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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 For the fiscal year ended December 31, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the transition period from____________ to ____________.
Commission File Number: 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
incorporation or organization) Identification No.)
7 Bulfinch Place - Suite 500
Boston, MA 02114
- ---------------------------------------- ------------------------
(Address of principal executive offices) (Zip Code)
617-570-4614
------------------------------------------------------------
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
Common Shares of Beneficial Interest, $1.00 par value New York Stock Exchange
Series A Cumulative Redeemable Preferred Shares of Beneficial
Interest, $25.00 par value New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and 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 at least 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 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. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined by Exchange Act Rule 12b-2). Yes [ ] No [X]
As of March 1, 2004, there were 31,058,913 common shares of beneficial interest
outstanding
At June 30, 2003, the aggregate market value of the common shares of beneficial
interest held by non-affiliates was $34,631,322.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement, to be filed with the
Securities and Exchange Commission within 120 days after the end of the fiscal
year covered by this Form 10-K, with respect to the 2004 Annual Meeting of
Beneficiaries, are incorporated by reference into Part III of this Annual Report
on Form 10-K.
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
CROSS REFERENCE SHEET PURSUANT TO ITEM G,
GENERAL INSTRUCTIONS TO FORM 10-K
ITEM OF FORM 10-K PAGE
PART I
1. Business 4
2. Properties 17
3. Legal Proceedings 19
4. Submission of Matters to a Vote of Security Holders 22
PART II
5. Market for Trust's Common Equity and Related Stockholder Matters 23
6. Selected Financial Data 24
7. Management's Discussion and Analysis of Financial Condition 26
and Results of Operations
7A. Quantitative and Qualitative Disclosures Regarding Market Risk 34
8. Financial Statements 35
9. Changes in and Disagreements with Accountants on 61
Accounting and Financial Disclosure
9A. Controls and Procedures 61
PART III
10. Directors and Executive Officers of the Trust 62
11. Executive Compensation 62
12. Security Ownership of Certain Beneficial Owners and Management 62
13. Certain Relationships and Related Transactions 62
14. Principal Accountant Fees and Services 62
PART IV
15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 63
(a) Financial Statements and Financial Statement Schedules 63
(b) Exhibits 63
(c) Reports on Form 8-K 66
Signatures 67
Schedule III - - Real Estate and Accumulated Depreciation 69
Exhibit Index 71
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
Any statements in this report, including any statements in the documents that
are incorporated by reference herein that are not strictly historical are
forward-looking statements within the meaning of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Any such forward-looking
statements contained or incorporated by reference herein should not be relied
upon as predictions of future events. Certain such forward-looking statements
can be identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," "seeks," "approximately," "intends,"
"plans," "pro forma," "estimates" or "anticipates" or the negative thereof or
other variations thereof or comparable terminology, or by discussions of
strategy, plans, intentions or anticipated or projected events, results or
conditions. Such forward-looking statements are dependent on assumptions, data
or methods that may be incorrect or imprecise and they may be incapable of being
realized. Such forward-looking statements include statements with respect to:
o the declaration or payment of distributions by First Union Real
Estate Equity and Mortgage Investments (the "Trust") or First
Union Management Inc. ("FUMI");
o the ownership, management and operation of properties;
o potential acquisitions or dispositions of properties, assets or
other businesses by the Trust or FUMI;
o the policies of the Trust or FUMI regarding investments,
acquisitions, dispositions, financings and other matters;
o the qualification of the Trust as a REIT under the Code and the
"grandfathering" rules under Section 269B of the Code;
o the real estate industry and real estate markets in general;
o the availability of debt and equity financing;
o interest rates;
o general economic conditions;
o supply and customer demand;
o trends affecting the Trust or FUMI;
o the effect of acquisitions or dispositions on capitalization and
financial flexibility;
o the anticipated performance of the Trust or FUMI and of acquired
properties and businesses, including, without limitation,
statements regarding anticipated revenues, cash flows, funds from
operations, earnings before interest, depreciation and
amortization, property net operating income, operating or profit
margins and sensitivity to economic downturns or anticipated
growth or improvements in any of the foregoing;
o the ability of the Trust or FUMI and of acquired properties and
businesses to grow; and
o developments in or outcomes of the Preferred Shareholder Lawsuit
or the Common Shareholder Lawsuits. (See "Item 3. Legal
Proceedings", below.)
Shareholders are cautioned that, while forward-looking statements reflect the
respective companies' good faith beliefs, they are not guarantees of future
performance and they involve known and unknown risks and uncertainties. Actual
results may differ materially from those in the forward-looking statements as a
result of various factors. The information contained or incorporated by
reference in this report and any amendment hereof, including, without
limitation, the information set forth in "Risk Factors" below or in any risk
factors in documents that are incorporated by reference in this report,
identifies important factors that could cause such differences. Neither the
Trust nor FUMI undertakes any obligation to publicly release the results of any
revisions to these forward-looking statements that may reflect any future events
or circumstances.
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PART I
ITEM 1. BUSINESS.
First Union Real Estate Equity and Mortgage Investments (the "Trust") is an
unincorporated association in the form of a business trust organized in Ohio
under a Declaration of Trust dated August 1, 1961, as amended from time to time
through March 2001 (the "Declaration of Trust"), which has as its stated
principal business activity the ownership and management of, and lending to,
real estate and related investments. At December 31, 2003, the Trust qualified
as a real estate investment trust ("REIT") under Sections 856 through 860 of the
Internal Revenue Code (the "Code").
To encourage efficient operation and management of its property, and after
receiving a ruling from the Internal Revenue Service with respect to the
proposed form of organization and operation, the Trust, in 1971, caused a
company to be organized pursuant to the laws of the State of Delaware under the
name First Union Management, Inc. ("FUMI"). As of December 31, 2003, FUMI's only
remaining operating subsidiary is VenTek International, Inc. ("VenTek"). VenTek
is in the business of manufacturing, installing and providing maintenance of
transit ticket vending equipment. VenTek's parking equipment business was sold
in August 2003.
For financial reporting purposes, the financial statements of FUMI are combined
with those of the Trust.
On July 22, 1998, tax legislation was enacted limiting the "grandfathering
rules" applicable to stapled REITS such as the Trust (the "Stapled REIT
Legislation"). As a result, the income and activities of FUMI with respect to
any real property interests acquired by the Trust and FUMI after March 26, 1998,
for which there was no binding written agreement, public announcement or filing
with the Securities and Exchange Commission on or before March 26, 1998, will be
attributed to the Trust for purposes of determining whether the Trust qualifies
as a REIT under the Code.
The Trust has been in the business of owning regional enclosed shopping malls,
large downtown office buildings and parking facilities as well as providing
financing to real estate and related assets and companies. The Trust's portfolio
was diversified by type of property, geographical location, tenant mix and
rental market. As of December 31, 2003, the Trust owned two real estate
properties, one shopping mall and one office property, as well as cash reserves.
The Trust's shopping mall is known as Park Plaza Mall and is located in Little
Rock, Arkansas. The Trust's office property is known as Circle Tower and is
located in Indianapolis, Indiana. In March 2004, the Trust engaged a real estate
broker to begin marketing the Park Plaza Mall property for sale. It cannot be
determined at this time as to what price or even if the property will ultimately
be sold.
THE GOTHAM TRANSACTION
On February 13, 2002, the Trust entered into a definitive Agreement and Plan of
Merger and Contribution, pursuant to which the Trust agreed to merge with and
into Gotham Golf Corp. ("Gotham Golf"), a Delaware corporation controlled by
Gotham Partners, L.P. ("Gotham Partners"), at that time the beneficial owner of
16.8% of the Trust's outstanding common shares. If consummated, the proposed
transaction would have resulted in the Trust's common shareholders receiving as
merger consideration for each Trust common share:
o $1.98 in cash;
o a choice of (a) an additional $0.35 in cash or (b) approximately 1/174th
(0.0057461) of a debt instrument to be issued by Southwest Shopping Centers,
Co. II, L.L.C. (a wholly-owned subsidiary of the Trust), with a face value
of $100 (which is an effective price of $60.91 per face value of $100),
indirectly secured by the Trust's principal real estate assets; and
o three-fiftieths (0.06) of a non-transferable uncertificated subscription
right, with each whole right exercisable to purchase one Gotham Golf common
share at $20.00 per share and, subject to availability and proration,
additional Gotham Golf common shares at $20.00 per share, for up to an
aggregate of approximately $41 million of Gotham Golf common shares.
The proposed transaction was subject to several conditions, including the
approval of the Trust's common shareholders and the obtaining of certain third
party consents. The Trust's common shareholders approved the
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proposed transaction by the requisite majority vote at a November 27, 2002
meeting of shareholders. However, litigation was brought with respect to the
proposed transaction, resulting in the granting of an injunction preventing the
proposed transaction from going forward.
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 year ended
December 31, 2003. See "Item 3. Legal Proceedings-Preferred Shareholder
Lawsuits" for additional information.
THE FUR INVESTORS TRANSACTION
On November 26, 2003, the Trust entered into a Stock Purchase Agreement with FUR
Investors, LLC ("FUR Investors"), an entity controlled by real estate investor
Michael L. Ashner, pursuant to which the Trust agreed to sell to FUR Investors a
minimum of 5,000,000 and a maximum of 5,185,724 newly issued common shares from
at a price of $2.60 per share. As part of the transaction, FUR Investors was
required to, and did, commence a tender offer to purchase up to 5,000,000 common
shares, at a price of $2.30 per share. Upon consummation of the tender offer, on
December 31, 2003, FUR Investors acquired 5,000,000 common shares pursuant to
the tender offer at a price of $2.30 per share and purchased an additional
5,000,000 newly issued common shares pursuant to the terms of the Stock Purchase
Agreement for a price of $2.60 per share. As a result of these purchases, FUR
Investors acquired a total of 10,000,000 of the outstanding common shares
representing 32.2% of the total outstanding common shares.
In connection with the transactions contemplated by the Stock Purchase
Agreement, (i) Michael L. Ashner was appointed as the Chief Executive Officer of
the Trust, (ii) the Trust entered into an Advisory Agreement with FUR Advisors,
LLC ("FUR Advisors"), an affiliate of FUR Investors, (iii) Mr. Ashner entered
into an exclusivity agreement, and (iv) FUR Investors entered into a covenants
agreement. In addition, Daniel J. Altobello and Jeffrey Citrin resigned as
members of the Board of Trustees, and three new trustees were appointed to the
Board of Trustees. As a result, the Board of Trustees presently consists of six
members.
Pursuant to the terms of the covenants agreement FUR Investors agreed that until
the later of the time when (i) Michael L. Ashner is no longer serving as either
Chairman or Chief Executive Officer of the Trust and (ii) Mr. Ashner, FUR
Investors or other affiliates of Mr. Ashner (the "Ashner affiliates") are no
longer beneficial owners of at least 10% of the outstanding common shares:
o FUR Investors will not propose, and will vote all of its commons shares
against, any action which would impair the Trust's status as a real
estate investment trust unless a majority of independent trustees then
in office determine that it would be in the Trust's best interest to do
so;
o FUR Investors will not take any affirmative action which would cause
the common shares to cease to be subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended, except as approved
by a majority of the independent trustees;
o FUR Investors will not take any action which would cause the common
shares to cease to be listed for trading on a major stock exchange,
except as approved by a majority of the independent trustees;
o So long as the Trust has 300 or more holders of common shares, FUR
Investors will not take any affirmative action which would cause the
Trust to fail to comply with the corporate governance provisions
applicable to a listed company including, in all cases, Section 303A of
the New York Stock Exchange Listing Standards (whether or not such rule
would otherwise apply to the Trust) except as otherwise approved by a
majority of independent trustees;
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o FUR Investors will not take any action to amend the provisions of
Section 11.13 of the Trust's Declaration of Trust, which requires all
transactions between the Trust and the Trust's officers, trustees or
advisor (or their affiliates) to be approved by a majority of the
board, including a majority of the independent trustees; and
o FUR Investors, Mr. Ashner and all Ashner affiliates will vote all their
common shares in proportion to the votes cast by other holders of
common shares at any meeting of holders of common shares with respect
to any proposal by such persons or any trustee of the Trust affiliated
with such persons relating to a transaction in which FUR Investors, Mr.
Ashner or any Ashner affiliate have an economic interest. This
restriction will not apply, however, to (i) certain amendments to the
Declaration of Trust, (ii) the election to the Board of up to two
nominees designated by FUR Investors, (iii) any election of qualified
independent directors and (iv) any transaction approved and recommended
by a majority of the independent trustees, if a majority of the
independent trustees has determined that FUR Investors, Mr. Ashner and
any Ashner affiliate may vote their common shares in such manner as FUR
Investors, Mr. Ashner and any Ashner affiliate determines.
Pursuant to the terms of the exclusivity agreement, Mr. Ashner agreed that all
real estate related investments of which he becomes aware will first be offered
to the Trust before such investment being offered to any other Ashner affiliate
except (i) investments in equity securities of publicly traded real estate
entities in an amount not to exceed 2% of the outstanding equity securities of
such entity other than Atlantic Realty Trust in which Mr. Ashner will be
permitted to own up to a 2.8% equity interest; (ii) passive investments in real
estate entities where the investment does not represent the greater of a 10%
equity interest in the entity or $1,500,000; and (iii) investments which relate
to assets that are currently held by certain entities associated with Mr. Ashner
that are set forth on a schedule to the exclusivity services agreement or
investments in assets owned or controlled by such entities.
VENTEK
In August 2003, VenTek sold substantially all the assets of its parking ticket
equipment 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 transferred approximately $0.2 million in
liabilities. The Trust recognized a gain for financial reporting purposes of
$54,000 on the transaction. The sale of the parking ticket equipment business is
not expected to have a significant impact on operations or cash flows of the
Trust.
During 2004, current management decided to dispose of VenTek. It is expected
that the disposition will take place during 2004.
ATLANTIC REALTY
In January 2004, the Trust acquired 267,000 shares in Atlantic Realty Trust
(NASD: ATLRS) representing 7.5% of the outstanding shares in Atlantic Realty.
The Trust acquired these shares with a view to making a profit on its
investment. In light of its investment objectives, on January 12, 2004, the
Trust contacted Atlantic Realty to discuss a possible business combination
between Atlantic Realty and the Trust. In general, the proposal seeks to merge
Atlantic Realty with and into the Trust, or a subsidiary thereof, in exchange
for $16.25 per common share of beneficial interest, payable, at the election of
the shareholder of Atlantic Realty, either (i) in cash, or (ii) in exchange for
the Trust's Series A cumulative convertible redeemable preferred shares of
beneficial interest (the "Preferred Shares") at a rate of .65 Preferred Shares
per share. In the event that Atlantic Realty shareholders holding more than
1,901,760 shares in the aggregate elect to receive Preferred Shares, such
shareholders will receive (i) a number of Preferred Shares equal to (a) .65
multiplied by (b) a fraction, the numerator of which is 1,901,760 and the
denominator of which is the total number of shares to be exchanged for Preferred
Shares and (ii) cash equal to (x) $16.25 multiplied by (y) a fraction, the
numerator of which is the number of shares to be exchanged for Preferred Shares
less 1,901,760 and the denominator of which is the number of shares to be
exchanged for Preferred Shares. The consideration would be subject to upward or
downward adjustment, as the case may be, based (i) on a projected post-closing
net cash balance of Atlantic Realty of $17,500,000 and (ii) any stock splits,
issuances, repurchases, reclassifications and other transactions affecting the
value of Atlantic Realty. The proposal also provides that it is
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subject to, among other things, the satisfactory completion by the Trust of a
five-business day due diligence review of Atlantic Realty. In addition, the
Trust requested a waiver to acquire in excess of 9.8% of the outstanding shares
in Atlantic Realty. The terms of such waiver proposed by Atlantic Realty were
rejected by the Trust and no such waiver was obtained. Atlantic Realty has
advised the Trust that they have established a special committee to review the
Trust's proposal as well as any other proposals and will advise the Trust as to
the adequacy of its proposal in due course.
NORTHSTAR LOAN
On March 3, 2004, the Trust acquired from Bank of America, N.A. a loan
receivable from NorthStar Partnership, L.P. in the principal amount of
approximately $16.944 million (the "NorthStar Loan"). The NorthStar Loan is
evidenced by a Credit Agreement, Promissory Note and collateral documents. The
NorthStar Loan is secured by a first priority lien on all or a portion of
NorthStar's interest in Morgans Hotel Group LLC, Emmes & Company LLC and
Presidio Capital Investment Company, LLC as well as certain other assets of
NorthStar. Upon acquisition, the NorthStar Loan was modified to extend the
maturity date for one year to May 28, 2005 and provides for an option to
NorthStar to further extend the maturity date, upon payment of a one point fee,
for up to two optional six-month extensions. The NorthStar Loan was further
modified to provide for an initial interest rate of at a minimum of 12% per
annum, with a yield to maturity of 12.86%, increasing by two percentage points
for each six month renewal term. In addition, NorthStar was required to
establish a reserve equal to interest for six months and, upon the occurrence of
certain events, to increase such reserve to one year's interest. The NorthStar
Loan requires payments of interest only, is prepayable at any time, together
with a premium, and requires mandatory prepayments from asset sales or
refinancings after the first $9 million in proceeds from such sales or
refinancings. Further, the Trust entered into an agreement pursuant to which it
has an option to invest in certain transactions involving assets of NorthStar
which are offered to existing equityholders of NorthStar, or their affiliates.
Due to the nature and amount of the NorthStar Loan, in order to comply with the
rules applicable to real estate investment trusts, a portion of the NorthStar
Loan is held by FT-TRS NS Loan Corp., a newly formed wholly-owned subsidiary of
the Trust that has elected to be treated as a taxable REIT subsidiary.
Accordingly, the portion of income allocated to the amount of the NorthStar Loan
held by the taxable REIT subsidiary will be subject to corporate level tax.
EMPLOYEES
As of December 31, 2003, the Trust had no employees and VenTek had 17 employees.
During 2003, the affairs of the Trust and FUMI were administered by Real Estate
Systems Implementations Group, LLC ("RE Systems"), an entity affiliated with the
then Interim Chief Executive Officer and Interim Chief Financial Officer of the
Trust, and other third party service providers.
The affairs of the Trust and its subsidiaries are now administered by FUR
Advisors pursuant to the terms of an Advisory Agreement (the "Advisory
Agreement") dated December 31, 2003 between the Trust and FUR Advisors which
agreement was negotiated and approved by the Board of Trustees of the Trust
prior to the acquisition by FUR Investors of its interest in the Trust. FUR
Advisors is controlled by and partially owned by the executive officers of the
Trust. Pursuant to the terms of the Advisory Agreement, FUR Advisors is
responsible for providing asset management services to the Trust and
coordinating with the Trust's transfer agent and property managers. Pursuant to
the terms of the Advisory Agreement, for providing these services, FUR Advisors
is entitled to the following fees: (i) an annual asset management fee of 1% of
the gross asset value of the Trust up to $100 million, .75% of the gross asset
value of the Trust between $100 million and $250 million, .625% of the gross
asset value of the Trust between $250 million and $500 million and .50% of the
gross asset value of the Trust in excess of $500 million; (ii) property and
construction management fees at commercially reasonable rates as determined by
the independent Trustees of the Board; (iii) loan servicing fees (not exceeding
commercially reasonable rates approved by a majority of the independent
Trustees) for providing administrative and clerical services with respect to
loans made by the Trust to third parties; and (iv) an incentive fee equal to 20%
of all distributions to the holders of the Trust's common shares of beneficial
interest after December 31, 2003 in excess of the Threshold Amount (as defined
below) increased by a return thereon of 7% per annum compounded annually. The
Threshold Amount is equal to $71.3 million, increased by the net issuance price
of all shares issued after December 31, 2003, and decreased by the redemption
price of all
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shares redeemed after December 31, 2003. In addition, FUR Advisors is entitled
to be reimbursed for up to $125,000 per annum for the costs associated with the
employment of one or more asset managers. The Trust also continues to retain RE
Systems on a month to month basis to provide services to FUMI and VenTek at a
cost of $10,000 per month.
COMPETITION
The Trust's shopping mall competes for tenants on the basis of the rent charged
and location, and encounters competition from other retail properties in its
market area. The principal competition for the Trust's shopping mall may come
from future shopping malls located in its market area. Additionally, the overall
economic health of retail tenants impacts the Trust's shopping mall.
The Trust's office property competes for tenants principally with office
buildings throughout the area in which it is located. Competition for tenants
has been and continues to be intense on the basis of rent, location and age of
the building. The Trust's segment data may be found in footnote 16 to the
Combined Financial Statements in Item 8.
RISK FACTORS
You should carefully consider the risks described below. These risks are not the
only ones that the Trust may face. Additional risks not presently known to the
Trust or that the Trust currently considers immaterial may also impair our
business operations and hinder our ability to make expected distributions to
equityholders
This Form 10-K also contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
the risks faced by us described below or elsewhere in this Form 10-K.
