SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1998
Commission File Number: 0-19989
FM Properties Inc.
Incorporated in Delaware 72-1211572
(IRS Employer Identification No.)
98 San Jacinto Blvd., Suite 220, Austin, Texas 78701
Registrant's telephone number, including area code: (512) 478-5788
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
On March 31, 1998, there were issued and outstanding 14,288,270 shares of the
registrant's Common Stock, par value $.01 per share.
FM PROPERTIES INC.
TABLE OF CONTENTS
Page
Part I. Financial Information
Financial Statements:
Condensed Balance Sheets 3
Statements of Operations 4
Statements of Cash Flow 5
Notes to Financial Statements 6
Remarks 7
Report of Independent Public Accountants 8
Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Part II. Other Information 13
Signature 15
Exhibit Index E-1
FM PROPERTIES INC.
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
FM PROPERTIES INC.
CONDENSED BALANCE SHEETS (Unaudited)
March 31, December 31,
1998 1997
---------- ----------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents $ 2,435 $ 873
Accounts receivable :
Property sales 929 1,265
Other, including income tax of $140,000 319 316
Prepaid expenses 389 473
---------- ----------
Total current assets 4,072 2,927
Real estate and facilities,net 105,149 105,274
Other assets 5,037 4,553
---------- ----------
Total assets $ 114,258 $ 112,754
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 1,793 $ 1,231
Accrued interest, property taxes and other 713 1,789
Current maturites of long-term debt 5,118 -
---------- ----------
Total current liabilities 7,624 3,020
Long-term debt 35,000 37,118
Other liabilities 5,910 6,009
Stockholders' equity 65,724 66,607
---------- ----------
Total liabilities and stockholders' equity $ 114,258 $ 112,754
========== ==========
The accompanying notes are an integral part of these financial statements.
FM PROPERTIES INC.
STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended
March 31,
-------------------------
1998 1997
---------- ----------
(In Thousands,Except
Per Share Amounts)
Revenues $ 2,655 $ 15,070
Costs and expenses:
Cost of sales 1,648 11,783
General and administrative expenses 1,392 796
---------- ----------
Total costs and expenses 3,040 12,579
---------- ----------
Operating income (loss) (385) 2,491
Interest expense, net (507) (537)
Other income, net 9 22
---------- ----------
Income (loss) before minority interest (883) 1,976
Minority interest - (4)
---------- ----------
Net income (loss) $ (883) $ 1,972
========== ==========
Net income (loss) per share:
Basic $(0.06) $0.14
====== =====
Diluted $(0.06) $0.14
====== =====
Average shares outstanding:
Basic 14,288 14,286
====== ======
Diluted 14,288 14,438
====== ======
The accompanying notes are an integral part of these financial statements.
FM PROPERTIES INC.
STATEMENTS OF CASH FLOW (Unaudited)
Three Months Ended
March 31,
-------------------------
1998 1997
---------- ----------
(In Thousands)
Cash flow from operating activities:
Net income (loss) $ (883) $ 1,972
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 14 35
Cost of real estate sold 2,091 11,860
Minority interest share of net income - 4
(Increase) decrease in working capital:
Accounts receivable and other 417 (576)
Accounts payable and accrued
liabilities (514) (1,853)
Other (584) (398)
---------- ----------
Net cash provided by operating activities 541 11,044
---------- ----------
Cash flow from investing activities:
Real estate and facilities (1,979) (2,714)
---------- ----------
Net cash used in investing activities (1,979) (2,714)
---------- ----------
Cash flow from financing activities:
Net proceeds from debt 3,000 -
Repayment of debt - (4,035)
---------- ----------
Net cash provided by (used in) financing
activities 3,000 (4,035)
---------- ----------
Net increase in cash and cash equivalents 1,562 4,295
Cash and cash equivalents at beginning of year 873 2,108
---------- ----------
Cash and cash equivalents at end of period $ 2,435 $ 6,403
========== ==========
The accompanying notes are an integral part of these financial statements.
FM PROPERTIES INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
FM Properties Inc. ("FMPO" or the "Company") operates through a partnership
in which FMPO owned a 99.8 percent interest until December 1997, when
FMPO acquired the remaining 0.2 percent interest from the outside managing
partner (See "Notes to Financial Statements" in the 1997 Annual Report on
Form 10-K). As a result of this acquisition, FMPO restated previously
reported interim 1997 financial results to reflect application of consolidation
accounting for its partnership investment rather than the equity method.
2. NEW ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") 128,
"Earnings Per Share," which simplifies the computation of earnings
per share ("EPS"). FMPO adopted SFAS 128 in the fourth quarter of
1997 and restated prior years' EPS data as required by SFAS 128.
