<PAGE> 1
EXHIBIT 13
----------
FINANCIAL HIGHLIGHTS
Years ended December 31, (In thousands, except per share data and footnote)
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Revenues $ 120,774 $ 148,062
Loss before capital gains, extraordinary loss,
and loss from discontinued operations (22,294) (63,769)
Net loss before preferred dividend (6,304) (83,518)
Net loss applicable to common shares of beneficial interest (9,137) (86,517)
Funds from (used in) operations before preferred dividend 10,726 (10,785)
Funds from (used in) operations after preferred dividend 7,894 (13,784)
Dividends declared for common shares of beneficial interest 13,166 3,478
Per share
Loss applicable to shares of beneficial interest before capital gains,
extraordinary loss, and loss from discontinued operations $ (.65) $ (2.17)
Net loss applicable to common shares of beneficial interest,
basic and diluted (.24) (2.81)
Dividends declared per common share of beneficial interest .31 .11
</TABLE>
MARKET PRICE AND DIVIDEND RECORD
DIVIDENDS
HIGH LOW DECLARED
-------------------------------------------
1999 QUARTERS ENDED
December 31 $ 5 1/16 $ 4 3/4 $ .155
September 30 5 3/8 4 5/8 .155
June 30 5 1/16 4
March 31 5 15/16 3 15/16 ----------
$ .31
==========
1998 QUARTERS ENDED
December 31 $ 6 1/8 $ 3 7/16 $
September 30 9 9/16 5 3/16
June 30 11 7/8 8 3/4
March 31 16 7/8 11 .11
----------
$ .11
==========
The Trust's shares are traded on the New York Stock Exchange (Ticker Symbol:
FUR). As of December 31, 1999, there were 3,000 recordholders of the Trust's
shares of beneficial interest. The Trust estimates the total number of
beneficial owners at approximately 9,000.
1
<PAGE> 2
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA
For the years ended December 31, (In thousands, except per share data and footnotes)
1995 1996 1997 1998 1999
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues(1) $ 79,205 $ 81,867 $ 110,539 $ 148,062 $ 120,774
Income (loss) before unrealized loss on
carrying value of assets identified for
disposition, capital gains, extraordinary loss,
cumulative effect of accounting change and
loss from discontinued operations(1),(2),(3),(4) 881 1,681 7,278 (63,769) (22,294)
Unrealized loss on carrying value of
assets identified for disposition (14,000)
Capital gains, net 31,577 1,468 10,346 28,334
Income (loss) before extraordinary loss,
cumulative effect of accounting change and
loss from discontinued operations(1),(2),(3),(4) 18,458 1,681 8,746 (53,423) 6,040
Extraordinary loss from early
extinguishment of debt(5) (910) (286) (226) (2,399) (5,508)
Cumulative effect of change in
accounting method(6) (4,325)
Loss from discontinued operations(1),(3) (2,844) (27,696) (6,836)
Net income (loss) before preferred dividend 13,223 1,395 5,676 (83,518) (6,304)
Net income (loss) applicable to shares of
beneficial interest 13,223 550 845 (86,517) (9,137)
Dividends declared for shares of
beneficial interest 7,542 7,684 11,651 3,478 13,166
Per share of beneficial interest
Income (loss) before capital gains,
extraordinary loss, cumulative effect of
accounting change and loss from
discontinued operations(1),(2),(3),(4) $ .05 $ .05 $ .10 $ (2.17) $ (.65)
Income (loss) before extraordinary loss,
cumulative effect of accounting change
and loss from discontinued operations(1),(2),(3),(4) 1.02 .05 .16 (1.83) .08
Extraordinary loss from early
extinguishment of debt(5) (.05) (.02) (.01) (.08) (.14)
Cumulative effect of change in accounting
method(6)
Loss from discontinued operations(1),(3) (.24) (.12) (.90) (.18)
Net income (loss) applicable to shares
of beneficial interest, basic and diluted .73 .03 .03 (2.81) (.24)
Dividends declared per share of
beneficial interest .41 .44 .44 .11 .31
FINANCIAL POSITION AT YEAR END
Total assets $ 376,144 $ 413,054 $ 734,984 $ 742,623 $ 461,452
Long-term obligations(7) 258,454 254,868 458,637 553,576 256,717
Total equity 77,500 124,957 235,310 150,696 169,710
OTHER DATA
Net cash provided by (used for)
Operations $ 12,989 $ 11,085 $ 15,940 $ 5,919 $ 9,409
Investing (28,345) (47,002) (112,233) (52,429) 112,089
Financing 15,783 35,466 110,124 72,781 109,128
</TABLE>
2
<PAGE> 3
This Selected Financial Data should be read in conjunction with the Combined
Financial Statements and Notes thereto.
(1) In September 1997, First Union acquired the interests of its joint venture
partners in eight shopping malls and 50% of another mall for $88 million in
cash and the assumption of $203 million of mortgage debt.
(2) The results of Impark have been classified as discontinued operations for
1997, 1998 and 1999 as Impark will be spun off to the shareholders of the
Trust in 2000. In 1998, Impark recognized a $15 million reduction of
goodwill.
(3) In 1998, loss before capital gains, extraordinary loss, cumulative effect
of accounting change and loss from discontinued operations included
expenses of $17.6 million related to the proxy contest and the resulting
change in the composition of the Trust's Board of Trustees:
<TABLE>
<CAPTION>
<S> <C>
Litigation and proxy expenses $ 4.8 million
Other professional fees to avoid change in composition of Board 1.5 million
Severance expenses for employee change in control agreements
and employment contract termination 3.7 million
Expenses related to termination of First Union's former chairman,
president and chief executive officer 3.4 million
Vesting of restricted stock upon change in composition of Board 4.2 million
--------------
$ 17.6 million
==============
</TABLE>
In 1995, income before capital gains, extraordinary loss, cumulative effect
of accounting change and loss from discontinued operations included $1.6
million of litigation and proxy expenses.
(4) In 1998, the Trust recognized $36 million in losses on the carrying value
of properties identified for disposition. In 1999, the Trust recognized
$9.8 million in losses on the carrying value of assets identified for
disposition.
(5) In 1999, the Trust repaid $46 million in mortgage debt resulting in a
prepayment penalty of $5.5 million. In 1998, the Trust repaid approximately
$87.5 million of its 8 7/8% Senior Notes resulting in $1.6 million in
unamortized issue costs and solicitation fees being expensed. Also, in the
fourth quarter of 1998, the Trust renegotiated its bank agreement and $90
million note payable resulting in $.8 million of deferred costs being
expensed. In 1997 and 1996, the Trust renegotiated its bank credit
agreements, resulting in a $226,000 and $286,000 charge, respectively,
related to the write-off of unamortized costs. In November 1995, the Trust
repaid approximately $36 million of mortgage debt resulting in a $910,000
charge for the write-off of unamortized costs and prepayment premiums.
(6) In December 1995, the Trust changed its accounting method to directly
expense internal leasing costs and recorded a $4.3 million noncash charge
for the cumulative effect of the accounting change as of the beginning of
1995.
(7) Included in long-term obligations are senior notes and mortgage loans. Bank
loans are classified as long-term for 1995 through 1997.
3
<PAGE> 4
COMBINED BALANCE SHEETS
As of December 31, (In thousands)
<TABLE>
<CAPTION>
1999 1998
---------------------------
<S> <C> <C>
ASSETS
INVESTMENTS IN REAL ESTATE
Land $ 53,028 $ 123,439
Buildings and improvements 271,223 674,791
--------- ---------
324,251 798,230
Less - Accumulated depreciation (75,161) (165,285)
--------- ---------
Total investments in real estate 249,090 632,945
INVESTMENT IN JOINT VENTURE 1,786 1,722
MORTGAGE LOANS AND NOTES RECEIVABLE,
including current portion of $64 and $58, respectively 5,426 5,508
OTHER ASSETS
Cash and cash equivalents- unrestricted 45,005 28,649
- restricted 12,836 16,526
Accounts receivable and prepayments, net of allowances
of $496 and $876, respectively 10,386 14,929
Investments 104,013 5
Inventory 3,395 1,827
Deferred charges and other, net 1,244 6,864
Unamortized debt issue costs, net 4,479 7,608
Other 385 280
Net assets of discontinued operations 23,407 25,760
--------- ---------
Total assets $ 461,452 $ 742,623
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage loans, including current portion of $1,817 and $4,308, respectively $ 195,051 $ 345,042
Notes payable 49,128 94,996
Senior notes 12,538 12,538
Bank loans 101,000
Accounts payable and accrued liabilities 22,936 25,826
Deferred obligations 10,579 10,602
Deferred capital gains and other deferred income 1,510 1,923
--------- ---------
Total liabilities 291,742 591,927
--------- ---------
SHAREHOLDERS' EQUITY
Preferred shares of beneficial interest, $25 liquidation preference, 2,300,000
shares authorized, 1,349,000 shares outstanding in 1999 and 1998 31,737 31,737
Shares of beneficial interest, $1 par, unlimited authorization, outstanding 42,472 31,416
Additional paid-in capital 218,831 190,679
Undistributed loss from operations (123,322) (115,968)
Undistributed capital gains 14,949
Deferred compensation (8)
Accumulated other comprehensive income
Foreign currency translation adjustment (2,117)
--------- ---------
Total shareholders' equity 169,710 150,696
--------- ---------
Total liabilities and shareholders' equity $ 461,452 $ 742,623
========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
4
<PAGE> 5
COMBINED STATEMENTS OF OPERATIONS
For the years ended December 31, (In thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------
<S> <C> <C> <C>
REVENUES
Rents $ 116,482 $ 144,128 $ 100,383
Interest- Mortgage loans 463 1,211 2,907
- Short-term investments 2,649 1,337 1,525
- Investments 302 494
Equity in income from joint venture 64 148 488
Management fees 332 353 2,808
Other income 784 583 1,934
--------- --------- ---------
120,774 148,062 110,539
--------- --------- ---------
EXPENSES
Property operating 44,894 54,626 37,380
Real estate taxes 9,937 12,453 9,948
Depreciation and amortization 25,331 27,603 18,787
Interest- Mortgage loans 28,264 29,032 15,437
- Notes payable 4,232 3,757
- Senior notes 1,113 5,856 8,875
- Bank loans and other 4,833 9,552 3,436
General and administrative 14,664 28,104 9,398
Litigation and proxy 4,848
Unrealized loss on carrying value of assets identified for
disposition and impaired assets 9,800 36,000
--------- --------- ---------
143,068 211,831 103,261
--------- --------- ---------
INCOME (LOSS) BEFORE CAPITAL GAIN, EXTRAORDINARY LOSS,
AND LOSS FROM DISCONTINUED OPERATIONS (22,294) (63,769) 7,278
Capital gains, net 28,334 10,346 1,468
Extraordinary loss from early extinguishment of debt (5,508) (2,399) (226)
Loss from discontinued operations (6,836) (27,696) (2,844)
--------- --------- ---------
NET INCOME (LOSS) BEFORE PREFERRED DIVIDEND (6,304) (83,518) 5,676
Preferred dividend (2,833) (2,999) (4,831)
--------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO SHARES OF BENEFICIAL INTEREST $ (9,137) $ (86,517) $ 845
========= ========= =========
PER SHARE DATA
Income (loss) applicable to shares of beneficial
interest before capital gain, extraordinary
loss and loss from discontinued operations $ (.65) $ (2.17) $ .10
--------- --------- ---------
Income (loss) before extraordinary loss and
loss from discontinued operations .08 (1.83) .16
Extraordinary loss from early extinguishment of debt (.14) (.08) (.01)
Loss from discontinued operations (.18) (.90) (.12)
--------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO SHARES OF BENEFICIAL INTEREST,
BASIC AND DILUTED $ (.24) $ (2.81) $ .03
========= ========= =========
ADJUSTED SHARES OF BENEFICIAL INTEREST, BASIC 38,827 30,772 24,537
ADJUSTED SHARES OF BENEFICIAL INTEREST, DILUTED 38,836 31,015 25,415
COMBINED STATEMENTS OF COMPREHENSIVE RESULTS
For the years ended December 31, (In thousands)
Net income (loss) $ (9,137) $ (86,517) $ 845
Other comprehensive income
Available for sale securities 66 (66)
Foreign currency translation adjustment 2,117 (1,305) (812)
--------- --------- ---------
Comprehensive loss $ (7,020) $ (87,756) $ (33)
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except footnotes)
<TABLE>
<CAPTION>
Preferred
Shares of Shares of Additional
Beneficial Beneficial Paid-In
Interest Interest Capital
----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE DECEMBER 31, 1996 $ 54,109 $ 17,622 $ 56,672
Net income before preferred dividend
Dividends paid or accrued on shares of beneficial
interest ($.44/share)
Dividends accrued on preferred shares ($2.10/share)
Sale of 3,910,000 shares of beneficial interest, net 3,910 42,211
Sale of 6,325,000 shares of beneficial interest, net 6,325 68,139
Shares sold under long-term incentive ownership
plan and share option agreements 96 611
Restricted shares issued 226 2,934
Deferred compensation related to restricted shares
Foreign currency translation adjustment
Available for sale securities -------- -------- --------
BALANCE DECEMBER 31, 1997 54,109 28,179 170,567
----------------------------------------------------------------------------------------------------------------------------------
Net loss before preferred dividend
Dividends paid on shares of beneficial interest ($.11/share)
Dividends paid or accrued on preferred shares ($2.10/share)
Conversion of preferred shares (22,372) 3,144 19,228
Shares sold under long-term incentive ownership
plan and share option agreements 373 2,623
Restricted shares issued 343 4,632
Restricted shares forfeited (453) (5,147)
Shares purchased (170) (1,660)
Issuance of 500,000 stock warrants 436
Deferred compensation related to restricted shares
Vesting of restricted shares
Foreign currency translation adjustment
Available for sale securities
-------- -------- --------
BALANCE DECEMBER 31, 1998 31,737 31,416 190,679
----------------------------------------------------------------------------------------------------------------------------------
Net loss before preferred dividend
Dividends paid or accrued on shares of beneficial interest
($.31/share)
Dividends paid or accrued on preferred shares ($2.10/share)
Sale of 12,549,445 shares of beneficial interest 12,549 33,927
Shares purchased (1,506) (6,485)
Compensation on variable stock options 666
Restricted shares issued 18 62
Restricted shares canceled (5) (18)
Deferred compensation related to restricted shares
Foreign currency translation adjustment
-------- -------- --------
BALANCE DECEMBER 31, 1999 $ 31,737 $ 42,472 $218,831
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
(1) Includes the balance of cumulative undistributed net loss of First Union
Management, Inc. of $6,579,000, $5,446,000, $36,077,000 and $46,936,000 as
of December 31, 1996, 1997, 1998 and 1999, respectively.