OUR ECONOMIC PERFORMANCE AND THE VALUE OF OUR REAL ESTATE ASSETS ARE SUBJECT TO
THE RISKS INCIDENTAL TO THE OWNERSHIP AND OPERATION OF REAL ESTATE PROPERTIES
Our economic performance, the value of our real estate assets, both those
presently held as well as future investments, and, therefore, the value of your
investment are subject to the risks normally associated with the ownership,
operation and disposal of real estate properties, including:
o changes in the general and o the attractiveness of our
local economic climate; properties to tenants and
purchasers;
o the cyclical nature of the
real estate industry and o changes in market rental
possible oversupply of, or rates and our ability to
reduced demand for, space in rent space on favorable
our core markets; terms;
o trends in the retail o the bankruptcy or insolvency
industry, in employment of tenants;
levels and in consumer
spending patterns; o the need to periodically
renovate, repair and
o changes in household re-lease space and the costs
disposable income; thereof;
o changes in interest rates o increases in maintenance,
and the availability of insurance and operating
financing; costs; and
o competition from other o civil unrest, acts of
properties; terrorism, earthquakes and
other natural disasters or
acts of God that may result
in uninsured losses.
In addition, applicable federal, state and local regulations, zoning and tax
laws and potential liability under environmental and other laws may affect real
estate values. Further, throughout the period that we own real property
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regardless of whether the property is producing any income, we must make
significant expenditures, including property taxes, maintenance costs, insurance
costs and related charges and debt service. The risks associated with real
estate investments may adversely affect our operating results and financial
position, and therefore the funds available for distribution to you as
dividends.
OUR ECONOMIC PERFORMANCE IS SUBJECT TO THE RISKS INCIDENTAL TO INVESTMENTS IN
REAL ESTATE PROPERTIES
At December 31, 2003, the Trust had $83.9 million of cash and short-term
investments available for investment. The Trust's ability to generate increased
operations is dependent upon the ability of the Trust to invest these funds in
real estate related assets that will ultimately generate favorable returns to
the Trust.
ASSET SALES HAVE REDUCED OUR PORTFOLIO AND MAY ADVERSELY AFFECT OUR ABILITY TO
MAINTAIN REIT STATUS
In March 2001, the Trust sold a significant portion of its remaining properties
(the "Asset Sale"). As of February 1, 2004, the Trust's real estate properties
consist of a shopping center in Little Rock, Arkansas and an office building in
Indianapolis, Indiana. As a result, the sale limits the Trust's flexibility to
engage in non-real estate related activities without adversely affecting its
REIT status.
By virtue of the income generated by its real estate assets, the Trust believes
that it will maintain its qualification as a REIT for 2004. The Trust does not
anticipate having to invest in REMICs, as defined in the section "Risk
Associated with Investment in REMICs," in 2004 in order to qualify as a REIT in
2004. If the Trust were to invest in additional non-real estate assets in 2004,
the Trust might not qualify as a REIT in 2004.
Although the Trust will seek to limit its investments so that it will continue
to maintain its REIT status in 2004, the Trust cannot presently determine
whether it will continue to qualify as a REIT after 2004.
WE FACE A NUMBER OF SIGNIFICANT ISSUES WITH RESPECT TO THE PROPERTIES WE OWN
WHICH MAY ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE
PARK PLAZA MALL
Background. Dillard Department Stores, Inc. (referred to herein as "Dillard's"),
the only anchor department store at the Trust's Park Plaza Mall located in
Little Rock, Arkansas, owns its facilities (two stores at opposite ends of the
mall) and has an agreement with a subsidiary of the Trust that contains an
operating covenant that required Dillard's to operate these facilities
continuously as retail department stores only until July 2003 but may continue
operations at Park Plaza Mall through 2031. The Trust had approached Dillard's
to extend this covenant prior to its expiration and continues to explore options
with Dillard's, however, to date, no agreement with Dillard's has been reached.
Further, if Dillard's chooses to close one or both of its stores, many of the
tenant's have the right to terminate their leases or pay less rent. In the event
that Dillard's ceases to operate its stores at the Park Plaza Mall, the value of
the Park Plaza Mall would be materially and adversely affected. These events
might result in a decline in net revenue that might trigger an event of default
under the senior mortgage loan secured by the Park Plaza Mall. There can be no
assurance that Dillard's will extend or renew its operating covenant on terms
acceptable to the Trust or continue to operate its stores at the Park Plaza
Mall. (See "Park Plaza Mall" in Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources").
Proposed New Mall and Related Litigation. In 2000, Dillard's and its partner
proposed the construction of a new mall in the vicinity of the Park Plaza Mall,
and would be anchored by Dillard's, among other department store anchors. During
the first quarter of 2001, the Little Rock zoning board 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. The decision was ultimately appealed to the Supreme
Court of Arkansas which determined that any zoning change needs to be approved
by voters through a referendum. Dillard's partner announced in February 2004
that it was no longer proceeding with the proposed development. Nevertheless, if
a new mall in the vicinity of Park Plaza Mall were to be developed, it could
adversely effect the operations of Park Plaza Mall and, accordingly, the Trust.
9
CIRCLE TOWER
The Trust's ownership interest in the Circle Tower office property in
Indianapolis, Indiana, includes a leasehold interest in a ground lease. The
original ground lease was entered into in 1910, expires in 2009 with an option
for an additional 99 years which has been exercised, and contains a "gold
clause" provision that may result in a rent increase if the leasehold interest
is sold. The resulting rent increase could be substantial. In addition, the
marketability of Circle Tower is also adversely affected by the uncertainty of
the rent rate for the renewal term of the ground lease. Until the rental rates
are finalized (which is not expected to occur until the period within 90 days
prior to the expiration of the original term), it may be difficult to sell
Circle Tower. Accordingly, it may be in the economic interest of the Trust to
hold the leasehold interest indefinitely. In December 2003, the Trust deposited
with an escrow agent the sum of $700,000 which amount is to be applied to the
purchase of the land underlying the Indianapolis property and the expenses
associated therewith. At the time the funds were deposited with the escrow
agent, the Trust offered to purchase from each owner of the land their
respective interests in the land at any time prior to May 31, 2004 for a price
equal to such owner's allocable share of the amount placed in escrow. At March
1, 2004, the Trust had acquired interests in the land representing approximately
a 73% interest in the land.
GENERAL PROPERTY ISSUES
Leasing Issues. With respect to its properties, the Trust is also subject to the
risk that, upon expiration, leases may not be renewed, the space may not be
relet, or the terms of renewal or reletting (including the cost of required
renovations) may be less favorable than the current lease terms. Leases
accounting for approximately 8% of the aggregate 2004 annualized base rents from
the Trust's remaining properties (representing approximately 9% of the net
rentable square feet at the properties) expire without penalty or premium
through the end of 2004, and leases accounting for approximately 22% of
aggregate 2004 annualized base rent from the properties (representing
approximately 18% of the net rentable square feet at the properties) are
scheduled to expire in 2005. Other leases grant their tenants early termination
rights upon payment of a termination penalty. Lease expirations will require the
Trust to locate new tenants and negotiate replacement leases with such tenants.
Replacement leases typically require the Trust to incur tenant improvements,
other tenant inducements and leasing commissions, in each case, which may be
higher than the costs relating to renewal leases. If the Trust is unable to
promptly relet or renew leases for all or a substantial portion of the space,
subject to expiring leases, if the rental rates upon such renewal or reletting
are significantly lower than expected or if the Trust's reserves for these
purposes prove inadequate, the Trust's revenues and net income could be
adversely affected.
Bankruptcy of Tenant. Further, a tenant may experience a downturn in its
business, which could cause the loss of that tenant or weaken its financial
condition and result in the tenant's inability to make rental payments when due.
In addition, a tenant may seek the protection of bankruptcy, insolvency or
similar laws, which could result in the rejection and termination of such
tenant's lease and cause a reduction in the Trust's cash flows.
The Trust cannot evict a tenant solely because of its bankruptcy. A court,
however, may authorize a tenant to reject and terminate its lease with the
Trust. In such a case, our claim against the tenant for unpaid, future rent
would be subject to a statutory cap that might be substantially less than the
remaining rent owed under the lease. In any event, it is unlikely that a
bankrupt tenant will pay in full amounts it owes the Trust under a lease. The
loss of rental payments from tenants could adversely affect the Trust's cash
flows and operating.
Tenant Concentration. The Trust's 10 largest tenants for its two properties
(based on pro forma base rent for 2004) aggregate approximately 32% of the
Trust's total base rent and approximately 25% of the Trust's net rental square
feet and have remaining lease terms ranging from approximately six months to
nine years. The Trust's largest tenant, the Gap Stores, (i.e., the GAP, GAP Kids
and Banana Republic) represents approximately 10% of the pro forma aggregate
annualized base rent for 2004 and 8% of the pro forma net rentable square feet
at the properties. Its lease expires on April 30, 2005. Although the Trust
believes that it has a good relationship with each of its principal tenants, the
Trust's revenues would be disproportionately and adversely affected if a
significant number of these tenants did not renew their leases or renewed their
lease upon expiration on terms less favorable to the Trust.
10
Competition. The Trust competes with a number of real estate developers,
operators, and institutions for tenants and acquisition opportunities. Many of
these competitors have significantly greater resources than the Trust. No
assurances can be given that such competition will not adversely affect the
Trust's revenues.
THE TRUST'S BUSINESS IS SUBSTANTIALLY DEPENDENT ON THE ECONOMIC CLIMATES OF TWO
MARKETS
As of February 1, 2004, the Trust's real estate portfolio consists of a shopping
center in Little Rock, Arkansas and an office building in Indianapolis, Indiana.
As a result, the Trust's current real estate revenue is substantially dependent
on the economies of these markets. A material downturn in demand for office or
retail space in either of these markets could have a material impact on the
Trust's ability to lease its office or retail space and may adversely impact the
Trust's cash flows operating results.
ADDITIONAL REGULATIONS APPLICABLE TO THE TRUST'S PROPERTIES MAY REQUIRE
SUBSTANTIAL EXPENDITURES TO ENSURE COMPLIANCE, WHICH COULD ADVERSELY AFFECT CASH
FLOWS AND OPERATING RESULTS
The Trust's properties are subject to various federal, state and local
regulatory requirements such as local building codes and other similar
regulations. If the Trust fails to comply with these requirements, governmental
authorities may impose fines on the Trust or private litigants may be awarded
damages against the Trust.
The Trust believes that its properties are currently in substantial compliance
with all applicable regulatory requirements. New regulations or changes in
existing regulations applicable to its properties, however, may require the
Trust to make substantial expenditures to ensure regulatory compliance, which
would adversely affect cash flows, operating results.
VENTEK INCURRED LOSSES AND THE TRUST COULD BE OBLIGATED TO MAKE SIGNIFICANT
PAYMENTS ON CERTAIN CONTINGENT OBLIGATIONS
FUMI's subsidiary, VenTek, a manufacturer of transit ticketing equipment, had
incurred significant operating losses through December 31, 2003. During 2003,
VenTek eliminated overhead and sold the parking operations portion of the
business. 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 guarantee in the amount of $5.3 million expired in September 2003
and the guarantee in the amount of $6.2 million will expire in September 2004.
As of December 31, 2003, VenTek had delivered all equipment required under the
contracts and no amounts had been drawn against these guarantees. If a warranty
or service claim against VenTek is made and VenTek fails or is unable to perform
in accordance with the remaining contract, the Trust may be responsible for
payment under the remaining guarantee. During the third quarter of 2003, VenTek
entered into a new contract with one of the transit authorities for $2.2 million
and received a change order for $0.8 million in the fourth quarter from the
other transit authority to manufacture transit ticket vending machines. The
contract and change order are presently expected to be completed by November 30,
2004. In connection with the contract, the Trust provided cash collateral of
$1.1 million which is equal to 50% of the contract value to secure a Letter of
Credit required by the bonding company. If VenTek does not perform under these
contracts, the Trust would be obligated on the guarantees and/or subject to lose
all or a portion of the cash collateral. During 2004, current management decided
to dispose of VenTek. It is expected that the disposition will take place during
2004.
THERE IS NO ASSURANCE THAT THE TRUST'S BUSINESS STRATEGY WILL BE SUCCESSFULLY
IMPLEMENTED AND THAT REPLACEMENT ASSETS, IF ANY, WILL PROVIDE GREATER RETURNS
The Trust's assets at December 31, 2003 were two real estate properties as well
as a significant amount of cash available for distribution or investment or for
use in connection with a possible business combination, as the Board of Trustees
may determine. It is the current intention of the Trustees of the Trust to
continue to operate the Trust as an ongoing enterprise and to examine other
strategic alternatives only if it deems it appropriate to do so. The Trust will
seek to make investments in real estate related assets (properties, securities
or debt of other real estate companies) at such times as it deems advisable.
There can be no assurance that such acquisitions, if any, will provide greater
returns to the shareholders than the current assets of the Trust.
11
FACTORS THAT MAY CAUSE THE TRUST TO LOSE ITS NEW YORK STOCK EXCHANGE LISTING
If the Trust were to fail to qualify as a REIT, it might lose its listing on the
New York Stock Exchange. Whether the Trust would lose its NYSE listing would
depend on a number of factors besides REIT status, including the number of
equityholders and amount and composition of its assets. If the Trust loses its
NYSE listing, the Trust would try to have its shares listed on another national
securities exchange.
NEW LEGISLATION COULD ADVERSELY AFFECT THE TRUST'S REIT QUALIFICATION
New legislation, as well as regulations, administrative interpretations or court
decisions, also could change the tax law with respect to the Trust's
qualification as a REIT and the federal income tax consequences of such
qualification. The adoption of any such legislation, regulations or
administrative interpretations or court decisions could have a material adverse
effect on the results of operations, financial condition and prospects of the
Trust and could restrict the Trust's ability to grow.
DEPENDENCE ON QUALIFICATION AS A REIT; TAX AND OTHER CONSEQUENCES IF REIT
QUALIFICATION IS LOST
Although the Trust believes that it will remain organized and will continue to
operate so as to qualify as a REIT for federal income tax purposes, it might
fail to remain qualified in this way. Qualification as a REIT for federal income
tax purposes is governed by highly technical and complex provisions of the
Internal Revenue Code for which there are only limited judicial or
administrative interpretations. The Trust's qualification as a REIT also depends
on various facts and circumstances that are not entirely within its control. In
addition, legislation, new regulations, administrative interpretations or court
decisions might significantly change the tax laws with respect to the
requirements for qualification as a REIT or the federal income tax consequences
of qualification as a REIT.
In addition, the Trust's ability to qualify as a REIT may be dependent upon its
continued exemption from the anti-stapling rules of Section 269B(a)(3) of the
Code, which, if they were to apply, might prevent the Trust from qualifying as a
REIT. The "grandfathering" rules governing Section 269B generally provide that
Section 269B(a)(3) does not apply to a stapled REIT if the REIT and its stapled
operating company were stapled on June 30, 1983. On June 30, 1983, the Trust was
stapled with FUMI. There are, however, no judicial or administrative authorities
interpreting this "grandfathering" rule. Moreover, if, for any reason, the Trust
failed to qualify as a REIT in 1983, the benefit of the "grandfathering" rule
would not be available to the Trust, in which case the Trust would not qualify
as a REIT for any taxable year from and after 1983.
If, with respect to any taxable year, the Trust fails to maintain its
qualification as a REIT, it could not deduct distributions to beneficiaries in
computing its taxable income and would have to pay federal income tax on its
taxable income at regular corporate rates. The federal income tax payable would
include any applicable alternative minimum tax. If the Trust had to pay federal
income tax, the amount of money available to distribute to beneficiaries would
be reduced for the year or years involved, and the Trust would no longer be
required to distribute money to Beneficiaries. In addition, the Trust would also
be disqualified from treatment as a REIT for the four taxable years following
the year during which qualification was lost, unless it was entitled to relief
under the relevant statutory provisions. Although the Trust currently intends to
operate in a manner designed to allow it to qualify as a REIT, future economic,
market, legal, tax or other considerations may cause it to revoke the REIT
election.
IN ORDER TO MAINTAIN OUR STATUS AS A REIT, WE MAY BE FORCED TO BORROW FUNDS
DURING UNFAVORABLE MARKET CONDITIONS
To qualify as a REIT, we generally must pay dividends to our beneficiaries at
least 90% of our net taxable income each year, excluding capital gains. This
requirement limits our ability to accumulate capital. We may not have sufficient
cash or other liquid assets to meet REIT dividend requirements. As a result, we
may need to incur debt to fund required dividends when prevailing market
conditions are not favorable. Difficulties in meeting dividend requirements may
arise as a result of:
12
o differences in timing between when we must recognize income for U.S.
federal income tax purposes and when we actually receive income;
o the effect of non-deductible capital expenditures;
o the creation of reserves; or
o required debt or amortization payments.
If we are unable to borrow funds on favorable terms, our ability to pay
dividends to our beneficiaries and our ability to qualify as a REIT may suffer.
ADVERSE EFFECTS OF REIT MINIMUM DIVIDEND REQUIREMENTS
In order to qualify as a REIT, the Trust is generally required each year to
distribute to its shareholders at least 90% of its taxable income (excluding any
net capital gain). The Trust generally is subject to a 4% nondeductible excise
tax on the amount, if any, by which certain distributions paid by it with
respect to any calendar year are less than the sum of:
o 85% of its ordinary income for that year,
o 95% of its capital gain net income for that year, and
o 100% of its undistributed income from prior years.
The Trust intends to comply with the foregoing minimum distribution
requirements; however, due to significant tax basis net operating losses, the
Trust does not anticipate that any distributions will be required in the
foreseeable future. Distributions to shareholders by the Trust are determined by
the Trust's Board of Trustees and depend on a number of factors, including the
amount of cash available for distribution, financial condition, results of
operations, decision by the Board of Trustees to reinvest funds rather than to
distribute such funds, capital expenditures, annual distribution requirements
under the REIT provisions of the Code and such other factors as the Board of
Trustees deems relevant. For federal income tax purposes, distributions paid to
shareholders may consist of ordinary income, capital gains, return of capital,
or a combination thereof. The Trust provides shareholders with annual statements
as to the taxability of distributions. During 2003, the Trust was not required
to and did not make any distributions to its common shareholders. It is
presently anticipated that the Trust will not be required to, nor is it expected
that it will, make any distributions to its common shareholders in 2004.
ABILITY TO OPERATE PROPERTIES DIRECTLY AFFECTS THE TRUST'S FINANCIAL CONDITION
The Trust's investments in real properties are subject to the risks inherent in
owning real estate. The underlying value of the Trust's real estate investments,
the results of its operations and its ability to make distributions to its
shareholders and to pay amounts due on its indebtedness will depend on its
ability to operate its properties and manage its other investments in a manner
sufficient to maintain or increase revenues and to generate sufficient revenues
in excess of its operating and other expenses.
ILLIQUIDITY OF REAL ESTATE
Real estate investments are relatively illiquid. The Trust's ability to vary its
real estate portfolio in response to changes in economic and other conditions
will therefore be limited. If the Trust decides to sell an investment, no
assurance can be given that the Trust will be able to dispose of it in the time
period it desires or that the sales price of any investment will recoup or
exceed the amount of the Trust's investment.
INCREASES IN PROPERTY TAXES COULD AFFECT THE TRUST'S ABILITY TO MAKE SHAREHOLDER
DISTRIBUTIONS
The Trust's real estate investments are all subject to real property taxes. The
real property taxes on properties which the Trust owns may increase or decrease
as property tax rates change and as the value of the properties are assessed
13
or reassessed by taxing authorities. Increases in property taxes may have an
adverse effect on the Trust and its ability to pay dividends to shareholders and
to pay amounts due on its indebtedness.
ENVIRONMENTAL LIABILITIES
The obligation to pay for the cost of complying with existing environmental
laws, ordinances and regulations, as well as the cost of complying with future
legislation, may affect the operating costs of the Trust. Under various federal,
state and local environmental laws, ordinances and regulations, a current or
previous owner or operator of real property may be liable for the costs of
removal or remediation of hazardous or toxic substances on or under the
property. Environmental laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances and whether or not such substances originated from the
property. In addition, the presence of hazardous or toxic substances, or the
failure to remediate such property properly, may adversely affect the Trust's
ability to borrow by using such real property as collateral. The Trust maintains
insurance related to potential environmental issues on its current and
previously owned properties.
Certain environmental laws and common law principles could be used to impose
liability for releases of hazardous materials, including asbestos-containing
materials or "ACMs," into the environment. In addition, third parties may seek
recovery from owners or operators of real properties for personal injury
associated with exposure to released ACMs or other hazardous materials.
Environmental laws may also impose restrictions on the use or transfer of
property, and these restrictions may require expenditures. In connection with
the ownership and operation of any of the Trust's properties, the Trust, FUMI
and the other lessees of these properties may be liable for any such costs. The
cost of defending against claims of liability or remediating contaminated
property and the cost of complying with environmental laws could materially
adversely affect the Trust and FUMI and their ability to pay amounts due on
their indebtedness and with respect to the Trust, to pay dividends to its
shareholders.
Prior to undertaking major transactions, the Trust has hired independent
environmental experts to review specific properties. The Trust has no reason to
believe that any environmental contamination or violation of any applicable law,
statute, regulation or ordinance governing hazardous or toxic substances has
occurred or is occurring. However, no assurance can be given that hazardous or
toxic substances are not located on any of the properties. The Trust will also
endeavor to protect itself from acquiring contaminated properties or properties
with significant compliance problems by obtaining site assessments and property
reports at the time of acquisition when it deems such investigations to be
appropriate. There is no guarantee, however, that these measures will
successfully insulate the Trust from all such liabilities.
