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SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14A-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to section 240.14a-11(c) or section 240.14a-12
FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PAUL F. LEVIN
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:________
(2) Aggregate number of securities to which transaction applies:___________
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):_____________
(4) Proposed maximum aggregate value of transaction:_______________________
(5) Total fee paid:________________________________________________________
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:________________________________________________
(2) Form, Schedule or Registration Statement No.:__________________________
(3) Filing Party:__________________________________________________________
(4) Date Filed:____________________________________________________________
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FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
55 PUBLIC SQUARE - SUITE 1900 - CLEVELAND, OHIO 44113-1937
NOTICE OF
1997 ANNUAL MEETING OF SHAREHOLDERS
TO THE SHAREHOLDERS:
Notice is hereby given that the 1997 Annual Meeting of the Shareholders of
First Union Real Estate Equity and Mortgage Investments ("First Union" or the
"Trust") will be held in the National City Bank Auditorium, on the fourth floor
of the National City Center Annex Building, 1900 East Ninth Street, Cleveland,
Ohio, on Tuesday, April 8, 1997, at 10:00 A.M., Eastern Daylight Time, for the
following purposes:
1. To elect three Trustees.
2. To consider and take action upon a shareholder proposal concerning the
tabulation of proxies.
3. To consider and take action upon such other matters as may properly come
before the meeting or any adjournment thereof.
Shareholders of record at the close of business on February 7, 1997, are
entitled to notice of and to vote at the meeting. Only such shareholders will be
permitted to attend.
By order of the Board of Trustees
PAUL F. LEVIN
Senior Vice President -- General Counsel
and Secretary
March 5, 1997
PLEASE FILL IN, DATE, SIGN AND RETURN THE ENCLOSED FORM OF PROXY WHETHER OR
NOT YOU EXPECT TO BE PRESENT AT THE MEETING. A SELF-ADDRESSED ENVELOPE IS
ENCLOSED FOR YOUR CONVENIENCE.
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FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
55 PUBLIC SQUARE - SUITE 1900 - CLEVELAND, OHIO 44113-1937
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PROXY STATEMENT
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ANNUAL MEETING OF SHAREHOLDERS
APRIL 8, 1997
GENERAL INFORMATION
The accompanying proxy is solicited by the Board of Trustees of First Union
for use at the 1997 Annual Meeting to be held on April 8, 1997 and at any
adjournment of that meeting. The Shares of Beneficial Interest, par value $1 per
share ("Shares"), represented by each valid proxy will be voted at the meeting
or any adjournment thereof, and, if a choice is specified in the proxy, the
Shares will be voted in accordance with such specification. If no specification
is made, such Shares will be voted for the Board of Trustees' nominees for
Trustees specified in the proxy card and against the shareholder proposal
concerning tabulation of proxies. A shareholder may revoke his proxy, without
affecting any vote previously taken, by giving notice to First Union in writing
or in open meeting. The approximate date on which this Proxy Statement and the
accompanying proxy were sent to shareholders is March 5, 1997.
First Union will bear the cost of preparing and mailing this statement, the
accompanying proxy and any other related materials. First Union has engaged
Corporate Investor Communication Inc. ("CIC") to assist in the solicitation of
proxies from shareholders, at a fee of $5,000, plus reimbursement of its
out-of-pocket expenses. First Union will also pay the standard charges and
expenses of brokerage houses, or other nominees or fiduciaries, for forwarding
such materials to, and obtaining the proxies from, shareholders and
beneficiaries for whose account they hold registered title to Shares of First
Union. In addition to use of the mail, proxies may be solicited personally, by
telephone or by telegram, by Trustees, officers and regular employees of First
Union without receiving additional compensation, as well as by employees of CIC.
First Union will pay the expense of such solicitation.
This proxy statement includes financial information contained in First
Union's Annual Report in previous years. The financial information, attached as
Appendix A, consists of Financial Highlights, Market Price and Dividend Record,
Selected Financial Data, Combined Financial Statements and Notes thereto,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Report of Independent Public Accountants. First Union's Annual
Report for 1996 contains the Letter to Share Owners from the Chairman and
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Chief Executive Officer, a feature section highlighting some of First Union's
properties and its investment in a joint venture which acquired a nine mall
portfolio and summary financial information. This new format was adopted to make
the Annual Report more informative and interesting and to provide a more cost
effective method of distributing the financial information with the proxy
statement.
The record date for determination of shareholders entitled to vote at the
Annual Meeting is February 7, 1997. On that date, 21,554,732 Shares were
outstanding. Each Share has one vote.
ELECTION OF TRUSTEES
Under the Declaration of Trust, as amended (the "Declaration of Trust") of
First Union, the Board of Trustees is divided into three classes, with each
class as nearly equal in number to the other classes as possible. The term of
office of each class expires in successive years. Accordingly, at each Annual
Meeting successors to the Trustees whose terms expire at that meeting are
elected to three-year terms. In addition, under the Declaration of Trust, the
number of Trustees may be fixed or changed from time to time by the
shareholders, provided that the number in each class is not set at fewer than
one nor more than five. In the event of an increase or decrease in the number of
Trustees, the additional or remaining Trustees, as the case may be, are to be
allocated to classes so as to make the classes as nearly equal as possible. Any
vacancy occurring in a class of Trustees may be filled by a majority vote of the
Trustees remaining in office, effective for the remainder of the term for such
class.
NOMINEES
Currently, the Board of Trustees is composed of nine Trustees and is
divided into equal classes known as Class I, II and III whose terms expire in
1997, 1998 and 1999, respectively. It is proposed that three Trustees be elected
to Class I of the Board of Trustees at the Annual Meeting.
While the Trustees do not anticipate that any of the nominees will be
unable to serve, if any is not available for election, proxies may be voted for
a substitute as well as for the other persons named.
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PRINCIPAL OCCUPATIONS, PERIOD OF EXPIRATION
BUSINESS EXPERIENCE SERVICE AS OF
NAME AND AGE AND AFFILIATIONS TRUSTEE TERM
- ---------------------------- ------------------------------------------------------- ----------- -----------
CLASS I
Kenneth K. Chalmers (67) Mr. Chalmers is a consultant. During 1995 and 1996, he 1994 to 2000
was a consultant with Kennedy & Co., Chicago, Illinois, Date
responsible for the Bank of America account. He was
Executive Vice President of Continental Bank, Chicago,
Illinois, and its successor, Bank of America, a commer-
cial bank, from 1984 to 1994. Previously he was Senior
Vice President -- Group Head of the bank from 1977 to
1984 and Vice President -- Division Head from 1972 to
1977. He is a director of Learning Insights, L.L.C. and
Catholic Health Partners; Vice Chairman and a member of
the Executive Committee of St. Joseph Health Care
Foundation, Chicago, Illinois, and serves on the
Advisory Board of the Kellogg Graduate School of
Management, Northwestern University.
William E. Conway (69) Mr. Conway has been Chairman of Fairmount Minerals, 1985 to 2000
Ltd., a miner and processor of industrial minerals, Date
since 1978, and was Chairman and Chief Executive
Officer from 1978 to 1996. Mr. Conway was a Group Vice
President of Midland-Ross Corporation, a diversified
capital goods manufacturer, from 1974 to 1978, and was
Executive Vice President, Administration of Diamond
Shamrock Corporation, a producer of chemicals,
petroleum and related products, from 1970 to 1974. Mr.
Conway is a director of The Huntington National Bank of
Ohio and a trustee of The Cleveland Clinic Foundation
and University School, and serves on the Advisory Board
of the Weatherhead School of Management of Case Western
Reserve University.
Russell R. Gifford (57) Mr. Gifford was President of CNG Energy Services Cor- 1991 to 2000
poration, an unregulated energy marketing company Date
providing gas and electric energy services throughout
North America, from 1994 to 1996. He was President and
Chief Executive Officer of The East Ohio Gas Company,
Cleveland, Ohio, a distributor of natural gas, from
1988 to 1994. He was also President of West Ohio Gas
Company, Lima, Ohio, and River Gas Company, Marietta,
Ohio. CNG, East Ohio, West Ohio and River are
subsidiaries of Consolidated Natural Gas Co. of
Pittsburgh, Pennsylvania. Mr. Gifford was Senior Vice
President of The East Ohio Gas from 1985 to 1988. Mr.
Gifford is a director of National City Bank and Applied
Industrial Technologies, Inc., a trustee of Baldwin
Wallace College, and a member of the National Board of
Governors of the American Red Cross. Mr. Gifford also
served as Chairman of the Greater Cleveland Growth
Association until March 1, 1995.
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REMAINING TRUSTEES
The remaining Trustees, whose present terms of office as Trustees will
continue after the meeting and will expire in the year set forth opposite his
name and upon the election and qualification of his successor, and certain
additional information with respect to each of them, are as follows:
PRINCIPAL OCCUPATIONS, PERIOD OF EXPIRATION
BUSINESS EXPERIENCE SERVICE AS OF
NAME AND AGE AND AFFILIATIONS TRUSTEE TERM
- ---------------------------- ------------------------------------------------------- ----------- -----------
CLASS II
E. Bradley Jones (69) Mr. Jones was Chairman and Chief Executive Officer of 1986 to 1998
LTV Steel Company, an integrated steel company, from Date
July 1984 to December 1984. Prior to that, he was
Chairman and Chief Executive Officer from 1982 to 1984
of Republic Steel Corporation. Mr. Jones is a director
of TRW , Inc., a diversified auto parts, spacecraft and
laser company; Consolidated Rail Corporation;
Cleveland-Cliffs, Inc. a processor of iron ore pellets;
Birmingham Steel products; and RPM, Inc., a
manufacturer of specialized chemical protective agents;
and is a trustee of Fidelity Funds and University
School.
James C. Mastandrea (53) Mr. Mastandrea has been Chairman, President and Chief 1994 to 1998
Executive Officer of the Trust since January 1994 and Date
during 1996 also assumed the title of Chief Financial
Officer; he was President and Chief Operating Officer
from July 1993 through December 1993. Mr. Mastandrea
was President and Chief Executive Officer of Triam
Corporation, Chicago, Illinois, an investment adviser
to various real estate investment funds from 1991 to
1993. He was Chairman, President and Chief Executive
Officer and founder of Midwest Development Corporation,
Buffalo Grove, Illinois, from 1978 to 1991. From 1971
to 1978, Mr. Mastandrea served in various capacities in
the field of commercial and real estate lending,
including Vice President of Continental Bank, Chicago,
Illinois, and with Mellon Bank, Pittsburgh,
Pennsylvania. He is Chairman of the Downtown
Development Corporation (DDC); Vice Chairman, Inner
City Committee; Urban Land Institute (ULI) Retail
Council; and a board member of the Convention and
Visitors Bureau of Greater Cleveland.
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PRINCIPAL OCCUPATIONS, PERIOD OF EXPIRATION
BUSINESS EXPERIENCE SERVICE AS OF
NAME AND AGE AND AFFILIATIONS TRUSTEE TERM
- ---------------------------- ------------------------------------------------------- ----------- -----------
Herman J. Russell (66) Mr. Russell is Chairman of H. J. Russell & Company, a 1997 1998
general construction, construction management,
brokerage, and real estate development and management
company. He formed the company in 1959. He is also
President and Chief Executive of Russell Properties,
Inc., a real estate development company formed by Mr.
Russell in 1991, and of Concessions International,
Inc., an airport food and beverage concessionaire
formed by Mr. Russell in 1978. He is Chairman of the
Board of Directors of Citizens Trust Bank, and a
director of Georgia Power Company, Wachovia
Corporation, National Service Industries, Inc. and
Georgia Port Authority. He is also a director of
Central Atlanta Progress and Atlanta Chamber of
Commerce and a trustee of Morris Brown College and
Tuskegee University.
CLASS III
Daniel G. DeVos (38) Mr. DeVos is Chairman, President and Chief Executive 1994 to 1999
Officer of DP Fox Ventures, L.L.C., a private real Date
estate investment, development and management company.
He is also Vice President, Corporate Affairs of Amway
Corporation, a direct sales consumer product business;
Vice Chairman, Governing Board of the Orlando Magic, a
professional NBA Basketball franchise; President and
Chief Executive Officer of the Grand Rapids Griffins
and the Kansas City Blades, professional International
Hockey League franchises; and Chairman and Chief
Executive Officer of Georgian Enterprises, Ltd.,
Barrie, Ontario, Canada, a group of related companies
involved in automobile sales, aircraft leasing, charter
and sales, real estate development and management; LTS
Finished Surfaces, Grand Rapids, Michigan, a wholesale
distributor of floor products; and Appliance
Distributors, Inc., Detroit, Michigan, a wholesale
distributor of high-end appliances. Mr. DeVos is a
director of Genmar Industries, Inc., Minneapolis,
Minnesota, a boat manufacturer. He is also a trustee of
Butterworth Hospital, Grand Rapids, Michigan, and a
member of the Boards of the Family Outreach Center,
Grand Rapids, Michigan, the Grand Rapids Symphony, and
the Mercy Respite Center.
