SOUTHWEST SHOPPING CENTERS CO II LLC - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED 12-31-02 COMMISSION FILE NUMBER 333-88144-01

SOUTHWEST SHOPPING CENTERS CO. II, L.L.C.
-----------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 34-1841345
- ------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) (Identification No.)

125 Park Avenue, 14th Floor
New York, New York 10017
- ---------------------------------------- -----
(Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: (212) 949-1373

Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.

NONE

SOUTHWEST SHOPPING CENTERS CO. II, L.L.C.
CROSS REFERENCE SHEET PURSUANT TO ITEM G,
GENERAL INSTRUCTIONS TO FORM 10-K

ITEM OF FORM 10-K LOCATION
- ----------------- --------
(PAGE OR PAGES)

PART I

1. Business 3 - 9

2. Properties 10

3. Legal Proceedings 11 - 13

4. Submission of Matters to a Vote of Security Holders 13

PART II

5. Market for Trust's Common Equity and Related Stockholder Matters 13

6. Selected Financial Data 14

7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 15 - 19

7A. Quantitative and Qualitative Disclosures Regarding Market Risk 19

8. Financial Statements 20 - 32

9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33

PART III

10. Directors and Executive Officers of the Trust 33

11. Executive Compensation 33

12. Security Ownership of Certain Beneficial Owners and Management 33

13. Certain Relationships and Related Transactions 33

PART IV

14. Controls and Procedures 33

15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a) Financial Statements and Financial Statement Schedules 34
(b) Exhibits 34 - 37
(c) Reports on Form 8-K 37

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PART I

ITEM 1. BUSINESS.

Southwest Shopping Centers Co. II, L.L.C. ("Southwest Shopping Centers") is a
limited liability company formed under the laws of the State of Delaware on
September 27, 1996 and will continue until the earlier of December 31, 2050 or
until it is dissolved in accordance with its limited liability company agreement
or by law. Southwest Shopping Centers is wholly owned by First Union Real Estate
Equity and Mortgage Investments ("First Union").

In September 1996, Southwest Shopping Centers acquired a joint venture interest
in seven shopping malls. In September 1997, Southwest Shopping Centers purchased
the interests of its joint venture partners in the seven shopping malls. In
December 1999, Southwest Shopping Centers sold six of the seven malls. Effective
January 1, 2000, Southwest Shopping Centers had no other assets, liabilities or
operations other than its ownership of Park Plaza Mall (the "Mall"), a 548,000
square foot shopping mall located in Little Rock, Arkansas.

The Mall competes for tenants on the basis of the rent charged and location, and
encounters competition from other retail properties in its market area. The
principal competition for the Mall may come from future shopping malls locating
in its market area. Additionally, the overall economic health of retail tenants
impacts the Mall.

There are no employees of Southwest Shopping Centers.

RISK FACTORS

THE PROPOSED TRANSACTION

On February 13, 2002, First Union entered into a definitive agreement of merger
and contribution, pursuant to which First Union agreed to merge with and into
Gotham Golf Corp., (or Gotham Golf), a Delaware corporation controlled by a
number of equityholders of First Union. If consummated, the proposed transaction
will result in First Union's common shareholders receiving as merger
consideration for each First Union common share:

- - $1.98 in cash;

- - a choice of (1) an additional $0.35 in cash or (2) approximately
1/174th (0.0057461) of a debt instrument (the "Note") 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; and

- - three-fiftieths (0.06) of a non-transferable uncertificated
subscription right, with each whole right exercisable to purchase one
Gotham Golf common share at $20.00 per share and, subject to
availability and proration, additional Gotham Golf common shares at
$20.00 per share, for up to an aggregate of approximately $41 million
of Gotham Golf common shares.

The proposed transaction is subject to several conditions, including the
approval of First Union's common shareholders and the obtaining of certain third
party consents. First Union's common shareholders approved the proposed
transaction by the requisite majority vote at a November 27, 2002 meeting of
shareholders. Litigation has arisen with respect to the proposed transaction,
resulting in the granting of an injunction preventing the proposed transaction
from going forward. Although the injunction is being appealed by First Union and
Gotham Partners L.P. ("Gotham Partners"), there can be no assurance that the
injunction will be lifted, that all required third party consents will be
obtained and that the proposed transaction will be consummated.

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WE FACE A NUMBER OF SIGNIFICANT ISSUES WITH RESPECT TO THE PROPERTY WE OWN WHICH
MAY ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE

PARK PLAZA MALL

Background. Dillard's Department Stores, Inc. (referred to herein as
"Dillard's"), the only anchor department store at Southwest Shopping Centers'
Park Plaza Mall located in Little Rock, Arkansas, owns its facilities (two
stores at opposite ends of the mall) and has an agreement with Southwest
Shopping Centers that contains an operating covenant requiring it to operate
these facilities continuously as retail department stores until July 2003.
Dillard's does not lease space from or pay base rent to Southwest Shopping
Centers; it does pay Southwest Shopping Centers its share of common area
maintenance costs. Southwest Shopping Centers has approached Dillard's to extend
this covenant prior to its expiration but, to date, Dillard's has declined to do
so. In the event that Dillard's ceases to operate its stores at the Mall, the
value of the Mall would be materially and adversely affected. These events may
result in a decline in net revenue that may trigger an event of default under
the mortgage loan secured by the Mall. There can be no assurance that Dillard's
will extend or renew its operating covenant on terms acceptable to Southwest
Shopping Centers or continue to operate its stores at the Mall. (See "Park Plaza
Mall" in Item 7, "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources").

Proposed New Mall and Related Litigation. Southwest Shopping Centers is aware of
the proposed construction of a new mall in the vicinity of the Mall, which would
be developed by Dillard's and its partner, and would be anchored by Dillard's,
among other department store anchors. During the first quarter of 2001, the
Little Rock board of directors approved a change in zoning that would allow
construction of the proposed new mall; however, as described more fully below,
the approval of the zoning change was overturned by judicial order in June 2002.
In the event that the new mall is built, Dillard's may decline to extend or
renew its operating covenant and cease operating its stores at the Mall.

Legal actions have been taken by local citizens to reverse the decision of the
Little Rock board of directors with respect to the zoning for the development of
the proposed new mall. On June 5, 2002, the court issued an opinion invalidating
the decision of the Little Rock board of directors with respect to zoning of the
proposed new mall and permanently enjoining the City of Little Rock from issuing
any building permits or taking any other action pursuant to the invalid
ordinances with respect to the proposed new mall. The decision has been appealed
to the Supreme Court of Arkansas, with no decision expected before June 2003.
There can be no assurance as to the length of time or potential outcome of the
appeal. It is also possible that proponents of the new mall will file a new
application to rezone the proposed area for a new competing retail development
during the pendency of this appeal.

Leasing Issues. With respect to its property, Southwest Shopping Centers is also
subject to the risk that, upon expiration, leases may not be renewed, the space
may not be relet, or the terms of renewal or reletting (including the cost of
required renovations) may be less favorable than the current lease terms. Leases
accounting for approximately 15% of the aggregate 2003 annualized base rents
from the Mall (representing approximately 14% of the net rentable square feet at
the Mall) expire without penalty or premium through the end of 2003, and leases
accounting for approximately 7% of aggregate 2003 annualized base rent from the
Mall (representing approximately 7% of the net rentable square feet at the Mall)
are scheduled to expire in 2004. Other leases grant tenants early termination
rights upon payment of a termination penalty. In the event that Dillard's ceases
to operate its stores at the Mall, many of the tenants have the right to
terminate their leases or to pay less rent. Lease expirations will require
Southwest Shopping Centers to locate new tenants and negotiate replacement
leases with such tenants. Replacement leases typically require Southwest
Shopping Centers to incur tenant improvements, other tenant inducements and
leasing commissions, in each case, which may be higher than the

4

costs relating to renewal leases. Southwest Shopping Centers has estimated the
expenditures for new and renewal leases for 2003 and 2004 but no assurances can
be given that Southwest Shopping Centers has correctly estimated such expenses.
If Southwest Shopping Centers is unable to promptly relet or renew leases for
all or a substantial portion of the space, subject to expiring leases, if the
rental rates upon such renewal or reletting are significantly lower than
expected or if Southwest Shopping Centers' funds for these purposes prove
inadequate, Southwest Shopping Centers' revenues and net income could be
adversely affected.

Tenant Concentration. Southwest Shopping Centers' 10 largest tenants at the Mall
(based on pro forma base rent for 2003) aggregate approximately 37% of Southwest
Shopping Centers' total base rent and approximately 35% of Southwest Shopping
Centers' net rental square feet and have remaining lease terms ranging from
approximately one to nine years. Southwest Shopping Centers' largest tenant, the
Gap Stores, (i.e., the GAP, GAP Kids and Banana Republic) represents
approximately 12% of the pro forma aggregate annualized base rent for 2003 and
12% of the pro forma net rentable square feet at the properties. Its lease
expires on April 30, 2005. Although Southwest Shopping Centers believes that it
has a good relationship with each of its principal tenants, Southwest Shopping
Centers' revenues would be disproportionately and adversely affected if a
significant number of these tenants did not renew their lease or renewed their
leases upon expiration on terms less favorable to Southwest Shopping Centers.