(2) Cumulative distributions in excess of the Trust's net income from inception
are $11,330,000.
6
<PAGE> 7
<TABLE>
<CAPTION>
Restated
Undistributed Foreign
Income (Loss) Available Currency
From Undistributed Deferred for Sale Translation
Operations(1),(2) Capital Gains Compensation Securities Adjustment
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
$ (15,167) $ 14,949 $ (3,229)
5,676
(11,651)
(4,831)
(3,160)
746
$ (812)
$ (66)
--------- --------- --------- --------- ---------
(25,973) 14,949 (5,643) (66) (812)
-----------------------------------------------------------------------------------------------
(83,518)
(3,478)
(2,999)
(4,975)
5,600
312
4,706
(1,305)
66
--------- --------- ------- -------- -------
(115,968) 14,949 - - (2,117)
-----------------------------------------------------------------------------------------------
(6,304)
(13,166)
(1,050) (1,783)
(80)
23
49
2,117
--------- --------- --------- --------- ---------
$(123,322) $ - $ (8) $ - $ -
========= ========= ========= ========= =========
</TABLE>
7
<PAGE> 8
COMBINED STATEMENTS OF CHANGES IN CASH
For the years ended December 31, (In thousands)
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income (loss) before preferred dividend
and loss from discontinued operations $ 532 $ (55,822) $ 8,520
Adjustments to reconcile net income (loss) before preferred
dividend and loss from discontinued operations to net
cash provided by operations
Depreciation and amortization 25,331 27,603 18,787
Extraordinary loss from early extinguishment of debt 5,508 2,399 226
Capital gains, net (28,334) (10,346) (1,468)
Loss on carrying value of assets identified for
disposition and impaired assets 9,800 36,000
Vesting of restricted shares 4,184
Increase in deferred charges and other, net (64) (1,316) (4,998)
Increase (decrease) in deferred income (413) 401 1,505
Increase in deferred interest on mortgage investments (6) (122)
Decrease in deferred obligations (23) (20) (18)
Net changes in other assets and liabilities (2,928) 2,842 (6,492)
--------- -------- --------
Net cash provided by operations 9,409 5,919 15,940
--------- -------- --------
CASH PROVIDED BY (USED FOR) INVESTING
Repayment of mortgage investment and note receivable 25,045 16,200
Principal received from mortgage investments 82 139 216
Proceeds from sales of properties 227,508 6,507 18,374
Purchase of investments (104,013) (1,771) (12,746)
Sale of investments 15,141
Investments in properties (63,022) (834)
Acquisition of joint venture interests, net of cash acquired (72,900)
Deposit for property acquisitions (170) (2,315)
Investment in Impark, net of cash acquired (11,195) (36,574)
Investments in capital and tenant improvements (11,488) (23,103) (21,654)
--------- -------- --------
Net cash provided by (used for) investing 112,089 (52,429) (112,233)
--------- -------- --------
CASH PROVIDED BY (USED FOR) FINANCING
Increase (decrease) in bank loans (101,000) 55,900 19,300
Increase in notes payable 49,000 90,000
Increase in mortgage loans 66,689 30,000 2,737
Repayment of mortgage loans- Normal payments (3,463) (3,951) (2,765)
- Balloon payments (49,548) (468) (13,835)
Mortgage repayment penalties (5,846)
Repayment of note payable (90,000)
Repayment of senior notes (87,462)
Purchase of First Union shares (7,989) (1,830)
Sale and employee option exercises of First Union shares 46,476 2,996 121,291
Sale of hedge agreement 825
Debt issue costs paid (4,031) (3,320) (1,261)
Dividends paid to shares of beneficial interest (6,583) (6,577) (10,473)
Dividends paid to preferred shares of beneficial interest (2,833) (3,332) (4,870)
--------- -------- --------
Net cash provided by (used for) financing (109,128) 72,781 110,124
--------- -------- --------
Increase in cash and cash equivalents from
continuing operations 12,370 26,271 13,831
Cash and cash equivalents at beginning of year 45,175 16,864 2,951
--------- -------- --------
Cash and cash equivalents at end of year 57,545 43,135 16,782
Change in cash from discontinued operations 296 2,040 82
--------- -------- --------
Cash and cash equivalents at end of year, including
discontinued operations $ 57,841 $ 45,175 $ 16,864
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
8
<PAGE> 9
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Union Real Estate Investments ("Trust") and First Union Management,
Inc. ("Company") are in the real estate and parking and transit ticket equipment
manufacturing industries with properties and operations primarily in the United
States and Canada. The accounting policies of the Trust and Company conform to
generally accepted accounting principles and give recognition, as appropriate,
to common practices within the real estate, parking and manufacturing
industries.
Under a trust agreement, the shares of the Company are held for the benefit
of the shareholders of the Trust. Accordingly, the financial statements of the
Company and Trust have been combined. Additionally, as the Company owns Imperial
Parking Limited ("Impark"),the financial statements of Impark are consolidated
with those of the Company. The Trust announced in January 2000 a planned
distribution to its shareholders of the parking business. The distribution is
expected to be completed in the first half of 2000. The financial information
for 1999,1998 and 1997 classifies the parking business as "discontinued
operations."
The preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the reporting periods. Actual results
could differ from these estimates.
The Trust's properties were leased to the Company through February 28, 1999.
Thereafter, the Trust became self-managed.
At December 31, 1999 and 1998, buildings and improvements included $1.2
million of equipment and $8.1 million of equipment and appliances, respectively.
Equipment and appliances are depreciated over useful lives of five to ten years.
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 and Company accrue the recovery of operating
costs based on actual costs incurred and accrue percentage rentals based on
current estimates of each retail tenant's sales. In July 1998, the Trust adopted
the Financial Accounting Standards Board's Emerging Issues Task Force Bulletin
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, 1999, 1998 and 1997,
the accrued recovery of operating costs and percentage rent income approximated
$30.0 million, $36.2 million and $21.9 million, respectively. Deferred revenue
is derived primarily from revenue received in advance of its due date.
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 as required by Statement of Financial Accounting
Standards (SFAS) 121, "Accounting for Long-Lived Assets and Long-Lived Assets to
be Disposed of."
9
<PAGE> 10
The Trust's buildings are depreciated as follows:
Life Buildings
(in years) (in thousands)
------------------------------
40 $ 168,548
30 98,563
25 3,952
10 160
---------
$ 271,223
=========
The Trust's useful lives for the calculation of depreciation are as follows:
Life
(in years)
---------------------------------
Shopping malls 40
Office buildings 40
Parking garages 25 - 40
Parking facilities 10
The Trust accounts for its investment in a joint venture which it does not
control using the equity method of accounting. This investment, which represents
a 50% non-controlling ownership interest in a shopping mall, was recorded
initially at the Trust's cost and subsequently adjusted for the Trust's equity
in income and cash distributions.
At December 31, 1999 and 1998, $1.1 million and $12.6 million of cash was
restricted, respectively, based on terms of a mortgage. Additionally, $1.7
million and $3.9 million of cash as of December 31, 1999 and 1998, respectively,
was classified as restricted because it secures benefits under change of control
agreements with employees of the Trust and Company. The restricted cash can also
be used for reimbursement of legal and other expenses incurred for claims
against Trustees serving prior to the change in the majority of the Board that
occurred in June 1998. The Trust also has $10.0 million of cash on deposit to
collateralize Impark's bank loan and is classified as restricted in the Combined
Balance Sheets at December 31, 1999.
Investments as of December 31, 1999, consisted of U.S. Treasury Bills. The
U.S. Treasury Bills were classified as held-to-maturity securities and were
recorded at cost plus accrued interest. Of the $104.0 million of U.S. Treasury
Bills, $5.0 million is held on deposit as collateral for Impark's bank loan.
The Trust has calculated earnings per share for 1999, 1998 and 1997 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 fully diluted earnings per share calculation is as
follows (in thousands):
1999 1998 1997
----------------------------
Basic weighted average shares 38,827 30,772 24,537
Stock options, treasury method 243 571
Restricted shares, treasury method 9 307
------ ------ ------
Diluted weighted average shares 38,836 31,015 25,415
====== ====== ======
The preferred shares and warrants to purchase shares of beneficial interest
are anti-dilutive and are not included in the weighted average shares
outstanding for the diluted earnings per share.
Financial instruments held by the Trust and Company include cash and cash
equivalents, accounts receivable, mortgage loans receivable, accounts payable,
revolving credit agreements, long-term debt and interest rate caps. The Trust
and Company do not hold or issue financial instruments or derivative financial
instruments for trading purposes.
10
<PAGE> 11
During 1998 and subsequently amended in 1999, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." The Statement requires companies to recognize all
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivatives and whether they
qualify for hedge accounting. This Statement is effective for fiscal years
beginning after June 15, 2000. The Trust believes that the effect of SFAS 133 on
its financial statements will be immaterial.