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PRINCIPAL OCCUPATIONS, PERIOD OF EXPIRATION
BUSINESS EXPERIENCE SERVICE AS OF
NAME AND AGE AND AFFILIATIONS TRUSTEE TERM
- ---------------------------- ------------------------------------------------------- ----------- -----------
Allen H. Ford (68) Mr. Ford is a consultant and was, from 1981 to 1986, 1983 to 1999
Senior Vice President -- Finance and Administration of Date
The Standard Oil Company (BP America), an integrated
domestic petroleum company engaged in all phases of the
petroleum business. Mr. Ford was Corporate Executive
Vice President and Unit President from 1976 to 1980,
Vice President, Finance, from 1969 to 1976, and
Treasurer during 1969 of Diamond Shamrock Corporation,
a producer of chemicals, petroleum and related
products. Mr. Ford is a director of Gliatech, Inc. and
Parker Hannifin Corporation, and is a trustee and
former Chairman of Case Western Reserve University, a
trustee of the Musical Arts Association (Cleveland
Orchestra), University Hospitals of Cleveland, the
Western Reserve Historical Society, and University
Circle, Inc. He is also a trustee and former Chairman
of the Edison BioTechnology Center.
Spencer H. Heine (54) Mr. Heine has been Executive Vice President, Secretary 1996 to 1999
and General Counsel of Montgomery Ward Holding Corp. a Date
national retail chain, since September 1991, and has
been a director of the company since May 1992. Prior
thereto, he was Senior Vice President, Secretary and
General Counsel of the company from June 1988 through
September 1991. Mr. Heine has been Executive Vice
President, Secretary and General Counsel of Montgomery
Ward & Co., Incorporated, a subsidiary of Montgomery
Ward Holding Corp., since April 1994, and has been
director of that company since May 1992. He has also
been President of Montgomery Ward Properties, a
subsidiary of Montgomery Ward & Co., Incorporated since
April 1994. Prior thereto, Mr. Heine served as
Executive Vice President, Legal and Financial Services
of Montgomery Ward & Co., Incorporated, from September
1991 through April 1994. Mr. Heine was Chairman and
Chief Executive Officer of Signature, a subsidiary of
Montgomery Ward & Co., Incorporated, from March 1993
through April 1994. Prior thereto, he also served as
President of Signature from September 1991.
COMPENSATION OF TRUSTEES
Trustees, other than Mr. Mastandrea, receive an annual retainer fee of
$12,000 and are paid an attendance fee of $500 for meetings of the Board and
committees, except for certain committee meetings for which an attendance fee of
$250 is paid.
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ORGANIZATION OF BOARD OF TRUSTEES
The Board of Trustees held seven Board meetings during 1996. Each of the
present Trustees attended at least 75% of the aggregate of the meetings of the
Board and the committees of the Board on which he served, except Mr. Russell who
was not a Trustee in 1996. The Board has standing Executive; Audit; Management,
Organization and Compensation; and Nominating Committees.
EXECUTIVE COMMITTEE
The Executive Committee exercises all of the powers and authority of the
Board during intervals between meetings of the Board except the declaration of
dividends and the filling of vacancies among the Trustees or the Executive
Committee and except as its powers and duties may be limited or proscribed by
the Trustees from time to time. Present members are Kenneth K. Chalmers, William
E. Conway, Daniel G. DeVos, Allen H. Ford, Russell R. Gifford, Spencer H. Heine,
E. Bradley Jones, Herman J. Russell and James C. Mastandrea (Chairman). The
Executive Committee held two meetings during 1996.
AUDIT COMMITTEE
The Audit Committee is composed entirely of Trustees who are not employees
of First Union. The Committee recommends to the Board the appointment of
auditors to examine and report on the combined financial statements, reviews
with the independent auditors the arrangements for and results of the audit
engagement, reviews the independence of the auditors, considers the range of
audit and non-audit fees and reviews the reports of First Union's internal
auditor and its system of internal accounting controls. Present members are
Kenneth K. Chalmers, Spencer H. Heine and Allen H. Ford, (Chairman) . The Audit
Committee held two meetings during 1996.
MANAGEMENT, ORGANIZATION AND COMPENSATION COMMITTEE
The Management, Organization and Compensation Committee, composed entirely
of Trustees who are not employees of First Union, makes recommendations to the
Board on matters involving management succession, the compensation of officers
with salaries of $75,000 per year or more and the retainer and attendance fees
for Trustees, makes recommendations and determinations concerning First Union's
Share option plans and the 1994 Long Term Incentive Performance Plan, and
reviews compensation arrangements as they relate to key employees. Present
members are Daniel G. DeVos, Herman J. Russell and William E. Conway (Chairman),
The Management, Organization and Compensation Committee held three meetings in
1996.
NOMINATING COMMITTEE
The Nominating Committee recommends qualified candidates for election as
Trustees and considers the performance of incumbent Trustees to determine
whether to recommend them for nomination to stand for re-election. Present
members are Russell R. Gifford, E. Bradley Jones and James C. Mastandrea
(Chairman). The Committee held one meeting in 1996. The Nominating Committee
will consider persons for election as Trustees who are recommended to it in
writing by any shareholder. Any shareholder wishing to submit a recommendation
to the
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Committee should send a signed letter of recommendation to the following
address: First Union Real Estate Equity and Mortgage Investments, Suite 1900, 55
Public Square, Cleveland, Ohio, 44113-1937, Attention: Chairman. Recommendation
letters should state the reasons for the recommendation and contain the full
name and address of each proposed nominee as well as a brief biographical
history setting forth past and present directorships, employment and civic
activities.
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SECURITY OWNERSHIP OF TRUSTEES AND OFFICERS AND OTHERS
The table below sets forth, with respect to Trustees and nominees, certain
named executive officers, and as to all Trustees and executive officers as a
group, information relating to their beneficial ownership of Shares of First
Union as of February 7, 1997:
SHARES
NAME OF INDIVIDUAL BENEFICIALLY PERCENT
OR IDENTITY OF GROUP OWNED(1) OF CLASS
- --------------------------------------------- ------------------- --------
TRUSTEES
Kenneth K. Chalmers 6,937 .032%
William E. Conway 15,635 .073
Daniel G. DeVos 14,028 .065
Allen H. Ford 25,000 .116
Russell R. Gifford 4,480 .021
Spencer H. Heine 2,500 .012
E. Bradley Jones 13,331 .062
Herman J. Russell -0- .000
James C. Mastandrea (also an Executive 597,589(2) 2.745
Officer)
EXECUTIVE OFFICERS
Steven M. Edelman 89,545(3) .414
Paul F. Levin 77,546(4) .359
John J. Dee 85,555(5) .396
Thomas T. Kmiecik 52,733(6) .244
All Trustees and executive officers 984,879(7) 4.484
(13 in number) as a group
<FN>
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(1) Pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, a person is
deemed to be a beneficial owner if he has or shares voting power or
investment authority in respect of such security or has the right to acquire
beneficial ownership within 60 days. The amounts shown in the above table do
not purport to represent beneficial ownership except as determined in
accordance with this Rule. Each Trustee and executive officer has sole
voting and investment power with respect to the amounts shown or shared
voting and investment powers with his spouse.
(2) Includes 337,500 Shares of restricted stock over which Mr. Mastandrea has
sole voting power but no investment power, 206,250 Shares that Mr.
Mastandrea has the vested right to acquire through the exercise of options,
and 3,000 Series A Cumulative Convertible Preferred Shares of Beneficial
Interest convertible into Shares at a conversion ratio of approximately 3.31
Shares per preferred share.
(3) Includes 30,000 Shares of restricted stock over which Mr. Edelman has sole
voting power but no investment power and 52,800 Shares that Mr. Edelman has
the vested right to acquire through the exercise of options.
(4) Includes 30,000 Shares of restricted stock over which Mr. Levin has sole
voting power but no investment power and 44,950 Shares that Mr. Levin has
the vested right to acquire through the exercise of options.
(5) Includes 30,000 Shares of restricted stock over which Mr. Dee has sole
voting power but no investment power and 52,840 Shares that Mr. Dee has the
vested right to acquire through the exercise of options.
(6) Includes 10,000 Shares of restricted stock over which Mr. Kmiecik has sole
voting power but no investment power and 41,473 Shares that Mr. Kmiecik has
the vested right to acquire through the exercise of options.
(7) Includes 398,313 Shares which executive officers have the vested right to
acquire through the exercise of options and 437,500 Shares of restricted
stock.
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The following table sets forth, as of the record date, information
concerning each person known by First Union to be the beneficial owner of more
than 5% of the Shares of First Union:
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP CLASS
- --------------------------------------------- ----------------- ----------
Franklin Resources, Inc. 1,883,390 8.0%
777 Mariners Island Blvd.,
San Mateo, CA 94404
Charles B. Johnson
777 Mariners Island Blvd.,
San Mateo, CA 94404
Rupert H. Johnson
777 Mariners Island Blvd.,
San Mateo, CA 94404
Franklin Mutual Advisors, Inc.
51 John F. Kennedy Parkway,
Short Hills, NJ 07078
Franklin Mutual Series Fund, Inc.
51 John F. Kennedy Parkway,
Short Hills, NJ 07078
The information regarding this holder was received by First Union through
the filing of a schedule 13-G with the Securities and Exchange Commission on or
about November 22, 1996. These Shares consist of 569,000 Series A Cumulative
Convertible Preferred Shares of Beneficial Interest ("Convertible Preferred
Shares"), each such share being convertible into approximately 3.31 Shares.
Apollo Real Estate Investment Fund II, LP 1,392,110 6.1%
Apollo Real Estate Advisors II LP
1301 Avenue of the Americas
New York, New York 10019
The information regarding this holder was received by First Union through the
filing with the Securities and Exchange Commission of a Schedule 13-D with
respect to Convertible Preferred Shares on or about December 2, 1996, and an
amendment thereto on or about February 4, 1997, and a Schedule 13-D with respect
to Shares on or about January 6, 1997, and an amendment thereto on or about
February 4, 1997. These Shares consist of 336,200 Convertible Preferred Shares,
each such share being convertible into approximately 3.31 Shares, and 280,700
Shares.
------------------------
Mr. Heine, a member of the Board of Trustees, is an executive officer of
Montgomery Ward Holding Corp. and its subsidiary, Montgomery Ward & Co.
Incorporated, which owns or leases space at five of First Union's properties.
First Union recorded rental income and operating expense reimbursement of
$1,246,400 for these spaces in 1996. The operating agreements or leases existed
prior to Mr. Heine's becoming a Trustee and are considered arm's-length.
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EXECUTIVE COMPENSATION
The table below sets forth the compensation paid or earned for services to
First Union during each of the last three years by the individual who was First
Union's Chief Executive Officer during 1996 and each of the remaining for
highest compensated executive officers of the Trust at December 31, 1996.
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION
-------------------------------------- ----------------------
OTHER RESTRICTED
NAME AND PRINCIPAL ANNUAL STOCK ALL OTHER
POSITION/COMPENSATION YEAR SALARY BONUS COMPENSATION OPTIONS AWARDS(1) COMPENSATION(2)
- ------------------------------------- -------- -------- ------------ ------- ---------- ---------------
James C. Mastandrea 1996 $290,000 $140,441 $ 5,467 200,000 $1,603,125 $12,694
Chairman, President 1995 283,333 99,876 6,536 112,500 871,875 18,760
and Chief Executive Officer 1994 250,000 110,610 5,151 162,500 717,188 35,630
Steven M. Edelman 1996 120,000 46,321 40,000 142,500 7,469
Executive Vice President - 1995 116,667 25,830 10,000 77,500 6,823
Chief Financial Officer 1994 87,500 27,652 10,000 63,750 5,064
Paul F. Levin 1996 115,000 39,808 40,000 142,500 6,804
Senior Vice President - 1995 112,500 24,754 10,000 77,500 6,573
General Counsel and Secretary 1994 93,000 27,652 10,000 63,750 5,006
John J. Dee 1996 112,000 38,900 40,000 142,500 6,585
Senior Vice President - 1995 110,000 24,108 10,000 77,500 6,257
Chief Accounting Officer 1994 86,667 24,887 10,000 63,750 5,014
Thomas T. Kmiecik 1996 93,333 33,250 30,000 142,500 5,117
Senior Vice President 1995 83,334 18,296 10,000 -- 4,408
Treasurer 1994 67,500 20,739 9,000 -- 2,576
<FN>
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(1) The Trust's Long Term Incentive Performance Plan was implemented in 1994.
Shares are awarded only as targeted financial goals are met or exceeded, and
restrictions are removed when the market price of Shares attains $21.00 for
twenty consecutive trading days or after eight years. Shares awarded under
the plan are entitled to dividends at the same rate and on the same terms as
unrestricted Shares of the same class. The aggregate number and value of
restricted shares held by the individuals listed above, valued as of
December 31, 1996, are as follows: James C. Mastandrea 337,500 shares
($4,218,750); Steven M. Edelman, 30,000 shares ($375,000); Paul F. Levin,
30,000 shares ($375,000); John J. Dee, 30,000 shares ($375,000); and Thomas
T. Kmiecik 10,000 shares ($125,000). The amounts for Restricted Stock Awards
shown in the table above were based on the Share closing price on the date
the restricted shares were awarded. The restricted shares for 1996 were
awarded on February 5, 1997.
