Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003 Commission File Number 1-6249
------------- ------
First Union Real Estate Equity and Mortgage Investments
-------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-6513657
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
125 Park Avenue, 14th Floor
New York, New York 10017
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 949-1373
--------------
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an acclerated filer
(as defined in rule 12b-2 of the Exchange Act)
Yes [ ] No [X]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
28,973,128 Common Shares of Beneficial Interest outstanding as of August 1, 2003
- --------------------------------------------------------------------------------
================================================================================
Total number of pages contained in this report: 27
--------
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Balance Sheets
(In thousands, except share data) June 30, 2003 December 31,
(Unaudited) 2002
----------- ----
ASSETS
Investments in real estate, at cost
Land $ 6,086 $ 6,086
Buildings and improvements 64,991 64,867
--------- ---------
71,077 70,953
Less - Accumulated depreciation (13,060) (12,057)
--------- ---------
Investments in real estate, net 58,017 58,896
Other assets
Cash and cash equivalents - unrestricted 6,130 3,897
- restricted 690 1,968
Accounts receivable and prepayments, net of allowances
of $590 and $601, respectively 688 1,625
Investments 86,990 103,974
Inventory, net of reserve 1,081 1,033
Unamortized debt issue costs, net 241 278
Other 137 154
--------- ---------
Total assets $ 153,974 $ 171,825
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loan $ 41,608 $ 41,781
Note payable 72 80
Senior notes 12,538 12,538
Accounts payable and accrued liabilities 7,022 8,332
Dividends payable 516 516
Deferred items 395 471
--------- ---------
Total liabilities 62,151 63,718
--------- ---------
Shareholders' equity
Convertible preferred shares of beneficial interest, $25 per share
liquidiation preference, 2,300,000 shares authorized, 983,082 shares
outstanding at June 30, 2003 and December 31, 2002 23,131 23,131
Shares of beneficial interest, $1 par, unlimited authorized, 28,973,128 and
34,814,361 outstanding at June 30, 2003 and December 31, 2002 28,973 34,814
Additional paid-in capital 202,377 207,634
Accumulated distributions in excess of net income (162,658) (157,472)
--------- ---------
Total shareholders' equity 91,823 108,107
--------- ---------
Total liabilities and shareholders' equity $ 153,974 $ 171,825
========= =========
See Notes to Combined Financial Statements.
2
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Statements of Operations
Unaudited (In thousands, except per share data) Three Months Ended Six Months Ended
June 30, June 30,
------------------- ---------------------
2003 2002 2003 2002
---- ---- ---- ----
Revenues
Rents $ 3,335 $ 3,407 $ 6,780 $ 6,704
Sales 718 647 1,444 1,592
Interest 251 436 510 897
-------- -------- -------- --------
4,304 4,490 8,734 9,193
-------- -------- -------- --------
Expenses
Property operating 1,342 1,187 2,523 2,457
Cost of goods sold 879 1,116 1,966 2,489
Real estate taxes 224 241 449 461
Depreciation and amortization 525 519 1,060 1,028
Interest 1,099 1,202 2,371 2,405
General and administrative 3,357 1,523 4,519 3,141
-------- -------- -------- --------
7,426 5,788 12,888 11,981
-------- -------- -------- --------
Net loss (3,122) (1,298) (4,154) (2,788)
Preferred dividend (516) (517) (1,032) (1,034)
-------- -------- -------- --------
Net loss applicable to shares of beneficial interest $ (3,638) $ (1,815) $ (5,186) $ (3,822)
======== ======== ======== ========
Per share data
Basic:
Net loss applicable to shares of beneficial interest $ (0.11) $ (0.05) $ (0.15) $ (0.11)
======== ======== ======== ========
Diluted:
Net loss applicable to shares of beneficial interest $ (0.11) $ (0.05) $ (0.15) $ (0.11)
======== ======== ======== ========
Basic weighted average shares 34,550 34,806 34,677 34,806
======== ======== ======== ========
Diluted weighted average shares 34,550 34,806 34,677 34,806
======== ======== ======== ========
See Notes to Combined Financial Statements.
3
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Statements of Cash Flows
Unaudited (In thousands) Six Months
Ended June 30,
--------------
2003 2002
---- ----
Cash used for operating activities
Net loss $ (4,154) $ (2,788)
Adjustments to reconcile net loss
to net cash used for operating activities
Depreciation and amortization 1,060 1,028
Decrease in deferred items (76) (287)
Net changes in other operating assets and liabilities (421) 220
--------- ---------
Net cash used for operating activities (3,591) (1,827)
--------- ---------
Cash provided by investing activities
Purchase of investments (751,525) (734,493)
Proceeds from maturity of investments 768,509 741,595
Investments in building and tenant improvements (127) (166)
--------- ---------
Net cash provided by investing activities 16,857 6,936
--------- ---------
Cash used for financing activities
Decrease in note payable (8) (8)
Repayment of mortgage loan - principal payments (173) (161)
Repurchase of shares of beneficial interest (11,098) --
Dividends paid on shares of beneficial interest -- (3,481)
Dividends paid on preferred shares of beneficial interest (1,032) (1,034)
--------- ---------
Net cash used for financing activities (12,311) (4,684)
--------- ---------
Increase in cash and cash equivalents 955 425
Cash and cash equivalents at beginning of period 5,865 4,724
--------- ---------
Cash and cash equivalents at end of period $ 6,820 $ 5,149
========= =========
Supplemental Disclosure of Cash Flow Information
Interest Paid $ 2,371 $ 2,405
========= =========
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Dividends accrued on shares of beneficial interest and preferred shares
of beneficial interest $ 516 $ 3,998
========= =========
See Notes to Combined Financial Statements.
4
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FORM 10-Q JUNE 30, 2003
NOTES TO COMBINED FINANCIAL STATEMENTS
General
The accompanying financial statements represent the combined results of
the registrant, First Union Real Estate Equity and Mortgage Investments (the
"Trust") and First Union Management Inc. (the "Company"). Under a trust
agreement, the common shares of the Company are held for the benefit of the
shareholders of the Trust. Accordingly, the financial statements of the Company
and the Trust have been combined.
The combined financial statements included herein have been prepared by
the Trust, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations, although the Trust
believes that the disclosures contained herein are adequate to make the
information presented not misleading. These combined financial statements should
be read in conjunction with the combined financial statements and the notes
thereto included in the Trust's latest annual report on Form 10-K.
The combined financial statements reflect, in the opinion of the Trust,
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly the combined financial position and results of operations for the
respective periods in conformity with accounting principles generally accepted
in the United States of America consistently applied.
Accounting Policies
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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 is
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 Accounting Principles Board
("APB") No. 30. The adoption of this statement on January 1, 2003 had no impact
on the Trust's combined financial statements.
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.