Certain reclassifications have been made to prior year balances so that they
are comparable to 1999.
2. DISCONTINUED OPERATIONS
In January 2000, the Trust announced plans to distribute to its common
shareholders shares of a restructured Impark, currently a subsidiary of the
Company. Prior to the spin-off, Ventek International, Inc., a subsidiary of
Impark, will be sold to the Company. The 1999 loss on disposal includes an
estimate for losses from Impark's operations through March 31, 2000, the
cumulative foreign currency translation at December 31, 1999, and costs
associated with the spin-off. After the spin-off, Impark will be a publicly
owned company. Common shareholders of the Trust will receive one share of Impark
for every 20 common shares of beneficial interest of the Trust that they own.
The Trust's Combined Financial Statements and Notes to Combined Financial
Statements report Impark as a discontinued operation.
DISCONTINUED OPERATIONS (AMOUNTS IN THOUSANDS)
1999 1998 1997
-------------------------------
Net operating income $ 8,380 $ 7,423 $ 5,170
Less- Interest expense 1,888 2,662 2,116
- Depreciation and amortization 5,277 5,786 4,105
- General and administrative 4,022 9,473 1,793
- Goodwill impairment 15,000
- Foreign currency (gain) loss (1,060) 2,198
--------- -------- ---------
Loss from operations (1,747) (27,696) (2,844)
Loss on disposal (5,091)
--------- -------- ---------
Total discontinued operations $ (6,838) $(27,696) $ (2,844)
========= ======== =========
NET ASSETS OF DISCONTINUED OPERATIONS (AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
-----------------------
ASSETS
<S> <C> <C>
Real estate, net of accumulated depreciation $10,961 $ 8,557
Equipment, net of accumulated depreciation 5,414 6,032
Note receivable 2,991
Accounts receivable and prepayments 3,990 6,880
Inventory 865 971
Goodwill, net of accumulated amortization 42,690 45,379
Management contracts, net of accumulated amortization 901 1,852
Deferred charges 214 150
LIABILITIES
Bank loans 22,501 24,821
Accounts payable and accrued liabilities 19,148 17,880
Deferred income 2,970 1,360
------- -------
Net assets of discontinued operations excluding cash 23,407 25,760
Cash 2,414 2,118
------- -------
$25,821 $27,878
======= =======
</TABLE>
11
<PAGE> 12
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES OF DISCONTINUED OPERATIONS
The real estate assets of $11.0 million consist of land, buildings and
construction in progress at December 31, 1999 that will be transferred to Impark
when the spin-off from the Trust occurs. The buildings are depreciated using a
40-year life.
Parking leasehold improvements are depreciated over five years. Routine
maintenance and repairs, including replacements, are charged to expense, while
replacements which improve or extend the lives of existing properties are
capitalized.
Goodwill represents the excess of cost over the value assigned to the net
assets from the purchase of Impark. Goodwill is amortized on a straight-line
basis over 20 years. Accumulated amortization at December 31, 1999 and 1998, was
$4.8 million and $2.3 million, respectively. Impark recorded a U.S. $15 million
reduction of goodwill in December 1998, in accordance with SFAS 121.
Lease and management agreements are recorded at cost and represent Impark's
investment in parking lot agreements acquired from other parking lot management
companies. The underlying value of this asset is calculated by discounting
future cash flows of each agreement over its length of term. Management and
lease agreements terminated before the life of the agreements are expensed.
Amortization is provided on a straight-line basis over their useful lives of
approximately three years as of the acquisition in April 1997. Accumulated
amortization at December 31, 1999 and 1998 was $4.9 million and $3.6 million,
respectively.
Inventory consists of parking equipment parts and supplies and is recorded
at the lower of cost determined on a first-in, first-out basis, or replacement
cost.
The assets and liabilities of the Canadian operations are translated into
U.S. dollars at the exchange rates in effect at the balance sheet date. Income
statement accounts are translated at the weighted average exchange rates for the
year. The gains or losses resulting from these translations are recorded in a
separate component of shareholders' equity. Gains or losses resulting from
realized foreign currency and intercompany transactions are included in net
income.
BANK DEBT
As of December 31, 1999, Impark has $22.5 million outstanding under a
secured credit agreement. The credit agreement consists of revolving and term
commitments of $4.5 million and $21.1 million, respectively. The credit
agreement matures in April 2000. The weighted average interest rate for the
credit agreement was 6.9% for 1999 and 7% for 1998. As the bank loans are at
market interest rates, the fair value is the carrying amount of the loans.
The Trust paid a fee to the bank facility lenders and provided $15.0 million
in cash to secure a portion of the balance outstanding under the bank facility
during 1999.
The revolving credit facility bears interest at the lender's prime rate plus
75 basis points and the term facility bears interest at the Canadian Bankers
Acceptance rate plus 175 basis points. Additionally, upon maturity of this
credit facility, Impark will pay to the lenders a fee of 55 basis points
retroactive to the inception date of the bank credit facility.
As part of the spin-off of Impark to the Trust's shareholders, the Trust
will repay Impark's bank credit facilities.
MINORITY INTEREST IN IMPARK
The Company in the third and fourth quarter of 1999 purchased the common
stock of Impark owned by the employees of Impark for approximately $1.0 million.
As a result of these transactions, the Company owns 100% of the common stock of
Impark and the employees of Impark own $.4 million or 4% preferred stock of
Impark. Additionally, the Company purchased $.5 million in preferred stock in
Impark from two terminated employees during 1999.
12
<PAGE> 13
SALE OF SUBSIDIARIES OF IMPARK
Inner-Tec Security Consultants Ltd., a security business, was sold in June
1999 to a former executive officer for a $.5 million note and cash of $.6
million. The note is for two years and bears interest at 12% per annum for the
first year and 16% per annum for the second year. The note receivable is current
at December 31, 1999.
Robbins Parking Services, Ltd. was sold in the second quarter of 1999 to the
former president of Impark for a $2.1 million ten-year note bearing interest at
8% per annum. The Trust also sold a building to the former president of Impark
for a $.3 million, ten-year mortgage note bearing interest at 8% per annum for
the first five years and 9.25% per annum for the second five years.
Imperial Parking Asian Ltd. was sold in September 1999 for $.6 million to an
unrelated third party.
SEVERANCE
During 1999, Impark reversed a severance provision of $1.8 million, while
recording an additional severance expense of $.9 million, resulting in a
reduction of severance expense in 1999 of $.9 million. The reversal of the 1998
provision for severance expense was the result of settling all claims with
Impark's former president below the 1998 accrued amount. The 1999 severance
provision represents termination expense which is expected to be paid through
2005 for final termination agreements entered into as of December 31, 1999.
Severance Accrual (amounts in thousands)
1999 1998
-----------------------
Beginning balance $ 2,352 $
Expense, net (873) 2,352
Payments (354)
-------- --------
Balance at end of year $ 1,125 $ 2,352
======== ========
3. FINANCIAL INSTRUMENTS
The Trust owns two interest rate protection agreements ("caps") which
protect the Trust from the impact of rising interest rates on two floating rate
mortgage loans. The first interest rate cap in the notional amount of $16
million expires in July 2002 and limits interest rate increases above 7% for one
month LIBOR. The net book value of this interest cap is $133,000 at December 31,
1999.The second interest rate cap is for the notional amount of $21.1 million
and protects the Trust from increases in interest rates above 9.65%. The net
book value of this interest rate cap is $106,000 at December 31, 1999.
4. COMPREHENSIVE INCOME
Comprehensive income includes changes in shareholders' equity, such as
foreign currency translation adjustments and reserves for the valuation of
securities held for sale, which are shown separately and have no effect on the
Trust's net income or shareholders' equity.
5. WARRANTS TO PURCHASE SHARES OF BENEFICIAL INTEREST
The Trust in November 1998 issued 500,000 warrants which allow a third party
to purchase 500,000 shares of beneficial interest at $10 per share. The warrants
expire in November 2008. The Trust issued the warrants to the third party as
part of the consideration for various services provided to the Trust and
recorded $.4 million in expense as a measurement of this consideration in 1998.
The fair value of the consideration was determined using the Black-Scholes model
using the following factors - 10-year term, 4% dividend yield, 4% risk free
interest rate and 32% for volatility.
13
<PAGE> 14
6. COMBINED STATEMENTS OF CHANGES IN CASH
The Trust and Company consider all highly liquid short-term investments with
original maturities of three months or less to be cash equivalents. The Trust
and Company paid interest of $39.8 million, $51.4 million and $29.9 million in
1999, 1998 and 1997, respectively.
7. LOSS ON CARRYING VALUE OF ASSETS IDENTIFIED FOR DISPOSITION
AND IMPAIRED ASSET
Management reviews the net realizable value of the Trust's portfolio
periodically to determine whether an allowance for possible losses is necessary.
The carrying value of the Trust's investments in real estate is evaluated on an
individual property basis in accordance with SFAS 121. In June 1999, the Trust
recorded $9.0 million in losses on the carrying value of six shopping malls
because the Trust agreed to sell these malls at a sales price which was below
net book value. These six malls were sold in December 1999. In December 1998,
the Trust recorded $36.0 million in losses on the carrying value of three
shopping centers, two office properties and a parking facility which were
identified for disposition. The Trust determined that these assets, which were
actively being marketed for sale, were impaired based on the bids received for
them as compared to their net book value. The bids received for these assets
best represent the cash flow to be realized in accordance with SFAS 121. These
assets were sold in 1999. In December 1999, the Trust, in accordance with SFAS
121, recorded $.8 million in losses on the carrying value of an asset that it
has identified for sale.
In January 1997, the Trust sold a shopping center for $9.0 million in cash.
The sale resulted in a capital loss of $4.0 million which was provided for as
part of a $14.0 million noncash, unrealized loss on the carrying value of
certain assets that was recorded in December 1995.
The amount of assets identified for sale, the reserve for loss and the
losses deducted from the reserve are summarized for the years ended December 31
in the following table (amounts in thousands):
<TABLE>
<CAPTION>
Restated
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Net book value of assets identified for sale $ 83,837 $ 5,163 $ 27,451
Additions 204,712 79,034 808
Depreciation (360) (387)
Sales of assets (282,171) (22,709)
--------- --------- ---------
Net book value of assets identified
for sale at year end $ 6,378 $ 83,837 $ 5,163
========= ========= =========
Reserve for loss $ 39,630 $ 3,630 $ 7,605
Additions to reserve 9,800 36,000 (3,975)
Losses realized on sale of assets (48,406)
Reversal of realized loss (224)
--------- --------- ---------
Reserve for loss at year end $ 800 $ 39,630 $ 3,630
========= ========= =========
</TABLE>
Property net operating income, which is rents less operating expenses for
assets identified for sale, are summarized for the years ended December 31 in
the following table (amounts in thousands):
1999 1998 1997
--------------------------------------
Revenues $ 472 $15,217 $17,145
Less-Operating expenses 57 7,756 8,456
------- ------- -------
Property net operating income $ 415 $ 7,461 $ 8,689
======= ======= =======
14
<PAGE> 15
8. CAPITAL GAINS AND LOSSES
The Trust sold a shopping center in February 1999 for $21.6 million,
resulting in a capital gain of $.4 million. In May 1999, the Trust sold eight
apartment complexes for $86 million, resulting in a capital gain of $8.7
million. Additionally, in May and June 1999 the Trust sold five shopping malls
and a strip shopping center for $59.4 million, resulting in capital gains of $19
million. The Trust sold two office properties, a parking lot, and nine shopping
malls in 1999 for $215.2 million, resulting in a capital gain of $.2 million.
