<PAGE> 1
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-00953
PROSPECTUS SUPPLEMENT
- ---------------------
(TO PROSPECTUS DATED OCTOBER 7, 1996)
2,000,000 SHARES
FIRST UNION REAL ESTATE EQUITY
AND MORTGAGE INVESTMENTS
SERIES A CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED SHARES OF
BENEFICIAL INTEREST (LIQUIDATION PREFERENCE $25.00 PER SHARE)
------------------------
First Union Real Estate Equity and Mortgage Investments ("First Union" or
the "Company") is a real estate investment trust (a "REIT") that specializes in
the ownership of regional enclosed shopping malls and multi-family apartment
communities. The Series A Cumulative Convertible Redeemable Preferred Shares of
Beneficial Interest, par value $25.00 per share (the "Series A Preferred
Shares"), of First Union are convertible into First Union's Shares of Beneficial
Interest, par value $1.00 per share (the "Common Shares"). The last reported
sale price of the Common Shares on the New York Stock Exchange ("NYSE") on
October 23, 1996 was $6.875. See "Price Range of Common Shares and
Distributions."
Distributions on the Series A Preferred Shares will be cumulative from the
date of original issue and will be in an amount per share equal to the greater
of $2.10 per share (equivalent to 8.4% of the liquidation preference per annum)
or the cash distributions (determined on each of the quarterly distribution
payment dates for the Series A Preferred Shares) on the Common Shares, or
portion thereof, into which a Series A Preferred Share is convertible, payable
quarterly. See "Description of Series A Preferred Shares--Distributions."
The Series A Preferred Shares are convertible at any time, unless previously
redeemed, at the option of the holders thereof into Common Shares at a
conversion price of $7.5625 per Common Share, subject to adjustment in certain
circumstances. See "Description of Series A Preferred Shares--Conversion
Rights."
The Series A Preferred Shares are not redeemable prior to October 29, 2001,
and at no time will the Series A Preferred Shares be redeemable for cash. On and
after October 29, 2001, the Series A Preferred Shares will be redeemable, in
whole or in part, at the option of the Company, for such number of Common Shares
as are issuable at a conversion rate of 3.31 Common Shares for each Series A
Preferred Share, subject to adjustment in certain circumstances. The Company may
exercise this option only if for 20 trading days within any period of 30
consecutive trading days, including the last trading day of such period, the
closing price of the Common Shares on the NYSE equals or exceeds the conversion
price per share, subject to adjustment in certain circumstances. The Series A
Preferred Shares will not be entitled to the benefit of any sinking fund. See
"Description of Series A Preferred Shares -- Redemption"
The Series A Preferred Shares have been approved for listing on the NYSE
under the symbol "FURPrA," subject to official notice of issuance.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS SUPPLEMENT OR THE
PROSPECTUS TO WHICH IT RELATES. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED THE
MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) FIRST UNION(3)
<S> <C> <C> <C>
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PER SHARE.................................... $25.00 $1.125 $23.875
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TOTAL (4).................................... $50,000,000 $2,250,000 $47,750,000
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<FN>
(1) Plus accrued distributions, if any, from the date of original issue.
(2) First Union has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by First Union estimated to be $650,000.
(4) First Union has granted to the Underwriters an option, exercisable for 30
days from the date of this Prospectus Supplement, to purchase a maximum of
300,000 additional Series A Preferred Shares solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public will be $57,500,000, Underwriting Discount will be
$2,587,500, and Proceeds to First Union will be $54,912,500. See
"Underwriting."
</TABLE>
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The Series A Preferred Shares are offered by the several Underwriters,
subject to prior sale, when, as and if delivered to and accepted by them,
subject to approval of certain legal matters by counsel for the Underwriters.
The Underwriters reserve the right to withdraw, cancel or modify such offer and
to reject orders in whole or in part. It is expected that certificates for the
Series A Preferred Shares will be ready for delivery on or about October 29,
1996.
SUTRO & CO. INCORPORATED
BT SECURITIES CORPORATION
TUCKER ANTHONY
INCORPORATED
The date of this Prospectus Supplement is October 23, 1996.
<PAGE> 2
FIRST UNION REAL ESTATE INVESTMENTS FINANCIAL TRENDS
<TABLE>
<CAPTION>
[GRAPH]
REVENUES
(AMOUNTS IN MILLIONS)
YEAR 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 76.861 $ 74.941 $ 74.567 $ 74.339 $ 76.339 $ 79.205
</TABLE>
<TABLE>
<CAPTION>
[GRAPH]
PROPERTY NOI
(AMOUNTS IN MILLIONS)
YEAR 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
PROPERTY NOI $ 48.035 $ 45.002 $ 43.403 $ 41.551 $ 41.880 $ 44.259
</TABLE>
<TABLE>
<CAPTION>
[GRAPH]
CAPITAL EXPENDITURES
(AMOUNTS IN MILLIONS)
YEAR 1990 1991 1992 1993 1994 1995
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
CAPITAL
EXPENDITURES $ 4.963 $ 5.876 $ 10.260 $ 12.796 $ 8.357 $ 25.510
</TABLE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICES OF THE SERIES A
PREFERRED SHARES OR THE COMMON SHARES AT LEVELS ABOVE THOSE WHICH MIGHT
OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE
NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
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PROMISES ARE BECOMING REALITIES AT FIRST UNION
During the past year, First Union has invested more than $25 million in its
properties across the country. These projects include the 1995 renovation and
expansion of Crossroads Center in Minnesota, and Fairgrounds Square in
Pennsylvania. First Union also aquired Steeplechase Apartments, an apartment
community in Ohio, and Woodland Commons, an open-air retail community center in
Illinois.
STEEPLECHASE APARTMENTS
[PICTURE]
Exterior view of Steeplechase Apartments, Cincinnati, Ohio, clubhouse and pool.
WOODLAND COMMONS
[PICTURE]
Exterior view of Woodland Commons, Buffalo Grove, Illinois, facade showing
tenant names.
<PAGE> 4
CROSSROADS CENTER
[2-PICTURES]
Interior view of Crossroads Center, St. Cloud, Minnesota, showing common area
of mall after renovation with skylights and new lighting treatment. Picture
includes a caption showing 733,072 square feet, which is the total square feet
of the mall. The caption also includes a list of major anchor tenants --
Dayton's JC Penney, Sears and Target.
Interior view of Crossroads Center, St. Cloud, Minnesota, showing common area of
mall before renovation. Picture is captioned before renovation.
FAIRGROUNDS SQUARE
[2-PICTURES]
Exterior view of Fairgrounds Square Mall, Reading, Pennsylvania, after
renovation of an entrance to the mall. Picture includes a caption showing
636,191 square feet, which is the total square feet of the mall. The caption
also includes a list of major anchor tenants -- Boscov's, JC Penney, Montgomery
Ward and Phar-Mor.
Exterior view of Fairgrounds Square Mall, Reading, Pennsylvania, before
renovation of an entrance to the mall. Picture is captioned before renovation.
<PAGE> 5
Unless otherwise indicated, the information contained in this Prospectus
Supplement assumes the sale of 2,000,000 Series A Preferred Shares at the
initial public offering price and the application of the proceeds therefrom and
does not give effect to any exercise of the Underwriters' over-allotment option.
The Company's investment in the joint venture described under "Recent
Developments -- Investment in Joint Venture" is not included within the
Company's retail operating division. Accordingly, references herein to the
number of retail properties in the Company's real estate portfolio, the
occupancy rates of those properties and the historical cost of properties as a
percentage of total real estate investments do not reflect the Company's
investment in the joint venture. Except as expressly stated herein or unless the
context requires otherwise, references to First Union or the Company relate to
both First Union Real Estate Equity and Mortgage Investments (including its
wholly owned subsidiaries) and First Union Management, Inc.
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
First Union is a self-administered and self-managed REIT. Its current
business focus is acquiring and repositioning retail and apartment properties
with development potential and creating additional value through targeted
capital expenditures, aggressive management and by capitalizing on redevelopment
opportunities. Its retail investments consist primarily of enclosed regional
malls in midsize markets, but also include two strip shopping centers, in
locations with strong demographics. The apartments presently owned are
garden-style communities with attractively landscaped grounds and a full range
of amenities. The Company believes its portfolio of properties has significant
upside rental revenue potential. As of September 30, 1996, the Company's
portfolio included 15 retail properties and eight apartment communities totaling
approximately 6,100,000 square feet of retail space (including anchor-owned
space) and 2,281 apartment units, respectively, located in 15 states. First
Union also owns five office properties totaling approximately 1,400,000 square
feet, but intends to divest itself in the near-term of all of these properties
except for its headquarters building in Cleveland. As of September 30, 1996, the
retail, apartment and office properties (excluding North Valley Center which is
being re-developed) were approximately 83%, 93% and 89% occupied, respectively.
First Union experienced consistent growth from its founding in 1961 through
the early 1980's. The Company has paid 139 uninterrupted quarterly dividends on
its Common Shares since inception. Tight fiscal management enabled the Company
to weather the real estate decline of the late 1980's, but First Union found
itself at that time with an investment portfolio that was in need of upgrading
and repositioning in order to regain its competitive position.
First Union expects growth from both retail and apartment investments,
which are consumer-driven types of income producing real estate. Unlike many
other REITs which generate income from single geographic regions, First Union
has an expanding presence in a number of high growth regions of the United
States including Durham, North Carolina and Buffalo Grove, Illinois. First Union
believes its existing retail portfolio has significant upside rental revenue
potential and the Company intends to purchase additional properties with upside
potential.
James C. Mastandrea joined First Union in July 1993 as Chief Operating
Officer and President, and immediately began to evaluate strategic alternatives
for each of its assets. In addition, Mr. Mastandrea assembled his senior
management team drawing from existing First Union executives as well as
recruiting from outside the organization. Mr. Mastandrea, who has since become a
holder of nearly 269,000 Common Shares, brought over 20 years of retail and
finance experience to the Company. In January 1994, he was named Chief Executive
Officer and Chairman of the Board of Trustees of First Union and began to
implement a five-year strategic plan for the Company.
THE STRATEGIC PLAN
Mr. Mastandrea and the new management team have instituted a formal
planning process and developed a strategic plan adopted by the Board in January
1994. The immediate and ongoing strategic elements of the plan are: renovating
the properties, repositioning the asset portfolios through targeted acquisitions
and dispositions, and improving the operations of the Company. Over a five-year
horizon, the strategic plan goals include restructuring of the balance sheet
primarily through reduction of the Company's debt-to-equity ratio,
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<PAGE> 6
significant growth in total assets, and substantial growth in funds from
operations, dividends and share price in order to maximize total return to
shareholders. The strategic plan calls for regular and ongoing evaluation of
each property, including a discussion of strategic alternatives and a detailed
annual program covering capital investment, management and leasing direction and
a hold-or-sell decision. Every year, the retail and apartment properties are
categorized into (i) assets to hold for enhanced value through capital
investment, (ii) assets to hold for income, growth and appreciation with no
further investment, (iii) assets to sell over the next three years and (iv)
assets to sell over a period of the next three to five years.
With its management restructuring and investment in a state-of-the-art
accounting and management information system, First Union is now properly
positioned to take advantage of superior opportunities to acquire retail and
apartment properties with upside potential. In accordance with its long range
plan, First Union intends to acquire underperforming assets and assets in
locations with favorable demographic trends that have high potential for growth
in income and asset value.
Management believes the implementation of the strategic plan has already
had a favorable impact on property operating results. By illustration, after
decreasing from $48 million in 1990 to $41.6 million in 1993, property net
operating income has since increased for two consecutive years to $41.9 million
in 1994 and $44.3 million in 1995. For the nine months ended September 30, 1996,
property net operating income was $33.3 million compared to $32.6 million for
the same period in 1995. This is due to the improvement in core operations in
leasing activity and in the repositioning of the portfolio through targeted
capital expenditures, acquisitions and dispositions.
PROPERTY NET OPERATING INCOME
(IN THOUSANDS)
[BAR GRAPH]
<TABLE>
<S> <C>
1990 $48,035
1991 $45,002
1992 $43,403
1993 $41,551
1994 $41,880
1995 $44,259
</TABLE>
Elements of the strategic plan are discussed in more depth in the following
subsections.
REPOSITIONING THE PORTFOLIO
Since January 1994, the Company has invested $30 million in a joint venture
which purchased nine retail malls for $311.7 million (see "Recent
Developments -- Investment in Joint Venture"), purchased one retail
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center for $21 million, purchased two apartment communities for a total of $31
million and sold three office properties and a parking garage for a total of
$13.1 million. These transactions are consistent with the Company's strategy of
selling its office properties and investing in retail and apartment properties.
The Company also sold its 50% ownership interests in two shopping centers for a
combined gain of $29.9 million because they did not meet the Company's strategic
property profile. In addition, the Company is redeveloping a retail mall into an
office campus in suburban Denver, Colorado, in response to the increasing demand
for office space and the decreasing demand for retail space in that market. The
repositioning of this mall as an office property should make it attractive for
sale in the future.
RENOVATING THE PROPERTIES
In 1994 and 1995, the Company spent a total of $33.9 million in capital
expenditures, including tenant improvements, as compared to the same amount over
the entire four year period from 1990 to 1993. For the nine months ended
September 30, 1996, capital expenditures and tenant improvements were $16.6
million compared to $15.6 million for the same period in 1995. Since January
1994, the Company has initiated significant redevelopment programs on five
retail centers aggregating approximately 2,500,000 square feet and completed
capital improvement programs on three apartment properties. Management believes
that these improvements were important in signing 357,000 square feet of new
retail leases and increasing average apartment rental rates from $575 to $598
per unit per month during 1995. The Company believes that many of its best
investment opportunities continue to be in improving its existing portfolio with
several expansion, renovation and lease-up opportunities still remaining.
CAPITAL EXPENDITURES AND TENANT IMPROVEMENTS
(IN THOUSANDS)
[BAR GRAPH]
<TABLE>
<S> <C>
1990 $4,963
1991 $5,876
1992 $10,260
1993 $12,796
1994 $8,357
1995 $25,510
</TABLE>
RESTRUCTURING THE BALANCE SHEET
In 1994, the Company began the restructuring of its balance sheet. The
Company initiated this process in the first quarter of 1994 by decreasing its
dividend by 44% from $0.72 on an annualized basis in 1993 to $0.40 on an
annualized basis in 1994, simultaneously decreasing its annual payout ratio from
65% of funds from operations to 43%. See "Management's Discussion and Analysis
of Financial Condition and Results of
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Operations" for the Company's definition of "funds from operations." The Company
decreased its dividend because of reduced cash flow as installment payments
ended from a prior year capital gain and to retain more capital for renovations
and improvements to existing properties. Improved property net operating income
allowed the Company to increase its dividend 10% in the fourth quarter of 1995
to $0.44 on an annualized basis resulting in a payout ratio of 53% of funds from
operations on an annualized basis.
In 1995, the Company replaced $34 million of floating rate debt and $14.3
million of short term, high-rate debt with $49.5 million of long term, lower
cost fixed-rate debt at a rate of 7.5% for seven years. This refinancing
decreased interest expense by $.04 per share on an annualized basis. Four other
mortgage loan transactions in 1996 replaced an additional $48.5 million of
variable rate debt with fixed rate debt at an average rate of 7.5%, most of
which has a term of ten years. Additionally, the Company restructured its two
existing revolving credit agreements from $80 million to a $96 million credit
facility with an expanded bank group. This new credit facility, which is secured
by the same collateral that secured the former $80 million facilities, is for a
two-year term that can be extended thereafter each year at the request of the
Company and upon consent of the bank group.
IMPROVING THE OPERATIONS
Management and the Board of Trustees have implemented several structural
changes to improve the operations of the Company. The election of four new Board
members and the addition of several new members of management since January 1994
have augmented retail, finance and real estate experience as well as provided a
network of business relationships to First Union. In order to better align the
interests of management and the shareholders, the Board of Trustees adopted a
management incentive program which tied cash awards, options and restricted
share grants to operating performance goals and the Company's share price.
Management reorganized the reporting structure into three business divisions:
retail, apartments and office. A management training program was added to help
recruit, develop and retain talented employees. Finally, the Company replaced
its obsolete computer with a new management information system.
GOING FORWARD
First Union plans to continue concentrating its efforts on retail and
multi-family investments while divesting its office properties. First Union
plans to increase its asset base significantly over the next few years, with
corresponding growth in funds from operations and total return to shareholders,
through new acquisitions and increased investments in existing properties in
markets with strong demographics. This plan depends on, among other things, the
availability of additional capital. This offering is part of an ongoing effort
of the Company to strengthen its balance sheet with the ultimate goals of
funding its growth plans, improving its credit ratings and reducing its cost of
capital.
First Union's headquarters are located at 55 Public Square, Suite 1900,
Cleveland, Ohio 44113-1937 and its telephone number is (216) 781-4030.
RECENT DEVELOPMENTS
PORTFOLIO LEASING ACTIVITY
Leases were executed for nearly 250,000 square feet in the first nine
months of 1996. Major transactions included a 60,000 square foot lease with
Gabriel Brothers at Mountaineer Mall in Morgantown, West Virginia, at $178,000
per year, which replaced a former tenant that paid approximately $20,000 in
1995. New leases for 57,000 square feet filled vacancies with tenants such as
Blockbuster Video and Rex TV & Appliance. TeleTech, an industry leader in the
outsourcing of customer telephone services and technical support functions,
occupied 56,500 square feet at North Valley Center in Denver, Colorado in the
second quarter and leased an additional 55,000 square feet in the third quarter.
In the third quarter, Dollar General Store and Wholesale Mattress signed
leases for a combined 14,000 square feet at Mountaineer Mall, and the Limited
signed a Bath and Body Works lease for a 4,000 square foot store at Crossroads
Mall, Fort Dodge, Iowa. Apple South Inc., currently the largest franchisee in
the
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<PAGE> 9
Applebee's Restaurant chain, signed a ground lease to build an Applebee's
Neighborhood Grill and Bar Restaurant, also at Crossroads Mall. Additionally,
Corey Everson Aerobics and Fitness signed a lease for a 10,000 square foot
physical fitness center at Woodland Commons in Buffalo Grove, Illinois.
Activity on leases signed in previous quarters included the commencement of
the 22,000 square foot United States Postal Service lease at Plaza 205 in
Portland, Oregon and the opening of a 107,000 square foot Montgomery Ward store
at Fairgrounds Square Mall in Reading, Pennsylvania. Montgomery Ward opened one
month ahead of schedule and advised the Company that the store surpassed its
grand opening sales goals. Non-retail leasing activity included Commercial
Financial Services, a Tulsa-based financial services firm, which leased an
additional 10,000 square feet, bringing its total occupancy to 40,000 square
feet, at Landmark Towers in Oklahoma City, Oklahoma. This property has increased
its occupancy to approximately 90% from 75% two years ago, due to a concentrated
and focused leasing effort.
FINANCING
Since January 1996, First Union has completed four mortgage loans,
replacing $48.5 million of variable rate debt with fixed rate debt at an average
rate of 7.5%. During the third quarter, First Union restructured its two
existing revolving credit agreements from $80 million to a $96 million credit
facility with an expanded bank group for a two-year term that can be extended
thereafter each year at the request of the Company and upon consent of the bank
group.
OFFICE BUILDING DISPOSITIONS
In the first quarter of 1996, two office buildings and a parking garage
located in Cleveland were sold for $8.8 million. First Union recorded a loss of
approximately $5.6 million which was taken against the $14 million asset reserve
recorded in 1995 in anticipation of this and other sales. First Union received
from the purchaser $1.8 million in cash and a secured note which was repaid at
the end of the second quarter.
FINANCIAL RESULTS
For the third quarter ended September 30, 1996, revenues were $19.7
million, which was comparable to the same period in 1995. Property net operating
income was $11.3 million for the third quarter of 1996, compared to $10.8
million for the third quarter of 1995. Income before capital gain or loss,
extraordinary loss and cumulative effect of accounting change was $1.0 million,
or $.06 per share for the third quarter of 1996 as compared to $.3 million, or
$.02 per share for the same quarter in 1995. Funds from operations increased to
$4.1 million in the third quarter of 1996 compared to $3.3 million for the same
period in 1995.
For the first nine months of 1996, revenues were $59.0 million, compared to
$58.8 million for the same period in 1995. Property net operating income was
$33.3 million for the first nine months of 1996, compared to $32.6 million for
the first nine months of 1995.
Without the impact of two non-recurring, non-cash charges, income before
capital gain or loss, extraordinary loss and cumulative effect of accounting
change was $2.5 million, or $.14 per share for the first nine months of 1996.
These non-recurring, non-cash charges, amounting to $1.3 million, included the
recognition of a $650,000 charge associated with the termination of the
employment contract of a former executive officer of First Union who had an
employment contract, and the write-off of a $680,000 tenant allowance related to
an anchor tenant that was replaced by Gabriel Brothers, which is paying
approximately $155,000 more in annual rent at Mountaineer Mall, Morgantown, West
Virginia. With these one-time, non-cash charges, income before capital gain or
loss, extraordinary loss and cumulative effect of accounting change for the
first nine months of 1996 was $1.1 million, or $.07 per share, compared to $2.2
million, or $.12 per share for the same period in 1995.
Funds from operations, excluding the impact of the employment contract
termination expenses, was $11.6 million, or $.68 per share for the first nine
months of 1996. Including this charge, funds from operations was $11.0 million,
or $.64 per share for the first nine months of 1996 compared to $10.9 million,
or $.60 per
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<PAGE> 10
share for the same period in 1995. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for the Company's definition of
"funds from operations."
TRUSTEE AND MANAGEMENT PURCHASES OF COMMON SHARES
In December 1995, approximately 40,000 Common Shares were purchased by
members of the Board of Trustees, which brings management and the Board of
Trustees' total ownership to nearly 600,000 shares.
In March 1996, 28 members of First Union's management team acquired
approximately 11,000 additional Common Shares as part of the Company's long-term
incentive ownership program. Management members receive 20% of their annual
performance based incentive compensation under the program in the form of Common
Shares issued at market prices. The Board of Trustees believes it is important
that management have a vested ownership interest in First Union's shares.
INVESTMENT IN JOINT VENTURE
As of September 27, 1996, First Union invested $30 million as equity in a
joint venture which purchased a portfolio of nine retail shopping malls,
comprising approximately 5,800,000 square feet of gross leasable area, located
in mid-size markets in Louisiana, Arkansas, Texas, Oklahoma and New Mexico. The
joint venture's purchase price for the nine malls was $311.7 million which
included the assumption of approximately $50 million in existing mortgage debt
and a new mortgage loan for $165 million provided by an affiliate of one of the
members of the joint venture, as described below. Eight of the mall properties
were acquired in fee and one was acquired through the purchase of a 50%
partnership interest in the mall. The acquisition of Pecanland Mall, one of the
eight malls acquired in fee, is contingent upon the receipt of a consent by the
mortgagee, which consent First Union expects the joint venture to receive.
The members of the joint venture are First Union and affiliates of General
Motors Acceptance Corporation ("GMAC") and Cargill, Incorporated ("Cargill").
First Union'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 ($6.6 million owned by GMAC and $3.4 million owned by Cargill)
and $73.5 million in preferred equity owned by GMAC and Cargill, as described
below.
The preferred equity is divided into three series, of which First Union's
is the most junior in distribution and liquidation priority. First Union'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 owned by Cargill (the "Senior Preferred") and a
$38.5 million series owned by GMAC (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. First Union and GMAC will seek an investment by a third party to replace
Cargill's 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.
First Union 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
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<PAGE> 11
options on the remainder of the preferred equity are exercisable at the end of
the third and fourth years. First Union 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 First Union will constitute additional amounts
of First Union's series of preferred equity. The put prices are identical to the
call prices, as described above.
If First Union is unable or unwilling to contribute capital to the joint
venture so that the put options can be satisfied, GMAC and Cargill have the
right to offset the dollar amount of such put option by transferring an
equivalent amount of capital from First Union's capital account and increasing
their own accounts by such amount. As long as First Union 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 First Union 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 First Union 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 First Union.
Once all the Senior Preferred and the Series B Preferred have been
acquired, First Union 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
Cargill's common equity is outstanding, Cargill is entitled to receive $75,000
per month. There are no put options on the common equity.
GMAC Commercial Mortgage Corporation provided an aggregate of $165 million
in new first mortgage financing for this acquisition. The financing encumbers
seven of the properties and those properties are cross-collateralized and their
mortgages have cross default provisions. The mortgages are at an interest rate
of 8.43% and provide for amortization on a 30-year schedule. The unpaid balances
are due ten years after commencement.
The joint venture members selected First Union to be the managing member of
the joint venture, and First Union has in turn retained its affiliate, First
Union Management, Inc. (the "Management Company") as property manager for all
nine malls. Although presently a minority investor in the joint venture, First
Union has approval rights over major business and operating issues, such as
capital expenditures, leasing criteria, dispositions of any one of the nine mall
properties and changes to the joint venture arrangements.
A list of the nine mall properties owned by the joint venture appears on
the following page.
S-9
<PAGE> 12
The investment in the joint venture is comprised of the following nine
retail shopping malls which the Company believes to be the dominant retailing
facilities in each of their respective midsize markets in the southwestern
United States. The total size of the portfolio is approximately 5,800,000 square
feet (including anchor-owned space) with individual malls ranging in size from
442,000 square feet to 917,000 square feet. The average occupancy of the
portfolio was over 92% as of December 31, 1995, and in-line mall retailers
averaged approximately $250 per square foot in sales. Each mall is anchored with
at least one Dillard's department store. Other primary anchor tenants include
JCPenney, Sears, Mervyn's, Wal-Mart and Service Merchandise. Because the
majority of the malls were built during the 1980s and have a modern appearance,
the Company believes only minor capital expenditures will be required over the
next several years.
<TABLE>
<CAPTION>
YEAR SEPTEMBER 30, 1996
JOINT OPENED/ ------------------------
VENTURE YEAR ANNUALIZED
TOTAL OWNED REMODELED BASE MINIMUM
SQ. FT. SQ. FT. OR OCCUPANCY RENT
PROPERTY AND LOCATION ANCHORS (000) (000) EXPANDED % (000)
- ----------------------- --------------- ------- ------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
ALEXANDRIA MALL Dillard's, 858 593 1973/1994 89% $4,027
Alexandria, LA JCPenney,
Mervyn's,
Sears, Service
Merchandise
BRAZOS MALL Dillard's, 698 588 1976/1994 89 3,108
Lake Jackson, TX JCPenney,
Sears, Service
Merchandise
KILLEEN MALL Bealls, 579 348 1981/1987 92 3,531
Killeen, TX Dillard's,
JCPenney,
Sears
MESILLA VALLEY MALL Bealls, 591 378 1981/1990 89 3,245
Las Cruces, NM Dillard's,
JCPenney,
Sears, Service
Merchandise
PARK PLAZA Dillard's 542 258 1988/1993 99 5,499
Little Rock,AR (two stores)
PECANLAND MALL Dillard's, 917 351 1985/1990 95 5,470
Monroe, LA JCPenney,
Mervyn's, Sears
SHAWNEE MALL Dillard's, 442 229 1989/1991 94 2,082
Shawnee, OK JCPenney,
Sears,
Wal-Mart
TEMPLE MALL Dillard's, 574 232(1) 1976/1994 92 2,743
Temple, TX Foley's,
JCPenney,
Service
Merchandise
VILLA LINDA MALL Dillard's, 570 350 1985/1991 91 3,785
Santa Fe, NM JCPenney,
Mervyn's, Sears
------- -------
TOTAL 5,771 3,327
<FN>
- ---------------
(1) Ownership represents a 50% interest in a partnership with the other 50%
being owned by an unrelated third party.
</TABLE>
S-10
<PAGE> 13
The following unaudited pro forma combined condensed financial information
is based on the historical financial statements of First Union and reflects the
$50 million Series A Preferred Share offering and the application of the net
proceeds thereof. First Union's investment in the joint venture which acquired
nine retail shopping malls occurred as of September 27, 1996. The unaudited pro
forma information should be read in conjunction with the historical statements
and notes related thereto of First Union.
The unaudited combined condensed Balance Sheet of First Union as of
September 30, 1996 is presented as if the Series A Preferred Share offering
occurred on September 30, 1996. The unaudited combined condensed Statement of
Income for the year ended December 31, 1995 is presented as if the Series A
Preferred Share offering and the investment in the joint venture occurred on
January 1, 1995. In management's opinion, all adjustments necessary to reflect
the investment in the joint venture have been included in the accompanying
financial statements. The unaudited pro forma Statement of Income is not
necessarily indicative of the results which actually would have occurred if the
transaction had been consummated at the beginning of the period presented, nor
does it purport to represent the financial results of operations for future
periods.
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS)
-------------------------------------------
FIRST UNION ISSUANCE OF
(HISTORICAL) PREFERRED SHARES PRO FORMA
------------ ---------------- ---------
<S> <C> <C> <C>
ASSETS
Investments in real estate, net.................... $340,715 $ $340,715
Investment in joint venture........................ 30,000 30,000
Mortgage loans receivable.......................... 42,206 42,206
Other assets....................................... 17,346 17,346
-------- -------- --------
$430,267 $ $430,267
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans................................... $129,985 $ $129,985
Senior notes..................................... 100,000 100,000
Bank loans....................................... 63,940 (47,100)(a) 16,840
Accounts payable and other....................... 38,361 38,361
-------- -------- --------
332,286 (47,100) 285,186
Shareholders' equity............................... 97,981 47,100(a) 145,081
-------- -------- --------
$430,267 $ -- $430,267
======== ======== ========
<FN>
- ---------------
(a) Reflects the issuance of $50 million of Series A Preferred Shares, net of
estimated issuance costs and the repayment of bank debt with the net
proceeds.