An environmental assessment of the Park Plaza Mall identified the potential for
asbestos to be present in the resilient vinyl floor tiles in retail tenant
storage areas and service corridors and in the cooling tower fill. A third party
consultant concluded that it was unlikely but possible that non-friable asbestos
was present in these areas. The consultant recommended and the Trust has
implemented a standard operations and maintenance plan based on EPA guidance.
COMPLIANCE WITH THE ADA MAY AFFECT DISTRIBUTIONS TO THE TRUST'S SHAREHOLDERS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all public
accommodations are required to meet certain federal requirements related to
access and use by disabled persons. A determination that the Trust is not in
compliance with the ADA could also result in the imposition of fines and/or an
award of damages to private litigants. If the Trust were required to make
significant modifications to comply with the ADA, there could be a material
adverse effect on its ability to pay amounts due on its indebtedness or to pay
dividends to its shareholders.
UNINSURED AND UNDERINSURED LOSSES
The Trust may not be able to insure its properties against losses of a
catastrophic nature, such as terrorist acts, earthquakes and floods, because
such losses are uninsurable or not economically insurable. The Trust will use
its discretion in determining amounts, coverage limits and deductibility
provisions of insurance, with a view to maintaining appropriate insurance
coverage on its investments at a reasonable cost and on suitable terms. This may
result in insurance coverage that, in the event of a substantial loss, would not
be sufficient to pay the full current market value or current replacement cost
of the lost investment and also may result in certain losses being totally
uninsured. Inflation, changes in building codes, zoning or other land use
ordinances, environmental considerations,
14
lender imposed restrictions and other factors also might make it not feasible to
use insurance proceeds to replace the property after such property has been
damaged or destroyed. Under such circumstances, the insurance proceeds, if any,
received by the Trust might not be adequate to restore its economic position
with respect to such property.
INABILITY TO REFINANCE
The Trust is subject to the normal risks associated with debt and preferred
stock financings, including the risk that the Trust's cash flow will be
insufficient to meet required payments of principal and interest and
distributions, the risk that indebtedness on its properties, or unsecured
indebtedness, will not be able to be renewed, repaid or refinanced when due or
that the terms of any renewal or refinancing will not be as favorable as the
terms of such indebtedness. If the Trust were unable to refinance the
indebtedness on acceptable terms, or at all, the Trust might be forced to
dispose of one or more of its properties on disadvantageous terms, which might
result in losses to the Trust, which losses could have a material adverse effect
on the Trust and its ability to pay dividends to shareholders and to pay amounts
due on its indebtedness. Furthermore, if a property is mortgaged to secure
payment of indebtedness and the Trust is unable to meet mortgage payments, the
mortgagor could foreclose upon the property, appoint a receiver and receive an
assignment of rents and leases or pursue other remedies, all with a consequent
loss of revenues and asset value to the Trust. Foreclosures could also create
taxable income without accompanying cash proceeds, thereby hindering the Trust's
ability to meet the REIT distribution requirements of the Code.
RISING INTEREST RATES
The Trust has incurred and may in the future incur indebtedness that bears
interest at variable rates. Accordingly, increases in interest rates would
increase the Trust's interest costs (to the extent that the related indebtedness
was not protected by interest rate protection arrangements), which could have a
material adverse effect on the Trust and its ability to pay dividends to
shareholders and to pay amounts due on its indebtedness or cause the Trust to be
in default under certain debt instruments. In addition, an increase in market
interest rates may cause holders to sell their shares of beneficial interest of
the Trust ("Common Shares") and reinvest the proceeds thereof in higher yielding
securities, which could adversely affect the market price for the Common Shares.
RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED BY FACTORS BEYOND THE TRUST'S
CONTROL
Results of operations of the Trust's properties may be adversely affected by,
among other things:
o changes in national economic conditions, changes in local market
conditions due to changes in general or local economic conditions and
neighborhood characteristics;
o changes in interest rates and in the availability, cost and terms of
financing;
o the impact of present or future environmental legislation and
compliance with environmental laws and other regulatory requirements;
o the ongoing need for capital improvements, particularly in older
structures;
o changes in real estate tax rates and assessments and other operating
expenses;
o adverse changes in governmental rules and fiscal policies;
o adverse changes in zoning and other land use laws; and
o acts of terrorism, earthquakes and other natural disasters (which may
result in uninsured losses) and other factors which are beyond its
control.
OWNERSHIP LIMITATIONS IN THE TRUST'S BY-LAWS MAY ADVERSELY AFFECT THE MARKET
PRICE OF THE COMMON SHARES
The Trust's By-laws contains an ownership limitation that is designed to
prohibit any transfer that would result in our being "closely-held" within the
meaning of Section 856(h) of the Internal Revenue Code of 1986, as amended. This
ownership limitation, which may be waived by the Trust, generally prohibits
ownership, directly or indirectly, by any single stockholder of more than 9.8%
of the Common Shares.
15
The inability of holders of Common Shares to sell their shares to persons other
than qualifying U.S. persons, or the perception of this inability, as well as
the limitations on transfer, may adversely affect the market price of the Common
Shares.
LIMITS ON CHANGES OF CONTROL MAY DISCOURAGE TAKEOVER ATTEMPTS THAT MAY BE
BENEFICIAL TO HOLDERS OF COMMON SHARES
Provisions of the Trust's Declaration of Trust and bylaws, as well as provisions
of the Internal Revenue Code of 1986, as amended, and Ohio law, may:
o delay or prevent a change of control over the Trust or a tender offer
for the Common Shares, even if those actions might be beneficial to
holders of Common Shares; and
o limit equityholders' opportunity to receive a potential premium for
their shares of Common Shares over then-prevailing market prices.
Primarily to facilitate the maintenance of the Trust's qualification as a REIT,
the by-laws of the Trust generally prohibits ownership, directly or indirectly,
by any single stockholder of more than 9.8% of the Common Shares. The Trust's
Board of Trustees may modify or waive the application of this ownership limit
with respect to one or more persons if the Board of Trustees determines that
ownership in excess of this limit will not jeopardize the Trust's status as a
REIT. In this regard, FUR Investors LLC has received such a waiver and may hold
up to 33% of the Common Shares provided that our REIT status will not be
jeopardized and we will not be deemed to be closely-held. The ownership limit,
however, may nevertheless have the effect of inhibiting or impeding a change of
control over us or a tender offer for our Common Shares.
In addition, the Board of Trustees has been divided into three classes, the
current terms of which expire in 2004, 2005 and 2006 respectively, with Trustees
of a given class chosen for three-year terms upon expiration of the terms of the
members of that class. Although the consent of beneficial holders will be sought
to eliminate the staggered board, until such time, if at all, the staggered
terms of the members of Board of Trustees may adversely affect the
beneficiaries' ability to effect a change in control of the Trust, even if such
a change in control were in the best interests of some, or a majority, of the
Trust's beneficiaries.
The Trust's Declaration of Trust authorizes the Board of Trustees to issue
preferred shares of beneficial interest in series and to establish the rights
and preferences of any series of preferred interests so issued. The issuance of
preferred interests could also have the effect of delaying or preventing a
change in control of the Trust.
WHERE CAN YOU FIND MORE INFORMATION ABOUT US?
The Trust is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), which means that the
Trust files periodic reports, including reports on Forms 10-K and 10-Q, and
other information with the Securities and Exchange Commission ("SEC"). As well,
the Trust distributes proxy statements annually and files those reports with the
SEC. You can read and copy these reports, statements and other information at
the public reference facilities maintained by the SEC at Room 1024, 450 Fifth
Street, NW, Washington, D.C. 20549, as well as the regional offices at the
Woolworth Building, 233 Broadway Ave., New York, New York 10279 and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You
may obtain copies of this material for a fee by writing to the SEC's Public
Reference Section of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549.
You may obtain information about the operation of the Public Reference Room by
calling the SEC at 1-800-SEC-0330. You can also access some of this information
electronically by means of the SEC's website on the Internet at
http://www.sec.gov, which contains reports, proxy and information statements and
other information that the Trust has filed electronically with the SEC. In
addition, you may inspect reports and other information concerning the Trust at
the offices of the New York Stock Exchange, which are located at 11 Wall Street,
New York, New York 10005 and can be contacted at 212-656-3000.
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ITEM 2. PROPERTIES.
At December 31, 2003, the Trust held an interest in two properties, a shopping
mall located in Little Rock, Arkansas and an office building located in
Indianapolis, Indiana. The Trust holds fee title in the Little Rock property.
The Trust holds a leasehold interest in the Indianapolis property. The ground
lease at the Indianapolis property expires in 2009, with an option for an
additional 99 years, which has been exercised.
The following table sets forth certain information relating to the Trust's
properties at December 31, 2003:
Year
Date of Ownership construction
Property Acquisition Percentage Square Feet completed Total Cost
- -------- ----------- ---------- ----------- --------- ----------
(000) (000)
Shopping Mall
Park Plaza 09/01/97 100 262 1988 $65,822
Office Building
Circle Tower 10/16/74 100 110 1930 6,161
-------
Total Equity Investments $71,983
=======
(1) The square footage shown represents gross leasable area for the shopping
mall (excluding approximately 284,000 square feet owned by Dillard's) and net
rentable area for the office building.
The following table lists the occupancy rates of the Trust's properties at the
end of each of the last three years.
Occupancy
Property 2003 2002 2001
-------- ---- ---- ----
Shopping Mall
Park Plaza(1) 82% 86% 87%
Office Building
Circle Tower 89% 81% 87%
(1) Park Plaza occupancy rate is based on total square feet excluding the
portions of the Mall owned and occupied by Dillard's.
The following table lists the average effective rental rate per square foot of
the Trust's properties at the end of each of the last three years.
Average Effective Rental Rate(1)
Property 2003 2002 2001
-------- ---- ---- ----
Shopping Mall
Park Plaza $31.52 $30.28 $28.37
Office Building
Circle Tower $14.25 $13.80 $13.64
(1) Average Effective Rental Rate is equal to the annual base rent divided by
the occupied square feet at December 31.
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The following table sets forth information relating to the mortgage loan
encumbering the Trust's Little Rock, Arkansas property. 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. The Trust's Indianapolis, Indiana
property is not encumbered by a mortgage loan.
Principal Repayment
Original Balance Balance at 12/31/03 for 2004 Interest Rate Year of Maturity
- ---------------- ------------------- -------- ------------- ----------------
$42,500,000 $41,457,390 $342,735 8.69%(1) 2030
(1) On May 1, 2010 the interest rate increases to 10.69% if the loan is then a
part of a securitized pool of loans in which rated securities have been issued
and 12.69% if it is not.
The following table contains information for each tenant that occupies ten
percent or more of the rentable square footage at of any of our properties.
Principal Square Feet
Name of Business of Leased by Lease Renewal
Property Tenant Tenant Tenant Annual Rent Expiration Date Options
- -------- ------ ------ ------ ----------- --------------- -------
Shopping Mall
Park Plaza GAP Retail-Clothing 31,374 $801,292 4/30/05 N/A
Office Building - - - - - -
Circle Tower
The following chart sets forth certain information concerning lease expirations
(assuming no renewals) for the Trust's Little Rock property as of December 31,
2003:
Number of Aggregate sq/ft.
Tenants whose Covered by 2003 Rental for Percentage of Total
Leases Expire Expiring Leases Leases Expiring (1) Annualized Rental (1)
------------- --------------- ------------------- ---------------------
2004 7 32,497 $811,344 12.0%
2005 12 44,998 $1,437,480 21.4%
2006 6 9,717 $357,612 5.3%
2007 5 13,963 $396,816 5.9%
2008 10 35,470 $1,086,552 16.1%
2009 10 20,309 $781,452 11.6%
2010 7 14,964 $520,836 7.7%
2011 4 12,047 $377,052 5.6%
2012 2 3,833 $121,656 1.8%
2013 6 15,491 $570,360 8.5%
(1) Based upon 2004 annualized base rental of $6,729,672 including month to
month leases.
18
The following chart sets forth certain information concerning lease expirations
(assuming no renewals) for the Trust's Indianapolis, Indiana property as of
December 31, 2003:
Number of Aggregate sq/ft.
Tenants whose Leases Covered by 2003 Rental for Percentage of Total
Expire Expiring Leases Leases Expiring (1) Annualized Rental (1)
------ --------------- ------------------- ---------------------
2004 22 23,223 $316,469 22.60%
2005 12 22,022 $310,146 22.15%
2006 9 20,380 $290,578 20.75%
2007 1 286 $4,004 .29%
2008 3 7,828 $123,657 8.83%
2009 1 4,468 $64,786 4.62%
2010 2 3,276 $88,541 6.32%
2011 0 0 0 0
2012 0 0 0 0
2013 0 0 0 0
(1) Based upon 2004 annualized base rental of $1,400,178 including month to
month leases.
The following table sets forth the realty tax rate and annual realty tax for
each of the Trust's properties for 2003.
Property Realty Tax Rate 2003 Taxes
-------- --------------- ----------
Shopping Mall
Park Plaza 1.38 $806,994
Office Building
Circle Tower 3.4540 $80,115
See "Item 7. Management's Discussion and Analysis and Results of Operations" for
information relating to capital improvements at the Trust's properties.
VenTek leased a 16,256 square foot facility located in Petaluma, CA. In February
2004, VenTek moved into a 6,689 square foot facility at the same location which
is adequate for VenTek's needs. VenTek's lease is now month to month and may be
terminated by either landlord or VenTek on 120 days prior notice. The annual
rent was $145,000 in 2003. Base rent for the new space is $5,000 per month.
ITEM 3. LEGAL PROCEEDINGS
PREFERRED SHAREHOLDERS LAWSUITS
Kimeldorf v. First Union Real Estate Equity and Mortgage Investments, et al. 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
then substantial shareholder of the Trust 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 April 15, 2002, the Trust was served with a complaint filed in the Supreme
Court of New York in New York County on behalf of a purported holder of the
Trust's convertible preferred shares. Among the allegations made by the
plaintiff is that the proposed transaction with Gotham Golf was approved by the
Trust's Board of Trustees in violation of fiduciary duties owed to the holders
of the Trust's convertible preferred shares. The suit seeks, among other things,
unspecified damages, an injunction of the proposed transaction and the court's
certification of the
19
lawsuit as a class action. Named as defendants in the lawsuit were the Trust,
its then five Trustees and Gotham Partners.
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.
In November 2002, the plaintiffs 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. 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 plaintiffs' motions for
preliminary injunction and expedited discovery in connection with the proposed
merger. Following hearings with respect to the plaintiffs' motions, the Court
issued an order in December 2002 granting a preliminary injunction barring the
proposed merger of the Trust with and into Gotham Golf. 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.
On April 30, 2003, the trial court granted the plaintiffs' motion to certify the
litigation as a class action. However, plaintiffs never submitted an order
identifying the certified class, and the court has issued an order nullifying
the grant of class certification.
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 contended
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.
On September 4, 2003, the Appellate Division, First Department of the New York
Supreme Court, issued its ruling on the appeal by the Trust and the other
defendants of the trial court's order barring the merger transaction. The
five-member Appellate Division panel unanimously found that the legal standard
for the granting of the injunction had not been satisfied and, accordingly, the
order of the trial court granting the injunction was reversed and the injunction
vacated. Plaintiff preferred shareholders did not appeal this decision.
As of January 23, 2004, the parties to the consolidated Kimeldorf case entered
into a Memorandum of Understanding ("MOU") providing for the terms of the
resolution of the litigation. Under the terms of the MOU, the consolidated
Kimeldorf case will be dismissed with prejudice and no payment of any kind will
be made to the plaintiffs or their counsel in connection with the dismissal.
Each party will bear its own fees, costs, and expenses of the litigation. It is
expected that the parties to the consolidated Kimeldorf case will submit the
pleadings to the Court in order to effectuate the terms of the MOU during the
first quarter of 2004.
20
COMMON SHAREHOLDERS LAWSUITS
Fink v. First Union Real Estate Equity and Mortgage Investments. 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 then
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 (see "Termination of Proposed Transaction," above)
was 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 does not believe that this matter will have a material impact on the
operations of the Trust.
K-A & Company, LTD. v. First Union Real Estate Equity and Mortgage Investments.
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 then 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. 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).
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 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.
Following the issuance of the Appellate Division, First Department of the New
York Supreme Court of its reversal of the order granting the injunction, and the
vacating of the injunction, granted in the Kimeldorf case, the plaintiffs in the
K-A & Company, LTD. case voluntarily dismissed their complaint with prejudice in
October 2003.
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 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, the case was
remanded to the trial court for further proceedings.
21
After the remand to the trial court, the Trust and the other plaintiffs pursued
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 filed a notice of appeal in the California Court of
Appeals. The appellate briefing was completed in May 2003. On November 26, 2003,
the Court of Appeals issued its decision reversing the decision of the trial
court. The Court held that the State was liable for the damages caused by the
flood. The Court of Appeals remanded the case to the trial court for a
determination of the damages to plaintiffs, including the Trust, and for an
award of attorney's fees and costs. The State filed a petition for rehearing in
the Court of Appeals, which was denied on December 24, 2003. On January 2, 2004,
the State filed a petition for review with the California Supreme Court.
Plaintiffs, including the Trust, filed an opposition to the petition on January
21, 2004, and the State filed a reply on January 29, 2004. The Trust anticipates
that the California Supreme Court will rule on whether to grant review during
the second quarter of 2004.
INDEMNITY TO IMPERIAL PARKING LIMITED
In 1999, Newcourt Financial Ltd. ("Newcourt") brought a claim in Ontario, Canada
against an affiliate of the Trust and Imperial Parking Limited alleging a breach
of a contract between the Trust's affiliate and Newcourt's
predecessor-in-interest, Oracle Credit Corporation and Oracle Corporation
Canada, Inc. The Trust's affiliate and Imperial Parking Limited brought a
separate action in British Columbia, Canada 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 an indemnity to Imperial Parking Corporation in respect to 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 Newcourt's claim, $825,000, includes
its 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.
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 and the suit was dismissed with prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
22
PART II
ITEM 5. MARKET FOR TRUST'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
MARKET PRICE AND DIVIDEND RECORD
Dividends
High Low Declared
2003 Quarters Ended
December 31 $2.32 $1.76 $ --
September 30 1.89 1.72 --
June 30 1.89 1.65 --
March 31 1.78 1.47 --
-----------
Total $ --
===========
2002 Quarters Ended
December 31 $ 2.30 $1.60 $ --
September 30 2.30 2.14 -
June 30 2.43 2.21 0.10
March 31 2.48 2.32 0.10
-----------
Total $ 0.20
===========
The Trust's shares are traded on the New York Stock Exchange (Ticker Symbol:
FUR). As of December 31, 2003, there were 1,999 record holders of the Common
Shares. The Trust estimates the total number of beneficial owners at
approximately 2,900.
During 2003, the Trust was not required to make any minimum distributions to its
common shareholders to maintain its REIT status.
23
ITEM 6. SELECTED FINANCIAL DATA.
These Selected Financial Data should be read in conjunction with the Combined
Financial Statements and Notes thereto.
For the years ended December 31, (In thousands, except per share data and
footnotes)
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
OPERATING RESULTS
Revenues $ 16,646 $ 18,701 $ 31,391 $ 67,265 $ 120,774
========== ========= ========== ========= =========
Loss before write-down of investment,
unrealized loss on carrying value of
assets identified for disposition, gain
on sale, and loss from discontinued
operations (5,956) (5,032) (3,155) (16,697) (18,002)
Write-down of investment (2) -- -- (11,463) -- --
Unrealized loss on carrying value of assets
identified for disposition -- -- -- (19,150) (9,800)
Gain on sale 54 -- 30,096 76,114 28,334
---------- --------- ---------- --------- ---------
(Loss) income before loss from discontinued
operations $ (5,902) $ (5,032) $ 15,478 $ 40,267 $ 532
Loss from discontinued operations (1) -- -- -- -- (6,836)
---------- --------- ---------- --------- ---------
Net (loss) income $ (5,902) $ (5,032) $ 15,478 $ 40,267 $ (6,304)
Preferred Dividend (2,064) (2,067) (2,068) (2,450) (2,833)
---------- --------- ---------- --------- ---------
Net (loss) income applicable to shares of
beneficial interest $ (7,966) $ (7,099) $ 13,410 $ 37,817 $ (9,137)
========== ========= ========== ========= =========
Dividends declared for shares of beneficial
interest $ -- $ 6,962 $ -- $ 6,583 $ 13,166
========== ========= ========== ========= =========
Per share of beneficial interest:
(Loss) income before loss from discontinued
operations, basic $ (0.26) $ (0.20) $ 0.37 $ 0.92 $ (0.06)
Loss from discontinued operations, basic (1) -- - - -- (0.18)
---------- --------- ---------- --------- ---------
Net (loss) income applicable to shares of
beneficial interest, basic $ (0.26) $ (0.20) $ 0.37 $ 0.92 $ (0.24)
========== ========= ========== ========= =========
(Loss) income before loss from discontinued
operations, diluted $ (0.26) $ (0.20) $ 0.37 $ 0.85 $ (0.06)
Loss from discontinued operations, diluted(1) -- -- -- -- (0.18)
---------- --------- ---------- --------- ---------
Net (loss) income applicable to shares of
beneficial interest, diluted $ (0.26) $ (0.20) $ 0.37 $ 0.85 $ (0.24)
========== ========= ========== ========= =========
Dividends declared per share of beneficial
interest $ -- $ 0.20 $- $ 1.124 $ 0.31
========== ========= ========== ========= =========
24
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
FINANCIAL POSITION AT YEAR END
Total assets 146,838 171,825 185,669 462,598 502,792
Long-term obligations (3) 41,457 54,319 54,616 171,310 207,589
Total equity 96,720 108,107 122,168 120,383 169,710
(1) The results of Imperial Parking Limited have been classified as discontinued
operations for 2000 and 1999, as Imperial Parking Limited was spun off to
the shareholders of the Trust in 2000.
