<PAGE> 1
PROSPECTUS SUPPLEMENT DATED APRIL 21, 1999 Filed Pursuant to Rule 424(b)(5)
(TO PROSPECTUS DATED APRIL 13, 1999) Registration No. 333-63547
FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
12,550,442 RIGHTS TO PURCHASE
12,550,442 SHARES OF BENEFICIAL INTEREST
<TABLE>
<S> <C>
- ----------------------------------- EACH HOLDER OF OUR COMMON SHARES IS RECEIVING--
CONSIDER CAREFULLY THE MATERIAL
RISKS BEGINNING ON PAGE S-9 OF o one non-transferable right for every 2.5 common
THIS PROSPECTUS SUPPLEMENT AND shares held on April 21, 1999
PAGE 4 OF THE ACCOMPANYING
PROSPECTUS BEFORE DECIDING TO EACH RIGHT ALLOWS ITS HOLDER--
EXERCISE RIGHTS.
- ----------------------------------- o to subscribe for one common share for $4.00 until
5:00 p.m., Eastern Daylight Time, on May 12, 1999,
or a later time and date that we select, at which
time the right will expire
- -----------------------------------
Our common shares are listed on
the New York Stock Exchange under A HOLDER WHO EXERCISES ALL OF ITS RIGHTS--
the symbol "FUR," and their last
reported sale price on April 19, o may oversubscribe for some or all common shares not
1999 was $4.6875. subscribed for by others so long as such holder will
- ----------------------------------- not own more than 9.8% of our common shares
OUR STANDBY PURCHASERS --
o will be Gotham Partners, L.P., Gotham Partners III, L.P.,
and Gotham Partners International, Ltd.
o have agreed to purchase at the $4.00 subscription
price any common shares not purchased by others
through the exercise of rights or the
oversubscription privilege, up to 12,500,000
common shares having a total subscription price of
up to $50,000,000
WE WILL USE APPROXIMATELY $39.4 MILLION OF THE NET PROCEEDS OF THE
OFFERING --
o to repay a portion of a loan made to us by lenders that
include insiders
</TABLE>
<TABLE>
<CAPTION>
PER COMMON SHARE TOTAL
<S> <C> <C>
Price to Investors $4.00 $50,201,768
Proceeds to First Union (1) $4.00 $50,201,768
- --------------------
</TABLE>
(1) Before deducting expenses estimated at approximately $800,000 payable
by First Union.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR
DETERMINED IF THIS PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PROSPECTUS SUPPLEMENT
<S> <C>
Prospectus Supplement Summary...................................................................................S-4
Risk Factors....................................................................................................S-9
Uncertain availability of additional financing.........................................................S-9
Control by Gotham......................................................................................S-9
Limitations on subscriptions...........................................................................S-9
Failure to purchase standby commitment shares..........................................................S-9
Failure to service debt...............................................................................S-10
Resale price of common shares may not equal or exceed the subscription price..........................S-10
Dilution in the offering..............................................................................S-10
Use of Proceeds................................................................................................S-10
Capitalization.................................................................................................S-11
Selected Financial Data........................................................................................S-12
The Offering...................................................................................................S-16
Federal Income Tax Consequences Regarding the Offering.........................................................S-22
Plan of Distribution...........................................................................................S-23
The Financial Advisor..........................................................................................S-23
Legal Matters..................................................................................................S-23
PROSPECTUS
Available Information.............................................................................................2
Incorporation of Certain Documents by Reference...................................................................2
Cautionary Statements Concerning Forward-Looking Statements.......................................................3
Risk Factors......................................................................................................4
New senior management lacks prior experience with First Union and in operating public
companies or REITs..............................................................................4
Proposed departure of some members of senior management..................................................4
Difficulties in servicing debt...........................................................................4
Default under the FUR Credit Facility, the Impark Credit Facility and the Bridge Loan....................5
Debt covenants restrict operating flexibility; failure to comply with debt instruments
could cause acceleration of debt................................................................5
Contemplated asset sales will shrink portfolio and returns to shareholders; replacement
assets may not provide greater shareholder value................................................5
Income and activities of FUMI may be attributed to First Union under recent anti-stapling
legislation and may threaten REIT status........................................................6
Improved properties may become subject to anti-stapling legislation under certain
circumstances and may threaten REIT status......................................................6
Other legislation could adversely affect First Union's REIT qualification................................6
Dependence on qualification as a REIT; tax and other consequences if REIT qualification lost.............7
Adverse effects of REIT minimum dividend requirements....................................................7
Ability to operate properties directly affects First Union's financial condition.........................8
Illiquidity of real estate...............................................................................8
Increases in property taxes could affect ability to make expected shareholder distributions..............8
Environmental liabilities................................................................................8
Compliance with the ADA may affect expected distributions to First Union's shareholders..................9
Uninsured and underinsured losses........................................................................9
Inability to refinance...................................................................................9
Rising interest rates....................................................................................9
Impact of Year 2000 issues..............................................................................10
Exchange rate losses....................................................................................10
Results of operations adversely affected by factors beyond First Union's control........................10
The Company......................................................................................................11
Use of Proceeds..................................................................................................17
</TABLE>
S-2
<PAGE> 3
<TABLE>
<S> <C>
Price Range of Common Shares and Distributions...................................................................18
Management.......................................................................................................20
Description of Capital Stock.....................................................................................24
Federal Income Tax Consequences..................................................................................30
Plan of Distribution.............................................................................................40
Experts ........................................................................................................41
Legal Matters....................................................................................................41
Glossary .......................................................................................................G-1
</TABLE>
-------------------------
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized any other person to provide you with different information.
