Item 1. Business
OVERVIEW
FM Properties Inc., a Delaware corporation ("FMPO" or the "Company"), was organized in March 1992 and operates through FM Properties Operating Co., a Delaware general partnership (the "Partnership"). Until December 1997 FMPO owned a 99.8 percent general partnership interest and Freeport-McMoRan Inc., which also served as the Partnership's Managing General Partner ("FTX"), owned a 0.2 percent general partnership. In December 1997 the Company acquired all of FTX's interest in the Partnership (see "Recent Developments" below). The Partnership was formed to hold, operate and develop substantially all domestic oil and gas properties of, and substantially all domestic real estate then held for development by, FTX and certain of its subsidiaries. The Partnership also assumed substantially all of the liabilities related to such assets, including approximately $500 million of indebtedness, substantially all of which was guaranteed by FTX. The Partnership subsequently has sold all of its oil and gas properties and currently is engaged in the development and marketing of real estate in the Austin, Dallas, Houston and San Antonio, Texas areas.
FMPO is engaged in the acquisition, development and sale of commercial and residential real estate properties, all of which are located in the state of Texas. FMPO's principal real estate holdings in the Austin, Texas area currently consist of approximately 3,000 acres of undeveloped residential, multi-family 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 in Austin, 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 in Austin.
FMPO also owns or has interests in approximately 300 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 that are being actively marketed. See Item 2.
Item 2. Properties
The following table provides information on the Company's holdings, including its existing inventory of finished lots and acreage to be developed. The acreage to be developed in the future is broken down into anticipated uses for single family lots, multifamily units and commercial development based upon the Company's understanding of the properties' existing entitlements. However, there is no assurance that the undeveloped acreage will be so developed due to the nature of the approval and development process and market demand for a particular use. See Item 3, "Legal Proceedings," for more details.
Item 3.
Item 3. Legal Proceedings
SOS Ordinance Litigation
Prior to 1995, development of the Company's Austin area properties had been delayed because of disagreements with the City of Austin (the "City") over various ordinances. In 1995, a Texas district court ruled in favor of FMPO, declaring that a restrictive 1992 water quality ordinance enacted by public initiative (the "SOS Ordinance") was void and that the Company was entitled to develop its Barton Creek and Circle C properties based on ordinances that were in effect at the time of its initial development permit applications. The City appealed this decision, and in 1996 the Texas Court of Appeals overturned the favorable district court ruling that invalidated the SOS Ordinance, but upheld the district court's favorable ruling regarding certain grandfathered rights for previously platted land. A significant portion of the Barton Creek and Circle C properties was previously platted and met the requirements to benefit from these grandfathered rights. An application for Writ of Error was filed with the Texas Supreme Court in January, 1997. The Writ of Error was accepted by the Texas Supreme Court and oral argument was heard on November 3, 1997. The Texas Supreme Court has not yet issued its decision. An unfavorable final judgment could have an adverse effect on any portion of the Company's property which cannot be
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developed under grandfathered entitlements (see "Legislative Developments," below) or which has not been removed from the jurisdiction of the City pursuant to the water quality protection zones at Barton Creek (the "Barton Creek WQPZ") and at Circle C (the "Circle C WQPZ," see below).
Southwest Travis County Water District Litigation
The Company's property in the Circle C development, comprising approximately 1,300 acres of undeveloped commercial and multi-family property, is located in the Southwest Travis County Water District (the "STCWD"). The STCWD is a conservation and reclamation district created by the Texas Legislature in 1995 for the purpose of conserving water resources and with authority to establish a water pollution control and abatement program meeting state criteria. Development within the STCWD is required to meet the STCWD's criteria and is exempt from municipal regulation. In October 1997, a Texas district court rendered final judgment that the legislation creating the STCWD was unconstitutional. The STCWD has filed an appeal, but no decision has yet been issued. The Company does not expect the validity of the STCWD will be upheld on appeal and has implemented an alternative strategy of creating the Circle C WQPZ to maximize development potential of 553 acres of its Circle C property (see "Circle C WQPZ Litigation," below). The Company's strategy with respect to the balance of its Circle C property holdings (outside the Circle C WQPZ), approximately 700 acres, is to expedite reimbursement of $25 million in previously incurred reimbursement infrastructure costs from the City by not opposing the City's annexation of the 700 acres (see "Annexation Litigation," below).
Annexation Litigation
On December 19, 1997, the City enacted an ordinance purporting to annex all land lying within the STCWD. Prior to the City's enactment of its annexation ordinance, the Company created the Circle C WQPZ (see below). As a result, the Company's 553 acres located within the Circle C WQPZ, which comprises all of the Company's land in the Circle C project other than the land within the Circle C municipal utility districts (the "MUDs"), was not eligible for annexation. Annexation subjects that portion of the Company's property located within the MUDs (approximately 700 acres), which has been annexed by the City, to the City's zoning and development regulations. In connection with annexation, the City has imposed an interim zoning classification on the approximately 700 acres permitting only one residential unit per acre, which results in significantly less development yield than the Company previously anticipated. However, consistent with the Company's strategy, annexation of the Company's property located within the MUDs requires the City to assume all MUD debt and reimburse the Company, simultaneously with the annexation, for a significant portion of previously incurred costs of water, wastewater and drainage infrastructure which could result in reimbursement of these costs much earlier than the Company initially anticipated. These reimbursable costs are estimated to be approximately $25 million. Because the City failed to pay these costs on December 19, 1997, the Company filed suit against the City to compel reimbursement of these amounts. The suit was promptly set for trial but subsequently stayed pending resolution of suits brought by the MUDs and other third parties challenging the validity of the City's purported annexation. Certain of those underlying third-party challenges have now been resolved and the Company has filed a motion to lift the stay to permit trial to proceed. The motion is scheduled for hearing on April 16. Although the Company expects to ultimately receive payment from the City, the City may continue to resist payment.
