10-Q 1 y52465e10-q.txt FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVES 1 -------------------------------------------------------------------------------- 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 ------------- ------ First Union Real Estate Equity and Mortgage Investments -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-6513657 -------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization)
125 Park Avenue, 14th Floor New York, New York 10017 ------------------------------------------ ------------------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 949-1373 -------------- ------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------- =============================================================================== Total number of pages contained in this report: 19 --------------- 2 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 ----------------- ------------------ ASSETS Investments in real estate Land $ 6,086 $ 45,692 Buildings and improvements 64,087 227,691 ----------------- ------------------ 70,173 273,383 Less - Accumulated depreciation (9,142) (68,507) ----------------- ------------------ 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 ----------------- ------------------ Total assets $ 198,101 $ 462,598 ================= ================== 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 ----------------- ------------------ Total liabilities 64,672 342,215 ----------------- ------------------ 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) ----------------- ------------------ Total shareholders' equity 133,429 120,383 ----------------- ------------------ Total liabilities and shareholders' equity $ 198,101 $ 462,598 ================= ==================
See Notes to Combined Financial Statements. 2 3 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, ------------------------------ ------------------------- 2001 2000 2001 2000 --------------- ------------ ----------- ----------- 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 --------------- ------------ ----------- ----------- 6,702 16,091 19,750 33,489 --------------- ------------ ----------- ----------- 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 - --------------- ------------ ----------- ----------- 9,756 19,133 23,285 41,112 --------------- ------------ ----------- ----------- 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) --------------- ------------ ----------- ----------- Net (loss) income before preferred dividend (2,912) 53,840 25,705 46,059 Preferred dividend (517) (708) (1,034) (1,416) --------------- ------------ ----------- ----------- Net (loss) income attributable to shares of beneficial interest $ (3,429) $ 53,132 $ 24,671 $ 44,643 =============== ============ =========== =========== Per share data Basic weighted average shares 36,388 42,469 38,012 42,470 =============== ============ =========== =========== Diluted weighted average shares 36,388 49,087 42,857 49,098 =============== ============ =========== =========== (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) --------------- ------------ ----------- ----------- Net (loss) income applicable to shares of beneficial interest, basic $ (0.09) $ 1.27 $ 0.65 $ 1.07 =============== ============ =========== =========== (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) --------------- ------------ ----------- ----------- Net (loss) income applicable to shares of beneficial interest, diluted $ (0.09) $ 1.10 $ 0.60 $ .94 =============== ============ =========== =========== Combined Statements of Comprehensive Income Net (loss) income $ (3,429) $ 53,132 $ 24,671 $ 44,643 Other comprehensive income - - - - --------------- ------------ ----------- ----------- Comprehensive (loss) income $ (3,429) $ 53,132 $ 24,671 $ 44,643 =============== ============ =========== ===========
See Notes to Combined Financial Statements. 3 4 FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS Combined Statements of Cash Flows
Unaudited (In thousands) Six Months Ended June 30, ------------------------------------- 2001 2000 ---------------- --------------- 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 ------------------- ------------------ Net cash (used for) provided by operations (5,899) 2,062 ------------------- ------------------ 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) ------------------- ------------------ Net cash provided by (used for) investing 144,171 (104,824) ------------------- ------------------ 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) ------------------- ------------------ Net cash (used for) provided by financing (156,465) 61,522 ------------------- ------------------ Decrease in cash and cash equivalents (18,193) (41,240) Cash and cash equivalents at beginning of period 23,889 57,841 ------------------- ------------------ Cash and cash equivalents at end of period 5,696 16,601 Change in cash from discontinued operations - (2,414) ------------------- ------------------ Cash and cash equivalents at end of period, including discontinued operations $ 5,696 $ 14,187 =================== ================== Supplemental Disclosure of Cash Flow Information ------------------------------------------------ Interest Paid $ 5,464 $ 13,071 =================== ================== Supplemental Disclosure of Non-Cash Financing Activities -------------------------------------------------------- Transfer of mortgage loan obligations in connection with real estate sales $ 122,772 $ - =================== ================== Transfer of deferred obligation in connection with real estate sales $ 1,775 $ - =================== ================== Issuance of mortgage loan receivable in connection with real estate sales $ 7,000 $ - =================== ================== Discontinued non-cash net assets charged to dividends paid $ - $ 64,747 =================== ==================
See Notes to Combined Financial Statements. 4 5 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. 5 6 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. 6 7 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. 7 8 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 ------------------ ----------------- --------------- ------------- Basic ----- (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 ------------------ ----------------- --------------- ------------- (Loss) income before extraordinary loss attributable to common shares, basic $ (3,429) $ 56,326 $ 25,560 $ 50,929 ================== ================= =============== ============= Basic weighted average shares 36,388 42,469 38,012 42,470 ================== ================= =============== ============= (Loss) income per share before extraordinary loss, basic $ (0.09) $ 1.33 $ 0.67 $ 1.20 ================== ================= =============== ============= Diluted ------- (Loss) income before extraordinary loss, diluted $ (2,912) $ 56,207 $ 26,594 $ 51,518 Preferred dividend (517) - - - Discount on preferred stock redemption - - - - ------------------ ----------------- --------------- ------------- (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 ================== ================= =============== =============
8 9 Business Segments
Six Months Ended June 30, ------------------------- 2001 2000 --------------------- ---------------------- 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 --------------------- ---------------------- 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) --------------------- ---------------------- 8,445 11,333 Less - Real Estate Taxes Shopping Centers 513 1,497 Office Buildings 230 696 Parking Facilities 347 951 Corporate (145) - --------------------- ---------------------- 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 --------------------- ---------------------- 6,806 14,151
9 10 Business Segments (Continued)
Six Months Ended June 30, ------------------------- 2001 2000 --------------------- ---------------------- 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) - --------------------- ---------------------- 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 --------------------- ---------------------- $ 674 $ 4,653 ===================== ====================== June 30, -------- 2001 2000 --------------------- ---------------------- 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 --------------------- ---------------------- Total Assets $ 198,101 $ 465,886 ===================== ======================
10 11 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. 11 12 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. 12 13 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. 13 14 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. 14 15 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%
15 16 ---------- 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. 16 17 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.
17 18 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 18 19 Index to Exhibits Exhibit 99.1 - Press release dated July 3, 2001 regarding a proposal made by Gotham Partners, LP. 19