If anyone provides you with different or inconsistent information, you should
not rely on it. We are not making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted.
You should assume that the information appearing in this prospectus
supplement and the accompanying prospectus is accurate as of the date on the
front cover of this prospectus supplement only. Our business, financial
condition, results of operations and prospects may have changed since that
date.
S-3
<PAGE> 4
PROSPECTUS SUPPLEMENT SUMMARY
This summary may not contain all the information that may be important
to you. You should read this entire prospectus supplement and the accompanying
prospectus, including the financial data and the related notes, before deciding
to exercise your rights. References in this prospectus supplement and the
accompanying prospectus to
o "First Union" or "we" are to First Union Real Estate Equity and
Mortgage Investments and its subsidiaries
o "FUMI" are to First Union Management, Inc. and its subsidiaries
o "First Union Companies" are to First Union and FUMI and
o "Impark" are to Imperial Parking Limited and its subsidiaries and
Impark Services Limited and its subsidiaries,
unless it is clear that those terms mean only the parent company in each
instance.
FIRST UNION
We are a real estate investment trust, and our primary business has
been to buy, manage, improve cash flow of and own retail, apartment, office and
parking properties throughout the United States and Canada. FUMI, one of our
affiliates, owns a controlling interest in Impark. We and FUMI have an
organizational structure commonly referred to as "stapled," where our common
shares are "stapled to" a proportionately equal interest in the common stock of
FUMI, with some exceptions which are described in "Description of Capital Stock
- -- Common Shares -- Beneficial Ownership of FUMI" in the accompanying
prospectus. Our common shares may not be issued or transferred without their
"stapled" counterparts in FUMI. The common stock of FUMI is held in trust for
the benefit of the holders of our common shares.
We own regional enclosed shopping malls, apartment complexes, office
buildings and parking facilities. Our portfolio is diversified by type of
property, geographical location, tenant mix and rental market. As of December
31, 1998, we owned, including under long-term ground leases, 21 shopping malls,
eight apartment complexes, five office properties and seven parking facilities
in the United States, and ten parking lots in Canada. We also own 50% of an
additional mall in a joint venture with an unrelated party. We are currently in
the process of selling some of our properties.
Background of the Offering
In August 1998, we purchased approximately 88% or $88 million of our
then outstanding 8-7/8% Senior Notes due 2003 through a tender offer for those
notes. We also amended the indenture governing the terms of the Senior Notes
through a consent solicitation that we conducted simultaneously with the tender
offer. The purpose of the tender offer and consent solicitation was to:
o avoid the possibility that we would be required to purchase the Senior
Notes at 101% of their principal amount, an obligation which we did
not have the financial resources to satisfy, and
o provide us with additional financial and operating flexibility.
We repurchased the Senior Notes for $970 per $1,000 principal amount
and paid all accrued interest on them. We also made a consent payment for the
indenture amendments of $30 per $1,000 principal amount of the Senior Notes.
