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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001 Commission File Number 1-6249
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First Union Real Estate Equity and Mortgage Investments
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(Exact name of registrant as specified in its charter)
Ohio 34-6513657
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
125 Park Avenue, 14th Floor
New York, New York 10017
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 949-1373
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Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
34,805,912 Shares of Beneficial Interest outstanding as of August 1, 2001
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Total number of pages contained in this report: 19
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Balance Sheets
(In thousands, except share data) June 30, 2001 December 31,
(Unaudited) 2000
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ASSETS
Investments in real estate
Land $ 6,086 $ 45,692
Buildings and improvements 64,087 227,691
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70,173 273,383
Less - Accumulated depreciation (9,142) (68,507)
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Total investments in real estate 61,031 204,876
Mortgage loans and note receivable 4,800 1,468
Other assets
Cash and cash equivalents - unrestricted 4,034 19,477
- restricted 1,662 4,412
Accounts receivable and prepayments, net of allowances
of $164 and $772, respectively 3,147 5,386
Investments 119,643 220,648
Inventory 3,181 3,097
Unamortized debt issue costs, net 388 1,439
Other 215 1,795
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Total assets $ 198,101 $ 462,598
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LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans $ 42,201 $ 158,772
Notes payable 103 150,110
Senior notes 12,538 12,538
Accounts payable and accrued liabilities 9,756 18,040
Deferred items 74 2,755
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Total liabilities 64,672 342,215
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Shareholders' equity
Preferred shares of beneficial interest, $25 liquidation preference,
2,300,000 shares authorized, 984,800 shares
outstanding at June 30, 2001 and December 31, 2000 23,171 23,171
Shares of beneficial interest, $1 par, unlimited authorized, 34,806,000
and 39,697,000 shares outstanding at June 30, 2001 and
December 31, 2000, respectively 34,806 39,697
Additional paid-in capital 207,602 214,336
Undistributed loss from operations (132,150) (156,821)
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Total shareholders' equity 133,429 120,383
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Total liabilities and shareholders' equity $ 198,101 $ 462,598
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See Notes to Combined Financial Statements.
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FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Statements of Operations
Unaudited (In thousands, except per share data) Three Months Ended Six Months Ended
June 30, June 30,
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2001 2000 2001 2000
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Revenues
Rents $ 3,065 $ 11,909 $ 12,165 $ 25,849
Sales 1,921 1,395 4,031 2,779
Interest - Mortgage loans 188 56 266 150
- Short-term investments 1,190 2,643 2,608 4,535
Dividends 337 112 675 112
Equity in loss from joint venture - (87) - (115)
Other income 1 63 5 179
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6,702 16,091 19,750 33,489
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Expenses
Property operating 1,696 3,080 4,617 7,099
Cost of goods sold 1,779 2,086 3,828 4,234
Real estate taxes 102 1,448 945 3,144
Depreciation and amortization 523 2,929 2,807 6,222
Interest - Mortgage loans 928 4,278 3,957 9,324
- Notes payable 18 1,704 147 2,632
- Senior notes 278 278 556 556
General and administrative 1,732 3,330 3,728 7,901
Write-down of investment 2,700 - 2,700 -
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9,756 19,133 23,285 41,112
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Loss before capital gains, extraordinary loss from early extinguishment
of debt and preferred dividend (3,054) (3,042) (3,535) (7,623)
Capital gains 142 59,249 30,129 59,141
Extraordinary loss from early extinguishment of debt - (2,367) (889) (5,459)
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Net (loss) income before preferred dividend (2,912) 53,840 25,705 46,059
Preferred dividend (517) (708) (1,034) (1,416)
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Net (loss) income attributable to shares of beneficial interest $ (3,429) $ 53,132 $ 24,671 $ 44,643
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Per share data
Basic weighted average shares 36,388 42,469 38,012 42,470
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Diluted weighted average shares 36,388 49,087 42,857 49,098
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(Loss) income before extraordinary loss, basic $ (0.09) $ 1.33 $ 0.67 $ 1.20
Extraordinary loss from early extinguishment of debt, basic - (0.06) (0.02) (0.13)
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Net (loss) income applicable to shares of beneficial interest, basic $ (0.09) $ 1.27 $ 0.65 $ 1.07
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(Loss) income before extraordinary loss, diluted $ (0.09) $ 1.15 $ 0.62 $ 1.05
Extraordinary loss from early extinguishment of debt, diluted - (.05) (0.02) (0.11)
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Net (loss) income applicable to shares of beneficial interest, diluted $ (0.09) $ 1.10 $ 0.60 $ .94
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Combined Statements of Comprehensive Income
Net (loss) income $ (3,429) $ 53,132 $ 24,671 $ 44,643
Other comprehensive income - - - -
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Comprehensive (loss) income $ (3,429) $ 53,132 $ 24,671 $ 44,643
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See Notes to Combined Financial Statements.