(2) In 2001, the Trust wrote off $11.5 million, the entire balance, of its
warrants and preferred stock investment in HQ Global Holdings, Inc.,
including accrued dividends.
(3) Included in long-term obligations are senior notes and mortgage loans.
25
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
TERMINATION OF THE PROPOSED TRANSACTION WITH GOTHAM PARTNERS
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
Item 3. "Legal Proceedings") filed with the New York Supreme Court for New York
County an Order to Show Cause why the transaction should not be enjoined. The
court held a hearing on that issue on November 20. On November 21, 2002, the
court issued an order denying the defendants' motion to dismiss the complaint
and granting plaintiff's motions for preliminary injunction and expedited
discovery in connection with the proposed merger. Following hearings with
respect to the plaintiff's motions, the court issued an order in December 2002
granting a preliminary injunction barring the proposed merger of the Trust with
and into Gotham Golf. 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.
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 2003.
On September 4, 2003, the Appellate Division, First Department of the New York
Supreme Court, issued its ruling on the appeal by the Trust and the other
defendants of the trial court's order barring the merger transaction. The
five-member Appellate Division panel unanimously found that the legal standard
for the granting of the injunction had not been satisfied and, accordingly, the
order of the trial court granting the injunction was reversed and the injunction
vacated. Plaintiff preferred shareholders did not appeal this decision. As the
transaction had already been terminated prior to the issuance of the opinion,
the opinion had no effect on the terminated transaction.
As of January 23, 2004, the parties to the preferred shareholder case entered
into a Memorandum of Understanding ("MOU") providing for the terms of the
resolution of the litigation. Under the terms of the MOU, the preferred
shareholder case will be dismissed with prejudice and no payment of any kind
will be made to the plaintiffs or their counsel in connection with the
dismissal. Each party will bear its own fees, costs, and expenses of the
litigation which amounted to approximately $1,300,000 for the Trust at December
31, 2003. It is expected that the parties to the preferred shareholder case will
submit the pleadings to the Court in order to effectuate the terms of the MOU
during the first quarter of 2004.
THE FUR INVESTORS TRANSACTION
On November 26, 2003, the Trust entered into a Stock Purchase Agreement with FUR
Investors, LLC, an entity controlled by real estate investor Michael L. Ashner,
pursuant to which the Trust agreed to sell to FUR Investors, LLC a minimum of
5,000,000 and a maximum of 5,185,724 newly issued common shares at a price of
$2.60 per share. As part of the transaction, FUR Investors, LLC was required to,
and did, commence a tender offer to purchase up to 5,000,000 common shares, at a
price of $2.30 per share. Upon consummation of the tender offer, on December
26
31, 2003, FUR Investors LLC acquired 5,000,000 common shares pursuant to the
tender offer at a price of $2.30 per share and purchased an additional 5,000,000
newly issued common shares pursuant to the terms of the Stock Purchase Agreement
for a price of $2.60 per share. As a result of these purchases, FUR Investors
LLC acquired a total of 10,000,000 of the outstanding common shares representing
32.2% of the total outstanding common shares.
In connection with the transactions contemplated by the Stock Purchase
Agreement, (i) Michael L. Ashner was appointed as the Chief Executive Officer of
the Trust, (ii) the Trust entered into an Advisory Agreement with FUR Advisors,
LLC, an affiliate of FUR Investors, LLC, (iii) Mr. Ashner entered into an
exclusivity agreement, and (iv) FUR Investors, LLC entered into a covenants
agreement. In addition, Daniel J. Altobello and Jeffrey Citrin resigned as
members of the Board of Trustees, and three new trustees were appointed to the
Board of Trustees. As a result, the Board of Trustees presently consists of six
members.
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
insurance policies were renewed in November 2003. The rates remained stable from
the prior year. Management is currently renewing the Trust's insurance policies
with a view towards obtaining better or comparable coverage at a reduced cost.
The Trust's Directors' and Officers' insurance will expire on June 13, 2004 at
which time it is expected that the policy will be renewed.
The Board of Trustees of 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. During 2003,
the Trust repurchased and retired 2,914,215 common shares of beneficial interest
for approximately $5.3 million.
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 were filed, one has since been dismissed with prejudice,
and the others settled, 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 "Item 8.
Financial Statements - Note 2").
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. A hearing of
the appeal was held on October 30, 2003. On December 4, 2003, the Supreme Court
of Arkansas determined that any zoning changes needs to be approved by voters
through a
27
referendum. Simon Property Group announced in February 2004 that it was no
longer proceeding with the proposed development.
Under the terms of the operating covenant, Dillard's has no obligation to
maintain its operations at Park Plaza Mall beyond July 2003 but may continue
operations at Park Plaza Mall through 2031. The Trust had approached Dillard's
to extend this covenant and continues to explore options with Dillard's;
however, to date, no agreement with Dillard's has been reached. 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. If it chooses to close one or both of its stores, many of
the tenants have the right to terminate their leases without incurring a
substantive penalty or to pay less rent.
With respect to capital improvements, the Trust completed the repair of Park
Plaza Mall's roof at a cost of approximately $0.6 million during the first
quarter of 2003. For 2004, the Trust has budgeted approximately $2.4 million for
capital improvements and capitalized tenant procurement costs at Park Plaza
Mall.
CIRCLE TOWER
In December 2003, the Trust deposited with an escrow agent the sum of $700,000
which amount is to be applied to the purchase of the land underlying the
Indianapolis property and the expenses associated therewith. At the time the
funds were deposited with the escrow agent, the Trust offered to purchase from
each owner of the land their respective interests in the land at any time prior
to May 31, 2004 for a price equal to such owner's allocable share of the amount
placed in escrow. At March 1, 2004, the Trust had acquired interests in the land
representing approximately a 73% interest in the land.
For 2004, the Trust has budgeted approximately $402,000 for capital improvements
and capitalized tenant procurement costs at Circle Tower.
VENTEK
The Trust's subsidiary, VenTek, a manufacturer of transit ticketing equipment,
has incurred significant operating losses through December 31, 2003. During
2003, VenTek eliminated overhead and sold the parking operations portion of the
business. 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 guarantee in the amount of $5.3 million expired in September 2003
and the remaining guarantee in the amount of $6.2 million will expire in
September 2004. As of December 31, 2003, VenTek had delivered all equipment
required under these contracts and no amounts had been drawn against these
guarantees. If a warranty or service claim against VenTek is made or VenTek
fails or is unable to perform in accordance with the remaining contract, the
Trust may be responsible for payment under the guarantee. In connection with one
of the contracts, VenTek settled a claim for liquidated damages for
approximately $0.1 million during the year ended December 31, 2003. During the
third quarter of 2003, VenTek entered into a new contract with one of the
transit authorities for $2.2 million and received a change order for $0.8
million in the fourth quarter from the other transit authority to manufacture
transit ticket vending machines. The contract and change order are presently
expected to be completed by November 30, 2004. In connection with the contract,
the Trust provided cash collateral of $1.1 million which is equal to 50 percent
of the contract value of $2.2 million to secure a Letter of Credit required by
the bonding company. During 2004, current management decided to dispose of
VenTek. It is expected that the disposition will take place during 2004.
In August 2003, VenTek sold substantially all the assets of its parking ticket
equipment 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 transferred approximately $0.2 million in
liabilities. The Trust recognized a gain of $54,000 on the transaction. The sale
of the parking ticket equipment business is not expected to have a significant
impact on operations or cash flows of the Trust.
28
During 2004, the Trust decided to dispose of VenTek. It is expected that the
disposition will take place during 2004. For the year ended December 31, 2003,
VenTek's loss from operations of $1.4 million consisted of $1.9 million of
revenue, a gain on sale of approximately $0.1 million and expenses of $3.4
million. VenTek's assets at December 31, 2003 of $1.0 million consist of $0.6
million of inventory, $0.3 million of receivables and prepayments and $0.1
million of fixed assets. VenTek's liabilities at December 31, 2003 consist of
$1.7 million of accounts payable and accrued liabilities.
OTHER CONTINGENCY
Revenue Canada has commenced a tax audit of Imperial Parking Corp. of Canada
("Imperial Parking"). Imperial Parking has communicated to the Trust that it
expects that Revenue Canada will disallow deductions previously taken by
Imperial Parking. As a result, the Trust has accrued, as its best estimate,
$700,000 for financial reporting purposes related to this matter, although there
can be no assurance as to the ultimate outcome.
SUBSEQUENT EVENTS
Atlantic Realty
In January 2004, the Trust acquired 267,000 shares in Atlantic Realty Trust
(NASD: ATLRS) representing 7.5% of the outstanding shares in Atlantic Realty.
The Trust acquired these shares with a view to making a profit on its
investment. In light of its investment objectives, on January 12, 2004, the
Trust contacted Atlantic Realty to discuss a possible business combination
between Atlantic Realty and the Trust. In general, the proposal seeks to merge
Atlantic Realty with and into the Trust, or a subsidiary thereof, in exchange
for $16.25 per common share of beneficial interest, payable, at the election of
the shareholder of Atlantic Realty, either (i) in cash, or (ii) in exchange for
the Trust's Series A cumulative convertible redeemable preferred shares of
beneficial interest (the "Preferred Shares") at a rate of .65 Preferred Shares
per Share. In the event that Atlantic Realty shareholders holding more than
1,901,760 shares in the aggregate elect to receive Preferred Shares, such
shareholders will receive (i) a number of Preferred Shares equal to (a) .65
multiplied by (b) a fraction, the numerator of which is 1,901,760 and the
denominator of which is the total number of shares to be exchanged for Preferred
Shares and (ii) cash equal to (x) $16.25 multiplied by (y) a fraction, the
numerator of which is the number of shares to be exchanged for Preferred Shares
less 1,901,760 and the denominator of which is the number of shares to be
exchanged for Preferred Shares. The consideration would be subject to upward or
downward adjustment, as the case may be, based (i) on a projected post-closing
net cash balance of Atlantic Realty of $17,500,000 and (ii) any stock splits,
issuances, repurchases, reclassifications and other transactions affecting the
value of Atlantic Realty. The proposal also provides that it is subject to,
among other things, the satisfactory completion by the Trust of a five-business
day due diligence review of Atlantic Realty. In addition, the Trust requested a
waiver to acquire in excess of 9.8% of the outstanding shares in Atlantic
Realty. The terms of such waiver proposed by Atlantic Realty were rejected by
the Trust and no such waiver was obtained. Atlantic Realty has advised the Trust
that they have established a special committee to review the Trust's proposal as
well as any other proposals and will advise the Trust as to the adequacy of its
proposal in due course.
NorthStar Loan
On March 3, 2004, the Trust acquired from Bank of America, N.A. a loan
receivable from NorthStar Partnership, L.P. in the principal amount of
approximately $16.944 million (the "NorthStar Loan"). The NorthStar Loan is
evidenced by a Credit Agreement, Promissory Note and collateral documents. The
NorthStar Loan is secured by a first priority lien on all or a portion of
NorthStar's interest in Morgans Hotel Group LLC, Emmes & Company LLC and
Presidio Capital Investment Company, LLC as well as certain other assets of
NorthStar. Upon acquisition, the NorthStar Loan was modified to extend the
maturity date for one year to May 28, 2005 and provides for an option to
NorthStar to further extend the maturity date, upon payment of a one point fee,
for up to two optional six-month extensions. The NorthStar Loan was further
modified to provide for an initial interest rate of at a minimum of 12% per
annum, with a yield to maturity of 12.86%, increasing by two percentage points
for each six month renewal term. In addition, NorthStar was required to
establish a reserve equal to interest for six months and, upon the occurrence of
certain events, to increase such reserve to one year's interest. The NorthStar
Loan requires payments of interest
29
only, is prepayable at any time, together with a premium, and requires mandatory
prepayments from asset sales or refinancings after the first $9 million in
proceeds from such sales or refinancings. Further, the Trust entered into an
agreement pursuant to which it has an option to invest in certain transactions
involving assets of NorthStar which are offered to existing equityholders of
NorthStar, or their affiliates.
Due to the nature and amount of the NorthStar Loan, in order to comply with the
rules applicable to real estate investment trusts, a portion of the NorthStar
Loan is held by a wholly-owned subsidiary of the Trust that has elected to be
treated as a taxable REIT subsidiary. Accordingly, the portion of income
allocated to the amount of the NorthStar Loan held by the taxable REIT
subsidiary will be subject to corporate level tax.
Park Plaza Mall
In March 2004, the Trust engaged a real estate broker to begin marketing the
Park Plaza Mall property for sale. It cannot be determined at this time as to
what price or even if the property will ultimately be sold.
LIQUIDITY AND CAPITAL RESOURCES
GENERAL
Unrestricted and restricted cash and cash equivalents increased by approximately
$11.9 million (to $17.8 million from $5.9 million) when comparing the balance at
December 31, 2003 to the balance at December 31, 2002.
The Trust's net cash provided by investing activities of $34.0 million was
partially offset by net cash used for operating activities of $3.7 million and
net cash used for financing activities of $18.4 million. Cash used for financing
activities included $16.4 million for the repurchase of shares of beneficial
interest, $12.5 million for the payment of senior notes, $2.1 million in cash
dividends to preferred shareholders and $0.3 million of mortgage amortization,
which was partially offset by $13.0 million received for the issuance of new
common shares. Cash provided by investing activities consisted of the excess of
maturities over purchases of investments of $35.0 million and approximately $0.1
million of proceeds from the sale of the VenTek parking business. Cash used for
investing activities consisted of $1.1 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 fourth
quarter of 2003. The dividend was paid January 30, 2004 to shareholders of
record at the close of business on December 31, 2003. In addition, the Trust
paid a dividend of $0.5 million ($0.525 per share) to the Preferred Shareholders
in the first, second and third quarters. During 2003, the Trust was not required
to make any distributions to its common shareholders to maintain its REIT
status.
At December 31, 2003, the Trust owned $48.905 million in face value of U.S.
Treasury Bills and Federal Home Loan Bank Discount Notes. The U.S. Treasury
Bills and Federal Home Loan Bank Discount Notes are of maturities of less than
90 days and classified as held to maturity. The average yields for the years
ended December 31, 2003 and 2002 were 1.03% and 1.61%, respectively. At December
31, 2003, the Trust also owned $20.0 million in interest bearing commercial
paper. The average yield for the year ended December 31, 2003 was 1.29%.
On October 1, 2003, the Trust satisfied the senior notes in full.
A summary of the Trust's borrowings and repayment timing is as follows
(in millions):
Payments Due by Period
----------------------
Contractual Obligations Total Years Less than 1 Year 1-3 Years 4-5 Years After 5 Years
- ----------------------- ----------- ---------------- --------- --------- -------------
Mortgage Loan Payable $41.5 $0.3 $0.8 $1.0 $39.4
===== ==== ==== ==== =====
During 2003, the Trust, FUMI or FUMI's subsidiaries were party to two leases
under which it had rental payment obligations. VenTek leases space in Petaluma,
California on a month to month basis at a monthly rental rate of
30
$5,000. In addition, the Trust was obligated to pay rent at a property in
Dallas, Texas that it had sublet. The term of this lease expired in February
2004.
As described above, the Trust has made an offer to acquire the land underlying
its Circle Tower property. In connection with this offer, the Trust deposited
with an escrow agent the sum of $700,000 which amount is to be applied to the
purchase of the land underlying the Circle Tower property and the expenses
associated therewith.
VenTek had open purchase orders of approximately $0.5 million at December 31,
2003 related to its outstanding contract and change order.
RESULTS OF OPERATIONS - 2003 VERSUS 2002
Net loss applicable to shares of beneficial interest for the year ended December
31, 2003 was $8.0 million as compared to net loss of $7.1 million for the year
ended December 31, 2002. Net loss for the year ended December 31, 2003 included
gain on sale of $54,000 related to the sale of the VenTek parking business.
Property net operating income, which is rent less property operating expenses
and real estate taxes, increased for the year ended December 31, 2003 to $8.2
million from $7.7 million in 2002. The increase was attributable to an increase
in revenues of $0.3 million, a decrease in operating expenses of $0.1 million
and a decrease in real estate taxes of $0.1 million. Revenues increased by $0.3
million for the year ended December 31, 2003, due to lease termination fees
received of $0.3 million at Park Plaza. A decrease in occupancy at Park Plaza to
82% from 86% was partially offset by an increase in rental rates to $31.52 from
$30.28 per square foot when comparing the year ended December 31, 2003 to
December 31, 2002. Occupancy rates increased to 89% from 81% and rental rates
increased to $14.25 from $13.80 per square foot 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. Real estate taxes decreased by $0.1 million due to a refund from taxes
paid in a previous year on a sold property.
Interest income decreased by $0.8 million during the year ended December 31,
2003, as compared to 2002. The decrease is a result of lower amounts invested
and lower interest rates between the periods.
Depreciation and amortization increased from 2003 to 2002 due to an increase in
building and improvements. Interest expense decreased when comparing the periods
due to the payment of principal on the mortgage loan and repayment of senior
notes on October 1, 2003.
General and administrative expenses increased by $1.2 million when comparing the
year ended December 31, 2003 to the comparable period in 2002. Included in
general and administrative expenses for the years ended December 31, 2003 and
2002 are approximately $2.9 million and $2.6 million, respectively, of the
Trust's transaction costs related to the Gotham proposal. Such costs for 2003
included the $2.4 million termination fee paid to Gotham Partners. During the
year ended December 31, 2003 and 2002, $0.4 million and $0.8 million,
respectively, of costs related to the preferred shareholders lawsuits were
included in general and administrative expense. Also included in general and
administrative expenses are $0.4 million and $0.8 million in 2003 and 2002,
respectively, to a firm that is providing management services to VenTek. During
the year ended December 31, 2003, the Trust accrued for financial reporting
purposes a $0.7 million tax contingency described above in "Other Contingency."
In addition, there was an increase in insurance premiums of $0.3 million,
trustee fees of $0.1 million and legal fees of $0.1 million.
VenTek incurred a net loss of approximately $1.6 million for the year ended
December 31, 2003, as compared to a net loss of approximately $1.8 million for
the year ended December 31, 2002. Sales decreased for the year ended December
31, 2003 to $1.9 million from $2.9 million in 2002 and cost of goods sold
decreased to $3.3 million from $4.9 million for the same period. The decrease in
both sales and cost of goods sold is due to the winding down of current
contracts. During the third quarter of 2003, VenTek entered into a new contract
for $2.2 million with one of the transit authorities to manufacture additional
ticket vending machines. In addition in October 2003 VenTek received a change
order on an existing contract to manufacture additional ticket vending machines
for $0.8 million.
31
During the year ended December 31, 2002, VenTek settled a claim for $0.5 million
against a California transit agency. The claim arose in 1999 from a termination
for convenience by the agency of a contract with VenTek. The amount recovered is
included in other income for the year ended December 31, 2002. During the year
ended December 31, 2003, eight employees were terminated in connection with the
sale of the parking business. During the year ended December 31, 2002 nine
employees were terminated who were involved in both the transit ticketing and
parking equipment, as well as administrative functions. Severance expenses of
approximately $0.3 million and $0.1 million were recorded during the years ended
December 31, 2003 and 2002, respectively. There was no backlog for VenTek at
December 31, 2003 besides the new contract and the change order. 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. The failure to replace backlog has
resulted in lower revenues.
RESULTS OF OPERATIONS - 2002 VERSUS 2001
Net loss applicable to shares of beneficial interest for the year ended December
31, 2002 was $7.1 million as compared to net income of $13.4 million for the
year ended December 31, 2001. Net income for the year ended December 31, 2001
included a write-down of an investment in preferred stock and warrants to
purchase common shares of HQ Global Holdings Inc. ("HQ") of $11.5 million, as
well as, a gain on sale of real estate of $30.1 million. The gain for the year
ended December 31, 2001 related to the sale two shopping center properties, four
office properties, five parking garages, one parking lot, a $1.5 million note
receivable and certain assets used in operations of the properties (the
"Purchased Assets").
Property net operating income, which is rent less property operating expenses
and real estate taxes, decreased for the year ended December 31, 2002 to $7.7
million from $10.5 million in 2001. The decrease was attributable to the sale of
the Purchased Assets in March 2001.
Property net operating income for the Trust's remaining real estate properties
for the year ended December 31, 2002 increased by $1.2 million. The increase was
attributable primarily to an increase in revenues of $0.7 million and a decrease
in operating expenses of $0.5 million. Revenues increased by $0.7 million for
the properties remaining for the year ended December 31, 2002, primarily due to
an increase in rental rates at Park Plaza. This was partially offset by a
decrease in occupancy at Circle Tower. Included in operating expenses are $0.2
million and $0.7 million in 2002 and 2001, respectively, of costs incurred in
connection with the matters described above in the Park Plaza Mall section.
Interest and dividends decreased by $3.4 million during the year ended December
31, 2002, as compared to 2001. The decrease is a result of lower amounts
invested and lower interest rates between the periods. In addition, during the
first and second quarter of 2001, a $0.7 million dividend was accrued on the
preferred shares of HQ.