The total purchase price for the Senior Notes and related consent payments were
financed with the proceeds of a $90 million bridge loan from Bankers Trust
Company, as agent for the lenders and as lender, and BankBoston, N.A.,
Blackacre Bridge Capital, Gotham Partners, L.P., Gotham Partners III, L.P.,
Elliott Associates, L.P., and Wellsford Capital, each as lenders. Except as
described below, the bridge loan is due August 11, 1999, bears interest at 12%
annually, and is subject to a mandatory repayment of principal so that the
outstanding principal balance under the loan must be less than approximately
$38 million by May 15, 1999. The lenders under the bridge loan have agreed to
allow $9.0 million of the net proceeds from this offering that would otherwise
be used to repay a portion of the bridge loan extended by three of these
lenders
S-4
<PAGE> 5
to be used to repay amounts outstanding under our senior credit facility.
Although the $9.0 million in principal will remain outstanding under the bridge
loan, it will be considered paid for purposes of the mandatory repayment of
principal described above. This $9.0 million portion of the bridge loan will
bear interest at 15% annually and mature on August 11, 1999. We intend to pay
down the bridge loan with the net proceeds of asset sales and the remaining net
proceeds of this offering. See "Use of Proceeds."
The terms of the bridge loan originally required us to obtain standby
purchase commitments for this offering to ensure that the net proceeds of this
offering would be sufficient to repay all amounts due and payable under the
bridge loan, including principal, interest and fees. To satisfy this
requirement, we originally obtained a standby commitment from Gotham Partners,
L.P., Gotham Partners III, L.P. and Elliott Associates, L.P., as standby
purchasers. The bridge loan now enables us to conduct one or more rights
offerings sufficient to repay amounts outstanding under the bridge loan as and
when due and payable.
CURRENT DEVELOPMENTS
The lenders under our senior credit facility have agreed that the
maximum commitment under the facility is $105 million and on April 30, 1999 it
will be reduced to $80 million, and on June 30, 1999 it will be reduced to $50
million.
We recently entered into a contract to sell our residential portfolio
to Apartment Investment and Management Company, a NYSE-listed company
("AIMCO"), for approximately $86 million. Under the agreement, AIMCO will
assume approximately $37 million of first mortgage debt (allowing us to avoid
more than $5 million in prepayment penalties), deliver 530,000 shares of AIMCO
common stock, and pay the balance of the purchase price in cash. The amount of
cash will be adjusted to reflect the value of AIMCO stock based on a trading
period average with a minimum value of $36.50 per share and a maximum value of
$40.50. The sale is scheduled to close on April 30th with the purchaser having
one 30-day extension option.
See "The Company -- Recent Developments" in the accompanying
prospectus.
THE OFFERING
Rights
We are distributing to each record holder of our common shares as of
the close of business on April 21, 1999, the record date, one non-transferable
right for every 2.5 common shares held.
We will issue a total of approximately 12,550,442 rights. All common
shares issued in the offering will be stapled to a proportionately equal
interest in the common stock of FUMI, with some exceptions. See "Description of
Capital Stock -- Common Shares -- Beneficial Ownership of FUMI" in the
accompanying prospectus.
Holders who own common shares through our dividend reinvestment plan
as of the record date will receive rights for those shares only if they follow
the procedures described in "The Offering -- Holders of Common Shares in
Dividend Reinvestment Plan."
Record Date
April 21, 1999.
Subscription Price
$4.00 per common share.
Closing Price of the Common Shares
on the NYSE on April 19, 1999
$4.6875 per common share.
Basic Subscription
Each right allows its holder to purchase one common share at the $4.00
subscription price. The number of rights a holder may exercise may be limited
by the 9.8% ownership limit described in "-- Share Ownership Limit; Limitations
on Subscription" below.
S-5
<PAGE> 6
Oversubscription Privilege
A rights holder who exercises in full its basic subscription without
going over the 9.8% ownership limit may also oversubscribe at the same
subscription price for additional common shares not otherwise purchased by
others through the exercise of rights, up to the 9.8% ownership limit.
If there are not enough unsubscribed common shares available to
satisfy fully all exercises of the oversubscription privilege, the available
unsubscribed common shares will be allocated pro rata among holders who
exercise the oversubscription privilege based on the respective numbers of
rights exercised by those holders through the basic subscription.
A holder may exercise its oversubscription privilege only concurrently
with its basic subscription. See "The Offering -- Oversubscription Privilege."
