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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended Commission File Number 333-88144
September 30, 2002
Southwest Shopping Centers Co. II, L.L.C.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 34-1841345
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
125 Park Avenue, 14th Floor
New York, New York 10017
- ---------------------------------------- ---------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,including area code: (212) 949-1373
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (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[ ]
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Total number of pages contained in this report: 40
-1-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SOUTHWEST SHOPPING CENTERS CO. II, L.L.C. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30,
2002 DECEMBER 31,
(UNAUDITED) 2001
--------------- --------------
(In thousands)
ASSETS
Real estate, at cost:
Land $ 5,816 $ 5,816
Building and improvements 58,990 58,744
Accumulated depreciation and amortization (7,863) (6,689)
--------------- --------------
56,943 57,871
Cash and cash equivalents 39 782
Restricted cash 494 883
Debt issue costs, net of accumulated amortization of
$82 and $56, respectively 256 282
Accounts receivable and other, net of allowance for
doubtful accounts of $132 and $134, respectively 87 203
--------------- --------------
Total assets $ 57,819 $ 60,021
=============== ==============
LIABILITIES AND MEMBER'S EQUITY
Accounts payable and accrued expenses $ 976 $ 1,522
Mortgage loan payable 41,850 42,078
--------------- --------------
Total liabilities 42,826 43,600
Contingency
Member's equity 14,993 16,421
--------------- --------------
Total liabilities and member's equity $ 57,819 $ 60,021
=============== ==============
See notes to consolidated financial statements (unaudited).
-2-
SOUTHWEST SHOPPING CENTERS CO. II, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
(In thousands)
Revenues
Base rent $ 1,683 $ 1,607 $ 5,102 $ 4,828
Percentage rent 1 - 21 -
Tenant recoveries 767 724 2,338 2,195
Utility reimbursements 284 275 851 850
Other income 199 155 512 437
Interest income - - - 42
----------- ----------- ----------- -----------
Total revenues 2,934 2,761 8,824 8,352
----------- ----------- ----------- -----------
Expenses
Operating expenses 863 806 2,116 2,045
Administrative 232 322 865 1,254
Real estate taxes 202 199 619 616
Insurance 23 19 73 49
Mortgage interest 930 937 2,766 2,784
Depreciation and amortization 398 405 1,209 1,208
Management fees 87 82 262 255
Bad debt - 29 43 85
----------- ----------- ----------- -----------
Total expenses 2,735 2,799 7,953 8,296
----------- ----------- ----------- -----------
Net income (loss) $ 199 $ (38) $ 871 $ 56
=========== =========== =========== ===========
See notes to consolidated financial statements (unaudited).
-3-
SOUTHWEST SHOPPING CENTERS CO. II, L.L.C. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS
ENDED SEPTEMBER 30,
2002 2001
----------- -----------
(In thousands)
Cash provided by operating activities:
Net income $ 871 $ 56
Adjustments to reconcile net income
to net cash provided by operating activities
Depreciation and amortization 1,209 1,208
Decrease in accounts receivable and other 116 432
Decrease in accounts payable and accrued expenses (546) (242)
Decrease in restricted cash 389 113
---------- ----------
Net cash provided by operating activities 2,039 1,567
---------- ----------
Cash used for investing activities:
Investments in building and improvements (255) (97)
---------- ----------
Net cash used for investing activities (255) (97)
---------- ----------
Cash used for financing activities:
Repayment of mortgage loans - principal payments (228) (209)
Distributions to member (2,299) (3,093)
---------- ----------
Net cash used for financing activities (2,527) (3,302)
---------- ----------
Decrease in cash and cash equivalents (743) (1,832)
Cash and cash equivalents at beginning of period 782 2,103
---------- ----------
Cash and cash equivalents at end of period $ 39 $ 271
========== ==========
Supplemental Disclosure of Cash Flow Information
Interest paid $ 2,766 $ 2,784
========== ==========
See notes to consolidated financial statements (unaudited).