Basic net income (loss) per share was calculated by dividing
net income applicable to common stock by the weighted-average number
of common shares outstanding during the period. Diluted net income
per share of common stock was calculated by dividing net income
applicable to common stock by the weighted-average number of common
shares outstanding during the period plus the net effect of dilutive
stock options, which represented approximately 152,000 shares in the
first quarter of 1997. The Company had a total of approximately
372,000 options outstanding excluded from the calculation as anti-
dilutive considering the loss reported in the first quarter of 1998.
During the first quarter of 1997, outstanding options to
purchase 225,000 shares common stock at an average exercise price of
$5.25 per share were excluded from the computation of diluted EPS
because the exercise prices were greater than the average market
price of the common shares during the period. No options outstanding
during the first quarter of 1998 had exercise prices greater than the
average market price; however, all outstanding options during that
quarter were excluded from the diluted EPS computation because of
the Company's net loss for the quarter.
In June 1997, FASB issued SFAS 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of
comprehensive income in the financial statements. Comprehensive
income is the total of net income and all the nonowner changes in
equity, of which FMPO has none. SFAS 130 is effective for 1998 and
adoption of this standard had no effect on FMPO's financial position
or results of operations.
3. LONG-TERM DEBT
In December 1997, FMPO entered into a restructured credit facility
consisting of a $35.0 million revolving credit facility and a $15.0
million term loan facility, with individual borrowings bearing
interest at rates based on the lead lender's prime rate or LIBOR, at
FMPO's option. The aggregate commitment will decline to $35.0
million on January 1, 1999, $15.0 million on January 1, 2000 and
will be eliminated on January 1, 2001. The Company classisfies any
borrowings in excess of $35 million as current maturities of long-
term debt in 1998. IMC Global Inc. ("IGL") has guaranteed amounts
borrowed under the facility in exchange for an annual fee, payable
quarterly, equal to the difference between FMPO's cost of LIBOR-
funded borrowings before the assumption of the guarantee by IGL and
the rate on the LIBOR-funded loans under the new facility. FMPO
cannot amend or refinance the facility without IGL's consent. As of
March 31, 1998, $8.3 million of additional borrowing was available
under the facility through December 31, 1998. For further discussion
of the restructured credit facility, see Note 4 of "Notes to the
Financial Statements" in FMPO's 1997 Annual Report on Form 10-K.
Capitalized interest totaled $150,000 and $452,000 during the
first quarters of 1998 and 1997, respectively.
4. PROPOSED OLYMPUS TRANSACTION
On March 2, 1998 FMPO and Olympus Real Estate Corporation, an
affiliate of Hicks, Muse, Tate & Furst Incorporated ("Olympus"),
entered into a letter of intent to form a strategic alliance to
develop certain of FMPO's properties and to pursue new real estate
acquisition and development opportunities. Under the terms of the
letter of intent, Olympus would make a $10 million investment in a
FMPO mandatorily redeemable equity security, provide a $10 million
convertible debt financing facility to FMPO and make available up to
$50 million of capital for its share of direct investments in joint
FMPO/Olympus projects. Olympus would also have the right to
designate for nomination 20 percent of FMPO's Board of Directors.
The $10 million mandatorily redeemable equity security would have
a par value of $5.84 per share, the average closing price of
FMPO common stock during the 30 trading days ended March 2, 1998.
FMPO would use the proceeds from the sale of these securities to repay
debt. These securities would share any dividends or distributions
ratably with the FMPO common stock, which currently pays no dividend,
and would be redeemable (i) at the option of the holder at any time
after the third anniversary of the closing for an amount per share
approximating the economic benefit that would have accrued had the
shares been converted into common stock on a one-to-one basis and sold
(the "common stock equivalent value") or (ii) at the option of FMPO
after the fifth anniversary (but in no event later than the sixth
anniversary) for the greater of their common stock equivalent value
or their par value per share, plus accrued and unpaid dividends,if any.
FMPO would have the option to satisfy the redemption with shares of its
common stock, subject to certain limitations.
The $10 million convertible debt facility would be available to
FMPO in whole or in part for a period of six years after closing to
finance FMPO's equity investment in new FMPO/Olympus joint venture
opportunities in properties not currently owned by FMPO. The
interest rate on this facility would be 12 percent per year, and at
Olympus' option, interest would be payable quarterly, or accrued and
added to principal. Outstanding principal under the facility would
be convertible at any time by the holder into FMPO common stock at a
conversion price of $7.31, which is 125 percent of the average
closing price of FMPO common stock during the 30 trading days ended
March 2, 1998. If not converted into common stock, the convertible
debt would be repaid on the sixth anniversary of the closing. If
the combination of interest at 12 percent and the value of the
conversion right does not provide Olympus with at least a 15 percent
annual return on the convertible debt, FMPO would pay Olympus
additional interest upon retirement of the convertible debt in an
amount necessary to yield a 15 percent annual return. The
convertible debt would be non-recourse to FMPO and would be secured
solely by FMPO's interest in FMPO/Olympus joint venture
opportunities financed with the proceeds of the convertible debt.
