.

 

Variable Interests

 

During 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46R “Consolidation of Variable Interest Entities” (“FIN 46R”). The Company evaluates its investments and subsidiaries to determine if an entity is a voting interest entity or a variable interest entity (“VIE”) under the provisions of FIN 46R. An entity is a VIE when (1) the equity investment at risk is not sufficient to permit the entity from financing its activities without additional subordinated financial support from other parties or (2) equity holders either (a) lack direct or indirect ability to make decisions about the entity, (b) are not obligated to absorb expected losses of the entity or (c) do not have the right to receive expected residual returns of the entity

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

if they occur. If an entity or investment is deemed to be a VIE, an enterprise that absorbs a majority of the expected losses of the VIE or receives a majority of the residual returns is considered the primary beneficiary and must consolidate the VIE. The Company had investments in two VIEs, both of which were consolidated at June 30, 2007 and had investments in three VIEs of which two were consolidated at December 31, 2006.

 

Quarterly Reporting

 

The accompanying consolidated financial statements and notes of the Company have been prepared in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared under GAAP have been condensed or omitted pursuant to such rules. In the opinion of management, all adjustments considered necessary for a fair presentation of the Company’s balance sheet, statement of operations, net assets in liquidation, changes in net assets in liquidation and cash flows have been included and are of a normal and recurring nature. These consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s annual report on Form 10-K/A for the year ended December 31, 2006, as filed with the Securities and Exchange Commission on April 30, 2007. The net income for the month ended June 30, 2007, changes in cash flows for the one and six months ended June 30, 2007 and 2006 and five months ended May 31, 2007 are not necessarily indicative of a full year results.

 

Summary of Significant Accounting Policies of the Acquired Business

 

The following are the significant accounting policies utilized and to be utilized with respect to the assets and business acquired from Private Reis, now part of the consolidated operations of the Company through the Reis Services segment:

 

Revenue Recognition

 

The Company’s subscription revenue is derived principally from subscriptions to its web-based services. Subscription fees are deferred at the time customers are billed and recognized as revenue ratably over the related contractual period, which is typically one year, but can be as long as 36 months. Revenues from ad-hoc and custom reports are recognized as completed and delivered to the customers, provided that no significant Company obligations remain.

 

Cost of Sales of Subscription Revenue

 

Cost of sales of subscription revenue principally consists of salaries and related expenses for the Company’s researchers who collect and analyze the commercial real estate data that is the basis for the Company’s information services. Additionally, cost of sales includes the amortization of database technology.

 

Web Site Development Costs

 

The Company follows Emerging Issues Task Force (“EITF”) Issue No. 00-2, “Accounting for Web Site Development Costs” which requires that costs of developing a web site should be accounted for in accordance with AICPA Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed for Internal Use” (SOP 98-1). The Company expenses all internet web site costs incurred during the preliminary project stage. All direct external and internal development and implementation costs are capitalized and amortized using the straight-line method over their remaining estimated useful

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

lives, not exceeding three years. The value ascribed to the web site development intangible asset at the time of the Merger is amortized on a straight-line basis over three years.

 

Database Costs

 

Database costs represent the fair value ascribed to the database intangible asset acquired at the time of the Merger and is amortized on a straight-line basis over five years.

 

Customer Relationship

 

The value ascribed to customer relationships acquired at the time of the Merger is amortized over a ten-year period.

 

Lease Value

 

The value ascribed to the below market terms of the office lease existing at the time of the Merger is amortized over the remaining term of the acquired office lease which was approximately nine years.

 

Goodwill

 

Goodwill is tested for impairment at least annually or after a triggering event has occurred requiring such a calculation in accordance with the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). An impairment loss is recognized to the extent that the carrying amount exceeds the asset’s fair value. SFAS No. 142 also requires that intangible assets with estimable useful lives that arose from the acquisitions be amortized over their respective estimated useful lives using a method of amortization that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise used up, and reviewed for impairment in accordance with SFAS No. 144 “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”).

 

Income Taxes 

 

In July 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). This interpretation, among other things, creates a two step approach for evaluating uncertain tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. FIN 48 specifically prohibits the use of a valuation allowance as a substitute for derecognition of tax positions, and it has expanded disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006, in which the impact of adoption should be accounted for as a cumulative-effect adjustment to the beginning balance of retained earnings. There was no financial statement impact upon the adoption of FIN 48, effective January 1, 2007.

