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SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies: .......
(2) Aggregate number of securities to which transaction applies: ..........
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): ............
(4) Proposed maximum aggregate value of transaction: ......................
(5) Total fee paid: .......................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: ...............................................
(2) Form, Schedule or Registration Statement No.: .........................
(3) Filing Party: .........................................................
(4) Date Filed: ...........................................................
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FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
55 PUBLIC SQUARE, SUITE 1900, CLEVELAND, OHIO 44113-1937
NOTICE OF
1998 SPECIAL MEETING OF BENEFICIARIES
To the Beneficiaries:
Notice is hereby given that the 1998 Special Meeting in lieu of Annual
Meeting of the Beneficiaries of First Union Real Estate Equity and Mortgage
Investments ("First Union" or the "Trust") will be held at the Forum Conference
& Education Center, located at One Cleveland Center, 1375 East 9th Street,
Cleveland, Ohio 44114, on Tuesday, May 19, 1998, at 10:00 A.M., Daylight
Saving Time, for the following purposes:
1. To fix the number of Trustees at twelve with one
vacancy to be added to each existing class of Trustees.
2. To elect three Class II Trustees.
3. To consider and act upon a proposal, if applicable and
properly presented, submitted by certain beneficiaries.
4. To consider and vote on six beneficiary nominees as Trustees,
if applicable and properly presented.
5. To transact such other business as may properly come before
the meeting.
Beneficiaries of record at the close of business on April 28, 1998 are
entitled to notice of and to vote at the meeting. Only such beneficiaries will
be permitted to attend.
By order of the Board of Trustees
Paul F. Levin
Senior Vice President -- General Counsel
and Secretary
March 26, 1998
YOUR VOTE IS VERY IMPORTANT. PLEASE FILL IN, DATE, SIGN AND RETURN PROMPTLY
THE ENCLOSED GREEN PROXY CARD WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE
MEETING. A SELF-ADDRESSED ENVELOPE IS ENCLOSED FOR YOUR CONVENIENCE.
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FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
55 PUBLIC SQUARE, SUITE 1900, CLEVELAND, OHIO 44113-1937
PROXY STATEMENT
SPECIAL MEETING OF BENEFICIARIES
May 19, 1998
GENERAL INFORMATION
This Proxy Statement and the accompanying GREEN proxy are being sent by
the Board of Trustees (sometimes referred to herein as the "Board") of First
Union Real Estate Equity and Mortgage Investments ("First Union" or the "Trust")
in connection with the solicitation of proxies from the holders of shares of
beneficial interest, par value $1 per share, of the Trust ("Shares") to be voted
at the 1998 Special Meeting in lieu of Annual Meeting of Beneficiaries,
including any adjournments or postponements thereof (the "Annual Meeting"), to
be held at the Forum Conference & Education Center, located at One Cleveland
Center, 1375 East 9th Street, Cleveland, Ohio 44114, on Tuesday, May 19, 1998,
at 10:00 A.M., Daylight Saving Time, to take the following actions: (i) to
approve fixing the number of Trustees at twelve with one vacancy to be added to
each existing class of Trustees (the "Board's Proposal"); (ii) to elect James M.
Delaney, James C. Mastandrea and Herman J. Russell, current Trustees whose term
on Class II of the Board of Trustees expires in 1998 (the "Board's Nominees");
(iii) if applicable, to vote against a beneficiary proposal to increase the size
of the Board from nine members to fifteen members, with two new seats in each of
the three classes on the Board, and to hold an election for the six newly
created seats (the "Gotham Proposal"); (iv) if applicable, to vote against
electing such beneficiary's nominees to the six newly created seats (the "Gotham
Nominees"); and (v) to transact such other business as may properly come before
the meeting or any adjournment or postponement thereof. Beneficiaries are urged
to read the sections of this Proxy Statement entitled "Certain Legal
Proceedings" and "Beneficiary Proposal" for information relating to the
foregoing items (iii) and (iv).
THE BOARD OF TRUSTEES RECOMMENDS THAT YOU VOTE IN FAVOR OF THE BOARD'S
NOMINEES AND THE BOARD'S PROPOSAL. IF APPLICABLE, THE BOARD RECOMMENDS THAT YOU
VOTE AGAINST THE GOTHAM PROPOSAL AND AGAINST ELECTING THE GOTHAM NOMINEES.
The Trust has been advised that two purported beneficiaries, Gotham
Partners, L.P. and its affiliate, Gotham Partners II, L.P. (collectively,
"Gotham" or the "Gotham Partnerships") would propose to introduce the Gotham
Proposal. If adopted, Gotham would propose to nominate the Gotham Nominees. The
adoption of the Gotham Proposal and election of the Gotham Nominees, together
with the approval of a proposed resolution to elect three additional Gotham
nominees for the three Trustee positions whose term expires in 1998, would, if
successful, result in a change in control of the Board of Trustees. Your Board
recommends that you vote AGAINST the Gotham Proposal because, among other
things, it would deprive you, the beneficiaries of the Trust, from realizing a
"takeover premium" in exchange for giving control of more than 50% of the Board
seats to Gotham, which is a minority beneficiary holding less then 10% of the
outstanding Shares.
In addition, granting control of the Board could have
serious economic and tax consequences with respect to the business of the Trust,
taken as a whole, because it would constitute a change in control under, among
other things, certain employment agreements and certain financing arrangements
of the Trust, including the Trust's Amended and Restated Credit Agreement, dated
as of November 1, 1997 (the "Trust Credit Agreement"), among the Trust, First
Union Management Inc., the lending institutions named therein, KeyBank National
Association, as documentation agent, Bankers Trust Company, as syndication
agent, and National City Bank, as administrative agent. Upon a change of
control, certain provisions in the Trust Credit Agreement give the Trust's
lenders the right to accelerate the repayment of $101 million by the Trust to
the Trust's lenders (an amount which will soon increase to $115 million). In
addition, pursuant to an Indenture, dated as of September 1, 1993 (the "Notes
Indenture"), under which the Trust's 8-7/8% Senior Notes were issued, the
holders thereof would have the right upon a change of control to demand
acceleration of repayment at a price in cash equal to 101% of the aggregate
principal amount thereof plus accrued and unpaid interest thereon. Acceleration
of repayment obligations under either the Trust Credit Agreement or the Notes
Indenture would also trigger acceleration or comparable provisions under other
agreements, including under an Ancillary Agreement, dated as of April 17, 1997
(the "Impark Credit Agreement"), between BT Bank of Canada ("BT"), Hong Kong
Bank of Canada ("HKB") and the Trust. Under the Impark Credit Agreement, upon
the occurrence of the adoption of the Gotham Proposal and election of the Gotham
Nominees, BT and HKB would have the right to require the Trust to deliver to a
trustee United States or Canadian government bonds representing the outstanding
amount of borrowings under the Amended and Restated Credit Agreement, dated
April 17, 1997, between Imperial Parking Ltd. ("Impark"), 504463 N.B. Inc. and
BT. The aggregate amount of such outstanding borrowings may be at any time
Canadian $50,000,000 (equivalent to US $35,403,000 based on March 17, 1998
exchange rate). In the event the Trust made any payments to BT and HKB, the
Trust would need to seek reimbursement from Impark. If Impark were unable to
reimburse the Trust by the end of a calendar quarter, under present
circumstances, the Trust would be disqualified as a real estate
investment trust ("REIT"). Loss of REIT status would give rise to the Trust
being treated as a corporation for federal income tax purposes.
The Board continues to believe that, in addition to the economic and
tax consequences described above, there are serious legal problems with the
Gotham Proposal, including, among other things, that Gotham's Shares were, in
the Board's view, "Excess Securities" at the time Gotham attempted to make its
proposal and that Gotham was therefore ineligible to submit any proposal for the
Annual Meeting. "Excess Securities" is defined in the By-Laws of the Trust and
refers to ownership of more than 9.8% of the outstanding Shares by any person
and also refers to Shares owned by any person who has failed to provide
ownership information upon reasonable request by the Trust. Under the Trust's
By-Laws, Shares that are deemed to be "Excess Securities" are not entitled to
any voting rights, are not considered to be outstanding for quorum or voting
purposes and are not entitled to receive dividends. In addition, even if the
Gotham Nominees were to be elected, the Board believes that there is no
assurance that all of the Gotham Nominees would be eligible under the By-Laws of
the Trust to serve as Trustees. The By-Laws of the Trust prohibit the Trustees
from having certain affiliations and conflicting business interests.
Furthermore, the Board does not believe that the Board can be declassified in
the manner provided by the Gotham Proposal. However, the Trust was unsuccessful
in obtaining a preliminary injunction in state court in the State of Ohio
clarifying this issue. Beneficiaries are urged to read the sections of this
Proxy Statement entitled "Certain Legal Proceedings" and "Beneficiary Proposal."
The Board has spent considerable time and resources in meetings with
representatives of Gotham attempting to develop a solution that would provide
additional representation on the Board to beneficiaries, including Gotham, and
result in the greatest value for the Trust's beneficiaries. Toward this end, on
March 20, 1998, the Trust reached an agreement in principle with Gotham that
would have given Board representation to Gotham, and over the course of the next
week the Trust negotiated in good faith to reach a definitive settlement
agreement with Gotham. On March 27, 1998, Gotham retreated without explanation
from the settlement negotiations. See "Beneficiary Proposal" for further
discussion on the Trust's settlement negotiations with Gotham.
While the Board does not believe that Gotham has the right to recommend
the Gotham Proposal or the right to put forward the Gotham Nominees, your Board
is soliciting your vote to vote against the Gotham Proposal and the Gotham
Nominees. Your Board urges you to read the sections of this Proxy Statement
entitled "Certain Legal Proceedings" and "Beneficiary Proposal" for further
information and an explanation of the reasons to vote, if applicable, AGAINST
the Gotham Proposal.
The record date for determination of beneficiaries entitled to vote at
the Annual Meeting is April 28, 1998 (the "Record Date"). Because of delays
associated with active settlement discussions with Gotham that abruptly ended on
March 27, 1998, the Board took action on March 27, 1998 to change the record and
meeting dates, which had originally been February 13, 1998 and April 14, 1998,
respectively, in order to provide the beneficiaries with sufficient time to
receive this Proxy Statement and to consider and vote upon the items contained
herein. However, after the Trust announced that it would postpone the Annual
Meeting, Gotham filed on March 30, 1998 a motion for preliminary injunction to
compel the Trust to hold the Annual Meeting as originally scheduled on April 14,
1998. On March 31, 1998, the parties agreed to a record date of April 28, 1998
and a special meeting date of May 19, 1998. As of the mailing of the Proxy
Statement, __________ Shares were outstanding, including Excess Securities.
Shares represented by a properly executed GREEN proxy card will be voted at the
meeting or any adjournment thereof, and, if a choice is specified in the proxy,
the Shares will be voted in accordance with such specification. If no
specification is made, such Shares will be voted FOR the Board's Proposal, FOR
the Board's Nominees, AGAINST the Gotham Proposal, AGAINST the Gotham Nominees
and, in the discretion of the persons named as proxies, to vote on such other
business as may properly come before the meeting or any adjournment or
postponement thereof. A beneficiary may revoke his proxy at any time prior to
its exercise by giving notice to First Union in writing or by attending the
Annual Meeting and voting in person (attendance alone at the Annual Meeting will
not by itself revoke a proxy).
The principal executive offices of the Trust are located at 55 Public
Square, Suite 1900, Cleveland, Ohio 44113-1937. The approximate date on which
this Proxy Statement and the accompanying GREEN proxy are first being sent to
the Trust's beneficiaries is April __, 1998.
First Union will bear the cost of preparing and mailing this Proxy
Statement, the accompanying GREEN proxy and any other related materials. First
Union has engaged Corporate Investor Communication, Inc. ("CIC") to assist in
the solicitation of proxies from beneficiaries, at a fee of $45,000, plus
reimbursement of its out-of-pocket expenses. First Union will also pay the
standard charges and expenses of brokerage houses, or other nominees or
fiduciaries, for forwarding such materials to, and obtaining the proxies from,
beneficiaries for whose account they hold registered title to Shares of First
Union. In addition to use of the mail, proxies may be solicited personally, by
telephone or otherwise, by Trustees, officers and regular employees of First
Union without receiving additional compensation, as well as by employees of CIC.
First Union will pay the expense of such solicitation.
FIXING THE SIZE OF THE BOARD OF TRUSTEES
(Item No. 1)
Under the Amended Declaration of Trust, as amended (the "Declaration of
Trust") of First Union, the number of Trustees shall be not less than three nor
more than fifteen, as from time to time determined at annual or special meetings
of beneficiaries. The number of Trustees is currently set at nine. The Board of
Trustees recommends that the number be increased to twelve with one additional
vacancy added to each class. The Board of Trustees has no current plans to fill
those vacancies regardless of whether the Gotham Nominees are elected, but
believes it is prudent to have vacancies in the event that qualified candidates
become available in connection with one or more acquisitions by the Trust or
otherwise. The Trust's strategic plan is to grow by acquisitions. If this effort
is successful, it is likely that one or more significant transactions would be
implemented over the near term, and it may be appropriate and attractive to add
one or more new Trustees in connection with such acquisitions. The Declaration
of Trust does not provide the flexibility for Trustees to enlarge the Board by
adding seats. However, the Declaration of Trust does provide that the number of
Trustees shall be not less than three, nor more than fifteen as determined by
vote of the beneficiaries. Consequently, in order to have vacancies available,
it is necessary to authorize them in advance. Any vacancy may be filled by a
majority vote of the remaining Trustees, effective for the remainder of the term
for the Class in which such vacancy exists. Regardless of whether the proposal
is approved by beneficiaries, only three Trustees will be elected at the Annual
Meeting.
The current size of the Board could be increased by as many as six
seats, which Gotham would propose to do. Gotham would also propose to fill such
vacancies, if created, with its own candidates to be elected at the Annual
Meeting. The Board of Trustees believes this procedure would be in contravention
of the Declaration of Trust, and this issue is currently a subject of litigation
between First Union and such group of beneficiaries. See "Certain Legal
Proceedings" and "Beneficiary Proposal" in this Proxy Statement.
First Union already has a classified Board of Trustees. The Trustee's
proposal to add three seats to the Board, one to each class, would not, in
general, affect a potential acquiror's effort to gain control of the Board of
First Union any more than has been true in the past. However, if a beneficiary
desired to take control of the Board of Trustees, it might be easier for such
beneficiary to accomplish its goal if the then current size of the Board were
nine and such beneficiary could mount an effort to increase the size of the
Board to fifteen and then seek election to both the current seats up for
election and all the newly created ones. Again, although the Trust was
unsuccessful in obtaining a preliminary injunction from the state court
clarifying this issue, the ability of a beneficiary to take control through
this method is currently the subject of litigation. The Trust acknowledges that
adoption of the Trustees' proposal to increase the size of the Board by three,
if approved, could have the effect of thwarting Gotham's effort to increase the
size of the Board by six, and, if Gotham's nominees for the three seats in
Class II were to be elected and the Gotham Proposal were not approved, the
Board's ability to fill three vacancies could dilute the position of Gotham's
nominees. Consequently, the Board's Proposal might render more difficult the
assumption of control by a principal beneficiary or beneficiary group, and thus
make more difficult the removal of management. In this regard, in its attempts
to settle the litigation with Gotham, the Board has met on a number of
occasions with representatives of Gotham to discuss adding holders of
significant minority interests to the Board, including representatives of
Gotham. The Board has also talked to representatives of Apollo Real Estate
Advisors II, L.P. ("Apollo") about serving on the Board. Vacancies created by
the adoption of the Board's Proposal could also be available for that purpose.
Management does not currently have plans to adopt or propose for adoption any
anti-takeover measures in future proxy solicitations.
ELECTION OF TRUSTEES
(Item No. 2)
Under the Declaration of Trust of First Union, the Board of Trustees is
divided into three classes, with each class as nearly equal in number to the
other classes as possible. The term of office of each class expires in
successive years. Accordingly, at each Annual Meeting successors to the Trustees
whose terms expire at that meeting are elected to three-year terms. Any vacancy
occurring in a class of Trustees may be filled by a majority vote of the
Trustees remaining in office, effective for the remainder of the term for such
class.
NOMINEES
Currently, the Board of Trustees is composed of nine Trustees and is
divided into equal classes known as Class I, II and III whose terms expire in
2000, 1998 and 1999, respectively. It is proposed that three Trustees be elected
to Class II of the Board of Trustees at the Annual Meeting. James M. Delaney,
James C. Mastandrea and Herman J. Russell, current Trustees whose term expire in
1998, are nominees for election at the meeting. Nominees receiving the greatest
number of votes duly cast by the Shares represented at the Annual Meeting that
are entitled to vote will be elected as Trustees.
While the Trustees do not anticipate that any of the Board's Nominees
will be unable to serve, if any is not available for election, proxies may be
voted for a substitute as well as for the other persons named.
THE BOARD OF TRUSTEES RECOMMENDS A VOTE FOR THE ELECTION OF MESSRS.
DELANEY, MASTANDREA AND RUSSELL.
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<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS, PERIOD OF EXPIRATION
BUSINESS EXPERIENCE SERVICE AS OF
NAME AND AGE AND AFFILIATIONS TRUSTEE TERM
------------ ---------------- ------- ----
<S> <C> <C>
CLASS II
James M. Delaney (63) Mr. Delaney was Managing Partner of the Northeast 1997 to Date 1998
Ohio Offices of Deloitte & Touche LLP (Deloitte)
from 1978 to 1997 when he retired. He is a CPA
and was a member of Deloitte since 1958. He is
currently a consultant to Deloitte, a member
of the Advisory Board of AON Risk Services, a
global insurance company, and a director of
Cardinal American Corporation, a private home
products company. Mr. Delaney was the
Financial Supervisor for the Oversight
Commission which supervised the City of
Cleveland's fiscal recovery from 1980 to 1986.
Mr. Delaney was a Vice Chairman of the Greater
Cleveland Growth Association, served as
Chairman of Build Up Greater Cleveland, a
public/private partnership, from 1989-1997,
chaired the Accountancy Advisory Board for
Case Western Reserve University from 1980 to
1990 and was a trustee of the Distribution
Committee of the Cleveland Foundation from
1986 to 1996. He is Treasurer of the
MetroHealth Foundation Board of Trustees, a
member of the Boards of Trustees of John
Carroll University and of Youth Opportunities
Unlimited, and the Visiting Committee of the
Weatherhead School of Management of Case
Western Reserve University.
James C. Mastandrea (54) Mr. Mastandrea has been Chairman, President and 1994 to Date 1998
Chief Executive Officer of the Trust since
January 1994 and in 1996 also served as Chief
Financial Officer; he was President and Chief
Operating Officer from July 1993 through
December 1993. Mr. Mastandrea was President
and Chief Executive Officer of Triam
Corporation, Chicago, Illinois, an investment
adviser to various real estate investment
funds from 1991 to 1993. He was Chairman,
President and Chief Executive Officer and
founder of Midwest Development Corporation,
Buffalo Grove, Illinois, from 1978 to 1991.
From 1971 to 1978, Mr. Mastandrea served in
various capacities in the field of commercial
and real estate lending, including Vice
President of Continental Bank, Chicago,
Illinois, and with Mellon Bank, Pittsburgh,
Pennsylvania. He is the Chairman of the Euclid
Corridor Improvement Project (Project
Management Board); Chairman of the Nominating
Committee of the Cleveland State University
Foundation Board of Directors; served as
Chairman of the Downtown Development
Coordinators from 1995-1997; a member of the
Cleveland State University Foundation Board of
Directors; a member of the Convention and
Visitors Bureau of Greater Cleveland Board of
Directors; a member of the University Circle,
Inc. Board of Directors and property
committee; a member of the Civic Vision 2000
and Beyond Surface Transportation Task Force;
a member of the Hotel Development Council of
the Urban Land Institute, a member of the
International Council of Shopping Centers, a
member of the National Association of Real
Estate Investment Trusts, a member of the
Multifamily Housing Association, and a member
of the National Association of Corporate
Directors.
Herman J. Russell (67) Mr. Russell is Chairman of H. J. Russell & Company, 1997 to Date 1998
a general construction, construction
management, brokerage, and real estate
development and management company. He formed
the company in 1959. He is also President and
Chief Executive Officer of Russell Properties,
Inc., a real estate development company formed
by Mr. Russell in 1991, and of Concessions
International, Inc., an airport food and
beverage concessionaire formed by Mr. Russell
in 1978. He is Chairman of the Board of
Directors of Citizens Trust Bank, and a
director of Georgia
</TABLE>
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Power Company, Wachovia Corporation, National
Service Industries, Inc. and Georgia Port
Authority. He is also a director of Central
Atlanta Progress and Atlanta Chamber of
Commerce and a trustee of Morris Brown College
and Tuskegee University.
REMAINING TRUSTEES
Each remaining Trustee, whose present term of office as Trustee will
continue after the meeting and will expire in the year set forth opposite his
name and upon the election and qualification of his successor, and certain
additional information with respect to each of them, is as follows:
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS, PERIOD OF EXPIRATION
BUSINESS EXPERIENCE SERVICE AS OF
NAME AND AGE AND AFFILIATIONS TRUSTEE TERM
------------ ---------------- ------- ----
<S> <C> <C>
CLASS I
Kenneth K. Chalmers (68) Mr. Chalmers is a consultant. During 1995 and 1994 to Date 2000
1996, he was a consultant with Kennedy & Co.,
Chicago, Illinois, responsible for the Bank of
America account. He was Executive Vice
President of Continental Bank, Chicago,
Illinois, and its successor, Bank of America,
a commercial bank, from 1984 to 1994.
Previously he was Senior Vice President -
Group Head of the bank from 1977 to 1984 and
Vice President - Division Head from 1972 to
1977. He is a director of Learning Insights,
L.L.C., Catholic Health Partners and Profile
Systems; Vice Chairman and a member of the
Executive Committee of St. Joseph Health Care
Foundation, Chicago, Illinois, and serves on
the Advisory Board of the Kellogg Graduate
School of Management, Northwestern University
and Maginfy Holdings Corporation.
William E. Conway (70) Mr. Conway has been Chairman of Fairmount Minerals, 1985 to Date 2000
Ltd., a miner and processor of industrial
minerals, since 1978, and was Chairman and
Chief Executive Officer from 1978 to 1996. Mr.
Conway was a Group Vice President of
Midland-Ross Corporation, a diversified
capital goods manufacturer, from 1974 to 1978,
and was Executive Vice President,
Administration of Diamond Shamrock
Corporation, a producer of chemicals,
petroleum and related products, from 1970 to
1974. Mr. Conway is a director of The
Huntington National Bank of Ohio and a trustee
of The Cleveland Clinic Foundation and
University School.
Russell R. Gifford (58) Mr. Gifford was President of CNG Energy Services 1991 to Date 2000
Corporation ("CNG"), an unregulated energy
marketing company providing gas and electric
energy services throughout North America, from
1994 to 1997. He was President and Chief
Executive Officer of The East Ohio Gas Company
("East Ohio"), Cleveland, Ohio, a distributor
of natural gas, from 1988 to 1994. He was also
President of West Ohio Gas Company ("West
Ohio"), Lima, Ohio, and River Gas Company
("River"), Marietta, Ohio. CNG, East Ohio,
West Ohio and River are subsidiaries of
Consolidated Natural Gas Co. of Pittsburgh,
Pennsylvania. Mr. Gifford was Senior Vice
President of East Ohio from 1985 to 1988. Mr.
Gifford is a director of Applied Industrial
Technologies, Inc., a trustee of Baldwin
Wallace College, and a member of the National
Board of Governors of the American Red Cross.
CLASS III
Daniel G. DeVos (39) Mr. DeVos is Chairman, President and Chief Executive 1994 to Date 1999
Officer of DP Fox Ventures, L.L.C., a private
real estate investment, development and
management company. He is also Vice President,
Corporate Affairs of Amway Corporation, a
direct sales consumer product business; Vice
Chairman, Governing Board of the Orlando
Magic, a professional NBA Basketball
</TABLE>
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<TABLE>
<S> <C> <C>
franchise; President and Chief Executive
Officer of the Grand Rapids Griffins and the
Kansas City Blades, professional International
Hockey League franchises and the Grand Rapids
Rampage, a professional Arena Football League
franchise; and Chairman and Chief Executive
Officer of Georgian Enterprises, Ltd., Barrie,
Ontario, Canada, a group of related companies
involved in automobile sales, aircraft
leasing, charter and sales, real estate
development and management; and Appliance
Distributors, Inc., Detroit, Michigan, a
wholesale distributor of high-end appliances.
Mr. DeVos is a director of Genmar Industries,
Inc., Minneapolis, Minnesota, a boat
manufacturer. He is also a trustee of
Butterworth Hospital, Grand Rapids, Michigan,
and a member of the Boards of the Family
Outreach Center, Grand Rapids, Michigan and
the Grand Rapids Symphony.
Allen H. Ford (69) Mr. Ford is a consultant and was, from 1981 to 1983 to Date 1999
1986, Senior Vice President - Finance and
Administration of The Standard Oil Company (BP
America), an integrated domestic petroleum
company engaged in all phases of the petroleum
business. Mr. Ford was Corporate Executive
Vice President and Unit President from 1976 to
1980, Vice President, Finance, from 1969 to
1976, and Treasurer during 1969 of Diamond
Shamrock Corporation, a producer of chemicals,
petroleum and related products. Mr. Ford is a
director of Gliatech, Inc. and Parker Hannifin
Corporation, and is a trustee and former
Chairman of Case Western Reserve University, a
trustee of the Musical Arts Association
(Cleveland Orchestra), University Hospitals of
Cleveland, the Western Reserve Historical
Society, and University Circle, Inc. He is
also a trustee and former Chairman of the
Edison BioTechnology Center.
Spencer H. Heine (55) Mr. Heine has been Executive Vice President, 1996 to Date 1999
Secretary and General Counsel of Montgomery
Ward Holding Corp., a national retail chain,
since September 1991, and has been a director
of the company since May 1992. Prior thereto,
he was Senior Vice President, Secretary and
General Counsel of the company from June 1988
through September 1991. Mr. Heine has been
Executive Vice President, Secretary and
General Counsel of Montgomery Ward & Co.,
Incorporated, a subsidiary of Montgomery Ward
Holding Corp., since April 1994, and has been
a director of that company since May 1992. He
has also been President of Montgomery Ward
Properties, a subsidiary of Montgomery Ward &
Co., Incorporated since April 1994. Prior
thereto, Mr. Heine served as Executive Vice
President, Legal and Financial Services of
Montgomery Ward & Co., Incorporated, from
September 1991 through April 1994. Mr. Heine
was Chairman and Chief Executive Officer of
Signature, a subsidiary of Montgomery Ward &
Co., Incorporated, from March 1993 through
April 1994. Prior thereto, he also served as
President of Signature from September 1991.
</TABLE>
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COMPENSATION OF TRUSTEES
Trustees, other than Mr. Mastandrea, receive an annual retainer fee of
$12,000 and are paid an attendance fee of $1,000 for meetings of the Board and
committees. A deferred compensation plan for nonemployee Trustees has been
established to permit Trustees to receive compensation in Shares.
ORGANIZATION OF BOARD OF TRUSTEES
The Board of Trustees held six board meetings during 1997. Each of the
present Trustees attended at least 75% of the aggregate of the meetings of the
Board and the committees of the Board on which he served except Mr. Russell who
attended 70.6% and Mr. DeVos who attended 72.2%. The Board has standing
Executive; Audit; Management, Organization and Compensation; and Nominating
Committees.
EXECUTIVE COMMITTEE
The Executive Committee exercises all of the powers and authority of
the Board during intervals between meetings of the Board except the declaration
of dividends and the filling of vacancies among the Trustees or the Executive
Committee and except as its powers and duties may be limited or proscribed by
the Trustees from time to time. Present members are Kenneth K. Chalmers, William
E. Conway, James M. Delaney, Daniel G. DeVos, Allen H. Ford, Russell R. Gifford,
Spencer H. Heine, Herman J. Russell and James C. Mastandrea (Chairman).
The Executive Committee held eight meetings during 1997.
AUDIT COMMITTEE
The Audit Committee is composed entirely of Trustees who are not
employees of First Union. The Committee recommends to the Board the appointment
of auditors to examine and report on the combined financial statements, reviews
with the independent auditors the arrangements for and results of the audit
engagement, reviews the independence of the auditors, considers the range of
audit and non-audit fees and reviews the reports of First Union's internal
auditor and its system of internal accounting controls. Present members are
Kenneth K. Chalmers, Spencer H. Heine and Allen H. Ford (Chairman). The Audit
Committee held two meetings during 1997.
MANAGEMENT, ORGANIZATION AND COMPENSATION COMMITTEE
The Management, Organization and Compensation Committee (the
"Management Committee"), composed entirely of Trustees who are not employees of
First Union, makes recommendations to the Board on matters involving management
succession, the compensation of officers with salaries of $75,000 per year or
more and the retainer and attendance fees for Trustees, makes recommendations
and determinations concerning First Union's Share option plans and the 1994 Long
Term Incentive Performance Plan (as amended from time to time, the "1994 Plan"),
and reviews compensation arrangements as they relate to key employees. Present
members are Daniel G. DeVos, Herman J. Russell and William E. Conway (Chairman).
The Management Committee held four meetings in 1997.
NOMINATING COMMITTEE
The Nominating Committee recommends qualified candidates for election
as Trustees and considers the performance of incumbent Trustees to determine
whether to recommend them for nomination to stand for reelection. Present
members are Russell R. Gifford and James C. Mastandrea (Chairman). The Committee
held one meeting in 1997. The Nominating Committee will consider persons for
election as Trustees who are recommended to it in writing by any beneficiary.
Any beneficiary wishing to submit a recommendation to the Committee should send
a signed letter of recommendation to the following address: First Union Real
Estate Equity and Mortgage Investments, Suite 1900, 55 Public Square, Cleveland,
Ohio 44113-1937, Attention: Chairman. Recommendation letters should state the
reasons for the recommendation and contain the full name and address of each
proposed nominee as well as a brief biographical history setting forth past and
present directorships, employment and civic activities.
7
<PAGE> 8
SECURITY OWNERSHIP OF TRUSTEES AND OFFICERS AND CERTAIN BENEFICIAL OWNERS
The table below sets forth, with respect to Trustees and nominees,
certain named executive officers, and as to all Trustees and executive officers
as a group, information relating to their beneficial ownership of Shares of
First Union as of February 13, 1998:
<TABLE>
<CAPTION>
NAME OF BENEFICIAL OWNER AMOUNT AND NATURE OF
- ------------------------- BENEFICIAL OWNERSHIP (1) PERCENT
------------------------ -------
<S> <C> <C>
TRUSTEES
Kenneth K. Chalmers 8,768 .028 %
William E. Conway 19,511 .062 %
James M. Delaney 2,198 .007 %
Daniel G. DeVos 15,745 .050 %
Allen H. Ford 25,000 .079 %
Russell R. Gifford 16,240 .051 %
Spencer H. Heine 5,000 .016 %
Herman J. Russell 8,733 .028 %
James C. Mastandrea
(also an Executive Officer) 915,559 (2) 2.874%
EXECUTIVE OFFICERS
Steven M. Edelman 117,670 (3) .372 %
Paul F. Levin 104,728 (4) .331 %
John J. Dee 108,022 (5) .342 %
Thomas T. Kmiecik 76,304 (6) .241 %
All Trustees and executive officers
(13 in number) as a group 1,423,478 (7) 4.440%
</TABLE>
(1) Pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as
amended, a person is deemed to be a beneficial owner if he has or
shares voting power or investment authority in respect of such security
or has the right to acquire beneficial ownership within 60 days. The
amounts shown in the above table do not purport to represent beneficial
ownership except as determined in accordance with this Rule. Each
Trustee and executive officer has sole voting and investment power with
respect to the amounts shown or shared voting and investment powers
with his spouse, except for restricted shares which have only voting
power and no investment power.
(2) Includes 565,890 Shares in the form of restricted stock over which Mr.
Mastandrea has sole voting power but no investment power, 286,441
Shares that Mr. Mastandrea has the vested right to acquire through the
exercise of options, and 3,000 Series A Cumulative Convertible
Preferred Shares of Beneficial Interest, par value $25.00 per share, of
the Trust ("Convertible Preferred Shares") convertible into Shares at a
conversion ratio of approximately 3.31:1 per preferred share.
(3) Includes 55,000 Shares in the form of restricted stock over which Mr.
Edelman has sole voting power but no investment power and 55,307 Shares
that Mr. Edelman has the vested right to acquire through the exercise
of options.
(4) Includes 50,000 Shares in the form of restricted stock over which Mr.
Levin has sole voting power but no investment power and 51,617 Shares
that Mr. Levin has the vested right to acquire through the exercise of
options.
(5) Includes 50,500 Shares in the form of restricted stock over which Mr.
Dee has sole voting power but no investment power and 52,307 Shares
that Mr. Dee has the vested right to acquire through the exercise of
options.
(6) Includes 30,000 Shares in the form of restricted stock over which Mr.
Kmiecik has sole voting power but no investment power and 44,647 Shares
that Mr. Kmiecik has the vested right to acquire through the exercise
of options.
(7) Includes 490,319 Shares which executive officers have the vested right
to acquire through the exercise of options and 751,390 Shares in the
form of restricted stock.
8
<PAGE> 9
The following table sets forth, according to publicly available information on
file with the Securities and Exchange Commission (the "Commission") as of the
dates indicated, information concerning each person known by First Union to be
the beneficial owner of more than 5% of the Shares of First Union:
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT OF
BENEFICIAL OWNER OWNERSHIP CLASS
---------------- --------- -----
<S> <C> <C>
Franklin Resources, Inc. 2,900,418 (1) 9.18%
777 Mariners Island Blvd.
San Mateo, CA 94404
Charles B. Johnson
777 Mariners Island Blvd.
San Mateo, CA 94404
Rupert H. Johnson
777 Mariners Island Blvd.
San Mateo, CA 94404
Franklin Mutual Advisors, Inc.
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Franklin Mutual Series Fund, Inc.
51 John F. Kennedy Parkway
Short Hills, NJ 07078
Gotham Partners, L.P. 2,632,400 (2) 8.34%
Gotham Partners II, L.P.
110 East 42nd St.
New York, New York 10017
Apollo Real Estate Investment Fund II, L.P. 2,135,987 (3) 6.8%
Apollo Real Estate Advisors II, L.P.
1301 Avenue of the Americas
New York, New York 10019
Stephen Feinberg 1,602,327 (4) 5.1%
Cerberus Partners L.P.
Cerberus International Ltd.
Ultra Cerberus Fund, Ltd.
Certam Private Funds
450 Park Avenue, 28th Floor
New York, New York 10022
</TABLE>
(1) The information regarding this holder, together with information on the
holdings of Franklin Mutual Advisors, Inc. ("FMAI"), Franklin Mutual
Series Fund, Inc., Charles B. Johnson and Rupert H. Johnson, was
received by First Union through the filing of a Schedule 13D with the
Commission on or about February 23, 1998. Collectively, the persons
reported in such Schedule 13D filing may be deemed to own beneficially
an aggregate of 2,900,418 Shares. FMAI has sole voting and dispositive
power with respect to such Shares.
(2) The information regarding this holder was received by First Union
through the filing of a Schedule 14A filed with the Commission on
March 16, 1998.
(3) The information regarding this holder was received by First Union
through the filing with the Commission of a Schedule 13D,
as amended through March 5, 1998.
(4) The information regarding this holder was received by First Union
through the filing with the Commission of a Schedule 13D on
February 17, 1998.
9
<PAGE> 10
CERTAIN LEGAL PROCEEDINGS
FIRST UNION VS. GOTHAM PARTNERSHIPS
In August and October 1997, the Trust requested information pursuant to
its Declaration of Trust and By-Laws in order to ascertain the ownership of
Shares held by two of its beneficiaries, the Gotham Partnerships. The requests
were made in furtherance of the Trustees' obligation to preserve the Trust's tax
status as a real estate investment trust. The Gotham Partnerships refused to
comply with such requests. On January 16, 1998, the Trust commenced a civil
action (Case No. 347063) in the Court of Common Pleas, Cuyahoga County, Ohio
("State Court," and such action, the "State Court Action"), against the Gotham
Partnerships to, among other things, enforce the Declaration of Trust and to
declare the Gotham Proposal, set forth in a letter dated January 8, 1998 from
Gotham to the Trust, unlawful, null and void. The Trust also seeks, among other
things, to enjoin the Gotham Partnerships from soliciting proxies for the Gotham
Proposal or the Gotham Partnerships' nominees for the Board of Trustees.
Initially, the Gotham Partnerships unsuccessfully sought to remove the State
Court Action to federal district court. On January 20, 1998, the Gotham
Partnerships filed counterclaims, alleging, among other things, that the Trust
had violated its purported fiduciary obligations to the Gotham Partnerships and
violated the proxy rules under federal securities laws. The Gotham Partnerships
also sought, among other things, a declaration that Gotham was entitled to
submit the Gotham Proposal and nominations for a vote at the Annual Meeting and
to enjoin the Trust from soliciting proxies from the Trust's beneficiaries.
On March 27, 1998, the State Court denied the Trust's motion to enforce
the Declaration of Trust and By-Laws which deem the Gotham Partnerships'
interest in the Trust to be "Excess Securities," the equivalent of treasury
shares, by virtue of their failure to comply with the Trust's requests for
ownership information, and to enjoin them from soliciting proxies for the Annual
Meeting.
On January 30, 1998, the Gotham Partnerships filed a separate civil
action in the United States District Court for the Northern District of Ohio
(Case No. 1:98CV 0272) (the "Federal Action"). Therein, the Gotham Partnerships
sought to enjoin the Trust from taking actions allegedly in violation of federal
securities laws and to permit Gotham to solicit proxies with respect to its
Proposal and purported nominations. The Trust filed an answer and counterclaims
on February 10, 1998 to the Gotham Partnerships' Federal Action, denying any
wrongdoing, and alleging, among other things, that the Gotham Partnerships
violated federal securities laws, tortiously interfered with the Trust's
business, and caused the Trust and its beneficiaries to suffer damage. The
Trust's counterclaims, as amended, seek compensatory and punitive damages,
injunctive relief and a trial by jury.
On March 6, 1998, the Trust filed its own motion for preliminary
injunction in the Federal Action seeking to enjoin the Gotham Partnerships from
soliciting proxies for the Annual Meeting on the basis that they have failed to
disclose their group in violation of federal securities laws.
FIRST UNION VS. THE STATE OF CALIFORNIA
The Trust has pursued legal action against the State of California with
the 1986 flood of Sutter Buttes Center, formerly Peach Tree Mall. 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 in Superior Court of the State of California.
No recognition of potential income has been made in the December 31, 1997
combined financial statements of the Trust.
10
<PAGE> 11
EXECUTIVE COMPENSATION
The table below sets forth the plan and non-plan compensation awarded,
paid or earned for services rendered to First Union during each of the last
three years to or by the Chief Executive Officer during 1997 and each of the
remaining four highest compensated executive officers of the Trust at December
31, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------- -------------------
OTHER RESTRICTED
NAME AND PRINCIPAL ANNUAL SECURITIES UNDERLYING SHARE ALL OTHER(2)
POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SHARES AWARDS(1) COMPENSATION
-------- ---- ------ ----- ------------ -------------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
James C. Mastandrea 1997 $340,000 $228,285 $17,131 225,000 $3,471,428 $13,094
Chairman, President 1996 290,000 140,441 5,467 200,000 1,603,125 12,694
Chief Executive Officer 1995 283,333 99,876 6,536 112,500 871,875 18,760
Steven M. Edelman 1997 157,500 63,450 20,000 385,000 7,719
Executive Vice President- 1996 120,000 51,769 40,000 142,500 7,469
Chief Financial Officer 1995 116,667 25,830 10,000 77,500 6,823
Paul F. Levin 1997 122,500 41,125 20,000 303,750 7,557
Senior Vice President- 1996 115,000 39,808 40,000 142,500 6,804
General Counsel and Secretary 1995 112,500 24,754 10,000 77,500 6,573
John J. Dee 1997 127,333 42,748 20,000 310,438 7,719
Senior Vice President- 1996 112,000 38,900 40,000 142,500 6,585
Chief Accounting Officer 1995 110,000 24,108 10,000 77,500 6,257
Thomas T. Kmiecik 1997 105,833 35,530 20,000 303,750 6,164
Senior Vice President- 1996 93,333 33,250 30,000 142,500 5,117
Treasurer 1995 83,334 18,296 10,000 - 4,408
</TABLE>
(1) The Trust's Long Term Incentive Performance Plan was implemented in
1994. Restricted shares are awarded only as targeted financial goals
are met or exceeded, except for restricted shares awarded upon exercise
of stock options as noted below. Restricted shares are entitled to
dividends at the same rate and on the same terms as unrestricted Shares
of the same class. Included in the amounts for Restricted Share Awards
are restricted shares that will have the restrictions removed when the
market price of Shares attains $21.00 for twenty consecutive trading
days or after eight years. The number and value of restricted shares
held by the individuals listed above subject to these provisions,
valued as of December 31, 1997, are as follows: James C. Mastandrea
450,000 shares ($7,312,500); Steven M. Edelman 40,000 shares
($650,000); Paul F. Levin 40,000 shares ($650,000); John J. Dee 40,000
shares ($650,000); and Thomas T. Kmiecik 20,000 shares ($325,000). The
number of restricted shares subject to these provisions awarded on July
1, 1997 were as follows: James C. Mastandrea 112,500; Steven M. Edelman
10,000; Paul F. Levin 10,000; John J. Dee 10,000; and Thomas T. Kmiecik
10,000.
