UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED 12-31-02 COMMISSION FILE NUMBER 1-6249
First Union Real Estate Equity and Mortgage Investments
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Ohio
------------------------------- 34-6513657
(State or other jurisdiction of ----------
incorporation or organization) (I.R.S. Employer
(Identification No.)
125 Park Avenue, 14th Floor
New York, New York 10017
------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 949-1373
Securities registered pursuant to Section 12(b) of the Act:
Title of each class:
Shares of Beneficial Interest, Par Value $1.00 per share;
Series A Cumulative Redeemable Preferred Shares of Beneficial Interest, Par
Value $25.00 per share
Name of Each Exchange on Which Registered: New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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 is not contained herein, and will not be contained,
to the best of the 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. [X]
State the aggregate market value of the voting stock held by non-affiliates
of the registrant. The aggregate market value shall be computed by
reference to the price at which the stock was sold, or the average bid and
asked prices of such stock, as of a specified date within 60 days prior to
the date of filing.
As of February 28, 2003, 26,558,083 Shares of Beneficial Interest were held
by non-affiliates, and the aggregate market value of such shares was
$40,899,488.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
34,814,361 Shares of Beneficial Interest were outstanding as of February 28,
2003
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.
2003 Proxy Statement
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
CROSS REFERENCE SHEET PURSUANT TO ITEM G,
GENERAL INSTRUCTIONS TO FORM 10-K
ITEM OF FORM 10-K LOCATION
- ----------------- --------
(PAGE OR PAGES)
PART I
1. Business 3 through 14
2. Properties 15
3. Legal Proceedings 16 through 19
4. Submission of Matters to a Vote of Security Holders 19 through 20
PART II
5. Market for Trust's Common Equity and Related Stockholder
Matters 21
6. Selected Financial Data 22 through 23
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 24 through 32
7A. Quantitative and Qualitative Disclosures
Regarding Market Risk 32
8. Financial Statements 33 through 61
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 62
PART III
10. Directors and Executive Officers of the Trust 63; 2003 Proxy
Statement
11. Executive Compensation 63; 2003 Proxy
Statement
12. Security Ownership of Certain Beneficial 63; 2003 Proxy
Owners and Management Statement
13. Certain Relationships and Related Transactions 63; 2003 Proxy
Statement
PART IV
14. Controls and Procedures 64
15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 64
(a) Financial Statements and Financial
Statement Schedules 64
(b) Exhibits 65;
Exhibit Index, pages 65 through 67
(c) Reports on Form 8-K 68
2
PART I
ITEM 1. BUSINESS.
First Union Real Estate Equity and Mortgage Investments (the "Trust") is an
unincorporated association in the form of a business trust organized in Ohio
under a Declaration of Trust dated August 1, 1961, as amended from time to time
through March 2001 (the "Declaration of Trust"), which has as its stated
principal business activity the ownership and management of real estate
investments. At December 31, 2002, the Trust qualified as a real estate
investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue
Code (the "Code").
To encourage efficient operation and management of its property, and after
receiving a ruling from the Internal Revenue Service with respect to the
proposed form of organization and operation, the Trust, in 1971, caused a
company to be organized pursuant to the laws of the State of Delaware under the
name First Union Management, Inc. ("FUMI"). As of December 31, 2002, FUMI's only
remaining operating subsidiary is VenTek International, Inc. ("VenTek"). VenTek
is in the business of manufacturing, installing and providing maintenance of
parking and transit ticket vending equipment.
For financial reporting purposes, the financial statements of FUMI are combined
with those of the Trust.
On July 22, 1998, tax legislation was enacted limiting the "grandfathering
rules" applicable to stapled REITS such as the Trust (the "Stapled REIT
Legislation"). As a result, the income and activities of FUMI with respect to
any real property interests acquired by the Trust and FUMI after March 26, 1998,
for which there was no binding written agreement, public announcement or filing
with the Securities and Exchange Commission on or before March 26, 1998, will be
attributed to the Trust for purposes of determining whether the Trust qualifies
as a REIT under the Code.
The Trust has been in the business of owning regional enclosed shopping malls,
large downtown office buildings and parking facilities. The Trust's portfolio
was diversified by type of property, geographical location, tenant mix and
rental market. As of December 31, 2002, the Trust owned two real estate
properties, one shopping mall and one office property, and had investments in
U.S. Treasury Bills. The Trust's shopping mall is known as Park Plaza Mall and
is located in Little Rock, Arkansas. The Trust's office property is known as
Circle Tower and is located in Indianapolis, Indiana.
The Trust's shopping mall competes for tenants on the basis of the rent charged
and location, and encounters competition from other retail properties in its
market area. The principal competition for the Trust's shopping mall may come
from future shopping malls locating in its market area. Additionally, the
overall economic health of retail tenants impacts the Trust's shopping mall.
The Trust's office property competes for tenants principally with office
buildings throughout the area in which it is located. Competition for tenants
has been and continues to be intense on the basis of rent, location and age of
the building. The Trust's segment data may be found in footnote 18 to the
Combined Financial Statements in Item 8.
The only person employed by the Trust as of December 31, 2002, is Neil H.
Koenig, Interim Chief Financial Officer. As of December 31, 2002, VenTek had 26
employees.
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RISK FACTORS
THE PROPOSED TRANSACTION
On February 13, 2002, the Trust entered into a definitive Agreement and Plan of
Merger and Contribution, pursuant to which the Trust agreed to merge with and
into Gotham Golf Corp. ("Gotham Golf"), a Delaware corporation controlled by
Gotham Partners, L.P. ("Gotham Partners"), at that time the beneficial owner of
16.8% of the Trust's outstanding common shares. If consummated, the proposed
transaction would result in the Trust's common shareholders receiving as merger
consideration for each Trust common share:
- - $1.98 in cash;
- - a choice of (a) an additional $0.35 in cash or (b) approximately 1/174th
(0.0057461) of a debt instrument to be issued by Southwest Shopping
Centers, Co. II, L.L.C. (a wholly-owned subsidiary of the Trust), with a
face value of $100 (which is an effective price of $60.91 per face value of
$100), indirectly secured by the Trust's principal real estate assets (such
debt instrument referred to in this document as a note); and
- - three-fiftieths (0.06) of a non-transferable uncertificated subscription
right, with each whole right exercisable to purchase one Gotham Golf common
share at $20.00 per share and, subject to availability and proration,
additional Gotham Golf common shares at $20.00 per share, for up to an
aggregate of approximately $41 million of Gotham Golf common shares.
The proposed transaction is subject to several conditions, including the
approval of the Trust's common shareholders and the obtaining of certain third
party consents. The Trust's common shareholders approved the proposed
transaction by the requisite majority vote at a November 27, 2002 meeting of
shareholders. Litigation has arisen with respect to the proposed transaction,
resulting in the granting of an injunction preventing the proposed transaction
from going forward. Although the injunction is being appealed by the Trust and
Gotham Partners, there can be no assurance that the injunction will be lifted,
that all required third party consents will be obtained and that the proposed
transaction will be consummated.
THE MERGER AGREEMENT FOR THE PROPOSED TRANSACTION CONTAINS OPERATING COVENANTS
Under the merger agreement, the Trust has agreed to comply with certain
restrictions in its conduct and operations. These restrictions will remain in
place until either the proposed transaction is consummated or the merger
agreement is terminated. Among other things, the Trust has agreed to conduct its
business in the ordinary course and that, except as consented to in writing by
Gotham Partners or required by law, it will;
- - Not amend its Amended and Restated Declaration of Trust or other
organizational documents, split or reclassify its shares, declare any
dividend except for regular quarterly dividends on the preferred shares or
take any action that would cause the conversion price with respect to the
preferred shares to change;
- - Not issue or sell any additional shares of beneficial interest or other
equity securities and not redeem, purchase or acquire, or offer to purchase
or acquire, any of its shares of beneficial interest;
- - Not incur any indebtedness other than in the ordinary course under existing
credit facilities and not make any capital or other expenditures;
- - Not sell, pledge, dispose of or encumber any material assets and not
discharge, settle or pay off any claims, liabilities or obligations of any
kind or any nature; and
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- - Not enter into any contract or commitment providing for sales or purchases
by the Trust and, subject to applicable law and the fiduciary duty of the
Trust's trustees, take any action or refrain from taking any action, enter
into any contract or refrain from entering into any contract or make any
undertaking or refrain from making any undertaking, in each case as
requested by Gotham Partners in its sole discretion.
These operating covenants, along with the other covenants in the merger
agreement, effectively prevent the Trust from executing any business strategy
other than maintenance of its current assets and pursuit of the proposed
transaction with Gotham Golf, without the consent of Gotham Partners.
RISKS WITHOUT GIVING EFFECT TO THE PROPOSED TRANSACTION
An investment in the Trust's securities involves various risks without giving
effect to the proposed transaction. The following factors should be carefully
considered in addition to the other information set forth in this report.
ASSET SALES HAVE REDUCED OUR PORTFOLIO AND MAY ADVERSELY AFFECT OUR ABILITY TO
MAINTAIN REIT STATUS
In March 2001, the Trust sold a significant portion of its remaining properties
(the "Asset Sale"). As of March 1, 2003, the Trust's real estate properties
consist of a shopping center in Little Rock, Arkansas and an office building in
Indianapolis, Indiana. As a result, this sale limits the Trust's flexibility to
engage in non-real estate related activities without adversely affecting its
REIT status.
By virtue of the income generated by its real estate assets, the Trust believes
that it will maintain its qualification as a REIT for 2003 if the proposed
transaction is not consummated. The Trust does not anticipate having to invest
in REMICs, as defined in the section "Risk Associated with Investment in
REMICs," in 2003 in order to qualify as a REIT in 2003. If the Trust were to
invest in additional non-real estate assets in 2003, the Trust might not qualify
as a REIT in 2003.
The Trust cannot presently determine whether it will continue to qualify as a
REIT after 2003. The Trust will continue to evaluate the desirability of
maintaining its REIT status.
WE FACE A NUMBER OF SIGNIFICANT ISSUES WITH RESPECT TO THE PROPERTIES WE OWN
WHICH MAY ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
PARK PLAZA MALL
Background. Dillard Department Stores, Inc. (referred to herein as "Dillard's"),
the only anchor department store at the Trust's Park Plaza Mall located in
Little Rock, Arkansas, owns its facilities (two stores at opposite ends of the
mall) and has an agreement with a subsidiary of the Trust that contains an
operating covenant requiring it to operate these facilities continuously as
retail department stores until July 2003. The Trust has approached Dillard's to
extend this covenant prior to its expiration but, to date, Dillard's has
declined to do so. In the event that Dillard's ceases to operate its stores at
the Park Plaza Mall, the value of the Park Plaza Mall would be materially and
adversely affected. These events may result in a decline in net revenue that may
trigger an event of default under the senior mortgage loan secured by the Park
Plaza Mall. There can be no assurance that Dillard's will extend or renew its
operating covenant on terms acceptable to the Trust or continue to operate its
stores at the Park Plaza Mall. (See "Park Plaza Mall" in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources").
5
Proposed New Mall and Related Litigation. The Trust is aware of the proposed
construction of a new mall in the vicinity of the Park Plaza Mall, which would
be developed by Dillard's and its partner, and would be anchored by Dillard's,
among other department store anchors. During the first quarter of 2001, the
Little Rock board of directors approved a change in zoning that would allow
construction of the proposed new mall; however, as described more fully below,
the approval of the zoning change was overturned by judicial order in June 2002.
In the event that the new mall is built, the anchor may decline to extend or
renew its operating covenant and cease operating its stores at the Park Plaza
Mall.
Legal actions have been taken by local citizens to reverse the decision of the
Little Rock board of directors with respect to the zoning for the development of
the proposed new mall. On June 5, 2002, the court issued an opinion invalidating
the decision of the Little Rock board of directors with respect to zoning of the
proposed new mall and permanently enjoining the City of Little Rock from issuing
any building permits or taking any other action pursuant to the invalid
ordinances with respect to the proposed new mall. The decision has been appealed
to the Supreme Court of Arkansas, with no decision expected before June 2003.
There can be no assurance as to the length of time or potential outcome of the
appeal. It is also possible that proponents of the new mall will file a new
application to rezone the proposed area for a new competing retail development
during the pendency of this appeal.
CIRCLE TOWER
The Trust's ownership interest in the Circle Tower office property in
Indianapolis, Indiana, includes a leasehold interest in a ground lease. The
original ground lease was entered into in 1910, expires in 2009 with an option
for an additional 99 years which has been exercised, and contains a "gold
clause" provision that may result in a rent increase if the leasehold interest
is sold. The resulting rent increase could be substantial. In addition, the
marketability of Circle Tower is also adversely affected by the uncertainty of
the rent rate for the renewal term of the ground lease. Until the rental rates
are finalized (which is not expected to occur until the period within 90 days
prior to the expiration of the original term), it may be difficult to sell
Circle Tower. Accordingly, it may be in the economic interest of the Trust to
hold the leasehold interest indefinitely.
GENERAL PROPERTY ISSUES
Leasing Issues. With respect to its properties, the Trust is also subject to the
risk that, upon expiration, leases may not be renewed, the space may not be
relet, or the terms of renewal or reletting (including the cost of required
renovations) may be less favorable than the current lease terms. Leases
accounting for approximately 14% of the aggregate 2003 annualized base rents
from the Trust's remaining properties (representing approximately 12% of the net
rentable square feet at the properties) expire without penalty or premium
through the end of 2003, and leases accounting for approximately 8% of aggregate
2003 annualized base rent from the properties (representing approximately 9% of
the net rentable square feet at the properties) are scheduled to expire in 2004.
Other leases grant their tenants early termination rights upon payment of a
termination penalty. The Trust has estimated the expenditures for new and
renewal leases for 2003 and 2004 but no assurances can be given that the Trust
has correctly estimated such expenses. Lease expirations will require the Trust
to locate new tenants and negotiate replacement leases with such tenants.
Replacement leases typically require the Trust to incur tenant improvements,
other tenant inducements and leasing commissions, in each case, which may be
higher than the costs relating to renewal leases. If the Trust is unable to
promptly relet or renew leases for all or a substantial portion of the space,
subject to expiring leases, if the rental rates upon such renewal or reletting
are significantly lower than expected or if the Trust's reserves for these
purposes prove inadequate, the Trust's revenues and net income could be
adversely affected.
6
Tenant Concentration. The Trust's 10 largest tenants for its two properties
(based on pro forma base rent for 2003) aggregate approximately 32% of the
Trust's total base rent and approximately 25% of the Trust's net rental square
feet and have remaining lease terms ranging from approximately one to nine
years. The Trust's largest tenant, the Gap Stores, (i.e., the GAP, GAP Kids and
Banana Republic) represents approximately 10% of the pro forma aggregate
annualized base rent for 2003 and 8% of the pro forma net rentable square feet
at the properties. Its lease expires on April 30, 2005. Although the Trust
believes that it has a good relationship with each of its principal tenants, the
Trust's revenues would be disproportionately and adversely affected if a
significant number of these tenants did not renew their lease or renewed their
leases upon expiration on terms less favorable to the Trust.
Competition. The Trust competes with a number of real estate developers,
operators, and institutions for tenants and acquisition opportunities. Many of
these competitors have significantly greater resources than the Trust. No
assurances can be given that such competition will not adversely affect the
Trust's revenues.
VENTEK CONTINUES TO INCUR LOSSES AND THE TRUST COULD BE OBLIGATED TO MAKE
SIGNIFICANT PAYMENTS ON CERTAIN CONTINGENT OBLIGATIONS.
FUMI's subsidiary, VenTek, a manufacturer of transit ticketing and parking
equipment, continues to incur significant operating losses. The Trust has
provided performance bond guarantees entered into with respect to two contracts
of VenTek with transit authorities, which contracts are in the amounts of $6.2
million and $5.3 million. These contracts are for the manufacture, installation
and maintenance of transit ticket vending equipment by VenTek. The guarantees
are expected to expire within the next two years based on the commencement of
contractual warranty and maintenance periods now in effect under both contracts.
As of March 15, 2003, no amounts have been drawn against these guarantees. If
VenTek is unable to perform in accordance with these contracts, the Trust may be
responsible for payment under these guarantees. Also, in connection with one of
these transit contracts, VenTek may be liable for liquidated damages (as
calculated under the contract) related to delays in completion of the contracts.
(See "VenTek" in Item 7 under "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources").
THERE IS NO ASSURANCE THAT THE TRUST'S BUSINESS STRATEGY, WHEN DETERMINED, WILL
BE SUCCESSFULLY IMPLEMENTED AND THAT REPLACEMENT ASSETS, IF ANY, WILL PROVIDE
GREATER RETURNS
The Trust's assets are real estate properties, which have been difficult to sell
at attractive prices, as well as a significant amount of cash available for
distribution or investment or for use in connection with a possible business
combination, as the Board of Trustees may determine. In February 2002, the Board
of Trustees authorized the Trust to enter into the merger agreement with Gotham
Partners and proceeded to pursue the proposed transaction, which was approved by
the common shareholders in November 2002; however, the consummation of the
proposed transaction has been prevented by the issuance of an injunction. There
can be no assurance that the injunction will be lifted or that the proposed
transaction will be consummated.
In the event that the proposed transaction with Gotham Partners is not
consummated, it is the current intention of the Trustees of the Trust to
continue to operate the Trust as an ongoing enterprise and to examine other
strategic alternatives only if it deems it appropriate to do so. No alternative
transaction would be considered without the Board first conducting a full
examination of its strategic alternatives. Furthermore, the Board of Trustees of
the Trust has no present intention of liquidating the Trust. In the event that
the proposed transaction with Gotham Partners is not consummated, the Board of
Trustees would evaluate, select and execute a new business strategy, which may
involve the use of the Trust's available cash for acquisition of new
investments. There can be no assurance that any such new business strategy, when
determined, will be successfully implemented and that replacement assets, if
any, will provide greater returns to the shareholders than either the current
status or the proposed transaction.
7
RISK ASSOCIATED WITH INVESTMENT IN REMICS.
If the Trust desires to maintain its REIT status after 2003, while still
maximizing its liquidity, the Trust may invest in REMICs. Depending on the
Trust's other investments, if any, at such time, the amount of the Trust's
investment in REMICs necessary to maintain REIT status could be substantial. A
REMIC is a vehicle that issues multiclass mortgage-backed securities. Investing
in REMICs involves certain risks, including the failure of a counter-party to
meet its commitments, adverse interest rate changes and the effects of
prepayments on mortgage cash flows. Further, the yield characteristics of REMICs
differ from those of traditional fixed-income securities. The major differences
typically include more frequent interest and principal payments (usually
monthly), the adjustability of interest rates, and the possibility of
prepayments of principal. The Trust may fail to recoup fully its investment in
REMICs notwithstanding any direct or indirect governmental agency or other
guarantee. REMICs may also be less effective than other types of U.S. government
securities as a means of "locking in" interest rates.
FACTORS THAT MAY CAUSE THE TRUST TO LOSE ITS NEW YORK STOCK EXCHANGE LISTING
If the Trust were to fail to qualify as a REIT, it might lose its listing on the
New York Stock Exchange. Whether the Trust would lose its NYSE listing would
also depend on a number of factors besides REIT status, including the amount and
composition of its assets. If the Trust loses its NYSE listing, the Trust would
try to have its shares listed on another national securities exchange, such as
the American Stock Exchange.
OTHER LEGISLATION COULD ADVERSELY AFFECT THE TRUST'S REIT QUALIFICATION
Other legislation (including legislation previously introduced, but not yet
passed), as well as regulations, administrative interpretations or court
decisions, also could change the tax law with respect to the Trust's
qualification as a REIT and the federal income tax consequences of such
qualification. The adoption of any such legislation, regulations or
administrative interpretations or court decisions could have a material adverse
effect on the results of operations, financial condition and prospects of the
Trust and could restrict the Trust's ability to grow.
DEPENDENCE ON QUALIFICATION AS A REIT; TAX AND OTHER CONSEQUENCES IF REIT
QUALIFICATION IS LOST
There can be no assurance that the Trust has operated in a manner to qualify as
a REIT for federal income tax purposes in the past or that it will so qualify in
the future. Qualification as a REIT involves the application of highly technical
and complex provisions of the Code, for which there are only limited judicial or
administrative interpretations. The complexity of these provisions is greater in
the case of a stapled REIT such as the Trust. Qualification as a REIT also
involves the determination of various factual matters and circumstances not
entirely within the Trust's control. In addition, the Trust's ability to qualify
as a REIT may be dependent upon its continued exemption from the anti-stapling
rules of Section 269B(a)(3) of the Code, which, if they were to apply, might
prevent the Trust from qualifying as a REIT. The "grandfathering" rules
governing Section 269B generally provide that Section 269B(a)(3) does not apply
to a stapled REIT (except with respect to new real property interests as
described above "--Income and Activities of FUMI May Be Attributed to the Trust
Under Recent Anti-Stapling Legislation and May Threaten REIT Status") if the
REIT and its stapled operating company were stapled on June 30, 1983. On June
30, 1983, the Trust was stapled with FUMI. There are, however, no judicial or
administrative authorities interpreting this "grandfathering" rule. Moreover,
if, for any reason, the Trust failed to qualify as a REIT in 1983, the benefit
of the "grandfathering" rule would not be available to the Trust, in which case
the Trust would not qualify as a REIT for any taxable year from and after 1983.
8
If it is determined that the Trust did not qualify as a REIT during any of the
preceding five fiscal years, the Trust potentially could incur corporate tax
with respect to a year that is still open to adjustment by the Internal Revenue
Service ("IRS"). If the Trust were to fail to qualify as a REIT, it would be
subject to federal income tax (including any applicable alternative minimum tax)
on its taxable income at corporate rates. In addition, unless entitled to relief
under certain statutory provisions and subject to the discussion above regarding
the impact if the Trust failed to qualify as a REIT in 1983, the Trust also
would be disqualified from re-electing REIT status for the four taxable years
following the year during which qualification is lost. Failure to qualify as a
REIT would result in additional tax liability to the Trust for the year or years
involved. In addition, the Trust would no longer be required by the Code to pay
dividends to its shareholders. To the extent that dividends to shareholders
would have been paid in anticipation of the Trust's qualifying as a REIT, the
Trust might be required to borrow funds or to liquidate certain of its
investments on disadvantageous terms to pay the applicable tax.