Circle C WQPZ Litigation
The Company owns approximately 553 acres in the Circle C development outside the boundaries of any MUD. In order to permit development of this property, the Company filed a water quality protection zone covering its 553 acres (the "Circle C WQPZ"). Such water quality protection zones ("WQPZ") permit development of defined areas outside of municipalities if such development conforms to state-approved water quality standards under plans approved by the Texas Natural Resource Conservation Commission ("TNRCC"). The law also restricts adjoining municipalities from attempting to enforce land use or development ordinances inconsistent with the requirements of the WQPZ or annexing any portion of the WQPZ prior to the earlier of completion of 90 percent of infrastructure construction or 20 years after creation of the WQPZ. The creation of the Circle C WQPZ was intended to permit the Company to develop its 553 acres in accordance with the water quality standards required by the Circle C WQPZ rather than the requirements of the City, and to confirm that effect the Company initiated a lawsuit in Hays County in November 1997 seeking a declaratory judgment confirming the validity of the Circle C WQPZ and the invalidity of the City's attempt to annex land within the Circle C WQPZ. The City filed a motion to transfer venue from Hays County to Travis County and, in addition, argued that the Hays County District Court had no jurisdiction pending consideration of the Circle C WQPZ's water quality plan by the TNRCC.
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On December 18, 1997, the TNRCC approved the Circle C WQPZ's water quality plan. On January 12, 1998, the Hays County District Court denied the City's motion to transfer venue and all other requested relief. The Company has filed a motion for summary judgement in the Hays County litigation, which is scheduled to be heard on March 30, subject to the Texas Supreme Court's decision as to whether the City's interlocutory appeal of the District Court's denial of the City's plea to the jurisdiction abates the summary judgment hearing. A favorable result in this litigation, which the Company expects, would confirm that the City's attempt to annex the Company's 553 acres in the Circle C WQPZ was invalid and that development of the 553 acres is not subject to City development regulations. An unfavorable ruling, which is not expected, would mean that the Circle C WQPZ was invalid and that the 553 acres is annexed, and subject to the City zoning and other regulatory authority, which could diminish the development potential of this property in the same manner as the approximately 700 acres discussed above (see "Annexation Litigation").
Legislative Developments
In the most recent legislative session of the Texas State legislature, a bill to reorganize a state governmental agency inadvertently repealed the provisions of law that established grandfathered rights for land which was platted or in the permitting process. The Company, based on an opinion from counsel, has taken the position that under Texas law, previously vested rights for the Company's property holdings are not affected by the repeal of this statute. The City, however, does not recognize any grandfathered entitlements arising under the repealed law and, in response to the repeal, enacted an ordinance effective September 5, 1997, establishing interim regulations on land development. It is anticipated that the City will enact a final ordinance and may attempt to apply it to portions of the Company's Circle C and Lantana properties. Should the City take this position, the Company anticipates asserting and defending its grandfathered entitlements. In the event the City were to prevail, portions of the Company's property would be subject to the City's current restrictive ordinances and development potential would be significantly reduced. During the last three sessions of the Texas legislature, legislation has been enacted to provide landowners relief from overly-aggressive attempts by municipalities to regulate land development in an effort to prevent growth. Much of that past legislation has been enacted to address abusive or unauthorized municipal land use regulations of the type adopted by the City. The Company anticipates that during the next session of the Texas legislature, beginning in January 1999, the Texas legislature will once again review and address inappropriate municipal land use regulation designed to prevent growth and development.
Other Matters
During February 1997, FMPO filed a petition for declaratory judgment against Phoenix Holdings, Ltd. 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 judgment on the primary case and subsequently, Phoenix Holdings, Ltd. dismissed its counterclaims with prejudice, but reserved the right to appeal the summary judgment of the primary case.
On January 9, 1998, the City filed a lawsuit (the "Travis County Suit") in Travis County District Court against 14 water quality zones and their owners, including the Barton Creek WQPZ. The City challenges the constitutionality of the legislation authorizing the creation of water quality zones. This same issue is being litigated in the lawsuit initiated by the Company discussed under Circle C WQPZ Litigation, above. The Attorney General of Texas has agreed to intervene in both the Travis County Suit and the suit in the Circle C WQPZ Litigation above, to defend the legislation. Although not expected, a court decision that the legislation authorizing WQPZs is invalid would diminish and delay development of portions of the Barton Creek project and the Company's land located in the Circle C WQPZ.
In April 1997, the U.S. Department of Interior ("DOI") listed the Barton Springs Salamander as an endangered species after a federal court overturned a March 1997 decision by the DOI not to list the Barton Springs Salamander based on a conservation agreement between the State of Texas and federal agencies. The listing of the Barton Springs Salamander is not anticipated to affect the Company's Barton Creek and Lantana properties for several reasons, including the results of recent technical studies and the Company's U.S. Fish and Wildlife Service 10(a) permit obtained in 1995. The Company's Circle C properties could, however, be affected, although the extent of any impact cannot be determined at this time. Special interest groups have provided written notice of their intention to challenge the Company's
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10(a) permit and compliance with water quality regulations. The Company believes these challenges are meritless and will continue to protect its entitlements.
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. Recently, 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 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 Edwards Aquifer. 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.
The Company maintains liability insurance to cover some, but not all, potential liabilities normally incident to the ordinary course of its businesses as well as other insurance coverage customary in its business, with such coverage limits as management deems prudent.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Executive Officers of the Registrant
Certain information, as of March 2, 1998, regarding the executive officers of the Company is set forth in the following table and accompanying text.
Name Age Position or Office ---- --- ------------------ Richard C. Adkerson 51 Chairman of the Board and Chief Executive Officer
W. H. Armstrong, III 33 President, Chief Operating Officer and Chief Financial Officer
John G. Amato 54 General Counsel
Mr. Adkerson has served as Chairman of the Board of the Company since March 1992 and Chief Executive Officer of the Company since May 1996. He also serves as President, Chief Operating Officer and Chief Financial Officer of Freeport-McMoRan Copper & Gold Inc. ("FCX"), Vice Chairman of the Board of Freeport-McMoRan Sulphur Inc. ("FSC") and Co-Chairman of the Board and Chief Executive of McMoRan Oil & Gas Co. ("MOXY"). He was Chairman of the Board, President and Chief Executive
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Officer of the Company from March 1992 to May 1993 and from August 1995 to May 1996, and Chairman of the Board from May 1993 to August 1995. Mr. Adkerson served as Executive Vice President of FCX from July 1995 to April 1997 and as Senior Vice President of FCX from February 1994 to July 1995. He served as Vice Chairman of the Board of FTX from August 1995 until December 1997 and as Senior Vice President of FTX from May 1992 to August 1995.
Mr. Armstrong has been employed by FMPO since its inception in 1992. He has served as the Company's President and Chief Operating Officer since August 1996 and a Chief Financial Officer since May 1996. He served as Executive Vice President from August 1995 to August 1996. Previously, Mr. Armstrong was a member of the Finance and Business Development Group of FTX with responsibility for real estate activities.