Also included in amounts for Restricted Share Awards are restricted
shares that will have the restrictions removed when funds from
operations for four consecutive quarters doubles compared to the four
consecutive quarters ending with the quarter in which the restricted
shares were granted, or the closing Share price for five consecutive
trading days is 50% higher compared to the average closing Share price
on the final five trading days of the quarter in which the restricted
shares were granted. The number and value of the restricted shares held
by individuals listed above subject to these provisions, valued as of
December 31, 1997, are as follows: James C. Mastandrea 112,500 shares
($1,828,125); Steven M. Edelman 15,000 shares ($243,750); Paul F. Levin
10,000 shares ($162,500); John J. Dee 10,000 shares ($162,500); and
Thomas T. Kmiecik 10,000 shares ($162,500). These restricted shares
were awarded on January 6, 1998 but were earned as of December 31,
1997.
To encourage employees to exercise stock options, the Trust grants one
restricted share for every four stock options exercised. The
restrictions are removed after four years as long as the individual is
an employee of the Trust and has retained the unrestricted Shares
received from exercising the original options. The number and value of
restricted shares held by the individuals listed above subject to these
provisions and included in the Restricted Stock Awards, valued as of
December 31, 1997, are as follows: James C. Mastandrea 3,390 shares
($55,088) and John J. Dee 500 shares ($8,125). The restricted shares
were issued on December 31, 1997 and March 27, 1997, respectively.
The amounts for Restricted Stock Awards in the table above were based
on the Share closing price on the date the restricted shares were
awarded.
(2) Amounts shown are composed solely of annual contributions made to a
defined contribution pension plan, except the amount for Mr.
Mastandrea, which also included term life insurance premiums. The
pension plan contribution for each participant is equal to the sum of
(i) 3% of the participant's total cash compensation paid for such year
up to that year's Social Security taxable wage base, and (ii) 6% of the
portion of the participant's cash compensation paid for such year which
is in excess of that year's Social Security taxable wage base up to a
maximum of $150,000 for 1995 and $160,000 for 1996 and 1997. The
contributions made by First Union on behalf of the above named
individuals are based on salary earned and paid in that year, plus
executive incentive compensation paid in that year. The insurance
premiums of $5,375 in 1997, $4,975 in 1996, and $11,596 in 1995 for Mr.
Mastandrea are net of the amount recoverable by First Union upon his
termination or death. The policy provides a death benefit of $2.5
million to Mr. Mastandrea's beneficiary.
11
<PAGE> 12
EMPLOYMENT CONTRACTS,
TERMINATION OF EMPLOYMENT AND
CHANGE IN CONTROL AGREEMENTS
EMPLOYMENT AGREEMENT
In July 1994, the Trust entered into an employment agreement (as
amended, the "Agreement") with Mr. Mastandrea. The Agreement has an initial
three-year term and is extended automatically for additional one-year terms
unless one of the parties gives notice of an intention not to renew.
The Agreement with Mr. Mastandrea provides that he will have the
titles, and perform the duties, of Chairman of the Board of Trustees, Chairman
of the Executive Committee of the Board of Trustees, and President and Chief
Executive Officer of the Trust. Under the Agreement, Mr. Mastandrea receives an
annual base salary of not less than $250,000, subject to annual review and
adjustment by the Board of Trustees; health and welfare benefits; participation
in the 1994 Plan; and split-dollar life insurance in the benefit amount of
$2,500,000.
The premiums on the split-dollar life insurance were set with the
expectation that, if Mr. Mastandrea continues to work for the Trust until he
attains age 65, the cash surrender value of the policy will be sufficient to
fund (1) the return to the Trust of all premiums paid by it and (2) paid-up
insurance on the life of Mr. Mastandrea in the amount of $2,500,000.
The Agreement also provides that, in the event Mr. Mastandrea becomes
disabled, the Trust will continue to pay his base salary and bonus and to
provide health and welfare benefits for three years, unless he earlier recovers
from the disability, dies, or attains age 65.
The employment of Mr. Mastandrea may be terminated at any time.
However, if the Trust terminates the employment of Mr. Mastandrea without cause
(as defined in the Agreement), or if he terminates his employment for good
reason (as defined), the Trust is required to continue to pay his base salary
and bonus and to provide benefits, including pension contributions and vesting
of options, for a period of three years, unless he earlier dies or attains age
65. A portion of the Shares in the form of restricted stock previously granted
to Mr. Mastandrea would also vest. Notification by the Trust that it does not
intend to renew the Agreement beyond the three-year initial term is treated, for
this purpose, as a termination by the Trust.
In the event of a change in control or shift in ownership of the Trust
(as defined), the Trust is required to deposit, in an irrevocable escrow
account, an amount sufficient to fund all payments that would be due to Mr.
Mastandrea upon termination without cause or for good reason. In addition, if
termination without cause or for good reason occurs after a change in control or
shift in ownership, the base salary, bonus and pension contributions payable to
him upon termination becomes due immediately in lump sum and all options
previously granted will fully vest and all restrictions on restricted stock
grants will be removed. Mr. Mastandrea is a "participant" under the rules of
the Commission by virtue of his position as a Trustee of the Trust. In the
event the Gotham Proposal were to be adopted and the Gotham Nominees elected,
Gotham has stated that it would intend to terminate Mr. Mastandrea's
employment with the Trust.
Under recent amendments to the Agreement, in exchange for agreeing to
remain in the employ of the Trust for at least 90 days after a change in the
ownership or control of the Trust, the aggregate amount payable to Mr.
Mastandrea would not be limited to the maximum amount that may be deducted for
Federal income tax purposes without constituting an "excess parachute payment"
under Section 280G of the Internal Revenue Code of 1986, as amended ("the
Code"), and Mr. Mastandrea would be entitled to receive an additional payment
(net of taxes, including interest and penalties) for any payment or distribution
(including payments under the Agreement, any stock option agreement or
otherwise) that is determined to be an "excess parachute payment" under Section
280G of the Code, to compensate Mr. Mastandrea for any excise tax imposed by the
Code on such payment or distribution. In addition, the Trust has agreed to
reimburse Mr. Mastandrea for certain legal services under the Agreement. Mr.
Mastandrea has agreed to defer the receipt of payments that would otherwise not
be deductible due to the $1,000,000 limit under Section 162(m) of the Code.
CHANGE IN CONTROL AGREEMENTS
On February 17, 1998, the Trust entered into agreements (each, a
"Change in Control Agreement") with five executive officers, including all of
the named executive officers, and certain senior officers and key employees of
the Trust. Each Change in Control Agreement provides that in the event such
executive's or employee's employment with the Trust is terminated within two
years following a change in control of the Trust (as defined below) either by
the officer or employee for "Good Reason" or by the Trust "Without Cause" (each
as defined in the Change in Control Agreement), such executive or employee will
be entitled to receive (i) base salary and other benefits earned or accrued,
(ii) an amount equal to a multiple of such person's base salary and Additional
Compensation (as defined), (iii) cash in lieu of Shares receivable upon the
exercise of options granted under any option plan including the 1994 Plan, and
(iv) cash for such unvested portion of such person's interest in any of the
Trust's pension plans. In addition, if any payment or distribution (including
payments under the Change in Control Agreement, any stock option agreement or
otherwise) to an officer or employee is determined to be an "excess parachute
payment" under the Code, such officer or employee would be entitled to receive
an additional payment (net of taxes, including interest and penalties) to
compensate such officer or employee for any excise tax imposed by the Code on
such payment or distribution. The specified multiple for a person's base salary
and Additional Compensation referred to above are: two, in the case of the
named executive officer and one senior officer; one, in the case of certain
other officers; and one-half, in the case of certain key employees. Certain of
the persons who are party to the foregoing Change in Control Agreements may be
"participants" under the rules of the Commission in the Trust's solicitation of
proxies. Gotham has stated in its publicly filed documents that it would
propose to make changes in the senior management of the Trust if the Gotham
Proposal were adopted and the Gotham Nominees elected. Consequently, if Gotham
were to acquire control of the Board, the persons party to the Change in
Control Agreements may no longer be in the positions they currently hold.
In addition to the above-described agreements, the Trust has agreed to
reimburse each officer and employee party to a Change in Control Agreement for
certain legal, financial and other professional services.
For purposes of the Change in Control Agreements, a change in control
of the Trust occurs if (a) any person (other than the Trust, any subsidiary
of the Trust, any employee benefit plan or employee share ownership plan of the
Trust, or any person organized, appointed, or established by the Trust or any
subsidiary of the Trust for or pursuant to the terms of any such plan), alone
or together with any of its Affiliates or Associates (each as defined in the
Change in Control Agreement) becomes the beneficial owner of 25% or more of the
Shares then outstanding, (b) at any time during a period of 24 consecutive
months, individuals who were Trustees at the beginning of the period no longer
constitute a majority of the members of the Board of Trustees unless the
election, or the nomination for election by the Trust's beneficiaries, of each
Trustee who was not a Trustee at the beginning of the period is approved by at
least a majority of the Trustees who are in office at the time of the election
or nomination and were Trustees at the beginning of the period and (c) a
record date is established for determining beneficiaries of the Trust entitled
to vote upon (i) a merger or consolidation of the Trust with another
business trust, REIT, partnership, corporation, or other entity in which the
Trust is not the surviving or continuing entity or in which all or part of the
outstanding Shares are to be converted into or exchanged for cash, securities
or other property, (ii) a sale or other disposition of all or substantially
all of the assets of the Trust, or (iii) the dissolution of the Trust.