 

Estimates

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

Accounting Pronouncements Not Yet Adopted 

 

In September 2006, the FASB issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 provides guidance for using fair value to measure assets and liabilities. This statement clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing the asset or liability. SFAS No. 157 establishes a fair value hierarchy, giving the highest priority to quoted prices in active markets and the lowest priority to unobservable data. SFAS No. 157 applies whenever other standards require assets or liabilities to be measured at fair value. This statement is effective in fiscal years beginning after November 15, 2007. The Company is evaluating SFAS No. 157 and has not determined the impact the adoption will have on the consolidated financial statements, but it is not expected to be significant.

 

In February 2007, the FASB issued Statement No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 provides companies with an option to report selected financial assets and liabilities at fair value. The Statement’s objective is to reduce both complexity in accounting for financial instruments and the volatility in earnings caused by measuring related assets and liabilities differently. The FASB believes that SFAS No. 159 helps to mitigate this type of accounting-induced volatility by enabling companies to report related assets and liabilities at fair value, which would likely reduce the need for companies to comply with detailed rules for hedge accounting. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between companies that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007. Early adoption is permitted as of the beginning of the previous fiscal year provided that the entity makes that choice in the first 120 days of that fiscal year and also elects to apply the provisions of SFAS No. 157. The Company is evaluating SFAS No. 159 and has not determined the impact the adoption will have on the consolidated financial statements.

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

Upon completion of the Merger and the resulting change in accounting from the liquidation basis to the going concern basis, the Company organized into two separately managed segments: Reis Services and Residential Development Activities. The Company has further separated the significant components of the Residential Development Activities for Palomino Park (Gold Peak), East Lyme and all other developments. The following tables present condensed balance sheet and operating data for these segments for the periods reported on a going concern basis:

 

 

 

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

 

 

 

Reis Services Segment

 

See Note 1 for a description of Reis’s business and products at June 30, 2007 and for a description of the Merger.

 

Through the date of the Merger, the Company had a preferred equity investment in Private Reis through Wellsford Capital. At May 31, 2007 and December 31, 2006, the carrying amount of the Company’s aggregate investment in Private Reis was $20,000,000 prior to the Merger on a liquidation basis, as described below. The Company’s investment represented approximately 23% of Private Reis’s equity on an as converted to common stock basis. The Company’s cash investment on an historical cost basis, was approximately $6,790,000 which was the amount recorded as Wellsford Capital’s investment at the Merger date.

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

Edward Lowenthal, the Company’s former President and Chief Executive Officer, who currently serves on the Company’s board of directors, was selected by the Company to also serve as the Company’s representative on the board of directors of Private Reis and had done so from the third quarter of 2000 through the Merger. Jeffrey Lynford and Mr. Lowenthal recused themselves from any investment decisions made by the Company pertaining to Private Reis, including the authorization by the Company’s board of directors to approve the Merger.

 

In the first quarter of 2006, Private Reis was considering offers from potential purchasers, ranging between $90,000,000 and $100,000,000, to acquire 100% of its capital stock. Based on these offers, in estimating the net proceeds in valuing its investment if Private Reis were to be sold at that amount, the Company would have received approximately $20,000,000 of proceeds, subject to escrow holdbacks.

 

After considering a range of values, including the current market price for the Company’s stock on the stock portion of the consideration and the per share price as established for the Merger agreement, the Company determined that it was appropriate to continue to value its investment in Private Reis at $20,000,000 at May 31, 2007 prior to the Merger and December 31, 2006.

 

Residential Development Activities Segment

 

At June 30, 2007, the Company’s residential development activities and other investments were comprised primarily of the following:

 

 

 

 

Gold Peak

 

In 2004, the Company commenced the development of Gold Peak, the final phase of Palomino Park, a 1,707 unit multifamily residential development in Highlands Ranch, a southern suburb of Denver, Colorado (“Palomino Park”). Gold Peak will be comprised of 259 condominium units on the remaining 29 acre land parcel at Palomino Park.

 

REIS, INC. AND SUBSIDIARIES
(FORMERLY WELLSFORD REAL PROPERTIES, INC.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) (Continued)

 

Gold Peak unit sales commenced in January 2006. At June 30, 2007, there were 29 Gold Peak units under contract with nominal down payments. The following table provides information regarding Gold Peak sales: