-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CqJ1H/T3VE3T8hryUPPCtMn6LBWSFvPVJzOWRrvT4ar3fHYV2jutWqUaCshcE8BQ yjCidLANOL7zE7+XyymAuA== 0000950123-01-508509.txt : 20020410 0000950123-01-508509.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950123-01-508509 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST UNION REAL ESTATE EQUITY & MORTGAGE INVESTMENTS CENTRAL INDEX KEY: 0000037008 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 346513657 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06249 FILM NUMBER: 1790218 BUSINESS ADDRESS: STREET 1: 551 FIFTH AVE STREET 2: STE 1416 CITY: NEW YORK STATE: NY ZIP: 10176 BUSINESS PHONE: 2129051104 MAIL ADDRESS: STREET 1: 551 FIFTH AVE STREET 2: SUITE 1416 CITY: NEW YORK STATE: NY ZIP: 10176 FORMER COMPANY: FORMER CONFORMED NAME: FIRST UNION REALTY DATE OF NAME CHANGE: 19691012 10-Q 1 y55039e10-q.txt FIRST UNION REAL ESTATE EQUITY/MORTAGE INVESTMENTS ================================================================================ 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 September 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 November 1, 2001 - -------------------------------------------------------------------------------- ================================================================================ Total number of pages contained in this report: 20 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS Combined Balance Sheets
September 30, 2001 December 31, (In thousands, except share data) (Unaudited) 2000 ------------ ----------- ASSETS Investments in real estate Land $ 6,086 $ 45,692 Buildings and improvements 64,140 227,691 ---------- ---------- 70,226 273,383 Less - Accumulated depreciation (9,620) (68,507) ---------- ---------- Total investments in real estate 60,606 204,876 Mortgage loan -- 1,468 Other assets Cash and cash equivalents - unrestricted 1,368 19,477 - restricted 1,885 4,412 Accounts receivable and prepayments, net of allowances of $164 and $771, respectively 2,534 5,386 Investments 121,453 220,648 Inventory 2,231 3,097 Unamortized debt issue costs, net 370 1,439 Other 190 1,795 ---------- ---------- Total assets $ 190,637 $ 462,598 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Mortgage loans $ 42,140 $ 158,772 Notes payable 99 150,110 Senior notes 12,538 12,538 Accounts payable and accrued liabilities 7,875 18,040 Deferred items 83 2,755 ---------- ---------- Total liabilities 62,735 342,215 ---------- ---------- Shareholders' equity Preferred shares of beneficial interest, $25 liquidation preference, 2,300,000 shares authorized, 984,800 shares outstanding at September 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 September 30, 2001 and December 31, 2000, respectively 34,806 39,697 Additional paid-in capital 207,602 214,336 Undistributed loss from operations (137,677) (156,821) ---------- ---------- Total shareholders' equity 127,902 120,383 ---------- ---------- Total liabilities and shareholders' equity $ 190,637 $ 462,598 ========== ==========
See Notes to Combined Financial Statements. 2 FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS Combined Statements of Operations
Unaudited (In thousands, except per share data) Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Revenues Rents $ 3,105 $ 11,346 $ 15,270 $ 37,195 Sales 1,722 1,463 5,753 4,242 Interest and dividends 971 3,500 4,520 8,297 Other (loss) income -- (33) 5 31 -------- -------- -------- -------- 5,798 16,276 25,548 49,765 -------- -------- -------- -------- Expenses Property operating 1,289 3,207 5,906 10,306 Cost of goods sold 2,722 2,076 6,550 6,310 Real estate taxes 36 1,180 981 4,324 Depreciation and amortization 523 2,948 3,330 9,170 Interest 1,222 6,575 5,882 19,087 General and administrative 639 2,158 4,367 10,059 Write-down of investment 4,363 -- 7,063 -- -------- -------- -------- -------- 10,794 18,144 34,079 59,256 -------- -------- -------- -------- Loss before (loss) gains on sale of real estate, extraordinary loss from early extinguishment of debt and preferred dividend (4,996) (1,868) (8,531) (9,491) (Loss) gains on sale of real estate (14) 772 30,115 59,913 -------- -------- -------- -------- (Loss) income before extraordinary loss from early extinguishment of debt and preferred dividend (5,010) (1,096) 21,584 50,422 Extraordinary loss from early extinguishment of debt -- -- (889) (5,459) -------- -------- -------- -------- Net (loss) income before preferred dividend (5,010) (1,096) 20,695 44,963 Preferred dividend (517) (517) (1,551) (1,933) -------- -------- -------- -------- Net (loss) income attributable to shares of beneficial interest $ (5,527) $ (1,613) $ 19,144 $ 43,030 ======== ======== ======== ======== Per share data Basic weighted average shares 34,806 41,751 36,931 42,229 ======== ======== ======== ======== Diluted weighted average shares 34,806 41,751 41,777 48,258 ======== ======== ======== ======== (Loss) income before extraordinary loss, basic $ (0.16) $ (0.04) $ 0.54 $ 1.17 Extraordinary loss from early extinguishment of debt, basic -- -- (0.02) (0.13) -------- -------- -------- -------- Net (loss) income applicable to shares of beneficial interest, basic $ (0.16) $ (0.04) $ 0.52 $ 1.04 ======== ======== ======== ======== (Loss) income before extraordinary loss, diluted $ (0.16) $ (0.04) $ 0.52 $ 1.04 Extraordinary loss from early extinguishment of debt, diluted -- -- (0.02) (0.11) -------- -------- -------- -------- Net (loss) income applicable to shares of beneficial interest, diluted $ (0.16) $ (0.04) $ 0.50 $ 0.93 ======== ======== ======== ======== Combined Statements of Comprehensive (Loss) Income Net (loss) income $ (5,527) $ (1,613) $ 19,144 $ 43,030 Other comprehensive income -- -- -- -- -------- -------- -------- -------- Comprehensive (loss) income $ (5,527) $ (1,613) $ 19,144 $ 43,030 ======== ======== ======== ========
See Notes to Combined Financial Statements. 3 FIRST UNION REAL ESTATE EQUITY and MORTGAGE INVESTMENTS Combined Statements of Cash Flows
Unaudited (In thousands) Nine Months Ended September 30, ----------------------------- 2001 2000 ------------ ------------ Cash (used for) provided by operations Net income before preferred dividend $ 20,695 $ 44,963 Adjustments to reconcile net income before preferred dividend to net cash (used for) provided by operations Depreciation and amortization 3,330 9,178 Write-down of investment 7,063 -- Extraordinary loss from early extinguishment of debt 889 5,459 Gains on sale of real estate (30,115) (59,913) (Decrease) increase in deferred items (897) 2,495 Net changes in other assets and liabilities (7,297) 2,406 ------------ ------------ Net cash (used for) provided by operations (6,332) 4,588 ------------ ------------ Cash provided by (used for) investing Principal received from mortgage loans and note receivable 7,048 3,866 Net proceeds from sale of real estate 43,617 2,451 Proceeds from sale of fixed assets -- 175 Proceeds from sale of investment in joint venture -- 2,410 Purchase of investments (951,276) (1,109,231) Proceeds from maturity of investments 1,044,083 1,003,668 Investments in building and tenant improvements (729) (7,118) ------------ ------------ Net cash provided by (used for) investing 142,743 (103,779) ------------ ------------ Cash (used for) provided by financing (Decrease) increase in notes payable (150,011) 100,985 Proceeds from mortgage loans 6,500 50,000 Repayment of mortgage loans - Normal payments (360) (1,098) - 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) (4,150) Purchase of First Union preferred shares -- (7,739) Income from variable stock options -- (666) Debt issue costs paid -- (567) Dividends paid on shares of beneficial interest -- (13,166) Dividends paid on preferred shares of beneficial interest (1,551) (2,124) ------------ ------------ Net cash (used for) provided by financing (157,047) 69,717 ------------ ------------ Decrease in cash and cash equivalents (20,636) (29,474) Cash and cash equivalents at beginning of period 23,889 57,841 ------------ ------------ Cash and cash equivalents at end of period 3,253 28,367 Change in cash from discontinued operations -- (2,414) ------------ ------------ Cash and cash equivalents at end of period, including discontinued operations $ 3,253 $ 25,953 ============ ============ Supplemental Disclosure of Cash Flow Information Interest Paid $ 6,964 $ 19,551 ============ ============ Supplemental Disclosure of Non-Cash Investing and Financing Activities Transfer of mortgage loan obligations in connection with real estate sales $ 122,722 $ 76,189 ============ ============ 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 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 nine months ended September 30, 2001, are not indicative of the results to be expected for the full year, as a result of the sale by the Trust of 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 (EITF 98-9), "Accounting for Contingent Rent in Interim Financial Periods." EITF 98-9 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 EITF 98-9. 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 adopted on January 1, 2001. The adoption of SFAS No. 133 had no effect on the Trust's financial statements. 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. The effect of SFAS No. 141 was not material to the Trust's financial statements. 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. 5 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 is not expected to be material to the Trust's financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of a Disposal of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business. This Statement also amends ARB No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. The provisions of this Statement generally are to be applied prospectively. The Trust has not evaluated the effect of this statement, however, it is not expected that this statement will have a material effect on the Trust's results of operations. Unrestricted cash and cash equivalents include checking and money market accounts. 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 deferred 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 deferred income taxes attributable to these temporary differences are included in the determination of income. 6 Business Segments The Trust's and Company's business segments at September 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 nine months ended September 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 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 gain on the sale of approximately $30.1 million, and 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. 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 Trust's remaining real estate properties consist of a shopping mall in Little Rock, Arkansas and an office building in Indianapolis, Indiana. Investments 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 the investment in warrants is other than temporary. At September 30, 2001, the Trust wrote off $4.4 million of its $8.8 million investment in HQ preferred stock because of recently disclosed defaults on HQ's various credit agreements, which the Trust believes has led to an other than temporary impairment in the value of its investment in HQ's preferred stock. HQ has disclosed that it has entered into a Forbearance Agreement with certain of its lenders which expires prior to the end of the year. The final disposition of these and other matters may cause the Trust to adjust further its investment in HQ preferred stock. The investment in HQ has been classified as available for sale. The remaining $117.1 million of investments consists of direct purchases of U.S. Treasury Bills and other U.S. Government Obligations with maturities of less than 90 days. These investments have been classified as held to maturity. 7 Related Party Transactions Radiant is currently providing asset management services to the Trust's remaining assets. For the nine months ended September 30, 2001 and 2000, the Trust paid fees to Radiant of $.4 million and $.5 million, respectively. The principals of Radiant were formerly executive officers of the Trust. The Trust and Company paid fees of $.4 million and $.1 million for the nine months ended September 30, 2001 and 2000, respectively, to the Real Estate Systems Implementations Group, LLC for financial reporting and advisory services. The managing member of this firm assumed the position of Interim Chief Financial Officer of the Trust on August 18, 2000 and is currently serving in that capacity. 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 Nine Months Nine Months Ended Ended Ended Ended September 30, September 30, September 30, September 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Basic (Loss) income before extraordinary loss, basic $ (5,010) $ (1,096) $ 21,584 $ 50,422 Preferred dividend (517) (517) (1,551) (1,933) Discount on preferred stock redemption -- -- -- 827 ---------- ---------- ---------- ---------- (Loss) income before extraordinary loss attributable to common shares, basic $ (5,527) $ (1,613) $ 20,033 $ 49,316 ========== ========== ========== ========== Basic weighted average shares 34,806 41,751 36,931 42,229 ========== ========== ========== ========== (Loss) income per share before extraordinary loss, basic $ (0.16) $ (0.04) $ 0.54 $ 1.17 ========== ========== ========== ========== Diluted (Loss) income before extraordinary loss, diluted $ (5,010) $ (1,096) $ 21,584 $ 50,422 Preferred dividend (517) (517) -- -- Discount on preferred stock redemption -- -- -- -- ---------- ---------- ---------- ---------- (Loss) income before extraordinary loss attributable to common shares, diluted $ (5,527) $ (1,613) $ 21,584 $ 50,422 ========== ========== ========== ========== Basic weighted average shares 34,806 41,751 36,931 42,229 Convertible preferred shares -- -- 4,846 6,029 ---------- ---------- ---------- ---------- Diluted weighted average shares 34,806 41,751 41,777 48,258 ========== ========== ========== ========== (Loss) income per share before extraordinary loss, diluted $ (0.16) $ (0.04) $ 0.52 $ 1.04 ========== ========== ========== ==========
The preferred shares are not included in the diluted earnings per share calculation for the three months ended September 30, 2001 and 2000, because they are anti-dilutive. 9 Business Segments(in thousands)
Three Months Ended Nine Months Ended September 30, September 30, ---------------------- ---------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Rents and Sales Shopping Centers $ 2,760 $ 5,413 $ 10,077 $ 19,731 Office Buildings 352 3,354 3,567 9,490 Parking Facilities - 2,542 1,619 7,766 Ventek 1,722 1,463 5,753 4,242 Corporate (7) 37 7 208 -------- -------- -------- -------- 4,827 12,809 21,023 41,437 Less - Operating Expenses and Costs of Goods Sold Shopping Centers 1,217 1,794 4,162 5,855 Office Buildings 172 1,418 1,631 4,103 Parking Facilities -- (5) 24 355 Ventek 2,722 2,076 6,550 6,310 Corporate (100) -- 89 (7) -------- -------- -------- -------- 4,011 5,283 12,456 16,616 Less - Real Estate Taxes Shopping Centers 199 394 712 1,891 Office Buildings 21 309 251 1,005 Parking Facilities -- 477 347 1,428 Corporate (184) -- (329) -- -------- -------- -------- -------- 36 1,180 981 4,324 Net Operating Income (Loss) Shopping Centers 1,344 3,225 5,203 11,985 Office Buildings 159 1,627 1,685 4,382 Parking Facilities - 2,070 1,248 5,983 Ventek (1,000) (613) (797) (2,068) Corporate 277 37 247 215 -------- -------- -------- -------- 780 6,346 7,586 20,497
