<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED 12-31-96 COMMISSION FILE NUMBER 1-6249
FIRST UNION REAL ESTATE AND MORTGAGE INVESTMENTS
(Exact name of registrant as specified in its charter)
OHIO 34-6513657
- - ------------------------------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SUITE 1900, 55 PUBLIC SQUARE
CLEVELAND, OHIO 44113-1937
- - ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (216) 781-4030
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ----------------
Shares of Beneficial Interest
(Par Value $1 Per Share) New York Stock Exchange
- - ------------------------ -----------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes /X/ No / /
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
As of January 31, 1997, 20,975,213 Shares of Beneficial Interest were held by
non-affiliates, and the aggregate market value of such shares was approximately
$283,165,376.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
21,558,779 Shares of Beneficial Interest were outstanding as of January 31, 1997
- - --------------------------------------------------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.
Proxy Statement dated March 5, 1997 for the Annual Meeting of
Shareholders to be held on April 8, 1997 (Part III).
<PAGE> 2
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
CROSS REFERENCE SHEET PURSUANT TO ITEM G,
GENERAL INSTRUCTIONS TO FORM 10-K
<TABLE>
<CAPTION>
ITEM OF FORM 10-K LOCATION
- - ----------------- --------
(PAGE OR PAGES)
<S> <C>
PART I
1. Business 3 through 4
2. Properties 5 through 11
3. Legal Proceedings 12
4. Submission of Matters to a Vote of Security Holders 12
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters 12; Exhibit 13, 1
6. Selected Financial Data 12; Exhibit 13,
2 through 3
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12; Exhibit 13,
18 through 22
8. Financial Statements 12; Exhibit 13,
4 through 17
9. Changes in and disagreements with Accountants on
Accounting and Financial Disclosure 12
PART III
10. Directors and Executive Officers of the Registrant 13 and 14; Proxy
Statement, 2
through 6
11. Executive Compensation 14; Proxy Statement,
6 and 11 through 16
12. Security Ownership of Certain Beneficial
Owners and Management 14; Proxy Statement,
9 and 10
13. Certain Relationships and Related Transactions 14; Proxy Statement,
10
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) Financial Statements and Financial
Statement Schedules 15 and 19 through
24; Exhibit 13,
4 through 17
(b) Exhibits 15 through 17;
Exhibit Index, 25
and 26
(c) Reports on Form 8-K 17
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS.
The registrant is an unincorporated association in the form of a
business trust organized in Ohio under a Declaration of Trust dated August 1,
1961, as amended from time to time through July 25, 1986 (the "Declaration of
Trust"), which has as its principal investment policy the purchase of interests
in real estate equities. The registrant qualifies as a real estate investment
trust under Sections 856 through 860 of the Internal Revenue Code.
In order to encourage efficient operation and management of its
property, and after receiving a ruling from the Internal Revenue Service with
respect to the proposed form of organization and operation, the registrant, in
1971, caused a management company to be organized pursuant to the laws of the
State of Delaware under the name First Union Management, Inc. (the "Management
Company"), to lease property from the registrant and to operate such property
for its own account as a separate taxable entity. At December 31, 1996, the
registrant net leased 35 of its properties to the Management Company. The shares
of the Management Company are held in trust, with the shareholders of the
registrant, as exist from time to time, as contingent beneficiaries. For
financial reporting purposes, the financial statements of the Management Company
are combined with those of the registrant.
The registrant owns regional enclosed shopping malls, apartment
complexes and large downtown office buildings. Additionally, in 1996 the
registrant invested $30 million in a joint venture which owns eight shopping
malls and 50% of another shopping mall. The registrant's Management Company
manages and leases the joint venture shopping malls. The registrant's portfolio
is diversified by type of property, geographical location, tenant mix and rental
market. As of December 31, 1996, the registrant owned (in fee or pursuant to
long-term groundleases under which the registrant is lessee) 13 shopping malls,
nine apartment complexes, six office properties and a 1,100-car parking garage
and a 300-car parking facility, as well as other miscellaneous properties (see
Item 2 - Properties).
Currently, the registrant intends to concentrate its portfolio in
retail and apartment properties while investments in office buildings will be
de-emphasized. Although not presently seeking new mortgage investments, except
when needed in the disposition of the registrant's office portfolio, the
registrant intends to hold two of its three mortgage investments to maturity. In
February 1997, the registrant accepted a payment of $16.2 million cash and a
$1.8 million note for the other mortgage investment.
All of the registrant's shopping malls compete for tenants on the basis
of the rent charged and location, and encounter competition from other retail
properties in their respective market areas, and some of the registrant's
shopping malls compete with other shopping malls in the environs. However, the
principal competition for the registrant's shopping malls may come from future
shopping malls locating in their market areas and from mail order and electronic
retailers. In three markets in which the registrant competes, overbuilding of
retail projects has caused occupancy levels to be negatively impacted.
Additionally, the overall economic health of retail tenants impacts the
registrant's shopping malls. Due to the overbuilding of retail space and a
demand for large, open area, administrative service space in Denver, CO, the
registrant has repositioned a former retail mall into an office property during
1995.
The registrant's apartment complexes compete with other apartments and
residential housing in the immediate areas in which they are located and may
compete with apartments and residential housing constructed in the same areas in
the future.
The registrant's office properties compete for tenants principally with
office buildings throughout the respective areas in which they are located. In
most areas where the registrant's office buildings are located competition for
tenants has been and continues to be intense on the basis of rent, location and
age of the building. High vacancy rates in the cities in which the registrant
has properties and the age of the registrant's office properties continue to
negatively impact the registrant's occupancy rates and its ability to raise
rental rates. Additionally, these factors also impact the ability of the
registrant to dispose of its office properties.
3
<PAGE> 4
The registrant's parking facilities compete with other parking
facilities in the immediate areas in which they are located and may compete with
new parking facilities constructed in the same areas in the future.
The registrant's mortgage investments are collateralized by an office
building, shopping mall, partnership units of another public real estate
investment trust and an apartment complex. Risks inherent with the registrant's
portfolio are applicable to the collateral securing the mortgage investments.
These risks may impair the realizability of the mortgage investments.
The registrant also experiences considerable competition when
attempting to acquire equity interests in desirable real estate at operating
yields below the registrant's cost of funds. As prices for real estate
acquisitions continue to firm, purchasing properties at substantial yields above
the registrant's cost of funds requires the registrant to assume an increased
level of risk. The competition is provided by other real estate investment
trusts, insurance companies, private pension plans and private developers.
Additionally, the registrant's credit rating and leverage affect its competitive
position in the public debt and equity markets.
The federal government and a number of states have adopted handicapped
facilities and energy laws and regulations relative to the development and use
of real estate. Such laws and regulations may operate to reduce the number and
attractiveness of investment opportunities available to the registrant. The
registrant has reviewed the properties which it owns or in which it has a
leasehold interest to determine the extent and amount of capital expenditures to
comply with the requirements for handicapped facilities. While the registrant is
making and will continue to make modifications to the properties which it owns,
the expenditures are not expected to be material. The registrant is not aware of
any other requirements to make capital expenditures to comply with such laws and
regulations. Other effects upon the registrant's investments which result from
the application of such laws and regulations cannot be predicted.
Additionally, under various federal, state and local laws, ordinances
and regulations, an owner of real estate generally is liable for the costs of
removal or remediation of certain hazardous or toxic substances located on or
in, or emanating from, its property, as well as related costs of investigation
and property damage. These laws often impose such liability without regard to
whether the owner knew of, or was responsible for, the presence of such
hazardous or toxic substances. The presence of such substances, or the failure
to properly remediate such substances, may adversely affect the registrant's
ability to sell or lease a property or to borrow using such real estate as
collateral. Other federal and state laws require the removal or encapsulation of
asbestos-containing material in poor condition in the event of remodeling or
renovation. Other statutes may require the removal of underground storage tanks
that are out of service or out of compliance.
Certain environmental laws impose liability on a previous owner of
property to the extent that hazardous or toxic substances were present during
the prior ownership period. A transfer of the property does not relieve an owner
of such liability. Thus, the registrant may have liability with respect to
properties previously sold but is not aware of any such liability.
Prior to undertaking major transactions, the registrant has hired
independent environmental experts to review specific properties. Thirteen
properties have been reviewed and no significant environmental hazards have been
uncovered. The registrant has no reason to believe that any environmental
contamination or violation of any applicable law, statute, regulation or
ordinance governing hazardous or toxic substances has occurred or is occurring.
However, no assurance can be given that hazardous or toxic substances are not
located on any of the properties. The registrant will also endeavor to protect
itself from acquiring contaminated properties or properties with significant
compliance problems by obtaining site assessments and property reports at the
time of acquisition when it deems such investigations to be appropriate. There
is no guarantee, however, that these measures will successfully insulate the
registrant from all such liabilities.
The number of persons employed by the registrant is 47.
4
<PAGE> 5
ITEM 2. PROPERTIES
The following table sets forth certain information relating to the
registrant's investments at December 31, 1996:
<TABLE>
<CAPTION>
Square Year
Date of Ownership feet(1) Occupancy construction
Direct equity investments Location acquisition percentage (000) rate(2) completed
- - ------------------------- -------- ----------- ---------- ------- --------- -----------
<S> <C> <C> <C> <C> <C>
Shopping Malls:
Eastern
- - -------
Mountaineer Morgantown, WV 1/29/78 100% 676(4) 89% 1975
Fingerlakes Auburn, NY 9/28/81 100 404 86 1980
Fairgrounds Square Reading, PA 9/30/81 100 737(6) 96 1980
Wilkes (8) Wilkesboro, NC 5/04/83 100 359 70 1982
Crossroads (21) St. Cloud, MN 1/01/72 100 734(9) 98 1966
Two Rivers Clarksville, TN 9/26/75 100 233 48 1968
Crossroads Fort Dodge, IA 4/22/77 100 427(11) 96 1967
Westgate Towne Centre Abilene, TX 4/22/77 100 386(12) 36(13) 1962
Kandi Willmar, MN 3/12/79 100 451 88 1973
Woodland Commons Buffalo Grove, IL 4/03/95 100 171 99 1991
Western
- - -------
Valley North Wenatchee, WA 8/30/73 100 171 91 1966
Mall 205 Portland, OR 3/01/75 100 432(14) 97 1970
Plaza 205 Portland, OR 4/26/78 100 167 100 1970
Valley Yakima, WA 5/01/80 100 426(15) 93 1972
Apartments:
Midwestern
- - ----------
Somerset Lakes Indianapolis, IN 11/10/88 100 360 units 97 1975
Meadows of Catalpa Dayton, OH 7/11/89 100 323 units 94 1972
Steeplechase Cincinnati, OH 6/30/95 100 272 units 94 1987
Hunters Creek Cincinnati, OH 12/11/96 100 146 units 97 1980
Southern
- - --------
Briarwood Fayetteville, NC 6/30/91 100 273 units 89 1968-70
Woodfield Gardens Charlotte, NC 6/30/91 100 132 units 94 1974
Windgate Place Charlotte, NC 6/30/91 100 196 units 96 1974-78
Walden Village Atlanta, GA 6/01/92 100 380 units 91 1973
Beech Lake Durham, NC 8/19/94 100 345 units 87 1986
<CAPTION>
Mortgage Loans
------------------------------------------------------------------
Balance Principal
Total Original at repayment
cost balance(s) 12/31/96 for 1997 Interest Year of
Direct equity investments (000) (000) (000) (000) rate maturity
- - ------------------------- ------- --------- --------- --------- -------- --------
Shopping Malls:
Eastern
- - -------
<S> <C> <C> <C> <C> <C> <C>
Mountaineer $33,358 $14,447(3) $ 8,088(5) $ 980(5) --%(5) --(5)
Fingerlakes 27,178 -- -- -- -- --
Fairgrounds Square 41,545 -- --(7) -- -- --
Wilkes (8) 18,730 -- -- -- -- --
Crossroads (21) 31,724 50,300(3) 49,551(10) 705(10) --(10) --(10)
Two Rivers 8,394 -- -- -- -- --
Crossroads 12,704 -- --(7) -- -- --
Westgate Towne Centre 9,724 -- -- -- -- --
Kandi 20,427 -- --(7) -- -- --
Woodland Commons 21,997 12,000(3) 11,948 220 7.750 2006
------- ------ ------ ------
225,781 76,747 69,587 1,905
------- ------ ------ ------
Western
- - -------
Valley North 4,318 -- -- -- -- --
Mall 205 13,813 -- -- -- -- --
Plaza 205 4,477 1,716 451 148 8.500 1999
Valley 12,339 -- -- -- -- --
------ ------ ------ -----
34,947 1,716 451 148
------- ------ ------ -----
260,728 78,463 70,038 2,053
------- ------ ------ -----
Apartments:
Midwestern
- - ----------
Somerset Lakes 20,544 15,000(3) 14,863 218 7.650 2006
Meadows of Catalpa 10,500 8,000(3) 7,716 83 8.750 2002
Steeplechase 12,046 9,000(3) 8,915 136 7.395 2006
Hunters Creek 5,493 -- -- -- -- --
------ ------ ------ ---
48,583 32,000 31,494 437
------ ------ ------ ---
Southern
- - --------
Briarwood 8,306 2,542 --(7) -- -- --
Woodfield Gardens 3,773 1,074 786 69 8.875 2005
Windgate Place 6,184 1,794 1,369(16) 103(16) --(16) --(16)
Walden Village 13,933 -- --(7) -- -- --
Beech Lake 19,849 12,500(3) 12,348 176 6.869 2005
------ ------ ------ ---
52,045 17,910 14,503 348
------ ------ ------ ---
100,628 49,910 45,997 785
------- ------ ------ ---
</TABLE>
5
<PAGE> 6
ITEM 2. PROPERTIES
-CONTINUED
<TABLE>
<CAPTION>
Square Year
Date of Ownership feet(1) Occupancy construction
Direct equity investments Location acquisition percentage (000) rate(2) completed
- - ------------------------- -------- ----------- ---------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Office Buildings:
Midwestern
- - ----------
55 Public Square Cleveland, OH 1/15/63 100% 397 94% 1959
Circle Tower Indianapolis, IN 10/16/74 100 102 80 1930
Southern
- - --------
Henry C. Beck Shreveport, LA 8/30/74 100 186 83 1958
Landmark Towers Oklahoma City, OK 10/01/77 100 257 89 1967-71
Western
- - -------
North Valley
Technical Center (17) Denver, CO 12/03/69 100 454 60 1967
Peach Tree Center Marysville, CA 12/19/79 100 436 50(18) 1972
Other:
Land-Huntington Bldg Cleveland, OH 10/25/61 100(19) -- -- ---
Parking Garage Cleveland, OH 12/31/75 100 1,100 spcs. -- 1969
Parking Facility Cleveland, OH 9/19/77 100 300 spcs. -- ---
<CAPTION>
Mortgage Loans
--------------------------------------------------------------
Balance Principal
Total Original at repayment
cost balance(s) 12/31/96 for 1997 Interest Year of
Direct equity investments (000) (000) (000) (000) rate maturity
- - ------------------------- ------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Office Buildings:
Midwestern
- - ----------
55 Public Square $31,894 $ -- $ ---(7) $-- --% --
Circle Tower 4,125 -- -- -- -- --
------ --------- ----- ----
36,019 -- -- --
------ --------- ----- ----
Southern
- - --------
Henry C. Beck 8,411 -- -- -- -- --
Landmark Towers 15,624 2,909 555 307 8.375 1998
------ --------- ----- ----
24,035 2,909 555 307
------ --------- ----- ----
Western
- - -------
North Valley
Technical Center (17) 17,601 2,037 336 156 7.750 1999
Peach Tree Center 13,625 -- -- -- -- --
------ ---------- ----- ----
31,226 2,037 336 156
------ ---------- ----- ----
91,280 4,946 891 463
------ ---------- ----- ----
Other:
Land-Huntington Bldg 4,501 -- -- -- -- --
Parking Garage 7,021 9,300(3) 8,698 238 8.550 2014
Parking Facility 2,409 -- -- -- -- --
-------- -------- -------- -------
13,931 9,300 8,698 238
-------- -------- -------- -------
466,567 142,619 125,624 3,539
Reserve for unrealized loss
on carrying value of real
estate (20) (7,004) --- --- ---
Senior debt underlying
wraparound mortgage loan
investments --- --- 3 ,444 324
-------- -------- -------- -------
Total equity investments $459,563 $142,619 $129,068 $ 3,863
======== ======== ======== =======
</TABLE>
6
<PAGE> 7
(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.