Mr. Amato has served as General Counsel of FMPO since August 1995. He is also General Counsel of MOXY and FSC. Prior to August 1995, Mr. Amato served as General Counsel of FTX and FCX. Mr. Amato currently provides legal and business advisory services to FCX under a consulting arrangement.
PART II
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock trades on the Nasdaq National Market under the symbol FMPO. The following table sets forth, for the periods indicated, the range of high and low sales prices, as reported by Nasdaq.
The Company has not in the past and does not anticipate in the foreseeable future paying cash dividends on its common stock. The decision whether or not to pay dividends and in what amounts is solely within the discretion of the Company's board of directors. The Company's ability to pay dividends is restricted by the terms of its credit agreement.
As of March 23, 1998 there were 10,112 record holders of the Company common stock.
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Item 6.
Item 6. Selected Financial Data
The following table sets forth selected historical financial data for the Company for each of the five years in the period ended December 31, 1997. The historical financial information is derived from the audited financial statements of the Company and is not necessarily indicative of future results. The following data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations and Disclosures about Market Risks" and the Company's historical financial statements and notes thereto contained elsewhere in this Form 10-K.
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a. Prior to 1997, reflects the Company's investment in the Partnership under the equity basis of accounting. See discussion under "Overview" in Items 7 and 7A below and Note 1 to the financial statements.
b. Includes $115.0 million charge for a write-down of real estate assets.
Items 7. and 7A. Management's Discussion and Analysis of Financial Condition and Results of Operations and Disclosures about Market Risks
OVERVIEW
FMPO's most significant assets include approximately 3,000 acres of primarily undeveloped land in and around the Barton Creek Community located near Austin, Texas (the "City"), and approximately 1,300 acres of undeveloped commercial and multi-family property in the Circle C development located in Austin, Texas. FMPO is also engaged in the development and marketing of real estate in the Dallas, Houston and San Antonio, Texas areas.
On December 22, 1997 Freeport-McMoRan Inc. ("FTX") merged into IMC Global Inc. ("IGL") (the "Merger"). Prior to the Merger, FMPO operated through its 99.8 percent general partnership interest in FM Properties Operating Co., a Delaware general partnership (the "Partnership"). The remaining 0.2 percent general partnership interest was held by FTX, which also served as the Partnership's Managing General Partner. FMPO reflected its investment in the Partnership on the equity basis of accounting because of certain rights held by FTX as managing general partner regarding the Partnership's operations as long as it guaranteed any of the Partnership's debt. In connection with the Merger, FTX sold its 0.2 percent general partnership interest to FMPO and a subsidiary of FMPO for $100,000. FMPO also restructured and consolidated its existing debt in December 1997, extending its maturity until January 1, 2001 and providing for staged reductions in available credit. IGL became guarantor of this restructured debt in place of FTX. See "Capital Resources and Liquidity." As a result of FTX's sale of its interest, elimination of its rights as a partner and replacement of the FTX guarantee with the IGL guarantee, FMPO's financial statements reflect the Partnership's assets, liabilities and operating results under consolidation accounting effective January 1, 1997.
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RESULTS OF OPERATIONS
As noted above, FMPO operates through the Partnership and, prior to January 1, 1997, reflected the Partnership's results of operations using the equity method of accounting. Accordingly, the following discussion and analysis addresses the results of operations and the capital resources and liquidity of FMPO for 1997 and of the Partnership for prior years, collectively referred to as "the Company" hereafter.
During 1997 and 1996 the Company was able to capitalize on enhanced sales opportunities at its properties in the Austin area brought about by several positive legislative and judicial developments that occurred during 1995. Prior to late 1995, development of the Company's Austin area properties had been delayed principally because of disagreements with the City over ordinances governing development activities in the Barton Creek and Circle C areas. Summary operating results follow:
a. Includes a $3.1 million reimbursement of previously expensed infrastructure costs. b. Includes a $4.5 million gain from sale of oil and gas property interests. c. Includes a $2.6 million gain from a bankruptcy settlement with a customer.
Revenues from developed properties for 1997 consisted of $5.4 million from the sale of 146 acres of residential properties and $12.3 million from the sale of 198 single- family homesites. Revenues from undeveloped properties for 1997 represented the sale of 72 acres of commercial and multi-family land. Revenues from developed properties during 1996 included the sale of the Barton Creek Country Club and Conference Resort for $25.0 million and the sale of 393 single-family homesites located in the Austin, Houston and San Antonio areas for $19.0 million. Revenues from undeveloped properties during 1996 included: two separate sales of undeveloped tracts within the Barton Creek development totaling 105 acres for $4.8 million, which were the first sales under the Water Quality Protection Zone legislation enacted in late 1995; the sale of several undeveloped, commercial and multi-family tracts in the Dallas area totaling 79 acres for $12.6 million; and the sale of 535 other undeveloped acres in the Austin, Dallas and San Antonio areas for $17.8 million.
General and administrative expenses were $2.8 million in 1997, compared with $2.5 million in 1996 and $4.2 million in 1995. The reduction in 1996 reflects the benefit of steps taken in the third quarter of 1995 to reduce costs. These actions, which included reducing personnel, legal and consulting costs, and the costs of certain management services (see Note 46 to the financial statements), were taken, to a significant extent, in response to the reduced permitting, engineering and administrative burdens resulting from the favorable legislative and judicial developments during 1995.
In September 1997, the Company sold several working interests and numerous overriding royalty interests in oil and gas properties which have been held since its formation to McMoRan Oil & Gas Co. ("MOXY") and Phosphate Resource Partners Limited Partnership ("PLP"), formerly Freeport-McMoRan Resource Partners, Limited Partnership, for $4.5 million cash, resulting in a gain of $4.5 million. MOXY is, and PLP was prior to the Merger, an affiliate of FMPO because of FTX's former role as administrative managing general partner of PLP and because of common management and a common director shared with MOXY. These interests, which had no cost basis and included all of the Company's remaining oil and gas interests, remained with the Company after the sale of substantially all of its oil and gas properties in 1993. The gain is reflected in Other Income, and proceeds were used to reduce debt. Other Income also includes royalty income generated by these properties totaling $0.8 million, $1.4 million and $0.6 million for 1997 (prior to the sale), 1996 and 1995, respectively.