</TABLE>
S-11
<PAGE> 14
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS)
-----------------------------------------------------------------------
FIRST UNION ISSUANCE OF INVESTMENT IN
(HISTORICAL) PREFERRED SHARES PRO FORMA JOINT VENTURE PRO FORMA
------------ ---------------- --------- ------------- ---------
<S> <C> <C> <C> <C> <C>
Revenues
Rents............................... $74,349 $ $74,349 $ $74,349
Management and leasing fees......... 4,616(c) 4,616
Interest............................ 4,856 4,856 4,856
Equity in earnings of joint
venture.......................... 1,405(d) 1,405
------- -------- ------- ------ -------
79,205 79,205 6,021 85,226
------- -------- ------- ------ -------
Expenses
Property operating.................. 25,982 25,982 25,982
Real estate taxes................... 8,555 8,555 8,555
Depreciation and amortization....... 11,901 11,901 11,901
Interest............................ 22,397 (3,669)(a) 18,728 2,337(e) 21,065
General and administrative.......... 7,114 7,114 2,600(f) 9,714
------- -------- ------- ------ -------
75,949 (3,669) 72,280 4,937 77,217
------- -------- ------- ------ -------
Income before capital gain or loss,
extraordinary loss and cumulative
effect of accounting change......... 3,256 3,669 6,925 1,084 8,009
Series A Preferred Share dividend... (4,200)(b) (4,200) (4,200)
------- -------- ------- ------ -------
Income before capital gain or loss,
extraordinary loss and cumulative
effect of accounting change
applicable to Common Shares......... $ 3,256 $ (531) $ 2,725 $ 1,084 $ 3,809
Per Share Data:
Income before capital gain or loss,
extraordinary loss and cumulative
effect of accounting change
applicable to Common Shares......... $ 0.18 $ (0.03)(g) $ 0.15 $ 0.06(g) $ 0.21
======= ======== ======= ====== =======
<FN>
- ---------------
(a) To reflect the reduction in interest expense from using the net proceeds of
the Series A Preferred Share offering to repay bank debt.
(b) To reflect the Series A Preferred Share distribution.
(c) To reflect the management and leasing fees assumed to be received by First
Union from the joint venture for management of the properties.
(d) To reflect First Union's share of equity earnings in the joint venture.
(e) To reflect the additional interest cost associated with financing First
Union's investment in the joint venture through bank debt.
(f) To reflect the additional estimated general and administrative costs
associated with managing and leasing the joint venture properties.
(g) The pro forma per share amount for income before capital gain or loss,
extraordinary loss and cumulative effect of change in accounting applicable
to Common Shares is based on the weighted average Common Shares outstanding
of 18,116,000.
</TABLE>
S-12
<PAGE> 15
TERMS OF THE OFFERING
Securities Offered.............. 2,000,000 Series A Cumulative Convertible
Redeemable Preferred Shares of Beneficial
Interest.
Distributions................... Cumulative in an amount per share equal to the
greater of $2.10 per share (equivalent to 8.4%
of the liquidation preference per annum) or
the cash distributions (determined on each of
the quarterly distribution payment dates
referred to below) on the Common Shares, or
portion thereof, into which a Series A
Preferred Share is convertible, payable
quarterly in arrears on the last day of
January, April, July and October of each year,
commencing January 31, 1997, when, as and if
declared by the Board of Trustees. See
"Description of Series A Preferred
Shares -- Distributions."
Liquidation Preference.......... $25.00 per share plus an amount equal to
accrued and unpaid distributions, if any. See
"Description of Series A Preferred
Shares -- Liquidation Rights."
Conversion Rights............... The Series A Preferred Shares are convertible,
in whole or in part, at the option of the
holders at any time, unless previously
redeemed, into Common Shares, at a conversion
price of $7.5625 per Common Share (equivalent
to a conversion rate of 3.31 Common Shares for
each Series A Preferred Share), subject to
adjustment in certain circumstances. See
"Description of Series A Preferred
Shares -- Conversion Rights" and
"-- Conversion Price Adjustments."
Limitations on Ownership........ With limited exceptions, no person or persons
acting as a group may beneficially own more
than (i) 9.8% of the Common Shares, which
limitation assumes that all securities
convertible into Common Shares owned by such
person or group of persons, such as the Series
A Preferred Shares, have been converted or
(ii) 25% of the Series A Preferred Shares (the
"Preferred Shares Ownership Limit Provision").
Shares owned in excess of such limitations
shall not be entitled to any voting rights,
shall not be considered outstanding for quorum
or voting purposes, shall not be entitled to
dividends, interest or any other distribution
with respect to such shares and, in the case
of the Series A Preferred Shares, shall not be
entitled to any conversion rights. Assuming a
holder of Series A Preferred Shares owns no
Common Shares or other securities convertible
into Common Shares, the maximum dollar amount
such holder of the Series A Preferred Shares
can own pursuant to such limitations will be
$12,500,000 as of the closing of this
offering. See "Description of Series A
Preferred Shares -- Restrictions on Ownership"
and "Description of Shares of Beneficial
Interest -- Restriction on Size of Holdings"
in the accompanying Prospectus.
Redemption at Option of First
Union........................... The Series A Preferred Shares are not
redeemable prior to October 29, 2001, and at
no time will the Series A Preferred Shares be
redeemable for cash. On and after October 29,
2001, the Series A Preferred Shares will be
redeemable, in whole or in part, at the option
of the Company, for such number of Common
Shares as are issuable at a conversion rate of
3.31 Common
S-13
<PAGE> 16
Shares for each Series A Preferred Share,
subject to adjustment in certain
circumstances. The Company may exercise this
option only if for 20 trading days within any
period of 30 consecutive trading days,
including the last trading day of such period,
the closing price of the Common Shares on the
NYSE equals or exceeds the conversion price
per share, subject to adjustment in certain
circumstances. The Series A Preferred Shares
will not be entitled to the benefit of any
sinking fund. See "Description of Series A
Preferred Shares -- Redemption."
Voting Rights................... Generally, the holders of Series A Preferred
Shares will have voting rights only as
described below. Whenever distributions on the
Series A Preferred Shares or any Parity Shares
(as defined below) are in arrears for six
quarterly distribution periods (whether or not
consecutive), holders of the Series A
Preferred Shares (voting together as a class
with holders of any other series of preferred
shares of beneficial interest of First Union
("Preferred Shares") ranking on a parity with
the Series A Preferred Shares with respect, in
each case, to the payment of distributions and
amounts upon liquidation, dissolution and
winding up ("Parity Shares")) will have the
right to elect two additional trustees to
serve on the Board of Trustees until such
distribution arrearage is eliminated. In
addition, certain changes that would be
materially adverse to the rights of holders of
Series A Preferred Shares or Parity Shares
cannot be made without the affirmative vote of
two-thirds of the Series A Preferred Shares
and the Parity Shares similarly affected,
voting as a single class, entitled to be cast
thereon. See "Description of Series A
Preferred Shares -- Voting Rights."
Ranking......................... The Series A Preferred Shares will rank senior
to the Common Shares with respect to payment
of distributions and amounts upon liquidation,
dissolution or winding up. See "Description of
Series A Preferred Shares -- Distributions"
and "-- Liquidation Rights."
NYSE Listing.................... The Series A Preferred Shares have been
approved for listing on the NYSE under the
symbol "FURPrA," subject to official notice of
issuance.
Use of Proceeds................. The net proceeds to First Union from the sale
of the Series A Preferred Shares offered
hereby are expected to be approximately
$47,100,000 ($54,262,500 if the Underwriters'
over-allotment option is exercised in full).
First Union will use the net proceeds to pay
down bank debt. See "Use of Proceeds" and
"Capitalization".
S-14
<PAGE> 17
BUSINESS
GENERAL
First Union, a business trust organized in Ohio under a Declaration of
Trust dated August 1, 1961, as amended (the "Declaration of Trust"), is a
self-administered and self-managed equity REIT whose primary business is
acquiring, repositioning, owning and managing retail and apartment properties.
In order to encourage efficient operation and management, in 1972 the Company
formed the Management Company, a separate but affiliated company, to manage its
properties. For financial reporting purposes, the financial statements of the
Management Company are combined with those of First Union.
The Company's retail properties consist of enclosed regional malls and
strip shopping centers. The apartments are typically garden-style communities
made up of groups of two and three story buildings on attractively landscaped
grounds. The Company believes its properties have significant upside rental
revenue potential. As of September 30, 1996, the Company's portfolio included 15
retail properties and eight apartment properties totaling approximately
6,100,000 square feet of retail space (including anchor-owned space) and 2,281
apartment units, respectively, located in 15 states. First Union also owns five
office properties totaling approximately 1,400,000 square feet but intends over
time to divest itself of these properties, except for its headquarters building.
As of September 30, 1996, the retail, apartment and office properties (excluding
North Valley Center which is being re-developed) were approximately 83%, 93% and
89% occupied, respectively.
First Union expects growth from both retail and apartment investments,
which are consumer-driven types of income producing real estate. Unlike many
other REITs which generate income from single geographic regions, First Union
has an expanding presence in a number of high growth regions of the United
States including Durham, North Carolina and Buffalo Grove, Illinois. First Union
believes its existing retail portfolio has significant upside rental revenue
potential and the Company intends to purchase additional properties with upside
potential.
In January 1994, First Union divided its operations into separate and
distinct business divisions: retail, apartment and office. A description of each
division follows.
RETAIL DIVISION
The retail division is structured into three geographic regions, each of
which operates autonomously. As of September 30, 1996, the retail portfolio
consisted of 15 properties, approximately 6,100,000 square feet, and was 60% of
total real estate investments based on historical cost. In 1995, the retail
division accounted for 50% of First Union's total property net operating income.
Year-end retail occupancy was 82%, 81% and 82% for 1995, 1994 and 1993,
respectively.
During 1994 and 1995, the Company invested approximately $22 million to
upgrade existing retail properties. Management expects these improvements to
generate increased rental revenues, while keeping the Company's cost per square
foot of rental properties at approximately $50 per square foot.
During 1995, First Union completed the sale of its 50% ownership interests
in Wyoming Valley Mall and Middletown Mall, structured as a tax-free exchange.
As part of this tax-free exchange, the Company acquired Woodland Commons in
Buffalo Grove, Illinois.
First Union's retail division signed new leases totaling 357,000 square
feet in 1995, including tenants such as Montgomery Ward, Peebles Department
Store, Dunham's Sporting Goods, JoAnn Fabrics, Rex TV & Appliance, Sears
Electronic & Appliance and On Cue (a division of Musicland). In addition, the
retail division signed new 10-year operating covenants with JC Penney, Dayton's
and Boscov's.
The leasing staff, which is part of the Management Company, has been
effective in strengthening First Union's image, name recognition and presence as
a retail property owner/operator. First Union seeks the most creditworthy
retailers/tenants in the industry, while maintaining tenant and geographic
diversification within
S-15
<PAGE> 18
its retail division to minimize its downside risk. The largest paying tenant
represented less than 2% of total revenues for 1995.
First Union's retail portfolio is oriented primarily toward value conscious
consumers located in secondary retail trade areas. First Union's retail
properties cater primarily to consumers residing in midsize markets with
manufacturing, distribution and agriculturally-based economies and generally do
not directly compete with those REITs that service major markets with upscale
fashion-oriented shopping centers.
In 1995 a specialty leasing department and a retail marketing unit for the
Management Company were created. Specialty leasing capitalizes on existing
opportunities within First Union's mall properties, such as cart and kiosk
rentals. The marketing staff organizes special events and promotes the
properties to the shoppers.
APARTMENT DIVISION
The apartment division is the Company's fastest growing operating segment.
Over the last two years, the Company has acquired two properties totaling 617
units and has invested over $2 million in improvements to existing communities.
As of September 30, 1996, First Union owned eight apartment communities
consisting of 2,281 units located in the Midwest and Southeast. As of September
30, 1996, apartments comprised 21% of First Union's total real estate
investments based on historical cost and 19% of total 1995 property net
operating income. Apartment property net operating income increased 36% to $8.5
million in 1995 from $6.2 million in 1994. Portfolio occupancy for the apartment
division throughout the year averaged 95%, 95% and 94% in 1995, 1994 and 1993,
respectively. First Union has focused on the acquisition of apartment
communities in growing consumer-driven markets, as shown in the chart below.
PROJECTED DEMOGRAPHIC GROWTH BY COUNTY
<TABLE>
<CAPTION>
EMPLOYMENT HOUSEHOLD
GROWTH GROWTH
(1995-2000) (1995-2000)
----------- -----------
<S> <C> <C>
Cumberland County, NC (Fayetteville)................ 7.3% 11.6%
Briarwood Apartments
DeKalb County, GA (Atlanta)......................... 5.5% 9.0%
Walden Village
Durham County, NC (Raleigh-Durham-Chapel Hill)...... 11.3% 15.7%
Beech Lake Apartments
Marion County, IN (Indianapolis).................... 5.8% 3.5%
Somerset Lakes
Mecklenburg County, NC (Charlotte).................. 9.0% 16.2%
Woodfield Gardens
Windgate Place
Montgomery County, OH (Dayton)...................... 2.6% 2.4%
Meadows of Catalpa
Warren County, OH (Cincinnati)...................... 8.6% 9.5%
Steeplechase Apartments
NATIONAL AVERAGE.................................... 4.9% 7.1%
</TABLE>
Source: Calculations by Company based on data compiled by Woods & Poole
Economics, Inc., Washington, D.C. Use of the information contained
herein, and conclusions drawn therefrom are solely the responsibility of
the Company and not Woods & Poole Economics, Inc.
The Company intends to continue this focus on growth markets. The
management team intends to improve resident retention by establishing a quality
property image, by providing competitive pricing and by responding to resident
needs.
S-16
<PAGE> 19
In 1995, First Union revitalized several of its apartment community
amenities, one of which was the rebuilding of an attractive and functional
clubhouse at Briarwood Apartments containing a new leasing office, exercise
facility and meeting and party rooms. In addition, the clubhouse at Meadows of
Catalpa was rebuilt. This facility houses a leasing office, pub, basketball
court, exercise and weight room and a community center. The clubhouse is
adjacent to an olympic-size swimming pool and six tennis courts. The Company
strives to maintain the value of its properties by refurbishing its existing
apartment communities to create additional value for this segment of the
portfolio.
During 1995, average rent increased from $575 to $598 per unit per month;
the expense ratio (expressed as a percentage of revenues) dropped from 47% to
44%. Overall, in this division revenues for 1995 were up $3.3 million, or 28%,
over 1994.
OFFICE PROPERTY DIVISION
First Union intends over time to divest its entire office property
portfolio, with the exception of its headquarters building. This move is part of
the Company's strategic plan to redirect a major portion of its capital
resources from office properties into retail and apartment acquisition
opportunities. Leasing efforts by the Management Company have been increased to
maximize the sale value of these properties.
As of September 30, 1996, First Union's office property division consisted
of five properties totaling approximately 1,400,000 square feet. First Union
sold one property in 1995 and two others in early 1996 totaling approximately
611,000 square feet. The remaining properties currently comprise approximately
17% of First Union's total real estate investments on a cost basis. Office
property net operating income improved from $4.3 million in 1994 to $4.6 million
in 1995. Year-end office occupancy was 75%, 76% and 76% in 1995, 1994 and 1993,
respectively.
OTHER OPERATIONS
PARKING FACILITIES. The Company currently owns three parking facilities in
downtown Cleveland, which account for approximately 3% of total real estate
investments of First Union on a cost basis. These facilities are leased to the
Management Company and managed by an independent operator compensated at a base
rate with an incentive. Parking net operating income increased from $2.9 million
in 1994 to $3.3 million in 1995, which represents 8% of total property net
operating income.
MORTGAGE INVESTMENTS. Mortgage loan interest income was approximately $4.4
million in 1995, which compares to $3.9 million in 1994. Currently, First Union
has three mortgage investments, consisting of a first mortgage loan secured by
an office building in Cleveland, maturing in 2011; a wraparound mortgage loan
secured by an apartment community in Atlanta, maturing in 1999; and a mortgage
loan on a mall in Fairmont, West Virginia, maturing in 1998. All of the loans
are current.
S-17
<PAGE> 20
USE OF PROCEEDS
The net proceeds to First Union from the sale of the Series A Preferred
Shares offered hereby are expected to be approximately $47,100,000 ($54,262,500
if the Underwriters' over-allotment option is exercised in full). First Union
will use the net proceeds to pay down bank debt.
As of September 30, 1996, the bank credit line outstanding was $63.9
million at an interest rate of 7.59%. The bank credit line matures in 1998.
CAPITALIZATION
The following table shows the combined capitalization of First Union and
the Management Company at September 30, 1996, and as adjusted to give effect to
this offering and the use of the estimated net proceeds described herein.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
OUTSTANDING AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
SENIOR DEBT
Bank loans......................................................... $ 63,940 $ 16,840
Mortgage debt, ranging from 6.875% to 9.375% and due 1996 to
2014............................................................ 129,985 129,985
8.875% Senior notes due 2003....................................... 100,000 100,000
--------- ---------
Total debt...................................................... 293,925 246,825
--------- ---------
SHAREHOLDERS' EQUITY
Series A Preferred Shares (liquidation preference $25 per share)
0 shares outstanding; 2,000,000 shares issued as adjusted, net
of issuance costs............................................... -- 47,100
Common Shares; 17,459,144 shares outstanding....................... 17,459 17,459
Additional paid-in capital......................................... 53,372 53,372
Undistributed income from operations............................... 17,963 17,963
Undistributed capital gains........................................ 14,949 14,949
Dividend accrued for common shares................................. (5,762) (5,762)
--------- ---------
Total shareholders' equity...................................... 97,981 145,081
--------- ---------
Total combined capitalization................................... $ 391,906 $ 391,906
========= =========
</TABLE>
S-18
<PAGE> 21
REAL ESTATE PORTFOLIO
First Union's real estate portfolio, excluding its interest in the joint
venture, consisted of the following properties as of September 30, 1996.
<TABLE>
<CAPTION>
TOTAL
YEAR ACQUIRED/ SQUARE FEET SQUARE FEET MORTGAGE LOAN
PROPERTY YEAR RENOVATED (1) OWNED OCCUPANCY % OF TOTAL TOTAL COST BALANCES
NAME LOCATION OR EXPANDED (000) (000) RATE (2) AT COST (000) (000)
- ---------- -------- --------------- ------------ ----------- --------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RETAIL
- ------
Fairgrounds
Square..... Reading, PA 1981/1995 636 538 96% 9.1% $ 41,247 $ --(3)
Mountaineer.. Morgantown, WV 1978/1994 674 616 88 7.3 33,327 8,320
Crossroads... St. Cloud, MN 1972/1995 733 625 98 6.9 31,309 49,717
Fingerlakes.. Auburn, NY 1981/1992 404 404 87 5.9 27,128 --
Woodland
Commons...... Buffalo Grove, IL 1995 171 171 94 4.8 21,940 12,000
Kandi........ Willmar, MN 1979/1992 451 451 89 4.5 20,307 --(3)
Wilkes....... Wilkesboro, NC 1983/1984 359 359 70 4.1 18,728 --
Mall 205..... Portland, OR 1975/1988 434 257 97 3.0 13,769 --
Peach Tree... Marysville, CA 1979/1986 436 436 51(4) 3.0 13,599 --
Valley....... Yakima, WA 1980/1988 425 309 93 2.7 12,330 --
Crossroads... Fort Dodge, IA 1977/1988 427 328 93 2.7 12,461 --(3)
Westgate
Towne
Centre..... Abilene, TX 1977/1987 386 291 36(5) 2.1 9,720 --
Two Rivers... Clarksville, TN 1975/1993 233 233 46(5) 1.8 8,348 --
Plaza 205.... Portland, OR 1978/1995 168 168 100 1.0 4,476 486
Valley North. Wenatchee, WA 1973/1981 171 171 87 .9 4,303 --
----- ----- --- --- -------- -------
6,108 5,357 83 59.8 272,992 70,523
----- ----- --- --- -------- -------
APARTMENTS
- ----------
Somerset
Lakes...... Indianapolis, IN 1988/1992 360 units 98 4.5 20,446 14,915
Beech Lake... Durham, NC 1994 345 units 90 4.3 19,797 12,391
Walden
Village.... Atlanta, GA 1992/1993 380 units 88 3.0 13,546 --(3)
Steeplechase. Cincinnati, OH 1995 272 units 94 2.6 12,036 8,947
Meadows of
Catalpa...... Dayton, OH 1989/1995 323 units 94 2.3 10,488 7,737
Briarwood.... Fayetteville, NC 1991/1995 273 units 91 1.8 8,296 --(3)
Windgate
Place...... Charlotte, NC 1991/1992 196 units 97 1.3 6,168 1,393
Woodfield
Gardens.... Charlotte, NC 1991/1992 132 units 94 .8 3,761 803
----- --- ---- -------- --------
2,281 units 93 20.6 94,538 46,186
----- --- ---- -------- --------
OFFICE
PROPERTIES
- ----------
55 Public
Square..... Cleveland, OH 1963/1992 398 94 6.9 31,609 --(3)
Landmark
Towers..... Oklahoma City, OK 1977/1987 259 89 3.4 15,558 628
Henry C.
Beck....... Shreveport, LA 1974 185 83 1.8 8,271 --
Circle
Tower...... Indianapolis, IN 1974/1988 104 78 .9 4,114 --
----- --- ---- -------- --------
946 89 13.0 59,552 628
----- --- ---- -------- --------
North Valley
Center (6). Denver, CO 1969/1995 452 61(6) 3.6 16,502 373
OTHER
- -----
Parking
Garage..... Cleveland, OH 1975 1,100 spcs. -- 1.5 7,021 8,754
Land-Huntington
Building... Cleveland, OH 1961 -- -- 1.0 4,501 --
Parking
Facility..... Cleveland, OH 1977 300 spcs. -- .5 2,286 --
--- -------- --------
3.0 13,808 8,754
--- -------- --------
457,392
Reserve for unrealized loss on carrying value of real estate.................. (7,004) 126,464
Senior debt underlying wraparound mortgage loan investments................... 3,521
-------- --------
Totals........................................................................ $450,388 $129,985
======== ========
</TABLE>
- ---------------
See following page for footnote references.
S-19
<PAGE> 22
NOTES TO SUMMARY OF REAL ESTATE PORTFOLIO
(1) The square footage shown represents gross leasable area for shopping malls
and net rentable area for office buildings. The apartments are shown as
number of units. The parking garage and parking facility are shown as number
of parking spaces. The office building square footage, apartment units and
garage spaces are the same for total and owned.
(2) Occupancy rates shown are as of September 30, 1996, and are based on the
total square feet at each property, except apartments which are based on the
average number of units occupied during the twelve-month period ended
September 30, 1996.
(3) These properties are the collateral for First Union's bank line of credit.
(4) The property was inundated by a flood which occurred in February 1986. The
mall was subsequently rebuilt and re-opened in November 1986. A temporary
tenant occupied approximately 70,000 square feet as of September 30, 1996.
First Union is pursuing a mixed use strategy for this former retailing
facility.
(5) Highly competitive market conditions have made leasing space difficult.
First Union continues to seek tenants and alternative retail strategies for
these properties.
(6) North Valley Center was repositioned and reclassified from a shopping mall
to an office property during 1995, and is being marketed and leased to
large, open-space users. A lease for 55,000 square feet of space was
executed as of September 30, 1996, which will increase occupancy to 73% when
the space opens in the fourth quarter of 1996.
S-20
<PAGE> 23
MAJOR TENANTS & SPECIALTY STORES
First Union's 15 retail properties have over 708 tenants, which represent a
wide variety of types of retailers and products, from major anchor department
stores to small local operators. First Union does not rely on any single entity
for a significant portion of rental revenues as the largest paying tenant
represents less than 2% of total revenues for 1995.
As of September 30, 1996, the tenants listed below, which do not include
the tenants of the joint venture properties, show the diversity of retailers
that provide annual revenue of at least $125,000 in aggregate base minimum rent.
<TABLE>
<CAPTION>
TOTAL BASE MINIMUM NUMBER OF
RETAIL TENANTS (1) RENT (ANNUALIZED) STORES
------------------ ------------------ ---------
ANCHORS (RENT IN THOUSANDS)
-------
<S> <C> <C>
JC Penney.................................................. $ 1,162 7
Montgomery Ward............................................ 812 4(2)
Wal-Mart................................................... 714 1
Dominick's................................................. 702 1
Kmart...................................................... 527 2
Herberger's................................................ 402 1
Food 4 Less................................................ 390 1
Stone & Thomas............................................. 324 1
Phar-Mor................................................... 281 1
Sears...................................................... 278 6(2)
Payless Drug............................................... 253 3
Dunhams.................................................... 202 2
Gabriel Brothers........................................... 178 1
Lamonts.................................................... 176 1
Belks...................................................... 146 1
The Emporium............................................... 125 1
-------- ---
6,672 34
OTHERS
------
F.W. Woolworth or affiliated company....................... 929 18
Department of Social Services, Yuba County................. 539 1
The Limited Inc............................................ 475 6
Melville Realty or affiliated company...................... 359 7
Scheels Sports Shop........................................ 328 1
Maurices................................................... 327 8
Radio Shack................................................ 278 9
Jo-Ann Fabrics............................................. 257 4
Payless Shoes/Volume Shoes................................. 248 7
Athletic Fitters........................................... 217 3
Sterling................................................... 215 5
U.S. Government............................................ 209 3
Waldenbooks................................................ 198 5
Carmike Cinemas............................................ 195 1
Walgreens.................................................. 193 2
Deb Shop................................................... 191 5
General Nutrition.......................................... 190 8
Musicland and On Cue....................................... 186 5
Claire's Boutique.......................................... 163 10
Regis Corp................................................. 163 9
Auburn Cinemas............................................. 156 1
Party Depot................................................ 146 1
Eastwynn Theatres.......................................... 144 2
BDalton.................................................... 134 3
Brauns Fashions............................................ 130 4
Red Roper.................................................. 130 1
Rex TV..................................................... 125 2
-------- ---
6,825 131
-------- ---
$ 13,497 165
======== ===
</TABLE>
- ---------------
See following page for footnote references.
S-21
<PAGE> 24
- ---------------
(1) The list of tenants includes one entity that is operating in bankruptcy
(Lamonts) and three stores where the tenants have vacated but are still
paying rent (F.W. Woolworth at Wilkes Mall, Kmart at Fingerlakes Mall and
Sears Paint and Hardware at Woodland Commons). The base minimum rents for
these five tenants comprise a total of only 1.0% of total revenues for 1995.
While still collecting rent on these spaces, First Union seeks out new,
stronger retailers as replacements. As an example, in 1994 First Union
opened a new 126,000 square foot Wal-Mart store at Mountaineer Mall in the
place of the bankrupt Ames department store. Customer traffic was
significantly enhanced, as was revenue.
(2) Montgomery Ward owns its pad site and building at two of the malls and Sears
occupies its store at one of the malls under a lease with an unrelated third
party.
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
The Common Shares are listed on the NYSE under the symbol "FUR." The
following table sets forth the high and low sale prices of the Common Shares as
reported in the New York Stock Exchange Composite Tape and the distributions
declared, for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTIONS
---- --- -------------
<S> <C> <C> <C>
1996 Quarters Ended
December 31 (through October 23)..................... $ 7 3/8 $ 6 3/8
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
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
1994 Quarters Ended
December 31.......................................... $ 8 1/8 $ 6 3/8 $ .10
September 30......................................... 7 3/8 6 1/8 .10
June 30.............................................. 8 6 3/8 .10
March 31............................................. 10 1/4 7 3/8 .10
------
$ .40
</TABLE>
See the cover page of this Prospectus Supplement for the price of a Common
Share as of a recent date. On September 30, 1996, First Union had approximately
17.5 million Common Shares outstanding, owned by approximately 15,000 beneficial
holders.
To qualify as a REIT, First Union is required to make distributions (other
than capital gain distributions) to its shareholders in amounts at least equal
to (i) the sum of (A) 95% of its "REIT taxable income" (computed without regard
to the dividends-paid deduction and its net capital gain) and (B) 95% of the net
income (after tax), if any, from foreclosure property, minus (ii) the sum of
certain items of noncash income. First Union's distribution strategy is to
distribute what it believes is a conservative percentage of its funds from
operations, while permitting the Company to retain funds for capital
improvements and other investments.
The payment of distributions is subject to the discretion of the Board of
Trustees and is dependent upon the financial condition and operating results of
First Union.
For federal income tax purposes, distributions may consist of ordinary
income, capital gains, non-taxable return of capital or a combination thereof.
Distributions that exceed First Union's current and accumulated earnings and
profits (calculated for tax purposes) constitute a return of capital rather than
a dividend and reduce the shareholder's basis in his or her shares. To the
extent a distribution exceeds both current and accumulated earnings and profits
and the shareholder's basis in his or her shares, it will generally be treated
as
S-22
<PAGE> 25
gain from the sale or exchange of that shareholder's shares. First Union
annually notifies shareholders of the taxability of distributions paid during
the preceding year. Approximately 82% of the distributions for 1995 was treated
as capital gain for federal income tax purposes and approximately 18% as
ordinary income.
Under federal income tax rules, First Union's earnings and profits are
first allocated to its Preferred Shares, to the extent any Preferred Shares are
outstanding, which may increase the portion of the Common Shares distribution
classified as a return of capital. First Union anticipates that all of the
dividends on the Series A Preferred Shares will be taxable income to its holders
for calendar year 1997.