(2) Occupancy rates shown are as of December 31, 1996, and are based on the
total square feet at each property, except apartments which are based on
the number of units and average occupancy during the year.
(3) The registrant obtained mortgages on the following properties subsequent to
acquisition: Meadows of Catalpa Apartments in the amount of $8,000,000 in
1992; Huntington Parking Garage in the amount of $9,300,000 in 1993;
Mountaineer Mall in the amount of $4,600,000 in 1994; Crossroads Shopping
Center (St. Cloud, MN) in the amount of $50,300,000 in 1995; Woodland
Commons in the amount of $12,000,000 in 1996; Somerset Lakes in the amount
of $15,000,000 in 1996; Steeplechase in the amount of $9,000,000 in 1996;
Beech Lake in the amount of $12,500,000 in 1996.
(4) The total mall contains 676,000 square feet; the registrant owns 618,000
square feet, the balance being ground leased to Giant Eagle Markets, Inc.
(5) This property has two mortgages. Interest rates are 9.10% and 8.25%. The
mortgages mature in 2001 and 2009, respectively. The 9.10% mortgage, in the
principal amount of $3,936,000, has a principal payment for 1997 of
$780,000. The 8.25% mortgage, in the principal amount of $4,152,000, has a
principal payment for 1997 of $200,000.
(6) The total mall contains 737,000 square feet; the registrant owns 536,000
square feet, the balance being separately ground leased to Boscov
Department Store, Inc.
(7) These properties are the collateral for the registrant's $90 million
revolving line of credit.
(8) The registrant sold this property in January 1997.
(9) The total mall contains 734,000 square feet; the registrant owns 625,000
square feet, the balance being separately owned by Target Stores.
(10) This property has two mortgages. Interest rates are 7% and 7.485%. The
mortgages mature in 2000 and 2002, respectively. The 7% mortgage, in the
principal amount of $692,000 has a principal repayment for 1997 of $65,000.
The 7.485% mortgage, in the principal amount of $48,859,000, has a
principal repayment for 1997 of $640,000.
(11) The total mall contains 427,000 square feet; the registrant owns 327,000
square feet, the balance being separately owned by an unrelated third party
with Sears, Roebuck and Co. as tenant.
(12) The total mall contains 386,000 square feet; the registrant owns 291,000
square feet, the balance being separately owned by Montgomery Ward & Co.,
Incorporated.
(13) Highly competitive market conditions have made leasing space difficult. The
registrant continues to seek tenants and alternative retail strategies for
this property.
(14) The total mall contains 432,000 square feet; the registrant owns 255,000
square feet, the balance being separately owned by Montgomery Ward
Development Corporation.
(15) The total mall contains 426,000 square feet; the registrant owns 308,000
square feet, the balance being separately ground leased to Sears, Roebuck
and Co.
(16) This property has two mortgages. Interest rates are 8.875% and 9.375%. The
mortgages mature in 2005 and 2007, respectively. The 8.875% mortgage in the
principal amount of $760,000 has a principal repayment for 1996 of $67,000.
The 9.375% mortgage, in the principal amount of $609,000, has a principal
repayment for 1996 of $36,000.
(17) North Valley Technical Center was repositioned from a shopping mall to an
office property during 1995.
7
<PAGE> 8
(18) 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 December 31, 1996.
The Trust is pursuing a mixed use strategy for this former retail facility.
(19) The registrant has ground leased the land until October 30, 2011, with
seven, 10-year renewal options.
(20) In December 1995, the registrant recorded a $14 million unrealized loss on
the carrying value of assets identified for disposition. Subsequent to the
disposition of three office buildings, this reserve was $7,004,000 as of
December 31, 1996.
(21) This property represents 11.5% of gross revenues of the registrant. The
property is located in St. Cloud, MN, which is approximately 55 miles
northwest from Minneapolis, MN. St. Cloud has a population of 170,000. The
property is a regional, enclosed retail center of 734,000 square feet, of
which 625,000 square feet is owned in fee. The retail center was renovated
in 1995. Also, the mall is the only regional, enclosed mall in its primary
trade area. The competition for the mall are power strip centers in the
primary trade area. Additionally, the mall represents 44% of the retail
square feet of its primary trade area.
<TABLE>
<CAPTION>
MORTGAGE SECURED BY THE PROPERTY
- - --------------------------------
<S> <C> <C> <C>
LOAN 1
- - ------
Original amount $49,500,000 Due Date 11/28/02
Interest rate 7.485% Amortization period 27 years
Annual Debt Service $4,275,238 Amount due at maturity $44,354,533
LOAN 2
- - ------
Original amount $800,000 Due Date 02/15/2000
Interest rate 7% Amortization period 10 years
Annual Debt Service $111,464 Amount due at maturity $478,385
</TABLE>
TENANTS OCCUPYING GREATER THAN 10% OR MORE OF THE
- - -------------------------------------------------
RENTABLE SQUARE FOOTAGE OF MALL
- - -------------------------------
<TABLE>
<CAPTION>
MINIMUM LEASE EXPIRATION
SQUARE RENT PER EXPIRATION OF LAST OPTION
TENANT FEET SQUARE FOOT DATE PERIOD
------ ---- ----------- ---- ------
<S> <C> <C> <C> <C>
Dayton Hudson Corporation 100,000 a) Jan-27 n/a
Sears Roebuck & Company 79,859 a) May-00 May-10
Dayton Hudson Corporation 108,162 b) Jul-41 n/a
(DBA Target)
JC Penney Co. Inc. 167,652 $1.12 Jan-01 Jan-11
<FN>
a) Tenant pays percentage rent in lieu of minimum rent.
b) Tenant owns its space.
</TABLE>
OCCUPANCY OF CROSSROADS - ST. CLOUD FOR LAST 5 YEARS
- - ----------------------------------------------------
1992 99%
1993 99%
1994 98%
1995 97%
1996 98%
8
<PAGE> 9
BASE MINIMUM RENT PER SQUARE FOOT OF OWNED MALL EXCLUDING ANCHOR TENANTS FOR
- - ----------------------------------------------------------------------------
THE LAST 5 YEARS
- - ----------------
PER SQUARE FOOT
1992 $14.84
1993 15.09
1994 16.31
1995 17.95
1996 18.91
LEASE EXPIRATIONS FOR THE NEXT 10 YEARS
- - ---------------------------------------
<TABLE>
<CAPTION>
# OF TENANTS SQUARE FEET BASE MINIMUM RENT % OF ANNUAL BASE
EXPIRING EXPIRING AMOUNT PER SQUARE FOOT RENT AS OF 12/31/96
-------- -------- ------ --------------- -------------------
<C> <C> <C> <C> <C> <C>
1997 21 32,107 $552,752 $17.21 11%
1998 12 18,358 388,634 21.16 7%
1999 15 24,450 512,131 20.94 10%
2000 15 23,078 519,888 22.52 10%
2001 18 47,994 784,615 16.34 15%
2002 11 29,391 476,856 16.22 9%
2003 7 18,744 492,681 26.28 9%
2004 4 7,404 144,511 19.51 2%
2005 9 20,199 419,677 20.78 8%
2006 7 25,917 550,883 21.25 10%
<CAPTION>
DEPRECIATION OF PROPERTY BOOK BASIS TAX BASIS LIFE METHOD
- - ------------------------ ---------- --------- ---- ------
<S> <C> <C> <C> <C>
Building $ 8,302,000 $ 8,674,000 40 yrs Straight line
Building improvements 14,904,000 13,972,000 40 yrs Straight line
Tenant improvements 2,726,000 2,596,000 40 yrs Straight line
Lease costs and equipment 740,000 637,000 10 yrs Straight line
</TABLE>
PROPERTY TAX RATE
- - -----------------
$.06 per $1.00 of assessed value. 1996 property taxes were $1,983,606.
As of December 31, 1996, the registrant owned in fee its interests in
Crossroads Center (St. Cloud, MN), Woodland Commons, Mall 205, Crossroads Mall
(Ft. Dodge, IA), Westgate Towne Centre, Mountaineer Mall, Plaza 205, Valley
Mall, Fingerlakes Mall, Fairgrounds Square Mall, Wilkes Mall, 55 Public Square
Building, Henry C. Beck Building, Landmark Towers, Peach Tree Center, Somerset
Lakes Apartments, Meadows of Catalpa Apartments, Briarwood Apartments, Woodfield
Gardens Apartments, Windgate Place Apartments, Walden Village Apartments, Beech
Lake Apartments, Steeplechase Apartments, Hunter's Creek Apartments, Land -
Huntington Building and the Parking Facility. The registrant holds a leasehold
estate or estates, or a fee interest and one or more leasehold estates in Valley
North Mall, Two Rivers Mall, Kandi Mall, Circle Tower Building and North Valley
Technical Center.
9
<PAGE> 10
RENTALS FROM NET LEASES
The following table sets forth the rentals payable to the registrant
for the year ended December 31, 1996, under net leases of the properties
indicated:
<TABLE>
<CAPTION>
ANNUAL
PROPERTY BASE RENT PERCENTAGE RENTS
- - -------- --------- ----------------
<S> <C> <C>
SHOPPING MALLS:
EASTERN
- - -------
Mountaineer (1) $ 705,000 45% of gross receipts in excess
of $1,506,000
Fingerlakes (1) 968,000 40% of gross receipts in excess
of $2,505,000
Fairgrounds Square (1) 3,150,000 55% of gross receipts in excess
of $3,944,000
Wilkes (1) 507,000 55% of gross receipts in excess
of $931,000
Crossroads
(St. Cloud, MN.) (1) 3,300,000 60% of gross receipts in excess
of $4,868,000(2)
Two Rivers (1) --- 5% of gross receipts
Crossroads
(Ft. Dodge, IA) (1) 736,000 55% of gross receipts in excess
of $1,302,000
Westgate Towne Centre (1) --- 10% of gross receipts
Kandi (1) 712,000 45% of gross receipts in excess
of $1,631,000
Woodland Commons (1) 1,500,000 25% of gross receipts in excess
of $1,280,000
WESTERN
- - -------
Valley North (1) 543,000 55% of gross receipts in excess
of $976,000
Mall 205 (1) 1,232,000 55% of gross receipts in excess
of $2,146,000
Plaza 205 (1) 276,000 60% of gross receipts in excess
of $463,000
Valley (1) 463,000 50% of gross receipts in excess
of $898,000
APARTMENTS:
MIDWESTERN
- - ----------
Somerset Lakes (1) $971,000 55% of gross receipts in excess
of $1,744,000
Meadows of Catalpa (1) 900,000 35% of gross receipts in excess
of $2,300,000
Steeplechase (1) 800,000 50% of gross receipts in excess
of $1,170,000
Hunter's Creek (1) 500,000 20% of gross receipts in excess
of $900,000
SOUTHERN
- - --------
Briarwood (1) 335,000 35% of gross receipts in excess
of $1,000,000
Woodfield Gardens (1) 100,000 20% of gross receipts in excess
of $500,000
Windgate Place (1) 135,000 20% of gross receipts in excess
of $700,000
Walden Village (1) 850,000 55% of gross receipts in excess
of $1,545,000
Beech Lake (1) 955,000 55% of gross receipts in excess
of $1,548,450
</TABLE>
10
<PAGE> 11
<TABLE>
<CAPTION>
ANNUAL
PROPERTY BASE RENT PERCENTAGE RENTS
- - -------- --------- ----------------
<S> <C> <C>
OFFICE BUILDINGS:
MIDWESTERN
- - ----------
55 Public Square (1) $1,500,000 40% of gross receipts in excess
of $3,400,000 (3)
Circle Tower (1) 189,000 25% of gross receipts in excess
of $709,000
SOUTHERN
- - --------
Henry C. Beck (1) 179,000 25% of gross receipts in excess
of $784,000
Landmark Towers East (1) 75,000 15% of gross receipts in excess
of $500,000
Landmark Towers Center (1) 75,000 15% of gross receipts in excess
of $408,000
Landmark Towers West (1) 75,000 15% of gross receipts in excess
of $347,000
WESTERN
- - -------
North Valley Technical Center (1) 50,000 5% of gross receipts in excess
of $1,000,000
Peach Tree Center (1) 292,000 45% of gross receipts in excess
of $672,000
OTHER:
Land-Huntington Building 170,000 First $130,000 plus 50% of all
additional rental, as defined,
received by registrant as landlord
under a net lease of the building
and improvements situated on
the land
Parking Garage (1) 800,000 70% of gross receipts in excess
of $1,168,000
Parking Facility (1) 217,000 70% of gross receipts in excess
of $416,000
<FN>
(1) Leased to the Management Company.
(2) An additional net lease for the Stearns County Building, which is part of the
Crossroads, St. Cloud, MN mall, provides for a base rent of $14,000.
(3) An additional net lease for the 55 Public Square Building garage provides
for a base rent of $331,000 and a percentage rent of 70% of gross receipts
in excess of $537,000.
</TABLE>
11
<PAGE> 12
ITEM 3. LEGAL PROCEEDINGS.
REGISTRANT VS. THE STATE OF CALIFORNIA
The registrant has pursued legal action against the State of California
associated with the 1986 flood of Peach Tree Mall. In September 1991, the court
ruled in favor of the registrant on the liability portion of this inverse
condemnation suit, which the State of California appealed. The registrant is
proceeding with its damage claim in Superior Court of the State of California.
No recognition of potential income has been made in the December 31, 1996
Combined Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET PRICE AND DIVIDEND RECORD.
"Market Price and Dividend Record" presented on page 1 of Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA.
"Selected Financial Data" presented on page 2 and 3 of Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" presented on pages 18 through 22 of Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS.
The "Combined Balance Sheets" as of December 31, 1996 and 1995, and the
"Combined Statements of Income, Combined Statements of Changes in Cash, Combined
Statements of Shareholders' Equity" for the years ended December 31, 1996, 1995
and 1994, of the registrant, "Notes to Combined Financial Statements" and
"Report of Independent Public Accountants" are presented on pages 4 through 17
of Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
12
<PAGE> 13
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(A) DIRECTORS.