-4-
Notes To Consolidated Financial Statements
General
The accompanying financial statements represent the consolidated
results of the Registrant, Southwest Shopping Centers Co. II, L.L.C. and
subsidiaries ("Southwest Shopping Centers").
The consolidated financial statements included herein have been
prepared by Southwest Shopping Centers, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although Southwest Shopping
Centers believes that the disclosures contained herein are adequate to make the
information presented not misleading. These consolidated financial statements
should be read in conjunction with the December 31, 2001 consolidated financial
statements and the notes thereto included in Southwest Shopping Centers's
registration statement on Form S-4, as amended, presented under financial
statements on page F-1.
The consolidated financial statements reflect, in the opinion of
Southwest Shopping Centers, all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the consolidated financial position and
results of operations for the respective periods in conformity with generally
accepted accounting principles consistently applied.
Accounting Policies
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses accounting and reporting for
intangible assets acquired, except for those acquired in a business combination.
SFAS No. 142 presumes that goodwill and certain intangible assets have
indefinite useful lives. Accordingly, goodwill and certain intangibles will not
be amortized but rather will be tested at least annually for impairment. SFAS
No. 142 also addresses accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. The adoption of this statement
had no impact on Southwest Shopping Centers's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of a Disposal of a Business and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. This statement also amends ARB No. 51,
"Consolidated Financial Statements," to eliminate the exception to consolidation
for a subsidiary for which control is likely to be temporary. SFAS No. 144 is
effective for fiscal years beginning after December 15, 2001, and interim
periods within those fiscal years. The provisions of this statement generally
are to be applied prospectively. The adoption of this statement had no impact on
Southwest Shopping Centers's consolidated liquidity, financial position or
result of operations.
-5-
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections," which updates, clarifies and simplifies existing accounting
pronouncements. In part, this statement rescinds SFAS No. 4, "Reporting Gains
and Losses from Extinguishment of Debt." SFAS No. 145 will be effective for
fiscal years beginning after May 15, 2002. Upon adoption, enterprises must
reclassify prior period items that do not meet the extraordinary item
classification criteria in APB Opinion No. 30. Southwest Shopping Centers
intends to adopt SFAS No. 145 as of January 1, 2003.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity. SFAS
No. 146 is effective prospectively for exit and disposal activities initiated
after December 31, 2002, with earlier adoption encouraged. As the provisions of
SFAS No. 146 are required to be applied prospectively after the adoption date,
management cannot determine the potential effects that adoption of SFAS No. 146
will have on Southwest Shopping Centers's consolidated financial statements.
Significant Tenants
The anchor department store at Park Plaza Mall (the "Mall") owns its
own facilities and has an agreement with a subsidiary of Southwest Shopping
Centers that contains an operating covenant requiring it to operate these
facilities continuously as a retail department store until July 2003. There is
no rental revenue from the anchor department store. However, if the anchor
department store at the Mall does not renew its operating agreement in July
2003, the majority of tenants at the Mall can terminate their lease without
incurring a substantive penalty.
One tenant represented approximately 12% of the total revenue for each
of the three and nine months ended September 30, 2002 and 2001. The tenant's
lease expires in April 2005.
Proposed Merger
On February 13, 2002, our parent company, First Union Real Estate
Equity and Mortgage Investments ("First Union"), entered into a definitive
agreement of merger and contribution with, among others, Gotham Partners, L.P.,
a shareholder of First Union that is controlled by affiliates of William A.
Ackman, then Chairman of the Board of Trustees of First Union, and Gotham Golf
Corp. ("Gotham Golf"), a Delaware corporation controlled by Gotham Partners,
L.P., pursuant to which First Union agreed to merge with and into Gotham Golf.