S-23
<PAGE> 26
SELECTED FINANCIAL DATA
Set forth below is selected financial data for the nine months ended
September 30, 1996 and 1995 and for the years ended December 31, 1995, 1994,
1993, 1992 and 1991. The selected financial data has been derived from, and
should be read in conjunction with, the unaudited combined financial statements
and accompanying notes included in the Company's Quarterly Report on Form 10-Q
for the nine months ended September 30, 1996 and 1995 and the related audited
combined financial statements and accompanying notes included in the Company's
Annual Reports on Form 10-K/A for the year ended December 31, 1995 and Form 10-K
for the years ended December 31, 1994, 1993, 1992 and 1991.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEARS ENDED DECEMBER 31,
------------------- ----------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
-------- -------- -------- -------- -------- -------- --------
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues.................................... $ 58,995 $ 58,794 $ 79,205 $ 76,339 $ 74,339 $ 74,567 $ 74,941
Property net operating income (1)........... 33,271 32,641 44,259 41,880 41,551 43,403 45,002
Interest expense............................ 17,513 16,625 22,397 21,280 18,517 18,933 20,771
Depreciation and amortization (2)........... 9,858 8,688 11,901 10,555 9,763 9,179 8,068
Income before capital gain or loss,
extraordinary loss and cumulative effect
of
accounting change (3)..................... 1,140 2,204 3,256 6,485 10,276 12,657 13,330
Unrealized loss on carrying value of assets
identified for disposition................ (14,000)
Capital gains............................... 29,870 29,870 4,948 5,775 4,906
Income before extraordinary loss and
cumulative effect of accounting change.... 1,140 32,074 19,126 6,485 15,224 18,432 18,236
Net income (4).............................. 1,140 27,749 13,891 6,485 13,984 18,432 18,236
Net income per share........................ $ 0.07 $ 1.52 $ 0.77 $ 0.36 $ 0.77 $ 1.02 $ 1.01
OTHER DATA
Net cash provided by (used for)
Operations................................ $ 13,808 $ 11,638 $ 12,989 $ 19,053 $ 19,649 $ 21,591 $ 19,892
Investing................................. (37,622) (21,504) (28,345) (26,507) (6,911) 1,662 1,100
Financing................................. 22,264 7,688 15,783 (28,094) 24,793 (35,621) (14,156)
EBIDA (5)................................... 28,511 27,517 37,554 38,320 38,556 40,769 42,169
Funds from operations (2) (6)............... 10,998 10,892 15,157 17,040 20,039 21,836 21,398
Dividends declared.......................... 5,762 5,514 7,542 7,273 13,031 13,022 16,827
Dividends declared per share................ $ 0.33 $ 0.30 $ 0.41 $ 0.40 $ 0.72 $ 0.72 $ 0.93
Dividend payout as a percent of funds from
operations................................ 52% 51% 50% 43% 65% 60% 79%
Ratio of combined income to fixed charges
(7):
Income from operations.................... 1.06x 1.13x 1.13x 1.30x 1.54x 1.65x 1.62x
Net income................................ 1.06x 2.87x 1.82x 1.30x 1.80x 1.95x 1.85x
Ratio of EBIDA to interest expense.......... 1.63x 1.66x 1.68x 1.80x 2.08x 2.15x 2.03x
FINANCIAL POSITION AT END OF PERIOD
Gross investment in real estate assets...... $480,388 $469,175 $449,560 $436,394 $409,060 $397,493 $377,218
Total assets................................ 430,267 413,817 400,999 376,189 393,621 353,455 377,276
Total debt.................................. 293,925 247,758 258,454 238,296 257,355 214,373 236,689
Shareholders' equity........................ 97,981 130,216 102,355 102,940 103,766 102,672 97,188
<FN>
- ---------------
(1) Property net operating income is property revenue and mortgage investment
income, less property operating expenses and real estate taxes, before debt
service and depreciation and amortization.
(2) In December 1995, First Union changed its 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
</TABLE>
S-24
<PAGE> 27
from operations and depreciation and amortization for previous years have
been restated for the change in accounting method on a basis comparable to
1995.
(3) Income before capital gain or loss, extraordinary loss and cumulative effect
of accounting change for the nine months ended September 30, 1996 included
$1.3 million of non-recurring, noncash charges comprised of $650,000
associated with the termination of a former executive officer employment
contract and $680,000 for the write-off of a tenant allowance related to an
anchor tenant at a mall that was replaced with a tenant paying approximately
$155,000 more in annual rent. Income before capital gain or loss,
extraordinary loss and cumulative effect of accounting change for the year
ended December 31, 1995 included $1.6 million of litigation and proxy
expenses related to a minority shareholder lawsuit and proxy contest. Of
this amount, $1.4 million is included in the nine months ended September 30,
1995.
(4) Net income in the years ended December 31, 1995 and 1993 included
extraordinary losses of $910,000 and $1.2 million, respectively, from the
early extinguishment of debt. Also included in the year ended December 31,
1995 is a $4.3 million noncash charge for the cumulative effect of the
accounting change to directly expense internal leasing costs.
(5) EBIDA is calculated as income before capital gain or loss, extraordinary
loss and cumulative effect of accounting change plus interest expense and
depreciation and amortization.
(6) The amount of funds from operations is calculated as income before capital
gain or loss, extraordinary loss and cumulative effect of accounting change
plus noncash charges for depreciation and amortization. A new definition of
funds from operations, proposed by the National Association of Real Estate
Investment Trusts, excludes depreciation and amortization of debt issue
costs and other corporate assets. First Union has chosen to add back all
expenses included in depreciation and amortization. Although funds from
operations 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, it is often used by real estate
investment trusts as a supplemental measure of operating performance. Funds
from operations is presented after deducting litigation and proxy expenses
related to a minority shareholder lawsuit and proxy contest. Funds from
operations, before the litigation and proxy expenses, were $16.7 million for
the year ended December 31, 1995 and $12.3 million for the nine months ended
September 30, 1995.
(7) For purposes of this computation, income from operations and net income
represent combined income before capital gain or loss, extraordinary loss
and cumulative effect of accounting change and combined net income plus
fixed charges, exclusive of construction interest capitalized. Fixed charges
consist of all interest expenses, amortization of debt issue costs, and the
portion of ground rent and net lease payments which is believed to be
representative of interest.
S-25
<PAGE> 28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
In January 1995, First Union sold its 50% interests in two malls in
Wilkes-Barre, Pennsylvania and Fairmount, West Virginia for $29.5 million in
cash ($2 million was received in 1994), a $6 million mortgage note receivable
and the assumption by the purchaser of $4.7 million in mortgage debt, resulting
in a capital gain of approximately $29.9 million. The proceeds were invested in
short-term securities until properties were acquired in a tax-free exchange in
April 1995 and June 1995. The $6 million note earns interest at 9% and is
secured by one of the malls and 750,000 partnership units in Crown American
Realty Trust.
In April 1995, First Union acquired Woodland Commons Shopping Center in
Buffalo Grove, Illinois, an upscale suburb of Chicago, with $21 million in cash.
Additionally, First Union acquired Steeplechase Apartments in Cincinnati, Ohio
for $11.9 million in cash on June 30, 1995. The purchases were funded with the
cash from the sale of the two malls and with bank loans under First Union's
revolving credit agreement. In accordance with provisions of the Code, First
Union treated the sales and purchases as "like-kind exchanges." The net result
of the sale and tax-free exchange was an annualized increase of $200,000 in
funds from operations (income from operations before litigation and proxy
expenses plus non-cash charges for depreciation and amortization).
During 1995, First Union renovated Crossroads Center Mall in St. Cloud,
Minnesota and Fairgrounds Square Mall in Reading, Pennsylvania. In addition to
the renovation at Fairgrounds Square, a 107,000 square foot Montgomery Ward
store was constructed. These major projects and other tenant alterations and
building improvements of $25 million were funded through borrowings from First
Union's bank credit facilities.
In December 1995, First Union recorded a $14 million noncash unrealized
loss on the carrying value of certain assets which have been identified for
disposition. The noncash adjustment represents the difference between the
estimated fair value and net book value of the assets. In December 1995, First
Union sold an office building in Pittsburgh, Pennsylvania for $4.3 million in
cash resulting in a capital loss of $1.4 million which was provided for in the
$14 million noncash adjustment.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operations of $13 million in 1995 was less than 1994
by approximately $6 million. The decrease was primarily attributed to $1.6
million of litigation and proxy expenses incurred in 1995, a $2 million payment
received in 1994 in connection with the sale of two malls (which was completed
in 1995) and approximately $1.6 million less in income from operations (see
below for a discussion of results from operations). Dividends paid in 1995 of
$7.3 million represented 56% of net cash from operating activities.
During 1995, proceeds of $31.8 million were received from the sales of an
office building in Pittsburgh, Pennsylvania, and two malls in Wilkes-Barre,
Pennsylvania, and Fairmount, West Virginia. Also during 1995, First Union
purchased a retail center in Buffalo Grove, Illinois for $21 million and an
apartment complex in Cincinnati, Ohio for $11.9 million. The sales and
acquisitions were all cash transactions except for a $6 million note received as
additional proceeds from the sale of the two malls. During 1995, First Union
reinvested in its existing properties approximately $25 million for tenant and
building improvements. These expenditures were made to renovate two malls,
expand a mall to add a major tenant and make other improvements to First Union's
portfolio.
During 1995, net cash provided by financing activities was obtained by
borrowing on First Union's credit facilities for $27.1 million and a $49.5
million mortgage loan. The borrowings under the credit facilities were primarily
used to fund the previously mentioned capital improvement program. The proceeds
from the mortgage loan were used to repay other mortgage loans of approximately
$48 million at a weighted average interest rate of 9.25%. First Union increased
its financing capacity by using a single property to secure the debt that was
previously secured by three properties and lowered the interest rate to 7.49% on
the new debt outstanding.
S-26
<PAGE> 29
During the fourth quarter of 1995, First Union renegotiated and extended
its $20 million unsecured credit agreement from July 1996 to December 1998
pending completion of loan documentation. The credit line is now fully secured.
In December 1995, First Union signed an agreement to purchase 950,000 of
its shares of beneficial interest at the average 1995 trading price through
December 8, 1995 of $7.50 per share from a minority shareholder. This was part
of a settlement which was reached to dismiss pending litigation. The transaction
occurred on January 10, 1996, but the effect of purchasing the 950,000 shares
was reflected in the financial statements at December 31, 1995 as an accrued
liability. The $7.1 million required for the purchase was funded in 1996 through
First Union's bank credit facilities.
Additionally, in January 1996, First Union obtained a $12.5 million
mortgage loan at an interest rate of 6.87% secured by an apartment complex in
Durham, North Carolina. The proceeds were used to reduce bank loans, which were
outstanding at higher variable rates in 1995.
During 1996, First Union has approximately $2.9 million of mortgage
principal payments, a $5 million senior note repayment and an estimated $22
million in building improvement and tenant construction costs to be funded.
These items will be financed through cash flow from operations, mortgaging
unencumbered properties, unused credit facilities of $18 million (including the
effect of the January 1996 mortgage loan proceeds and share purchase), and the
public and private capital markets, as market conditions allow.
RESULTS FROM OPERATIONS
Income before capital gain or loss, extraordinary loss and cumulative
effect of accounting change was $3.3 million in 1995 as compared to $6.5 million
in 1994. The 1995 income included a charge of $1.6 million for litigation and
proxy expenses. Net income of $13.9 million in 1995 included a $29.9 million
capital gain and a $14 million noncash unrealized loss on the carrying value of
assets identified for disposition. Net income for 1995 was reduced by an
extraordinary loss from the early extinguishment of debt of $910,000 and a $4.3
million noncash charge for the cumulative effect of a change in accounting
method. Net income of $6.5 million in 1994 did not include any comparable
special items.
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.
The extraordinary loss of $910,000 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, Minnesota.
The cumulative effect of $4.3 million resulted from a change in the method
of accounting to directly expense internal leasing costs rather than continue to
capitalize and amortize these costs over the term of office and retail tenant
leases. The effect of this change will be to lower depreciation and amortization
and increase general and administrative expenses. A reclassification between
these two expense items has been made so that prior year amounts are on a
comparable basis to 1995.
Income from property operations, which is rents less property operating
expenses and real estate taxes, increased by $1.9 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 operations when comparing 1995 to 1994.
However, this increase was offset by the sale of the two malls in January 1995.
S-27
<PAGE> 30
Income from property operations when comparing 1994 to 1993 increased by
$.4 million. This increase was primarily the result of the apartment complex
purchased in August 1994. However, this increase was partially offset by
favorable real estate tax settlements recorded during 1993 in the office
property portfolio causing income from property operations to decline when
comparing 1994 to 1993. The comparable apartment and retail portfolios income
from operations was approximately the same when comparing 1994 to 1993.
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. During the first quarter of 1995, First Union had $29.5 million in
proceeds from the sale of two malls invested in short-term securities until it
purchased the Woodland Commons Shopping Center in April 1995 and the
Steeplechase Apartments in June 1995. When comparing 1994 to 1993, short-term
investment income increased because short-term investments averaged $30 million
in 1994 as compared to an average of $6 million in 1993. The large increase in
short-term investments from 1993 to 1994 was due to First Union borrowing $38
million under one of its lines of credit which had converted to a term loan on
December 31, 1993, and subsequently investing the funds in short-term
securities. In August 1994, First Union used $19 million of short-term
investments to purchase Beech Lake Apartments in Durham, North Carolina. In
December 1994, First Union repaid $17 million under its bank lines of credit
with short-term investments.
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.
The increase in depreciation and amortization expense when comparing 1995
to 1994 and 1994 to 1993 was primarily the result of the newly-acquired shopping
center and apartment communities in 1995 and 1994 and additional tenant
improvements.
Mortgage interest expense increased when comparing 1994 to 1993. This
increase was primarily caused by the $35 million mortgage obtained in September
1993, which was secured by a shopping mall in St. Cloud, Minnesota.
Senior notes interest expense increased in 1994 as compared to 1993 because
of the issuance of $100 million of 8.875% senior notes on October 1, 1993. The
proceeds were used primarily to repay $45 million of 8.375% senior notes and
$37.6 million of 10.25% convertible debentures on November 1, 1993. Because of
the one-month difference between the receipt of proceeds from the issuance of
$100 million of 8.875% senior notes and the repayment of the $45 million senior
notes and the $37.6 million convertible debentures (due to 30-day call
provisions in the indentures of the retired debt), nonrecurring interest expense
of $435,000, net of short-term investment income and reduced interest expense on
bank loans, was incurred in 1993.
Interest on bank loans increased when comparing 1995 to 1994 due to an
increase of approximately 260 basis points in short-term interest rates. First
Union'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, First Union's weighted average interest
rate was 7.8% on an average outstanding balance of $50.8 million. Interest
expense on bank loans increased when comparing 1994 to 1993 due to the increase
of approximately 130 basis points in interest rates from 1993 to 1994. First
Union's weighted average borrowing rate during 1994 was 5.2% on an average
outstanding balance of $59 million. Short-term interest rates increased during
1994 so that the $42.5 million of outstanding bank loans at the end of 1994 was
at a weighted average borrowing rate of 7.4%.
General and administrative costs increased when comparing 1995 to 1994 and
1994 to 1993. Expenses increased in 1995 as a result of 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 increase in expense between 1994 and 1993
resulted from professional fees related to First Union's reorganization of the
portfolio and management, expenses from the new long-term incentive program and
increased staffing to execute First Union's new strategic plan.
S-28
<PAGE> 31
FUNDS FROM OPERATIONS AND DIVIDENDS DECLARED
Funds from operations is calculated as income before capital gain or loss,
extraordinary loss and cumulative effect of accounting change plus noncash
charges for depreciation and amortization. A new definition of funds from
operations, proposed by the National Association of Real Estate Investment
Trusts, excludes depreciation and amortization of debt issue costs and other
corporate assets. Funds from operations presented by First Union adds back the
entire amount of depreciation and amortization including $866,000 for debt issue
costs and other corporate assets for the year ended December 31, 1995.
Although funds from operations 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, it is often used by
real estate investment trusts as a supplemental measure of operating
performance.
The table below shows the calculation of funds from operations, dividends
declared to holders of shares of beneficial interest and the payout ratio.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) 1995 1994 1993
-------- ------- -------
<S> <C> <C> <C>
Net income........................................... $ 13,891 $ 6,485 $13,984
Cumulative effect of accounting change............... 4,325
Extraordinary loss from debt extinguishment.......... 910 1,240
Unrealized loss on carrying value of assets
identified for disposition......................... 14,000
Capital gains........................................ (29,870) (4,948)
-------- ------- -------
Income before capital gain or loss, extraordinary
loss and cumulative effect of accounting change.... 3,256 6,485 10,276
Depreciation and amortization........................ 11,901 10,555 9,763
-------- ------- -------
Funds from operations................................ $ 15,157 $17,040 $20,039
Dividends declared................................... $ 7,542 $ 7,273 $13,031
Payout ratio of dividends to funds from operations... 50% 43% 65%
</TABLE>
In the fourth quarter of 1995, First Union raised its quarterly dividend by
10%, resulting in a payout ratio of 53% of funds from operations on an
annualized basis.
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<PAGE> 32
MANAGEMENT
A new senior management team is repositioning First Union. The Board of
Trustees recruited James C. Mastandrea, a seasoned real estate and financial
executive, to lead this effort. He plans to build upon First Union's franchise,
significant size, history as a publicly-traded real estate firm and experienced
staff to grow its portfolio.
Mr. Mastandrea has recruited additional senior executives, promoted talent
from within First Union, and restructured the entire organization. The primary
goal set by Mr. Mastandrea and his team is to increase First Union's funds from
operations through enhanced revenues and controlled operating expenses. They
intend to accomplish this through a significant capital improvement program to
upgrade First Union's core portfolio of retail and apartment properties,
strategic acquisitions and disciplined management.
The following executives are responsible for managing the affairs of First
Union and the Management Company.
FIRST UNION
JAMES C. MASTANDREA -- 53 -- CHAIRMAN, PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHIEF FINANCIAL OFFICER -- Mr. Mastandrea has been Chairman, President and
Chief Executive Officer of First Union since January 1994. On February 12, 1996
he also assumed the title of Chief Financial Officer. He was President and Chief
Operating Officer of First Union from July 1993 through December 1993. Mr.
Mastandrea was President and Chief Executive Officer of Triam Corporation,
Chicago, Illinois, an investment advisor to various real estate investment
funds, from 1991 to 1993. He was Chairman, President and Chief Executive Officer
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. Mr.
Mastandrea holds a bachelor of science degree in business from Cleveland State
University and a master's degree in economics from Miami University of Ohio.
STEVEN M. EDELMAN -- 41 -- EXECUTIVE VICE PRESIDENT - CHIEF INVESTMENT
OFFICER -- Mr. Edelman was promoted to his current position in January 1996. He
joined First Union in 1980 as Internal Auditor, after completing three years of
public accounting experience with Touche Ross & Co.; became Assistant Controller
in 1982; Acquisition Analyst in 1984; Assistant Vice President in 1985; Vice
President - Acquisitions in 1985; Senior Vice President - Asset Management in
1992. He currently oversees and implements First Union's investment program
including acquisitions, asset sales, and the development of its assets and
market research. Mr. Edelman holds a bachelor of science degree from Washington
University, master of business administration degree from John Carroll
University and is a certified public accountant.
JOHN J. DEE -- 45 -- SENIOR VICE PRESIDENT - CHIEF ACCOUNTING
OFFICER -- Mr. Dee was promoted to his current position in 1996. He joined First
Union as Accounting Manager in 1978; became Assistant Controller in 1979;
Controller in 1981; Vice President - Controller in 1987; Senior Vice
President - Controller in 1992. He has had experience in both public accounting
and industry, having spent two years with Peat Marwick Main & Co., and three
years with Premier Industrial Corporation. He holds a bachelor of business
administration degree from Cleveland State University and is a certified public
accountant.
PAUL F. LEVIN -- 49 -- SENIOR VICE PRESIDENT - GENERAL COUNSEL AND
SECRETARY -- Mr. Levin was promoted to his current position in 1994. He joined
First Union in 1989 as Vice President - General Counsel and Secretary. Prior to
joining First Union, he spent most of his career in private practice in
Cleveland, Ohio, specializing in real estate, corporate and public law. Mr.
Levin holds a bachelor of arts degree from Case Western Reserve University and a
law degree from Columbia University.
THOMAS T. KMIECIK -- 37 -- SENIOR VICE PRESIDENT AND TREASURER -- Mr.
Kmiecik was promoted to his current position in January 1996. He joined First
Union as Assistant Controller in 1984; became Treasurer in 1989; Vice President
in 1994. In addition to his treasury responsibilities, he is involved in the
capital markets and investor relations. Prior to joining First Union, he was a
Senior Auditor with the Cleveland office of
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<PAGE> 33
Arthur Young & Company for four years. He holds a bachelor of business
administration from Baldwin-Wallace College and is a certified public
accountant.
GREGORY C. SCOTT -- 32 -- CONTROLLER -- Mr. Scott was promoted to the
position of Controller in 1996. He had served as the Assistant Controller of
First Union since 1989. Prior to joining First Union, he was a Senior Auditor
with the Cincinnati office of Arthur Andersen & Co. for four years. He holds a
bachelor of science degree from Miami University of Ohio and is a certified
public accountant.
FRANK SCHWAB -- 45 -- VICE PRESIDENT - DEVELOPMENT -- Mr. Schwab joined
First Union in March 1995. Prior to joining First Union, he was Chief Financial
Officer and Director for Sundance Homes Inc. from 1992 through 1994 and was
instrumental in their conversion from private ownership to a public company in
mid-1993. Previously, Mr. Schwab was with Irving Federal Bank ("IFB") and
Development Equities Inc. ("DEI"), a wholly owned subsidiary of IFB, from
1974-1992 serving as President and Director for both. Mr. Schwab also served as
Director of Rescorp Development and Chairman of Rescorp Finance from 1986-1991.
He holds a bachelor of science degree from the University of Illinois and a
master of business administration degree from Roosevelt University.
THE MANAGEMENT COMPANY
DANIEL E. NIXON, JR. -- 48 -- EXECUTIVE VICE PRESIDENT - DIRECTOR OF RETAIL
DIVISION -- Mr. Nixon was promoted to his current position in January 1996. He
joined First Union in 1978 as Credit Manager; became Assistant Vice President of
Operations in 1978; Assistant Vice President of Administration in 1980; Vice
President - Lease Administration in 1982; Vice President - Office Building
Operations in 1983; Vice President - Director of Leasing in 1985; Vice
President - Shopping Center Development in 1989; Vice President - Director of
Retail in 1994 where he was responsible for the entire retail portfolio which
included leasing and operations. Mr. Nixon holds a bachelor of
economics/business administration degree from Marietta College.
LANA J. TIESZEN -- 34 -- VICE PRESIDENT - DIRECTOR OF APARTMENT
DIVISION -- Ms. Tieszen was promoted to her current position in January 1996.
She joined First Union in September 1994 as Assistant Vice President and assumed
responsibility for the operations and leasing activities of First Union's
apartment portfolio. Ms. Tieszen was formerly Regional Manager for Capital
Associates Management Company ("CAMCO"), Chicago, Illinois. Prior to joining
CAMCO in 1993, she was associated with the Chicago-based real estate firms of
JMB Realty and Draper & Kramer, Inc. She holds a bachelor of arts degree from
Drake University and a master's degree from the University of Illinois, Chicago.
KEVIN FARRELL -- 36 -- VICE PRESIDENT & DIRECTOR OF CONSTRUCTION -- Mr.
Farrell was promoted to his current position in June 1994. He joined First Union
in 1993 as Director of Construction where he has supervisory duties relating to
the upgrade and renovation of First Union's portfolio of core properties. Prior
to joining First Union, he was associated with the Chicago-based firms of Draper
& Kramer, Inc., The Linpro Group, and Fifield Development, where he managed
construction and renovation projects. Mr. Farrell holds a bachelor's degree in
civil engineering from the University of Illinois at Champaign-Urbana and a
master's degree in business administration from the Illinois Institute of
Technology.
SUSAN M. FOWLER -- 44 -- ASSISTANT VICE PRESIDENT - DIRECTOR OF THE OFFICE
DIVISION -- Ms. Fowler joined First Union in June 1995. She is responsible for
the operations and leasing activities of First Union's office buildings. Ms.
Fowler has experience in office leasing, management and sales, having worked
with Adler Galvin Rogers, Inc., and Coldwell Banker Commercial Real Estate
Services, both of Cleveland, Ohio, from 1983 to 1990. During the years 1981-1982
she worked with the Management Company as a regional leasing manager. Ms. Fowler
holds a bachelor of arts degree from West Liberty State College and a master's
degree in education from Kent State University.
BOARD OF TRUSTEES
The Board of Trustees is comprised of James C. Mastandrea, Chairman, the
only insider, and eight independent members with public and private company
experience. Four of the nine Trustees, including Mr. Mastandrea, have become
members since 1994. Two of the nine Trustees have been members since the
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<PAGE> 34
early 1990's and the balance of the Board of Trustees have been members since
the mid-1980's. Not only is the Board of Trustees independent in composition,
but it encompasses a breadth of experience that includes real estate, retail,
finance and banking. Since 1994, the Board of Trustees has doubled its share
holdings in First Union. The Trustees and their public and private company
experience are listed below.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS, BUSINESS EXPERIENCE AND TRUSTEE
NAME AND AGE AFFILIATIONS SINCE
- ------------------------- ------------------------------------------------------- -------
<S> <C> <C>
KENNETH K. CHALMERS (67) Mr. Chalmers is a consultant with Kennedy & Co., 1994
Chicago, Illinois, responsible for the Bank of America
Illinois account. He was Executive Vice President of
Continental Bank, Chicago, Illinois, and its successor,
Bank of America Illinois, a commercial bank, from 1984
to 1994.
WILLIAM E. CONWAY (68) Mr. Conway has been Chairman of Fairmount Minerals, 1985
Ltd., a miner and processor of industrial minerals,
since 1978. He was also Chief Executive Officer from
1978 until March, 1996. Mr. Conway is also a director
of The Huntington National Bank of Ohio.
DANIEL G. DEVOS (38) Mr. DeVos is Chairman, President and Chief Executive 1994
Officer of Landquest International, L.L.C., a private
real estate investment, development and management
company. He is also Vice President, Corporate Affairs
of Amway Corporation, a direct sales consumer product
business.
ALLEN H. FORD (68) Mr. Ford is a consultant and was formerly Senior Vice 1983
President - Finance and Administration of The Standard
Oil Company, an integrated petroleum company. Mr. Ford
is a director of Gliatech, Inc., a biotechnology
company, and Parker Hannifin Corporation, an industrial
machinery company.
RUSSELL R. GIFFORD (57) Mr. Gifford was President of CNG Energy Services 1991
Corporation, an unregulated energy marketing company
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. Mr. Gifford is a director of National
City Bank and Bearings, Inc., a distributor of bearings
and mechanical equipment.
STEPHEN R. HARDIS (61) Mr. Hardis has been Chairman and Chief Executive 1992
Officer of Eaton Corporation, a manufacturer of
highly-engineered products serving the automotive,
industrial, commercial and defense markets, since
January 1996 and has been with Eaton in various
capacities since 1979. Mr. Hardis is a director of
Progressive Companies, an insurance company writing
specialty insurance, KeyCorp, a bank holding company,
KeyBank, a subsidiary of KeyCorp, and Nordson
Corporation, a manufacturer of equipment to apply
adhesives and coatings.
</TABLE>
S-32
<PAGE> 35
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS, BUSINESS EXPERIENCE AND TRUSTEE
NAME AND AGE AFFILIATIONS SINCE
- ------------------------- ------------------------------------------------------- -------
<S> <C> <C>
SPENCER H. HEINE (54) Mr. Heine has been Executive Vice President, Secretary 1996
and General Counsel of Montgomery Ward Holding Corp.
("Montgomery Ward Holding"), a national retail chain,
since September 1991, and has been a director of that
company since May 1992. Mr. Heine has been Executive
Vice President, Secretary and General Counsel of
Montgomery Ward & Co., Incorporated ("Montgomery
Ward"), a subsidiary of Montgomery Ward Holding since
April 1994, and has been a director of that company
since May 1992. He is also President of Montgomery Ward
Properties, a subsidiary of Montgomery Ward.
E. BRADLEY JONES (68) Mr. Jones was Chairman and Chief Executive Officer of 1986
LTV Steel Company, an integrated steel company, from
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 Corporation, an operator of mini-mills
and manufacturer of steel products; and RPM, Inc., a
manufacturer of specialized chemical protective agents;
and is a Trustee of Fidelity Funds.
</TABLE>
BOARD OF DIRECTORS OF THE MANAGEMENT COMPANY
The Board of Directors of the Management Company include:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS, BUSINESS EXPERIENCE AND DIRECTOR
NAME AND AGE AFFILIATIONS SINCE
- ------------------------- ------------------------------------------------------- --------
<S> <C> <C>
HENRY G. PIPER (74) Mr. Piper has been a Director of the Management Company 1989
since 1989. He was the Chairman of Brush Wellman, Inc.,
Cleveland, Ohio, a producer of high
performance-engineered materials for industry from 1980
to 1988.
ADOLF POSNICK (70) Mr. Posnick has been a Director of the Management 1985
Company since 1985. He was the Chairman and Chief
Executive Officer of Ferro Corporation, Cleveland,
Ohio, a manufacturer of specialty materials for
industry from 1989 to 1991.
RENOLD D. THOMPSON (70) Mr. Thompson has been a Director of the Management 1989
Company since 1989. He has been the Vice Chairman of
Oglebay Norton Company, Cleveland, Ohio, a raw
materials and Great Lakes marine transportation
company, since 1992.
</TABLE>
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<PAGE> 36
DESCRIPTION OF SERIES A PREFERRED SHARES
The summary of certain terms and provisions of the Series A Preferred
Shares contained in this Prospectus Supplement does not purport to be complete
and is subject to, and qualified in its entirety by reference to, the terms and
provisions of the Certificate of Designations authorizing the Series A Preferred
Shares (the "Certificate of Designations"), a copy of which will be filed as an
exhibit to a Current Report on Form 8-K to be filed by the Company with the
Securities and Exchange Commission and incorporated by reference herein, and the
Declaration of Trust and the By-Laws, copies of which are incorporated by
reference as exhibits to the Registration Statement of which the Prospectus was
a part. The following description of the particular terms of the Series A
Preferred Shares supplements, and to the extent inconsistent therewith, replaces
the description of the general terms and provisions of the Preferred Shares set
forth in the accompanying Prospectus, to which description reference is hereby
made.
GENERAL
Subject to limitations as may be prescribed by Ohio law and First Union's
By-Laws and Declaration of Trust, the Board of Trustees is authorized to issue
without the approval of the shareholders, Preferred Shares in series and to
establish from time to time the number of Preferred Shares to be included in
such series and to fix the designation and any preferences, conversion and other
rights, voting powers, restrictions, limitations as to distributions,
qualifications and terms and conditions of redemption of the shares of each such
series. First Union currently has no Preferred Shares outstanding.
When issued, the Series A Preferred Shares will be validly issued, fully
paid and, except as set forth in the accompanying Prospectus under "Description
of Shares of Beneficial Interest -- Shareholder Liability," non-assessable. The
holders of the Series A Preferred Shares will have no pre-emptive rights with
respect to any shares of the capital securities of First Union or any other
securities of First Union convertible into or carrying rights or options to
purchase any such shares. The Series A Preferred Shares will not be subject to
any sinking fund or other obligation of First Union to redeem or retire the
Series A Preferred Shares. Unless converted into Common Shares or redeemed by
First Union, the Series A Preferred Shares will have a perpetual term, with no
maturity.
The Series A Preferred Shares, unlike the Common Shares, will not be
entitled to the benefit of the Management Company Declaration of Trust. See
"Description of Shares of Beneficial Interest -- Beneficial Ownership of the
Management Company" in the accompanying Prospectus. Accordingly, the holders of
Series A Preferred Shares will not derive any benefit from any distribution from
the Management Company, notwithstanding that dividends may be in arrears on the
Series A Preferred Shares at the time Management Company distributions are made.
