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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From .......... to ..........
Commission file number 0-19989
FM Properties Inc.
(Exact name of Registrant as specified in Charter)
Delaware 72-1211572
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
98 San Jacinto Blvd., Suite 220
Austin, Texas 78701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (512) 478- 5788
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Par Value $0.01 per Share
Preferred Stock Purchase Rights
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.___
The aggregate market value of the voting stock held by non-affiliates
of the registrant was approximately $92,880,000 on March 18, 1998.
On March 18, 1998, 14,288,270 shares of Common Stock, par value
$0.01 per share, of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be submitted to the
registrant's stockholders in connection with its 1998 Annual Meeting
to be held on May 14, 1998, are incorporated by reference into Part
III of this Report.
TABLE OF CONTENTS
Page
Part I............................................................. 1
Items 1. Business............................................... 1
Overview............................................ 1
Company Strategies.................................. 1
Recent Developments................................. 2
Regulation and Environmental Matters................ 3
Employees........................................... 3
IGL Debt Guarantee.................................. 4
Proposed Transaction with Olympus................... 4
Cautionary Statements............................... 5
Item 2. Properties.......................................... 7
Item 3. Legal Proceedings................................... 7
Item 4. Submission of Matters to a Vote of Security
Holders Executive Officers of the Registrant........10
Part II............................................................11
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.................................11
Item 6. Selected Financial Data.............................12
Items 7. and 7A. Management's Discussion and Analysis of
Financial Condition and Results of Operations
and Disclosures about Market Risks..............12
Item 8. Financial Statements and Supplementary Data........16
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................30
Part III...........................................................31
Item 10. Directors and Executive Officers of the Registrant.31
Item 11. Executive Compensation.............................31
Item 12. Security Ownership of Certain Beneficial Owners and
Management.........................................31
Item 13. Certain Relationships and Related Transactions.....31
Part IV............................................................31
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K................................31
Signatures........................................................S-1
Financial Statement Schedules.................................... F-1
Exhibits........................................................ E-1
PART I
Item 1. Business
OVERVIEW
FM Properties Inc., a Delaware corporation ("FMPO" or the
"Company"), was organized in March 1992 and operates through FM
Properties Operating Co., a Delaware general partnership (the
"Partnership"). Until December 1997 FMPO owned a 99.8 percent
general partnership interest and Freeport-McMoRan Inc., which also
served as the Partnership's Managing General Partner ("FTX"), owned
a 0.2 percent general partnership. In December 1997 the Company
acquired all of FTX's interest in the Partnership (see "Recent
Developments" below). The Partnership was formed to hold, operate
and develop substantially all domestic oil and gas properties of,
and substantially all domestic real estate then held for development
by, FTX and certain of its subsidiaries. The Partnership also
assumed substantially all of the liabilities related to such assets,
including approximately $500 million of indebtedness, substantially
all of which was guaranteed by FTX. The Partnership subsequently has
sold all of its oil and gas properties and currently is engaged in
the development and marketing of real estate in the Austin, Dallas,
Houston and San Antonio, Texas areas.
FMPO is engaged in the acquisition, development and sale of
commercial and residential real estate properties, all of which are
located in the state of Texas. FMPO's principal real estate
holdings in the Austin, Texas area currently consist of
approximately 3,000 acres of undeveloped residential, multi-family
and commercial property within the Barton Creek development,
approximately 1,300 acres of undeveloped commercial and multi-family
property within the Circle C Ranch development in Austin, and
approximately 500 acres of undeveloped residential, multi-family and
commercial property known as the Lantana tract, south of and
adjacent to the Barton Creek development in Austin.
FMPO also owns or has interests in approximately 300 developed lots,
200 acres of undeveloped residential property and 75 acres of
undeveloped commercial and multi-family property located in Dallas,
Houston and San Antonio, Texas that are being actively marketed.
See Item 2. "Properties." These real estate interests are managed
by professional real estate developers who have been retained to
provide master planning, zoning, permitting, development,
construction and marketing services for the properties. Under the
terms of these agreements, operating expenses and development costs,
net of revenues, are funded by the Partnership, and the developers
are entitled to a management fee and a 25% interest in the net
profits, after recovery by the Partnership of its investments and a
stated return, resulting from the sale of properties under their
management.
Pursuant to a joint venture agreement between FMPO and IMC-Agrico
Company ("IMC-Agrico"), a joint venture between Phosphate Resource
Partners Limited Partnership, an affiliate of IMC Global Inc.
("IGL"), and IGL, the Company may also participate in the potential
future development of up to approximately 171,000 acres of land in
Florida owned by IMC-Agrico that has been or will be reclaimed
following completion of IMC-Agrico's mining activities on the
properties. No significant development activity is expected in
Florida in the near future.
COMPANY STRATEGIES
Since the formation of the Company, the primary objective of
managing, developing and operating the Partnership's assets has been
the reduction of its indebtedness and the elimination the FTX debt
guarantee in order to establish the Company as an independent,
stand-alone entity. During 1996 and 1997, the Partnership was able
to sell a substantial number of properties in the Austin area
because of several positive legislative and judicial developments.
As a result, the Partnership generated significantly higher
operating cash flows, which enabled it to reduce its debt by $63
million during 1996 and $21 million during 1997. Outstanding debt
was $37.1 million at December 31, 1997.
In December 1997, the Company restructured its credit agreement
and purchased that portion of the Company's operating partnership
which it did not previously own. These events enabled FMPO to
become an autonomous company, reduced restrictions on the Company's
business activities and allowed it to pursue its long standing
objective of establishing a long-term, self-supporting capital
structure for the Company. In addition, in March 1998, FMPO signed
a letter of intent with Olympus Real Estate Corporation to form a
strategic alliance to develop certain of the Company's existing
properties and to jointly pursue new acquisition and development
activities throughout the United States. These
[Page] 1
transactions are discussed in more detail below under the headings,
"Recent Developments" and "Proposed Transaction with Olympus".
FMPO is continuing to focus its efforts on reducing the
Company's debt and increasing its return on stockholder equity. Key
factors in accomplishing these goals include:
* FMPO intends to maintain its current sales momentum at Barton
Creek, and enhance the value of its Austin properties by developing
and building its own products for sale or investment. These future
developments may be through joint ventures or wholly owned by the
Company. To that end, it has set in motion a 1998 capital program
of over $25 million, which includes the first phase of an office
project at its Lantana Corporate Center, and several new
subdivisions surrounding a new Tom Fazio designed golf course being
constructed on its Barton Creek project. The new capital
provided by the proposed Olympus transaction is intended to enable
the Company to concentrate on the development of its core assets in
Austin, limiting the need for future tract sales to subdevelopers
and thereby increasing the Company's potential returns from these
core assets.
* The Company believes that it has the right to receive in the
future up to $40 million in reimbursement of certain of its prior
utility development costs. Substantial additional costs eligible
for reimbursement will be incurred in the future as development
continues. During the past twelve months the initial bond issues
from two of the seven Barton Creek Municipal Utility Districts
("MUDs") have been issued, resulting in approximately $4 million
being received by the Company. In addition, the Company is in
litigation to collect almost $25 million in Circle C MUD
reimbursements. See Item 3, "Legal Proceedings," for more details
on that matter.
* The Company is again facing significant challenges to the
development entitlements of its core properties in Austin, which are
more fully discussed under Item 3, "Legal Proceedings." FMPO will
continue to vigorously defend its rights to the development
entitlements of all its properties, but it is anticipated that the
City of Austin's continuing aggressive attempts to restrict growth
in the area of FMPO's holdings may have a negative effect on the
level of the Company's near term development and sales activity.
* FMPO will continue to evaluate new opportunities in its
existing markets, including Dallas, Houston and San Antonio, as well
as elsewhere, in an effort to diversify its holdings both
geographically and by type of product.
The transactions described under the heading "Recent
Developments" below have increased FMPO's autonomy over its
operations and short-term financial flexibility. However,
significant cash inflows are required to fund FMPO's necessary
development capital expenditures and debt reduction requirements
under its new credit agreement. In addition, FMPO anticipates
continued challenges to its development entitlements from the City
of Austin (the "City") and special interest groups which may result
in delays and higher development costs requiring additional capital.
See Item 3, "Legal Proceedings." FMPO is pursuing various means of
raising capital, including equity and subordinated debt investments
and through joint ventures and recently entered into a letter of
intent for such purposes. See "Recent Developments" and "Proposed
Transaction with Olympus" below. The future performance of FMPO
continues to be dependent on its cash flows from real estate sales,
which will be significantly affected by future real estate values,
development costs, future interest rate levels and the ability of
the Company to continue to protect its land use and development
entitlements. FMPO will be required to actively pursue all of its
alternatives in order to generate sufficient cash flow or obtain
sufficient funds to carry out its development programs and make
required interest and principal payments under the new credit
agreement.
RECENT DEVELOPMENTS
On December 22, 1997, FTX merged into IGL (the "Merger"). In
connection with the Merger, FTX sold its 0.2 percent interest as
Managing General Partner of the Partnership to FMPO and a wholly-
owned subsidiary of FMPO for $100,000. In addition, FMPO
restructured its bank credit agreement to extend its term to January
1, 2001, with staged reductions of credit available under the bank
credit agreement through the term, beginning with available credit
of $50 million through December 31, 1998, $35 million through
December 31, 1999, and $15 million through December 31, 2000. On
January 1,
[Page] 2
2001, availability under this credit agreement will be
eliminated. The new credit agreement is guaranteed by IGL, which
became guarantor in place of FTX as a result of the Merger. As a
result, while FMPO will continue to be required to comply with the
terms of the guarantee of its debt by IGL, it is no longer
restricted by FTX's rights as Managing General Partner of the
Partnership. In recognition of the Company's increased autonomy and
its independence from FTX, FMPO has proposed to change the Company's
name to Stratus Properties Inc. which is subject to shareholder
approval.
Significant development capital expenditures remain for FMPO's
Austin-area properties prior to their eventual sale. While bank
financing for further development of existing properties currently
is available, bank financing for undeveloped land purchases
generally is expensive and difficult to obtain. These factors,
combined with the debt reduction requirements under the new credit
agreement, could impede FMPO's ability to develop its existing
properties and expand its business. As a result, FMPO has pursued a
number of capital raising alternatives, including equity sales,
formation of joint ventures with third parties, various forms of
debt financing and other means. In March, 1998 FMPO announced the
signing of a letter of intent to form a strategic alliance with
Olympus Real Estate Corporation, an affiliate of Hicks, Muse, Tate &
Furst Incorporated ("Olympus"), for the development of certain of
FMPO's existing properties as well as new acquisition opportunities
throughout the United States. Under this alliance Olympus would
provide up to $70 million in financing to FMPO. See "Proposed
Transaction with Olympus" below. This transaction is subject to
completion of due diligence, negotiation of definitive agreements
and approval by FMPO's Board of Directors. While FMPO believes
these efforts will successfully address the capital resource needs
discussed above, there can be no assurance that FMPO will generate
sufficient cash flow or obtain sufficient funds to make required
interest and principal payments under the new credit agreement.
REGULATION AND ENVIRONMENTAL MATTERS
FMPO's real estate investments are subject to applicable local,
city, county and state rules and regulations regarding permitting,
zoning, subdivision, utilities and water quality as well as federal
rules and regulations regarding air and water quality and protection
of endangered species and their habitats. Such regulation has
delayed and will likely continue to delay development of the
Company's properties and result in higher developmental and
administrative costs. See Item 3, "Legal Proceedings."
The Company is making, and will continue to make, expenditures
with respect to its real estate development for the protection of the
environment. Emphasis on environmental matters will result in
additional costs in the future. Upon analysis of its operations in
relation to current and presently anticipated environmental
requirements, the Company does not anticipate that these costs will
have a significant adverse impact on its future operations or
financial condition.
EMPLOYEES
Since January 1, 1996, a Delaware corporation currently owned 10
percent by FMPO (the "Services Company"), has provided executive,
accounting, legal, financial, tax, insurance, personnel and
management information and similar services pursuant to a services
agreement between the Company and the Services Company (the
"Services Agreement"). The Services Agreement is terminable by FMPO
at any time upon 90 days' notice. Since July 1995, these services
have been provided for an annual fee of $500,000, subject to annual
cost of living increases beginning in the first quarter of 1997.
Effective January 1, 1998, the Services Agreement was modified to
provide that such services would be provided prospectively on a cost
reimbursement basis.
At December 31, 1997, the Company had a total of 8 employees,
who manage the Company's operations and supervise the functions of
Services Company personnel under the Services Agreement.
[Page] 3
IGL DEBT GUARANTEE
FMPO's acquisition of FTX's 0.2 percent general partner interest
in the Partnership and replacement of the FTX debt guarantee has
eliminated the rights previously held by FTX as Managing General Partner.