The parties subsequently adopted Amendment No. 1 to the merger agreement on
April 24, 2002, Amendment No. 2 to the merger agreement on September 24, 2002
and Amendment No. 3 to the merger agreement on October 24, 2002. If consummated,
the proposed transaction would result in First Union's common shareholders
receiving as merger consideration for each common share:
- - $1.98 in cash;
- - a choice of (a) an additional $0.35 in cash or (b) approximately 1/174th
(0.0057461) of a debt instrument (the "Notes") to be issued by Southwest
Shopping Centers, with a face value of $100 (which is an effective price of
$60.91 per face value of $100), indirectly secured by First Union's
principal real estate assets; and
-6-
- - three-fiftieths (0.06) of a non-transferable uncertificated subscription
right, with each whole right exercisable to purchase one Gotham Golf common
share at $20.00 per share and, subject to availability and pro ration,
additional Gotham Golf common shares at $20.00 per share, for up to an
aggregate of approximately $41 million of Gotham Golf common shares.
Each Note issued by Southwest Shopping Centers will have a face amount
of $100, which is equivalent to approximately $0.575 per share, and will bear
interest at 11% per annum on its face amount. The Notes will be secured by a
pledge of two underlying loans: (1) an approximate $3.5 million first leasehold
mortgage on the Circle Tower office building in Indianapolis, Indiana and (2) an
approximate $16.5 million mezzanine loan on the Park Plaza Mall in Little Rock,
Arkansas. Holders of Notes will receive a pass-through of the economic
attributes of the two underlying loans.
Shareholders who receive their proportionate share of the Notes in the
transaction will have the right to require Southwest Shopping Centers to redeem
them on the 90th day after the effective time of the merger for $0.35 in cash
for every approximately 1/174th of a Note received as merger consideration.
Gotham Partners has agreed to purchase from Southwest Shopping Centers any
redeemed Notes for the same redemption price paid to the shareholders.
On May 13, 2002, Gotham Golf and Southwest Shopping Centers filed a
Registration Statement on Form S-4 containing preliminary proxy materials. The
Registration Statement, as amended on July 18, 2002, August 26, 2002, September
27, 2002 and October 31, 2002, was declared effective by the Securities and
Exchange Commission on November 1, 2002. First Union filed additional materials
on Schedule 13E-3 on May 13, 2002, as amended by Schedules 13E-3/A filed on July
18, 2002, August 26, 2002, September 27, 2002, and October 31, 2002. On November
1, 2002, First Union announced that a special meeting of the common shareholders
would be held on November 25, 2002 for the purpose of approving the merger.
On November 15, 2002, the plaintiff in the preferred shareholder
litigation filed with the New York Supreme Court for New York County an Order to
Show Cause why the transaction should not be enjoined. Southwest Shopping
Centers is not a named party in the litigation. The court held a hearing on that
issue on November 20. On November 21, 2002, the court issued an order denying
the defendant's motion to dismiss the complaint and granting motions for
preliminary injunction and expedited discovery in connection with the proposed
merger. The court also set a hearing for November 26, 2002 to determine whether
to grant further relief to plaintiff with respect to the proposed transaction.
An evidentiary hearing was held on November 26, 27 and December 2, 2002 with
respect to this matter. Thereafter, the court issued an order dated December 6,
2002, reaffirming its preliminary injunction barring the proposed merger of
First Union with and into Gotham Golf. The court's order extended indefinitely
the preliminary injunction previously granted with respect to the proposed
merger transaction and directed the parties to the lawsuit to attend a
preliminary conference on December 16, 2002 for the purpose of scheduling
discovery. On December 10, 2002, First Union filed a notice of appeal and began
pursuit of its appeal of the court's order barring the transaction in the
Appellate Division of the New York Supreme Court. No assurance can be given that
the injunction will be lifted and the transaction consummated. In the event the
merger transaction is not consummated, the Notes will not be issued.
-7-
Contingency - Park Plaza Mall
Two Dillard's department stores are the anchor stores at Park Plaza
Mall. Dillard's owns its facilities in Park Plaza Mall and has a Construction,
Operation and Reciprocal Easement Agreement with First Union that contains an
operating covenant requiring Dillard's to operate these facilities continuously
as retail department stores until July 2003. Dillard's and its partner, Simon
Property Group, own a parcel of land of nearly 100 acres in the western part of
Little Rock, Arkansas and have announced, at various times over the last several
years, their intention to build in this new location. During the first quarter
of 2001, the Little Rock board of directors approved a change in zoning that
would allow the construction of an approximately 1.3 million square foot
regional enclosed mall on this site. The zoning on this site reverted to its
prior status as a residential use property pursuant to a court order in 2002;
however, the proponents of the regional enclosed mall have filed a notice of
appeal of this ruling in the Supreme Court of Arkansas and a briefing schedule
has been set by the court for the appeal, with final briefs due in March 2003
prior to oral argument, as yet unscheduled. A final decision is not expected for
several months. No assurance can be given as to the final outcome of the
litigation.