10 Business Segments (Continued)
Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2001 2000 2001 2000 -------- -------- -------- -------- Less - Depreciation and Amortization $ 523 $ 2,948 $ 3,330 $ 9,170 Less - Interest Expense 1,222 6,575 5,882 19,087 Corporate Income (Expense) Interest and dividends 971 3,500 4,520 8,297 Other income -- (33) 5 31 General and administrative (639) (2,158) (4,367) (10,059) Write-down of investment (4,363) -- (7,063) -- -------- -------- -------- -------- Loss before (loss) Gains on Sale of Real Estate, Extraordinary Loss and Preferred Dividend $ (4,996) $ (1,868) $ (8,531) $ (9,491) ======== ======== ======== ======== Capital Expenditures Shopping Centers $ 28 $ 130 $ 133 $ 830 Office Buildings 25 2,070 428 5,979 Parking Facilities -- 204 114 224 Ventek 2 20 54 44 Corporate -- 41 -- 41 -------- -------- -------- -------- $ 55 $ 2,465 $ 729 $ 7,118 ======== ======== ======== ========
September 30, --------------------- 2001 2000 -------- -------- Identifiable Assets Shopping Centers $ 59,623 $149,701 Office Buildings 2,413 55,080 Parking Facilities -- 77,046 Mortgages -- 1,483 Ventek 4,049 7,258 Corporate 124,552 186,323 -------- -------- Total Assets $190,637 $476,891 ======== ========
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 gain on the sale of approximately $30.1 million and 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, and repurchased 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. As of September 30, 2001, the Trust has authority to spend approximately $13.0 million with respect to the repurchase program. 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 the investment in warrants is other than temporary. At September 30, 2001, the Trust wrote off $4.4 million of its remaining $8.8 million investment in HQ preferred stock because of recently disclosed defaults on HQ's various credit agreements, which the Trust believes has permanently impaired the value of its investment in HQ's preferred stock. 12 The Trust, as one Plaintiff in a class action composed of numerous businesses and individuals, has pursued legal action against the State of California associated with the 1986 flood of Sutter Buttes Center, formerly Peachtree Mall. In September 1991, the court ruled in favor of the plaintiffs on the liability portion of the inverse condemnation suit, which the State of California appealed. In the third quarter of 1999, the 1991 ruling in favor of the Trust and the other plaintiffs was reversed by the State of California Appeals Court, which remanded the case to the trial court for further proceedings. After the remand to the trial court, the Trust and the other plaintiffs determined to pursue a retrial before the court. The retrial of the litigation commenced February 2001 and was completed July 2001. The trial court judge has issued a preliminary "Intended Decision" that generally holds in favor of the State of California. The Trust's attorneys have presented objections to the Intended Decision and are awaiting a final decision from the trial court judge. The Trust has not determined whether it will appeal the ruling if it is not in its favor. 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. On September 24, 2001, the Trust signed a letter of intent with Gotham Partners, LP ("Gotham"), a major shareholder of the Trust. William A. Ackman, a principal of Gotham, is the Chairman of the Trust. The Letter of Intent, which has been previously disclosed in a press release and a Form 8-K, encompasses a business combination and cash-out merger transaction, in which the Trust's shareholders will receive cash, the option of receiving either a proportionate share in the continuing assets of the Trust or a cash payment and subscription rights to invest in a new entity, Gotham Golf Corp.. Pursuant to the Letter of Intent, the parties have been engaged in the negotiation of a definitive agreement with respect to the business combination and merger transaction. The negotiations of the parties have taken into account the recent events concerning HQ. The proposed transaction will require approval of the Trust's common shareholders, which will be solicited pursuant to a proxy statement-prospectus. The proposed transaction will be part of an integrated plan that will be consummated at a single closing. The proposed transaction will be effected pursuant to a definitive combination agreement in form and substance customary for comparable transactions, which would be entered into only following (i) approval and recommendation by the unaffiliated members of the Trust's Board of Trustees in connection with the consideration of the proposed transaction, and (ii) receipt by the Trust of an opinion from its independent financial advisor as to the fairness from a financial point of view of the proposed transaction to the Trust's common shareholders unaffiliated with Gotham. There can be no assurances that the Trust will consummate the transaction with Gotham or that if the transaction is consummated, it will be on the same terms as set forth herein or in the Letter of Intent. 