Distributions to the holders of the Common Shares have consisted solely of those
paid by First Union and not the Management Company. In the past, results of the
Management Company's operations have not been sufficient to justify
distributions to holders of Common Shares. It is possible that in the future,
such results from the independent operations of the Management Company or
otherwise will be sufficient to justify cash distributions to holders of Common
Shares. For a more detailed discussion on the "stapling" of shares, see
"Description of Shares of Beneficial Interest -- Beneficial Ownership of the
Management Company" and "Federal Income Tax Considerations" in the accompanying
Prospectus.
The transfer agent, registrar and distribution disbursing agent for the
Series A Preferred Shares will be The Huntington National Bank.
DISTRIBUTIONS
Holders of the Series A Preferred Shares shall be entitled to receive,
when, as and if declared by the Board of Trustees, out of funds legally
available for the payment of distributions, cumulative preferential cash
distributions in an amount per share equal to the greater of $2.10 per share
(equivalent to 8.4% of the liquidation preference per annum) or the cash
distributions (determined on each of the quarterly distribution payment dates
referred to below) on the Common Shares, or portion thereof, into which a Series
A Preferred Share is convertible. Such distributions will equal the number of
Common Shares, or portion thereof, into
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<PAGE> 37
which a Series A Preferred Share is convertible, multiplied by the most current
quarterly cash distribution on a Common Share on or before the applicable
distribution payment date. Such distributions shall be cumulative from the date
of original issue and shall be payable quarterly in arrears on the last day of
each January, April, July and October or, if not a business day, the next
succeeding business day (each, a "Distribution Payment Date"). The first
distribution, which will, when and if declared, be paid on January 31, 1997,
will represent the period from the original issue date until the Distribution
Payment Date and will include a partial distribution period from the date of
original issue to October 31, 1996. The distribution for such partial
distribution period and any other distribution payable on the Series A Preferred
Shares for any other partial distribution period will be computed on the basis
of a 360-day year consisting of twelve 30-day months. Distributions will be
payable to holders of record as they appear in the records of First Union at the
close of business on the applicable record date, which shall be on such date
designated by the Board of Trustees for the payment of distributions that is not
more than 50 nor less than 10 days prior to such Distribution Payment Date
(each, a "Distribution Record Date").
No distributions on Series A Preferred Shares shall be declared by the
Board of Trustees or paid or set apart for payment by First Union at such time
as the terms and provisions of any agreement of First Union, including any
agreement relating to its indebtedness, prohibits such declaration, payment or
setting apart for payment or provides that such declaration, payment or setting
apart for payment would constitute a breach thereof or a default thereunder, or
if such declaration or payment shall be restricted or prohibited by law.
Notwithstanding the foregoing, distributions on the Series A Preferred
Shares will accrue whether or not First Union has earnings, whether or not there
are funds legally available for the payment of such distributions and whether or
not such distributions are declared. Accrued but unpaid distributions on the
Series A Preferred Shares will not bear interest. Holders of the Series A
Preferred Shares will not be entitled to any distributions in excess of full
cumulative distributions as described above. See "Description of Preferred
Shares of Beneficial Interest -- Dividends" in the accompanying Prospectus. No
interest, or sum of money in lieu of interest, shall be payable in respect of
any distribution payment or payments on the Series A Preferred Shares which may
be in arrears.
If, for any taxable year, First Union elects to designate as "capital gain
dividends" (as defined in Section 857 of the Code) any portion (the "Capital
Gains Amount") of the dividends (as determined for federal income tax purposes)
paid or made available for the year to holders of all classes of shares (the
"Total Dividends"), then the portion of the Capital Gains Amount that shall be
allocable to the holders of Series A Preferred Shares shall be the amount that
the total dividends (as determined for federal income tax purposes) paid or made
available to the holders of the Series A Preferred Shares for the year bears to
the Total Dividends.
If any Series A Preferred Shares are outstanding, no full distributions
shall be declared or paid or set apart for payment on any series of Preferred
Shares ranking, as to distributions, on a parity with or junior to the Series A
Preferred Shares for any period unless full cumulative distributions have been
or contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payments on the Series A Preferred Shares
for all past distribution periods and the then current distribution period. When
distributions are not paid in full (or a sum sufficient for such full payment is
not so set apart) upon the Series A Preferred Shares and the shares of any other
series of Preferred Shares ranking on parity as to distributions with the Series
A Preferred Shares, all distributions declared upon the Series A Preferred
Shares and any other series of Preferred Shares ranking on a parity as to
distributions with the Series A Preferred Shares shall be declared pro rata so
that the amount of distributions declared per share on the Series A Preferred
Shares and such other series of Preferred Shares shall in all cases bear to each
other the same ratio that accrued distributions per share on the Series A
Preferred Shares and such other series of Preferred Shares bear to each other.
Except as provided in the immediately preceding paragraph, unless full
cumulative distributions on the Series A Preferred Shares have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for all past distribution periods and the
then current distribution period, no distributions (other than in Common Shares
or other capital shares ranking junior to
S-35
<PAGE> 38
the Series A Preferred Shares as to distributions and in the distribution of
assets ("Fully Junior Shares")) shall be declared or paid or set aside for
payment or other distribution shall be declared or made upon the Common Shares
or any other capital shares of First Union ranking junior to or on a parity with
the Series A Preferred Shares as to distributions or in the distribution of
assets, nor shall any Common Shares or any other capital shares of First Union
ranking junior to or on a parity with the Series A Preferred Shares as to
distributions or in the distribution of assets be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any such shares) by First
Union (except by conversion into or exchange for Fully Junior Shares).
Any distribution payment made on Series A Preferred Shares shall first be
credited against the earliest accrued but unpaid distribution due with respect
to Series A Preferred Shares which remains payable.
LIQUIDATION RIGHTS
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of First Union, then, before any distribution or payment shall be
made to the holders of any Common Shares or any other class or series of capital
shares of First Union ranking junior to the Series A Preferred Shares in the
distribution of assets upon any liquidation, dissolution or winding up of First
Union, the holders of Series A Preferred Shares shall be entitled to receive out
of assets of First Union (excluding the assets of the Management Company)
legally available for distribution to shareholders, liquidating distributions in
the amount of the liquidation preference ($25.00 per share), plus an amount
equal to all distributions accrued and unpaid thereon, if any. After payment of
the full amount of the liquidating distributions to which they are entitled, the
holders of Series A Preferred Shares will have no right or claim to any of the
remaining assets of First Union. In the event that, upon any such voluntary or
involuntary liquidation, dissolution or winding up, the available assets of
First Union are insufficient to pay the amount of the liquidating distributions
on all outstanding Series A Preferred Shares and the corresponding amounts
payable on all shares of other classes or series of capital shares of First
Union ranking on a parity with the Series A Preferred Shares in the distribution
of assets, then the holders of the Series A Preferred Shares and all other such
classes or series of capital shares shall share ratably in any such distribution
of assets in proportion to the full liquidating distributions to which they
would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
Series A Preferred Shares and all other classes or series of capital shares of
First Union ranking on a parity with the Series A Preferred Shares in the
distribution of assets, the remaining assets of First Union shall be distributed
among the holders of any other classes or series of capital shares ranking
junior to the Series A Preferred Shares in the distribution of assets upon any
liquidation, dissolution or winding up of First Union, according to their
respective rights and preferences and in each case according to their respective
number of shares. For such purposes, the consolidation or merger of First Union
with or into any other entity, the sale, lease or conveyance of all or
substantially all of the property or business of First Union or a statutory
share exchange shall not be deemed to constitute a liquidation, dissolution or
winding up of First Union.
REDEMPTION
The Series A Preferred Shares will not be redeemable by the Company prior
to October 29, 2001, and at no time will the Series A Preferred Shares be
redeemable for cash (except to the extent provided below in lieu of the issuance
of fractional Common Shares). On and after October 29, 2001, the Series A
Preferred Shares will be redeemable at the option of the Company, in whole or in
part, for such number of Common Shares as equals the liquidation preference of
the Series A Preferred Shares to be redeemed (without regard to accrued and
unpaid distributions) divided by the Conversion Price (as defined below under
"Conversion Rights") as of the opening of business on the date set for such
redemption (equivalent to a conversion rate of 3.31 Common Shares for each
Series A Preferred Share), subject to adjustment in certain circumstances as
described below. See "-- Conversion Price Adjustments." The Company may exercise
this option only if for 20 trading days, within any period of 30 consecutive
trading days, including the last trading day of such period, the closing price
of the Common Shares on the NYSE equals or exceeds the Conversion Price per
share, subject to adjustments in certain circumstances as described below. See
"-- Conversion Price Adjustments." In order to
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<PAGE> 39
exercise its redemption option, the Company must issue a press release
announcing the redemption prior to the opening of business on the second trading
day after the conditions in the preceding sentences have, from time to time,
been met, but in no event prior to October 29, 2001.
Notice of redemption will be given by mail to each holder of record of
Series A Preferred Shares at the address shown on the transfer books of First
Union not more than four business days after the Company issues the press
release. Each notice shall state: (i) the redemption date; (ii) the number of
Series A Preferred Shares to be redeemed and, if fewer than all the Shares held
by such holder are to be redeemed, the number of such Shares to be redeemed from
such holder; (iii) the number of Common Shares to be issued with respect to each
Series A Preferred Share; (iv) the place or places where certificates for Series
A Preferred Shares are to be surrendered for certificates representing Common
Shares; (v) the then current Conversion Price; and (vi) that distributions on
the Series A Preferred Shares to be redeemed will cease to accrue on such
redemption date. The redemption date will be a date selected by the Company not
less than 30 nor more than 60 days after the date on which the Company issues
the press release announcing its intention to redeem the Series A Preferred
Shares. If fewer than all of the outstanding Series A Preferred Shares are to be
redeemed, the shares to be redeemed shall be selected pro rata or in some other
equitable manner determined by the Company.
On the redemption date, the Company must pay on each share of Series A
Preferred Shares to be redeemed any accrued and unpaid distributions, in
arrears, for any distribution period ending on or prior to the redemption date,
without interest. In the case of a redemption date falling after a Distribution
Record Date and prior to the related Distribution Payment Date, the holders of
the Series A Preferred Shares at the close of business on such record date will
be entitled to receive the distribution payable on such shares on the
corresponding Distribution Payment Date, notwithstanding the redemption of such
shares following such Distribution Record Date. Except as provided for in the
two preceding sentences, no payment or allowance will be made for accrued
distributions on any Series A Preferred Shares called for redemption or on the
Common Shares issuable upon such redemption.
In the event that full cumulative distributions on the Series A Preferred
Shares and any Parity Shares have not been paid or declared and set apart for
payment, the Series A Preferred Shares may not be redeemed in part and the
Company may not purchase or acquire Series A Preferred Shares or Parity Shares
otherwise than pursuant to a purchase or exchange offer made on the same terms
to all holders of Series A Preferred Shares or Parity Shares, as the case may
be.
On and after the date fixed for redemption, provided that the Company has
made available at the office of the registrar and transfer agent a sufficient
number of Common Shares and an amount of cash to effect the redemption,
distributions will cease to accrue on the Series A Preferred Shares called for
redemption (except that, in the case of a redemption date after a Distribution
Record Date and prior to the related Distribution Payment Date, holders of
Series A Preferred Shares on the Distribution Record Date will be entitled on
such Distribution Payment Date to receive the distributions payable on such
shares), such shares shall no longer be deemed to be outstanding and all rights
of the holders of such Series A Preferred Shares shall cease except the right to
receive the Common Shares upon such redemption and any cash payable upon such
redemption, without interest from the date of such redemption. At the close of
business on the redemption date, each holder of Series A Preferred Shares
(unless the Company defaults in the delivery of the Common Shares or cash) will
be, without any further action, deemed a holder of the number of Common Shares
for which such Series A Preferred Shares are redeemable. Notwithstanding the
preceding sentence, the holders of the Series A Preferred Shares and the Common
Shares issued on the redemption date will be subject to the limitations on
ownership described in "-- Restrictions on Ownership" below and "Description of
Shares of Beneficial Interest -- Restrictions on Size of Holdings" and
"Description of Shares of Beneficial Interest -- Beneficial Ownership of the
Management Company" in the accompanying Prospectus.
Fractional Common Shares will not be issued upon redemption of the Series A
Preferred Shares, but, in lieu thereof, the Company will pay a cash adjustment
based on the current market price of the Common Shares on the day prior to the
redemption date.
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<PAGE> 40
For a description of the Common Shares, see "Description of Shares of
Beneficial Interest" in the accompanying Prospectus.
VOTING RIGHTS
Except as indicated below, or except as otherwise from time to time
required by applicable law, the holders of Series A Preferred Shares will have
no voting rights.
If six quarterly distributions (whether or not consecutive) payable on the
Series A Preferred Shares or any Parity Shares are in arrears, whether or not
earned or declared, the number of Trustees then constituting the Board of
Trustees will be increased by two, and the holders of Series A Preferred Shares,
voting together as a class with the holders of any other series of Parity Shares
(any such other series, the "Voting Preferred Shares"), will have the right to
elect two additional Trustees to serve on the Board of Trustees at any annual
meeting of shareholders or a properly called special meeting of the holders of
Series A Preferred Shares and such Voting Preferred Shares and at each
subsequent annual meeting of shareholders until all such distributions and
distributions for the current quarterly period on the Series A Preferred Shares
and such other Voting Preferred Shares have been paid or declared and paid or
set aside for payment. The term of office of all Trustees so elected will
terminate with the termination of such voting rights.
The approval of two-thirds of the outstanding Series A Preferred Shares and
all other series of Voting Preferred Shares similarly affected, voting as a
single class, is required in order to (i) amend the Declaration of Trust,
By-Laws or the Certificate of Designations to affect materially and adversely
the rights, preferences or voting power of the holders of the Series A Preferred
Shares or the Voting Preferred Shares, (ii) enter into a share exchange that
affects the Series A Preferred Shares, consolidate with or merge into another
entity, or permit another entity to consolidate with or merge into First Union,
unless in each such case each Series A Preferred Share remains outstanding
without a material adverse change to its terms and rights or is converted into
or exchanged for convertible preferred stock of the surviving entity having
preferences, conversion and other rights, voting powers, restrictions,
limitations as to distributions, qualifications and terms or conditions of
redemption thereof identical to that of a Series A Preferred Share (except for
changes that do not materially and adversely affect the holders of the Series A
Preferred Shares) or (iii) authorize, reclassify, create or increase the
authorized amount of any class of shares of beneficial interest having rights
senior to the Series A Preferred Shares as to distributions or in the
distribution of assets. However, First Union may create additional classes of
Parity Shares and shares ranking junior to the Series A Preferred Shares as to
distributions or in the distribution of assets ("Junior Shares"), increase the
authorized number of Parity Shares and Junior Shares and issue additional series
of Parity Shares and Junior Shares without the consent of any holder of Series A
Preferred Shares.
Except as provided above and as required by law, the holders of Series A
Preferred Shares are not entitled to vote on any merger or consolidation
involving First Union or a sale of all or substantially all of the assets of
First Union. See "-- Conversion Price Adjustments" below.
CONVERSION RIGHTS
The Series A Preferred Shares will be convertible, in whole or in part, at
any time, unless previously redeemed, at the option of the holders thereof, into
Common Shares at a conversion price of $7.5625 per Common Share (equivalent to a
conversion rate of 3.31 Common Shares for each Series A Preferred Share),
subject to adjustment as described below (the "Conversion Price"). See
"-- Conversion Price Adjustments." The right to convert Series A Preferred
Shares called for redemption will terminate at the close of business on the
redemption date for such Series A Preferred Shares. For information as to
notices of redemption, see "-- Redemption" above.
Conversion of Series A Preferred Shares, or a specified portion thereof,
may be effected by delivering certificates evidencing such shares, together with
written notice of conversion and a proper assignment of such certificates to
First Union or in blank, to the office or agency to be maintained by First Union
for that purpose. Initially, such office will be the offices of The Huntington
National Bank, care of Bank of New York, 101 Barclay Street, 1 East, New York,
NY 10286.
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<PAGE> 41
Each conversion will be deemed to have been effected immediately prior to
the close of business on the date on which the certificates for Series A
Preferred Shares shall have been surrendered and notice shall have been received
by First Union as aforesaid (and if applicable, payment of an amount equal to
the distribution payable on such shares shall have been received by First Union
as described below) and the conversion shall be at the Conversion Price in
effect at such time and on such date.
Holders of Series A Preferred Shares at the close of business on a
Distribution Record Date will be entitled to receive the distribution on such
shares on the corresponding Distribution Payment Date notwithstanding the
conversion of such shares following such Distribution Record Date and prior to
such Distribution Payment Date. However, Series A Preferred Shares surrendered
for conversion during the period between the close of business on any
Distribution Record Date and the opening of business on the corresponding
Distribution Payment Date (except shares converted after the issuance of a
notice of redemption with respect to a redemption date during such period, which
will be entitled to such distribution) must be accompanied by payment of an
amount equal to the distribution payable on such shares on such Distribution
Payment Date. A holder of Series A Preferred Shares on a Distribution Record
Date who (or whose transferee) tenders any such shares for conversion into
Common Shares on such Distribution Payment Date will receive the distribution
payable by First Union on such Series A Preferred Shares on such date, and the
converting holder need not include payment of the amount of such distribution
upon surrender of Series A Preferred Shares for conversion. Except as provided
above, First Union will make no payment or allowance for unpaid distributions,
whether or not in arrears, on converted shares or for distributions on the
Common Shares issued upon such conversion.
Fractional Common Shares will not be issued upon conversion, but in lieu
thereof, the Company will pay a cash adjustment based on the current market
price of the Common Shares on the day prior to the conversion date.
For a description of the Common Shares, see "Description of Shares of
Beneficial Interest" in the accompanying Prospectus.
CONVERSION PRICE ADJUSTMENTS
The Conversion Price is subject to adjustment upon certain events,
including without duplication (i) distributions payable in Common Shares, (ii)
the issuance to all holders of Common Shares of certain rights, options or
warrants entitling them to subscribe for or purchase Common Shares at a price
per share less than the fair market value per Common Share (which, as defined,
includes an adjustment for underwriting commissions avoided in rights offerings
to shareholders), (iii) subdivisions, combinations and reclassifications of
Common Shares, (iv) distributions to all holders of Common Shares of any capital
securities of First Union (other than Common Shares), evidences of indebtedness
of First Union or assets (including securities, but excluding those rights,
warrants and distributions referred to above and excluding Permitted Common
Share Cash Distributions, as hereinafter defined) and (v) payment in respect of
a tender or exchange offer by First Union or any subsidiary of First Union for
Common Shares if the cash and value of any other consideration included in such
payment per Common Share (as determined by the Board of Trustees) exceeds the
current market price (as defined) per Common Share on the trading day next
succeeding the last date tenders or exchanges may be made pursuant to such
tender or exchange offer. "Permitted Common Share Cash Distributions" are those
cumulative cash distributions paid with respect to the Common Shares after
December 31, 1995 which are not in excess of the following: the sum of (i) First
Union's cumulative undistributed income from operations and capital gains and
cumulative depreciation and amortization at December 31, 1995, plus (ii) the
cumulative amount of net income before distributions accrued or paid on the
Series A Preferred Shares, plus depreciation and amortization, after December
31, 1995, minus (iii) the cumulative amount of distributions accrued or paid on
the Series A Preferred Shares or any other class of Preferred Shares after the
date of original issue of the Series A Preferred Shares. In addition to the
foregoing adjustments, First Union will be permitted to make such reductions in
the Conversion Price as it considers to be advisable in order that any event
treated for federal income tax purposes as a distribution of stock or stock
rights will not be taxable to the holders of the Common Shares.
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<PAGE> 42
In the event that First Union shall be a party to any transaction
(including without limitation a merger, consolidation, statutory share exchange,
tender offer for all or substantially all of the Common Shares or sale of all or
substantially all of First Union's assets), in each case as a result of which
all or substantially all Common Shares are converted into the right to receive
shares, securities or other property (including cash or any combination
thereof); each Series A Preferred Share which is not redeemed or converted prior
to such transaction will thereafter be convertible into the kind and amount of
shares, securities and other property (including cash or any combination
thereof) receivable upon the consummation of such transaction by a holder of
that number of Common Shares or fraction thereof into which one Series A
Preferred Share was convertible immediately prior to such transaction (assuming
such holder of Common Shares failed to exercise any rights of election and
received per share the kind and amount received per share by a plurality of non-
electing shares). First Union may not become a party to any such transaction
unless the terms thereof are consistent with the foregoing.
No adjustment of the Conversion Price will be required to be made in any
case until cumulative adjustments amount to 1% or more of the Conversion Price.
Any adjustments not so required to be made will be carried forward and taken
into account in subsequent adjustments.
RESTRICTIONS ON OWNERSHIP
With limited exceptions, no person, or persons acting as a group, may
beneficially own more than 25% of the Series A Preferred Shares outstanding at
any time, except as a result of First Union's redemption of any Series A
Preferred Shares. Series A Preferred Shares owned in excess of the Preferred
Shares Ownership Limit Provision shall not be entitled to dividends, interest or
any other distribution with respect to such shares, shall not be entitled to any
conversion rights, shall not be entitled to any voting rights, and shall not be
considered outstanding for quorum or voting purposes. The Preferred Shares
Ownership Limit Provision is not applicable if a person's ownership exceeds the
limitation due solely to First Union's redemption of Series A Preferred Shares;
provided that thereafter any additional Series A Preferred Shares acquired by
such person shall be subject to the Preferred Shares Ownership Limit Provision.
All certificates representing Series A Preferred Shares will bear a legend
referring to the restrictions described above.
With limited exceptions, no person or persons acting as a group may
beneficially own more than 9.8% of the Common Shares, which limitation assumes
that all securities convertible into Common Shares owned by such person or group
of persons, such as the Series A Preferred Shares, have been converted. In
addition, in order for a Common Shareholder to be entitled to the benefit of the
Management Company Declaration of Trust, such shareholder may not own, after
taking into consideration all Common Shares owned by such person together with
any Common Shares attributed to such person under the Code, which would include
the Series A Preferred Shares on an as converted basis, more than 5% of the
outstanding Common Shares of First Union. For additional information regarding
these ownership limitations, see "Description of Shares of Beneficial
Interest -- Restriction on Size of Holdings" and "Description of Shares of
Beneficial Interest -- Beneficial Ownership of the Management Company" in the
accompanying Prospectus.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain federal income tax matters of general
application pertaining to the holding and disposing of Series A Preferred Shares
under the Code. This discussion is general in nature and is not exhaustive of
all possible tax considerations, nor does the discussion address any state,
local or foreign tax considerations. The discussion is based on current law, is
for general information only, and is not tax advice. This discussion does not
purport to deal with all aspects of federal income taxation that may be relevant
to particular shareholders in light of their personal investment or tax
circumstances, or to certain types of shareholders (including insurance
companies, tax exempt organizations, financial institutions or broker dealers,
foreign corporations and persons who are not citizens or residents of the United
States) subject to special treatment under the federal income tax laws. First
Union has not requested and will not request a ruling from the Service with
respect to any of the federal income tax issues discussed below.
S-40
<PAGE> 43
This Prospectus Supplement does not address the taxation of First Union or
the impact on First Union of its election to be taxed as a REIT. Such matters
are addressed in the accompanying Prospectus under "Federal Income Tax
Considerations -- Taxation of First Union." Prospective investors should
consult, and must depend on, their own tax advisors regarding the state, local,
foreign and other tax consequences of holding and disposing of Series A
Preferred Shares.
Dividends and Other Distributions. For a discussion regarding the taxation
of dividends and other distributions, see "Federal Income Tax
Considerations -- Taxation of Shareholders" in the accompanying Prospectus.
Share Ownership Test for REIT Status. As discussed in the accompanying
Prospectus under "Federal Income Tax Considerations -- Taxation of First
Union -- Share Ownership Tests," First Union has placed certain restrictions on
the transfer of its shares to prevent additional concentration of share
ownership for purposes of a REIT qualification standard. The Series A Preferred
Shares are also subject to a limitation on share ownership. However, if the
value of First Union Common Shares were to decline significantly, there can be
no assurance that the limitation on ownership of Series A Preferred Shares would
permit First Union to satisfy the ownership concentration test to maintain its
REIT status.
Backup Withholding. For a discussion of backup withholding, see "Federal
Income Tax Considerations -- Taxation of Shareholders -- Backup Withholding" in
the accompanying Prospectus.
Tax Consequences upon Redemption or Conversion of Series A Preferred Shares
in Exchange for Common Shares. Generally, except with respect to cash received
in lieu of fractional shares and as provided below, no gain or loss will be
recognized upon the redemption or conversion of Series A Preferred Shares in
exchange for Common Shares. The tax basis of a holder of Series A Preferred
Shares in the Common Shares received will equal such holder's tax basis in the
Series A Preferred Shares surrendered in the redemption or conversion reduced by
any basis attributable to fractional shares deemed received. The holding period
for the Common Shares will include the holder's holding period for the Series A
Preferred Shares. Based on the Service's present advance ruling policy, cash
received in lieu of a fractional Common Share upon redemption or conversion of
Series A Preferred Shares should be treated as a payment in redemption of the
fractional share interest in such Common Shares. Furthermore, under certain
circumstances, a holder of Series A Preferred Shares may recognize gain or
dividend income to the extent that there are dividends in arrears on the Series
A Preferred Shares at the time of the redemption or conversion of the Series A
Preferred Shares in exchange for Common Shares. In addition, upon redemption or
conversion, a holder may recognize income to the extent of the then value of the
stapled interest in the Management Company trust to which such holder's Common
Shares are entitled.
Deemed Dividends on Series A Preferred Shares. The Conversion Price of the
Series A Preferred Shares may be adjusted if First Union makes certain
distributions of stock, cash, or other property to its shareholders. While First
Union does not presently contemplate making such a distribution, if First Union
makes a distribution of cash or property resulting in an adjustment to the
Conversion Price, a holder of Series A Preferred Shares may be viewed as
receiving a "deemed distribution" that is taxable as a dividend under Sections
301 and 305 of the Code.
Sale or Exchange of Series A Preferred Shares. Upon the sale or exchange of
Series A Preferred Shares to a party other than First Union, a holder of Series
A Preferred Shares will realize a capital gain or loss measured by the
difference between the amount realized on the sale or other disposition and the
holder's adjusted tax basis in the Series A Preferred Shares (provided the
Series A Preferred Shares are held as a capital asset). Such gain or loss will
be a long-term capital gain or loss if the holder's holding period with respect
to the Series A Preferred Shares is more than one year at the time of the sale
or exchange. Further, any loss on a sale of Series A Preferred Shares which were
held by the holder for six months or less and with respect to which a capital
gain dividend was received will be treated as a long-term capital loss, up to
the amount of the capital gain dividend received with respect to such shares.
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<PAGE> 44
Foreign Holders. Certain regulations proposed in 1984 concerning payment of
dividends to non-U.S. shareholders, as described in the accompanying Prospectus
under "Certain United States Tax Considerations For Non-U.S.
Shareholders -- Distributions from First Union," were withdrawn and replaced by
new regulations issued on April 15, 1996. Under the new proposed regulations, a
foreign shareholder would still have to supply certain forms to receive a
reduced withholding rate on dividends under an applicable income tax treaty, but
other procedural requirements proposed in the 1984 proposed regulations have
been eliminated.
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<PAGE> 45
UNDERWRITING
The Underwriters named below, acting through their Representatives, Sutro &
Co. Incorporated, BT Securities Corporation and Tucker Anthony Incorporated (the
"Representatives"), have severally agreed, subject to the terms and conditions
set forth in the Underwriting Agreement with First Union, to purchase from First
Union, the number of Series A Preferred Shares set forth opposite their
respective names:
<TABLE>
<CAPTION>
NUMBER OF
NAME OF UNDERWRITERS SHARES
------------------------------------------------------------------ ---------
<S> <C>
Sutro & Co. Incorporated.......................................... 568,000
BT Securities Corporation......................................... 566,000
Tucker Anthony Incorporated....................................... 566,000
Robert W. Baird & Co. Incorporated................................ 20,000
J.C. Bradford & Co. .............................................. 20,000
Crowell, Weedon & Co. ............................................ 20,000
EVEREN Securities, Inc. .......................................... 20,000
Friedman, Billings, Ramsey & Co., Inc. ........................... 20,000
First of Michigan Corporation..................................... 20,000
Morgan Keegan & Company, Inc. .................................... 20,000
The Ohio Company.................................................. 20,000
Parker/Hunter Incorporated........................................ 20,000
Piper Jaffray Inc. ............................................... 20,000
Principal Financial Services Inc. ................................ 20,000
Rauscher Pierce Refsnes, Inc. .................................... 20,000
Roney & Co., LLC.................................................. 20,000
Starr Securities, Inc. ........................................... 20,000
Vector Securities International, Inc. ............................ 20,000
---------
Total............................................................. 2,000,000
=========
</TABLE>
The Series A Preferred Shares are being offered by the several Underwriters
named herein, subject to receipt and acceptance by them, to the right to reject
any order in whole or in part and to certain other conditions. The Underwriters
are committed to purchase all of the above Series A Preferred Shares if any are
purchased.
The Representatives have advised First Union that the Underwriters propose
to offer the Series A Preferred Shares to the public initially at the public
offering price set forth on the cover page of this Prospectus Supplement and to
certain dealers at such price less a concession not in excess of $.62 per share,
and that the Underwriters and such dealers may reallow to certain dealers,
including any Underwriters, a discount not in excess of $.10 per share. After
the offering, the public offering price, concessions and reallowances to dealers
may be changed by the Representatives as a result of market conditions or other
factors.
First Union has granted an option to the Underwriters, exercisable by the
Representatives within 30 days after the date of this Prospectus Supplement, to
purchase up to 300,000 additional Series A Preferred Shares at the initial
offering price, less underwriting discounts and commissions. The Representatives
may exercise such option solely for the purpose of covering over-allotments, if
any, incurred in the sale of the Series A Preferred Shares offered hereby. To
the extent that such over-allotment option is exercised, each of the
Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares as the number of shares to be purchased and
offered by such Underwriter in the above table bears to the total.
First Union has agreed to indemnify the Underwriters against certain civil
liabilities, including liabilities under the Securities Act of 1933, as amended,
or to contribute to payments in respect thereof.
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<PAGE> 46
The Series A Preferred Shares have been approved for listing on the NYSE
under the symbol "FURPrA," subject to official notice of issuance.