ADVERSE EFFECTS OF REIT MINIMUM DIVIDEND REQUIREMENTS
In order to qualify as a REIT, the Trust is generally required each year to
distribute to its shareholders at least 90% of its taxable income (excluding any
net capital gain). The Trust generally is subject to a 4% nondeductible excise
tax on the amount, if any, by which certain distributions paid by it with
respect to any calendar year are less than the sum of:
- 85% of its ordinary income for that year,
- 95% of its capital gain net income for that year, and
- 100% of its undistributed income from prior years.
The Trust intends to comply with the foregoing minimum distribution
requirements; however, due to significant tax basis net operating losses, the
Trust does not anticipate that any distributions will be required in the
foreseeable future. Distributions to shareholders by the Trust are determined by
the Trust's Board of Trustees and depend on a number of factors, including the
amount of cash available for distribution, financial condition, results of
operations, any decision by the Board of Trustees to reinvest funds rather than
to distribute such funds, capital expenditures, the annual distribution
requirements under the REIT provisions of the Code and such other factors as the
Board of Trustees deems relevant. For federal income tax purposes, distributions
paid to shareholders may consist of ordinary income, capital gains, return of
capital, or a combination thereof. The Trust provides shareholders with annual
statements as to the taxability of distributions. During 2002, the Trust was not
required to make any minimum distributions to its common shareholders. During
the first and second quarters of 2002, the Board of Trustees paid a $0.10 per
share dividend to common shareholders.
ABILITY TO OPERATE PROPERTIES DIRECTLY AFFECTS THE TRUST'S FINANCIAL CONDITION
The Trust's investments in real properties are subject to the risks inherent in
owning real estate. The underlying value of the Trust's real estate investments,
the results of its operations and its ability to make distributions to its
shareholders and to pay amounts due on its indebtedness will depend on its
ability to operate its properties and manage its other investments in a manner
sufficient to maintain or increase revenues and to generate sufficient revenues
in excess of its operating and other expenses.
ILLIQUIDITY OF REAL ESTATE
Real estate investments are relatively illiquid. The Trust's ability to vary its
real estate portfolio in response to changes in economic and other conditions
will therefore be limited. If the Trust decides to sell an investment, no
assurance can be given that the Trust will be able to dispose of it in the time
period it desires or that the sales price of any investment will recoup or
exceed the amount of the Trust's investment.
9
INCREASES IN PROPERTY TAXES COULD AFFECT THE TRUST'S ABILITY TO MAKE EXPECTED
SHAREHOLDER DISTRIBUTIONS
The Trust's real estate investments are all subject to real property taxes. The
real property taxes on properties which the Trust owns may increase or decrease
as property tax rates change and as the value of the properties are assessed or
reassessed by taxing authorities. Increases in property taxes may have an
adverse effect on the Trust and its ability to pay dividends to shareholders and
to pay amounts due on its indebtedness.
ENVIRONMENTAL LIABILITIES
The obligation to pay for the cost of complying with existing environmental
laws, ordinances and regulations, as well as the cost of complying with future
legislation, may affect the operating costs of the Trust. Under various federal,
state and local environmental laws, ordinances and regulations, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on or under the
property. Environmental laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances and whether or not such substances originated from the
property. In addition, the presence of hazardous or toxic substances, or the
failure to remediate such property properly, may adversely affect the Trust's
ability to borrow by using such real property as collateral. The Trust maintains
insurance related to potential environmental issues on its current and
previously owned properties.
Certain environmental laws and common law principles could be used to impose
liability for releases of hazardous materials, including asbestos-containing
materials or "ACMs," into the environment. In addition, third parties may seek
recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs or other hazardous materials.
Environmental laws may also impose restrictions on the use or transfer of
property, and these restrictions may require expenditures. In connection with
the ownership and operation of any of the Trust's properties, the Trust, FUMI
and the other lessees of these properties may be liable for any such costs. The
cost of defending against claims of liability or remediating contaminated
property and the cost of complying with environmental laws could materially
adversely affect the Trust and FUMI and their ability to pay amounts due on
their indebtedness and with respect to the Trust, to pay dividends to its
shareholders.
Prior to undertaking major transactions, the Trust has hired independent
environmental experts to review specific properties. The Trust has no reason to
believe that any environmental contamination or violation of any applicable law,
statute, regulation or ordinance governing hazardous or toxic substances has
occurred or is occurring. However, no assurance can be given that hazardous or
toxic substances are not located on any of the properties. The Trust will also
endeavor to protect itself from acquiring contaminated properties or properties
with significant compliance problems by obtaining site assessments and property
reports at the time of acquisition when it deems such investigations to be
appropriate. There is no guarantee, however, that these measures will
successfully insulate the Trust from all such liabilities.
An environmental assessment of the Park Plaza Mall identified the potential for
asbestos to be present in the resilient vinyl floor tiles in retail tenant
storage areas and service corridors and in the cooling tower fill. A third party
consultant concluded that it was unlikely but possible that non-friable asbestos
was present in these areas. Rather than incurring the expense of testing to
eliminate the possibility of asbestos being present, the consultant recommended
a standard operations and maintenance plan based on EPA guidance.
10
COMPLIANCE WITH THE ADA MAY AFFECT EXPECTED DISTRIBUTIONS TO THE TRUST'S
SHAREHOLDERS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. A determination that the Trust is not in
compliance with the ADA could also result in the imposition of fines and/or an
award of damages to private litigants. If the Trust were required to make
modifications to comply with the ADA, there could be a material adverse effect
on its ability to pay amounts due on its indebtedness or to pay dividends to its
shareholders.
UNINSURED AND UNDERINSURED LOSSES
The Trust may not be able to insure its properties against losses of a
catastrophic nature, such as terrorist acts, earthquakes and floods, because
such losses are uninsurable or not economically insurable. The Trust will use
its discretion in determining amounts, coverage limits and deductibility
provisions of insurance, with a view to maintaining appropriate insurance
coverage on its investments at a reasonable cost and on suitable terms. This may
result in insurance coverage that, in the event of a substantial loss, would not
be sufficient to pay the full current market value or current replacement cost
of the lost investment and also may result in certain losses being totally
uninsured. Inflation, changes in building codes, zoning or other land use
ordinances, environmental considerations, lender imposed restrictions and other
factors also might make it not feasible to use insurance proceeds to replace the
property after such property has been damaged or destroyed. Under such
circumstances, the insurance proceeds, if any, received by the Trust might not
be adequate to restore its economic position with respect to such property.
INABILITY TO REFINANCE
The Trust is subject to the normal risks associated with debt and preferred
stock financings, including the risk that the Trust's cash flow will be
insufficient to meet required payments of principal and interest and
distributions, the risk that indebtedness on its properties, or unsecured
indebtedness, will not be able to be renewed, repaid or refinanced when due or
that the terms of any renewal or refinancing will not be as favorable as the
terms of such indebtedness. If the Trust were unable to refinance the
indebtedness on acceptable terms, or at all, the Trust might be forced to
dispose of one or more of its properties on disadvantageous terms, which might
result in losses to the Trust, which losses could have a material adverse effect
on the Trust and its ability to pay dividends to shareholders and to pay amounts
due on its indebtedness. Furthermore, if a property is mortgaged to secure
payment of indebtedness and the Trust is unable to meet mortgage payments, the
mortgagor could foreclose upon the property, appoint a receiver and receive an
assignment of rents and leases or pursue other remedies, all with a consequent
loss of revenues and asset value to the Trust. Foreclosures could also create
taxable income without accompanying cash proceeds, thereby hindering the Trust's
ability to meet the REIT distribution requirements of the Code.
RISING INTEREST RATES
The Trust has incurred and may in the future incur indebtedness that bears
interest at variable rates. Accordingly, increases in interest rates would
increase the Trust's interest costs (to the extent that the related indebtedness
was not protected by interest rate protection arrangements), which could have a
material adverse effect on the Trust and its ability to pay dividends to
shareholders and to pay amounts due on its indebtedness or cause the Trust to be
in default under certain debt instruments. In addition, an increase in market
interest rates may cause holders to sell their shares of beneficial interest of
the Trust ("Common Shares") and reinvest the proceeds thereof in higher yielding
securities, which could adversely affect the market price for the Common Shares.
11
RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY FACTORS BEYOND THE TRUST'S
CONTROL
Results of operations of the Trust's properties may be adversely
affected by, among other things:
- changes in national economic conditions, changes in local
market conditions due to changes in general or local economic
conditions and neighborhood characteristics;
- changes in interest rates and in the availability, cost and
terms of financing;
- the impact of present or future environmental legislation and
compliance with environmental laws and other regulatory
requirements;
- the ongoing need for capital improvements, particularly in
older structures;
- changes in real estate tax rates and assessments and other
operating expenses;
- adverse changes in governmental rules and fiscal policies;
- adverse changes in zoning and other land use laws; and
- earthquakes and other natural disasters (which may result in
uninsured losses) and other factors which are beyond its
control.
PAYMENT OF GOTHAM PARTNERS EXPENSES DUE TO TERMINATION OF MERGER AGREEMENT
In the event that the merger agreement is terminated due to certain
circumstances (including those described below), the Trust may have to pay the
expenses of Gotham Partners in connection with the proposed transaction. As
provided in the merger agreement, the obligation to pay Gotham Partners expenses
could be triggered by the termination of the merger agreement with respect to
any one of the following circumstances:
- If the Trust's shareholders have failed to approve the merger
agreement and the transactions contemplated thereunder by a majority
vote of the Common Shares.
- If the Trust determines to enter into a definitive agreement with
another party providing for an acquisition transaction other than the
proposed transaction, which is deemed by the Board of Trustees to be
superior to the proposed transaction.
- With respect to certain representations, warranties or covenants in
the merger agreement, if the Trust materially breaches these
representations, warranties or covenants except if said breaches were
from failures as would not reasonably be expected to result,
individually or in the aggregate, in monetary liability greater than
or equal to $65 million; and, with respect to certain other
representations, warranties or covenants relating to the
capitalization of the Trust, the authority of the Trust to enter into
the merger agreement and the Trust's non-contravention and compliance
with certain agreements, if the Trust breaches these representations,
warranties or covenants.
- If the Board of Trustees of the Trust has withdrawn or adversely
amended in any material respect its approval or recommendation to the
Trust's shareholders of the merger agreement or the transactions
contemplated thereby, other than the exercise of the subscription
rights or the Note election described in Item 7 below under
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - The Proposed Transaction".
12
The Trust is contractually obligated under the merger agreement to pursue the
proposed transaction with Gotham Partners unless a superior proposal is made;
that is, an offer consisting of cash or publicly traded securities for more than
90% of the Trust's common shares or all or substantially all of the Trust's
assets that would be more favorable to the holders of the common shares than the
proposed transactions under the merger agreement with Gotham Partners. The
pending litigation opposing the transaction does not give the Trust the
contractual right under the merger agreement to terminate its obligations to
complete the transaction. If the Trust were to seek to terminate its obligations
solely for that reason, the Trust could incur a liability to Gotham Partners
that may include responsibility for the payment of Gotham Partners' expenses for
the transaction, which the Trust believes may exceed $8 million.
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
Any statements in this report, including any statements in the documents that
are incorporated by reference herein that are not strictly historical are
forward-looking statements within the meaning of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Any such forward-looking
statements contained or incorporated by reference herein should not be relied
upon as predictions of future events. Certain such forward-looking statements
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "seeks," "approximately," "intends,"
"plans," "pro forma," "estimates" or "anticipates" or the negative thereof or
other variations thereof or comparable terminology, or by discussions of
strategy, plans, intentions or anticipated or projected events, results or
conditions. Such forward-looking statements are dependent on assumptions, data
or methods that may be incorrect or imprecise and they may be incapable of being
realized. Such forward-looking statements include statements with respect to:
- the declaration or payment of distributions by the Trust or FUMI,
- the consummation of or the failure to consummate the proposed
transaction;
- the ownership, management and operation of properties,
- potential acquisitions or dispositions of properties, assets or other
businesses by the Trust or FUMI,
- the policies of the Trust or FUMI regarding investments, acquisitions,
dispositions, financings and other matters,
- the qualification of the Trust as a REIT under the Code and the
"grandfathering" rules under Section 269B of the Code,
- the real estate industry and real estate markets in general,
- the availability of debt and equity financing,
- interest rates,
- general economic conditions,
- supply and customer demand,
- trends affecting the Trust or FUMI,
- the effect of acquisitions or dispositions on capitalization and
financial flexibility,
- the anticipated performance of the Trust or FUMI and of acquired
properties and businesses, including, without limitation, statements
regarding anticipated revenues, cash flows, funds from operations,
earnings before interest, depreciation and amortization, property net
operating income, operating or profit margins and sensitivity to
economic downturns or anticipated growth or improvements in any of the
foregoing,
13
- the ability of the Trust or FUMI and of acquired properties and
businesses to grow, and
- developments in or outcomes of the Preferred Shareholder Lawsuit or
the Common Shareholder Lawsuits. (See "Item 3. Legal Proceedings",
below.)
Shareholders are cautioned that, while forward-looking statements reflect the
respective companies' good faith beliefs, they are not guarantees of future
performance and they involve known and unknown risks and uncertainties. Actual
results may differ materially from those in the forward-looking statements as a
result of various factors. The information contained or incorporated by
reference in this report and any amendment hereof, including, without
limitation, the information set forth in "Risk Factors" above or in any risk
factors in documents that are incorporated by reference in this report,
identifies important factors that could cause such differences. Neither the
Trust nor FUMI undertakes any obligation to publicly release the results of any
revisions to these forward-looking statements that may reflect any future events
or circumstances.
14
ITEM 2. PROPERTIES
The following table sets forth certain information relating to the
Trust's investments at December 31, 2002:
Square Year Total
Date of Ownership feet(1) Occupancy construction cost
Direct equity investments Location acquisition percentage (000) rate(2) completed (000)
- ------------------------- --------------- ----------- ---------- ------- --------- ------------ ---------
Shopping Mall:
Park Plaza Little Rock, AR 09/01/97 100 548 86 1988 $ 64,925
Office Building:
Circle Tower Indianapolis, IN 10/16/74 100 102 81 1930 6,028
---------
Total equity Investments $ 70,953
=========
Mortgage Loan
---------------------------------------------------------------
Balance Principal
Original at repayment
balance 12/31/02 for 2003 Interest Year of
Direct equity investments (000) (000) (000) rate maturity
- ------------------------- ---------- --------- -------- -------- ---------
Shopping Mall:
Park Plaza $ 42,500 (3) $ 41,781 $ 324 8.69% (4) 2030
Office Building:
Circle Tower - - -
---------- --------- --------
Total equity Investments $ 42,500 $ 41,781 $ 324
========== ========= ========
(1) The square footage shown represents gross leasable area for the shopping
mall (including approximately 284,000 square feet for Dillard's) and net
rentable area for the office building.
(2) Occupancy rates shown are as of December 31, 2002, and are based on the
total square feet of each property.
(3) In 2000, the Trust obtained a $42,500,000 mortgage on the Park Plaza Mall.
(4) The Trust anticipates paying the loan on May 1, 2010. On May 1, 2010 the
interest rate increases to 10.69% if the loan is then the subject of a
secondary market transaction at which rated securities have been issued and
12.69% if it is not.
As of December 31, 2002, the Trust owned in fee its interest in Park Plaza Mall.
The Trust holds a leasehold interest in a ground lease at Circle Tower, which
ground lease expires in 2009, with an option for an additional 99 years, which
has been exercised.
VenTek leases a 16,256 square foot facility located in Petaluma, CA. The annual
rent was $142,000 and the lease expired in February 2003. VenTek's lease is now
month to month and the landlord must give 120 days notice to terminate the
lease. The facility is adequate for VenTek's needs.
The occupancy rate of Park Plaza Mall at December 31, 2002, 2001, 2000, 1999 and
1998 was 86%, 87%, 87%, 100%, and 100% , respectively.
Park Plaza Mall has one tenant (whose business is retail clothing sales), which
occupies 12% of the rentable square footage of the mall. Their annual base rent
is $801,292 (12%, 12% and 10% of the total base rent for 2002, 2001 and 2000,
respectively). Their lease expires on April 30, 2005 and there are no renewal
options.
The average effective annual rental per square foot at Park Plaza Mall for the
years ended December 31, 2002, 2001 and 2000 was $30.28, $28.37, and $28.30,
respectively.
The realty tax rate and annual realty taxes for Park Plaza Mall in 2002 were
6.9% and $807,000, respectively.
Percentage of
Annualized Base
Number of Annualized Approximate Rent Represented
Year Ending Leases Base Rent of Square Feet of By Expiring
December 31, Expiring Expiring Leases Expiring Leases Leases (1)
- ------------ --------- --------------- --------------- ----------------
2003 13 $ 1,023,999 37,779 15.05%
2004 2 468,723 18,613 6.89%
2005 11 1,377,483 44,898 20.24%
2006 4 301,602 9,446 4.43%
2007 5 417,856 13,963 6.14%
2008 11 1,123,046 40,459 16.50%
2009 10 861,063 20,983 12.65%
2010 6 493,834 14,437 7.26%
2011 5 445,386 12,785 6.54%
2012 3 172,180 4,073 2.53%
-- --------------- ------ ------
Total 70 $ 6,685,172 217,436 98.23%
== =============== ======= ======
(1) Based upon 2003 annualized base rent of $6,805,532.
15
ITEM 3. LEGAL PROCEEDINGS.
PREFERRED SHAREHOLDER LAWSUITS
KIMELDORF V. FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS, ET AL.,
SUPREME COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK (INDEX NO.
107176/02).
On April 15, 2002, the Trust was served with a complaint filed in the Supreme
Court of New York in New York County on behalf of a purported holder of the
Trust's convertible preferred shares. Among the allegations made by the
plaintiff is that the proposed transaction with Gotham Golf was approved by the
Trust's Board of Trustees in violation of fiduciary duties owed to the holders
of the Trust's convertible preferred shares. The suit seeks, among other things,
unspecified damages, an injunction of the proposed transaction and the court's
certification of the lawsuit as a class action. Named as defendants in the
lawsuit were the Trust, its five then trustees and Gotham Partners. The Trust
and the other defendants filed a motion to dismiss the lawsuit. An oral argument
on the motion to dismiss was held on July 15, 2002. Discovery on the case was
stayed pending the ruling of the court on the motion to dismiss.
On November 1, 2002, the Trust issued a press release announcing that a special
shareholders meeting was to be held November 25, 2002, for the purpose of
shareholder approval of the Merger Agreement. Shortly thereafter, the plaintiff
preferred shareholder in Kimeldorf filed a motion to show cause why a
preliminary injunction should not be issued to enjoin the November 25, 2002
shareholder vote to consider the Merger Agreement. A hearing on the motion was
held on November 20, 2002. On November 21, the New York Supreme Court of New
York County issued an order granting motions for preliminary injunction and
expedited discovery, denying defendant's motion to dismiss, and scheduling a
hearing for November 26 to determine whether to grant further relief to
plaintiff with respect to the transactions contemplated under the Merger
Agreement. The special meeting of shareholders was convened as scheduled on
November 25, with the vote on the proposed merger transaction tabled and the
meeting adjourned until November 27, at which time the vote was held and the
Trust's common shareholders approved the proposed transaction by the requisite
majority vote.
The New York Supreme Court of New York County held a three-day hearing on
November 26, 27 and December 3, 2002. On December 6, 2002, the New York Supreme
Court for New York County issued an order reaffirming its preliminary injunction
barring the proposed merger of the Trust with and into Gotham Golf. The court's
order also extended indefinitely the preliminary injunction previously granted
with respect to the proposed merger transaction and directed the parties to the
lawsuit to attend a preliminary conference for the purpose of scheduling
discovery.
The Trust filed a notice of appeal of the preliminary injunction with the
Appellate Division of the New York Supreme Court. In addition, the Trust filed
an auxiliary motion for expedited appeal regarding this matter with the
Appellate Division, which motion was denied. The Trust, Gotham Partners and the
other defendants in the Kimeldorf litigation filed joint appellate briefs in
support of the reversal of the injunction. Plaintiffs filed a reply brief in
support of the injunction. Oral argument with respect to the appeal was held
before a judicial panel of the Appellate Division - First Department of the New
York Supreme Court on March 11, 2003. There is no specific timetable for the
appellate court to render its decision.
16
It is not possible to predict the outcome of the appellate process with respect
to lifting the injunction. In the event that the Appellate Division rules that
the injunction should not be lifted, the case will proceed to trial on the
merits. In the event that the injunction imposed by the trial court were lifted
and dissolved, it is the intention of the Trust and, to the best of the Trust's
knowledge, Gotham Partners and the other Gotham Partners-affiliated parties to
the proposed merger transaction, to take the steps necessary to consummate the
proposed transaction. Any party to the Kimeldorf litigation may seek leave of
the Appellate Division to appeal to the Court of Appeals of the State of New
York an adverse ruling by the Appellate Division regarding the injunction
granted by the trial court.
On or about November 8, 2002, First Carolina Investors, Inc. ("First Carolina")
a holder of preferred shares, filed a separate lawsuit in New York Supreme Court
for New York County, naming the same defendants as in the Kimeldorf case. On or
about December 20, 2002, plaintiffs Kimeldorf and First Carolina Investors, Inc.
filed a consolidated amended complaint alleging, among others, breach of
contract; aiding and abetting breach of contract; tortious interference with the
contract; breach of fiduciary duties; aiding and abetting of breach of fiduciary
duties; and unconscionability against the defendants, styled Kimeldorf et al. v.
First Union, et al. This consolidated amended complaint essentially consolidated
the separate First Carolina Investors, Inc. complaint, filed on or about
November 8, 2002 with the complaint of Mr. Kimeldorf filed in April 2002. The
Trust regards the lawsuit as being without merit and will vigorously defend
against the asserted claims.
COMMON SHAREHOLDER LAWSUITS
FINK V. FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS, ET AL., SUPREME
COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK (INDEX NO. 03600265)
On or about January 24, 2003, the Trust was served with a complaint filed in the
Supreme Court of New York, New York County on behalf of a purported holder of
the Trust's common shares, on behalf of himself and the common shareholders as a
class. The lawsuit seeks a declaration that the lawsuit is maintainable as a
class action and a certification that the plaintiff, Robert Fink, is the
representative of the class. Named as defendants in the lawsuit are the Trust,
Gotham Partners, the companies affiliated with Gotham Partners and the Trust
that are parties to the Merger Agreement, William Ackman and the four current
Trustees of the Trust. Among the allegations asserted are breach of fiduciary
duty and aiding and abetting thereof in connection with the transactions
contemplated by the Merger Agreement. The relief requested by the plaintiff
includes an injunction preventing the defendants from proceeding with
consummation of the merger, rescission of the merger if it occurs, an accounting
for any profits realized by the defendants as a result of the actions complained
of, an order permitting the creation of a shareholders' committee composed of
the Trust common shareholders and their representatives to manage the affairs of
the Trust, compensatory damages and the costs and disbursements of plaintiff's
counsel.
On or about February 14, 2003, the parties to this lawsuit stipulated that the
defendants need not answer or otherwise respond to the complaint for an
indefinite period of time. The stipulation is revocable by the plaintiff at any
time. The Trust believes that the purpose of the stipulation was to delay court
proceedings in this lawsuit until the outcome of the appeal of the injunction
entered in the Kimeldorf, et al. v. First Union Real Estate Equity and Mortgage
Investments, et al. case is decided by the Appellate Division.
The Trust regards the lawsuit as without merit and plans to vigorously defend
against the allegations. The Trust will oppose any attempt by the plaintiff to
interfere with the transactions contemplated by the Merger Agreement, which was
approved by more than 64% of the outstanding the Trust common shares of the
Trust and by approximately 98% of the common shares voted at a special meeting
of shareholders held on November 27, 2002.
17
K-A & COMPANY, LTD. V. FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS,
ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT OF OHIO, EASTERN
DIVISION (CASE NO. 1:03 CV 0460)
On or about February 12, 2003, certain Trustees of the Trust and, later, the
Trust, were served with a complaint filed in the Court of Common Pleas, Cuyahoga
County, Ohio, by a purported holder of The Trust's common shares, on behalf of
himself and the Trust common shareholders as a class. Named as defendants in the
lawsuit are the Trust, Gotham, William Ackman and the four current Trustees of
the Trust. The allegations made and the relief requested in the K-A suit are
substantially identical to those of the Fink v. First Union suit referenced
above. The lawsuit seeks a declaration that the lawsuit is maintainable as a
class action and certification that the plaintiff, K-A & Company, Ltd., is the
representative of the class. Among the allegations asserted are breach of
fiduciary duty and aiding and abetting thereof in connection with the
transactions contemplated by the Merger Agreement. This lawsuit was removed by
notice filed by defendants to the United States District Court, Northern
District of Ohio, Eastern Division (Case No. 1:03 CV 0460)
The relief requested by the plaintiff includes an injunction preventing the
defendants from proceeding with consummation of the merger, rescission of the
merger if it occurs, an accounting for any profits realized by the defendants as
a result of the actions complained of, an order permitting the creation of a
shareholders' committee composed of the Trust common shareholders and their
representatives to manage the affairs of the Trust, compensatory damages and the
costs and disbursements of plaintiff's counsel.
As with the Fink v. The Trust lawsuit, the Trust regards the lawsuit as without
merit and plans to vigorously defend against the allegations.
OTHER LITIGATION
PEACH TREE MALL LITIGATION
The Trust, as one Plaintiff in a class action composed of numerous businesses
and individuals, has pursued legal action against the State of California
associated with the 1986 flood of Sutter Buttes Center, formerly Peach Tree
Mall. In September 1991, the court ruled in favor of the plaintiffs on the
liability portion of the inverse condemnation suit, which the State of
California appealed. In the third quarter of 1999, the 1991 ruling in favor of
the Trust and the other plaintiffs was reversed by the State of California
Appeals Court, which remanded the case to the trial court for further
proceedings. After the remand to the trial court, the Trust and the other
plaintiffs determined to pursue a retrial before the court. The retrial of the
litigation commenced February 2001 and was completed July 2001. In November
2001, the trial court issued a decision that generally holds in favor of the
State of California. In February 2002, the Plaintiffs in the case filed a notice
of appeal of the ruling of the trial court. Both the Plaintiffs and the State
have filed their opening briefs in the California Court of Appeals. The
Plaintiffs are scheduled to submit a reply brief in May 2003. The Trust is
unable to predict at this time whether or not it will recover any amount of its
damage claims in this legal proceeding.
INDEMNITY TO IMPERIAL PARKING CORPORATION
In 1999, Newcourt Financial Ltd. brought a claim in Ontario against an affiliate
of the Trust and Imperial Parking Limited alleging a breach of a contract
between the Trust affiliate and Newcourt Financial's predecessor-in-interest,
Oracle Credit Corporation and Oracle Corporation Canada, Inc. The Trust
affiliate and Imperial Parking Limited brought a separate action in British
Columbia against Newcourt, Oracle Credit Corporation and Oracle Corporation
Canada claiming, among other things, that the contract at issue was not properly
authorized by the Trust's board of trustees and the Imperial Parking board of
directors. On March 27, 2000, in connection with the spinoff of Imperial Parking
Corporation (the successor in interest to Imperial Parking Limited) to the
Trust's shareholders, the Trust granted a full indemnity to Imperial Parking
Corporation in respect of all damages arising from the outstanding actions.
18
Numerous attempts to settle this matter have not been successful. The Trust has
reserved $575,000 in its consolidated financial statements for this claim. The
reserved amount consists of the face amount of the contract of $425,000 and
estimated costs of $150,000. The amount of the claim, $825,000, includes
Newcourt's calculation of interest on the amount due at the default rate under
the contract. The Trust believes that, due to the failure of attempted
settlement negotiations, discovery will commence, and the matter will become
more actively litigated. The Trust intends to defend vigorously against the
claims brought against the parties that it has indemnified and to pursue their
separate claims with respect to this matter.
MOUNTAINEER MALL CLAIM
The Trust was named as a defendant in a lawsuit filed in connection with a
contractor's claim relative to the construction of a portion of the Mountaineer
Mall, located in Morgantown, West Virginia. The construction of the mall
commenced in 1993 and was completed in 1995. The mall was sold in July 1999. A
trial on the merits of the lawsuit was held in 1997.
In October 2002, the court issued findings of fact and conclusions of law
providing that the claimant was entitled to recover from the Trust the principal
amount of $266,076 in damages plus various interest amounts, which, when added
to the principal amount, would result in an aggregate damage award of $494,382
against the Trust. The court's order provided, however, that the amount of the
damage award is subject to offset by the amount of legal fees and expenses
reasonably and necessarily incurred by the Trust in defending a certain
mechanic's lien claim asserted by the plaintiff in the lawsuit. The court
further directed that the plaintiff and the Trust negotiate in good faith as to
the amount of such expense and that, if the parties are unable to agree as to
the appropriate offset, the court would schedule an evidentiary hearing for the
purpose of resolving the issue.
In response to the October 2002 order, the Trust's counsel in the litigation has
been attempting to determine the amount of allowable offset to reduce the
damages assessed against the Trust. As this matter is subject to further
negotiation and possible further court proceedings to reach a final resolution,
the Trust is not able to predict the final outcome of this claim. The Trust does
not expect that the outcome will have a significant impact on the combined
financial position of the Trust.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
SPECIAL MEETING OF SHAREHOLDERS TO APPROVE PROPOSED TRANSACTION.
In furtherance of the transactions contemplated by the merger agreement, the
parties to the merger agreement prepared a joint filing with the Securities and
Exchange Commission, being a Registration Statement on Form S-4, including a
proxy statement soliciting shareholder approval of the proposed transaction and
a prospectus with respect to subscription rights for securities of Gotham Golf
and the notes, which were included in the merger consideration with respect to
the proposed transaction. The Form S-4 Registration Statement was declared
effective on October 31, 2002. On November 1, 2002, the Trust issued a press
release announcing that a special shareholders meeting was to be held November
25, 2002, for the purpose of shareholder approval of the proposed transaction.
Shortly thereafter, the plaintiff preferred shareholder in Kimeldorf filed a
motion to show cause why a preliminary injunction should not be issued to enjoin
the November 25, 2002 shareholder vote with respect to the proposed transaction.
A hearing on the motion was set for November 20, 2002. On November 21, the New
York Supreme Court of New York County granted plaintiffs motions for preliminary
injunction and expedited discovery, denied defendant's motion to dismiss, and
scheduled a hearing for November 26 to determine whether to grant further relief
to plaintiff with respect to the transactions contemplated under the Merger
Agreement. The Trust determined that the preliminary injunction prevented the
shareholder vote from proceeding at the meeting scheduled for November 25 and,
after the meeting on November 25 was called to order, it was adjourned until
November 27. At the November 26 hearing, the Trust requested that the court
permit the shareholder meeting and the vote on the proposed transaction to
proceed and the court so ruled.
19
The special meeting of shareholders was reconvened on November 27, at which time
the vote was held and the Trust's common shareholders approved the proposed
transaction by the requisite majority vote of the outstanding shares, with
22,287,091 shares, or approximately 64% of the 34,805,912 outstanding shares of
the Trust voting to approve the proposed transaction, which constituted
approximately 98% of the 22,631,634 shares voted with respect to that issue. Of
the remaining shares, 290,319 were voted against the transaction and 54,225
abstained. In addition, a vote was held on the other issue presented to
shareholders, as to whether or not to confer discretionary authority on the
Board to adjourn or postpone the meeting to permit further solicitation with
respect to the foregoing proposal. The Trust's common shareholders approved this
proposal by the requisite majority vote of the shares represented at the
meeting, with 21,670,853 shares, or approximately 96% of the shares represented
at the meeting, voting in favor of the proposal. In addition, 917,691 shares
were voted against the proposal and 43,090 abstained.
20
PART II
ITEM 5. MARKET FOR TRUST'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET PRICE AND DIVIDEND RECORD
Dividends
High Low Declared
-------- --------- ---------
2002 Quarters Ended
December 31 $ 2.30 $ 1.60 $ -
September 30 2.30 2.14 -
June 30 2.43 2.21 0.10
March 31 2.48 2.32 0.10
---------
$ 0.20
=========
2001 Quarters Ended
December 31 $ 2.56 $ 2.20 $ -
September 30 2.75 2.23 -
June 30 2.62 2.16 -
March 31 2.85 2.38 -
---------
$ -
=========
The Trust's shares are traded on the New York Stock Exchange (Ticker Symbol:
FUR). As of December 31, 2002, there were 2,151 recordholders of the Common
Shares. The Trust estimates the total number of beneficial owners at
approximately 4,900.
During 2002, the Trust was not required to make any minimum distributions to its
common shareholders to maintain its REIT status. During the first and second
quarters of 2002, the Trust paid a quarterly dividend of $0.10 on cash of its
Common Shares. There were no other distributions to the common shareholders.
21
ITEM 6. SELECTED FINANCIAL DATA
For the years ended December 31, (In thousands, except per share data and
footnotes)
2002 2001 2000 1999 1998 (2)
---- ---- ---- ---- --------
OPERATING RESULTS
Revenues $ 18,701 $ 31,391 $ 67,265 $ 120,774 $ 148,062
========= ========= ========= ========= =========
Loss before write-down of investment, unrealized loss
on carrying value of assets identified for disposition,
gains on sale of real estate, extraordinary loss and loss
from discontinued operations (5,032) (2,266) (10,632) (12,494) (27,769)
Write-down of investment (3) - (11,463) - - -
Unrealized loss on carrying value of assets
identified for disposition - - (19,150) (9,800) (36,000)
Gains on sale of real estate - 30,096 76,114 28,334 10,346
--------- --------- --------- --------- ---------
(Loss) income before extraordinary loss and loss from
discontinued operations (5,032) 16,367 46,332 6,040 (53,423)
Extraordinary loss from early extinguishment of debt (4) - (889) (6,065) (5,508) (2,399)
Loss from discontinued operations (1) - - - (6,836) (27,696)
--------- --------- --------- --------- ---------
Net (loss) income $ (5,032) $ 15,478 $ 40,267 $ (6,304) $ (83,518)
========= ========= ========= ========= =========
Net (loss) income applicable to shares of
beneficial interest $ (7,099) $ 13,410 $ 37,817 $ (9,137) $ (86,517)
========= ========= ========= ========= =========
Dividends declared for shares of beneficial interest $ 6,962 $ - $ 6,583 $ 13,166 $ 3,478
========= ========= ========= ========= =========
Per share of beneficial interest:
(Loss) income before extraordinary loss and loss from
discontinued operations, basic $ (0.20) $ 0.39 $ 1.07 $ 0.08 $ (1.83)
Extraordinary loss from early extinguishment of debt, basic (4) - (0.02) (0.15) (0.14) (0.08)
Loss from discontinued operations, basic (1) - - - (0.18) (0.90)
--------- --------- --------- --------- ---------
Net (loss) income applicable to shares of beneficial interest,
basic $ (0.20) $ 0.37 $ 0.92 $ (0.24) $ (2.81)
========= ========= ========= ========= =========
(Loss) income before extraordinary loss and loss from
discontinued operations, diluted $ (0.20) $ 0.39 $ 0.98 $ 0.08 $ (1.83)
Extraordinary loss from early extinguishment of debt, diluted (4) - (0.02) (0.13) (0.14) (0.08)
Loss from discontinued operations, diluted (1) - - - (0.18) (0.90)
--------- --------- --------- --------- ---------
Net (loss) income applicable to shares of beneficial interest,
diluted $ (0.20) $ 0.37 $ 0.85 $ (0.24) $ (2.81)
========= ========= ========= ========= =========
Dividends declared per share of beneficial interest $ 0.20 $ - $ 1.124 $ 0.31 $ 0.11
========= ========= ========= ========= =========
FINANCIAL POSITION AT YEAR END
Total assets $ 171,825 $ 185,669 $ 462,598 $ 502,792 $ 742,623
Long-term obligations (5) 54,319 54,616 171,310 207,589 357,580
Total equity 108,107 122,168 120,383 169,710 150,696
22
ITEM 6. SELECTED FINANCIAL DATA.
These Selected Financial Data should be read in conjunction with the Combined
Financial Statements and Notes thereto.
(1) The results of Impark have been classified as discontinued operations for
2000, 1999 and 1998, as Impark was spun off to the shareholders of the
Trust in 2000. In 1998, Impark recognized a $15.0 million reduction of
goodwill.
(2) In 1998, the loss before unrealized loss on carrying value of assets
identified for disposition and impaired assets, gains on sales of real
estate, extraordinary loss, loss from discontinued operations and preferred
dividend included expenses of $17.6 million related to the proxy contest
and the resulting change in the composition of the Trust's Board of
Trustees.
(3) In 2001, the Trust wrote off $11.5 million, the entire balance, of its
warrants and preferred stock investment in HQ Global Holdings, Inc.,
including accrued dividends.
(4) In 2001, the Trust recognized a $0.9 million extraordinary loss from early
extinguishment of debt relating to the first mortgage debt which was
assumed as part of the sale of assets to Radiant Investors LLC. In 2000,
the Trust repaid a $10.6 million deferred obligation resulting in a
prepayment penalty of $3.1 million and also recognized an extraordinary
loss on the early extinguishment of debt of $2.4 million in connection with
the sale of Crossroads Mall and $0.6 million in connection with the sale of
the Huntington Garage. In 1999, the Trust repaid $46.0 million in mortgage
debt resulting in a prepayment penalty of $5.5 million. In 1998, the Trust
repaid approximately $87.5 million of its 8 7/8% Senior Notes resulting in
$1.6 million in unamortized issue costs and solicitation fees being
expensed. Also, in 1998, the Trust renegotiated its bank agreement and a
$90.0 million note payable resulting in $0.8 million of deferred costs
being expensed.
(5) Included in long-term obligations are senior notes and mortgage loans.
23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
2002 TRANSACTION
THE PROPOSED TRANSACTION
In April 2001, the Board of Trustees of the Trust established a Special
Committee for the purpose of evaluating and advising the Board with respect to
proposed transactions and other possible business alternatives that the Trust
may pursue. The Special Committee, which is composed of Daniel J. Altobello and
Bruce R. Berkowitz, independent Trustees of the Trust, retained Libra
Securities, LLC and Duff & Phelps LLC as its financial advisors and Shaw Pittman
LLP as its independent legal counsel.
On February 13, 2002, the Trust entered into a definitive agreement of
merger and contribution with, among others, Gotham Partners a shareholder of the
Trust that is controlled by affiliates of William A. Ackman, who was at the time
Chairman of the Board of Trustees of the Trust, and Gotham Golf, a Delaware
corporation controlled by Gotham Partners, pursuant to which the Trust agreed to
merge with and into Gotham Golf. The merger agreement provided that the Trust's
common shareholders would receive as merger consideration for each common share
$2.20 in cash, subject to possible deductions on account of dividends paid to
the Trust's common shareholders prior to completion of the transaction, breaches
of certain representations, warranties and covenants contained in the merger
agreement and costs, fees and expenses associated with obtaining certain
third-party consents for the proposed transaction, a choice of an additional
$0.35 in cash or a debt instrument and a subscription right to purchase common
shares of Gotham Golf. The merger agreement also provided that Gotham Golf would
exchange the outstanding shares of the Trust's convertible preferred shares for
shares of Gotham Golf Series A Cumulative Convertible Redeemable Preferred
Stock, par value $25.00 per share, having terms and conditions substantially
identical to those as the Trust's convertible preferred shares had with respect
to the Trust.
On April 24, 2002, the parties adopted Amendment No. 1 to the merger
agreement to change the formula in which the conversion price of Gotham Golf
convertible preferred shares is determined and to extend the time during which
Gotham Partners can elect not to include the note option as part of the merger
consideration to any time prior to the effective time of the merger.
On September 24, 2002, the parties adopted Amendment No. 2 to the
merger agreement to reduce the cash merger consideration by $0.20 to reflect the
amount that would have been deducted from the merger consideration at closing on
account of dividends paid to the Trust's common shareholders prior to completion
of the transaction and by an additional $0.02 to reflect the Trust's and Gotham
Partners's agreement, based on the good faith estimate of the parties, of the
amount that may result from possible breaches of certain representations,
warranties and covenants contained in the merger agreement and costs, fees and
expenses associated with obtaining certain third-party consents for the proposed
transaction. The parties also agreed to eliminate from the merger agreement all
provisions relating to any reduction in the cash merger consideration.
Finally, on October 24, 2002, in order to facilitate the listing of the
Gotham Golf convertible preferred shares on the American Stock Exchange, the
parties adopted Amendment No. 3 to the merger agreement to provide a right to
holders of Gotham Golf convertible preferred shares to approve of, by a majority
vote, the creation of, or increase in the authorized amount of, any additional
class of preferred stock with a liquidation preference equal to that of the
Gotham Golf convertible preferred shares.
24
If consummated, the proposed transaction as contemplated by the amended merger
agreement will result in the Trust's common shareholders receiving as merger
consideration for each common share:
- - $1.98 in cash;
- - a choice of (a) an additional $0.35 in cash or (b) approximately
1/174th (0.0057461) of a debt instrument to be issued by Southwest
Shopping Centers, Co. II, L.L.C., with a face value of $100 (which is
an effective price of $60.91 per face value of $100), indirectly
secured by the Trust's principal real estate assets (such debt
instrument referred to in this document as a note); and
- - three-fiftieths (0.06) of a non-transferable uncertificated
subscription right, with each whole right exercisable to purchase one
Gotham Golf common share at $20.00 per share and, subject to
availability and proration, additional Gotham Golf common shares at
$20.00 per share, for up to an aggregate of approximately $41 million
of Gotham Golf common shares.
The proposed transaction was approved by the Trust's common
shareholders at a special meeting held on November 27, 2002. There can be no
assurance that the proposed transaction approved by the Trust's common
shareholders will be consummated.
Under the proposed transaction:
- - The Trust will merge with and into Gotham Golf, a new corporation
formed by Gotham Golf Partners, L.P. ("Gotham Golf Partners"), which is
a golf course acquirer, owner and operator. As part of the transaction,
Gotham Partners and certain other Gotham Golf Partners equityholders
will contribute their respective limited partnership interests in
Gotham Golf Partners to Gotham Golf and their respective general
partnership interests in Gotham Golf Partners to a wholly owned limited
liability company of Gotham Golf, in exchange for common stock of
Gotham Golf. As a result, after the proposed transaction, Gotham Golf
will directly and indirectly own approximately 92.5% of the equity
interests in Gotham Golf Partners, and Gotham Partners and the other
equityholders that contributed their equity interests in Gotham Golf
Partners in the proposed transaction will own approximately 52.55% of
the shares of Gotham Golf stock, assuming that (i) all of the
subscription rights to receive Gotham Golf common shares are exercised
and (ii) no other equity of Gotham Golf will be issued on or prior to
the effective time of the proposed transaction.
- - Each note will have a face amount of $100, which is equivalent to
approximately $0.575 per share, and will bear interest at 11% per annum
on its face amount. The notes will be secured by a pledge of two
underlying loans: (1) an approximate $3.5 million first leasehold
mortgage on the Circle Tower office building in Indianapolis, Indiana
and (2) an approximate $16.5 million mezzanine loan on the Park Plaza
Mall in Little Rock, Arkansas. Holders of notes will receive a
pass-through of the economic attributes of the two underlying loans.
- - Shareholders who receive their proportionate share of the notes in the
transaction will have the right to require the issuer of the notes to
redeem them on the 90th day after the effective time of the merger for
$0.35 in cash for every approximately 1/174th of a note received as
merger consideration. Gotham Partners has agreed to purchase from the
issuer any redeemed notes for the same redemption price paid by the
issuer to the shareholders.
- - The notes will not be issued unless certain consents are obtained from
the mortgage lender on the Park Plaza Mall and the rating agencies that
originally rated the certificates backed by the first Park Plaza Mall
mortgage. If any required consents, approvals or similar clearances
with respect to the notes cannot be timely obtained, the merger
consideration will be adjusted to eliminate the ability for common
shareholders to elect to receive the notes in lieu of part of the cash
consideration, and all shareholders will receive cash consideration of
$2.33 per common share.