"Election of Trustees" presented on pages 2 through 6 of registrant's
1997 Proxy Statement is incorporated herein by reference.
(B) EXECUTIVE OFFICERS.
<TABLE>
<CAPTION>
PERIOD
OF
NAME AGE POSITIONS, OFFICES AND BUSINESS EXPERIENCE SERVICE
---- --- ------------------------------------------ -------
<S> <C> <C>
James C. Mastandrea 53 Chairman, President and Chief Executive Officer since 1993 to date
February 1997. Chairman, President, Chief Executive
Officer and Chief Financial Officer from February 1996
to January 1997. Chairman, President and Chief
Executive Officer from January 1994 to January 1996.
President and Chief Operating Officer from July 1993 to
December 1993. President and Chief Executive Officer
of Triam Corporation, Chicago, Illinois, an investment
adviser to various real estate investment funds, from
1991 to 1993. Chairman, President and Chief Executive
Officer of Midwest Development Corporation, Buffalo
Grove, Illinois from 1978 to 1991. Served in various
capacities in the field of commercial and real estate
lending from 1971 to 1978, including Vice President of
Continental Bank, Chicago, Illinois, and with Mellon
Bank, Pittsburgh, Pennsylvania.
Paul F. Levin 50 Senior Vice President, General Counsel and Secretary 1989 to date
since December 1994. Vice President, General Counsel
and Secretary from May 1989 to November 1994.
Principal of Schwarzwald, Robiner, Rock & Levin, a
Legal Professional Association, from 1981 to 1989.
Associate of Gaines, Stern, Schwarzwald & Robiner Co.,
L.P.A. from 1979 to 1980. Assistant Director of Law,
City of Cleveland, Ohio, from 1975 to 1978.
John J. Dee 45 Senior Vice President and Chief Accounting Officer 1978 to date
since February 1996. Senior Vice President and
Controller from July 1992 to February 1996. Vice
President and Controller from December 1986 to July
1992, Controller from April 1981 to December 1986,
Assistant Controller from December 1979 to April 1981,
Accounting Manager from August 1978 to December 1979.
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
<S> <C> <C>
Steven M. Edelman 42 Executive Vice President-Chief Financial Officer since 1980 to date
February 1997. Executive Vice President, Chief
Investment Officer from January 1996 to January 1997.
Senior Vice President, Chief Investment Officer from
March 1995 to December 1995. Senior Vice President,
Asset Management from July 1992 to February 1995. Vice
President, Acquisitions from December 1985 to June
1992. Assistant Vice President, Acquisitions from
January 1985 to November 1985. Acquisition Analyst
from February 1984 to December 1985. Assistant
Controller from July 1982 to January 1984. Internal
Auditor from June 1980 to June 1982. Auditor with
Touche Ross & Co. from 1978 to 1980.
Thomas T. Kmiecik 38 Senior Vice President, Treasurer since January 1996, 1984 to date
Vice President, Treasurer from January 1994 to December
1995. Treasurer from May 1989 to December 1993.
Assistant Controller from March 1984 to April 1989,
Senior Auditor with Arthur Young from 1980 to 1984.
</TABLE>
ITEM 11. EXECUTIVE COMPENSATION.
- - -------- -----------------------
"Compensation of Trustees" and "Executive Compensation", presented on page
6 and pages 11 through 16, respectively, of registrant's 1997 Proxy Statement
are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
- - -------- ---------------------------------------------------------------
"Security Ownership of Trustees, Officers and Others" presented on pages 9
and 10 of registrant's 1997 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
- - -------- -----------------------------------------------
"Certain Relationships and Related Transactions" presented on page 10 of
registrant's 1997 Proxy Statement is incorporated herein by reference.
14
<PAGE> 15
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(A) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) FINANCIAL STATEMENTS:
Combined Balance Sheets - December 31, 1996 and 1995 on page 4
of Exhibit 13.
Combined Statements of Income - For the Years Ended December
31, 1996, 1995 and 1994 on page 5 of Exhibit 13.
Combined Statements of Changes in Cash - For the Years Ended
December 31, 1996, 1995 and 1994 on page 6 of Exhibit 13.
Combined Statements of Shareholders' Equity - For the Years
Ended December 31, 1996, 1995 and 1994 on page 7 of Exhibit
13.
Notes to Combined Financial Statements on pages 8 to 16 of
Exhibit 13.
Report of Independent Public Accountants on page 17 of Exhibit
13.
(2) FINANCIAL STATEMENT SCHEDULES:
Report of Independent Public Accountants on Financial
Statement Schedules.
Schedule III - Real Estate and Accumulated Depreciation.
Schedule IV - Mortgage Loans on Real Estate.
All Schedules, other than III and IV, are omitted, as the
information is not required or is otherwise furnished.
(B) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO
<S> <C> <C>
(3)(a) Declaration of Trust of Registrant dated August 1, 1961, as Registration Statement on Form S-3
amended through July 25, 1986 No. 33-4493
(3)(b) By-laws of Registrant, as amended Registration Statement on Form S-3
No. 33-4493
(4)(a) Form of certificate for Shares of Beneficial Interest Registration Statement on Form S-3
No. 33-2818
(4)(b) Form of Indenture governing Debt Securities, dated February 1, Registration Statement on Form S-3
1983 between Registrant and Ameritrust Company No. 2-81605
(4)(c) Form of Debt Security Registration Statement on Form S-3
No. 33-4493
(4)(d) Form of Indenture governing Debt Securities, dated October 1, Registration Statement on Form S-3
1993 between Registrant and Society National Bank No. 33-68002
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO
<S> <C> <C>
(4)(e) Form of Note Registration Statement on Form S-3
No. 33-68002
(4)(f) Form of Indenture governing Debt Securities Registration Statement on Form S-3
No. 333-00953
(4)(g) Rights Agreement between Registrant and National City Bank dated Form 8-A dated March 30, 1990 No.
March 7, 1990 0-18411
(10)(a) Share Purchase Agreement dated as of December 31, 1989 between Registration Statement No. 2-88719
registrant and First Union Management, Inc.
(10)(b) First Amendment to Share Purchase Agreement dated as of December Registration Statement No. 33-2818
10, 1985 between registrant and First Union Management, Inc.
(10)(c) Second Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-11524
December 9, 1986 between registrant and First Union Management,
Inc.
(10)(d) Third Amendment to Share Purchase Agreement dated as of December Registration Statement No. 33-19812
2, 1987 between registrant and First Union Management, Inc.
(10)(e) Fourth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-26758
December 7, 1988 between registrant and First Union Management,
Inc.
(10)(f) Fifth Amendment to Share Purchase Agreement dated as of November Registration Statement No. 33-33279
29, 1989 between registrant and First Union Management, Inc.
(10)(g) Sixth Amendment to Share Purchase Agreement dated as of November Registration Statement No. 33-38754
28, 1990 between registrant and First Union Management, Inc.
(10)(h) Seventh Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-45355
November 27, 1991 between registrant and First Union Management,
Inc.
(10)(i) Eighth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-57756
November 30, 1992 between registrant and First Union Management,
Inc.
(10)(j) Employment and Consulting Agreement with Donald S. Schofield 1991 Form 10-K
dated September 1, 1991
(10)(k) Employment Agreement with James C. Mastandrea dated July 13, 1994 June 30, 1994 Form 10-Q
(10)(l) Employment Agreement with Gregory D. Bruhn dated July 13, 1994 June 30, 1994 Form 10-Q
(10)(m) Credit Agreement with National City Bank dated December 5, 1994 1994 Form 10-K
(10)(n) Credit Agreement with Society National Bank dated March 4, 1996 1995 Form 10-K
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO
<S> <C> <C>
(10)(o) 1981 Employee Share Option Plan 1992 Proxy Statement
(10)(p) 1994 Long Term Incentive Performance Plan 1994 Proxy Statement
(10)(q) Bank Credit Agreement dated September 30, 1996 September 30, 1996 Form 10-Q
(11) Statements Re: Computation of Per Share Earnings
(12) Statements of Ratios of Combined Income from Operations and
Combined Net Income to Fixed Charges
(13) 1996 Annual Report
(23) Consent of Independent Public Accountants
(24) Powers of Attorney
(27) Financial Data Schedule
</TABLE>
(C) REPORTS ON FORM 8-K.
- - --- --------------------
DATE SUBJECT
---- -------
June 12, 1996 Joint venture investment in nine shopping
malls.
October 24, 1996 Sale of 2,300,000 preferred shares of
beneficial interest.
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS
By: /s/ James C. Mastandrea
------------------------------
James C. Mastandrea, Chairman,
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
Principal Executive Officer Chairman, President, March 21, 1997
and Chief Executive
Officer
/s/ James C. Mastandrea
- - ---------------------------
James C. Mastandrea
Principal Financial Officer Executive Vice President- March 21, 1997
Chief Financial Officer
/s/ Steven M. Edelman
- - ---------------------------
Steven M. Edelman
Principal Accounting Senior Vice President- March 21, 1997
Officer Chief Accounting
Officer
/s/ John J. Dee
- - ---------------------------
John J. Dee
Trustees: ) Date
*Kenneth K. Chalmers )
)
*William E. Conway ) March 21, 1997
)
*Daniel G. DeVos )
)
*Allen H. Ford )
)
*Russell R. Gifford )
)
*Spencer H. Heine )
)
*E. Bradley Jones )
)
*Herman J. Russell )
)
*James C. Mastandrea )
)
)
SIGNATURE )
---------
)
*By: /s/ Paul F. Levin )
)
Paul F. Levin, Attorney-in-fact )
18
<PAGE> 19
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
-------------------------------------------
FINANCIAL STATEMENT SCHEDULES
-----------------------------
To First Union Real Estate Equity
and Mortgage Investments:
We have audited in accordance with generally accepted auditing
standards, the combined financial statements included in the registrant's 1996
Annual Report included as Exhibit 13 of this form 10-K and have issued our
report thereon dated February 5, 1997. Our audit was made for the purpose of
forming an opinion on those combined statements taken as a whole. The schedules
listed under Item 14(a)(2) on page 15 are the responsibility of management and
are presented for purposes of complying with the Securities and Exchange
Commission's rules and are not part of the basic combined financial statements.
These schedules have been subjected to the auditing procedures applied in the
audit of the basic combined financial statements and, in our opinion, fairly
state in all material respects the financial data required to be set forth
therein in relation to the basic combined financial statements taken as a whole.
Cleveland, Ohio,
February 5, 1997.
19
<PAGE> 20
Schedule III
------------
REAL ESTATE AND ACCUMULATED DEPRECIATION
----------------------------------------
AS OF DECEMBER 31, 1996
------------------------
(IN THOUSANDS)
--------------
<TABLE>
<CAPTION>
Cost
capitalized
Initial cost to subsequent to
Registrant acquisition
---------- -----------
Buildings Land
Encum- and and
Description brances Land Improvements Improvements
- - ----------------------------------- ------- ---- ------------ ------------
<S> <C> <C> <C> <C>
Shopping Malls:
Eastern
- - -------
Mountaineer, Morgantown, WV $8,088 $1,450 $12,693 $19,215
Fingerlakes, Auburn, NY -- 1,300 23,698 2,180
Fairgrounds Square, Reading, PA -- 2,400 22,635 16,510
Wilkes, Wilkesboro, NC -- 1,168 13,891 3,671
Crossroads, St. Cloud, MN 49,551 1,680 8,303 21,741
Two Rivers, Clarksville, TN -- -- 3,206 5,188
Crossroads, Ft. Dodge, IA -- 1,151 2,792 8,761
Kandi, Willmar, MN -- -- 5,035 15,392
Woodland Commons, Buffalo Grove, IL 11,948 6,744 15,093 160
Westgate Towne Centre, Abilene, TX -- 1,425 3,050 5,249
------ ------ ------- ------
69,587 17,318 110,396 98,067
------ ------ ------- ------
Western
- - -------
Valley North, Wenatchee, WA -- 405 2,916 997
Mall 205, Portland, OR -- 1,228 6,140 6,445
Plaza 205, Portland, OR 451 -- 1,677 2,800
Valley, Yakima, WA -- -- 8,731 3,608
------- ------- -------- --------
451 1,633 19,464 13,850
------- ------- -------- --------
$70,038 $18,951 $129,860 $111,917
======= ======= ======== ========
<CAPTION>
Gross amount at which
carried at close of
period Accumu- Year
--------------------- lated construc-
Buildings and depreci- tion Date
Description Land Improvements Total ation completed Acquired Life
- - ------------------------------------ ---- ------------ ----- ----- --------- -------- ----
Shopping Malls:
Eastern
- - -------
<S> <C> <C> <C> <C> <C> <C> <C>
Mountaineer, Morgantown, WV $1,615 $31,743 $33,358 $8,053 1975 01-29-78 60
Fingerlakes, Auburn, NY 1,370 25,808 27,178 7,875 1980 09-28-81 50
Fairgrounds Square, Reading, PA 2,369 39,176 41,545 7,613 1980 09-30-81 57
Wilkes, Wilkesboro, NC 1,168 17,562 18,730 4,847 1982 05-04-83 50
Crossroads, St. Cloud, MN 5,052 26,672 31,724 6,607 1966 01-01-72 64
Two Rivers, Clarksville, TN -- 8,394 8,394 3,034 1968 09-26-75 50
Crossroads, Ft. Dodge, IA 1,333 11,371 12,704 3,579 1967 04-22-77 57
Kandi, Willmar, MN -- 20,427 20,427 5,959 1973 03-12-79 55
Woodland Commons, Buffalo Grove, IL 6,807 15,190 21,997 538 1991 04-03-95 59
Westgate Towne Centre, Abilene, TX 1,485 8,239 9,724 2,501 1962 04-22-77 60
-------- -------- -------- -------
21,199 204,582 225,781 50,606
-------- -------- -------- -------
Western
- - -------
Valley North, Wenatchee, WA 477 3,841 4,318 2,152 1966 08-30-73 40
Mall 205, Portland, OR 1,228 12,585 13,813 4,824 1970 03-01-75 59
Plaza 205, Portland, OR 695 3,782 4,477 1,413 1970 04-26-78 47
Valley, Yakima, WA 623 11,716 12,339 3,488 1972 05-01-80 54
-------- -------- -------- -------
3,023 31,924 34,947 11,877
-------- -------- -------- -------
$24,222 $236,506 $260,728 $62,483
======== ======== ======== =======
</TABLE>
20
<PAGE> 21
Schedule III
------------
Continued
<TABLE>
<CAPTION>
Initial cost to
Registrant
------------------
Buildings
Encum- and
Description brances Land Improvements
- - ----------------------------------- ------- ---- ------------
<S> <C> <C> <C>
Apartments:
Midwestern
----------
Somerset Lakes, Indianapolis, IN $ 14,863 $ 2,172 $ 16,400
Meadows of Catalpa, Dayton, OH 7,716 1,270 7,955
Hunter's Creek, Cincinnati, OH -- 1,098 4,395
Steeplechase, Cincinnati, OH 8,915 1,782 10,114
------ ----- ------
31,494 6,322 38,864
------ ----- ------
Southern
--------
Briarwood, Fayetteville, NC -- 495 6,614
Woodfield Gardens, Charlotte, NC 786 171 3,087
Windgate Place, Charlotte, NC 1,369 353 4,818
Walden Village, Atlanta, GA -- 2,768 9,288
Beech Lake, Durham, NC 12,348 3,760 15,707