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Interest expense incurred during 1997 was lower than in 1996 as a result of reduced debt levels. Interest expense in 1996 increased from 1995 because of reduced capitalized interest, partially offset by lower average debt levels and interest rates.
During 1996, FMPO agreed to sell the remaining assets of Circle C for $34.0 million. The Company received a $1.0 million non- refundable cash deposit, with the balance of the purchase price due in January 1997. However, the investor group was unable to complete the sale and the agreement expired. The cash deposit was recorded as a reduction in the related carrying value of these properties. The Company has no further obligation to the investor group and is proceeding with developing and marketing the Circle C commercial and multi-family properties.
The Company is evaluating the development of income producing properties on certain of its tracts and continues to consider opportunities to enter into significant transactions involving its properties. As a result, and because of numerous other factors inherent in the Company's business activities as described herein, past operating results are not necessarily indicative of future trends in profitability.
CAPITAL RESOURCES AND LIQUIDITY
The Company's increased sales activity and limited development during 1997 and 1996 generated significantly higher operating cash flows which enabled it to reduce its debt by a total of $21.2 million during 1997, to $37.1 million at December 31, 1997. Additionally, in connection with the Merger, FMPO amended it's existing credit agreements to consolidate these facilities, extend the maturity to January 1, 2001 and allow for the sale of FTX's ownership interest. IGL agreed to guarantee the restructured credit agreements in place of FTX for a fee (see Note 4 to the financial statements). The new credit agreement provides for a revolving credit facility and a term loan with initial maximum available balances of $35 million and $15 million, respectively. The aggregate available credit of $50 million is available through December 31, 1998 and is reduced to $35 million thereafter through December 31, 1999 and $15 million through December 31, 2000. This facility bears interest at rates tied to the lending bank's prime rate or LIBOR at FMPO's option. As a result of these events, FMPO's autonomy over its operations and short-term financial flexibility have substantially increased, a definitive timetable for the complete elimination of the debt guarantee has been established, restrictions on the Company's business activities have been reduced, and FMPO is better able to pursue its objective of establishing a long-term, self-supporting capital structure.
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 capital 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 agreement, could impede FMPO's ability to develop its existing properties and expand its business. As a result, FMPO has pursued 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 for such purposes. See "Proposed Transaction with Olympus", above. 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 new credit agreement.
Net cash provided by operating activities totaled $29.5 million in 1997, $68.7 million in 1996 and $47.5 million in 1995. The 1997 period included the $4.5 million gain on the sale of oil and gas properties to MOXY and PLP and $3.1 million for the reimbursement of previously expensed infrastructure costs, while the 1996 period included $25.0 million from the sale of the Barton Creek County Club and Conference Resort and 1995 benefited from the sale of Circle C's single-family residential real estate properties and related amenities for $15.8 million. Net cash used in investing activities totaled $9.5 million in 1997, $5.9 million in 1996 and $35.2 million in 1995, all of which represent real estate capital
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expenditures except for a $9.7 million final payment in 1995 to working and royalty interest owners out of proceeds from a natural gas contract settlement related to oil and gas properties previously sold. Increased 1997 expenditures resulted from increased development requirements for the properties currently being marketed and a $1.5 million acquisition of Austin-area land, while the decrease in 1996 expenditures from 1995 resulted from reduced development requirements brought about by the positive legislative and judicial events that occurred during 1995 and the Company's success in securing land use and development entitlements, marketing and selling undeveloped tracts to sub-developers. Financing activities consisted of a net reduction in borrowings totaling $21.2 million in 1997, $63.0 million in 1996 and $11.2 million in 1995. As of December 31, 1997, $10.9 million of additional borrowings were available under the restructured credit facility. Capital expenditures for 1998 are expected to be approximately $28 million, subject to resolution of regulatory issues impacting the Company's Austin-area properties. Such expenditures will be funded by working capital and borrowings under the new credit agreement.
Refer to Item 3., "Legal Proceedings," for a discussion of various litigation and regulatory matters affecting FMPO.
FMPO has assessed its year 2000 information systems cost issues and believes its current plans for system upgrades will adequately address these issues at no material cost.
DISCLOSURES ABOUT MARKET RISKS
FMPO's revenues are derived from the management, development and sale of its real estate holdings. FMPO's net income can vary significantly with fluctuations in the market prices of real estate in these areas, which are influenced by numerous factors, including interest rate levels. Changes in interest rates affect FMPO's interest expense on its debt. At the present time FMPO does not hedge its exposure to changes in interest rates. Based on projected 1998 debt levels, a change of 100 basis points in applicable annual interest rates would have an approximate $0.4 million impact on net income.
ENVIRONMENTAL
Increasing emphasis on environmental matters is likely to result in additional costs, which will be charged against the Company's operations in future periods when such costs can be estimated. Present and future environmental laws and regulations applicable to the Company's operations may require substantial capital expenditures, could adversely affect the development of its real estate interests, or may affect its operations in other ways that cannot be accurately predicted at this time.
CAUTIONARY STATEMENT
Management's discussion and analysis of financial condition and results of operations contains certain forward-looking statements regarding FMPO's financial position and liquidity, strategic plans, future financing plans, development and capital expenditures and other plans and objectives of the Company's management for future operations and activities. Important factors that might cause future results to differ from these projections are described in more detail under Item 1 of this Form 10-K.
____________________
The results of operations reported and summarized above are not necessarily indicative of future operating results.
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Item 8.
Item 8. Financial Statements and Supplementary Data
REPORT OF MANAGEMENT
FM Properties Inc. (FMPO) is responsible for the preparation of the financial statements and all other information contained in this Annual Report. The financial statements have been prepared in conformity with generally accepted accounting principles and include amounts that are based on management's informed judgments and estimates.
FMPO maintains a system of internal accounting controls designed to provide reasonable assurance at reasonable costs that assets are safeguarded against loss or unauthorized use, that transactions are executed in accordance with management's authorization and that transactions are recorded and summarized properly. The system is tested and evaluated on a regular basis by FMPO's internal auditors, Price Waterhouse LLP. In accordance with generally accepted auditing standards, FMPO's independent public accountants, Arthur Andersen LLP, have developed an overall understanding of our accounting and financial controls and have conducted other tests as they consider necessary to support their opinion on the financial statements.