12
<PAGE> 13
OPTION GRANTS
IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
----------------- VALUE AT ASSUMED
ANNUAL RATES OF SHARE
% OF TOTAL PRICE APPRECIATION
NUMBER OF SHARES OPTIONS FOR 8
UNDERLYING GRANTED TO EXERCISE YEAR OPTION TERM(2)
OPTIONS EMPLOYEES PRICE PER EXPIRATION -------------------
NAME GRANTED (1) IN 1997 SHARE DATE 5% 10%
---- ----------- ------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
James C. Mastandrea 112,500 34.6% $14.250 02/05/2005 $765,421 $1,833,316
112,500 34.6% 14.125 07/01/2005 758,707 1,817,234
Steven M. Edelman 10,000 3.1% 14.250 02/05/2005 68,037 162,961
10,000 3.1% 14.125 07/01/2005 67,441 161,533
Paul F. Levin 10,000 3.1% 14.250 02/05/2005 68,037 162,961
10,000 3.1% 14.125 07/01/2005 67,441 161,533
John J. Dee 10,000 3.1% 14.250 02/05/2005 68,037 162,961
10,000 3.1% 14.125 07/01/2005 67,441 161,533
Thomas T. Kmiecik 10,000 3.1% 14.250 02/05/2005 68,037 162,961
10,000 3.1% 14.125 07/01/2005 67,441 161,533
</TABLE>
(1) Options granted under the 1994 Plan may be in the form of Incentive
Stock Options (qualifying as such under Section 422A of the Code) and
Nonstatutory Stock Options. Options granted are at prices not less than
the fair market value of the Shares at the date of grant and expire not
later than eight years after the date granted. Options are exercisable
only after the optionee has been continuously employed by the Trust for
twelve months from the date of grant and thereafter to the extent of
one-third during the second year, two-thirds during the third year and
in full during the fourth through eighth years. In the event of any
change in control of the Trust, a defined term in the 1994 Plan,
including liquidation or dissolution of the Trust, or a merger or
consolidation with respect to which the Trust shall not be the
surviving entity, all options become exercisable immediately.
(2) The appreciation calculation is a required disclosure. The appreciation
examples shown above do not reflect past experience of the Trust's
options granted, nor can they be expected to predict future
performance.
AGGREGATED SHARE OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT FISCAL YEAR END AT FISCAL YEAR END
ACQUIRED ------------------ ------------------
ON VALUE UNEXER- UNEXER-
NAME EXERCISE REALIZED CISABLE EXERCISABLE CISABLE EXERCISABLE
---- -------- -------- ------- ----------- ------- -----------
<S> <C> <C> <C> <C> <C> <C>
James C. Mastandrea 13,559 $116,946 425,000 286,441 $2,225,000 $2,548,414
Steven M. Edelman 53,333 55,307 335,831 359,430
Paul F. Levin 53,333 51,617 335,831 316,283
John J. Dee 2,000 $14,000 53,333 52,307 335,831 329,805
Thomas T. Kmiecik 45,833 44,647 269,268 296,947
</TABLE>
13
<PAGE> 14
MANAGEMENT, ORGANIZATION AND COMPENSATION COMMITTEE
REPORT ON EXECUTIVE COMPENSATION
The Board of Trustees is responsible for fixing the compensation of
executive officers. However, the Board acts on the basis of recommendations of
its Management Committee. The Management Committee makes recommendations to the
Board with respect to (i) the compensation of all officers with annual salaries
of $75,000 or more, and (ii) awards to employees under the 1994 Plan. The
Management Committee consists of three independent, non-management Trustees,
Messrs. William E. Conway (Chairman), Daniel G. DeVos and Herman J. Russell.
GENERAL APPROACH TO EXECUTIVE COMPENSATION
Compensation for executive officers consists of four principal
elements: base salaries, annual cash/stock bonus awards, stock options, and
restricted stock.
The Management Committee seeks to structure executive compensation to
attract and retain highly qualified, experienced management personnel and to use
the four principal components of the Trust's executive compensation program to
align the interests of management and beneficiaries and to use the non-salary
compensation components to reward performance beyond regular, competent, job
performance as measured by individual performance goals and corporate
performance targets. This general approach to establishing executive
compensation was initially adopted in 1994 and, as new data is available, has
been regularly refined since then.
In establishing each component of executive compensation, the
Management Committee initially compared the level of compensation of its
executive officers with compensation paid by organizations of similar size in
comparable industries. In making these comparisons, the Management Committee
utilized data initially gathered and compiled by its independent compensation
consultant in 1994 and updated from time to time through 1997. The Management
Committee did not have and, therefore, did not separately consider data relating
to corporate performance of the companies included in its compensation
consultant's comparisons. While the initial approach in 1994 was to use broad
comparisons to several industries requiring comparable management skills, in
1997 and other recent years, the comparison has been narrowed to primarily other
REITs. Companies included in such compensation comparisons are also included in
the National Association of Real Estate Investment Trusts ("NAREIT") All REITs
Index. The performance graph in this Proxy Statement compares corporate
performance (based upon five-year cumulative total shareholder return) of the
Trust versus that of companies included in the NAREIT All REITs Index and in the
NYSE Composite Index.
Base Salaries. In its recommendations regarding base salaries, the
Management Committee examined base compensation of executive officers at other
real estate investment trusts in similar product types and/or with comparable
market capitalization (the "comparable REITs"). The base salaries of the Trust's
chief executive officer and other named executive officers have historically
been below the average base salary of such officers at comparable REITs. Base
salary amounts were determined without direct reference to corporate
performance.
Annual Cash/Stock Bonus Awards. The primary goals of the annual
cash/stock bonus awards are to provide a direct link between compensation and
annual performance, to provide a strong incentive to attain Trust and operating
unit goals, to recognize and reward employees for performance beyond regular,
competent job performance, and to build and reinforce the concept of a team by
focusing on the key measure of the Trust's performance -- funds from operations
for the current year. Awards are designed to be comparable in amount to the
average of awards paid by organizations of similar size in comparable industries
when target performance is met; awards will be above this average when the
target is exceeded, or below this average when the target is not achieved.
Awards are paid partially in stock in order to encourage Share ownership.
The Trust's annual cash/stock bonus awards are intended to be the
method for compensating executive officers for achieving performance goals for a
particular fiscal year. Performance goals are expressed in terms of threshold,
target and maximum performance goals. Threshold goals are the minimum necessary
performance levels required for an executive officer to earn an annual bonus
award. In 1997, threshold performance goals were based upon an executive officer
achieving 80% of such executive officer's target goal. Target goals were based
upon meeting the goal, while maximum performance goals were based upon an
executive officer achieving 120% of such executive officer's target goal. If a
threshold, target or maximum performance goal was achieved, the executive
officer received 50%, 100% or 150%, respectively, of such executive officer's
bonus potential. If the threshold 80% was not met, no bonus was paid. Bonuses
for achievement of performance goals at a level between an executive officer's
threshold and target goals or target and maximum goals were calculated based
upon straight line interpolation. Annual cash/stock bonus awards are paid 20% in
Shares of the Trust and 80% in cash. For 1997, the chief executive officer and
all named executive officers had a single performance goal based upon achieving
the Trust's funds from operations target. In 1997, the Trust achieved funds from
operations that exceeded the target performance goal.
Stock Options. The primary goal of the stock options is to link
beneficiary and employee interest by providing a way for both to gain from
appreciation in the market price of Shares over time. Stock options are granted
to executive officers as well as key employees in the organization on the theory
that the best performance for beneficiaries will be attained when a broad group
of employees has a mutual interest with the beneficiaries. In 1997 the
Management Committee adopted a new rule providing for the grant of one
restricted share for each four options exercised. The restrictions are removed
after four years provided the recipient has not disposed of the Shares acquired
by exercise of the option and is still employed by First Union.
Restricted Stock. The restricted stock awards are designed to encourage
senior executives to think and act like beneficiaries and, as a result, to
promote the long term growth and performance of the Trust and increase the
market price of the Shares. The awards are intended to act as long term
performance incentives by creating a strong positive correlation between stock
price appreciation and dividend growth, on the one hand, and compensation levels
on the other. The level of the awards are recognized to be above average for
organizations of similar size in comparable industries. Awards of restricted
stock through 1997 were based on attainment of a predetermined level of
performance but the goal required to earn the restricted stock in less than
eight years is challenging (the market price of the Shares has to attain $21 per
Share for 20 consecutive trading days. In October 1997 the Management Committee
adopted a new rule for subsequent awards of restricted stock. In January 1998
restricted shares were awarded based on attainment of financial goals, which
will vest only when funds from operations for four consecutive
14
<PAGE> 15
quarters doubles as compared to funds from operations in the quarter the
restricted shares were issued or when the per share price is 50% greater than
the per share price on the five consecutive trading days of the quarter
immediately preceding the grant date of the restricted shares. Restricted stock
under this rule is granted only to the most senior officers--those who have the
greatest impact on the performance of the Trust.
In determining the amount of all incentive compensation arrangements
(i.e., target bonus compensation, stock option grants and restricted stock
awards) for executive officers of the Trust, the Management Committee initially
considered data presented by its compensation consultant in 1994 with respect to
incentive compensation paid at approximately 125 other financial services
companies, including REITs and banking and insurance institutions, with average
sales of $356 million and average assets of approximately $200 million
("comparable companies"). The banking and insurance companies were initially
included as comparisons because it was deemed necessary to attract individuals
from both within and without the REIT industry who have valuable related skills
of financial analysis and management. For 1997, the weight given to non-REIT or
real estate comparable companies has significantly diminished as the focus on
recruitment of new executives has shifted to those with real estate acquisition
skills. The data has been updated by the consultant from time to time through
1997. Target bonus compensation was fixed by the Management Committee so that
executive officers achieving their target performance goals would receive bonus
compensation in the median range for corresponding positions at comparable
companies. Likewise, option grants were fixed by the Management Committee so
that executive officers (other than the chief executive officer) would receive
incentive stock options in the median range for corresponding positions at
comparable companies. In contrast, however, the amount of restricted stock
awards granted to executive officers (including the chief executive officer)
were fixed by the Management Committee with reference to data from comparable
companies but so that executive officers achieving their long term incentive
goals would receive restricted stock compensation higher than the average awards
granted to executive officers in corresponding positions at comparable
companies. The number of stock options and shares of restricted stock granted to
Mr. Mastandrea was determined in connection with the negotiation of Mr.
Mastandrea's employment agreement as Chief Executive Officer of the Trust with
the Management Committee in consultation with its compensation consultant.
Stock option grants and restricted stock awards to executive officers
were conditioned upon corporate performance during the immediately preceding
year, and such compensation was structured in a manner the Management Committee
believes will maximize future performance by executive officers by linking the
vesting of restricted stock and such officers' eligibility to receive future
option and restricted stock awards until certain funds from operations or share
price targets are achieved. Although the Management Committee utilized incentive
compensation data from all comparable companies, the Management Committee has
not relied significantly on incentive compensation data from comparable REITs in
fixing the executive officers' incentive compensation because a high standard
deviation made such data inherently unreliable for comparison purposes. This is
so because of the relatively small sample of comparable REITs and the wide
variation in both levels and components of executive compensation.
COMPENSATION OF THE CHIEF EXECUTIVE OFFICER
During 1997, Mr. Mastandrea served as Chairman of the Board of
Trustees, Chairman of the Executive Committee of the Board of Trustees, and
President, Chief Executive Officer and Chief Financial Officer of the Trust.