5
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 were
effective for the Trust's December 31, 2002 combined financial statements. The
initial recognition and initial measurement provisions of this Interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. This Interpretation had no effect on the Trust's combined
financial statements. The Trust's guarantees are disclosed in the combined
financial statements.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities." This Interpretation clarifies the application of
existing accounting pronouncements to certain entities in which equity investors
do not have the characteristics of a controlling financial interest or do not
have sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. The provisions of
the Interpretation are immediately effective for all variable interests in
variable interest entities created after January 31, 2003, and the Trust will
need to apply its provisions to any existing variable interests in variable
interest entities no later than July 1, 2003. The Trust does not anticipate
that this Interpretation will have an impact on its combined financial
statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." The
statement improves the accounting for certain financial instruments that under
previous guidance, issuers could account for as equity. The new statement
requires that those instruments be classified as liabilities in statements of
financial position. SFAS No. 150 affects the issuer's accounting for three types
of freestanding financial instruments. One type is mandatorily redeemable
shares, which the issuing company is obligated to buy back in exchange for cash
or other assets. A second type, which includes put options and forward purchase
contracts, involves instruments that do or may require the issuer to buy back
some of its shares in exchange for cash or other assets. The third type of
instruments that are liabilities under this statement is obligations that can be
settled with shares, the monetary value of which is fixed, tied solely or
predominantly to a variable such as a market index, or varies inversely with the
value of the issuers' shares. SFAS No. 150 does not apply to features embedded
in a financial instrument that is not a derivative in its entirety. In addition
to its requirements for the classification and measurement of financial
instruments in its scope, SFAS No. 150 also requires disclosures about
alternative ways of settling the instruments and the capital structure of
entities, all of whose shares are mandatorily redeemable. Most of the guidance
in SFAS No. 150 is effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003. The Trust does not expect
this statement to have any effect on the Trust's combined financial statements.
6
Earnings Per Share
The computation of basic and diluted earnings per share is as follows
(in thousands, except per share data):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
E 2003 2002 2003 2002
---- ---- ---- ----
Basic
Net loss $ (3,122) $ (1,298) $ (4,154) $ (2,788)
Preferred dividend (516) (517) (1,032) (1,034)
-------- -------- -------- --------
Net loss applicable to shares of beneficial interest $ (3,638) $ (1,815) $ (5,186) (3,822)
======== ======== ======== ========
Basic weighted average shares 34,550 34,806 34,677 34,806
======== ======== ======== ========
Net loss per share $ (0.11) $ (0.05) $ (0.15) $ (0.11)
======== ======== ======== ========
Diluted
Net loss $ (3,122) $ (1,298) $ (4,154) $ (2,788)
Preferred dividend (516) (517) (1,032) (1,034)
-------- -------- -------- --------
Net loss applicable to shares of beneficial interest $ (3,638) $ (1,815) $ (5,186) $ (3,822)
======== ======== ======== ========
Basic weighted average shares 34,550 34,806 34,677 34,806
Convertible preferred shares -- -- -- --
-------- -------- -------- --------
Diluted weighted average shares 34,550 34,806 34,677 34,806
======== ======== ======== ========
Net loss per share $ (0.11) $ (0.05) $ (0.15) $ (0.11)
======== ======== ======== ========
The preferred shares are not included in the diluted earnings per share
calculation for the three and six months ended June 30, 2003 because they are
anti-dilutive.
Share Options
The Trust accounts for stock option awards in accordance with APB No.
25, "Accounting for Stock Issued to Employees" and has adopted the
disclosure-only provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation." Consequently, compensation cost has not been recognized for the
share option plans except for the options granted in 1999 which had an exercise
price that was less than the grant date per share market price. Had the Trust
applied the expense recognition provisions of SFAS No. 123, there would have
been no impact on the results of operations for the periods ended June 30, 2003
and 2002.
Dividends
The Trust declared a dividend of $0.5 million ($0.525 per share) to
Series A Cumulative Preferred Shareholders in both the first and second quarters
of 2003. The first quarter dividends were paid April 30, 2003 to shareholders of
record at the close of business on March 31, 2003. The second quarter dividends
were paid July 31, 2003 to shareholders of record at the close of business on
June 30, 2003.
7
Termination of Proposed Transaction
On February 13, 2002, the Trust entered into a definitive agreement of
merger and contribution with, among others, Gotham Partners, a shareholder of
the Trust that is controlled by affiliates of William A. Ackman, who was at the
time Chairman of the Board of Trustees of the Trust, and Gotham Golf, a Delaware
corporation controlled by Gotham Partners, pursuant to which the Trust agreed to
merge with and into Gotham Golf. The 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.
The proposed transaction was approved by the Trust's common
shareholders at a special meeting held on November 27, 2002.
In November 2002, the plaintiff in the preferred shareholder litigation
(see "Legal Proceedings") filed with the New York Supreme Court for New York
County an Order to Show Cause why the transaction should not be enjoined. The
court held a hearing on that issue on November 20. On November 21, 2002, the
court issued an order denying the defendants' motion to dismiss the complaint
and granting plaintiff's motions for preliminary injunction and expedited
discovery in connection with the proposed merger. Following a hearing to
determine whether to grant further relief to plaintiff with respect to the
proposed transaction, the court issued an order dated December 6, 2002,
reaffirming its preliminary injunction barring the proposed merger of the Trust
with and into Gotham Golf. The court's order extended indefinitely the
preliminary injunction previously granted with respect to the proposed merger
transaction. The Trust appealed the court's order barring the transaction in the
Appellate Division of the New York Supreme Court. Oral argument on the appeal
was heard by the Appellate Division on March 11, 2003. As of August 8, 2003, the
Appellate Division had not issued a decision with respect to the appeal. There
is no specific timetable for the Appellate Division to render its decision.
On June 25, 2003 the Trust entered into a Settlement, Termination and
Standstill Agreement (the "Agreement") with, among others, Gotham Partners. The
Agreement provided for the termination of the merger agreement regarding the
merger of the Trust with Gotham Golf, the purchase by the Trust of 5,841,233
common shares of the Trust owned by Gotham Partners and its affiliates for
approximately $11.1 million and a termination payment to Gotham Partners of $2.4
million. The Agreement also provides that neither Gotham Partners nor any
affiliate will enter into or agree to enter into any form of business
combination, acquisition or other transaction involving the Trust or any
majority-owned affiliate for a period of five years from the date of the
Agreement. The termination payment was recognized as a general and
administrative expense during the three months ended June 30, 2003.
Share Repurchase
The Trust authorized a share repurchase plan in July 2003. The plan
allows for the Trust to purchase up to $10.0 million of its common and preferred
shares in the market or through private transactions. Through August 7, 2003,
the Trust repurchased 966,575 common shares for $1,759,167.
8
Legal Proceedings
Preferred Shareholders Lawsuit
Kimeldorf v. First Union, et al. On April 15, 2002, the Trust was
served with a complaint filed in the Supreme Court of New York in New York
County on behalf of a purported holder of the Trust's convertible preferred
shares. Among the allegations made by the plaintiff is that the proposed
transaction with Gotham Golf Corp. ("Gotham Golf") was approved by the Trust's
Board of Trustees in violation of fiduciary duties owed to the holders of the
Trust's convertible preferred shares. The suit seeks, among other things,
unspecified damages, an injunction of the proposed transaction and the court's
certification of the lawsuit as a class action. Named as defendants in the
lawsuit were the Trust, its then five trustees and Gotham Partners. (For a
summary of the proceedings in this suit to date, see "Termination of Proposed
Transaction," above).