------ ----- ------
14,503 7,547 39,514
------ ----- --------
45,997 13,869 78,378
====== ====== ========
Office Buildings:
Midwestern
----------
55 Public Square, Cleveland OH -- 2,500 19,055
Circle Tower, Indianapolis, IN -- 270 1,609
------ ----- --------
2,770 20,664
====== ===== ========
Southern
--------
Henry C. Beck, Shreveport, LA -- 717 3,906
Landmark Towers, Oklahoma City, OK 555 1,940 7,234
------ ----- --------
555 2,657 11,140
====== ===== ========
Western
-------
North Valley Technical Center,
Denver, CO 336 -- 7,666
Peach Tree Center, Marysville, CA -- 985 3,622
------ ----- --------
336 985 11,288
------ ----- --------
891 6,412 43,092
====== ===== ========
Other:
Land-Huntington Bldg., Cleveland, OH -- 4,501 --
Parking Garage, Cleveland, OH 8,698 1,600 4,407
Parking Facility, Cleveland, OH -- 2,030 --
------ ----- --------
8,698 8,131 4,407
====== ===== ========
Reserve on carrying value of real
estate assets -- -- --
------ ----- --------
Real Estate net carrying value at
December 31, 1996 $125,624 $47,363 $255,737
======== ======= ========
<CAPTION>
Cost
capitalized
subsequent to Gross amount at which
acquisition carried at close of
------------ ----------------------------- Accumu- Year
Land period lated construc-
and Buildings and depreci- tion Date
Description Improvements Land Improvements Total ation completed Acquired Life
- - ---------------------------------- ------------ ---- ------------ ----- ----- --------- -------- ----
Apartments:
Midwestern
----------
Somerset Lakes, Indianapolis, IN $ 1,972 $ 2,172 $ 18,372 $ 20,544 $ 4,312 1975 11-10-88 40
Meadows of Catalpa, Dayton, OH 1,275 1,270 9,230 10,500 2,141 1972 07-11-89 40
Hunter's Creek, Cincinnati, OH -- 1,098 4,395 5,493 6 1980 12-11-96 40
Steeplechase, Cincinnati, OH 150 1,782 10,264 12,046 395 1987 06-30-95 40
-------- ------- --------- --------- --------
3,397 6,322 42,261 48,583 6,854
-------- ------- --------- --------- --------
Southern
--------
Briarwood, Fayetteville, NC 1,197 495 7,811 8,306 1,308 1968-70 06-30-91 40
Woodfield Gardens, Charlotte, NC 515 171 3,602 3,773 676 1974 06-30-91 40
Windgate Place, Charlotte, NC 1,013 353 5,831 6,184 1,151 1974-78 06-30-91 40
Walden Village, Atlanta, GA 1,877 2,768 11,165 13,933 1,518 1973 06-01-92 40
Beech Lake, Durham, NC 382 3,760 16,089 19,849 1,000 1986 08-19-94 40
-------- ------- --------- --------- --------
4,984 7,547 44,498 52,045 5,653
-------- ------- --------- --------- --------
8,381 13,869 86,759 100,628 12,507
======== ======= ========= ========= ========
Office Buildings:
Midwestern
----------
55 Public Square, Cleveland OH 10,339 2,500 29,394 31,894 16,461 1959 01-15-63 63
Circle Tower, Indianapolis, IN 2,246 270 3,855 4,125 2,067 1930 10-16-74 40
-------- ------- --------- --------- --------
12,585 2,770 33,249 36,019 18,528
-------- ------- --------- --------- --------
Southern
--------
Henry C. Beck, Shreveport, LA 3,788 717 7,694 8,411 3,323 1958 08-30-74 51
Landmark Towers, Oklahoma City, OK 6,450 1,940 13,684 15,624 4,581 1967-71 10-01-77 60
-------- ------- --------- --------- --------
10,238 2,657 21,378 24,035 7,904
-------- ------- --------- --------- --------
Western
-------
North Valley Technical Center,
Denver, CO 9,935 -- 17,601 17,601 4,683 1967 12-03-69 60
Peach Tree Center, Marysville, CA 9,018 985 12,640 13,625 3,977 1972 12-19-79 50
-------- ------- --------- --------- --------
18,953 985 30,241 31,226 8,660
-------- ------- --------- --------- --------
41,776 6,412 84,868 91,280 35,092
======== ======= ========= ========= ========
Other:
Land-Huntington Bldg., Cleveland, OH -- 4,501 -- 4,501 -- -- 10-25-61 --
Parking Garage, Cleveland, OH 1,014 1,600 5,421 7,021 2,280 1969 12-31-75 53
Parking Facility, Cleveland, OH 379 2,287 122 2,409 252 -- 09-19-77 10
-------- ------- --------- --------- --------
1,393 8,388 5,543 13,931 2,532
======== ======= ========= ========= ========
Reserve on carrying value of real
estate assets -- -- (7,004) (7,004) --
-------- ------- --------- --------- --------
Real Estate net carrying value at
December 31, 1996 $163,467 $52,891 $406,672 $459,563 $112,614
======== ======= ========= ========= ========
</TABLE>
Aggregate cost for federal tax purposes is $434,641,000.
21
<PAGE> 22
Schedule III
------------
- Continued
The following is a reconciliation of real estate assets and accumulated
depreciation for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
(In thousands)
Years Ended December 31,
----------------------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Asset reconciliation:
Balance, beginning of period $449,560 $436,394 $409,060
Additions during the period:
Property acquisitions 5,491 35,424 20,017
Improvements 19,148 24,713 7,570
Equipment and appliances 1,116 797 787
Reduction in reserve on carrying
value of real estate assets 5,575 --- ---
Deductions during the period:
Sales of real estate (20,385) (27,089) ---
Write-off of internal leasing costs(A) --- ( 8,006) ---
Reserve on carrying value of real
estate assets (12,580) ---
Other - write-off of assets and
certain fully depreciated
tenant alterations ( 942) (93) (1,040)
--------- --------- --------
Balance, end of period $459,563 $449,560 $436,394
======== ======== ========
Accumulated depreciation
reconciliation:
Balance, beginning of period $107,701 $111,972 $101,824
Additions during the period:
Depreciation 12,067 11,038 11,188
Deductions during the period:
Sales of real estate (6,212) (11,535) ---
Write-off of internal leasing costs(A) --- (3,681) ---
Write-off of assets and
certain fully depreciated
tenant alterations ( 942) (93) (1,040)
--------- -------- --------
Balance, end of period $112,614 $107,701 $111,972
======== ======== ========
<FN>
(A) The registrant wrote off the unamortized balance of deferred internal
leasing costs effective January 1, 1995. The registrant currently
recognizes as an expense internal leasing costs in the period incurred.
</TABLE>
22
<PAGE> 23
Schedule IV
-----------
MORTGAGE LOANS ON REAL ESTATE
-----------------------------
AS OF DECEMBER 31, 1996
-----------------------
(IN THOUSANDS, EXCEPT FOR PAYMENT TERMS AND FOOTNOTES)
<TABLE>
<CAPTION>
Current
effective Final
rate on net maturity
Description investment date Periodic payment terms
- - --------------- ----------- -------- -----------------------------
First Mortgage
Loan:
<S> <C> <C> <C>
Secured by 10% 10-31-11 Interest calculated at stated
office building rate of 9.65%, with install-
in Cleveland, OH ments of principal and interest
payable monthly through maturity;
$13,013,000 due at maturity;
prepayment without penalty
subject to certain conditions.
Mortgage Loan:
Secured by mall 9% 1-31-98 Interest calculated at stated
in Fairmount, WV rate of 9%, with installments
and partnership of 8% interest payable monthly
units of Crown through maturity; no prepayment
American without consent of registrant.
Properties, L.P.
Wraparound Mortgage
Loan:
Secured by 13% 11-30-99 Monthly installments of interest
garden payable through November 1999;
apartments difference between interest paid
in Atlanta, GA and interest calculated at the
stated rate of 10% will increase
registrant's equity investment
until January 1998; equity
investment and deferred interest
totaling $22,434,000 due at
maturity; prepayment without
penalty.
Totals, December 31, 1996
<CAPTION>
Face Carrying
amount of amount of Prior Net
Description mortgage mortgage liens investment
- - --------------- --------- --------- ------ ----------
<S> <C> <C> <C> <C>
First Mortgage
Loan:
Secured by $11,387 $19,103 $ --- $19,103
office building
in Cleveland, OH
Mortgage Loan:
Secured by mall 6,000 6,125 --- 6,125
in Fairmount, WV
and partnership
units of Crown
American
Properties, L.P.
Wraparound Mortgage
Loan:
Secured by 18,060 17,038(A) 3,444 13,594
garden
apartments
in Atlanta, GA
------ ------ ------ ------
$35,447 $42,266(B) $ 3,444 $38,822
====== ====== ====== ======
<FN>
(A) The registrant accepted a payment of $16.2 million cash and a $1.8 million
note in February 1997 for this mortgage investment.
(B) Aggregate cost for federal tax purposes is $46,689,000.
</TABLE>
23
<PAGE> 24
Schedule IV
-----------
- Continued
The following is a reconciliation of the carrying amounts of the
mortgage loans outstanding for the years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
(In thousands)
Years Ended December 31,
-----------------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Balance, beginning of period $42,042 $35,761 $35,550
ADDITIONS DURING THE PERIOD:
Mortgage loan on mall in
Fairmount, WV secured by the mall
and partnership units of Crown
American Properties, L.P. 6,000
Deferred interest on:
Wraparound mortgage
on garden apartments in
Atlanta, GA 332 384 357
Mortgage on mall in
Fairmount, WV 68 57
DEDUCTIONS DURING THE PERIOD:
Collection of principal (176) (160) (146)
-------- ------- ------
Balance, end of period $42,266 $42,042 $35,761
====== ====== ======
</TABLE>
24
<PAGE> 25
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO PAGE
------ ----------- ------------ ----
<S> <C> <C> <C>
(3)(a) Declaration of Trust of Registrant dated August 1, 1961, Registration Statement on Form S-3
as amended through July 25, 1986 No. 33-4493 ----
(3)(b) By-laws of Registrant, as amended Registration Statement on Form S-3
No. 33-4493 ----
(4)(a) Form of certificate for Shares of Beneficial Interest Registration Statement on Form S-3
No. 33-2818 ----
(4)(b) Form of Indenture governing Debt Securities, dated Registration Statement on Form S-3
February 1, 1983 between Registrant and Ameritrust Company No. 2-81605 ----
(4)(c) Form of Debt Security Registration Statement on Form S-3
No. 33-4493 ----
(4)(d) Form of Indenture governing Debt Securities, dated Registration Statement on Form S-3
October 1, 1993 between Registrant and Society National No. 33-68002
Bank ----
(4)(e) Form of Note Registration Statement on Form S-3
No. 33-68002 ----
(4)(f) Form of Indenture governing Debt Securities Registration Statement on Form S-3
No. 333-00953 ----
(4)(g) Rights Agreement between Registrant and National City Form 8-A dated March 30, 1990 No.
Bank dated March 7, 1990 0-18411 ----
(10)(a) Share Purchase Agreement dated as of December 31, 1989 Registration Statement No. 2-88719
between registrant and First Union Management, Inc. ----
(10)(b) First Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-2818
December 10, 1985 between registrant and First Union
Management, Inc. ----
(10)(c) Second Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-11524
December 9, 1986 between registrant and First Union
Management, Inc. ----
(10)(d) Third Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-19812
December 2, 1987 between registrant and First Union
Management, Inc. ----
(10)(e) Fourth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-26758
December 7, 1988 between registrant and First Union
Management, Inc. ----
(10)(f) Fifth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-33279
November 29, 1989 between registrant and First Union
Management, Inc. ----
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN
NUMBER DESCRIPTION BY REFERENCE TO PAGE
------ ----------- --------------- ----
<S> <C> <C> <C>
(10)(g) Sixth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-38754
November 28, 1990 between registrant and First Union
Management, Inc. ----
(10)(h) Seventh Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-45355
November 27, 1991 between registrant and First Union
Management, Inc. ----
(10)(i) Eighth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-57756
November 30, 1992 between registrant and First Union
Management, Inc. ----
(10)(j) Employment and Consulting Agreement with Donald S. 1991 Form 10-K
Schofield dated September 1, 1991 ----
(10)(k) Employment Agreement with James C. Mastandrea dated July June 30, 1994 Form 10-Q
13, 1994 ----
(10)(l) Employment Agreement with Gregory D. Bruhn dated July 13, June 30, 1994 Form 10-Q
1994 ----
(10)(m) Credit Agreement with National City Bank dated December 1994 Form 10-K
5, 1994 ----
(10)(n) Credit Agreement with Society National Bank dated March 1995 Form 10-K
4, 1996 ----
(10)(o) 1981 Employee Share Option Plan 1992 Proxy Statement ----
(10)(p) 1994 Long Term Incentive Performance Plan 1994 Proxy Statement ----
(10)(q) Bank Credit Agreement dated September 30, 1996 September 30, 1996 Form 10-Q ----
(11) Statements Re: Computation of Per Share Earnings
X
----
(12) Statements of Ratios of Combined Income from Operations
and Combined Net Income to Fixed Charges
X
----
(13) 1996 Annual Report X
----
(23) Consent of Independent Public Accountants
X
----
(24) Powers of Attorney X
----
(27) Financial Data Schedule X
----
</TABLE>
26
<PAGE> 1
EXHIBIT 11
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS AND
FIRST UNION MANAGEMENT, INC.
STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Shares Outstanding:
For computation of primary net
income per share -
Weighted average 17,163 18,059 18,105 18,086 18,086
Share equivalents - Options 9 -- -- 10 --
- Restricted shares 92 57 15 -- --
-------- -------- -------- ------- -------
Adjusted shares outstanding 17,264 18,116 18,120 18,096 18,086
======== ======== ======== ======= =======
For computation of fully diluted
net income per share -
Weighted average, without regard to,
exercise under share option plans,
or purchase of outstanding shares 17,163 18,100 18,109 18,086 18,086
Assumption of exercise under share
option plans 367 -- -- 10 --
Weighted average of shares
issued under long-term
incentive plan 9 8 -- -- --
Weighted average of restricted
shares granted 167 57 15 -- --
Weighted average
of outstanding
shares purchased and retired -- (49) (4) -- --
-------- -------- -------- ------- -------
Adjusted shares outstanding 17,706 18,116 18,120 18,096 18,086
======== ======== ======== ======= =======
Net Income:
Net income applicable to shares
of beneficial interest (used
for computing primary and
fully diluted net income per
share) $ 3,291 $ 13,891 $ 6,485 $13,984 $18,432
======== ======== ======== ======= =======
Net income per share of beneficial
interest:
Primary and fully diluted
Income before extraordinary
loss from early extinguishment
of debt and cumulative effect
of accounting change $ .21 $ 1.06 $ .36 $ .84 $ 1.02
Extraordinary loss from early
extinguishment of debt (.02) (.05) -- (.07) --
Cumulative effect of change in
accounting for internal leasing
costs -- (.24) -- -- --
-------- -------- -------- ------- -------
Net income $ .19 $ .77 $ .36 $ .77 $ 1.02
======== ======== ======== ======= =======
</TABLE>
<PAGE> 1
EXHIBIT 12
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS AND
FIRST UNION MANAGEMENT, INC.