Competition. Southwest Shopping Centers competes with a number of real estate
developers, operators, and institutions for tenants and acquisition
opportunities. Many of these competitors have significantly greater resources
than Southwest Shopping Centers. No assurances can be given that such
competition will not adversely affect Southwest Shopping Centers' revenues.

IT MAY BE NECESSARY TO EXPEND MATERIAL AMOUNTS OF CASH TO KEEP THE MALL
COMMERCIALLY VIABLE

The Mall must be continually maintained to keep it operating in a commercially
viable manner. Such maintenance, repair and replacement programs are typically
funded with the cash flow from the property. In certain circumstances, however,
more significant repairs may be required. With respect to capital improvements,
for example, Southwest Shopping Centers has recently completed the repair of the
Mall's roof at a cost of approximately $0.6 million. In addition, premiums may
increase for property and liability insurance coverage, which currently expires
in November 2003, including coverage as it relates to claims arising from
terrorism. Failure to properly maintain or insure the Mall could have a material
adverse effect on the value of this property and the ability of Southwest
Shopping Centers to satisfy its obligation with respect to the mortgage loan.

SOUTHWEST SHOPPING CENTERS DEPENDS ON THIRD PARTIES FOR MANAGEMENT OF THE MALL

Southwest Shopping Centers depends on the services of third parties to manage
the Mall. Currently, the third-party asset manager of the Mall is Radiant
Partners, L.L.C., the principals of which are Daniel Friedman, Anne Zahner and
David Schonberger. The loss of the services of Radiant Partners and the
inability to find replacement managers in a timely fashion could materially harm
the operation of the Mall as well as the business, financial condition and
operations of Southwest Shopping Centers.

ECONOMIC CONDITIONS COULD AFFECT SOUTHWEST SHOPPING CENTERS' OPERATIONS

The Mall, as well as the business, financial condition and results of operations
of Southwest Shopping Centers, may be harmed by general and local economic
conditions. If the national or local economy suffers a downturn, the property
could be harmed because tenants may not be able to fulfill their leasehold
obligations, or the owners of the property could face pressure to renegotiate
the terms of the tenants' leases. Either occurrence

5

could have a material adverse effect on the cash flow generated by the property.
Any adverse impact on cash flow could impair the ability of Southwest Shopping
Centers to fulfill their obligation under its mortgage loan.

ABILITY TO OPERATE THE PROPERTY DIRECTLY AFFECTS SOUTHWEST SHOPPING CENTERS'
FINANCIAL CONDITION

Southwest Shopping Centers is subject to the risks inherent in owning real
estate. The underlying value of Southwest Shopping Centers' Mall, the results of
its operations and its ability to make distributions to its member and to pay
amounts due on its indebtedness will depend on its ability to operate its
property in a manner sufficient to maintain or increase revenues and to generate
sufficient revenues in excess of its operating and other expenses.

ILLIQUIDITY OF REAL ESTATE

Real estate investments are relatively illiquid. Southwest Shopping Centers'
ability to sell its property in response to changes in economic and other
conditions will therefore be limited. If Southwest Shopping Centers decides to
sell its property, no assurance can be given that Southwest Shopping Centers
will be able to dispose of it in the time period it desires or that the sales
price will recoup or exceed the amount of Southwest Shopping Centers'
investment.

INCREASES IN PROPERTY TAXES COULD AFFECT THE SOUTHWEST SHOPPING CENTERS' ABILITY
TO MAKE DISTRIBUTIONS TO ITS MEMBER

Southwest Shopping Centers' Mall is subject to real property taxes which may
increase as property tax rates change and as the value of the property is
assessed or reassessed by taxing authorities. Increases in property taxes may
have an adverse affect on Southwest Shopping Centers and its ability to make
distributions to its member and to pay amounts due on its indebtedness.

ENVIRONMENTAL LIABILITIES

The obligation to pay for the cost of complying with existing environmental
laws, ordinances and regulations, as well as the cost of complying with future
legislation, may affect the operating costs of Southwest Shopping Centers. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on or under the
property. Environmental laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances and whether or not such substances originated from the
property. In addition, the presence of hazardous or toxic substances, or the
failure to remediate such property properly, may adversely affect Southwest
Shopping Centers' ability to borrow by using such real property as collateral.
Southwest Shopping Centers maintains insurance related to potential
environmental issues on its current and previously owned properties.

Certain environmental laws and common law principles could be used to impose
liability for releases of hazardous materials, including asbestos-containing
materials or "ACMs," into the environment. In addition, third parties may seek
recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs or other hazardous materials.
Environmental laws may also impose restrictions on the use or transfer of
property, and these restrictions may require expenditures. In connection with
the ownership and operation of any of the Southwest Shopping Centers' property,
Southwest Shopping Centers and the other lessees of the property may be liable
for any such costs. The cost of defending against claims of liability or
remediating contaminated property and the cost of complying with environmental
laws could

6

materially adversely affect Southwest Shopping Centers' ability to pay amounts
due on their indebtedness and to make distributions to its member.

Prior to undertaking major transactions, Southwest Shopping Centers has hired
independent environmental experts to review specific properties. Southwest
Shopping Centers has no reason to believe that any environmental contamination
or violation of any applicable law, statute, regulation or ordinance governing
hazardous or toxic substances has occurred or is occurring. However, no
assurance can be given that hazardous or toxic substances are not located at its
remaining property.

An environmental assessment of the Mall identified the potential for asbestos to
be present in the resilient vinyl floor tiles in retail tenant storage areas and
service corridors and in the cooling tower fill. A third party consultant
concluded that it was unlikely but possible that non-friable asbestos was
present in these areas. Rather than incurring the expense of testing to
eliminate the possibility of asbestos being present, the consultant recommended
a standard operations and maintenance plan based on EPA guidance.

COMPLIANCE WITH THE ADA MAY AFFECT EXPECTED DISTRIBUTIONS TO SOUTHWEST SHOPPING
CENTERS' MEMBER

Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. A determination that Southwest Shopping
Centers is not in compliance with the ADA could also result in the imposition of
fines and/or an award of damages to private litigants. If Southwest Shopping
Centers were required to make modifications to comply with the ADA, there could
be a material adverse affect on its ability to pay amounts due on its
indebtedness or to make distributions to its member.

UNINSURED AND UNDERINSURED LOSSES

Southwest Shopping Centers may not be able to insure its property against losses
of a catastrophic nature, such as terrorist acts, earthquakes and floods,
because such losses are uninsurable or not economically insurable. Southwest
Shopping Centers will use its discretion in determining amounts, coverage limits
and deductibility provisions of insurance, with a view to maintaining
appropriate insurance coverage on its property at a reasonable cost and on
suitable terms. This may result in insurance coverage that, in the event of a
substantial loss, would not be sufficient to pay the full current market value
or current replacement cost of the property and also may result in certain
losses being totally uninsured. Inflation, changes in building codes, zoning or
other land use ordinances, environmental considerations, lender imposed
restrictions and other factors also might make it not feasible to use insurance
proceeds to replace the property after such property has been damaged or
destroyed. Under such circumstances, the insurance proceeds, if any, received by
Southwest Shopping Centers might not be adequate to restore its economic
position with respect to the property.

RISING INTEREST RATES

Southwest Shopping Centers may in the future incur indebtedness that bears
interest at variable rates. Accordingly, increases in interest rates would
increase Southwest Shopping Centers' interest costs (to the extent that the
related indebtedness was not protected by interest rate protection
arrangements), which could have a material adverse effect on Southwest Shopping
Centers and its ability to make distributions to its member and to pay amounts
due on its indebtedness.

7

RESULTS OF OPERATIONS ADVERSELY AFFECTED BY FACTORS BEYOND SOUTHWEST SHOPPING
CENTERS' CONTROL

Results of operations of Southwest Shopping Centers' property may be
adversely affected by, among other things:

- changes in national economic conditions, changes in local
market conditions due to changes in general or local economic
conditions and neighborhood characteristics;

- changes in interest rates and in the availability, cost and
terms of financing;

- the impact of present or future environmental legislation and
compliance with environmental laws and other regulatory
requirements;

- the ongoing need for capital improvements, particularly in
older structures;

- changes in real estate tax rates and assessments and other
operating expenses;

- adverse changes in governmental rules and fiscal policies;

- adverse changes in zoning and other land use laws; and

- earthquakes and other natural disasters (which may result in
uninsured losses) and other factors which are beyond its
control.

CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS

Any statements in this report that are not strictly historical are
forward-looking statements within the meaning of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Any such forward-looking
statements contained herein should not be relied upon as predictions of future
events. Certain such forward-looking statements can be identified by the use of
forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates"
or "anticipates" or the negative thereof or other variations thereof or
comparable terminology, or by discussions of strategy, plans, intentions or
anticipated or projected events, results or conditions. Such forward-looking
statements are dependent on assumptions, data or methods that may be incorrect
or imprecise and they may be incapable of being realized. Such forward-looking
statements include statements with respect to:

- the payment of distributions by Southwest Shopping Centers,

- the consummation of or the failure to consummate the proposed
transaction;

- the ownership, management and operation of its property,

- potential acquisitions or dispositions of properties, assets
or other businesses by Southwest Shopping Centers,

- the policies of Southwest Shopping Centers regarding
investments, acquisitions, dispositions, financings and other
matters,

- the real estate industry and real estate markets in general,

- the availability of debt and equity financing,

- interest rates,

- general economic conditions,

- supply and customer demand,

- trends affecting Southwest Shopping Centers,

8

- the effect of acquisitions or dispositions on capitalization
and financial flexibility,

- the anticipated performance of Southwest Shopping Centers and
of acquired properties and businesses, including, without
limitation, statements regarding anticipated revenues, cash
flows, funds from operations, earnings before interest,
depreciation and amortization, property net operating income,
operating or profit margins and sensitivity to economic
downturns or anticipated growth or improvements in any of the
foregoing, and

- the ability of Southwest Shopping Centers and of acquired
properties and businesses to grow.

Members are cautioned that, while forward-looking statements reflect the
Southwest Shopping Centers' good faith beliefs, they are not guarantees of
future performance and they involve known and unknown risks and uncertainties.
Actual results may differ materially from those in the forward-looking
statements as a result of various factors. The information contained in this
report and any amendment hereof, including, without limitation, the information
set forth in "Risk Factors" above identifies important factors that could cause
such differences. Southwest Shopping Centers undertakes no obligation to
publicly release the results of any revisions to these forward-looking
statements that may reflect any future events or circumstances.

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ITEM 2. PROPERTY

The following table sets forth certain information relating to
Southwest Shopping Centers' property at December 31, 2002:

Square Year
Date of Ownership feet(1) Occupancy construction
Direct equity investments Location acquisition percentage (000) rate(2) completed
- ------------------------- -------- ----------- ---------- ------- --------- ------------

Shopping Mall:
Park Plaza Little Rock, AR 09/01/97 100 548 86 1988

Mortgage Loan
-----------------------------------------------------------------
Balance Principal
Total Original at repayment
cost balance 12/31/02 for 2003 Interest Year of
Direct equity investments (000) (000) (000) (000) rate maturity
- ------------------------- ------- -------- -------- --------- -------- --------

Shopping Mall:
Park Plaza $64,925 $ 42,500(3) $ 41,781 $ 324 8.69%(4) 2030
======= ======== ======== =====

(1) The square footage shown represents gross leasable area for the
shopping mall (including approximately 284,000 Square fee for
Dillard's).

(2) The occupancy rate shown is as of December 31, 2002, and is based on
the total gross leasable area of the Mall.

(3) In 2000, the Southwest Shopping Centers obtained a $42,500,000 mortgage
on the Mall.

(4) Southwest Shopping Centers anticipates paying the loan on May 1, 2010.
On May 1, 2010 the interest rate increases to 10.69% if the loan is
then subject of a secondary market transaction at which rated
securities have been issued and 12.69% if it is not.

As of December 31, 2002, Southwest Shopping Centers owned in fee its interest in
the Mall.

The Mall has one tenant, (whose business is retail clothing sales), which
occupies 12% of the rentable square footage of the mall. Their annual base rent
is $801,292 (12%, 12% and 10% of the total base rent for 2002, 2001 and 2000,
respectively). Its lease expires on April 30, 2005 and there are no renewal
options.

The occupancy rate of Park Plaza Mall at December 31, 2002, 2001, 2000, 1999 and
1998 was 86%, 87%, 87%, 100%, and 100%, respectively.

The average effective annual rental per square foot at Park Plaza Mall for the
years ended December 31, 2002, 2001 and 2000 was $30.28, $28.37, and $28.30,
respectively.

The realty tax rate and annual realty taxes for Park Plaza Mall in 2002 were
6.9% and $807,000, respectively.

The following table presents, as of December 31, 2002, scheduled lease
expirations with respect to Park Plaza Mall for the next 10 years, assuming that
none of the tenants exercise renewal options or termination rights:

Percentage of
Annualized Base
Number of Annualized Approximate Rent Represented
Year Ending Leases Base Rent of Square Feet of By Expiring
December 31, Expiring Expiring Leases Expiring Leases Leases (1)
- ------------ -------- --------------- --------------- ----------

2003 13 $ 1,023,999 37,779 15.05%
2004 2 468,723 18,613 6.89%
2005 11 1,377,483 44,898 20.24%
2006 4 301,602 9,446 4.43%
2007 5 417,856 13,963 6.14%
2008 11 1,123,046 40,459 16.50%
2009 10 861,063 20,983 12.65%
2010 6 493,834 14,437 7.26%
2011 5 445,386 12,785 6.54%
2012 3 172,180 4,073 2.53%
----- ----------- ----------- --------
Total 70 $ 6,685,172 217,436 98.23%
===== =========== =========== ========

(1) Based upon 2003 annualized base rent of $6,805,532.

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ITEM 3. LEGAL PROCEEDINGS.

LEGAL PROCEEDINGS WITH RESPECT TO PROPOSED TRANSACTION

PREFERRED SHAREHOLDER LITIGATION - FIRST UNION

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 then trustees and Gotham Partners. 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 ruling
of the court on the motion to dismiss.

On November 1, 2002, First Union issued a press release announcing that a
special shareholders meeting was to be held November 25, 2002, for the purpose
of shareholder approval of the Merger Agreement. Shortly thereafter, the
plaintiff filed a motion to show cause why a preliminary injunction should not
be issued to enjoin the November 25, 2002 shareholder vote to consider the
Merger Agreement. A hearing on the motion was held on November 20, 2002. On
November 21, the New York Supreme Court of New York County issued an order
granting motions for preliminary injunction and expedited discovery, denying
defendant's motion to dismiss, and scheduling a hearing for November 26 to
determine whether to grant further relief to plaintiff with respect to the
transactions contemplated under the Merger Agreement. The special meeting of
shareholders was convened as scheduled on November 25, with the vote on the
proposed merger transaction tabled and the meeting adjourned until November 27,
at which time the vote was held and First Union's common shareholders approved
the proposed transaction by the requisite majority vote.

The New York Supreme Court of New York County held a three-day hearing on
November 26, 27 and December 3, 2002. On December 6, 2002, the New York Supreme
Court for New York County issued an order reaffirming its preliminary injunction
barring the proposed merger of First Union with and into Gotham Golf. The
court's order also extended indefinitely the preliminary injunction previously
granted with respect to the proposed merger transaction and directed the parties
to the lawsuit to attend a preliminary conference for the purpose of scheduling
discovery.

First Union filed a notice of appeal of the preliminary injunction with the
Appellate Division of the New York Supreme Court. In addition, First Union filed
an auxiliary motion for expedited appeal regarding this matter with the
Appellate Division, which motion was denied. First Union, Gotham Partners and
the other defendants in the litigation filed joint appellate briefs in support
of the reversal of the injunction. Plaintiffs filed a reply brief in support of
the injunction. Oral argument with respect to the appeal was held before a
judicial panel of the Appellate Division - First Department of the New York
Supreme Court on March 11, 2003. There is no specific timetable for the
appellate court to render its decision.

It is not possible to predict the outcome of the appellate process with respect
to lifting the injunction. In the event that the Appellate Division rules that
the injunction should not be lifted, the case will proceed to trial on the
merits. In the event that the injunction imposed by the trial court were lifted
and dissolved, it is the intention of First Union and, to the best of First
Union's knowledge, Gotham Partners and the other Gotham Partners-

11

affiliated parties to the proposed merger transaction, to take the steps
necessary to consummate the proposed transaction. If the merger transaction is
not consummated, the Notes will not be issued.

COMMON SHAREHOLDER LAWSUITS - FIRST UNION

On or about January 24, 2003, First Union was served with a complaint filed in
the Supreme Court of New York, New York County on behalf of a purported holder
of First Union's common shares, on behalf of himself and the common shareholders
as a class. The lawsuit seeks a declaration that the lawsuit is maintainable as
a class action and a certification that the plaintiff, Robert Fink, is the
representative of the class. Named as defendants in the lawsuit are First Union,
Gotham Partners, the companies affiliated with Gotham Partners and First Union
that are parties to the Merger Agreement, William Ackman and the four current
Trustees of First Union. Among the allegations asserted are breach of fiduciary
duty and aiding and abetting thereof in connection with the transactions
contemplated by the Merger Agreement. The relief requested by the plaintiff
includes an injunction preventing the defendants from proceeding with
consummation of the merger, rescission of the merger if it occurs, an accounting
for any profits realized by the defendants as a result of the actions complained
of, an order permitting the creation of a shareholders' committee composed of
First Union common shareholders and their representatives to manage the affairs
of First Union, compensatory damages and the costs and disbursements of
plaintiff's counsel.

On or about February 14, 2003, the parties to this lawsuit stipulated that the
defendants need not answer or otherwise respond to the complaint for an
indefinite period of time. The stipulation is revocable by the plaintiff at any
time. First Union believes that the purpose of the stipulation was to delay
court proceedings in this lawsuit until the outcome of the appeal of the
injunction entered in the Kimeldorf et al. v. First Union Real Estate Equity and
Mortgage Investments, et al. case is decided by the Appellate Division.