13 INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE JOINT PROXY STATEMENT/ PROSPECTUS REGARDING THE BUSINESS COMBINATION TRANSACTION REFERENCED IN THE FOREGOING INFORMATION WHEN IT BECOMES AVAILABLE, BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION. The joint proxy statement/prospectus will be filed with the Securities and Exchange Commission by the Trust, Gotham Partners, L.P. and Gotham Golf Partners. Investors and security holders may obtain a free copy of the joint proxy statement/prospectus (when it becomes available) and other documents filed by the Trust, Gotham Partners, L.P. and Gotham Golf Partners with the Securities and Exchange Commission at the Commission's web site at www.sec.gov. The joint proxy statement/prospectus and these other documents may also be obtained for free from First Union. READ THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS CAREFULLY BEFORE MAKING A DECISION CONCERNING THE PROPOSED TRANSACTION. Liquidity and Capital Resources General Unrestricted and restricted cash decreased by $20.6 million (from $23.9 million to $3.3 million) when comparing the balance at September 30, 2001 to the balance at December 31, 2000. The Trust's net cash used for operating activities of $6.3 million and net cash used for financing activities of $157.0 million more than offset the $142.7 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 $1.6 million of cash dividends to preferred shareholders, $.4 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 $7.0 million of principal on the bridge loan to Radiant, net proceeds from the sale of real estate of $43.6 million and the proceeds from maturity over purchases of U.S. Treasury Bills and other U.S. Government Obligations of $92.8 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 third quarter of 2001. The dividend was paid October 31, 2001 to shareholders of record at the close of business on September 30, 2001. In addition, the Trust paid a dividend for the first and second quarter of 2001 of $.5 million ($.525 per share) per quarter to preferred shareholders. No cash dividend for the first, second or third quarter was declared with respect to the common shares. At September 30, 2001, the Trust owned $117.1 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. During the nine months ended September 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 September 30, 2001. 14 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. Legal actions have been taken by local citizens to reverse the decision of the Little Rock Board of Directors. 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 leave Park Plaza Mall and does not sell or lease its two stores to comparable anchor tenants, the value of the mall would be materially and adversely affected due to the decline in traffic and sales volume at the mall, and the likely departure of many of the mall tenants. Results of Operations Net income applicable to common shares for the nine months ended September 30, 2001 was $19.1 million as compared to net income of $43.0 million for the nine months ended September 30, 2000. Net income for the nine months ended September 30, 2001 included a write-down of an investment in preferred stock of HQ and warrants to purchase common shares of HQ of $7.1 million. Net income for the nine months ended September 30, 2001 included a gain on sale of real estate of approximately $30.1 million compared to gains of $59.9 million in the comparable period of 2000. The gain for the nine months ended September 30, 2001 related to the sale of the Purchased Assets. The gain for the nine months ended September 30, 2000 included $59.0 million related to the sale of Crossroads Mall. Net income for the nine months ended September 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 nine months ended September 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 September 30, 2001 was $5.5 million as compared to a net loss of $1.6 million in the comparable period of 2000. The net loss for the three months ended September 30, 2001 included a write-down of an investment in HQ preferred stock of $4.4 million. The net loss for the three months ended September 30, 2000 included a gain of $.8 million from the sale of the Trust's joint venture interest in Temple Mall. Short term investment income decreased during the three and nine months ended September 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 nine month periods. Property net operating income decreased for the nine months ended September 30, 2001 to $8.4 million from $22.6 million in 2000. The decrease was attributable to the sale of properties in March 2001. Property net operating income decreased for the three months ended September 30, 2001 to $1.8 million from $7.0 million in 2000. The decrease was attributable to the sale of properties in March 2001. 