STATEMENTS OF RATIOS OF COMBINED INCOME FROM
OPERATIONS AND COMBINED NET
INCOME TO FIXED CHARGES
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income before capital gain or loss,
extraordinary loss and cumulative
effect of accounting change $4,422 $ 3,256 $ 6,485 $10,276 $12,657
Add fixed charges, exclusive of
construction interest capitalized 24,018 22,987 21,865 19,103 19,469
------ ------- ------- ------- -------
Income from operations, as defined 28,440 26,243 28,350 29,379 32,126
Capital gains --- 29,870 --- 4,948 5,775
Reduction for unrealized loss on
carrying value of assets identified
for disposition --- (14,000) --- --- ---
-------- -------- ------- ------- -------
Net income, as defined $ 28,440 $ 42,113 $28,350 $34,327 $37,901
======== ======== ======= ======= =======
Fixed charges:
Interest
- - - Mortgage loans $ 8,877 $ 7,670 $ 7,335 $ 5,777 $ 6,182
- - - Senior notes 9,090 9,305 9,305 5,779 4,199
- - - 10.25% debentures --- --- --- 3,214 3,858
- - - Bank loans and other 5,459 5,422 4,640 3,747 4,694
- - - Capitalized interest 121 169 --- --- ---
Amortization of debt issue costs 196 184 168 162 122
Rents (1) 396 406 417 424 414
------- -------- ------- ------- -------
Fixed charges, as defined $24,139 $ 23,156 $21,865 $19,103 $19,469
======= ======== ======= ======= =======
Preferred dividend accrued $ 845 $ --- $ --- $ --- $ ---
======= ======== ======= ======= =======
Ratio of income from operations, as
defined, to fixed charges 1.18 1.13 1.30 1.54 1.65
Ratio of net income, as defined, ======= ======== ======= ======= =======
to fixed charges 1.18 1.82 1.30 1.80 1.95
======= ======== ======= ======= =======
Ratio of net income from operations,
as defined, to fixed charges and
preferred dividend 1.14 1.82 1.30 1.80 1.95
======= ======== ======= ======= =======
<FN>
(1) The interest portion of rentals is assumed to be one-third of all ground rental and net lease payments.
</TABLE>
<PAGE> 1
EXHIBIT 13
----------
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA AND FOOTNOTES)
1996 1995
<S> <C> <C>
Revenues $81,867 $79,205
Income before capital gain or loss, extraordinary loss and
cumulative effect of accounting change 4,422 3,256
Net income before preferred dividend(1) 4,136 13,891
Net income applicable to shares of
beneficial interest(1) 3,291 13,891
Funds from operations before preferred dividend(2) 17,935 15,157
Funds from operations after preferred dividend(2) 17,090 15,157
Dividends declared 7,684 7,542
Per share
Income applicable to shares of beneficial interest before capital gain or loss,
extraordinary loss and cumulative
effect of accounting change $.21 $.18
Net income applicable to shares of beneficial interest(1) .19 .77
Dividends declared .44 .41
MARKET PRICE AND DIVIDEND RECORD
Dividends
1996 QUARTERS ENDED High Low Declared
- - ------------------- ---- --- --------
<S> <C> <C> <C>
December 31 $12 1/2 $ 6 3/8 $ .11
September 30 7 6 3/8 .11
June 30 7 3/8 6 3/8 .11
March 31 8 1/8 6 7/8 .11
-----
$ .44
=====
1995 QUARTERS ENDED
- - -------------------
December 31 $ 7 5/8 $ 6 7/8 $ .11
September 30 7 7/8 7 1/8 .10
June 30 8 7 .10
March 31 8 5/8 6 1/2 .10
-----
$ .41
=====
<FN>
The Trust's shares are traded on the New York Stock Exchange (Ticker Symbol:
FUR). As of December 31, 1996, there were 4,582 recordholders of the Trust's
shares of beneficial interest. The Trust estimates the number of beneficial
owners at approximately 15,000.
(1) In 1996, the Trust expensed $286,000 of unamortized costs relating to a
prior bank credit agreement. In 1995, the Trust recognized a capital gain
of $29.9 million, a $14 million noncash unrealized loss on the carrying
value of certain assets identified for disposition, $910,000 of unamortized
costs and prepayment premiums related to the early repayment of mortgage
debt and a $4.3 million noncash charge for the cumulative effect of a
change in accounting method.
(2) The amount of funds from operations (FFO) is calculated as income before
capital gain or loss, extraordinary loss and cumulative effect of
accounting change, both before and after the preferred dividend, plus
noncash charges for depreciation and amortization for both First Union and
the joint venture. A new definition of FFO, adopted by the National
Association of Real Estate Investment Trusts, excludes depreciation and
amortization of debt issue costs and other corporate assets. First Union
adds back all expenses included in depreciation and amortization. FFO does
not replace net income (determined in accordance with generally accepted
accounting principles) as a measure of performance or net cash flows as a
measure of liquidity. FFO should be considered a supplemental measure of
operating performance used by real estate investment trusts.
</TABLE>
1
<PAGE> 2
SELECTED FINANCIAL DATA
For the years ended December 31, (In thousands, except per share data and
footnotes)
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
---- ---- ---- ---- ----
OPERATING RESULTS
<S> <C> <C> <C> <C> <C>
Revenues $ 74,567 $ 74,339 $ 76,339 $ 79,205 $ 81,867
Income before capital gain or loss,
extraordinary loss and cumulative
effect of accounting change(1) 12,657 10,276 6,485 3,256 4,422
Unrealized loss on carrying value of
assets identified for disposition (14,000)
Capital gains 5,775 4,948 29,870
Income before extraordinary loss and
cumulative effect of accounting
change 18,432 15,224 6,485 19,126 4,422
Extraordinary loss from early
extinguishment of debt(2) (1,240) (910) (286)
Cumulative effect of change in
accounting method(3) (4,325)
Net income before preferred dividend 18,432 13,984 6,485 13,891 4,136
Net income applicable to shares of
beneficial interest 18,432 13,984 6,485 13,891 3,291
Dividends declared for shares of
beneficial interest 13,022 13,031 7,273 7,542 7,684
- - ------------------------------------------------------------------------------------------------------
Per share of beneficial interest:
Income before capital gain or loss,
extraordinary loss and cumulative
effect of accounting change(1) $ .70 $ .57 $ .36 $ .18 $ .21
Income before extraordinary loss and
cumulative effect of accounting
change 1.02 .84 .36 1.06 .21
Extraordinary loss from early
extinguishment of debt(2) (.07) (.05) (.02)
Cumulative effect of change in
accounting method(3) (.24)
Net income applicable to shares of
beneficial interest 1.02 .77 .36 .77 .19
Dividends declared per share of
beneficial interest .72 .72 .40 .41 .44
- - ------------------------------------------------------------------------------------------------------
FINANCIAL POSITION AT YEAR END
Total assets $ 353,455 $ 393,621 $ 376,189 $ 400,999 $ 440,530
Long-term obligations(4) 109,733 257,355 238,296 258,454 254,868
Total equity 102,672 103,766 102,940 102,355 152,553
OTHER DATA
Net cash provided by or (used for)
Operations $ 21,591 $ 19,649 $ 19,053 $ 12,989 $ 11,085
Investing 1,662 (6,911) (26,507) (28,345) (47,002)
Financing (35,621) 24,793 (28,094) 15,783 35,466
Funds from operations before
preferred dividend(5) 21,836 20,039 17,040 15,157 17,935
Funds from operations after
preferred dividend(5) 21,836 20,039 17,040 15,157 17,090
</TABLE>
See footnotes on the following page
<PAGE> 3
This selected financial data should be read in conjunction with the Combined
Financial Statements and notes thereto.
(1) Included in income before capital gain or loss, extraordinary loss and
cumulative effect of accounting change in 1995 was $1.6 million of
litigation and proxy expenses related to a minority shareholder lawsuit and
proxy contest.
(2) In 1996, the Trust renegotiated its bank credit agreements, resulting in a
$286,000 charge related to the write-off of unamortized costs. In November
1995, the Trust repaid approximately $36 million of mortgage debt resulting
in a $910,000 charge for the write-off of unamortized costs and prepayment
premiums. In November 1993, the Trust repaid prior to their maturity dates
$45 million of senior notes and $37.6 million of convertible debentures
resulting in a $1.2 million charge for the write-off of unamortized issue
costs and payment of a redemption premium.
(3) In December 1995, the Trust changed its accounting method to directly
expense internal leasing costs and recorded a $4.3 million noncash charge
for the cumulative effect of the accounting change as of the beginning of
1995. Funds from operations for previous years have been restated for the
change in accounting method on a basis comparable to 1995.
(4) Included in long-term obligations are senior notes, mortgage loans and bank
loans along with any current portion. Before 1993, bank loans were not
included.
(5) The amount of funds from operations (FFO) is calculated as income before
capital gain or loss, extraordinary loss and cumulative effect of
accounting change, both before and after preferred dividend, plus noncash
charges for depreciation and amortization of First Union and the joint
venture. A new definition of FFO, adopted by the National Association of
Real Estate Investment Trusts, excludes depreciation and amortization of
debt issue costs and other corporate assets. First Union adds back all
expenses included in depreciation and amortization. FFO does not replace
net income (determined in accordance with generally accepted accounting
principles) as a measure of performance or net cash flows as a measure of
liquidity. FFO should be considered a supplemental measure of operating
performance used by real estate investment trusts.
3
<PAGE> 4
COMBINED BALANCE SHEETS
As of December 31, (In thousands)
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Investments in real estate
Land $ 52,891 $ 54,403
Buildings and improvements 406,672 395,157
--------- ---------
459,563 449,560
Less - Accumulated depreciation (112,614) (107,701)
--------- ---------
Total investments in real estate 346,949 341,859
INVESTMENT IN JOINT VENTURE 30,776
MORTGAGE LOANS RECEIVABLE,
including current portion of $194,000 42,266 42,042
OTHER ASSETS
Cash and cash equivalents 2,951 3,402
Accounts receivable and prepayments 8,440 4,536
Deferred charges and other, net 5,225 4,873
Unamortized debt issue costs 3,923 4,287
--------- ---------
Total assets $ 440,530 $ 400,999
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage loans, including current portion of $3,863,000 $ 129,068 $ 83,854
Senior notes 100,000 105,000
Bank loans 25,800 69,600
Accounts payable and accrued liabilities 14,549 21,779
Deferred obligations 10,825 10,670
Deferred capital gains and other deferred income 7,735 7,741
--------- ---------
Total liabilities 287,977 298,644
--------- ---------
SHAREHOLDERS' EQUITY
Preferred shares of beneficial interest, $25 liquidation preference,
2,300,000 shares authorized and outstanding 54,109
Shares of beneficial interest, $1 par, unlimited
authorization, outstanding 17,622 17,485
Additional paid-in capital 53,443 53,098
Undistributed income from operations 12,430 16,823
Undistributed capital gains 14,949 14,949
--------- ---------
Total shareholders' equity 152,553 102,355
--------- ---------
$ 440,530 $ 400,999
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
COMBINED STATEMENTS OF INCOME
For the years ended December 31, (In thousands, except per share data)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
REVENUES
Rents $ 75,555 $ 74,176 $71,079
Interest- Mortgage loans 4,732 4,447 3,928
- Short-term investments 80 409 1,211
Equity in income from joint venture 528
Management fees 617
Other income 355 173 121
-------- -------- -------
81,867 79,205 76,339
-------- -------- -------
EXPENSES
Property operating 25,786 25,982 25,318
Real estate taxes 8,297 8,555 7,930
Depreciation and amortization 13,149 11,901 10,555
Interest- Mortgage loans 8,877 7,670 7,335
- Senior notes 9,090 9,305 9,305
- Bank loans and other 5,459 5,422 4,640
General and administrative 6,787 7,114 4,771
-------- -------- -------
77,445 75,949 69,854
-------- -------- -------
INCOME BEFORE CAPITAL GAIN OR LOSS,
EXTRAORDINARY LOSS AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 4,422 3,256 6,485
Unrealized loss on carrying value of assets
identified for disposition (14,000)
Capital gains 29,870
-------- -------- -------
INCOME BEFORE EXTRAORDINARY LOSS AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 4,422 19,126 6,485
Extraordinary loss from early
extinguishment of debt (286) (910)
Cumulative effect of change in
accounting for internal lease costs (4,325)
-------- -------- -------
NET INCOME BEFORE PREFERRED DIVIDEND 4,136 13,891 6,485
Preferred dividend (845)
-------- -------- -------
NET INCOME APPLICABLE TO SHARES OF
BENEFICIAL INTEREST $ 3,291 $ 13,891 $ 6,485
======== ======== =======
PER SHARE DATA
Income applicable to shares of beneficial
interest before capital gain or loss, extraordinary
loss and cumulative effect of accounting change $ .21 $ .18 $ .36
-------- -------- -------
Income before extraordinary loss and
cumulative effect of accounting change .21 1.06 .36
Extraordinary loss from early
extinguishment of debt (.02) (.05)
Cumulative effect of change in
accounting for internal lease costs (.24)
-------- -------- -------
NET INCOME APPLICABLE TO SHARES OF BENEFICIAL
INTEREST $ .19 $ .77 $ .36
======== ======== =======
ADJUSTED SHARES OF BENEFICIAL INTEREST 17,264 18,116 18,120
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
COMBINED STATEMENTS OF CHANGES IN CASH
For the years ended December 31, (In thousands)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income before preferred dividend $ 4,136 $13,891 $6,485
Adjustments to reconcile net income before preferred
dividend to net cash provided by operations -
Depreciation and amortization 13,149 11,901 10,555
Extraordinary loss from early
extinguishment of debt 286 910
Cumulative effect of change in
accounting for internal lease costs 4,325
Capital gains (29,870)
Unrealized loss on carrying value of assets
identified for disposition 14,000
Increase in deferred charges and other, net (963) (1,711) (1,608)
Increase in deferred interest on mortgage
investments (400) (441) (357)
Increase in deferred obligations 155 148 128
Net changes in other assets and liabilities (5,278) (164) 3,850
-------- ------- ------
Net cash provided by operations 11,085 12,989 19,053
-------- ------- ------
CASH PROVIDED BY (USED FOR) INVESTING
Principal received from mortgage investments 176 160 146
Investments in properties (5,491) (35,424) (19,050)
Investment in joint venture (30,248)
Investments in capital and tenant improvements (20,264) (24,881) (7,603)
Proceeds from sales of properties 8,825 31,800
-------- ------- ------
Net cash used for investing (47,002) (28,345) (26,507)
-------- ------- ------
CASH PROVIDED BY (USED FOR) FINANCING
(Decrease) increase in bank loans (43,800) 27,100 (17,500)
Issuance of preferred shares of beneficial interest, net of costs 54,109
Increase in mortgage loans 48,500 49,500 4,600
Repayment of mortgage loans - Normal payments (3,286) (3,651) (3,934)
- Balloon payments (48,967) (2,225)
Repayment of medium term notes (5,000)
Proceeds from sale of interest rate cap 1,025
Purchase of First Union shares (7,125) (57)
Sale of First Union shares 252 75
Debt issue costs paid (1,414) (656) (226)
Dividends paid to shares of beneficial interest (7,789) (7,341) (8,707)
Other (6) (277) (45)
-------- ------- ------
Net cash provided by (used for) financing 35,466 15,783 (28,094)
-------- ------- ------
(Decrease) increase in cash and cash equivalents (451) 427 (35,548)
Cash and cash equivalents at beginning of year 3,402 2,975 38,523
-------- ------- ------
Cash and cash equivalents at end of year $ 2,951 $ 3,402 $ 2,975
======== ======== =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except footnotes)
<TABLE>
<CAPTION>
Preferred Shares of Additional Undistributed Undistributed
Shares of Beneficial Paid-In Income From Capital
Beneficial Interest Interest Capital(1) Operations(2) Gains
------------------- -------- ---------- ------------- -----
<S> <C>
BALANCE DECEMBER 31, 1993 $18,109 $59,446 $20,732 $5,479
Net income 6,485
Dividends paid or accrued ($.40/share) (7,273)
Restricted shares issued 162 873
Deferred compensation
related to restricted shares,
net of amortization (971)
Shares purchased (8) (49)
Other (45)
------- --------- ------- -------
BALANCE DECEMBER 31, 1994 18,263 59,254 19,944 5,479
------- --------- ------- -------
Net income (1,979) 15,870
Dividends paid or accrued ($.41/share) (1,142) (6,400)
Shares purchased (950) (6,175)
Shares sold under long-term
incentive ownership plan 10 65
Restricted shares issued 162 1,097
Deferred compensation
related to restricted shares,
net of amortization (1,012)
Other (131)
------- --------- ------- -------
BALANCE DECEMBER 31, 1995 17,485 53,098 16,823 14,949
------- --------- ------- -------
Net income before preferred dividend 4,136
Dividends paid or accrued
on shares of beneficial interest ($.44/share) (7,684)
Dividends accrued on preferred shares ($.3674/share) (845)
Sale of 2,300,000 preferred shares of
beneficial interest, $25 per share, net $54,109
Shares sold under long-term incentive
ownership plan and share option agremeents 31 221
Restricted shares issued 142 1,603
Deferred compensation related to
restricted shares, net of amortization (1,246)
Restricted shares forfeited (36) (226)
Other (7)
------- ------- --------- ------- -------
BALANCE DECEMBER 31, 1996 $54,109 $17,622 $53,443(3) $12,430 $14,949
======= ======= ========= ======= =======
<FN>
(1) Includes cumulative balance of unamortized compensation related to
restricted shares of $971,000, $1,983,000 and $3,475,000 at December 31,
1994, 1995 and 1996, respectively.