Standby Commitment
Gotham Partners, L.P., Gotham Partners III, L.P. and Gotham Partners
International, Ltd. have agreed to purchase at the $4.00 subscription price per
share any common shares not purchased through the exercise of rights or the
oversubscription privilege, up to a total of 12,500,000 common shares having a
total subscription price of up to $50,000,000. If holders subscribe for fewer
than 12,500,000 common shares through their basic subscription and
oversubscription privilege, the standby purchasers will subscribe for the
difference. The standby purchasers have customary rights to terminate their
obligations to purchase the standby commitment shares, and their obligations
will in any event expire on the 45th day following the date this offering
commences. We have agreed not to extend this offering beyond such date.
We have agreed to pay the Gotham entities as standby purchasers
$2,000,000, an amount equal to 4% of their maximum standby commitment in this
offering, whether or not the offering is completed. Each of the standby
purchasers is entitled to its pro rata portion of the payment based on its
share of the standby commitment. Although the Gotham entities are collectively
entitled to receive $2,000,000 of the payment, they agreed to accept only
$1,800,000.
Our Board of Trustees has agreed to waive the 9.8% ownership limit to
enable the Gotham entities to exercise rights and the oversubscription
privilege and to satisfy their standby commitment obligations. An independent
committee of the Board of Trustees has approved the terms and conditions of the
standby commitment. See "The Offering -- Standby Commitment." As of April 19,
1999, the Gotham entities beneficially owned 9.71% of our outstanding common
shares.
Share Ownership Limit; Limitations on Subscription
To help maintain our status as a REIT, our by-laws restrict beneficial
and constructive ownership of common shares by any person or group of persons
acting collectively to 9.8% of our outstanding common shares. See "The Offering
- -- Basic Subscription; Limitations on Subscription" in this prospectus
supplement and "Federal Income Tax Consequences" and "Description of Capital
Stock -- Common Shares -- Restriction on Size of Holdings" in the accompanying
prospectus.
A holder may exercise only up to the number of rights that would allow
that holder to reach but not go over the 9.8% ownership limit. A holder's
percentage beneficial ownership interest in common shares will be calculated
promptly after the expiration of the offering by dividing
o the sum of:
(1) the total number of common shares beneficially owned by that
holder immediately before the expiration time,
(2) the total number of common shares for which that holder has
exercised rights, and
(3) the total number of common shares into which all Series A
Cumulative Redeemable Preferred Shares beneficially owned by
that holder immediately before the expiration time are
convertible,
S-6
<PAGE> 7
by
o the sum of:
(1) the total number of common shares outstanding immediately
after completion of this offering, and
(2) the total number of common shares into which all Series A
Preferred Shares beneficially owned by that holder
immediately after completion of this offering are
convertible.
See "The Offering -- Basic Subscription; Limitations on Subscription."
The anticipated size of a holder's beneficial ownership interest in
First Union after completion of this offering cannot be determined at the time
that holder exercises its rights because the size of that interest will depend
largely on the number of common shares subscribed for by other holders.
However, in light of the standby commitment of the standby purchasers, a
holder, in calculating its beneficial ownership interest, may assume that at
least 12,500,000 common shares offered for sale in this offering will be
issued. See "The Offering -- Standby Commitment."
Any rights exercised by a holder and any common shares subscribed for
by a holder through the exercise of its oversubscription privilege that would
cause it to go over the 9.8% ownership limit will not be considered exercised
or subscribed for by that holder. The total subscription price paid by a holder
for rights that are not considered exercised and for common shares not
considered subscribed for will be returned to that holder, without interest, as
soon as practicable after completion of this offering. See "The Offering --
Escrow Arrangements; Return of Funds."
If a holder subscribes for and, inadvertently or otherwise, is issued
a number of common shares that causes that holder to go over the 9.8% ownership
limit, the number of common shares in excess of the 9.8% ownership limit will
be "Excess Securities" under our by-laws and therefore will not, in the hands
of that holder, have dividend, voting and other rights or be considered
outstanding for quorum, voting and other purposes. See "Description of Capital
Stock -- Common Shares -- Restriction on Size of Holdings" in the accompanying
prospectus.
Transferability of Rights
Rights may not be transferred, except by operation of law.
Subscription Agent
National City Bank.