First Union regards the lawsuit as without merit and plans to vigorously defend
against the allegations. First Union will oppose any attempt by the plaintiff to
interfere with the transactions contemplated by the Merger Agreement, which was
approved by more than 64% of the outstanding First Union common shares of First
Union and by approximately 98% of the common shares voted at a special meeting
of shareholders held on November 27, 2002.

On or about February 12, 2003, certain Trustees of First Union and, later, First
Union, were served with a complaint filed in the Court of Common Pleas, Cuyahoga
County, Ohio, by a purported holder of First Union's common shares, on behalf of
himself and First Union's common shareholders as a class. Named as defendants in
the lawsuit are First Union, Gotham, William Ackman and the four current
Trustees of First Union. The allegations made and the relief requested in the
K-A suit are substantially identical to those of the Fink v. First Union suit
referenced above. The lawsuit seeks a declaration that the lawsuit is
maintainable as a class action and certification that the plaintiff, K-A &
Company, Ltd., is the representative of the class. Among the allegations
asserted are breach of fiduciary duty and aiding and abetting thereof in
connection with the transactions contemplated by the Merger Agreement. This
lawsuit was removed by notice filed by defendants to the United States District
Court, Northern District of Ohio, Eastern Division (Case No. 1:03 CV 0460).

The relief requested by the plaintiff includes an injunction preventing the
defendants from proceeding with consummation of the merger, rescission of the
merger if it occurs, an accounting for any profits realized by the defendants as
a result of the actions complained of, an order permitting the creation of a
shareholders' committee composed of First Union common shareholders and their
representatives to manage the affairs of First Union, compensatory damages and
the costs and disbursements of plaintiff's counsel.

12

As with the Fink v. First Union lawsuit, First Union regards the lawsuit as
without merit and plans to vigorously defend against the allegations.

LEGAL PROCEEDINGS WITH RESPECT TO PARK PLAZA MALL

Southwest Shopping Centers is aware of the proposed construction of a new mall
in the vicinity of the Mall, which would be developed by Dillard's and its
partner, and would be anchored by Dillard's, among other department store
anchors. During the first quarter of 2001, the Little Rock board of directors
approved a change in zoning that would allow construction of the proposed new
mall; however, as described more fully below, the approval of the zoning change
was overturned by judicial order in June 2002. In the event that the new mall is
built, Dillard's may decline to extend or renew its operating covenant and cease
operating its stores at the Mall.

Legal actions have been taken by local citizens to reverse the decision of the
Little Rock board of directors with respect to the zoning for the development of
the proposed new mall. On June 5, 2002, the court issued an opinion invalidating
the decision of the Little Rock board of directors with respect to zoning of the
proposed new mall and permanently enjoining the City of Little Rock from issuing
any building permits or taking any other action pursuant to the invalid
ordinances with respect to the proposed new mall. The decision has been appealed
to the Supreme Court of Arkansas, with no decision expected before June 2003.
There can be no assurance as to the length of time or potential outcome of the
appeal. It is also possible that proponents of the new mall will file a new
application to rezone the proposed area for a new competing retail development
during the pendency of this appeal.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

No matters were submitted to a vote of security holders.

PART II

ITEM 5. MARKET FOR SOUTHWEST SHOPPING CENTERS' COMMON EQUITY AND RELATED MEMBER
MATTERS.

Southwest Shopping Centers is a wholly owned subsidiary of First Union.

13

ITEM 6. SELECTED FINANCIAL DATA.
(In thousands)

Year Ended December 31,
------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA 2002 2001 2000 1999 1998
----------- ----------- ----------- ---------- ---------

Revenues $ 12,099 $ 11,427 $ 11,599 $ 47,267 $ 48,586
=========== =========== =========== ========== =========
Income before loss on sale of real estate and
extraordinary loss from early extinguishment
of debt 1,556 312 2,662 7,456 7,197
Loss on sale of real estate - - - (9,000)(1) -
----------- ----------- ----------- ---------- ---------
Income (loss) before extraordinary loss from
early extinguishment of debt 1,556 312 2,662 (1,544) 7,197
Extraordinary loss from early extinguishment
of debt - - - (5,508)(1) -
----------- ----------- ----------- ----------- ---------
Net income (loss) $ 1,556 $ 312 $ 2,662 $ (7,052) $ 7,197
=========== =========== =========== ========== =========
BALANCE SHEET DATA AT YEAR END
Total assets $ 58,388 $ 60,021 $ 63,089 $ 64,219 $ 281,280
Long-term obligations 41,781 42,078 42,349 - 162,118
Total equity 14,773 16,421 19,594 61,708 112,741

This selected financial data should be read in conjunction with the Consolidated
Financial Statements and Notes thereto.

(1) In December 1999, Southwest Shopping Centers sold six shopping malls
and recorded a loss of $9.0 million. In connection with the sale of the
shopping malls, Southwest Shopping Centers paid off the Park Plaza
Mall's mortgage loan payable resulting in a prepayment penalty of $5.5
million.

14

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

2002 TRANSACTIONS

The Proposed Transaction

On February 13, 2002, First Union entered into a definitive agreement
of merger and contribution with, among others, Gotham Partners, 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 a Delaware corporation
controlled by Gotham Partners 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 will 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 Note 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 proration, additional Gotham Golf common shares at
$20.00 per share, for up to an aggregate of approximately $41 million
of Gotham Golf common shares.

Each Note to be issued by Southwest Shopping Centers would have a face
amount of $100, which is equivalent to approximately $0.575 per share, and would
bear interest at 11% per annum on its face amount. The Notes would 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,
which is owned by First Union and (2) an approximate $16.5 million mezzanine
loan on the Park Plaza Mall in Little Rock, Arkansas. Holders of Notes would
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 would 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.

The proposed transaction is subject to several conditions, including
the approval of First Union's shareholders and the obtaining of certain third
party consents. The proposed transaction was approved by First Union's common
shareholders at a special meeting held on November 27, 2002. There can be no
assurance that the proposed transaction approved by First Union's common
shareholders will be consummated.

In November 2002, the plaintiff in the preferred shareholder litigation
(see "Item 3. Legal Proceedings") filed with the New York Supreme Court for New
York County an Order to Show Cause why the transaction should not be enjoined.
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

15

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.
The issue of the lifting of the injunction was briefed by the parties to the
litigation and oral argument on the appeal was heard by the Appellate Division
of the New York Supreme Court on March 11, 2003. No assurance can be given that
the injunction will be lifted, that all required third party consents will be
obtained and that the transaction will be consummated. In the event the merger
transaction is not consummated, the Notes will not be issued.

OTHER MATTERS

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' property insurance was renewed in November 2002. The
rate increased 41% upon renewal.

One of Southwest Shopping Centers' most critical accounting policy
relates to the evaluation of the impairment 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 estimated future undiscounted cash
flows are not sufficient to recover the asset's carrying amount. The impairment
loss is measured by comparing the fair value of the asset to its carrying
amount. The evaluation of the impairment of real estate is an estimate that is
susceptible to change and actual results could differ from the estimates.

In addition, Southwest Shopping Centers accounts for its leases as
operating leases. Revenue from base rents is recognized on a straight-line basis
over the non-cancellable minimum lease terms, subject to management's review of
collectibility. Tenant leases generally provide for billings of certain
operating costs and certain retail tenant leases provide for percentage rentals,
in addition to fixed minimum rentals. Southwest Shopping Centers accrues the
recovery of operating costs based on actual costs incurred. For percentage
rentals, Southwest Shopping Centers follows the Financial Accounting Standards
Board's ("FASB") Emerging Issues Task Force Issue No. 98-9 (EITF-98-9),
"Accounting for Contingent Rent in Interim Financial Periods." EITF-98-9
requires that contingent rental income, such as percentage rent which is
dependent on sales of retail tenants, be recognized in the period that a tenant
exceeds its specified sales breakpoint. Consequently, Southwest Shopping Centers
accrues the majority of percentage rent income in the fourth quarter of each
year in accordance with EITF-98-9.

SHAREHOLDER LITIGATION - FIRST UNION

Several lawsuits have been filed seeking to block the proposed
transaction between First Union and Gotham Partners relative to the Merger
Agreement of February 13, 2002. (See "Item 3. Legal Proceedings".) With respect
to one of these legal proceedings, the New York Supreme Court of New York County
has issued an order granting an injunction preventing the transaction from going
forward. That injunction is currently

16

under appeal. No assurance can be given that the injunction will be lifted or
that the proposed transaction will be consummated.