(2) Amounts shown are composed solely of annual contributions made to a defined
contribution pension plan, except the amount for Mr. Mastandrea, which also
included term life insurance premiums. The pension plan contribution for
each participant is equal to the sum of (i) 3% of the participant's total
cash compensation paid for such year up to a maximum of $150,000, for 1994
and 1995 and $160,000 for 1996, and (ii) 3% of the portion of the
participant's cash compensation paid for such year which is in excess of
that year's Social Security taxable wage base up to a maximum of $150,000
for 1994 and 1995 and $160,000 for 1996. The contributions made by First
Union on behalf of the above named individuals are based on salary earned
and paid in that year, plus executive incentive compensation paid in that
year. The insurance premiums of $4,975 in 1996, $11,596 in 1995 and $35,630
in 1994 for Mr. Mastandrea are net of the amount recoverable by First Union
upon his termination or death. The policy provides a death benefit of $2.5
million to Mr. Mastandrea's beneficiary.
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EMPLOYMENT AGREEMENT
In July 1994, the Trust entered into an Employment Agreement with Mr.
Mastandrea. The Agreement has an initial three-year term and is extended
automatically for additional one-year terms unless one of the parties gives
notice of an intention not to renew.
The agreement with Mr. Mastandrea provides that he will have the titles,
and perform the duties, of Chairman of the Board of Trustees, Chairman of the
Executive Committee of the Board of Trustees, and President and Chief Executive
Officer of the Trust. Under the agreement, Mr. Mastandrea receives an annual
base salary of not less than $250,000, subject to annual review and adjustment
by the Board of Trustees; health and welfare benefits; participation in Trust's
1994 Long Term Incentive Performance Plan; and split dollar life insurance in
the benefit amount of $2,500,000.
The premiums on the split dollar life insurance were set with the
expectation that, if Mr. Mastandrea continues to work for the Trust until he
attains age 65, the cash surrender value of the policy will be sufficient to
fund (1) the return to the Trust of all premiums paid by it and (2) paid-up
insurance on the life of Mr. Mastandrea in the amount of $2,500,000.
The Agreement also provides that, in the event Mr. Mastandrea becomes
disabled, the Trust will continue to pay his base salary and bonus and to
provide health and welfare benefits for three years, unless he earlier recovers
from the disability, dies, or attains age 65.
The employment of Mr. Mastandrea may be terminated at any time. However, if
the Trust terminates the employment of Mr. Mastandrea without cause (as defined
in the Agreement), or if he terminates his employment for good reason (as
defined), the Trust is required to continue to pay his base salary and bonus and
to provide benefits, including pension contributions and vesting of options, for
a period of three years, unless he earlier dies or attains age 65. A portion of
the Shares of restricted stock previously granted to Mr. Mastandrea would also
vest. Notification by the Trust that it does not intend to renew the Agreement
beyond the three-year initial term is treated, for this purpose, as a
termination by the Trust.
In the event of a change in control or shift in ownership of the Trust (as
defined), the Trust is required to deposit, in an irrevocable escrow account, an
amount sufficient to fund all payments that would be due to Mr. Mastandrea upon
termination without cause or for good reason. In addition, if termination
without cause or for good reason occurs after a change in control or shift in
ownership, the base salary, bonus and pension contributions payable to him upon
termination becomes due immediately in lump sum.
In the event a change in the ownership or control occurs within the meaning
of Section 280G of the Internal Revenue Code, the aggregate amount payable to
Mr. Mastandrea will be limited to the maximum amount that may be deducted for
Federal income tax purposes without constituting "excess parachute payments"
under Section 280G. In addition, Mr. Mastandrea has agreed to defer the receipt
of payments that would otherwise not be deductible due to the $1,000,000 limit
under Section 162(m) of the Internal Revenue Code.
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OPTION GRANTS
IN LAST FISCAL YEAR
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED ANNUAL
-------------------------------------------------------- RATES OF SHARE PRICE
% OF TOTAL APPRECIATION
OPTIONS FOR 10 YEAR
GRANTED EXERCISE OPTION TERM(2)
OPTIONS TO EMPLOYEES PRICE PER EXPIRATION -----------------------
NAME GRANTED(1) IN 1996 SHARE DATE 5% 10%
- ------------------------------- ---------- ------------ --------- ---------- -------- ----------
James C. Mastandrea............ 200,000 40.9% $ 7.375 03-01-2006 $927,620 $2,350,770
Steven M. Edelman.............. 40,000 8.2% 7.375 03-01-2006 185,524 470,154
Paul F. Levin.................. 40,000 8.2% 7.375 03-01-2006 185,524 470,154
John J. Dee.................... 40,000 8.2% 7.375 03-01-2006 185,524 470,154
Thomas T. Kmiecik.............. 30,000 6.1% 7.375 03-01-2006 139,143 352,616
<FN>
- ---------------
(1) Options granted under the 1981 Employee Share Option Plan (the "1981 Plan")
may be in the form of Incentive Stock Options (qualifying as such under
Section 422A of the Internal Revenue Code, as amended) and Nonstatutory
Stock Options. Options granted are at prices not less than the fair market
value of the Shares at the date of grant and expire not later than ten years
after the date granted. Options are exercisable only after the optionee has
been continuously employed by the Trust for twelve months from the date of
grant and thereafter to the extent of 25% during the second year, 50% during
the third year, 75% percent during the fourth year and in full during the
fifth through tenth years. In the event of any change in control of the
Trust, a defined term in the 1981 Plan, including liquidation or dissolution
of the Trust, or a merger or consolidation with respect to which the Trust
shall not be the surviving entity, all options become exercisable
immediately.
No options were granted to the executive officers under the 1994 Long Term
Incentive Performance Plan during 1996.
(2) The appreciation calculation is a required disclosure. The appreciation
examples shown above do not reflect past experience of the Trust's options
granted, nor can they be expected to predict future performance.
AGGREGATED SHARE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
NUMBER OF UNEXERCISED OPTIONS VALUE OF UNEXERCISED
SHARES IN-THE-MONEY OPTIONS
ACQUIRED AT FISCAL YEAR END AT FISCAL YEAR END
ON VALUE ------------------------------- -------------------------------
NAME EXERCISE REALIZED UNEXERCISABLE EXERCISABLE UNEXERCISABLE EXERCISABLE
- ------------------------- --------- -------- -------------- ------------ -------------- ------------
James C. Mastandrea...... 0 $ 0 293,750 206,250 $1,495,313 $1,059,375
Steven M. Edelman........ 0 0 40,000 42,800 205,833 154,778
Paul F. Levin............ 1,000 5,375 40,000 44,950 205,833 135,218
John J. Dee.............. 1,000 5,375 40,000 52,840 205,833 148,653
Thomas T. Kmiecik........ 0 0 32,167 41,473 165,356 122,260
MANAGEMENT, ORGANIZATION AND COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The Board of Trustees is responsible for fixing the compensation of
executive officers. However, the Board acts on the basis of recommendations of
its Management, Organization and Compensation Committee (the "Committee"). The
Committee makes recommendations to the
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Board with respect to (i) the compensation of all officers with annual salaries
of $75,000 or more, (ii) grants of options under the Trust's 1981 Employee Share
Option Plan and (iii) awards to employees under the 1994 Long Term Incentive
Performance Plan. The Committee consists of three independent, non-management
Trustees, Messrs. William E. Conway (Chairman), Daniel G. DeVos and Russell R.
Gifford.
GENERAL APPROACH TO EXECUTIVE COMPENSATION
Compensation for executive officers consists of four principal elements:
base salaries, annual cash/stock bonus awards, stock options, and restricted
stock.
The Committee seeks to structure executive compensation to attract and
retain highly qualified, experienced management personnel and to use the four
principal components of the Company's executive compensation program to align
the interests of management and shareholders and to use the non-salary
compensation components to reward performance beyond regular, competent, job
performance as measured by individual performance goals and corporate
performance targets.
In establishing each component of executive compensation, the Committee
compared the level of compensation of its executive officers with compensation
paid by organizations of similar size in comparable industries. In making these
comparisons, the Committee utilized data gathered and compiled by its
independent compensation consultant in 1994. The Committee did not have and,
therefore, did not separately consider data relating to corporate performance of
the companies included in its compensation consultant's comparisons. However,
certain companies included in such compensation comparisons are also included in
the NAREIT All REITs Index. The Performance Graph in this proxy statement
compares corporate performance (based upon five year cumulative total
shareholder return) of the Trust versus that of companies included in the NAREIT
All REITs Index and in the NYSE Composite Index.
Base Salaries. In its recommendations regarding base salaries, the
Committee examined base compensation of executive officers at other real estate
investment trusts located in the Midwest that have market capitalizations
between approximately $60 million and $360 million (the "comparable REITs"). The
base salaries of the Trust's chief executive officer and other named executive
officers have historically been below the average base salary of such officers
at comparable REITs. Base salary amounts were determined without reference to
corporate performance. None of the executive officers received an increase in
base salary in 1996. However Messrs. Levin, Dee and Kmiecik received a one-time
salary supplement of $5,000 each and Mr. Edelman received a one-time salary
supplement of $10,000.
Annual Cash/Stock Bonus Awards. The primary goals of the annual cash/stock
bonus awards are to provide a direct link between compensation and annual
performance, to provide a strong incentive to attain Trust and operating unit
goals, to recognize and reward employees for performance beyond regular,
competent job performance, and to build and reinforce the concept of a team by
focusing on the key measure of the Trust's performance -- funds from operations
for the current year. Awards are designed to be comparable in amount to the
average of awards paid by organizations of similar size in comparable industries
when target performance is met; awards will be above this average when the
target is exceeded, or below this average when the
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target is not achieved. Awards are paid partially in stock in order to encourage
Share ownership.
The Trust's annual cash/stock bonus awards are intended to be the method
for compensating executive officers for achieving performance goals for a
particular fiscal year. Performance goals are expressed in terms of threshold,
target and maximum performance goals. Threshold goals are the minimum necessary
performance levels required for an executive officer to earn an annual bonus
award. In 1996, threshold performance goals were based upon an executive officer
achieving 80% of such executive officer's target goal. Target goals were based
upon meeting the goal, while maximum performance goals were based upon an
executive officer achieving 120% of such executive officer's target goal. If a
threshold, target or maximum performance goal was achieved, the executive
officer received 50%, 100% or 150%, respectively, of such executive officer's
bonus potential. If the threshold 80% was not met, no bonus was paid. Bonuses
for achievement of performance goals at a level between an executive officer's
threshold and target goals or target and maximum goals were calculated based
upon straight line interpolation. Annual cash/stock bonus awards are paid 20% in
Shares of the Trust and 80% in cash. For 1996, the chief executive officer and
all named executive officers had a single performance goal based upon achieving
the Trust's funds from operations target. In 1996, the Trust achieved funds from
operations that exceeded the target performance goal.
Stock Options. The primary goal of the stock options is to link
shareholder and employee interest by providing a way for both to gain from
appreciation in the market price of Shares over time. Stock options are granted
to executive officers as well as others in the organization on the theory that
the best performance for shareholders will be attained when a broad group of
employees has a mutual interest with the shareholders.
Restricted Stock. The restricted stock awards are designed to encourage
senior executives to think and act like shareholders and, as a result, to
promote the long term growth and performance of the Trust and increase the
market price of the Shares. The awards are intended to act as long term
performance incentives by creating a strong positive correlation between stock
price appreciation and dividend growth, on the one hand, and compensation levels
on the other. The level of the awards are recognized to be above average for
organizations of similar size in comparable industries, but the goal required to
earn the restricted stock in less than eight years is challenging (the market
price of the Shares has to attain $21 per Share for 20 consecutive trading
days). Restricted stock is granted only to the most senior officers -- those who
have the greatest impact on the performance of the Trust.
In determining the amount of all incentive compensation arrangements (i.e.,
target bonus compensation, stock option grants and restricted stock awards) for
executive officers of the Trust, the Committee considered data presented by its
compensation consultant in 1994 with respect to incentive compensation paid at
approximately 125 other financial services companies, including REITs and
banking and insurance institutions, with average sales of $356 million and
average assets of approximately $200 million ("comparable companies"). Target
bonus compensation was fixed by the Committee so that executive officers
achieving their target performance goals would receive bonus compensation in the
median range for corresponding positions at comparable companies. Likewise,
option grants were fixed by the Committee so that executive officers (other than
the chief executive officer) would receive incentive stock options in the median
range for corresponding positions at comparable companies. In contrast, however,
the
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amount of restricted stock awards granted to executive officers (including the
chief executive officer) were fixed by the Committee with reference to data from
comparable companies but so that executive officers achieving their long term
incentive goals would receive restricted stock compensation higher than the
average awards granted to executive officers in corresponding positions at
comparable companies. The number of stock options and shares of restricted stock
granted to Mr. Mastandrea was determined in connection with the negotiation of
Mr. Mastandrea's employment agreement as chief executive officer of the Company
with the Committee in consultation with its compensation consultant.