15 Property net operating income for the Trust's remaining real estate properties for the nine months ended September 30, 2001 and 2000 decreased by $.9 million. The decrease was attributable mainly to an increase in operating expenses. Operating expenses increased at both Circle Tower and Park Plaza. Rental income remained relatively constant at both properties. Property net operating income for the Trust's remaining real estate properties for the three months ended September 30, 2001 and 2000 decreased by $.3 million. The decrease in property net operating income was attributable to an increase in operating expenses. Depreciation and amortization, and mortgage loan interest expense decreased when comparing the three and nine months ended September 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 $5.7 million when comparing the nine months ended September 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 nine months ended September 30, 2001 are $.6 million of transaction costs related to the Gotham proposal. Included in general and administrative expenses for the nine months ended September 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 and a decrease in legal expense and accounting fees. General and administrative expenses decreased by $1.5 million when comparing the three months ended September 30, 2001 and the comparable period in 2000, primarily due to a decrease in legal and professional fees and expenses related to previously sold properties. Included in general and administrative expenses for the three months ended September 30, 2001 are $.6 million of transaction costs related to the Gotham proposal. The Company's manufacturing facility incurred a net loss of $1.1 million for the nine months ended September 30, 2001, as compared to a net loss of approximately $2.3 million for the nine months ended September 30, 2000; and, a net loss of $1.1 million for the three months ended September 30, 2001 as compared to a net loss of approximately $.7 million for the three months ended September 20, 2000. The net loss for the 2001 periods include approximately $.3 million in credits estimated to be issued in connection with a contract and a $.2 million inventory valuation adjustment, which is primarily related to discontinued parking models and the Company's transit ticketing equipment inventory. In October 2001, the Company decided to terminate eleven employees who were principally engaged in the production of transit ticketing equipment. Severance expense of less than $.1 million will be incurred in the fourth quarter of 2001 and stay bonuses for selected remaining employees are expected to result in a charge of approximately $.1 million over a one year period, beginning in the fourth quarter of 2001. 16 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, the risk that material adverse events will prelude consummation of the proposed transaction with GGC, changes in market activity, changes in local real estate conditions and markets, actions by competitors, interest rate movements, events affecting the value of the HQ preferred stock and general economic conditions. Further information about these matters can be found in the Trust's Annual Report filed with the SEC on Forms 10-K and 10-K/A and other filings. 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 remaining loans outstanding all have fixed interest rates. The Trust's investments in U.S. Treasury Bills and other U.S. Government Obligations mature in less than 90 days and therefore are not subject to significant interest rate risk. 17 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. On August 16, 2001, the parties signed a stipulation providing that (1) the Brickell lawsuit is withdrawn as moot (ii) plaintiff agrees not to seek to renew or reinstate the Brickell Lawsuit or the claims asserted therein, and (iii) each side will be responsible for its own costs and expenses, including attorney's fees, incurred in connection with the Brickell Lawsuit. The stipulation has been submitted to the court for approval. 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits None (b) Reports on Form 8K: September 28, 2001 Item 4 - The audit committee of the Registrant's Board of Trustees proposed, and its Board of Directors approved, the dismissal of the accounting firm of Arthur Andersen LLP as its independent accountants and the appointment of the accounting firm of KPMG LLP as its independent accountants for the Registrant. Item 7 - Exhibits 16.1 Letter of Arthur Andersen LLP dated September 24, 2001 September 28, 2001 Item 5 - The Registrant issued a press release announcing that it has entered into a letter of intent with Gotham Partners, L.P. that outlines a proposed business combination and cash out merger transaction. Item 7(c) - Exhibits 99.1 Press Release dated September 24, 2001 regarding a letter of intent between the Registrant and Gotham Partners, L.P. 99.2 Letter of Intent between the Registrant and Gotham Partners, L.P. 19 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: November 14, 2001 By: /s/ Neil H. Koenig ------------------------------- Neil H. Koenig, Interim Chief Financial Officer 20 -----END PRIVACY-ENHANCED MESSAGE-----