Page 3 ITEM 1. BUSINESS THE TRUST On September 25, 1985, pursuant to the Plan of Complete Liquidation and Dissolution of City Investing Company ("City") approved by stockholders of City on December 12, 1984, City transferred all its remaining assets and liabilities ("Trust Estate") to the City Investing Company Liquidating Trust (the "Trust") to assure compliance with Section 337 of the Internal Revenue Code. The common stock transfer books of City were permanently closed on September 25, 1985, and the holders of record of common stock of City as of the close of business on that date became holders of units of beneficial interest in the Trust on the basis of one unit of beneficial interest for each share of common stock of City held on September 25, 1985. After September 25, 1985, the outstanding certificates that formerly represented shares of common stock of City are deemed to evidence the same number of units of beneficial interest in the Trust.
The City Investing Company Liquidating Trust Agreement ("Trust Agreement") provides that the Trust is organized for the sole purpose of liquidating the Trust Estate in a manner calculated to conserve and protect the Trust Estate, and to collect and distribute to the beneficiaries proceeds therefrom in as prompt and orderly a fashion as possible after the payment of, or provision for, expenses and liabilities. The Trustees are required to distribute to the beneficiaries cash or other property comprising a portion of the Trust Estate as the Trustees may, in their sole discretion, determine may be distributed without detriment to the ability of the Trust to pay or discharge claims, expenses, charges, liabilities and obligations. The existence of the contingent liabilities referred to in Note 7 to the Trust's Financial Statements will affect the timing of future distributions of Trust assets, see Item 8 - Note 7, "Litigation and Other Contingent Liabilities".
On July 30, 2002, the Trustees extended the time limit of the Trust's existence to September 25, 2003 from September 25, 2002 in order to continue the orderly resolution of legal exposures of the Trust and reducing to cash the remaining non-liquid assets.
ITEM 3. LEGAL PROCEEDINGS
In accordance with the Trust Agreement, the Trust has assumed the obligation to make payments, where required, to discharge certain litigation and other contingent liabilities of City which existed at September 25, 1985 or which have subsequently arisen. For a description of litigation and claims currently pending or threatened that affect the Trust, see Item 8 - Note 7, "Litigation and Other Contingent Liabliities".
ITEM 5. MARKET PRICE OF UNITS
The Trust's Units of Beneficial Interest ("Units") trade on The Nasdaq stock exchange and appear daily in the list entitled Small Capitalization Issues, under the symbol CITYINVLQ or CNVLZ. Selected contemporaneous trading information is available on the Internet and can be accessed as follows - http://www.nasdaq.com. The high and low prices for the Units during 2002 and 2001 were as follows:
As of December 31, 2002, there were approximately 13,000 registered holders of the Trust's Units of Beneficial Interest. No cash distributions were made in either 2002 or 2001.
The Trust may have a contingent liability to the United States Environmental Protection Agency and other third parties.
The Trust recorded net income of $1,504,000 ($0.04 per unit) in 2002 compared with $5,337,000 ($0.14 per unit) in 2001 and $3,387,000 ($0.09 per unit) in 2000. It is difficult to compare amounts in comparable periods, as the financial statements of the Trust are prepared on the basis of accounting used for Federal income tax purposes; that is, amounts are reflected in the financial statements when amounts are received or paid.
In February 2000, the Trust sold 39 percent of certain real estate acreage for $2,410,000 in cash, which resulted in a recognized long-term capital gain, net of expenses, of $610,000. In May 2000, the Trust sold its remaining real estate acreage for $478,000 in cash and a non-recourse promissory note of $3,683,000, payable in five equal annual installments plus interest at 8 percent. The May 2000 sale resulted in a recognized long-term capital gain, net of expenses, of $171,000 and deferred gain of $1,173,000. The deferred gain of $1,173,000 was recorded as a reduction to the $3,683,000 mortgage receivable. In June 2001 and 2002, cash payment installments of $960,000 and $907,000, respectively, were received which resulted in a recognized long-term gain, net of expenses, of $183,000 in both years and net interest income of $274,000 and $222,000, respectively. The deferred gains of $704,000 at December 31, 2002 and $938,000 at December 31, 2001, are netted against the gross mortgage receivable of $2,210,000 at December 31, 2002 and $2,946,000 at December 31, 2001. It is projected that the remaining deferred gain of $704,000 will be subject to expenses estimated to be $154,000.