The size of the Trust's stock option grants and restricted stock awards to
executive officers was based upon corporate performance during the immediately
preceding year, and such compensation was structured in a manner the Committee
believes will maximize future performance by executive officers by linking the
vesting of restricted stock and such officers' eligibility to receive future
option and restricted stock awards until certain funds from operations targets
are achieved. Although the Committee utilized incentive compensation data from
comparable companies, the Committee did not utilize incentive compensation data
from comparable REITs in fixing the executive officers' incentive compensation
because a high standard deviation made such data inherently unreliable for
comparison purposes.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
During 1996, Mr. Mastandrea served as Chairman of the Board of Trustees,
Chairman of the Executive Committee of the Board of Trustees, and President,
Chief Executive Officer and Chief Financial Officer of the Trust. For the year
end December 31, 1996, he received a base salary of $290,000, an annual bonus of
$140,441, options to purchase 200,000 Shares and restricted stock of 112,500
Shares. See the tables entitled "Summary Compensation Table" and "Option Grants
in Last Fiscal Year."
The Committee believes that Mr. Mastandrea's compensation is consistent
with its general approach to executive compensation, which is described above,
as well as Mr. Mastandrea's position and responsibilities with the Trust and his
individual performance during 1996. Mr. Mastandrea's compensation is also
consistent with commitments made to him when he was hired by the Trust in July
1993, which are reflected in an employment agreement discussed above under the
heading "Employment and Consulting Agreements."
COMPENSATION OF OTHER NAMED EXECUTIVE OFFICERS
As is the case with Mr. Mastandrea, the Committee believes that the
compensation provided to other executive officers named in the "Summary
Compensation Table" is consistent with the Committee's general approach to
executive compensation, which is described above, as well as the position and
responsibilities with the Trust and individual performance of each of these
executive officers during 1996.
WILLIAM E. CONWAY (CHAIRMAN) DANIEL G. DEVOS RUSSELL R. GIFFORD
(DURING 1996)
MEMBERS OF THE COMMITTEE
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PERFORMANCE GRAPH
The performance graph assumes $100 invested on December 31, 1991 in First
Union Shares, All REITs and the NYSE Composite, with dividends reinvested when
paid and share prices as of the last day of each calendar year. The total return
for All REITs was compiled by the National Association of Real Estate Investment
Trusts (NAREIT).
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) FIRST UNION ALL REITS NYSE COMPOSITE
1991 $ 100 $ 100 $ 100
1992 142 112 105
1993 160 133 113
1994 117 134 109
1995 130 159 144
1996 244 215 171
PROPOSAL 2
SHAREHOLDER PROPOSAL
Statement in Support and Proposal
I, Allen Wolff, 1553 So. Carpenter Road, Brunswick, Ohio 44212-3826, feel
that there are a number of indiscretions allowing for increased executive
remuneration often in spite of decreased earnings, declining market confidence
and shareholder rewards and for reaffirmations of reigning directors and
management-sponsored (and often self serving) resolutions because of a triple
standard in counting proxies. The space allowed me here will not adequately
permit me to address these issues.
Did you ever wonder how managements put up such high numbers in shares
represented, shares voted for THEIR proposals and AGAINST shareholder
proposals? Shareholder-proposals
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garnering 10-45% of the vote SHOULD get some attention from the incumbent
management but so often they rest on the fact that it failed. In addition to
counting votes on shares they may NEVER own (SARs and stock options), they count
differently (1) proxies signed but not marked are counted in favor of
management's position (2) proxies held in street names may be voted in favor of
management's slate perhaps without receipt by the real owner and without any
input from him and (3) unvoted proxies held in employee 401K plans may be
COUNTED as voted in the same proportion as those actually voted. In these days
of mergers and downsizing, sometimes employees are AFRAID to vote against
management, sometimes feeling intimidated by communications from management.
Management provides only one slate of director-candidates. It is "take it
or leave it" and opposition can come only from well-financed renegades-sometimes
with less than the best interest of the company in mind. If anything
anti-management comes up at the annual meeting, they already have your proxy to
vote on ANYTHING ELSE if the CEO allows a vote.
Most managements will say that they use the parameters of the SEC in
revealing or not revealing management perks and they may use the date of the
last merger or name change in revealing just how long an individual has been
tenured. Managements say that they boldly tell how unmarked proxies will be
voted and feel that their shareholders appreciate not being required to make a
few Xs after intelligently wading through 20 or more pages of the proxy
statement. Get real ! Just because the SEC may allow something does not make it
right. Many things are legal, but immoral.
Management doesn't tell you how to get your proxy from a street name
holder, nor how to appoint another proxy to represent you, nor how to vote for
someone else for director (BUT I WILL).
MY PROPOSAL IS TO ELIMINATE ALL DISCRETIONARY VOTING WHEN THE INDIVIDUAL
(NOT THE TECHNICAL) SHAREHOLDER HAS NOT ACTUALLY VOTED BY MARKING THE CARD. For
those employee-shareholders who are afraid to vote unconfidentially, but don't
agree with management, at least ABSTAIN. That means your vote will not be
counted FOR nor AGAINST. For the independent, but astute shareholder, I ask you
to vote FOR. If you don't understand, ABSTAIN. If you leave it blank, it will be
counted AGAINST.
BOARD OF TRUSTEES' RECOMMENDATION AND STATEMENT
The Board of Trustees recommends that the beneficiaries vote AGAINST this
proposal for the following reasons:
This is substantially the same proposal as one presented by Mr. Wolff last
year and the year before, and rejected by the shareholders each time.
This proposal seeks to eliminate the right and ability of First Union's
beneficiaries to have their Shares voted by simply signing and returning a proxy
card. This right is explicitly provided for in Rule 14a-4(b) (1) (the "Rule")
under the Securities Exchange Act, which provides: "A proxy may confer
discretionary authority with respect to matters as to which a choice is not
specified by the Security holder provided that the form of proxy states in
boldface type how it is intended to vote the shares represented by the proxy in
each such case." Thus, the practice is specifically approved by the Rule. As a
convenience, First Union provides its
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beneficiaries with the opportunity to return a signed and dated but unmarked
proxy card, thereby authorizing the designated proxies to vote in accordance
with the recommendations of the Board. In such a case, the beneficiaries
actually vote their Shares in accordance with the recommendations of the Board,
but are permitted to do so by simply signing the card, and are not required to
specifically mark each item listed on the proxy card. As required by the Rule,
beneficiaries are advised, in bold letters on each proxy card, as to the effect
of returning such a signed and unmarked proxy card. We credit all beneficiaries
with the ability to read and understand this procedure. Thus, sending back a
signed but unmarked proxy card is as much an affirmative act of voting for the
Company's recommendation as is actually marking the issues with an "x". In
addition, all beneficiaries continue to have the opportunity, if they so desire,
to submit a proxy card with separate instructions for each item by marking the
appropriate FOR, AGAINST, or ABSTAIN box for each issue as applicable.
Moreover, the proponent again interjects in his proposal extraneous
material and unsupported assertions regarding issues unrelated to voting. He
makes statements regarding "voting" of SARs and stock options which are simply
false, and about voting street name Shares and 401k plan Shares which are
equally untrue and unsupported. In fact, there are no First Union Shares held in
employee 401k plan accounts.
The proposal will not serve to provide shareholders with any new rights or
powers. To the contrary, it will simply deprive First Union's shareholders of a
convenient method of participating in annual or special meetings.
VOTE REQUIRED. Approval of this proposal will require the affirmative vote
of the holders of a majority of the Shares present in person or by proxy and
voting at the meeting.
SELECTION OF AUDITORS
Arthur Andersen LLP has been selected as auditors of First Union for the
ensuing year. Arthur Andersen LLP has been First Union's auditors since the
founding of the Trust in 1961. Representatives of Arthur Andersen LLP are
expected to be present at the 1997 Annual Meeting with the opportunity to make a
statement if they so desire and to respond to shareholder questions.
VOTING
The affirmative vote of the holders of a majority of the Shares present in
person or by proxy and voting at the meeting is required for approval of the
matters described in this Proxy Statement. If the requisite approval is not
obtained with respect to a particular matter, the proposal referred to in such
matter will not be implemented.
As far as the Trustees are aware, no matters other than those outlined in
this Proxy Statement will be presented to the meeting for action on the part of
the shareholders. If any other matters are properly brought before the meeting,
it is the intention of the persons named in the accompanying proxy to vote the
Shares to which the proxy relates in accordance with their best judgment.
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SHAREHOLDER PROPOSALS
Any shareholder proposals intended to be presented at the 1998 Annual
Meeting of Shareholders must be received by First Union for inclusion in First
Union's proxy statement and form of proxy relating to that meeting on or before
November 8, 1997. Any such proposals should be sent to the following address:
First Union Real Estate Equity and Mortgage Investments, Suite 1900, 55 Public
Square, Cleveland, Ohio, 44113-1937, Attention: Paul F. Levin, Secretary.
FIRST UNION REAL ESTATE EQUITY
AND MORTGAGE INVESTMENTS
PAUL F. LEVIN
Senior Vice President -- General
Counsel and Secretary
March 5, 1997
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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
INDEX TO APPENDIX TO THE PROXY STATEMENT
DECEMBER 31, 1996
PAGE
----
Financial Highlights and Market Price and Dividend Record............................ A-1
Selected Financial Data.............................................................. A-2
Financial Statements --
Combined Balance Sheets............................................................ A-4
Combined Statements of Income...................................................... A-5
Combined Statements of Changes in Cash............................................. A-6
Combined Statements of Shareholders' Equity........................................ A-7
Notes to Combined Financial Statements............................................. A-8
Report of Independent Public Accountants............................................. A-19
Management's Discussion and Analysis of Financial Condition and
Results of Operations.............................................................. A-20
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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA AND FOOTNOTES)
1996 1995
------- -------
Revenues $81,867 $79,205
Income before capital gain or loss, extraordinary loss and
cumulative effect of accounting change 4,422 3,256
Net income before preferred dividend(1) 4,136 13,891
Net income applicable to shares of beneficial interest(1) 3,291 13,891
Funds from operations before preferred dividend(2) 17,935 15,157
Funds from operations after preferred dividend(2) 17,090 15,157
Dividends declared 7,684 7,542
Per share
Income applicable to shares of beneficial interest before
capital gain or loss, extraordinary loss and cumulative
effect of accounting change $ .21 $ .18
Net income applicable to shares of beneficial interest(1) .19 .77
Dividends declared .44 .41
MARKET PRICE AND DIVIDEND RECORD
DIVIDENDS
HIGH LOW DECLARED
----- ---- ---------
1996 QUARTERS ENDED
-------------------
December 31 $12 1/2 $6 3/8 $ .11
September 30 7 6 3/8 .11
June 30 7 3/8 6 3/8 .11
March 31 8 1/8 6 7/8 .11
-----
$ .44
-----
1995 QUARTERS ENDED
-------------------
December 31 $ 7 5/8 $6 7/8 $ .11
September 30 7 7/8 7 1/8 .10
June 30 8 7 .10
March 31 8 5/8 6 1/2 .10
-----
$ .41
-----
<FN>
- ---------------
The Trust's shares are traded on the New York Stock Exchange (Ticker Symbol:
FUR). As of December 31, 1996, there were 4,582 recordholders of the Trust's
shares of beneficial interest. The Trust estimates the number of beneficial
owners at approximately 15,000.
(1) In 1996, the Trust expensed $286,000 of unamortized costs relating to a
prior bank credit agreement. In 1995, the Trust recognized a capital gain of
$29.9 million, a $14 million noncash unrealized loss on the carrying value
of certain assets identified for disposition, $910,000 of unamortized costs
and prepayment premiums related to the early repayment of mortgage debt and
a $4.3 million noncash charge for the cumulative effect of a change in
accounting method.
(2) The amount of funds from operations (FFO) is calculated as income before
capital gain or loss, extraordinary loss and cumulative effect of accounting
change, both before and after the preferred dividend, plus noncash charges
for depreciation and amortization for both First Union and the joint
venture. A new definition of FFO, adopted by the National Association of
Real Estate Investment Trusts, excludes depreciation and amortization of
debt issue costs and other corporate assets. First Union adds back all
expenses included in depreciation and amortization. FFO does not replace net
income (determined in accordance with generally accepted accounting
principles) as a measure of performance or net cash flows as a measure of
liquidity. FFO should be considered a supplemental measure of operating
performance used by real estate investment trusts.