In November 2002, First Carolina Investors, Inc. ("First Carolina") a
holder of preferred shares, filed a separate lawsuit in New York Supreme Court
for New York County, naming the same defendants as in the Kimeldorf case. In
December 2002, plaintiffs Kimeldorf and First Carolina filed a consolidated
amended complaint, styled Kimeldorf et al. v. First Union, et al, alleging,
among others, breach of contract; aiding and abetting breach of contract;
tortious interference with the contract; breach of fiduciary duties; aiding and
abetting of breach of fiduciary duties; and unconscionability against the
defendants. This consolidated amended complaint essentially consolidated the
separate First Carolina complaint, filed in November 2002 with the complaint of
Mr. Kimeldorf filed in April 2002.
On April 30, 2003, the trial court granted the plaintiff's motion to
certify the litigation as a class action.
In July 2003, Kimeldorf and First Carolina each filed separate motions
with the trial court seeking to hold the defendants in contempt as a result of
the execution and performance of the Termination Agreement (see "Termination of
Proposed Transaction", above). The plaintiffs contend that these actions
violated the trial court's injunction against the consummation of the merger
between the Trust and Gotham Golf. Defendants filed a brief in opposition to the
motions. The trial court heard oral argument on July 29, 2003 and has taken the
motions under advisement.
The Trust regards the lawsuit as being without merit and will
vigorously defend against the asserted claims.
Common Shareholders Lawsuits
Fink v. First Union. On or about January 24, 2003, the Trust was served
with a complaint filed in the Supreme Court of New York, New York County on
behalf of a purported holder of the Trust's common shares, on behalf of himself
and the common shareholders as a class. The lawsuit seeks a declaration that the
lawsuit is maintainable as a class action and a certification that the
plaintiff, Robert Fink, is the representative of the class. Named as defendants
in the lawsuit are the Trust, Gotham Partners, the companies affiliated with
Gotham Partners and the Trust that are parties to the Merger Agreement, William
Ackman and the four current Trustees of the Trust. Among the allegations
asserted are breach of fiduciary duty and aiding and abetting thereof in
connection with the transactions contemplated by the Merger Agreement. The
relief requested by the plaintiff includes an injunction preventing the
defendants from proceeding with consummation of the merger, rescission of the
merger if it occurs, an accounting for any profits realized by the defendants as
a result of the actions complained of, an order permitting the creation of a
shareholders' committee composed of the Trust common
9
shareholders and their representatives to manage the affairs of the Trust,
compensatory damages and the costs and disbursements of plaintiff's counsel.
On or about February 14, 2003, the parties to this lawsuit stipulated
that the defendants need not answer or otherwise respond to the complaint for an
indefinite period of time. The stipulation is revocable by the plaintiff at any
time. The Trust believes that the purpose of the stipulation was to delay court
proceedings in this lawsuit until the outcome of the appeal of the injunction
entered in the Kimeldorf case (see "Termination of Proposed Transaction," above)
is decided by the Appellate Division.
On or about July 3, 2003, the Plaintiff filed an amended complaint
which seeks additional relief based upon the termination agreement, including a
request that the defendants be required to return to the Trust the termination
fee paid to Gotham as well as the consideration paid for Gotham's shares in the
Trust. As with the original complaint, the parties have stipulated that the
defendants need not answer or otherwise respond to the amended complaint for an
indefinite period of time. The stipulation is revocable by the plaintiff at any
time.
The Trust regards the lawsuit as without merit and plans to vigorously
defend against the allegations.
K-A & Company, LTD. v. First Union. On or about February 12, 2003, a
complaint was filed in the Court of Common Pleas, Cuyahoga County, Ohio, by a
purported holder of the Trust's common shares, on behalf of itself and the Trust
common shareholders as a class. Named as defendants in the lawsuit are the
Trust, Gotham Partners, William Ackman and four of the current Trustees of the
Trust. The allegations made and the relief requested in the K-A suit are
substantially identical to those of the Fink suit referenced above. The lawsuit
seeks a declaration that the lawsuit is maintainable as a class action and
certification that the plaintiff, K-A & Company, LTD., is the representative of
the class. Among the allegations asserted are breach of fiduciary duty and
aiding and abetting thereof in connection with the transactions contemplated by
the Merger Agreement. This lawsuit was removed by notice filed by defendants to
the United States District Court, Northern District of Ohio, Eastern Division
(Case No. 1:03 CV 0460).
The relief requested by the plaintiff includes an injunction preventing
the defendants from proceeding with consummation of the merger, rescission of
the merger if it occurs, an accounting for any profits realized by the
defendants as a result of the actions complained of, an order permitting the
creation of a shareholders' committee composed of the Trust common shareholders
and their representatives to manage the affairs of the Trust, compensatory
damages and the costs and disbursements of plaintiff's counsel.
On April 10, 2003, the plaintiff filed a motion for a preliminary
injunction seeking an order preventing the defendants from consummation of the
merger. The defendants have filed a motion requesting the court to stay
consideration of the plaintiff's motion pending a decision on the appeal of the
preliminary injunction entered by the New York Supreme Court for New York County
in Kimeldorf, described above. Thereafter, the parties entered into an agreed
stay of plaintiff's motion, which requires that the defendants timely notify the
plaintiff and the court of any decision of the appeal of the preliminary
injunction entered in the Kimeldorf case.
As with the Fink lawsuit, the Trust regards the lawsuit as without
merit and plans to vigorously defend against the allegations.
Peach Tree Mall Litigation
The Trust, as one Plaintiff in a class action composed of numerous
businesses and individuals, has pursued legal action against the State of
California associated with the 1986 flood of Sutter Buttes Center,
10
formerly Peach Tree Mall. In September 1991, the court ruled in favor of the
plaintiffs on the liability portion of the inverse condemnation suit, which the
State of California appealed. In the third quarter of 1999, the 1991 ruling in
favor of the Trust and the other plaintiffs was reversed by the State of
California Appeals Court, which remanded the case to the trial court for further
proceedings. After the remand to the trial court, the Trust and the other
plaintiffs determined to pursue a retrial before the court. The retrial of the
litigation commenced February 2001 and was completed July 2001. In November
2001, the trial court issued a decision that generally held in favor of the
State of California. In February 2002, the Plaintiffs in the case filed a notice
of appeal of the ruling of the trial court in the California Court of Appeals.
The appellate briefing was completed in May 2003. The Trust is unable to predict
at this time whether or not it will recover any amount of its damage claims in
this legal proceeding.
Indemnity to Imperial Parking Corporation
In 1999, Newcourt Financial Ltd. ("Newcourt") brought a claim in
Ontario against an affiliate of the Trust and Imperial Parking Limited alleging
a breach of a contract between the Trust affiliate and Newcourt's
predecessor-in-interest, Oracle Credit Corporation and Oracle Corporation
Canada, Inc. The Trust affiliate and Imperial Parking Limited brought a separate
action in British Columbia against Newcourt, Oracle Credit Corporation and
Oracle Corporation Canada claiming, among other things, that the contract at
issue was not properly authorized by the Trust's board of trustees and the
Imperial Parking Limited board of directors. On March 27, 2000, in connection
with the spinoff of Imperial Parking Corporation (the successor in interest to
Imperial Parking Limited) to the Trust's shareholders, the Trust granted a full
indemnity to Imperial Parking Corporation in respect of all damages arising from
the outstanding actions.
Numerous attempts to settle this matter have not been successful. The
Trust has reserved $600,000 in its combined financial statements for this claim.