In February 2000, the Trust received $20,000 as the final liquidating distribution from Global Bancorporation, which resulted in a long-term capital loss of $562,000.
In 1985, City Investing Company purchased a group annuity contract from The Prudential Insurance Company of America (Prudential). Upon the 2002 demutualization of Prudential, the Trust received 885 shares of Prudential Financial Inc. As the Trust had a $0 basis in this asset, all of the $29,000 proceeds received upon the sale of these shares is reported as long-term capital gain.
Legal fees attributable to issues that relate to periods before the liquidation of City of $1,009,000 in 2002, compared to $451,000 in 2001 and $257,000 in 2000 are reflected as losses on dispositions of assets.
Interest, dividend and other income of $2,707,000 in 2002, $5,953,000 in 2001 and $3,711,000 in 2000, was principally derived from interest earned on U.S. Treasury securities. The cessation of the issuance of one-year Treasury Bills by the U.S. Government led to a substantial increase in the amount of interest income collected by the Trust in 2001, as compared with 2002 and 2000. As the Trust reports on a cash basis, both annual interest received on Treasury Bills and semi-annual interest received on Treasury Notes were reported as income in 2001. In addition, declining interest rates adversely affected interest income received in 2002 and 2001.
Administrative expenses were $406,000 in 2002, $348,000 in 2001, and $286,000 in 2000. The increases in 2002 and 2001were primarily due to increases in legal expenses incurred in preparing for the complete liquidation of the Trust.
At December 31, 2002, the Trust had cash and cash equivalents and investment securities of $81,643,000. The Trustees believe that such cash resources and investment securities are sufficient to meet all anticipated liquidity requirements.
No cash distributions have been made since May 12, 1990. For information regarding considerations affecting the future distribution of Trust assets, see Item 8 - Note 8, "Future Distributions of Trust Assets."
We have audited the accompanying balance sheets of the City Investing Company Liquidating Trust (the "Trust") as of December 31, 2002 and 2001, and the related statements of operations, cash flows and changes in trust equity for each of the years in the three-year period ended December 31, 2002. These financial statements are the responsibility of the Trust's Trustees. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the Trustees, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As described in Note 2 to the financial statements, the Trust's policy is to prepare its financial statements on the basis of accounting used for Federal income tax reporting purposes. Accordingly, the accompanying financial statements are not intended to present financial position, income and expenses, cash flows and changes in trust equity in conformity with accounting principles generally accepted in the United States of America.
See Note 7 to the financial statements for a description of litigation and other contingent liabilities.
In our opinion, the financial statements referred to above present fairly, in all material respects, the assets, liabilities, and trust equity of City Investing Company Liquidating Trust as of December 31, 2002 and 2001, and its income and expenses, cash flows and changes in trust equity for each of the years in the three-year period ended December 31, 2002, on the basis of accounting described in Note 2.
KPMG LLP
STATEMENTS OF OPERATIONS
December 31
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STATEMENTS OF CASH FLOWS
Year Ended December 31
Page 9 Notes to Financial Statements Note 1 - Organization The City Investing Company Liquidating Trust (the "Trust") was created on September 25, 1985, pursuant to an Agreement and Declaration of Trust ("Trust Agreement") by and between City Investing Company ("City") and the three individuals then serving as trustees of the Trust ("Trustees"). The Trust Agreement is governed by the laws of the State of Delaware. On September 25, 1985, pursuant to a Plan of Complete Liquidation and Dissolution approved by stockholders of City on December 12, 1984, City transferred all its remaining assets and liabilities ("Trust Estate") to the Trust to assure compliance with Section 337 of the Internal Revenue Code. The sole purpose of the Trust is to liquidate the Trust Estate in a manner calculated to conserve and protect the Trust Estate, and to collect and distribute to the beneficiaries the income and proceeds therefrom in as prompt and orderly a fashion as possible after the payment of, or provision for, expenses and liabilities. The common stock transfer books of City were permanently closed on September 25, 1985, and the holders of record of common stock of City as of the close of business on that date became holders of units of beneficial interest in the Trust on the basis of one unit of beneficial interest for each share of common stock of City held on September 25, 1985. After September 25, 1985, the outstanding certificates that formerly represented shares of common stock of City are deemed to evidence the same number of units of beneficial interest in the Trust. The Trust Agreement, signed on September 25, 1985, set forth a time limit of three years for the disposition of the Trust's assets and distribution to the unit holders unless a later termination was required by the Trustees. As a result of the protracted nature of certain litigation and other claims asserted against the Trust, the Trustees extended the time limit of the Trust's existence a number of times, most recently to September 25, 2003.