VALIDITY OF SHARES
Certain legal matters relating to the validity of the issuance of the
Series A Preferred Shares offered pursuant to this Prospectus Supplement will be
passed upon for First Union by Mayer, Brown & Platt, and for the Underwriters by
Squire, Sanders & Dempsey. As to all matters of Ohio law, Mayer, Brown & Platt
will rely on the opinion of Paul F. Levin, Senior Vice President - General
Counsel and Secretary of First Union. From time to time, Squire, Sanders &
Dempsey acts as counsel to First Union.
S-44
<PAGE> 47
PROSPECTUS
- ----------
FIRST UNION REAL ESTATE
EQUITY AND MORTGAGE INVESTMENTS
$200,000,000
DEBT SECURITIES, PREFERRED SHARES,
SHARES, SECURITIES WARRANTS AND RIGHTS
First Union Real Estate Equity and Mortgage Investments ("First Union") may
from time to time offer and sell in one or more series (i) its unsecured senior
debt securities (the "Debt Securities"); (ii) Preferred Shares of Beneficial
Interest (the "Preferred Shares"); (iii) Shares of Beneficial Interest, par
value $1.00 per share (the "Shares"); or (iv) warrants to purchase Debt
Securities (the "Debt Securities Warrants"), warrants to purchase Preferred
Shares (the "Preferred Shares Warrants") and warrants to purchase Shares (the
"Shares Warrants"), with an aggregate public offering price of up to
$200,000,000, on terms to be determined by market conditions at the time of
offering. In addition, First Union may issue in the form of a dividend,
shareholder purchase rights entitling owners of Shares to subscribe for and
purchase Shares (the "Rights"). The Debt Securities Warrants, the Preferred
Shares Warrants and the Shares Warrants shall be referred to herein collectively
as the "Securities Warrants." The Debt Securities, Preferred Shares, Shares,
Securities Warrants and Rights (collectively, the "Offered Securities") may be
offered separately or together, in separate series, in amounts and at prices and
terms to be set forth in an accompanying supplement to this Prospectus (each, a
"Prospectus Supplement").
The specific terms of the Offered Securities in respect of which this
Prospectus is being delivered will be set forth in the applicable Prospectus
Supplement and will include, where applicable: (i) in the case of Debt
Securities, the specific title, aggregate principal amount, currency, form
(which may be registered or bearer, or certificated or global), authorized
denominations, maturity, rate (or manner of calculation thereof) and time of
payment of interest, terms for redemption at the option of First Union or
repayment at the option of the Holder, any sinking fund provisions and any
conversion provisions, and any initial public offering price, along with any
other relevant specific terms; (ii) in the case of Preferred Shares, the
specific title and stated value, any dividend, liquidation, redemption,
conversion, voting and other rights, and any initial public offering price,
along with any other relevant specific terms; (iii) in the case of Shares, any
initial public offering price, along with any other relevant specific terms;
(iv) in the case of Securities Warrants, the duration, offering price, exercise
price and detachability, if applicable, along with any other relevant specific
terms; and (v) in the case of the Rights, the kind and number of Shares which
will be offered pursuant to the Rights, and the period during which and price at
which the Rights will be exercisable, along with any other relevant specific
terms. In addition, such specific terms may include limitations on direct or
indirect beneficial ownership and restrictions on transfer of the Offered
Securities, in each case as may be appropriate to preserve the status of First
Union as a real estate investment trust ("REIT") for federal income tax
purposes.
The applicable Prospectus Supplement will also contain information, where
applicable, about certain United States federal income tax considerations
relating to, and any listing on a securities exchange of, the Offered Securities
covered by such Prospectus Supplement.
The Offered Securities may be offered directly by First Union, or through
agents designated from time to time by First Union, or to or through
underwriters or dealers, which may include affiliates of First Union, or through
a combination of the foregoing. If any agents, dealers or underwriters are
involved in the sale of any of the Offered Securities, their names, and any
applicable purchase price, fee, commission or discount arrangement between or
among them, will be set forth, or will be calculable from the information set
forth, in the applicable Prospectus Supplement. See "Plan of Distribution." No
Offered Securities may be sold without delivery of the applicable Prospectus
Supplement describing the method and terms of the offering of such series of
Offered Securities.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
------------------------
The date of this Prospectus is October 7, 1996
<PAGE> 48
AVAILABLE INFORMATION
First Union is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports and other information with the Securities and Exchange
Commission (the "Commission"). Reports, proxy material and other information
concerning First Union can be inspected and copied at the offices of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 or at its regional
offices, Citicorp Center, 500 West Madison Street, Chicago, Illinois 60661 and
Seven World Trade Center, New York, New York 10048. Copies of such material can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. First Union's
outstanding Shares are listed on the New York Stock Exchange (the "NYSE") under
the symbol "FUR", and all such reports, proxy material and other information
filed by First Union with the NYSE may be inspected at the offices of the NYSE
at 20 Broad Street, New York, New York 10005.
First Union has filed with the Commission a registration statement on Form
S-3 (together with all amendments and exhibits, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered hereby. This prospectus ("Prospectus"), which
constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain items of which are
contained in exhibits to the Registration Statement as permitted by the rules
and regulations of the Commission. Statements made in this Prospectus as to the
content of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed or incorporated by reference as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
INCORPORATION BY REFERENCE
The following documents filed by First Union with the Commission (File No.
1-6249) pursuant to the Exchange Act are incorporated by reference in this
Prospectus:
(1) First Union's Annual Report on Form 10-K and Form 10-K/A for the
fiscal year ended December 31, 1995;
(2) First Union's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1996, June 30, 1996 and September 30, 1996;
(3) First Union's Current Reports on Form 8-K and Form 8-K/A dated
June 12, 1996; and
(4) Description of First Union's Share Purchase Rights included in the
Registration Statement on Form 8-A dated March 30, 1990.
All documents filed by First Union pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made hereby shall be deemed to be incorporated
by reference in this Prospectus and to be a part hereof from the date of filing
of such documents. Any statement contained in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein, or in any other subsequently filed document which is or is
deemed to be incorporated by reference herein, modifies or supersedes any such
statement. Any such statement so modified or superseded will not be deemed,
except as so modified or superseded, to constitute a part of this Prospectus.
First Union will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the request of such
person, a copy of any of the foregoing documents incorporated herein by
reference (other than the exhibits to such documents unless such exhibits are
specifically incorporated by reference into such documents). Requests should be
directed to First Union Real Estate Equity and Mortgage Investments, 55 Public
Square, Suite 1900, Cleveland, Ohio 44113-1937, Attention: Treasurer, telephone
(216) 781-4030.
2
<PAGE> 49
FIRST UNION
First Union is a real estate investment trust ("REIT") whose primary
business is acquiring, repositioning, owning and managing retail and apartment
properties. First Union intends to divest itself in the near term of its
ownership of office buildings except for its headquarters building in Cleveland.
First Union has, for the past 35 years, qualified as a REIT for federal income
tax purposes and, as such, is not subject to federal corporate income tax so
long as certain requirements are met, primarily the distribution to shareholders
of at least 95% of its taxable income.
First Union's portfolio is diversified by geographical locations, tenant
mix and rental markets. As of September 30, 1996, First Union's portfolio
included 15 retail properties, eight apartment communities, five office
buildings, an investment in land under the Huntington Building in Cleveland, and
three parking facilities.
First Union leases space to approximately 1,100 commercial tenants
including well-known shopping mall retailers such as JC Penney, Kmart, Sears,
Montgomery Ward, Wal-Mart and The Limited. First Union is also landlord to
apartment dwellers for nearly 2,300 units.
First Union is a self-administered REIT which employs a full-time salaried
staff. First Union presently net leases 34 of its properties to First Union
Management, Inc. (the "Management Company"), which operates these properties for
its own account as a separate taxable entity. The Management Company is 100%
beneficially owned by First Union's shareholders. For financial reporting
purposes, the financial statements of the Management Company are combined with
those of First Union.
First Union was formed as an Ohio business trust in 1961. First Union's
executive offices are located at 55 Public Square, Suite 1900, Cleveland, Ohio
44113-1937 and its telephone number is (216) 781-4030.
USE OF PROCEEDS
Unless otherwise described in the Prospectus Supplement which accompanies
this Prospectus, First Union intends to use the net proceeds from the sale of
the Offered Securities for general corporate purposes, which may include
acquisition and development of shopping malls and apartment communities,
investment in co-investment ventures, improvement of the properties in the
portfolio and repayment of secured or unsecured indebtedness.
DESCRIPTION OF DEBT SECURITIES
The following description sets forth certain general terms and provisions
of the Debt Securities to which this Prospectus and any applicable Prospectus
Supplement may relate. The Debt Securities will be issued under one or more
indentures (each an "Indenture") between First Union and a trustee (the
"Indenture Trustee"), each to be dated as of a date prior to the issuance of the
Debt Securities to which it relates. A form of the Indenture has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part, is
incorporated herein by reference and is available as described above under
"Available Information." The Indenture is subject to, and governed by, the Trust
Indenture Act of 1939, as amended (the "TIA"). The statements made hereunder
relating to the Indenture and the Debt Securities to be issued thereunder are
summaries of certain provisions thereof, do not purport to be complete and are
subject to, and are qualified in their entirety by reference to, all provisions
of the Indenture and such Debt Securities. All section references appearing
herein are to sections of the Indenture, and capitalized terms used but not
defined herein shall have the respective meanings set forth in the Indenture.
GENERAL
The Debt Securities will be direct, unsecured and unsubordinated
obligations of First Union and will rank equally with all other unsecured and
unsubordinated indebtedness of First Union. The Indenture provides that the Debt
Securities may be issued without limit as to aggregate principal amount, in one
or more series, in each case as established from time to time in or pursuant to
authority granted by a resolution of the Board of
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Trustees of First Union (the "Board of Trustees") or as established in one or
more indentures supplemental to the Indenture. All Debt Securities of one series
need not be issued at the same time and, unless otherwise provided, a series may
be reopened, without the consent of the Holders of the Debt Securities of such
series, for issuances of additional Debt Securities of such series (Section
301).
Reference is made to the Prospectus Supplement relating to the Debt
Securities offered thereby for the specific terms of such Debt Securities,
including:
1. the title of such Debt Securities;
2. the aggregate principal amount of such Debt Securities and any
limit on such aggregate principal amount;
3. the date or dates, or the method for determining such date or
dates, on which the principal of such Debt Securities will be payable and
the amount of principal payable thereon;
4. the rate or rates (which may be fixed or variable), or the method
by which such rate or rates shall be determined, at which such Debt
Securities will bear interest, if any;
5. the date or dates, or the method for determining such date or
dates, from which any such interest will accrue, the Interest Payment Dates
on which any such interest will be payable, the Regular Record Dates for
such Interest Payment Dates, or the method by which such dates shall be
determined, the Person to whom, and the manner in which, such interest
shall be payable, and the basis upon which interest shall be calculated if
other than that of a 360-day year comprised of twelve 30-day months;
6. the place or places where the principal of (and premium or
Make-Whole Amount (as defined), if any) and interest and Additional
Amounts, if any, on such Debt Securities will be payable, where such Debt
Securities may be surrendered for registration of transfer or exchange and
where notices or demands to or upon First Union in respect of such Debt
Securities and the Indenture may be served;
7. the period or periods within which, the price or prices (including
the premium or Make-Whole Amount, if any) at which, the currency or
currencies, currency unit or units or composite currency or currencies in
which and the other terms and conditions upon which such Debt Securities
may be redeemed, as a whole or in part, at the option of First Union, if
First Union is to have such an option;
8. the obligation, if any, of First Union to redeem, repay or purchase
such Debt Securities pursuant to any sinking fund or analogous provision or
at the option of a Holder thereof, and the period or periods within which,
the date or dates upon which, the price or prices at which, the currency or
currencies, currency unit or units or composite currency or currencies in
which, and the other terms and conditions upon which such Debt Securities
shall be redeemed, repaid or purchased, as a whole or in part, pursuant to
such obligation;
9. the percentage of the principal amount at which such Debt
Securities will be issued and, if other than the full principal amount
thereof, the portion of the principal amount thereof payable upon
declaration of acceleration of the maturity thereof, or (if applicable) the
portion of the principal amount of such Debt Securities which is
convertible into Shares, Preferred Shares or Debt Securities of another
series, or the method by which any such portion shall be determined;
10. if other than U.S. dollars, the currency or currencies in which
such Debt Securities are denominated and payable, which may be a foreign
currency or units of two or more foreign currencies or a composite currency
or currencies, and the terms and conditions relating thereto;
11. whether the amount of payments of principal of (and premium or
Make-Whole Amount, if any) or interest, if any, on such Debt Securities may
be determined with reference to an index, formula or other method (which
index, formula or method may, but need not be, based on a currency,
currencies, currency unit or units or composite currency or currencies) and
the manner in which such amounts shall be determined;
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12. whether the principal of (and premium or Make-Whole Amount, if
any) or interest or Additional Amounts, if any, on such Debt Securities are
to be payable, at the election of First Union or a Holder, in a currency or
currencies, currency unit or units or composite currency or currencies,
other than that in which such Debt Securities are denominated or stated to
be payable, the period or periods within which, and the terms and
conditions upon which, such election may be made, and the time and manner
of, and identity of the exchange rate agent with responsibility for,
determining the exchange rate between the currency or currencies in which
such Debt Securities are denominated or stated to be payable and the
currency or currencies in which such Debt Securities are to be so payable;
13. any additions to, modifications of or deletions from the terms of
such Debt Securities with respect to the Events of Default or covenants set
forth in the Indenture;
14. whether such Debt Securities will be issued in certificated or
book-entry form;
15. whether such Debt Securities will be in registered or bearer form
and, if in registered form, the denominations thereof if other than $1,000
and any integral multiple thereof and, if in bearer form, the denominations
thereof if other than $5,000 and terms and conditions relating thereto;
16. the applicability, if any, of the defeasance and covenant
defeasance provisions of Article Fourteen of the Indenture to such Debt
Securities and any provisions in modification thereof, in addition thereto
or in lieu thereof;
17. if such Debt Securities are to be issued upon the exercise of Debt
Securities Warrants, the time, manner and place for such Debt Securities to
be authenticated and delivered;
18. the terms, if any, upon which Debt Securities may be convertible
into Shares, Preferred Shares or Debt Securities of another series of First
Union and the terms and conditions upon which such conversion will be
effected, including, without limitation, the initial conversion price or
rate and the conversion period;
19. if convertible, in connection with the preservation of First
Union's status as a REIT, any applicable limitations on the ownership or
transferability of the Shares, Preferred Shares or other shares of
beneficial interest of First Union into which such Debt Securities are
convertible;
20. whether and under what circumstances First Union will pay
Additional Amounts as contemplated in the Indenture on such Debt Securities
in respect of any tax, assessment or governmental charge and, if so,
whether First Union will have the option to redeem such Debt Securities
rather than pay such Additional Amounts; and
21. any other terms of such Debt Securities not inconsistent with the
provisions of the Indenture (Section 301).
The Debt Securities may provide for less than the entire principal amount
thereof to be payable upon declaration of acceleration of the maturity thereof
or bear no interest or bear interest at a rate which at the time of issuance is
below market rates ("Original Issue Discount Securities"). All material U.S.
federal income tax, accounting and other considerations applicable to Original
Issue Discount Securities will be described in the applicable Prospectus
Supplement.
Under the Indenture, First Union will have the ability, in addition to the
ability to issue Debt Securities with terms different from those of Debt
Securities previously issued, without the consent of the Holders, to reopen a
previous issue of a series of Debt Securities and issue additional Debt
Securities of such series.
Except as set forth in the Indenture or in one or more indentures
supplemental thereto, the Indenture will not contain any other provisions that
would limit the ability of First Union to incur indebtedness or that would
afford Holders of Debt Securities protection in the event of a highly leveraged
or similar transaction involving First Union or in the event of a change of
control. However, First Union's By-Laws (the "By-Laws") contain restrictions on
ownership and transfers of the Shares which are designed to preserve First
Union's status as a REIT and, therefore, may act to prevent or hinder a change
of control. See "Description of Shares of Beneficial Interest -- Restriction on
Size of Holdings." Reference is made to the applicable Prospectus
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Supplement for information with respect to any deletions from, modifications of
or additions to the Events of Default or covenants of First Union that are
described below, including any addition of a covenant or other provision
providing event risk or similar protection.
DENOMINATIONS
Unless otherwise described in the applicable Prospectus Supplement, the
Debt Securities of any series, other than Debt Securities issued in global form
(which may be in any denomination), will be issuable in denominations of $1,000
and integral multiples thereof (Section 302).
PRINCIPAL AND INTEREST
Unless otherwise specified in the applicable Prospectus Supplement, the
principal of (and premium or Make-Whole Amount, if any) and interest on any
series of Debt Securities will be payable at the corporate trust office of the
Indenture Trustee, provided that, at the option of First Union, payment of
interest may be made by check mailed to the address of the Person entitled
thereto as it appears in the Security Register or by wire transfer of funds to
such Person at an account maintained within the United States (Sections 301,
305, 306, 307 and 1002).
If any date for the payment of principal or interest falls on a day that is
not a Business Day, the required payment shall be made on the next Business Day
as if it were made on the date such payment was due and no interest shall accrue
on the amount so payable for the period from and after such date for the payment
of principal or interest, as the case may be, through and including such next
Business Day (Section 113). "Business Day" means any day, other than a Saturday
or Sunday, that is neither a legal holiday nor a day on which banks in the
applicable place of payment are required or authorized by law, regulation or
executive order to close. Any interest not punctually paid or duly provided for
on any Interest Payment Date with respect to a Debt Security ("Defaulted
Interest") will forthwith cease to be payable to the Holder on the applicable
Regular Record Date and either may be paid to the person in whose name such Debt
Security is registered at the close of business on a special record date (the
"Special Record Date") for the payment of such Defaulted Interest to be fixed by
the Indenture Trustee, notice of which shall be given to the Holder of such Debt
Security not less than 10 days prior to such Special Record Date, or may be paid
at any time in any other lawful manner, all as more completely described in the
Indenture (Section 307).
REGISTRATION AND TRANSFER
Subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series will be exchangeable for
other Debt Securities of the same series and of a like aggregate principal
amount and tenor of different authorized denominations upon surrender of such
Debt Securities at the corporate trust office of the Indenture Trustee. In
addition, subject to certain limitations imposed upon Debt Securities issued in
book-entry form, the Debt Securities of any series may be surrendered for
conversion or registration of transfer thereof at the corporate trust office of
the Indenture Trustee. Every Debt Security surrendered for conversion or
registration of transfer or exchange shall be duly endorsed or accompanied by a
written instrument of transfer. No service charge will be made for any
registration of transfer or exchange of any Debt Securities, but First Union may
require payment of a sum sufficient to cover any tax or other governmental
charge payable in connection therewith (Section 305). First Union may designate
a transfer agent or transfer agents (in addition to the Indenture Trustee) with
respect to any series of Debt Securities. If First Union has designated such a
transfer agent or transfer agents, First Union may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts, except that First Union will be
required to maintain a transfer agent in each Place of Payments for such series.
First Union may at any time designate additional transfer agents with respect to
any series of Debt Securities (Section 1002).
Neither First Union nor the Indenture Trustee shall be required to (i)
issue, register the transfer of or exchange Debt Securities of any series during
a period beginning at the opening of the business 15 days before any selection
of Debt Securities of that series to be redeemed and ending at the close of
business on the day of
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mailing of the relevant notice of redemption; (ii) register the transfer of or
exchange any Debt Security, or portion thereof, called for redemption, except
the unredeemed portion of any Debt Security being redeemed in part; or (iii)
issue, register the transfer of or exchange any Debt Security which has been
surrendered for repayment at the option of the Holder, except the portion, if
any, of such Debt Security not to be so repaid (Section 305).
MERGER, CONSOLIDATION OR SALE
First Union, without the consent of the Holders of any of the Debt
Securities, may consolidate with, or sell, lease or convey all or substantially
all of its assets to, or merge with or into, any other entity, provided that (a)
either First Union shall be the continuing entity or, the successor entity (if
other than First Union) formed by or resulting from any such consolidation or
merger or which shall have received the transfer of such assets is a Person
organized and existing under the laws of the United States or any state thereof
and shall expressly assume payment of the principal of (and premium or
Make-Whole Amount, if any) and interest (including Additional Amounts, if any)
on all of the Debt Securities and the due and punctual performance and
observance of all of the covenants and conditions contained in the Indenture;
(b) immediately after giving effect to such transaction and treating any
indebtedness which becomes an obligation of First Union or any Subsidiary as a
result thereof as having been incurred by First Union or such Subsidiary at the
time of such transaction, no Event of Default under the Indenture, and no event
which, after notice or the lapse of time, or both, would become such an Event of
Default, shall have occurred and be continuing; and (c) an officer's certificate
and legal opinion covering such conditions shall be delivered to the Indenture
Trustee (Sections 801 and 803).
CERTAIN COVENANTS
Existence. Except as permitted under "Merger, Consolidation or Sale," First
Union will do or cause to be done all things necessary to preserve and keep in
full force and effect the existence, rights (charter and statutory) and
franchises of First Union and its Subsidiaries; provided, however, that First
Union shall not be required to preserve any right or franchise if the Board of
Trustees determines that the preservation thereof is no longer desirable in the
conduct of the business of First Union and its Subsidiaries as a whole and that
the loss thereof is not disadvantageous in any material respect to the Holders
of the Debt Securities (Section 1005).
Maintenance of Properties. First Union will cause all of its properties
used or useful in the conduct of its business or the business of any Subsidiary
to be maintained and kept in good condition, repair and working order and
supplied with all necessary equipment and will cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as in
the judgment of First Union may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times;
provided, however, that First Union and its Subsidiaries shall not be prevented
from selling or otherwise disposing for value its properties in the ordinary
course of business (Section 1006).
Insurance. First Union will, and will cause each of its Subsidiaries to,
keep all of its insurable properties insured against loss or damage at least
equal to their full insurable value with financially sound and reputable
insurance companies (Section 1007).
Payment of Taxes and Other Claims. First Union will pay or discharge or
cause to be paid or discharged, before the same shall become delinquent, (i) all
taxes, assessments and governmental charges levied or imposed upon it or any
Subsidiary or upon the income, profits or property of First Union or any
Subsidiary; and (ii) all lawful claims for labor, materials and supplies which,
if unpaid, might by law become a lien upon the property of First Union or any
Subsidiary; provided, however, that First Union shall not be required to pay or
discharge or cause to be paid or discharged any such tax, assessment, charge or
claim whose amount, applicability or validity is being contested in good faith
by appropriate proceedings (Section 1008).
Provision of Financial Information. Whether or not First Union is subject
to Section 13 or 15(d) of the Exchange Act, First Union will, to the extent
permitted under the Exchange Act, file with the Commission the annual reports,
quarterly reports and other documents which First Union would have been required
to file
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with the Commission pursuant to such Section 13 or 15(d) (the "Financial
Statements") if First Union were so subject, such documents to be filed with the
Commission on or prior to the respective dates (the "Required Filing Dates") by
which First Union would have been required so to file such documents if First
Union were so subject. First Union will also in any event (x) within 15 days of
each Required Filing Date (i) transmit by mail to all holders of Debt
Securities, as their names and addresses appear in the Security Register,
without cost to such holders, copies of the annual reports and quarterly reports
which First Union would have been required to file with the Commission pursuant
to Section 13 or 15(d) if First Union were subject to such sections, and (ii)
file with the Indenture Trustee copies of the annual reports, quarterly reports
and other documents which First Union would have been required to file with the
Commission pursuant to Section 13 or 15(d) of the Exchange Act if First Union
were subject to such Sections; and (y) if filing such documents by First Union
with the Commission is not permitted under the Exchange Act, promptly upon
written request and payment of the reasonable cost of duplication and delivery,
supply copies of such documents to any prospective Holder (Section 1009).
ADDITIONAL COVENANTS AND/OR MODIFICATIONS TO THE COVENANTS DESCRIBED ABOVE
Any additional covenants of First Union and/or modifications to the
covenants described above with respect to any Debt Securities or series thereof,
including any covenants relating to limitations on incurrence of indebtedness or
other financial covenants, will be set forth in the applicable Indenture or in
an indenture supplement thereto and described in the Prospectus Supplement
relating thereto.
EVENTS OF DEFAULT, NOTICE AND WAIVER
The Indenture provides that the following events are "Events of Default"
with respect to any series of Debt Securities issued thereunder: (a) default
which continues for 30 days in the payment of any installment of interest or
Additional Amounts payable on any Debt Security of such series; (b) default in
the payment of the principal of (or premium or Make-Whole Amount, if any, on)
any Debt Security of such series at its Maturity; (c) default in making any
sinking fund payment as required for any Debt Security of such series; (d)
default in the performance of any other covenant of First Union contained in the
Indenture (other than a covenant added to the Indenture solely for the benefit
of a series of Debt Securities issued thereunder other than such series),
continued for 60 days after written notice as provided in the Indenture; (e)
default in the payment of an aggregate principal amount exceeding $10,000,000 of
any evidence of indebtedness of First Union or any mortgage, indenture or other
instrument under which such indebtedness is issued or by which such indebtedness
is secured, such default having occurred after the expiration of any applicable
grace period and having resulted in the acceleration of the maturity of such
indebtedness, but only if such indebtedness is not discharged or such
acceleration is not rescinded or annulled; (f) the entry by a court of competent
jurisdiction of one or more judgments, orders or decrees against First Union or
any of its Subsidiaries in an aggregate amount (excluding amounts fully covered
by insurance) in excess of $10,000,000 and such judgments, orders or decrees
remain undischarged, unstayed or unsatisfied in an aggregate amount (excluding
amounts fully covered by insurance) in excess of $10,000,000) for a period of 30
consecutive days; (g) certain events of bankruptcy, insolvency or
reorganization, or court appointment of a receiver, liquidator or trustee of
First Union or any Significant Subsidiary or for all or substantially all of the
property of First Union or any Significant Subsidiary; and (h) any other Event
of Default provided with respect to a particular series of Debt Securities
(Section 501).
If an Event of Default under the Indenture with respect to Debt Securities
of any series at the time Outstanding occurs and is continuing, then in every
such case, unless the principal of all of the Outstanding Debt Securities of
such series shall already have become due and payable, the Indenture Trustee or
the Holders of not less than 25% in principal amount of the Outstanding Debt
Securities of that series may declare the principal (or, if the Debt Securities
of that series are Original Issue Discount Securities or Indexed Securities,
such portion of the principal as may be specified in the terms thereof) of, and
the Make-Whole Amount, if any, on, all of the Debt Securities of that series to
be due and payable immediately by written notice thereof to First Union (and to
the Indenture Trustee if given by the Holders). However, at any time after such
a declaration of acceleration with respect to Debt Securities of such series has
been made, but
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before a judgment or decree for payment of the money due has been obtained by
the Indenture Trustee, the Holders of not less than a majority in principal
amount of the Outstanding Debt Securities of such series may rescind and annul
such declaration and its consequences if (a) First Union shall have deposited
with the Indenture Trustee all required payments of the principal of (and
premium or Make-Whole Amount, if any) and interest, and any Additional Amounts,
on the Debt Securities of such series plus certain fees, expenses, disbursements
and advances of the Indenture Trustee and (b) all Events of Default, other than
the non-payment of accelerated principal of (or premium or the Make-Whole
Amount, if any) or interest, with respect to Debt Securities of such series have
been cured or waived as provided in the Indenture (Section 502). The Indenture
also provides that the Holders of not less than a majority in principal amount
of the Outstanding Debt Securities of any series may waive any past default with
respect to such series and its consequences, except a default (x) in the payment
of the principal of (or premium or Make-Whole Amount, if any) or interest or
Additional Amounts payable on any Debt Security of such series or (y) in respect
to a covenant or provision contained in the Indenture that cannot be modified or
amended without the consent of the Holder of each Outstanding Debt Security
affected thereby (Section 513).
The Indenture Trustee is required to give notice to the Holders of Debt
Securities within 90 days of a default under the Indenture; provided, however,
that the Indenture Trustee may withhold notice to the Holders of any series of
Debt Securities of any default with respect to such series (except a default in
the payment of the principal of (or premium or Make-Whole Amount, if any) or
interest or Additional Amounts payable on any Debt Security of such series or in
the payment of any sinking fund installment in respect of any Debt Security of
such series) if the Responsible Officers of the Indenture Trustee consider such
withholding to be in the interest of such Holders (Section 601).
The Indenture provides that no Holders of Debt Securities of any series may
institute any proceedings, judicial or otherwise, with respect to the Indenture
or for any remedy thereunder; except in the case of failure of the Indenture
Trustee, for 60 days, to act after it has received a written request to
institute proceedings in respect of an Event of Default from the Holders of not
less than 25% in principal amount of the Outstanding Debt Securities of such
series, as well as an offer of reasonable indemnity (Section 507). This
provision will not prevent, however, any Holder of Debt Securities from
instituting suit for the enforcement of payment of the principal of (and premium
or Make-Whole Amount, if any), interest on and Additional Amounts payable with
respect to, such Debt Securities at the respective due dates thereof (Section
508).
Subject to provisions in the Indenture relating to its duties in case of
default, the Indenture Trustee is under no obligation to exercise any of its
rights or powers under the Indenture at the request or direction of any Holders
of any series of Debt Securities then outstanding under the Indenture, unless
such Holders shall have offered to the Indenture Trustee reasonable security or
indemnity (Section 602). The Holders of not less than a majority in principal
amount of the Outstanding Debt Securities of any series shall have the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Indenture Trustee, or of exercising any trust or power
conferred upon the Indenture Trustee. However, the Indenture Trustee may refuse
to follow any direction which is in conflict with any law or the Indenture,
which may involve the Indenture Trustee in personal liability or which may be
unduly prejudicial to the Holders of Debt Securities of such series not joining
therein (Section 512).
Within 120 days after the close of each fiscal year, First Union must
deliver to the Indenture Trustee a certificate, signed by one of several
specified officers, stating whether or not such officer has knowledge of any
default under the Indenture and, if so, specifying each such default and the
nature and status thereof (Section 1010).