(2) Includes the balance of cumulative undistributed net loss of First Union
Management, Inc. of $71,000, $1,071,000, $5,825,000 and $6,621,000 as of
December 31, 1993, 1994, 1995 and 1996, respectively.
(3) Cumulative distributions in excess of the Trust's net income from inception
are $11,330,000.
</TABLE>
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Union Real Estate Investments ("Trust") and First Union
Management, Inc., ("Company") are in the real estate industry and do
not have operations outside this industry. The accounting policies of
the Trust and Company conform to generally accepted accounting
principles and give recognition, as appropriate, to common practices
within the real estate industry.
The preparation of the financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses during the
reporting periods.
Under a trust agreement, the shares of the Company are held
for the benefit of the shareholders of the Trust. Accordingly, the
financial statements of the Company and the Trust have been combined.
The Trust's properties are currently leased to the Company
except for one. That remaining property is leased to another party
under a net lease with original terms expiring in 2011 and with renewal
options available thereafter.
At December 31, 1996 and 1995, buildings and improvements
included equipment and appliances of $6.4 million and $5.3 million,
respectively.
Tenant leases generally provide for billings of certain
operating costs and retail tenant leases generally provide for
percentage rentals, in addition to fixed minimum rentals. The Company
accrues the recovery of operating costs based on actual costs incurred
and accrues percentage rentals based on current estimates of each
retail tenant's sales. For the years ended December 31, 1996, 1995 and
1994, such additional income approximated $15.7 million, $16.1 million
and $16.9 million, respectively.
Depreciation for financial reporting purposes is computed
using the straight-line method. Buildings and improvements are
depreciated over their estimated useful lives of 40 to 64 years and
equipment and appliances over five to 10 years. Routine maintenance and
repairs, including replacements, are charged to expense; however,
replacements which improve or extend the lives of existing properties
are capitalized.
The Trust accounts for its investment in a joint venture which
it does not control using the equity method of accounting. This
investment, which represents a 26% non-controlling ownership interest,
was recorded initially at the Trust's cost and subsequently adjusted
for the Trust's net equity in income and cash distributions.
Net income per share of beneficial interest has been computed
based on weighted average shares and share equivalents outstanding for
the applicable period. The preferred shares of beneficial interest are
anti-dilutive and are not included in the weighted average shares
outstanding for 1996.
Certain reclassifications have been made to prior year
balances so that they are comparable to 1996.
2. COMBINED STATEMENTS OF CHANGES IN CASH
The Trust considers all highly liquid short-term investments
with original maturities of three months or less to be cash
equivalents. The Trust paid interest expense of $24.1 million, $22.3
million and $21.1 million in 1996, 1995 and 1994, respectively. During
1996 and 1995, $121,000 and $169,000, respectively, of interest related
to construction projects was capitalized.
3. UNREALIZED LOSS ON CARRYING VALUE OF ASSETS IDENTIFIED FOR DISPOSITION
Management reviews the net realizable value of the Trust's
portfolio periodically to determine whether an allowance for possible
losses is necessary. The carrying value of the Trust's investments in
real estate are evaluated on an individual property basis in accordance
with SFAS 121 (Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to be Disposed of). In December 1995, the Trust
recorded a $14 million noncash unrealized loss on the carrying value of
certain assets which were identified for disposition. The noncash
adjustment represents the difference between the estimated fair value
and net book value of the assets. Assets identified for disposition as
of December 31, 1996, had a net book value of $28.3 million, net of the
$7 million remaining balance of the asset reserve as of December 31,
1996.
8
<PAGE> 9
In February 1996, the Trust sold two office buildings and an
attached parking garage in Cleveland, OH for $1.8 million in cash and a
$7 million, 8% note secured by the properties. The note was repaid in
June 1996. This sale resulted in a capital loss of $5.6 million which
was provided for as part of a $14 million noncash unrealized loss on
the carrying value of certain assets that was recorded in December
1995.
In January 1997, the Trust sold a shopping center for $9
million in cash. The sale resulted in a capital loss of $5 million
which was provided for as part of a $14 million noncash unrealized loss
on the carrying value of certain assets that was recorded in December
1995.
4. CAPITAL GAINS
In January 1995, the Trust sold its 50% interests in two malls located
in Wilkes-Barre, PA and Fairmount, WV for $35.5 million and the
assumption by the purchaser of $4.7 million of existing mortgage loans
on the properties. Proceeds from the transaction were received as a $2
million cash payment in 1994, $27.5 million of cash in 1995 that was
deposited into a tax intermediary escrow account and a $6 million note
with an interest rate of 9% due in January 1998. The $27.5 million of
proceeds were subsequently used in 1995 to acquire a retail center and
an apartment complex in a tax-free exchange. The capital gain
recognized for financial reporting purposes was $29.9 million.
5. CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING METHOD
Prior to 1995, the Company accounted for internal leasing costs by
deferring and amortizing such costs as part of depreciation and
amortization expense over the life of consummated leases. In the fourth
quarter of 1995, the Company changed this method of accounting to
recognize internal leasing costs in the period in which they are
incurred. Accordingly, the Company wrote off the balance of its
deferred internal leasing costs of $4.3 million effective January 1,
1995 and expensed those leasing costs that were deferred throughout
1995. The effect of this change in accounting method decreased income
by $0.6 million in 1995 as a result of reducing depreciation and
amortization expense $1.4 million and increasing general and
administrative expense $2 million. A reclassification has been made
between depreciation and amortization and general and administrative
expense for 1994 so that the prior year amounts are on a comparable
basis to 1995.
6. EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
In 1996, the Trust renegotiated its bank credit agreements. As a
result, $286,000 of deferred costs relating to its prior bank credit
agreements was written off.
In November 1995, the Trust repaid prior to their maturity
dates three mortgage loans totaling approximately $36 million,
resulting in prepayment premiums and the write-off of unamortized
mortgage costs of $910,000.
9
<PAGE> 10
7. INVESTMENTS IN MORTGAGE LOANS
As of December 31, 1996, the Trust had the following
investments in mortgage loans (dollar amounts in thousands):
<TABLE>
<CAPTION>
CURRENT
EFFECTIVE
RATE ON NET LOAN PRIOR NET
INVESTMENT AMOUNT LIENS INVESTMENT
---------- ------ ----- ----------
<S> <C> <C> <C> <C>
Mortgage loan secured by a mall in
Fairmount, WV, maturing in 1998 and
partnership units of Crown
American Properties, L.P. 9% $6,125 --- $6,125
First mortgage loan secured by an
office building in Cleveland, OH,
maturing in 2011. 10% 19,103 --- 19,103
Wraparound mortgage loan secured
by an apartment complex in Atlanta,
GA, maturing in 1999. 13% 17,038 3,444 13,594
------- ------ -------
$42,266 $3,444 $38,822
======= ====== =======
</TABLE>
The fair value of the mortgage investments at December 31,
1996 approximates book value based on current interest rates and
market conditions.
8. BANK LOANS
As of December 31, 1996, there was $25.8 million outstanding under a
fully secured $90 million credit agreement at an interest rate of
7.73%. This credit agreement matures on September 30, 1998. Interest
under this agreement is calculated, at the option of the Trust, based
on a Eurodollar rate plus 200 basis points or the prime interest rate.
As the bank loans are at market interest rates, the fair value is the
carrying amount of the loans.
Commitment fees not greater than 3/8% per annum are payable on
the unused portion of the revolving credit agreement. The agreement
contains certain requirements including maintaining minimum funds from
operations (income from operations plus depreciation and amortization),
net worth, leverage and interest coverage. The Trust was in compliance
with all the above requirements as of December 31, 1996.
The Trust currently has a rate guarantee contract in the
notional amount of approximately $45 million which is tied to LIBOR and
has a maximum rate of 9%. This rate contract is used by the Trust to
reduce the impact of changes in interest rates on its floating rate
bank loans. The contract expires in October 1998 and the cost is being
amortized over the life of the contract.
9. MORTGAGE LOANS PAYABLE
As of December 31, 1996, the Trust had outstanding $129.1 million of
mortgage loans due in installments extending to the year 2014. Interest
rates on fixed rate mortgages range from 6.869% to 9.375%. Principal
payments due during the five years following December 31, 1996 are $3.9
million, $6.0 million, $3.8 million, $4.4 million and $3.5 million,
respectively. The fair value of the mortgage loans payable at December
31, 1996 is approximates book value based on current market interest
rates and market conditions.
10. SENIOR NOTES
As of December 31, 1996, the Trust had $100 million in senior notes
outstanding. The interest rate is 8.875% and the notes mature in
October 2003. The senior notes are noncallable, limit future borrowings
by the Trust and require maintenance of a minimum net worth. The Trust
was in compliance with all requirements as of December 31, 1996. The
fair value of the senior notes at December 31, 1996 is the carrying
value based on current market quotations. In July 1996, the $5 million,
8.6% medium term notes were repaid.
10
<PAGE> 11
11. PREFERRED SHARES OF BENEFICIAL INTEREST
In October 1996, the Trust issued $57.5 million of Series A cumulative
convertible redeemable preferred shares of beneficial interest ("Series
A Preferred Shares"). The 2,300,000 Series A Preferred Shares were
issued at a par value of $25 per share and are each convertible into
3.31 shares of beneficial interest (Shares). The distributions on the
Series A Preferred Shares are cumulative and equal to the greater of
$2.10 per share (equivalent to 8.4% of the liquidation preference per
annum) or the cash distributions on the Shares into which the Series A
Preferred Shares are convertible (determined on each of the quarterly
distribution payment dates for the Series A Preferred Shares). The
Series A Preferred Shares are not redeemable prior to October 29, 2001,
and at no time will they be redeemable for cash.
12. INVESTMENT IN JOINT VENTURE
The following presents summarized financial information for the Trust's
investment in a joint venture which owns eight regional shopping malls
and a 50% interest in another mall at December 31, 1996. The Trust
entered into this joint venture on September 30, 1996.
<TABLE>
<CAPTION>
1996
----
(In thousands)
<S> <C>
ASSETS
Investments in real estate at cost
less accumulated depreciation $303,047
Cash and cash equivalents 10,523
Other assets 13,474
--------
Total assets 327,044
========
LIABILITIES AND PARTNERS' EQUITY
Mortgage notes payable 204,419
Other liabilities 10,359
--------
Total liabilities 214,778
Preferred stock 73,500
PARTNERS' EQUITY 38,766
--------
Total liabilities and equity $327,044
========
GROSS REVENUES FROM REAL ESTATE $15,072
EXPENSES
Property operating expenses 5,441
Mortgage and other interest expense 5,672
Depreciation and amortization 1,398
Preferred dividends 2,731
--------
NET LOSS $(170)
========
</TABLE>
Management fees of $.6 million were paid to the Trust's
affiliated management company for property management services.
Additionally, lease commissions may be earned by the Trust's affiliated
management company for new or renewal leases.
Depreciation for financial reporting purposes is computed
using the straight line method. Buildings, tenant improvements and
equipment are depreciated over useful lives of 10 to 50 years using the
straight-line method of depreciation.
11
<PAGE> 12
Mortgage notes payable which are secured by the related properties are
due in installments extending to the year 2017 with interest rates ranging from
8.43% to 12.25%. A $40 million mortgage at 12.25% requires participation in the
cash flow of the secured property over predefined levels. Principal payments due
during the five years following December 31, 1996 are $2.0 million, $2.1
million, $2.3 million, $2.6 million and $21.3 million.
The members of the joint venture are the Trust and two other entities.
The Trust's $30 million investment in the joint venture is comprised of $3.5
million in common and $26.5 million in preferred equity. The aggregate equity
investment of the other parties is $83.5 million which is comprised of $10
million in common and $73.5 million in preferred equity as described below.