As financial guarantor of FMPO's new credit agreement, IGL receives
an annual fee equal to the difference between FMPO's cost of LIBOR-
funded borrowings before the assumption of the guarantee by IGL and
the rate on LIBOR-funded loans under the new agreement. This fee was
60 basis points (0.6%) as of December 31, 1997. FMPO has granted liens
in favor of IGL on certain of its properties as security for the
guarantee. These liens would be released for property sales, subject
to certain restrictions. Additionally, under the guarantee terms FMPO
cannot amend or refinance the credit facility without IGL's consent.
PROPOSED TRANSACTION WITH OLYMPUS
On March 2, 1998 FMPO and Olympus entered into a letter of
intent to form a strategic alliance to develop certain of FMPO's
properties and to pursue new real estate acquisition and development
opportunities. Under the terms of the letter of intent, Olympus
would make a $10 million investment in an FMPO mandatorily
redeemable equity security, provide a $10 million convertible debt
financing facility to FMPO and make available up to $50 million of
capital for its share of direct investments in joint FMPO/Olympus
projects. Olympus would also have the right to designate for
nomination 20 percent of FMPO's Board of Directors.
The $10 million mandatorily redeemable equity security would
have a par value of $5.84 per share, the average closing price of
FMPO common stock during the 30 trading days ending March 2, 1998.
FMPO would use the proceeds from the sale of these securities to
repay debt. These securities would share any dividends or
distributions ratably with the FMPO common stock, which currently
pays no dividend, and would be redeemable (i) at the option of the
holder at any time after the third anniversary of the closing for an
amount per share approximating the economic benefit that would have
accrued had the shares been converted into common stock on a one-to-
one basis and sold (the "common stock equivalent value") or (ii) at
the option of FMPO after the fifth anniversary (but in no event
later than the sixth anniversary) for the greater of their common
stock equivalent value or their par value per share, plus accrued
and unpaid dividends, if any. FMPO would have the option to satisfy
the redemption with shares of its common stock, subject to certain
limitations.
The $10 million convertible debt facility would be available to
FMPO in whole or in part for a period of six years after closing to
finance FMPO's equity investment in new FMPO/Olympus joint venture
opportunities in properties not currently owned by FMPO. The
interest rate on this facility would be 12 percent per year, and at
Olympus's option, interest would be payable quarterly, or accrued
and added to principal. Outstanding principal under the facility
would be convertible at any time into FMPO common stock at a
conversion price of $7.31, which is 125 percent of the average
closing price of FMPO common stock during the 30 trading days ending
March 2, 1998. If not converted into common stock, the convertible
debt would be repaid on the sixth anniversary of the closing. If
the combination of interest at 12 percent and the value of the
conversion right does not provide Olympus with at least a 15 percent
annual return on the convertible debt, FMPO would pay Olympus
additional interest upon retirement of the convertible debt in an
amount necessary to yield a 15 percent annual return. The
convertible debt would be non-recourse to FMPO and would be secured
solely by FMPO's interest in FMPO/Olympus joint venture
opportunities financed with the proceeds of the convertible debt.
For a three-year period after the closing, Olympus would make
available up to $50 million for its share of capital for direct
investments in FMPO/Olympus joint acquisition and development
activities. For the three-year period, FMPO would provide Olympus
with a right of first refusal to participate for no less than a 50
percent interest in all new acquisition and development projects on
properties not currently owned by FMPO, as well as development
opportunities on existing properties in which FMPO seeks third-party
equity participation.
The transaction is expected to close in the second quarter of
1998 and is subject to the completion of due diligence, negotiation
of definitive agreements and approval of FMPO's Board of Directors.
[Page] 4
CAUTIONARY STATEMENTS
This report includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. All statements other than
statements of historical fact included in this report, including,
without limitation, the statements under the headings "Business,"
"Properties," "Market for Registrant's Common Equity and Related
Stockholder Matters," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations and Disclosures about
Market Risks" regarding FMPO's financial position and liquidity,
payment of dividends, strategic plans, future financing plans,
development and capital expenditures, business strategies, and other
plans and objectives of management of the Company for future
operations and activities, are forward-looking statements.
Although FMPO believes that the expectations reflected in such
forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to have been correct. Important
factors that could cause actual results to differ materially from
FMPO's expectations are disclosed in this report including, without
limitation, in conjunction with the forward-looking statements
included in this report. These statements are based on certain
assumptions and analyses made by the Company in light of its
experience and its perception of historical trends, current
conditions, expected future developments and other factors it
believes are appropriate under the circumstances. Such statements
are subject to a number of assumptions, risks and uncertainties,
including the risk factors discussed below, and in the Company's
other filings with the Securities and Exchange Commission (the
"Commission"), general economic and business conditions, the
business opportunities that may be presented to and pursued by the
Company, changes in laws or regulations and other factors, many of
which are beyond the control of the Company. Readers are cautioned
that any such statements are not guarantees of future performance
and the actual results or developments may differ materially from
those projected in the forward-looking statements. All subsequent
written and oral forward-looking statements attributable to FMPO or
persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements.
Performance of the Real Estate Industry
The real estate activities of the Company are subject to numerous
factors outside of the control of management, including local real
estate market conditions (both where its properties are located and
in areas where its potential customers reside), substantial existing
and potential competition, the cyclical nature of the real estate
business, general national economic conditions, fluctuations in
interest rates and mortgage availability and changes in demographic
conditions. Real estate markets have historically been subject to
strong periodic cycles driven by numerous factors beyond the control
of market participants.
Real estate investments are relatively illiquid and market values
may be adversely affected by these economic circumstances, market
fundamentals, competition and demographic conditions. Because of
the effect of these factors on real estate values, it is difficult
to predict with certainty the level of future sales or sales prices
that will be realized for individual assets.
Financing
Substantial reductions in the Company's debt have been made since
its formation in 1992 and the Company's debt recently has been
restructured. However, significant cash inflows are required in
order to fund FMPO's necessary development capital expenditures and
debt reduction requirements under the new credit agreement. FMPO
has pursued a number of capital raising alternatives, including
equity sales, formation of joint ventures with third parties,
various forms of debt financing and other means. The Company's
future performance continues to be dependent on future cash flows
from real estate sales, and there can be no assurance that FMPO will
generate sufficient cash flow or otherwise obtain sufficient funds
to make required interest and principal payments under the new
credit agreement.
Although all of the Company's outstanding bank debt subject to the
terms of the bank credit facility is currently guaranteed by IGL,
there is no commitment by IGL to guarantee any such debt after
December 2000, and there is no expectation that any such further
guarantee will be provided.
The Company's real estate operations are also dependent upon the
availability and cost of mortgage financing for potential customers,
to the extent they finance their purchases, and for buyers of
[Page] 5
the potential customers' existing residences.
Regulatory Approval
Before the Company can develop a property, it must obtain a variety
of approvals from local and state governments with respect to such
matters as zoning, density, parking, subdivision, architectural
design and environmental issues. Because of the discretionary
nature of these approvals and the concerns about development in the
areas where FMPO's properties are located often raised by various
government agencies and special interest groups during the approval
and development processes, the Company's ability to develop
properties and realize future income from its projects could be
delayed, reduced or prevented.
The City of Austin and certain special interest groups have long
opposed certain of the Company's plans in the Austin area and have
also taken various other actions to partially or completely restrict
development in certain areas, including the Company's properties.
See Item 3, "Legal Proceedings." These actions are being actively
opposed by FMPO and other interested parties, and management does
not believe unfavorable rulings will have an adverse effect on the
overall value of the Company's property holdings. However, because
of the regulatory environment that continues to exist in the Austin
area, there can be no assurance that such expectations will prove to
have been correct. A more complete discussion of these matters is
set forth under Item 3, "Legal Proceedings."
Environmental Regulation
Real estate development is subject to state and federal
regulations and to possible interruption or termination on account
of environmental considerations, including, without limitation, air
and water quality and protection of endangered species and their
habitats. Certain of the Barton Creek properties includes nesting
territories for the Golden Cheek Warbler, a federally listed
endangered species. In February 1995 the Company received a permit
from the U.S. Wildlife Service pursuant to the Endangered Species
Act (the "ESA"), which to date has allowed the development of the
Barton Creek properties, free of restrictions under the ESA related
to the maintenance of habitat for the Golden Cheek Warbler.
Additionally, in April 1997, the U.S. Department of Interior ("DOI")
listed the Barton Springs Salamander as an endangered species after
a federal court overturned a March 1997 decision by the DOI not to
list the Barton Springs Salamander based on a conservation agreement
between the State of Texas and federal agencies. The listing of the
Barton Springs Salamander is not anticipated to affect the Company's
Barton Creek and Lantana properties for several reasons, including
the results of recent technical studies and the Company's U.S. Fish
and Wildlife Service 10(a) permit obtained in 1995. The Company's
Circle C properties could, however, be affected, although the extent
of any impact cannot be determined at this time. Special interest
groups have provided written notice of their intention to challenge
the Company's 10(a) permit and compliance with water quality
regulations.
The Company is making, and will continue to make, expenditures
with respect to its real estate development for the protection of the
environment. Emphasis on environmental matters will result in
additional costs in the future.
Effect of Competition
The Company's business is highly competitive. A large number
of companies and individuals are engaged in the real estate business,
and many of them possess financial resources greater than those of
the Company. In each of the Company's markets it competes against
local developers who are committed primarily to particular markets
and also against national developers who acquire properties
throughout the United States.
Geographic Concentration and Dependence on the Texas Economy
The Company's real estate activities are located entirely in
the Austin, Dallas, Houston and San Antonio, Texas areas. Because
of the Company's geographic concentration and limited number of
projects, its operations are more vulnerable to local economic
downturns and adverse project-specific risks than those of larger,
more diversified companies.
[Page] 6
The performance of the Texas economy affects sales of FMPO's
properties and consequently has an impact on the income derived from
the Company's real estate activities and the underlying values of
property owned by FMPO. While the Texas economy has remained
healthy in recent years, there can be no assurance that this trend
will continue.
Natural Risks
The Company's performance may be adversely affected by weather
conditions that delay development or damage property.
Item 2. Properties
The following table provides information on the Company's
holdings, including its existing inventory of finished lots and
acreage to be developed. The acreage to be developed in the future
is broken down into anticipated uses for single family lots,
multifamily units and commercial development based upon the
Company's understanding of the properties' existing entitlements.
However, there is no assurance that the undeveloped acreage will be
so developed due to the nature of the approval and development
process and market demand for a particular use. See Item 3, "Legal
Proceedings," for more details.
Potential Development Acreage
-----------------------------------------------
Developed Single
Lots Family Multifamily Commercial Total
---------- -------- ----------- ---------- ---------
Location
Austin
Barton Creek 5 1,549 249 673 2,471
Lantana - 154 36 323 513
Circle C - - 212 1,062 1,274
Dallas
Bent Tree 54 - 18 2 20
Willow Bend 79 - - - -
Houston
Copper Lakes 142 169 - - 169
San Antonio
Camino Real 21 30 54 - 84
--- ----- --- ----- -----
Total 301 1,902 569 2,060 4,531
=== ===== === ===== =====
Item 3. Legal Proceedings
SOS Ordinance Litigation
Prior to 1995, development of the Company's Austin area
properties had been delayed because of disagreements with the City
of Austin (the "City") over various ordinances. In 1995, a Texas
district court ruled in favor of FMPO, declaring that a restrictive
1992 water quality ordinance enacted by public initiative (the "SOS
Ordinance") was void and that the Company was entitled to develop
its Barton Creek and Circle C properties based on ordinances that
were in effect at the time of its initial development permit
applications. The City appealed this decision, and in 1996 the
Texas Court of Appeals overturned the favorable district court
ruling that invalidated the SOS Ordinance, but upheld the district
court's favorable ruling regarding certain grandfathered rights for
previously platted land. A significant portion of the Barton Creek
and Circle C properties was previously platted and met the
requirements to benefit from these grandfathered rights. An
application for Writ of Error was filed with the Texas Supreme Court
in January, 1997. The Writ of Error was accepted by the Texas
Supreme Court and oral argument was heard on November 3, 1997. The
Texas Supreme Court has not yet issued its decision. An unfavorable
final judgment could have an adverse effect on any portion of the
Company's property which cannot be
[Page] 7
developed under grandfathered
entitlements (see "Legislative Developments," below) or which has
not been removed from the jurisdiction of the City pursuant to the
water quality protection zones at Barton Creek (the "Barton Creek
WQPZ") and at Circle C (the "Circle C WQPZ," see below).
Southwest Travis County Water District Litigation
The Company's property in the Circle C development, comprising
approximately 1,300 acres of undeveloped commercial and multi-family
property, is located in the Southwest Travis County Water District
(the "STCWD"). The STCWD is a conservation and reclamation district
created by the Texas Legislature in 1995 for the purpose of
conserving water resources and with authority to establish a water
pollution control and abatement program meeting state criteria.