The reserved amount consists of the face amount of the contract of $425,000 and
estimated costs of $175,000. The amount of the claim, $825,000, includes
Newcourt's calculation of interest on the amount due at the default rate under
the contract. The Trust believes that, due to the failure of attempted
settlement negotiations, discovery will commence, and the matter will become
more actively litigated. The Trust intends to defend vigorously against the
claims brought against the parties that it has indemnified and to pursue their
separate claims with respect to this matter.
Mountaineer Mall Claim
The Trust was named as a defendant in a lawsuit filed in connection
with a contractor's claim relative to the construction of a portion of the
Mountaineer Mall, located in Morgantown, West Virginia. The construction of the
mall commenced in 1993 and was completed in 1995. The mall was sold in July
1999. A trial on the merits of the lawsuit was held in 1997.
In October 2002, the court issued findings of fact and conclusions of
law providing that the claimant was entitled to recover from the Trust the
principal amount of $266,076 in damages plus various interest amounts, which,
when added to the principal amount, would result in an aggregate damage award of
$494,382 against the Trust. The court's order provided, however, that the amount
of the damage award was subject to offset by the amount of legal fees and
expenses reasonably and necessarily incurred by the Trust in defending a certain
mechanic's lien claim asserted by the plaintiff in the lawsuit. The court
further directed that the plaintiff and the Trust negotiate in good faith as to
the amount of such expense and that, if the parties were unable to agree as to
the appropriate offset, the court would schedule an evidentiary hearing for the
purpose of resolving the issue.
11
In July 2003, the Trust and the plaintiff entered into a settlement
agreement providing for the payment by the Trust of $350,000 to the plaintiff in
full settlement of the claim.
Contingencies
VenTek
The Company's subsidiary, VenTek International, Inc. ("VenTek"), a
manufacturer of transit ticketing and parking equipment, continues to incur
significant operating losses. The Trust has provided performance bond guarantees
entered into with respect to two contracts of VenTek with transit authorities,
which contracts are in the amounts of $6.2 million and $5.3 million. These
contracts are for the manufacture, installation and maintenance of transit
ticket vending equipment by VenTek. The guarantees are expected to expire within
the next eighteen months based on the commencement of contractual warranty and
maintenance periods now in effect under both contracts. As of August 1, 2003, no
amounts have been drawn against these guarantees. If VenTek is unable to perform
in accordance with these contracts, the Trust may be responsible for payment
under these guarantees. In connection with one of the contracts, VenTek settled
a claim for liquidated damages for approximately $0.1 million during the six
months ended June 30, 2003.
Park Plaza Mall
Two department stores owned and operated by Dillard's Department
Stores, Inc. ("Dillard's") are the anchor stores at Park Plaza Mall. Dillard's
owns its facilities in Park Plaza Mall and has a Construction, Operation and
Reciprocal Easement Agreement with a subsidiary of the Trust that contains an
operating covenant requiring Dillard's to operate these facilities continuously
as retail department stores until July 2003. Dillard's and its partner, Simon
Property Group, own a parcel of land of nearly 100 acres in the western part of
Little Rock, Arkansas and have announced, at various times over the last several
years, their intention to build in this new location. During the first quarter
of 2001, the Little Rock board of directors approved a change in zoning that
would allow the construction of an approximately 1.3 million square foot
regional enclosed mall on this site. The zoning on this site reverted to its
prior status as a residential use property pursuant to a court order in 2002;
however, the proponents of the regional enclosed mall have filed a notice of
appeal of this ruling in the Supreme Court of Arkansas, with no decision
expected before September 2003. In the event that a large-scale retail facility
is built on this site, Dillard's may cease operating its stores at Park Plaza
Mall. In the event Dillard's closes one or both of its stores at Park Plaza
Mall, it is unlikely that it would sell or lease its two stores to comparable
anchor tenants. Accordingly, the value of Park Plaza Mall would be materially
and adversely affected due to the decline in traffic and sales volume at Park
Plaza Mall, and the rights of many of the tenants to terminate their leases or
to pay less rent triggered by the closure of one or both of the anchor stores.
The Park Plaza Mall property is financed by a mortgage loan. The loss of an
anchor tenant or a significant number of other mall tenants 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 Park Plaza Mall beyond July 2003. Dillard's has
been approached to extend the operating covenant at the Park Plaza Mall. To
date, it has declined to do so, however, under the terms of the operating
covenant, Dillard's is permitted to continue operations at Park Plaza Mall
through 2031. If Dillard's does not maintain its presence as an anchor store at
Park Plaza Mall, the Park Plaza Mall would experience a loss of revenue and
likely an event of default under the mortgage, thereby causing the value of the
Park Plaza Mall to be materially and adversely affected. In such circumstances,
there would be an impairment of the value of the property and a loss could be
recognized. There can be no assurance that Dillard's will maintain its presence
as an anchor store at Park Plaza Mall.
12
Subsequent Event
On August 1, 2003, VenTek sold substantially all the assets of its
parking business to an unrelated third party for approximately $0.4 million.
VenTek received approximately $0.1 million in cash, a note receivable for
approximately $0.1 million and approximately $0.2 million in assumption of
liabilities. The Trust does not expect to recognize any gain or loss on the
transaction.
Business Segments
The Trust's and Company's business segments include ownership of a
shopping center, an office building, and a parking and transit ticket equipment
manufacturing company. Management evaluates performance based upon net operating
income. With respect to property assets, net operating income is property rent
less property operating expense, and real estate taxes. With respect to VenTek,
a manufacturer of transit ticketing and parking equipment, net operating income
is sales revenue less cost of goods sold. Corporate assets consist primarily of
cash and cash equivalents, investments and deferred issue costs for senior
notes. All intercompany transactions between segments have been eliminated (see
table of business segments).
13
Business Segments
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Rents and Sales
Shopping Centers $ 2,872 $ 2,963 $ 5,977 $ 5,890
Office Buildings 363 347 703 684
Ventek 718 647 1,444 1,592
Corporate 100 97 100 130
------- ------- ------- -------
4,053 4,054 8,224 8,296
Less - Operating Expenses and
Costs of Goods Sold
Shopping Centers 1,101 992 2,069 2,069
Office Buildings 188 168 388 361
Ventek 879 1,116 1,966 2,489
Corporate 53 27 66 27
------- ------- ------- -------
2,221 2,303 4,489 4,946
Less - Real Estate Taxes
Shopping Centers 202 217 404 416
Office Buildings 22 24 45 45
------- ------- ------- -------
224 241 449 461
Net Operating Income (Loss)
Shopping Centers 1,569 1,754 3,504 3,405
Office Buildings 153 155 270 278
Ventek (161) (469) (522) (897)
Corporate 47 70 34 103
------- ------- ------- -------
1,608 1,510 3,286 2,889
14
Business Segments (Continued)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2003 2002 2003 2002
---- ---- ---- ----
Less - Depreciation and Amortization $ 525 $ 519 $ 1,060 $ 1,028
Less - Interest Expense 1,099 1,202 2,371 2,405
Corporate Income (Expense)
Interest and dividends 251 436 510 897
General and administrative (3,357) (1,523) (4,519) (3,141)
------ ------ ------ ------
Net loss before Preferred Dividend $(3,122) $(1,298) $(4,154) $(2,788)
======= ======= ======= =======
Capital Expenditures
Shopping Centers $ 47 $ 89 $ 51 $ 98
Office Buildings 42 14 74 64
Ventek -- 2 2 4
------- ------- ------- -------
$ 89 $ 105 $ 127 $ 166
======= ======= ======= =======
June 30,
--------
2003 2002
---- ----
Identifiable Assets
Shopping Center $ 57,485 $ 58,871
Office Building 2,241 2,367
Ventek 1,672 3,330
Corporate 92,576 113,134
-------- --------
Total Assets $153,974 $177,702
======== ========
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
2002 TRANSACTION
THE PROPOSED TRANSACTION
On February 13, 2002, the Trust entered into a definitive agreement of
merger and contribution with, among others, Gotham Partners, L.P., ("Gotham
Partners") a shareholder of the Trust that is controlled by affiliates of
William A. Ackman, who was at the time Chairman of the Board of Trustees of the
Trust, and Gotham Golf Corp. ("Gotham Golf"), a Delaware corporation controlled
by Gotham Partners, pursuant to which the Trust agreed to merge with and into
Gotham Golf. On October 24, 2002, the parties adopted the last of three
amendments to the merger agreement.