PARK PLAZA MALL

Two Dillard's department stores are the anchor stores at the Mall.
Dillard's owns its facilities in the Mall and has a Construction, Operation and
Reciprocal Easement Agreement with Southwest Shopping Centers that contains an
operating covenant requiring Dillard's to operate these facilities continuously
as retail department stores until July 2003. Dillard's does not lease space from
or pay base rent to Southwest Shopping Centers; it does pay Southwest Shopping
Centers its share of common area maintenance costs. Dillard's and its partner,
Simon Property Group, own a parcel of land on nearly 100 acres in the western
part of Little Rock, Arkansas and have announced, at various times over the last
several years, their intention to build in this new location. During the first
quarter of 2001, the Little Rock board of directors approved a change in zoning
that would allow the construction of an approximately 1.3 million square foot
regional enclosed mall on this site. The zoning on this site reverted to its
prior status as a residential use property pursuant to a court order in 2002;
however, the proponents of the regional enclosed mall have filed a notice of
appeal of this ruling in the Supreme Court of Arkansas, with no decision
expected before June 2003. In the event that a large-scale retail facility is
built on this site, Dillard's may decline to extend or renew its operating
covenant and cease operating its stores at the Mall. In the event Dillard's
closes one or both of its stores at the Mall, it is unlikely that it would sell
or lease its two stores to comparable anchor tenants. Accordingly, the value of
the Mall would be materially and adversely affected due to the decline in
traffic and sales volume at the Mall, and the rights of many of the tenants to
terminate their leases or to pay less rent which may be triggered by the closure
of one or both of the anchor stores. The Mall property is financed by a mortgage
loan. The loss of an anchor tenant or a significant number of other mall tenants
could 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 the 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
Mall; however, to date, it has declined to do so. If Dillard's does not maintain
its presence as an anchor store at the Mall, the Mall would experience a loss of
revenue and likely an event of default under the mortgage, thereby causing the
value of the Mall to be materially and adversely affected. In such
circumstances, there would be an impairment of the value of the property and a
loss would be recognized. There can be no assurance that Dillard's will extend
or renew its operating covenant on terms acceptable to Southwest Shopping
Centers.

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 Mall's mortgage loan and for capital improvements. With respect to capital
improvements, Southwest Shopping Centers has recently completed the repair of
the Mall's roof at a cost of approximately $0.6 million. Southwest Shopping
Centers' rental income and tenant reimbursements were sufficient for the years
ended December 31, 2002 and 2001 to pay for Southwest Shopping Centers'
expenses, debt service, capital improvements and distributions to its member.

17

Cash decreased by $0.4 million when comparing the balance at December
31, 2002 to the balance at December 31, 2001.

Southwest Shopping Centers' net cash from operating activities of $3.5
million was more than offset by net cash used for investing activities of $0.4
million and net cash used for financing activities of $3.5 million. Cash used
for financing activities consisted of $0.3 million of principal payments on the
mortgage loan and $3.2 million of distributions to First Union. Distributions
are made at the discretion of First Union. Cash used for investing activities
consisted of $0.4 million of improvements to the property.

A summary of Southwest Shopping Centers' borrowings at December 31,
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 $41.8 $0.3 $0.7 $0.9 $39.9
===== ==== ==== ==== =====

RESULTS OF OPERATIONS - 2002 VERSUS 2001

Net income for the year ended December 31, 2002 was $1.6 million as
compared to net income of $0.3 million for the year ended December 31, 2001.
Base rent increased by $0.3 million when comparing December 31, 2002 to December
31, 2001 due to an increase in rental rates. Administrative expenses decreased
by $0.5 million. Included in administrative expenses are $0.2 million and $0.7
million in 2002 and 2001, respectively, of costs incurred in connection with the
matters described above in the Park Plaza Mall section.

RESULTS OF OPERATIONS - 2001 VERSUS 2000

Net income for the year ended December 31, 2001 was $0.3 million as
compared to net income of $2.7 million for the year ended December 31, 2000. The
decrease of $2.4 million was a result of a decrease in revenue of $0.2 million
and an increase in expenses of $2.2 million. The increase in expenses was
primarily due to increases in mortgage interest of $1.1 million and
administrative expenses of $0.9 million as a result of costs incurred in
connection with the matters described above in the Park Plaza Mall section.
Mortgage interest expense increased as a result of the mortgage loan that was
obtained on the Mall in April 2000. Rental rates and occupancy remained
relatively constant when comparing 2001 versus 2000.

RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses accounting and reporting for
intangible assets acquired, except for those acquired in a business combination.
SFAS No. 142 presumes that goodwill and certain intangible assets have
indefinite useful lives. Accordingly, goodwill and certain intangibles will not
be amortized but rather will be tested at least annually for impairment. SFAS
No. 142 also addresses accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. The adoption of this statement
had no impact on Southwest Shopping Centers' consolidated financial statements.

18

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' consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and Technical
Corrections," which updates, clarifies and simplifies existing accounting
pronouncements. In part, this statement rescinds SFAS No. 4, "Reporting Gains
and Losses from Extinguishment of Debt." FASB No. 145 will be effective for
fiscal years beginning after May 15, 2002. Upon adoption, enterprises must
reclassify prior period items that do not meet the extraordinary item
classification criteria in APB 30. Southwest Shopping Centers intends to adopt
FASB No. 145 as of January 1, 2003.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity. SFAS
No. 146 is effective prospectively for exit and disposal activities initiated
after December 31, 2002, with earlier adoption encouraged. Southwest Shopping
Centers does not expect that this statement will have a material effect on its
consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others. The Interpretation elaborates on the
disclosures to be made by a guarantor in its financial statements about its
obligations under certain guarantees that it has issued. It also clarifies that
a guarantor is required to recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. This Interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the term of the
related guarantee. The disclosure provisions of this Interpretation are
effective for Southwest Shopping Centers' December 31, 2002 consolidated
financial statements. The initial recognition and initial measurement provisions
of this Interpretation are applicable on a prospective basis to guarantees
issued or modified after December 31, 2002. This Interpretation had no effect on
Southwest Shopping Centers' consolidated financial statements.

ITEM 7A. 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' mortgage
loan is payable at a fixed rate of interest.

19

ITEM 8. FINANCIAL STATEMENTS.

SOUTHWEST SHOPPING CENTERS CO. II, L.L.C. AND SUBSIDIARIES

Consolidated Balance Sheets
As of December 31, (In thousands)

2002 2001
-------- --------

ASSETS

Real estate, at cost:
Land $ 5,816 $ 5,816
Building and improvements 59,109 58,745
Accumulated depreciation and amortization (8,273) (6,689)
-------- --------
56,652 57,872

Cash 426 782
Restricted cash 719 882
Debt issue costs, net of accumulated amortization of
$90 and $56 248 282
Accounts receivable and other, net of allowance for
doubtful accounts of $132 and $134 343 203
-------- --------
Total assets $ 58,388 $ 60,021
======== ========

LIABILITIES AND MEMBER'S EQUITY

Accounts payable, accrued expenses and
deferred income $ 1,834 $ 1,522
Mortgage loan payable 41,781 42,078
-------- --------
Total liabilities 43,615 43,600
-------- --------

Contingency

Member's equity 14,773 16,421
-------- --------
Total liabilities and member's equity $ 58,388 $ 60,021
======== ========

The accompanying notes are an integral part of these consolidated
financial statements.

20

SOUTHWEST SHOPPING CENTERS CO II, L.L.C. AND SUBSIDIARIES

Consolidated Statements of Operations

For the years ended December 31, (In thousands)

2002 2001 2000
------- ------- -------

Revenues
Base rent $ 6,809 $ 6,462 $ 6,529
Percentage rent 215 131 249
Tenant recoveries 3,109 2,899 2,837
Utility reimbursements 1,138 1,126 1,130
Other income 828 767 763
Interest income - 42 91
------- ------- -------
Total revenues 12,099 11,427 11,599
------- ------- -------
Expenses
Operating expenses 2,700 2,663 2,505
Administrative 1,220 1,706 883
Real estate taxes 821 817 765
Insurance 96 68 24
Mortgage interest 3,695 3,720 2,600
Depreciation and amortization 1,628 1,610 1,582
Management fees 340 364 354
Bad debt 43 167 224
------- ------- -------

Total expenses 10,543 11,115 8,937
------- ------- -------

Net income $ 1,556 $ 312 $ 2,662
======= ======= =======

The accompanying notes are an integral part of these consolidated
financial statements.

21

SOUTHWEST SHOPPING CENTERS CO. II, L.L.C. AND SUBSIDIARIES

Consolidated Statements of Member's Equity
For the years ended December 31,
(In thousands)

Member's equity at December 31, 1999 $ 61,708

Distributions to member - cash (43,756)
- transfer of net assets and liabilities (1,020)

Net income 2,662
-------------

Member's equity at December 31, 2000 19,594

Distributions to member (3,485)

Net income 312
-------------

Member's equity at December 31, 2001 16,421

Distributions to member (3,204)

Net income 1,556
-------------
Member's equity at December 31, 2002 $ 14,773
=============

The accompanying notes are an integral part of these consolidated
financial statements.

22

SOUTHWEST SHOPPING CENTERS CO. II, L.L.C. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

For the years ended December 31, (In thousands)

2002 2001 2000
-------- -------- --------

Cash provided by operating activities:
Net income $ 1,556 $ 312 $ 2,662
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 1,628 1,610 1,582
(Increase) decrease in accounts receivable and other (140) 347 (282)
Increase (decrease) in accounts payable, accrued expenses and
deferred income 312 376 (25)
Decrease (increase) in funding of restricted cash escrows 163 (109) (774)
-------- -------- --------
Net cash provided by operating activities 3,519 2,536 3,163
-------- -------- --------

Cash used for investing activities:
Investments in building and improvements (374) (101) (54)
-------- -------- --------

Cash used for financing activities:

Proceeds from mortgage loan - - 42,500
Repayment of mortgage loan - principal payments (297) (271) (151)
Debt issue costs paid - - (338)
Distributions to member (3,204) (3,485) (43,756)
-------- -------- --------
Net cash used for financing activities (3,501) (3,756) (1,745)
-------- -------- --------
(Decrease) increase in cash and cash equivalents (356) (1,321) 1,364
Cash and cash equivalents at beginning of year 782 2,103 739
-------- -------- --------
Cash and cash equivalents at end of year $ 426 $ 782 $ 2,103
======== ======== ========

Supplemental Disclosure of Cash Flow Information
Interest paid $ 3,695 $ 3,720 $ 2,600
======== ======== ========

Supplemental Disclosure on Non-Cash Financing Activities

Distribution of net assets and liabilities to member $ - $ - $ (1,020)
======== ======== ========

The accompanying notes are an integral part of these consolidated
financial statements.