MODIFICATION OF THE INDENTURE
Modifications and amendments of the Indenture may be made with the consent
of the Holders of not less than a majority in principal amount of all
Outstanding Debt Securities which are affected by such modification or
amendment; provided, however, that no such modification or amendment may,
without the consent of the Holder of each such Debt Security affected thereby,
(a) change the Stated Maturity of the principal of (or premium or Make-Whole
Amount, if any), or any installment of principal of or interest or
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Additional Amounts payable on, any such Debt Security; (b) reduce the principal
amount of, or the rate or amount of interest on, or any premium or Make-Whole
Amount payable on redemption of, or any Additional Amounts payable with respect
to, any such Debt Security, or reduce the amount of principal of an Original
Issue Discount Security or Make-Whole Amount, if any, that would be due and
payable upon declaration of acceleration of the maturity thereof or would be
provable in bankruptcy, or adversely affect any right of repayment of the Holder
of any such Debt Security; (c) change the Place of Payment, or the currency or
currencies, for payment of principal of (and premium or Make-Whole Amount, if
any), or interest on, or any Additional Amounts payable with respect to, any
such Debt Security; (d) impair the right to institute suit for the enforcement
of any payment on or with respect to any such Debt Security; (e) reduce the
above-stated percentage of Outstanding Debt Securities of any series necessary
to modify or amend the Indenture, to waive compliance with certain provisions
thereof or certain defaults and consequences thereunder or to reduce the quorum
or voting requirements set forth in the Indenture; or (f) modify any of the
foregoing provisions or any of the provisions relating to the waiver of certain
past defaults or certain covenants, except to increase the required percentage
to effect such action or to provide that certain other provisions may not be
modified or waived without the consent of the Holder of such Debt Security
(Section 902).
The Holders of not less than a majority in principal amount of each series
of Outstanding Debt Securities have the right to waive compliance by First Union
with certain covenants in the Indenture (Section 1012).
Modifications and amendments of the Indenture may be made by First Union
and the Indenture Trustee without the consent of any Holder of Debt Securities
for any of the following purposes: (i) to evidence the succession of another
Person to First Union as obligor under the Indenture; (ii) to add to the
covenants of First Union for the benefit of the Holders of all or any series of
Debt Securities or to surrender any right or power conferred upon First Union in
the Indenture; (iii) to add Events of Default for the benefit of the Holders of
all or any series of Securities; (iv) to add or change any provisions of the
Indenture to facilitate the issuance of, or to liberalize certain terms of, Debt
Securities in bearer form, or to permit or facilitate the issuance of Debt
Securities in uncertificated form, provided that such action shall not adversely
affect the interests of the Holders of the Debt Securities of any series in any
material respect; (v) to change or eliminate any provisions of the Indenture,
provided that any such change or elimination shall become effective only when
there are no Debt Securities Outstanding of any series created prior thereto
which are entitled to the benefit of such provision; (vi) to secure the Debt
Securities; (vii) to establish the form or terms of Debt Securities of any
series and related coupons, including the provisions and procedures, if
applicable, for the conversion of such Debt Securities into Shares, Preferred
Shares or Debt Securities of another series of First Union; (viii) to provide
for the acceptance of appointment by a successor Indenture Trustee or facilitate
the administration of the trusts under the Indenture by more than one Indenture
Trustee; (ix) to cure any ambiguity in the Indenture, correct or supplement any
provision in the Indenture which may be defective or inconsistent or make any
other changes with respect to matters or questions arising under the Indenture,
provided that such action shall not adversely affect the interests of Holders of
Debt Securities of any series in any material respect; (x) to close the
Indenture with respect to the authentication and delivery of additional series
of Debt Securities or to qualify, or maintain qualification of, the Indenture
under the TIA; or (xi) to supplement any of the provisions of the Indenture to
the extent necessary to permit or facilitate defeasance and discharge of any
series of such Debt Securities, provided that such action shall not adversely
affect the interests of the Holders of the Debt Securities of any series in any
material respect (Section 901).
The Indenture provides that in determining whether the Holders of the
requisite principal amount of Outstanding Debt Securities of a series have given
any request, demand, authorization, direction, notice, consent or waiver
thereunder or whether a quorum is present at a meeting of Holders of Debt
Securities, (i) the principal amount of an Original Issue Discount Security that
shall be deemed to be outstanding shall be the amount of the principal thereof
that would be due and payable as of the date of such determination upon
declaration of acceleration of the maturity thereof; (ii) the principal amount
of a Debt Security denominated in a Foreign Currency that shall be deemed
outstanding shall be the U.S. dollar equivalent, determined on the issue date
for such Debt Security, of the principal amount (or, in the case of an Original
Issue Discount Security, the U.S. dollar equivalent on the issue date of such
Debt Security of the amount determined as provided in (i) above); (iii) the
principal amount of an Indexed Security that shall be deemed
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outstanding shall be the principal face amount of such Indexed Security at
original issuance, unless otherwise provided with respect to such Indexed
Security pursuant to Section 301 of the Indenture; and (iv) Debt Securities
owned by First Union or any other obligor upon the Debt Securities or any
Affiliate of First Union or of such other obligor shall be disregarded (Section
101).
The Indenture contains provisions for convening meetings of the Holders of
Debt Securities of a series (Section 1501). A meeting may be called at any time
by the Indenture Trustee, and also, upon request, by First Union or the Holders
of at least 10% in principal amount of the Outstanding Debt Securities of such
series, in any such case upon notice given as provided in the Indenture (Section
1502). Except for any consent that must be given by the Holder of each Debt
Security affected by certain modifications and amendments of the Indenture, any
resolution presented at a meeting or adjourned meeting duly reconvened at which
a quorum is present may be adopted by the affirmative vote of the Holders of a
majority in principal amount of the Outstanding Debt Securities of that series;
provided, however, that, except as referred to above, any resolution with
respect to any request, demand, authorization, direction, notice, consent,
waiver or other action that may be made, given or taken by the Holders of a
specified percentage, which is less than a majority, in principal amount of the
Outstanding Debt Securities of a series may be adopted at a meeting or adjourned
meeting duly reconvened at which a quorum is present by the affirmative vote of
the Holders of such specified percentage in principal amount of the Outstanding
Debt Securities of that series. Any resolution passed or decision taken at any
meeting of Holders of Debt Securities of any series duly held in accordance with
the Indenture will be binding on all Holders of Debt Securities of that series.
The quorum at any meeting called to adopt a resolution, and at any reconvened
meeting, will be Persons holding or representing a majority in principal amount
of the Outstanding Debt Securities of a series; provided, however, that if any
action is to be taken at such meeting with respect to a consent or waiver which
may be given by the Holders of not less than a specified percentage in principal
amount of the Outstanding Debt Securities of a series, the Persons holding or
representing such specified percentage in principal amount of the Outstanding
Debt Securities of such series will constitute a quorum (Section 1504).
Notwithstanding the foregoing provisions, if any action is to be taken at a
meeting of Holders of Debt Securities of any series with respect to any request,
demand, authorization, direction, notice, consent, waiver or other action that
the Indenture expressly provides may be made, given or taken by the Holders of a
specified percentage in principal amount of all Outstanding Debt Securities
affected thereby, or of the Holders of such series and one or more additional
series: (i) there shall be no minimum quorum requirement for such meeting; and
(ii) the principal amount of the Outstanding Debt Securities of such series that
vote in favor of such request, demand, authorization, direction, notice,
consent, waiver or other action shall be taken into account in determining
whether such request, demand, authorization, direction, notice, consent, waiver
or other action has been made, given or taken under the Indenture (Section
1504).
Any request, demand, authorization, direction, notice, consent, waiver or
other action provided by the Indenture to be given or taken by a specified
percentage in principal amount of the Holders of any or all series of Debt
Securities may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such specified percentage of Holders in
person or by agent duly appointed in writing; and, except as otherwise expressly
provided in the Indenture, such action shall become effective when such
instrument or instruments are delivered to the Indenture Trustee. Proof of
execution of any instrument or of a writing appointing any such agent shall be
sufficient for any purpose of the Indenture and (subject to Article Six of the
Indenture) conclusive in favor of the Indenture Trustee and First Union, if made
in the manner specified above (Section 1507).
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
First Union may discharge certain obligations to Holders of any series of
Debt Securities that have not already been delivered to the Indenture Trustee
for cancellation and that either have become due and payable or will become due
and payable within one year (or scheduled for redemption within one year) by
irrevocably depositing with the Indenture Trustee, in trust, funds in such
currency or currencies, currency unit or units or composite currency or
currencies in which such Debt Securities are payable in an amount sufficient to
pay the entire indebtedness on such Debt Securities in respect of principal (and
premium or Make-Whole Amount, if
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any) and interest and Additional Amounts payable to the date of such deposit (if
such Debt Securities have become due and payable) or to the Stated Maturity or
Redemption Date, as the case may be (Section 1401, 1402, 1403 and 1404).
The Indenture provides that, if the provisions of Article Fourteen are made
applicable to the Debt Securities of or within any series pursuant to Section
301 of the Indenture, First Union may elect either (a) to defease and be
discharged from any and all obligations with respect to such Debt Securities
(except for the obligation to pay Additional Amounts, if any, upon the
occurrence of certain events of tax, assessment or governmental charge with
respect to payments on such Debt Securities and the obligations to register the
transfer or exchange of such Debt Securities, to replace temporary or mutilated,
destroyed, lost or stolen Debt Securities, to maintain an office or agency in
respect of such Debt Securities and to hold moneys for payment in trust)
("defeasance") (Section 1402) or (b) to be released from its obligations with
respect to such Debt Securities under Section 1004 to 1009, inclusive, of the
Indenture (being the restrictions described under "-- Certain Covenants") and,
if provided pursuant to Section 301 of the Indenture, its obligations with
respect to any other covenant, and any omission to comply with such obligations
shall not constitute a default or an Event of Default with respect to such Debt
Securities ("covenant defeasance") (Section 1403), in either case upon the
irrevocable deposit by First Union with the Indenture Trustee, in trust, of an
amount, in such currency or currencies, currency unit or units or composite
currency or currencies in which such Debt Securities are payable at Stated
Maturity, or Governmental Obligations (as defined below), or both, applicable to
such Debt Securities which through the scheduled payment of principal and
interest in accordance with their terms will provide money in an amount
sufficient to pay the principal of (and premium or Make-Whole Amount, if any)
and interest on such Debt Securities, and any mandatory sinking fund or
analogous payments thereon, on the scheduled due dates therefor. (Section 1404)
Such a trust may only be established if, among other things, First Union
has delivered to the Indenture Trustee an Opinion of Counsel (as specified in
the Indenture) to the effect that the Holders of such Debt Securities will not
recognize income, gain or loss for U.S. federal income tax purposes as a result
of such defeasance or covenant defeasance and will be subject to U.S. federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such defeasance or covenant defeasance had not
occurred, and such Opinion of Counsel, in the case of defeasance, must refer to
and be based upon a ruling of the Internal Revenue Service or a change in
applicable United States federal income tax law occurring after the date of the
Indenture (Section 1404).
"Government Obligations" means securities which are (i) direct obligations
of the United States of America or the government which issued the Foreign
Currency in which the Debt Securities of a particular series are payable, for
the payment of which its full faith and credit is pledged, or (ii) obligations
of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America or such government which issued
the Foreign Currency in which the Debt Securities of such series are payable,
the payment of which is unconditionally guaranteed as a full faith and credit
obligation by the United States of America or such other government, which, in
either case, are not callable or redeemable at the option of the issuer thereof,
and shall also include a depository receipt issued by a bank or trust company as
custodian with respect to any such Government Obligation or a specific payment
of interest on or principal of any such Government Obligation held by such
custodian for the account of the holder of a depository receipt, provided that
(except as required by law) such custodian is not authorized to make any
deduction from the amount payable to the holder of such depository receipt from
any amount received by the custodian in respect of the Government Obligation or
the specific payment of interest on or principal of the Government Obligation
evidenced by such depository receipt (Section 101).
Unless otherwise provided in the applicable Prospectus Supplement, if after
First Union has deposited funds and/or Government Obligations to effect
defeasance or covenant defeasance with respect to Debt Securities of any series,
(a) the Holder of a Debt Security of such series is entitled to, and does, elect
pursuant to Section 301 of the Indenture or the terms of such Debt Security to
receive payment in a currency, currency unit or composite currency other than
that in which such deposit has been made in respect of such Debt Security, or
(b) a Conversion Event (as defined below) occurs in respect of the currency,
currency unit or composite currency in which such deposit has been made, the
indebtedness represented by such Debt Security
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shall be deemed to have been, and will be, fully discharged and satisfied
through the payment of the principal of (and premium or Make-Whole Amount, if
any) and interest on such Debt Security as they become due out of the proceeds
yielded by converting the amount so deposited in respect of such Debt Security
into the currency, currency unit or composite currency in which such Debt
Security becomes payable as a result of such election or such cessation of usage
based on the applicable market exchange rate (Section 1405). "Conversion Event"
means the cessation of use of (i) a currency (other than the ECU or other
currency unit) both by the government of the country which issued such currency
and for the settlement of transactions by a central bank or other public
institutions of or within the international banking community, (ii) the ECU both
within the European Monetary System and for the settlement of transactions by
public institutions of or within the European Communities or (iii) any currency
unit or composite currency other than the ECU for the purposes for which it was
established.
In the event First Union effects covenant defeasance with respect to any
Debt Securities and such Debt Securities are declared due and payable because of
the occurrence of any Event of Default other than the Event of Default described
in clause (d) under "-- Events of Default, Notice and Waiver" with respect to
Sections 1004 to 1010, inclusive, of the Indenture (which Sections would no
longer be applicable to such Debt Securities) or described in clause (f) under
"-- Events of Default, Notice and Waiver" with respect to any other covenant as
to which there has been covenant defeasance, the amount in such currency,
currency unit or composite currency in which such Debt Securities are payable,
and Government Obligations on deposit with the Indenture Trustee, will be
sufficient to pay amounts due on such Debt Securities at the time of their
Stated Maturity but may not be sufficient to pay amounts due on such Debt
Securities at the time of the acceleration resulting from such Event of Default.
However, First Union would remain liable to make payment of such amounts due at
the time of acceleration.
The applicable Prospectus Supplement may further describe the provisions,
if any, permitting such defeasance or covenant defeasance, including any
modifications to the provisions described above, with respect to the Debt
Securities of or within a particular series.
CONVERSION RIGHTS
The terms and conditions, if any, upon which the Debt Securities are
convertible into Shares, Preferred Shares or Debt Securities of another series
will be set forth in the applicable Prospectus Supplement relating thereto. Such
terms will include whether such Debt Securities are convertible into Shares,
Preferred Shares or Debt Securities of another series, the conversion price (or
manner of calculation thereof), the conversion period, provisions as to whether
conversion will be at the option of the Holders or First Union, the events
requiring an adjustment of the conversion price and provisions affecting
conversion in the event of the redemption of such Debt Securities. To protect
First Union's status as a REIT, a Holder may not convert any Debt Security, and
such Debt Security shall not be convertible by any Holder, if as a result of
such conversion any person would then be deemed to own, directly or indirectly,
more than 9.8% of the Shares.
GLOBAL SECURITIES
The Debt Securities of a series may be issued in whole or in part in the
form of one or more global securities ("Global Securities") that will be
deposited with, or on behalf of, a depository (the "Depository") identified in
the applicable Prospectus Supplement relating to such series. Global Securities,
if any, are expected to be deposited with The Depository Trust Company, as
Depository. Global Securities may be issued in fully registered form and may be
issued in either temporary or permanent form. Unless and until it is exchanged
in whole or in part for the individual Debt Securities represented thereby, a
Global Security may not be transferred except as a whole by the Depository for
such Global Security to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository or by the
Depository or any nominee of such Depository to a successor Depository or any
nominee of such successor.
The specific terms of the depository arrangement with respect to a series
of Debt Securities will be described in the applicable Prospectus Supplement
relating to such series. Unless otherwise indicated in the
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applicable Prospectus Supplement, First Union anticipates that the following
provisions will apply to depository arrangements.
Upon the issuance of a Global Security, the Depository for such Global
Security or its nominee will credit on its book-entry registration and transfer
system the respective principal amounts of the individual Debt Securities
represented by such Global Security to the accounts of persons that have
accounts with such Depository ("Participants"). Such accounts shall be
designated by the underwriters, dealers or agents with respect to such Debt
Securities or by First Union if such Debt Securities are offered and sold
directly by First Union. Ownership of beneficial interests in a Global Security
will be limited to Participants or persons that may hold interests through
Participants. Ownership of beneficial interests in such Global Security will be
shown on, and the transfer of that ownership will be effected only through,
records maintained by the applicable Depository or its nominee (with respect to
beneficial interests of Participants) and records of Participants (with respect
to beneficial interests of persons who hold through Participants). The laws of
some states require that certain purchasers of securities take physical delivery
of such securities in definitive form. Such limits and laws may impair the
ability to own, pledge or transfer beneficial interest in a Global Security.
So long as the Depository for a Global Security or its nominee is the
registered owner of such Global Security, such Depository or such nominee, as
the case may be, will be considered the sole owner or holder of the Debt
Securities represented by such Global Security for all purposes under the
Indenture. Except as provided below or in the applicable Prospectus Supplement,
owners of beneficial interest in a Global Security will not be entitled to have
any of the individual Debt Securities of the series represented by such Global
Security registered in their names, will not receive or be entitled to receive
physical delivery of any such Debt Securities of such series in definitive form
and will not be considered the owners or holders thereof under the Indenture.
Payments of principal of, any premium or Make-Whole Amount and any interest
on, or any Additional Amounts payable with respect to, individual Debt
Securities represented by a Global Security registered in the name of a
Depository or its nominee will be made to the Depository or its nominee, as the
case may be, as the registered owner of the Global Security representing such
Debt Securities. None of First Union, the Indenture Trustee, any Paying Agent or
the Security Registrar for such Debt Securities will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Security for such Debt
Securities or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interests.
First Union expects that the Depository for a series of Debt Securities or
its nominee, upon receipt of any payment of principal, premium, Make-Whole
Amount or interest in respect of a permanent Global Security representing any of
such Debt Securities, immediately will credit Participants' accounts with
payments in amounts proportionate to their respective beneficial interests in
the principal amount of such Global Security for such Debt Securities as shown
on the records of such Depository or its nominee. First Union also expects that
payments by Participants to owners of beneficial interests in such Global
Security held through such Participants will be governed by standing
instructions and customary practices, as is the case with securities held for
the account of customers in bearer form or registered in "street name." Such
payments will be the responsibility of such Participants.
If a Depository for a series of Debt Securities is at any time unwilling,
unable or ineligible to continue as depository and a successor depository is not
appointed by First Union within 90 days, First Union will issue individual Debt
Securities of such series in exchange for the Global Security representing such
series of Debt Securities. In addition, First Union may, at any time and in its
sole discretion, subject to any limitations described in the applicable
Prospectus Supplement relating to such Debt Securities, determine not to have
any Debt Securities of such series represented by one or more Global Securities
and, in such event, will issue individual Debt Securities of such series in
exchange for the Global Security or Securities representing such series of Debt
Securities. Individual Debt Securities of such series so issued will be issued
in denominations, unless otherwise specified by First Union, of $1,000 and
integral multiples thereof.
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NO PERSONAL LIABILITY
No past, present or future Trustee, officer, employee or shareholder, as
such, of First Union or any successor thereof shall have any liability for any
obligations of First Union under the Debt Securities or the Indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of Debt Securities by accepting such Debt Securities
waives and releases all such liability. The waiver and release are part of the
consideration for the issue of Debt Securities (Section 111).
INDENTURE TRUSTEE
The Indenture provides that there may be more than one Indenture Trustee
thereunder, each with respect to one or more series of Debt Securities. Any
Indenture Trustee under the Indenture may resign or be removed with respect to
one or more series of Debt Securities, and a successor Indenture Trustee may be
appointed to act with respect to such series. In the event that two or more
Persons are acting as Indenture Trustee with respect to different series of Debt
Securities, each such Indenture Trustee shall be a Indenture Trustee of a trust
under the Indenture separate and apart from the trust administered by any other
Indenture Trustee (Section 610), and, except as otherwise indicated herein, any
action described herein to be taken by the Indenture Trustee may be taken by
each such Indenture Trustee with respect to, and only with respect to, the one
or more series of Debt Securities for which it is Indenture Trustee under the
Indenture. (Section 609)
DESCRIPTION OF SHARES OF BENEFICIAL INTEREST
GENERAL
The following description sets forth certain general terms and provisions
of the Shares to which any Prospectus Supplement may relate, including a
Prospectus Supplement which provides for Shares issuable pursuant to
subscription offerings or rights offerings, upon conversion or exchange of
Preferred Shares or Debt Securities or upon the exercise of Shares Warrants. The
statements below describing the Shares are in all respects subject to and
qualified in their entirety by reference to the applicable provisions of First
Union's Declaration of Trust (the "Declaration of Trust") and By-Laws.
The number of Shares which First Union is authorized to issue is unlimited.
All Shares are entitled to participate equally in any distributions thereon
declared by First Union. Subject to the provisions of the By-Laws regarding
Excess Shares (as defined below), each outstanding Share entitles the Holder
thereof to one vote on all matters voted on by shareholders (as described
below), including the election of Trustees. Shareholders have no pre-emptive
rights. The outstanding Shares are fully paid and non-assessable and have equal
liquidation rights. The Shares are fully transferable except that their issuance
and transfer may be regulated or restricted by First Union in order to assure
qualification by First Union for taxation as a REIT. See "Restriction on Size of
Holdings." The Shares are not redeemable at the option of First Union or of any
shareholder. The Board of Trustees are authorized without shareholder approval
to borrow money and issue obligations and equity securities which may or may not
be convertible into Shares and warrants, rights or options to purchase Shares;
and to issue other securities of any class or classes which may or may not have
preferences or restrictions not applicable to the Shares. The issuance of
additional Shares or such conversion rights, warrants or options may have the
effect of diluting the interest of shareholders. Annual meetings of the
shareholders are held on the second Tuesday of the fourth month following the
close of each fiscal year at such place as the Trustees may from time to time
determine. Special meetings may be called at any time and place when ordered by
a majority of the Trustees, or upon written request of the holders of not less
than one-quarter of the outstanding Shares.
SHAREHOLDER LIABILITY
The Declaration of Trust provides that no shareholder shall be personally
liable in connection with the property or the affairs of First Union, and that
all persons shall look solely to property of First Union for satisfaction of
claims of any nature arising in connection with affairs of First Union.
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Under present Ohio law, no personal liability will attach to shareholders
of First Union, but with respect to tort claims, contract claims where liability
of shareholders is not expressly negated, claims for taxes and certain statutory
liabilities, the shareholders may in some jurisdictions other than Ohio be held
personally liable to the extent that such claims are not satisfied by First
Union, in which event the shareholders would, in the absence of negligence or
misconduct on their part, be entitled to reimbursement from the general assets
of First Union. First Union carries insurance which the Trustees consider
adequate to cover any probable tort claims. To the extent the assets and
insurance of First Union should be insufficient to reimburse a shareholder who
has been required to pay a claim against First Union, the shareholder would
suffer a loss. The statements in this paragraph and the next preceding paragraph
also apply to holders of the Preferred Shares, although any possible liability
of such holders would be further reduced by the greater limitations on their
voting power.
REIT QUALIFICATION
Under regulations of the Internal Revenue Service, the Trustees must have
continuing exclusive authority over the management of First Union and the
conduct of its affairs, free from any control by the shareholders, other than
the right to elect or remove Trustees, to terminate the Declaration of Trust, to
ratify amendments to the Declaration of Trust, and certain other permitted
rights, if First Union is to continue to qualify as a REIT under the applicable
sections of the Internal Revenue Code of 1986, as amended (the "Code"). If First
Union is to have limited liability for its shareholders under Ohio law, it is
also required that the Trustees have absolute control over the management of
First Union free from any control by the shareholders, other than the right to
elect Trustees or to approve certain actions of the Trustees. Consequently, the
only voting power presently granted to the shareholders is the right by a
majority vote (i) to elect Trustees, (ii) when approved by a majority of the
Trustees, to approve or disapprove the transfer of the assets of First Union to
a corporation, and to approve or disapprove amendments to the Declaration of
Trust or termination of the Declaration of Trust, and (iii) when removal is
proposed by all other Trustees, to approve or disapprove removal of any Trustee.
First Union has no fixed duration and will continue indefinitely, unless
terminated as provided in the Declaration of Trust.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Shares is National City Bank. The
Shares are listed on the NYSE under the symbol "FUR."
RESTRICTION ON SIZE OF HOLDINGS
The By-Laws restrict beneficial ownership of First Union's outstanding
capital stock by a single person, or persons acting as a group, to 9.8% (the
"Share Ownership Limit") of the Shares, which limitation assumes that all
securities convertible into Shares owned by such person or group of persons have
been converted. The purposes of these provisions are to assist in protecting and
preserving First Union's REIT status and to protect the interest of shareholders
in takeover transactions by preventing the acquisition of a substantial block of
shares unless the acquiror makes a cash tender offer for all outstanding shares.
For First Union to qualify as a REIT under the Code, not more than 50% in value
of its outstanding capital stock may be owned by five or fewer individuals at
any time during the last half of First Union's taxable year. The provision
permits five persons each to acquire up to a maximum of 9.8% of the Shares, or
an aggregate of 49% of the outstanding Shares, and thus, assists the Trustees in
protecting and preserving REIT status for tax purposes.
Shares owned by a person or group of persons in excess of 9.8% of First
Union's outstanding Shares ("Excess Shares") shall not be entitled to any voting
rights; shall not be considered outstanding for quorums or voting purposes; and
shall not be entitled to dividends, interest or any other distribution with
respect to the securities.
TRUSTEE LIABILITY
The Declaration of Trust provides that Trustees shall not be individually
liable for any obligation or liability incurred by or on behalf of First Union
or by Trustees for the benefit and on behalf of First Union.
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Under the Declaration of Trust and Ohio law respecting REITs, Trustees are not
liable to First Union or the shareholders for any act or omission except for
acts or omissions which constitute bad faith, willful misfeasance, gross
negligence or reckless disregard of duties to First Union and its shareholders.
BENEFICIAL OWNERSHIP OF THE MANAGEMENT COMPANY
All of the shares of the Management Company are owned in trust for the
benefit of owners of First Union's Shares pursuant to a declaration of trust
dated as of October 1, 1996, as amended (the "Management Company Declaration of
Trust"). The Management Company Declaration of Trust provides that the net
income of the trust estate shall be paid from time to time to the First Union
shareholders in proportion to the number of Shares of First Union held by them.
Upon termination of the trust, each holder of Shares of First Union is entitled
to a proportionate share of the net proceeds received upon the sale of the
assets of the trust estate. The trustees of the trust may require, as a
condition to the receipt of any payment of the net income or of the net proceeds
upon termination, that a shareholder demonstrate that the Shares of First Union
owned by him, together with any Shares the ownership of which is attributed to
him by the Code, does not exceed 5% of the then outstanding Shares of First
Union. The Management Company Declaration of Trust provides that the trust shall
terminate upon the termination of First Union. The trustees of the trust are
selected by the Trustees of First Union. See "Federal Income Tax
Considerations -- Taxation of First Union -- Stapled Stock."
SHAREHOLDER RIGHTS PLAN
In March 1990, the Board of Trustees declared a dividend with respect to
each Share consisting of one right to purchase one Share at an exercise price of
$50 per right. If a person or group, excluding certain affiliated entities of
First Union, acquires 15% or more of the outstanding Shares (except in a tender
offer or exchange offer approved by the Board of Trustees), is declared to be an
"adverse person" by the Board of Trustees or engages in certain self-dealing
transactions with the First Union ("flip-in events"), each right, other than
rights owned by a 15% owner or an "adverse person", entitle the holder to
purchase one Share for its par value (currently $1 per share). If First Union is
acquired in a merger or other business combination ("flip-over events"), each
right entitles the holder to purchase, for $1, shares of the acquiring company
having a market value equal to the market value of one Share.
The rights may be redeemed by First Union 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.
DESCRIPTION OF PREFERRED SHARES OF BENEFICIAL INTEREST
GENERAL
Subject to limitations prescribed by Ohio law and the Declaration of Trust,
the Board of Trustees is authorized to issue, without the approval of the
shareholders, Preferred Shares in series and to establish from time to time the
number of Preferred Shares to be included in such series and to fix the
designation and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption of the shares of each series. All Preferred Shares
issued will be duly authorized and fully paid. The Prospectus Supplement
relating to the Preferred Shares will set forth whether or not the holders of
the Preferred Shares will be entitled to the benefit of the Management Company
Declaration of Trust. See "Description of Shares of Beneficial
Interest -- Beneficial Ownership of the Management Company."
Reference is made to the Prospectus Supplement relating to the Preferred
Shares offered thereby for the specific terms of such Preferred Shares,
including:
(1) The title and stated value of such Preferred Shares;
(2) The number of shares of such Preferred Shares offered, the
liquidation preference per share and the offering price of such Preferred
Shares;
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(3) The dividend rate(s), period(s) and/or payment date(s) or
method(s) of calculation thereof applicable to such Preferred Shares;
(4) The date from which dividends on such Preferred Shares shall
cumulate, if applicable;
(5) The provision for a sinking fund, if any, for such Preferred
Shares;
(6) The provision for redemption, if applicable, of such Preferred
Shares;
(7) Any listing of such Preferred Shares on any securities exchange;
(8) The terms and conditions, if applicable, upon which such Preferred
Shares will be convertible into Shares, including the conversion price (or
manner of calculation thereof);
(9) Whether interests in such Preferred Shares will be represented by
Global Securities;
(10) Any other specific terms, preferences, rights, limitations or
restrictions of such Preferred Shares;
(11) A discussion of federal income tax considerations applicable to
such Preferred Shares;
(12) The relative ranking and preferences of such Preferred Shares as
to dividend rights and rights upon liquidation, dissolution or winding up
of the affairs of First Union;
(13) Any limitations on issuance of any series of Preferred Shares
ranking senior to or on a parity with such series of Preferred Shares as to
dividend rights and rights upon liquidation, dissolution or winding up of
the affairs of First Union; and
(14) Any limitations on direct or beneficial ownership and
restrictions on transfer of Preferred Shares, in each case as may be
appropriate to preserve the status of First Union as a REIT.
To protect First Union's status as a REIT, separate restrictions on
ownership of Preferred Shares similar to the restrictions on ownership of Shares
may be imposed. See "Description of Shares of Beneficial Interest -- Restriction
on Size of Holdings".