Development within the STCWD is required to meet the STCWD's
criteria and is exempt from municipal regulation. In October 1997,
a Texas district court rendered final judgment that the legislation
creating the STCWD was unconstitutional. The STCWD has filed an
appeal, but no decision has yet been issued. The Company does not
expect the validity of the STCWD will be upheld on appeal and has
implemented an alternative strategy of creating the Circle C WQPZ to
maximize development potential of 553 acres of its Circle C property
(see "Circle C WQPZ Litigation," below). The Company's strategy
with respect to the balance of its Circle C property holdings
(outside the Circle C WQPZ), approximately 700 acres, is to expedite
reimbursement of $25 million in previously incurred reimbursement
infrastructure costs from the City by not opposing the City's
annexation of the 700 acres (see "Annexation Litigation," below).
Annexation Litigation
On December 19, 1997, the City enacted an ordinance purporting
to annex all land lying within the STCWD. Prior to the City's
enactment of its annexation ordinance, the Company created the
Circle C WQPZ (see below). As a result, the Company's 553 acres
located within the Circle C WQPZ, which comprises all of the
Company's land in the Circle C project other than the land within
the Circle C municipal utility districts (the "MUDs"), was not
eligible for annexation. Annexation subjects that portion of the
Company's property located within the MUDs (approximately 700
acres), which has been annexed by the City, to the City's zoning and
development regulations. In connection with annexation, the City
has imposed an interim zoning classification on the approximately
700 acres permitting only one residential unit per acre, which
results in significantly less development yield than the Company
previously anticipated. However, consistent with the Company's
strategy, annexation of the Company's property located within the
MUDs requires the City to assume all MUD debt and reimburse the
Company, simultaneously with the annexation, for a significant
portion of previously incurred costs of water, wastewater and
drainage infrastructure which could result in reimbursement of these
costs much earlier than the Company initially anticipated. These
reimbursable costs are estimated to be approximately $25 million.
Because the City failed to pay these costs on December 19, 1997, the
Company filed suit against the City to compel reimbursement of these
amounts. The suit was promptly set for trial but subsequently stayed
pending resolution of suits brought by the MUDs and other third
parties challenging the validity of the City's purported annexation.
Certain of those underlying third-party challenges have now been
resolved and the Company has filed a motion to lift the stay to
permit trial to proceed. The motion is scheduled for hearing on
April 16. Although the Company expects to ultimately receive
payment from the City, the City may continue to resist payment.
Circle C WQPZ Litigation
The Company owns approximately 553 acres in the Circle C
development outside the boundaries of any MUD. In order to permit
development of this property, the Company filed a water quality
protection zone covering its 553 acres (the "Circle C WQPZ"). Such
water quality protection zones ("WQPZ") permit development of
defined areas outside of municipalities if such development conforms
to state-approved water quality standards under plans approved by
the Texas Natural Resource Conservation Commission ("TNRCC"). The
law also restricts adjoining municipalities from attempting to
enforce land use or development ordinances inconsistent with the
requirements of the WQPZ or annexing any portion of the WQPZ prior
to the earlier of completion of 90 percent of infrastructure
construction or 20 years after creation of the WQPZ. The creation
of the Circle C WQPZ was intended to permit the Company to develop
its 553 acres in accordance with the water quality standards
required by the Circle C WQPZ rather than the requirements of the
City, and to confirm that effect the Company initiated a lawsuit in
Hays County in November 1997 seeking a declaratory judgment
confirming the validity of the Circle C WQPZ and the invalidity of
the City's attempt to annex land within the Circle C WQPZ. The City
filed a motion to transfer venue from Hays County to Travis County
and, in addition, argued that the Hays County District Court had no
jurisdiction pending consideration of the Circle C WQPZ's water
quality plan by the TNRCC.
[Page] 8
On December 18, 1997, the TNRCC approved
the Circle C WQPZ's water quality plan. On January 12, 1998, the
Hays County District Court denied the City's motion to transfer
venue and all other requested relief. The Company has filed a
motion for summary judgement in the Hays County litigation, which is
scheduled to be heard on March 30, subject to the Texas Supreme
Court's decision as to whether the City's interlocutory appeal of
the District Court's denial of the City's plea to the jurisdiction
abates the summary judgment hearing. A favorable result in this
litigation, which the Company expects, would confirm that the City's
attempt to annex the Company's 553 acres in the Circle C WQPZ was
invalid and that development of the 553 acres is not subject to City
development regulations. An unfavorable ruling, which is not
expected, would mean that the Circle C WQPZ was invalid and that the
553 acres is annexed, and subject to the City zoning and other
regulatory authority, which could diminish the development potential
of this property in the same manner as the approximately 700 acres
discussed above (see "Annexation Litigation").
Legislative Developments
In the most recent legislative session of the Texas State
legislature, a bill to reorganize a state governmental agency
inadvertently repealed the provisions of law that established
grandfathered rights for land which was platted or in the permitting
process. The Company, based on an opinion from counsel, has taken
the position that under Texas law, previously vested rights for the
Company's property holdings are not affected by the repeal of this
statute. The City, however, does not recognize any grandfathered
entitlements arising under the repealed law and, in response to the
repeal, enacted an ordinance effective September 5, 1997,
establishing interim regulations on land development. It is
anticipated that the City will enact a final ordinance and may
attempt to apply it to portions of the Company's Circle C and
Lantana properties. Should the City take this position, the Company
anticipates asserting and defending its grandfathered entitlements.
In the event the City were to prevail, portions of the Company's
property would be subject to the City's current restrictive
ordinances and development potential would be significantly reduced.
During the last three sessions of the Texas legislature, legislation
has been enacted to provide landowners relief from overly-aggressive
attempts by municipalities to regulate land development in an effort
to prevent growth. Much of that past legislation has been enacted
to address abusive or unauthorized municipal land use regulations of
the type adopted by the City. The Company anticipates that during
the next session of the Texas legislature, beginning in January
1999, the Texas legislature will once again review and address
inappropriate municipal land use regulation designed to prevent
growth and development.
Other Matters
During February 1997, FMPO filed a petition for declaratory
judgment against Phoenix Holdings, Ltd. in order to secure its
ownership of approximately $25 million of MUD reimbursements that
pertain to existing infrastructure that serves the Circle C development.
Phoenix filed a counter claim against Circle C in June 1997. On
February 20, 1998, the District Court granted the Company's motion
for summary judgment on the primary case and subsequently, Phoenix
Holdings, Ltd. dismissed its counterclaims with prejudice, but
reserved the right to appeal the summary judgment of the primary
case.
On January 9, 1998, the City filed a lawsuit (the "Travis County
Suit") in Travis County District Court against 14 water quality
zones and their owners, including the Barton Creek WQPZ. The City
challenges the constitutionality of the legislation authorizing the
creation of water quality zones. This same issue is being litigated
in the lawsuit initiated by the Company discussed under Circle C
WQPZ Litigation, above. The Attorney General of Texas has agreed to
intervene in both the Travis County Suit and the suit in the Circle
C WQPZ Litigation above, to defend the legislation. Although not
expected, a court decision that the legislation authorizing WQPZs is
invalid would diminish and delay development of portions of the
Barton Creek project and the Company's land located in the Circle C
WQPZ.
In April 1997, the U.S. Department of Interior ("DOI") listed
the Barton Springs Salamander as an endangered species after a
federal court overturned a March 1997 decision by the DOI not to
list the Barton Springs Salamander based on a conservation agreement
between the State of Texas and federal agencies. The listing of the
Barton Springs Salamander is not anticipated to affect the Company's
Barton Creek and Lantana properties for several reasons, including
the results of recent technical studies and the Company's U.S. Fish
and Wildlife Service 10(a) permit obtained in 1995. The Company's
Circle C properties could, however, be affected, although the extent
of any impact cannot be determined at this time. Special interest
groups have provided written notice of their intention to challenge
the Company's
[Page] 9
10(a) permit and compliance with water quality
regulations. The Company believes these challenges are meritless
and will continue to protect its entitlements.
Austin's Continuing Efforts to Restrict and Redirect Growth
Although the Company expects a favorable result in the Circle C
litigation confirming the validity of the Circle C WQPZ (see above),
the Company expects the City may continue to assert claims that it
has regulatory jurisdiction over development within the Circle C
WQPZ and that additional litigation may be necessary to preserve
development entitlements. Recently, one of Austin's largest
employers, Motorola Inc., contracted to purchase approximately 167
acres of the Company's commercial land located in the Circle C WQPZ
for development of a campus facility bringing thousands of jobs to
the Circle C community. Even though not required, Motorola agreed to
develop its campus facility in strict accordance with the City's
regulations, including the SOS Ordinance. Certain City
representatives publically asserted zoning and development
authority over Motorola's selected site and indicated that Motorola
would not receive the City development and zoning approvals that the
City asserts are needed to develop the campus project even if all
ordinance requirements would be fully satisfied. After meetings with
City representatives and members of the SOS Alliance (a special
interest group), Motorola elected to terminate its contract with the
Company. As a consequence, the Company lost a significant sale.
Austin recently elected a council strongly opposed to development in
the southwest sector of Austin and the Company anticipates that in
the future, the City will use similar tactics to those is used in
the Motorola incident to restrict growth in the southwest corridor.
For example, the City recently announced its "Smart Growth" program
designed to direct growth away from the southwest sector of the City
towards the "Desired Development Zone," an area located generally in
the northern and eastern sections of Austin. Consistent with its
Smart Growth program, in March 1998, the City announced a proposed
bond sale to raise funds to acquire land in the southwest corridor,
which it refers to as the "Barton Creek Zone," for the purported
purpose of protecting the Edwards Aquifer. The Circle C project is
within the Barton Creek Zone. The Company anticipates that the City
will continue its efforts to impose development regulations limiting
development in an effort to reduce the value of land it has targeted
to acquire for the Barton Creek Zone. As it has been compelled to
do during the last several years, the Company anticipates having to
continue to be involved in litigation to protect its entitlements
and maximize the developability and value of its properties. The
Company anticipates that it will continue to successfully develop
and market its properties during the pendency of its disputes with
the City of Austin.
The Company maintains liability insurance to cover some, but not
all, potential liabilities normally incident to the ordinary course
of its businesses as well as other insurance coverage customary in
its business, with such coverage limits as management deems prudent.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
Certain information, as of March 2, 1998, regarding the executive
officers of the Company is set forth in the following table and
accompanying text.
Name Age Position or Office
---- --- ------------------
Richard C. Adkerson 51 Chairman of the Board and Chief Executive
Officer
W. H. Armstrong, III 33 President, Chief Operating Officer and
Chief Financial Officer
John G. Amato 54 General Counsel
Mr. Adkerson has served as Chairman of the Board of the Company
since March 1992 and Chief Executive Officer of the Company since
May 1996. He also serves as President, Chief Operating Officer and
Chief Financial Officer of Freeport-McMoRan Copper & Gold Inc.
("FCX"), Vice Chairman of the Board of Freeport-McMoRan Sulphur Inc.
("FSC") and Co-Chairman of the Board and Chief Executive of McMoRan
Oil & Gas Co. ("MOXY"). He was Chairman of the Board, President and
Chief Executive
[Page] 10
Officer of the Company from March 1992 to May 1993
and from August 1995 to May 1996, and Chairman of the Board from May
1993 to August 1995. Mr. Adkerson served as Executive Vice
President of FCX from July 1995 to April 1997 and as Senior Vice
President of FCX from February 1994 to July 1995. He served as Vice
Chairman of the Board of FTX from August 1995 until December 1997
and as Senior Vice President of FTX from May 1992 to August 1995.
Mr. Armstrong has been employed by FMPO since its inception in 1992.
He has served as the Company's President and Chief Operating Officer
since August 1996 and a Chief Financial Officer since May 1996. He
served as Executive Vice President from August 1995 to August 1996.
Previously, Mr. Armstrong was a member of the Finance and Business
Development Group of FTX with responsibility for real estate
activities.
Mr. Amato has served as General Counsel of FMPO since August 1995.
He is also General Counsel of MOXY and FSC. Prior to August 1995, Mr.
Amato served as General Counsel of FTX and FCX. Mr. Amato currently
provides legal and business advisory services to FCX under a consulting
arrangement.
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters
The Company's common stock trades on the Nasdaq National Market
under the symbol FMPO. The following table sets forth, for the
periods indicated, the range of high and low sales prices, as
reported by Nasdaq.
1997 1996
--------------------- ------------------
High Low High Low
-------- -------- ------- -------
First Quarter $3 15/16 $2 1/16 $2 7/8 $1 1/2
Second Quarter 3 15/16 2 5/16 2 5/8 2 1/16
Third Quarter 5 7/16 2 13/16 3 1/16 2 1/8
Fourth Quarter 5 3/4 3 1/32 3 1/16 2 3/4
The Company has not in the past and does not anticipate in the
foreseeable future paying cash dividends on its common stock. The
decision whether or not to pay dividends and in what amounts is
solely within the discretion of the Company's board of directors.
The Company's ability to pay dividends is restricted by the terms of
its credit agreement.
As of March 23, 1998 there were 10,112 record holders of the Company
common stock.
[Page] 11
Item 6. Selected Financial Data
The following table sets forth selected historical financial data
for the Company for each of the five years in the period ended
December 31, 1997. The historical financial information is derived
from the audited financial statements of the Company and is not
necessarily indicative of future results. The following data should
be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations and Disclosures about
Market Risks" and the Company's historical financial statements and
notes thereto contained elsewhere in this Form 10-K.