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FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS
Combined Statements of Cash Flows
Unaudited (In thousands) Six Months
Ended June 30,
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2001 2000
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Cash (used for) provided by operations
Net income before preferred dividend $ 25,705 $ 46,059
Adjustments to reconcile net income before preferred dividend
to net cash (used for) provided by operations
Depreciation and amortization 2,807 6,230
Write-down of investment 2,700 -
Extraordinary loss from early extinguishment of debt 889 5,459
Capital gain, net (30,129) (59,141)
(Decrease) increase in deferred items (906) 2,131
Net changes in other assets and liabilities (6,965) 1,324
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Net cash (used for) provided by operations (5,899) 2,062
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Cash provided by (used for) investing
Principal received from mortgage loans and note receivable 2,248 2,651
Net proceeds from sale of real estate 43,617 2,451
Proceeds from sale of fixed assets - 175
Purchase of investments (639,807) (609,116)
Sale of investments 738,787 503,668
Investments in capital and tenant improvements (674) (4,653)
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Net cash provided by (used for) investing 144,171 (104,824)
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Cash (used for) provided by financing
(Decrease) increase in notes payable (150,007) 95,989
Proceeds from mortgage loans 6,500 42,000
Repayment of mortgage loans - Normal payments (299) (770)
- Balloon payments - (1,000)
Payment of deferred obligation - (10,579)
Deferred obligation repayment penalty - (3,092)
Payments for Impark spin-off - (37,087)
Purchase of First Union common shares (11,625) (612)
Purchase of First Union preferred shares - (7,739)
Income from variable stock options - (666)
Debt issue costs paid - (340)
Dividends paid on shares of beneficial interest - (13,166)
Dividends paid on preferred shares of beneficial interest (1,034) (1,416)
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Net cash (used for) provided by financing (156,465) 61,522
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Decrease in cash and cash equivalents (18,193) (41,240)
Cash and cash equivalents at beginning of period 23,889 57,841
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Cash and cash equivalents at end of period 5,696 16,601
Change in cash from discontinued operations - (2,414)
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Cash and cash equivalents at end of period, including discontinued
operations $ 5,696 $ 14,187
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Supplemental Disclosure of Cash Flow Information
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Interest Paid $ 5,464 $ 13,071
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Supplemental Disclosure of Non-Cash Financing Activities
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Transfer of mortgage loan obligations in connection with real estate sales $ 122,772 $ -
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Transfer of deferred obligation in connection with real estate sales $ 1,775 $ -
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Issuance of mortgage loan receivable in connection with real estate sales $ 7,000 $ -
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Discontinued non-cash net assets charged to dividends paid $ - $ 64,747
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See Notes to Combined Financial Statements.
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Notes to Combined Financial Statements
General
The accompanying financial statements represent the combined results of
the registrant, First Union Real Estate Equity and Mortgage Investments (the
"Trust") and First Union Management Inc. (the "Company"). Under a trust
agreement, the common shares of the Company are held for the benefit of the
shareholders of the Trust. Accordingly, the financial statements of the Company
and the Trust have been combined.
The combined financial statements included herein have been prepared by
the Trust, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, although the Trust believes that the disclosures
contained herein are adequate to make the information presented not misleading.
