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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
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For Quarter Ended March 31, 1997 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
incorporation or organization) Identification) No.)
Suite 1900, 55 Public Square
Cleveland, Ohio 44113-1937
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 781-4030
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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
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Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
21,625,503 Shares of Beneficial Interest outstanding as of March 31, 1997
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Total number of pages contained in this report: 10
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PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements.
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The combined financial statements included herein have been prepared by
the registrant, 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 registrant believes that the disclosures
contained herein are adequate to make the information presented not misleading.
It is suggested that these combined financial statements be read in conjunction
with the combined financial statements and the notes thereto included in the
registrant's latest annual report on Form 10-K.
The unaudited "Combined Balance Sheets" as of March 31, 1997 and
"Combined Statements of Income and Combined Statements of Changes in Cash" for
the periods ended March 31, 1997 and 1996, of the registrant, and "Notes to
Combined Financial Statements," are included herein. These financial statements
reflect, in the opinion of the registrant, all adjustments (consisting of normal
recurring accruals) 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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations.
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Financial Condition
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In January 1997, the registrant sold a shopping center in Wilkesboro,
NC for $9 million in cash. This sale resulted in a capital loss of $4.9 million,
which was previously provided for by the registrant as part of a $14 million
noncash unrealized loss on the carrying value of certain assets identified for
disposition recorded in December 1995. The net proceeds were used to repay
short-term bank loans.
In January 1997, the registrant issued 3,910,000 shares of beneficial
interest, resulting in net proceeds of $46.1 million. The net proceeds were used
to repay short-term bank loans of $17 million, repay $5 million in mortgage
loans and invest $24 million in short-term investments.
In February 1997, the registrant received repayment of its wraparound
mortgage loan investment secured by an apartment complex in Atlanta, GA. The
registrant received $16.2 million in cash and a 10%, $1.8 million second
mortgage secured by the management agreement on the apartment complex. The
proceeds were used to repay $3.4 million in underlying mortgage debt and invest
$12.8 million in short-term investments.
Except as noted above, there has been no material change in the
registrant's financial condition from December 31, 1996.
Liquidity and Capital Resources
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Net cash provided by operations for the first quarter of 1997 of $7
million was $2 million greater than the same period of 1996. This increase is
primarily attributed to an increase in net income before preferred dividend
when comparing the first quarter of 1997 to that of 1996. Dividends paid in 1997
of $2.0 million represented 28% of net cash from operating activities.
As described above in the first quarter of 1997, the registrant
received $16.2 million from the repayment of a mortgage investment and $9
million from the sale of a mall. The proceeds were used to repay mortgage debt
related to the mortgage investment and repay amounts outstanding under the bank
credit agreement with the balance of the proceeds being invested temporarily in
short-term investments. The registrant also invested $4.1 million in its
existing portfolio, primarily to complete a tenant alteration at its office
technology center in Denver, CO, which is continuing with a re-tenanting and
conversion from a retail center to a modern commerce center.
The net proceeds of $46.1 million from the January 1997 share offering
were used to repay mortgage and bank loans with the balance of the proceeds
being invested temporarily in short-term investments.
In April 1997, the registrant's affiliated management company purchased
voting control of Imperial Parking Ltd. for $75 million including the assumption
of $26 million in debt. The purchase was funded through cash held in short-term
investments at March 31, 1997 and through short-term borrowings.
During the remaining nine months of 1997, the registrant has
approximately $1.5 million of mortgage principle payments and $15 million of
tenant and building improvements
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to fund. These commitments will be funded through existing operations and bank
credit facilities.
Results From Operations
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Net income applicable to shares of beneficial interest for the first
quarter of 1997 was $1 million as compared to a net loss of $.9 million for the
first quarter of 1996.
Net income applicable to shares of beneficial interest in 1997 included
a non-cash recognition of $.7 million of income from the repayment of a
wraparound mortgage investment, as the proceeds of $18 million exceeded the
registrant's basis in the wraparound mortgage investment. Additionally, in 1997,
net income applicable to shares of beneficial interest was reduced by the
accrual of a preferred dividend of $1.2 million. The preferred shares were
issued in October 1996.
Net income applicable to shares of beneficial interest for the first
quarter of 1996 included two non-cash charges totaling $1.3 million for the
write-off of a tenant allowance and the termination of an employment contract.