In May 1998, the Trust sold its investment in the land beneath the
Huntington Building in Cleveland, OH for $6.1 million, resulting in a capital
gain of $1.7 million. Additionally, an $18.8 million mortgage investment secured
by the Huntington Building was repaid in 1998, resulting in the recognition of a
$7.7 million capital gain which was deferred when the building was sold in 1982
since the Trust received the mortgage note as consideration. In June 1998, the
Trust sold a forward exchange agreement, resulting in a gain of $.8 million. The
forward exchange contract was purchased to protect the Trust from foreign
currency fluctuations resulting from notes issued in conjunction with the
acquisition of Impark. In December 1998, the Trust sold a land parcel in Monroe,
LA, resulting in a gain of $.1 million.
In November 1997, the Trust sold an apartment complex in Dayton, OH for $.7
million in cash,a $2.6 million, 8.75% second mortgage, secured by the property,
and the assumption by the purchaser of a $7.6 million existing mortgage loan.
The capital gain recognized was $2.7 million. In December 1997, the Trust sold
an office complex in Oklahoma City, OK for $4.7 million in cash, resulting in a
capital loss of $1.2 million.
9. EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
In 1999, the Trust repaid $45.9 million in mortgage debt prior to maturity
resulting in a prepayment penalty of $5.5 million. The mortgage debt was repaid
because it was cross-collateralized with the mortgages on six shopping malls
which were sold in December 1999.
In 1998, the Trust repaid approximately $87.5 million of its 8-7/8% senior
notes resulting in $1.6 million of unamortized issue costs and solicitation fees
being expensed. Additionally, the Trust renegotiated its bank credit agreement
and the terms of the $90 million note payable in 1998 resulting in $.8 million
of deferred costs related to the bank credit agreement and note payable being
expensed.
In 1997, the Trust renegotiated its bank credit agreements resulting in $.2
million of deferred costs relating to its prior bank credit agreements being
expensed.
10. INVESTMENTS IN MORTGAGE LOANS AND NOTES RECEIVABLE
As of December 31, the Trust had the following investments in mortgage loans
and notes receivable (amounts in thousands):
<TABLE>
<CAPTION>
Current
Rate on
Investment 1999 1998
--------------------------------------
<S> <C> <C> <C>
Second mortgage loan secured by an apartment
complex in Dayton, OH, maturing in 2002 8.75% $2,560 $2,581
Note receivable secured by management contract
on an apartment complex in Atlanta, GA,
maturing in 2008 10% 1,666 1,727
Note receivable secured by Temple Mall Company,
maturing in 2023 6% 1,200 1,200
------ ------
$5,426 $5,508
====== ======
</TABLE>
The market value of mortgage investments is approximately $4.9 million as of
December 31, 1999 based on current market conditions and interest rates. The
mortgage loan secured by the apartment complex in Dayton, OH was repaid in March
2000 for $2.5 million.
15
<PAGE> 16
11. BANK LOANS
As of December 31, 1998, the Trust had $101 million outstanding under a
fully secured $110 million credit agreement at a weighted average interest rate
of 8.37%. The bank loans were repaid and the credit facility was terminated in
1999.
12. MORTGAGE LOANS PAYABLE AND DEFERRED OBLIGATION
As of December 31, 1999, the Trust had outstanding $195.1 million of
mortgage loans due in installments extending to the year 2018. Interest rates on
fixed rate mortgages range from 7.5% to 15% with $71.1 million of mortgage loans
bearing interest based on LIBOR. Variable rate mortgage loans of $34.0 million
were outstanding at December 31, 1998 at a weighted average interest rate of
7.32%. The weighted average interest rate of the variable rate mortgages is
8.96% at December 31, 1999. Principal payments due during the five years
following December 31, 1999 are $1.8 million, $35.9 million, $83.5 million, $2.0
million and $31.1 million, respectively.
A $38.2 million mortgage at 12.25% provides for the lender to participate in
the cash flow of the secured property over predefined levels.
A $29.6 million mortgage loan at 15% is a second mortgage loan that matures
in 2000. The second mortgage loan requires that the interest is paid quarterly
at a 7% pay rate with 8% deferred. This second mortgage note also requires that
the first $.6 million of cash flow remaining after paying the debt service on
the first and second mortgage loans be deposited into an escrow account on an
annual basis. Cash flow above the $.6 million threshold is to be used to repay
the deferred interest on the second mortgage loan. The lender of the second
mortgage loan was granted an option exercisable in April 2000 to purchase the
shopping mall securing the first and second mortgages for $2.0 million in excess
of the mortgage loan balances. The Trust has a put option exercisable in April
2000 to require the lender to purchase the mall if the lender fails to exercise
its option.
The fair value of mortgage loans payable is $200.5 million at December 31,
1999 based on current market conditions and interest rates.
The Trust also has outstanding a $10.6 million deferred obligation at an
interest rate of 14.88%, which was repaid in January 2000. The fair value of the
deferred obligation is approximately $13.6 million at December 31, 1999.
13. SENIOR NOTES
The Trust has approximately $12.5 million of 8-7/8% Senior Notes outstanding
at December 31, 1999. The fair value of the Senior Notes is approximately $12.3
million based on current market quotations.
14. 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 are each convertible into 3.31 common shares of
beneficial interest. 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 are not redeemable
prior to October 29, 2001, and at no time will they be redeemable for cash. On
and after October 29, 2001, the Series A Preferred Shares are redeemable at the
option of the Trust at the conversion rate of one Series A Preferred Share for
3.31 common shares of beneficial interest. 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 $7.5625 per share of
beneficial interest.
16
<PAGE> 17
In February 1998, 951,000 Series A Preferred Shares were converted to
3,144,000 common shares of beneficial interest.
15. NOTES PAYABLE
The Trust has a $49.1 note payable loan bearing interest at 7.25% per annum
and maturing in March 2000. The note payable is secured by a $99.0 million U.S.
Treasury Bill.
The Trust as of December 31, 1998 had notes payable of $90.0 million and
$4.9 million outstanding. The $90.0 million note payable was repaid during the
first six months of 1999. The $4.9 million note was payable to the trustee of an
escrow account which secures the change in control agreements entered into by
the Trust and Company with their employees. The note was payable upon demand by
the trustee. The $4.9 million liability for the note payable was reversed by the
Trust in 1999 because the Trust believes that there is sufficient liquidity to
meet any remaining severance payments and legal fees associated with the change
in the majority of the Trust's Board of Trustees.
16. 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 nonstatutory 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.
The activity of the plan is summarized for the years ended December 31 in
the following table:
<TABLE>
<CAPTION>
1999 Weighted 1998 Weighted 1997 Weighted
Shares Average Shares Average Shares Average
----------------------- ------------------------ -----------------------
<S> <C> <C> <C> <C> <C> <C>
Exercised 186,155 $ 8.51 39,809 $ 7.64
Canceled 82,550 $ 10.61 317,281 8.22 13,590 13.14
Expired 7,280 17.07 16,120 17.43 22,880 17.55
</TABLE>
As of December 31, 1999, the following options were outstanding under the
1981 plan:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------ ---------------------------------
Weighted
Year Average Weighted Weighted
Options Number Range of Remaining Years Average Number Average
Granted Outstanding Exercise Prices of Options Exercise Price Exercisable Exercise Price
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 22,500 $ 7.375 6.20 $ 7.375 22,500 $ 7.375
</TABLE>
The weighted average exercise price of the 112,330 options outstanding on
January 1, 1999 was $10.386 per share.
LONG-TERM INCENTIVE OWNERSHIP PLAN
This plan, adopted in 1994 and amended in 1999, reserved 1,629,785 shares
for the granting of incentive and nonstatutory share options and restricted
shares. In accordance with the original plan, 9% of the shares of beneficial
interest resulting from the conversion of preferred shares in February 1998 and
the January 1997 and June 1997 shares of beneficial interest offerings were
reserved and added to the plan for grant. In May 1999, the plan was amended with
shareholder approval and 1,357,037 shares of beneficial interest were reserved
and added to the plan. The share
17
<PAGE> 18
options expire eight to ten years after being granted. The price of the options
is the fair market value of the shares at the date of grant with the exception
of the option grants in November 1998 and May 1999. The stock options granted in
1998 were granted at exercise prices exceeding the market price per share. The
option grants in May 1999 were at the equity price of the rights offering.
Additionally, the options granted in 1998 and 1999 have a cost of capital
feature whereby the exercise price of the options will increase by 10%,
compounded annually and prorated monthly, beginning in May 2000 and in each
November thereafter, less the amount of per share dividends or other
distributions to shareholders. Because the 1998 and 1999 option grants are
deemed to be variable, compensation expense will be recorded when the market
price of the shares of beneficial interest exceeds the option price for these
shares. As of December 31, 1999, the option price of the 1998 grants did not
exceed the market price of shares of beneficial interest, consequently no
compensation expense was recorded for 1999; the option price of the 1999 grants
was less than the market price of shares of beneficial interest and compensation
expense of approximately $.7 million was recorded in 1999. In June 1998, a
change in the majority of the Trust's Board of Trustees occurred resulting in
all stock options vesting that had been granted prior to that date.
Since the inception of this plan and prior to the June 1998 change in the
composition of the Board of Trustees, restricted shares were issued to key
employees. The holders of restricted shares received dividends and had voting
rights but could not sell or transfer the shares until the restrictions lapsed.
In June 1998, a change in the majority of the Trust's Board of Trustees occurred
resulting in all restrictions being removed from the restricted shares that had
been previously granted and a $4.2 million expense was recorded for the
remaining deferred compensation which had not been expensed as of that date.
Deferred compensation of $5 million in 1998 and $3.2 million in 1997 was
recorded. Amortization of the deferred compensation of $.3 million and $.7
million was recognized in 1998 and 1997, respectively.
The activity of this plan is summarized for the years ended December 31 in
the following table:
<TABLE>
<CAPTION>
1999 Weighted 1998 Weighted 1997 Weighted
Shares Average Shares Average Shares Average
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Share options granted 627,471 $ 3.69 1,800,000 $ 7.50 327,000 $ 14.19
Share options canceled 69,840 11.32 501,468 10.83 7,102 7.38
Share options exercised - 168,382 7.10 52,754 7.31
Restricted shares granted 17,500 343,964 226,867
Restricted shares canceled 5,000 606,852 3,521
Shares purchased by
employees - 18,499 9,005
Additional shares reserved 1,357,037 282,941 921,150
Available share options
and restricted shares 1,057,391 270,485 1,041,687
</TABLE>
As of December 31, 1999, this plan had the following options outstanding:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
---------------------------------------------------------------------- --------------------------------
Weighted
Year Average Weighted Weighted
Options Number Range of Remaining Years Average Number Average
Granted Outstanding Exercise Prices of Options Exercise Price Exercisable Exercise Price
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1996 2,334 $ 7.375 4.20 $ 7.375 2,334 $ 7.375
1997 20,000 14.125-14.25 5.30 14.1875 20,000 14.1875
1998 1,800,000 6.19-8.19 8.83 7.19 450,000 7.19
1999 627,471 3.69 9.50 3.69 156,868 3.69
--------- ------------- ------- ------------
2,449,805 $ 6.36 629,202 $ 6.76
========= ============= ======= ============
</TABLE>
The weighted average exercise price of the 1,892,174 options outstanding as
of January 1, 1999 was $7.71 per share.
18
<PAGE> 19
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 May 1999 which have an
exercise price that is less than the year end per share market price. If
compensation expense for the Trust's two share option plans had been recorded
based on the fair value at the grant date for awards in 1999, 1998 and 1997,
consistent with SFAS 123, the Trust's net income would be adjusted as follows
(amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Restated
1999 1998 1997
----------------------------------------------
<S> <C> <C> <C>
Net income (loss) applicable to shares
of beneficial interest $ (9,137) $ (86,517) $ 845
Effect of stock options as calculated (1,481) (557) (569)
---------- ---------- -----
Net income (loss) as adjusted $ (10,618) $ (87,074) $ 276
========== ========== =====
Per share
Basic and diluted:
Net income (loss) $ (.24) $ (2.81) $ .02
Effect of stock options as calculated (.04) (.02) (.02)
---------- ---------- -----
Net income (loss), as adjusted $ (.28) $ (2.83) $ -
========== ========== =====
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the Black- Scholes option pricing model, with the following weighted
average assumptions used for grants in 1999, 1998 and 1997.