These combined financial statements should be read in conjunction with the
combined financial statements and the notes thereto included in the Trust's
latest annual report on Form 10-K, as amended.
The combined financial statements reflect, in the opinion of the Trust,
all adjustments (consisting of normal recurring adjustments) necessary to
present fairly the combined financial position and results of operations for the
respective periods in conformity with generally accepted accounting principles
consistently applied. The results of operations for the six months ended June
30, 2001, are not indicative of the results to be expected for the full year,
since the Trust sold the majority of its properties on March 6, 2001.
Accounting Policies
The Trust follows the Financial Accounting Standards Board's ("FASB")
Emerging Issues Task Force Bulletin 98-9 (EITF98-9), "Accounting for Contingent
Rent in Interim Financial Periods." EITF98-9 requires that contingent rental
income, such as percentage rent which is dependent on sales of retail tenants,
be recognized in the period that a tenant exceeds its specified sales
breakpoint. Consequently, the Trust accrues the majority of percentage rent
income in the fourth quarter of each year in accordance with EITF98-9.
The FASB issued Statement of Financial Accounting Standards ("SFAS")
No. 137, "Accounting for Derivative Instruments and Hedging Activities -
Deferral of the Effective Date of SFAS No. 133." The Statement deferred for one
year the effective date of SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The Statement requires companies to recognize all
derivatives on the balance sheet as assets or liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether they
qualify for hedge accounting. This Statement was effective for fiscal years
beginning after June 15, 2000. The effect of SFAS No. 133 on the Trust's
financial statements was immaterial.
In July 2001, the FASB issued SFAS No. 141 "Business Combinations." SFAS
No. 141 requires that all business combinations be accounted for under the
purchase method of accounting. SFAS No. 141 also changes the criteria for the
separate recognition of intangible assets acquired in a business combination.
SFAS No. 141 is effective for all business combinations initiated after June 30,
2001. SFAS No. 141 will have no effect on the Trust's financial statements.
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In July 2001, the FASB issued SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 142 addresses accounting and reporting for
intangible assets acquired, except for those acquired in a business combination.
SFAS No. 142 presumes that goodwill and certain intangible assets have
indefinite useful lives. Accordingly, goodwill and certain intangibles will not
be amortized but rather will be tested at least annually for impairment. SFAS
No. 142 also addresses accounting and reporting for goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 is effective for
fiscal years beginning after December 15, 2001. The effect of SFAS No. 142 will
not be material to the Trust's financial statements.
The Company's manufacturing subsidiary, Ventek International, Inc.
("Ventek") is in the business of manufacturing, installing and providing
maintenance of transit ticket vending equipment. A summary of Ventek's
significant accounting policies are as follows:
Inventory:
Inventory is valued at the lower of weighted average cost or
net realizable value.
Fixed Assets:
Fixed assets are recorded at cost. Depreciation of furniture,
fixtures and equipment are calculated using the declining-balance and
straight-line methods over terms of three to five years. Amortization
of leasehold improvements is calculated using the straight-line method
over the lease term.
Revenue Recognition:
Revenue from transit ticket vending equipment contracts is
recognized by the percentage completion method. Revenue in excess of
billings represents the difference between revenues recognized under
the percentage completion method and billings issued under the terms of
the contracts and are included as part of inventory on the accompanying
balance sheet.
Income Taxes:
Current income taxes are recognized during the period in which
transactions enter into the determination of financial statement
income, with future income taxes being provided for temporary
differences between the carrying values of assets and liabilities for
financial reporting purposes and such values as measured by income tax
laws. Changes in future income taxes attributable to these temporary
differences are included in the determination of income.
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Business Segments
The Trust's and Company's business segments at June 30, 2001 include
ownership of a shopping center, an office building and a parking and transit
ticket equipment manufacturing company. Management evaluates performance based
upon net operating income which is income before depreciation, amortization,
interest and non-operating items. During the six months ended June 30, 2001, the
Trust sold two shopping center properties, four office properties, five parking
garages, one parking lot, a $1.5 million note receivable and certain assets used
in the operations of the properties. With respect to property assets, net
operating income is property rent less property operating expense, and real
estate taxes. With respect to the manufacturing company, net operating income is
sales revenue less cost of goods sold. Corporate interest expense consists of
the Trust's senior notes and borrowings collateralized by U.S. Treasury Bills.