23

ITEM 8. FINANCIAL STATEMENTS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. OWNERSHIP AND DESCRIPTION OF BUSINESS

Southwest Shopping Centers Co. II, L.L.C. ("Southwest Shopping
Centers"), which is wholly owned by First Union Real Estate Equity and
Mortgage Investments ("First Union"), was formed on September 27, 1996
and will continue until the earlier of December 31, 2050 or until it is
dissolved in accordance with its limited liability company Agreement or
by law. In September 1996, Southwest Shopping Centers acquired a joint
venture interest in seven shopping malls. In September 1997, Southwest
Shopping Centers purchased the interests of its joint venture partners
in the seven shopping malls. In December 1999, Southwest sold six of
the seven malls. Effective January 1, 2000, Southwest Shopping Centers
had no other assets, liabilities or operations other than its ownership
of Park Plaza Mall (the "Mall"), a 548,000 square foot shopping mall
located in Little Rock, Arkansas.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Real Estate

Real estate is carried at cost, adjusted for depreciation and
impairment of value. Southwest Shopping Centers records impairment
losses for long-lived assets used in operations when indicators of
impairment are present and the estimated future undiscounted cash flows
are not sufficient to recover the asset's carrying amount. The
impairment loss is measured by comparing the fair value of the asset to
its carrying amount.

Consolidation

The consolidated financial statements include all of the accounts of
Southwest Shopping Centers and its subsidiaries. All significant
intercompany transactions and balances have been eliminated.

Depreciation and Amortization

Depreciation and amortization for financial reporting purposes are
computed using the straight-line method. Building and improvements are
depreciated or amortized over lives extending to 40 years. Tenant
related expenditures and lease commissions are amortized over the
length of the lease. Debt issue costs are amortized over the term of
the loan.

Financial Instruments

Financial instruments held by Southwest Shopping Centers include cash,
accounts receivable, accounts payable and long-term debt. The fair
value of cash, accounts receivable and accounts payable approximates
their current carrying amounts due to their short-term nature. The fair
value of Southwest Shopping Centers' mortgage loan payable approximates
its carrying amount based upon current market conditions and interest
rates. Southwest Shopping Centers does not hold or issue financial
instruments or derivative financial instruments for trading purposes.

24

Revenue Recognition

Southwest Shopping Centers accounts for its leases as operating leases.
Revenue from base rents is recognized on a straight-line basis over the
non-cancellable minimum lease terms, subject to management's review of
collectibility. Tenant leases generally provide for billings of certain
operating costs and certain retail tenant leases provide for percentage
rentals, in addition to fixed minimum rentals. Southwest Shopping
Centers accrues the recovery of operating costs based on actual costs
incurred. For percentage rentals, Southwest Shopping Centers follows
the Financial Accounting Standards Board's ("FASB") Emerging Issues
Task Force Issue No. 98-9 (EITF-98-9), "Accounting for Contingent Rent
in Interim Financial Periods." EITF-98-9 requires that contingent
rental income, such as percentage rent which is dependent on sales of
retail tenants, be recognized in the period that a tenant exceeds its
specified sales breakpoint. Consequently, Southwest Shopping Centers
accrues the majority of percentage rent income in the fourth quarter of
each year in accordance with EITF-98-9. For the years ended December
31, 2002, 2001 and 2000 the recovery of operating costs and percentage
rent income was $4.5 million, $4.2 million and $4.2 million,
respectively. Deferred revenue is derived primarily from revenue
received in advance of its due date. At December 31, 2002 and 2001,
deferred revenue was approximately $0.5 million and $0.4 million,
respectively.

Member's Equity

Member's equity represents undistributed earnings of Southwest Shopping
Centers. Subsequent to the sale of real estate in 1999, Southwest
Shopping Centers transferred the net assets and liabilities of the sold
properties to First Union. The net assets and liabilities that were
transferred amount to $1.0 million and were recorded in 2000 as a
distribution in the statement of member's equity.

Segment Reporting

Southwest Shopping Centers has one reportable segment, ownership of a
shopping mall. Southwest Shopping Centers evaluates performance based
upon net operating income, which is income before depreciation,
amortization, interest and non-operating items.

Restricted Cash

At December 31, 2002 and 2001, $0.7 million and $0.9 million,
respectively of cash was restricted for real estate taxes, insurance
and improvements based on the terms of the mortgage loan payable.

Income Taxes

No provision for income taxes is necessary in the consolidated
financial statements of Southwest Shopping Centers as the tax effect of
its activities accrues to First Union.

25

Use of Estimates

Management has made a number of estimates and assumptions relating to
the reporting of assets, liabilities, revenues and expenses and the
disclosure of contingent assets and liabilities to prepare these
consolidated financial statements in conformity with accounting
principles generally accepted in the United States. Of these estimates,
management's estimate of the fair value of real estate is particularly
susceptible to change. Actual results could differ from those
estimates.

Trade Accounts Receivable

The allowance for doubtful accounts is Management's best estimate of
the amount of probable credit losses in the Mall's existing accounts
receivable. Management reviews its allowance for doubtful accounts
monthly. Past due balances over 90 days and a specified amount are
reviewed individually for collectibility.

Recent Accounting Pronouncements

In July 2001, the 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' 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 effect on Southwest Shopping Centers'
consolidated financial statements.

26

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13 and
Technical Corrections," which updates, clarifies and simplifies
existing accounting pronouncements. In part, this statement rescinds
SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt."
FASB No. 145 will be effective for fiscal years beginning after May 15,
2002. Upon adoption, enterprises must reclassify prior period items
that do not meet the extraordinary item classification criteria in APB
30. Southwest Shopping Centers intends to adopt FASB No. 145 as of
January 1, 2003.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 requires
companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a
commitment to an exit or disposal plan. Examples of costs covered by
the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing or other exit or disposal activity. SFAS No.
146 is effective prospectively for exit and disposal activities
initiated after December 31, 2002, with earlier adoption encouraged.
Southwest Shopping Centers does not expect that this statement will
have a material effect on its consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45, Guarantors'
Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. The Interpretation
elaborates on the disclosures to be made by a guarantor in its
financial statements about its obligations under certain guarantees
that it has issued. It also clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the fair
value of the obligation undertaken in issuing the guarantee. This
Interpretation does not prescribe a specific approach for subsequently
measuring the guarantor's recognized liability over the term of the
related guarantee. The disclosure provisions of this Interpretation are
effective for the Southwest Shopping Centers' December 31, 2002
consolidated financial statements. The initial recognition and initial
measurement provisions of this Interpretation are applicable on a
prospective basis to guarantees issued or modified after December 31,
2002. This Interpretation had no effect on Southwest Shopping Centers'
consolidated financial statements.

3. PROPOSED MERGER

On February 13, 2002, First Union entered into a definitive agreement
of merger and contribution with, among others, Gotham Partners, L.P.,
("Gotham Partners") 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, 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;

27

- a choice of (a) an additional $0.35 in cash or (b)
approximately 1/174th (0.0057461) of a Note 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 proration, additional Gotham Golf
common shares at $20.00 per share, for up to an aggregate of
approximately $41 million of Gotham Golf common shares.

Each Note to be issued by Southwest Shopping Centers would have a face
amount of $100, which is equivalent to approximately $0.575 per share,
and would bear interest at 11% per annum on its face amount. The Notes
would 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, which is owned by First Union
and (2) an approximate $16.5 million mezzanine loan on the Park Plaza
Mall in Little Rock, Arkansas. Holders of Notes would 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 would 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.

The proposed transaction is subject to several conditions, including
the approval of First Union's shareholders and the obtaining of certain
third party consents. The proposed transaction was approved by First
Union's common shareholders at a special meeting held on November 27,
2002. There can be no assurance that the proposed transaction approved
by First Union's common shareholders will be consummated.

In November 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. 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. The issue of the lifting of the injunction was briefed
by the parties to the litigation and oral argument on the appeal was
heard by the Appellate Division of the New York Supreme Court on March
11, 2003. No assurance can

28

be given that the injunction will be lifted, that all required third
party consents will be obtained and the transaction will be
consummated. In the event the merger transaction is not consummated,
the Notes will not be issued.