The preferred equity is divided into three series, of which the Trust
is the most junior in distribution and liquidation priority. The Trust's
preferred equity is entitled to distributions at a fixed rate of 10% for the
first five years and 4% thereafter. The two senior series of preferred equity
consist of a $35 million series (the "Senior Preferred") and a $38.5 million
series (the "Series B Preferred"). The Senior Preferred is entitled to
distributions at a floating rate equal to LIBOR plus 500 basis points (which
increases by 50 basis points after each three month period). The joint venture
has the right to redeem the Senior Preferred at any time. The Trust and the
holder of the Series B Preferred are seeking an investment by a third party to
replace the Senior Preferred and common equity as soon as practicable. The
Series B Preferred is entitled to distributions at a floating rate equal to
LIBOR plus 600 basis points. The joint venture has purchased an interest rate
cap that limits its exposure to LIBOR increasing above 7%. Generally, additional
income and cash, if any, after preferred distributions will be allocated and
distributed proportionately to the joint venture members according to their
common equity ownership.
The Trust has call options on all of the preferred equity held by the
other joint venture members, commencing immediately with respect to the Senior
Preferred and commencing after six months with respect to the Series B
Preferred. The call price of the Senior Preferred is equal to 100% of its face
amount plus accumulated distributions thereon, with interest but without any
additional premium. The call price of the Series B Preferred is equal to 100% of
its face amount plus the amount necessary to provide the holder thereof with a
15.75% annualized internal rate of return, after taking into account
distributions previously made on the Series B Preferred.
The holders of the Senior Preferred and the Series B Preferred have put
options back to the joint venture with respect to their preferred equity
commencing after two years in the aggregate amount of $10 million; put options
on the remainder of the preferred equity are exercisable in the third and fourth
years. The Trust has the right to contribute capital to the joint venture in
order to enable the joint venture to satisfy those puts. Any such capital
contributed by the Trust will constitute additional amounts of the Trust's
series of preferred equity. The put prices are identical to the call prices, as
described above.
If the Trust is unable or unwilling to contribute capital to the joint
venture so that the put options can be satisfied, the other entities have the
right to offset the dollar amount of such put option by transferring an
equivalent amount of capital from the Trust's capital account and increasing
their own accounts by such amount. As long as the Trust has any capital balance
remaining in the joint venture, it has the right to subsequently have its
capital account restored by meeting the put and paying certain additional
amounts. There can be no assurance that the Trust will have sufficient funds
available to make the capital contributions which may be required to satisfy the
put options of the other joint venture members or that the Trust will choose to
make such capital contributions at that time. The failure to make such capital
contributions would have a material adverse effect on the financial condition of
the Trust.
Once all the Senior Preferred and the Series B Preferred have been
acquired, the Trust will have call options on all of the common equity of the
other joint venture members as well. The call price of the common equity is
equal to 100% of the face amount plus the amount necessary to provide the holder
thereof with a 20% annualized internal rate of return, after taking into account
distributions previously made on the common equity. In addition, for so long as
the Senior Preferred holder's common equity is outstanding, the Senior Preferred
holder is entitled to receive $75,000 per month. There are no put options on the
common equity.
12
<PAGE> 13
13. SHARE OPTIONS
The Trust has the following share option plans for key personnel.
1981 STOCK OPTION PLAN
This plan provides that option prices be at the fair market value of
the shares at the date of grant and that option rights granted expire
ten years after the date granted. Adopted in 1981, the plan originally
reserved 624,000 shares for the granting of incentive and nonstatutory
share options. Subsequently, the shareholders approved amendments to
the plan reserving an additional 200,000 shares, for a total of 824,000
shares, for the granting of options and extending the expiration date
to December 31, 1996. The amendments do not affect previously issued
options.
The activity of the plan is summarized for the years ended
December 31 in the following table:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Granted 409,500 - 75,000
Exercised 9,455 - -
Canceled 118,090 28,910 121,317
Expired 23,427 - -
Available - 314,837 285,927
</TABLE>
As of December 31, 1996, options on 644,625 shares were
outstanding at prices ranging from $7.375 to $17.55 per share.
Separately, the Trust and Company have an agreement whereby,
as of December 31, 1996, the Company may purchase up to 63,540 shares
from the Trust at prices ranging from $8.25 to $17.55 per share to
satisfy the Company's obligations to deliver shares to certain of its
key employees pursuant to options previously granted. The option
agreements with the Company's employees provide that option prices be
at the fair market value of the Trust shares at the date of grant and
that option rights granted expire ten years after the date granted.
1994 LONG-TERM INCENTIVE OWNERSHIP PLAN
This plan, adopted in 1994, reserved 1,629,785 shares for the granting
of incentive and nonstatutory share options and restricted shares. The
share options expire eight years after being granted. The price of the
options is the fair market value of the shares at the date of grant.
The restricted shares receive dividends and have voting rights but may
not be sold or transferred until the restriction period lapses after
eight years from the date of grant, or earlier if the Trust's share
price equals or exceeds $21 for 20 consecutive days or upon a change in
control as defined in the plan. Additional restricted shares will be
granted when defined levels of funds from operations and net capital
gains are achieved during any four consecutive calendar quarters.
Deferred compensation of $1.7 million in 1996, $1.3 million in 1995 and
$1 million in 1994 was recorded in connection with the issuance of the
restricted shares and is being amortized over an eight-year period on a
straight-line basis. Amortization of $498,000, $248,000 and $65,000,
respectively, was recognized in 1996, 1995 and 1994.
13
<PAGE> 14
The activity of this plan is summarized for the years ended
December 31 in the following table:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Share options granted 79,000 242,450 229,850
Share options canceled 18,400 11,300 16,000
Restricted shares granted 142,500 162,500 162,500
Restricted shares canceled 37,007 - -
Shares purchased by employees 11,094 9,812 -
Exercised 10,700 20 -
Available share options
and restricted shares 652,786 849,973 1,253,435
</TABLE>
As of December 31, 1996, options on 494,880 shares at prices
ranging from $6.375 to $7.75 and 427,500 restricted shares were
outstanding.
The Trust accounts for stock option awards in accordance with
APB 25 and has adopted the disclosure-only provisions of SFAS 123
(Accounting for Stock-Based Compensation). Consequently, no
compensation cost has been recognized for the share option plans. If
compensation expense for the Trust's two share option plans had been
recorded based on the fair value at the grant date for awards in 1996
consistent with SFAS No. 123, the Trust's net income applicable to
shares of beneficial interest would have been reduced by $430,000 or
$.02 per share. The fair value of each option was calculated using the
Black-Scholes option-pricing model with the following assumptions:
Dividend yield of 3.5%, expected volatility of 30%, risk-free interest
rate of 6.35% and expected option life of 10 years.
14. SHAREHOLDER RIGHTS PLAN
In March 1990, the Board of Trustees declared a dividend consisting of
one right to purchase one share of beneficial interest of the Trust
with respect to each share of beneficial interest. The rights may be
exercised only if a person or group acquires 15% or more of the
outstanding shares of beneficial interest, makes a tender offer for at
least 15% of the outstanding shares of beneficial interest, or is
declared to be an "adverse person." The exercise price of each right is
$50. If a person or group acquires 15% or more of the outstanding
shares of beneficial interest (except in a tender offer approved by the
Board of Trustees), is declared to be an "adverse person," or engages
in certain self-dealing transactions with the Trust ("flip-in events"),
each right (other than rights owned by a 15% owner of an "adverse
person") entitles the holder to purchase one share of beneficial
interest of the Trust for par value (now $1 per share). If the Trust is
acquired in a merger or other business combination ("flip-over
events"), each right entitles the holder to purchase, for $1, shares of
the acquiring company having a market value equal to the market value
of one share of beneficial interest of the Trust. The rights may be
redeemed by the Trust at a price of $0.01 per right at any time prior
to the earlier of a "flip-in" or "flip-over" event or the expiration of
the rights on March 30, 2000.
15. FEDERAL INCOME TAXES
No provision for current or deferred income taxes has been made by the
Trust on the basis that it qualified under Sections 856-860 of the
Internal Revenue Code as a real estate investment trust and has
distributed all of its taxable income to shareholders.
In accordance with Section 1031 of the Internal Revenue
Code, the Trust is treating the sale of its 50% interest in two malls
in Wilkes-Barre, PA and Fairmount, WV as a like-kind exchange for
Woodland Commons Shopping Center and Steeplechase Apartments. As a
result, the Trust is deferring for tax purposes the capital gain
realized in the transaction except for $6 million related to the
mortgage note received as part of the sale and the $2 million payment
received in 1994.
The Trust and Company treat certain items of income and
expense differently in determining net income reported for financial
reporting and tax purposes. Such items resulted in a net decrease in
income for tax reporting purposes of approximately $1.1 million for
1996 and $5 million for 1995, and a net increase of approximately $.5
million for 1994.
As of December 31, 1996, net investments in real estate for
financial reporting purposes were approximately $69 million greater
than for tax purposes.
14
<PAGE> 15
The 1996 quarterly allocation of cash dividends per share of
beneficial interest for individual shareholders' income tax purposes
was as follows:
<TABLE>
<CAPTION>
LONG-TERM
CAPITAL ORDINARY TOTAL
DATE PAID GAINS INCOME PAID
--------- ----- ------ ----
<S> <C> <C> <C> <C>
February 1, 1996 $.018 $.092 $.11
April 30, 1996 --- .110 .11
July 31, 1996 --- .110 .11
October 31, 1996 --- .110 .11
----- ----- ----
$.018 $.422 $.44
----- ----- ----
</TABLE>
For the year ended December 31, 1995, the cash dividends paid
of $0.40 consisted of $.074 per share of ordinary income and $.326 per
share of capital gains, and for the year ended December 31, 1994, $0.48
per share was ordinary income.
16. LEGAL CONTINGENCY
The Trust has pursued legal action against the State of California
associated with the 1986 flood of Peach Tree Center. In September 1991,
the court ruled in favor of the Trust on the liability portion of this
inverse condemnation suit, which the State of California appealed. The
Trust is proceeding with its damage claim. No recognition of potential
income has been made in the accompanying financial statements.
17. LITIGATION AND PROXY EXPENSE
During 1995, the Trust was involved in a lawsuit and proxy contest with
a minority shareholder. The initial lawsuit filed by the Trust alleged
several violations of Securities and Exchange Commission rules and
regulations by the minority shareholder and other associated parties.
Extensive discovery was undertaken and numerous motions and pleadings
were filed by the various parties throughout most of 1995. Certain
professional fees related to the litigation and proxy contest of $1.6
million were incurred and have been included in general and
administrative expenses in the accompanying Combined Financial
Statements. All litigation was resolved on December 13, 1995 by a
settlement and standstill agreement. The Trust purchased 950,000 shares
of beneficial interest at the average 1995 trading price through
December 8, 1995 of $7.50 per share in January 1996. This transaction
was recorded in the 1995 Combined Financial Statements. Additionally,
as part of this agreement, the minority shareholder will not acquire
additional shares of the Trust.
18. PROFORMA EARNINGS PER SHARE FOR THE JANUARY 1997 SALE OF 3,910,000
SHARES OF BENEFICIAL INTEREST
In January 1997, the Trust sold 3,910,000 shares of beneficial
interest. The net proceeds of $46.1 million are to be used to repay
$20.5 million in short-term bank loans and $13.8 million of mortgage
debt. Had the shares been sold in the beginning of 1996 and the
proceeds been used to repay the indebtedness indicated, 1996 net income
per share would have been $.29 on a proforma basis.
15
<PAGE> 16
19. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is an unaudited condensed summary of the combined results
of operations by quarter for the years ended December 31, 1996 and
1995. In the opinion of the Trust and Company, all adjustments
(consisting of normal recurring accruals) necessary to present fairly
such interim combined results in conformity with generally accepted
accounting principles have been included.
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1996
<S> <C> <C> <C> <C>
Revenues $19,897 $19,363 $19,735 $22,872
Income (loss) before preferred dividend and
extraordinary loss (877) 973 1,044 3,282
Extraordinary loss from early extinguishment
of debt (286)
----- ---- ------ ------
Net income (loss) before preferred dividend $(877) $973 $1,044 $2,996
----- ---- ------ ------
Net income (loss) applicable to shares of
beneficial interest $(877)(1) $973 $1,044 $2,151(2)
===== ==== ====== ======
Per share
Income (loss) applicable to shares of
beneficial interest before extraordinary loss $(.05) $.06 $.06 $.14
Extraordinary loss from early extinguishment
of debt (.02)
----- ---- ------ ------
Net income (loss) applicable to shares of $(.05) $. 06 $.06 $.12
===== ===== ====== ======
beneficial interest
<FN>
(1) Included a noncash charge for the write-off of a tenant allowance and the termination of an employment contract.
(2) Included a lease termination fee of $1.1 million.
</TABLE>
<TABLE>
<CAPTION>
QUARTERS ENDED
--------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1995
<S> <C> <C> <C> <C>
Revenues $19,347 $19,576 $19,871 $ 20,411
------- ------- ------- --------
Income before capital gain or loss, extraordinary loss
and cumulative effect of accounting change 567 1,312 325 1,052
Unrealized loss on carrying value of assets identified
for disposition (14,000)
Capital gains 29,870
------- ------- ------- -------
Income (loss) before extraordinary loss and cumulative
effect of accounting change 30,437 1,312 325 (12,948)
Extraordinary loss from early extinguishment of debt (910)
Cumulative effect of change in accounting method (4,325)
------- ------- ------- -------
Net income (loss) $26,112 $1,312 $ 325 $(13,858)
======= ====== ======= ========
Per share
Income before capital gain or loss, extraordinary loss
and cumulative effect of accounting change $.03 $.07 $.02 $ .06
------- ------- ------- --------
Income (loss) before extraordinary loss and cumulative
effect of accounting change 1.67 .07 .02 (.72)
Extraordinary loss from early extinguishment of debt (.05)
Cumulative effect of change in accounting method (.24)
------- ------- ------- --------
Net income (loss) $1.43 $.07 $ .02 $ (.77)
======= ====== ======= ========
</TABLE>
16
<PAGE> 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SECURITYHOLDERS AND TRUSTEES OF FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS:
We have audited the accompanying combined balance sheets of First Union
Real Estate Equity and Mortgage Investments (an unincorporated Ohio business
trust, also known as First Union Real Estate Investments) and First Union
Management, Inc. (a Delaware corporation) as of December 31, 1996 and 1995, and
the related combined statements of income, shareholders' equity and changes in
cash for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined financial position of First Union
Real Estate Equity and Mortgage Investments and First Union Management, Inc. as
of December 31, 1996 and 1995, and the results of their operations and their
changes in cash for each of the three years in the period ended December 31,
1996, in conformity with generally accepted accounting principles.
Cleveland, Ohio,
February 5, 1997. ARTHUR ANDERSEN LLP
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Financial Condition
- - -------------------
In February 1996, the Trust sold two office buildings and an attached
parking garage in Cleveland, OH for $1.8 million in cash and a $7 million, 8%
note secured by the properties. This sale resulted in a capital loss of $5.6
million which was previously provided for by the Trust as part of a $14 million
noncash unrealized loss on the carrying value of certain assets identified for
disposition, which was recorded in December 1995.
During 1996, the Trust obtained four mortgage loans totaling $48.5
million at a weighted average interest rate of 7.5%, most of which have a term
of 10 years. The mortgage loans are individually secured by three apartment
complexes and a shopping center. The proceeds repaid loans outstanding under the
bank credit agreements.