Procedure for Exercise
A holder may exercise its basic subscription and oversubscription
privilege by properly completing and executing the certificate evidencing its
rights and forwarding that rights certificate, together with payment of the
subscription price for each common share subscribed for, to the subscription
agent before the offering expires. If a holder chooses to forward a rights
certificate by mail, we recommend using insured, registered mail.
Alternatively, a holder may use the guaranteed delivery procedures described in
"The Offering -- Late Delivery of Payments and Rights Certificates."
A rights holder may not revoke any exercise of its basic subscription
or oversubscription privilege.
No Fractional Common Shares
We will not issue any fractional common shares for the exercise of any
rights or the oversubscription privilege or through the standby purchasers'
standby commitment.
Persons Holding Through Others
Shareholders holding common shares and receiving rights through a
broker, dealer, commercial bank, trust company or other nominee, as well as
shareholders holding stock certificates who would prefer to have such
institutions exercise rights and subscribe for common shares on their behalf,
should contact the appropriate nominee or institution and request it to effect
those transactions for them. See "The Offering -- Method of Exercising Rights
and Oversubscription Privilege."
S-7
<PAGE> 8
Issuance of Certificates
Certificates for common shares purchased in this offering will be
delivered to subscribers as soon as practicable after the offering expires. See
"The Offering -- Delivery of Common Shares."
Common Shares Outstanding Before this Offering (1)
31,376,105.
Series A Preferred Shares Outstanding Before this Offering (2)
1,349,000.
Common Shares Outstanding After this
Offering (3)
43,926,547.
- ------------------
(1) As of April 19, 1999.
(2) As of April 19, 1999. As of such date, each outstanding Series A
Preferred Share was convertible into 3.31 common shares. See
"Description of Capital Stock -- Preferred Shares -- Conversion
Rights" in the accompanying prospectus.
(3) Does not include common shares issuable upon conversion of Series A
Preferred Shares. Assumes all rights are exercised.
Use of Proceeds
We intend to use the net proceeds of this offering to repay $9.0
million of borrowings outstanding under our senior credit facility described in
"The Company -- Recent Developments" in the accompanying prospectus and
approximately $39.4 million of borrowings outstanding under our bridge loan
described in "-- First Union -- Background of the Offering" above. See "Use of
Proceeds."
Expiration Time
May 12, 1999 at 5:00 p.m., Eastern Daylight Time, unless we select a
later date and time in our sole discretion. After that time, rights will become
void and have no value.
RISK FACTORS
You should carefully consider the matters discussed under "Risk
Factors" in this prospectus supplement and the accompanying prospectus before
deciding to exercise your rights.
S-8
<PAGE> 9
RISK FACTORS
You should carefully consider the following matters and the matters
discussed under "Risk Factors" in the accompanying prospectus as well as the
information contained elsewhere or incorporated by reference in this prospectus
supplement and the accompanying prospectus.
UNCERTAIN AVAILABILITY OF ADDITIONAL FINANCING
We can give no assurance that our cash reserves, cash flows from
operations, anticipated proceeds from asset sales and available funding under
our credit facilities will be adequate to fund our operations through the end
of 1999 or that we will not need additional funding either during or after this
period. If we require additional financing, we can provide no assurance that
such financing will be available or, if available, that it will be available to
us on commercially reasonable terms. If adequate funds are not available to
satisfy either our short- or long-term capital requirements, we may be required
to limit our operations significantly, sell assets on disadvantageous terms or
seek protection or relief under applicable bankruptcy laws. See "Risk Factors
- -- Difficulties in servicing debt, " "-- Default under the FUR Credit Facility,
the Impark Credit Facility and the Bridge Loan" and "-- Debt covenants restrict
operating flexibility; failure to comply with debt instruments could cause
acceleration of debt" in the accompanying prospectus.
CONTROL BY GOTHAM
If no rights are exercised and the standby purchasers purchase all the
standby commitment shares they are required to purchase under the standby
commitment, the Gotham entities will own approximately 35.4% of our issued and
outstanding common shares after completion of this offering. The purchase of
common shares by the Gotham entities through the oversubscription privilege and
the standby commitment may enable them to control the outcome of all matters
submitted to shareholders for a vote, including the election of Trustees and,
therefore, our management, policies and operations.