For the year ended December 31, 1997, he received a base salary of $350,000, an
annual bonus of $228,285, options to purchase 225,000 Shares and restricted
stock of 228,390 Shares. See the tables entitled "Summary Compensation Table"
and "Option Grants in Last Fiscal Year."
The Management Committee believes that Mr. Mastandrea's compensation is
consistent with its general approach to executive compensation, which is
described above, as well as Mr. Mastandrea's position and responsibilities with
the Trust and his individual performance during 1997. Mr. Mastandrea's
compensation is also consistent with commitments made to him when he was hired
by the Trust in July 1993, which are reflected in the Agreement discussed above
under the heading "Employment Agreement."
COMPENSATION OF OTHER NAMED EXECUTIVE OFFICERS
As is the case with Mr. Mastandrea, the Management Committee believes
that the compensation provided to other executive officers named in the "Summary
Compensation Table" is consistent with the Management Committee's general
approach to executive compensation, which is described above, as well as the
position and responsibilities with the Trust and individual performance of each
of these executive officers during 1997.
WILLIAM E. CONWAY (CHAIRMAN) DANIEL G. DEVOS HERMAN J. RUSSELL
MEMBERS OF THE COMMITTEE
15
<PAGE> 16
PERFORMANCE GRAPH
The performance graph assumes $100 invested on December 31, 1992 in
First Union Shares, All REITs and the NYSE Composite Index, with dividends
reinvested when paid and share prices as of the last day of each calendar year.
The total return for All REITs was compiled by NAREIT.
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
First Union $100 $113 $ 82 $ 95 $172 $233
All REITs 100 120 123 142 192 232
NYSE Composite 100 111 111 149 181 241
</TABLE>
SELECTION OF AUDITORS
Arthur Andersen LLP has been selected as auditors of First Union for
the ensuing year. Arthur Andersen LLP has been First Union's auditors since the
founding of the Trust in 1961. Representatives of Arthur Andersen LLP are
expected to be present at the Annual Meeting with the opportunity to make a
statement if they so desire and to respond to appropriate beneficiary questions.
BENEFICIARY PROPOSAL
(Item Nos. 3 and 4)
The Trust has been advised that the Gotham Partnerships would propose
to introduce a resolution for the Gotham Proposal and statement in support
thereof at the Annual Meeting. Briefly, Gotham would propose to increase the
number of Trustees constituting the full Board of Trustees from nine members to
fifteen, would nominate its own candidates to each of the six newly created
seats of the Board of Trustees and, in addition to the foregoing, would propose
to nominate its own candidates to fill the seats of the three Trustees in Class
II whose terms are expiring. As discussed in "Certain Legal Proceedings," the
Trust maintains that the Shares held by the Gotham Partnerships were Excess
Securities under the Trust's By-Laws at the time their proposal was made and
that the Gotham Partnerships are therefore not eligible to put forward the
Gotham Proposal for a vote of the beneficiaries. As discussed under "Certain
Legal Proceedings," the Trust was unsuccessful in obtaining a preliminary
injunction in the State Court Action. Nevertheless, the Trust and the Gotham
Partnerships are involved in continuing litigation to determine the right of the
Gotham Partnerships to vote at the Annual Meeting and to present their Proposal.
See "Certain Legal Proceedings" in this Proxy Statement for a summary of the
litigation.
For purposes of the Annual Meeting and in the event that the courts
ultimately determine that the Gotham Partnerships are entitled to present the
Gotham Proposal for a vote of the beneficiaries of the Trust, the Board
recommends a vote "against" the Gotham Proposal for the following reasons:
As discussed under "General Information," the Board has spent
considerable time and resources in meetings with representatives of Gotham
attempting to develop a solution that would provide additional representation on
the Board to significant minority beneficiaries, including Gotham, and result in
the greatest value for the Trust's beneficiaries. In addition to meeting
numerous times with representatives of Gotham, the Board met twice with
representatives of Cerberus Partners L.P. and once with representatives of
Apollo.
On March 20, 1998, the Trust reached an agreement in principle with
Gotham that would have given three of nine seats on the Board to Gotham
representatives and one seat to a mutually acceptable, independent nominee, as
well as majority representation on a special "transactions committee." Over the
course of the next week the Trust negotiated in good faith to reach a definitive
settlement agreement with Gotham. On March 27, 1998, Gotham retreated without
explanation from the settlement discussions. That same day The Wall Street
Journal reported that the U.S. Congress is almost certain to enact new federal
legislation that would sharply curb the tax benefits of "paired-share"
structures enjoyed by the Trust and four other REITs. According to the report,
the proposed legislation would not completely repeal the paired-share benefit,
but would impose limits on the ability of the Trust and the four other REITs to
use the tax structure to expand. The report also stated that the measure would
apply to the acquisition of assets after March 26, 1998 unless covered by
existing written contracts or already announced acquisitions that have not yet
closed. It is possible, though not known to the Board, that Gotham's decision to
withdraw from settlement discussions was related to this reported development.
The Board believes that an optimal settlement solution would have
resulted in providing additional seats on the Board to representatives of other
large beneficiaries of the Trust. Unfortunately, this solution did not appeal to
Gotham. Moreover, Gotham wanted reimbursement by the Trust of all of its legal
and other fees and expenses totaling an estimated $2.75 million. Settlement of
differences with Gotham was also, in the Board's view, preferable because the
Gotham Proposal, if otherwise adopted, would trigger change in control
provisions under various agreements discussed under "General Information" that
would be costly and could, in the Board's view, produce economic and tax
consequences with respect to the business of the Trust, taken as a whole.
Moreover, a settlement with Gotham was preferred by the Board because a change
in control typically yields other unquantifiable effects such as loss of
talented management and skilled personnel and reduced employee morale.
In its meetings with Gotham, the Board noted that Gotham did not have a
well formulated strategic plan for the Trust. While not averse to the
suggestions made by Gotham, in the Board's opinion, the goals for the Trust as
articulated by Gotham appeared identical to the approach which has been taken by
the management of the Trust of upgrading properties and extracting added value
from the properties owned by the Trust. The acquisition program presented by
Gotham would focus on the types of opportunities that require, in the Board's
opinion, the very same management expertise, skills and creativity that the
Trust's management team possesses. As a result of the Board's meetings with
Gotham, the Board does not believe that Gotham is a long-term investor in the
Trust and that, although other beneficiaries may benefit from Gotham's
investment, Gotham's solutions do not represent, in the Board's view, the most
favorable solution for long-term investors in the Trust. Moreover, whatever
Gotham's stated plan may be, it appears to the Board to be unfocused and subject
to significant change. While Gotham's suggestions regarding potential
acquisitions appear, at first blush, to mirror those of the Board, on March 30,
1998, a Gotham principal, William A. Ackman, was quoted in The Wall Street
Journal as now proposing a different structure for the Trust and transforming
the Trust into a "real-estate opportunity fund." In the view of management, such
a change in purpose of the Trust, coupled with the lack of experience of the
Gotham Nominees in running an operating company, change the investment in the
Trust to a high risk endeavor for the Trust's beneficiaries.
The Board of Trustees is committed to maximizing beneficiary value and
has set a strategy that has turned around the Trust and that it believes will
continue to provide the best opportunity to grow the value of the Trust's Shares
over the long term. In the course of its deliberations, the Board regularly
reevaluates and refines its business strategy. As a result, the Trust has
undertaken several important initiatives in the past several years, including
planned divestitures in office properties and acquisitions in retail and parking
properties. With the acquisition this year of Impark, the Trust achieved
substantially its first step in consolidating the parking industry. The Board
believes that the Gotham Proposal and the disruptive solicitation process in
which it has engaged assert unfounded complaints that pay no regard to the
accomplishments of the Trust in these past four years and the benefits that all
of the beneficiaries have derived from such accomplishments.
The Board understands that the Trust's beneficiaries are interested in
ways to enhance beneficiary value. In view of the reported developments that
will affect the benefits derived by the beneficiaries from the Trust's tax
status as a REIT, this goal is paramount to the Board. The Board has already
embarked on an ongoing strategic review process focused on the long-term success
of the Trust and maximizing beneficiary value. As part of this strategic
planning process, the Trust retained CS First Boston in late 1997 to provide
investment banking advice to the Board and to evaluate various strategic
options, including a possible sale of the Trust's "paired-share" structure.
Although proposed federal legislation has affected the options under
consideration, the Board remains open to opportunities for maximizing
beneficiary value, including continued use of the "paired-share" structure, a
possible sale of the structure or acquisitions of additional businesses or new
properties. The Board believes that, based on the actions taken by the Board and
the Trust to date, the Gotham Proposal is moot. The Gotham Partnerships' plans
with respect to the Trust appear to focus primarily on having the Trust enter
into transactions that take advantage of the tax benefits of the Trust's
"paired-share" structure. However, based on recent developments reported in The
Wall Street Journal, as discussed above, it appears likely that the U.S.
Congress will adopt federal legislation that was drafted in response to a budget
proposal announced by President Clinton in January 1998 to severely limit those
advantages. Consequently, your Trustees believe that strategic plans for
maximizing the Trust's value must focus on growing both the current portfolio of
Trust properties, as well as seeking other advantageous business opportunities,
including continued use of the "paired-share" structure.
The Board believes that the Gotham Proposal is not in the best
interests of the beneficiaries and that the Gotham Proposal amounts to handing
control of the Board and of the business of the Trust to minority investors
whose interests may not coincide with, and may even be adverse to, the interests
of the majority of beneficiaries. Moreover, you, as the Trust's beneficiaries,
will not receive a takeover "premium" or other evident benefit, financial or
otherwise, in exchange for granting such control of the Board to a minority
investor. The Board believes that adopting a proposal which would throw out
qualified individuals from serving on the Board of Trustees and replace the
current Trustees on the Board with Gotham's handpicked appointees would handicap
beneficiaries' ability to elect individuals whom the Board believes are best
suited to be Trustees of the Trust. The Board believes that Gotham has failed to
demonstrate that it can adequately represent the interests of all of the
Trust's beneficiaries, large and small, and the Board can only recommend voting
against the Gotham Proposal.
The Board believes that the impact of the change in control provisions
contained in the various Trust agreements discussed under "General Information,"
together with the probable loss of skilled management and trained personnel who
have helped turn the Trust around, that would result from adoption of the Gotham
Proposal would likely have a harmful result for the Trust and its beneficiaries.
The Board believes that voting against the Gotham Proposal enhances the
likelihood of continuity and stability in the composition of and in the
investment policies formulated by the Trust's Board of Trustees. The Board also
believes that voting against the Gotham Proposal, in turn, permits it to
represent more effectively the interests of all beneficiaries.