Depreciation and amortization, and mortgage loan interest expense decreased from
2001 to 2002 due to the sale of properties in March 2001. With respect to the
remaining properties, depreciation and amortization expense, and interest
expense remained relatively constant.
General and administrative expenses remained relatively constant when comparing
the year ended December 31, 2002 to the comparable period in 2001. Included in
general and administrative expenses for the years ended December 31, 2002 and
2001 are approximately $2.6 million and $0.9 million, respectively, of the
Trust's transaction costs related to the Gotham proposal. During the year ended
December 31, 2002, $0.8 million of costs related to the preferred shareholder
lawsuit were included in general and administrative expense. Also included in
general and administrative expenses are $0.8 million and $1.0 million in 2002
and 2001, respectively, to a firm that is providing management services to
VenTek. Otherwise, general and administrative expenses decreased due to reduced
legal, accounting, professional and management fees primarily as a result of
selling the majority of its assets in March 2001. The Trust cannot predict what
the professional fees may be in 2003 due to the ongoing litigation which may be
substantial.
VenTek incurred a net loss of approximately $1.8 million for the year ended
December 31, 2002, as compared to a net loss of approximately $1.6 million for
the year ended December 31, 2001. Sales decreased for the year ended
32
December 31, 2002 to $2.9 million from $7.6 million in 2001 and cost of goods
sold decreased to $4.9 million from $8.8 million for the same period. The
decrease in both sales and cost of goods sold is due to the winding down of
current contracts and having nominal new business. As described above, during
the year ended December 31, 2002, VenTek settled a claim for $0.5 million
against a California transit agency, which amount is included in other income.
During the year ended December 31, 2002 nine employees were terminated. These
employees were involved in both the transit ticketing and parking equipment, as
well as administrative functions. Severance expenses of less than $0.1 million
was recorded during both the years ended December 31, 2002 and 2001.
RECENTLY ISSUED ACCOUNTING STANDARDS
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections,"
which updates, clarifies and simplifies existing accounting pronouncements. In
part, this statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." FASB No. 145 will be effective for fiscal years
beginning after May 15, 2002. Upon adoption, enterprises must reclassify prior
period items that do not meet the extraordinary item classification criteria in
APB 30. The effect of this statement on the Trust's financial statements was the
reclassification of extraordinary loss on early extinguishment of debt to
interest expense, however, this had no effect on the Trust's net income
applicable to shares of beneficial interest.
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. The statement had no effect on the Trust's combined financial
statements for 2003.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities ("VIEs"), which addresses how
a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Trust will be required to adopt FIN 46R in the first fiscal period ending
after March 15, 2004. Upon adoption of FIN 46R, the assets, liabilities and
noncontrolling interest of the VIE initially would be measured at their carrying
amounts with any difference between the net amount added to the balance sheet
and any previously recognized interest being recognized as the cumulative effect
of an accounting change. If determining the carrying amounts is not practicable,
fair value at the date FIN 46R first applies may be used to measure the assets,
liabilities and noncontrolling interest of the VIE. It is not anticipated that
the effect on the Trust's Combined Financial Statements would be material.
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 mandatory 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 require mandatory redemption. 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. This statement had no effect
on the Trust's combined financial statements.
33
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
INTEREST RATE RISK
All of the Trust's loans outstanding at December 31, 2003 have fixed interest
rates. The Trust's investments in U.S. Treasury Bills, Federal Home Loan Bank
Discount Notes, and commercial paper mature in less than 90 days and therefore
are not subject to significant interest rate risk.
34
ITEM 8. FINANCIAL STATEMENTS
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
AN OHIO TRUST
COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
I N D E X
Page
Number
------
Independent Auditors' Report.................................................................36
Combined financial statements, years ended December 31, 2003, 2002 and 2001
Combined Balance Sheets.................................................................37
Combined Statements of Operations.......................................................38
Combined Statements of Shareholders' Equity.............................................39
Combined Statements of Cash Flows.......................................................40
Notes to Combined Financial Statements.......................................................41
35
Independent Auditors' Report
The Board of Trustees and Shareholders
First Union Real Estate Equity and Mortgage Investments:
We have audited the accompanying combined balance sheets of First Union Real
Estate Equity and Mortgage Investments and First Union Management, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the related combined
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period ended December 31, 2003. These combined financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of First Union
Real Estate Equity and Mortgage Investments and First Union Management, Inc. and
subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2003, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
New York, New York
March 4, 2004
36
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Balance Sheets
As of December 31, (In thousands, except share data)
2003 2002
--------- ---------
ASSETS
Investments in real estate, at cost
Land $ 6,086 $ 6,086
Buildings and improvements 65,897 64,867
--------- ---------
71,983 70,953
Less - Accumulated depreciation (14,102) (12,057)
--------- ---------
Investments in real estate, net 57,881 58,896
Other assets
Cash and cash equivalents - unrestricted 14,924 3,897
- restricted 2,818 1,968
Accounts receivable and prepayments, net of allowances
of $223 and $601, respectively 1,291 1,625
Investments 68,986 103,974
Inventory, net of reserve 591 1,033
Unamortized debt issue costs, net 214 278
Other 133 154
--------- ---------
Total assets $ 146,838 $ 171,825
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loan, including current portion of $343 and $324, respectively $ 41,457 $ 41,781
Note payable 64 80
Senior notes -- 12,538
Accounts payable and accrued liabilities 7,654 8,332
Dividends payable 516 516
Deferred items 427 471
--------- ---------
Total liabilities 50,118 63,718
--------- ---------
Shareholders' equity
Convertible preferred shares of beneficial interest, $25 per share
liquidation preference, 2,300,000 shares authorized, 983,082
outstanding in 2003 and 2002 23,131 23,131
Shares of beneficial interest, $1 par, unlimited authorized, 31,058,913
and 34,814,361 shares, outstanding in 2003 and 2002 31,059 34,814
Additional paid-in capital 207,968 207,634
Accumulated distributions in excess of net income (165,438) (157,472)
--------- ---------
Total shareholders' equity 96,720 108,107
--------- ---------
Total liabilities and shareholders' equity $ 146,838 $ 171,825
========= =========
The accompanying notes are an integral part of these combined financial
statements.
37
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Statements of Operations
For the years ended December 31, (In thousands, except per share data)
2003 2002 2001
-------- -------- --------
Revenues
Rents $ 13,916 $ 13,643 $ 18,741
Sales 1,892 2,924 7,554
Interest and dividends 838 1,659 5,091
Other income -- 475 5
-------- -------- --------
16,646 18,701 31,391
-------- -------- --------
Expenses
Property operating 4,965 5,043 6,981
Cost of goods sold 3,279 4,892 8,777
Real estate taxes 773 899 1,218
Depreciation and amortization 2,161 2,077 3,837
Interest 4,551 5,102 7,983
General and administrative 6,873 5,720 5,750
Write-down of investment -- -- 11,463
-------- -------- --------
22,602 23,733 46,009
-------- -------- --------
Loss before gain on sale (5,956) (5,032) (14,618)
Gain on sale 54 -- 30,096
-------- -------- --------
Net (loss) income (5,902) (5,032) 15,478
Preferred dividend (2,064) (2,067) (2,068)
-------- -------- --------
Net (loss) income applicable to shares of beneficial interest $ (7,966) $ (7,099) $ 13,410
======== ======== ========
Per share data
Basic:
Net (loss) income applicable to shares of beneficial interest $ (0.26) $ (0.20) $ 0.37
======== ======== ========
Diluted:
Net (loss) income applicable to shares of beneficial interest $ (0.26) $ (0.20) $ 0.37
======== ======== ========
Basic weighted average shares 30,885 34,807 36,396
======== ======== ========
Diluted weighted average shares 30,885 34,807 36,396
======== ======== ========
The accompanying notes are an integral part of these combined financial
statements.
38
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Statements of Shareholders' Equity
(In thousands, except per share data)
Number of Amount of
Preferred Preferred Number of Amount of Accumulated
Shares of Shares of Shares of Shares of Additional Distributions Total
Beneficial Beneficial Beneficial Beneficial Paid-In in Excess of Shareholders'
Interest Interest Interest Interest Capital Net Income (1) Equity
---------- ----------- ------------ ---------- ----------- --------------- ---------------
Balance December 31, 2000 985 $ 23,171 39,697 $ 39,697 $ 214,336 $(156,821) $ 120,383
Net income before
preferred dividend 15,478 15,478
Dividends paid or accrued on
preferred shares
($2.10/share) (2,068) (2,068)
Shares repurchased (4,891) (4,891) (6,734) (11,625)
--------- --------- --------- --------- --------- --------- ---------
Balance December 31, 2001 985 23,171 34,806 34,806 207,602 (143,411) 122,168
Net loss before
preferred dividend (5,032) (5,032)
Dividends paid on shares --
of beneficial
interest ($0.20/share) (6,962) (6,962)
Dividends paid or accrued on
preferred shares
($2.10/share) (2,067) (2,067)
Conversion of preferred shares (2) (40) 8 8 32 --
--------- --------- --------- --------- --------- --------- ---------
Balance December 31, 2002 983 23,131 34,814 34,814 207,634 (157,472) 108,107
Net loss before
preferred dividend (5,902) (5,902)
Dividends paid or accrued on
preferred shares
($2.10/share) (2,064) (2,064)
Shares issued 5,000 5,000 8,000 13,000
Shares repurchased (8,755) (8,755) (7,666) (16,421)
--------- --------- --------- --------- --------- --------- ---------
Balance December 31, 2003 983 $ 23,131 31,059 $ 31,059 $ 207,968 $(165,438) $ 96,720
========= ========= ========= ========= ========= ========= =========
(1) Includes the balance of accumulated distributions in excess of net income of
First Union Management, Inc. of $2,554, $4,173 and $5,699 as of December 31,
2001, 2002 and 2003, respectively.
The accompanying notes are an integral part of these combined financial
statements.
39
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Statements of Cash Flows
For the years ended December 31, (In thousands)
2003 2002 2001
----------- ----------- -----------
Cash used for operating activities
Net (loss) income $ (5,902) $ (5,032) $ 15,478
Adjustments to reconcile net (loss) income
to net cash used for operating activities
Depreciation and amortization 2,161 2,077 3,837
Write-down of investment -- -- 11,463
Extraordinary loss from early extinguishment of debt -- -- 889
Gain on sale of real estate -- -- (30,096)
Gain on sale of VenTek parking business (54) -- --
(Decrease) increase in deferred items (44) 55 (564)
Net changes in other operating assets and liabilities 92 2,050 (6,285)
----------- ----------- -----------
Net cash used for operating activities (3,747) (850) (5,278)
----------- ----------- -----------
Cash provided by investing activities
Principal received from mortgage loans and note receivable -- -- 7,048
Net proceeds from sale of real estate -- -- 43,617
Net proceeds from sale of VenTek parking business 60 -- --
Purchase of investments (1,362,820) (1,662,806) (1,283,394)
Proceeds from maturity of investments 1,397,808 1,674,837 1,377,249
Investments in building and tenant improvements (1,061) (697) (778)
----------- ----------- -----------
Net cash provided by investing activities 33,987 11,334 143,742
----------- ----------- -----------
Cash used for financing activities
Decrease in notes payable (16) (16) (150,014)
Proceeds from mortgage loan -- -- 6,500
Repayment of mortgage loans - principal payments (324) (297) (422)
Payment of senior notes (12,538) -- --
Issuance of common shares 13,000 -- --
Repurchase of common shares (16,421) -- (11,625)
Dividends paid on shares of beneficial interest -- (6,962) --
Dividends paid on preferred shares of beneficial interest (2,064) (2,068) (2,068)
----------- ----------- -----------
Net cash used for financing activities (18,363) (9,343) (157,629)
----------- ----------- -----------
Increase (decrease) in cash and cash equivalents 11,877 1,141 (19,165)
Cash and cash equivalents at beginning of year 5,865 4,724 23,889
----------- ----------- -----------
Cash and cash equivalents at end of year $ 17,742 $ 5,865 $ 4,724
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information
Interest paid $ 4,829 $ 5,102 $ 7,899
=========== =========== ===========
Supplemental Disclosure on Non-Cash Investing and Financing Activities
Dividends accrued on preferred shares of beneficial interest $ 516 $ 516 $ 517
=========== =========== ===========
Loan receivable in connection with the sale of VenTek parking business $ 133 $ -- $ --
=========== =========== ===========
Transfer of inventory in connection with the sale of VenTek parking business $ 158 $ -- $ --
=========== =========== ===========
Net transfer of receivables and payables in connection with the
sale of VenTek parking business $ 19 $ -- $ --
=========== =========== ===========
Transfer of mortgage loan obligations in connection with real estate sales $ -- $ -- $ 122,722
=========== =========== ===========
Transfer of deferred obligation in connection with real estate sales $ -- $ -- $ 1,775
=========== =========== ===========
Issuance of mortgage loan receivable in connection with real estate sales $ -- $ -- $ 7,000
=========== =========== ===========
The accompanying notes are an integral part of these combined financial
statements.
40
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Union Real Estate Equity and Mortgage Investments (the "Trust") and First
Union Management, Inc. ("FUMI") are in the real estate and transit ticket
equipment manufacturing industries with properties and operations in the United
States. In addition, they were in the parking equipment business until it was
sold in August 2003. The accounting policies of the Trust and FUMI conform to
generally accepted accounting principles and give recognition, as appropriate,
to common practices within the real estate, parking and manufacturing
industries. In March 2001, the Trust sold a significant portion of its remaining
real estate assets. As of December 31, 2003, the Trust owned two real estate
properties, a shopping mall located in Little Rock, Arkansas and an office
property located in Indianapolis, Indiana.
Under a trust agreement, the common shares of FUMI are held by the Trust for the
benefit of the shareholders of the Trust. Accordingly, the financial statements
of FUMI and the Trust have been combined as entities under common control and
activity between the entities has been eliminated in combination.
The preparation of financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses and the disclosure of contingent assets and liabilities.
Such estimates that are particularly susceptible to change relate to
management's estimate of the impairment of real estate. In addition, estimates
are used when accounting for the allowance for doubtful accounts, asset
valuation for tax compliance, potentially excess and obsolete inventory, product
warranty reserves, the percentage of completion method and contingencies, among
others. Actual results could differ from these estimates.
The Trust accounts for its leases with tenants as operating leases. Tenant
leases generally provide for billings of certain operating costs and retail
tenant leases generally provide for percentage rentals, in addition to fixed
minimum rentals. The Trust accrues the recovery of operating costs based on
actual costs incurred. For percentage rentals, the Trust follows the Financial
Accounting Standards Board's ("FASB") Emerging Issues Task Force Issue No. 98-9
(EITF-98-9), "Accounting for Contingent Rent in Interim Financial Periods."
EITF-98-9 requires that contingent rental income, such as percentage rent which
is dependent on sales of retail tenants, be recognized in the period that a
tenant exceeds its specified sales breakpoint. Consequently, the Trust accrues
the majority of percentage rent income in the fourth quarter of each year in
accordance with EITF-98-9. For the years ended December 31, 2003, 2002 and 2001,
the accrued recovery of operating costs and percentage rent income approximated
$4.5 million, $4.5 million and $5.6 million, respectively. Deferred revenue is
derived primarily from revenue received in advance of its due date.
Real estate assets are stated at cost. Expenditures for repairs and maintenance
are expensed as incurred. Significant renovations that extend the useful life of
the properties are capitalized. Depreciation for financial reporting purposes is
computed using the straight-line method. Buildings are depreciated over their
estimated useful lives of 10 to 40 years, based on the property's age, overall
physical condition, type of construction materials and intended use.
Improvements to the buildings are depreciated over the remaining useful life of
the building at the time the improvement is completed. Tenant alterations are
depreciated over the life of the lease of the tenant. The Trust annually reviews
its portfolio of properties for any impairment losses. The Trust records
impairment losses when indicators of impairment are present and the undiscounted
cash flows are not sufficient to recover the asset's carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. The Trust did not incur any such losses in 2003, 2002 or 2001.
At December 31, 2003 and 2002, buildings and improvements included $0.1 million
of equipment. Equipment is depreciated over useful lives of five to ten years.
At December 31, 2003 and 2002, $1.0 million and $0.7 million of cash was
restricted, respectively, based on the terms of the mortgages. At December 31,
2003, the Trust provided cash collateral equal to 50 percent of the new VenTek
contract value to secure a letter of credit required by the bonding company of
$1.1 million, which was classified as restricted. Additionally, $0.7 million of
cash as of December 31, 2003 was classified as restricted because this amount
was set aside in an escrow account to purchase interests in the land underlying
Circle Tower. At December 31, 2002, an
41
additional $1.2 million of cash was classified as restricted because this amount
secured benefits under change of control agreements with former employees of the
Trust and FUMI. The escrow expired in May 2003.
The Trust has calculated earnings per share for 2003, 2002 and 2001 in
accordance with SFAS 128, "Earnings Per Share." SFAS 128 requires that common
share equivalents be excluded from the weighted average shares outstanding for
the calculation of basic earnings per share. The reconciliation of shares
outstanding for the basic and diluted earnings per share calculation is as
follows (in thousands):
2003 2002 2001
------ ------ ------
Basic weighted average shares 30,885 34,807 36,396
Convertible preferred shares -- -- --
------ ------ ------
Diluted weighted average shares 30,885 34,807 36,396
====== ====== ======
The preferred shares are anti-dilutive and are not included in the weighted
average shares outstanding for the diluted earnings per share for 2003, 2002 and
2001. The warrants and options to purchase shares of beneficial interest are
anti-dilutive and are not included for any period.
Trade Accounts Receivable and Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts is the Trust's best estimate of
the amount of probable credit losses in the Trust's existing accounts
receivable. The Trust reviews its allowance for doubtful accounts monthly. Past
due balances over 90 days and over a specified amount are reviewed individually
for collectibility. Account balances are charged off against the allowance after
all means of collection have been exhausted and the potential for recovery is
considered remote. The Trust does not have any off-balance-sheet credit exposure
related to its customers.
Income Taxes
Current income taxes are recognized during the period in which transactions
enter into the determination of financial statement income, with deferred income
taxes being provided for temporary differences between the carrying values of
assets and liabilities for financial reporting purposes and such values as
measured by income tax laws. Changes in deferred income taxes attributable to
these temporary differences are included in the determination of income. A
valuation allowance has been provided for the entire amount of deferred tax
assets, which consists of FUMI's capital loss carryforwards, due to the
uncertainty of realization of the deferred tax assets.
Share Options
The Trust accounts for stock option awards in accordance with APB 25 and has
adopted the disclosure-only provisions of SFAS 123, "Accounting for Stock-Based
Compensation." Consequently, compensation cost has not been recognized for the
share option plans except for the options granted in 1999 which had an exercise
price that was less than the grant date per share market price. If compensation
expense for the Trust's two share option plans
42
had been recorded based on the fair value at the grant date for awards in
previous years, consistent with SFAS 123, the Trust's net income would be
adjusted as follows (amounts in thousands, except per share data):
2003 2002 2001
---- ---- ----
Net (loss) income applicable to shares of
beneficial interest, as reported $(7,966) $(7,099) $13,410
Effect of stock options as calculated (126) -- --
------- ------- -------
Net (loss) income as adjusted $(8,092) $(7,099) $13,410
======= ======= =======
Per share
Basic:
Net (loss) income applicable to shares
of beneficial interest, as reported $ (0.26) $ (0.20) $ 0.37
Effect of stock options as calculated -- -- --
------- ------- -------
Net (loss) income, as adjusted $ (0.26) $ (0.20) $ 0.37
======= ======= =======
Diluted:
Net (loss) income applicable to shares
of beneficial interest, as reported $ (0.26) $ (0.20) $ 0.37
Effect of stock options as calculated -- -- --
------- ------- -------
Net (loss) income, as adjusted $ (0.26) $ (0.20) $ 0.37
======= ======= =======
Recently Issued Accounting Standards
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendment of FASB Statement No. 13 and Technical Corrections,"
which updates, clarifies and simplifies existing accounting pronouncements. In
part, this statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." FASB No. 145 will be effective for fiscal years
beginning after May 15, 2002. Upon adoption, enterprises must reclassify prior
period items that do not meet the extraordinary item classification criteria in
APB 30. The effect of this statement on the Trust's combined financial
statements was the reclassification of extraordinary loss on early
extinguishment of debt to interest expense, however, this had no effect on the
Trust's net income applicable to shares of beneficial interest.
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. The statement had no effect on the Trust's combined financial
statements for 2003.
In December 2003, the FASB issued FASB Interpretation No. 46 (revised December
2003), Consolidation of Variable Interest Entities ("VIEs"), which addresses how
a business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN 46R replaces FASB Interpretation No. 46,
Consolidation of Variable Interest Entities, which was issued in January 2003.
The Trust will be required to adopt FIN 46R in the first fiscal period ending
after March 15, 2004. Upon adoption of FIN 46R, the assets, liabilities and
noncontrolling interest of the VIE initially would be measured at their carrying
amounts with any difference between the net amount added to the balance sheet
and any previously recognized interest being recognized as the cumulative effect
of an accounting change. If determining the carrying amounts is not practicable,
fair value at the date FIN 46R first applies may be used to measure the assets,
liabilities and noncontrolling interest of the VIE. It is not anticipated that
the effect on the Trust's Combined Financial Statements would be material.