The Board of Directors, through its Audit Committee composed solely of non-employee directors, is responsible for overseeing the integrity and reliability of FMPO's accounting and financial reporting practices and the effectiveness of its system of internal controls. Arthur Andersen LLP and Price Waterhouse LLP meet regularly with, and have access to, this committee, with and without management present, to discuss the results of their audit work.
Richard C. Adkerson W. H. Armstrong, III Chairman of the Board President, Chief Operating Officer and Chief Executive Officer and Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF FM PROPERTIES INC.:
We have audited the accompanying balance sheets of FM Properties Inc. (a Delaware Corporation) as of December 31, 1997 and 1996, and the related statements of operations, cash flow and changes in stockholders' equity for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinioon, the financial statements referred to above present fairly, in all material respects, the financial position of FM Properties Inc. as of December 31, 1997 and 1996 and the results of its operations and its cash flow for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
San Antonio, Texas January 20, 1998 (except for the matters discussed in Note 10, as to which the date is March 10, 1998)
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The accompanying notes are an integral part of these financial statements.
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The accompanying notes are an integral part of these financial statements.
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The accompanying notes are an integral part of these financial statements.
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The accompanying notes are an integral part of these financial statements.
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FM PROPERTIES INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting. The real estate development and marketing operations of FM Properties Inc. (FMPO or the Company) are conducted in Austin and other urban areas of Texas through its investment in FM Properties Operating Co., a Delaware general partnership (the Partnership). Prior to December 22, 1997, FMPO owned a 99.8 percent general partnership interest in the Partnership and Freeport-McMoRan Inc. (FTX), FMPO's former parent, owned the remaining 0.2 percent general partnership interest and served as Managing General Partner. FTX had certain rights regarding the Partnership's operations as long as it guaranteed any of the Partnership's debt (Note 2). Because of FTX's rights, FMPO reflected its investment in the Partnership under the equity basis of accounting.
On December 22, 1997 FTX merged into IMC Global Inc. (IGL) (the Merger). In connection with the Merger FTX sold its 0.2 percent general partnership interest to FMPO and a subsidiary of FMPO for $100,000. FMPO also restructured and consolidated its existing debt in December 1997, extending its maturity until January 1, 2001 and providing for staged reductions in available credit. IGL became guarantor of this restructured debt in place of FTX. As a result of FTX's sale of its interest and the replacement of the FTX guarantee with the IGL guarantee, the accompanying financial statements and related footnotes reflect the Partnership's financial position and results of operations under consolidation accounting effective January 1, 1997 and under the equity basis of accounting prior to 1997.
Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. The more significant estimates include valuation allowances for deferred tax assets, estimates of future cash flows from development and sale of real estate properties, and useful lives for depreciation and amortization. Actual results could differ from those estimates.
Cash and Cash Equivalents. Highly liquid investments purchased with a maturity of three months or less are considered cash equivalents.
Financial Instruments. The carrying amounts of property sales and other receivables, other current assets, accounts payable and long- term borrowings reported in the balance sheet approximate fair value.
Earnings Per Share. In February 1997, the Financial Accounting Standards Board 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.
Net income per share without dilution was calculated by dividing net income applicable to common stock by the weighted- average number of common shares outstanding during the year. Net income per share of common stock with dilution was calculated by dividing net income applicable to common stock by the weighted- average number of common shares outstanding during the year plus dilutive stock options, which represented approximately 229,000 shares in 1997, 104,000 shares in 1996 and 26,000 shares in 1995.
Options to purchase common stock that were outstanding during the years presented but were not included in the computation of diluted EPS because the options' exercise prices were greater than the average market price of the common shares totaled 235,000 options at an average exercise price of $5.23 per share in 1997, 300,000 options at an average of $4.61 per share in 1996 and 225,000 options at an average of $5.25 per share in 1995.
Investment in Real Estate. Real estate assets are stated at the lower of cost or net realizable value and include acreage, development, construction and carrying costs, and other related costs through the development stage. Capitalized costs are assigned to individual components of a project, as practicable, whereas interest and other common costs are allocated based on the relative fair value of individual land parcels. Carrying costs are capitalized on properties currently under active development. Revenues are
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recognized when the risks and rewards of ownership are transferred to the buyer and the consideration received can be reasonably determined.
SFAS 121, "Accounting for the Impairment of Long-Lived Assets," requires a reduction of the carrying amount of long-lived assets to fair value when events indicate that the carrying amount may not be recoverable. Measurement of the impairment loss is based on the fair value of the asset. Generally, the Partnership determines fair value using valuation techniques such as the expected future sales proceeds from properties. Since the adoption of SFAS 121 effective January 1, 1995, no impairment losses have been recognized.
2. INVESTMENT IN THE PARTNERSHIP
FMPO has no significant operations or sources of funds other than its interest in the Partnership. Therefore, the following financial statements of the Partnership for the periods prior to 1997 should be read in conjunction with FMPO's financial statements.
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The Company's investment in real estate includes approximately 4,500 acres of land located in Austin, Dallas, Houston and San Antonio. Most significant among these are the Barton Creek Community, located near Austin, Texas, which includes approximately 3,000 acres of primarily undeveloped land adjacent to the Barton Creek Resort, and the approximately 1,300 acres of undeveloped commercial and multi-family property, which is located within the Circle C development in Austin, Texas. The real estate interests of the Company in Dallas, Houston and San Antonio, Texas are managed by professional real estate developers. Under the terms of these agreements, the operating expenses and development costs, net of revenues, are funded by the Company. The developers are entitled to a management fee and a 25 percent interest in the net profits, after recovery by the Company of its investments and a stated return, resulting from the sale of the managed properties. As of December 31, 1997 no amounts have been or are expected to be paid in connection with these agreement provisions.
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In 1995, Circle C sold its single-family residential real estate properties and related amenities for $15.8 million. During 1996, FMPO agreed to sell the remaining assets of Circle C for $34.0 million and received a $1.0 million non-refundable cash deposit, with the balance of the purchase price due in January 1997. However, the investor group was unable to complete the sale and the agreement expired. FMPO has no further obligation to the investor group and is proceeding with developing and marketing the Circle C commercial and multi-family properties. The cash deposit was recorded as a reduction in the related carrying value of these properties.
The Barton Creek Resort, which included a conference center, a 147-room hotel and related facilities and three golf courses, was sold during 1996 for $25.0 million. The Partnership realized no gain or loss on the transaction and proceeds were used to reduce debt.
Various regulatory matters and litigation involving FMPO's development of its Austin properties is summarized below.