For a three-year period after the closing, Olympus would make
available up to $50 million for its share of capital for direct
investments in FMPO/Olympus joint acquisition and development
activities. For the three-year period, FMPO would provide Olympus
with a right of first refusal to participate for no less than a 50
percent interest in all new acquisition and development projects on
properties not currently owned by FMPO, as well as development
opportunities on existing properties in which FMPO seeks third-party
equity participation.
The transaction is expected to close in the second quarter of
1998 and is subject to the completion of due diligence, negotiation
of definitive agreements and approval of FMPO's Board of Directors.
5. SUBSEQUENT EVENTS (including two items subsequent to auditors'
review report, dated April 23, 1998 and May 8, 1998)
On April 9, 1998, FMPO and Olympus entered into an agreement for
FMPO to manage Olympus' newly acquired, wholly owned Walden on Lake
Houston development in Houston, Texas. The development includes 900
developed lots and 80 acres of undeveloped real estate. FMPO will
receive a fixed management fee plus commissions on new lot sales for
its management services. Upon completion of the FMPO/Olympus
transaction, FMPO will have the option to purchase up to a 50
percent interest in the project.
During February 1997, FMPO filed a petition for declaratory
judgement against Phoenix Holding Ltd. ("Phoenix") in order to
secure its ownership of approximately $25 million of MUD
reimbursements that pertain to existing infrastructure that serves
the Circle C development. Phoenix filed a counter claim against
Circle C in June 1997. On February 20, 1998 the District Court
granted the Company's motion for summary judgement on the primary
case and Phoenix dismissed its counterclaims with prejudice, but
reserved the right to appeal the summary judgement of the primary
case. On April 10, 1998, Phoenix appealed the summary judgement on
the primary case. See Part II - Other Information,Item 1. "Legal
Proceedings", "Other Matters."
In December 1997, Austin (the "City") enacted an ordinance
purporting to annex all land within the Southwest Travis County
Water District, including the Company's Circle C lands. The Company
filed suit seeking reimbursable municipal utility districts ("MUD")
proceeds which the City failed to pay. A state court in Austin
stayed the proceedings pending resolution of suits brought by third
parties, opposing the City's annexation plans. Circle C filed a
motion to lift the stay. Because certain of the third party
challenges were resolved on April 16, 1998, the Travis County
District Court heard arguments on Circle C's motion and on April 23,
1998 issued an order lifting the stay and is allowing the trial to
go forward. Because of the complexity of the case, the District
Court set a minimum 60 day notice on any summary judgement hearing
and a minimum six month notice for a trial to be set. A summary
judgement hearing has been set for July 28, 1998 and a jury trial
set for January 20, 1999. See Part II - Other Information, Item 1.
"Legal Proceedings", "Annexation Litigation."
In 1995, the Travis County court declared unconstitutional
Austin's SOS (Save Our Springs) ordinance. The Austin Court of
Appeals reversed the lower court's decision but upheld the lower
court's ruling on certain grandfathered rights for land previously
platted, which benefits FMPO because a significant portion of its
land qualifies as being previously platted. On May 8, 1998, the
Texas Supreme Court upheld the Austin Court of Appeals ruling.
See Part II - Other Information, Item 1. "Legal Proceedings",
"SOS Ordinance."
For a detailed discussion of the Company's legal matters
including the three discussed above, see Item 3 "Legal Proceedings"
and Note 3 "Real Estate" in FMPO's 1997 Annual Report on Form 10-K.
--------------------
Remarks
The information furnished herein should be read in conjunction with
FMPO's financial statements contained in its 1997 Annual Report to
stockholders included in its Annual Report on Form 10-K.
The information furnished herein reflects all adjustments which are,
in the opinion of management, necessary for a fair statement of the
results for the periods. All such adjustments are, in the opinion
of management, of a normal recurring nature.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
of FM Properties Inc.:
We have reviewed the accompanying condensed balance sheet of FM
Properties Inc. (the Company), a Delaware corporation, as of March
31, 1998, and the related statements of operations and cash flow for
the three-month periods ended March 31, 1998 and 1997. These
financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which
is the expression of an opinion regarding the financial statements
taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications
that should be made to the financial statements referred to above
for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of FM Properties Inc. as of
December 31, 1997, and the related statements of operations,
stockholders' equity and cash flow for the year then ended (not
presented herein), and in our report dated January 20, 1998, based
on our audit, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the
accompanying condensed balance sheet as of December 31, 1997, is
fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
ARTHUR ANDERSEN LLP
San Antonio, Texas
April 21, 1998
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
OVERVIEW
FM Properties Inc. ("FMPO" or the "Company") is engaged in the
acquisition, development and sale of commercial and residential real
estate properties, located in Texas. FMPO's principal real estate
holdings are in the Austin, Texas area and consist of approximately
2,500 acres of undeveloped residential, multifamily and commercial
property within the Barton Creek development, approximately 1,300
acres of undeveloped commercial and multi-family property within the
Circle C Ranch development, and approximately 500 acres of
undeveloped residential, multi-family and commercial property known
as the Lantana tract, south of and adjacent to the Barton Creek
development.