In the event that a large-scale retail facility is built on this site,
Dillard's may decline to extend or renew its operating covenant and cease
operating its stores at Park Plaza Mall. In the event Dillard's closes one or
both of its stores at Park Plaza Mall, it is unlikely that it would sell or
lease its two stores to comparable anchor tenants. Accordingly, the value of
Park Plaza Mall would be materially and adversely affected due to the decline in
traffic and sales volume at Park Plaza Mall, and the likely departure of many of
the tenants pursuant to early termination provisions of their leases that may be
triggered by the closure of one or both of the anchor stores. The Park Plaza
Mall property is financed by a mortgage loan. The loss of an anchor tenant or a
significant number of other mall tenants would most likely result in an event of
default under this mortgage.
Regardless of whether the proposed new mall is built at the site in
question, under the terms of the operating covenant, Dillard's has no obligation
to maintain its operations at Park Plaza Mall beyond July 2003. Dillard's is
actively pursuing a number of alternative locations for an additional store in
this market. Dillard's has been approached to extend the operating covenant at
the Park Plaza Mall; however, to date, it has declined to do so. If Dillard's
does not maintain its presence as an anchor store at Park Plaza Mall, the Park
Plaza Mall would experience a loss of revenue and likely an event of default
under the mortgage, thereby causing the value of the Park Plaza Mall to be
materially and adversely affected. In such circumstances, there would be an
impairment of the value of the property and a loss could be recognized. There
can be no assurance that Dillard's will extend or renew its operating covenant
on terms acceptable to First Union.
Related Party Transactions
Beginning January 1, 2000, First Union outsourced all management and
leasing activities to independent third party providers. Southwest Shopping
Centers was allocated $12,000 per month by First Union beginning January 1,
2000, as reimbursement for asset management services.
During the nine months ended September 30, 2002 Southwest Shopping
Centers transferred $2.3 million to First Union, which is presented as a
distribution to member and a reduction of member's equity in the consolidated
financial statements.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Proposed Transaction
On February 13, 2002, our parent company, First Union, entered into a
definitive agreement of merger and contribution with, among others, Gotham
Partners, L.P., a shareholder of First Union that is controlled by affiliates of
William A. Ackman, then Chairman of the Board of Trustees of First Union, and
Gotham Golf Corp. ("Gotham Golf"), a Delaware corporation controlled by Gotham
Partners, L.P., pursuant to which First Union agreed to merge with and into
Gotham Golf. The parties subsequently adopted Amendment No. 1 to the merger
agreement on April 24, 2002, Amendment No. 2 to the merger agreement on
September 24, 2002 and Amendment No. 3 to the merger agreement on October 24,
2002. If consummated, the proposed transaction would result in First Union's
common shareholders receiving as merger consideration for each common share:
- - $1.98 in cash;
- - a choice of (a) an additional $0.35 in cash or (b) approximately 1/174th
(0.0057461) of a debt instrument (the "Notes") to be issued by Southwest
Shopping Centers, with a face value of $100 (which is an effective price of
$60.91 per face value of $100), indirectly secured by First Union's
principal real estate assets; and
- - three-fiftieths (0.06) of a non-transferable uncertificated subscription
right, with each whole right exercisable to purchase one Gotham Golf common
share at $20.00 per share and, subject to availability and pro ration,
additional Gotham Golf common shares at $20.00 per share, for up to an
aggregate of approximately $41 million of Gotham Golf common shares.