A-1
25
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA AND
FOOTNOTES)
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
OPERATING RESULTS
Revenues $ 74,567 $ 74,339 $ 76,339 $ 79,205 $ 81,867
Income before capital gain or loss,
extraordinary loss and cumulative effect
of accounting change(1) 12,657 10,276 6,485 3,256 4,422
Unrealized loss on carrying value of
assets identified for disposition (14,000)
Capital gains 5,775 4,948 29,870
Income before extraordinary loss and
cumulative effect of accounting change 18,432 15,224 6,485 19,126 4,422
Extraordinary loss from early
extinguishment of debt(2) (1,240) (910) (286)
Cumulative effect of change in accounting
method(3) (4,325)
Net income before preferred dividend 18,432 13,984 6,485 13,891 4,136
Net income applicable to shares of
beneficial interest 18,432 13,984 6,485 13,891 3,291
Dividends declared for shares of
beneficial interest 13,022 13,031 7,273 7,542 7,684
- ---------------------------------------------------------------------------------------------------------------
Per share of beneficial interest:
Income before capital gain or loss,
extraordinary loss and cumulative effect
of accounting change(1) $ .70 $ .57 $ .36 $ .18 $ .21
Income before extraordinary loss and
cumulative effect of accounting change 1.02 .84 .36 1.06 .21
Extraordinary loss from early
extinguishment of debt(2) (.07) (.05) (.02)
Cumulative effect of change in accounting
method(3) (.24)
Net income applicable to shares of
beneficial interest 1.02 .77 .36 .77 .19
Dividends declared per share of beneficial
interest .72 .72 .40 .41 .44
- ---------------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END
Total assets $353,455 $393,621 $376,189 $400,999 $440,530
Long-term obligations(4) 109,733 257,355 238,296 258,454 254,868
Total equity 102,672 103,766 102,940 102,355 152,553
OTHER DATA
Net cash provided by or (used for)
Operations $ 21,591 $ 19,649 $ 19,053 $ 12,989 $ 11,085
Investing 1,662 (6,911) (26,507) (28,345) (47,002)
Financing (35,621) 24,793 (28,094) 15,783 35,466
Funds from operations before preferred
dividend(5) 21,836 20,039 17,040 15,157 17,935
Funds from operations after preferred
dividend(5) 21,836 20,039 17,040 15,157 17,090
(See footnotes on the following page.)
A-2
26
- ---------------
This selected financial data should be read in conjunction with the Combined
Financial Statements and notes thereto.
(1) Included in income before capital gain or loss, extraordinary loss and
cumulative effect of accounting change in 1995 was $1.6 million of
litigation and proxy expenses related to a minority shareholder lawsuit and
proxy contest.
(2) In 1996, the Trust renegotiated its bank credit agreements, resulting in a
$286,000 charge related to the write-off of unamortized costs. In November
1995, the Trust repaid approximately $36 million of mortgage debt resulting
in a $910,000 charge for the write-off of unamortized costs and prepayment
premiums. In November 1993, the Trust repaid prior to their maturity dates
$45 million of senior notes and $37.6 million of convertible debentures
resulting in a $1.2 million charge for the write-off of unamortized issue
costs and payment of a redemption premium.
(3) In December 1995, the Trust changed its accounting method to directly
expense internal leasing costs and recorded a $4.3 million noncash charge
for the cumulative effect of the accounting change as of the beginning of
1995. Funds from operations for previous years have been restated for the
change in accounting method on a basis comparable to 1995.
(4) Included in long-term obligations are senior notes, mortgage loans and bank
loans along with any current portion. Before 1993, bank loans were not
included.
(5) The amount of funds from operations (FFO) is calculated as income before
capital gain or loss, extraordinary loss and cumulative effect of accounting
change, both before and after preferred dividend, plus noncash charges for
depreciation and amortization of First Union and the joint venture. A new
definition of FFO, adopted by the National Association of Real Estate
Investment Trusts, excludes depreciation and amortization of debt issue
costs and other corporate assets. First Union adds back all expenses
included in depreciation and amortization. FFO does not replace net income
(determined in accordance with generally accepted accounting principles) as
a measure of performance or net cash flows as a measure of liquidity. FFO
should be considered a supplemental measure of operating performance used by
real estate investment trusts.
A-3
27
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, (IN THOUSANDS)
1996 1995
-------- --------
ASSETS
INVESTMENTS IN REAL ESTATE
Land $ 52,891 $ 54,403
Buildings and improvements 406,672 395,157
-------- --------
459,563 449,560
Less -- Accumulated depreciation (112,614) (107,701)
-------- --------
Total investments in real estate 346,949 341,859
INVESTMENT IN JOINT VENTURE 30,776
MORTGAGE LOANS RECEIVABLE,
including current portion of $194,000 42,266 42,042
OTHER ASSETS
Cash and cash equivalents 2,951 3,402
Accounts receivable and prepayments 8,440 4,536
Deferred charges and other, net 5,225 4,873
Unamortized debt issue costs 3,923 4,287
-------- --------
$440,530 $400,999
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage loans, including current portion of $3,863,000 $129,068 $ 83,854
Senior notes 100,000 105,000
Bank loans 25,800 69,600
Accounts payable and accrued liabilities 14,549 21,779
Deferred obligations 10,825 10,670
Deferred capital gains and other deferred income 7,735 7,741
-------- --------
Total liabilities 287,977 298,644
-------- --------
SHAREHOLDERS' EQUITY
Preferred shares of beneficial interest, $25 liquidation
preference, 2,300,000 shares authorized and outstanding 54,109
Shares of beneficial interest, $1 par, unlimited authorization,
outstanding 17,622 17,485
Additional paid-in capital 53,443 53,098
Undistributed income from operations 12,430 16,823
Undistributed capital gains 14,949 14,949
-------- --------
Total shareholders' equity 152,553 102,355
-------- --------
$440,530 $400,999
======== ========
The accompanying notes are an integral part of these statements.
A-4
28
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
COMBINED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA)
1996 1995 1994
------- -------- -------
REVENUES
Rents $75,555 $ 74,176 $71,079
Interest--Mortgage loans 4,732 4,447 3,928
--Short-term investments 80 409 1,211
Equity in income from joint venture 528
Management fees 617
Other income 355 173 121
------- -------- -------
81,867 79,205 76,339
------- -------- -------
EXPENSES
Property operating 25,786 25,982 25,318
Real estate taxes 8,297 8,555 7,930
Depreciation and amortization 13,149 11,901 10,555
Interest--Mortgage loans 8,877 7,670 7,335
--Senior notes 9,090 9,305 9,305
--Bank loans and other 5,459 5,422 4,640
General and administrative 6,787 7,114 4,771
------- -------- -------
77,445 75,949 69,854
------- -------- -------
INCOME BEFORE CAPITAL GAIN OR LOSS, EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 4,422 3,256 6,485
Unrealized loss on carrying value of assets identified for
disposition (14,000)
Capital gains 29,870
------- -------- -------
INCOME BEFORE EXTRAORDINARY LOSS AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 4,422 19,126 6,485
Extraordinary loss from early extinguishment of debt (286) (910)
Cumulative effect of change in accounting for internal lease
costs (4,325)
------- -------- -------
NET INCOME BEFORE PREFERRED DIVIDEND 4,136 13,891 6,485
Preferred dividend (845)
------- -------- -------
NET INCOME APPLICABLE TO SHARES OF BENEFICIAL INTEREST $ 3,291 $ 13,891 $ 6,485
======= ======== =======
PER SHARE DATA
Income applicable to shares of beneficial interest before
capital gain or loss, extraordinary loss and cumulative effect
of accounting change $ .21 $ .18 $ .36
------- -------- -------
Income before extraordinary loss and cumulative effect of
accounting change .21 1.06 .36
Extraordinary loss from early extinguishment of debt (.02) (.05)
Cumulative effect of change in accounting for internal lease
costs (.24)
------- -------- -------
NET INCOME APPLICABLE TO SHARES OF BENEFICIAL INTEREST $ .19 $ .77 $ .36
======= ======== =======
ADJUSTED SHARES OF BENEFICIAL INTEREST 17,264 18,116 18,120
The accompanying notes are an integral part of these statements.
A-5
29
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
COMBINED STATEMENTS OF CHANGES IN CASH
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS)
1996 1995 1994
-------- -------- --------
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income before preferred dividend $ 4,136 $ 13,891 $ 6,485
Adjustments to reconcile net income before preferred
dividend to net cash provided by operations --
Depreciation and amortization 13,149 11,901 10,555
Extraordinary loss from early extinguishment of debt 286 910
Cumulative effect of change in accounting for internal lease
costs 4,325
Capital gains (29,870)
Unrealized loss on carrying value of assets identified for
disposition 14,000
Increase in deferred charges and other, net (963) (1,711) (1,608)
Increase in deferred interest on mortgage investments (400) (441) (357)
Increase in deferred obligations 155 148 128
Net changes in other assets and liabilities (5,278) (164) 3,850
-------- -------- --------
Net cash provided by operations 11,085 12,989 19,053
-------- -------- --------
CASH PROVIDED BY (USED FOR) INVESTING
Principal received from mortgage investments 176 160 146
Investments in properties (5,491) (35,424) (19,050)
Investment in joint venture (30,248)
Investments in capital and tenant improvements (20,264) (24,881) (7,603)
Proceeds from sales of properties 8,825 31,800
-------- -------- --------
Net cash used for investing (47,002) (28,345) (26,507)
-------- -------- --------
CASH PROVIDED BY (USED FOR) FINANCING
(Decrease) increase in bank loans (43,800) 27,100 (17,500)
Issuance of preferred shares of beneficial interest, net of
costs 54,109
Increase in mortgage loans 48,500 49,500 4,600
Repayment of mortgage loans--Normal payments (3,286) (3,651) (3,934)
--Balloon payments (48,967) (2,225)
Repayment of medium term notes (5,000)
Proceeds from sale of interest rate cap 1,025
Purchase of First Union shares (7,125) (57)
Sale of First Union shares 252 75
Debt issue costs paid (1,414) (656) (226)
Dividends paid to shares of beneficial interest (7,789) (7,341) (8,707)
Other (6) (277) (45)
-------- -------- --------
Net cash provided by (used for) financing 35,466 15,783 (28,094)
-------- -------- --------
(Decrease) increase in cash and cash equivalents (451) 427 (35,548)
Cash and cash equivalents at beginning of year 3,402 2,975 38,523
-------- -------- --------
Cash and cash equivalents at end of year $ 2,951 $ 3,402 $ 2,975
======== ======== ========
The accompanying notes are an integral part of these statements.
A-6
30
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOOTNOTES)
PREFERRED
SHARES OF SHARES OF ADDITIONAL UNDISTRIBUTED UNDISTRIBUTED
BENEFICIAL BENEFICIAL PAID-IN INCOME FROM CAPITAL
INTEREST INTEREST CAPITAL(1) OPERATIONS(2) GAINS
---------- ---------- ---------- ------------- -------------
BALANCE DECEMBER 31, 1993 $ 18,109 $ 59,446 $20,732 $ 5,479
Net income 6,485
Dividends paid or accrued ($.40/share) (7,273)
Restricted shares issued 162 873
Deferred compensation related to
restricted shares, net of amortization (971)
Shares purchased (8) (49)
Other (45)
------- ------- ------- -------
BALANCE DECEMBER 31, 1994 18,263 59,254 19,944 5,479
------- ------- ------- -------
Net income (1,979) 15,870
Dividends paid or accrued ($.41/share) (1,142) (6,400)
Shares purchased (950) (6,175)
Shares sold under long-term incentive
ownership plan 10 65
Restricted shares issued 162 1,097
Deferred compensation related to
restricted shares, net of amortization (1,012)
Other (131)
------- ------- ------- -------
BALANCE DECEMBER 31, 1995 17,485 53,098 16,823 14,949
------- ------- ------- -------
Net income before preferred dividend 4,136
Dividends paid or accrued on shares of
beneficial interest ($.44/share) (7,684)
Dividends accrued on preferred shares
($.3674/share) (845)
Sale of 2,300,000 preferred shares of
beneficial interest, $25 per share, net $ 54,109
Shares sold under long-term incentive
ownership plan and share option
agreements 31 221
Restricted shares issued 142 1,603
Deferred compensation related to
restricted shares, net of amortization (1,246)
Restricted shares forfeited (36) (226)
Other (7)
------- ------- ------- ------- -------
BALANCE DECEMBER 31, 1996 $ 54,109 $ 17,622 $ 53,443(3) $12,430 $14,949
======= ======= ======= ======= =======
<FN>
- ---------------
(1) Includes cumulative balance of unamortized compensation related to
restricted shares of $971,000, $1,983,000 and $3,475,000 at December 31,
1994, 1995 and 1996, respectively.
(2) Includes the balance of cumulative undistributed net loss of First Union
Management, Inc. of $71,000, $1,071,000, $5,825,000 and $6,621,000 as of
December 31, 1993, 1994, 1995 and 1996, respectively.
(3) Cumulative distributions in excess of the Trust's net income from inception
are $11,330,000.
The accompanying notes are an integral part of these statements.
A-7
31
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Union Real Estate Investments ("Trust") and First Union Management, Inc.,
("Company") are in the real estate industry and do not have operations outside
this industry. The accounting policies of the Trust and Company conform to
generally accepted accounting principles and give recognition, as appropriate,
to common practices within the real estate industry.
The preparation of the financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the reporting periods.
Under a trust agreement, the 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 Trust's properties are currently leased to the Company except for one.
That remaining property is leased to another party under a net lease with
original terms expiring in 2011 and with renewal options available thereafter.
At December 31, 1996 and 1995, buildings and improvements included
equipment and appliances of $6.4 million and $5.3 million, respectively.
Tenant leases generally provide for billings of certain operating costs and
retail tenant leases generally provide for percentage rentals, in addition to
fixed minimum rentals. The Company accrues the recovery of operating costs based
on actual costs incurred and accrues percentage rentals based on current
estimates of each retail tenant's sales. For the years ended December 31, 1996,
1995 and 1994, such additional income approximated $15.7 million, $16.1 million
and $16.9 million, respectively.