1999 1998 1997
------------------------------
Risk-free interest rate 5% 5% 5.7%
Expected option life 8 yrs. 10 yrs. 4 yrs.
Expected volatility 20% 32% 23%
Expected dividend yield 3% 4% 3.5%
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
of beneficial interest and options to acquire common shares for Trustees who are
not employees of First Union and who are not affiliated with Apollo Real Estate
Advisors or Gotham Partners. A total of 500,000 shares of beneficial interest
are available under this plan.
The eligible Trustees serving on the Board on the day following the 1999
annual meeting were granted the lesser of 2,500 shares or the number of shares
having a market price of $12,500 as of the annual meeting date. Seven Trustees
each received 2,500 shares; two Trustees later resigned in 1999 and forfeited
their shares. The shares vest and are non-forfeitable on the day prior to the
2000 annual meeting as long as the Trustee is still a member of the Board. The
Trustees receive dividends and have the right to vote the shares. Deferred
compensation of $.1 million was recorded and $48,000 was recognized as
amortization expense in 1999.
Each eligible Trustee who purchases a minimum of $5,000 of shares between
annual meeting dates 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 between annual meeting dates 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 made after November 1998. The options vest and become exercisable
one year after being granted.
At December 31, 1999, a total of 12,500 shares were outstanding under this
plan and options were not yet required to be granted for shares that the
Trustees purchased.
19
<PAGE> 20
17. SHAREHOLDER RIGHTS PLAN
In March 1990, the Board of Trustees declared a dividend consisting of one
right to purchase one share of beneficial interest of the Trust with respect to
each share of beneficial interest. The rights may be exercised only if a person
or group acquires 15% or more of the outstanding shares of beneficial interest,
makes a tender offer for at least 15% of the outstanding shares of beneficial
interest or is declared to be an "adverse person." The Board of Trustees amended
the plan in 1999 for specific shareholders to acquire shares of beneficial
interest exceeding the 15% threshold. The shareholder rights plan will expire on
March 30, 2000 and the plan will terminate.
18. FEDERAL INCOME TAXES
The Trust has made no provision for 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 all of
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 is dependent upon its
continued exemption from the anti-stapling rules of the Code, which, if they
were to apply, would prevent the Trust from qualifying as a REIT. Qualification
as a REIT also involves the determination of various factual matters and
circumstances. The failure of the Trust to qualify as a REIT would have a
material adverse effect on the Trust's ability to make dividends to its
shareholders and to pay amounts due on its indebtedness. 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 reelecting
REIT status for the four taxable years following the year during which
qualification is lost.
In order to continue to meet certain REIT qualification income tests of the
Code for the year 2000, the Impark parking businesses must be disposed of or
other sources of qualified income obtained. The disposition of Impark is
currently planned by distributing the stock of the parking business to the
shareholders. If the disposal of the parking business is not accomplished or
another source of qualified income obtained in time to allow the REIT income
tests for the year 2000 to be satisfied, then the continued REIT classification
of the Trust for 2000 will be dependent on the Trust being able to demonstrate
it is using ordinary business care and prudence in an effort to dispose of this
property, and, if it can so demonstrate, it will be subject to certain excise
taxes for non-qualifying income.
The Trust and Company 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 $1.8 million
in 1999 and a net increase in income for tax reporting purposes of $72.0 million
in 1998 and $8.0 million for 1997.
As of December 31, 1999, net investments in real estate after accumulated
depreciation for tax reporting purposes was approximately $282.6 million as
compared to $263.3 million for financial reporting purposes.
20
<PAGE> 21
The 1999 quarterly allocation of cash dividends per common share of
beneficial interest for individual shareholders' income tax purposes was as
follows:
20% Rate
Capital Ordinary Total
Dates Paid Gains Income Paid
-------------------------------------------------------
October 29, 1999 $ .155 $ - $ .155
January 28, 2000 .155 - .155
------- ------- -------
$ .310 $ - $ .310
======= ======= =======
The 1999 quarterly allocation of cash dividends per preferred share of
beneficial interest for individual shareholders' income tax purposes was as
follows:
20% Rate
Capital Ordinary Total
Dates Paid Gains Income Paid
-------------------------------------------------------
February 1, 1999 $ .525 $ - $ .525
April 30, 1999 .525 - .525
July 31, 1999 .525 - .525
October 29, 1999 .525 - .525
January 28, 2000 .525 - .525
------- ------- -------
$ 2.625 $ - $ 2.625
======= ======= =======
19. LEGAL CONTINGENCY
The Trust has pursued legal action against the State of California
associated with the 1986 flood of Sutter Buttes Center, formerly Peach Tree
Center. In September 1991, the court ruled in favor of the Trust on the
liability portion of this inverse condemnation suit, which the State of
California appealed. However, in the third quarter of 1999, the 1991 ruling in
favor of the Trust was reversed by the State of California appeals court.
Accordingly, the Trust expensed $1.2 million in deferred legal fees which the
earlier court ruling in favor of the Trust had allowed for recovery.
20. SUBSEQUENT EVENT
The Trust in January 2000 repaid its $10.6 million deferred obligation
resulting in a prepayment penalty of $3.1 million.
21. BUSINESS SEGMENTS
The Trust and Company's business segments include ownership of shopping
centers, apartment complexes, office buildings, parking facilities, mortgage
investments and parking and transit ticket equipment manufacturing (Ventek).
Corporate rent and operating expense consist primarily of ground lease income
from a property leased to a third party. Rent, property operating expense and
real estate taxes, interest expense, depreciation, capital improvements and
identifiable assets for real estate assets have been identified for each of the
business segments for the last three years. The apartment portfolio was sold in
May 1999 and during 1999, the Trust sold 16 shopping centers, two office
facilities and a parking lot. Impark and the Trust's Canadian parking facilities
are shown as discontinued operations for 1999, 1998 and 1997 because they will
be spun off to the Trust's shareholders in 2000. Property net operating income
is property rent and sales revenue less property operating expense, cost of
goods sold and real estate taxes. Corporate interest expense consists of the
Trust's non-recourse notes payable, senior notes, and bank loan interest
expense. Corporate depreciation and amortization consist primarily of the
amortization of deferred issue costs on non-recourse debt and the leasehold
improvements for its corporate office. Corporate assets consist primarily of
cash and cash equivalents, leasehold improvements for the corporate office and
deferred issue costs for non-recourse debt and senior notes. All intercompany
transactions between segments have been eliminated. (See table of business
segments on the next page.)
21
<PAGE> 22
<TABLE>
<CAPTION>
21. BUSINESS SEGMENTS CONTINUED
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
RENTS AND SALES
Shopping Centers $ 79,412 $ 97,584 $ 58,284
Apartments 6,079 17,056 17,835
Office Buildings 12,715 13,275 13,989
Parking Facilities 10,506 9,931 3,585
Ventek 6,643 5,170 5,534
Corporate 1,127 1,112 1,156
--------- --------- ---------
$ 116,482 $ 144,128 $ 100,383
LESS - OPERATING EXPENSES AND
COSTS OF GOODS SOLD
Shopping Centers $ 26,475 $ 32,433 $ 17,182
Apartments 2,349 6,182 6,729
Office Buildings 5,745 6,069 6,753
Parking Facilities 808 2,022 716
Ventek 8,670 7,008 5,127
Corporate 847 912 873
--------- --------- ---------
$ 44,894 $ 54,626 $ 37,380
LESS - REAL ESTATE TAXES
Shopping Centers $ 6,608 $ 8,918 $ 6,857
Apartments 339 975 1,382
Office Buildings 1,126 992 1,085
Parking Facilities 1,864 1,568 624
--------- --------- ---------
$ 9,937 $ 12,453 $ 9,948
PROPERTY NET OPERATING INCOME (LOSS)
Shopping Centers $ 46,329 $ 56,233 $ 34,245
Apartments 3,391 9,899 9,724
Office Buildings 5,844 6,214 6,151
Parking Facilities 7,834 6,341 2,245
Ventek (2,027) (1,838) 407
Corporate 280 200 283
--------- --------- ---------
$ 61,651 $ 77,049 $ 53,055
--------- --------- ---------
LESS - DEPRECIATION AND
AMORTIZATION
Shopping Centers $ 12,675 $ 15,880 $ 10,414
Apartments 1,011 2,751 2,952
Office Buildings 5,071 4,282 3,963
Parking Facilities 1,812 1,561 247
Ventek 83 46 34
Corporate 4,679 3,083 1,177
--------- --------- ---------
$ 25,331 $ 27,603 $ 18,787
LESS - INTEREST EXPENSE
Shopping Centers $ 22,649 $ 23,832 $ 11,224
Apartments 1,006 2,819 3,406
Office Buildings 1,377 - 15
Parking Facilities 3,231 2,381 784
Ventek 8 23 16
Corporate 10,171 19,142 12,303
--------- --------- ---------
$ 38,442 $ 48,197 $ 27,748
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------
<S> <C> <C> <C>
MORTGAGE INVESTMENT INCOME $ 463 $ 1,211 $ 2,907
CORPORATE INCOME (EXPENSE)
Short-term investment income $ 2,649 $ 1,337 $ 1,525
Other income 1,180 1,386 5,724
General and administrative (14,664) (28,104) (9,398)
Litigation and proxy costs - (4,848) -
Loss on carrying value of real estate
and impaired assets (9,800) (36,000) -
Loss from discontinued operations (6,836) (27,696) (2,844)
--------- --------- ---------
INCOME (LOSS) BEFORE CAPITAL GAIN
AND EXTRAORDINARY LOSS $ (29,130) $ (91,465) $ 4,434
========= ========= =========
CAPITAL EXPENDITURES
Shopping Centers $ 6,497 $ 12,585 $ 9,381
Apartments 262 2,081 1,497
Office Buildings 3,337 8,045 9,741
Parking Facilities 1,392 392 1,035
--------- --------- ---------
$ 11,488 $ 23,103 $ 21,654
========= ========= =========
IDENTIFIABLE ASSETS
Shopping Centers $ 154,202 $ 471,996 $ 498,238
Apartments - 79,011 79,386
Office Buildings 40,782 45,404 45,412
Parking Facilities 69,065 72,434 7,988
Mortgages 5,426 5,508 30,686
Ventek 5,247 4,476 5,206
Corporate 160,909 35,916 29,723
Net Assets of Discontinued Operations 25,821 27,878 38,345
--------- --------- ---------
Total Assets $ 461,452 $ 742,623 $ 734,984
========= ========= =========
</TABLE>
22. MINIMUM RENTS
The future minimum lease payments that are scheduled to be received under
noncancellable operating leases are as follows (amounts in thousands):
2000 $ 30,442
2001 27,438
2002 25,793
2003 23,793
2004 20,617
Thereafter 62,318
---------
$ 190,401
=========
23
<PAGE> 24
23. RELATED PARTY TRANSACTIONS
The Company has engaged a law firm, that has a partner who is a Trustee, to
advise it on strategic matters regarding Impark. As of December 31, 1999,
approximately $.3 million has been paid to this firm.
The Company leases four of its parking facilities to a third party which is
partially owned by an affiliate of a Trust shareholder, Apollo Real Estate
Investment Fund II, L.P. and Apollo Real Estate Advisors. In 1999, the Trust
received approximately $4 million in rent from this third party.
In connection with a $90.0 million note payable, the Trust paid interest and
fees of $1.2 million to Gotham Partners, L.P. and Gotham Partners III, L.P.
("Gotham").