Corporate depreciation and amortization consist primarily of the amortization of
deferred issue costs. Corporate assets consist primarily of cash and cash
equivalents, an investment in preferred stock and warrants of HQ Global
Holdings, Inc. and deferred issue costs for senior notes. All intercompany
transactions between segments have been eliminated (see table of business
segments).
Sale of Properties
In March 2001, the Trust sold two shopping center properties, four
office properties, five parking garages, one parking lot, a $1.5 million note
receivable and certain assets used in the operations of the properties (the
"Purchased Assets") to Radiant Ventures I, LLC (the "Purchaser") for an
aggregate sales price before adjustments and closing costs of $205 million. At
the closing of this transaction, the sale price of $205 million was reduced by
$20.6 million, which was the net sales price realized by the Trust from the sale
of the Huntington Garage property which was sold in December 2000 to another
party as agreed by Purchaser and which was part of the aggregate sales price of
$205 million. The remaining properties were sold to Purchaser, an affiliate of
Radiant Partners, LLC ("Radiant"), an asset management firm comprised of former
executive officers of the Trust. The Trust recognized a capital gain on the sale
of approximately $30.1 million, less an extraordinary loss on early
extinguishment of debt of $.9 million. The Trust had previously recorded in
December 2000 a $19.2 million unrealized loss on the carrying value of certain
of the Purchased Assets. As part of the sale, Purchaser assumed $122.8 of
existing mortgage debt on the purchased properties. Radiant is currently
providing asset management services to the Trust's remaining assets.
In connection with the sale, the Trust provided Purchaser a four-month
bridge loan. The loan in the original amount of $7.0 million bore interest at
11% per annum and was secured by cross-collateralized first mortgages on two
properties. The loan was repaid in two installments, $2.2 million was paid in
June 2001 and $4.8 million in July 2001. The balance remaining at June 30, 2001
was $4.8 million.
The Trust's remaining real estate properties consist of a shopping mall
in Little Rock, Arkansas and an office building in Indianapolis, Indiana.
Write-Down of Investment
At June 30, 2001, the Trust wrote off its $2.7 million investment in HQ
Global Holdings, Inc. ("HQ") warrants because of a decline in center occupancy
and other business setbacks recently disclosed by HQ. The Trust believes that
the decline in estimated fair market value of this investment is other than
temporary.
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Earnings Per Share
The computation of basic and diluted earnings per share before extraordinary
loss is as follows (in thousands, except per share data):
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, June 30, June 30, June 30,
2001 2000 2001 2000
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Basic
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(Loss) income before extraordinary loss, basic $ (2,912) $ 56,207 $ 26,594 $ 51,518
Preferred dividend (517) (708) (1,034) (1,416)
Discount on preferred stock redemption - 827 - 827
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(Loss) income before extraordinary loss attributable to
common shares, basic $ (3,429) $ 56,326 $ 25,560 $ 50,929
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Basic weighted average shares 36,388 42,469 38,012 42,470
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(Loss) income per share before extraordinary
loss, basic $ (0.09) $ 1.33 $ 0.67 $ 1.20
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Diluted
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(Loss) income before extraordinary loss, diluted $ (2,912) $ 56,207 $ 26,594 $ 51,518
Preferred dividend (517) - - -
Discount on preferred stock redemption - - - -
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(Loss) income before extraordinary loss attributable to
common shares, diluted $ (3,429) $ 56,207 $ 26,594 $ 51,518
================== ================= =============== =============
Diluted weighted average shares 36,388 49,087 42,857 49,098
================== ================= =============== =============
(Loss) income per share before extraordinary loss, diluted $ (0.09) $ 1.15 $ 0.62 $ 1.05
================== ================= =============== =============
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Business Segments
Six Months Ended June 30,
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2001 2000
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Rents and Sales
Shopping Centers $ 7,317 $ 14,318
Office Buildings 3,215 6,136
Parking Facilities 1,619 5,224
Ventek 4,031 2,779
Corporate 14 171