Depreciation for financial reporting purposes is computed using the
straight-line method. Buildings and improvements are depreciated over their
estimated useful lives of 40 to 64 years and equipment and appliances over five
to 10 years. Routine maintenance and repairs, including replacements, are
charged to expense; however, replacements which improve or extend the lives of
existing properties are capitalized.
The Trust accounts for its investment in a joint venture which it does not
control using the equity method of accounting. This investment, which represents
a 26% non-controlling ownership interest, was recorded initially at the Trust's
cost and subsequently adjusted for the Trust's net equity in income and cash
distributions.
Net income per share of beneficial interest has been computed based on
weighted average shares and share equivalents outstanding for the applicable
period. The preferred shares of beneficial interest are anti-dilutive and are
not included in the weighted average shares outstanding for 1996.
Certain reclassifications have been made to prior year balances so that
they are comparable to 1996.
A-8
32
2. COMBINED STATEMENTS OF CHANGES IN CASH
The Trust considers all highly liquid short-term investments with original
maturities of three months or less to be cash equivalents. The Trust paid
interest expense of $24.1 million, $22.3 million and $21.1 million in 1996, 1995
and 1994, respectively. During 1996 and 1995, $121,000 and $169,000,
respectively, of interest related to construction projects was capitalized.
3. UNREALIZED LOSS ON CARRYING VALUE OF ASSETS IDENTIFIED FOR DISPOSITION
Management reviews the net realizable value of the Trust's portfolio
periodically to determine whether an allowance for possible losses is necessary.
The carrying value of the Trust's investments in real estate are evaluated on an
individual property basis in accordance with SFAS 121 (Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of). In
December 1995, the Trust recorded a $14 million noncash unrealized loss on the
carrying value of certain assets which were identified for disposition. The
noncash adjustment represents the difference between the estimated fair value
and net book value of the assets. Assets identified for disposition as of
December 31, 1996, had a net book value of $28.3 million, net of the $7 million
remaining balance of the asset reserve as of December 31, 1996.
In February 1996, the Trust sold two office buildings and an attached
parking garage in Cleveland, OH for $1.8 million in cash and a $7 million, 8%
note secured by the properties. The note was repaid in June 1996. This sale
resulted in a capital loss of $5.6 million which was provided for as part of a
$14 million noncash unrealized loss on the carrying value of certain assets that
was recorded in December 1995.
In January 1997, the Trust sold a shopping center for $9 million in cash.
The sale resulted in a capital loss of $5 million which was provided for as part
of a $14 million noncash unrealized loss on the carrying value of certain assets
that was recorded in December 1995.
4. CAPITAL GAINS
In January 1995, the Trust sold its 50% interests in two malls located in
Wilkes-Barre, PA and Fairmount, WV for $35.5 million and the assumption by the
purchaser of $4.7 million of existing mortgage loans on the properties. Proceeds
from the transaction were received as a $2 million cash payment in 1994, $27.5
million of cash in 1995 that was deposited into a tax intermediary escrow
account and a $6 million note with an interest rate of 9% due in January 1998.
The $27.5 million of proceeds were subsequently used in 1995 to acquire a retail
center and an apartment complex in a tax-free exchange. The capital gain
recognized for financial reporting purposes was $29.9 million.
5. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD
Prior to 1995, the Company accounted for internal leasing costs by deferring and
amortizing such costs as part of depreciation and amortization expense over the
life of consummated leases. In the fourth quarter of 1995, the Company changed
this method of accounting to recognize internal leasing costs in the period in
which they are incurred. Accordingly, the Company wrote off the balance of its
deferred internal leasing costs of $4.3 million effective January 1, 1995 and
expensed those leasing costs that were deferred throughout 1995. The effect of
this change in
A-9
33
accounting method decreased income by $0.6 million in 1995 as a result of
reducing depreciation and amortization expense $1.4 million and increasing
general and administrative expense $2 million. A reclassification has been made
between depreciation and amortization and general and administrative expense for
1994 so that the prior year amounts are on a comparable basis to 1995.
6. EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
In 1996, the Trust renegotiated its bank credit agreements. As a result,
$286,000 of deferred costs relating to its prior bank credit agreements was
written off.
In November 1995, the Trust repaid prior to their maturity dates three
mortgage loans totaling approximately $36 million, resulting in prepayment
premiums and the write-off of unamortized mortgage costs of $910,000.
7. INVESTMENTS IN MORTGAGE LOANS
As of December 31, 1996, the Trust had the following investments in mortgage
loans (dollar amounts in thousands):
CURRENT
EFFECTIVE
RATE ON NET LOAN PRIOR NET
INVESTMENT AMOUNT LIENS INVESTMENT
----------- ------- ------ ----------
Mortgage loan secured by a mall in
Fairmount, WV, maturing in 1998
and partnership units of Crown
American Properties, L.P. 9% $ 6,125 -- $ 6,125
First mortgage loan secured by an
office building in Cleveland, OH,
maturing in 2011. 10% 19,103 -- 19,103
Wraparound mortgage loan secured by
an apartment complex in Atlanta,
GA, maturing in 1999. 13% 17,038 3,444 13,594
------- ------ -------
$42,266 $3,444 $ 38,822
======= ====== =======
The fair value of the mortgage investments at December 31, 1996 approximates
book value based on current interest rates and market conditions.
8. BANK LOANS
As of December 31, 1996, there was $25.8 million outstanding under a fully
secured $90 million credit agreement at an interest rate of 7.73%. This credit
agreement matures on September 30, 1998. Interest under this agreement is
calculated, at the option of the Trust, based on a Eurodollar rate plus 200
basis points or the prime interest rate. As the bank loans are at market
interest rates, the fair value is the carrying amount of the loans.
A-10
34
Commitment fees not greater than 3/8% per annum are payable on the unused
portion of the revolving credit agreement. The agreement contains certain
requirements including maintaining minimum funds from operations (income from
operations plus depreciation and amortization), net worth, leverage and interest
coverage. The Trust was in compliance with all the above requirements as of
December 31, 1996.
The Trust currently has a rate guarantee contract in the notional amount of
approximately $45 million which is tied to LIBOR and has a maximum rate of 9%.
This rate contract is used by the Trust to reduce the impact of changes in
interest rates on its floating rate bank loans. The contract expires in October
1998 and the cost is being amortized over the life of the contract.
9. MORTGAGE LOANS PAYABLE
As of December 31, 1996, the Trust had outstanding $129.1 million of mortgage
loans due in installments extending to the year 2014. Interest rates on fixed
rate mortgages range from 6.869% to 9.375%. Principal payments due during the
five years following December 31, 1996 are $3.9 million, $6.0 million, $3.8
million, $4.4 million and $3.5 million, respectively. The fair value of the
mortgage loans payable at December 31, 1996 approximates book value based on
current market interest rates and market conditions.
10. SENIOR NOTES
As of December 31, 1996, the Trust had $100 million in senior notes outstanding.
The interest rate is 8.875% and the notes mature in October 2003. The senior
notes are noncallable, limit future borrowings by the Trust and require
maintenance of a minimum net worth. The Trust was in compliance with all
requirements as of December 31, 1996. The fair value of the senior notes at
December 31, 1996 is the carrying value based on current market quotations. In
July 1996, the $5 million, 8.6% medium term notes were repaid.
11. PREFERRED SHARES OF BENEFICIAL INTEREST
In October 1996, the Trust issued $57.5 million of Series A cumulative
convertible redeemable preferred shares of beneficial interest ("Series A
Preferred Shares"). The 2,300,000 Series A Preferred Shares were issued at a par
value of $25 per share and are each convertible into 3.31 shares of beneficial
interest (Shares). The distributions on the Series A Preferred Shares are
cumulative and equal to the greater of $2.10 per share (equivalent to 8.4% of
the liquidation preference per annum) or the cash distributions on the Shares
into which the Series A Preferred Shares are convertible (determined on each of
the quarterly distribution payment dates for the Series A Preferred Shares). The
Series A Preferred Shares are not redeemable prior to October 29, 2001, and at
no time will they be redeemable for cash.
A-11
35
12. INVESTMENT IN JOINT VENTURE
The following presents summarized financial information for the Trust's
investment in a joint venture which owns eight regional shopping malls and a 50%
interest in another mall at December 31, 1996. The Trust entered into this joint
venture on September 30, 1996.
1996
--------------
(IN THOUSANDS)
ASSETS
Investments in real estate at cost less accumulated depreciation $303,047
Cash and cash equivalents 10,523
Other assets 13,474
--------
Total assets $327,044
========
LIABILITIES AND PARTNERS' EQUITY
Mortgage notes payable 204,419
Other liabilities 10,359
--------
Total liabilities 214,778
Preferred stock 73,500
PARTNERS' EQUITY 38,766
--------
Total liabilities and equity $327,044
========
GROSS REVENUES FROM REAL ESTATE $ 15,072
EXPENSES
Property operating expenses 5,441
Mortgage and other interest expense 5,672
Depreciation and amortization 1,398
Preferred dividends 2,731
--------
NET LOSS $ (170)
========
Management fees of $.6 million were paid to the Trust's affiliated
management company for property management services. Additionally, lease
commissions may be earned by the Trust's affiliated management company for new
or renewal leases.
Depreciation for financial reporting purposes is computed using the
straight line method. Buildings, tenant improvements and equipment are
depreciated over useful lives of 10 to 50 years using the straight-line method
of depreciation.
Mortgage notes payable which are secured by the related properties are due
in installments extending to the year 2017 with interest rates ranging from
8.43% to 12.25%. A $40 million mortgage at 12.25% requires participation in the
cash flow of the secured property over predefined levels. Principal payments due
during the five years following December 31, 1996 are $2.0 million, $2.1
million, $2.3 million, $2.6 million and $21.3 million.
A-12
36
The members of the joint venture are the Trust and two other entities. The
Trust's $30 million investment in the joint venture is comprised of $3.5 million
in common and $26.5 million in preferred equity. The aggregate equity investment
of the other parties is $83.5 million which is comprised of $10 million in
common and $73.5 million in preferred equity as described below.
The preferred equity is divided into three series, of which the Trust is
the most junior in distribution and liquidation priority. The Trust's preferred
equity is entitled to distributions at a fixed rate of 10% for the first five
years and 4% thereafter. The two senior series of preferred equity consist of a
$35 million series (the "Senior Preferred") and a $38.5 million series (the
"Series B Preferred"). The Senior Preferred is entitled to distributions at a
floating rate equal to LIBOR plus 500 basis points (which increases by 50 basis
points after each three month period). The joint venture has the right to redeem
the Senior Preferred at any time. The Trust and the holder of the Series B
Preferred are seeking an investment by a third party to replace the Senior
Preferred and common equity as soon as practicable. The Series B Preferred is
entitled to distributions at a floating rate equal to LIBOR plus 600 basis
points. The joint venture has purchased an interest rate cap that limits its
exposure to LIBOR increasing above 7%. Generally, additional income and cash, if
any, after preferred distributions will be allocated and distributed
proportionately to the joint venture members according to their common equity
ownership.
The Trust has call options on all of the preferred equity held by the other
joint venture members, commencing immediately with respect to the Senior
Preferred and commencing after six months with respect to the Series B
Preferred. The call price of the Senior Preferred is equal to 100% of its face
amount plus accumulated distributions thereon, with interest but without any
additional premium. The call price of the Series B Preferred is equal to 100% of
its face amount plus the amount necessary to provide the holder thereof with a
15.75% annualized internal rate of return, after taking into account
distributions previously made on the Series B Preferred.
The holders of the Senior Preferred and the Series B Preferred have put
options back to the joint venture with respect to their preferred equity
commencing after two years in the aggregate amount of $10 million; put options
on the remainder of the preferred equity are exercisable in the third and fourth
years. The Trust has the right to contribute capital to the joint venture in
order to enable the joint venture to satisfy those puts. Any such capital
contributed by the Trust will constitute additional amounts of the Trust's
series of preferred equity. The put prices are identical to the call prices, as
described above.
If the Trust is unable or unwilling to contribute capital to the joint
venture so that the put options can be satisfied, the other entities have the
right to offset the dollar amount of such put option by transferring an
equivalent amount of capital from the Trust's capital account and increasing
their own accounts by such amount. As long as the Trust has any capital balance
remaining in the joint venture, it has the right to subsequently have its
capital account restored by meeting the put and paying certain additional
amounts. There can be no assurance that the Trust will have sufficient funds
available to make the capital contributions which may be required to satisfy the
put options of the other joint venture members or that the Trust will choose to
make such capital contributions at that time. The failure to make such capital
contributions would have a material adverse effect on the financial condition of
the Trust.
A-13
37
Once all the Senior Preferred and the Series B Preferred have been
acquired, the Trust will have call options on all of the common equity of the
other joint venture members as well. The call price of the common equity is
equal to 100% of the face amount plus the amount necessary to provide the holder
thereof with a 20% annualized internal rate of return, after taking into account
distributions previously made on the common equity. In addition, for so long as
the Senior Preferred holder's common equity is outstanding, the Senior Preferred
holder is entitled to receive $75,000 per month. There are no put options on the
common equity.
13. SHARE OPTIONS
The Trust has the following share option plans for key personnel.