Additionally, the Trust paid $1.8 million to Gotham for a stand-by
commitment fee in connection with the May 1999 share rights offering which
raised $46.5 million in net proceeds. Gotham owned 13.75% of the shares of
beneficial interest of the Trust as of December 31, 1999.
The Trust in 1999 engaged a company to provide mortgage brokerage services.
A member of the immediate family of a Trustee is a principal of that company and
the Trustee is also a principal of Gotham. In 1999, fees of $.6 million were
paid to this company.
24. SEVERANCE ACCRUAL
During 1999 and 1998, the Trust recorded $2.2 million and $3.7 million,
respectively, in severance expense. The 1999 severance expense of $2.2 million
is a result of staff reductions made in 1999 and for employees who have been
notified that their employment with the Trust will be terminated in the first
half of 2000 due to the closing of the Cleveland, OH headquarters. The 1998
severance expense of $3.7 million was recorded for change in control agreements
and compensation arrangements for continuation of employment. The Trust
recognizes continuation of employment expense over the period that employees are
required to remain in employment of the Trust. The severance accrual for the
years ended December 31, 1999 and 1998 was as follows (amounts in thousands):
1999 1998
----------------------
Beginning balance $ 2,742
Expense 2,219 $ 3,742
Payments (3,730) (1,000)
-------- --------
Balance at end of year $ 1,231 $ 2,742
======== ========
The accrued severance is expected to be paid during the first half of 2000.
25. CONTINGENCIES
The Trust, in exchange for a fee from Impark, has provided performance
guarantees for the manufacturing and installation of transit ticket vending
equipment. The guarantees of $5.3 million and $6.2 million expire in February
2001 and 2002, respectively. As of December 31, 1999, no amounts have been drawn
against these guarantees.
24
<PAGE> 25
26. 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, 1999 and 1998. In the
opinion of the Trust and Company, all adjustments (consisting of normal
recurring accruals) necessary to present fairly such interim combined results in
conformity with generally accepted accounting principles have been included.
Impark and the Trust's Canadian real estate have been classified as
discontinued operations for 1999 and 1998.
The first three quarters of 1999 have been restated to reflect the adoption
of the use of a 20- year life for the amortization of Impark's goodwill in
October 1999, retroactive to January 1, 1999. Previously, the amortization life
was 40 years.
<TABLE>
<CAPTION>
Quarters Ended
-------------------------------------------------------------------
Restated Restated Restated
March 31 June 30 September 30 December 31
-------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per share data and footnotes)
1999
Revenues $ 34,694 $ 30,891 $ 25,863 $ 29,326
---------- --------- --------- ---------
Income (loss) before preferred dividend,
extraordinary loss from early
extinguishment of debt and loss
from discontinued operations (3,099) 15,726 (1,401) (5,186)
Extraordinary loss from early
extinguishment of debt (5,508)
Income (loss) from discontinued operations (1,793) 184 (154) (5,073)
---------- --------- --------- ---------
Net income (loss) before preferred dividend (4,892) 15,910 (1,555) (15,767)
---------- --------- --------- ---------
Net loss applicable to shares
of beneficial interest $ (5,600) $ 15,202(1),(2) $ (2,263) $ (16,476)(3)
========== ========= ========= =========
Comprehensive net income (loss) $ (5,461) $ 15,194 $ (2,233) $ (14,520)
========== ========= ========= =========
Per share
Income (loss) applicable to shares of
beneficial interest before extraordinary
loss and loss from discontinued operations $ (.12) $ .40 $ (.05) $ (.14)
Extraordinary loss from early
extinguishment of debt (.13)
Loss from discontinued operations $ (.06) $ - $ - $ (.12)
---------- --------- --------- ---------
Net income (loss) applicable to shares of
beneficial interest, basic and diluted $ (.18) $ .40 $ (.05) $ (.39)
========== ========= ========= ==========
As previously reported:
Net income (loss) previously disclosed $ (5,371) $ 15,430 $ (2,033)
Change in amortization expense (229) (228) (230)
---------- --------- ---------
Net income (loss) as restated $ (5,600) $ 15,202 $ (2,263)
========== ========= ==========
Net income (loss) per share as
previously disclosed, basic
and diluted $ (.17) $ .41 $ (.05)
Net loss per share as restated,
basic and diluted (.18) .40 (.05)
</TABLE>
(1) Includes capital gains of $8.7 million for the sale of eight apartment
complexes and $19.4 million for the sale of seven shopping malls.
(2) Includes a $9 million loss on the carrying value of assets held for sale.
(3) Includes an accrual of $5.1 million for professional fees, the operating
loss for the discontinued operations for the first quarter of 2000 and the
recognition of foreign currency losses from the discontinued operations.
Also includes a $5.5 million penalty from the prepayment of a mortgage loan
and $1.8 million of asset write-downs of Ventek.
25
<PAGE> 26
26. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) CONTINUED
<TABLE>
<CAPTION>
Quarters Ended
--------------------------------------------------------------------
March 31 June 30 September 30 December 31
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
(In thousands, except per share data and footnotes)
1998
Revenues $ 35,551 $ 36,260 $ 35,385 $ 40,866
-------- -------- -------- --------
Loss before preferred dividend,
extraordinary loss from early
extinguishment of debt and loss
from discontinued operations (1,699) (7,192) (5,519) (39,013)
Extraordinary loss from early
extinguishment of debt (1,633) (766)
Loss from discontinued operations (1,880) (3,884) (3,079) (18,853)
-------- -------- -------- --------
Net loss before preferred dividend (3,579) (11,076) (10,231) (58,632)
-------- -------- -------- --------
Net loss applicable to shares
of beneficial interest $ (4,454)(1) $(11,784)(2) $(10,939)(3) $(59,340)(4)
======== ======== ======== ========
Comprehensive net loss $ (4,450) $(12,073) $(11,276) $(59,957)
======== ======== ======== ========
Per share
Loss applicable to shares of
beneficial interest before extraordinary
loss and loss from discontinued operations $ (.09) $ (.25) $ (.20) $ (1.13)
Extraordinary loss from early
extinguishment of debt (.05) (.02)
Loss from discontinued operations (.06) (.13) (.10) (.60)
-------- -------- -------- --------
Net loss applicable to shares of
beneficial interest, basic and diluted $ (.15) $ (.38) $ (.35) $ (1.75)
======== ======== ======== ========
(1) Included $.9 million loss from Ventek and $.9 million in proxy and
litigation expenses.
(2) Included $3.4 million expense for the termination of the former chairman,
president and chief executive officer, $3.9 million in proxy and litigation
expenses, $4.7 million expense for the vesting of restricted shares, $2.2
million loss of a property acquisition deposit due to the Trust terminating
the deal, $1.5 million in professional fees to avoid a change in the
composition of the Trust's Board, $1.0 million in bank loan waiver fees, a
$.4 million loss for the termination of a systems project and $1.5 million
in foreign currency translation loss.
(3) Included $1.7 million severance accrual, $.8 million in expense for
terminations of former employees, $1.6 million in legal fees for possible
corporate and financial transactions of the Trust, $1.1 million in foreign
currency translation loss for marking an intercompany receivable to the spot
rate, the reduction in the accrual of percentage rent of $1.5 million due to
the adoption of EITF 98-9 and a $1.6 million extraordinary loss from the
repayment of $87.5 million of senior notes prior to their maturity.
(4) Included $1.1 million in expense for various services provided to the Trust
by a third party and warrants issued in connection therewith, $.8 million in
legal fees for a rights offering and potential acquisitions and sales, $.5
million in professional fees resulting from an unsuccessful effort to
refinance the Trust's bridge and bank loans, $.8 million extraordinary loss
resulting from amendments to the Trust's bank credit facility and $90
million note payable, $4.4 million severance accrual offset by $1.5 million
in additional percentage rent accrued due to the prospective adoption of
EITF 98-9. Also included a $51 million loss on carrying value of assets
identified for disposition and impaired.
</TABLE>
26
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SECURITYHOLDERS AND TRUSTEES OF FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS:
We have audited the accompanying consolidated balance sheets of First Union
Real Estate Equity and Mortgage Investments (an unincorporated Ohio business
trust, also known as First Union Real Estate Investments) and First Union
Management, Inc. (a Delaware corporation) and its subsidiaries as of December
31, 1999 and 1998, and the related combined statements of operations,
comprehensive income, shareholders' equity and changes in cash for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of management. Our responsibility is to express an
opinion on these financial statements based on our audits. We did not audit the
financial statements of First Union Management, Inc.'s Parking Business (also
known as FUMI Parking Business), comprised primarily of Imperial Parking Limited
and Impark Services Ltd., for the year ended December 31, 1999, which statements
reflect total assets and total revenues of approximately 12 percent and
approximately 39 percent of the related consolidated totals. Those statements
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for those entities, is
based solely on the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of other auditors for
1999, the 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 its subsidiaries as of
December 31, 1999 and 1998, and the results of their operations and their
changes in cash for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States.
Cleveland, Ohio,
March 1, 2000. Arthur Andersen LLP
27
<PAGE> 28
MANAGEMENT 'S DISCUSSION & ANALYSIS
OF FINANCIAL CONDITION & RESULTS OF OPERATIONS
FINANCIAL CONDITION
During 1999, the Trust sold 27 properties, obtained non-recourse mortgage
loans on three properties, and sold shares under a stock rights offering to
raise capital which was used primarily to repay debt and generate cash.
In summary, the 27 properties were sold for $404.7 million. Proceeds of
$213.2 million were used to repay mortgage debt related to the properties or the
mortgage loans were transferred with the properties as part of the
consideration. The net proceeds of $172.2 million after transaction costs,
prorations and mortgage debt were used to partially repay a note payable for
$49.8 million, partially repay bank debt of $86 million, and the remaining $36.4
million was held as cash. The proceeds from the property sales and use of the
proceeds are shown by property in the following table.
<TABLE>
<CAPTION>
(amounts in millions)
----------------------------------------------------------------------------------------------
NET
PROCEEDS MORTGAGE
MONTH (AFTER COSTS DEBT REPAID
SOLD IN GROSS AND OR
PROPERTY 1999 PROCEEDS PRORATIONS) TRANSFERRED
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WOODLAND COMMONS FEBRUARY $ 21.6 $ 20.8 $ 11.5
SHOPPING CENTER
BECK BUILDING (OFFICE) MARCH 2.2 1.8
SUTTER BUTTES (OFFICE) APRIL 3.8 3.6
NORTHWEST MALLS MAY 37.4 36.1
Valley
Valley North
Mall 205
Plaza 205
APARTMENT PORTFOLIO MAY 86.0 84.2 37.5
Somerset Lakes
Steeplechase
Briarwood
Hunters Creek
Beech Lake
Woodfield Gardens
Windgate Place
Walden Village
MAGIC MILE MAY 2.0 1.9
PARKING LOT
TWO-MALL PACKAGE JUNE 22.1 21.7
Crossroads, Ft. Dodge
Kandi
FINGERLAKES MALL JUNE 2.3 2.2
MOUNTAINEER MALL JULY 11.0 10.2 3.6
FAIRGROUNDS SQUARE JULY 24.8 24.0
SOUTHWESTERN MALLS DECEMBER 191.5 178.9 160.6
Alexandria
Brazos
Killeen
Mesilla Valley
Shawnee
Villa Linda
------ ------ ------
SUBTOTALS 404.7 385.4 213.2
ADJUSTMENTS TO AGREE TO STATEMENT
OF CHANGES IN CASH
Mortgage prepayment penalties 5.8
Mortgage debt transferred
to purchasers (163.7) (163.7)
-------- -------- --------
$ 404.7 $ 227.5 $ 49.5
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
(amounts in millions)
-----------------------------------------------------------------------------------------
Net Use of Net Proceeds
Proceeds ---------------------------------
(after Repaid Repaid
mortgage Note Bank Available
Property debt) Payable Loan Cash
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WOODLAND COMMONS $ 9.3 $ 9.3
SHOPPING CENTER
BECK BUILDING (OFFICE) 1.8 1.8
SUTTER BUTTES (OFFICE) 3.6 3.6
NORTHWEST MALLS 36.1 2.7 $33.4
Valley
Valley North
Mall 205
Plaza 205
APARTMENT PORTFOLIO 46.7 15.7 31.0
Somerset Lakes
Steeplechase
Briarwood
Hunters Creek
Beech Lake
Woodfield Gardens
Windgate Place
Walden Village
MAGIC MILE 1.9 1.9
PARKING LOT
TWO-MALL PACKAGE 21.7 0.1 21.6
Crossroads, Ft. Dodge
Kandi
FINGERLAKES MALL 2.2 2.2
MOUNTAINEER MALL 6.6 6.6
FAIRGROUNDS SQUARE 24.0 5.9 $18.1
SOUTHWESTERN MALLS 18.3 18.3
Alexandria
Brazos
Killeen
Mesilla Valley
Shawnee
Villa Linda
------ ------ ------ -----
SUBTOTALS 172.2 49.8 86.0 36.4
ADJUSTMENTS TO AGREE TO STATEMENT
OF CHANGES IN CASH
Mortgage prepayment penalties
Mortgage debt transferred
to purchasers
-------- -------- -------- --------
$ 172.2 $ 49.8 $ 86.0 $ 36.4
======== ======== ======== ========
</TABLE>
28
<PAGE> 29
Mortgage loans were obtained on three properties for a total of $66.7
million and the net proceeds of $62.9 million were held as cash.