1997(a) 1996 1995 1994(b) 1993
-------- ------- -------- --------- --------
(In Thousands, Except Per Share Amounts)
Years Ended December 31:
Revenues $ 30,953 $ - $ - $ - $ -
Loss from
Partnership - (346) (571) (118,741) (24,057)
Operating
income (loss) 3,907 (566) (2,367) (122,869) (27,526)
Net income (loss) 7,006 76 153 (86,290) (18,814)
Net income (loss)
per share .49 .01 .01 (6.04) (1.32)
Average shares
outstanding 14,288 14,286 14,286 14,286 14,286
At December 31:
Real estate and
facilities, net 105,274 - - - -
Investment in
the Partnership - 56,055 56,401 56,972 193,415
Total assets 112,754 60,985 60,897 60,903 193,637
Stockholders'
equity 66,607 59,599 59,523 59,370 145,660
___________
a. Prior to 1997, reflects the Company's investment in the
Partnership under the equity basis of accounting. See discussion
under "Overview" in Items 7 and 7A below and Note 1 to the financial
statements.
b. Includes $115.0 million charge for a write-down of real estate
assets.
Items 7. and 7A. Management's Discussion and Analysis of Financial
Condition and Results of Operations and Disclosures about Market
Risks
OVERVIEW
FMPO's most significant assets include approximately 3,000 acres of
primarily undeveloped land in and around the Barton Creek Community
located near Austin, Texas (the "City"), and approximately 1,300
acres of undeveloped commercial and multi-family property in the
Circle C development located in Austin, Texas. FMPO is also engaged
in the development and marketing of real estate in the Dallas,
Houston and San Antonio, Texas areas.
On December 22, 1997 Freeport-McMoRan Inc. ("FTX") merged into
IMC Global Inc. ("IGL") (the "Merger"). Prior to the Merger, FMPO
operated through its 99.8 percent general partnership interest in FM
Properties Operating Co., a Delaware general partnership (the
"Partnership"). The remaining 0.2 percent general partnership
interest was held by FTX, which also served as the Partnership's
Managing General Partner. FMPO reflected its investment in the
Partnership on the equity basis of accounting because of certain
rights held by FTX as managing general partner regarding the
Partnership's operations as long as it guaranteed any of the
Partnership's debt. In connection with the Merger, FTX sold its 0.2
percent general partnership interest to FMPO and a subsidiary of
FMPO for $100,000. FMPO also restructured and consolidated its
existing debt in December 1997, extending its maturity until January
1, 2001 and providing for staged reductions in available credit.
IGL became guarantor of this restructured debt in place of FTX. See
"Capital Resources and Liquidity." As a result of FTX's sale of its
interest, elimination of its rights as a partner and replacement of
the FTX guarantee with the IGL guarantee, FMPO's financial
statements reflect the Partnership's assets, liabilities and
operating results under consolidation accounting effective January
1, 1997.
[Page] 12
RESULTS OF OPERATIONS
As noted above, FMPO operates through the Partnership and, prior
to January 1, 1997, reflected the Partnership's results of operations
using the equity method of accounting. Accordingly, the following
discussion and analysis addresses the results of operations and the
capital resources and liquidity of FMPO for 1997 and of the
Partnership for prior years, collectively referred to as "the
Company" hereafter.
During 1997 and 1996 the Company was able to capitalize on
enhanced sales opportunities at its properties in the Austin area
brought about by several positive legislative and judicial developments
that occurred during 1995. Prior to late 1995, development of the
Company's Austin area properties had been delayed principally
because of disagreements with the City over ordinances governing
development activities in the Barton Creek and Circle C areas.
Summary operating results follow:
1997 1996 1995
------- ------- -------
(In Thousands)
Revenues
Developed properties $17,723 $44,016 $35,024
Undeveloped properties
and other 13,230 35,161 13,146
------- ------- -------
Total revenues 30,953 79,177 48,170
------- ------- -------
Operating income (loss) 3,907a 3,534 (2,308)
Net income (loss) 7,006a,b (346) (571)c
a. Includes a $3.1 million reimbursement of previously expensed
infrastructure costs.
b. Includes a $4.5 million gain from sale of oil and gas property
interests.
c. Includes a $2.6 million gain from a bankruptcy settlement with
a customer.
Revenues from developed properties for 1997 consisted
of $5.4 million from the sale of 146 acres of residential
properties and $12.3 million from the sale of 198 single-
family homesites. Revenues from undeveloped properties for
1997 represented the sale of 72 acres of commercial and
multi-family land. Revenues from developed properties during
1996 included the sale of the Barton Creek Country Club and
Conference Resort for $25.0 million and the sale of 393
single-family homesites located in the Austin, Houston and
San Antonio areas for $19.0 million. Revenues from
undeveloped properties during 1996 included: two separate
sales of undeveloped tracts within the Barton Creek
development totaling 105 acres for $4.8 million, which were
the first sales under the Water Quality Protection Zone
legislation enacted in late 1995; the sale of several
undeveloped, commercial and multi-family tracts in the
Dallas area totaling 79 acres for $12.6 million; and the
sale of 535 other undeveloped acres in the Austin, Dallas
and San Antonio areas for $17.8 million.
General and administrative expenses were $2.8 million in 1997,
compared with $2.5 million in 1996 and $4.2 million in 1995. The
reduction in 1996 reflects the benefit of steps taken in the third
quarter of 1995 to reduce costs. These actions, which included
reducing personnel, legal and consulting costs, and the costs of
certain management services (see Note 46 to the financial
statements), were taken, to a significant extent, in response to the
reduced permitting, engineering and administrative burdens resulting
from the favorable legislative and judicial developments during
1995.
In September 1997, the Company sold several working interests
and numerous overriding royalty interests in oil and gas properties
which have been held since its formation to McMoRan Oil & Gas Co.
("MOXY") and Phosphate Resource Partners Limited Partnership
("PLP"), formerly Freeport-McMoRan Resource Partners, Limited
Partnership, for $4.5 million cash, resulting in a gain of $4.5
million. MOXY is, and PLP was prior to the Merger, an affiliate of
FMPO because of FTX's former role as administrative managing general
partner of PLP and because of common management and a common
director shared with MOXY. These interests, which had no cost basis
and included all of the Company's remaining oil and gas interests,
remained with the Company after the sale of substantially all of its
oil and gas properties in 1993. The gain is reflected in Other
Income, and proceeds were used to reduce debt. Other Income also
includes royalty income generated by these properties totaling $0.8
million, $1.4 million and $0.6 million for 1997 (prior to the sale),
1996 and 1995, respectively.
[Page] 13
Interest expense incurred during 1997 was lower than in 1996 as
a result of reduced debt levels. Interest expense in 1996 increased
from 1995 because of reduced capitalized interest, partially offset
by lower average debt levels and interest rates.
During 1996, FMPO agreed to sell the remaining assets of Circle C
for $34.0 million. The Company received a $1.0 million non-
refundable cash deposit, with the balance of the purchase price due
in January 1997. However, the investor group was unable to complete
the sale and the agreement expired. The cash deposit was recorded
as a reduction in the related carrying value of these properties.
The Company has no further obligation to the investor group and is
proceeding with developing and marketing the Circle C commercial and
multi-family properties.
The Company is evaluating the development of income producing
properties on certain of its tracts and continues to consider
opportunities to enter into significant transactions involving its
properties. As a result, and because of numerous other factors
inherent in the Company's business activities as described herein,
past operating results are not necessarily indicative of future
trends in profitability.
CAPITAL RESOURCES AND LIQUIDITY
The Company's increased sales activity and limited development
during 1997 and 1996 generated significantly higher operating cash
flows which enabled it to reduce its debt by a total of $21.2
million during 1997, to $37.1 million at December 31, 1997.
Additionally, in connection with the Merger, FMPO amended it's
existing credit agreements to consolidate these facilities, extend
the maturity to January 1, 2001 and allow for the sale of FTX's
ownership interest. IGL agreed to guarantee the restructured credit
agreements in place of FTX for a fee (see Note 4 to the financial
statements). The new credit agreement provides for a revolving
credit facility and a term loan with initial maximum available
balances of $35 million and $15 million, respectively. The
aggregate available credit of $50 million is available through
December 31, 1998 and is reduced to $35 million thereafter through
December 31, 1999 and $15 million through December 31, 2000. This
facility bears interest at rates tied to the lending bank's prime
rate or LIBOR at FMPO's option. As a result of these events, FMPO's
autonomy over its operations and short-term financial flexibility
have substantially increased, a definitive timetable for the
complete elimination of the debt guarantee has been established,
restrictions on the Company's business activities have been reduced,
and FMPO is better able to pursue its objective of establishing a
long-term, self-supporting capital structure.
The future performance of FMPO continues to be dependent on future
cash flows from real estate sales, which will be significantly
affected by future real estate values, regulatory issues,
development costs, the ability of the Company to continue to protect
its land use and development entitlements, and interest rate levels.
Significant development capital expenditures remain to be incurred
for FMPO's Austin-area properties prior to their eventual sale.
While bank financing for further development of existing properties
currently is available, bank financing for undeveloped land
purchases generally is expensive and difficult to obtain. These
factors, combined with the debt reduction requirements under the new
credit agreement, could impede FMPO's ability to develop its
existing properties and expand its business. As a result, FMPO has
pursued a number of capital raising alternatives, including equity
sales, formation of joint ventures with third parties, various forms
of debt financing and other means and recently entered into a letter
of intent with Olympus for such purposes. See "Proposed Transaction
with Olympus", above. The proposed transaction with Olympus is
subject to due diligence, negotiation of definitive agreements and
approval by FMPO's Board of Directors. While FMPO believes these
efforts will successfully address the capital resource needs
discussed above, there can be no assurance that FMPO will generate
sufficient cash flow or obtain sufficient funds to make required
interest and principal payments under the new credit agreement.
Net cash provided by operating activities totaled $29.5
million in 1997, $68.7 million in 1996 and $47.5 million in
1995. The 1997 period included the $4.5 million gain on the
sale of oil and gas properties to MOXY and PLP and $3.1
million for the reimbursement of previously expensed
infrastructure costs, while the 1996 period included $25.0
million from the sale of the Barton Creek County Club and
Conference Resort and 1995 benefited from the sale of Circle
C's single-family residential real estate properties and
related amenities for $15.8 million. Net cash used in
investing activities totaled $9.5 million in 1997, $5.9
million in 1996 and $35.2 million in 1995, all of which
represent real estate capital
[Page] 14
expenditures except for a $9.7
million final payment in 1995 to working and royalty
interest owners out of proceeds from a natural gas contract
settlement related to oil and gas properties previously
sold. Increased 1997 expenditures resulted from increased
development requirements for the properties currently being
marketed and a $1.5 million acquisition of Austin-area land,
while the decrease in 1996 expenditures from 1995 resulted
from reduced development requirements brought about by the
positive legislative and judicial events that occurred
during 1995 and the Company's success in securing land use
and development entitlements, marketing and selling
undeveloped tracts to sub-developers. Financing activities
consisted of a net reduction in borrowings totaling $21.2
million in 1997, $63.0 million in 1996 and $11.2 million in
1995. As of December 31, 1997, $10.9 million of additional
borrowings were available under the restructured credit
facility. Capital expenditures for 1998 are expected to be
approximately $28 million, subject to resolution of
regulatory issues impacting the Company's Austin-area
properties. Such expenditures will be funded by working
capital and borrowings under the new credit agreement.
Refer to Item 3., "Legal Proceedings," for a discussion of various
litigation and regulatory matters affecting FMPO.
FMPO has assessed its year 2000 information systems cost issues
and believes its current plans for system upgrades will adequately
address these issues at no material cost.
DISCLOSURES ABOUT MARKET RISKS
FMPO's revenues are derived from the management, development and
sale of its real estate holdings. FMPO's net income can vary
significantly with fluctuations in the market prices of real estate
in these areas, which are influenced by numerous factors, including
interest rate levels. Changes in interest rates affect FMPO's
interest expense on its debt. At the present time FMPO does not
hedge its exposure to changes in interest rates. Based on projected
1998 debt levels, a change of 100 basis points in applicable annual
interest rates would have an approximate $0.4 million impact on net
income.
ENVIRONMENTAL
Increasing emphasis on environmental matters is likely to result
in additional costs, which will be charged against the Company's
operations in future periods when such costs can be estimated.
Present and future environmental laws and regulations applicable to
the Company's operations may require substantial capital
expenditures, could adversely affect the development of its real
estate interests, or may affect its operations in other ways that
cannot be accurately predicted at this time.
CAUTIONARY STATEMENT
Management's discussion and analysis of financial condition and
results of operations contains certain forward-looking statements
regarding FMPO's financial position and liquidity, strategic plans,
future financing plans, development and capital expenditures and
other plans and objectives of the Company's management for future
operations and activities. Important factors that might cause
future results to differ from these projections are described in
more detail under Item 1 of this Form 10-K.