43
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 mandatory 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 require mandatory redemption. 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. This statement had no effect
on the Trust's combined financial statements.
VENTEK
FUMI's manufacturing subsidiary, VenTek International, Inc. ("VenTek"), is in
the business of manufacturing, installing and providing maintenance of transit
ticket vending equipment. In addition, VenTek was in the parking equipment
business until it was sold in August 2003. A summary of VenTek's significant
accounting policies are as follows:
Inventory
Inventory is valued at the lower of weighted average cost or net realizable
value and consists of transit ticketing parts and unbilled revenue recognized
under the percentage completion method. Unbilled revenue was $0.1 million and
$0.6 million at December 31, 2003 and 2002, respectively. VenTek's inventory
valuation reserve was zero and $0.5 million at December 31, 2003 and 2002,
respectively.
Fixed Assets
Fixed assets are recorded at cost and are included as part of other assets on
the accompanying combined balance sheet. Depreciation of furniture, fixtures and
equipment are calculated using the declining-balance and straight-line methods
over terms of three to five years.
Revenue Recognition
Revenue from transit ticket vending equipment and maintenance contracts is
recognized by either the completed contract method or the percentage completion
method as units are delivered. Under the percentage of completion method,
revenue in excess of billings represents the difference between revenues
recognized and billings issued under the terms of the contracts and is included
as part of inventory on the accompanying combined balance sheet. VenTek reviews
cost performance and estimates to complete on these contracts at least
quarterly. If the estimated cost to complete a contract changes from a previous
estimate, VenTek records an adjustment to earnings at that time. Revenues from
the sales of parking equipment were recognized upon delivery.
Product Warranty Policy
VenTek provides product warranties for both its parking and transit ticket
equipment. The warranty policy for parking equipment generally provided for one
year of coverage. The warranty policy for transit ticket equipment generally
provides two to two and a half years of coverage. However, with respect to the
order received in the fourth quarter of 2003, no extended warranty will be
provided with such equipment. VenTek's policy is to accrue the estimated cost of
warranty coverage at the time the sale is recorded. Product warranties of
approximately $0.1
44
million and $0.2 million are included in accounts payable and accrued
liabilities at December 31, 2003 and 2002, respectively.
2. TERMINATION OF PROPOSED TRANSACTION WITH GOTHAM PARTNERS
On February 13, 2002, the Trust entered into a definitive agreement of merger
and contribution with, among others, Gotham Partners, L.P. ("Gotham Partners"),
a shareholder of the Trust that is controlled by affiliates of William A.
Ackman, who was at the time Chairman of the Board of Trustees of the Trust, and
Gotham Golf Corp. ("Gotham Golf"), a Delaware corporation controlled by Gotham
Partners, pursuant to which the Trust agreed to merge with and into Gotham Golf.
The parties subsequently adopted Amendment No. 1 to the merger agreement on
April 24, 2002, Amendment No. 2 to the merger agreement on September 24, 2002
and Amendment No. 3 to the merger agreement on October 24, 2002.
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
Note 15 "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 hearings with
respect to the plaintiff's motions, the court issued an order in December 2002
granting a preliminary injunction barring the proposed merger of the Trust with
and into Gotham Golf. 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.
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 2003.
On September 4, 2003, the Appellate Division, First Department of the New York
Supreme Court, issued its ruling on the appeal by the Trust and the other
defendants of the trial court's order barring the merger transaction. The
five-member Appellate Division panel unanimously found that the legal standard
for the granting of the injunction had not been satisfied and, accordingly, the
order of the trial court granting the injunction was reversed and the injunction
vacated. Plaintiff preferred shareholders have not sought to appeal from this
decision. As the transaction had already been terminated prior to the issuance
of the opinion, the opinion had no effect on the terminated transaction.
As of January 23, 2004, the parties to the preferred shareholder case entered
into a Memorandum of Understanding ("MOU") providing for the terms of the
resolution of the litigation. Under the terms of the MOU, the preferred
shareholder case will be dismissed with prejudice and no payment of any kind
will be made to the plaintiffs or their counsel in connection with the
dismissal. Each party will bear its own fees, costs, and expenses of the
litigation which amounted to approximately $1,300,000 for the Trust at December
31, 2003. The parties to the preferred shareholder case are presently drafting
the pleadings to be submitted to the Court in order to effectuate the terms of
the MOU.
45
3. THE FUR INVESTORS TRANSACTION
On November 26, 2003, the Trust entered into a Stock Purchase Agreement with FUR
Investors, LLC, an entity controlled by real estate investor Michael L. Ashner,
pursuant to which the Trust agreed to sell to FUR Investors, LLC a minimum of
5,000,000 and a maximum of 5,185,724 newly issued common shares at a price of
$2.60 per share. As part of the transaction, FUR Investors, LLC was required to,
and did, commence a tender offer to purchase up to 5,000,000 common shares, at a
price of $2.30 per share. Upon consummation of the tender offer, on December 31,
2003, FUR Investors LLC acquired 5,000,000 common shares pursuant to the tender
offer at a price of $2.30 per share and purchased an additional 5,000,000 newly
issued common shares pursuant to the terms of the Stock Purchase Agreement for a
price of $2.60 per share. As a result of these purchases, FUR Investors LLC
acquired a total of 10,000,000 of the outstanding common shares representing
32.2% of the total outstanding common shares.
In connection with the transactions contemplated by the Stock Purchase
Agreement, (i) Michael L. Ashner was appointed as the Chief Executive Officer of
the Trust, (ii) the Trust entered into an Advisory Agreement with FUR Advisors,
LLC, an affiliate of FUR Investors, LLC, (iii) Mr. Ashner entered into an
exclusivity agreement, and (iv) FUR Investors, LLC entered into a covenants
agreement. In addition, Daniel J. Altobello and Jeffrey Citrin resigned as
members of the Board of Trustees, and three new trustees were appointed to the
Board of Trustees. As a result, the Board of Trustees presently consists of six
members.
4. INVESTMENTS
Investments as of December 31, 2003 and 2002 include U.S. Treasury Bills and
Federal Home Loan Bank Discount Notes in the face amount of $48.9 million and
$104.0 million, respectively. The U.S. Treasury Bills and Federal Home Loan Bank
Discount Notes are classified as held-to-maturity securities and are recorded at
cost less unamortized discount. At December 31, 2003, the Trust owned $20.0
million in interest bearing commercial paper which are classified as held to
maturity. All investments matured within thirty days of the respective year end.
In addition, the Trust invested approximately $0.1 million in the common shares
of Atlantic Realty Trust. See Note 21.
During 2000, the Trust invested $10.0 million in convertible preferred stock and
warrants issued by HQ Global Holdings, Inc. ("HQ"). The convertible preferred
stock accrued a 13.5% "pay-in-kind" dividend which increased annually. During
2001, the Trust wrote off its entire investment in the preferred stock and the
warrants because of continued operating losses and defaults on HQ's various
credit agreements, which the Trust believed had permanently impaired the value
of its investment in HQ's preferred stock. On March 31, 2002 HQ filed a
voluntary petition for a Chapter 11 Reorganization under the U.S. Bankruptcy
Code, from which they have not emerged.
5. FINANCIAL INSTRUMENTS
Financial instruments held by the Trust and FUMI include cash and cash
equivalents, accounts receivable, investments, accounts payable and long-term
debt. The fair value of cash and cash equivalents, accounts receivable,
investments in government securities and commercial paper and accounts payable
approximates their current carrying amounts due to their short-term nature.
Management has determined that the fair value of the Trust's investment in
convertible preferred stock and the related warrants of HQ is zero at December
31, 2003 and 2002. The fair value of the Trust's mortgage loan payable, as
described in Note 9 could not be estimated. The Trust and FUMI do not hold or
issue financial instruments or derivative financial instruments for trading
purposes.
6. WARRANTS TO PURCHASE SHARES OF BENEFICIAL INTEREST
In November 1998, the Trust issued 500,000 warrants that allow a third party to
purchase 500,000 Common Shares at $10 per share. The current exercise price of
the warrants is $8.37. The warrants expire in November 2008. The Trust issued
the warrants as part of the consideration for various services provided to the
Trust.
7. CASH AND CASH EQUIVALENTS
Cash and cash equivalents include checking and money market accounts.
46
8. GAIN ON SALE
On August 1, 2003, VenTek sold substantially all the assets of its parking
ticketing equipment 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 transferred approximately $0.2 million in
liabilities. The Trust recognized a gain for financial reporting purposes of
$54,000.
In March 2001, the Trust sold two shopping center properties, four office
properties, five parking garages, one parking lot, a $1.5 million note
receivable and certain assets used in the operations of the properties (the
"Purchased Assets") to Radiant Ventures I, LLC (the "Purchaser"), a related
party, for an aggregate sales price before adjustments and closing costs of $205
million. At the closing of this transaction, the sale price of $205 million was
reduced by $20.6 million, which was the net sales price realized by the Trust
from the sale of the Huntington Garage property which was sold in December 2000
to another party as agreed by Purchaser and which was part of the aggregate
sales price of $205 million. The Trust recognized a gain on the sale of
approximately $30.1 million.
9. MORTGAGE LOAN PAYABLE
As of December 31, 2003 and 2002, the Trust had one remaining mortgage loan for
$41.5 million and $41.8 million, respectively, secured by the Park Plaza Mall.
The loan, obtained in April 2000, is non-recourse and has an anticipated
repayment date of May 1, 2010. The mortgage loan bears interest at a rate of
8.69% until May 1, 2010 and thereafter until its final maturity in May 2030 at a
rate of 10.69% if the mortgage loan is then the subject of a secondary market
transaction in which rated securities have been issued and 12.69% if it is not.
The mortgage loan requires monthly payments based on a 30-year amortization
schedule of approximately $0.4 million for principal, interest and escrow
deposits. Prepayment of the loan is permitted prior to the anticipated repayment
date (after an initial lockout period of three years or two years from
securitization), only with yield maintenance or defeasance, and payable after
the anticipated repayment date upon thirty days notice without payment of any
penalties, as defined in the loan agreement. Principal payments due during the
five years following December 31, 2003 are $0.3 million, $0.4 million, $0.4
million, $0.5 million and $0.5 million, respectively.
Management cannot estimate the fair value of the mortgage loan payable due to
the contingency described in Footnote 19 relating to the Park Plaza Mall.
10. SENIOR NOTES
The Trust had zero and approximately $12.5 million of 8 7/8% Senior Notes
outstanding at December 31, 2003 and 2002, respectively. The Senior Notes were
paid on October 1, 2003.
11. CONVERTIBLE PREFERRED SHARES OF BENEFICIAL INTEREST
In October 1996, the Trust issued $57.5 million of Series A cumulative
convertible redeemable preferred shares of beneficial interest ("Series A
Preferred Shares"). The 2,300,000 Series A Preferred Shares were issued at a par
value of $25 per share and were each convertible into 3.31 Common Shares of
beneficial interest. In connection with the distribution of the Impark shares,
the Trust adjusted the conversion price of the preferred shares to 4.92 Common
Shares for each preferred share. The distributions on the Series A Preferred
Shares are cumulative and equal to the greater of $2.10 per share (equivalent to
8.4% of the liquidation preference per annum) or the cash distributions on the
Common Shares of beneficial interest into which the Series A Preferred Shares
are convertible (determined on each of the quarterly distribution payment dates
for the Series A Preferred Shares). The Series A Preferred Shares may not be
redeemed for cash. The Series A Preferred Shares are redeemable at the option of
the Trust at the conversion rate of one Series A Preferred Share for 4.92 Common
Shares. The Trust may exercise its option only if for 20 trading days within any
period of 30 consecutive trading days, the closing price of the Common Shares of
beneficial interest on the New York Stock Exchange equals or exceeds the
conversion price of $5.0824 per Common Share.
In December 2002, a total of 1,718 shares of Series A Preferred Shares were
converted to Common Shares. Based on the conversion price of the Series A
Preferred Shares, an additional 8,449 Common Shares were issued.
47
12. REPURCHASE OF SHARES
The Board of Trustees of the Trust authorized a share repurchase program in July
2003. The plan allows the Trust to purchase up to $10.0 million of its common
and preferred shares in the market or through private transactions. Through
December 31, 2003, the Trust repurchased and retired 2,914,215 common shares
under this plan for approximately $5.3 million. See Note 2 for additional
repurchases of common shares in connection the settlement of the Gotham
transaction.
In April 2001, the Trust entered into separate agreements with Apollo Real
Estate Investment Fund II, L.P., a related party at such time, and Bear Stearns
International Limited, and repurchased an aggregate of approximately $4.8
million of its common shares at a price of $2.375 per share. The repurchases
were part of the common share repurchase authorization program, under which the
Trust had previously expended approximately $15.6 million to buy common shares.
This program was suspended during the proposed Gotham transaction.
13. SHARE OPTIONS
The Trust has the following share option plans for key personnel and Trustees:
1981 STOCK OPTION PLAN
This plan provided that option prices be at the fair market value of the shares
at the date of grant and that option rights granted expire 10 years after the
date granted. Adopted in 1981, the plan originally reserved 624,000 shares for
the granting of incentive and non-statutory share options. Subsequently, the
shareholders approved amendments to the plan reserving an additional 200,000
shares, for a total of 824,000 shares, for the granting of options and extending
the expiration date to December 31, 1996. The amendments did not affect
previously issued options. In June 1998, a change in the majority of the Trust's
Board of Trustees resulted in all share options not previously vested to become
fully vested as of that date.
As of December 31, 2003 and 2002, there were no outstanding options under the
1981 plan.
LONG-TERM INCENTIVE OWNERSHIP PLAN
This plan, adopted in 1994 and amended in 1999, reserved 3,507,196 shares for
the granting of incentive and non-statutory share options and restricted shares.
Options granted in 1999 expired unexercised in 2001.
The activity of this plan is summarized for the years ended December 31 in the
following table:
2003 WEIGHTED 2002 WEIGHTED 2001 WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
--------------- ---------------- ---------- -------------- ------------ --------------
Share options granted 100,000 $2.23 - - - -
Share options canceled - - - - - -
Share options expired - - - - 627,471 $3.69
Restricted shares granted - - - - - -
Restricted shares canceled - - - - - -
Additional shares reserved - - - - - -
Available share options
and restricted shares 3,407,196 - 3,507,196 - 3,507,196 -
As of December 31, 2003 and 2002, there were 100,000 and zero options
outstanding under this plan, respectively. In December 2003, the then members of
the Board of Trustees granted 100,000 option under the Long Term
48
Incentive Performance Plan to Neil Koenig, a Trustee of the Trust and the then
Interim Chief Executive Officer and Interim Chief Financial Officer. See Note
18. Each option has an exercise price of $2.23. 50,000 of the options are
exercisable from and after June 16, 2004 and 50,000 are exercisable from and
after December 16, 2004 and expire on December 16, 2013. The fair value of the
option grant was estimated on the date of the grant utilizing the Black-Scholes
option valuation model with the following assumptions: Expected life - 10 years;
Risk free interest rate - 5%; Volatility - .35. Utilizing the assumptions, the
fair value of the options granted at the date of the grant is $126,000 for the
year ended December 31, 2003.
TRUSTEE SHARE OPTION PLAN
In 1999, the shareholders approved a share option plan for members of the Board
of Trustees. This plan provides compensation in the form of Common Shares and
options to acquire Common Shares for Trustees who are not employees of the Trust
and who were not affiliated with Apollo Real Estate Advisors or Gotham Partners.
A total of 500,000 Common Shares were authorized under this plan.
The eligible Trustees serving on the Board in May 1999 were granted the lesser
of 2,500 shares or the number of shares having a market price of $12,500 as of
the grant date. Seven Trustees each received 2,500 shares; two Trustees later
resigned in 1999 and forfeited their shares. The remaining shares vested and
became non-forfeitable in December 2000.
Each eligible Trustee who invests a minimum of $5,000 in shares in a Service
Year, as defined in the plan, will receive options, commencing in the year 2000,
to purchase four times the number of shares that he has purchased. Shares
purchased in excess of $25,000 in a Service Year will not be taken into account
for option grants. The option prices will be the greater of fair market value on
the date of grant or $6.50 for half of the options, and the greater of fair
market value or $8.50 for the other half of the options. The option prices will
be increased by 10% per annum beginning May 2000 and decreased by dividend
distributions on Common Shares made after November 1998. The options vest and
become exercisable one year after being granted.
At December 31, 2002, there were 8,000 exercisable options outstanding which had
a weighted average exercise price of $7.72 and a three year remaining life. At
December 31, 2003, the 8,000 options outstanding had a weighted average unit
price of $8.49 and a two-year remaining life. The SFAS 123 impact of these
options was immaterial.
14. FEDERAL INCOME TAXES
The Trust has made no provision for regular current or deferred federal and
state income taxes on the basis that it qualifies under the Internal Revenue
Code (the "Code") as a real estate investment trust ("REIT") and has distributed
its taxable income to shareholders. Qualification as a REIT involves the
application of highly technical and complex provisions of the Code, for which
there are only limited judicial or administrative interpretations. The
complexity of these provisions is greater in the case of a stapled REIT such as
the Trust. The Trust's ability to qualify as a REIT may be dependent upon its
continued exemption from the anti-stapling rules of the Code, which, if they
were to apply, might prevent the Trust from qualifying as a REIT. Qualification
as a REIT also involves the determination of various factual matters and
circumstances. Disqualification of REIT status during any of the preceding five
calendar years would cause a REIT to incur corporate tax with respect to a year
that is still open to adjustment by the Internal Revenue Service. In addition,
unless entitled to relief under certain statutory provisions, a REIT also would
be disqualified from re-electing REIT status for the four taxable years
following the year during which qualification is lost.
The Trust and FUMI treat certain items of income and expense differently in
determining net income reported for financial and tax purposes. Such items
resulted in a net decrease in income for tax reporting purposes of approximately
$1.8 million in 2003, a net increase of $3.6 million in 2002 and a net decrease
of $51.0 million in 2001. The Trust has Federal net operating loss carryforwards
of approximately $46.9 million, which expire in 2019 ($4.3 million), 2021 ($32.7
million), 2022 ($3.8 million) and 2023 ($6.1 million). FUMI has Federal net
operating loss carryforwards of approximately $6.9 million, which expire in 2020
($2.8 million), 2021 ($0.9 million), 2022 ($1.6 million) and 2023 ($1.6
million). The Trust has capital loss carryforwards of approximately $12.3
million, $0.8 million of which will expire in 2006 and the balance of $11.5
million will expire in 2007. A valuation allowance has been provided for the
49
entire amount of deferred tax assets of FUMI, which consists of operating loss
carryforwards, due to the uncertainty of realization of the deferred tax assets.
The Trust and FUMI do not file consolidated tax returns.
As of December 31, 2003, net investments in real estate after accumulated
depreciation for tax reporting purposes was approximately $57.8 million as
compared to financial reporting purposes of approximately $57.9 million.
During 2003, there were no cash dividends per share of beneficial interest.
The 2003 cash dividends per Series A Preferred Share for individual
shareholders' income tax purposes was as follows:
Capital Gains
--------------------------------------------------
Unrecaptured
Ordinary Section 1250 NonTaxable Total
Dividends 20% Rate Gain (25% Rate) Distributions Dividends Paid
- ----------------------- --------------------- ------------------------- --------------------- ------------------
$ - $ - $ - $ 2.10 $ 2.10
======================= ===================== ========================= ===================== ==================
The 2002 cash dividend per share of beneficial interest for individual
shareholder's income tax purposes was as follows:
Capital Gains
--------------------------------------------------
Unrecaptured
Ordinary Section 1250 NonTaxable Total
Dividends 20% Rate Gain (25% Rate) Distributions Dividends Paid
- ----------------------- --------------------- ------------------------- --------------------- ------------------
$ - $ - $ - $ 0.20 $ 0.20
======================= ===================== ========================= ===================== ==================
The 2002 cash dividends per Series A Preferred Share for individual
shareholders' income tax purposes was as follows:
Capital Gains
--------------------------------------------------
Unrecaptured
Ordinary Section 1250 NonTaxable Total
Dividends 20% Rate Gain (25% Rate) Distributions Dividends Paid
- ----------------------- --------------------- ------------------------- --------------------- ------------------
$ - $ - $ - $ 2.10 $ 2.10
======================= ===================== ========================= ===================== ==================
50
During 2001, there were no cash dividends per share of beneficial interest.
The 2001 cash dividends per Series A Preferred Share for individual
shareholders' income tax purposes was as follows:
Capital Gains
--------------------------------------------------
Unrecaptured
Ordinary Section 1250 NonTaxable Total
Dividends 20% Rate Gain (25% Rate) Distributions Dividends Paid
- ----------------------- --------------------- ------------------------- --------------------- ------------------
$ 0.524 $ 1.192 $ 0.384 $ - $ 2.10
======================= ===================== ========================= ===================== ==================
15. LEGAL PROCEEDINGS
PREFERRED SHAREHOLDERS LAWSUITS
Kimeldorf v. First Union Real Estate Equity and Mortgage Investments, et al. 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
then substantial shareholder of the Trust 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 April 15, 2002, the Trust was served with a complaint filed in the Supreme
Court of New York in New York County on behalf of a purported holder of the
Trust's convertible preferred shares. Among the allegations made by the
plaintiff is that the proposed transaction with Gotham Golf was approved by the
Trust's Board of Trustees in violation of fiduciary duties owed to the holders
of the Trust's convertible preferred shares. The suit seeks, among other things,
unspecified damages, an injunction of the proposed transaction and the court's
certification of the lawsuit as a class action. Named as defendants in the
lawsuit were the Trust, its then five trustees and Gotham Partners.