SOS Ordinance Litigation - Prior to 1995, development of the Company's Austin area properties had been delayed because of disagreements with the City over various ordinances. In 1995, a Texas district court ruled in favor of FMPO, declaring that a restrictive 1992 water quality ordinance enacted by public initiative (the "SOS Ordinance") was void and that the Company was entitled to develop its Barton Creek and Circle C properties based on ordinances that were in effect at the time of its initial development permit applications. The City appealed this decision, and in 1996 the Texas Court of Appeals overturned the favorable district court ruling that invalidated the SOS Ordinance, but upheld the district court's favorable ruling regarding certain grandfathered rights for previously platted land. A significant portion of the Barton Creek and Circle C properties was previously platted and met the requirements to benefit from these grandfathered rights. An application for Writ of Error was filed with the Texas Supreme Court in January, 1997. The Writ of Error was accepted by the Texas Supreme Court and oral argument was heard on November 3, 1997. The Texas Supreme Court has not yet issued its decision. An unfavorable final judgment could have an adverse effect on any portion of the Company's property which cannot be developed under grandfathered entitlements (see "Legislative Developments," below) or which has not been removed from the jurisdiction of the City pursuant to the water quality protection zones at Barton Creek (the "Barton Creek WQPZ") and at Circle C (the "Circle C WQPZ," see below).
Southwest Travis County Water District Litigation - The Company's property in the Circle C development, comprising approximately 1,300 acres of undeveloped commercial and multi-family property, is located in the Southwest Travis County Water District (the "STCWD"). The STCWD is a conservation and reclamation district created by the Texas Legislature in 1995 for the purpose of conserving water resources and with authority to establish a water pollution control and abatement program meeting state criteria. Development within the STCWD is required to meet the STCWD's criteria and is exempt from municipal regulation. In October 1997, a Texas district court rendered final judgment that the legislation creating the STCWD was unconstitutional. The STCWD has filed an appeal, but no decision has yet been issued. The Company does not expect the validity of the STCWD will be upheld on appeal and has implemented an alternative strategy of creating the Circle C WQPZ to maximize development potential of 553 acres of its Circle C property (see "Circle C WQPZ Litigation," below). The Company's strategy with respect to the balance of its Circle C property holdings (outside the Circle C WQPZ), approximately 700 acres, is to expedite reimbursement of $25 million in previously incurred reimbursement infrastructure costs from the City by not opposing the City's annexation of the 700 acres (see "Annexation Litigation," below).
Annexation Litigation - On December 19, 1997, the City enacted an ordinance purporting to annex all land lying within the STCWD. Prior to the City's enactment of its annexation ordinance, the Company created the Circle C WQPZ (see below). As a result, the Company's 553 acres located within the Circle C WQPZ, which comprises all of the Company's land in the Circle C project other than the land within the Circle C municipal utility districts (the "MUDs"), was not eligible for annexation. Annexation subjects that portion of the Company's property located within the MUDs (approximately 700 acres), which has been annexed by the City, to the City's zoning and development regulations. In connection with annexation, the City has imposed an interim zoning classification on the approximately 700 acres permitting only one residential unit per acre, which results in significantly less development yield than the Company previously anticipated. However, consistent with the Company's strategy, annexation of the Company's property
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located within the MUDs requires the City to assume all MUD debt and reimburse the Company, simultaneously with the annexation, for a significant portion of previously incurred costs of water, wastewater and drainage infrastructure which could result in reimbursement of these costs much earlier than the Company initially anticipated. These reimbursable costs are estimated to be approximately $25 million. Because the City failed to pay these costs on December 19, 1997, the Partnership filed suit against the City to compel reimbursement of these amounts. The suit was promptly set for trial but subsequently stayed pending resolution of suits brought by the MUDs and other third parties challenging the validity of the City's purported annexation. Certain of those underlying third-party challenges have now been resolved and the Company has filed a motion to lift the stay to permit trial to proceed. The motion is scheduled for hearing on April 16. Although the Company expects to ultimately receive payment from the City, the City may continue to resist payment.
Circle C WQPZ Litigation -The Company owns approximately 553 acres in the Circle C development outside the boundaries of any municipal utility district. In order to permit development of this property, the Company filed a water quality protection zone covering its 553 acres (the "Circle C WQPZ"). Such water quality protection zones ("WQPZ") permit development of defined areas outside of municipalities if such development conforms to state-approved water quality standards under plans approved by the Texas Natural Resource Conservation Commission ("TNRCC"). The law also restricts adjoining municipalities from attempting to enforce land use or development ordinances inconsistent with the requirements of the WQPZ or annexing any portion of the WQPZ prior to the earlier of completion of 90 percent of infrastructure construction or 20 years after creation of the WQPZ. The creation of the Circle C WQPZ was intended to permit the Company to develop its 553 acres in accordance with the water quality standards required by the Circle C WQPZ rather than the requirements of the City, and to confirm that effect the Company initiated a lawsuit in Hays County in November 1997, seeking a declaratory judgment confirming the validity of the Circle C WQPZ and the invalidity of the City's attempt to annex land within the Circle C WQPZ. The City filed a motion to transfer venue from Hays County to Travis County and, in addition, argued that the Hays County District Court had no jurisdiction pending consideration of the Circle C WQPZ's water quality plan by the TNRCC. On December 18, 1997, the TNRCC approved the Circle C WQPZ's water quality plan. On January 12, 1998, the Hays County District Court denied the City's motion to transfer venue and all other requested relief. The Company has filed a motion for summary judgement in the Hays County litigation, which is scheduled to be heard on March 30, subject to the Texas Supreme Court's decision as to whether the City's interlocutory appeal of the District Court's denial of the City's plea to the jurisdiction abates the summary judgment hearing. A favorable result in this litigation, which the Company expects, would confirm that the City's attempt to annex the Company's 553 acres in the Circle C WQPZ was invalid and that development of the 553 acres is not subject to City development regulations. An unfavorable ruling, which is not expected, would mean that the Circle C WQPZ was invalid and that the 553 acres is annexed, and subject to the City zoning and other regulatory authority, which could diminish the development potential of this property in the same manner as for the approximately 700 acres discussed above (see "Annexation Litigation").