____________________
The results of operations reported and summarized above are not
necessarily indicative of future operating results.
[Page] 15
Item 8. Financial Statements and Supplementary Data
REPORT OF MANAGEMENT
FM Properties Inc. (FMPO) is responsible for the preparation of
the financial statements and all other information contained in this
Annual Report. The financial statements have been prepared in
conformity with generally accepted accounting principles and include
amounts that are based on management's informed judgments and
estimates.
FMPO maintains a system of internal accounting controls designed
to provide reasonable assurance at reasonable costs that assets are
safeguarded against loss or unauthorized use, that transactions are
executed in accordance with management's authorization and that
transactions are recorded and summarized properly. The system is
tested and evaluated on a regular basis by FMPO's internal auditors,
Price Waterhouse LLP. In accordance with generally accepted
auditing standards, FMPO's independent public accountants, Arthur
Andersen LLP, have developed an overall understanding of our
accounting and financial controls and have conducted other tests as
they consider necessary to support their opinion on the financial
statements.
The Board of Directors, through its Audit Committee composed
solely of non-employee directors, is responsible for overseeing the
integrity and reliability of FMPO's accounting and financial
reporting practices and the effectiveness of its system of internal
controls. Arthur Andersen LLP and Price Waterhouse LLP meet
regularly with, and have access to, this committee, with and without
management present, to discuss the results of their audit work.
Richard C. Adkerson W. H. Armstrong, III
Chairman of the Board President, Chief Operating Officer
and Chief Executive Officer and Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF FM PROPERTIES INC.:
We have audited the accompanying balance sheets of FM
Properties Inc. (a Delaware Corporation) as of December 31, 1997 and
1996, and the related statements of operations, cash flow and
changes in stockholders' equity for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. 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 opinioon, the financial statements referred to above
present fairly, in all material respects, the financial position of
FM Properties Inc. as of December 31, 1997 and 1996 and the results
of its operations and its cash flow for each of the three years in
the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
San Antonio, Texas
January 20, 1998 (except for the matters discussed in Note 10, as to
which the date is March 10, 1998)
[Page] 16
FM PROPERTIES INC.
BALANCE SHEETS
December 31,
------------------------
1997 1996
---------- ---------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 873 $ -
Accounts receivable:
Property sales 1,265 -
Other, including income tax of $140,000
and $503,000, respectively 316 559
Prepaid expenses 473 -
Amounts receivable from the Partnership - 4,371
---------- ---------
Total current assets 2,927 4,930
Real estate and facilities, net 105,274 -
Investment in the Partnership (Note 2) - 56,055
Other assets 4,553 -
---------- ---------
Total assets $ 112,754 $ 60,985
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,231 $ -
Accrued interest, property taxes and
other 1,789 -
---------- ---------
Total current liabilities 3,020 -
Long-term debt 37,118 -
Other liabilities 6,009 1,386
Stockholders' equity:
Preferred stock, par value $0.01,
50,000,000 shares authorized and
unissued - -
Common stock, par value $0.01, 150,000,000
shares authorized, 14,288,270 and
14,285,770 issued and outstanding,
respectively 143 143
Capital in excess of par value of
common stock 176,447 176,445
Accumulated deficit (109,983) (116,989)
---------- ---------
Total liabilities and stockholders'
equity $ 112,754 $ 60,985
========== =========
The accompanying notes are an integral part of these financial
statements.
[Page] 17
FM PROPERTIES INC.
STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------
1997 1996 1995
-------- -------- --------
(In Thousands, Except Per Share Amounts)
Revenues $ 30,953 $ - $ -
Costs and expenses:
Cost of sales 24,294 - -
General and administrative
expenses 2,752 220 1,796
-------- --------- --------
Total costs and expenses 27,046 220 1,796
-------- --------- --------
Loss from the Partnership
(Note 2) - (346) (571)
-------- --------- --------
Operating Income (loss) 3,907 (566) (2,367)
Other Income (expense),net 5,375 166 (173)
Interest expense, net (2,181) - -
-------- ---------- --------
Income (loss) before income
tax benefit and minority
interest 7,101 (450) (2,540)
Income tax benefit (expense) (80) 526 2,693
Minority interest in net
income of Partnership (15) - -
-------- --------- --------
Net income $ 7,006 $ 76 $ 153
======== ========= ========
Net income per share:
Without dilution $0.49 $0.01 $0.01
===== ===== =====
With dilution $0.48 $0.01 $0.01
===== ===== =====
Average shares outstanding 14,288 14,286 14,286
====== ====== ======
The accompanying notes are an integral part of these financial
statements.
[Page] 18
FM PROPERTIES INC.
STATEMENTS OF CASH FLOW
Years Ended December 31,
----------------------------------
1997 1996 1995
--------- ------- --------
(In Thousands)
Cash flow from operating activities:
Net income $ 7,006 $ 76 $ 153
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 104 - -
Cost of real estate sales 23,729 - -
Minority interest's share of
Partnership net income 15 - -
Excess of equity in losses of
the Partnership over distributions
received - 346 571
(Increase) decrease in working capital:
Accounts receivable and prepaid
expenses 2,582 (2,624) (1,780)
Accounts payable and accrued
liabilities (2,734) 12 16
Accrued income and other
taxes - 2,190 1,215
Other (1,183) - -
---------- ------- --------
Net cash provided by operating
activities 29,519 - 175
---------- ------- --------
Cash flow from investing activities:
Real estate and facilities (9,547) - -
---------- ------- --------
Net cash used in investing
activities (9,547) - -
---------- ------- --------
Cash flow from financing activities:
Repayment of debt (21,207) - (175)
---------- ------- --------
Net cash used in financing
activities (21,207) - (175)
---------- ------- --------
Net decrease in cash and cash
equivalents (1,235) - -
Cash and cash equivalents at
beginning of year 2,108 - -
---------- ------- --------
Cash and cash equivalents at
end of year $ 873 $ - $ -
========== ======= ========
Interest paid $ 3,351 $ - $ -
========== ======= ========
Income taxes paid $ 220 $ - $ -
========== ======= ========
The accompanying notes are an integral part of these financial
statements.
[Page] 19
FM PROPERITES INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
Capital
in
Excess
Preferred Common of Par Accumulated
Stock Stock Value Deficit Total
--------- ------- -------- ---------- -------
Balance at January
1, 1995 $ - $ 143 $176,445 $(117,218) $59,370
Net income - - - 153 153
--------- ------- -------- --------- -------
Balance at December
31, 1995 - 143 176,445 (117,065) 59,523
Net income - - - 76 76
--------- ------- -------- --------- -------
Balance at December
31, 1996 - 143 176,445 (116,989) 59,599
Stock options
exercised - - 2 - 2
Net income - - - 7,006 7,006
--------- ------- -------- --------- -------
Balance at December
31, 1997 $ - $ 143 $176,447 $(109,983) $66,607
========= ======= ======== ========= =======
The accompanying notes are an integral part of these financial
statements.
[Page] 20
FM PROPERTIES INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting. The real estate development and marketing
operations of FM Properties Inc. (FMPO or the Company) are conducted
in Austin and other urban areas of Texas through its investment in
FM Properties Operating Co., a Delaware general partnership (the
Partnership). Prior to December 22, 1997, FMPO owned a 99.8 percent
general partnership interest in the Partnership and Freeport-McMoRan
Inc. (FTX), FMPO's former parent, owned the remaining 0.2 percent
general partnership interest and served as Managing General Partner.
FTX had certain rights regarding the Partnership's operations as
long as it guaranteed any of the Partnership's debt (Note 2).
Because of FTX's rights, FMPO reflected its investment in the
Partnership under the equity basis of accounting.
On December 22, 1997 FTX merged into IMC Global Inc. (IGL) (the
Merger). In connection with the Merger FTX sold its 0.2 percent
general partnership interest to FMPO and a subsidiary of FMPO for
$100,000. FMPO also restructured and consolidated its existing debt
in December 1997, extending its maturity until January 1, 2001 and
providing for staged reductions in available credit. IGL became
guarantor of this restructured debt in place of FTX. As a result of
FTX's sale of its interest and the replacement of the FTX guarantee
with the IGL guarantee, the accompanying financial statements and
related footnotes reflect the Partnership's financial position and
results of operations under consolidation accounting effective
January 1, 1997 and under the equity basis of accounting prior to
1997.
Use of Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in these financial statements and accompanying notes. The
more significant estimates include valuation allowances for deferred
tax assets, estimates of future cash flows from development and sale
of real estate properties, and useful lives for depreciation and
amortization. Actual results could differ from those estimates.
Cash and Cash Equivalents. Highly liquid investments purchased with
a maturity of three months or less are considered cash equivalents.
Financial Instruments. The carrying amounts of property sales and
other receivables, other current assets, accounts payable and long-
term borrowings reported in the balance sheet approximate fair
value.
Earnings Per Share. In February 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
(SFAS) 128, "Earnings Per Share," which simplifies the computation
of earnings per share (EPS). FMPO adopted SFAS 128 in the fourth
quarter of 1997 and restated prior years' EPS data as required by
SFAS 128.
Net income per share without dilution was calculated by
dividing net income applicable to common stock by the weighted-
average number of common shares outstanding during the year. Net
income per share of common stock with dilution was calculated by
dividing net income applicable to common stock by the weighted-
average number of common shares outstanding during the year plus
dilutive stock options, which represented approximately 229,000
shares in 1997, 104,000 shares in 1996 and 26,000 shares in 1995.
Options to purchase common stock that were outstanding during
the years presented but were not included in the computation of
diluted EPS because the options' exercise prices were greater than
the average market price of the common shares totaled 235,000
options at an average exercise price of $5.23 per share in 1997,
300,000 options at an average of $4.61 per share in 1996 and 225,000
options at an average of $5.25 per share in 1995.
Investment in Real Estate. Real estate assets are stated at the
lower of cost or net realizable value and include acreage,
development, construction and carrying costs, and other related
costs through the development stage. Capitalized costs are assigned
to individual components of a project, as practicable, whereas
interest and other common costs are allocated based on the relative
fair value of individual land parcels. Carrying costs are
capitalized on properties currently under active development.
Revenues are
[Page] 21
recognized when the risks and rewards of ownership are
transferred to the buyer and the consideration received can be
reasonably determined.
SFAS 121, "Accounting for the Impairment of Long-Lived Assets,"
requires a reduction of the carrying amount of long-lived assets to
fair value when events indicate that the carrying amount may not be
recoverable. Measurement of the impairment loss is based on the
fair value of the asset. Generally, the Partnership determines fair
value using valuation techniques such as the expected future sales
proceeds from properties. Since the adoption of SFAS 121 effective
January 1, 1995, no impairment losses have been recognized.
2. INVESTMENT IN THE PARTNERSHIP
FMPO has no significant operations or sources of funds other than
its interest in the Partnership. Therefore, the following financial
statements of the Partnership for the periods prior to 1997 should
be read in conjunction with FMPO's financial statements.
Balance Sheet
December 31,
1996
-----------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 2,108
Accounts receivable:
Property sales 2,067
Other 1,922
Prepaid expenses 144
-----------
Total current assets 6,241
Real estate and facilities, net 118,755
Other assets 5,196
-----------
Total assets $ 130,192
===========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities:
Accounts payable $ 335
Accrued interest, property taxes and other 5,419
Amounts due to FMPO 4,371
-----------
Total current liabilities 10,125
Long-term debt 58,325
Other liabilities 5,574
Partners' capital 56,168
-----------
Total liabilities and partners' capital $ 130,192
===========
Statements Of Operations
Years Ended December 31,
------------------------
1996 1995
---------- ----------
(In Thousands)
Revenues $ 79,177 $ 48,170
Costs and expenses:
Cost of sales 73,347 48,099
General and administrative expenses 2,296 2,379
---------- ----------
Total costs and expenses 75,643 50,478
---------- ----------
Operating income (loss) 3,534 (2,308)
Interest expense, net (3,896) (1,061)
Other income, net 16 2,798
---------- ----------
Net loss $ (346) $ (571)
========== ==========
[Page] 22
Statements Of Cash Flow
Years Ended December 31,
------------------------
1996 1995
---------- ----------
(In Thousands)
Cash flow from operating activities:
Net loss $ (346) $ (571)
Adjustments to reconcile net loss to net
cash provided by operating
activities:
Depreciation and amortization 1,484 2,472
Cost of real estate sales 66,466 41,756
(Increase) decrease in working capital:
Accounts receivable and prepaid
expenses (568) 1,298
Accounts payable and accrued
liabilities 1,702 2,281
Other - 244
---------- ----------
Net cash provided by operating activities 68,738 47,480
---------- ----------
Cash flow from investing activities:
Real estate and facilities (5,943) (25,509)
Natural gas contract settlement proceeds
paid to working and royalty interests - (9,733)
---------- ----------
Net cash used in investing activities (5,943) (35,242)
---------- ----------
Cash flow from financing activities:
Proceeds from debt 1,000 16,000
Repayment of debt (63,969) (27,156)
---------- ----------
Net cash used in financing activities (62,969) (11,156)
---------- ----------
Net increase (decrease) in cash and
cash equivalents (174) 1,082
Cash and cash equivalents at beginning
of year 2,282 1,200
---------- ----------
Cash and cash equivalents at end of year $ 2,108 $ 2,282
========== ==========
Interest paid $ 10,481 $ 9,768
========== ==========
3. REAL ESTATE
December 31,
------------------------
1997 1996
---------- ----------
(In Thousands)
Land held for development or sale:
Austin, Texas area, net of accumulated
depreciation of $46 for 1997 and $76
for 1996 $ 85,098 $ 85,785
Other areas of Texas 20,176 31,270
Operating properties, net of accumulated
depreciation of $647 for
1996 (sold in 1997) - 1,700
---------- ----------
$ 105,274 $ 118,755
========== ==========
The Company's investment in real estate includes approximately
4,500 acres of land located in Austin, Dallas, Houston and San
Antonio. Most significant among these are the Barton Creek
Community, located near Austin, Texas, which includes approximately
3,000 acres of primarily undeveloped land adjacent to the Barton
Creek Resort, and the approximately 1,300 acres of undeveloped
commercial and multi-family property, which is located within the
Circle C development in Austin, Texas. The real estate
interests of the Company in Dallas, Houston and San Antonio, Texas
are managed by professional real estate developers. Under the terms
of these agreements, the operating expenses and development costs,
net of revenues, are funded by the Company. The developers are
entitled to a management fee and a 25 percent interest in the net
profits, after recovery by the Company of its investments and a
stated return, resulting from the sale of the managed properties.