FMPO also owns or has interests in approximately 250 developed lots,
200 acres of undeveloped residential property and 75 acres of
undeveloped commercial and multi-family property located in Dallas,
Houston and San Antonio, Texas which are being actively marketed.
These real estate interests are managed by professional real estate
developers who have been retained to provide master planning,
zoning, permitting, development, construction and marketing services
for the properties. Under the terms of these agreements, operating
expenses and development costs, net of revenues, are funded by FMPO,
and the developers are entitled to a management fee and a 25 percent
interest in the net profits, after recovery by FMPO of its
investments and a stated return, resulting from the sale of
properties under their management.
RESULTS OF OPERATIONS
FMPO's summary operating results follow:
First Quarter
------------------------
1998 1997
---------- ----------
(In Thousands)
Revenues:
Developed properties $ 2,385 $ 3,839
Undeveloped properties and other 270 11,231
---------- ----------
Total revenues 2,655 15,070
Operating income (loss) (385) 2,491
Net income (loss) (883) 1,972
Revenues from developed properties represented the sale of 44
single-family homesites during the first quarter of 1998, compared
with the sale of 61 single-family homesites in the first quarter of
1997. Revenues from undeveloped properties for the first quarter of
1998 represented the sale of two acres of undeveloped commercial
property, compared to the sale of 126 acres of undeveloped
commercial property during the first quarter of 1997. Reduced revenues
from the sale of single family homesites in the first quarter of
1998 were primarily attributable to the Company previous sale of a
significant portion of its single family homesite inventory, and limited
sales of undeveloped commercial properties. As a result of a significant
reduction in the Company's outstanding debt since the first quarter of 1997
and the restructuring of its credit faciltity (see Note 3), FMPO is again
developing single family home-sites and is evaluating several commercial
development opportunities. This strategy will enable the Company to capture
the development profits associated with its properties.
Operating results were adversely affected by an increase in
general and administrative expenses resulting primarily from the
Company's ongoing efforts to resolve through litigation attempts by
the City of Austin to restrict the Company's development
entitlements and to secure reimbursements of approximately $25
million of infrastructure costs incurred in the development of the
Circle C property. The increased general and administrative expenses
were partially offset by the portion of a reimbursement of
previously incurred infrastructure costs relating to properties
previously sold of approximately $0.8 million, which reduced cost of
sales in the first quarter of 1998 (see discussion below).
During 1995, legislation was enacted that enabled the
Company to create a series of municipal utility districts (MUDs) to
serve the Barton Creek development. Once established, the MUDs
issue bonds, the proceeds of which are used to reimburse the Company
for costs related to the installation of major utility, drainage and
water quality infrastructure. During the first quarter of 1998, the
Company received $1.0 million in partial reimbursement of
infrastructure costs relating to the Barton Creek development. The
proceeds were used in part to fund current development expenditures.
The Company expects to receive additional reimbursements for
previously incurred infrastructure costs related to the Barton Creek
development from the proceeds of MUD bonds issued in the future.
However, the timing and the amount of future reimbursements are
uncertain. See Part II, Item 1, "Legal Proceedings" for information
regarding litigation concerning these reimbursable costs.
Net interest expense totaled $507,000 in the first quarter of
1998 compared to $537,000 during the first quarter of 1997. The
decrease reflects lower average debt outstanding in the current
year. A larger amount of interest was capitalized in 1997
($452,000) than in 1998 ($150,000).
CAPITAL RESOURCES AND LIQUIDITY
The Company's sales activity slowed substantially in early 1998 and
will continue at reduced levels during the remainder of the year,
because previous sales of single family homesites have reduced
inventories, and the Company plan to initiate development of
certain commercial properties, as indicated in "Results of
Operations" above. Development expenditures during the 1998 first
quarter were funded largely from borrowings under the Company's new
credit facility, which provides aggregate available credit of $50
million through December 31, 1998, reducing to $35 million through
December 31, 1999 and $15 million through December 31, 2000. At
March 31, 1998 the amount available under the facility through
December 31, 1998 was $8.3 million. Anticipated capital
expenditures for the remainder of 1998 are expected to be funded by
operating cash flow and additional borrowings, with the level of
such capital expenditures subject to change based on the resolution
of ownership of certain reimbursements of previously incurred
infrastructure costs and other legal and regulatory issues, as
further discussed in Part II, Item 1, "Legal Proceedings."