Property net operating income, which is rents less property operating
expenses and real estate taxes, was $.6 million and $.5 million greater than
when comparing the first quarter of 1997 to that of 1996 on a comparable and
non-comparable property basis, respectively. The office property portfolio
benefited from increased occupancy at a former retail center in Denver, CO.
which is in the process of being converted into a commerce center and produced
$.5 million of increased income from property net operating income when
comparing 1997 to 1996. The comparable retail portfolio produced an additional
$.3 million in property net operating income primarily due to the addition of
anchor tenants at shopping malls in Reading, PA and Morgantown, WV. The
comparable parking portfolio had a decline of $.2 million in property net
operating income when comparing 1997 to 1996 due to increased real estate tax
expense and the expiration of a fixed minimum rent contract. The property net
operating income for the apartment complex purchased in December 1996 was offset
by the property net operating income lost from the sale of two office buildings
with an attached parking garage in 1996 and the shopping mall sold in
January 1997.
In September 1996, the registrant invested in a joint venture that owns
eight shopping malls and 50% of another mall. The joint venture produced $.3
million in investment income and $.8 million in management fees for the
registrant's affiliated management company in the first quarter of 1997.
Mortgage investment income declined when comparing 1997 to 1996 due
primarily to the repayment of a wraparound mortgage investment in February 1997,
as noted previously.
Short-term investment income increased in 1997 as compared to 1996 due
to the registrant having an average of $26 million invested in short-term
securities in 1997 versus a minimal amount of short-term investments in 1996.
The proceeds from income, the repayment of the wrap-around mortgage investment
in February 1997 and the net proceeds of the issuance of shares of beneficial
interest after repayment of bank and mortgage loans were invested temporarily
in short-term securities in the first quarter of 1997.
Mortgage interest expense increased in 1997 versus 1996 due to three
mortgages obtained in the last nine months of 1996 for $36 million at an average
rate of 7.6%.
Interest on bank loans decreased when comparing 1997 to 1996. The
registrant had an average of $6 million outstanding under its bank credit
agreement in 1997 versus an average balance of $66 million in 1996. The net
proceeds from the sale of preferred shares of beneficial interest in October
1996, $17 million from the proceeds of the sale of shares of beneficial interest
in January 1997, and the $9 million proceeds from the sale of a shopping mall,
were used to repay bank loans during the fourth quarter of 1996 and first
quarter of 1997.
Depreciation and amortization decreased by $.5 million compared to the
first quarter of 1996. The decline is primarily attributed to the one-time, $.7
million write-off of a tenant allowance in 1996 due to the registrant replacing
an anchor tenant at its shopping mall in Morgantown, WV. The one-time write-off
in 1996 is partially offset by the increase in depreciation expense associated
with the registrant's ongoing capital improvement program.
General and administrative expenses for 1996 included a non-recurring,
non-cash charge of $.7 million for the termination of an employment contract of
a former executive. In 1997, general and administrative expenses included the
additional expenses to manage the nine properties acquired by the joint venture.
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PART II - OTHER INFORMATION
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Item 1. Legal Proceedings.
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None.
Item 2. Changes in Securities.
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None.
Item 3. Defaults Upon Senior Securities.
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None.
Item 4. Submission of Matters to a Vote of Security Holders.
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The following matters were considered at the Annual Meeting of
Shareholders held on April 8, 1997:
1. Election of Trustees
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Name Total Votes For Against Abstentions
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Kenneth K. Chalmers 17,387,805 15,729,280 -- 1,658,525
William E. Conway 17,387,805 15,671,950 -- 1,715,855
Russel R. Gifford 17,387,805 15,696,629 -- 1,691,176
Continuing Term Trustees
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E. Bradley Jones 1998
James C. Mastandrea 1998
Herman T. Russell 1998
Daniel G. DeVos 1999
Allen H. Ford 1999
Spencer H. Heine 1999
2. Other Matters
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A Shareholder proposal to disallow proxy ballots
which are unmarked as an affirmative vote for the issue under consideration.
Total Votes For Against Abstentions
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7,986,479 1,987,221 6,988,013 1,011,245
Item 5. Other Information.
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None.
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits:
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Exhibit (3) - First Union Real Estate Equity and
Mortgage Investments Amended By-Laws.
Exhibit (10a) - Credit agreement between Imperial
Parking Limited and BT Bank of Canada
Exhibit (10b) - Put agreement entered into between BT
Bank of Canada, Hong Kong Bank of Canada
and First Union Real Estate Equity and
Mortgage Investments.
Exhibit (10c) - Share Purchase Agreement and amendments
-- Impark Investments Inc. and First
Union Real Estate Equity and Mortgage
Investments.
Exhibit (10d) - Put agreement entered into between
Impark Investments Inc., the Onex
Associates and First Union Real Estate
Equity and Mortgage Investments.