1981 STOCK OPTION PLAN
This plan provides that option prices be at the fair market value of the shares
at the date of grant and that option rights granted expire ten years after the
date granted. Adopted in 1981, the plan originally reserved 624,000 shares for
the granting of incentive and nonstatutory share options. Subsequently, the
shareholders approved amendments to the plan reserving an additional 200,000
shares, for a total of 824,000 shares, for the granting of options and extending
the expiration date to December 31, 1996. The amendments do not affect
previously issued options.
The activity of the plan is summarized for the years ended December 31 in
the following table:
1996 1995 1994
------- ------- -------
Granted 409,500 -- 75,000
Exercised 9,455 -- --
Canceled 118,090 28,910 121,317
Expired 23,427 -- --
Available -- 314,837 285,927
As of December 31, 1996, options on 644,625 shares were outstanding at
prices ranging from $7.375 to $17.55 per share.
Separately, the Trust and Company have an agreement whereby, as of December
31, 1996, the Company may purchase up to 63,540 shares from the Trust at prices
ranging from $8.25 to $17.55 per share to satisfy the Company's obligations to
deliver shares to certain of its key employees pursuant to options previously
granted. The option agreements with the Company's employees provide that option
prices be at the fair market value of the Trust shares at the date of grant and
that option rights granted expire ten years after the date granted.
1994 LONG-TERM INCENTIVE OWNERSHIP PLAN
This plan, adopted in 1994, reserved 1,629,785 shares for the granting of
incentive and nonstatutory share options and restricted shares. The share
options expire eight years after being granted. The price of the options is the
fair market value of the shares at the date of grant. The restricted shares
receive dividends and have voting rights but may not be sold or
A-14
38
transferred until the restriction period lapses after eight years from the date
of grant, or earlier if the Trust's share price equals or exceeds $21 for 20
consecutive days or upon a change in control as defined in the plan. Additional
restricted shares will be granted when defined levels of funds from operations
and net capital gains are achieved during any four consecutive calendar
quarters. Deferred compensation of $1.7 million in 1996, $1.3 million in 1995
and $1 million in 1994 was recorded in connection with the issuance of the
restricted shares and is being amortized over an eight-year period on a
straight-line basis. Amortization of $498,000, $248,000 and $65,000,
respectively, was recognized in 1996, 1995 and 1994.
The activity of this plan is summarized for the years ended December 31 in
the following table:
1996 1995 1994
------- ------- ---------
Share options granted 79,000 242,450 229,850
Share options canceled 18,400 11,300 16,000
Restricted shares granted 142,500 162,500 162,500
Restricted shares canceled 37,007 -- --
Shares purchased by employees 11,094 9,812 --
Exercised 10,700 20 --
Available share options and restricted shares 652,786 849,973 1,253,435
As of December 31, 1996, options on 494,880 shares at prices ranging from
$6.375 to $7.75 and 427,500 restricted shares were outstanding.
The Trust accounts for stock option awards in accordance with APB 25 and
has adopted the disclosure-only provisions of SFAS 123 (Accounting for
Stock-Based Compensation). Consequently, no compensation cost has been
recognized for the share option plans. If compensation expense for the Trust's
two share option plans had been recorded based on the fair value at the grant
date for awards in 1996 consistent with SFAS No. 123, the Trust's net income
applicable to shares of beneficial interest would have been reduced by $430,000
or $.02 per share. The fair value of each option was calculated using the
Black-Scholes option-pricing model with the following assumptions: Dividend
yield of 3.5%, expected volatility of 30%, risk-free interest rate of 6.35% and
expected option life of 10 years.
14. SHAREHOLDER RIGHTS PLAN
In March 1990, the Board of Trustees declared a dividend consisting of one right
to purchase one share of beneficial interest of the Trust with respect to each
share of beneficial interest. The rights may be exercised only if a person or
group acquires 15% or more of the outstanding shares of beneficial interest,
makes a tender offer for at least 15% of the outstanding shares of beneficial
interest, or is declared to be an "adverse person." The exercise price of each
right is $50. If a person or group acquires 15% or more of the outstanding
shares of beneficial interest (except in a tender offer approved by the Board of
Trustees), is declared to be an "adverse person," or engages in certain
self-dealing transactions with the Trust ("flip-in events"), each right (other
than rights owned by a 15% owner of an "adverse person") entitles the holder to
purchase one share of beneficial interest of the Trust for par value (now $1 per
share). If the Trust is acquired in a merger or other business combination
("flip-over events"), each right
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39
entitles the holder to purchase, for $1, shares of the acquiring company having
a market value equal to the market value of one share of beneficial interest of
the Trust. The rights may be redeemed by the Trust at a price of $0.01 per right
at any time prior to the earlier of a "flip-in" or "flip-over" event or the
expiration of the rights on March 30, 2000.
15. FEDERAL INCOME TAXES
No provision for current or deferred income taxes has been made by the Trust on
the basis that it qualified under Sections 856-860 of the Internal Revenue Code
as a real estate investment trust and has distributed all of its taxable income
to shareholders.
In accordance with Section 1031 of the Internal Revenue Code, the Trust is
treating the sale of its 50% interest in two malls in Wilkes-Barre, PA and
Fairmount, WV as a like-kind exchange for Woodland Commons Shopping Center and
Steeplechase Apartments. As a result, the Trust is deferring for tax purposes
the capital gain realized in the transaction except for $6 million related to
the mortgage note received as part of the sale and the $2 million payment
received in 1994.
The Trust and Company treat certain items of income and expense differently
in determining net income reported for financial reporting and tax purposes.
Such items resulted in a net decrease in income for tax reporting purposes of
approximately $1.1 million for 1996 and $5 million for 1995, and a net increase
of approximately $.5 million for 1994.
As of December 31, 1996, net investments in real estate for financial
reporting purposes were approximately $69 million greater than for tax purposes.
The 1996 quarterly allocation of cash dividends per share of beneficial
interest for individual shareholders' income tax purposes was as follows:
LONG-TERM
CAPITAL ORDINARY TOTAL
DATE PAID GAINS INCOME PAID
--------- --------- -------- -----
February 1, 1996 $.018 $ .092 $.11
April 30, 1996 -- .11 .11
July 31, 1996 -- .11 .11
October 31, 1996 -- .11 .11
----- ------ ----
$.018 $ .422 $.44
===== ====== ====
For the year ended December 31, 1995, the cash dividends paid of $0.40
consisted of $.074 per share of ordinary income and $.326 per share of capital
gains, and for the year ended December 31, 1994, $0.48 per share was ordinary
income.
16. LEGAL CONTINGENCY
The Trust has pursued legal action against the State of California associated
with the 1986 flood of Peach Tree Center. In September 1991, the court ruled in
favor of the Trust on the liability portion of this inverse condemnation suit,
which the State of California appealed. The Trust is proceeding with its damage
claim. No recognition of potential income has been made in the accompanying
financial statements.
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17. LITIGATION AND PROXY EXPENSE
During 1995, the Trust was involved in a lawsuit and proxy contest with a
minority shareholder. The initial lawsuit filed by the Trust alleged several
violations of Securities and Exchange Commission rules and regulations by the
minority shareholder and other associated parties. Extensive discovery was
undertaken and numerous motions and pleadings were filed by the various parties
throughout most of 1995. Certain professional fees related to the litigation and
proxy contest of $1.6 million were incurred and have been included in general
and administrative expenses in the accompanying Combined Financial Statements.
All litigation was resolved on December 13, 1995 by a settlement and standstill
agreement. The Trust purchased 950,000 shares of beneficial interest at the
average 1995 trading price through December 8, 1995 of $7.50 per share in
January 1996. This transaction was recorded in the 1995 Combined Financial
Statements. Additionally, as part of this agreement, the minority shareholder
will not acquire additional shares of the Trust.
18. PROFORMA EARNINGS PER SHARE FOR THE JANUARY 1997 SALE OF 3,910,000 SHARES
OF BENEFICIAL INTEREST
In January 1997, the Trust sold 3,910,000 shares of beneficial interest. The net
proceeds of $46.1 million are to be used to repay $20.5 million in short-term
bank loans and $13.8 million of mortgage debt. Had the shares been sold in the
beginning of 1996 and the proceeds been used to repay the indebtedness
indicated, 1996 net income per share would have been $.29 on a proforma basis.
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19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is an unaudited condensed summary of the combined results of
operations by quarter for the years ended December 31, 1996 and 1995. In the
opinion of the Trust and Company, all adjustments (consisting of normal
recurring accruals) necessary to present fairly such interim combined results in
conformity with generally accepted accounting principles have been included.
QUARTERS ENDED
-----------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
Revenues $19,897 $19,363 $ 19,735 $ 22,872
------- ------- ------- -------
Income (loss) before preferred dividend and
extraordinary loss (877) 973 1,044 3,282
Extraordinary loss from early extinguishment of debt (286)
------- ------- ------- -------
Net income (loss) before preferred dividend $ (877) $ 973 $ 1,044 $ 2,996
------- ------- ------- -------
Net income (loss) applicable to shares of beneficial
interest $ (877) (1) $ 973 $ 1,044 $ 2,151(2)
------- ------- ------- -------
Per share
Income (loss) applicable to shares of beneficial
interest before extraordinary loss $ (.05) $ .06 $ .06 $ .14
Extraordinary loss from early extinguishment of debt (.02)
------- ------- ------- -------
Net income (loss) applicable to shares of beneficial
interest $ (.05) $ .06 $ .06 $ .12
======= ======= ======= =======
1995
Revenues $19,347 $19,576 $ 19,871 $ 20,411
------- ------- ------- -------
Income before capital gain or loss, extraordinary
loss and cumulative effect of accounting change 567 1,312 325 1,052
Unrealized loss on carrying value of assets
identified for disposition (14,000)
Capital gains 29,870
------- ------- ------- -------
Income (loss) before extraordinary loss and
cumulative effect of accounting change 30,437 1,312 325 (12,948)
Extraordinary loss from early extinguishment of debt (910)
Cumulative effect of change in accounting method (4,325)
------- ------- ------- -------
Net income (loss) $26,112 $ 1,312 $ 325 $ (13,858)
------- ------- ------- -------
Per share
Income before capital gain or loss, extraordinary
loss and cumulative effect of accounting change $ .03 $ .07 $ .02 $ .06
------- ------- ------- -------
Income (loss) before extraordinary loss and
cumulative effect of accounting change 1.67 .07 .02 (.72)
Extraordinary loss from early extinguishment of debt (.05)
Cumulative effect of change in accounting method (.24)
------- ------- ------- -------
Net income (loss) $ 1.43 $ .07 $ .02 $ (.77)
------- ------- ------- -------
<FN>
- ---------------
(1) Included a noncash charge for the write-off of a tenant allowance and the
termination of an employment contract.
(2) Included a lease termination fee of $1.1 million.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SECURITYHOLDERS AND TRUSTEES OF FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS:
We have audited the accompanying combined balance sheets of First Union
Real Estate Equity and Mortgage Investments (an unincorporated Ohio business
trust, also known as First Union Real Estate Investments) and First Union
Management, Inc. (a Delaware corporation) as of December 31, 1996 and 1995, and
the related combined statements of income, shareholders' equity and changes in
cash for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of First Union Real
Estate Equity and Mortgage Investments and First Union Management, Inc. as of
December 31, 1996 and 1995, and the results of their operations and their
changes in cash for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
February 5, 1997
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FINANCIAL CONDITION
In February 1996, the Trust sold two office buildings and an attached
parking garage in Cleveland, OH for $1.8 million in cash and a $7 million, 8%
note secured by the properties. This sale resulted in a capital loss of $5.6
million which was previously provided for by the Trust as part of a $14 million
noncash unrealized loss on the carrying value of certain assets identified for
disposition, which was recorded in December 1995.
During 1996, the Trust obtained four mortgage loans totaling $48.5 million
at a weighted average interest rate of 7.5%, most of which have a term of 10
years. The mortgage loans are individually secured by three apartment complexes
and a shopping center. The proceeds repaid loans outstanding under the bank
credit agreements.
In June 1996, the Trust received repayment of the $7 million mortgage
investment, which was part of the consideration received in the Trust's sale of
the two office buildings and an attached parking garage discussed above. The
proceeds of this mortgage investment were used to repay short-term bank loans
and the $5 million, 8.6% medium term note which was due in July 1996.
The Trust in September of 1996 combined and expanded its revolving credit
agreements. The new $90 million credit agreement is secured by the same
collateral that secured the former $80 million facilities. The new agreement is
at a variable interest rate and requires defined levels of funds from
operations, net worth, leverage and interest coverage. The term of the $90
million credit agreement is two years and can be extended thereafter each year
upon request of the Trust and consent of the bank group.
Also in late September 1996, the Trust invested $30 million from its bank
credit facility, in a joint venture. The joint venture acquired eight regional
shopping malls and a 50% interest in another mall totaling 5,800,000 square feet
of gross leasable area. These shopping malls are the dominant retail facilities
located primarily in regional markets in Louisiana, Arkansas, Texas, Oklahoma
and New Mexico. The purchase price paid by the joint venture was $311.7 million
which included the assumption of $50 million in existing mortgage debt. The
Trust's property management affiliate will manage the properties for the joint
venture. The Trust has recorded this joint venture investment using the equity
method of accounting, as the Trust owns 26% of the common equity of the joint
venture.