Note 2 - Significant Accounting Policies Basis of presentation : The accompanying financial statements have been prepared on the basis of accounting used for Federal income tax purposes. Accordingly, certain revenue and the related assets are recognized when received rather than when earned; certain expenses are recognized when paid rather than when the obligation is incurred; and assets are reflected at their tax basis. Valuation of assets and liabilities : The Trust Equity balance on September 25, 1985 was established at an amount equivalent to the number of units of beneficial interest outstanding (38,979,372) multiplied by the average of the high and low trading prices of such units on the first day of trading ($3.1875), or an aggregate of $124.2 million. The fair market value for Federal income tax purposes of each asset other than cash and cash equivalents was determined by that asset's proportionate share of the Trust Equity increased by accounts payable and decreased by cash and cash equivalents at September 25, 1985. The proportionate share of each of these assets was determined by the estimated value of such Trust asset in relation to the estimated value of all of the Trust assets other than cash and cash equivalents. In determining the estimated value of Trust assets, the Trustees evaluated, where appropriate, such factors as City's historical carrying values, expected amounts and dates of realization, prevailing interest rates, available market prices and restrictions with respect to disposition. Income taxes : For Federal income tax purposes, the September 25, 1985 transfer of assets and liabilities to the Trust and distribution to stockholders of units in the Trust was treated as a distribution of assets and liabilities by City to its stockholders and a contribution by the stockholders of such net assets to the Trust in return for units.
Page 10 Notes to Financial Statements (continued) The Trust is treated as a grantor trust and not as a corporation. Accordingly, any income or loss of the Trust will not be taxable to the Trust but will be taxable to the unit holders as if the unit holders had themselves realized the income or loss from their undivided interests in Trust assets. Losses on dispositions of assets: Losses on dispositions of assets, net of gains, includes legal fees attributable to issues that relate to periods before the liquidation of City. Net income per unit: Net income per unit is calculated by dividing net income of the Trust by the number of outstanding Units of Beneficial Interest. Cash and cash equivalents: The Trust considers all investments in money market funds as cash equivalents. Note 3 - Investment Securities Investment securities at December 31, 2002 and December 31, 2001 consist of U.S. Treasuries and are carried at original cost, net of premium amortization recorded at interest collection dates. The fair value of U.S. Treasuries is based on quoted market prices. Investment securities at December 31, consist of the following:
Note 4 - Restricted Funds Restricted funds at December 31, 2002 and 2001 represent a rent deposit of $4,000 and $5,000, respectively.
Note 5 - Investments
The Trust held 10,000 shares of Global Bancorporation, which were carried at their tax basis. In February 2000, the Trust collected a final liquidating distribution of $20,000 from Global Bancorporation, which resulted in a recognized long-term capital loss of $562,000. The Trust holds 310,810 shares of Oklahoma Energy Corp. Page 11 Notes to Financial Statements (continued)
common stock, which are carried at their tax basis. At December 31, 2002 and 2001, the fair value of the Oklahoma Energy stock, based on quoted market prices, was $9,324 and $310, respectively. Note 6 - Real Estate In February 2000, the Trust sold 39 percent of certain real estate acreage for $2,410,000 in cash, which resulted in a recognized long-term capital gain, net of expenses, of $610,000. In May 2000, the Trust sold its remaining real estate acreage for $478,000 in cash and a non-recourse promissory note of $3,683,000, payable in five equal annual installments plus interest at 8 percent. The May 2000 sale resulted in a recognized long-term capital gain, net of expenses, of $171,000 and deferred gain of $1,173,000. The deferred gain of $1,173,000 was recorded as a reduction to the $3,683,000 mortgage receivable. In June 2001 and 2002, cash payment installments of $960,000 and $907,000, respectively, were received which resulted in a recognized long-term gain, net of expenses, of $183,000 in both years and net interest income of $274,000 and $222,000, respectively. The deferred gains of $704,000 at December 31, 2002 and $938,000 at December 31, 2001, are netted against the gross mortgage receivable of $2,210,000 at December 31, 2002 and $2,946,000 at December 31, 2001. It is projected that the remaining deferred gain of $704,000 will be subject to expenses estimated to be $154,000. Note 7 - Litigation and Other Contingent Liabilities In accordance with the Trust Agreement, the Trust has assumed the obligation to make payments, where