25
- - Convertible preferred shareholders of the Trust will receive
convertible preferred shares of Gotham Golf, as provided for in the
Certificate of Designations for the convertible preferred shares of the
Trust. The existing 8.875% unsecured notes will remain outstanding
according to their terms and will become obligations of Gotham Golf
after the closing of the transaction.
- - The Trust, Gotham Partners and each of the members of the Board of
Trustees have entered into a Voting Agreement, pursuant to which the
parties thereto have agreed to vote a collective 7,424,943 common
shares, or approximately 21.3% of the total outstanding common shares,
for the approval of the proposed transaction.
- - The merger is subject to certain customary closing conditions,
including approval by the Trust's common shareholders and receipt of
certain third-party consents. There can be no assurance that the
proposed transaction will be consummated.
The Trust's approval of the merger agreement was based on the recommendation of
the Special Committee. The Special Committee concluded that the transaction was
in the best interests of the Trust and the Trust's common shareholders (other
than Gotham Partners and its affiliates), where such shareholders elect to
receive the full cash consideration in the merger. The Board of Trustees of the
Trust, with Mr. Ackman not participating, unanimously voted in favor of the
transaction. The Special Committee was advised by Libra Securities, LLC and Duff
& Phelps, LLC, and Gotham and its affiliates were advised by Mercury Partners.
In November 2002, the plaintiff in the preferred shareholder litigation (see
"Item 3. Legal Proceedings") filed with the New York Supreme Court for New York
County an Order to Show Cause why the transaction should not be enjoined. The
court held a hearing on that issue on November 20. On November 21, 2002, the
court issued an order denying the defendant's motion to dismiss the complaint
and granting motions for preliminary injunction and expedited discovery in
connection with the proposed merger. The court also set a hearing for November
26, 2002 to determine whether to grant further relief to plaintiff with respect
to the proposed transaction. An evidentiary hearing was held on November 26, 27
and December 2, 2002 with respect to this matter. Thereafter, the court issued
an order dated December 6, 2002, reaffirming its preliminary injunction barring
the proposed merger of the Trust with and into Gotham Golf. The court's order
extended indefinitely the preliminary injunction previously granted with respect
to the proposed merger transaction and directed the parties to the lawsuit to
attend a preliminary conference for the purpose of scheduling discovery. The
Trust filed a notice of appeal and began pursuit of its appeal of the court's
order barring the transaction in the Appellate Division of the New York Supreme
Court. The issue of the lifting of the injunction was briefed by the parties to
the litigation and oral argument on the appeal was heard by the Appellate
Division of the New York Supreme Court on March 11, 2003. No assurance can be
given that the injunction will be lifted, that all required third party consents
will be obtained and that the transaction will be consummated.
The Trust is contractually obligated under the merger agreement to pursue the
proposed transaction with Gotham Partners unless a superior proposal is made;
that is, an offer consisting of cash or publicly traded securities for more than
90% of the Trust's common shares or all or substantially all of the Trust's
assets that would be more favorable to the holders of the common shares than the
proposed transactions under the merger agreement with Gotham Partners. The
pending preferred shareholder litigation opposing the transaction does not give
the Trust the contractual right under the merger agreement to terminate its
obligations to complete the transaction. If the Trust were to seek to terminate
its obligations solely for that reason, the Trust could incur liability to
Gotham Partners that may include responsibility for the payment of Gotham
Partners' expenses for the transaction, which the Trust believes may exceed $8
million.
26
OTHER MATTERS
The Trust was not directly affected by the events of the September 11th
terrorist attacks; however, the attacks have had a negative effect on the
economy which was already considered to be in a recession. The Trust could be
affected by declining economic conditions as a result of various factors that
affect the real estate business including the financial condition of tenants,
competition, and increased operating costs. The Trust's property insurance was
renewed in November 2002. The rates increased 73% upon renewal. The Trust's
Directors' and Officers' insurance will expire on May 30, 2003. The rates are
expected to increase substantially upon renewal.
The Trust's most critical accounting policy relates to the evaluation of the
carrying value of real estate. The Trust evaluates the need for an impairment
loss on its real estate assets when indicators of impairment are present and the
undiscounted cash flows are not sufficient to recover the asset's carrying
amount. The impairment loss is measured by comparing the fair value of the asset
to its carrying amount. In addition, estimates are used when accounting for the
allowance for doubtful accounts, potentially excess and obsolete inventory,
product warranty reserves, the percentage of completion method of recognizing
revenue and contingent liabilities, among others. These estimates are
susceptible to change and actual results could differ from these estimates. The
effects of changes in these estimates are recognized in the period they are
determined.
SHAREHOLDER LITIGATION
Three separate lawsuits have been filed seeking to block the proposed
transaction between the Trust and Gotham Partners relative to the Merger
Agreement of February 13, 2002 (See "Item 3. Legal Proceedings"). With respect
to one of these legal proceedings, the New York Supreme Court of New York County
has issued an order granting an injunction preventing the transaction from going
forward. That injunction is currently under appeal. No assurance can be given
that the injunction will be lifted or that the proposed transaction will be
consummated.
PARK PLAZA MALL
Two Dillard's department stores are the anchor stores at Park Plaza Mall.
Dillard's owns its facilities in Park Plaza Mall and has a Construction,
Operation and Reciprocal Easement Agreement with a subsidiary of the Trust that
contains an operating covenant requiring Dillard's to operate these facilities
continuously as retail department stores until July 2003. Dillard's and its
partner, Simon Property Group, own a parcel of land of nearly 100 acres in the
western part of Little Rock, Arkansas and have announced, at various times over
the last several years, their intention to build in this new location. During
the first quarter of 2001, the Little Rock board of directors approved a change
in zoning that would allow the construction of an approximately 1.3 million
square foot regional enclosed mall on this site. The zoning on this site
reverted to its prior status as a residential use property pursuant to a court
order in 2002; however, the proponents of the regional enclosed mall have filed
a notice of appeal of this ruling in the Supreme Court of Arkansas, with no
decision expected before June 2003. In the event that a large-scale retail
facility is built on this site, Dillard's may decline to extend or renew its
operating covenant and cease operating its stores at Park Plaza Mall. In the
event Dillard's closes one or both of its stores at Park Plaza Mall, it is
unlikely that it would sell or lease its two stores to comparable anchor
tenants. Accordingly, the value of Park Plaza Mall would be materially and
adversely affected due to the decline in traffic and sales volume at Park Plaza
Mall, and the likely departure of many of the tenants pursuant to early
termination provisions of their leases that may be triggered by the closure of
one or both of the anchor stores. The Park Plaza Mall property is financed by a
mortgage loan. The loss of an anchor tenant or a significant number of other
mall tenants would most likely result in an event of default under this
mortgage.
27
Regardless of whether the proposed new mall is built at the site in question,
under the terms of the operating covenant, Dillard's has no obligation to
maintain its operations at Park Plaza Mall beyond July 2003. Dillard's is
actively pursuing a number of alternative locations for an additional store in
this market. Dillard's has been approached to extend the operating covenant at
the Park Plaza Mall; however, to date, it has declined to do so. If Dillard's
does not maintain its presence as an anchor store at Park Plaza Mall, the Park
Plaza Mall would experience a loss of revenue and likely an event of default
under the mortgage, thereby causing the value of the Park Plaza Mall to be
materially and adversely affected. In such circumstances, there would be an
impairment of the value of the property and a loss could be recognized. There
can be no assurance that Dillard's will extend or renew its operating covenant
on terms acceptable to the Trust.
With respect to capital improvements, the Trust estimates that the Park Plaza
Mall will need to repair or replace its roof at a cost of approximately $0.6
million. The Trust plans to perform the repair or replacement over the next six
months.
VENTEK
FUMI's subsidiary, VenTek, a manufacturer of transit ticketing and parking
equipment, continues to incur significant operating losses. The Trust has
provided performance bond guarantees entered into with respect to two contracts
of VenTek with transit authorities, which contracts are in the amounts of $6.2
million and $5.3 million. These contracts are for the manufacture, installation
and maintenance of transit ticket vending equipment by VenTek. The guarantees
are expected to expire within the next two years based on the commencement of
contractual warranty and maintenance periods now in effect under both contracts.
As of March 14, 2003, no amounts have been drawn against these guarantees. If
VenTek is unable to perform in accordance with these contracts, the Trust may be
responsible for payment under these guarantees. Also, in connection with one of
these transit contracts, VenTek may be liable for liquidated damages (as
calculated under the contract) related to delays in completion of the contract.
LIQUIDITY AND CAPITAL RESOURCES
General
Unrestricted and restricted cash and cash equivalents increased by approximately
$1.2 million (to $5.9 million from $4.7 million) when comparing the balance at
December 31, 2002 to the balance at December 31, 2001.
The Trust's net cash provided by investing activities of $11.3 million was
substantially offset by net cash used for operating activities of approximately
$0.8 million and net cash used for financing activities of $9.3 million. Cash
used for financing activities included approximately $6.9 million of cash
dividends to common shareholders, $2.1 million of cash dividends to preferred
shareholders and $0.3 million of mortgage amortization. Cash provided by
investing activities consisted of the excess of sales over purchases of U.S.
Treasury Bills of $12.0 million. Cash used for investing activities consisted of
$0.7 million of improvements to properties.
The Trust declared a dividend of $0.5 million ($0.525 per share) to Series A
Cumulative Preferred Shareholders in the fourth quarter of 2002. The dividend
was paid January 31, 2003 to shareholders of record at the close of business on
December 31, 2002. In addition, the Trust paid a dividend for the first, second
and third quarter of 2002 of $0.5 million ($0.525 per share) per quarter to
preferred shareholders. During 2002, the Trust was not required to make any
minimum distributions to its common shareholders to maintain its REIT status.
The Trust paid a dividend of $3.5 million ($0.10 per share) to the common
shareholders during the first and second quarters of 2002.
28
\
At December 31, 2002, the Trust owned $104.0 million in face value of U.S.
Treasury Bills. The U.S. Treasury Bills are of maturities of less than 90 days
and classified as held to maturity. The average yield for the year ended
December 31, 2002 and 2001 was 1.61% and 3.64%, respectively.
A summary of the Trust's borrowings and repayment timing is as follows (in
millions):
Payments Due by Period
----------------------
Less than 1-3 4-5 After 5
Contractual Obligations Total 1 Year Years Years Years
- ----------------------- ----- --------- ------ ----- -------
Mortgage loan payable $41.8 $ 0.3 $ 0.7 $ 0.9 $ 39.9
Senior notes $12.5 $ 12.5 $ - $ - $ -
----- --------- ------ ----- -------
Total $54.3 $ 12.8 $ 0.7 $ 0.9 $ 39.9
===== ========= ======= ===== =======
The only lease with respect to which the Trust has an obligation for payment of
rent for is for VenTek, which is month to month.
RESULTS OF OPERATIONS - 2002 VERSUS 2001
Net loss applicable to Common Shares for the year ended December 31, 2002 was
$7.1 million as compared to net income of $13.4 million for the year ended
December 31, 2001. Net income for the year ended December 31, 2001 included a
write-down of an investment in preferred stock and warrants to purchase common
shares of HQ Global Holdings Inc. ("HQ") of $11.5 million, as well as, a gain on
sale of real estate of $30.1 million. The gain for the year ended December 31,
2001 related to the sale two shopping center properties, four office properties,
five parking garages, one parking lot, a $1.5 million note receivable and
certain assets used in operations of the properties (the "Purchased Assets").
Net income for the year ended December 31, 2001 also included a $0.9 million
extraordinary loss from early extinguishment of debt relating to the first
mortgage debt which was assumed as part of the sale of the Purchased Assets.
Interest and dividends decreased by $3.4 million during the year ended December
31, 2002, as compared to 2001. The decrease is a result of lower amounts
invested and lower interest rates between the periods. In addition, during the
first and second quarter of 2001, a $0.7 million dividend was accrued on the
preferred shares of HQ.
Property net operating income, which is rent less property operating expenses
and real estate taxes, decreased for the year ended December 31, 2002 to $7.7
million from $10.5 million in 2001. The decrease was attributable to the sale of
the Purchased Assets in March 2001.
Property net operating income for the Trust's remaining real estate properties
for the year ended December 31, 2002 increased by $1.2 million. The increase was
attributable primarily to an increase in revenues of $0.7 million and a decrease
in operating expenses of $0.5 million. Revenues increased by $0.7 million for
the properties remaining for the year ended December 31, 2002, primarily due to
an increase in rental rates at Park Plaza. This was partially offset by a
decrease in occupancy at Circle Tower. Included in operating expenses are $0.2
million and $0.7 million in 2002 and 2001, respectively, of costs incurred in
connection with the matters described above in the Park Plaza Mall section.
Depreciation and amortization, and mortgage loan interest expense decreased from
2001 to 2002 due to the sale of properties in March 2001. With respect to the
remaining properties, depreciation and amortization expense, and interest
expense remained relatively constant.
29
General and administrative expenses remained relatively constant when comparing
the year ended December 31, 2002 to the comparable period in 2001. Included in
general and administrative expenses for the years ended December 31, 2002 and
2001 are approximately $2.6 million and $0.9 million, respectively, of the
Trust's transaction costs related to the Gotham proposal. During the year ended
December 31, 2002, $0.8 million of costs related to the preferred shareholder
lawsuit were included in general and administrative expense. Also included in
general and administrative expenses are $0.8 million and $1.0 million in 2002
and 2001, respectively, to a firm that is providing management services to
VenTek. Otherwise, general and administrative expenses decreased due to reduced
legal, accounting, professional and management fees primarily as a result of
selling the majority of its assets in March 2001. The Trust cannot predict what
the professional fees may be in 2003 due to the ongoing litigation which may be
substantial.
FUMI's manufacturing facility, VenTek, incurred a net loss of approximately $1.8
million for the year ended December 31, 2002, as compared to a net loss of
approximately $1.6 million for the year ended December 31, 2001. Sales decreased
for the year ended December 31, 2002 to $2.9 million from $7.6 million in 2001
and cost of goods sold decreased to $4.9 million from $8.8 million for the same
period. The decrease in both sales and cost of goods sold is due to the winding
down of current contracts and having nominal new business. During the year ended
December 31, 2002, VenTek settled a claim for $0.5 million against a California
transit agency. The claim arose in 1999 from a termination for convenience by
the agency of a contract with VenTek. The amount recovered is included in other
income for the year ended December 31, 2002. During the year ended December 31,
2002 nine employees were terminated. These employees were involved in both the
transit ticketing and parking equipment, as well as administrative functions.
Severance expenses of less than $0.1 million was recorded during both the years
ended December 31, 2002 and 2001. The backlog for VenTek is approximately $0.5
million at December 31, 2002. Backlog represents products or services that
VenTek's customers have committed by contract to purchase. VenTek's backlog is
subject to fluctuations and is not necessarily indicative of future sales. A
failure to replace backlog has resulted in and will continue to result in lower
revenues.
RESULTS OF OPERATIONS - 2001 VERSUS 2000
Net income applicable to Common Shares for 2001 was $13.4 million as compared to
net income of $37.8 million for 2000. Net income for 2001 included a write-down
of an investment in preferred stock and warrants to purchase common shares of HQ
of $11.5 million. Net income for 2000 included a $19.2 million impairment loss
on certain of the assets which the Trust had agreed to sell to the Purchaser at
a sales price that was less than net book value at December 31, 2000. The
Purchased Assets were sold in March 2001. Net income for 2001 included a gain on
sale of real estate of approximately $30.1 million compared to gains of $76.1
million in the comparable period of 2000. The gain for 2001 related to the sale
of the Purchased Assets. The gain for 2000 included $58.7 million related to the
sale of Crossroads Mall, $1.2 million from the sale of the joint venture
interest in Temple Mall, $16.1 million from the sale of Huntington Garage and
$0.1 million from the sale of other assets. Net income for 2001 included a $0.9
million extraordinary loss from early extinguishment of debt relating to the
first mortgage debt which was assumed as part of the sale of the Purchased
Assets. Net income for 2000 included a $3.1 million extraordinary loss from
early extinguishment of debt relating to the payoff of the Trust's deferred
obligation of $10.6 million and a $2.4 million loss from early extinguishment of
debt relating to the first mortgage debt which was assumed as part of the sale
of Crossroads Mall and a $0.6 million loss from early extinguishment of debt
related to the sale of Huntington Garage.
Interest and dividends decreased during 2001 as compared to 2000. The decrease
is a result of lower amounts, invested and lower interest rates between the
periods.
Property net operating income, which is rent less property operating expenses
and real estate taxes, decreased for 2001 to $10.5 million from $29.8 million in
2000. The decrease was attributable to the sale of properties in March 2001.
30
Property net operating income for the Trust's remaining real estate properties
for 2001 decreased by $1.2 million. The decrease was attributable mainly to an
increase in operating expenses at Park Plaza Mall. The increase in operating
expenses was primarily due to $0.7 million of costs incurred in connection with
the matters described above in the Park Plaza Mall section. Rental income
remained relatively constant at both properties.
Depreciation and amortization and mortgage loan interest expense decreased when
comparing 2001 to the comparable period in 2000 due to the sale of properties in
March 2001. With respect to the remaining properties, depreciation and
amortization expense increased slightly due to improvements to properties.
Mortgage interest expense increased with respect to the remaining properties as
a result of a first mortgage loan that was obtained on Park Plaza Mall in April
2000.
Interest expense relating to notes payable decreased due to the repayment of
reverse repurchase agreements in January 2001.
General and administrative expenses decreased by $5.6 million from 2000 to 2001,
primarily due to severance expenses incurred during 2000. Included in general
and administrative expenses for 2001 are $0.9 million of transaction costs
related to the Gotham proposal and $1.0 million to a firm that is providing
management services to VenTek. Included in general and administrative expenses
for 2000 are approximately $2.7 million of stay bonuses and severance expense.
In addition, general and administrative expenses decreased due to salary and
overhead savings as a result of the Trust outsourcing its management functions
and a decrease in legal expense and accounting fees.
FUMI's manufacturing facility, VenTek, incurred a net loss of $1.6 million for
2001, as compared to a net loss of approximately $3.1 million for 2000. The net
loss for 2001 includes approximately $0.4 million in credits estimated to be
issued in connection with contracts and a $0.3 million inventory valuation
adjustment, which is primarily related to discontinued parking models and FUMI's
transit ticketing equipment inventory. In October 2001, VenTek decided to
terminate eleven employees who were principally engaged in the production of
transit ticketing equipment. Severance expense of less than $0.1 million was
incurred in the fourth quarter of 2001 and stay bonuses for selected remaining
employees are expected to result in a charge of approximately $0.1 million over
a one year period, beginning in the fourth quarter of 2001. The backlog for
VenTek was approximately $1.3 million at December 31, 2001.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses accounting and reporting for
intangible assets acquired, except for those acquired in a business combination.
SFAS No. 142 presumes that goodwill and certain intangible assets have
indefinite useful lives. Accordingly, goodwill and certain intangibles will not
be amortized but rather will be tested at least annually for impairment. SFAS
No. 142 also addresses accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. The adoption of this statement
had no impact on the Trust's combined financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed Of" and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting
31
the Results of Operations - Reporting the Effects of a Disposal of a Business
and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
for the disposal of a segment of a business. This statement also amends ARB No.
51, "Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary. SFAS
No. 144 is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The provisions of this statement
generally are to be applied prospectively. The adoption of this statement had no
impact on the Trust's combined liquidity, financial position or result of
operations, although in future years sales of properties would be presented in a
manner similar to discontinued operations.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections,"
which updates, clarifies and simplifies existing accounting pronouncements. In
part, this statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." FASB No. 145 will be effective for fiscal years
beginning after May 15, 2002. Upon adoption, enterprises must reclassify prior
period items that do not meet the extraordinary item classification criteria in
APB 30. The effect of this statement on the Trust's financial statements would
be the reclassification of extraordinary loss on early extinguishment of debt to
interest expense, however, this will have no effect on the Trust's net income
applicable to shares of beneficial interest. The Trust intends to adopt FASB No.
145 as of January 1, 2003.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. SFAS No. 146 is
effective prospectively for exit and disposal activities initiated after
December 31, 2002, with earlier adoption encouraged.
In November 2002, the FASB issued Interpretation No. 45, Guarantors' Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others. The Interpretation elaborates on the disclosures to be
made by a guarantor in its financial statements about its obligations under
certain guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. This Interpretation
does not prescribe a specific approach for subsequently measuring the
guarantor's recognized liability over the term of the related guarantee. The
disclosure provisions of this Interpretation are effective for the Trust's
December 31, 2002 combined financial statements. The initial recognition and
initial measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. This
Interpretation had no effect on the Trust's combined financial statements. The
Trust's guarantees are disclosed in the combined financial statements.
In January of 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities. This Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
the Interpretation will be immediately effective for all variable interests in
variable interest entities created after January 31, 2003, and the Trust will
need to apply its provisions to any existing variable interests in variable
interest entities by no later than December 31, 2004. The Trust does not
anticipate that this will have an impact on its combined financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTEREST RATE RISK
All of the Trust's loans outstanding at December 31, 2002 have fixed interest
rates. The Trust's investments in U.S. Treasury Bills mature in less than 90
days and therefore are not subject to significant interest rate risk.
32
ITEM 8. FINANCIAL STATEMENTS.