The proposed transaction was approved by the Trust's common
shareholders at a special meeting held on November 27, 2002.
In November 2002, the plaintiff in the preferred shareholder litigation
(see "Legal Proceedings") filed with the New York Supreme Court for New York
County an Order to Show Cause why the transaction should not be enjoined. The
court held a hearing on that issue on November 20. On November 21, 2002, the
court issued an order denying the defendants' motion to dismiss the complaint
and granting plaintiff's motions for preliminary injunction and expedited
discovery in connection with the proposed merger. Following a hearing to
determine whether to grant further relief to plaintiff with respect to the
proposed transaction, the court issued an order dated December 6, 2002,
reaffirming its preliminary injunction barring the proposed merger of the Trust
with and into Gotham Golf. The court's order extended indefinitely the
preliminary injunction previously granted with respect to the proposed merger
transaction. The Trust appealed the court's order barring the transaction in the
Appellate Division of the New York Supreme Court. Oral argument on the appeal
was heard by the Appellate Division on March 11, 2003. As of August 8, 2003, the
Appellate Division had not issued a decision with respect to the appeal. There
is no specific timetable for the Appellate Division to render its decision.
On June 25, 2003 the Trust entered into a Settlement, Termination and
Standstill Agreement (the "Agreement") with, among others, Gotham Partners. The
Agreement provided for the termination of the merger agreement regarding the
merger of the Trust with Gotham Golf, the purchase by the Trust of 5,841,233
common shares of the Trust owned by Gotham Partners and its affiliates for
approximately $11.1 million and a termination payment to Gotham Partners of $2.4
million. The Agreement also provides that neither Gotham Partners nor any
affiliate will enter into or agree to enter into any form of business
combination, acquisition or other transaction involving the Trust or any
majority-owned affiliate for a period of five years from the date of the
Agreement.
OTHER MATTERS
The Trust could be affected by declining economic conditions as a
result of various factors that affect the real estate business including the
financial condition of tenants, competition, and increased operating costs. The
Trust's property insurance was renewed in November 2002. The rates increased 73%
upon renewal. The Trust's Directors' and Officers' insurance was renewed in June
2003. The rates increased in excess of 100% upon renewal.
16
The Trust authorized a share repurchase plan in July 2003. The plan
allows for the Trust to purchase up to $10.0 million of its common and preferred
shares in the market or private transactions.
The Trust's most critical accounting policy relates to the evaluation
of the carrying value of real estate. The Trust evaluates the need for an
impairment loss on its real estate assets when indicators of impairment are
present and the undiscounted cash flows are not sufficient to recover the
asset's carrying amount. The impairment loss is measured by comparing the fair
value of the asset to its carrying amount. In addition, estimates are used when
accounting for the allowance for doubtful accounts, potentially excess and
obsolete inventory, product warranty reserves, the percentage of completion
method of recognizing revenue and contingent liabilities, among others. These
estimates are susceptible to change and actual results could differ from these
estimates. The effects of changes in these estimates are recognized in the
period they are determined.
SHAREHOLDER LITIGATION
Three separate lawsuits have been filed with respect to the proposed
transactions between the Trust and Gotham Partners relative to the Merger
Agreement of February 13, 2002, which Merger Agreement was terminated effective
June 25, 2003. (See "Part II, Item 1. Legal Proceedings").
PARK PLAZA MALL
Two Dillard's department stores are the anchor stores at Park Plaza
Mall. Dillard's owns its facilities in Park Plaza Mall and has a Construction,
Operation and Reciprocal Easement Agreement with a subsidiary of the Trust that
contains an operating covenant requiring Dillard's to operate these facilities
continuously as retail department stores until July 2003. Dillard's and its
partner, Simon Property Group, own a parcel of land of nearly 100 acres in the
western part of Little Rock, Arkansas and have announced, at various times over
the last several years, their intention to build in this new location. During
the first quarter of 2001, the Little Rock board of directors approved a change
in zoning that would allow the construction of an approximately 1.3 million
square foot regional enclosed mall on this site. The zoning on this site
reverted to its prior status as a residential use property pursuant to a court
order in 2002; however, the proponents of the regional enclosed mall have filed
a notice of appeal of this ruling in the Supreme Court of Arkansas, with no
decision expected before September 2003. In the event that a large-scale retail
facility is built on this site, Dillard's may cease operating its stores at Park
Plaza Mall. In the event Dillard's closes one or both of its stores at Park
Plaza Mall, it is unlikely that it would sell or lease its two stores to
comparable anchor tenants. Accordingly, the value of Park Plaza Mall would be
materially and adversely affected due to the decline in traffic and sales volume
at Park Plaza Mall, and the rights of many of the tenants to terminate their
leases or to pay less rent triggered by the closure of one or both of the anchor
stores. The Park Plaza Mall property is financed by a mortgage loan. The loss of
an anchor tenant or a significant number of other mall tenants 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 Park Plaza Mall beyond July 2003. Dillard's has
been approached to extend the operating covenant at the Park Plaza Mall. To
date, it has declined to do so, however, under the terms of the operating
covenant, Dillard's is permitted to continue operations at Park Plaza Mall
through 2031. If Dillard's does not maintain its presence as an anchor store at
Park Plaza Mall, the Park Plaza Mall would experience a loss of revenue and
likely an event of default under the mortgage, thereby causing the value of the
Park Plaza Mall to be materially and adversely affected. In such circumstances,
17
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 maintain its presence
as an anchor store at Park Plaza Mall.
With respect to capital improvements, the Trust has completed the
repair of Park Plaza Mall's roof at a cost of approximately $0.6 million during
the first quarter of 2003.
VENTEK
The Company's subsidiary, VenTek, a manufacturer of transit ticketing
and parking equipment, continues to incur significant operating losses. The
Trust has provided performance bond guarantees entered into with respect to two
contracts of VenTek with transit authorities, which contracts are in the amounts
of $6.2 million and $5.3 million. These contracts are for the manufacture,
installation and maintenance of transit ticket vending equipment by VenTek. The
guarantees are expected to expire within the next eighteen months based on the
commencement of contractual warranty and maintenance periods now in effect under
both contracts. As of August 1, 2003, no amounts have been drawn against these
guarantees. If VenTek is unable to perform in accordance with these contracts,
the Trust may be responsible for payment under these guarantees. In connection
with one of the contracts, VenTek settled a claim for liquidated damages for
approximately $0.1 million during the six months ended June 30, 2003.