The future performance of FMPO continues to be dependent on future
cash flows from real estate sales, which will be significantly
affected by future real estate values, regulatory issues,
development costs, the ability of the Company to continue to protect
its land use and development entitlements, and interest rate levels.
Significant development expenditures remain to be incurred for
FMPO's Austin-area properties prior to their eventual sale. While
bank financing for further development of existing properties
currently is available, bank financing for undeveloped land
purchases generally is expensive and difficult to obtain. These
factors, combined with the debt reduction requirements under the new
credit facility, could impede FMPO's ability to develop its
properties and expand its business. As a result, FMPO has
considered a number of capital raising alternatives, including
equity sales, formation of joint ventures with third parties,
various forms of debt financing and other means and recently entered
into a letter of intent with Olympus Real Estate Corporation
("Olympus") for such purposes. See Note 4, of "Notes to the
Financial Statements." The proposed transaction with Olympus is
subject to due diligence, negotiation of definitive agreements and
approval by FMPO's Board of Directors. While FMPO believes these
efforts will successfully address the capital resource needs
discussed above, there can be no assurance that FMPO will generate
sufficient cash flow or obtain sufficient funds to make required
interest and principal payments under the facility.
Net cash provided by operations totaled $0.5 million during the
first quarter of 1998 compared with $11.0 million during the first
quarter of 1997. The decrease reflects the substantial reduction of
undeveloped commercial properties sold during the first quarter of
1998. Financing activities provided cash of $3.0 million during
the first quarter of 1998 from borrowings under the restructured
credit facility, which were used to fund real estate development
expenditures. Debt repayments of $4.0 million were made during the
first quarter of 1997. Higher revenues in the prior year, mainly
from the sale of undeveloped properties, allowed the Company to
repay outstanding debt.
FMPO's financial flexibility and operating autonomy were
improved by the restructuring of debt and the acquisition of the
remaining 0.2 percent general partnership interest from the outside
managing partner (see"Notes to Financial Statements" above). These
changes enable FMPO to pursue its previously announced objectives
of establishing a long-term, self supporting capital structure and
allow it to operate independently. In connection with these changes,
the Board of Directors and management have recommended a change of
FMPO's name to Stratus Properties Inc. for approval at the upcoming
shareholders' meeting on May 14, 1998.
CAUTIONARY STATEMENT
Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements regarding
future reimbursement for infrastructure costs, future events related
to financing and the IGL guarantee, the anticipated outcome of the
litigation and regulatory matters, the expected results of FMPO's
business strategy, and other plans and objectives of management for
future operations and activities. Important factors that could
cause actual results to differ materially from FMPO's expectations
include, economic and business conditions, business opportunities
that may be presented to and pursued by the Company, changes in laws
or regulations and other factors, many of which are beyond the
control of the Company and other factors that as described in more
detail under the heading "Cautionary Statements" in FMPO's Form 10-K
for the year ended December 31, 1997.
----------------------------
The results of operations reported and summarized above are not
necessarily indicative of future operating results.
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in various regulatory matters and
litigation involving development of its Austin properties. For a
detailed discussion on these matters see Item 3, "Legal Proceedings"
and Note 3, "Real Estate" in FMPO's 1997 Annual Report on Form 10-K.
Below is a partial list of the cases in which the Company is
currently involved. The current status is summarized and should be
read in conjunction with the above referenced sections of the FMPO
1997 Annual Report on Form 10-K.
SOS Ordinance
In 1995, the Travis County court declared unconstitutional
Austin's SOS (Save Our Springs) ordinance. The Austin Court of
Appeals reversed the lower court's decision but upheld the lower
court's ruling on certain grandfathered rights for land previously
platted, which benefits FMPO because a significant portion of its
land qualifies as being previously platted. On May 8, 1998, the
Texas Supreme Court upheld the Austin Court of Appeals ruling upholding
the SOS Ordinances's validity.
Annexation Litigation
In December 1997, the City of Austin (the "City") enacted an ordinance
purporting to annex all land within the Southwest Travis County
Water District, including the Company's Circle C lands. The Company
filed suit seeking reimbursable municipal utility districts ("MUD")
proceeds that the City failed to pay. A state court in Austin
stayed the proceedings pending resolution of suits brought by third
parties, opposing the City's annexation plans. Circle C filed a
motion to lift the stay. Because certain of the third party
challenges were resolved on April 16, 1998, the Travis County
District Court heard arguments on Circle C's motion and on April 23,
1998 issued an order lifting the stay and is allowing the trial to
go forward. Because of the complexity of the case, the District
Court set a minimum 60 day notice on any summary judgement hearing
and a minimum six month notice for a trial to be set. A summary
judgement hearing has been set for July 28, 1998 and a jury trial
set for January 20, 1999.