As of December 31, 1997 no amounts have been or are expected to be
paid in connection with these agreement provisions.
[Page] 23
In 1995, Circle C sold its single-family residential
real estate properties and related amenities for $15.8
million. During 1996, FMPO agreed to sell the remaining
assets of Circle C for $34.0 million and received a $1.0
million non-refundable cash deposit, with the balance of the
purchase price due in January 1997. However, the investor
group was unable to complete the sale and the agreement
expired. FMPO has no further obligation to the investor
group and is proceeding with developing and marketing the
Circle C commercial and multi-family properties. The cash
deposit was recorded as a reduction in the related carrying
value of these properties.
The Barton Creek Resort, which included a conference
center, a 147-room hotel and related facilities and three
golf courses, was sold during 1996 for $25.0 million. The
Partnership realized no gain or loss on the transaction and
proceeds were used to reduce debt.
Various regulatory matters and litigation involving FMPO's
development of its Austin properties is summarized below.
SOS Ordinance Litigation - Prior to 1995, development of the
Company's Austin area properties had been delayed because of
disagreements with the City over various ordinances. In 1995, a
Texas district court ruled in favor of FMPO, declaring that a
restrictive 1992 water quality ordinance enacted by public
initiative (the "SOS Ordinance") was void and that the Company was
entitled to develop its Barton Creek and Circle C properties based
on ordinances that were in effect at the time of its initial
development permit applications. The City appealed this decision,
and in 1996 the Texas Court of Appeals overturned the favorable
district court ruling that invalidated the SOS Ordinance, but upheld
the district court's favorable ruling regarding certain
grandfathered rights for previously platted land. A significant
portion of the Barton Creek and Circle C properties was previously
platted and met the requirements to benefit from these grandfathered
rights. An application for Writ of Error was filed with the Texas
Supreme Court in January, 1997. The Writ of Error was accepted by
the Texas Supreme Court and oral argument was heard on November 3,
1997. The Texas Supreme Court has not yet issued its decision. An
unfavorable final judgment could have an adverse effect on any
portion of the Company's property which cannot be developed under
grandfathered entitlements (see "Legislative Developments," below)
or which has not been removed from the jurisdiction of the City
pursuant to the water quality protection zones at Barton Creek (the
"Barton Creek WQPZ") and at Circle C (the "Circle C WQPZ," see
below).
Southwest Travis County Water District Litigation - The
Company's property in the Circle C development, comprising
approximately 1,300 acres of undeveloped commercial and multi-family
property, is located in the Southwest Travis County Water District
(the "STCWD"). The STCWD is a conservation and reclamation district
created by the Texas Legislature in 1995 for the purpose of
conserving water resources and with authority to establish a water
pollution control and abatement program meeting state criteria.
Development within the STCWD is required to meet the STCWD's
criteria and is exempt from municipal regulation. In October 1997,
a Texas district court rendered final judgment that the legislation
creating the STCWD was unconstitutional. The STCWD has filed an
appeal, but no decision has yet been issued. The Company does not
expect the validity of the STCWD will be upheld on appeal and has
implemented an alternative strategy of creating the Circle C WQPZ to
maximize development potential of 553 acres of its Circle C property
(see "Circle C WQPZ Litigation," below). The Company's strategy
with respect to the balance of its Circle C property holdings
(outside the Circle C WQPZ), approximately 700 acres, is to expedite
reimbursement of $25 million in previously incurred reimbursement
infrastructure costs from the City by not opposing the City's
annexation of the 700 acres (see "Annexation Litigation," below).
Annexation Litigation - On December 19, 1997, the City enacted
an ordinance purporting to annex all land lying within the STCWD.
Prior to the City's enactment of its annexation ordinance, the
Company created the Circle C WQPZ (see below). As a result, the
Company's 553 acres located within the Circle C WQPZ, which
comprises all of the Company's land in the Circle C project other
than the land within the Circle C municipal utility districts (the
"MUDs"), was not eligible for annexation. Annexation subjects that
portion of the Company's property located within the MUDs
(approximately 700 acres), which has been annexed by the City, to
the City's zoning and development regulations. In connection with
annexation, the City has imposed an interim zoning classification on
the approximately 700 acres permitting only one residential unit per
acre, which results in significantly less development yield than the
Company previously anticipated. However, consistent with the
Company's strategy, annexation of the Company's property
[Page] 24
located within the MUDs requires the City to assume all MUD debt and
reimburse the Company, simultaneously with the annexation, for a
significant portion of previously incurred costs of water,
wastewater and drainage infrastructure which could result in
reimbursement of these costs much earlier than the Company initially
anticipated. These reimbursable costs are estimated to be
approximately $25 million. Because the City failed to pay these
costs on December 19, 1997, the Partnership filed suit against the
City to compel reimbursement of these amounts. The suit was promptly
set for trial but subsequently stayed pending resolution of suits
brought by the MUDs and other third parties challenging the validity
of the City's purported annexation. Certain of those underlying
third-party challenges have now been resolved and the Company has
filed a motion to lift the stay to permit trial to proceed. The
motion is scheduled for hearing on April 16. Although the Company
expects to ultimately receive payment from the City, the City may
continue to resist payment.
Circle C WQPZ Litigation -The Company owns approximately 553
acres in the Circle C development outside the boundaries of any
municipal utility district. In order to permit development of this
property, the Company filed a water quality protection zone covering
its 553 acres (the "Circle C WQPZ"). Such water quality protection
zones ("WQPZ") permit development of defined areas outside of
municipalities if such development conforms to state-approved water
quality standards under plans approved by the Texas Natural Resource
Conservation Commission ("TNRCC"). The law also restricts adjoining
municipalities from attempting to enforce land use or development
ordinances inconsistent with the requirements of the WQPZ or
annexing any portion of the WQPZ prior to the earlier of completion
of 90 percent of infrastructure construction or 20 years after
creation of the WQPZ. The creation of the Circle C WQPZ was
intended to permit the Company to develop its 553 acres in
accordance with the water quality standards required by the Circle C
WQPZ rather than the requirements of the City, and to confirm that
effect the Company initiated a lawsuit in Hays County in November
1997, seeking a declaratory judgment confirming the validity of the
Circle C WQPZ and the invalidity of the City's attempt to annex land
within the Circle C WQPZ. The City filed a motion to transfer venue
from Hays County to Travis County and, in addition, argued that the
Hays County District Court had no jurisdiction pending consideration
of the Circle C WQPZ's water quality plan by the TNRCC. On December
18, 1997, the TNRCC approved the Circle C WQPZ's water quality plan.
On January 12, 1998, the Hays County District Court denied the
City's motion to transfer venue and all other requested relief. The
Company has filed a motion for summary judgement in the Hays County
litigation, which is scheduled to be heard on March 30, subject to
the Texas Supreme Court's decision as to whether the City's
interlocutory appeal of the District Court's denial of the City's
plea to the jurisdiction abates the summary judgment hearing. A
favorable result in this litigation, which the Company expects,
would confirm that the City's attempt to annex the Company's 553
acres in the Circle C WQPZ was invalid and that development of the
553 acres is not subject to City development regulations. An
unfavorable ruling, which is not expected, would mean that the
Circle C WQPZ was invalid and that the 553 acres is annexed, and
subject to the City zoning and other regulatory authority, which
could diminish the development potential of this property in the
same manner as for the approximately 700 acres discussed above (see
"Annexation Litigation").
Legislative Developments - In the most recent legislative
session of the Texas State legislature, a bill to reorganize a state
governmental agency inadvertently repealed the provisions of law
that established grandfathered rights for land which was platted or
in the permitting process. The Company, based on an opinion from
counsel, has taken the position that under Texas law, previously
vested rights for the Company's property holdings are not affected
by the repeal of this statute. The City, however, does not
recognize any grandfathered entitlements arising under the repealed
law and, in response to the repeal, enacted an ordinance effective
September 5, 1997, establishing interim regulations on land
development. It is anticipated that the City will enact a final
ordinance and may attempt to apply it to portions of the Company's
Circle C and Lantana properties. Should the City take this
position, the Company anticipates asserting and defending its
grandfathered entitlements. In the event the City were to prevail,
portions of the Company's property would be subject to the City's
current restrictive ordinances and development potential would be
significantly reduced. During the last three sessions of the Texas
legislature, legislation has been enacted to provide landowners
relief from overly-aggressive attempts by municipalities to regulate
land development in an effort to prevent growth. Much of that past
legislation has been enacted to address abusive or unauthorized
municipal land use regulations of the type adopted by the City. The
Company anticipates that during the next session of the Texas
legislature, beginning in January 1999, the Texas legislature will
once again review and address inappropriate municipal land use
regulation designed to prevent growth and development.
[Page] 25
Other Matters - During February 1997, FMPO filed a petition for
declaratory judgment against Phoenix Holdings, Ltd. in order to
secure its ownership of approximately $25 million of MUD
reimbursements that pertain to existing infrastructure that serves
the Circle C development. Phoenix filed a counter claim against
Circle C in June 1997.
On January 9, 1998, the City filed a lawsuit (the "Travis County
Suit") in Travis County District Court against 14 water quality
zones and their owners, including the Barton Creek WQPZ. The City
challenges the constitutionality of the legislation authorizing the
creation of water quality zones. This same issue is being litigated
in the lawsuit initiated by the Company discussed under "Circle C
WQPZ Litigation," above. The Attorney General of Texas has agreed
to intervene in both the Travis County Suit and the suit in "Circle
C WQPZ Litigation" above, to defend the legislation. Although not
expected, a court decision that the legislation authorizing WQPZs is
invalid would diminish and delay development of portions of the
Barton Creek project and the Company's land located in the Circle C
WQPZ.
In April 1997, the U.S. Department of Interior ("DOI") listed
the Barton Springs Salamander as an endangered species after a
federal court overturned a March 1997 decision by the DOI not to
list the Barton Springs Salamander based on a conservation agreement
between the State of Texas and federal agencies. The listing of the
Barton Springs Salamander is not anticipated to affect the Company's
Barton Creek and Lantana properties for several reasons, including
the results of recent technical studies and the Company's U.S. Fish
and Wildlife Service 10(a) permit obtained in 1995. The Company's
Circle C properties could, however, be affected, although the extent
of any impact cannot be determined at this time. Special interest
groups have provided written notice of their intention to challenge
the Company's 10(a) permit and compliance with water quality
regulations. The Company believes these challenges are meritless
and will continue to protect its entitlements.
4. LONG-TERM DEBT
December 31,
------------------------
1997 1996
---------- ----------
(In Thousands)
Bank credit facility, average rate 6.6%
in 1997 and 6.9% in 1996 $ 37,118 $ -
Bank loan, average rate 6.6% in 1997
and 6.9% in 1996 - 31,000
Circle C bank loan, average rate 6.7%
in 1997 and 6.8% in 1996 - 27,325
---------- ----------
$ 37,118 $ 58,325
========== ==========
In December, 1997 FMPO finalized a restructured debt facility
with certain banks. This restructured debt establishes a $50
million facility consisting of a $35.0 million revolving credit
facility and a $15.0 million term loan facility, with individual
borrowings bearing interest at rates based on either the prime rate
or LIBOR at FMPO's option. The aggregate committed loan amount will
reduce to $35.0 million on January 1, 1999, to $15.0 million on
January 1, 2000 and will be eliminated on January 1, 2001.