In August 2003, VenTek sold substantially all the assets of its parking
business to an unrelated third party for approximately $0.4 million. VenTek
received approximately $0.1 million in cash, a note receivable for approximately
$0.1 million and approximately $0.2 million in assumption of liabilities. The
Trust does not expect to recognize any gain or loss on the transaction. The sale
of the parking business is not expected to have a significant impact on
operations or cash flows of the Trust.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Unrestricted and restricted cash and cash equivalents increased by
approximately $1.0 million (to $6.8 million from $5.8 million) when comparing
the balance at June 30, 2003 to the balance at December 31, 2002.
The Trust's net cash provided by investing activities of $16.9 million
was substantially offset by net cash used for operating activities of $3.6
million and net cash used for financing activities of $12.3 million. Cash used
for financing activities included $11.1 million for the repurchase of shares of
beneficial interest from Gotham Partners and affiliates, $1.0 million in cash
dividends to preferred shareholders and $0.2 million of mortgage amortization.
Cash provided by investing activities consisted of the excess of maturities over
purchases of U.S. Treasury Bills of $17.0 million. Cash used for investing
activities consisted of $0.1 million of improvements to properties.
The Trust declared a dividend of $0.5 million ($0.525 per share) to
Series A Cumulative Preferred Shareholders (the "Preferred Shareholders") in the
second quarter of 2003. The dividend was paid July 31, 2003 to shareholders of
record at the close of business on June 30, 2003. In addition, the Trust paid a
dividend of $0.5 million ($0.525 per share) to the Preferred Shareholders in the
first quarter. No cash dividend for the first or second quarters was declared
with respect to the Common Shares.
18
At June 30, 2003, the Trust owned $87.0 million in face value of U.S.
Treasury Bills. The U.S. Treasury Bills are of maturities of less than 90 days
and classified as held to maturity. The average yields for the six months ended
June 30, 2003 and 2002 were 1.13% and 1.68%, respectively.
A summary of the Trust's borrowings and repayment timing is as follows
(in millions):
Payments Due by Period
----------------------
Less than 1-3 4-5 After 5
Contractual Obligations Total 1 Year Years Years Years
- ----------------------------------------------------------------------------------------------------------------------
Mortgage loan payable $ 41.6 $ 0.3 $ 0.8 $ 0.9 $ 39.6
Senior notes 12.5 12.5 -- -- --
--------------------------------------------------------------------------------
Total $ 54.1 $ 12.8 $ 0.8 $ 0.9 $ 39.6
================================================================================
The only lease with respect to which the Trust has an obligation for
payment of rent for is for VenTek, which is month to month. The senior notes are
due on October 1, 2003.
RESULTS OF OPERATIONS
Net loss applicable to shares of beneficial interest for the six months
ended June 30, 2003 was $5.2 million as compared to a net loss of $3.8 million
for the six months ended June 30, 2002.
Net loss applicable to shares of beneficial interest for the three
months ended June 30, 2003 was $3.6 million as compared to a net loss of $1.8
million in the comparable period in 2002.
Interest income decreased by $0.2 million and $0.4 million during the
three and six months ended June 30, 2003, as compared to the comparable periods
in 2002. The decrease is a result of lower amounts invested and lower interest
rates between the periods.
Property net operating income, which is rent less property operating
expenses and real estate taxes, remained constant for the six months ended June
30, 2003 at $3.8 million. There was an increase in revenues of $0.1 million and
an increase in operating expenses of $0.1 million. Revenues increased by $0.1
million for the six months ended June 30, 2003, primarily due to a lease
termination fee received of $0.1 million at Park Plaza. A decrease in occupancy
at Park Plaza was partially offset by an increase in rental rates when comparing
the six months ended June 30, 2003 to June 30, 2002. Occupancy and rental rates
both increased at Circle Tower when comparing the periods. Included in operating
expenses are $0.2 million in 2002 of costs incurred in connection with the
matters described above in the Park Plaza Mall section.
Property net operating income decreased for the three months ended June
30, 2003 to $1.8 million from $2.0 million in 2002. The decrease was attributed
to a decrease in revenues of approximately $0.1 million and an increase in
operating expenses of approximately $0.2 million. The decrease of $0.1 million
in revenues was primarily due to a decrease in occupancy at Park Plaza.
Depreciation and amortization, and interest expense remained relatively
constant for the three and six months ended June 30, 2003 when compared to the
comparable period in 2002.
General and administrative expenses increased by approximately $1.4
million when comparing the six months ended June 30, 2003 to the comparable
period in 2002. The increase was due to a $2.4 million
19
termination fee paid to Gotham Partners to terminate the Gotham Proposal. The
termination fee was partially offset by a decrease in legal fees and
professional fees. Included in general and administrative expenses for the six
months ended June 30, 2003 and 2002 are approximately $2.8 million and $1.5
million, respectively, of the Trust's transaction costs related to the Gotham
proposal. During the six months ended June 30, 2003 and 2002, $0.3 million of
costs related to the preferred shareholder lawsuit were included in general and
administrative expense. Also included in general and administrative expenses are
$0.3 million and $0.4 million in 2003 and 2002, respectively, to a firm
providing management services to VenTek. Otherwise, general and administrative
expenses remained relatively constant when comparing the six months ended June
30, 2003 to the comparable period in 2002. The Trust cannot predict what the
professional fees may be in 2003 due to the ongoing litigation.
General and administrative expenses increased by $1.8 million when
comparing the three months ended June 30, 2003 to the comparable period in 2002.
The increase was due to a $2.4 million termination fee paid to Gotham Partners
to terminate the Gotham Proposal. The Gotham termination fee was partially
offset by a decrease in legal fees and professional fees. Included in general
and administrative expenses for the three months ended June 30, 2003 and 2002
are $2.6 million and $0.6 million of transaction costs related to the Gotham
Proposal. Also included in general and administrative expenses are $0.1 million
and $0.2 million for the three months ended June 30, 2003 and 2002,
respectively, to a firm providing management services to VenTek. Also included
in general and administrative expenses for the 2002 period is a $0.2 million tax
refund.
The Company's manufacturing facility, VenTek, incurred a net loss of
$0.7 million for the six months ended June 30, 2003, as compared to a net loss
of approximately $1.0 million for the six months ended June 30, 2002. Revenue
decreased for the six months ended June 30, 2003 to $1.4 million from $1.6
million in 2002 and cost of goods sold decreased to $2.0 million from $2.5
million for the same period. For the three months ended June 30, 2003, VenTek
incurred a net loss of $0.2 million as compared to a net loss of $0.5 million
for the three months ended June 30, 2002. Revenues remained relatively constant
for the three months ended June 30, 2003 and 2002 and costs of goods sold
decreased to $0.9 million from $1.1 million for the same period. The decrease in
both revenues and cost of goods sold is due to the winding down of current
contracts and having nominal new business. There was no backlog for VenTek at
June 30, 2003. Backlog represents products or services that VenTek's customers
have committed by contract to purchase. VenTek's backlog is subject to
fluctuations and is not necessarily indicative of future sales. A failure to
replace backlog has resulted in and will continue to result in lower revenues.