LIMITATIONS ON SUBSCRIPTIONS
Whether a holder may exercise all of its rights through the basic
subscription and the oversubscription privilege will depend on that holder's
total equity interest in us following such exercise. A holder may exercise only
up to the number of rights that would allow it to reach but not go over the
9.8% ownership limit. Any rights exercised and any common shares subscribed for
through the exercise of the oversubscription privilege that would cause a
holder to go over the 9.8% ownership limit will not be considered exercised or
subscribed for by that holder. Given the way the 9.8% ownership limit is
determined, holders may be forced to exercise fewer rights and thereby acquire
fewer common shares than they desire. If a holder subscribes for and,
inadvertently or otherwise, is issued a number of common shares that makes that
holder go over the 9.8% ownership limit, the number of common shares in excess
of the 9.8% ownership limit would be "Excess Securities" under our by-laws and
therefore would not, in the hands of that holder, have dividend, voting and
other rights or be considered outstanding for quorum, voting and other
purposes. See "Description of Capital Stock -- Common Shares -- Restriction on
Size of Holdings" in the accompanying prospectus.
FAILURE TO PURCHASE STANDBY COMMITMENT SHARES
The standby purchasers have agreed to purchase any common shares not
purchased through the exercise of rights or the oversubscription privilege, up
to a total of 12,500,000 common shares having a total subscription price of up
to $50,000,000. However, the standby purchasers' obligations under their
standby commitment are not secured by any collateral, and there can be no
assurance that the standby purchasers will purchase the standby commitment
shares. In addition, the standby purchasers have customary rights to terminate
their standby commitment obligations, and these obligations will in any event
expire on the 45th day following the date this offering commences. If for any
reason any standby purchaser does not purchase its pro rata portion of standby
commitment shares, we may not receive enough proceeds to make mandatory
principal payments under the bridge loan. A failure by any standby purchaser to
purchase its pro rata portion of the standby commitment shares would also
result in an event of default under the bridge loan. Our failure to make
mandatory principal payments or the standby purchasers' failure to purchase the
standby commitment shares would enable the lenders under the bridge loan to
accelerate all amounts due under the bridge loan and trigger cross-defaults
under our other debt obligations.
S-9
<PAGE> 10
FAILURE TO SERVICE DEBT
As of April 19, 1999, we had $165.6 million in principal outstanding
under our senior credit facility and our bridge loan. The upcoming amortization
payments require us to reduce the principal amounts outstanding under the
senior credit facility and the bridge loan to $155.3 million in the aggregate
in April 1999, $118.0 million in the aggregate in May 1999 and $88.0 million in
the aggregate in June 1999. All remaining principal under the senior credit
facility and the bridge loan is due on August 11, 1999, provided that such
amounts may be due on June 30, 1999 if the lenders do not extend the existing
waiver relating to the June 1998 change in the board's composition. We are
relying on our cash reserves, cash flow from operations, net proceeds from
assets sales, net proceeds from financing assets and net proceeds from
offerings of rights and common shares under this prospectus supplement to make
these principal payments, but there can be no assurance that these sources will
provide sufficient funds to enable us to make these payments. If we are unable
to satisfy our obligations under either the senior credit facility or the
bridge loan, the lenders thereunder may declare all indebtedness outstanding
thereunder, together with any accrued interest thereon, due and payable
immediately and by such action trigger cross-defaults under other debt
instruments. In such circumstances, we will seek waivers for these defaults,
but there can be no assurance that these waivers will be granted, in which
case, the standby purchasers may have the right to terminate their obligations
under their standby commitment. In such circumstances, we may terminate this
offering.
RESALE PRICE OF COMMON SHARES MAY NOT EQUAL OR EXCEED THE SUBSCRIPTION PRICE
There can be no assurance that, after we issue rights and the common
shares upon exercise of rights, a subscribing holder will be able to sell
common shares purchased in this offering at a price equal to or greater than
the $4.00 per share subscription price. The last reported sale price of the
common shares on the NYSE on April 19, 1999 was $4.6875.
DILUTION IN THE OFFERING
Holders who do not exercise their rights and subscribe for common
shares will experience dilution of their equity ownership interest in First
Union. This dilution may be significant. In addition, because rights are not
transferable, holders not exercising their rights will relinquish any value
inherent in those rights. Purchasers of common shares in the offering will
experience immediate and significant dilution in the net tangible book value
per share of those common shares.