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.
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. 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 hearings with respect to the plaintiff's motions, the court
issued an order in December 2002 granting a preliminary injunction barring the
proposed merger of the Trust with and into Gotham Golf. 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.
On April 30, 2003, the trial court granted the plaintiff's motion to certify the
litigation as a class action. However, plaintiff never submitted an order
identifying the certified class, and the court has issued an order nullifying
the grant of class certification.
51
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 contended
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.
On September 4, 2003, the Appellate Division, First Department of the New York
Supreme Court, issued its ruling on the appeal by the Trust and the other
defendants of the trial court's order barring the merger transaction. The
five-member Appellate Division panel unanimously found that the legal standard
for the granting of the injunction had not been satisfied and, accordingly, the
order of the trial court granting the injunction was reversed and the injunction
vacated. Plaintiff preferred shareholders did not appeal this decision.
As of January 23, 2004, the parties to the consolidated Kimeldorf case entered
into a Memorandum of Understanding ("MOU") providing for the terms of the
resolution of the litigation. Under the terms of the MOU, the consolidated
Kimeldorf case will be dismissed with prejudice and no payment of any kind will
be made to the plaintiffs or their counsel in connection with the dismissal.
Each party will bear its own fees, costs, and expenses of the litigation. It is
expected that the parties to the consolidated Kimeldorf case will submit the
pleadings to the Court in order to effectuate the terms of the MOU during the
first quarter of 2004.
COMMON SHAREHOLDERS LAWSUITS
Fink v. First Union Real Estate Equity and Mortgage Investments. 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 then
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 (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 does not believe that this matter will have a material impact on the
operations of the Trust.
52
K-A & Company, LTD. v. First Union Real Estate Equity and Mortgage Investments.
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 then 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. 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).
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 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.
Following the issuance of the Appellate Division, First Department of the New
York Supreme Court of its reversal of the order granting the injunction, and the
vacating of the injunction, granted in the Kimeldorf case, the plaintiffs in the
K-A & Company, LTD. case have voluntarily dismissed their complaint with
prejudice in October 2003; accordingly, that case has been disposed of.
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 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. On November 26, 2003, the Court of Appeals issued its decision reversing
the decision of the trial court. The Court held that the State was liable for
the damages caused by the flood. The Court of Appeal remanded for a
determination the damages of plaintiffs, including the Trust, and for an award
of attorney's fees and costs. The State filed a petition for rehearing in the
Court of Appeal, which was denied on December 24, 2003. On January 2, 2004, the
State filed a petition for review with the California Supreme Court. Plaintiffs,
including the Trust, filed an opposition to the petition on January 21, 2004,
and the State filed a reply on January 29, 2004. The Trust anticipates that the
California Supreme Court should rule on whether to grant review during the
second quarter of 2004.
INDEMNITY TO IMPERIAL PARKING LIMITED
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
53
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.
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.
16. BUSINESS SEGMENTS
The Trust's and FUMI'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 and parking ticketing 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. The
parking ticket equipment business was sold on August 1, 2003. All intercompany
transactions between segments have been eliminated (see table of business
segments).
BUSINESS SEGMENTS (IN THOUSANDS)
2003 2002 2001
--------- --------- ---------
RENTS AND SALES
Shopping Centers $ 12,327 $ 12,098 $ 13,152
Office Buildings 1,478 1,379 3,962
Parking Facilities -- -- 1,610
VenTek 1,892 2,924 7,554
Corporate 111 166 17
--------- --------- ---------
15,808 16,567 26,295
LESS - OPERATING EXPENSES AND COSTS OF
GOODS SOLD
Shopping Centers 4,116 4,231 5,351
Office Buildings 734 719 1,787
Parking Facilities -- -- 24
VenTek 3,279 4,892 8,777
Corporate 115 93 (181)
--------- --------- ---------
8,244 9,935 15,758
54
2003 2002 2001
--------- --------- ---------
LESS - REAL ESTATE TAXES
Shopping Centers 809 821 913
Office Buildings 90 90 287
Parking Facilities -- -- 347
Corporate (126) (12) (329)
--------- --------- ---------
773 899 1,218
NET OPERATING INCOME (LOSS)
Shopping Centers 7,402 7,046 6,888
Office Buildings 654 570 1,888
Parking Facilities -- -- 1,239
VenTek (1,387) (1,968) (1,223)
Corporate 122 85 527
--------- --------- ---------
6,791 5,733 9,319
--------- --------- ---------
Less - Depreciation and Amortization 2,161 2,077 3,837
Less - Interest Expense 4,551 5,102 7,983
CORPORATE INCOME (EXPENSE)
Interest and dividends 838 1,659 5,091
Other income (loss) (VenTek in 2002) -- 475 5
General and administrative (6,873) (5,720) (5,750)
Write-down of investment -- -- (11,463)
--------- --------- ---------
Loss before Gain on Sale $ (5,956) $ (5,032) $ (14,618)
========= ========= =========
CAPITAL EXPENDITURES
Shopping Centers $ 909 $ 374 $ 138
Office Buildings 134 314 472
Parking Facilities -- -- 114
VenTek 18 9 54
--------- --------- ---------
$ 1,061 $ 697 $ 778
========= ========= =========
IDENTIFIABLE ASSETS
Shopping Centers $ 57,550 $ 58,388 $ 60,042
Office Buildings 2,134 2,444 2,382
VenTek 1,110 2,131 3,428
Corporate 86,044 108,862 119,817
--------- --------- ---------
TOTAL ASSETS $ 146,838 $ 171,825 $ 185,669
========= ========= =========
55
17. MINIMUM RENTS
The future minimum lease payments that are scheduled to be received under
noncancellable operating leases are as follows (amounts in thousands):
2004 $ 7,345
2005 6,271
2006 4,985
2007 4,606
2008 3,917
Thereafter 10,067
-------
$37,191
=======
The Trust has one tenant that occupies more than 10% of its rentable square
footage at its properties and contributed 10% of the base rental revenue of the
Trust for the years ended December 31, 2003 and 2002.
The operating agreement at the anchor department store of the Trust's shopping
mall ended in July 2003. The department store has not extended the operating
agreement to date, however, they continue to operate at the mall and can do so
through 2031. If it chooses to close one or both of its stores, many of the
tenants have the right to terminate their leases without incurring a substantive
penalty or to pay less rent.
18. RELATED PARTY TRANSACTIONS
The Trust leased four of its parking facilities to an entity which is partially
owned by an affiliate of a former Trust shareholder, Apollo Real Estate
Investment Fund II, L.P. and Apollo Real Estate Advisors. The parking facilities
were sold March 7, 2001. In 2001, the Trust received approximately $0.3 million
in rent from this third party. In April 2001, the Trust purchased all of the
Common Shares of the Trust beneficially owned by this shareholder.
The Trust and FUMI paid fees of $0.5 million, $0.5 million and $0.6 million for
the years ended December 31, 2003, 2002 and 2001, respectively, to the Real
Estate Systems Implementations Group, LLC ("RE Systems") for financial reporting
and advisory services. The managing member of this firm assumed the position of
Interim Chief Financial Officer of the Trust on August 18, 2000, and Interim
Chief Executive Officer in January 2003. In addition, he became a Trustee of the
Trust in June 2003 and resigned as Interim Chief Executive Officer and Interim
Chief Financial Officer on December 31, 2003. The Trust continues to retain RE
Systems on a month to month basis to provide services to FUMI and VenTek at a
cost of $10,000 per month.
Radiant Partners, LLC ("Radiant") provided asset management services to the
Trust's remaining real estate assets. For the years ended December 31, 2003,
2002 and 2001, the Trust paid fees to Radiant of $0.3 million, $0.3 million and
$0.5 million, respectively. The principals of Radiant were formerly executive
officers of the Trust. During 2001, the Trust sold two shopping center
properties, four office properties, five parking garages, one parking lot, a
$1.5 million note receivable and certain assets used in operations of the
properties to an affiliate of Radiant. Effective February 4, 2004, the Trust
entered into a termination agreement with Radiant pursuant to which Radiant
ceased providing asset management services but will continue to provide
transition services through April 30, 2004.
The affairs of the Trust and its subsidiaries are administered by FUR Advisors
pursuant to the terms of an Advisory Agreement (the "Advisory Agreement") dated
December 31, 2003 between the Trust and FUR Advisors, which agreement was
negotiated and approved by the Board of Trustees of the Trust prior to the
acquisition by FUR Investors LLC of its interest in the Trust. FUR Advisors is
controlled by and partially owned by the executive officers of the Trust.
Pursuant to the terms of the Advisory Agreement, FUR Advisors is responsible for
providing asset management services to the Trust and coordinating with the
Trust's investor servicer and property managers. Pursuant to the terms of the
Advisory Agreement, for providing these services, FUR Advisors is entitled to
the
56
following fees: (i) an asset management fee of 1% of the gross asset value of
the Trust up to $100 million, .75% of the gross asset value of the Trust between
$100 million and $250 million, .625% of the gross asset value of the Trust
between $250 million and $500 million and .50% of the gross asset value of the
Trust in excess of $500 million; (ii) property and construction management fees
at commercially reasonable rates as determined by the independent Trustees of
the Board; (iii) loan servicing fees (not exceeding commercially reasonable
rates approved by a majority of the independent trustees) for providing
administrative and clerical services with respect to loans made by the Trust to
third parties; and (iv) an incentive fee equal to 20% of all distributions to
Beneficiaries after December 31, 2003 in excess of (x) $71.3 million, increased
by the net issuance price of all shares issued after December 31, 2003, and
decreased by the redemption price of all shares redeemed after December 31,
2003, plus (y) a return on the amount, as adjusted, set forth in (x) equal to 7%
per annum compounded annually. In addition, FUR Advisors is entitled to be
reimbursed for up to $125,000 per annum for the costs associated with the
employment of one or more asset managers.
Effective February 1, 2004, Kestrel Management L.P., an affiliate of FUR
Advisors and the Trust's executive officers, assumed property management
responsibilities for Circle Tower. Pursuant to the terms of the property
management agreement, Kestrel Management receives a fee equal to 3% of the
monthly revenues of Circle Tower which amount is less than the amount paid to
the prior property management company.
The Trust believes that at the time of entering into of such transactions, the
terms of all such transactions were as favorable to the Trust as those that
would have been obtained from unrelated third parties.
19. CONTINGENCIES
VenTek
The Trust has provided performance guarantees entered into with respect to
contracts of VenTek with two transit authorities, which contracts are in the
amounts of $5.3 million and $6.2 million for the manufacturing, installation and
maintenance of transit ticket vending equipment manufactured by VenTek. The
guarantee in the amount of $5.3 million expired in September 2003 and the
remaining guarantee bond in the amount of $6.2 million will expire in September
2004. No amounts have been drawn against these guarantees. If a warranty or
service claim against VenTek is made and VenTek fails or is unable to perform in
accordance with the remaining contract, the Trust may be responsible for partial
payment under the remaining guarantee. In connection with one of the contracts,
VenTek settled a claim for liquidated damages for approximately $0.1 million
during the year ended December 31, 2003. During the third quarter of 2003,
VenTek entered into a new contract for $2.2 million with one of the transit
authorities to manufacture additional ticket vending machines. In connection
with the contract, the Trust provided cash collateral equal to 50 percent of the
contract value to secure a letter of credit required by the bonding company.
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. A hearing of
the appeal was held on October 30, 2003. On December 4, 2003, the Supreme Court
of Arkansas determined that any zoning changes needs to be approved by voters
through a referendum. Simon Property Group announced in February 2004 that it
was no longer proceeding with the proposed development.
Under the terms of the operating covenant, Dillard's has no obligation to
maintain its operations at Park Plaza Mall beyond July 2003 but may continue
operations at Park Plaza Mall through 2031. The Trust had approached
57
Dillard's to extend this covenant prior to its expiration and continues to
explore options with Dillard's, however, to date, no agreement with Dillard's
has been reached. 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. See Note 17.
Other Contingency
Revenue Canada has commenced a tax audit of Imperial Parking Corp. of Canada
("Imperial Parking"). Imperial Parking has communicated to the Trust that it
expects that Revenue Canada will disallow deductions previously taken by
Imperial Parking. As a result, the Trust has accrued, as its best estimate,
$700,000 for financial reporting purposes related to this matter, although there
can be no assurance as to the ultimate outcome.
20. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is an unaudited condensed summary of the combined results of
operations by quarter for the years ended December 31, 2003 and 2002. In the
opinion of the Trust and FUMI, all adjustments (consisting of normal recurring
accruals) necessary to present fairly such interim combined results in
conformity with accounting principles generally accepted in the United States of
America have been included.
QUARTERS ENDED
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
--------------- ------------- ----------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND FOOTNOTE)
2003
- ----
Revenues $ 4,430 $ 4,304 $ 4,020 $ 3,892
======== ======= ========== =======
Net loss $ (1,032) $(3,122)(1) $ (729) $(1,019)
======== ======= ========== =======
Net loss applicable to shares of beneficial interest $ (1,548) $(3,638) $ (1,245) $(1,535)
======== ======= ========== =======
Per share
Net loss applicable to shares of beneficial
interest, basic $ (0.04) $ (0.11) $ (0.04) $ (0.06)
======== ======= ========== =======
Net loss applicable to shares of beneficial
interest, diluted $ (0.04) $ (0.11) $ (0.04) $ (0.06)
======== ======= ========== =======
2002
- ----
Revenues $ 4,703 $ 4,490 $ 4,807 $ 4,701
======== ======= ========== =======
Net loss $ (1,490) $(1,298) $ (1,015) $(1,229)
======== ======= ========== =======
Net loss applicable to shares of beneficial interest $ (2,007) $(1,815) $ (1,532) $(1,745)
======== ======= ========== =======
Per share
Net loss applicable to shares of beneficial
interest, basic $ (0.06) $ (0.05) $ (0.04) $ (0.05)
======== ======= ========== =======
Net loss applicable to shares of beneficial
interest, diluted $ (0.06) $ (0.05) $ (0.04) $ (0.05)
======== ======= ========== =======
(1) Includes the $2.4 million termination fee paid in connection with the Gotham
transaction.
58
21. SUBSEQUENT EVENTS
VenTek
During 2004, the Trust decided to dispose of VenTek. It is expected that the
disposition will take place during 2004. For the year ended December 31, 2003,
VenTek's loss from operations of $1.4 million consisted of $1.9 million of
revenue, a gain on sale of approximately $0.1 million and expenses of $3.4
million. VenTek's assets at December 31, 2003 of $1.0 million consist of $0.6
million of inventory, $0.3 million of receivables and prepayments and $0.1
million of fixed assets. VenTek's liabilities at December 31, 2003 consist of
$1.7 million of accounts payable and accrued liabilities.
Atlantic Realty
In January 2004, the Trust acquired 267,000 shares in Atlantic Realty Trust
(NASD: ATLRS) representing 7.5% of the outstanding shares in Atlantic Realty.
The Trust acquired these shares with a view to making a profit on its
investment. In light of its investment objectives, on January 12, 2004, the
Trust contacted Atlantic Realty to discuss a possible business combination
between Atlantic Realty and the Trust. In general, the proposal seeks to merge
Atlantic Realty with and into the Trust, or a subsidiary thereof, in exchange
for $16.25 per common share of beneficial interest, payable, at the election of
the shareholder of Atlantic Realty, either (i) in cash, or (ii) in exchange for
the Trust's Series A cumulative convertible redeemable preferred shares of
beneficial interest (the "Preferred Shares") at a rate of .65 Preferred Shares
per Share. In the event that Atlantic Realty shareholders holding more than
1,901,760 shares in the aggregate elect to receive Preferred Shares, such
shareholders will receive (i) a number of Preferred Shares equal to (a) .65
multiplied by (b) a fraction, the numerator of which is 1,901,760 and the
denominator of which is the total number of shares to be exchanged for Preferred
Shares and (ii) cash equal to (x) $16.25 multiplied by (y) a fraction, the
numerator of which is the number of shares to be exchanged for Preferred Shares
less 1,901,760 and the denominator of which is the number of shares to be
exchanged for Preferred Shares. The consideration would be subject to upward or
downward adjustment, as the case may be, based (i) on a projected post-closing
net cash balance of Atlantic Realty of $17,500,000 and (ii) any stock splits,
issuances, repurchases, reclassifications and other transactions affecting the
value of Atlantic Realty. The proposal also provides that it is subject to,
among other things, the satisfactory completion by the Trust of a five-business
day due diligence review of Atlantic Realty. In addition, the Trust requested a
waiver to acquire in excess of 9.8% of the outstanding shares in Atlantic
Realty. The terms of such waiver proposed by Atlantic Realty were rejected by
the Trust and no such waiver was obtained. Atlantic Realty has advised the Trust
that they have established a special committee to review the Trust's proposal as
well as any other proposals and will advise the Trust as to the adequacy of its
proposal in due course.
NorthStar Loan
On March 3, 2004, the Trust acquired from Bank of America, N.A. a loan
receivable from NorthStar Partnership, L.P. in the principal amount of $16.944
million (the "NorthStar Loan"). The NorthStar Loan is evidenced by a Credit
Agreement, Promissory Note and collateral documents. The NorthStar Loan is
secured by a first priority lien on all or a portion of NorthStar's interest in
Morgans Hotel Group LLC, Emmes & Company LLC and Presidio Capital Investment
Company, LLC as well as certain other assets of NorthStar. Upon acquisition, the
NorthStar Loan was modified to extend the maturity date for one year to May 28,
2005 and provides for an option to NorthStar to further extend the maturity
date, upon payment of a one point fee, for up to two optional six-month
extensions. The NorthStar Loan was further modified to provide for an initial
interest rate of at a minimum of 12% per annum, with a yield to maturity of
12.86%, increasing by two percentage points for each six month renewal term. In
addition, NorthStar was required to establish a reserve equal to interest for
six months and, upon the occurrence of certain events, to increase such reserve
to one year's interest. The NorthStar Loan requires payments of interest only,
is prepayable at any time, together with a premium, and requires mandatory
prepayments from asset sales or refinancings after the first $9 million in
proceeds from such sales or refinancings. Further, the Trust entered into an
agreement pursuant to which it has an option to invest in certain transactions
involving assets of NorthStar which are offered to existing equityholders of
NorthStar, or their affiliates.
59
Due to the nature and amount of the NorthStar Loan, in order to comply with the
rules applicable to real estate inVestment trusts, a portion of the NorthStar
Loan is held by a wholly-owned subsidiary of the Trust that has elected to be
treated as a taxable REIT subsidiary. Accordingly, the portion of income
allocated to the amount of the NorthStar Loan held by the taxable REIT
subsidiary will be subject to corporate level tax.
Park Plaza Mall
In March 2004, the Trust engaged a real estate broker to begin marketing the
Park Plaza Mall property for sale. It cannot be determined at this time as to
what price or even if the property will ultimately be sold.
60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On February 25, 2004, KPMG LLP, the Trust's independent auditors for
the year ended December 31, 2003 advised the Trust that they would not stand for
re-election as the Trust's independent auditors for the year ending December 31,
2004. KPMG LLP's report on the Trust's combined financial statements as of and
for the years ended December 31, 2003 and 2002 did not contain any adverse
opinion or a disclaimer of opinion nor were they qualified or modified as to
uncertainty, audit scope, or accounting principles.
During the Trust's past two fiscal years and through the date of this
report, there were no disagreements with the KPMG LLP on any matter of
accounting principle or practice, financial statement disclosure, or auditing
scope or procedure which disagreements if not resolved to the KPMG LLP's
satisfaction, would have caused them to make reference to the subject matter in
connection with their report on our financial statements for such year.
ITEM 9A. CONTROLS AND PROCEDURES
As of the end of the period covered by this annual report on Form 10-K, an
evaluation was carried out under the supervision and with the participation of
the Trust's management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the Trust's disclosure controls and
procedures (as such term is defined in Rule 13a-15 (e) under the Securities
Exchange Act of 1934). Based on that evaluation, the Trust's Chief Executive
Officer and Chief Financial Officer have concluded that, as of the end of such
period, the Trust's disclosure controls and procedures were effective as of the
end of the period covered by this report. In addition, no change in our internal
control over financial reporting (as defined in Rule 13a- 15 (f) under the
Securities Exchange Act of 1934) occurred during the fourth quarter of our
fiscal year ended December 31, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
61
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE TRUST.
(A) DIRECTORS.
"Election of Trustees" presented in the Trust's 2004 Proxy Statement to
be filed is incorporated herein by reference.
(B) EXECUTIVE OFFICERS.
"Executive Officers" as presented in the Trust's 2004 Proxy Statement
to be filed is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
"Compensation of Trustees" and "Executive Compensation", presented in
the Trust's 2004 Proxy Statement to be filed are incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
"Security Ownership of Trustees, Officers and Others" presented in the
Trust's 2004 Proxy Statement to be filed is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Certain Transactions and Relationships" presented in the Trust's 2004
Proxy Statement to be filed is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
"Principal Accountant Fees and Services" presented in the Trust's 2004
Proxy Statement to be filed is incorporated herein by reference.