Each Note issued by Southwest Shopping Centers will have a face amount
of $100, which is equivalent to approximately $0.575 per share, and will bear
interest at 11% per annum on its face amount. The Notes will be secured by a
pledge of two underlying loans: (1) an approximate $3.5 million first leasehold
mortgage on the Circle Tower office building in Indianapolis, Indiana and (2) an
approximate $16.5 million mezzanine loan on the Park Plaza Mall in Little Rock,
Arkansas. Holders of Notes will receive a pass-through of the economic
attributes of the two underlying loans.
Shareholders who receive their proportionate share of the Notes in the
transaction will have the right to require Southwest Shopping Centers to redeem
them on the 90th day after the effective time of the merger for $0.35 in cash
for every approximately 1/174th of a Note received as merger consideration.
Gotham Partners has agreed to purchase from Southwest Shopping Centers any
redeemed Notes for the same redemption price paid to the shareholders.
On May 13, 2002, Gotham Golf and Southwest Shopping Centers filed a
Registration Statement on Form S-4 containing preliminary proxy materials. The
Registration Statement, as amended on July 18, 2002, August 26, 2002, September
27, 2002 and October 31, 2002, was declared effective by the Securities and
Exchange Commission on November 1, 2002. First Union filed additional materials
on Schedule 13E-3 on May 13, 2002, as amended by Schedules 13E-3/A filed on July
18, 2002, August 26, 2002, September 27, 2002, and October 31, 2002. On November
1, 2002, First Union announced that a special meeting of the common shareholders
would be held on November 25, 2002 for the purpose of approving the merger.
-9-
On November 15, 2002, the plaintiff in the preferred shareholder
litigation (see "Litigation - Preferred Shareholder Lawsuit", below) filed with
the New York Supreme Court for New York County an Order to Show Cause why the
transaction should not be enjoined. Southwest Shopping Centers is not a named
party in the litigation. The court held a hearing on that issue on November 20.
On November 21, 2002, the court issued an order denying the defendant's motion
to dismiss the complaint and granting motions for preliminary injunction and
expedited discovery in connection with the proposed merger. The court also set a
hearing for November 26, 2002 to determine whether to grant further relief to
plaintiff with respect to the proposed transaction. An evidentiary hearing was
held on November 26, 27 and December 2, 2002 with respect to this matter.
Thereafter, the court issued an order dated December 6, 2002, reaffirming its
preliminary injunction barring the proposed merger of First Union with and into
Gotham Golf. The court's order extended indefinitely the preliminary injunction
previously granted with respect to the proposed merger transaction and directed
the parties to the lawsuit to attend a preliminary conference on December 16,
2002 for the purpose of scheduling discovery. On December 10, 2002, First Union
filed a notice of appeal and began pursuit of its appeal of the court's order
barring the transaction in the Appellate Division of the New York Supreme Court.
No assurance can be given that the injunction will be lifted and the transaction
consummated. In the event the merger transaction is not consummated, the Notes
will not be issued.
INVESTORS AND SECURITY HOLDERS SHOULD READ THE DEFINITIVE MERGER
AGREEMENT AND THE AMENDED FORM S-4 OF GOTHAM GOLF AND SOUTHWEST SHOPPING CENTERS
FILED ON OCTOBER 31, 2002 TO APPRISE THEMSELVES OF THE PROPOSED TRANSACTION. IN
ADDITION, INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE DEFINITIVE PROXY
STATEMENT/PROSPECTUS, DATED OCTOBER 31, 2002, REGARDING THE BUSINESS COMBINATION
TRANSACTION REFERENCED IN THE FOREGOING INFORMATION BECAUSE IT WILL CONTAIN
IMPORTANT INFORMATION. The definitive proxy statement/prospectus was filed with
the Securities and Exchange Commission by First Union, Gotham Golf and Southwest
Shopping Centers. Investors and security holders may obtain a free copy of the
definitive proxy statement/prospectus and other documents filed by First Union,
Gotham Golf and Southwest Shopping Centers with the Securities and Exchange
Commission at the Commission's website at www.sec.gov. The definitive proxy
statement/prospectus and these other documents may also be obtained for free
from First Union.