USE OF PROCEEDS
We anticipate receiving approximately $48.4 million in net proceeds
from the sale of the common shares in this offering. This estimate of net
proceeds accounts for the approximately $1.8 million payment to the standby
purchasers but not our other estimated offering expenses. We will use $9.0
million of the net proceeds to repay borrowings under our senior credit
facility and the remainder of the net proceeds, approximately $39.4 million, to
repay borrowings under the bridge loan. As of April 19, 1999, $90.3 million in
principal amount was outstanding under the senior credit facility and $75.3
million in principal amount was outstanding under the bridge loan. Amounts
outstanding under the senior credit facility accrue interest at either LIBOR
plus 3% annually or the base rate of the agent bank of the senior credit
facility plus 1/2% annually and mature on August 11, 1999. We are obligated to
make mandatory principal repayments under the senior credit facility to reduce
its outstanding principal balance to less than $80.0 million by April 30, 1999
and less than $50.0 million by June 30, 1999. For a more detailed description
of the senior credit facility, see "The Company -- Recent Developments" in the
accompanying prospectus. Except as described below, borrowings under the bridge
loan accrue interest at a rate of 12% annually and mature on August 11, 1999.
We are obligated to make a mandatory principal repayment under the bridge loan
to reduce its outstanding principal balance to less than approximately $38.0
million by May 15, 1999. The lenders under the bridge loan have agreed to allow
$9.0 million of the net proceeds from this offering that would otherwise be
used to repay a portion of the bridge loan extended by three of these lenders
to be used to repay amounts outstanding under our senior credit facility.
Although the $9.0 million in principal will remain outstanding under the bridge
loan, it will be considered paid for purposes of the mandatory repayment of
principal described above. This $9.0 million portion of the bridge loan will
bear interest at 15% annually and mature on August 11, 1999. For a more
detailed description of the bridge loan, see "The Company -- Recent
Developments" in the accompanying prospectus.
S-10
<PAGE> 11
CAPITALIZATION
The following table shows the capitalization of the First Union
Companies on a consolidated basis (i) at December 31, 1998 and (ii) as adjusted
to give effect to this offering and recent asset sales, which assumes all
rights are exercised, and the application of the net proceeds therefrom:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
------------------------------------
AS ADJUSTED
FOR THE OFFERING
AND ASSET
HISTORICAL SALES(1)(2)
---------- ----------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C>
SENIOR DEBT:
Bank loans ............................................................. $ 125,821 $ 116,821
Bridge loan(2) ......................................................... 90,000 35,878
Mortgage debt, ranging from 6.869% to 12.25% and due 1999 to
2018(2) ................................................................ 345,042 333,572
Senior Notes ........................................................... 12,538 12,538
Notes payable .......................................................... 4,996 4,996
--------- ---------
Total debt ......................................................... 578,397 503,805
--------- ---------
SHAREHOLDERS' EQUITY:
Series A Preferred Shares (liquidation preference $25 per share);
2,300,000 shares authorized and 1,349,000 shares
outstanding .......................................................... 31,737 31,737
Common shares; unlimited authorization and 31,416,326 common
shares outstanding; 43,966,768 common shares, as adjusted ............ 31,416 43,966
Additional paid-in capital ............................................. 190,679 226,530
Deficit from operations ................................................ (115,968) (115,968)
Undistributed capital gains ............................................ 14,949 14,949
Foreign currency translation adjustment ................................ (2,117) (2,117)
--------- ---------
Total shareholders' equity ......................................... 150,696 199,097
--------- ---------
Total capitalization ............................................... $ 729,093 $ 702,902
========= =========
</TABLE>
- ------------------
(1) See "Use of Proceeds."
(2) First Union sold a shopping center in February 1999 for approximately
$21.6 million and applied the net proceeds from the sale to repay
$11.5 million principal amount of debt secured by a mortgage on the
property and $9.3 million principal amount of the bridge loan. First
Union sold an office building in March 1999 for approximately $2.2
million and applied the net proceeds from the sale to repay $1.8
million principal amount of the bridge loan. First Union also sold an
office center in April 1999 for approximately $3.8 million and applied
the net proceeds from the sale to repay $3.6 million principal amount
of the bridge loan.
S-11
<PAGE> 12
SELECTED FINANCIAL DATA
Set forth below is selected consolidated financial data of the First
Union Companies for the years ended December 31, 1998, 1997, 1996, 1995 and
1994. The selected financial data has been derived from, and should be read in
conjunction with, the audited combined financial statements and accompanying
notes included in First Union's Annual Reports on Form 10-K/A for the years
ended December 31, 1998, 1997 and 1995 and Form 10-K for the years ended
December 31, 1996 and 1994. The selected financial data below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the First Union Companies' financial statements
and notes thereto contained in the Annual Reports.