required, to discharge certain litigation and other contingent liabilities of City which existed at September 25, 1985 or which have subsequently arisen. The Trust may have a contingent liability with respect to certain issues described below: AmBase Corporation v. City Investing Company Liquidating Trust, et al. (01 Civ. 0771): On January 30, 2001, AmBase Corporation ("AmBase") filed a Complaint in the United States District Court for the Southern District of New York claiming that the Trust was primarily liable for certain potential tax liabilities of City and seeking to recover expenses incurred by AmBase in defending against those liabilities in the Tax Court of the United States. Although a subsequent decision by the Tax Court concluding that City was not liable for the taxes in question has mooted any claim for reimbursement of the tax liability, AmBase's claim seeking recovery of its expenses remains at issue. A virtually identical suit by AmBase against the Trust in the Delaware Chancery Court was dismissed on statute-of-limitations grounds on January 3, 2001. The Trust moved for dismissal of this case on the same grounds. On January 11, 2002, Judge Louis Stanton granted the Trust's motion and dismissed the action based on the statute of limitations. AmBase appealed the dismissal of its action to the United States Court of Appeals for the Second Circuit (02-7230). The appeal was argued before the Court on November 7, 2002, which has not rendered a decision as yet. Marina Pacifica: Environmental Protection Agency Claim. The U.S. Environmental Protection Agency ("EPA") has identified Marina Pacifica as a Potentially Responsible Party ("PRP") under the Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") with respect to the Operating Industries, Inc. Site in Monterey, California ("Site"). The Site, a landfill for municipal and industrial waste, was included on the National Priorities List in May 1986. Marina Pacifica was a California limited partnership, the general partner of which was a subsidiary of City Investing Company. Marina Pacifica was in the business of developing and selling condominiums. Development of one construction site required the relocation of six oil wells. Drilling muds generated during the relocation activities were allegedly disposed of at the Site.
Page 12 Notes to Financial Statements (continued) In September 1990, EPA sent a special notice letter to all PRPs, including Marina Pacifica, demanding payment of the total costs incurred by the government since June 1, 1988, which EPA estimated were at least $15.3 million. EPA also requested a good faith offer to perform or pay for the remedy selected for the third remedial stage. Marina Pacifica did not make a counter offer. Counsel for Marina Pacifica notified EPA that Marina Pacifica had been dissolved and would be unable to participate in any settlements. On September 30, 1997, the EPA sent a further special notice letter to all PRPs, including Marina Pacifica, that requested a good-faith offer to perform or pay for, among other things, the final remedial measures covered by the September 1996 Record of Decision. The EPA included an updated list of 280 PRPs on which Marina Pacifica appeared 84th in volumetric terms. Marina Pacifica did not make a counter offer, and has not received anything further from EPA. The EPA has conducted site control and monitoring activities at the Site since May 1986. In addition, EPA has conducted a number of removal actions and studies at the Site to stabilize site conditions and to evaluate the extent of contamination. Other PRPs have entered into several consent decrees requiring clean-up work or payments to EPA, including a December 2001 decree that awaits court approval and requires work estimated to cost $340 million. Based on its volumetric share and other material factors, counsel would expect actual payments, if any, required of Marina Pacifica to be a small fraction of the total costs (estimated at $340 million) at the Site. Given that City Investing Company had nothing to do with day-to-day operations of Marina Pacifica or its general partner, the Trust should not be liable for any clean-up responsibilities of Marina Pacifica. Admiral Home Appliances Site. Maytag Corporation ("Maytag") has sued Rheem Manufacturing Company ("Rheem") in the United States District Court for the District of South Carolina, Aiken Division, (Maytag Corporation v. Rheem Manufacturing Company v. City Investing Company, et al. Civ. Action 1-01-0137-22), seeking to recover environmental remediation expenses for which Maytag is liable under the Comprehensive Environmental Response, Compensation and Liability Act because of ownership by a subsidiary of Maytag of the Admiral Home Appliances Super Fund Site in Williston, South Carolina ( the "Admiral Site"). In its Complaint against Rheem, Maytag claimed that Rheem was liable for a share of the remediation expenses because of Rheem's prior ownership of the Admiral Site. On October 23, 2001, Rheem filed a Third Party Complaint against City Investing Company ("City"), alleging that City, as