Liquidity and Capital Resources
General
Southwest Shopping Centers receives cash primarily from rental income
and tenant reimbursements, which are also its primary sources of liquidity.
Southwest Shopping Centers uses cash to pay operating expenses, management fees,
general and administrative expenses, principal, interest and escrow deposits on
the Park Plaza Mall's senior mortgage loan and for capital improvements. With
respect to capital improvements, Southwest Shopping Centers estimates that it
will need to repair or replace the Park Plaza Mall's roof at a cost of
approximately $0.8 million to $1.2 million. Southwest Shopping Centers plans to
perform the repair or replacement over the next three years. Southwest Shopping
Centers's rental income and tenant reimbursements were sufficient for the year
ended December 31, 2001 and the nine months ended September 30, 2002 to pay for
Southwest Shopping Centers's expenses, debt service and capital improvements.
-10-
Cash and cash equivalents decreased by $0.7 million when comparing the
balance at September 30, 2002 to the balance at December 31, 2001.
Southwest Shopping Centers's net cash from operating activities of $2.0
million was more than offset by net cash used for investing activities of $0.3
million and net cash used for financing activities of $2.5 million. Cash used
for financing activities consisted of $0.2 million of principal payments on the
mortgage loan and $2.3 million of distributions to First Union. Cash used for
investing activities consisted of $0.2 million of improvements to the property.
Southwest Shopping Centers was not directly affected by the events of
the September 11th terrorist attacks; however, the attacks have had a negative
effect on the economy, which was already considered to be in a recession.
Southwest Shopping Centers could be affected by declining economic conditions as
a result of various factors that affect the real estate business, including the
financial condition of tenants, competition, and increased operating costs.
Southwest Shopping Centers's property insurance coverage as it relates to claims
caused by terrorist incidents is limited to $1 million per occurrence. In
addition, the cost of property/casualty and liability insurance unrelated to
terrorist incidents has increased significantly.
Southwest Shopping Centers's most critical accounting policy relates to
the evaluation of the fair value of real estate. Southwest Shopping Centers
evaluates the need for an impairment loss on its real estate assets when
indicators of impairment are present and the undiscounted cash flows are not
sufficient to recover the asset's carrying amount. The impairment loss, if any,
would be measured by comparing the fair value of the asset to its carrying
amount. The evaluation of the fair value of real estate is an estimate that is
susceptible to change and actual results could differ from those estimates.
A summary of Southwest Shopping Centers's borrowings at September 30,
2002 and repayment timing is as follows (in millions):
Payments Due by Period
-------------------------------------------------------------------------------
Contractual Obligations Total Less than 1 Year 1-3 Years 4-5 Years After 5 Years
- ----------------------- ----- ---------------- --------- --------- -------------
Mortgage loan payable $41.9 $0.3 $0.7 $0.8 $40.1
===== ==== ==== ==== =====
Contingency - Park Plaza Mall
Two Dillard's department stores are the anchor stores at Park Plaza
Mall. Dillard's owns its facilities in Park Plaza Mall and has a Construction,
Operation and Reciprocal Easement Agreement with First Union that contains an
operating covenant requiring Dillard's to operate these facilities continuously
as retail department stores until July 2003. Dillard's and its partner, Simon
Property Group, own a parcel of land of nearly 100 acres in the western part of
Little Rock, Arkansas and have announced, at various times over the last several
years, their intention to build in this new location. During the first quarter
of 2001, the Little Rock board of directors approved a change in zoning that
would allow the construction of an approximately 1.3 million square foot
regional enclosed mall on this site. The zoning on this site reverted to its
prior status as a residential use property pursuant to a court order in 2002;
however, the proponents of the regional enclosed mall have filed an appeal of
this ruling in the Supreme Court of Arkansas. In the event that a large-scale
retail facility is built on this site, Dillard's may decline to extend or renew
its operating covenant and cease operating its stores at Park Plaza Mall. In the
event Dillard's closes one or both of its
-11-
stores at Park Plaza Mall, it is unlikely that it would sell or lease its two
stores to comparable anchor tenants. Accordingly, the value of Park Plaza Mall
would be materially and adversely affected due to the decline in traffic and
sales volume at Park Plaza Mall, and the likely departure of many of the tenants
pursuant to early termination provisions of their leases that may be triggered
by the closure of one or both of the anchor stores. The Park Plaza Mall property
is financed by a mortgage loan. The loss of an anchor tenant or a significant
number of other mall tenants would most likely result in an event of default
under this mortgage.