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16,196 28,628
Less - Operating Expenses and
Costs of Goods Sold
Shopping Centers 2,945 4,061
Office Buildings 1,459 2,685
Parking Facilities 24 360
Ventek 3,828 4,234
Corporate 189 (7)
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8,445 11,333
Less - Real Estate Taxes
Shopping Centers 513 1,497
Office Buildings 230 696
Parking Facilities 347 951
Corporate (145) -
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945 3,144
Property - Net Operating Income (Loss)
Shopping Centers 3,859 8,760
Office Buildings 1,526 2,755
Parking Facilities 1,248 3,913
Ventek 203 (1,455)
Corporate (30) 178
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6,806 14,151
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Business Segments (Continued)
Six Months Ended June 30,
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2001 2000
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Less - Depreciation and Amortization $ 2,807 $ 6,222
Less - Interest Expense 4,660 12,512
Mortgage Investment Income 266 150
Corporate Income (Expense)
Investment income 3,283 4,647
Other income 5 64
General and administrative (3,728) (7,901)
Write-down of investment (2,700) -
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Loss before Capital Gain
and Extraordinary Loss $ (3,535) $ (7,623)
===================== ======================
Capital Expenditures
Shopping Centers $ 105 $ 700
Office Buildings 403 3,909
Parking Facilities 114 20
Ventek 52 24
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$ 674 $ 4,653
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June 30,
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2001 2000
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Identifiable Assets
Shopping Centers $ 59,870 $ 136,482
Office Buildings 2,513 52,275
Parking Facilities - 73,027
Mortgages 4,800 2,698
Ventek 5,444 4,904
Corporate 125,474 196,500
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Total Assets $ 198,101 $ 465,886
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Financial Condition
In March 2001, the Trust sold a significant portion of its remaining real estate
assets to Purchaser, an affiliate of Radiant, for an aggregate sales price of
$205 million. At the closing of this transaction, the sales price of $205
million was reduced by $20.6 million, which was the net sales price realized by
the Trust from the sale of the Huntington Garage which was sold in December 2000
to another party and which was part of the aggregate sales price of $205
million. The Huntington Garage property was among those that the Purchaser
agreed to acquire from the Trust. The Purchaser and the Trust had agreed that
the Trust was permitted to sell the Huntington Garage property to a third party
and that the Purchaser would receive a credit towards the $205 million purchase
price equal to the net sales price realized by the Trust from the sale of the
Huntington Garage. The Trust received approximately $192 million in aggregate
consideration for the Purchased Assets after the payment of expenses, and net
operating income and other adjustments, but not including operating income and
expense prorations. Of the approximate $192 million, approximately $62 million
(including the Huntington Garage sale and North Valley financing) was in cash,
$7 million was in the form of a bridge loan and approximately $123 million was
for the assumption or repayment of mortgage indebtedness on the Purchased
Assets. The $7 million bridge loan had a four month term. The interest rate on
the loan was 11% per annum and was secured by cross-collateralized first
mortgages on two properties. The loan was repaid in two installments, $2.2
million was paid in June 2001 and $4.8 million was paid in July 2001. The Trust
recognized a capital gain on the sale of approximately $30.1 million, less an
extraordinary loss on early extinguishment of debt of $.9 million. The Trust had
previously recorded in December of 2000 a $19.2 million unrealized loss on the
carrying value of certain of the Purchased Assets.
In February 2001, in accordance with the sales agreement, the Trust amended the
mortgage loan on the North Valley Tech Center property to provide for an
additional $6.5 million of financing. The Purchaser assumed this obligation at
closing and in accordance with the sales agreement received a credit for the net
cash proceeds of this loan received by the Trust.
In February 2001, the Board of Trustees approved the expansion of the Trust's
common share repurchase program. The original authorization, which occurred in
August 1999, was for $20 million. The Board of Trustees expanded this amount by
an additional $20 million to be used for share repurchases in open market,
privately negotiated or other types of transactions, from time to time, as
market conditions warrant.