<TABLE>
<CAPTION>
(amounts in millions)
-------------------------------------------------------------------------------------------------------------------------------
NET PROCEEDS
MONTH OF LOAN (AFTER COSTS AND
PROPERTY LOAN IN 1999 AMOUNT INTEREST RATE MATURITY PRORATIONS)
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
55 Public Square August $ 21.1 LIBOR + 325 2002 $ 18.8
(Office and Garage) basis points
North Valley Tech Center (Office) August 16.0 LIBOR + 295 2002 14.7
basis points
Crossroads Center, St. Cloud October 29.6 15% 2000 29.4
Second mortgage loan; lender has
option to purchase the mall, and the
Trust has a right to put the mall to the
lender, in April 2000 for $2.0 million
plus the first and second mortgages. ------ -------
$ 66.7 $ 62.9
====== =======
</TABLE>
In May 1999, the Trust distributed approximately 12.5 million rights to its
shareholders to purchase shares of beneficial interest of the Trust at $4.00 per
share, raising approximately $46.5 million, net of offering costs. The Trust
used the net proceeds of the rights offering to repay $37.5 million of its note
payable and $9 million of its bank loan.
Unrestricted and restricted cash and cash equivalents of $57.8 million at
December 31, 1999 represented an increase of $12.7 million compared to the end
of 1998. The major items contributing to this increase were as follows:
<TABLE>
<CAPTION>
(amounts in millions)
------------------------------------------------------------------------------------------------------
CASH WAS GENERATED FROM
<S> <C>
Net proceeds of property sales, after debt transferred to purchasers $ 227.5
Net proceeds of mortgage loans 62.9
Stock rights offering 46.5
Operations 9.4
Proceeds from note payable (used to purchase a $99 million U.S. Treasury bill) 49.0
--------
$ 395.3
--------
CASH WAS USED TO
Repay note payable $ 90.0
Repay bank loan 101.0
Repay mortgage loans 49.5
Mortgage prepayment penalties 5.8
Repurchase the Trust's common shares 8.0
Fund tenant and building improvements 11.5
Pay preferred and common dividends 9.4
Provide collateral on Imperial Parking's credit agreement 5.0
Purchase a U.S. Treasury bill 99.0
Other, net 3.4
--------
$ 382.6
--------
Increase in unrestricted and restricted cash and cash equivalents $ 12.7
========
</TABLE>
The Trust purchased a $99 million Treasury bill in December 1999 using $50
million of cash on hand and borrowing $49 million with the U.S. Treasury bill as
collateral. The $49 million is classified as a note payable in the December 31,
1999 Combined Balance Sheet. Additionally, in September 1999, the Trust
purchased a $5 million U.S. Treasury bill. The $5 million U.S. Treasury bill is
pledged as collateral for Impark's bank borrowings. Both Treasury bills are
classified as held to maturity.
29
<PAGE> 30
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations was $9.4 million in 1999 compared to $5.9
million in 1998. The increase is primarily attributed to a reduction in the loss
before capital gains, extraordinary loss and loss from discontinued operations
when comparing 1999 to 1998.
As shown in a table above, the Trust sold 27 properties for $404.7 million
and received net proceeds of $172.2 million after costs of the transactions,
prorations and repayment or transfer of the mortgage debt. Net proceeds of $46.5
million were generated from the May 1999 stock rights offering. Additionally,
the Trust received net proceeds of $62.9 million from three mortgage loans
obtained in 1999, also shown in a table above.
During 1999, the Trust invested $11.5 million in capital and tenant
improvements. The investment was made primarily for tenant improvements to
continue to tenant the former retail center in Denver, CO, which has been
converted into an office technology center, and to build an anchor tenant store
in Abilene, TX.
The Trust repaid approximately $101 million of bank loans by using
approximately $86 million from proceeds of property sales, $9 million from the
sale of shares of beneficial interest from the rights offering and $6 million
from funds generated from operations.
In 1999, the Trust used $49.8 million of cash from property sales, $37.5
million from the rights offering and $2.7 million from operating cash to repay
its $90 million note payable. The $90 million note payable originated in August
1998 when the Trust repaid $87.5 million of its 8-7/8% senior notes pursuant to
a tender offer that the Trust initiated in July 1998.
The Trust during the third quarter of 1999 repurchased 1.5 million shares of
beneficial interest for $7.8 million.
The Trust did not pay a dividend to common shareholders of beneficial
interest in the first nine months of 1999, but did declare a $0.155 per share
dividend to common shareholders and disbursed the $6.6 million in October 1999.
Additionally, the Trust declared a $0.155 per share dividend to common
shareholders in December 1999 payable in January 2000.
In January 2000, the Trust repaid a $10.6 million deferred obligation plus a
prepayment fee of $3.1 million.
In the first quarter of 2000, the Trust announced that it intended to spin
off Imperial Parking Corporation to the holders of the Trust's common shares. As
part of the spin-off, the Trust will repay Imperial Parking's bank credit
facility of approximately $22 million, contribute $7 million of cash and its 14
Canadian parking properties, and fund up to $6 million of cash for a parking
development which will be leased to and operated by Imperial Parking. The Trust
will also provide a secured line of credit for $8 million to Imperial Parking.
Trust shareholders will receive one share of Imperial Parking Corporation common
stock for every 20 First Union common shares of beneficial interest held as of
March 20, 2000, expected to be distributed on March 27, subject to the SEC
declaring the registration statement effective. Imperial Parking has applied to
have its common stock listed on the American Stock Exchange under the symbol
"IPK."
RESULTS OF OPERATIONS -1999 VERSUS 1998
Net loss applicable to common shares before discontinued operations for 1999
was $2.3 million as compared to a net loss before discontinued operations of
$58.8 million for 1998. Net loss before discontinued operations for 1999
included $28.3 million of capital gains compared to $10.3 million in 1998.
Capital gains for 1999 included $8.7 million from the sale of eight apartment
complexes, $19.4 million from the sale of six shopping malls and one shopping
center and $.2 million from the sale of six shopping malls in December 1999. In
1998, capital gains included the sale of land in Cleveland, OH for $1.7 million,
recognition of a $7.7 million capital gain which had been deferred from a sale
in 1982 when the Trust received a mortgage note as part of the sale
consideration which was repaid in May 1998, and $.8 million from the sale of a
forward exchange agreement.
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Net loss before discontinued operations for 1999 included a $9 million
impairment loss which was recorded because the Trust entered into a contract in
July 1999 to sell six shopping malls at a sales price that was less than net
book value at June 30, 1999. The six malls were sold in December 1999. An
additional $.8 million impairment loss was recorded in December 1999 for an
asset expected to be sold within the next 12 to 18 months. Net loss before
discontinued operations for 1998 included a $36 million impairment loss for
impaired assets and assets held for sale.
Net loss before discontinued operations for 1998 included a $2.2 million
loss for a forfeited deposit for a property acquisition which was terminated, a
$4.2 million expense due to lifting of restrictions on restricted shares which
vested upon the change in the majority of the Board of Trustees in June 1998, a
$3.4 million payment to the Trust's former chairman, president and chief
executive officer, $3.7 million of severance expense, $4.8 million in proxy and
litigation expenses, and $1.5 million in professional fees incurred to avoid a
change in the composition of the Board of Trustees.
The loss from discontinued operations for 1999 included a $1.7 million loss
from Impark, the recognition of $1.8 million of unrealized currency losses from
Impark because it is being reclassified as a discontinued operation and $3.3
million for the estimated net loss of Impark prior to the proposed spin-off in
the first quarter of 2000 and estimated professional fees to accomplish the
spin-off.
Mortgage loan investment income declined when comparing 1999 to 1998. The
decline in interest income was caused by the repayment of two mortgage
investments in 1998.
Short-term investment income increased during 1999 as compared to 1998. The
increase is primarily from investing the net proceeds from the $62.9 million
mortgage loans obtained in the third and fourth quarters of 1999 and
approximately $18 million from the sale of a mall in Reading, PA, which was sold
in July 1999.
Property net operating income, which is defined as rent less operating
expenses and real estate taxes, for 1999 decreased by $15.4 million when
compared to the previous year. The decrease was primarily due to the sale of 27
properties in 1999 resulting in decreased property net operating income of $18.2
million. Property net operating income for properties in the portfolio in 1999
and 1998 increased by $2.2 million. The increase was attributed to the increased
occupancy at the North Valley Tech Center and Westgate Town Center and increased
results from parking properties due to a new contract with third-party
operators. Additionally, four parking garages acquired during 1998 produced an
additional $1 million in property net operating income on a non-comparable
basis. Ventek, the Company's equipment manufacturing subsidiary, had a decrease
in net operating income of $.2 million in 1999 compared to 1998. The 1999 year
included approximately $2 million in write-offs of accounts receivable and
inventory for a contract cancelled during the fourth quarter of 1999. The 1998
year included approximately $1.8 million of non recurring general and
administrative costs incurred to expand business capabilities in anticipation of
sales which did not occur.
Notes payable interest expense increased while senior note interest
decreased when comparing 1999 to 1998 because the Trust, in August 1998, repaid
$87.5 million of 8-7/8% senior notes with a $90 million note payable. As noted
previously, the $90 million note payable was repaid during the first seven
months of 1999. The average note payable balance in 1998 was $90 million as
compared to $53.1 in 1999. The average rate on the note was 9.875% per annum in
1998 and 13.5% per annum in 1999.
Bank loan interest expense decreased when comparing 1999 to 1998. The
decrease was primarily due to repayment of the Trust's bank facility in the
second quarter of 1999 from property sales proceeds and a portion of the rights
offering proceeds. Additionally, in June 1998 the Trust recorded $.6 million of
bank covenant waiver fees as interest expense.
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General and administrative expenses declined $13.4 million when comparing
1999 to 1998. The decline is primarily the result of expenses recorded in 1998
that did not recur in 1999. These expenses included:
- $3.4 million payment to the Trust's former chairman, president and chief
executive officer due to his termination.
- $4.2 million for the vesting of restricted shares upon the change in the
majority of the Board of Trustees.
- $2.2 million for a forfeited deposit for a property acquisition which was
terminated.