Additionally, the restructured credit facility contains covenants
restricting dividends or other distributions, mergers, the creation
of liens or certain additional debt and certain other matters. IGL
has guaranteed amounts borrowed under the restructured facility. As
consideration for IGL's guarantee, FMPO agreed to pay IGL an annual
fee, payable quarterly, equal to the difference between FMPO's cost
of LIBOR-funded borrowings before the assumption of the guarantee by
IGL and the rate on LIBOR-funded loans under the new agreement.
This fee was 60 basis points (0.6%) as of December 31, 1997. FMPO
has granted liens in favor of IGL on certain of its properties as
security for the guarantee. These liens are to be released for
property sales, subject to certain restrictions. Additionally,
under the guarantee terms FMPO cannot amend or refinance the credit
facility without IGL's consent.
Capitalized interest totaled $1.4 million in 1997, $3.1 million
in 1996 and $11.7 million in 1995.
5. INCOME TAXES
Income taxes are recorded pursuant to SFAS 109 "Accounting for
Income Taxes". FMPO has provided a valuation allowance equal to its
deferred tax assets because of the expectation of incurring tax
losses for the near future. The components of deferred taxes
follow:
[Page] 26
December 31,
------------------------
1997 1996
---------- ----------
(In Thousands)
Deferred tax asset:
Net operating losses (expire 2001-2012) $ 12,509 $ 7,259
Real estate and facilities, net (7,511) 1,067
Alternative minimum tax credits and
depletion allowance (no expiration) 800 718
Other future deduction carryforwards
(expire 1999-2002) 319 241
Valuation allowance (6,117) (9,285)
---------- ----------
$ - $ -
========== ==========
FMPO recognized tax benefits of $0.5 million in 1996 and $2.7
million in 1995 for the carryback of each year's tax loss to recoup
taxes paid in previous years. Income taxes credited (charged) to income
follow:
1997 1996 1995
------ ------- -------
(In Thousands)
Current income tax benefit
(expense)
Federal $ - $ 526 $ 2,693
State (80) - -
------ ------- -------
(80) 526 2,693
Deferred federal income taxes - - -
------ ------- -------
Income tax benefit (expense) $ (80) $ 526 $ 2,693
====== ======= =======
Reconciliations of the differences between the income tax
(charges) benefits computed at the federal statutory tax rate and
the income tax (expense) benefit recorded follow:
1997 1996 1995
---------------- -------------- --------------
Amount Percent Amount Percent Amount Percent
------- ------- ------ ------- ------- ------
(Dollars In Thousands)
Income tax benefit (expense)
computed at the federal
statutory income tax rate $(2,485) (35)% $ 158 35% $ 889 35%
Increase (decrease) attributable
to:
Change in valuation
allowance 3,168 45 (169) (37) 1,209 48
State taxes and
other (763) (11) 537 119 595 23
------- --- ----- --- ------ ---
Income tax benefit
(expense) $ (80) (1)% $ 526 117% $2,693 106%
======= === ===== === ====== ===
6. TRANSACTIONS WITH AFFILIATES
Management Services. Certain management and administrative services
have been provided to FMPO by FTX during 1995 and by FM Services
Company (Services Company), currently ten percent owned by FMPO,
since January 1996. These services were provided for a total cost
of $1.7 million in 1995 and for a fixed annual fee of $0.5 million
since July 1995, subject only to annual cost of living increases
beginning in the 1997 first quarter. Effective January 1, 1998,
Services Company and FMPO implemented a new management services
agreement for these same services to be provided on a cost
reimbursement basis. FMPO believes the cost of these services does
not (and in the future will not) differ significantly from those
which would be incurred if the related employees were employed
directly by FMPO.
Sale of Oil & Gas Interests. In September 1997, the Company sold
several working interests and numerous overriding royalty interests
in oil and gas properties which have been held since its formation
to McMoRan Oil & Gas Co. (MOXY) and Phosphate Resource Partners
Limited Partnership (PLP), formerly Freeport-McMoRan Resource
Partners, Limited Partnership, for $4.5 million cash, resulting in a
gain of $4.5 million. MOXY is and PLP was, prior to the Merger, an
affiliate of FMPO because of FTX's former role as administrative
managing general partner of PLP and because of common management
and a common director shared with MOXY. These interests, which had
no cost basis, remained with the Company after the sale of
substantially all of its oil and gas properties in 1993. The gain
is reflected in Other Income, and proceeds were used to reduce debt.
Other income also includes royalty income
[Page] 27
generated by these
properties totaling $0.8 million, $1.4 million and $0.6 million for
1997 (prior to the sale), 1996 and 1995, respectively.
7. EMPLOYEE BENEFITS
Stock Options. FMPO's Stock Option Plan and Stock Option Plan for
Non-Employee Directors (the Plans) provide for the issuance of up to
a total of 1.3 million stock options and stock appreciation rights
(SARs) at no less than market value at time of grant. Generally,
stock options are exercisable in 25 percent annual increments
beginning one year from the date of grant and expire 10 years after
the date of grant. A summary of stock options outstanding,
including 200,000 SARs, follows:
1997 1996 1995
--------------------- -------------------- ---------------
Average Average Average
Number of Option Number of Option Number of Option
Options Price Options Price Options Price
---------- ---------- ---------- -------- -------- ------
Beginning of
year 790,000 $2.77 535,000 $3.23 425,000 $3.60
Granted 280,000 3.55 305,000 1.79 110,000 1.81
Exercised (2,500) 1.50 - - - -
Expired/
Forfeited (17,500) 2.64 (50,000) 1.81 - -
--------- ------- -------
End of
year 1,050,000 2.98 790,000 2.77 535,000 3.23
========= ======= =======
At December 31, 1997, 247,500 shares were available for new
grants under the Plans. Summary information of fixed stock options
outstanding at December 31, 1997 follows:
Options Outstanding Options Exercisable
--------------------------------- -------------------
Weighted Weighted
Average Average Average
Range of Number Remaining Option Number Option
Exercise Prices of Options Life Price of Options Price
- --------------- ---------- ----------- -------- ---------- --------
$1.50 to $1.81 280,000 8.0 years $1.57 85,000 $1.63
$2.63 to $3.50 335,000 9.2 years 3.32 18,750 2.69
$4.81 to $5.25 235,000 1.0 years 5.23 225,000 5.25
------- -------
850,000 328,750
======= =======
FMPO has adopted the disclosure-only provisions of SFAS 123 and
continues to apply APB Opinion No. 25 and related interpretations in
accounting for its stock-based compensation plans. Accordingly, no
compensation cost has been recognized for FMPO's fixed stock option
grants. Had compensation cost for FMPO's fixed stock option grants
been determined based on the fair value at the grant dates for
awards under those plans consistent with SFAS 123, FMPO's net income
would have decreased by $252,000 ($0.02 per share) in 1997, $104,000
($0.01 per share) in 1996 and remained essentially unchanged in
1995. For the pro forma computations, the fair values of the fixed
option grants were estimated on the dates of grant using the Black-
Scholes option pricing model. These values totaled $2.76 per option
in 1997, $1.46 per option in 1996 and $1.45 per option in 1995. The
weighted average assumptions used include a risk-free interest rate
of 6.7 percent in 1997 and 6.4 percent in 1996 and 1995, expected
lives of 10 years and expected volatility of 62 percent in 1997 and
70 percent in 1996 and 1995. The pro forma effects on net income for
1997, 1996 and 1995 are not representative for future years because
they do not take into consideration grants made prior to 1995. No
other discounts or restrictions related to vesting or the likelihood
of vesting of fixed stock options were applied.
8. COMMITMENTS AND CONTINGENCIES
The Company has made, and will continue to make, expenditures at its
operations for protection of the environment. Increasing emphasis
on environmental matters can be expected to result in additional
costs, which will be charged against the Company's operations in
future periods. Present and future environmental laws and
regulations applicable to the Company's operations may require
substantial capital expenditures, could adversely affect the
development of its real estate interests or may affect its
operations in other ways that cannot be accurately predicted at this
time.
In connection with the sale of one of its oil and gas
properties in 1993, the Company indemnified the purchaser for any
future abandonment costs in excess of net revenues received by the
purchaser.
[Page] 28
The Company has accrued $3.0 million relating to this
contingent liability, included in Other Liabilities, which it
believes to be adequate.
9. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Net Income
(Loss)Per Share
Operating Net ------------------
Income Income Without With
Revenues a (Loss) (Loss) Dilution Dilution
---------- -------- -------- -------- --------
(In Thousands, Except Per Share Amounts)
1997
1st Quarter $ 15,070 $ 2,491 $ 1,972 $ .14 $ .14
2nd Quarter 5,191 1,756b 1,744 .12b .12b
3rd Quarter 4,037 (637) 3,455c .24c .24c
4th Quarter 6,655 297 (165) (.01) (.01)
-------- ------- --------
$ 30,953 $ 3,907 $ 7,006 .49 .48
======== ======= ========
1996
1st Quarter $ (865) $ (894) $ (894) $ (.06) $ (.06)
2nd Quarter 559 500 500 .03 .03
3rd Quarter 1,011 934 1,460d .10d .10d
4th Quarter (1,051) (1,106) (990) (.07) (.07)
-------- ------- --------
$ (346) $ (566) $ 76 .01 .01
======== ======= ========
a. Amounts shown for 1996 are for Income (Loss) from Partnership,
as reflected using the equity basis of accounting (Note 1).
b. Includes a $3.1 million ($0.22 per share) reimbursement of
previously expensed infrastructure costs.
c. Includes a $4.5 million ($0.31 per share) gain from sale of oil
and gas property interests.
d. Includes a $0.5 million tax benefit ($0.04 per share).
10. SUBSEQUENT EVENTS
On March 2, 1998 FMPO and Olympus Real Estate Corporation, an
affiliate of Hicks, Muse, Tate & Furst Incorporated ("Olympus"),
entered into a letter of intent to form a strategic alliance to
develop certain of FMPO's properties and to pursue new real estate
acquisition and development opportunities. Under the terms of the
letter of intent, Olympus would make a $10 million investment in an
FMPO mandatorily redeemable equity security, provide a $10 million
convertible debt financing facility to FMPO and make available up to
$50 million of capital for its share of direct investments in joint
FMPO/Olympus projects. Olympus would also have the right to
designate for nomination 20 percent of FMPO's Board of Directors.
The $10 million mandatorily redeemable equity security
would have a par value of $5.84 per share, the average
closing price of FMPO common stock during the 30 trading
days ending March 2, 1998. FMPO would use the proceeds from
the sale of these securities to repay debt. These
securities would share any dividends or distributions
ratably with the FMPO common stock, which currently pays no
dividend, and would be redeemable (i)at the option of the
holder at any time after the third anniversary of the
closing for an amount per share approximating the economic
benefit that would have accrued had the shares been
converted into common stock on a one-to-one basis and sold
(the "common stock equivalent value") or (ii)at the option
of FMPO after the fifth anniversary (but in no event later
than the sixth anniversary) for the greater of their common
stock equivalent value or their par value per share, plus
accrued and unpaid dividends, if any. FMPO would have the
option to satisfy the redemption with shares of its common
stock, subject to certain limitations.
The $10 million convertible debt facility would be available to
FMPO in whole or in part for a period of six years after closing to
finance FMPO's equity investment in new FMPO/Olympus joint venture
opportunities in properties not currently owned by FMPO. The
interest rate on this facility would be 12 percent per year, and at
Olympus's option, interest would be payable quarterly, or accrued
and added to principal. Outstanding principal under the facility
would be convertible at any time into FMPO common stock at a
conversion price of $7.31, which is 125 percent of the average
closing price of FMPO common stock during the 30 trading days ending
March 2, 1998. If not converted into common stock, the
[Page] 29
convertible
debt would be repaid on the sixth anniversary of the closing. If
the combination of interest at 12 percent and the value of the
conversion right does not provide Olympus with at least a 15 percent
annual return on the convertible debt, FMPO would pay Olympus
additional interest upon retirement of the convertible debt in an
amount necessary to yield a 15 percent annual return. The
convertible debt would be non-recourse to FMPO and would be secured
solely by FMPO's interest in FMPO/Olympus joint venture
opportunities financed with the proceeds of the convertible debt.
For a three-year period after the closing, Olympus would make
available up to $50 million for its share of capital for direct
investments in FMPO/Olympus joint acquisition and development
activities. For the three-year period, FMPO would provide Olympus
with a right of first refusal to participate for no less than a 50
percent interest in all new acquisition and development projects on
properties not currently owned by FMPO, as well as development
opportunities on existing properties in which FMPO seeks third-party
equity participation.
The transaction is expected to close in the second quarter of
1998 and is subject to the completion of due diligence, negotiation
of definitive agreements and approval of FMPO's Board of Directors.
With respect to the litigation discussed under "Other Matters"
in Note 3, on February 20, 1998, the District Court granted the
Company's motion for summary judgment on the primary case and
subsequently, Phoenix Holdings, Ltd. dismissed its counterclaims
with prejudice, but reserved the right to appeal the summary
judgment of the primary case.