In April 2001, the Trust entered into separate agreements with Apollo Real
Estate Investment Fund II, L.P. and with Bear Stearns International Limited
providing for the repurchase by the Trust of an aggregate of approximately 4.8
million of its common shares at a price of $2.375 per share. The repurchases are
part of the Trust's common share repurchase authorization, under which the Trust
had previously expended approximately $15.6 million to buy common shares. The
Trust has authority remaining to spend approximately $13.0 million with respect
to the repurchase program.
At June 30, 2001, the Trust off its their $2.7 million investment in HQ
Global Holdings, Inc. ("HQ") warrants because of a decline in center occupancy
and other business setbacks recently disclosed by HQ. The Trust believes that
the decline in estimated fair market value of this investment is other than
temporary. The Trust continues to evaluate its investment in the convertible
preferred stock of HQ.
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The Board of Trustees of the Trust has established a Special Committee for the
purpose of evaluating and advising the Board with respect to proposed
transactions and other possible business alternatives that the Trust may pursue.
The Special Committee, which is comprised of Daniel J. Altobello and Bruce P.
Berkowitz, Trustees of the Trust, has retained US Bancorp-Libra and Duff and
Phelps LLC as its investment advisors and Shaw Pittman as its independent legal
counsel. Among the matters that the Special Committee is evaluating is a new
proposal made on July 3, 2001 by Gotham Partners, LP ("Gotham"), a major
shareholder of the Trust. The terms of the Gotham proposal have been previously
disclosed in a press release (filed as an exhibit to this 10-Q) by the Trust and
by Gotham. William A. Ackman, a principal of Gotham, is the Chairman of the
Trust. There can be no assurances that the Trust will pursue the Gotham proposal
or come to terms with Gotham with respect to the Gotham proposal. No
determinations have been reached by the Special Committee with respect to the
pursuit of any specific alternatives.
Liquidity and Capital Resources
General
Unrestricted and restricted cash decreased by $18.2 million (from $23.9
million to $5.7 million) when comparing the balance at June 30, 2001 to the
balance at December 31, 2000.
The Trust's net cash used for operating activities of $5.9 million and
net cash used for financing activities of $156.5 million more than offset the
$144.2 million of net cash provided by investing activities. Cash used for
financing activities included the repayment of $150.0 million that had been
borrowed pursuant to reverse repurchase agreements that were utilized to
purchase U.S. Treasury Bills. The Trust invests its excess cash primarily in
U.S. Treasury Bills and other U.S. Government Obligations. Cash used for
financing activities also included $1.0 million of cash dividends to preferred
shareholders, $.3 million of mortgage amortization and $11.6 million to
repurchase common shares. Cash provided by financing activities included $6.5
million of proceeds received when the Trust amended the mortgage loan on the
North Valley Tech Center property to provide for additional financing. Cash
provided by investing activities consisted of the receipt of $2.2 million of
principal on the bridge loan, net proceeds from the sale of real estate of $43.6
million and the excess of sales over purchases of U.S. Treasury Bills and other
U.S. Government Obligations of $99.0 million. Cash used for investing activities
consisted of $.7 million of improvements to properties.
The Trust declared a dividend of $.5 million ($.525 per share) to
Series A Cumulative Preferred Shareholders in the second quarter of 2001. The
dividend was paid July 31, 2001 to shareholders of record at the close of
business on June 30, 2001. In addition, the Trust paid a dividend for the first
quarter of 2001 of $.5 million ($.525 per share) to preferred shareholders. No
cash dividend for the first or second quarter was declared with respect to the
common shares. The Trust anticipates generating an approximate $25 to $30
million net operating loss carry forward, subject to limitations and the ability
to generate future profits, for tax reporting purposes during 2001.
At June 30, 2001, the Trust owned $111.1 million in face value of U.S.
Treasury Bills and other U.S. Government Obligations. The U.S. Treasury Bills
and U.S. Government Obligations are classified as held to maturity.
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During the six months ended June 30, 2001, the Trust repurchased
4,890,692 common shares for an aggregate cash consideration of $11.6 million. As
a result of these transactions, 34,805,912 common shares of beneficial interest
were outstanding at June 30, 2001.