RANK
Unless otherwise specified in the Prospectus Supplement, the Preferred
Shares will, with respect to dividend rights and rights upon liquidation,
dissolution or winding up of First Union, rank (i) senior to all classes or
series of Shares and to all equity securities ranking junior to such Preferred
Shares; (ii) on a parity with all equity securities issued by First Union the
terms of which specifically provide that such equity securities rank on a parity
with the Preferred Shares; and (iii) junior to all equity securities issued by
First Union the terms of which specifically provide that such equity securities
rank senior to the Preferred Shares. The rights of the holders of each series of
the Preferred Shares will be subordinate to those of First Union's general
creditors.
DIVIDENDS
Holders of each series of Preferred Shares shall be entitled to receive,
when, as and if declared by the Board of Trustees, out of assets of First Union
legally available for payment, cash dividends at such rates and on such dates as
will be set forth in the applicable Prospectus Supplement. Such rate may be
fixed or variable or both. Each such dividend shall be payable to holders of
record as they appear on the share transfer books of First Union on such record
dates as shall be fixed by the Board of Trustees.
Dividends on any series of the Preferred Shares may be cumulative or
non-cumulative, as provided in the applicable Prospectus Supplement. Dividends,
if cumulative, will be cumulative from and after the date set forth in the
applicable Prospectus Supplement. If the Board of Trustees fails to declare a
dividend payable on a dividend payment date on any series of the Preferred
Shares for which dividends are noncumulative, then the holders of such series of
the Preferred Shares will have no right to receive a dividend in respect of the
dividend period ending on such dividend payment date, and First Union will have
no obligation to pay the dividend
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accrued for such period, whether or not dividends on such series are declared
payable on any future dividend payment date.
If Preferred Shares of any series are outstanding, no full dividends shall
be declared or paid or set apart for payment on the Preferred Shares of any
other series ranking, as to dividends, on a parity with or junior to the
Preferred Shares of such series for any period unless (i) if such series of
Preferred Shares has a cumulative dividend, full cumulative dividends have been
or contemporaneously are declared and paid or declared and a sum sufficient for
the payment thereof set apart for such payment on the Preferred Shares of such
series for all past dividend periods and the then current dividend period or
(ii) if such series of Preferred Shares does not have a cumulative dividend,
full dividends for the then current dividend period have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for such payment on the Preferred Shares of such
series. When dividends are not paid in full (or a sum sufficient for such full
payment is not so set apart) upon the Preferred Shares of any series and the
shares of any other series of Preferred Shares ranking on a parity as to
dividends with the Preferred Shares of such series, all dividends declared upon
Preferred Shares of such series and any other series of Preferred Shares ranking
on a parity as to dividends with such Preferred Shares shall be declared pro
rata so that the amount of dividends declared per share on the Preferred Shares
of such series and such other series of Preferred Shares shall in all cases bear
to each other the same ratio that accrued dividends per share on the Preferred
Shares of such series (which shall not include any cumulation in respect of
unpaid dividends for prior dividend periods if such series of Preferred Shares
does not have a cumulative dividend) and such other series of Preferred Shares
bear to each other. No interest, or sum of money in lieu of interest, shall be
payable in respect of any dividend payment or payments on Preferred Shares of
such series which may be in arrears.
Except as provided in the immediately preceding paragraph, unless (i) if
such series of Preferred Shares has a cumulative dividend, full cumulative
dividends on the Preferred Shares of such series have been or contemporaneously
are declared and paid or declared and a sum sufficient of the payment thereof
set apart for payment for all past dividend periods and the then current
dividend period and (ii) if such series of Preferred Shares does not have a
cumulative dividend, full dividends on the Preferred Shares of such series have
been or contemporaneously are declared and paid or declared and a sum sufficient
for the payment thereof set apart for payment for the then current dividend
period, no dividends (other than in Shares or other shares of beneficial
interest ranking junior to the Preferred Shares of such series as to dividends
and upon liquidation) shall be declared or paid or set aside for payment or
other distribution shall be declared or made upon the Shares or any other shares
of beneficial interest of First Union ranking junior to or on a parity with the
Preferred Shares of such series as to dividends or upon liquidation, nor shall
any Shares or any other shares of beneficial interest of First Union ranking
junior to or on a parity with the Preferred Shares of such series as to
dividends or upon liquidation be redeemed, purchased or otherwise acquired for
any consideration (or any moneys be paid to or made available for a sinking fund
for the redemption of any such shares) by First Union (except by conversion into
or exchange for other shares of beneficial interest of First Union ranking
junior to the Preferred Shares of such series as to dividends and upon
liquidation).
Any dividend payment made on a series of Preferred Shares shall first be
credited against the earliest accrued but unpaid dividend due with respect to
shares of such series which remains payable.
REDEMPTION
If so provided in the applicable Prospectus Supplement, the Preferred
Shares will be subject to mandatory redemption or redemption at the option of
First Union, as a whole or in part, in each case upon the terms, at the times
and at the redemption prices set forth in such Prospectus Supplement.
The Prospectus Supplement relating to a series of Preferred Shares that is
subject to mandatory redemption will specify the number of such Preferred Shares
that shall be redeemed by First Union in each year commencing after a date to be
specified, at a redemption price per share to be specified, together with an
amount equal to all accrued and unpaid dividends thereon (which shall not, if
such Preferred Shares do not have a cumulative dividend, include any cumulation
in respect of unpaid dividends for prior dividend periods) to the date of
redemption. The redemption price may be payable in cash, Shares or other
property, as specified
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in the applicable Prospectus Supplement. If the redemption price for Preferred
Shares of any series is payable only from the net proceeds of the issuance of
shares of beneficial interest of First Union, the terms of such Preferred Shares
may provide that, if no such shares of beneficial interest shall have been
issued or to the extent the net proceeds from any issuance are insufficient to
pay in full the aggregate redemption price then due, such Preferred Shares shall
automatically and mandatorily be converted into shares of the applicable shares
of beneficial interest of First Union pursuant to conversion provisions
specified in the applicable Prospectus Supplement.
Notwithstanding the foregoing, unless (i) if such series of Preferred
Shares has a cumulative dividend, full cumulative dividends on all Preferred
Shares of any series have been or contemporaneously are declared and paid or
declared and a sum sufficient for the payment thereof set apart for payment for
all past dividend periods and the then current dividend period and (ii) if such
series of Preferred Shares does not have a cumulative dividend, full dividends
on all Preferred Shares of any series have been or contemporaneously are
declared and paid or declared and a sum sufficient for the payment thereof set
apart for payment for the then current dividend period, no Preferred Shares of
any series shall be redeemed unless all outstanding Preferred Shares of such
series are simultaneously redeemed; provided, however, that the foregoing shall
not prevent the purchase or acquisition of Preferred Shares of such series
pursuant to a purchase or exchange offer made on the same terms to holders of
all outstanding Preferred Shares of such series, and, unless (i) if such series
of Preferred Shares has a cumulative dividend, full cumulative dividends on all
Preferred Shares of any series have been or contemporaneously are declared and
paid or declared and a sum sufficient for the payment thereof set apart for
payment for all past dividend periods and the then current dividend period and
(ii) if such series of Preferred Shares does not have a cumulative dividend,
full dividends on all Preferred Shares of any series have been or
contemporaneously are declared and paid or declared and a sum sufficient for the
payment thereof set apart for payment for the then current dividend period,
First Union shall not purchase or otherwise acquire directly or indirectly any
shares of Preferred Shares of such series (except by conversion into or exchange
for shares of beneficial interest of First Union ranking junior to the Preferred
Shares of such series as to dividends and upon liquidation).
If fewer than all of the outstanding Preferred Shares of any series are to
be redeemed, the number of shares to be redeemed will be determined by First
Union and such shares may be redeemed pro rata from the holders of record of
Preferred Shares of such series in proportion to the number of Preferred Shares
of such series held by such holders (with adjustments to avoid redemption of
fractional shares), by lot in a manner determined by First Union or by any other
method as may be determined by First Union in its sole discretion to be
equitable.
Notice of redemption will be mailed at least 30 days but not more than 60
days before the redemption date to each holder of record of Preferred Shares of
any series to be redeemed at the address shown on the share transfer books of
First Union. Unless otherwise specified in the applicable Prospectus Supplement,
each notice shall state: (i) the redemption date; (ii) the number of shares and
series of the Preferred Shares to be redeemed; (iii) the redemption price; (iv)
the place or places where certificates for such Preferred Shares are to be
surrendered for payment of the redemption price; (v) that dividends on the
Preferred Shares to be redeemed will cease to accrue on such redemption date;
and (vi) the date upon which the holder's conversion rights, if any, as to such
Preferred Shares shall terminate. If fewer than all the Preferred Shares of any
series are to be redeemed, the notice mailed to each such holder thereof shall
also specify the number of Preferred Shares to be redeemed from each such
holder. If notice of redemption of any Preferred Shares has been given and if
the funds necessary for such redemption have been set aside by First Union in
trust for the benefit of the holders of any Preferred Shares so called for
redemption, then from and after the redemption date dividends will cease to
accrue on such Preferred Shares, and all rights of the holders of such shares
will terminate, except the right to receive the redemption price.
LIQUIDATION PREFERENCE
Upon any voluntary or involuntary liquidation, dissolution or winding up of
the affairs of First Union, then, before any distribution or payment shall be
made to the holders of any Shares or any other class or series of shares of
beneficial interest of First Union ranking junior to the Preferred Shares in the
distribution of assets
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upon any liquidation, dissolution or winding up of First Union, the holders of
each series of Preferred Shares shall be entitled to receive out of assets of
First Union (excluding the assets of the Management Company) legally available
for distribution to shareholders, liquidating distributions in the amount of the
liquidation preference per share (set forth in the applicable Prospectus
Supplement), plus an amount equal to all dividends accrued and unpaid thereon
(which shall not include any cumulation in respect of unpaid dividends for prior
dividend periods if such Preferred Shares do not have a cumulative dividend).
After payment of the full amount of the liquidating distributions to which they
are entitled, the holders of Preferred Shares will have no right or claim to any
of the remaining assets of First Union. In the event that, upon any such
voluntary or involuntary liquidation, dissolution or winding up, the available
assets of First Union are insufficient to pay the amount of the liquidating
distributions on all outstanding Preferred Shares and the corresponding amounts
payable on all shares of other classes or series of shares of beneficial
interest of First Union ranking on a parity with the Preferred Shares in the
distribution of assets, then the holders of the Preferred Shares and all other
such classes or series of shares of beneficial interest shall share ratably in
any such distribution of assets in proportion to the full liquidating
distributions to which they would otherwise be respectively entitled.
If liquidating distributions shall have been made in full to all holders of
the Preferred Shares, the remaining assets of First Union shall be distributed
among the holders of any other classes or series of shares of beneficial
interest ranking junior to the Preferred Shares upon liquidation, dissolution or
winding up of First Union, according to their respective rights and preferences
and in each case according to their respective number of shares. For such
purposes, the consolidation or merger of First Union with or into any other
entity, or the sale, lease or conveyance of all or substantially all of the
property or business of First Union, shall not be deemed to constitute a
liquidation, dissolution or winding up of First Union.
VOTING RIGHTS
Holders of the Preferred Shares of a particular series will not have any
voting rights, except as set forth below or in the applicable Prospectus
Supplement or as otherwise required by applicable law. The following is a
summary of the voting rights that, unless provided otherwise in the applicable
Prospectus Supplement, will apply to each series of Preferred Shares.
If six quarterly dividends (whether or not consecutive) payable on the
Preferred Shares of such series, or any other series of Preferred Shares ranking
on a parity with such series of Preferred Shares with respect in each case to
the payment of dividends, amounts upon liquidation, dissolution and winding up
("Parity Shares"), are in arrears, whether or not earned or declared, the number
of Trustees then constituting the Board of Trustees will be increased by two,
and the holders of Preferred Shares of such series, voting together as a class
with the holders of Parity Shares of any other series (any such other series,
the "Voting Preferred Shares"), will have the right to elect two additional
Trustees to serve on the Board of Trustees at any annual meeting of shareholders
or a properly called special meeting of the holders of Preferred Shares of such
series and such Voting Preferred Shares and at each subsequent annual meeting of
shareholders until all such dividends and dividends for the current quarterly
period on the Preferred Shares of such series and such other Voting Preferred
Shares have been paid or declared and set aside for payment. Such voting rights
will terminate when all such accrued and unpaid dividends have been declared and
paid or set aside for payment. The term of office of all Trustees so elected
will terminate with the termination of such voting rights.
The approval of two-thirds of the outstanding Preferred Shares of such
series and all other series of Voting Preferred Shares similarly affected,
voting as a single class, is required in order to (i) amend the Declaration of
Trust to affect materially and adversely the rights, preferences or voting power
of the holders of the Preferred Shares of such series or the Voting Preferred
Shares, (ii) enter into a share exchange that affects the Preferred Shares of
such series, consolidate with or merge into another entity, or permit another
entity to consolidate with or merge into First Union, unless in each such case
each Preferred Share of such series remains outstanding without a material and
adverse change to its terms and rights or is converted into or exchanged for
convertible preferred shares of the surviving entity having preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications and terms or conditions of redemption thereof
identical to that of a Preferred Share of such series (except for changes that
do not materially and adversely affect the holders of the Preferred Shares of
such series) of (iii) authorize, reclassify,
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create, or increase the authorized amount of any class of shares having rights
senior to the Preferred Shares of such series with respect to the payment of
dividends or amounts upon liquidation, dissolution or winding up. However, First
Union may create additional classes of Parity Shares and Preferred Shares of any
other series ranking junior to such series of Preferred Shares with respect in
each case to the payment of dividends, amounts upon liquidation, dissolution and
winding up ("Junior Shares") and issue additional series of Parity Shares and
Junior Shares without the consent of any holder of Preferred Shares of such
series.
Except as provided above and as required by law, the holders of Preferred
Shares of each series will not be entitled to vote on any merger or
consolidation involving First Union or a sale of all or substantially all of the
assets of First Union.
With respect to any matter as to which the Preferred Shares of any series
is entitled to vote, holders of the Preferred Shares of such series and any
Voting Preferred Shares will be entitled to cast the number of votes set forth
in the respective Prospectus Supplement with respect to that series of Preferred
Shares and Voting Preferred Shares. As a result of the provisions requiring the
holders of shares of a series of the Preferred Shares to vote together as a
class with the holders of shares of one or more series of Parity Shares, it is
possible that the holders of such Parity Shares could approve action that would
adversely affect such series of Preferred Shares, including the creation of a
class of shares of beneficial interest ranking prior to such series of Preferred
Shares as to dividends, voting or distributions of assets.
CONVERSION RIGHTS
The terms and conditions, if any, upon which Preferred Shares of any series
are convertible into Shares will be set forth in the applicable Prospectus
Supplement relating thereto. Such terms will include the number of Shares into
which the Preferred Shares are convertible, the conversion price (or manner of
calculation thereof), the conversion period, provisions as to whether conversion
will be at the option of the holders of the Preferred Shares or First Union, the
events requiring an adjustment of the conversion price and provisions affecting
conversion in the event of the redemption of such Preferred Shares.
TRANSFER AGENT AND REGISTRAR
The name and address of the transfer agent and registrar for any series of
Preferred Shares will be set forth in the applicable Prospectus Supplement.
DESCRIPTION OF SECURITIES WARRANTS
First Union may issue Securities Warrants for the purchase of Debt
Securities, Preferred Shares or Shares. Securities Warrants may be issued
independently or together with any other Offered Securities offered by any
Prospectus Supplement and may be attached to or separate from such Offered
Securities. Each series of Securities Warrants will be issued under a separate
warrant agreement (each, a "Warrant Agreement") to be entered into between First
Union and a warrant agent specified in the applicable Prospectus Supplement (the
"Warrant Agent"). The Warrant Agent will act solely as an agent of First Union
in connection with the Securities Warrants of such series and will not assume
any obligation or relationship of agency or trust for or with any holders or
beneficial owners of Securities Warrants. The following summaries of certain
provisions of the Securities Warrant Agreement and the Securities Warrants do
not purport to be complete and are subject to, and are qualified in their
entirety by reference to, all the provisions of the Securities Warrant Agreement
and the Securities Warrant certificates relating to each series of Securities
Warrants which will be filed with the Commission at or prior to the time of the
issuance of such series of Securities Warrants.
If Securities Warrants are offered, the applicable Prospectus Supplement
will describe the terms of such Securities Warrants, including, in the case of
Securities Warrants for the purchase of Debt Securities, the following where
applicable: (i) the offering price; (ii) the denominations and terms of the
series of Debt Securities purchasable upon exercise of such Securities Warrants;
(iii) the designation and terms of any series of Debt Securities with which such
Securities Warrants are being offered and the number of such Securities Warrants
being offered with such Debt Securities; (iv) the date, if any, on and after
which such Securities
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Warrants and the related series of Debt Securities will be transferable
separately; (v) the principal amount of the series of Debt Securities
purchasable upon exercise of each such Securities Warrant and the price at which
such principal amount of Debt Securities of such series may be purchased upon
such exercise; (vi) the date on which the right to exercise such Securities
Warrants shall commence and the date on which such right shall expire (the
"Expiration Date"); (vii) whether the Securities Warrants will be issued in
registered or bearer form; (viii) any special United States federal income tax
consequences; (ix) the terms, if any, on which First Union may accelerate the
date by which the Securities Warrants must be exercised; and (x) any other
material terms of such Securities Warrants.
In the case of Securities Warrants for the purchase of Preferred Shares or
Shares, the applicable Prospectus Supplement will describe the terms of such
Securities Warrants, including the following where applicable: (i) the offering
price; (ii) the aggregate number of shares purchasable upon exercise of such
Securities Warrants, the exercise price, and in the case of Securities Warrants
for Preferred Shares, the designation, aggregate number and terms of the series
of Preferred Shares purchasable upon exercise of such Securities Warrants; (iii)
the designation and terms of any series of Preferred Shares with which such
Securities Warrants are being offered and the number of such Securities Warrants
being offered with such Preferred Shares; (iv) the date, if any, on and after
which such Securities Warrants and the related series of Preferred Shares or
Shares will be transferable separately; (v) the date on which the right to
exercise such Securities Warrants shall commence and the Expiration Date; (vi)
any special United States federal income tax consequences; and (vii) any other
material terms of such Securities Warrants.
Securities Warrant certificates may be exchanged for new Securities Warrant
certificates of different denominations, may (if in registered form) be
presented for registration of transfer, and may be exercised at the corporate
trust office of the Securities Warrant Agent or any other office indicated in
the applicable Prospectus Supplement. Prior to the exercise of any Securities
Warrant to purchase Debt Securities, holders of such Securities Warrants will
not have any of the rights of holders of the Debt Securities purchasable upon
such exercise, including the right to receive payments of principal, premium, if
any, or interest, if any, on such Debt Securities or to enforce covenants in the
applicable indenture. Prior to the exercise of any Securities Warrants to
purchase Preferred Shares or Shares, holders of such Securities Warrants will
not have any rights of holders of such Preferred Shares or Shares, including the
right to receive payments of dividends, if any, on such Preferred Shares or
Shares, or to exercise any applicable right to vote.
To protect First Union's status as a REIT, separate restrictions on
ownership of Securities Warrants similar to the restrictions on ownership of
Shares may be imposed. See "Description of Shares of Beneficial
Interest -- Restriction on Size of Holdings."
EXERCISE OF SECURITIES WARRANTS
Each Securities Warrant will entitle the holder thereof to purchase such
principal amount of Debt Securities or number of shares of Preferred Shares or
Shares, as the case may be, at such exercise price as shall in each case be set
forth in, or calculable from, the Prospectus Supplement relating to the offered
Securities Warrants. After the close of business on the Expiration Date (or such
later date to which such Expiration Date may be extended by First Union),
unexercised Securities Warrants will become void.
Securities Warrants may be exercised by delivering to the Securities
Warrant Agent payment as provided in the applicable Prospectus Supplement of the
amount required to purchase the Debt Securities, Preferred Shares or Shares, as
the case may be, purchasable upon such exercise together with certain
information set forth on the reverse side of the Securities Warrant certificate.
Securities Warrants will be deemed to have been exercised upon receipt of
payment of the exercise price, subject to the receipt within five (5) business
days, of the Securities Warrant certificate evidencing such Securities Warrants.
Upon receipt of such payment and the Securities Warrant certificate properly
completed and duly executed at the corporate trust office of the Securities
Warrant Agent or any other office indicated in the applicable Prospectus
Supplement, First Union will, as soon as practicable, issue and deliver the Debt
Securities, Preferred Shares or Shares, as the case may be, purchasable upon
such exercise. If fewer than all of the Securities Warrants represented by such
Securities
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Warrant certificate are exercised, a new Securities Warrant certificate will be
issued for the remaining amount of Securities Warrants.
AMENDMENTS AND SUPPLEMENTS TO WARRANT AGREEMENT
The Warrant Agreements may be amended or supplemented without the consent
of the holders of the Securities Warrants issued thereunder to effect changes
that are not inconsistent with the provisions of the Securities Warrants and
that do not adversely affect the interests of the holders of the Securities
Warrants.
ADJUSTMENTS
Unless otherwise indicated in the applicable Prospectus Supplement, the
exercise price of, and the number of Shares covered by, a Shares Warrant is
subject to adjustment in certain events, including (i) payment of a dividend on
the Shares payable in shares of beneficial interest and share splits,
combinations or reclassification of the Shares; (ii) issuance to all holders of
Shares of rights or warrants to subscribe for or purchase shares of Shares at
less than their current market price (as defined in the Warrant Agreement for
such series of Shares Warrants); and (iii) certain distributions of evidences of
indebtedness or assets (including securities but excluding cash dividends or
distributions paid out of consolidated earnings or retained earnings or
dividends payable in Shares) or of subscription rights and warrants (excluding
those referred to above).
No adjustment in the exercise price of, and the number of Shares covered
by, a Shares Warrant will be made for regular quarterly or other periodic or
recurring cash dividends or distributions or for cash dividends or distributions
to the extent paid from consolidated earnings or retained earnings. No
adjustment will be required unless such adjustment would require a change of at
least 1% in the exercise price then in effect. Except as stated above, the
exercise price of, and the number of Shares covered by, a Shares Warrant will
not be adjusted for the issuance of Shares or any securities convertible into or
exchangeable for Shares, or carrying the right or option to purchase or
otherwise acquire the foregoing, in exchange for cash, other property or
services.
In the event of any (i) consolidation or merger of First Union with or into
any entity (other than a consolidation or a merger that does not result in any
reclassification, conversion, exchange or cancellation of outstanding Shares);
(ii) sale, transfer, lease or conveyance of all or substantially all of the
assets of First Union; or (iii) reclassification, capital reorganization or
change of the Shares (other than solely a change in par value or from par value
to no par value), then any holder of a Shares Warrant will be entitled, on or
after the occurrence of any such event, to receive on exercise of such Shares
Warrant the kind and amount of shares of beneficial interest or other
securities, cash or other property (or any combination thereof) that the holder
would have received had such holder exercised such holder's Shares Warrant
immediately prior to the occurrence of such event. If the consideration to be
received upon exercise of the Shares Warrant following any such event consists
of common shares of the surviving entity, then from and after the occurrence of
such event, the exercise price of such Shares Warrant will be subject to the
same anti-dilution and other adjustments described in the second preceding
paragraph, applied as if such common shares were Shares.
DESCRIPTION OF RIGHTS
As set forth under "Plan of Distribution" below, First Union may sell the
Shares to investors directly through Rights. If Shares are to be sold through
Rights, such Rights will be distributed as a dividend to owners of the Shares
for which such shareholders will pay no separate consideration. The Prospectus
Supplement with respect to the offer of Shares pursuant to Rights will set forth
the relevant terms of the Rights, including (i) the kind and number of Shares
which will be offered pursuant to the Rights, (ii) the period during which and
the price at which the Rights will be exercisable, (iii) the number of Rights
then outstanding, (iv) any provisions for changes to or adjustments in the
exercise price of the Rights and (v) any other material terms of the Rights. See
"Plan of Distribution."
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FEDERAL INCOME TAX CONSIDERATIONS
The following is a description of the material Federal income tax
consequences to First Union and its shareholders of the treatment of First Union
as a REIT. The discussion is general in nature and not exhaustive of all
possible tax considerations, nor does the discussion give a detailed description
of any state, local, or foreign tax considerations. The discussion does not
discuss all aspects of Federal income tax law that may be relevant to a
prospective shareholder in light of his particular circumstances or to certain
types of shareholders (including insurance companies, financial institutions,
broker-dealers, tax exempt organizations, foreign corporations and persons who
are not citizens or residents of the United States) subject to special treatment
under the federal income tax law nor does the discussion address special
considerations, if any, which may relate to the purchase of Debt Securities,
Preferred Shares or Securities Warrants.
Based upon certain representations of First Union and as described further
below, in the opinion of Mayer, Brown & Platt, counsel to First Union, First
Union's existing legal organization and its method of operation, as described in
this Prospectus and as represented by it, will enable it to satisfy the
requirements for qualification as a REIT. This opinion is based on certain
assumptions relating to the organization and operation of the Management Company
and of any partnerships in which First Union will hold an interest, and is
conditioned upon certain representations made by First Union as to certain
factual matters relating to First Union's and the Management Company's
organization and manner of operation. It is also based on the assumption that
for all of its taxable years (or portion thereof) prior to the date of this
Prospectus, First Union satisfied all of the requirements necessary for
qualification as a REIT under the Code, and the assumption that all
organizational documents for First Union and the Management Company are complied
with. In addition, this opinion is based on the law existing and in effect on
the date hereof. First Union's qualification and taxation as a REIT in the
future will depend upon First Union's ability to meet on a continuing basis,
through actual operating results, asset composition, distribution levels and
diversity of stock ownership, the various qualification tests imposed under the
Code discussed below. Mayer, Brown & Platt will not review compliance with these
tests on a continuing basis. No assurance can be given that First Union will
satisfy such tests on a continuing basis.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX PLANNING,
AND EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT WITH ITS TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE PURCHASE, OWNERSHIP AND
SALE OF THE OFFERED SECURITIES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE, AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
If certain detailed conditions imposed by the REIT provisions of the Code
are met, entities, such as First Union, that invest primarily in real estate and
that otherwise would be treated for Federal income tax purposes as corporations,
are generally not taxed at the corporate level on their "REIT taxable income"
that is currently distributed to shareholders. This treatment substantially
eliminates the "double taxation" (i.e., at both the corporate and shareholder
levels) that generally results from the use of corporations.
If First Union fails to qualify as a REIT in any year, however, it will be
subject to Federal income taxation as if it were a domestic corporation, and its
shareholders will be taxed in the same manner as shareholders of ordinary
corporations. In this event, First Union could be subject to potentially
significant tax liabilities, and therefore the amount of cash available for
distribution to its shareholders would be reduced or eliminated.
First Union believes it properly elected and continued to elect REIT status
for all taxable years since its filing of a REIT election, and the Board of
Trustees believes that First Union has operated and expects that First Union
will continue to operate in a manner that will permit First Union to elect REIT
status in each taxable year thereafter. There can be no assurance, however, that
this belief or expectation will be fulfilled, since qualification as a REIT
depends on First Union continuing to satisfy numerous asset, income and
distribution tests described below, which in turn will be dependent in part on
First Union's operating results.
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TAXATION OF FIRST UNION
General. In any year in which First Union qualifies as a REIT, it will not,
in general, be subject to Federal income tax on that portion of its REIT taxable
income or capital gain which is distributed to shareholders. First Union may,
however, be subject to tax at normal corporate rates upon any taxable income or
capital gain not distributed.
Notwithstanding its qualification as a REIT, First Union may also be
subject to taxation in certain other circumstances. If First Union should fail
to satisfy either the 75% or the 95% gross income test (as discussed below), and
nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the greater of the
amount by which First Union fails either the 75% or the 95% test, multiplied by
a fraction intended to reflect First Union's profitability. First Union will
also be subject to a tax of 100% on net income from any "prohibited transaction"
as described below, and if First Union has (i) income from the sale or other
disposition of "foreclosure property" which is held primarily for sale to
customers in the ordinary course of business or (ii) other non-qualifying income
from foreclosure property, it will be subject to tax on such income from
foreclosure property at the highest corporate rate. In addition, if First Union
should fail to distribute during each calendar year at least the sum of (i) 85%
of its REIT ordinary income for such year, (ii) 95% of its REIT capital gain net
income for such year, and (iii) any undistributed taxable income from prior
years, First Union would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed. First Union may
also be subject to the corporate alternative minimum tax, as well as tax in
certain situations not presently contemplated. The Management Company will be
taxed on its income at regular corporate rates. First Union uses the calendar
year both for Federal income tax purposes and for financial reporting purposes.
Stapled Stock. First Union and the Management Company are "stapled
entities" as defined in Section 269B of the Code. Section 269B of the Code
defines the term "stapled entities" to mean any group of two or more entities if
more than 50% in value of the beneficial ownership in each of such entities
consists of interests which, by reason of form of ownership, restrictions on
transfers, or other terms or conditions, the transfer of one of such interests
requires the transfer of the other of such interests. Section 269B of the Code
provides that if the shares of a group of entities that include a REIT are
stapled, then such entities shall be treated as one entity for purposes of
applying the REIT provisions of the Code. If Section 269B of the Code were to
apply to First Union and the Management Company, then First Union might not be
able to satisfy the "Gross Income Tests" as described below that are necessary
to qualify as a REIT.
Prior to the enactment of Section 269B of the Code, First Union received
two rulings from the Internal Revenue Service sanctioning the stapling of First
Union and the Management Company. These rulings provided that (i) even though
First Union and the Management Company were "stapled," such stapling would not
preclude First Union from qualifying as a REIT, and (ii) amounts otherwise
qualifying as rents from real property under the REIT rules would not fail to
meet that definition by reason of the fact that First Union and the Management
Company were stapled. The effective date provision for Section 269B provides
that Section 269B of the Code does not apply if a group of stapled entities that
included a REIT on June 30, 1983 were stapled on that date. First Union believes
that because First Union and the Management Company were stapled on June 30,
1983, Section 269B should not apply to First Union and the Management Company.
Under the Code, rents from real property do not include amounts received or
accrued, directly or indirectly, from any person if the REIT owns, directly or
indirectly, in the case of a corporation, stock of such corporation possessing
10% or more of the total combined voting power of all classes of stock entitled
to vote, or 10% or more of the total number of shares of all classes of stock of
such corporation. For purposes of this provision, certain attribution rules
under Section 318 of the Code are applicable. Under this provision, even though
Section 269B of the Code does not apply to First Union and the Management
Company, if any person were to acquire, directly or indirectly, 10% or more in
value of the shares of First Union (taking into account such attribution rules),
then rents received from the Management Company would not qualify as rents from
real property under the REIT rules. In such a case, First Union would likely not
satisfy the "Gross Income Tests" described below, and accordingly, would not
qualify as a REIT.