In June 1996, the Trust received repayment of the $7 million mortgage
investment, which was part of the consideration received in the Trust's sale of
the two office buildings and an attached parking garage discussed above. The
proceeds of this mortgage investment were used to repay short-term bank loans
and the $5 million, 8.6% medium term note which was due in July 1996.
The Trust in September of 1996 combined and expanded its revolving
credit agreements. The new $90 million credit agreement is secured by the same
collateral that secured the former $80 million facilities. The new agreement is
at a variable interest rate and requires defined levels of funds from
operations, net worth, leverage and interest coverage. The term of the $90
million credit agreement is two years and can be extended thereafter each year
upon request of the Trust and consent of the bank group.
Also in late September 1996, the Trust invested $30 million from its
bank credit facility, in a joint venture. The joint venture acquired eight
regional shopping malls and a 50% interest in another mall totaling 5,800,000
square feet of gross leasable area. These shopping malls are the dominant retail
facilities located primarily in regional markets in Louisiana, Arkansas, Texas,
Oklahoma and New Mexico. The purchase price paid by the joint venture was $311.7
million which included the assumption of $50 million in existing mortgage debt.
The Trust's property management affiliate will manage the properties for the
joint venture. The Trust has recorded this joint venture investment using the
equity method of accounting, as the Trust owns 26% of the common equity of the
joint venture.
In late October 1996, the Trust issued 2,300,000 shares of 8.4% Series
A cumulative convertible redeemable preferred shares of beneficial interest at
$25 per share. The net proceeds of $54.1 million were used to repay borrowings
under the Trust's bank line of credit.
The Trust in December of 1996 purchased an apartment complex for $5.5
million in Cincinnati, Ohio. The purchase was funded from the bank line of
credit.
Liquidity and Capital Resources
- - -------------------------------
Net cash provided by operations for 1996 of $11.1 million was
approximately $1.9 million less than the prior year primarily due to the
increase in accounts receivable when comparing 1996 to 1995. Dividends paid in
1996 of $7.8 million represented 70% of net cash from operating activities.
18
<PAGE> 19
Net cash used for investing of $47.0 million for 1996 included $8.8
million in proceeds received from the sale of two office buildings and an
attached parking garage. The Trust in September 1996 invested $30 million in a
joint venture which has ownership interests in nine regional shopping malls.
Additionally, the Trust in 1996 invested approximately $20.3 million in its
existing portfolio. These improvements included the completion of the renovation
of two shopping malls in St. Cloud, MN and Reading, PA, the addition of an
anchor tenant building in Reading, PA and the conversion of 86,000 square feet
to office space of a former retail facility in Denver, CO. In December 1996, as
noted previously, the Trust purchased an apartment complex in Cincinnati, OH for
$5.5 million.
Net cash provided by financing of $35.5 million during 1996 included
four mortgage loans secured by three apartment complexes and a shopping center.
Additionally, the Trust sold 2,300,000 preferred shares of beneficial interest
for $54.1 million of net proceeds. The mortgage proceeds and the net proceeds
from the sale of preferred shares were used to repay amounts outstanding under
the bank credit agreement.
In 1997, the Trust has $3.9 million in mortgage principal payments due
and $20 million in planned tenant and building improvements. These requirements
will be funded through available bank lines of credit and approximately $46
million of net proceeds from the sale of 3,910,000 shares of beneficial interest
in January 1997.
Results of Operations
- - ---------------------
Net income applicable to shares of beneficial interest was $3.3 million
for 1996, as compared to $13.9 million for 1995.
Net income applicable to shares of beneficial interest in 1996 included
an accrued preferred dividend of $845,000, two non-recurring, noncash charges
totaling $1.3 million for the write-off of a tenant allowance and the
termination of an employment contract, a lease termination fee of $1.1 million
and an extraordinary loss of $286,000 from the write-off of deferred costs
related to former bank credit agreements which were negotiated into a new
agreement.
Net income for 1995 included a capital gain of $29.9 million, a $14
million noncash unrealized loss on the carrying value of certain assets which
were identified for disposition, a $4.3 million noncash charge for the
cumulative effect of a change in accounting method, an extraordinary loss of
$910,000 from the early repayment of debt and $1.6 million of litigation and
proxy expenses.
The $29.9 million capital gain in 1995 resulted from the sale of the
Trust's 50% interests in two malls in Wilkes-Barre, PA and Fairmount, WV for
$29.5 million in cash, a $6 million mortgage at an interest rate of 9% secured
by one of the malls and also secured by partnership units of Crown American
Properties L.P., and the assumption by the purchaser of $4.7 million of mortgage
debt. The proceeds from this sale were invested in short-term securities until
properties were acquired in 1995 in a tax-free exchange.
In 1995, the Trust recorded a noncash charge of $4.3 million for the
cumulative effect of the change in accounting method for internal leasing costs.
Previously, the Trust deferred internal leasing costs and amortized these costs
over the lives of the consummated leases. Capitalizing these leasing costs is
generally done in the real estate industry; however, the Trust adopted a more
conservative practice by expensing these costs in the period incurred. This
change in the method of accounting was made retroactive to January 1995 and
consequently, 1995 amounts were restated to reflect this change.
19
<PAGE> 20
The extraordinary loss of $910,000 in 1995 primarily represented the
write-off of unamortized mortgage costs and prepayment premiums from the
repayment of mortgage loans prior to their maturity dates in conjunction with
the $49.5 million refinancing of Crossroads Center in St. Cloud, MN.
Litigation and proxy expenses of $1.6 million were incurred during
1995. These professional fees resulted from litigation and a proxy contest with
a minority shareholder. The litigation was resolved in December 1995 by a
settlement and standstill agreement.
Income from property operations for 1996, which is rents less property
operating expenses and real estate taxes, was $1.8 million greater than 1995.
However, on a comparable property basis, the retail properties in the portfolio
for all of 1996 and 1995 increased income from property operations by $2.2
million primarily due to increased occupancy of small shop space, the addition
of two anchor tenants and the recognition of a termination fee from an anchor
tenant for $1.1 million in December 1996. The office portfolio on a comparable
property basis for 1996 and 1995 increased income from property operations by
$.3 million primarily due to increased occupancy at the Oklahoma City, OK office
property. The comparable parking portfolio produced an additional $.3 million in
income from property operations due primarily to an increase in the guaranteed
minimum rent paid by the operator of the parking facilities. The 1996 full year
impact of the apartment complex purchased in June 1995 and the shopping center
purchased in April 1995 is offset by the sale in 1996 of two office buildings
and an attached parking garage and the sales in 1995 of an office building and
two shopping malls.
Income from property operations increased by $1.8 million when
comparing 1995 to 1994. The retail properties in the portfolio for all 12 months
of 1995 and 1994 increased income from property operations by $.4 million when
comparing 1995 to 1994 primarily due to increased occupancy. The comparable
apartment portfolio income from operations increased $.6 million primarily due
to increased rental rates. The office property portfolio increased income from
operations by approximately $.4 million from real estate tax refunds in 1995.
The parking portfolio produced an additional $.4 million in income from
operations due to an increase in the guaranteed rent paid by the operator of the
parking facilities and reduced real estate tax expense when comparing 1995 to
1994. The apartment complexes acquired in June 1995 and August 1994 and the
shopping center acquired in April 1995 increased income from property operations
when comparing 1995 to 1994. However, this increase was offset by the sale of
the two malls in January 1995.
As noted previously, the Trust invested $30 million in a joint venture
in September 1996. During the fourth quarter of 1996, the joint venture produced
$528,000 in investment income and $617,000 in management fees for the Trust's
affiliated management company.
Short-term investment income declined when comparing 1996 to 1995
because during the first half of 1995, the Trust had an average of $13 million
in short-term investments from the proceeds of the January 1995 sale of its 50%
interest in two malls. These funds were used to purchase a shopping center and
an apartment complex in April and June of 1995, respectively. Also, short-term
investment income declined when comparing 1995 to 1994 because short-term
investments averaged $6.4 million in 1995 as compared to $30 million in 1994. In
1994, the Trust had short-term investments until it purchased an apartment
complex for $19 million in August and repaid $17 million on a bank line of
credit.
Mortgage investment income increased when comparing 1995 to 1994 due to
the $6 million mortgage note receivable which was part of the consideration
received in January 1995 from the sale of the two malls.
20
<PAGE> 21
Mortgage interest expense increased when comparing 1996 to 1995 due to
the four new mortgage loans totaling $48.5 million obtained during 1996.
However, the Trust's refinancing in the fourth quarter of 1995 of four other
mortgage loans at an average interest rate of 9.25% for one mortgage loan at
7.49% partially offset the full effect of the increase in mortgage interest
expense from the addition of the four mortgage loans in 1996.
Depreciation and amortization expense for 1996 increased over 1995 by
approximately $1.2 million. This increase was caused by a non-recurring, noncash
$680,000 write-off of a tenant allowance due to the Trust replacing an anchor
tenant at one of its malls. The remaining increase in depreciation expense was
attributable to the Trust's capital improvement program during the last half of
1995 and continuing in 1996. The increase in depreciation and amortization
expense when comparing 1995 to 1994 was primarily the result of the newly
acquired shopping center and apartment complex in 1995 and additional tenant
improvements.
Interest on bank loans increased when comparing 1995 to 1994 due to an
increase of approximately 260 basis points in short-term interest rates. The
Trust's interest rates on its bank lines of credit fluctuate based on short-term
market rates. The increase in interest rates was partially offset by a decrease
in borrowings during 1995. During 1995, the Trust's weighted average interest
rate was 7.8% on an average outstanding balance of $50.8 million; whereas,
during 1996, the Trust had an average outstanding balance of $50.9 million at a
weighted average interest rate of 7.6%.
General and administrative expenses for 1996 included a non-recurring,
noncash charge of $650,000 for the termination of an employment contract of a
former executive. Also in 1996, additional expenses were incurred in the fourth
quarter to manage the nine properties acquired in the joint venture. Litigation
and proxy expenses of $1.6 million were included in general and administrative
expenses in 1995, but were previously disclosed separately.
General and administrative costs increased when comparing 1995 to 1994.
Expenses increased in 1995 as a result of litigation and proxy costs, changing
the method of accounting to directly expense internal leasing costs rather than
continue to capitalize and amortize these costs over the term of tenant leases
and an increase in leasing personnel.
The Trust in late October 1996 issued 2,300,000 of convertible
preferred shares of beneficial interest at 8.4%. Consequently, the preferred
dividend of $845,000 is non-comparable to 1995.
Funds From Operations and Dividends Declared
- - --------------------------------------------
Funds from operations (FFO) is calculated as income before capital gain
or loss, extraordinary loss and cumulative effect of accounting change, both
before and after preferred dividend, plus noncash charges for depreciation and
amortization for both the Trust and a joint venture. A new definition of FFO,
adopted by the National Association of Real Estate Investment Trusts, excludes
depreciation and amortization of debt issue costs and other corporate assets.
FFO presented by the Trust adds back the entire amount of depreciation and
amortization including $1,080,000, $866,000 and $568,000 for debt issue costs
and other corporate assets for the years ended December 31, 1996, 1995 and 1994,
respectively.
21
<PAGE> 22
The table below shows the calculation of FFO, dividends declared to
holders of shares of beneficial interest and the payout ratio.
<TABLE>
<CAPTION>
(AMOUNTS IN THOUSANDS) 1996 1995 1994
---------------------- ---- ---- ----
<S> <C> <C> <C>
Net income before preferred dividend $ 4,136 $13,891 $ 6,485
Depreciation and amortization 13,149 11,901 10,555
Depreciation and amortization of joint venture 364
Cumulative effect of accounting change 4,325
Extraordinary loss from debt extinguishment 286 910
Unrealized loss on carrying value of assets identified for
disposition 14,000
Capital gains (29,870)
------- ------- -------
Funds from operations before preferred dividend 17,935 15,157 17,040
Preferred dividend (845)
------- ------- -------
Funds from operations after preferred dividend $17,090 $15,157 $17,040
Dividends declared for shares of beneficial interest $ 7,684 $ 7,542 $ 7,273
Payout ratio of dividends for shares of beneficial interest
to FFO 45% 50% 43%
</TABLE>
The payout ratio of dividends declared to funds from operations was 45%, 50%
and 43% for 1996, 1995, and 1994 respectively. The payout ratio, compared to the
equity REIT industry average of approximately 80%, reflects the Trust's policy
of reinvesting in its present portfolio and increasing its portfolio through
acquisitions so that dividend increases will be supported by future operating
results.
22
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-k into the registrant's
previously filed Registration Statements on Form S-3 (Registration Nos.
2-88719, 33-2818, 33-11524, 33-19812, 33-26758, 33-33279, 33-38754, 33-45355,
33-57756 and 333-953).
ARTHUR ANDERSEN LLP
Cleveland, Ohio,
March 21, 1997
<PAGE> 1
Exhibit 24
----------
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
-------------------------------------------------------
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------
Power of Attorney of Officers and Trustees
------------------------------------------
The undersigned, an Officer or Trustee or both an Officer and Trustee
of First Union Real Estate Equity and Mortgage Investments, an Ohio business
trust (the "Trust") which anticipates filing with the Securities and Exchange
Commission, Washington, D.C., under the provisions of the Securities Exchange
Act of 1934, an Annual Report on Form 10-K for the year ended December 31, 1996
(hereinafter called the "Form 10-K"), does hereby constitute and appoint James
C. Mastandrea and Paul F. Levin, and either of them, with full power of
substitution and resubstitution, as attorneys or attorney to sign for him and in
his name the Form 10-K and any and all amendments and exhibits thereto, and any
and all other documents to be filed with the Securities and Exchange Commission
pertaining to the Form 10-K, with full power and authority to do and perform any
and all acts and things whatsoever required or necessary to be done in the
premises, as fully to all intents and purposes as he could do if personally
present, hereby ratifying and approving the acts of said attorneys and any of
them and any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this
fifth day of March, 1997.
/s/ Kenneth K. Chalmers
- - --------------------------
/s/ William E. Conway
- - --------------------------
/s/ Daniel G. DeVos
- - --------------------------
/s/ Allen H. Ford
- - --------------------------
/s/ Russel R. Gifford
- - --------------------------
/s/ Spencer H. Heine
- - --------------------------
/s/ Herman J. Russel
- - --------------------------
/s/ E. Bradley Jones
- - --------------------------
/s/ James C. Mastandrea
- - --------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000037008
<NAME> FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
<MULTIPLIER> 1
<CURRENCY> DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 2,951,000
<SECURITIES> 0
<RECEIVABLES> 8,440,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 11,391,000
<PP&E> 459,563,000
<DEPRECIATION> (112,614,000)
<TOTAL-ASSETS> 440,530,000
<CURRENT-LIABILITIES> 14,549,000
<BONDS> 254,868,000
<COMMON> 98,444,000
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 440,530,000
<SALES> 75,555,000
<TOTAL-REVENUES> 81,867,000
<CGS> 0
<TOTAL-COSTS> 77,445,000
<OTHER-EXPENSES> 54,019,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,426,000
<INCOME-PRETAX> 4,422,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 4,422,000
<DISCONTINUED> 0
<EXTRAORDINARY> (286,000)
<CHANGES> 0
<NET-INCOME> 3,291,000
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