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Balance Sheets
As of December 31, (In thousands, except share data)
2002 2001
------------ -----------
ASSETS
Investments in real estate, at cost
Land $ 6,086 $ 6,086
Buildings and improvements 64,867 64,189
------------ -----------
70,953 70,275
Less - Accumulated depreciation (12,057) (10,108)
------------ -----------
Investments in real estate, net 58,896 60,167
Other assets
Cash and cash equivalents - unrestricted 3,897 2,609
- restricted 1,968 2,115
Accounts receivable and prepayments, net of allowances
of $601 and $680, respectively 1,625 2,261
Investments 103,974 116,005
Inventory, net of reserve 1,033 1,971
Unamortized debt issue costs, net 278 351
Other 154 190
------------ -----------
Total assets $ 171,825 $ 185,669
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loan, including current portion of $324 and $297, respectively $ 41,781 $ 42,078
Note payable 80 96
Senior notes 12,538 12,538
Accounts payable and accrued liabilities 8,332 7,856
Dividends payable 516 517
Deferred items 471 416
------------ -----------
Total liabilities 63,718 63,501
------------ -----------
Shareholders' equity
Convertible preferred shares of beneficial interest, $25 per share
liquidation preference, 2,300,000 shares authorized, 983,082 and 984,800
outstanding in 2002 and 2001 23,131 23,171
Shares of beneficial interest, $1 par, unlimited authorized, 34,814,361
and 34,805,912 shares, outstanding in 2002 and 2001 34,814 34,806
Additional paid-in capital 207,634 207,602
Accumulated distributions in excess of net income (157,472) (143,411)
------------ -----------
Total shareholders' equity 108,107 122,168
------------ -----------
Total liabilities and shareholders' equity $ 171,825 $ 185,669
============ ===========
The accompanying notes are an integral part of these combined financial
statements.
33
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Statements of Operations
For the years ended December 31, (In thousands, except per share data)
2002 2001 2000
------------- ------------- -----------
Revenues
Rents $ 13,643 $ 18,741 $ 49,603
Sales 2,924 7,554 5,556
Interest and dividends 1,659 5,091 12,108
Other income (loss) 475 5 (2)
------------- ------------- -----------
18,701 31,391 67,265
------------- ------------- -----------
Expenses
Property operating 5,043 6,981 14,448
Cost of goods sold 4,892 8,777 8,156
Real estate taxes 899 1,218 5,348
Depreciation and amortization 2,077 3,837 12,580
Interest 5,102 7,094 26,004
General and administrative 5,720 5,750 11,361
Write-down of investment - 11,463 -
Unrealized loss on carrying value of assets identified for disposition - - 19,150
------------- ------------- -----------
23,733 45,120 97,047
------------- ------------- -----------
Loss before gains on sales of real estate, extraordinary loss from early
extinguishment of debt (5,032) (13,729) (29,782)
Gains on sales of real estate - 30,096 76,114
------------- ------------- -----------
(Loss) income before extraordinary loss from early extinguishment of debt (5,032) 16,367 46,332
Extraordinary loss from early extinguishment of debt - (889) (6,065)
------------- ------------- -----------
Net (loss) income (5,032) 15,478 40,267
Preferred dividend (2,067) (2,068) (2,450)
------------- ------------- -----------
Net (loss) income applicable to shares of beneficial interest $ (7,099) $ 13,410 $ 37,817
============= ============= ===========
Per share data
Basic:
(Loss) income before extraordinary loss from early extinguishment of debt $ (0.20) $ 0.39 $ 1.07
Extraordinary loss from early extinguishment of debt - (0.02) (0.15)
------------- ------------- -----------
Net (loss) income applicable to shares of beneficial interest $ (0.20) $ 0.37 $ 0.92
============= ============= ===========
Diluted:
(Loss) income before extraordinary loss from early extinguishment of debt $ (0.20) $ 0.39 $ 0.98
Extraordinary loss from early extinguishment of debt - (0.02) (0.13)
------------- ------------- -----------
Net (loss) income applicable to shares of beneficial interest $ (0.20) $ 0.37 $ 0.85
============= ============= ===========
Basic weighted average shares 34,807 36,396 41,758
============= ============= ===========
Diluted weighted average shares 34,807 36,396 47,499
============= ============= ===========
The accompanying notes are an integral part of these combined financial
statements.
34
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Statements of Shareholders' Equity
(In thousands, except per share data)
Number of Amount of
Preferred Preferred Number of Amount of
Shares of Shares of Shares of Shares of
Beneficial Beneficial Beneficial Beneficial
Interest Interest Interest Interest
---------- ---------- ---------- ----------
Balance December 31, 1999 1,349 $ 31,737 42,472 $ 42,472
Net income before preferred dividend
Dividends paid or accrued on shares of beneficial
interest ($0.31/share)
Dividends paid or accrued on preferred
shares ($2.10/share)
Shares repurchased (364) (8,566) (2,775) (2,775)
Compensation on variable stock options
Spinoff of Impark
Deferred compensation related to restricted shares
---------- ---------- ---------- ----------
Balance December 31, 2000 985 23,171 39,697 39,697
Net income before preferred dividend
Dividends paid or accrued on preferred
shares ($2.10/share)
Shares repurchased (4,891) (4,891)
---------- ---------- ---------- ----------
Balance December 31, 2001 985 23,171 34,806 34,806
Net loss before preferred dividend
Dividends paid on shares
of beneficial interest ($0.20/share)
Dividends paid or accrued on preferred
shares ($2.10/share)
Conversion of preferred shares (2) (40) 8 8
---------- ---------- ---------- ----------
Balance December 31, 2002 983 $ 23,131 34,814 $ 34,814
========== ========== ========== ==========
Accumulated
Additional Distributions Total
Paid-In in Excess of Deferred Shareholders'
Capital Net Income (1) Compensation Equity
---------- -------------- ------------ --------------
Balance December 31, 1999 $ 218,831 $ (123,322) $ (8) $ 169,710
Net income before preferred dividend 40,267 40,267
Dividends paid or accrued on shares of beneficial
interest ($0.31/share) (6,583) (6,583)
Dividends paid or accrued on preferred
shares ($2.10/share) (2,450) (2,450)
Shares repurchased (3,829) (15,170)
Compensation on variable stock options (666) (666)
Spinoff of Impark (64,733) (64,733)
Deferred compensation related to restricted shares 8 8
---------- -------------- ------------ --------------
Balance December 31, 2000 214,336 (156,821) - 120,383
Net income before preferred dividend 15,478 15,478
Dividends paid or accrued on preferred (2,068) (2,068)
shares ($2.10/share)
Shares repurchased (6,734) (11,625)
---------- -------------- ------------ --------------
Balance December 31, 2001 207,602 (143,411) - 122,168
Net loss before preferred dividend (5,032) (5,032)
Dividends paid on shares
of beneficial interest ($0.20/share) (6,962) (6,962)
Dividends paid or accrued on preferred
shares ($2.10/share) (2,067) (2,067)
Conversion of preferred shares 32 -
---------- -------------- ------------ --------------
Balance December 31, 2002 $ 207,634 $ (157,472) $ - $ 108,107
========== ============== ============ ==============
(1) Includes the balance of accumulated distributions in excess of net income of
First Union Management, Inc. of $8,588, $2,554 and $4,173 as of December 31,
2000, 2001 and 2002, respectively.
The accompanying notes are an integral part of these combined financial
statements.
35
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Statements of Cash Flows
For the years ended December 31, (In thousands)
2002 2001 2000
----------- ----------- ---------
Cash (used for) provided by operating activities
Net (loss) income $ (5,032) $ 15,478 $ 40,267
Adjustments to reconcile net (loss) income
to net cash (used for) provided by operating activities
Depreciation and amortization 2,077 3,837 12,580
Write-down of investment - 11,463 -
Extraordinary loss from early extinguishment of debt - 889 6,065
Gains on sales of real estate - (30,096) (76,114)
Loss on carrying value of assets identified for disposition - - 19,150
Increase (decrease) in deferred items 55 (564) 2,409
Net changes in other operating assets and liabilities 2,050 (6,285) 3,942
----------- ----------- ---------
Net cash (used for) provided by operating activities (850) (5,278) 8,299
----------- ----------- ---------
Cash provided by (used for) investing activities
Principal received from mortgage loans and note receivable - 7,048 3,881
Net proceeds from sales of real estate - 43,617 23,325
Proceeds from sale of fixed assets - - 175
Proceeds from sale of investment in joint venture - - 2,410
Purchase of investments (1,662,806) (1,283,394) (1,519,627)
Proceeds from maturity of investments 1,674,837 1,377,249 1,403,668
Investments in building and tenant improvements (697) (778) (10,980)
----------- ----------- ---------
Net cash provided by (used for) investing activities 11,334 143,742 (97,148)
----------- ----------- ---------
Cash (used for) provided by financing activities
(Decrease) increase in notes payable (16) (150,014) 100,982
Proceeds from mortgage loans - 6,500 50,000
Repayment of mortgage loans - Principal payments (297) (422) (1,477)
- Balloon payments - - (8,613)
Mortgage prepayment penalties - - (514)
Payment of deferred obligation - - (10,579)
Deferred obligation repayment penalty - - (3,092)
Payments for Impark spin-off - - (37,087)
Repurchase of common shares - (11,625) (7,431)
Repurchase of preferred shares - - (7,739)
Income from variable stock options - - (666)
Debt issue costs paid - - (666)
Dividends paid on shares of beneficial interest (6,962) - (13,166)
Dividends paid on preferred shares of beneficial interest (2,068) (2,068) (2,641)
----------- ----------- ---------
Net cash (used for) provided by financing activities (9,343) (157,629) 57,311
----------- ----------- ---------
Increase (decrease) in cash and cash equivalents 1,141 (19,165) (31,538)
Cash and cash equivalents at beginning of year 4,724 23,889 57,841
----------- ----------- ---------
Cash and cash equivalents at end of year 5,865 4,724 26,303
Change in cash from discontinued operations - - (2,414)
----------- ----------- ---------
Cash and cash equivalents at end of year, including discontinued operations $ 5,865 $ 4,724 $ 23,889
=========== =========== =========
Supplemental Disclosure of Cash Flow Information
Interest paid $ 5,102 $ 7,899 $ 26,165
=========== =========== =========
Supplemental Disclosure on Non-Cash Investing and Financing Activities
Dividends accrued on preferred shares of beneficial interest $ 516 $ 517 $ 517
=========== =========== =========
Transfer of mortgage loan obligations in connection with real estate sales $ - $ 122,722 $ 76,189
=========== ========= =========
Transfer of deferred obligation in connection with real estate sales $ - $ 1,775 $ -
=========== =========== =========
Issuance of mortgage loan receivable in connection with real estate sales $ - $ 7,000 $ -
=========== =========== =========
Discontinued non-cash net assets charged to dividends paid $ $ - $ 64,747
=========== =========== =========
The accompanying notes are an integral part of these combined financial
statements.
36
ITEM 8. FINANCIAL STATEMENTS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Union Real Estate Equity and Mortgage Investments (the
"Trust") and First Union Management, Inc. ("FUMI") are in the real
estate and parking and transit ticket equipment manufacturing
industries with properties and operations in the United States. The
accounting policies of the Trust and FUMI conform to generally accepted
accounting principles and give recognition, as appropriate, to common
practices within the real estate, parking and manufacturing industries.
In March 2001, the Trust sold a significant portion of its remaining
real estate assets. As of December 31, 2002, the Trust owned two real
estate properties, a shopping mall located in Little Rock, Arkansas and
an office property located in Indianapolis, Indiana.
Under a trust agreement, the common shares of FUMI are held by
the Trust for the benefit of the shareholders of the Trust.
Accordingly, the financial statements of FUMI and the Trust have been
combined and activity between the entities has been eliminated in
combination. Additionally, FUMI owned voting control of Imperial
Parking Limited ("Impark"). Impark operates parking facilities
throughout Canada. In March 2000, the Trust entered into a plan of
settlement and a plan of reorganization with a number of its affiliated
companies which resulted in a transfer of the assets of Impark to a
subsidiary of the Trust, Imperial Parking Corporation, a Delaware
corporation ("Imperial"). In March 2000, the Trust distributed all
common stock of Imperial to its shareholders. The financial information
for 2000 classifies the Canadian parking business as "discontinued
operations."
The preparation of financial statements requires management to
make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses and the disclosure of
contingent assets and liabilities. Such estimates that are particularly
susceptible to change relate to management's estimate of the impairment
of real estate. In addition, estimates are used when accounting for the
allowance for doubtful accounts, potentially excess and obsolete
inventory, product warranty reserves, the percentage of completion
method and contingencies, among others. Actual results could differ
from these estimates.
The Trust accounts for its leases with tenants as operating
leases. Tenant leases generally provide for billings of certain
operating costs and retail tenant leases generally provide for
percentage rentals, in addition to fixed minimum rentals. The Trust
accrues the recovery of operating costs based on actual costs incurred.
For percentage rentals, the Trust follows the Financial Accounting
Standards Board's ("FASB") Emerging Issues Task Force Issue No. 98-9
(EITF-98-9), "Accounting for Contingent Rent in Interim Financial
Periods." EITF-98-9 requires that contingent rental income, such as
percentage rent which is dependent on sales of retail tenants, be
recognized in the period that a tenant exceeds its specified sales
breakpoint. Consequently, the Trust accrues the majority of percentage
rent income in the fourth quarter of each year in accordance with
EITF-98-9. For the years ended December 31, 2002, 2001 and 2000, the
accrued recovery of operating costs and percentage rent income
approximated $4.5 million, $5.6 million and $11.6 million,
respectively. Deferred revenue is derived primarily from revenue
received in advance of its due date.
37
Real estate assets are stated at cost. Expenditures for
repairs and maintenance are expensed as incurred. Significant
renovations that extend the useful life of the properties are
capitalized. Depreciation for financial reporting purposes is computed
using the straight-line method. Buildings are depreciated over their
estimated useful lives of 10 to 40 years, based on the property's age,
overall physical condition, type of construction materials and intended
use. Improvements to the buildings are depreciated over the remaining
useful life of the building at the time the improvement is completed.
Tenant alterations are depreciated over the life of the lease of the
tenant. The Trust annually reviews its portfolio of properties for any
impairment losses. The Trust records impairment losses when indicators
of impairment are present and the undiscounted cash flows are not
sufficient to recover the asset's carrying amount. The impairment loss
is measured by comparing the fair value of the asset to its carrying
amount.
At December 31, 2002 and 2001, buildings and improvements
included $0.1 million of equipment. Equipment is depreciated over
useful lives of five to ten years.
The Trust accounted for its investment in a joint venture
which it did not control using the equity method of accounting. This
investment, which represented a 50% non-controlling ownership interest
in a shopping mall, was recorded initially at the Trust's cost and was
subsequently adjusted for the Trust's equity in income and cash
distributions. The shopping mall was sold in August 2000.
At December 31, 2002 and 2001, $0.7 million and $0.9 million
of cash was restricted, respectively, based on the terms of the
mortgages. Additionally, $1.2 million of cash as of December 31, 2002
and 2001 was classified as restricted because this amount secures
benefits under change of control agreements with former employees of
the Trust and FUMI. The restricted cash can also be used for
reimbursement of legal and other expenses incurred for claims against
Trustees serving prior to the change in the majority of the Board that
occurred in June 1998. The terms of the escrow agreement expire in May
2003.
The Trust has calculated earnings per share for 2002, 2001 and
2000 in accordance with SFAS 128, "Earnings Per Share." SFAS 128
requires that common share equivalents be excluded from the weighted
average shares outstanding for the calculation of basic earnings per
share. The reconciliation of shares outstanding for the basic and
diluted earnings per share calculation is as follows (in thousands):
2002 2001 2000
---- ---- ----
Basic weighted average shares 34,807 36,396 41,758
Convertible preferred shares - - 5,741
------ ------ ------
Diluted weighted average shares 34,807 36,396 47,499
====== ====== ======
The preferred shares are anti-dilutive and are not included in
the weighted average shares outstanding for the diluted earnings per
share for 2002 and 2001. The warrants to purchase shares of beneficial
interest are anti-dilutive and are not included for any period.
38
The computation of basic and diluted earnings per share before
extraordinary loss is as follows (in thousands, except per share data):
2002 2001 2000
----------- ------------ -----------
Basic
(Loss) income before extraordinary loss from early
extinguishment of debt $ (5,032) $ 16,367 $ 46,332
Preferred dividend (2,067) (2,068) (2,450)
Discount on preferred stock redemption - - 827
----------- ------------ -----------
(Loss) income before extraordinary loss from early
extinguishment of debt attributable to
common shares $ (7,099) $ 14,299 $ 44,709
============ ============ ===========
Basic weighted average shares 34,807 36,396 41,758
=========== ============ ===========
(Loss) income per share before extraordinary
loss from early extinguishment of debt $ (0.20) $ 0.39 $ 1.07
=========== ============ ===========
Diluted
(Loss) income before extraordinary loss from early
extinguishment of debt $ (5,032) $ 16,367 $ 44,709
Preferred dividend (2,067) (2,068) -
Preferred dividend on unredeemed stock - - 2,068
Impact of redeemed preferred stock - - (444)
----------- ------------ -----------
(Loss) income before extraordinary loss from early
extinguishment of debt and loss from attributable to
common shares $ (7,099) $ 14,299 $ 46,333
============ ============ ===========
Diluted weighted average shares 34,807 36,396 47,499
=========== ============ ===========
(Loss) income per share before extraordinary
loss from early extinguishment of debt $ (0.20) $ 0.39 $ 0.98
=========== ============ ===========
VENTEK
FUMI's manufacturing subsidiary, VenTek International, Inc.
("VenTek"), is in the business of manufacturing, installing and
providing maintenance of transit ticket vending and parking equipment.
A summary of VenTek's significant accounting policies are as follows:
Inventory
Inventory is valued at the lower of weighted average cost or
net realizable value and consists primarily of transit ticketing and
parking equipment parts and unbilled revenue recognized under the
percentage completion method. Unbilled revenue was $0.6 million and
$1.1 million at December 31, 2002 and 2001, respectively. VenTek's
inventory valuation reserve was $0.5 million and $0.3 million at
December 31, 2002 and 2001, respectively.
39
Fixed Assets
Fixed assets are recorded at cost and are included as part of
other assets on the accompanying combined balance sheet. Depreciation
of furniture, fixtures and equipment are calculated using the
declining-balance and straight-line methods over terms of three to five
years. Amortization of leasehold improvements is calculated using the
straight-line method over the lease term.
Revenue Recognition
Revenue from transit ticket vending equipment and maintenance
contracts is recognized by the percentage completion method. Revenue in
excess of billings represents the difference between revenues
recognized under the percentage completion method and billings issued
under the terms of the contracts and is included as part of inventory
on the accompanying combined balance sheet. VenTek reviews cost
performance and estimates to complete on these contracts at least
quarterly. If the estimated cost to complete a contract changes from a
previous estimate, VenTek records an adjustment to earnings at that
time. Revenues from the sales of parking equipment are recognized upon
delivery.
Product Warranty Policy
VenTek provides product warranties for both its parking and
transit ticket equipment. The warranty policy for parking equipment
generally provides for one year of coverage. The warranty policy for
transit ticket equipment generally provides two to two and a half years
of coverage. VenTek's policy is to accrue the estimated cost of
warranty coverage at the time the sale is recorded. Product warranties
of approximately $0.2 million and $0.3 million are included in accounts
payable and accrued liabilities at December 31, 2002 and 2001,
respectively.
Income Taxes
Current income taxes are recognized during the period in which
transactions enter into the determination of financial statement
income, with deferred income taxes being provided for temporary
differences between the carrying values of assets and liabilities for
financial reporting purposes and such values as measured by income tax
laws. Changes in deferred income taxes attributable to these temporary
differences are included in the determination of income. A valuation
allowance has been provided for the entire amount of deferred tax
assets, which consists of FUMI's capital loss carryforwards, due to the
uncertainty of realization of the deferred tax assets.
Share Options
The Trust accounts for stock option awards in accordance with
APB 25 and has adopted the disclosure-only provisions of SFAS 123,
"Accounting for Stock-Based Compensation." Consequently, compensation
cost has not been recognized for the share option plans except for the
options granted in 1999 which had an exercise price that was less than
the grant date per share market price. If compensation expense for the
Trust's two share option plans had been recorded based on the fair
value at the grant date for awards in previous years, consistent with
SFAS 123, the Trust's net income would be adjusted as follows (amounts
in thousands, except per share data):
40
2002 2001 2000
---- ---- ----
Net (loss) income applicable to shares
of beneficial interest, as reported $ (7,099) $ 13,410 $ 37,817
Effect of stock options as calculated - - (208)
---------- ---------- ----------
Net (loss) income as adjusted $ (7,099) $ 13,410 $ 37,609
========== ========== ==========
Per share
Basic:
Net (loss) income, as reported $ (0.20) $ 0.37 $ 0.92
Effect of stock options as calculated - - -
---------- ---------- ----------
Net (loss) income, as adjusted $ (0.20) $ 0.37 $ 0.92
========== ========== ==========
Diluted:
Net (loss) income, as reported $ (0.20) $ 0.37 $ 0.85
Effect of stock options as calculated - - -
---------- ---------- ----------
Net (loss) income, as adjusted $ (0.20) $ 0.37 $ 0.85
========== ========== ==========
Recently Issued Accounting Standards
In July 2001, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards ("SFAS")
No. 142 "Goodwill and Other Intangible Assets." SFAS No. 142 addresses
accounting and reporting for intangible assets acquired, except for
those acquired in a business combination. SFAS No. 142 presumes that
goodwill and certain intangible assets have indefinite useful lives.
Accordingly, goodwill and certain intangibles will not be amortized but
rather will be tested at least annually for impairment. SFAS No. 142
also addresses accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. The
adoption of this statement had no impact on the Trust's combined
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," which addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets. This statement supersedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" and the accounting and reporting provisions of APB Opinion
No. 30, "Reporting the Results of Operations - Reporting the Effects of
a Disposal of a Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a
business. This statement also amends ARB No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for
a subsidiary for which control is likely to be temporary. SFAS No. 144
is effective for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The provisions of this
statement generally are to be applied prospectively. The adoption of
this statement had no impact on the Trust's combined liquidity,
financial position or results of operations, although in future years
sales of properties would be presented in a manner similar to
discontinued operations.
41
In April 2002, the FASB issued SFAS No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13
and Technical Corrections," which updates, clarifies and simplifies
existing accounting pronouncements. In part, this statement rescinds
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt."
FASB No. 145 will be effective for fiscal years beginning after May 15,
2002. Upon adoption, enterprises must reclassify prior period items
that do not meet the extraordinary item classification criteria in APB
30. The effect of this statement on the Trust's combined financial
statements would be the reclassification of extraordinary loss on early
extinguishment of debt to interest expense, however, this will have no
effect on the Trust's net income applicable to shares of beneficial
interest. The Trust intends to adopt FASB No. 145 as of January 1, 2003
In July 2002, the FASB issued SFAS No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities." SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by
the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. SFAS No.