Regardless of whether the proposed new mall is built at the site in
question, under the terms of the operating covenant, Dillard's has no obligation
to maintain its operations at Park Plaza Mall beyond July 2003. Dillard's is
actively pursuing a number of alternative locations for an additional store in
this market. Dillard's has been approached to extend the operating covenant at
the Park Plaza Mall; however, to date, it has declined to do so. If Dillard's
does not maintain its presence as an anchor store at Park Plaza Mall, the Park
Plaza Mall would experience a loss of revenue and likely an event of default
under the mortgage, thereby causing the value of the Park Plaza Mall to be
materially and adversely affected. In such circumstances, there would be an
impairment of the value of the property and a loss could be recognized. There
can be no assurance that Dillard's will extend or renew its operating covenant
on terms acceptable to First Union.
With respect to capital improvements, First Union estimates that the
Park Plaza Mall will need to repair or replace its roof at a cost of
approximately $0.8 million to $1.2 million. First Union plans to perform the
repair or replacement over the next three years.
Results of Operations
Net income for the nine months ended September 30, 2002 was $0.9
million as compared to net income of $0.1 million for the nine months ended
September 30, 2001. Base rent increased by $0.3 million when comparing September
30, 2002 to September 30, 2001 due to an increase in both rental rates and
occupancy. Administrative expenses decreased by $0.4 million due to a decrease
in costs of litigation associated with the proposed new mall, described in the
Park Plaza Mall section.
Net income for the three months ended September 30, 2002 was $0.2
million as compared to approximately breakeven for the three months ended
September 30, 2001. Base rent increased by $0.1 million when comparing September
30, 2002 to September 30, 2001 due to an increase in both rental rates and
occupancy. Administrative expenses decreased by $0.1 million due to a decrease
in costs of litigation associated with the proposed new mall, described in the
Park Plaza Mall section.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Southwest Shopping Centers does not have any financial instruments that
would expose it to market risk associated with the risk of loss arising from
adverse changes in market rates and prices. Southwest Shopping Centers's
mortgage loan is payable at a fixed rate of interest.
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ITEM 4. CONTROLS AND PROCEDURES
The Registrant's principal executive and financial officers have, within
90 days of the filing date of this quarterly report, evaluated the effectiveness
of the Registrant's disclosure controls and procedures (as defined in Exchange
Act Rules 13a-14(c)) and has determined that such disclosure controls and
procedures are adequate to ensure that information required to be disclosed by
the Registrant in the reports filed or submitted under the Exchange Act is
recorded, processed, and summarized and reported within the time periods
specified by the Securities and Exchange Commission. There have been no
significant changes in the Registrant's internal controls or in other factors
that could significantly affect such internal controls since the date of
evaluation. Accordingly, no corrective actions have been taken with regard to
significant deficiencies or material weaknesses.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Preferred Shareholder Lawsuit
On April 15, 2002, First Union was served with a complaint filed in the
Supreme Court of New York in New York County on behalf of a purported holder of
First Union's convertible preferred shares. Southwest Shopping Centers is not a
party to this litigation. Among the allegations made by the plaintiff is that
the proposed transaction with Gotham Golf was approved by First Union's board of
trustees in violation of duties owed to the holders of First Union's convertible
preferred shares. The suit seeks, among other things, unspecified damages, an
injunction of the proposed transaction and the court's certification of the
lawsuit as a class action. Named as defendants in the lawsuit were First Union,
its five trustees and Gotham Partners, L.P. First Union and the other defendants
filed a motion to dismiss the lawsuit. An oral argument on the motion to dismiss
was held on July 15, 2002. Discovery on the case was stayed pending the decision
of the court. On November 15, 2002, the plaintiff filed with the court an Order
to Show Cause as to why the transaction should not be enjoined. The court held a
hearing on that issue on November 20. On November 21, 2002, the court issued an
order denying the defendant's motion to dismiss the complaint and granting
motions for preliminary injunction and expedited discovery in connection with
the proposed merger. The court also set a hearing for November 26, 2002 to
determine whether to grant further relief to plaintiff with respect to the