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First Union's By-Laws restrict beneficial ownership of First Union's
outstanding shares by a single person, or persons acting as a group, to 9.8% of
First Union's Shares of Beneficial Interest. Assuming this restriction precludes
any person from owning 10% or more in value of the shares of First Union and 10%
or more of the voting power and all classes of stock of the Management Company,
First Union believes that amounts otherwise qualifying as rents from real
property received from the Management Company will continue to qualify as rents
from real property for REIT purposes.
In order to qualify as a REIT, First Union must meet, among others, the
following requirements:
Share Ownership Tests. First Union's shares of beneficial interest must be
held by a minimum of 100 persons for at least 335 days in each taxable year (or
a proportional number of days in any short taxable year). In addition, at all
times during the second half of each taxable year, no more than 50% in value of
the outstanding shares of beneficial interest of First Union may be owned,
directly or indirectly and by applying certain constructive ownership rules, by
five or fewer individuals, which for this purpose includes certain tax-exempt
entities. However, for purposes of this test, any shares of beneficial interest
held by a qualified domestic pension or other retirement trust will be treated
as held directly by its beneficiaries in proportion to their actuarial interest
in such trust rather than by such trust.
In order to attempt to provide for compliance with the foregoing share
ownership tests, First Union has placed certain restrictions on the transfer of
its shares of beneficial interest to prevent additional concentration of share
ownership. Moreover, to evidence compliance with these requirements, under
Treasury regulations First Union must maintain records which disclose the actual
ownership of its outstanding shares of beneficial interest. In fulfilling its
obligations to maintain records, First Union must and will demand written
statements each year from the record holders of designated percentages of its
shares of beneficial interest disclosing the actual owners of such shares of
beneficial interest (as prescribed by Treasury regulations). A list of those
persons failing or refusing to comply with such demand must be maintained as a
part of First Union's records. A shareholder failing or refusing to comply with
First Union's written demand must submit with his tax return a similar statement
disclosing the actual ownership of his shares and certain other information. In
addition, the By-Laws provide restrictions regarding the transfer of its shares
that are intended to assure continued satisfaction of the share ownership
requirements. See "Description of Shares of Beneficial Interest -- Restriction
on Size of Holdings."
Asset Tests. At the close of each quarter of First Union's taxable year,
First Union must satisfy two tests relating to the nature of its assets (with
"assets" being determined in accordance with generally accepted accounting
principles). First, at least 75% of the value of First Union's total assets must
be represented by interests in real property, interests in mortgages on real
property, shares in other REITs, cash, cash items, government securities and
qualified temporary investments. Second, although the remaining 25% of First
Union's assets generally may be invested without restriction, securities in this
class may not exceed (i) in the case of securities of any one non-government
issuer, 5% of the value of First Union's total assets or (ii) 10% of the
outstanding voting securities of any one such issuer.
Gross Income Tests. There are three separate percentage tests relating to
the sources of First Union's gross income which must be satisfied for each
taxable year. For purposes of these tests, where First Union invests in a
partnership, First Union will be treated as receiving its share of the income
and loss of the partnership, and the gross income of the partnership will retain
the same character in the hands of First Union as it has in the hands of the
partnership. The three tests are as follows:
The 75% Test. At least 75% of First Union's gross income for the taxable
year must be "qualifying income." Qualifying income generally includes (i) rents
from real property (except as modified below); (ii) interest on obligations
secured by mortgages on, or interests in, real property; (iii) gains from the
sale or other disposition of interests in real property and real estate
mortgages, other than gain from property held primarily for sale to customers in
the ordinary course of First Union's trade or business ("dealer property"); (iv)
dividends or other distributions on shares in other REITs, as well as gain from
the sale of such shares; (v) abatements and refunds of real property taxes; (vi)
income from the operation, and gain from the sale, of property acquired at or in
lieu of a foreclosure of the mortgage secured by such property ("foreclosure
property"); (vii) commitment fees received for agreeing to make loans secured by
mortgages on real property
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or to purchase or lease real property; and (viii) certain qualified temporary
investment income attributable to the investment of new capital received by
First Union in exchange for its shares or specified debt securities during the
one-year period following the receipt of such capital.
Rents received from a tenant will not, however, qualify as rents from real
property in satisfying the 75% test (or the 95% gross income test described
below) if First Union, or an owner of 10% or more of First Union, directly or
constructively owns 10% or more of such tenant. In addition, if rent
attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
rents from real property. Moreover, an amount received or accrued will not
qualify as rents from real property (or as interest income) for purposes of the
75% and 95% gross income tests if it is based in whole or in part on the income
or profits of any person, although an amount received or accrued generally will
not be excluded from "rents from real property" solely by reason of being based
on a fixed percentage or percentages of receipts or sales. Finally, for rents
received to qualify as rents from real property for purposes of the 75% and 95%
gross income tests, First Union generally must not operate or manage the
property or furnish or render services to tenants, other than through an
"independent contractor" from whom First Union derives no income, except that
the "independent contractor" requirement does not apply to the extent that the
services provided by First Union are "usually or customarily rendered" in
connection with the rental of space for occupancy only, or are not otherwise
considered "rendered to the occupant for his convenience."
The 95% Test. In addition to deriving 75% of its gross income from the
sources listed above, at least 95% of First Union's gross income for the taxable
year must be derived from the above-described qualifying income, or from
dividends, interest, or gains from the sale or other disposition of stock or
other securities that are not dealer property. Dividends and interest on any
obligations not collateralized by an interest in real property are included for
purposes of the 95% test, but not for purposes of the 75% test.
For purposes of determining whether First Union complies with the 75% and
the 95% gross income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property (excluding
foreclosure property); however, it does not include a sale of property if such
property is held by First Union for at least four years and certain other
requirements (relating to the number of properties sold in a year, their tax
bases, and the cost of improvements made thereto) are satisfied. See
"-- Taxation of First Union -- General."
First Union believes that, for purposes of both the 75% and the 95% gross
income tests, its investment in the real properties will in major part give rise
to qualifying income in the form of rents, and that gains on sales of the real
properties generally will also constitute qualifying income.
Even if First Union fails to satisfy one or both of the 75% or 95% gross
income tests for any taxable year, it may still qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will generally be available if: (i) First Union's failure to comply
was due to reasonable cause and not to willful neglect; (ii) First Union reports
the nature and amount of each item of its income included in the tests on a
schedule attached to its tax return; and (iii) any incorrect information on this
schedule is not due to fraud with intent to evade tax. If these relief
provisions apply, however, First Union will nonetheless be subject to a 100% tax
on the greater of the amount by which it fails either the 75% or 95% gross
income test, multiplied by a fraction intended to reflect First Union's
profitability.
The 30% Test. First Union must derive less than 30% of its gross income for
each taxable year from the sale or other disposition of (i) real property held
for less than four years (other than foreclosure property and involuntary
conversions); (ii) stock or securities (including an interest rate swap or cap
agreement) held for less than one year; and (iii) property in a prohibited
transaction. First Union does not anticipate that it will have difficulty in
complying with this test. However, if extraordinary circumstances were to occur
that give rise to dispositions of real estate properties held for less than four
years (for example, on account of the inability to obtain refinancing), the 30%
test could become an issue.
Annual Distribution Requirements. In order to qualify as a REIT, First
Union is required to distribute dividends (other than capital gain dividends) to
its shareholders each year in an amount at least equal to
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(A) the sum of (i) 95% of First Union's REIT taxable income (computed without
regard to the dividends paid deduction and First Union's net capital gain) and
(ii) 95% of the net income (after tax), if any, from foreclosure property, minus
(B) the sum of certain items of non-cash income. Such distributions must be paid
in the taxable year to which they relate, or in the following taxable year if
declared before First Union timely files its tax return for such year and if
paid on or before the first regular dividend payment after such declaration. To
the extent that First Union does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its REIT taxable income, as
adjusted, it will be subject to tax on the undistributed amount at regular
capital gains or ordinary corporate tax rates, as the case may be.
First Union intends to make timely distributions sufficient to satisfy the
annual distribution requirements described in the first sentence of the
preceding paragraph. It is possible that First Union may not have sufficient
cash or other liquid assets to meet the 95% distribution requirement, due to
timing differences between the actual receipt of income and actual payment of
expenses on the one hand, and the inclusion of such income and deduction of such
expenses in computing First Union's REIT taxable income on the other hand, or
for other reasons. To avoid a problem with the 95% distribution requirement,
First Union will closely monitor the relationship between its REIT taxable
income and cash flow and, if necessary, intends to borrow funds in order to
satisfy the distribution requirement. However, there can be no assurance that
such borrowing would be available at such time.
If First Union fails to meet the 95% distribution requirement as a result
of an adjustment to First Union's tax return by the Internal Revenue Service,
First Union may retroactively cure the failure by paying a "deficiency dividend"
(plus applicable penalties and interest) within a specified period.
Failure to Qualify. If First Union fails to qualify for taxation as a REIT
in any taxable year and the relief provisions do not apply, First Union will be
subject to tax (including any applicable alternative minimum tax) on its taxable
income at regular corporate rates. Distributions to shareholders in any year in
which First Union fails to qualify as a REIT will not be deductible by First
Union, nor generally will they be required to be made under the Code. In such
event, to the extent of current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income, and, subject
to certain limitations in the Code, corporate distributees may be eligible for
the dividends received deduction. Unless entitled to relief under specific
statutory provisions, First Union also will be disqualified from re-electing
taxation as a REIT for the four taxable years following the year during which
qualification was lost.
TAXATION OF SHAREHOLDERS
Taxation of Taxable Domestic Shareholders. As long as First Union qualifies
as a REIT, distributions made to First Union's taxable domestic shareholders out
of current or accumulated earnings and profits (and not designated as capital
gain dividends) will be taken into account by them as ordinary income and will
not be eligible for the dividends received deduction for corporations.
Distributions that are designated as capital gain dividends will be taxed as
long-term capital gains (to the extent they do not exceed First Union's actual
net capital gain for the taxable year) without regard to the period for which
the shareholder has held its shares of beneficial interest of First Union.
However, corporate shareholders may be required to treat up to 20% of certain
capital gain dividends as ordinary income. To the extent that First Union makes
distributions in excess of current and accumulated earnings and profits, these
distributions are treated first as a tax-free return of capital to the
shareholder, reducing the tax basis of a shareholder's shares by the amount of
such excess distribution (but not below zero), with distributions in excess of
the shareholder's tax basis being taxed as capital gains (if the shares are held
as a capital asset). In addition, any dividend declared by First Union in
October, November or December of any year and payable to a shareholder of record
on a specific date in any such month shall be treated as both paid by First
Union and received by the shareholder on December 31 of such year, provided that
the dividend is actually paid by First Union during January of the following
calendar year. Shareholders may not include in their individual income tax
returns any net operating losses or capital losses of First Union. Federal
income tax rules may also require that certain minimum tax adjustments and
preferences be apportioned to First Union shareholders.
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In general, any loss upon a sale or exchange of Shares by a shareholder who
has held such Shares for six months or less (after applying certain holding
period rules) will be treated as a long-term capital loss, to the extent of
distributions from First Union required to be treated by such shareholder as
long-term capital gains.
Backup Withholding. First Union will report to its domestic shareholders
and to the Internal Revenue Service the amount of dividends paid for each
calendar year, and the amount of tax withheld, if any, with respect thereto.
Under the backup withholding rules, a shareholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such
shareholder (i) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact or (ii) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A shareholder that does not provide First Union with its
correct taxpayer identification number may also be subject to penalties imposed
by the Internal Revenue Service. Any amount paid as backup withholding is
available as a credit against the shareholder's income tax liability. In
addition, First Union may be required to withhold a portion of capital gain
distributions made to any shareholders who fail to certify their non-foreign
status to First Union. See "Certain United States Tax Considerations for
Non-U.S. Shareholders -- Distributions from First Union -- Capital Gain
Dividends" below.
Taxation of Tax-Exempt Shareholders. The Internal Revenue Service has
issued a revenue ruling in which it held that amounts distributed by a REIT to a
tax-exempt employees' pension trust do not constitute unrelated business taxable
income ("UBTI"). Subject to the discussion below regarding a "pension-held
REIT," based upon such ruling and the statutory framework of the Code,
distributions by First Union to a shareholder that is a tax-exempt entity should
not constitute UBTI, provided that the tax-exempt entity has not financed the
acquisition of its shares with "acquisition indebtedness" within the meaning of
the Code, that the shares are not otherwise used in an unrelated trade or
business of the tax-exempt entity, and that First Union, consistent with its
present intent, does not hold a residual interest in a REMIC.
However, if any pension or other retirement trust that qualifies under
Section 401(a) of the Code ("qualified pension trust") holds more than 10% by
value of the interests in a "pension-held REIT" at any time during a taxable
year, a portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For these purposes, a "pension-held REIT" is defined
as a REIT if (i) such REIT would not have qualified as a REIT but for the
provisions of the Code which look through such a qualified pension trust in
determining ownership of shares of the REIT and (ii) at least one qualified
pension trust holds more than 25% by value of the interests of such REIT or one
or more qualified pension trusts (each owning more than a 10% interest by value
in the REIT) hold in the aggregate more than 50% by value of the interests in
such REIT.
OTHER TAX CONSIDERATIONS
Possible Legislative or Other Actions Affecting Tax
Consequences. Prospective shareholders should recognize that the present
Federal income tax treatment of investment in First Union may be modified by
legislative, judicial or administrative action at any time and that any such
action may affect investments and commitments previously made. The rules dealing
with Federal income taxation are constantly under review by persons involved in
the legislative process and by the Internal Revenue Service and the Treasury
Department, resulting in revisions of regulations and revised interpretations of
established concepts as well as statutory changes. No assurance can be given as
to the form or content (including with respect to effective dates) of any tax
legislation which may be enacted. Revisions in Federal tax laws and
interpretations thereof could adversely affect the tax consequences of
investment in First Union.
State and Local Taxes. First Union and its shareholders may be subject to
state or local taxation, and First Union may be subject to state or local tax
withholding requirements, in various jurisdictions, including those in which it
or they transact business or resides. The state and local tax treatment of First
Union and its shareholders may not conform to the Federal income tax
consequences discussed above. Consequently, prospective shareholders should
consult their own tax advisors regarding the effect of state and local tax laws
on an investment in shares.
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CERTAIN UNITED STATES TAX CONSIDERATIONS
FOR NON-U.S. SHAREHOLDERS
The following is a discussion of certain anticipated U.S. Federal income
and U.S. Federal estate tax consequences of the ownership and disposition of
shares of beneficial interest applicable to Non-U.S. Shareholders of such
shares. A "Non-U.S. Shareholder" is (i) any individual who is neither a citizen
nor resident of the United States, (ii) any corporation or partnership other
than a corporation or partnership created or organized in the United States or
under the laws of the United States or any state thereof or under the laws of
the District of Columbia or (iii) any estate or trust that is not "resident" in
the United States. The discussion is based on current law and is for general
information only. The discussion does not address other aspects of U.S. Federal
taxation other than income and estate taxation or all aspects of U.S. Federal
income and estate taxation. The discussion does not consider any specific facts
or circumstances that may apply to a particular Non-U.S. Shareholder.
PROSPECTIVE INVESTORS ARE URGED TO CONSULT THEIR TAX ADVISORS REGARDING THE
U.S. FEDERAL, STATE, LOCAL AND NON-U.S. INCOME, ESTATE AND OTHER TAX
CONSEQUENCES OF HOLDING AND DISPOSING OF SHARES OF BENEFICIAL INTEREST.
DISTRIBUTIONS FROM FIRST UNION
Ordinary Dividends. The portion of dividends received by Non-U.S.
Shareholders payable out of First Union's earnings and profits that are not
attributable to capital gains of First Union and that are not effectively
connected with a U.S. trade or business of the Non-U.S. Shareholder will be
subject to U.S. withholding tax at the rate of 30% (unless reduced by treaty or
the Non-U.S. Shareholder files an Internal Revenue Service Form 4224 with First
Union certifying that the investment to which the distribution relates is
effectively connected to a United States trade or business of such Non-U.S.
Shareholder). Under certain limited circumstances, the amount of tax withheld
may be refundable, in whole or in part, because of the tax status of certain
partners or beneficiaries of Non-U.S. Shareholders that are either foreign
partnerships or foreign estates or trusts. In general, Non-U.S. Shareholders
will not be considered engaged in a U.S. trade or business solely as a result of
their ownership of shares of beneficial interest. In cases where the dividend
income from a Non-U.S. Shareholder's investment in shares of beneficial interest
is (or is treated as) effectively connected with the Non-U.S. Shareholder's
conduct of a U.S. trade or business, the Non-U.S. Shareholder generally will be
subject to U.S. tax at graduated rates, in the same manner as U.S. shareholders
are taxed with respect to such dividends (and may also be subject to the 30%
branch profits tax (unless reduced by treaty) in the case of a Non-U.S.
Shareholder that is a foreign corporation).
Under current Treasury Regulations, dividends paid to an address in a
foreign country are presumed to be paid to a resident of that country (unless
the payor has knowledge to the contrary) for purposes of the withholding
discussed above and, under the current interpretation of the Treasury
Regulations, for purposes of determining the applicability of a tax treaty rate.
However, under Treasury Regulations proposed to be effective for dividends paid
after 1997 (the "Proposed Regulations"), a non-U.S. Shareholder who wishes to
claim the benefit of an applicable treaty rate would be required to satisfy
applicable certification requirements on Internal Revenue Service Form W-8. The
Proposed Regulations would also permit a reduced rate of withholding on payments
of dividends to foreign partnerships whose partners are entitled to a reduced
rate of withholding if the partners and the foreign partnership supply the
appropriate Internal Revenue Service certifications or if the foreign
partnership elects to be treated as a "qualified intermediary" for withholding
tax purposes. Under the Proposed Regulations, U.S. Shareholders who claim that
the dividends are effectively connected with the conduct of a U.S. trade or
business would have to supply Form W-8 in lieu of Form 4224.
Capital Gain Dividends. Under the Foreign Investment in Real Property Tax
Act of 1980 ("FIRPTA"), any distribution made by First Union to a Non-U.S.
Shareholder, to the extent attributable to gains from dispositions of United
States Real Property Interests ("USRPIs") by First Union ("USRPI Capital
Gains"), will be considered effectively connected with a U.S. trade or business
of the Non-U.S. Shareholder and subject to U.S. income tax at the rates
applicable to U.S. individuals or corporations, without regard to whether such
distribution is designated as a capital gain dividend. In addition, First Union
will be
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required to withhold tax equal to 35% of the amount of such distribution to the
extent it constitutes USRPI Capital Gains. Such distribution may also be subject
to the 30% branch profits tax (unless reduced by treaty) in the case of a
Non-U.S. Shareholder that is a foreign corporation.
Non-Dividend Distributions. Any distributions by First Union that exceed
both current and accumulated earnings and profits of First Union will not be
taxed as either ordinary dividends or capital gain dividends. However, under
current law, if it cannot be determined at the time a distribution is made
whether or not such distribution will be in excess of current and accumulated
earnings and profits, the distribution will be subject to withholding. Should
this occur, the Non-U.S. Shareholder may seek a refund of over withholding from
the Internal Revenue Service once it is subsequently determined that such
distribution was, in fact, in excess of current and accumulated earnings and
profits of First Union. Under the Proposed Regulations, First Union would be
entitled to make a reasonable estimate of the portion of the distribution that
is not a dividend.
DISPOSITIONS OF SHARES OF BENEFICIAL INTEREST
Unless the shares of beneficial interest constitute USRPIs, a sale or
exchange of shares of beneficial interest by a Non-U.S. Shareholder generally
will not be subject to U.S. taxation under FIRPTA. The shares of beneficial
interest will not constitute USRPIs if First Union is a "domestically controlled
REIT." A domestically controlled REIT is a REIT in which, at all times during a
specified testing period, less than 50% in value of its shares is held directly
or indirectly by Non-U.S. Shareholders. It is currently anticipated that First
Union will be a domestically controlled REIT and, therefore, that the sale of
shares of beneficial interest will not be subject to taxation under FIRPTA. No
assurance can be given that First Union will continue to be a domestically
controlled REIT.
If First Union does not constitute a domestically controlled REIT, a
Non-U.S. Shareholder's sale or exchange of shares of beneficial interest
generally will still not be subject to tax under FIRPTA as a sale of USRPIs
provided that (i) First Union's shares of beneficial interest are "regularly
traded" (as defined by applicable Treasury regulations) on an established
securities market (e.g., the NYSE, on which the Shares are listed) and (ii) the
selling Non-U.S. Shareholder held 5% or less of First Union's outstanding shares
of beneficial interest at all times during a specified testing period.
If gain on the sale or exchange of shares of beneficial interest were
subject to taxation under FIRPTA, the Non-U.S. Shareholder would be subject to
U.S. income tax at the rates applicable to U.S. individuals or corporations, and
the purchaser of shares of beneficial interest could be required to withhold 10%
of the purchase price and remit such amount to the Internal Revenue Service. The
branch profits tax would not apply to such sales or exchanges.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Shareholder in two cases: (i) if the Non-U.S.
Shareholder's investment in shares of beneficial interest is effectively
connected with a U.S. trade or business conducted by such Non-U.S. Shareholder,
the Non-U.S. Shareholder will be subject to the same treatment as U.S.
shareholders with respect to such gain or (ii) if the Non-U.S. Shareholder is a
nonresident alien individual who was present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States or an
office or other fixed place of business in the United States to which such gain
is attributable, the nonresident alien individual will be subject to 30% tax on
the individual's capital gain (unless reduced or eliminated by treaty).
FEDERAL ESTATE TAX
Shares of beneficial interest owned or treated as owned by an individual
who is not a citizen or "resident" (as specifically defined for U.S. Federal
estate tax purposes) of the United States at the time of death will be
includable in the individual's gross estate for U.S. Federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise. Such
individual's estate may be subject to U.S. Federal estate tax on the property
includable in the estate for U.S. Federal estate tax purposes.
32
<PAGE> 79
INFORMATION REPORTING AND BACKUP WITHHOLDING
First Union must report annually to the Internal Revenue Service and to
each Non-U.S. Shareholder the amount of dividends (including any capital gain
dividends) paid to, and the tax withheld with respect to, each Non-U.S.
Shareholder. These reporting requirements apply regardless of whether
withholding was reduced or eliminated by an applicable tax treaty. Copies of
these returns may also be made available under the provisions of a specific
treaty or agreement with the tax authorities in the country in which the
Non-U.S. Shareholder resides.
U.S. backup withholding (which generally is imposed at the rate of 31% on
certain payments to persons that fail to furnish the information required under
the U.S. information reporting requirements) and information reporting will
generally not apply to dividends (including any capital gain dividends) paid on
shares of beneficial interest to a Non-U.S. Shareholder at an address outside
the United States. However, under the Proposed Regulations, a Non-U.S.
Shareholder may be required to provide a certification on Form W-8 to be exempt
from backup withholding.
The payment of the proceeds from the disposition of shares of beneficial
interest to or through a U.S. office of a broker will be subject to information
reporting and backup withholding unless the owner, under penalties of perjury,
certifies, among other things, its status as a Non-U.S. Shareholder, or
otherwise establishes an exemption. The payment of the proceeds from the
disposition of shares of beneficial interest to or through a non-U.S. office of
a non-U.S. broker generally will not be subject to backup withholding and
information reporting, except as noted below. In the case of a payment of
proceeds from the disposition of shares of beneficial interest to or through a
non-U.S. office of a broker which is (i) a U.S. person, (ii) a "controlled
foreign corporation" for U.S. Federal income tax purposes or (iii) a foreign
person 50% or more of whose gross income for certain periods is derived from a
U.S. trade or business, information reporting (but not backup withholding) will
apply unless the broker has documentary evidence in its files that the holder is
a Non-U.S. Shareholder (and the broker has no actual knowledge to the contrary)
and certain other conditions are met, or the holder otherwise establishes an
exemption. Under proposed Treasury regulations (not the Proposed Regulations), a
payment of the proceeds from the disposition of shares of beneficial interest to
or through such broker will be subject to backup withholding if such broker has
actual knowledge that the holder is a U.S. person.
Backup withholding is not an additional tax. Any amounts withheld under the
backup withholding rules will be refunded or credited against the Non-U.S.
Shareholder's U.S. Federal income tax liability, provided that required
information is furnished to the Internal Revenue Service.
These backup withholding and information reporting rules are currently
under review by the Treasury Department, and their application to shares of
beneficial interest is subject to change.
PLAN OF DISTRIBUTION
First Union may offer and sell the Offered Securities in any of four ways:
(i) through agents, (ii) to or through underwriters or dealers, which may
include affiliates of First Union, (iii) directly to one or more purchasers or
(iv) through any combination of the foregoing. Direct sales to investors may be
accomplished through subscription offerings or through Rights distributed to
holders of Shares. In connection with subscription offerings or the distribution
of Rights to shareholders, if all of the underlying Offered Securities are not
subscribed for, First Union may sell such unsubscribed Offered Securities to
third parties directly or through underwriters or agents and, in addition,
whether or not all of the underlying Offered Securities are subscribed for,
First Union may concurrently offer additional Offered Securities to third
parties directly or through underwriters or agents. Any such underwriter or
agent involved in the offer and sale of the Offered Securities will be named in
the applicable Prospectus Supplement.
The distribution of the Offered Securities may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, or at prices related to the prevailing market prices at the time of
sale or at negotiated prices (any of which may represent a discount from the
prevailing market prices). First Union also may, from time to time, authorize
underwriters acting as First Union's agents to offer and sell the
33
<PAGE> 80
Offered Securities upon the terms and conditions as are set forth in the
applicable Prospectus Supplement. In connection with the sale of Offered
Securities, underwriters may be deemed to have received compensation from First
Union in the form of underwriting discounts or commissions and may also receive
commissions from purchasers of Offered Securities for whom they may act as
agent. Underwriters may sell Offered Securities to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agent.
Any underwriting compensation paid by First Union to underwriters or agents
in connection with the offering of Offered Securities, and any discounts,
concessions or commissions allowed by underwriters to participating dealers,
will be set forth in the applicable Prospectus Supplement. Underwriters, dealers
and agents participating in the distribution of the Offered Securities may be
deemed to be underwriters, and any discounts and commissions received by them
and any profit realized by them on resale of the Offered Securities may be
deemed to be underwriting discounts and commissions, under the Securities Act.
Underwriters, dealers and agents may be entitled, under agreements entered into
with First Union, to indemnification against and contribution toward certain
civil liabilities, including liabilities under the Securities Act.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for First Union and its
subsidiaries in the ordinary course of business.
All Offered Securities (except the Shares) will be new issues of securities
with no established trading market. Any underwriters to whom Offered Securities
are sold by First Union for public offering and sale may make a market in such
Offered Securities, but such underwriters will not be obligated to do so and may
discontinue any market making at any time without notice. No assurance can be
given concerning the liquidity of the trading market for any Offered Securities.
EXPERTS
The combined financial statements and schedules as of December 31, 1995 and
1994, and for each of the three years in the period ended December 31, 1995,
incorporated by reference in the Registration Statement of which this Prospectus
is a part, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
incorporated by reference in reliance upon the authority of said firm as experts
in giving said reports.
The Schedule of Operating Revenues and Certain Expenses of the Marathon
Centers for the years ended December 31, 1995, 1994 and 1993 incorporated in
this Prospectus by reference to the Current Report on Form 8-K/A of First Union
dated June 12, 1996 have been so incorporated in reliance on the report of Price
Waterhouse LLP, independent accountants, given on authority of said firm as
experts in auditing and accounting.
LEGAL MATTERS
Certain legal matters relating to the validity of the Offered Securities
offered pursuant to this Prospectus will be passed upon for First Union by
Mayer, Brown & Platt. As to all matters of Ohio law, Mayer, Brown & Platt will
rely on the opinion of Paul F. Levin, Senior Vice President-General Counsel and
Secretary of First Union.
34
<PAGE> 81
FIRST UNION REAL ESTATE INVESTMENTS
55 Public Square, Suite 1900, Cleveland, Ohio 44113-1937
<PAGE> 82
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NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS
SUPPLEMENT OR THE PROSPECTUS IN CONNECTION WITH THE OFFER MADE HEREBY. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY FIRST UNION OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS
SUPPLEMENT AND PROSPECTUS DO NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER
THAN THE SERIES A CUMULATIVE CONVERTIBLE REDEEMABLE PREFERRED SHARES OF
BENEFICIAL INTEREST TO WHICH IT RELATES OR AN OFFER IN ANY JURISDICTION TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER
THE DELIVERY OF THIS PROSPECTUS SUPPLEMENT AND PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AT ANY TIME AFTER THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
PROSPECTUS SUPPLEMENT
First Union Real Estate Equity and
Mortgage Investments.................... S-3
Recent Developments....................... S-6
Terms of the Offering..................... S-13
Business.................................. S-15
Use of Proceeds........................... S-18
Capitalization............................ S-18
Price Range of Common Shares and
Distributions........................... S-22
Selected Financial Data................... S-24
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. S-26
Management................................ S-30
Description of Series A Preferred
Shares.................................. S-34
Certain Federal Income Tax
Considerations.......................... S-40
Underwriting.............................. S-43
Validity of Shares........................ S-44
PROSPECTUS
Available Information..................... 2
Incorporation by Reference................ 2
First Union............................... 3
Use of Proceeds........................... 3
Description of Debt Securities............ 3
Description of Shares of Beneficial
Interest................................ 15
Description of Preferred Shares of
Beneficial Interest..................... 17
Description of Securities Warrants........ 22
Description of Rights..................... 24
Federal Income Tax Considerations......... 25
Certain United States Tax Considerations
for Non-U.S. Shareholders............... 31
Plan of Distribution...................... 33
Experts................................... 34
Legal Matters............................. 34
</TABLE>
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2,000,000 SHARES
FIRST UNION REAL ESTATE
EQUITY AND MORTGAGE
INVESTMENTS
SERIES A CUMULATIVE CONVERTIBLE
REDEEMABLE PREFERRED SHARES
OF BENEFICIAL INTEREST
------------------------------------------
PROSPECTUS SUPPLEMENT
-------------------------------------------
SUTRO & CO. INCORPORATED
BT SECURITIES CORPORATION
TUCKER ANTHONY INCORPORATED
OCTOBER 23, 1996
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