Exhibit (10e) - Senior subordinated note by 3357392
Canada Inc. to 3006302 Nova Scotia
Company.
Exhibit (10f) - Senior subordinated note by 504463 N.B.
Inc. to 3006302 Nova Scotia Company.
Exhibit (10g) - Shareholders Agreement dated April 17,
1997 between 3357392 Canada, Inc. and
3355489 Canada, Inc. and the individuals
and trusts listed on Schedule A.
Exhibit (10h) - Shareholders Agreement dated April 17,
1997 between 504308 N.B., Inc. First
Union Management, Inc. and the
individuals listed on Schedule A.
Exhibit (10i) - Assignment dated March 27, 1997 between
First Union Real Estate Equity and
Mortgage Investments and First Union
Management, Inc.
Exhibit (10j) - Assignment dated April 16, 1997 between
First Union Management, Inc. and
335489 Canada, Inc.
Exhibit (10k) - Assignment dated April 16, 1997 between
335489 Canada, Inc. and 3357392
Canada, Inc.
Exhibit (10l) - Amendment to assignment made May 8, 1997
between First Union Real Estate Equity
and Mortgage Investments and Imperial
Parking Limited.
Exhibit (11) - Statements Re: Computation of Per Share
Earnings
Exhibit (12) - Statements Re: Statements of Ratios of
Combined Income from
Operations and Combined
Net Income to Fixed
Charges
Exhibit (20) - Financial Statements (Unaudited)
Combined Balance Sheets
as of March 31, 1997 and
December 31, 1996
Combined Statements of
Income, for the Three
Months ended March 31,
1997 and 1996
Combined Statements of
Changes in Cash, for
the Three Months ended
March 31, 1997 and 1996
Notes to Combined
Financial Statements
(b) Reports on Form 8-K:
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None.
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SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
First Union Real Estate Equity and
Mortgage Investments
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(Registrant)
Date: May 9, 1997 By: /s/ James C. Mastandrea
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James C. Mastandrea, Chairman,
President and Chief Executive
Officer
Date: May 9, 1997 By: /s/ Steven M. Edelman
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Steven M. Edelman, Executive
Vice President - Chief Financial
Officer
Date: May 9, 1997 By: /s/ John J. Dee
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John J. Dee, Senior Vice
President - Chief Accounting
Officer
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Index to Exhibits
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Exhibit (3) - First Union Real Estate Equity and Mortgage Investments amended
By-Laws
Exhibit (10a) - Credit agreement between Imperial Parking Limited and BT Bank of
Canada
(10b) - Put agreement entered into between BT Bank of Canada, Hong Kong
Bank of Canada and First Union Real Estate Equity and Mortgage
Investments
(10c) - Share Purchase Agreement and amendments-- Impark Investments
Inc. and First Union Real Estate Equity and Mortgage
Investment
(10d) - Put agreement entered into between Impark Investements Inc.,
the Onex Associates and First Union Real Estate Equity and
Mortgage Investements
(10e) - Senior subordinated note by 3357392 Canada Inc. to 3006302 Nova
Scotia Company
(10f) - Senior subordinated note by 504463 N.B. Inc. to 3006302 Nova
Scotia Company
(10g) - Shareholders Agreement dated April 17, 1997 between 3357392
Canada, Inc. and 3355489 Canada, Inc. and the individuals and
trusts listed on Schedule A.
(10h) - Shareholders Agreement dated April 17, 1997 between 504308
N.B., Inc. First Union Management, Inc. and the individuals
listed on Schedule A.
(10i) - Assignment dated March 27, 1997 between First Union Real
Estate Equity and Mortgage Investments and First Union
Management, Inc.
(10j) - Assignment dated April 16, 1997 between First Union
Management, Inc. and 335489 Canada, Inc.
(10k) - Assignment dated April 16, 1997 between 335489 Canada, Inc.
and 3357392 Canada, Inc.
(10l) - Amendment to assignment made May 8, 1997 between First Union
Real Estate Equity and Mortgage Investments and Imperial
Parking Limited.
Exhibit (11) - Statements Re: Computation of per share earnings
Exhibit (12) - Statements Re: Ratios of combined income from
operations and combined net
income to fixed charges
Exhibit (20) - Financial Statements (unaudited)
Combined Balance Sheets as of March 31, 1997 and
December 31, 1996
Combined Statements of Income for the Three
Months ended March 31, 1997 and 1996
Combined Statements of Changes in Cash for the
Three Months ended March 31, 1997 and 1996
Notes to Combined Financial Statements
Exhibit (27) - Financial Data Schedule
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