4. MORTGAGE LOAN PAYABLE

The mortgage loan, obtained in April 2000, is non-recourse, has an
anticipated repayment date of May 1, 2010 and is secured by the Mall.
The mortgage loan bears interest at a rate of 8.69% until May 1, 2010
and thereafter until its final maturity in May 2030 at a rate of 10.69%
if the mortgage loan is then the subject of a secondary market
transaction in which rated securities have been issued and 12.69% if it
is not. The mortgage loan requires monthly payments based on a 30-year
amortization schedule of approximately $0.4 million for principal,
interest and escrow deposits. Prepayment of the loan is permitted prior
to the anticipated repayment date (after an initial lockout period of
three years or two years from securitization), only with yield
maintenance or defeasance, and payable after the anticipated repayment
date upon thirty days notice without payment of any penalties, as
defined in the loan agreement.

Scheduled annual principal payments are as follows (amounts in
thousands):

2003 $ 324
2004 343
2005 385
2006 420
2007 459
Thereafter 39,850
----------
$ 41,781
==========

29

5. FUTURE MINIMUM RENTALS

The future minimum lease payments to be received by the Mall under
noncancellable operating leases are as follows (amounts in thousands):

2003 $ 6,587
2004 5,371
2005 4,496
2006 3,592
2007 3,193
Thereafter 6,133
------------
$ 29,372
============

Dillard's Department Stores, Inc. ("Dillard's"), the anchor department
store at the Mall owns its facilities and has an agreement with
Southwest Shopping Centers that contains an operating covenant
requiring it to operate these facilities continuously as retail
department stores until July 2003. There is no rental revenue from the
anchor department store included in the above table. However, if
Dillard's does not renew its operating agreement (see note 6) in July
2003, many tenants at the Mall can terminate their lease without
incurring a substantive penalty or pay less rent.

One tenant represented approximately 12%, 12% and 10% of the total
revenue of the Mall for the years ended December 31, 2002, 2001and 2000
respectively. The tenant's leases expire in April 2005.

6. CONTINGENCY - PARK PLAZA MALL

Two Dillard's department stores are the anchor stores at the Mall.
Dillard's owns its facilities in the Mall and has a Construction,
Operation and Reciprocal Easement Agreement with Southwest Shopping
Centers that contains an operating covenant requiring Dillard's to
operate these facilities continuously as retail department stores until
July 2003. Dillard's does not lease space from or pay base rent to
Southwest Shopping Centers; it does pay Southwest Shopping Centers its
share of common area maintenance costs. Dillard's and its partner,
Simon Property Group, own a parcel of land on nearly 100 acres in the
western part of Little Rock, Arkansas and have announced, at various
times over the last several years, their intention to build in this new
location. During the first quarter of 2001, the Little Rock board of
directors approved a change in zoning that would allow the construction
of an approximately 1.3 million square foot regional enclosed mall on
this site. The zoning on this site reverted to its prior status as a
residential use property pursuant to a court order in 2002; however,
the proponents of the regional enclosed mall have filed a notice of
appeal of this ruling in the Supreme Court of Arkansas, with no
decision expected before June 2003. In the event that a large-scale
retail facility is built on this site, Dillard's may decline to extend
or renew its operating covenant and cease operating its stores at the
Mall. In the event Dillard's closes one or both of its stores at the
Mall, it is unlikely that it would sell or lease its two stores to
comparable anchor tenants. Accordingly, the value of the Mall would be
materially and adversely affected due to the decline in traffic and
sales volume at the Mall, and the rights of many of the tenants to
terminate their leases or to pay less rent which may be triggered by
the closure of one or both of the anchor stores. The Mall property is
financed by a mortgage loan. The loss of an anchor tenant or a
significant number of other mall tenants could result in an event of
default under this mortgage.

30

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 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 Mall; however, to date, it has
declined to do so. If Dillard's does not maintain its presence as an
anchor store at the Mall, the Mall would experience a loss of revenue
and likely an event of default under the mortgage, thereby causing the
value of the 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 Southwest Shopping Centers.

7. RELATED PARTY TRANSACTIONS

Beginning January 1, 2000, First Union outsourced all management and
leasing activities to 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 years ended December 31, 2002, 2001 and 2000 Southwest
Shopping Centers transferred $3.2 million, $3.5 million and $44.8
million, respectively, to First Union, which is presented as a
distribution to member and a reduction of member's equity in the
consolidated financial statements.

8. INCOME TAXES

The difference between the book basis and the tax basis of the net
assets of Southwest Shopping Centers, not directly subject to income
taxes, is as follows:

December 31,
----------------------------------
2002 2001
--------------- -------------

Book basis of net assets $ 14,773 $ 16,421
Excess of book over tax basis,
principally related to depreciation
and amortization of real estate (1,238) (1,244)
--------------- -------------
Tax basis of net assets $ 13,535 $ 15,177
=============== =============

31

Independent Auditors' Report

The Member
Southwest Shopping Centers Co. II, L.L.C.:

We have audited the accompanying consolidated balance sheets of Southwest
Shopping Centers Co. II, L.L.C. and subsidiaries as of December 31, 2002 and
2001, and the related consolidated statements of operations, member's equity,
and cash flows for each of the years in the three-year period ended December 31,
2002. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Southwest Shopping
Centers Co., II, L.L.C. and subsidiaries as of December 31, 2002 and 2001, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2002 in conformity with accounting
principles generally accepted in the United States of America.

/s/ KPMG LLP

New York, New York
April 8, 2003

32

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISLCOSURE.

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF SOUTHWEST SHOPPING CENTERS

As a limited liability company, Southwest Shopping Centers has
no Board of Directors. Further, Southwest Shopping Centers has
no executive officers. Neil H. Koenig serves as Manager,
acting at the sole direction of the sole member, First Union.

ITEM 11. EXECUTIVE COMPENSATION

None.

ITEM 12. SECURITY OWNERSHIP

First Union is the sole member of Southwest Shopping Centers.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Beginning January 1, 2000, First Union outsourced all
management and leasing activities to 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 years ended December 31, 2002, 2001 and 2000
Southwest Shopping Centers transferred $3.2 million, $3.5
million and $44.8 million, respectively, to First Union, which
is presented as a distribution to member and a reduction of
member's equity in the consolidated financial statements.

PART IV

ITEM 14. CONTROLS AND PROCEDURES

Southwest Shopping Centers' principal executive and financial officer
has, within 90 days of the filing date of this annual report, evaluated the
effectiveness of Southwest Shopping Centers' 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 Southwest Shopping Centers' 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.

33

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.

(1) FINANCIAL STATEMENTS:

Consolidated Balance Sheets - December 31, 2002 and 2001 on
page 20 of Item 8.

Consolidated Statements of Operations - For the Years Ended
December 31, 2002, 2001 and 2000 on page 21 of Item 8.

Consolidated Statements of Member's Equity - For the Years
Ended December 31, 2002, 2001 and 2000 on page 22 of Item 8.

Consolidated Statements of Cash Flows - For the Years Ended
December 31, 2002, 2001 and 2000 on page 23 of Item 8.

Notes to Consolidated Financial Statements on pages 24 through
31 of Item 8.

Independent Auditors' Report on page 32 of Item 8.

(2) FINANCIAL STATEMENT SCHEDULES:

Independent Auditors' Report on Financial Statement Schedule.

Schedule III - Real Estate and Accumulated Depreciation.

All Schedules, other than III, are omitted, as the information
is not required or is otherwise furnished.

(B) EXHIBITS.

Exhibit Incorporated Herein by
Number Description Reference to
------- ----------- ----------------------

2(a) Agreement and Plan of Merger and Contribution by and among The Form 8-K dated February 14, 2002,
First Union Real Estate Equity and Mortgage Investments, previously filed by First Union.
that certain Ohio Trust, declared as of October 1, 1996, by
Adolph Posnick, Trustee, First Union Management, Inc., GGC
Merger Sub, Inc., Gotham Partners, L.P., Gotham Golf
Partners, L.P., Florida Golf Associates, L.P., Florida Golf
Properties, Inc., and Gotham Golf Corp.

34

2(a)(1) Amendment No. 1 dated as of April 30, 2002 to the Agreement Appendix B to Amendment No. 4 to Form
and Plan of Merger and Contribution by and among First Union S-4, Registration Statement No.
Real Estate Equity and Mortgage Investments, that certain 333-88144, of Gotham Golf Corp. and
Ohio Trust, declared as of October 1, 1996, by Adolph Southwest Shopping Centers Co. II, L.L.C.
Posnick, Trustee, First Union Management, Inc., GGC Merger
Sub, Inc., Gotham Partners, L.P., Gotham Golf Partners,
L.P., Florida Golf Associates, L.P., Florida Golf
Properties, Inc., and Gotham Golf Corp.

2(a)(2) Amendment and Restatement dated as of October 30, 2002 of Appendix C to Amendment No. 4 to Form
Amendment No. 2 dated as of September 27, 2002 to the S-4, Registration Statement No.
Agreement and Plan of Merger and Contribution by and among 333-88144, of Gotham Golf Corp. and
First Union Real Estate Equity and Mortgage Investments, Southwest Shopping Centers Co. II, L.L.C.
that certain Ohio Trust, declared as of October 1, 1996, by
Adolph Posnick, Trustee, First Union Management, Inc., GGC
Merger Sub, Inc., Gotham Partners, L.P., Gotham Golf
Partners, L.P., Florida Golf Associates, L.P., Florida Golf
Properties, Inc., and Gotham Golf Corp.