proposed transaction. An evidentiary hearing was held on November 26, 27 and
December 2, 2002 with respect to this matter. Thereafter, the court issued an
order dated December 6, 2002, reaffirming its preliminary injunction barring the
proposed merger of First Union with and into Gotham Golf. The court's order
extended indefinitely the preliminary injunction previously granted with respect
to the proposed merger transaction and directed the parties to the lawsuit to
attend a preliminary conference on December 16, 2002 for the purpose of
scheduling discovery. On December 10, 2002, First Union filed a notice of appeal
and began pursuit of its appeal of the court's order barring the transaction in
the Appellate Division of the New York Supreme Court. No assurance can be given
that the injunction will be lifted and the transaction consummated. In the event
the merger transaction is not consummated, the Notes will not be issued.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
23.1 Independent Auditors' Consent.
99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act.
99.2 Southwest Shopping Centers Co. II, L.L.C. and
Subsidiaries Consolidated Financial Statements - Years
Ended December 31, 2001, 2000 and 1999.
(b) Reports on Form 8-K: None
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
Southwest Shopping Centers Co. II, L.L.C.
Date: December 20, 2002 By: /s/ Neil H. Koenig
-------------------------------
Neil H. Koenig
Interim Chief Financial Officer
Date: December 20, 2002 By: /s/ Mark Goldberg
-------------------------------
Mark Goldberg
Principal Executive Officer
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SOUTHWEST SHOPPING CENTERS CO. II, L.L.C.
FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2002
CERTIFICATIONS
I, Neil H. Koenig, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Southwest Shopping
Centers Co. II, L.L.C.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the Registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant is
made known to me, particularly during the period in which
this quarterly report is being prepared:
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures on my
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
my most recent evaluation, to the Registrant's auditors and the audit
committee:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and
report financial data and have identified for the
Registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
-17-
SOUTHWEST SHOPPING CENTERS CO., LLC
FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2002
6. The Registrant's other certifying officer and I have indicated
in this quarterly report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of my most recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
Date: December 20, 2002 /s/ Neil H. Koenig
-------------------------------
Neil H. Koenig
Interim Chief Financial Officer
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SOUTHWEST SHOPPING CENTERS CO. II, L.L.C.
FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2002
CERTIFICATIONS
I, Mark Goldberg, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Southwest Shopping
Centers Co. II, L.L.C.;
2. Based on my knowledge, this quarterly report does not contain
any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report,
fairly present in all material respects the financial
condition, results of operations and cash flows of the
Registrant as of, and for, the periods presented in this
quarterly report;
4. The Registrant's other certifying officer and I are
responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the Registrant and have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the Registrant is
made known to me, particularly during the period in which
this quarterly report is being prepared:
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior
to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures on my
evaluation as of the Evaluation Date;
5. The Registrant's other certifying officer and I have disclosed, based on
my most recent evaluation, to the Registrant's auditors and the audit
committee:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
Registrant's ability to record, process, summarize and
report financial data and have identified for the
registrant's auditors any material weaknesses in internal
controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Registrant's internal
controls; and
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SOUTHWEST SHOPPING CENTERS CO., LLC
FORM 10-Q FOR THE FISCAL QUARTER ENDED SEPTEMBER 30, 2002
6. The Registrant's other certifying officer and I have indicated
in this quarterly report whether there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date
of my most recent evaluation, including any corrective actions
with regard to significant deficiencies and material
weaknesses.
Date: December 20, 2002 /s/ Mark Goldberg
---------------------------
Mark Goldberg
Principal Executive Officer
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