Park Plaza Mall
The anchor department store, ("Dillard's"), at the Trust's Park Plaza
Mall located in Little Rock, Arkansas, owns its facilities and has an operating
agreement with the Trust that expires in 2003. Dillard's and its partner Simon
Property Group own a parcel of land in West Little Rock and have announced their
intention to build a 1.3 million square foot mall in this new location. During
the first quarter of 2001, the Little Rock Board of Directors re-approved zoning
which would permit the construction of this new property. Although the Trust
does not believe that a new mall is economically feasible, in the event that the
new mall is approved and built, Dillard's may decline to extend or renew its
operating agreement and vacate its premises at the Park Plaza Mall. In the event
Dillard's does not remain at the Park Plaza Mall and no comparable anchor tenant
is substituted, the value of the mall would be materially and adversely
affected.
Results of Operations
Net income applicable to common shares for the six months ended June
30, 2001 was $24.7 million as compared to a net income of $44.6 million for the
six months ended June 30, 2000. Net income for the six months ended June 30,
2001 included a write-down of an investment in warrants to purchase common
shares of HQ of $2.7 million. Net income for the six months ended June 30, 2001
included capital gains of approximately $30.1 million compared to capital gains
of $59.1 million in the comparable period of 2000. Capital gains for the six
months ended June 30, 2001 related to the sale of the Purchased Assets. The
capital gain for the six months ended June 30, 2000 included $59.0 million
related to the sale of Crossroads Mall. Net income for the six months ended June
30, 2001 included a $.9 million extraordinary loss from early extinguishment of
debt relating to the first mortgage debt which was assumed as part of the sale
of the Purchased Assets. Net income for the six months ended June 30, 2000
included a $3.1 million extraordinary loss from early extinguishment of debt
relating to the payoff of the Trust's deferred obligation of $10.6 million and a
$2.4 million loss from early extinguishment of debt relating to the first
mortgage debt which was assumed as part of the sale of Crossroads Mall.
Net loss for the three months ended June 30, 2001 was $3.4 million as
compared to net income of $53.1 million in the comparable period of 2000. The
net loss for the three months ended June 30, 2001 included a $2.7 million
write-down of an investment. The net income for the three months ended June 30,
2000 included a capital gain of $59.0 million from the sale of Crossroads Mall
and $2.4 million loss from the early extinguishment of debt.
Short term investment income decreased during the six months ended June
30, 2001, as compared to the comparable period of 2000. The decrease is a result
of lower amounts invested and lower interest rates between the comparable three
and six month periods.
Property net operating income decreased for the six months ended June
30, 2001 to $6.6 million from $15.6 million in 2000. The decrease was
attributable to the sale of properties in March 2001.
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Property net operating income for the Trust's remaining real estate
properties for the six months ended June 30, 2001 and 2000 decreased by $.6
million. The decrease was attributable to a decrease in revenue of $.1 million
and an increase in operating expense of $.5 million. Revenues decreased by $.1
million for the properties remaining for the six months ended June 30, 2001 and
2000, primarily due to a decrease in occupancy at Park Plaza. Operating expenses
increased at both Circle Tower and Park Plaza.
Property net operating income for the Trust's remaining real estate
properties for the three months ended June 30, 2001 and 2000 decreased by $.5
million. The decrease was attributable to an increase in operating expenses.
Depreciation and amortization, and mortgage loan interest expense
decreased when comparing the three and six months ended June 30, 2001 to the
comparable periods in 2000 due to the sale of properties in March 2001. With
respect to the remaining properties, depreciation and amortization expense
increased slightly due to improvements to properties. Mortgage interest expense
increased with respect to the remaining properties as a result of a first
mortgage loan that was obtained on the Park Plaza Mall in April 2000.
Interest expense relating to notes payable decreased due to the
repayment of reverse repurchase agreements in January 2001.