Circle C WQPZ Litigation
In November 1997, the Company sought a declatory judgement in
the Hays County District Court confirming the validity of the Circle
C water quality protection zone ("WQPZ"), which covers Circle C's
approximate 553 acres located outside the boundaries of any MUD.
The City contested the court's jurisdiction but was denied in its
motion to transfer venue and all other requested relief. The City
has failed in its attempts to change venue in both district and
appeals courts and has filed an appeal with the Texas Supreme Court,
which has stayed action pending its ruling regarding jurisdiction.
The Texas Supreme Court has set the briefing schedule with the
City's brief due on June 1, 1998, Circle C's response due June 22,
1998 and the City's reply due on the earlier of July 7, 1998 or 15
days after receiving Circle C's brief. The Company has filed a
motion for summary judgement in the District Court subject to the
Texas Supreme Court's decision regarding the stay. If the Texas
Supreme Court denies the City's appeal or if the appeals court
affirms the District Court's denial of the City's plea to the
jurisdiction, the Company's motion for summary judgement will be
able to proceed.
The City's WQPZ Action
On January 9, 1998, the City filed a lawsuit (the "Travis
County Suit") in the Travis County District Court against 14 water
quality zones and their owners, including the Barton Creek WQPZ.
The City challenges the constitutionally of the legislation
authorizing the creation of water quality zones. The Attorney
General of Texas has agreed to intervene in the Travis County suit
and the Circle C WPQZ litigation above, to defend the legislation.
The City filed a motion for partial summary judgement against one
defendant and against the State of Texas. All defendant parties have
filed motions summary judgement. A summary judgement hearing is set
for June 8, 1998, with briefs being due May 27, 1998.
Other Matters
During February 1997, FMPO filed a petition for declaratory
judgement against Phoenix Holding Ltd. ("Phoenix") in order to
secure its ownership of approximately $25 million of MUD
reimbursements that pertain to existing infrastructure that serves
the Circle C development. Phoenix filed a counter claim against
Circle C in June 1997. On February 20, 1998 the District Court
granted the Company's motion for summary judgement on the primary
case and Phoenix dismissed its counterclaims with prejudice, but
reserved the right to appeal the summary judgement of the primary
case. On April 10, 1998, Phoenix appealed the summary judgement on
the primary case.
Austin's Continuing Efforts to Restrict and Redirect Growth
Although the Company expects a favorable result in the Circle C
litigation confirming the validity of the Circle C WQPZ (see above),
the Company expects the City may continue to assert claims that it
has regulatory jurisdiction over development within the Circle C
WQPZ and that additional litigation may be necessary to preserve
development entitlements. In March 1998, one of Austin's largest
employers, Motorola Inc., contracted to purchase approximately 167
acres of the Company's commercial land located in the Circle C WQPZ
for development of a campus facility bringing thousands of jobs to
the Circle C community. Even though not required, Motorola agreed to
develop its campus facility in strict accordance with the City's
regulations, including the SOS Ordinance. Certain City
representatives publically asserted zoning and development
authority over Motorola's selected site and indicated that Motorola
would not receive the City development and zoning approvals that the
City asserts are needed to develop the campus project even if all
ordinance requirements would be fully satisfied. After meetings with
City representatives and members of the SOS Alliance (a special
interest group), Motorola elected to terminate its contract with the
Company. As a consequence, the Company lost a significant sale.
Austin recently elected a council strongly opposed to development in
the southwest sector of Austin and the Company anticipates that in
the future, the City will use similar tactics to those is used in
the Motorola incident to restrict growth in the southwest corridor.
For example, the City recently announced its "Smart Growth" program
designed to direct growth away from the southwest sector of the City
towards the "Desired Development Zone," an area located generally in
the northern and eastern sections of Austin. Consistent with its
Smart Growth program, in March 1998, the City announced and received
voter approvals of a proposed bond sale to raise funds to acquire
land in the southwest corridor, which it refers to as the "Barton
Creek Zone," for the purported purpose of protecting the City's
drinking water supply. The Circle C project is within the Barton
Creek Zone. The Company anticipates that the City will continue its
efforts to impose development regulations limiting development in an
effort to reduce the value of land it has targeted to acquire for
the Barton Creek Zone. As it has been compelled to do during the
last several years, the Company anticipates having to continue to be
involved in litigation to protect its entitlements and maximize the
developability and value of its properties. The Company anticipates
that it will continue to successfully develop and market its
properties during the pendency of its disputes with the City of
Austin.
Item 6. Exhibits and Reports on Form 8-K.
(a) The exhibits to this report are listed in the Exhibit
Index appearing on page E-1 hereof.
(b) One Current Report on Form 8-K was filed by the
registrant reporting an event under Item 5 on March 3, 1998 during
the period covered by this Quarterly Report on Form 10-Q.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
FM PROPERTIES INC.