owner of the stock of first and second-tier subsidiaries which conducted manufacturing operations at the Admiral Site, was liable to reimburse Rheem for some or all of Rheem's liability. The Trust was added as a Third Party Defendant in an amended pleading. The Trust moved to dismiss the Third Party Complaint against City and the Trust for lack of in personam jurisdiction and for failure to state a cause of action. On October 23, 2002, the United States District Court granted the Trust's motion to dismiss Rheem's Third Party Complaint on the ground that City's involvement with the operation or management of the Admiral Site was insufficient to confer jurisdiction over City and the Trust. While the Trust has been advised by its counsel that the Trust is not liable for environmental remediation expenses related to the Admiral Site, no assurance can be given as to the ultimate outcome of the Trust's exposure to this environmental matter. Other Matters. The Trust also remains subject to possible claims by other third parties. Lease Commitment. Rather than renewing its prior lease at 99 University Place, the Trust has leased smaller office space at 853 Broadway, Suite 1607, New York, NY 10003-4703 with a savings of one third over the proposed annual rental expense at the prior location. The new five-year lease can be cancelled after two years without penalty in the event of the liquidation of the Trust. Minimum annual lease expense beginning July 1, 2002, will be approximately $24,000 during the first year of the lease, escalating to approximately $27,000 during the last year of the lease. Rent expense was $29,000 in 2002, $31,000 in 2001, and $26,000 in 2000.
Page 13 Notes to Financial Statements (continued) Note 8 - Future Distributions of Trust Assets The existence of the contingent liabilities referred to in Note 7 will affect the timing of future distributions of Trust assets. Note 9 - Quarterly Financial Data (unaudited) The quarterly financial data for 2002 and 2001 are as follows:
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The Trustees of the Trust are Eben W. Pyne, John J. Quirk and Lester J. Mantell. Each Trustee will serve for the term of the Trust subject to his earlier resignation or removal. There are no family relationships between the Trustees. Eben W. Pyne (85) retired in 1982 as a Senior Vice President of Citibank, N.A. He was a director of City, AmBase and W.R. Grace and Co. John J. Quirk (59) is a managing director at Morgan Joseph & Co. Inc. He was a principal at Churchill Capital, Inc., a private equity firm, from 1998 to 2001. He was the Chairman and Co-founder of Quirk Carson Peppet Inc. from 1985 to 1998. He served as Senior Vice President and Treasurer of City prior to March 1985. Lester J. Mantell (65) was an officer of City and AmBase prior to 1997.
Page 14 The Trust has adopted a Code of Ethics that is applicable to the Trustees, one of whom is the functional equivalent of its principal executive officer and its principal financial officer, and the Trust's Administrator. See Exhibit 99.3 -"Code of Ethics". ITEM 11. EXECUTIVE COMPENSATION Pursuant to Section 9.1 of the Trust Agreement, the Trustees, in lieu of commissions or other compensation fixed by law for Trustees, receive as compensation for services there under the aggregate sum of $36,000 per year to be allocated equally among the Trustees. Each Trustee is also reimbursed from the Trust Estate for all expenses reasonably incurred by him in the performance of his duties pursuant to the Trust Agreement. There are no plans, pursuant to which cash or non-cash compensation was paid or distributed during the last fiscal year, or is proposed to be paid or distributed in the future, to the Trustees, except for amounts that one Trustee may receive as a holder of 1,000 Units of Beneficial Interest.
The following are the only persons known to the Trust to own beneficially (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934) more than five percent of the Trust's Units of Beneficial Interest. The information provided below was obtained from Form 4 of Goldman, Sachs & Co., as filed with the Securities and Exchange Commission ("SEC") as of August 10, 2001, from Form 4 of Farallon Capital Management, L.L.C. filed with the SEC as of January 22, 2003, and from Amendment No. 3 to Schedule 13G as filed with the SEC by Franklin Mutual Advisers, LLC as of January 22, 2002.
The following table shows the Units of Beneficial Interest of the Trust beneficially owned by each Trustee and the Trustees as a group as of January 7, 2003.
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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 on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized on this 12th day of February 2003. CITY INVESTING COMPANY LIQUIDATING TRUST
LESTER J. MANTELL Pursuant to the requirements of the Securities Exchange Act of 1934, this report on Form 10-K has been signed below by the following persons on behalf of the Registrant on the 12th day of February 2003. The Trustees:
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