Certain statements contained in this Form 10-Q that are forward-looking
are based on current expectations that are subject to a number of uncertainties
and risks, and actual results may differ materially. The uncertainties and risks
include, but are not limited to, the risk that material adverse events will
prelude consummation of the proposed transaction with Gotham Golf, changes in
market activity, changes in local real estate conditions and markets, actions by
competitors, interest rate movements and general economic conditions. Further
information about these matters can be found in the Trust's Annual Report filed
with the SEC on Form 10-K.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Interest Rate Risk
All of the Trust's loans outstanding at June 30, 2003 have fixed
interest rates. The Trust's investments in U.S. Treasury Bills mature in less
than 90 days and therefore are not subject to significant interest rate risk.
20
ITEM 4. CONTROLS AND PROCEDURES
The registrant's principal executive and financial officer has, within
90 days of the filing date of this quarterly report, evaluated the effectiveness
of the registrant's disclosure controls and procedures (as defined in Exchange
Act Rules 13a - 14(c)) and has determined that such disclosure controls and
procedures are adequate to ensure that information required to be disclosed by
the registrant in the reports filed or submitted under the Exchange Act is
recorded, processed and summarized and reported within the time periods
specified by the Securities and Exchange Commission. There have been no
significant changes in the registrant's internal controls or in other factors
that could significantly affect such internal controls since the date of
evaluation. Accordingly, no corrective actions have been taken with regard to
significant deficiencies or material weaknesses.
21
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
PREFERRED SHAREHOLDER LAWSUITS
KIMELDORF V. FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS, ET AL.,
SUPREME COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK (INDEX NO.
107176/02).
On April 15, 2002, the Trust was served with a complaint filed in the Supreme
Court of New York in New York County on behalf of a purported holder of the
Trust's convertible preferred shares. Among the allegations made by the
plaintiff is that the proposed transaction with Gotham Golf Corp. ("Gotham
Golf") was approved by the Trust's Board of Trustees in violation of fiduciary
duties owed to the holders of the Trust's convertible preferred shares. The suit
seeks, among other things, unspecified damages, an injunction of the proposed
transaction and the court's certification of the lawsuit as a class action.
Named as defendants in the lawsuit were the Trust, its five then trustees and
Gotham Partners, L.P. ("Gotham Partners"). The Trust and the other defendants
filed a motion to dismiss the lawsuit. An oral argument on the motion to dismiss
was held on July 15, 2002. Discovery on the case was stayed pending the ruling
of the court on the motion to dismiss.
On November 1, 2002, the Trust issued a press release announcing that a special
shareholders meeting was to be held November 25, 2002, for the purpose of
shareholder approval of the Merger Agreement. Shortly thereafter, the plaintiff
preferred shareholder in Kimeldorf with the New York Supreme Court for New York
County an Order to Show Cause why the transaction should not be enjoined. The
court held a hearing on that issue on November 20. On November 21, 2002, the
court issued an order denying the defendants' motion to dismiss the complaint
and granting plaintiff's motions for preliminary injunction and expedited
discovery in connection with the proposed merger. The special meeting of
shareholders was convened as scheduled on November 25, with the vote on the
proposed merger transaction tabled and the meeting adjourned until November 27,
at which time the vote was held and the Trust's common shareholders approved the
proposed transaction by the requisite majority vote.
Following a hearing to determine whether to grant further relief to plaintiff
with respect to the proposed transaction, the court issued an order dated
December 6, 2002, reaffirming its preliminary injunction barring the proposed
merger of the Trust with and into Gotham Golf. The court's order extended
indefinitely the preliminary injunction previously granted with respect to the
proposed merger transaction. The Trust appealed the court's order barring the
transaction in the Appellate Division of the New York Supreme Court. Oral
argument on the appeal was heard by the Appellate Division on March 11, 2003. As
of August 8, 2003, the Appellate Division had not issued a decision with respect
to the appeal. There is no specific timetable for the Appellate Division to
render its decision.
In November 2002, First Carolina Investors, Inc. ("First Carolina") a holder of
preferred shares, filed a separate lawsuit in New York Supreme Court for New
York County, naming the same defendants as in the Kimeldorf case. In December
2002, plaintiffs Kimeldorf and First Carolina filed a consolidated amended
complaint, styled Kimeldorf et al. v. First Union, et al, alleging, among
others, breach of contract; aiding and abetting breach of contract; tortious
interference with the contract; breach of fiduciary duties; aiding and abetting
of breach of fiduciary duties; and unconscionability against the defendants.
This consolidated amended complaint essentially consolidated the separate First
Carolina complaint, filed in November 2002 with the complaint of Mr. Kimeldorf
filed in April 2002.
22
On April 30, 2003, the trial court granted the plaintiff's motion to certify the
litigation as a class action.
On June 25, 2003 the Trust entered into a Settlement, Termination and Standstill
Agreement (the "Agreement") with, among others, Gotham Partners. The Agreement
provided for the termination of the merger agreement regarding the merger of the
Trust with Gotham Golf, the purchase by the Trust of 5,841,233 common shares of
the Trust owned by Gotham Partners and its affiliates for approximately $11.1
million and a termination payment to Gotham Partners of $2.4 million. The
Agreement also provides that neither Gotham Partners nor any affiliate will
enter into or agree to enter into any form of business combination, acquisition
or other transaction involving the Trust or any majority-owned affiliate for a
period of five years from the date of the Agreement.
In July 2003, Kimeldorf and First Carolina each filed separate motions with the
trial court seeking to hold the defendants in contempt as a result of the
execution and performance of the Termination Agreement. The plaintiffs contend
that these actions violated the trial court's injunction against the
consummation of the merger between the Trust and Gotham Golf. Defendants filed a
brief in opposition to the motions. The trial court heard oral argument on July
29, 2003 and has taken the motions under advisement.
The Trust regards the lawsuit as being without merit and will vigorously defend
against the asserted claims.
COMMON SHAREHOLDER LAWSUITS
FINK V. FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS, ET AL., SUPREME
COURT OF THE STATE OF NEW YORK, COUNTY OF NEW YORK (INDEX NO. 03600265)
On or about January 24, 2003, the Trust was served with a complaint filed in the
Supreme Court of New York, New York County on behalf of a purported holder of
the Trust's common shares, on behalf of himself and the common shareholders as a
class. The lawsuit seeks a declaration that the lawsuit is maintainable as a
class action and a certification that the plaintiff, Robert Fink, is the
representative of the class. Named as defendants in the lawsuit are the Trust,
Gotham Partners, the companies affiliated with Gotham Partners and the Trust
that are parties to the Merger Agreement, William Ackman and the four current
Trustees of the Trust. Among the allegations asserted are breach of fiduciary
duty and aiding and abetting thereof in connection with the transactions
contemplated by the Merger Agreement. The relief requested by the plaintiff
includes an injunction preventing the defendants from proceeding with
consummation of the merger, rescission of the merger if it occurs, an accounting
for any profits realized by the defendants as a result of the actions complained
of, an order permitting the creation of a shareholders' committee composed of
the Trust common shareholders and their representatives to manage the affairs of
the Trust, compensatory damages and the costs and disbursements of plaintiff's
counsel.