Legislative Developments - In the most recent legislative session of the Texas State legislature, a bill to reorganize a state governmental agency inadvertently repealed the provisions of law that established grandfathered rights for land which was platted or in the permitting process. The Company, based on an opinion from counsel, has taken the position that under Texas law, previously vested rights for the Company's property holdings are not affected by the repeal of this statute. The City, however, does not recognize any grandfathered entitlements arising under the repealed law and, in response to the repeal, enacted an ordinance effective September 5, 1997, establishing interim regulations on land development. It is anticipated that the City will enact a final ordinance and may attempt to apply it to portions of the Company's Circle C and Lantana properties. Should the City take this position, the Company anticipates asserting and defending its grandfathered entitlements. In the event the City were to prevail, portions of the Company's property would be subject to the City's current restrictive ordinances and development potential would be significantly reduced. During the last three sessions of the Texas legislature, legislation has been enacted to provide landowners relief from overly-aggressive attempts by municipalities to regulate land development in an effort to prevent growth. Much of that past legislation has been enacted to address abusive or unauthorized municipal land use regulations of the type adopted by the City. The Company anticipates that during the next session of the Texas legislature, beginning in January 1999, the Texas legislature will once again review and address inappropriate municipal land use regulation designed to prevent growth and development.
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Other Matters - During February 1997, FMPO filed a petition for declaratory judgment against Phoenix Holdings, Ltd. 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 January 9, 1998, the City filed a lawsuit (the "Travis County Suit") in Travis County District Court against 14 water quality zones and their owners, including the Barton Creek WQPZ. The City challenges the constitutionality of the legislation authorizing the creation of water quality zones. This same issue is being litigated in the lawsuit initiated by the Company discussed under "Circle C WQPZ Litigation," above. The Attorney General of Texas has agreed to intervene in both the Travis County Suit and the suit in "Circle C WQPZ Litigation" above, to defend the legislation. Although not expected, a court decision that the legislation authorizing WQPZs is invalid would diminish and delay development of portions of the Barton Creek project and the Company's land located in the Circle C WQPZ.
In April 1997, the U.S. Department of Interior ("DOI") listed the Barton Springs Salamander as an endangered species after a federal court overturned a March 1997 decision by the DOI not to list the Barton Springs Salamander based on a conservation agreement between the State of Texas and federal agencies. The listing of the Barton Springs Salamander is not anticipated to affect the Company's Barton Creek and Lantana properties for several reasons, including the results of recent technical studies and the Company's U.S. Fish and Wildlife Service 10(a) permit obtained in 1995. The Company's Circle C properties could, however, be affected, although the extent of any impact cannot be determined at this time. Special interest groups have provided written notice of their intention to challenge the Company's 10(a) permit and compliance with water quality regulations. The Company believes these challenges are meritless and will continue to protect its entitlements.
FMPO recognized tax benefits of $0.5 million in 1996 and $2.7 million in 1995 for the carryback of each year's tax loss to recoup taxes paid in previous years. Income taxes credited (charged) to income follow:
Reconciliations of the differences between the income tax (charges) benefits computed at the federal statutory tax rate and the income tax (expense) benefit recorded follow:
6. TRANSACTIONS WITH AFFILIATES
Management Services. Certain management and administrative services have been provided to FMPO by FTX during 1995 and by FM Services Company (Services Company), currently ten percent owned by FMPO, since January 1996. These services were provided for a total cost of $1.7 million in 1995 and for a fixed annual fee of $0.5 million since July 1995, subject only to annual cost of living increases beginning in the 1997 first quarter. Effective January 1, 1998, Services Company and FMPO implemented a new management services agreement for these same services to be provided on a cost reimbursement basis. FMPO believes the cost of these services does not (and in the future will not) differ significantly from those which would be incurred if the related employees were employed directly by FMPO.
Sale of Oil & Gas Interests. In September 1997, the Company sold several working interests and numerous overriding royalty interests in oil and gas properties which have been held since its formation to McMoRan Oil & Gas Co. (MOXY) and Phosphate Resource Partners Limited Partnership (PLP), formerly Freeport-McMoRan Resource Partners, Limited Partnership, for $4.5 million cash, resulting in a gain of $4.5 million. MOXY is and PLP was, prior to the Merger, an affiliate of FMPO because of FTX's former role as administrative managing general partner of PLP and because of common management and a common director shared with MOXY. These interests, which had no cost basis, remained with the Company after the sale of substantially all of its oil and gas properties in 1993. The gain is reflected in Other Income, and proceeds were used to reduce debt. Other income also includes royalty income
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generated by these properties totaling $0.8 million, $1.4 million and $0.6 million for 1997 (prior to the sale), 1996 and 1995, respectively.
7. EMPLOYEE BENEFITS
Stock Options. FMPO's Stock Option Plan and Stock Option Plan for Non-Employee Directors (the Plans) provide for the issuance of up to a total of 1.3 million stock options and stock appreciation rights (SARs) at no less than market value at time of grant. Generally, stock options are exercisable in 25 percent annual increments beginning one year from the date of grant and expire 10 years after the date of grant. A summary of stock options outstanding, including 200,000 SARs, follows:
At December 31, 1997, 247,500 shares were available for new grants under the Plans. Summary information of fixed stock options outstanding at December 31, 1997 follows:
FMPO has adopted the disclosure-only provisions of SFAS 123 and continues to apply APB Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, no compensation cost has been recognized for FMPO's fixed stock option grants. Had compensation cost for FMPO's fixed stock option grants been determined based on the fair value at the grant dates for awards under those plans consistent with SFAS 123, FMPO's net income would have decreased by $252,000 ($0.02 per share) in 1997, $104,000 ($0.01 per share) in 1996 and remained essentially unchanged in 1995. For the pro forma computations, the fair values of the fixed option grants were estimated on the dates of grant using the Black- Scholes option pricing model. These values totaled $2.76 per option in 1997, $1.46 per option in 1996 and $1.45 per option in 1995. The weighted average assumptions used include a risk-free interest rate of 6.7 percent in 1997 and 6.4 percent in 1996 and 1995, expected lives of 10 years and expected volatility of 62 percent in 1997 and 70 percent in 1996 and 1995. The pro forma effects on net income for 1997, 1996 and 1995 are not representative for future years because they do not take into consideration grants made prior to 1995. No other discounts or restrictions related to vesting or the likelihood of vesting of fixed stock options were applied.
8. COMMITMENTS AND CONTINGENCIES
The Company has made, and will continue to make, expenditures at its operations for protection of the environment. Increasing emphasis on environmental matters can be expected to result in additional costs, which will be charged against the Company's operations in future periods. Present and future environmental laws and regulations applicable to the Company's operations may require substantial capital expenditures, could adversely affect the development of its real estate interests or may affect its operations in other ways that cannot be accurately predicted at this time.