62
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) FINANCIAL STATEMENTS:
Independent Auditors' Report on page 36 of Item 8
Combined Balance Sheets - December 31, 2003 and 2002 on page
37 of Item 8.
Combined Statements of Operations - For the Years Ended
December 31, 2003, 2002 and 2001 on page 38 of Item 8.
Combined Statements of Shareholders' Equity - For the Years
Ended December 31, 2003, 2002 and 2001 on page 39 of Item 8.
Combined Statements of Cash Flows - For the Years Ended
December 31, 2003, 2002 and 2001 on page 40 of Item 8.
Notes to Combined Financial Statements on pages 41 through 60
of Item 8.
(2) FINANCIAL STATEMENT SCHEDULES:
Independent Auditors' Report on Financial Statement Schedules.
Schedule III - Real Estate and Accumulated Depreciation.
All Schedules, other than III, are omitted, as the information
is not required or is otherwise furnished.
(b) EXHIBITS.
Exhibit Incorporated Herein by
Number Description Reference to
- ------ ----------- ------------
2(a) Agreement and Plan of Merger and Contribution by and among First Form 8-K dated February 14,
Union Real Estate Equity and Mortgage Investments, that certain Ohio 2002
Trust, declared as of October 1, 1996, by Adolph Posnick, Trustee,
First Union Management, Inc., GGC Merger Sub, Inc., Gotham Partners,
L.P., Gotham Golf Partners, L.P., Florida Golf Associates, L.P.,
Florida Golf Properties, Inc., and Gotham Golf Corp.
2(a)(1) Amendment No. 1 dated as of April 30, 2002 to the Agreement and Plan Appendix B to Amendment No.
of Merger and Contribution by and among First Union Real Estate 4 to Form S-4, Registration
Equity and Mortgage Investments, that certain Ohio Trust, declared Statement No. 333-88144, of
as of October 1, 1996, by Adolph Posnick, Trustee, First Union Gotham Golf Corp. and
Management, Inc., GGC Merger Sub, Inc., Gotham Partners, L.P., Southwest Shopping Centers
Gotham Golf Partners, L.P., Florida Golf Associates, L.P., Florida Co. II, L.L.C.
Golf Properties, Inc., and Gotham Golf Corp.
2(a)(2) Amendment and Restatement dated as of October 30, 2002 of Amendment Appendix C to Amendment No.
No. 2 dated as of September 27, 2002 to the Agreement 4 to Form S-4,
63
and Plan of Merger and Contribution by and among First Union Real Registration Statement No.
Estate Equity and Mortgage Investments, that certain Ohio Trust, 333-88144, of Gotham Golf
declared as of October 1, 1996, by Adolph Posnick, Trustee, First Corp. and Southwest
Union Management, Inc., GGC Merger Sub, Inc., Gotham Partners, Shopping Centers Co. II,
L.P., Gotham Golf Partners, L.P., Florida Golf Associates, L.P., L.L.C.
Florida Golf Properties, Inc., and Gotham Golf Corp.
2(a)(3) Amendment No. 3 dated as of October 24, 2002 to the Agreement and Appendix D to Amendment No.
Plan of Merger and Contribution by and among First Union Real Estate 4 to Form S-4, Registration
Equity and Mortgage Investments, that certain Ohio Trust, declared Statement No. 333-88144, of
as of October 1, 1996, by Adolph Posnick, Trustee, First Union Gotham Golf Corp. and
Management, Inc., GGC Merger Sub, Inc., Gotham Partners, L.P., Southwest Shopping Centers
Gotham Golf Partners, L.P., Florida Golf Associates, L.P., Florida Co. II, L.L.C.
Golf Properties, Inc., and Gotham Golf Corp.
3(a) By-laws of Trust as amended 1998 Form 10-K
3(b) Certificate of Amendment to Amended and Restated Declaration of 2000 Form 10-K
Trust as of March 6, 2001
4(a) Form of certificate for Shares of Beneficial Interest Registration Statement on
Form S-3 No. 33-2818
4(b) Form of Indenture governing Debt Securities, dated October 1, 1993 Registration Statement on
between Trust and Society National Bank Form S-3 No. 33-68002
4(c) First Supplemental Indenture governing Debt securities, dated July 2000 Form 10-K
31, 1998 between Trust and Chase Manhattan Trust Company, National
Association
4(d) Form of Note Registration Statement on
Form S-3 No. 33-68002
4(e) Certificate of Designations relating to Trust's Series A Cumulative Form 8-K dated October 24,
Redeemable Preferred Shares of Beneficial Interest 1996
4(f) Warrant to purchase 500,000 shares of beneficial interest of Trust 1998 Form 10-K
10(a) 1999 Trustee Share Option Plan 1999 Proxy Statement for
Special Meeting held May
17, 1999 in lieu of Annual
Meeting
10(b) 1999 Long Term Incentive Performance Plan 1999 Proxy Statement for
Special Meeting held May
17, 1999 in lieu of Annual
Meeting
10(c) Registration Rights Agreement as of November 1, 1999 by and among 1999 Form 10-K
First Union Equity and Mortgage Investments and Gotham Partners,
L.P., Gotham Partners III, L.P., and Gotham Partners International,
Ltd.
10(d) Asset Management Agreement executed March 27, 2000 with Radiant March 31, 2000 Form 10-Q
Partners, LLC. **
64
10(e) Promissory note dated April 20, 2000 between Park Plaza Mall, LLC Form 8-K dated May 11, 2000
and First Union National Bank
10(f) Mortgage and Security Agreement dated April 20, 2000 between Park Form 8-K dated May 11, 2000
Plaza Mall, LLC and First Union National Bank
10(g) Cash Management Agreement dated April 20, 2000 among Park Plaza Form 8-K dated May 11, 2000]
Mall, LLC, as borrower, Landau & Heymann of Arkansas, Inc., as
manager and First Union National Bank, as holder
10(h) Amendment to Asset Management Agreement executed May 31, 2000 with Form 8-K dated June 6, 2000
Radiant Partners, LLC **
10(i) Amendment to Asset Management Agreement ** September 30, 2000 Form 10-Q
10(j) Second Amendment to Asset Management Agreement ** September 30, 2000 Form 10-Q
10(k) Third Amendment to Asset Management Agreement ** September 30, 2000 Form 10-Q
10(l) Fourth Amendment to Asset Management Agreement ** September 30, 2000 Form 10-Q
10(m) Fifth Amendment to Asset Management Agreement ** September 30, 2000 Form 10-Q
10(n) Modification to Asset Management Agreement** 2000 Form 10-K
10(o) Voting Agreement dated as of February 13, 2002, by and among the Form 8-K dated February 14,
Trust, Gotham and Messrs. Ackman, Altobello, Bruce R. Berkowitz, 2002
Citrin and Embry
10(p) Lease, dated as of April 26, 1910, between Frank Fauvre and Lillian Exhibit 10.1 to Amendment
Fauvre as Lessors and the German American Trust Company as Lessee No. 3 to Form S-4,
Registration Statement No.
333-88144, of Gotham Golf
Corp. and Southwest
Shopping Centers Co. II,
L.L.C.
10(q) Indemnification Agreement with Neil Koenig, dated as of April 29, 2002 Form 10-K
2002
10(r) Extension Letter Agreement to Asset Management Agreement, dated as 2002 Form 10-K
of January 16, 2003
10(s) Real Estate Management Agreement between Park Plaza Mall LLC and 2002 Form 10-K
General Growth Management Inc.
10(t) Stock Purchase Agreement between First Union Real Estate Equity and Form 8-K dated November 26,
Mortgage Investments and FUR Investors, LLC, dated as of November 2003
26, 2003 ("Stock Purchase Agreement"), including Annex
65
A thereto, being the list of Conditions to the Offer.
10(u) Guaranty of Michael L. Ashner, Guarantor, dated November 26, 2003, Form 8-K dated November 26,
in favor of First Union Real Estate Equity and Mortgage 2003
Investments, Guarantee, in the form provided as Annex F to the
Stock Purchase Agreement.
10.3(v) Advisory Agreement between First Union Real Estate Equity and Form 8-K dated November 26,
Mortgage Investments and FUR Advisors, LLC. 2003
10(w) Exclusivity Services Agreement between First Union Real Estate Form 8-K dated November 26,
Equity and Mortgage Investments and Michael L. Ashner. 2003
10(x) Covenant Agreement between First Union Real Estate Equity and Form 8-K dated November 26,
Mortgage Investments and FUR Investors, LLC. 2003
16 Letter from KPMG LLP Form 8-K dated March 2, 2004
23 Consent of KPMG LLP *
24 Powers of Attorney *
31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002*
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002*
* Filed herewith
** Management contract or compensatory plan or arrangement
(c) REPORTS ON FORM 8-K - FILED DURING THE FOURTH QUARTER OF 2003
-------------------------------------------------------------
1. November 14, 2003
Items 7 and 12 - Financial results for the third quarter of 2003
2. December 1, 2003
Item 5 and 7- Entering into of Stock Purchase Agreement with FUR
Investors, LLC
3. December 5, 2003
Items 5 and 7 - Entering into of favorable decision in the class action
captioned Paterno et al. v. State of California
4. December 10, 2003
Items 5 and 7 - Announcing decision by the Supreme Court of Arkansas
that it reversed a June 2002 trial court ruling that the zoning of
a proposed mall site in Little Rock, Arkansas had reverted from
commercial to residential zoning in 1991.
5. December 11, 2003
Items 5 and 7 - Amendment to certain provisions of the Advisory
Agreement.
66
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Trust has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
FIRST UNION REAL ESTATE EQUITY
AND MORTGAGE INVESTMENTS
Dated: March 8, 2004 By: /s/ Michael L. Ashner
---------------------
Michael L. Ashner
Chief Executive Officer
Dated: March 8, 2004 By: /s/ Thomas Staples
------------------
Thomas Staples
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
NAME TITLE DATE
---- ----- ----
Bruce R. Berkowitz Trustee March 8, 2004
Arthur Blasberg, Jr.
Talton R. Embry
Howard Goldberg
Neil H. Koenig
Arthur N. Queler
By: /s/ Michael L. Ashner.
- -------------------------------------
Michael L. Ashner as attorney-in fact
67
Independent Auditors' Report
----------------------------
The Board of Trustees and Shareholders
First Union Real Estate Equity and Mortgage Investments:
Under date of March 4, 2004, we reported on the combined balance sheets of First
Union Real Estate Equity and Mortgage Investments and First Union Management,
Inc. and subsidiaries as of December 31, 2003 and 2002, and the related combined
statements of operations, shareholders' equity, and cash flows for each of the
years in the three-year period then ended, which is included in the Annual
Report on Form 10-K. In connection with our audits of the aforementioned
combined financial statements, we also audited the related financial statement
schedule listed under Item 15(a)(2) on page 63. 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 combined financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
/s/ KPMG LLP
New York, New York
March 4, 2004
68
Schedule III
REAL ESTATE AND ACCUMULATED DEPRECIATION
As Of December 31, 2003
(In thousands)
Cost capitalized
Initial cost to subsequent to
Registrant acquisition As of December 31, 2003
----------------------- ------------- -----------------------
Building and Building and Building and
Description Encumbrances Land Improvements Improvements Land Improvements
- ------------------ ------------ ------- ------------ ------------ --------- ------------
Shopping Mall:
Park Plaza, Little Rock, AR $41,457 $ 5,816 $58,037 $ 1,969 $ 5,816 $60,006
------- ------- ------- ------- ------- -------
Office Building:
Circle Tower, Indianapolis, IN -- 270 1,609 4,282 270 5,891
------- ------- ------- ------- ------- -------
Real Estate net carrying value at
December 31, 2003 $41,457 $ 6,086 $59,646 $ 6,251 $ 6,086 $65,897
======= ======= ======= ======= ======= =======
As of December 31, 2003
---------------------------- Year
Accumulated construction Date
Description Total depreciation completed Acquired Life
- ------------------ ----------- --------------- ---------------- ----------------- -------------
Shopping Mall:
Park Plaza, Little Rock, AR $65,822 $ 9,894 1988 9/1/1997 40
------- -------
Office Building:
Circle Tower, Indianapolis, IN 6,161 4,208 1930 10/16/1974 40
------- -------
Real Estate net carrying value at
December 31, 2003 $71,983 $14,102
======= =======
Aggregate cost for federal tax purposes is approximately $71,983.
69
Schedule III
--------------------
- Continued
The following is a reconciliation of real estate assets and accumulated
depreciation for the years ended December 31, 2003, 2002, and 2001.
(In thousands)
Years Ended December 31,
2003 2002 2001
--------- --------- ---------
Asset reconciliation:
Balance, beginning of period $ 70,953 $ 70,275 $ 273,383
Additions during the period:
Improvements 1,043 688 722
Equipment and appliances -- -- 2
Deductions during the period:
Sale of real estate -- -- (203,832)
Other - write-off of assets and
certain fully depreciated tenant alterations (13) (10) --
--------- --------- ---------
Balance, end of period: $ 71,983 $ 70,953 $ 70,275
========= ========= =========
Accumulated depreciation
Reconciliation:
Balance, beginning of period $ 12,057 $ 10,108 $ 68,507
Additions during the period:
Depreciation 2,058 1,959 3,553
Deductions during the period:
Sale of real estate -- -- (61,952)
Write-off of assets and certain fully
depreciated tenants alterations (13) (10) --
--------- --------- ---------
Balance, end of period $ 14,102 $ 12,057 $ 10,108
========= ========= =========
70
EXHIBIT INDEX
Page
Exhibit Description Number
------- ----------- ------
(2)(a) Agreement and Plan of Merger and Contribution by and among First Union Real Estate (a)
Equity and Mortgage Investments, that certain Ohio Trust, declared as of October 1,
1996, by Adolph Posnick, Trustee, First Union Management, Inc., GGC Merger Sub,
Inc., Gotham Partners, L.P., Gotham Golf Partners, L.P., Florida Golf Associates,
L.P., Florida Golf Properties, Inc., and Gotham Golf Corp.
2(a)(1) Amendment No. 1 dated as of April 30, 2002 to the Agreement and Plan of Merger and (b)
Contribution by and among First Union Real Estate Equity and Mortgage Investments,
that certain Ohio Trust, declared as of October 1, 1996, by Adolph Posnick, Trustee,
First Union Management, Inc., GGC Merger Sub, Inc., Gotham Partners, L.P., Gotham
Golf Partners, L.P., Florida Golf Associates, L.P., Florida Golf Properties, Inc.,
and Gotham Golf Corp.
2(a)(2) Amendment and Restatement dated as of October 30, 2002 of Amendment No. 2 dated as
of September 27, 2002 to the Agreement and Plan of Merger and Contribution by and
among First Union Real Estate Equity and Mortgage Investments, that certain Ohio
Trust, declared as of October 1, 1996, by Adolph Posnick, Trustee, First Union
Management, Inc., GGC Merger Sub, Inc., Gotham Partners, L.P., Gotham Golf Partners,
L.P., Florida Golf Associates, L.P., Florida Golf Properties, Inc., and Gotham Golf
Corp.
(c)
2(a)(3) Amendment No. 3 dated as of October 24, 2002 to the Agreement and Plan of Merger and (d)
Contribution by and among First Union Real Estate Equity and Mortgage Investments,
that certain Ohio Trust, declared as of October 1, 1996, by Adolph Posnick, Trustee,
First Union Management, Inc., GGC Merger Sub, Inc., Gotham Partners, L.P., Gotham
Golf Partners, L.P., Florida Golf Associates, L.P., Florida Golf Properties, Inc.,
and Gotham Golf Corp.
3(a) By-laws of Trust as amended (e)
3(b) Certificate of Amendment to Amended and Restated Declaration of Trust as of March 6, (f)
2001
4(a) Form of certificate for Shares of Beneficial Interest (g)
4(b) Form of Indenture governing Debt Securities, dated October 1, 1993 between Trust and (h)
Society National Bank
4(c) First Supplemental Indenture governing Debt securities, dated July 31, 1998 between (f)
Trust and Chase Manhattan Trust Company, National Association
4(d) Form of Note (h)
4(e) Certificate of Designations relating to Trust's Series A Cumulative Redeemable (i)
Preferred Shares of Beneficial Interest
4(f) Warrant to purchase 500,000 shares of beneficial interest of Trust (e)
10(a) 1999 Trustee Share Option Plan (j)
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10(b) 1999 Long Term Incentive Performance Plan (j)
10(c) Registration Rights Agreement as of November 1, 1999 by and among First Union Equity (k)
and Mortgage Investments and Gotham Partners, L.P., Gotham Partners III, L.P., and
Gotham Partners International, Ltd.
10(d) Asset Management Agreement executed March 27, 2000 with Radiant Partners, LLC. ** (l)
10(e) Promissory note dated April 20, 2000 between Park Plaza Mall, LLC and First Union (m)
National Bank
10(f) Mortgage and Security Agreement dated April 20, 2000 between Park Plaza Mall, LLC (m)
and First Union National Bank
10(g) Cash Management Agreement dated April 20, 2000 among Park Plaza Mall, LLC, as (m)
borrower, Landau & Heymann of Arkansas, Inc., as manager and First Union National
Bank, as holder
10(h) Amendment to Asset Management Agreement executed May 31, 2000 with Radiant Partners, (n)
LLC **
10(i) Amendment to Asset Management Agreement ** (o)
10(j) Second Amendment to Asset Management Agreement ** (o)
10(k) Third Amendment to Asset Management Agreement ** (o)
10(l) Fourth Amendment to Asset Management Agreement ** (o)
10(m) Fifth Amendment to Asset Management Agreement ** (o)
10(n) Modification to Asset Management Agreement** (f)
10(o) Voting Agreement dated as of February 13, 2002, by and among the Trust, Gotham and (a)
Messrs. Ackman, Altobello, Bruce R. Berkowitz, Citrin and Embry
10(p) Lease, dated as of April 26, 1910, between Frank Fauvre and Lillian Fauvre as (p)
Lessors and the German American Trust Company as Lessee
10(q) Indemnification Agreement with Neil Koenig, dated as of April 29, 2002 (q)
10(r) Extension Letter Agreement to Asset Management Agreement, dated as of January 16, (q)
2003
10(s) Real Estate Management Agreement between Park Plaza Mall LLC and General Growth (q)
Management Inc.
10(t) Stock Purchase Agreement between First Union Real Estate Equity and Mortgage (r)
Investments and FUR Investors, LLC, dated as of November 26, 2003 ("Stock Purchase
Agreement"), including Annex A thereto, being the list of Conditions to the Offer.
10(u) Guaranty of Michael L. Ashner, Guarantor, dated November 26, 2003, in favor of First (r)
72
Union Real Estate Equity and Mortgage Investments, Guarantee, in the form provided
as Annex F to the Stock Purchase Agreement.
10.3(v) Advisory Agreement between First Union Real Estate Equity and Mortgage Investments (r)
and FUR Advisors, LLC.
10(w) Exclusivity Services Agreement between First Union Real Estate Equity and Mortgage (r)
Investments and Michael L. Ashner.
10(x) Covenant Agreement between First Union Real Estate Equity and Mortgage Investments (r)
and FUR Investors, LLC.
16 Letter from KPMG (s)
23 Consent of KPMG LLP 74
24 Powers of Attorney 75
31 Certifications Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 76
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 78
(a) Incorporated by reference to the Trust's Form 8-K dated February 14,
2002
(b) Incorporated by reference to Appendix B to Amendment No. 4 to Form S-4,
Registration Statement No. 333-88144, of Gotham Golf Corp. and
Southwest Shopping Centers Co. II, L.L.C.
(c) Incorporated by reference to Appendix C to Amendment No. 4 to Form S-4,
Registration Statement No. 333-88144, of Gotham Golf Corp. and
Southwest Shopping Centers Co. II, L.L.C.
(d) Incorporated by reference to Appendix D to Amendment No. 4 to Form S-4,
Registration Statement No. 333-88144, of Gotham Golf Corp. and
Southwest Shopping Centers Co. II, L.L.C.
(e) Incorporated by reference to the Trust's 1998 Form 10-K
(f) Incorporated by reference to the Trust's 2000 Form 10-K
(g) Incorporated by reference to the Trust's Registration Statement on Form
S-3 No. 33-2818
(h) Incorporated by reference to the Trust's Registration Statement on Form
S-3 No. 33-68002
(i) Incorporated by reference to the Trust's Form 8-K dated October 24,
1996
(j) Incorporated by reference to the Trust's 1999 Proxy Statement for
Special Meeting held May 17, 1999 in lieu of Annual Meeting
(k) Incorporated by reference to the Trust's 1999 Form 10-K
(l) Incorporated by reference to the Trust's March 31, 2000 Form 10-Q
(m) Incorporated by reference to the Trust's Form 8-K dated May 11, 2000
(n) Incorporated by reference to the Trust's Form 8-K dated June 6, 2000
(o) Incorporated by reference to the Trust's September 30, 2000 Form 10-Q
(p) Incorporated by reference to Exhibit 10.1 to Amendment No. 3 to Form
S-4, Registration Statement No. 333-88144, of Gotham Golf Corp. and
Southwest Shopping Centers Co. II, L.L.C.
(q) Incorporated by reference to the Trust's 2002 Form 10-K
(r) Incorporated by reference to the Trust's Form 8-K dated November 26,
2003
(s) Incorporated by reference to the Trust's Form 8-K dated March 2, 2004.
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