In late October 1996, the Trust issued 2,300,000 shares of 8.4% Series A
cumulative convertible redeemable preferred shares of beneficial interest at $25
per share. The net proceeds of $54.1 million were used to repay borrowings under
the Trust's bank line of credit.
The Trust in December of 1996 purchased an apartment complex for $5.5
million in Cincinnati, Ohio. The purchase was funded from the bank line of
credit.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations for 1996 of $11.1 million was approximately
$1.9 million less than the prior year primarily due to the increase in accounts
receivable when comparing
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1996 to 1995. Dividends paid in 1996 of $7.8 million represented 70% of net cash
from operating activities.
Net cash used for investing of $47.0 million for 1996 included $8.8 million
in proceeds received from the sale of two office buildings and an attached
parking garage. The Trust in September 1996 invested $30 million in a joint
venture which has ownership interests in nine regional shopping malls.
Additionally, the Trust in 1996 invested approximately $20.3 million in its
existing portfolio. These improvements included the completion of the renovation
of two shopping malls in St. Cloud, MN and Reading, PA, the addition of an
anchor tenant building in Reading, PA and the conversion of 86,000 square feet
to office space of a former retail facility in Denver, CO. In December 1996, as
noted previously, the Trust purchased an apartment complex in Cincinnati, OH for
$5.5 million.
Net cash provided by financing of $35.5 million during 1996 included four
mortgage loans totaling $48.5 million secured by three apartment complexes and a
shopping center. Additionally, the Trust sold 2,300,000 preferred shares of
beneficial interest for $54.1 million of net proceeds. The mortgage proceeds and
the net proceeds from the sale of preferred shares were used to repay amounts
outstanding under the bank credit agreement.
In 1997, the Trust has $3.9 million in mortgage principal payments due and
$20 million in planned tenant and building improvements. These requirements will
be funded through available bank lines of credit and approximately $46 million
of net proceeds from the sale of 3,910,000 shares of beneficial interest in
January 1997.
RESULTS OF OPERATIONS
Net income applicable to shares of beneficial interest was $3.3 million for
1996, as compared to $13.9 million for 1995.
Net income applicable to shares of beneficial interest in 1996 included an
accrued preferred dividend of $845,000, two non-recurring, noncash charges
totaling $1.3 million for the write-off of a tenant allowance and the
termination of an employment contract, a lease termination fee of $1.1 million
and an extraordinary loss of $286,000 from the write-off of deferred costs
related to former bank credit agreements which were negotiated into a new
agreement.
Net income for 1995 included a capital gain of $29.9 million, a $14 million
noncash unrealized loss on the carrying value of certain assets which were
identified for disposition, a $4.3 million noncash charge for the cumulative
effect of a change in accounting method, an extraordinary loss of $910,000 from
the early repayment of debt and $1.6 million of litigation and proxy expenses.
The $29.9 million capital gain in 1995 resulted from the sale of the
Trust's 50% interests in two malls in Wilkes-Barre, PA and Fairmount, WV for
$29.5 million in cash, a $6 million mortgage at an interest rate of 9% secured
by one of the malls and also secured by partnership units of Crown American
Properties L.P., and the assumption by the purchaser of $4.7 million of mortgage
debt. The proceeds from this sale were invested in short-term securities until
properties were acquired in 1995 in a tax-free exchange.
In 1995, the Trust recorded a noncash charge of $4.3 million for the
cumulative effect of the change in accounting method for internal leasing costs.
Previously, the Trust deferred internal
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leasing costs and amortized these costs over the lives of the consummated
leases. Capitalizing these leasing costs is generally done in the real estate
industry; however, the Trust adopted a more conservative practice by expensing
these costs in the period incurred. This change in the method of accounting was
made retroactive to January 1995 and consequently, 1995 amounts were restated to
reflect this change.
The extraordinary loss of $910,000 in 1995 primarily represented the
write-off of unamortized mortgage costs and prepayment premiums from the
repayment of mortgage loans prior to their maturity dates in conjunction with
the $49.5 million refinancing of Crossroads Center in St. Cloud, MN.
Litigation and proxy expenses of $1.6 million were incurred during 1995.
These professional fees resulted from litigation and a proxy contest with a
minority shareholder. The litigation was resolved in December 1995 by a
settlement and standstill agreement.
Income from property operations for 1996, which is rents less property
operating expenses and real estate taxes, was $1.8 million greater than 1995.
However, on a comparable property basis, the retail properties in the portfolio
for all of 1996 and 1995 increased income from property operations by $2.2
million primarily due to increased occupancy of small shop space, the addition
of two anchor tenants and the recognition of a termination fee from an anchor
tenant for $1.1 million in December 1996. The office portfolio on a comparable
property basis for 1996 and 1995 increased income from property operations by
$.3 million primarily due to increased occupancy at the Oklahoma City, OK office
property. The comparable parking portfolio produced an additional $.3 million in
income from property operations due primarily to an increase in the guaranteed
minimum rent paid by the operator of the parking facilities. The 1996 full year
impact of the apartment complex purchased in June 1995 and the shopping center
purchased in April 1995 is offset by the sale in 1996 of two office buildings
and an attached parking garage and the sales in 1995 of an office building and
two shopping malls.
Income from property operations increased by $1.8 million when comparing
1995 to 1994. The retail properties in the portfolio for all 12 months of 1995
and 1994 increased income from property operations by $.4 million when comparing
1995 to 1994 primarily due to increased occupancy. The comparable apartment
portfolio income from operations increased $.6 million primarily due to
increased rental rates. The office property portfolio increased income from
operations by approximately $.4 million from real estate tax refunds in 1995.
The parking portfolio produced an additional $.4 million in income from
operations due to an increase in the guaranteed rent paid by the operator of the
parking facilities and reduced real estate tax expense when comparing 1995 to
1994. The apartment complexes acquired in June 1995 and August 1994 and the
shopping center acquired in April 1995 increased income from property operations
when comparing 1995 to 1994. However, this increase was offset by the sale of
the two malls in January 1995.
As noted previously, the Trust invested $30 million in a joint venture in
September 1996. During the fourth quarter of 1996, the joint venture produced
$528,000 in investment income and $617,000 in management fees for the Trust's
affiliated management company.
Short-term investment income declined when comparing 1996 to 1995 as the
Trust had an average of $13 million in short-term investments during the first
half of 1995 from the proceeds of the January 1995 sale of its 50% interest in
two malls. These funds were used to purchase a
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46
shopping center and an apartment complex in April and June of 1995,
respectively. Also, short-term investment income declined when comparing 1995 to
1994 because short-term investments averaged $6.4 million in 1995 as compared to
$30 million in 1994. In 1994, the Trust had short-term investments until it
purchased an apartment complex for $19 million in August and repaid $17 million
on a bank line of credit.
Mortgage investment income increased when comparing 1995 to 1994 due to the
$6 million mortgage note receivable which was part of the consideration received
in January 1995 from the sale of the two malls.
Mortgage interest expense increased when comparing 1996 to 1995 due to the
four new mortgage loans totaling $48.5 million obtained during 1996. However,
the Trust's refinancing in the fourth quarter of 1995 of four other mortgage
loans at an average interest rate of 9.25% for one mortgage loan at 7.49%
partially offset the full effect of the increase in mortgage interest expense
from the addition of the four mortgage loans in 1996.
Depreciation and amortization expense for 1996 increased over 1995 by
approximately $1.2 million. This increase was caused by a non-recurring, noncash
$680,000 write-off of a tenant allowance due to the Trust replacing an anchor
tenant at one of its malls. The remaining increase in depreciation expense was
attributable to the Trust's capital improvement program during the last half of
1995 and continuing in 1996. The increase in depreciation and amortization
expense when comparing 1995 to 1994 was primarily the result of the newly
acquired shopping center and apartment complex in 1995 and additional tenant
improvements.
Interest on bank loans increased when comparing 1995 to 1994 due to an
increase of approximately 260 basis points in short-term interest rates. The
Trust's interest rates on its bank lines of credit fluctuate based on short-term
market rates. The increase in interest rates was partially offset by a decrease
in borrowings during 1995. During 1995, the Trust's weighted average interest
rate was 7.8% on an average outstanding balance of $50.8 million; whereas,
during 1996, the Trust had an average outstanding balance of $50.9 million at a
weighted average interest rate of 7.6%.
General and administrative expenses for 1996 included a non-recurring,
noncash charge of $650,000 for the termination of an employment contract of a
former executive. Also in 1996, additional expenses were incurred in the fourth
quarter to manage the nine properties acquired in the joint venture. Litigation
and proxy expenses of $1.6 million were included in general and administrative
expenses in 1995, but were previously disclosed separately.
General and administrative costs increased when comparing 1995 to 1994.
Expenses increased in 1995 as a result of litigation and proxy costs, changing
the method of accounting to directly expense internal leasing costs rather than
continue to capitalize and amortize these costs over the term of tenant leases
and an increase in leasing personnel.
The Trust in late October 1996 issued 2,300,000 of convertible preferred
shares of beneficial interest at 8.4%. Consequently, the preferred dividend of
$845,000 is non-comparable to 1995.
FUNDS FROM OPERATIONS AND DIVIDENDS DECLARED
Funds from operations (FFO) is calculated as income before capital gain or
loss, extraordinary loss and cumulative effect of accounting change, both before
and after preferred dividend,
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47
plus noncash charges for depreciation and amortization for both the Trust and a
joint venture. A new definition of FFO, adopted by the National Association of
Real Estate Investment Trusts, excludes depreciation and amortization of debt
issue costs and other corporate assets. FFO presented by the Trust adds back the
entire amount of depreciation and amortization including $1,080,000, $866,000
and $568,000 for debt issue costs and other corporate assets for the years ended
December 31, 1996, 1995 and 1994, respectively.
The table below shows the calculation of FFO, dividends declared to holders
of shares of beneficial interest and the payout ratio.
(AMOUNTS IN THOUSANDS) 1996 1995 1994
----------------------------------------------------- ------- ------- -------
Net income before preferred dividend $ 4,136 $13,891 $ 6,485
Depreciation and amortization 13,149 11,901 10,555
Depreciation and amortization of joint venture 364
Cumulative effect of accounting change 4,325
Extraordinary loss from debt extinguishment 286 910
Unrealized loss on carrying value of assets
identified for disposition 14,000
Capital gains (29,870)
------- ------- -------
Funds from operations before preferred dividend 17,935 15,157 17,040
Preferred dividend (845)
------- ------- -------
Funds from operations after preferred dividend $17,090 $15,157 $17,040
Dividends declared for shares of beneficial interest $ 7,684 $ 7,542 $ 7,273
Payout ratio of dividends for shares of
beneficial interest to FFO 45% 50% 43%
The payout ratio of dividends declared to funds from operations was 45%,
50% and 43% for 1996, 1995 and 1994, respectively. The payout ratio, compared to
the equity REIT industry average of approximately 80%, reflects the Trust's
policy of reinvesting in its present portfolio and increasing its portfolio
through acquisitions so that dividend increases will be supported by future
operating results.
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DETACH CARD
- --------------------------------------------------------------------------------
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS -- PROXY
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES.
E. Bradley Jones and James C. Mastandrea, or either of them, are hereby
authorized, with full power of substitution, to represent and to vote the shares
which the undersigned may be entitled to vote, including reinvestment shares, if
any, at the Annual Meeting of Shareholders of First Union Real Estate Equity and
Mortgage Investments to be held on April 8, 1997, or at any adjournment thereof,
as follows:
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "FOR" ALL NOMINEES IN PROPOSAL 1
1. ELECTION OF TRUSTEES WITHHOLD AUTHORITY [ ]
FOR all nominees listed below [ ] to vote for all nominees listed below
(except as indicated to the contrary below)
Kenneth K. Chalmers, William E. Conway, Russell R. Gifford
INSTRUCTION: (TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE WRITE
THAT NOMINEE'S NAME IN THE SPACE PROVIDED BELOW)
-----------------------------------------------------------------------------
THE BOARD OF TRUSTEES RECOMMENDS A VOTE "AGAINST" PROPOSAL 2
2. SHAREHOLDER PROPOSAL CONCERNING TABULATION OF PROXIES
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, as to such other business as may properly come before
the meeting or at any adjournment thereof.
(CONTINUED, AND TO BE SIGNED ON OTHER SIDE)
49
DETACH CARD
- --------------------------------------------------------------------------------
PROXY NO. SHARES
(Continued from the other side)
IF NO SPECIFICATION IS MADE, AUTHORITY IS GRANTED TO CAST THE VOTE OF THE
UNDERSIGNED IN FAVOR OF PROPOSAL 1 AND AGAINST PROPOSAL 2.
Dated................, 1997
...........................
Signature
...........................
Signature
...........................
Title
Please sign as name appears
on the share certificates
(as indicated on this
card). When shares are held
by joint tenants, both
should sign. When signing
as attorney, executor,
administrator, trustee or
guardian, please give your
full title as such. If the
share certificate is issued
in the name of a
corporation, please sign in
full corporation name by a
duly authorized officer. If
a partnership, please sign
in partnership name by a
duly authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE
PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.