In connection with the sale of one of its oil and gas properties in 1993, the Company indemnified the purchaser for any future abandonment costs in excess of net revenues received by the purchaser.
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The Company has accrued $3.0 million relating to this contingent liability, included in Other Liabilities, which it believes to be adequate.
a. Amounts shown for 1996 are for Income (Loss) from Partnership, as reflected using the equity basis of accounting (Note 1). b. Includes a $3.1 million ($0.22 per share) reimbursement of previously expensed infrastructure costs. c. Includes a $4.5 million ($0.31 per share) gain from sale of oil and gas property interests. d. Includes a $0.5 million tax benefit ($0.04 per share).
10. SUBSEQUENT EVENTS
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 an 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 ending 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's option, interest would be payable quarterly, or accrued and added to principal. Outstanding principal under the facility would be convertible at any time 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 ending March 2, 1998. If not converted into common stock, the
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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.
With respect to the litigation discussed under "Other Matters" in Note 3, on February 20, 1998, the District Court granted the Company's motion for summary judgment on the primary case and subsequently, Phoenix Holdings, Ltd. dismissed its counterclaims with prejudice, but reserved the right to appeal the summary judgment of the primary case.
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. Recently, 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 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 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 Edwards Aquifer. 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 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
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PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The information set forth under the caption "Information About Nominees and Directors" of the Proxy Statement submitted to the stockholders of the registrant in connection with its 1998 annual meeting to be held on May 14, 1998, is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation
The information set forth under the captions "Director Compensation" and "Executive Officer Compensation" of the Proxy Statement submitted to the stockholders of the registrant in connection with its 1998 annual meeting to be held on May 14, 1998, is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information set forth under the captions "Common Stock Ownership of Certain Beneficial Owners" and "Common Stock Ownership of Directors and Executive Officer" of the Proxy Statement submitted to the stockholders of the registrant in connection with its 1998 annual meeting to be held on May 14, 1998, is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions
The information set forth under the caption "Certain Transactions" of the Proxy Statement submitted to the stockholders of the registrant in connection with its 1998 annual meeting to be held on May 14, 1998, is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements. Reference is made to the Financial Statements beginning on page 16 hereof.
(a)(2) Financial Statement Schedules. Reference is made to the
(a)(3) Exhibits. Reference is made to the Exhibit Index beginning on page E-1 hereof.
(b) Reports on Form 8-K. None.
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SIGNATURES
Pursuant to the requirements of Section 13 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, on March 30, 1998.
FM PROPERTIES INC.
By: /s/ Richard C. Adkerson ----------------------- Richard C. Adkerson Chairman of the Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated, on March 30, 1998.
/s/ Richard C. Adkerson ----------------------- Chairman of the Board, Chief Executive Richard C. Adkerson Officer (principal executive officer) and Director
* -------------------- W. H. Armstrong, III President, Chief Operating Officer and Chief Financial Officer (principal financial officer)
* ------------------ C. Donald Whitmire Vice President and Controller (pricipal accounting officer) * ------------------ James C. Leslie Director
* ------------------ Michael D. Madden Director
*By: /s/ Richard C. Adkerson ----------------------- Richard C. Adkerson Attorney-in-Fact
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FM PROPERTIES INC. EXHIBIT INDEX
2.1 Distribution Agreement dated as of June 10, 1992 among Freeport-McMoRan Inc. ("FTX"), the Company and FM Properties Operating Co. (the "Partnership"). Incorporated by reference to Exhibit 2.1 to the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1992 (the "1992 Form 10-K").
3.1 Amended and Restated Certificate of Incorporation of the Company. Incorporated by reference to Exhibit 3.1 to the 1992 Form 10-K.
3.2 By-laws of the Company, as amended. Incorporated by reference to Exhibit 3.2 to the 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 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 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.
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.
10.2 Amended and Restated Services Agreement, dated as of December 23, 1997 between FM Services Company and the Company.
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 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 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 1992 Form 10-K.
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10.6 FMPO Guarantee Agreement dated as of December 15, 1997 by the Company.
10.7 Amended and Restated IGL Guarantee Agreement dated as of December 22, 1997 by IMC Global Inc.
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 Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1994.
10.9 FMPO Stock Option Plan, as amended.
10.10 FMPO Stock Option Plan for Non-Employee Directors, as amended.
21.1 List of Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
24.1 Certified Resolution of the Board of Directors of FMPO authorizing this report to be signed on behalf of any officer or director pursuant to a Power of Attorney.
24.2 Powers of Attorney pursuant to which this report has been signed on behalf of certain officers and directors of the Company.
27.1 Financial Data Schedule.
27.2 Restated Financial Data Schedule.
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FM PROPERTIES INC.
The financial statements in the schedule listed below should be read in conjunction with the financial statements of FMPO contained elsewhere in Annual Report on Form 10-K.
Page Report of Independent Public Accountants Schedule III-Real Estate and Accumulated Depreciation
Schedules other than the one listed above have been omitted since they are either not required, not applicable or the required information is included in the financial statements or notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of FM Properties Inc.:
We have audited, in accordance with generally accepted auditing standards, the financial statements as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997 included elsewhere in FM Properties Inc.'s Annual Report on Form 10-K, and have issued our report thereon dated January 20, 1998. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accoompanying schedule is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole.
Arthur Andersen LLP
San Antonio, Texas January 20, 1998
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FM Properties Inc. Notes to Schedule III (In Thousands)
(1) Reconciliation of Real Estate Properties:
The changes in real estate assets for the years ended December 31, 1997 and 1996 are as follows:
The aggregate net book value for federal income tax purposes as of December 31, 1997 was $124,919,000. (2) Reconciliation of Accumulated Depreciation: The changes in accumulated depreciation for the years ended December 31, 1997 and 1996 are as follows:
Depreciation of buildings and improvements reflected in the statements of operations is calculated over estimated lives of 30 years.
(3) Concurrent with certain year-end 1994 debt negotiations, the Partnership analyzed the carrying amount of its real estate assets, using generally accepted accounting principles, and recorded a $115 million pre-tax, non-cash write-down. The actual amounts that will be realized depend on future market conditions and may be more or less than the amounts recorded in the Partnership's financial statements.
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