By: /s/ C. Donald Whitmire, Jr.
---------------------------
C. Donald Whitmire, Jr.
Vice President & Controller
(authorized signatory and
Principal Accounting Officer)
Date: May 13, 1998
FM PROPERTIES INC.
EXHIBIT INDEX
Exhibit
Number
3.1 Amended and Restated Certificate of Incorporation of the
Company. Incorporated by reference to Exhibit 3.1 to the Company's
1992 Form 10-K.
3.2 By-laws of the Company, as amended. Incorporated by
reference to Exhibit 3.2 to the Company's 1992 Form 10-K.
4.1 The Company's Certificate of Designations of Series A
Participating Cumulative Preferred Stock. Incorporated by reference
to Exhibit 4.1 to the Company's 1992 Form 10-K.
4.2 Rights Agreement dated as of May 28, 1992 between the
Company and Mellon Securities Trust Company, as Rights Agent.
Incorporated by reference to Exhibit 4.2 to the Company's 1992
Form 10-K.
4.3 Amendment No. 1 to Rights Agreement dated as of April 21,
1997 between the Company and the Rights Agent. Incorporated by
reference to Exhibit 4 to the Company's Current Report on Form 8-K
dated April 21, 1997.
4.4 Amended, Restated and Consolidated Credit Agreement dated
as of December 15, 1997 among the Partnership, Circle C Land Corp.,
certain banks, and The Chase Manhattan Bank, as Administrative Agent
and Document Agent. Incorporated by reference to Exhibit 4.4 to the
Company's 1997 Form 10-K.
10.1 Second Amended and Restated Agreement of General Partnership of FM
Properties Operating Co. dated as of December 15, 1997 between the
Company and FMPO L.L.C. Incorporated by reference to Exhibit 10.1
to the Company's 1997 Form 10-K.
10.2 Amended and Restated Services Agreement, dated as of December 23,
1997 between FM Services Company and the Company. Incorporated by
reference to Exhibit 10.2 to the Company's 1997 Form 10-K.
10.3 Joint Venture Agreement between Freeport-McMoRan Resource
Partners, Limited Partnership and the Partnership, dated June 11,
1992. Incorporated by reference to Exhibit 10.3 to the Company's
1992 Form 10-K.
10.4 Development and Management Agreement dated and effective
as of June 1, 1991 by and between Longhorn Development Company and
Precept Properties, Inc. (the "Precept Properties Agreement").
Incorporated by reference to Exhibit 10.8 to the Company's 1992 Form
10-K.
10.5 Assignment dated June 11, 1992 of the Precept Properties Agreement by
and among FTX (successor by merger to FMI Credit Corporation, as
successor by merger to Longhorn Development Company), the Partnership
and Precept Properties Inc. Incorporated by reference to Exhibit
10.9 to the Company's 1992 Form 10-K.
10.6 FMPO Guarantee Agreement dated as of December 15, 1997 by the
Company. Incorporated by reference to Exhibit 10.6 to the Company's
1997 Form 10-K.
10.7 Amended and Restated IGL Guarantee Agreement dated as of
December 22, 1997 by IMC Global Inc. Incorporated by reference to
Exhibit 10.7 to the Company's 1997 Form 10-K.
Executive Compensation Plans and Arrangements (Exhibits 10.8 through
10.10)
10.8 The Company's Performance Incentive Awards Program, as
amended. Incorporated by reference to Exhibit 10.21 to the FMPO
Annual Report on Form 10-K for the fiscal year ended December 31,
1994.
10.9 FMPO Stock Option Plan, as amended. Incorporated by
reference to Exhibit 10.9 to the Company's 1997 Form 10-K.
10.10 FMPO Stock Option Plan for Non-Employee Directors, as
amended. Incorporated by reference to Exhibit 10.10 to the
Company's 1997 Form 10-K.
15.1 Letter dated April 21, 1998 from Arthur Andersen LLP
regarding unaudited interim financial statement.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
27.3 Restated Financial Data Schedule.
Exhibit 15.1
April 21, 1998
FM Properties Inc.
1615 Poydras St.
New Orleans, LA 70112
Gentlemen:
We are aware that FM Properties Inc. has incorporated by
reference in its Registration Statements (File Nos. 33-
78798 and 333-31059) its Form 10-Q for the quarter ended
March 31, 1998, which includes our report dated April
21, 1998 covering the unaudited interim financial
information contained therein. Pursuant to Regulation C
of the Securities Act of 1933 (the Act), this report is
not considered a part of the registration statements
prepared or certified by our firm or a report prepared
or certified by our firm within the meaning of Sections
7 and 11 of the Act.
Very truly yours,
Arthur Andersen LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from FM
Properties Inc. financial statements at March 31,1998 and the three months then
ended, and is qualified in its entirety by reference to such statements. The
earning per share (EPS) data shown was prepared in accordance with Statement of
Financial Accounting Standard No.128 "Earning Per Share," basic and diluted EPS
have been entered in place of primary and fully-diluted, respectively.