146 is effective prospectively for exit and disposal activities
initiated after December 31, 2002, with earlier adoption encouraged.
In November 2002, the FASB issued Interpretation No. 45,
Guarantors' Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others. The
Interpretation elaborates on the disclosures to be made by a guarantor
in its financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee.
This Interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the
term of the related guarantee. The disclosure provisions of this
Interpretation are effective for the Trust's December 31, 2002 combined
financial statements. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis
to guarantees issued or modified after December 31, 2002. This
Interpretation had no effect on the Trust's combined financial
statements. The Trust's guarantees are disclosed in the combined
financial statements.
In January of 2003, the FASB issued Interpretation No. 46,
Consolidation of Variable Interest Entities. This Interpretation
clarifies the application of existing accounting pronouncements to
certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties.
The provisions of the Interpretation will be immediately effective for
all variable interests in variable interest entities created after
January 31, 2003, and the Trust will need to apply its provisions to
any existing variable interests in variable interest entities by no
later than December 31, 2004. The Trust does not anticipate that this
will have an impact on its combined financial statements.
2. PROPOSED TRANSACTION
On February 13, 2002, the Trust entered into a definitive
agreement of merger and contribution with, among others, Gotham
Partners, L.P. ("Gotham Partners") a shareholder of the Trust that is
controlled by affiliates of William A. Ackman, who was at the time
Chairman of the Board of Trustees of the Trust, and Gotham Golf Corp.
("Gotham Golf"), a Delaware corporation controlled by Gotham Partners,
pursuant to which the Trust agreed to merge with and into Gotham Golf.
The parties subsequently adopted Amendment No. 1 to the merger
agreement on April 24, 2002, Amendment No. 2 to the merger agreement on
September 24, 2002 and Amendment No. 3 to the merger agreement on
October 24, 2002. If consummated, the proposed transaction will result
in the Trust's common shareholders receiving as merger consideration
for each common share:
42
- $1.98 in cash;
- a choice of (a) an additional $0.35 in cash or (b)
approximately 1/174th (0.0057461) of a debt instrument to be
issued by Southwest Shopping Centers, Co. II, L.L.C.
("Southwest Shopping Centers"), with a face value of $100
(which is an effective price of $60.91 per face value of
$100), indirectly secured by the Trust's principal real estate
assets; and
- three-fiftieths (0.06) of a non-transferable uncertificated
subscription right, with each whole right exercisable to
purchase one Gotham Golf common share at $20.00 per share and,
subject to availability and proration, additional Gotham Golf
common shares at $20.00 per share, for up to an aggregate of
approximately $41 million of Gotham Golf common shares.
The proposed transaction is subject to several conditions,
including the approval of the Trust's shareholders and the obtaining of
certain third party consents. The proposed transaction was approved by
the Trust's common shareholders at a special meeting held on November
27, 2002. There can be no assurance that the proposed transaction
approved by the Trust's common shareholders will be consummated.
In November 2002, the plaintiff in the preferred shareholder
litigation (see "Footnote 17, Legal Proceedings") filed with the New
York Supreme Court for New York County an Order to Show Cause why the
transaction should not be enjoined. The court held a hearing on that
issue on November 20. On November 21, 2002, the court issued an order
denying the defendant's motion to dismiss the complaint and granting
motions for preliminary injunction and expedited discovery in
connection with the proposed merger. The court also set a hearing for
November 26, 2002 to determine whether to grant further relief to
plaintiff with respect to the proposed transaction. An evidentiary
hearing was held on November 26, 27 and December 2, 2002 with respect
to this matter. Thereafter, the court issued an order dated December 6,
2002, reaffirming its preliminary injunction barring the proposed
merger of the Trust with and into Gotham Golf. The court's order
extended indefinitely the preliminary injunction previously granted
with respect to the proposed merger transaction and directed the
parties to the lawsuit to attend a preliminary conference for the
purpose of scheduling discovery. The Trust filed a notice of appeal and
began pursuit of its appeal of the court's order barring the
transaction in the Appellate Division of the New York Supreme Court.
The issue of the lifting of the injunction was briefed by the parties
to the litigation and oral argument on the appeal was heard by the
Appellate Division of the New York Supreme Court on March 11, 2003. No
assurance can be given that the injunction will be lifted, that all
required third party consents will be obtained and that the transaction
will be consummated.
3. DISCONTINUED OPERATIONS
In March 2000, the Trust distributed all common stock of
Imperial to its shareholders. One share of Imperial common stock was
distributed for every 20 Trust common shares of beneficial interest
("Common Shares") held on March 20, 2000. Approximately 2.1 million
shares of Imperial common stock were distributed. As part of the
spin-off, the Trust repaid Impark's bank credit facility of
approximately $24.2 million, contributed to Imperial approximately $7.5
million of cash, its 14 Canadian parking properties and $6.7 million
for a parking development located in San Francisco, California. The
Trust had also provided a secured line of credit for $8 million to
Imperial. The unused line of credit expired on September 27, 2000. FUMI
retained ownership of VenTek, a former manufacturing subsidiary of
Impark.
The Trust also adjusted the conversion price with respect to
its Series A Cumulative Redeemable Preferred Shares of Beneficial
Interest ("Preferred Shares"). The conversion price of the Preferred
Shares was decreased to $5.0824 per Common Share (equivalent to a
conversion rate of 4.92 Common Shares for each Preferred Share) in
connection with the distribution of the Imperial shares, in accordance
with the provisions of the documents establishing the terms of the
Preferred Shares.
43
4. INVESTMENTS
Investments as of December 31, 2002 and 2001 include U.S.
Treasury Bills in the face amount of $104.0 million and $116.0 million,
respectively. The U.S. Treasury Bills are classified as
held-to-maturity securities and are recorded at cost less unamortized
discount. In addition, the Trust invested $10.0 million during 2000 in
convertible preferred stock and warrants issued by HQ Global Holdings,
Inc. ("HQ"). The convertible preferred stock was accounted for as an
available-for-sale security and accrued a 13.5% "pay-in-kind" dividend
which increased annually. The shares and accrued dividends can be
converted into common shares. Management had determined that the fair
value of the investment in convertible preferred stock was $7.3 million
plus accrued dividends. The warrants allow the Trust to purchase shares
of common stock for a nominal strike price and were originally valued
at $2.7 million.
At June 30, 2001, the Trust wrote off its $2.7 million
investment in HQ warrants because of a decline in center occupancy and
other business setbacks disclosed by HQ. The Trust believed that the
decline in estimated fair market value of the investment in warrants
was other than temporary. The Trust also stopped accruing dividends at
June 30, 2001. During the third and fourth quarters of 2001, the Trust
wrote off its remaining $8.8 million investment in HQ preferred stock
because of continued losses and recently disclosed defaults on HQ's
various credit agreements, which the Trust believed had permanently
impaired the value of its investment in HQ's preferred stock. On March
13, 2002, HQ filed a voluntary petition for a Chapter 11 Reorganization
under the U.S. Bankruptcy Code, which they have not emerged from.
5. FINANCIAL INSTRUMENTS
Financial instruments held by the Trust and FUMI include cash
and cash equivalents, accounts receivable, investments, accounts
payable and long-term debt. The fair value of cash and cash
equivalents, accounts receivable and accounts payable approximates
their current carrying amounts due to their short-term nature.
Management has determined that the fair value of the Trust's investment
in convertible preferred stock and the related warrants is zero at
December 31, 2002 and 2001. The fair value of the Trust's mortgage loan
payable, as described in Note 11 could not be estimated. The fair value
of the Trust's Senior Notes approximates its carrying amount. The Trust
and FUMI do not hold or issue financial instruments or derivative
financial instruments for trading purposes.
6. WARRANTS TO PURCHASE SHARES OF BENEFICIAL INTEREST
In November 1998, the Trust issued 500,000 warrants that allow
a third party to purchase 500,000 Common Shares at $10 per share. The
current exercise price of the warrants is $8.37. The warrants expire in
November 2008. The Trust issued the warrants as part of the
consideration for various services provided to the Trust.
7. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include checking and money market
accounts.
44
8. LOSS ON CARRYING VALUE OF ASSETS IDENTIFIED FOR DISPOSITION
Management reviews the net realizable value of the Trust's
portfolio periodically to determine whether an allowance for possible
losses is necessary. The carrying value of the Trust's investments in
real estate is evaluated on an individual property basis. In December
2000, the Trust recorded $19.2 million in losses on the carrying value
of properties that the Trust agreed to sell at an allocated sales price
which was below net book value. These properties were sold in March
2001. There were no assets identified for sale for the year ended
December 31, 2002. The net book value of assets identified for sale for
the year ended December 31, 2001 is summarized in the following table
(amounts in thousands):
2001
-----------
Net book value of assets identified for sale $ 143,159
Additions 360
Depreciation (1,639)
Sales of assets (141,880)
-----------
Net book value of assets identified for sale
at year end $ -
===========
Property net operating income, which is rents less operating
expenses and real estate taxes for assets identified for sale, are
summarized for the year ended December 31, 2001 in the following table
(amounts in thousands):
Revenues $ 5,921
Less - Operating expenses and real estate taxes 2,288
-----------
Property net operating income $ 3,633
===========
9. GAINS ON SALE OF REAL ESTATE
In March 2001, the Trust sold two shopping center properties,
four office properties, five parking garages, one parking lot, a $1.5
million note receivable and certain assets used in the operations of
the properties (the "Purchased Assets") to Radiant Ventures I, LLC (the
"Purchaser"), a related party, for an aggregate sales price before
adjustments and closing costs of $205 million. At the closing of this
transaction, the sale price of $205 million was reduced by $20.6
million, which was the net sales price realized by the Trust from the
sale of the Huntington Garage property which was sold in December 2000
to another party as agreed by Purchaser and which was part of the
aggregate sales price of $205 million. The Trust recognized a gain on
the sale of approximately $30.1 million.
In December 2000, the Trust sold a parking garage for $21.3
million, resulting in a gain on sale of real estate of $16.1 million.
In April 2000, the Trust sold a shopping mall for $80.1 million,
resulting in a gain on sale of real estate of $58.7 million. The Trust
also recognized a gain on sale of real estate of $1.2 million from its
joint venture interest in a shopping mall that was sold during 2000 and
a net $0.1 million from the sale of other assets.
45
10. EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
In 2001, the Trust recognized an extraordinary loss from early
extinguishment of debt of $0.9 million relating to the first mortgage
debt which was assumed as part of the sale of the Purchased Assets.
In 2000, the Trust repaid a $10.6 million deferred obligation
relating to the purchase of the Huntington garage resulting in a
prepayment penalty of $3.1 million. Additionally, the Trust recognized
an extraordinary loss from early extinguishment of debt of $2.4 million
related to the shopping mall that was sold in April 2000 and an early
extraordinary loss from early extinguishment of debt of $0.6 million
related to the parking garage that was sold in December 2000.
11. MORTGAGE LOAN PAYABLE
As of December 31, 2002 and 2001, the Trust had one remaining
mortgage loan for $41.8 million and $42.1 million, respectively,
secured by the Park Plaza Mall. The loan, obtained in April 2000, is
non-recourse, and has an anticipated repayment date of May 1, 2010. The
mortgage loan bears interest at a rate of 8.69% until May 1, 2010 and
thereafter until its final maturity in May 2030 at a rate of 10.69% if
the mortgage loan is then the subject of a secondary market transaction
in which rated securities have been issued and 12.69% if it is not. The
mortgage loan requires monthly payments based on a 30 year amortization
schedule of approximately $0.4 million for principal, interest and
escrow deposits. Prepayment of the loan is permitted prior to the
anticipated repayment date (after an initial lockout period of three
years or two years from securitization), only with yield maintenance or
defeasance, and payable after the anticipated repayment date upon
thirty days notice without payment of any penalties, as defined in the
loan agreement. Principal payments due during the five years following
December 31, 2002 are $0.3 million, $0.3 million, $0.4 million, $0.4
million and $0.5 million, respectively.
Management cannot estimate the fair value of the mortgage loan
payable due to the contingency described in Footnote 22 relating to the
Park Plaza Mall.
12. SENIOR NOTES
The Trust had approximately $12.5 million of 8 7/8% Senior
Notes outstanding at December 31, 2002 and 2001. The Senior Notes are
unsecured and due in full in October 2003. The fair value of the Senior
Notes, based upon the latest trade, approximates its carrying amount.
The Senior Notes have certain debt covenants which the Trust was in
compliance with at December 31, 2002.
13. CONVERTIBLE PREFERRED SHARES OF BENEFICIAL INTEREST
In October 1996, the Trust issued $57.5 million of Series A
cumulative convertible redeemable preferred shares of beneficial
interest ("Series A Preferred Shares"). The 2,300,000 Series A
Preferred Shares were issued at a par value of $25 per share and were
each convertible into 3.31 Common Shares of beneficial interest. In
connection with the distribution of the Impark shares, the Trust
adjusted the conversion price of the preferred shares to 4.92 Common
Shares for each preferred share. The distributions on the Series A
Preferred Shares are cumulative and equal to the greater of $2.10 per
share (equivalent to 8.4% of the liquidation preference per annum) or
the cash distributions on the Common Shares of beneficial interest into
which the Series A Preferred Shares are convertible (determined on each
of the quarterly distribution payment dates for the Series A Preferred
Shares). The Series A Preferred Shares may not be redeemed for cash.
The Series A Preferred Shares are redeemable at the option of the Trust
at the conversion rate of one Series A Preferred Share for 4.92 Common
Shares. The Trust may exercise its option only if for 20 trading days
within any period of 30 consecutive trading days, the closing price of
the Common Shares of beneficial interest on the New York Stock Exchange
equals or exceeds the conversion price of $5.0824 per Common Share.
46
In December 2002, a total of 1,718 shares of Series A
Preferred Shares were converted to Common Shares. Based on the
conversion price of the Series A Preferred Shares, an additional 8,449
Common Shares were issued.
14. REPURCHASE OF SHARES
In April 2001, the Trust entered into separate agreements with
Apollo Real Estate Investment Fund II, L.P., a related party, and with
Bear Stearns International Limited, and repurchased an aggregate of
approximately 4.8 million of its Common Shares at a price of $2.375 per
share. The repurchases are part of the Common Share repurchase
authorization program, under which the Trust had previously expended
approximately $15.6 million to buy Common Shares. From June 28, 2000
through December 31, 2000, the Trust repurchased 2,775,125 Common
Shares for an aggregate cash consideration of $7,430,834. The Common
Share repurchase program has been suspended, pending the outcome of the
proposed transaction with Gotham described in Footnote 2.
In June 2000, the Trust repurchased, in a private transaction,
an aggregate of 364,200 Series A Preferred Shares from three
institutional investors at a purchase price of $21.25 per share, for an
aggregate cash consideration of $7,739,250.
15. SHARE OPTIONS
The Trust has the following share option plans for key
personnel and Trustees:
1981 STOCK OPTION PLAN
This plan provided that option prices be at the fair market
value of the shares at the date of grant and that option rights granted
expire 10 years after the date granted. Adopted in 1981, the plan
originally reserved 624,000 shares for the granting of incentive and
nonstatutory share options. Subsequently, the shareholders approved
amendments to the plan reserving an additional 200,000 shares, for a
total of 824,000 shares, for the granting of options and extending the
expiration date to December 31, 1996. The amendments did not affect
previously issued options. In June 1998, a change in the majority of
the Trust's Board of Trustees resulted in all share options not
previously vested to become fully vested as of that date.
The activity of the plan is summarized for the years ended
December 31 in the following table:
2002 WEIGHTED 2001 WEIGHTED 2000 WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
------ -------- ------ -------- ------ --------
Exercised - - - - - -
Canceled - - - - 22,500 $ 7.38
Expired - - - - - -
As of December 31, 2002 and 2001, there were no outstanding
options under the 1981 plan.
LONG-TERM INCENTIVE OWNERSHIP PLAN
This plan, adopted in 1994 and amended in 1999, reserved
3,507,196 shares for the granting of incentive and nonstatutory share
options and restricted shares. Because certain 1999 option grants are
deemed to be variable, compensation expense is recorded when the market
price of the Common Shares exceeds the option price for these shares.
During 2000, the option price of the 1999 grants exceeded the market
price of shares of beneficial interest and income of $0.7 million was
recorded in 2000. Options granted in 1998 were canceled in March 2000.
Options granted in 1999 expired unexercised in 2001.
47
The activity of this plan is summarized for the years ended
December 31 in the following table:
2002 WEIGHTED 2001 WEIGHTED 2000 WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
--------- -------- --------- -------- --------- --------
Share option granted - - - - - -
Share options canceled - - - - 1,822,334 $ 7.20
Share options expired - - 627,471 $ 3.69 - -
Restricted shares granted - - - - - -
Restricted shares canceled - - - - - -
Additional shares reserved - - - - - -
Available share options
and restricted shares 3,507,196 - 3,507,196 - 2,879,725 -
As of December 31, 2002 and 2001, there were no outstanding
options under this plan.
TRUSTEE SHARE OPTION PLAN
In 1999, the shareholders approved a share option plan for
members of the Board of Trustees. This plan provides compensation in
the form of Common Shares and options to acquire Common Shares for
Trustees who are not employees of the Trust and who are not affiliated
with Apollo Real Estate Advisors or Gotham Partners. A total of 500,000
Common Shares were authorized under this plan.
The eligible Trustees serving on the Board in May 1999 were
granted the lesser of 2,500 shares or the number of shares having a
market price of $12,500 as of the grant date. Seven Trustees each
received 2,500 shares; two Trustees later resigned in 1999 and
forfeited their shares. The remaining shares vested and became
non-forfeitable in December 2000. Deferred compensation, net of
forfeitures, of approximately $57,000, was recorded in 1999 and $8,000
and $49,000 were recognized as amortization expense in 2000 and 1999,
respectively.
Each eligible Trustee who invests a minimum of $5,000 in
shares in a Service Year, as defined in the plan, will receive options,
commencing in the year 2000, to purchase four times the number of
shares that he has purchased. Shares purchased in excess of $25,000 in
a Service Year will not be taken into account for option grants. The
option prices will be the greater of fair market value on the date of
grant or $6.50 for half of the options, and the greater of fair market
value or $8.50 for the other half of the options. The option prices
will be increased by 10% per annum beginning May 2000 and decreased by
dividend distributions on Common Shares made after November 1998. The
options vest and become exercisable one year after being granted.
At December 31, 2000, 28,000 options had been issued to the
Trustees. The 28,000 outstanding options at December 31, 2000 were
exercisable, had a weighted average exercise price of $6.52 and a five
year remaining life. During 2001, 20,000 options were cancelled. At
December 31, 2001, the 8,000 options outstanding were exercisable, had
a weighted average unit price of $7.21 and a four year remaining life.
At December 31, 2002, the 8,000 options outstanding were exercisable
had a weighted average of $7.72 and a three year remaining life. The
SFAS 123 impact of these options was immaterial.
48
16. FEDERAL INCOME TAXES
The Trust has made no provision for regular current or
deferred federal and state income taxes on the basis that it qualifies
under the Internal Revenue Code (the "Code") as a real estate
investment trust ("REIT") and has distributed its taxable income to
shareholders. Qualification as a REIT involves the application of
highly technical and complex provisions of the Code, for which there
are only limited judicial or administrative interpretations. The
complexity of these provisions is greater in the case of a stapled REIT
such as the Trust. The Trust's ability to qualify as a REIT may be
dependent upon its continued exemption from the anti-stapling rules of
the Code, which, if they were to apply, might prevent the Trust from
qualifying as a REIT. Qualification as a REIT also involves the
determination of various factual matters and circumstances.
Disqualification of REIT status during any of the preceding five
calendar years would cause a REIT to incur corporate tax with respect
to a year that is still open to adjustment by the Internal Revenue
Service. In addition, unless entitled to relief under certain statutory
provisions, a REIT also would be disqualified from re-electing REIT
status for the four taxable years following the year during which
qualification is lost. A valuation allowance has been provided for the
entire amount of deferred tax assets of FUMI, which consists of capital
loss carryforwards, due to the uncertainty of realization of the
deferred tax assets.
The Trust and FUMI treat certain items of income and expense
differently in determining net income reported for financial and tax
purposes. Such items resulted in a net increase in income for tax
reporting purposes of approximately $3.6 million in 2002, a net
decrease of $51.0 million in 2001 and a net increase of $12.8 million
in 2000. The Trust has Federal net operating loss carryforwards of
approximately $37.0 million, which expire in 2019 ($4.3 million) and
2021 ($32.7 million). The Trust does not anticipate being able to
utilize the benefits of these carryforwards. The Trust and FUMI do not
file consolidated tax returns.
As of December 31, 2002, net investments in real estate after
accumulated depreciation for tax, reporting purposes was approximately
$57.3 million as compared to financial reporting purposes of
approximately $58.9 million.
The 2002 cash dividend per common share of beneficial interest
for individual shareholder's income tax purposes was as follows:
CAPITAL GAINS
----------------------------
UNRECAPTURED
ORDINARY SECTION 1250 NONTAXABLE TOTAL
DIVIDENDS 20% RATE GAIN (25% RATE) DISTRIBUTIONS DIVIDENDS PAID
- --------- -------- -------------- --------------- ---------------
$ - $ - $ - $ .20 $ 0.20
========= ======== ============== =============== ===============
49
The 2002 cash dividends per Series A Preferred Share for individual
shareholders' income tax purposes was as follows:
CAPITAL GAINS
----------------------------
UNRECAPTURED
ORDINARY SECTION 1250 NONTAXABLE TOTAL
DIVIDENDS 20% RATE GAIN (25% RATE) DISTRIBUTIONS DIVIDENDS PAID
- --------- -------- -------------- --------------- ---------------
$ - $ - $ - $ 2.10 $ 2.10
========= ======== ============== =============== ===============
During 2001, there were no cash dividends per Common Share.