On or about February 14, 2003, the parties to this lawsuit stipulated that the
defendants need not answer or otherwise respond to the complaint for an
indefinite period of time. The stipulation is revocable by the plaintiff at any
time. The Trust believes that the purpose of the stipulation was to delay court
proceedings in this lawsuit until the outcome of the appeal of the injunction
entered in the Kimeldorf case is decided by the Appellate Division
On or about July 3, 2003, the Plaintiff filed an amended complaint which seeks
additional relief based upon the termination agreement, including a request that
the defendants be required to return to the Trust the termination fee paid to
Gotham as well as the consideration paid for Gotham's shares in the Trust. As
with the original
23
complaint, the parties have stipulated that the defendants need not answer or
otherwise respond to the amended complaint for an indefinite period of time. The
stipulation is revocable by the plaintiff at any time.
The Trust regards the lawsuit as without merit and plans to vigorously defend
against the allegations.
K-A & COMPANY, LTD. V. FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS,
ET AL., UNITED STATES DISTRICT COURT, NORTHERN DISTRICT OF OHIO, EASTERN
DIVISION (CASE NO. 1:03 CV 0460)
On or about February 12, 2003, a complaint was filed in the Court of Common
Pleas, Cuyahoga County, Ohio, by a purported holder of the Trust's common
shares, on behalf of itself and the Trust common shareholders as a class. Named
as defendants in the lawsuit are the Trust, Gotham, William Ackman and four of
the current Trustees of the Trust. The allegations made and the relief requested
in the K-A suit are substantially identical to those of the Fink suit referenced
above. The lawsuit seeks a declaration that the lawsuit is maintainable as a
class action and certification that the plaintiff, K-A & Company, LTD., is the
representative of the class. Among the allegations asserted are breach of
fiduciary duty and aiding and abetting thereof in connection with the
transactions contemplated by the Merger Agreement. This lawsuit was removed by
notice filed by defendants to the United States District Court, Northern
District of Ohio, Eastern Division (Case No. 1:03 CV 0460).
The relief requested by the plaintiff includes an injunction preventing the
defendants from proceeding with consummation of the merger, rescission of the
merger if it occurs, an accounting for any profits realized by the defendants as
a result of the actions complained of, an order permitting the creation of a
shareholders' committee composed of the Trust common shareholders and their
representatives to manage the affairs of the Trust, compensatory damages and the
costs and disbursements of plaintiff's counsel.
On April 10, 2003, the plaintiff filed a motion for a preliminary injunction
seeking an order preventing the defendants from consummation of the merger. The
defendants have filed a motion requesting the court to stay consideration of the
plaintiff's motion pending a decision on the appeal of the preliminary
injunction entered by the New York Supreme Court for New York County in
Kimeldorf v. First Union, described above. Thereafter, the parties entered into
an agreed stay of plaintiff's motion, which requires that the defendants timely
notify the plaintiff and the court of any decision of the appeal of the
preliminary injunction entered in the Kimeldorf case.
As with the Fink lawsuit, the Trust regards the lawsuit as without merit and
plans to vigorously defend against the allegations.
OTHER LITIGATION
PEACH TREE MALL LITIGATION
The Trust, as one Plaintiff in a class action composed of numerous businesses
and individuals, has pursued legal action against the State of California
associated with the 1986 flood of Sutter Buttes Center, formerly Peach Tree
Mall. In September 1991, the court ruled in favor of the plaintiffs on the
liability portion of the inverse condemnation suit, which the State of
California appealed. In the third quarter of 1999, the 1991 ruling in favor of
the Trust and the other plaintiffs was reversed by the State of California
Appeals Court, which remanded the case to the trial court for further
proceedings. After the remand to the trial court, the Trust and the other
plaintiffs determined to pursue a retrial before the court. The retrial of the
litigation commenced February 2001 and was completed July 2001. In November
2001, the trial court issued a decision that generally held in favor of the
State of California. In February 2002, the Plaintiffs in the case filed a notice
of appeal of the ruling of the
24
trial court in the California Court of Appeals. The appellate briefing was
completed in May 2003. The Trust is unable to predict at this time whether or
not it will recover any amount of its damage claims in this legal proceeding.
INDEMNITY TO IMPERIAL PARKING CORPORATION
In 1999, Newcourt Financial Ltd. ("Newcourt") brought a claim in Ontario against
an affiliate of the Trust and Imperial Parking Limited alleging a breach of a
contract between the Trust affiliate and Newcourt's predecessor-in-interest,
Oracle Credit Corporation and Oracle Corporation Canada, Inc. The Trust
affiliate and Imperial Parking Limited brought a separate action in British
Columbia against Newcourt, Oracle Credit Corporation and Oracle Corporation
Canada claiming, among other things, that the contract at issue was not properly
authorized by the Trust's board of trustees and the Imperial Parking Limited
board of directors. In March 2000, in connection with the spinoff of Imperial
Parking Corporation (the successor in interest to Imperial Parking Limited) to
the Trust's shareholders, the Trust granted a full indemnity to Imperial Parking
Corporation in respect of all damages arising from the outstanding actions.
Numerous attempts to settle this matter have not been successful. The Trust has
reserved $600,000 in its combined financial statements for this claim. The
reserved amount consists of the face amount of the contract of $425,000 and
estimated costs of $175,000. The amount of the claim, $825,000, includes
Newcourt's calculation of interest on the amount due at the default rate under
the contract. The Trust believes that, due to the failure of attempted
settlement negotiations, discovery will commence, and the matter will become
more actively litigated. The Trust intends to defend vigorously against the
claims brought against the parties that it has indemnified and to pursue their
separate claims with respect to this matter.
MOUNTAINEER MALL CLAIM
The Trust was named as a defendant in a lawsuit filed in connection with a
contractor's claim relative to the construction of a portion of the Mountaineer
Mall, located in Morgantown, West Virginia. The construction of the mall
commenced in 1993 and was completed in 1995. The mall was sold in July 1999. A
trial on the merits of the lawsuit was held in 1997.
In October 2002, the court issued findings of fact and conclusions of law
providing that the claimant was entitled to recover from the Trust the principal
amount of $266,076 in damages plus various interest amounts, which, when added
to the principal amount, would result in an aggregate damage award of $494,382
against the Trust. The court's order provided, however, that the amount of the
damage award is subject to offset by the amount of legal fees and expenses
reasonably and necessarily incurred by the Trust in defending a certain
mechanic's lien claim asserted by the plaintiff in the lawsuit. The court
further directed that the plaintiff and the Trust negotiate in good faith as to
the amount of such expense and that, if the parties are unable to agree as to
the appropriate offset, the court would schedule an evidentiary hearing for the
purpose of resolving the issue.
In July 2003, the Trust and the plaintiff entered into a settlement agreement
providing for the payment by the Trust of $350,000 to the plaintiff in full
settlement of the claim.
25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
31 Certification Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32 Certification Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8K:
June 27, 2003
Item 5 - On June 27, 2003, the Trust
announced that it and Gotham
Partners entered into an
agreement terminating the
proposal merger.
Item 7 - Exhibits
99.1 Press release dated June
27, 2003, issued by the
Trust.
99.2 Settlement, Termination
and Standstill Agreement,
dated as of June 25, 2003.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Trust has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Union Real Estate Equity and
Mortgage Investments
----------------------------------------
(Trust)
Date: August 14, 2003 By: /s/ Neil H. Koenig
------------------------------------
Neil H. Koenig
Interim Chief Executive Officer and
Interim Chief Financial Officer
27