General and administrative expenses also declined due to reduced salary
expense of $1.9 million when comparing 1999 to 1998 primarily as the result of
staff reductions. The Trust in 1999 recorded $2.3 million of severance expense
as compared to $3.7 million in 1998. Additionally, legal expense declined by
$1.3 million when comparing 1999 to 1998 primarily as the result of completing
the repayment of bank loans and the $90 million note payable in mid-1999. These
decreases were offset by a $.7 million expense to record compensation expense
for variable stock options in 1999.
Depreciation and amortization expense for 1999 declined by $2.3 million when
compared to 1998. The properties sold in 1999 resulted in reduced depreciation
expense of $5.3 million when compared to 1998. This decrease is partially offset
by increased depreciation expense of $1.3 million from improvements made
primarily to the North Valley Tech Center and Westgate Town Center, $.2 million
of amortization from mortgage loan costs for mortgages obtained in 1999, and
$1.5 million in expense from the write-off of the unamortized computer system
and home office equipment since the Trust outsourced its in-house accounting and
property management functions effective January 1, 2000.
YEAR 2000
During 1999 the Trust and Impark completed the process of reviewing
potential system and operation problems for the year 2000. This process involved
identifying and remediating data recognition problems in computer systems,
software and other operating equipment, working with third parties to address
year 2000 issues as they pertain to the Trust and Impark, and developing
contingency plans to address potential risks in the event of year 2000 failures.
To date, the Trust and Impark have successfully managed this transition.
Although considered unlikely, unanticipated problems in the Trust and
Impark's core business process, including problems associated with non-compliant
third parties and disruptions to the economy in general, could still occur
despite efforts to date to remediate affected systems and develop contingency
plans. The Trust and Impark will continue to monitor all business processes,
including interaction with the Trust and Impark's customers, vendors and other
third parties, throughout 2000 to address any issues and ensure all processes
continue to function properly.
QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
INTEREST RATE RISK
The Trust and Impark have entered into certain financing arrangements that
require interest payments based on variable interest rates. As such, the
combined financial statements are subject to changes in the market rate of
interest. To reduce the exposure to changes in the market rate of interest, the
Trust has interest rate caps for a portion of its floating rate financing
arrangements. The Trust does not enter into rate guarantee contracts for trading
purposes.
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The table below provides information about the Trust and Impark's financial
instruments that are sensitive to changes in interest rates. Weighted average
variable rates are based on the rates in effect at December 31, 1999. No
assumptions have been made about future interest rates. The Canadian dollar
denominated obligation is presented in U.S. dollar equivalents, which is the
Trust's reporting currency.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999 (AMOUNTS IN MILLIONS)
--------------------------------------------------------------------------------------------------------
EXPECTED MATURITY DATES
---------------------------------------------------------------------------
2000 2001 2002 2003 2004 THEREAFTER TOTAL FAIR VALUE
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BANK LOANS AT
VARIABLE RATES
Impark ($US) $ 22.5 $ 22.5 $ 22.5
Weighted average
interest rate 6.9%
MORTGAGE LOANS
Fixed rate $ 1.8 $ 1.9 $ 46.4 $ 2.0 $ 31.1 $ 40.8 $ 124.0 $ 129.4
Average interest rate 10.7% 10.7% 10.7% 12.8% 11.5% 11.5%
Variable rate
(based on LIBOR) $ 34.0 $ 37.1 $ 71.1 $ 71.1
Weighted average
interest rate 8.2% 9.6%
SENIOR NOTES
Fixed rate $ 12.5 $ 12.5 $ 12.3
Interest rate 8.875%
</TABLE>
INTEREST RATE DERIVATIVES
The Trust owns two interest rate caps that protect it from increases in
LIBOR. The interest rate caps have notional amounts of $16 million and $21.1
million covering the variable rate loans maturing in 2002. The net book value of
these interest rate caps is $.2 million as of December 31, 1999.
EXCHANGE RATE RISK
Impark operates internationally and enters into transactions denominated
mainly in Canadian currency. As a result, the Trust and Company are subject to
the variability that arises from exchange rate movements. The Trust and Company
do not hedge risks in foreign currency exchange rate movements and do not intend
to do so in the foreseeable future.
The only Canadian denominated debt obligation that is sensitive to foreign
currency exchange rates is the Impark bank loan. The table above presents the
principal amount, weighted average interest rate and maturity date for this bank
loan. The weighted average variable rate is based on the rate in effect at
December 31, 1999.
RESULTS OF OPERATIONS - 1998 VERSUS 1997
Net loss applicable to shares of beneficial interest before discontinued
operations for 1998 was $58.8 million as compared to net income before
discontinued operations of $3.7 million for 1997. The net loss for 1998 included
a $2.2 million loss on a property acquisition deposit that was approved prior to
the change in the majority of the Board of Trustees in June 1998, and which was
offset by $200,000 later in 1998 by assigning the contract to a third party, a
$3.4 million payment to the Trust's former chairman and chief executive officer,
a $4.2 million expense due to lifting of restrictions on restricted shares which
followed the change in the majority of the Trust's Board of Trustees, $1.5
million in other professional fees to avoid a change in the composition of the
Trust's Board, $4.8 million in proxy and litigation expenses and a $36 million
noncash charge to recognize
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the loss on the carrying value of assets held for sale and impaired assets.
Additionally, the Trust incurred $3.7 million in accrued severance expenses for
change in control agreements and for employee terminations and $2.6 million in
legal fees.
In February 1998, 951,000 preferred shares of beneficial interest were
converted into common shares of beneficial interest resulting in a decreased
preferred dividend when comparing 1998 to 1997.
Net loss before discontinued operations for 1998 included $10.3 million of
capital gains. The Trust sold its land beneath a building in Cleveland, OH,
resulting in a capital gain of $1.7 million. An additional capital gain of $7.7
million was recognized when a mortgage investment was repaid. This capital gain
had been deferred from a property sale in 1982 since the Trust received the
mortgage note as purchase consideration. The Trust also realized a capital gain
from the sale of a forward exchange contract of $.8 million in the second
quarter of 1998. In December 1998, the Trust sold a land parcel in Monroe, LA,
resulting in a $.1 million capital gain. Additionally, the net loss for 1998
before discontinued operations included $1.6 million of unamortized senior note
issue costs and professional fees which were expensed in the third quarter of
1998 when the Trust repaid approximately $87.5 million of the senior notes prior
to their maturity and $.8 million of deferred costs which were expensed when the
Trust renegotiated its bank agreement and a $90 million note payable.
The loss from discontinued operations includes the loss from operations of
Impark of $28.1 million, the net income from the Trust's Canadian parking
facilities of $.5 million and accrual for Canadian taxes of $.1 million.
Impark's net loss in 1998 included a $15 million U.S. reduction of goodwill, a
$2.4 million severance accrual, and approximately $2.5 million of expansion
costs into U.S. markets.
Mortgage loan interest income declined by $1.7 million, when comparing 1998
to 1997. The decline in interest income when comparing 1998 to 1997 was caused
by the repayment of a mortgage investment secured by a shopping mall in
Fairmont, WV in January 1998 and the repayment of a mortgage investment secured
by an office building in Cleveland, OH in May 1998.
The Trust had approximately $11.5 million invested in U.S. Treasury bills
and approximately $2.1 million invested in the stock of another REIT for the
first five months of 1998. The U.S. Treasury bills were purchased in April 1997
to secure the Trust's obligation under an agreement with the former owners of
Impark to collateralize the $10.5 million in non-voting stock and accrued
interest which the former owners of Impark received when the Trust's affiliated
management company purchased voting control of Impark in April 1997. The REIT
stock was acquired in the third and fourth quarters of 1997 as a long-term
investment. After the Trust purchased the non-voting common stock of Impark in
June 1998, it sold the U.S. Treasury bills. The Trust also sold its holdings in
the REIT stock as a result of its change in investment strategy.
In September 1996, the Trust invested in a joint venture that owned eight
shopping malls and 50% of another mall. The Trust, in September 1997, purchased
the interests of its joint venture partners. Consequently, the Trust's
investment income and management fees for the Trust's affiliated management
company declined when comparing 1998 to 1997.
Property net operating income for 1998 increased $23.9 million from 1997 on
a non-comparable basis. The acquisition of the former joint venture properties
in September 1997 and five parking facilities in the first three months of 1998
produced $21.8 million and $3.7 million, respectively, of increased property net
operating income when comparing 1998 to the same period of 1997. These increases
were offset by the decrease in property net operating income of $1.5 million
resulting from the sale of an office building and an apartment complex in the
last four months of 1997 and a $2.3 million decrease in property net operating
income from the Company's equipment subsidiary primarily due to increased
expenses of $1.8 million for anticipated sales which did not occur. Property net
operating income increased by $2.2 million for the comparable portfolio when
comparing 1998 to 1997. The increase was attributable to the continued lease-up
of the North Valley Tech Center and increased rental rates in the apartment
portfolio.
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Mortgage interest expense increased when comparing 1998 to that of 1997
primarily due to the $203 million in mortgage debt assumed in September 1997 in
conjunction with the purchase of the remaining interest in the Trust's joint
venture and a $30 million mortgage obtained in May 1998.
Bank loan interest expense increased when comparing 1998 to the prior year
due to increased borrowing, exclusive of the bank debt assumed in the April 1997
acquisition of Impark. The average balance for 1998 outstanding was $90 million.
The average balance outstanding for 1997 was approximately $19 million. The bank
loans increased when comparing 1998 to 1997 primarily due to borrowings to fund
the parking garage acquisitions and a development site, partially fund the
Trust's purchase of its partners' interest in the joint venture and to fund
tenant and capital improvements during 1998 and 1997. Additionally, the bank
covenant waiver fees of $.6 million for the second quarter covenant waivers were
recorded as bank loan interest expense in 1998. Offsetting the increase in the
bank credit facilities were the proceeds from property sales during the last
four months of 1997 and in May 1998, the repayment of mortgage investments in
the first and third quarters of 1998 and a $30 million mortgage obtained in May
1998.
Depreciation and amortization expense for 1998 increased over 1997 primarily
due to the depreciation from the eight shopping malls acquired in September 1997
when the Trust acquired its joint venture partners' interest in the malls and
the depreciation from the four parking facilities which were acquired in the
first quarter of 1998.
General and administrative expenses increased when comparing 1998 to 1997
primarily related to several charges as a result of the proxy contest and the
change in the majority of the Board of Trustees. The charges in the second
quarter of 1998 included $4.8 million in proxy and litigation expenses, $3.4
million resulting from the termination of the former chairman, president and
chief executive officer, $4.2 million for the vesting of restricted shares which
occurred upon the change in the majority of the Board of Trustees, and $1.5
million in additional professional fees to avoid a change in the composition of
the Trust's Board. Additionally, in the third and fourth quarters of 1998, the
Trust accrued $3.9 million of severance expense for employee termination, change
in control and continuation of employment agreements. During the last six months
of 1998, the Trust incurred approximately $2.6 million in legal fees for
negotiation of the $90 million note payable and credit facilities, potential
sales of properties and corporate acquisitions, and corporate due diligence and
preparation of a rights offering. In November 1998, the Trust issued 500,000
ten-year warrants to purchase 500,000 shares of beneficial interest at $10 per
share to Enterprise Asset Management Inc. The Trust also paid Enterprise
$750,000 for consulting services during the summer of 1998 when the Trust was
evaluating its retail portfolio and marketing the properties for sale. The Trust
recognized a total expense of $1.1 million for the fee paid to Enterprise and
the fair value of the warrants based on the Black-Scholes model. The Trust
expensed $.5 million in fees for an unsuccessful effort to refinance its current
debt in December 1998. The Trust also recorded a $2.2 million expense when it
did not close on the purchase of a parking facility because the Board of
Trustees believed that the contract, which was approved prior to the change in
the majority of the Board in June 1998, was on disadvantageous terms. The Trust
partially offset this loss by assigning the contract to a third party for
$200,000.
35