The 2001 cash dividends per Series A Preferred Share for individual
shareholders' income tax purposes was as follows:
CAPITAL GAINS
----------------------------
UNRECAPTURED
ORDINARY SECTION 1250 NONTAXABLE TOTAL
DIVIDENDS 20% RATE GAIN (25% RATE) DISTRIBUTIONS DIVIDENDS PAID
- --------- -------- -------------- --------------- ---------------
$ 0.524 $ 1.192 $ 0.384 $ - $ 2.10
========= ======== ============== =============== ===============
The 2000 dividends per Common Share for individual shareholders' income tax
purposes was as follows:
CAPITAL GAINS
----------------------------
UNRECAPTURED
ORDINARY SECTION 1250 NONTAXABLE TOTAL
DIVIDENDS 20% RATE GAIN (25% RATE) DISTRIBUTIONS DIVIDENDS PAID
- --------- -------- -------------- --------------- ---------------
$ .105 $ .802 $ .217 $ - $ 1.124
========= ======== ============== =============== ===============
The 2000 cash dividends per Series A Preferred Share for individual
shareholders' income tax purposes was as follows:
CAPITAL GAINS
----------------------------
UNRECAPTURED
ORDINARY SECTION 1250 NONTAXABLE TOTAL
DIVIDENDS 20% RATE GAIN (25% RATE) DISTRIBUTIONS DIVIDENDS PAID
- --------- -------- -------------- --------------- ---------------
$ .196 $ 1.5000 $ .404 $ - $ 2.100
========= ======== ============== =============== ===============
50
17. LEGAL PROCEEDINGS
Preferred Shareholders Lawsuit
Kimeldorf v. First Union, et al. On April 15, 2002, the Trust
was served with a complaint filed in the Supreme Court of New York in
New York County on behalf of a purported holder of the Trust's
convertible preferred shares. Among the allegations made by the
plaintiff is that the proposed transaction with Gotham Golf was
approved by the Trust's Board of Trustees in violation of fiduciary
duties owed to the holders of the Trust's convertible preferred shares.
The suit seeks, among other things, unspecified damages, an injunction
of the proposed transaction and the court's certification of the
lawsuit as a class action. Named as defendants in the lawsuit were the
Trust, its five then trustees and Gotham Partners. On November 21, the
New York Supreme Court of New York County issued an order granting
motions for preliminary injunction. On December 6, 2002, the New York
Supreme Court for New York County issued an order reaffirming its
preliminary injunction barring the proposed merger of the Trust with
and into Gotham Golf. The court's order also extended indefinitely the
preliminary injunction previously granted with respect to the proposed
merger transaction and directed the parties of the lawsuit to attend a
preliminary conference for the purpose of scheduling discovery.
The Trust filed a notice of appeal of the preliminary
injunction with the Appellate Division of the New York Supreme Court.
Oral argument with respect to the appeal was held before a judicial
panel of the Appellate Division - First Department of the New York
Supreme Court on March 11, 2003. There is no specific timetable for the
appellate court to render its decision.
It is not possible to predict the outcome of the appellate
process with respect to lifting the injunction. In the event that the
Appellate Division rules that the injunction should not be lifted, the
case will proceed to trial on the merits. In the event that the
injunction imposed by the trial court were lifted and dissolved, it is
the intention of the Trust and, to the best of the Trust's knowledge,
Gotham Partners and the other Gotham Partners-affiliated parties to the
proposed merger transaction, to take the steps necessary to consummate
the proposed transaction, however. Any party to the Kimeldorf
litigation may seek leave of the Appellate Division to appeal to the
Court of Appeals of the State of New York an adverse ruling by the
Appellate Division regarding the injunction granted by the trial court.
On or about November 8, 2002, First Carolina Investors, Inc.
("First Carolina") a holder of preferred shares, filed a separate
lawsuit in New York Supreme Court for New York County, naming the same
defendants as in the Kimeldorf case. On or about December 20, 2002,
plaintiffs Kimeldorf and First Carolina Investors, Inc. filed a
consolidated amended complaint alleging, among others, breach of
contract; aiding and abetting breach of contract; tortuous interference
with the contract; breach of fiduciary duties; aiding and abetting of
breach of fiduciary duties; and unconscionability against the
defendants, styled Kimeldorf et al. v. First Union, et al. This
consolidated amended complaint essentially consolidated the separate
First Carolina Investors, Inc. complaint, filed on or about November 8,
2002 with the complaint of Mr. Kimeldorf filed in April 2002. The Trust
regards the lawsuit as being without merit and will vigorously defend
against the asserted claims.
51
Common Shareholders Lawsuits
Fink v. First Union. On or about January 24, 2003, the Trust
was served with a complaint filed in the Supreme Court of New York, New
York County on behalf of a purported holder of the Trust's common
shares, on behalf of himself and the common shareholders as a class.
The lawsuit seeks a declaration that the lawsuit is maintainable as a
class action and a certification that the plaintiff, Robert Fink, is
the representative of the class. Named as defendants in the lawsuit are
the Trust, Gotham Partners, the companies affiliated with Gotham
Partners and the Trust that are parties to the Merger Agreement,
William Ackman and the four current Trustees of the Trust. Among the
allegations asserted are breach of fiduciary duty and aiding and
abetting thereof in connection with the transactions contemplated by
the Merger Agreement. The relief requested by the plaintiff includes an
injunction preventing the defendants from proceeding with consummation
of the merger, rescission of the merger if it occurs, an accounting for
any profits realized by the defendants as a result of the actions
complained of, an order permitting the creation of a shareholders'
committee composed of the Trust common shareholders and their
representatives to manage the affairs of the Trust, compensatory
damages and the costs and disbursements of plaintiff's counsel.
On or about February 14, 2003, the parties to this lawsuit
stipulated that the defendants need not answer or otherwise respond to
the complaint for an indefinite period of time. The stipulation is
revocable by the plaintiff at any time. The Trust believes that the
purpose of the stipulation was to delay court proceedings in this
lawsuit until the outcome of the appeal of the injunction entered in
the Kimeldorf, et al. v. First Union, et al. case (see above) is
decided by the Appellate Division.
The Trust regards the lawsuit as without merit and plans to
vigorously defend against the allegations. The Trust will oppose any
attempt by the plaintiff to interfere with the transactions
contemplated by the Merger Agreement, which was approved by more than
64% of the outstanding common shares of the Trust and by approximately
99% of the common shares voted at a special meeting of shareholders
held on November 27, 2002.
K-A & Company, LTD. v. First Union. On or about February 12,
2003, certain of the Trust Trustees and, later, the Trust, were served
with a complaint filed in the Court of Common Pleas, Cuyahoga County,
Ohio, by a purported holder of the Trust's common shares, on behalf of
himself and the Trust common shareholders as a class. Named as
defendants in the lawsuit are the Trust, Gotham Partners, William
Ackman and the four current Trustees of the Trust. The allegations made
and the relief requested in the K-A suit are substantially identical to
those of the Fink v. First Union suit referenced above. The lawsuit
seeks a declaration that the lawsuit is maintainable as a class action
and certification that the plaintiff, K-A & Company, Ltd., is the
representative of the class. Among the allegations asserted are breach
of fiduciary duty and aiding and abetting thereof in connection with
the transactions contemplated by the Merger Agreement. This lawsuit was
removed by notice filed by defendants to the United States District
Court, Northern District of Ohio, Eastern Division (Case No. 1:03 CV
0460)
The relief requested by the plaintiff includes an injunction
preventing the defendants from proceeding with consummation of the
merger, rescission of the merger if it occurs, an accounting for any
profits realized by the defendants as a result of the actions
complained of, an order permitting the creation of a shareholders'
committee composed of the Trust common shareholders and their
representatives to manage the affairs of the Trust, compensatory
damages and the costs and disbursements of plaintiff's counsel.
As with the Fink v. First Union lawsuit, the Trust regards the
lawsuit as without merit and plans to vigorously defend against the
allegations.
52
Peach Tree Mall Litigation
The Trust, as one Plaintiff in a class action composed of
numerous businesses and individuals, has pursued legal action against
the State of California associated with the 1986 flood of Sutter Buttes
Center, formerly Peach Tree Mall. In September 1991, the court ruled in
favor of the plaintiffs on the liability portion of the inverse
condemnation suit, which the State of California appealed. In the third
quarter of 1999, the 1991 ruling in favor of the Trust and the other
plaintiffs was reversed by the State of California Appeals Court, which
remanded the case to the trial court for further proceedings. After the
remand to the trial court, the Trust and the other plaintiffs
determined to pursue a retrial before the court. The retrial of the
litigation commenced February 2001 and was completed July 2001. In
November 2001, the trial court issued a decision that generally holds
in favor of the State of California. In February 2002, the Plaintiffs
in the case filed a notice of appeal of the ruling of the trial court.
Both the Plaintiffs and the State have filed their opening briefs in
the California Court of Appeals, and the Plaintiffs are to submit a
reply brief in May 2003. The Trust is unable to predict at this time
whether or not it will recover any amount of its damage claims in this
legal proceeding.
Indemnity to Imperial Parking Corporation
In 1999, Newcourt Financial Ltd. brought a claim in Ontario
against an affiliate of the Trust and Imperial Parking Limited alleging
a breach of a contract between the Trust affiliate and Newcourt
Financial's predecessor-in-interest, Oracle Credit Corporation and
Oracle Corporation Canada, Inc. The Trust affiliate and Imperial
Parking Limited brought a separate action in British Columbia against
Newcourt, Oracle Credit Corporation and Oracle Corporation Canada
claiming, among other things, that the contract at issue was not
properly authorized by the Trust's board of trustees and the Imperial
Parking board of directors. On March 27, 2000, in connection with the
spinoff of Imperial Parking Corporation (the successor in interest to
Imperial Parking Limited) to the Trust's shareholders, the Trust
granted a full indemnity to Imperial Parking Corporation in respect of
all damages arising from the outstanding actions.
Numerous attempts to settle this matter have not been
successful. The Trust has reserved $575,000 in its consolidated
financial statements for this claim. The reserved amount consists of
the face amount of the contract of $425,000 and estimated costs of
$150,000. The amount of the claim, $825,000, includes Newcourt's
calculation of interest on the amount due at the default rate under the
contract. The Trust believes that, due to the failure of attempted
settlement negotiations, discovery will commence, and the matter will
become more actively litigated. The Trust intends to defend vigorously
against the claims brought against the parties that it has indemnified
and to pursue their separate claims with respect to this matter.
Mountaineer Mall Claim
The Trust was named as a defendant in a lawsuit filed in
connection with a contractor's claim relative to the construction of a
portion of the Mountaineer Mall, located in Morgantown, West Virginia.
The construction of the mall commenced in 1993 and was completed in
1995. The mall was sold in July 1999. A trial on the merits of the
lawsuit was held in 1997.
53
In October 2002, the court issued findings of fact and
conclusions of law providing that the claimant was entitled to recover
from the Trust the principal amount of $266,076 in damages plus various
interest amounts, which, when added to the principal amount, would
result in an aggregate damage award of $494,382 against the Trust. The
court's order provided, however, that the amount of the damage award is
subject to offset by the amount of legal fees and expenses reasonably
and necessarily incurred by the Trust in defending a certain mechanic's
lien claim asserted by the plaintiff in the lawsuit. The court further
directed that the plaintiff and the Trust negotiate in good faith as to
the amount of such expense and that, if the parties are unable to agree
as to the appropriate offset, the court would schedule an evidentiary
hearing for the purpose of resolving the issue.
In response to the October 2002 order, the Trust's counsel in
the litigation has been attempting to determine the amount of allowable
offset to reduce the damages assessed against the Trust. As this matter
is subject to further negotiation and possible further court
proceedings to reach a final resolution, the Trust is not able to
predict the final outcome of this claim. The Trust does not expect that
the outcome will have a significant impact on the combined financial
position of the Trust.
18. BUSINESS SEGMENTS
The Trust's and FUMI's business segments at December 31, 2002
include ownership of a shopping center, an office building and a
parking and transit ticket equipment manufacturing company. Management
evaluates performance based upon net operating income. With respect to
property assets, net operating income is property rent less property
operating expense, and real estate taxes. With respect to the
manufacturing company, net operating income is sales revenue less cost
of goods sold. During the year ended December 31, 2001, the Trust sold
two shopping center properties, four office properties, five parking
garages, one parking lot, a $1.5 million note receivable and certain
assets used in the operations of the properties and realized a gain of
approximately $30.1 million. Corporate interest expense consists of the
Trust's senior notes and borrowings collateralized by U.S. Treasury
Bills. Corporate assets consist primarily of cash and cash equivalents,
investments and deferred issue costs for senior notes. All intercompany
transactions between segments have been eliminated (see table of
business segments).
54
BUSINESS SEGMENTS (IN THOUSANDS)
2002 2001 2000
----------- ------------ ------------
RENTS AND SALES
Shopping Centers $ 12,098 $ 13,152 $ 25,922
Office Buildings 1,379 3,962 12,966
Parking Facilities - 1,610 10,470
VenTek 2,924 7,554 5,556
Corporate 166 17 245
----------- ------------ ------------
16,567 26,295 55,159
LESS - OPERATING EXPENSES AND COSTS OF GOODS SOLD
Shopping Centers 4,231 5,351 8,304
Office Buildings 719 1,787 5,695
Parking Facilities - 24 418
VenTek 4,892 8,777 8,156
Corporate 93 (181) 31
----------- ------------ ------------
9,935 15,758 22,604
LESS - REAL ESTATE TAXES
Shopping Centers 821 913 2,004
Office Buildings 90 287 1,187
Parking Facilities - 347 2,157
Corporate (12) (329) -
----------- ------------ ------------
899 1,218 5,348
NET OPERATING INCOME (LOSS)
Shopping Centers 7,046 6,888 15,614
Office Buildings 570 1,888 6,084
Parking Facilities - 1,239 7,895
VenTek (1,968) (1,223) (2,600)
Corporate 85 527 214
----------- ------------ ------------
5,733 9,319 27,207
----------- ------------ ------------
Less - Depreciation and Amortization 2,077 3,837 12,580
Less - Interest Expense 5,102 7,094 26,004
CORPORATE INCOME (EXPENSE)
Interest and dividends 1,659 5,091 12,108
Other income (loss) (VenTek in 2002) 475 5 (2)
General and administrative (5,720) (5,750) (11,361)
Write-down of investment - (11,463) -
55
2002 2001 2000
----------- ------------ ------------
Loss on carrying value of real estate
and impaired assets - - (19,150)
----------- ------------ ------------
Loss before Gains on Sale of Real Estate and
Extraordinary Loss From Early Extinguishment of Debt $ (5,032) $ (13,729) $ (29,782)
=========== ============ ============
CAPITAL EXPENDITURES
Shopping Centers $ 374 $ 138 $ 2,608
Office Buildings 314 472 7,889
Parking Facilities - 114 438
VenTek 9 54 45
----------- ------------ ------------
$ 697 $ 778 $ 10,980
=========== ============ ============
IDENTIFIABLE ASSETS
Shopping Centers $ 58,388 $ 60,042 $ 115,587
Office Buildings 2,444 2,382 43,481
Parking Facilities - - 58,505
Mortgages - - 1,468
VenTek 2,131 3,428 5,284
Corporate 108,862 119,817 238,273
----------- ------------ ------------
TOTAL ASSETS $ 171,825 $ 185,669 $ 462,598
=========== ============ ============
19. MINIMUM RENTS
The future minimum lease payments that are scheduled to be received
under noncancellable operating leases are as follows (amounts in
thousands):
2003 $ 7,735
2004 6,384
2005 5,306
2006 4,071
2007 3,597
Thereafter 8,767
-------------
$ 35,860
=============
If the anchor department store at the Trust's shopping mall does not renew its
operating agreement in July 2003, the majority of tenants at the shopping mall
can terminate their lease without incurring a substantive penalty.
56
20. RELATED PARTY TRANSACTIONS
The Trust engaged a law firm that has a partner who was a
Trustee, to advise it on strategic matters regarding Impark and the
Imperial spinoff. During 2000, approximately $0.4 million had been paid
to this firm, respectively. In May 2001 the Trustee resigned from the
board.
The Trust leased four of its parking facilities to an entity
which is partially owned by an affiliate of a Trust shareholder, Apollo
Real Estate Investment Fund II, L.P. and Apollo Real Estate Advisors.
The parking facilities were sold March 7, 2001. In 2001 and 2000, the
Trust received approximately $0.3 million and $4 million in rent from
this third party, respectively. In April 2001, the Trust purchased all
of the Common Shares of the Trust beneficially owned by this
shareholder.
The Trust and FUMI paid fees of $0.5 million, $0.6 million and
$0.2 million for the years ended December 31, 2002, 2001 and 2000,
respectively, to the Real Estate Systems Implementations Group, LLC for
financial reporting and advisory services. The managing member of this
firm assumed the position of Interim Chief Financial Officer of the
Trust on August 18, 2000 and is currently serving in that capacity.
Radiant Partners, LLC ("Radiant") is currently providing asset
management services to the Trust's remaining real estate assets. For
the years ended December 31, 2002, 2001 and 2000, the Trust paid fees
to Radiant of $0.3 million, $0.5 million and $0.9 million,
respectively. The principals of Radiant were formerly executive
officers of the Trust. During 2001, the Trust sold the Purchased Assets
to an affiliate of Radiant.
The Trust had engaged Ackman-Ziff Real Estate Group LLC
("Ackman-Ziff") to arrange for mortgage financing on several properties
of the Trust. Lawrence D. Ackman, who is the father of William A.
Ackman, former Chairman and Trustee of the Trust, is an equity owner of
Ackman-Ziff. In 2000, $100,000 was paid to Ackman-Ziff.
The Trust believes that the terms of all such transactions
were as favorable to the Trust as those that would have been obtained
from unrelated third parties.
21. SEVERANCE LIABILITY
During both 2002 and 2001 severance expense of less than $0.1
million was paid by VenTek due to the termination of employees. During
2000, the Trust recorded $2.3 million in severance expense as a result
of the termination of the employment of Messrs. Friedman and
Schonberger and Ms. Zahner, and $0.2 million in severance expense as a
result of the termination of another executive.
22. CONTINGENCIES
The Trust has provided performance guarantees entered into
with respect to contracts of VenTek with two transit authorities, which
contracts are in the amounts of $5.3 million and $6.2 million for the
manufacturing, installation and maintenance of transit ticket vending
equipment manufactured by VenTek. The guarantees expire within the next
two years based upon the projected completion dates anticipated by
VenTek and the transit agencies. No amounts have been drawn against
these guarantees. Since these projects are entering their final stages,
management does not anticipate that payment will have to be made under
the guarantees; however, if VenTek is unable to perform in accordance
with these contracts, and subsequent change orders the Trust may be
responsible for partial payment under these guarantees. Also, in
connection with one of these transit contracts, VenTek may be liable
for liquidated damages (as calculated under the contract) related to
delays in completion of the contract.
57
The Trust is aware of the proposed construction of a new mall
in the vicinity of Park Plaza Mall (the "Mall") by a partnership of a
mall developer and the anchor department store. Legal actions have been
taken by local citizens of Little Rock, Arkansas to reverse the
decision of the Little Rock board of directors with respect to the
zoning for the development of the proposed new mall. A trial to
determine whether the property is to be re-zoned and on whether or not
the voters of Little Rock can vote to overturn the decision of the
board occurred at the end of February 2002. On June 5, 2002, the court
issued an opinion invalidating the decision of the board of directors
and as a result, the zoning of the site reverted to its prior status as
a residential use property. Furthermore, the court permanently enjoined
the City of Little Rock from issuing any building permits or taking any
other action pursuant to the invalid ordinances with respect to the
proposed new mall. The proponents of the new mall have filed a notice
of appeal of the decision in the Supreme Court of Arkansas, with no
decision expected before June 2003. It is also possible that proponents
of the new mall will file a new application to rezone the proposed area
for the new mall for commercial use and, specifically for large-scale
retail use. The administrative expenses, principally legal fees related
to this contingency, have been paid by the Trust.
Regardless of whether the proposed new mall is built at the
site in question, under the terms of the operating covenant, Dillard's
has no obligation to maintain its operations at Park Plaza Mall beyond
July 2003. Dillard's is actively pursuing a number of alternative
locations for an additional store in this market. Dillard's has been
approached to extend the operating covenant at the Park Plaza Mall;
however, to date, it has declined to do so. If Dillard's does not
maintain its presence as an anchor store at Park Plaza Mall, the Park
Plaza Mall would experience a loss of revenue and likely an event of
default under the mortgage, thereby causing the value of the Park Plaza
Mall to be materially and adversely affected. In such circumstances,
there would be an impairment of the value of the property and a loss
could be recognized. There can be no assurance that Dillard's will
extend or renew its operating covenant on terms acceptable to the
Trust.
The Trust is contractually obligated under the merger
agreement to pursue the proposed transaction with Gotham Partners
unless a superior proposal, as defined in the agreement, is made. The
pending preferred shareholder litigation opposing the transaction does
not give the Trust the contractual right under the merger agreement to
terminate its obligations to complete the transaction. If the Trust
were to seek to terminate its obligations solely for that reason, the
Trust could incur liability to Gotham Partners that may include
responsibility for the payment of Gotham Partners' expenses for the
transaction, which the Trust believes may exceed $8 million.
24. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is an unaudited condensed summary of the
combined results of operations by quarter for the years ended December
31, 2002 and 2001. In the opinion of the Trust and FUMI, all
adjustments (consisting of normal recurring accruals) necessary to
present fairly such interim combined results in conformity with
accounting principles generally accepted in the United States of
America have been included.