</LEGEND>
<CIK> 0000885508
<NAME> FM PROPERTIES INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 2,435
<SECURITIES> 0
<RECEIVABLES> 929
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,072
<PP&E> 105,209
<DEPRECIATION> 60
<TOTAL-ASSETS> 114,258
<CURRENT-LIABILITIES> 7,624
<BONDS> 35,000
0
0
<COMMON> 143
<OTHER-SE> 65,581
<TOTAL-LIABILITY-AND-EQUITY> 114,258
<SALES> 2,655
<TOTAL-REVENUES> 2,655
<CGS> 1,648
<TOTAL-COSTS> 1,648
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 507
<INCOME-PRETAX> (883)
<INCOME-TAX> 0
<INCOME-CONTINUING> (883)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (883)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FM Properties Inc. adopted Statement of Financial Accounting Standards No.128,
"Earnings Per Share," (SFAS 128) in the fourth quarter of 1997 and restated
prior years' earnings per share (EPS) as required by SFAS 128. Presented below
are the restated EPS amounts for the 3-month period ended March 31,1997 the
6-month period ended June 30, 1997 and the 9-month period ended September 30,
1997. Basic and diluted EPS have been entered in place of primary and fully-
diluted,respectively. In addition, the amounts below restate FM Properties
interim results for 1997 using consolidation accounting which was adopted during
the fourth quarter of 1997. Interim results had previously been presented using
the equity method of accounting.
</LEGEND>
<RESTATED>
<CIK> 0000885508
<NAME> FM PROPERTIES INC.
<MULTIPLIER> 1000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 6,403 2,671 3,944
<SECURITIES> 0 0 0
<RECEIVABLES> 4,397 2,248 2,307
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 11,614 5,651 6,909
<PP&E> 109,530 107,512 103,968
<DEPRECIATION> 682 705 32
<TOTAL-ASSETS> 127,837 119,510 120,264
<CURRENT-LIABILITIES> 58,188 48,114 45,403
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 143 143 143
<OTHER-SE> 61,427 63,171 66,629
<TOTAL-LIABILITY-AND-EQUITY> 127,837 119,510 120,264
<SALES> 15,070 20,261 24,298
<TOTAL-REVENUES> 15,070 20,261 24,298
<CGS> 11,783 14,458 18,568
<TOTAL-COSTS> 11,783 14,458 18,568
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 536 1,061 1,608
<INCOME-PRETAX> 1,976 3,944 7,405
<INCOME-TAX> 0 220 220
<INCOME-CONTINUING> 1,972 3,716 7,170
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 1,972 3,716 7,170
<EPS-PRIMARY> .14 .26 .50
<EPS-DILUTED> .14 .26 .50
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
FM Properties Inc. adopted Statement of Financial Accounting Standards
No.128, "Earning Per Share" (SFAS 128) in the fourth quarter of 1997 and
restated prior years' earning per share (EPS) as required by SFAS 128.
Presented below are the restated EPS amounts for the 6-month period ended June
30, 1996, the 9-month period ended September 30, 1996 and the year ended
December 31, 1996. Basic and diluted EPS have been entered in place of primary
and fully diluted, respectively. The interim results below have been restate
using the equity method of acconting which FM Properties Inc. adopted in the
fourth quarter of 1996. Results prior to the fourth quarter of 1996 had been
reported under the consolidation accounting method.
</LEGEND>
<RESTATED>
<CIK> 0000885508
<NAME> FM PROPERTIES INC
<MULTIPLIER> 1000
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> JUN-30-1996 SEP-30-1996 DEC-31-1996
<CASH> 0 0 0
<SECURITIES> 0 0 0
<RECEIVABLES> 0 0 0
<ALLOWANCES> 0 0 0
<INVENTORY> 0 0 0
<CURRENT-ASSETS> 2,684 4,886 4,930
<PP&E> 0 0 0
<DEPRECIATION> 0 0 0
<TOTAL-ASSETS> 60,515 61,992 60,985
<CURRENT-LIABILITIES> 0 0 0
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 143 143 143
<OTHER-SE> 58,986 60,446 59,456
<TOTAL-LIABILITY-AND-EQUITY> 60,515 61,992 60,985
<SALES> 0 0 0
<TOTAL-REVENUES> 0 0 0
<CGS> 0 0 0
<TOTAL-COSTS> 0 0 0
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> (394) 540 (450)
<INCOME-TAX> 0 (526) (526)
<INCOME-CONTINUING> (394) 1,066 76
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> (394) 1,066 76
<EPS-PRIMARY> (.03) .07 .01
<EPS-DILUTED> (.03) .07 .01
</TABLE>