FOR ALL OF THE FOREGOING REASONS, THE BOARD OF TRUSTEES RECOMMENDS THAT
BENEFICIARIES VOTE AGAINST THE GOTHAM PROPOSAL AND AGAINST THE GOTHAM
NOMINEES.
VOTING
Beneficiaries of record on the Record Date are entitled to notice of
and to vote at the Annual Meeting. Only such beneficiaries will be permitted to
attend. Under the Trust's By-Laws, Shares that are deemed to be "Excess
Securities" are not entitled to any voting rights, are not considered to be
outstanding for quorum or voting purposes and are not entitled to receive
dividends. Therefore, holders of "Excess Securities" as of the date of the
meeting shall not be entitled to vote or to be counted for quorum purposes.
The affirmative vote of the holders of a majority of the Shares present
in person or by proxy and voting at the meeting is required for approval of the
Board's Proposal or, if applicable, the Gotham Proposal. Nominees for election
to the seats on the Board of Trustees who receive the greatest number of votes
duly cast by the Shares represented at the Annual Meeting that are entitled to
vote will be elected as Trustees. If the requisite approval is not obtained with
respect to a particular matter, the proposal referred to in such matter will not
be implemented. In the event that neither the Board's Proposal nor the Gotham
Proposal, if applicable, were adopted by the beneficiaries, the size of the
Board would remain at the current nine seats.
Abstentions and broker non-votes will be included in determining the
number of Shares present for purposes of determining the presence of a quorum.
Broker non-votes will not be treated as entitled to vote on the Board's
Proposal or, if applicable, the Gotham Proposal and, therefore, will have no
effect on whether the Board's Proposal or the Gotham Proposal is adopted.
Abstentions from voting on the Board's Proposal or, if applicable, the Gotham
Proposal, will have the same effect as a vote "against" the Board's Proposal or,
if applicable, the Gotham Proposal. Abstentions and broker non-votes will have
no effect on the election of the Board's Nominees to the Board of Trustees.
Shares represented by properly executed GREEN proxy cards will be voted
at the Annual Meeting as marked and, in the absence of specific instructions,
will be voted FOR the Board's Proposal, FOR the Board's Nominees, AGAINST the
Gotham Proposal (if applicable), AGAINST the election of the Gotham Nominees (if
applicable), and, in the discretion of the persons named as proxies, on all such
other business as may properly come before the meeting or any adjournment or
postponement thereof.
A beneficiary may revoke his proxy at any time prior to its exercise by
giving notice to First Union in writing or by attending the Annual Meeting and
voting in person (attendance alone at the Annual Meeting will not by itself
revoke a proxy). The delivery of a subsequently dated proxy which is properly
completed will constitute a revocation of any earlier proxy. The revocation may
be delivered to First Union in care of Corporate Investor Communications, Inc.
at the address set forth on the back cover of this Proxy Statement or to First
Union at 55 Public Square, Suite 1900, Cleveland, Ohio 44113-1937, or any other
address provided by First Union.
IF YOU WISH TO VOTE FOR THE BOARD'S PROPOSAL, FOR THE ELECTION OF THE
BOARD'S NOMINEES, AGAINST THE GOTHAM PROPOSAL AND AGAINST THE GOTHAM NOMINEES,
PLEASE SIGN, DATE AND RETURN PROMPTLY THE ENCLOSED GREEN PROXY CARD IN THE
POSTAGE-PAID ENVELOPE PROVIDED. THE BOARD RECOMMENDS THAT YOU VOTE FOR THE
BOARD'S PROPOSAL AND BOARD'S NOMINEES AND AGAINST THE GOTHAM PROPOSAL AND THE
GOTHAM NOMINEES.
As far as the Trustees are aware, no matters other than those outlined
in this Proxy Statement will be presented to the Annual Meeting for action on
the part of the beneficiaries. If any other matters are properly brought before
the meeting, it is the intention of the persons named in the accompanying GREEN
proxy card to vote the Shares to which the proxy relates in accordance with
their best judgment.
FORM 10-K ANNUAL REPORT
A COPY OF THE TRUST'S ANNUAL REPORT ON FORM 10-K AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997,
WILL BE FURNISHED WITHOUT CHARGE TO BENEFICIARIES UPON WRITTEN REQUEST DIRECTED
TO THOMAS T. KMIECIK, SENIOR VICE PRESIDENT - TREASURER, FIRST UNION REAL ESTATE
EQUITY AND MORTGAGE INVESTMENTS, 55 PUBLIC SQUARE, SUITE 1900, CLEVELAND, OHIO
44113-1937.
BENEFICIARY PROPOSALS
Any beneficiary proposals intended to be presented at the 1999 Annual
Meeting of Beneficiaries must be received by First Union for inclusion in First
Union's proxy statement and form of proxy relating to that meeting on or before
November 5, 1998. Any such proposals should be sent to the following address:
First Union Real Estate Equity and Mortgage Investments, Suite 1900, 55 Public
Square, Cleveland, Ohio 44113-1937, Attention: Paul F. Levin, Secretary.
FIRST UNION REAL ESTATE EQUITY
AND MORTGAGE INVESTMENTS
Paul F. Levin
Senior Vice President -- General
Counsel and Secretary
March 26, 1998
16
<PAGE> 17
IMPORTANT
Your vote is important. No matter how many Shares you own, please give
your proxy FOR approving the Board's proposal calling for fixing the number of
Trustees to twelve with one vacancy to be added to each existing class of
Trustees (Item 1), FOR electing your Board's nominees for Class II Trustees
(Item 2), AGAINST adopting the Gotham Proposal (Item 3) and AGAINST approving
the Gotham Nominees (Item 4), by taking the following steps:
1. SIGNING the enclosed GREEN proxy card;
2. DATING the enclosed GREEN proxy card; and
3. MAILING the enclosed GREEN proxy card TODAY in the envelope provided
(no postage is required if mailed in the United States).
If any of your Shares are held in the name of a brokerage firm, bank,
bank nominee or other institution, only it can vote such Shares and only upon
receipt of your specific instructions. Accordingly, please contact the person
responsible for your account and instruct that person to execute the GREEN proxy
card representing your Shares.
If you have any questions or require any additional information
concerning this Proxy Statement, please contact Corporate Investor
Communications, Inc. at the address set forth below.
CORPORATE INVESTOR COMMUNICATIONS, INC.
111 COMMERCE ROAD
CARLSTADT, NEW JERSEY 07072-2586
BANKS, BROKERS AND INSTITUTIONS CALL TOLL-FREE (800) 346-7885
INDIVIDUALS CALL TOLL-FREE (888) 217-3011
<PAGE> 18
[GREEN PROXY CARD]
FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
55 Public Square, Suite 1900, Cleveland, Ohio 44113-1937
1998 Special Meeting in Lieu of Annual Meeting of Beneficiaries, May 19, 1998
PROXY SOLICITED ON BEHALF OF THE BOARD OF TRUSTEES
The undersigned hereby appoints Russell R. Gifford and William E.
Conway, or either one of them, each with power of substitution, attorneys and
proxies for and in the name and place of the undersigned, to vote, as designated
below, all of the shares of beneficial interest, par value $1 per share
("Shares"), of First Union Real Estate Equity and Mortgage Investments, a
business trust formed under the laws of the State of Ohio (the "Trust"), to be
held at the Forum Conference & Education Center, One Cleveland Center, 1375 East
9th Street, Cleveland, Ohio 44114, on Tuesday, May 19, 1998, at 10:00 A.M.,
Daylight Saving Time, and any adjournments or postponements thereof, upon the
matters set forth in the Notice of 1998 Special Meeting of Beneficiaries and
Proxy Statement, receipt of which is hereby acknowledged, as follows:
<TABLE>
THE BOARD RECOMMENDS A VOTE FOR ITEMS 1 AND 2
<S> <C> <C>
1. To fix the number of Trustees at twelve with one vacancy to be added
to each existing class of Trustees.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. To elect three Class II Trustees [ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote for all
(except as noted to the contrary below) nominees listed below
Nominees: James M. Delaney, James C. Mastandrea and Herman J. Russell
Instruction: To withhold authority to vote for any individual nominee
write that nominee's name on the following line:
----------------------------------------------------------------------------------------------------------------------
THE BOARD RECOMMENDS A VOTE AGAINST ITEMS 3 AND 4, IF APPLICABLE
3. To adopt a proposal of Gotham Partners, L.P., if applicable, to fix the
number of Trustees at fifteen and to assign two of the six newly created seats
to each of the three existing classes of Trustees.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To vote on six Gotham Nominees as Trustees, if applicable.
[ ] FOR all nominees listed below [ ] WITHHOLD AUTHORITY to vote for all
(except as noted to the contrary below) nominees listed below
Nominees: Daniel Shuchman and Steven S. Snider as Class I Trustees, Mary
Ann Tighe and Stephen J. Garchik as Class II Trustees, and David S. Klafter and
Daniel J. Altobello as Class III Trustees.
Instruction: To withhold authority to vote for any individual nominee
write that nominee's name on the following line:
- --------------------------------------------------------------------------------------------------------------------------
5. In their discretion, the Proxies are authorized to vote upon all other
matters properly brought before the meeting.
</TABLE>
IF PROPERLY EXECUTED, THIS PROXY WILL BE VOTED AS DIRECTED IN THE SPACE
PROVIDED. TO THE EXTENT NO DIRECTIONS ARE GIVEN, THIS PROXY WILL BE VOTED FOR
THE BOARD'S PROPOSAL (ITEM 1), FOR THE ELECTION OF ANY OR ALL NOMINEES OF THE
BOARD FOR TRUSTEES (ITEM 2), AGAINST THE GOTHAM PROPOSAL (ITEM 3), TO WITHHOLD
AUTHORITY FOR THE ELECTION OF ANY OR ALL GOTHAM NOMINEES (ITEM 4), AND IN THE
DISCRETION OF THE PROXIES FOR ALL OTHER MATTERS PROPERLY BROUGHT BEFORE THE
MEETING. THIS PROXY MAY BE REVOKED AT ANY TIME PRIOR TO ITS EXERCISE.
Date , 1998
------------------------ -------------------------------------
Signature
-------------------------------------
Signature (if jointly held)
-------------------------------------
Capacity
Where Shares are registered jointly
in the name of two or more persons,
all should sign. Signature should
correspond exactly with the name on
the Share certificate. Persons
signing in a representative capacity
should indicate that capacity.
I Do [ ] Do Not [ ]
plan to attend the Annual Meeting
in person.
IMPORTANT: PLEASE SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE
ENCLOSED POSTAGE-PAID ENVELOPE.