2(a)(3) Amendment No. 3 dated as of October 24, 2002 to the Appendix D to Amendment No. 4 to Form
Agreement and Plan of Merger and Contribution by and among S-4, Registration Statement No.
First Union Real Estate Equity and Mortgage Investments, 333-88144, of Gotham Golf Corp. and
that certain Ohio Trust, declared as of October 1, 1996, by Southwest Shopping Centers Co. II, L.L.C.
Adolph Posnick, Trustee, First Union Management, Inc., GGC
Merger Sub, Inc., Gotham Partners, L.P., Gotham Golf
Partners, L.P., Florida Golf Associates, L.P., Florida Golf
Properties, Inc., and Gotham Golf Corp.

3.1 Articles of Organization of Southwest Shopping Centers Co., Exhibit 3.1 to Amendment No. 4 to Form
II, L.L.C. S-4, Registration Statement No.
333-88144, of Gotham Golf Corp. and
Southwest Shopping Centers Co. II, L.L.C.

3.2 Second Amended and Restated Limited Liability Company Exhibit 3.2 to Amendment No. 4 to Form
Agreement of Southwest Shopping Centers Co., II, L.L.C., S-4, Registration Statement No.
dated as of May 7, 2002 333-88144, of Gotham Golf Corp. and
Southwest Shopping Centers Co. II, L.L.C.

10.1 Asset Management Agreement executed March 27, 2000 with Exhibit 10(v) to First Union's Quarterly
Radiant Partners, L.L.C. by First Union Report on Form 10-Q for the quarter ended
March 31, 2000 (File No. 1-6249)

35

10.2 Promissory Note dated April 20, 2000 between Park Plaza Exhibit 99.5 to First Union's Current
Mall, L.L.C. and First Union National Bank Report on Form 8-K dated May 11, 2000
(File No. 1-6249)

10.3 Mortgage and Security Agreement dated April 20, 2000 between Exhibit 99.6 to First Union's Current
Park Plaza Mall, L.L.C. and First Union National Bank Report on Form 8-K dated May 11, 2000
(File No. 1-6249)

10.4 Cash Management Agreement dated April 20, 2000 among Park Exhibit 99.7 to First Union's Current
Plaza Mall, L.L.C., as borrower, Landau & Heymann of Report on Form 8-K dated May 11, 2000
Arkansas, Inc., as manager and First Union National Bank as (File No. 1-6249)]
holder.

10.5 Amendment to Asset Management Agreement executed May 31, Exhibit 99.2 to First Union's Current
2000 with Radiant Partners L.L.C. by First Union Report on Form 8-K dated June 6, 2000
(File No. 1-6249)

10.6 Amendment to Asset Management Agreement executed by Radiant Exhibit 10(x) to First Union's Quarterly
Partners L.L.C. and First Union Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 1-6249)

10.7 Second Amendment to Asset Management Agreement executed by Exhibit 10(y) to First Union's Quarterly
Radiant Partners L.L.C. and First Union Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 1-6249)

10.8 Third Amendment to Asset Management Agreement executed by Exhibit 10(z) to First Union's Quarterly
Radiant Partners L.L.C. and First Union Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 1-6249)

10.9 Fourth Amendment to Asset Management Agreement executed by Exhibit 10(aa) to First Union's Quarterly
Radiant Partners L.L.C. and First Union Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 1-6249)

10.10 Fifth Amendment to Asset Management Agreement executed by Exhibit 10(bb) to First Union's Quarterly
Radiant Partners L.L.C. and First Union Report on Form 10-Q for the quarter ended
September 30, 2000 (File No. 1-6249)

10.11 Modification to Asset Management Agreement executed by Exhibit 10(kk) to First Union's Annual
Radiant Partners L.L.C. and First Union Report on Form 10-K for the year ended
December 31, 2000 (File No. 1-6249)

36

10.12 Construction, Operation and Reciprocal Easement Agreement Exhibit 10.3 to Amendment No. 4 to Form
dated as of December 15, 1986 by and among Construction S-4, Registration Statement No.
Developers, Incorporated, Dillard Department Stores, Inc. 333-88144, of Gotham Golf Corp. and
and Herring-Marathon Master Partnership B Southwest Shopping Centers Co. II, L.L.C.

10.13 Real Estate Management Agreement, effective as of October 1, Exhibit 10.4 to Amendment No. 4 to Form
2002, by and between Park Plaza Mall, LLC and General Growth S-4, Registration Statement No.
Management, Inc. 333-88144, of Gotham Golf Corp. and
Southwest Shopping Centers Co. II, L.L.C.

21 Subsidiaries of Registrant *

99 Certification Pursuant to Section 906 of the Sarbanes-Oxley *
Act of 2002

* Filed herewith

(C) REPORTS ON FORM 8-K - FILED ON OR BEFORE DECEMBER 31, 2002.

None.

37

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, Southwest Shopping Centers 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.

By: /s/ Neil H. Koenig
-------------------------------------------
Neil H. Koenig
Principal Executive Officer,
Interim Chief Financial Officer and Manager

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
Southwest Shopping Centers and in the capacities and on the dates indicated.

SIGNATURE TITLE DATE
--------- ----- ----

/s/ Neil H. Koenig Principal Executive Officer, April 15, 2003
- ------------------ Interim Chief Financial Officer and Manager
Neil H. Koenig

38

SOUTHWEST SHOPPING CENTERS CO. II, L.L.C.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2002

CERTIFICATIONS

I, Neil H. Koenig, in the capacities indicated below, certify
that:

1. I have reviewed this annual report on Form 10-K of Southwest
Shopping Centers Co., II, L.L.C.

2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light
of the circumstances under which such statements were made,
not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial statements, and other
financial information included in this annual report, fairly
present in all material respects the financial condition,
results of operations and cash flows of the registrant as of,
and for, the periods presented in this annual report;

4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to
ensure that material information relating to the
registrant is made known to me, particularly during
the periods in which this annual report is being
prepared;

b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date
within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

c) presented in this annual report my conclusions about
the effectiveness of the disclosure controls and
procedures on my evaluation as of the Evaluation
Date;

5. I have disclosed, based on my most recent evaluation, to the
registrant's auditors and the audit committee of the
registrant:

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

39

SOUTHWEST SHOPPING CENTERS CO. II, L.L.C.
FORM 10-K DECEMBER 31, 2002

6. I have indicated in this annual report whether there were
significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent
to the date of my most recent evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.

Date: April 15, 2003 /s/ Neil H. Koenig
----------------------------
Neil H. Koenig
Principal Executive Officer,
Interim Chief Financial Officer
and Manager

40

Independent Auditors' Report

The Member
Southwest Shopping Centers Co. II, L.L.C.:

Under date of April 8, 2003, we reported on the consolidated balance sheets of
Southwest Shopping Centers Co., II, L.L.C. and subsidiaries as of December 31,
2002 and 2001, and the related consolidated statements of operations, member's
equity, and cash flows for each of the years in the three-year period ended
December 31, 2002, which is included in the Annual Report on Form 10-K. In
connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule listed under Item 15(a)(2) on page 34. This financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion on this financial statement schedule based on our
audits.

In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

/s/ KPMG LLP

New York, New York
April 8, 2003

41

Schedule III

REAL ESTATE AND ACCUMULATED DEPRECIATION
As Of December 31, 2002
(In thousands)

Cost capitalized
subsequent to
Initial cost to Registrant acquisition
------------------------------------- ----------------
Building and Building and
Description Encumbrances Land Improvements Improvements
----------- ------------ --------- ------------ ----------------

Shopping Mall:
Park Plaza, Little Rock, AR $ 41,781 $ 5,816 $ 58,037 $ 1,072
========= ======== ========= ========

As of December 31, 2002
----------------------------------------------------
year
Building and Accumulated construction Date
Description Land Improvements Total depreciation completed Acquired Life
- ----------- ------- ------------ --------- ------------ ------------ --------- -----

Shopping Mall:
Park Plaza, Little Rock, AR $ 5,816 $ 59,109 $ 64,925 $ 8,273 1998 9/1/1997 40
======= ========= ========= ========

Aggregate cost for federal tax purposes is approximately $64,925.

42

Schedule III
------------
- Continued

The following is a reconciliation of real estate assets and accumulated
depreciation for the years ended December 31, 2002, 2001, and 2000.

(In thousands)
Years Ended December 31,
2002 2001 2000
------------------- --------------------- ---------------

Asset reconciliation:
Balance, beginning of period $ 64,561 $ 64,460 $ 64,406

Additions during the period:
Improvements 374 101 54

Other - write off of assets and certain
fully depreciated tenant alterations (10) - -
---------- ----------- ----------
Balance, end of period: $ 64,925 $ 64,561 $ 64,460
========== =========== ==========

Accumulated depreciation
Reconciliation:
Balance, beginning of period $ 6,689 $ 5,112 $ 3,553
Additions during the period:
Depreciation 1,594 1,577 1,559

Write-off of assets and certain fully
depreciated tenants alterations (10) - -
---------- ----------- ----------
Balance, end of period $ 8,273 $ 6,689 $ 5,112
========== =========== ==========

43