58
QUARTERS ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- ---------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND FOOTNOTES)
2002
Revenues $ 4,703 $ 4,490 $ 4,807 $ 4,701
========== ========== ========== ===========
Loss before extraordinary loss from early
extinguishment of debt $ (1,490) $ (1,298) $ (1,015) $ (1,229)
Extraordinary loss from early extinguishment of debt - - - -
---------- ---------- ------------ -----------
Net loss $ (1,490) $ (1,298) $ (1,015) $ (1,229)
========== ========== ========== ===========
Net loss applicable to shares of beneficial interest $ (2,007) $ (1,815) $ (1,532) $ (1,745)
========== ========== ========== ===========
Per share
Loss applicable to shares of beneficial interest
before extraordinary loss, basic $ (0.06) $ (0.05) $ (0.04) $ (0.05)
Extraordinary loss from early extinguishment of debt, basic - - - -
---------- ---------- ------------ -----------
Net loss applicable to shares of beneficial interest, basic $ (0.06) $ (0.05) $ (0.04) $ (0.05)
========== ========== ========== ===========
Loss applicable to shares of beneficial interest before
extraordinary loss, diluted $ (0.06) $ (0.05) $ (0.04) $ (0.05)
Extraordinary loss from early extinguishment of debt, diluted - - - -
---------- ---------- ------------ -----------
Net loss applicable to shares of beneficial interest, diluted $ (0.06) $ (0.05) $ (0.04) $ (0.05)
========== ========== ========== ===========
QUARTERS ENDED
----------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
---------- --------- -------------- -------------
2001
Revenues $ 13,048 $ 6,702 $ 5,798 $ 5,843
======== ======== ======== ========
Income (loss) before extraordinary loss from early
extinguishment of debt $ 29,506 $ (2,912) $ (5,010) $ (5,217)
Extraordinary loss from early extinguishment of debt (889) - - -
-------- -------- ---------- --------
Net income (loss) $ 28,617 $ (2,912) $ (5,010) $ (5,217)
======== ======== ======== ========
Net income (loss) applicable to shares of beneficial interest $ 28,100 (1) $ (3,429)(2) $ (5,527)(2) $ (5,734)(2)
======== ======== ======== ========
Per share
Income (loss) applicable to shares of beneficial interest
before extraordinary loss, basic $ 0.73 $ (0.09) $ (0.16) $ (0.16)
Extraordinary loss from early extinguishment of debt, basic (0.02) - - -
-------- -------- ---------- --------
Net income (loss) applicable to shares of beneficial interest,
basic $ 0.71 $ (0.09) $ (0.16) $ (0.16)
======== ======== ======== ========
Income (loss) applicable to shares of beneficial interest before
extraordinary loss, diluted $ 0.66 $ (0.09) $ (0.16) $ (0.16)
Extraordinary loss from early extinguishment of debt, diluted (0.02) - - -
-------- -------- ---------- --------
Net income (loss) applicable to shares of beneficial interest,
diluted $ 0.64 $ (0.09) $ (0.16) $ (0.16)
======== ======== ======== ========
(1) Includes a gain on sale of real estate of $30.1 million from the sale
of the Purchased Assets.
(2) Includes a write-down of investment of $2.7 million, $4.4 million and
$4.4 million for the second, third and fourth quarters, respectively.
59
Independent Auditors' Report
The Board of Trustees and Shareholders
First Union Real Estate Equity and Mortgage Investments:
We have audited the accompanying combined balance sheets of First Union Real
Estate Equity and Mortgage Investments and First Union Management, Inc. and
subsidiaries as of December 31, 2002 and 2001, and the related combined
statements of operations, shareholders' equity, and cash flows for the years
then ended. These combined financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of First Union
Real Estate Equity and Mortgage Investments and First Union Management, Inc. and
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America.
/s/ KPMG LLP
New York, New York
March 28, 2003
60
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Securityholders And Trustees Of First Union Real Estate Equity and
Mortgage Investments:
We have audited the accompanying consolidated balance sheet of First Union Real
Estate Equity and Mortgage Investments (an unincorporated Ohio business trust,
also known as First Union Real Estate Investments) and First Union Management,
Inc. (a Delaware corporation) and its subsidiaries as of December 31, 2000, and
the related combined statements of operations, comprehensive income,
shareholders' equity and cash flows for each of the two years in the period
ended December 31, 2000. These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We did not audit the financial statements of
Imperial Parking Limited for the year ended December 31, 1999, which statements
reflect total revenues of approximately 39 percent of the consolidated total.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included for those
entities, is based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors for 1999,
the financial statements referred to above present fairly, in all material
respects, the combined financial position of First Union Real Estate Equity and
Mortgage Investments and First Union Management, Inc. and its subsidiaries as of
December 31, 2000, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
Cleveland, Ohio,
March 7, 2001. /s/ Arthur Andersen LLP
* This Report of Independent Public Accountants on Financial Statement
Schedules is a copy of a previously issued report issued by Arthur
Andersen LLP and has not been reissued by Arthur Andersen. The
inclusion of this previously issued report is pursuant to the
"Temporary Final Rule and Final Rule Requirements for Arthur Andersen
LLP Auditing Clients" promulgated by the United States Securities and
Exchange Commission in March 2002.
61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
a. On September 21, 2001, the Audit Committee of the
Trust's Board of Trustees proposed, and its Board of
Trustees approved, the dismissal of the accounting
firm of Arthur Andersen LLP as its independent
accountants and the appointment of the accounting
firm of KPMG LLP as its independent accountants for
the Trust.
b. The reports of Arthur Andersen LLP for the fiscal
years ended December 31, 1999 and December 31, 2000
did not contain an adverse opinion or disclaimer of
opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.
Arthur Andersen LLP stated in its report with respect
to the fiscal year ended December 31, 1999 that it
did not audit the financial statements of Imperial
Parking Limited for the year ended December 31, 1999,
which statements reflect total assets and total
revenues of approximately 12 percent and
approximately 39 percent of the related consolidated
totals. In its report, Arthur Andersen LLP stated
that the financial statements of Imperial Parking
Limited for the year ended December 31, 1999 were
audited by other auditors whose report was furnished
to Arthur Andersen LLP and the report of Arthur
Andersen LLP, insofar as it related to the amounts
included for Imperial Parking Limited, was based
solely on the report of the other auditors.
c. In connection with the audits of the Trust's
financial statements for the fiscal years ended
December 31, 2000 and December 31, 1999, and in the
subsequent interim period preceding the dismissal,
there were no disagreements with Arthur Andersen LLP
on any matter of accounting principals or practices,
financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to
the satisfaction of Arthur Andersen LLP, would have
caused it to make reference to the subject matter of
the disagreements in connection with its report.
d. In connection with the audits of the Trust's
financial statements for the fiscal years ended
December 31, 2000 and 1999, and through the
subsequent interim period preceding the dismissal,
there were no "reportable events" as that term is
described in Item 304(a)(1)(v) of Regulation S-K.
e. The Trust has provided Arthur Andersen LLP with a
copy of the disclosures which the Trust made in item
4 of a Form 8-K filed by the Trust on September 28,
2001 and requested that Arthur Andersen LLP furnish
it with a letter addressed to the Securities and
Exchange Commission stating whether or not it agreed
with such disclosures. A copy of such letter dated
September 24, 2001 was filed as Exhibit 16.1 to the
Form 8-K.
f. The Trust had not consulted with KPMG LLP during the
previous two fiscal years and the interim periods
prior to their appointment on any matters which were
the subject of any disagreement or with respect to
any "reportable event" as is defined in Item 304 of
Regulation S-K or the type of audit opinion which
might be rendered on the Trust's financial
statements.
g. KPMG LLP (Canada) is the independent auditor for
VenTek International, Inc., an affiliate of the
Trust, and for Imperial Parking Corporation, formerly
an affiliate of the Trust.
62
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE TRUST.
(a) DIRECTORS.
"Election of Trustees" presented in the Trust's 2003 Proxy
Statement to be filed is incorporated herein by reference.
(b) EXECUTIVE OFFICERS.
"Executive Officers" as presented in the Trust's 2003 Proxy
Statement to be filed is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
"Compensation of Trustees" and "Executive Compensation", presented in
the Trust's 2003 Proxy Statement to be filed are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
"Security Ownership of Trustees, Officers and Others" presented in the
Trust's 2003 Proxy Statement to be filed is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Certain Transactions and Relationships" presented in the Trust's 2003
Proxy Statement to be filed is incorporated herein by reference.
63
PART IV
ITEM 14. CONTROLS AND PROCEDURES
The Registrant's principal executive and financial officer has, within
90 days of the filing date of this annual report, evaluated the effectiveness of
the Registrant's disclosure controls and procedures (as defined in Exchange Act
Rules 13a - 14(c) and has determined that such disclosure controls and
procedures are adequate to ensure that information required to be disclosed by
the Registrant in the reports filed or submitted under the Exchange Act is
recorded, processed and summarized and reported within the time periods
specified by the Securities and Exchange Commission. There have been no
significant changes in the Registrant's internal controls or in other factors
that could significantly affect such internal controls since the date of
evaluation. Accordingly, no corrective actions have been taken with regard to
significant deficiencies or material weaknesses.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) FINANCIAL STATEMENTS:
Combined Balance Sheets - December 31, 2002 and 2001 on page
33 of Item 8.
Combined Statements of Operations and - For the Years Ended
December 31, 2002, 2001 and 2000 on page 34 of Item 8.
Combined Statements of Shareholders' Equity - For the Years
Ended December 31, 2002, 2001 and 2000 on page 35 of Item 8.
Combined Statements of Cash Flows - For the Years Ended
December 31, 2002, 2001 and 2000 on page 36 of Item 8.
Notes to Combined Financial Statements on pages 37 through 59
of Item 8.
Independent Auditors' Reports on pages 60 through 61 of Item
8.
(2) FINANCIAL STATEMENT SCHEDULES:
Independent Auditors' Reports on Financial Statement Schedules.
Schedule III - Real Estate and Accumulated Depreciation.
All Schedules, other than III, are omitted, as the information
is not required or is otherwise furnished.
64
(b) EXHIBITS.
Exhibit Incorporated Herein by
Number Description Reference to
- ------ ----------- ------------
(2)(a) Agreement and Plan of Merger and Contribution by and among Form 8-K dated February 14, 2002
First Union Real Estate Equity and Mortgage Investments,
that certain Ohio Trust, declared as of October 1, 1996,
by Adolph Posnick, Trustee, First Union Management, Inc.,
GGC Merger Sub, Inc., Gotham Partners, L.P., Gotham Golf
Partners, L.P., Florida Golf Associates, L.P., Florida
Golf Properties, Inc., and Gotham Golf Corp.
2(a)(1) Amendment No. 1 dated as of April 30, 2002 to the Appendix B to Amendment No. 4 to Form S-4,
Agreement and Plan of Merger and Contribution by and among Registration Statement No. 333-88144, of
First Union Real Estate Equity and Mortgage Investments, Gotham Golf Corp. and Southwest Shopping
that certain Ohio Trust, declared as of October 1, 1996, Centers Co. II, L.L.C.
by Adolph Posnick, Trustee, First Union Management, Inc.,
GGC Merger Sub, Inc., Gotham Partners, L.P., Gotham Golf
Partners, L.P., Florida Golf Associates, L.P., Florida
Golf Properties, Inc., and Gotham Golf Corp.
2(a)(2) Amendment and Restatement dated as of October 30, 2002 of Appendix C to Amendment No. 4 to Form S-4,
Amendment No. 2 dated as of September 27, 2002 to the Registration Statement No. 333-88144, of
Agreement and Plan of Merger and Contribution by and among Gotham Golf Corp. and Southwest Shopping
First Union Real Estate Equity and Mortgage Investments, Centers Co. II, L.L.C.
that certain Ohio Trust, declared as of October 1, 1996,
by Adolph Posnick, Trustee, First Union Management, Inc.,
GGC Merger Sub, Inc., Gotham Partners, L.P., Gotham Golf
Partners, L.P., Florida Golf Associates, L.P., Florida
Golf Properties, Inc., and Gotham Golf Corp.
2(a)(3) Amendment No. 3 dated as of October 24, 2002 to the Appendix D to Amendment No. 4 to Form S-4,
Agreement and Plan of Merger and Contribution by and among Registration Statement No. 333-88144, of
First Union Real Estate Equity and Mortgage Investments, Gotham Golf Corp. and Southwest Shopping
that certain Ohio Trust, declared as of October 1, 1996, Centers Co. II, L.L.C.
by Adolph Posnick, Trustee, First Union Management, Inc.,
GGC Merger Sub, Inc., Gotham Partners, L.P., Gotham Golf
Partners, L.P., Florida Golf Associates, L.P., Florida
Golf Properties, Inc., and Gotham Golf Corp.
(3)(a) By-laws of Trust as amended 1998 Form 10-K
65
(3)(b) Certificate of Amendment to Amended and Restated 2000 Form 10-K
Declaration of Trust as of March 6, 2001
(4)(a) Form of certificate for Shares of Beneficial Interest Registration Statement on Form S-3 No.
33-2818
(4)(b) Form of Indenture governing Debt Securities, dated October Registration Statement on Form S-3 No.
1, 1993 between Trust and Society National Bank 33-68002
(4)(c) First Supplemental Indenture governing Debt securities, 2000 Form 10-K
dated July 31, 1998 between Trust and Chase Manhattan
Trust Company, National Association
(4)(d) Form of Note Registration Statement on Form S-3 No.
33-68002
(4)(e) Certificate of Designations relating to Trust's Series A Form 8-K dated October 24, 1996
Cumulative Redeemable Preferred Shares of Beneficial
Interest
(4)(f) Warrant to purchase 500,000 shares of beneficial interest 1998 Form 10-K
of Trust
(10)(a) 1999 Trustee Share Option Plan 1999 Proxy Statement for Special Meeting
held May 17, 1999 in lieu of Annual Meeting
(10)(b) 1999 Long Term Incentive Performance Plan 1999 Proxy Statement for Special Meeting
held May 17, 1999 in lieu of Annual Meeting
(10)(c) Registration Rights Agreement as of November 1, 1999 by 1999 Form 10-K
and among First Union Equity and Mortgage Investments and
Gotham Partners, L.P., Gotham Partners III, L.P., and
Gotham Partners International, Ltd.
(10)(d) Asset Management Agreement executed March 27, 2000 with March 31, 2000
Radiant Partners, LLC. ** Form 10-Q
(10)(e) Promissory note dated April 20, 2000 between Park Plaza Form 8-K dated May 11, 2000
Mall, LLC and First Union National Bank
(10)(f) Mortgage and Security Agreement dated April 20, 2000 Form 8-K dated May 11, 2000
between Park Plaza Mall, LLC and First Union National Bank
(10)(g) Cash Management Agreement dated April 20, 2000 among Park Form 8-K dated May 11, 2000]
Plaza Mall, LLC, as borrower, Landau & Heymann of
Arkansas, Inc., as manager and First Union National Bank,
as holder
66
(10)(h) Amendment to Asset Management Agreement executed May 31, Form 8-K dated June 6, 2000
2000 with Radiant Partners, LLC **
(10)(i) Amendment to Asset Management Agreement ** September 30, 2000 Form 10-Q
(10)(j) Second Amendment to Asset Management Agreement ** September 30, 2000 Form 10-Q
(10)(k) Third Amendment to Asset Management Agreement ** September 30, 2000 Form 10-Q
(10)(l) Fourth Amendment to Asset Management Agreement ** September 30, 2000 Form 10-Q
(10)(m) Fifth Amendment to Asset Management Agreement ** September 30, 2000 Form 10-Q
(10)(n) Modification to Asset Management Agreement** 2000 Form 10-K
(10)(o) Voting Agreement dated as of February 13, 2002, by and Form 8-K dated February 14, 2002
among the Trust, Gotham and Messrs. Ackman, Altobello,
Bruce R. Berkowitz, Citrin and Embry
(10)(p) Lease, dated as of April 26, 1910, between Frank Fauvre Exhibit 10.1 to Amendment No. 3 to Form
and Lillian Fauvre as Lessors and the German American S-4, Registration Statement No. 333-88144,
Trust Company as Lessee of Gotham Golf Corp. and Southwest
Shopping Centers Co. II, L.L.C.
(10)(q) Indemnification Agreement with Neil Koenig, dated as of
April 29, 2002*
(10)(r) Extension Letter Agreement to Asset Management Agreement,
dated as of January 16, 2003*
(10)(s) Real Estate Management Agreement between Park Plaza Mall
LLC and General Growth Management Inc.*
(23) Consent of KPMG LLP *
(24) Powers of Attorney *
(99.1) Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
* Filed herewith
** Management contract or compensatory plan or arrangement
67
(c) REPORTS ON FORM 8-K - FILED ON OR BEFORE DECEMBER 31, 2002.
November 22, 2002
Item 5 - On November 21, 2002, the New York
Supreme Court of New York County granted
motions for preliminary injunction and
expedited discovery in connection with the
proposed merger of the Trust and Gotham Golf
Corp.
Item 7 - Press release dated November 21, 2002,
issued by the Trust.
68
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Trust has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS
By: /s/Neil H. Koenig
-----------------
Neil H. Koenig, Interim 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
Trust and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Neil H. Koenig Principal Executive
------------------ and Principal Financial Officer March 31, 2003
Neil H. Koenig
Trustees:
Date
Daniel J. Altobello* )
Bruce R. Berkowitz* )
Jeffrey B. Citrin* ) March 31, 2003
Talton R. Embry* )
SIGNATURE
---------
*By: /s/Neil H. Koenig
Neil H. Koenig, Attorney-in-Fact
69
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
CERTIFICATIONS
I, Neil H. Koenig, in the capacities indicated below, certify that:
1. I have reviewed this annual report on Form 10-K of First Union Real
Estate Equity and Mortgage Investments;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. I am responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for
the registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant is made
known to me, particularly during the periods in which this
annual report is being prepared:
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c) presented in this annual report my conclusions about the
effectiveness of the disclosure controls and procedures on my
evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of registrant's Board of
Trustees:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
70
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002
6. I have indicated in this annual report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of my
most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 31, 2003
/s/ Neil H. Koenig
-----------------------------------
Neil H. Koenig
Principal Executive Officer
and Interim Chief Financial Officer
71
Independent Auditors' Report
The Board of Trustees and Shareholders
First Union Real Estate Equity and Mortgage Investments:
Under date of March 28, 2003, we reported on the combined balance sheets of
First Union Real Estate Equity and Mortgage Investments and First Union
Management, Inc. and subsidiaries as of December 31, 2002 and 2001, and the
related combined statements of operations, shareholders' equity, and cash flows
for the years ended, which is included in the Annual Report on Form 10-K. In
connection with our audits of the aforementioned combined financial statements,
we also audited the related combined financial statement schedule listed under
Item 15(a)(2) on page 64. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such financial statement schedule for 2002 and 2001, when
considered in relation to the basic combined financial statements taken as a
whole, present fairly, in all material respects, the information set forth
therein.
/s/ KPMG LLP
New York, New York
March 28, 2003
72
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Securityholders and Trustees of First Union Real Estate Equity and
Mortgage Investments:
We have audited in accordance with auditing standards generally
accepted in the United States, the combined financial statements included in
this Form 10-K, and have issued our report thereon dated March 7, 2001. Our
audit was made for the purpose of forming an opinion on those combined
statements taken as a whole. The schedules listed under Item 15(a)(2) on page 64
are the responsibility of the registrant's management and are presented for
purposes of complying with the Securities and Exchange Commission's rules and
are not part of the basic combined financial statements. These schedules have
been subjected to the auditing procedures applied in the audit of the basic
combined financial statements and, in our opinion, fairly state in all material
respects the financial data required to be set forth therein in relation to the
basic combined financial statements taken as a whole.
Arthur Andersen LLP
Cleveland, Ohio,
March 7, 2001.
* This Report of Independent Public Accountants on Financial Statement
Schedules is a copy of a previously issued report issued by Arthur
Andersen LLP and has not been reissued by Arthur Andersen. The
inclusion of this previously issued report is pursuant to the
"Temporary Final Rule and Final Rule Requirements for Arthur Andersen
LLP Auditing Clients" promulgated by the United States Securities and
Exchange Commission in March 2002.
73
Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
As Of December 31, 2002
(In thousands)
Cost capitalized
subsequent to
Initial cost to Registrant acquisition
--------------------------- ------------
Building and Building and
Description Encumbrances Land Improvements Improvements
----------- ------------ ------------ ------------ ------------
Shopping Mall:
Park Plaza, Little Rock, AR $ 41,781 $ 5,816 $ 58,037 $ 1,072
------------ ------------ ------------ ------------
Office Building:
Circle Tower, Indianapolis, IN -- 270 1,609 4,149
------------ ------------ ------------ ------------
Real Estate net carrying value at
December 31, 2002 $ 41,781 $ 6,086 $ 59,646 $ 5,221
============ ============ ============ ============
As of December 31, 2002
--------------------------------------------------------- Year
Building and Accumulated construction Date
Description Land Improvements Total depreciation completed Acquired Life
----------- ------------ ------------ ------------ ------------ ------------ ---------- ----
Shopping Mall:
Park Plaza, Little Rock, AR $ 5,816 $ 59,109 $ 64,925 $ 8,273 1988 9/1/1997 40
------------ ------------ ------------ ------------
Office Building:
Circle Tower, Indianapolis, IN 270 5,758 6,028 3,784 1930 10/16/1974 40
------------ ------------ ------------ ------------
Real Estate net carrying value at
December 31, 2002 $ 6,086 $ 64,867 $ 70,953 $ 12,057
============ ============ ============ ============
Aggregate cost for federal tax purposes is approximately $70,953.
74
Schedule III
-Continued
The following is a reconciliation of real estate assets and accumulated
depreciation for the years ended December 31, 2002, 2001, and 2000.
(In thousands)
Years Ended December 31,
2002 2001 2000
--------- --------- ---------
Asset reconciliation:
Balance, beginning of period $ 70,275 $ 273,383 $ 335,325
Additions during the period:
Improvements 688 722 10,685
Equipment and appliances - 2 250
Transfer from First Union corporate - - 1,453
Deductions during the period:
Sales of real estate - (203,832) (44,106)
Spinoff of Impark - - (11,074)
Unrealized loss on carrying value of real estate assets - - (19,150)
Other - write-off of assets and
certain fully depreciated
tenant alterations (10) - -
--------- --------- ---------
Balance, end of period: $ 70,953 $ 70,275 $ 273,383
========= ========= =========
Accumulated depreciation
Reconciliation:
Balance, beginning of period $ 10,108 $ 68,507 $ 75,275
Additions during the period:
Depreciation 1,959 3,553 11,064
Transfer from First Union corporate - - 551
Deductions during the period:
Sales of real estate - (61,952) (18,269)
Spinoff of Impark - - (114)
Write-off of assets and certain fully
depreciated tenants alterations (10) - -
--------- --------- ---------
Balance, end of period $ 12,057 $ 10,108 $ 68,507
========= ========= =========
75