Although the Company expects a favorable result in the Circle C
litigation confirming the validity of the Circle C WQPZ (see above),
the Company expects the City may continue to assert claims that it
has regulatory jurisdiction over development within the Circle C
WQPZ and that additional litigation may be necessary to preserve
development entitlements. Recently, one of Austin's largest
employers, Motorola Inc., contracted to purchase approximately 167
acres of the Company's commercial land located in the Circle C WQPZ
for development of a campus facility bringing thousands of jobs to
the Circle C community. Even though not required, Motorola agreed to
develop its campus facility in strict accordance with the City's
regulations, including the SOS Ordinance. Certain City
representatives publically asserted zoning and development
authority over Motorola's selected site and indicated that Motorola
would not receive the City development and zoning approvals the City
asserts are needed to develop the campus project even if all
ordinance requirements would be fully satisfied. After meetings with
City representatives and members of the SOS Alliance (a special
interest group), Motorola elected to terminate its contract with the
Company. As a consequence, the Company lost a significant sale.
Austin recently elected a council strongly opposed to development in
the southwest sector of Austin and the Company anticipates that in
the future, the City will use similar tactics to those is used in
the Motorola incident to restrict growth in the southwest corridor.
For example, the city recently announced its "Smart Growth" program
designed to direct growth away from the southwest sector of the city
towards the "Desired Development Zone," an area located generally in
the northern and eastern sections of Austin. Consistent with its
Smart Growth program, in March 1998, the City announced a proposed
bond sale to raise funds to acquire land in the southwest corridor,
which it refers to as the "Barton Creek Zone," for the purported
purpose of protecting the Edwards Aquifer. The Circle C project is
within the Barton Creek Zone. The Company anticipates that the City
will continue its efforts to impose development regulations limiting
development in an effort to reduce the value of land it has targeted
to acquire for the Barton Creek Zone. As it has been compelled to
do during the last several years, the Company anticipates having to
continue to be involved in litigation to protect its entitlements
and maximize the developability and value of its properties. The
Company anticipates that it will continue to successfully develop
and market its properties during the pendency of its disputes with
the City of Austin.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not applicable.
[Page] 30
PART III
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Information About
Nominees and Directors" of the Proxy Statement submitted to the
stockholders of the registrant in connection with its 1998 annual
meeting to be held on May 14, 1998, is incorporated herein by
reference.
Item 11. Executive Compensation
The information set forth under the captions "Director Compensation"
and "Executive Officer Compensation" of the Proxy Statement
submitted to the stockholders of the registrant in connection with
its 1998 annual meeting to be held on May 14, 1998, is incorporated
herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management
The information set forth under the captions "Common Stock Ownership
of Certain Beneficial Owners" and "Common Stock Ownership of
Directors and Executive Officer" of the Proxy Statement submitted to
the stockholders of the registrant in connection with its 1998
annual meeting to be held on May 14, 1998, is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions"
of the Proxy Statement submitted to the stockholders of the
registrant in connection with its 1998 annual meeting to be held on
May 14, 1998, is incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K
(a)(1) Financial Statements. Reference is made to the Financial
Statements beginning on page 16 hereof.
(a)(2) Financial Statement Schedules. Reference is made to the
Index to Financial Statements
(a)(3) Exhibits. Reference is made to the Exhibit Index
beginning on page E-1 hereof.
(b) Reports on Form 8-K. None.
[Page] 31
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized, on March 30, 1998.
FM PROPERTIES INC.
By: /s/ Richard C. Adkerson
-----------------------
Richard C. Adkerson
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf
of the registrant and in the capacities indicated, on March 30,
1998.
/s/ Richard C. Adkerson
----------------------- Chairman of the Board, Chief Executive
Richard C. Adkerson Officer (principal executive officer)
and Director
*
--------------------
W. H. Armstrong, III President, Chief Operating Officer and
Chief Financial Officer (principal
financial officer)
*
------------------
C. Donald Whitmire Vice President and Controller
(pricipal accounting officer)
*
------------------
James C. Leslie Director
*
------------------
Michael D. Madden Director
*By: /s/ Richard C. Adkerson
-----------------------
Richard C. Adkerson
Attorney-in-Fact
[Page] S-1
FM PROPERTIES INC.
EXHIBIT INDEX
2.1 Distribution Agreement dated as of June
10, 1992 among Freeport-McMoRan Inc. ("FTX"), the Company and FM
Properties Operating Co. (the "Partnership"). Incorporated by
reference to Exhibit 2.1 to the Annual Report on Form 10-K of the
Company for the fiscal year ended December 31, 1992 (the "1992 Form
10-K").
3.1 Amended and Restated Certificate of Incorporation of the
Company. Incorporated by reference to Exhibit 3.1 to the 1992 Form
10-K.
3.2 By-laws of the Company, as amended. Incorporated by
reference to Exhibit 3.2 to the 1992 Form 10-K.
4.1 The Company's Certificate of Designations of Series A
Participating Cumulative Preferred Stock. Incorporated by reference
to Exhibit 4.1 to the 1992 Form 10-K.
4.2 Rights Agreement dated as of May 28, 1992 between the
Company and Mellon Securities Trust Company, as Rights Agent.
Incorporated by reference to Exhibit 4.2 to the 1992 Form 10-K.
4.3 Amendment No. 1 to Rights Agreement dated as of April 21,
1997 between the Company and the Rights Agent. Incorporated by
reference to Exhibit 4 to the Company's Current Report on Form 8-K
dated April 21, 1997.
4.4 Amended, Restated and Consolidated Credit Agreement dated
as of December 15, 1997 among the Partnership, Circle C Land Corp.,
certain banks, and The Chase Manhattan Bank, as Administrative Agent
and Document Agent.
10.1 Second Amended and Restated Agreement of General Partnership
of FM Properties Operating Co. dated as of December 15, 1997 between
the Company and FMPO L.L.C.
10.2 Amended and Restated Services Agreement, dated as of
December 23, 1997 between FM Services Company and the Company.
10.3 Joint Venture Agreement between Freeport-McMoRan Resource
Partners, Limited Partnership and the Partnership, dated June 11,
1992. Incorporated by reference to Exhibit 10.3 to the 1992 Form
10-K.
10.4 Development and Management Agreement dated and effective
as of June 1, 1991 by and between Longhorn Development Company and
Precept Properties, Inc. (the "Precept Properties Agreement").
Incorporated by reference to Exhibit 10.8 to the 1992 Form 10-K.
10.5 Assignment dated June 11, 1992 of the Precept Properties
Agreement by and among FTX (successor by merger to FMI Credit Corporation,
as successor by merger to Longhorn Development Company), the Partnership
and Precept Properties, Inc. Incorporated by reference to Exhibit
10.9 to the 1992 Form 10-K.
[Page] E-1
10.6 FMPO Guarantee Agreement dated as of December 15, 1997 by the
Company.
10.7 Amended and Restated IGL Guarantee Agreement dated as of
December 22, 1997 by IMC Global Inc.
Executive Compensation Plans and Arrangements (Exhibits 10.8 through
10.10)
10.8 The Company's Performance Incentive Awards Program, as
amended. Incorporated by reference to Exhibit 10.21 to the Annual
Report on Form 10-K of the Company for the fiscal year ended
December 31, 1994.
10.9 FMPO Stock Option Plan, as amended.
10.10 FMPO Stock Option Plan for Non-Employee Directors, as
amended.
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
24.1 Certified Resolution of the Board of Directors of FMPO
authorizing this report to be signed on behalf of any officer or
director pursuant to a Power of Attorney.
24.2 Powers of Attorney pursuant to which this report has been
signed on behalf of certain officers and directors of the Company.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
[Page] E-2
FM PROPERTIES INC.
INDEX TO FINANCIAL STATEMENTS
The financial statements in the schedule listed below should be read
in conjunction with the financial statements of FMPO contained elsewhere
in Annual Report on Form 10-K.
Page
Report of Independent Public Accountants F-1
Schedule III-Real Estate and Accumulated Depreciation F-2
Schedules other than the one listed above have been omitted
since they are either not required, not applicable or the required
information is included in the financial statements or notes
thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors
of FM Properties Inc.:
We have audited, in accordance with generally accepted auditing
standards, the financial statements as of December 31, 1997 and 1996
and for each of the three years in the period ended December 31,
1997 included elsewhere in FM Properties Inc.'s Annual Report on
Form 10-K, and have issued our report thereon dated January 20,
1998. Our audits were made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The accoompanying
schedule is the responsibility of the Company's management and is
presented for purposes of complying with the Securities and Exchange
Commission's rules and is not part of the basic financial
statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the
basic financial statements taken as a whole.
Arthur Andersen LLP
San Antonio, Texas
January 20, 1998
[Page] F-1
FM Properties Inc.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1997
(In Thousands)
SCHEDULE III
Cost
Capitalized
Subsequent to Gross Amounts
Initial Cost Acquisitons December 31, 1997
-------------------- ------------- -------------------
Building and Building and
Land Improvements Land Land Improvements
-------- ------------ ----------- ------ ------------
Developed Lots
Camino Real,
San Antonio, TX $ 235 $ - $ 561 $ 796 $ -
Bent Tree Marsh,
Dallas, TX 482 - 1,070 1,552 -
Preston Springs,
Plano, TX 7 - - 7 -
Willow Bend,
Plano, TX 3,946 - 4,499 8,445 -
Copper Lakes,
Houston, TX 883 - 1,828 2,711 -
Barton Creek
(North),
Austin, TX 716 - 22 738 -
Undeveloped Acreage
Hunter's Glen,
Plano, TX 168 - 14 182 -
Camino Real,
San Antonio, TX 968 - 257 1,225 -
Copper Lakes,
Houston, TX 2,225 - 1,795 4,020 -
Bent Tree Addison,
Dallas, TX 364 - - 364 -
Bent Tree Apt.
/Retail,Dallas,
TX 872 - 1 873 -
Barton Creek
(North),
Austin,
TX 9,010 - 12,871 21,881 -
Barton Creek
(South),
Austin,
TX 20,688 - 11,137 31,825 -
Lantana,
Austin, TX 3,934 - 1,618 5,552 -
Longhorn Properties,
Austin,
TX 15,793 - 9,049 24,842 -
Operating Properties
Barton Creek
Utilities,
Austin ,TX 307 - - 307
------- ---- ------- -------- ----
$60,291 $307 $44,722 $105,013 $307
======= ==== ======= ======== ====
SCHEDULE III, continued
Number
of Lots
and Acres
------------
Accumulated Year
Total Lots Acres Depreciation Acquired
-------- ---- ----- ------------ --------
Developed Lots
Camino Real, San Antonio, TX $ 796 21 - $ - 1990
Bent Tree Marsh, Dallas, TX 1,552 54 - - 1991
Preston Springs, Plano, TX 7 1 - - 1991
Willow Bend, Plano, TX 8,445 78 - - 1991
Copper Lakes, Houston, TX 2,711 142 - - 1991
Barton Creek (North), Austin, TX 738 5 - - 1997
Undeveloped Acreage
Hunter's Glen, Plano, TX 182 - 2 1990
Camino Real, San Antonio, TX 1,225 - 84 1990
Copper Lakes, Houston, TX 4,020 - 169 1991
Bent Tree Addison, Dallas, TX 364 - 8 - 1991
Bent Tree Apt./Retail, Dallas, TX 873 - 10 - 1990
Barton Creek (North),
Austin, TX 21,881 - 721 1988
Barton Creek (South),
Austin, TX 31,825 - 1,750 - 1988
Lantana, Austin, TX 5,552 - 513 - 1994
Longhorn Properties,
Austin, TX 24,842 - 1,274 - 1992
Operating Properties
Barton Creek Utilities,
Austin ,TX 307 - - 46 1997
-------- --- ----- ---
$105,320 301 4,531 $46
======== === ===== ===
FM Properties Inc.
Notes to Schedule III
(In Thousands)
(1) Reconciliation of Real Estate Properties:
The changes in real estate assets for the years ended December
31, 1997 and 1996 are as follows:
1997 1996
---------- ----------
Balance, beginning of year $ 119,478 $ 189,309
Acquisitions 1,802 -
Improvements and other 10,116 6,665
Cost of real estate sold (26,076) (76,496)
---------- ----------
Balance, end of year $ 105,320 $ 119,478
========== ==========
The aggregate net book value for federal income tax purposes as of
December 31, 1997 was $124,919,000.
(2) Reconciliation of Accumulated Depreciation:
The changes in accumulated depreciation for the years ended
December 31, 1997 and 1996 are as follows:
1997 1996
---------- ----------
Balance, beginning of year $ 723 $ 9,269
Depreciation expense 98 1,484
Real estate sold (775) (10,030)
---------- ----------
Balance, end of year $ 46 $ 723
========== ==========
Depreciation of buildings and improvements reflected in the
statements of operations is calculated over estimated lives of 30
years.
(3) Concurrent with certain year-end 1994 debt negotiations, the
Partnership analyzed the carrying amount of its real estate assets,
using generally accepted accounting principles, and recorded a $115
million pre-tax, non-cash write-down. The actual amounts that will
be realized depend on future market conditions and may be more or
less than the amounts recorded in the Partnership's financial
statements.
[Page] F-3