General and administrative expenses decreased by $4.2 million when
comparing the six months ended June 30, 2001 and the comparable period in 2000,
primarily due to severance expenses incurred during the 2000 period. Included in
general and administrative expenses for the six months ended June 30, 2000 are
approximately $2.7 million of stay bonuses and severance expense. In addition,
general and administrative expenses decreased due to salary and overhead savings
as a result of the Trust outsourcing its management functions.
Operations improved at the Company's manufacturing facility when
comparing the three and six months ended June 30, 2001 and the comparable
periods in 2000, primarily due to a higher profit percentage earned on contracts
that were worked on during the 2001 periods and a decrease in cost of goods
sold. In addition, the Trust has retained a management consulting team to
upgrade and improve operations at this facility.
Certain statements contained in this Form 10-Q that are forward-looking
are based on current expectations that are subject to a number of uncertainties
and risks, and actual results may differ materially. The uncertainties and risks
include, but are not limited to, changes in market activity, changes in local
real estate conditions and markets, actions by competitors, interest rate
movements and general economic conditions. Further information about these
matters can be found in the Trust's Annual Report filed with the SEC on Forms
10K and 10K/A.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Interest Rate Risk
The Trust had entered into certain financing arrangements that required
interest payments based on variable interest rates. As such, the combined
financial statements were subject to changes in the market rate of interest. All
floating rate loans were transferred with the sale of the properties in March
2001. The fair value of financial instruments is determined by approximating the
interest rate available in the current market for financial instruments with
similar attributes, terms and conditions.
The table below provides information about the Trust's financial
instruments:
AS OF JUNE 30, 2001
EXPECTED MATURITY DATES (AMOUNTS IN MILLIONS)
FAIR
2001 2002 2003 2004 2005 THEREAFTER TOTAL VALUE
--------- ---------- --------- -------- --------- --------------- -------- ---------
LIABILITIES
- ----------------------------
Mortgage loan
- -------------
- - Fixed rate $.1 $.3 $.3 $.3 $.4 $40.8 $42.2 $42.2
Interest rate 8.69% 8.69% 8.69% 8.69% 8.69% 8.69%
Senior notes
- ------------
- - Fixed rate $12.5 $12.5 $12.5
Interest rate 8.875%
Note payable
- ------------
- - Fixed rate $.1 $.1 $.1
Interest rate 7.5%
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 18, 2001, the plaintiff in the Brickell vs. Friedman et. al.
lawsuit (the "Brickell Lawsuit") filed an amended complaint which added
allegations challenging a proposal by Gotham, announced on May 16, 2001,
pursuant to which Gotham would sell certain of its assets to the Trust in
exchange for shares of the Trust (the "First Gotham Proposal"). The amended
complaint alleged that approval by the Board of the First Gotham Proposal would
constitute a breach of its fiduciary duty. On May 25, 2001, Gotham announced
that it was withdrawing the First Gotham Proposal. On July 16, 2001, First
Union, trustees and certain former trustees of the Trust moved to dismiss the
Brickell Lawsuit. Radiant Investors, LLC and its principals filed a separate
motion to dismiss.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
Exhibit 99.1 - Press release dated July 3, 2001 regarding a proposal made by
Gotham Partners, LP.
(b) Reports on Form 8K:
April 5, 2001 - The Trust filed Form 8-K/A which amended and supplemented the
Item 2 Form 8-K filed on March 22, 2001 regarding the sale of certain real
estate properties to Radiant Ventures I, LLC.
Item 7(b) - Pro Forma Financial Information.
- Pro Forma Combined Balance Sheet as of December 31, 2000.
- Pro Forma Combined Statement of Operations for the Year Ended
December 31, 2000.
- Pro Forma Combined Statement of Operations for the Year Ended
December 31, 1999.
- Notes to Pro Forma Combined Financial Statements.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Trust has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Union Real Estate Equity and
Mortgage Investments
----------------------------------
(Trust)
Date: August 13, 2001 By: /s/ Neil H. Koenig
--------------------------------------
Neil H. Koenig,
Interim Chief Financial Officer
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Index to Exhibits
Exhibit 99.1 - Press release dated July 3, 2001 regarding a proposal
made by Gotham Partners, LP.
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