S-12
<PAGE> 13
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------
1998 1997(1) 1996(1) 1995(1) 1994(1)
---- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues(2) ................................. $ 324,526 $ 235,544 $ 81,867 $ 79,205 $ 76,339
Interest expense(2) ......................... 50,859 29,864 23,426 22,397 21,280
Depreciation and amortization(2)(3) ......... 33,389 22,892 15,890 14,276 12,779
Income (loss) before capital gain or
loss, extraordinary loss, cumulative
effect of accounting change and
minority interest (2)(4)(5)............... (91,465) 3,490 1,681 881 4,261
Unrealized loss on carrying value of
assets identified for disposition ........ -- -- -- (14,000) --
Capital gains, net .......................... 10,346 1,468 -- 31,577 --
Extraordinary loss from early
extinguishment of debt(6) ................ (2,399) (226) (286) (910) --
Cumulative effect of change in accounting
for internal lease
costs(3) ................................. -- -- -- (4,325) --
Allocation of minority interest ............. -- 944 -- -- --
Net income (loss) before preferred
dividend(4)(5) ........................... (83,518) 5,676 1,395 13,223 4,261
Preferred dividend .......................... (2,999) (4,831) (845) -- --
Net income (loss) applicable to shares of
beneficial interest(4)(5) ................ (86,517) 845 550 13,223 4,261
Net income (loss) applicable to shares of
beneficial interest, basic and diluted ... $ (2.81) $ 0.03 $ 0.03 $ 0.72 $ 0.24
Basic weighted average shares ............... 30,772 24,537 17,172 18,059 18,105
Stock options, treasury method .............. 243 571 367 -- --
Restricted shares, treasury method .......... -- 307 167 58 15
Diluted weighted average shares ............. 31,015 25,415 17,706 18,117 18,120
FINANCIAL POSITION AT END OF PERIOD (2)
Gross investment in real estate assets ... $ 806,859 $ 756,308 $ 458,963 $ 449,080 $ 436,394
Total assets ............................. 768,684 790,226 413,054 376,144 352,005
Total debt ............................... 578,397 483,459 254,868 258,454 238,296
Shareholders' equity ..................... 150,696 235,310 124,947 77,500 78,756
OTHER DATA
Net cash provided by (used for)
Operations ............................... $ 6,413 $ 15,740 $ 11,085 $ 12,989 $ 19,053
Investing ................................ (52,429) (112,233) (47,002) (28,345) (26,507)
Financing ................................ 74,327 110,406 35,466 15,783 (28,094)
Property net operating income(2)(7) ......... 86,184 64,428 47,349 44,086 41,759
EBIDA(7) .................................... 40,784 51,415 40,152 37,554 38,320
Funds from (used in) operations after
preferred dividends(3)(7) ................ (12,469) 21,150 16,010 14,291 16,472
Preferred dividend accrued .................. 2,999 4,831 845 -- --
Dividends declared .......................... 3,478 11,651 7,684 7,542 7,273
Dividends declared per share ................ $ 0.11 $ 0.44 $ 0.44 $ 0.41 $ 0.40
Dividends payout as a percent of funds
from operations(3)(4)(7) ................. (8) 55% 48% 53% 44%
</TABLE>
(1) As a result of First Union's review of lives assigned to real estate
assets for calculation of depreciation expense during the fourth
quarter of 1998, reduced asset lives have been assigned effective
January 1, 1998. Consequently, First Union has restated its Combined
Financial Statements for the years 1994 through 1998. Shareholders'
equity at December 31, 1993 was restated from $103,766,000 to
$81,806,000.
(2) In September 1997, First Union acquired the interests of its joint
venture partners in eight shopping malls and 50% of another mall for
$88 million in cash and the assumption of $203 million of mortgage
debt. First Union acquired voting control of Impark in April 1997 for
$36.6 million in cash, the assumption of $26 million in debt and the
issuance of $12.4 million of stock in Impark to Impark employees and
to its former owner.
S-13
<PAGE> 14
(3) In December 1995, First Union changed its method to directly expense
internal leasing costs and recorded a $4.3 million noncash charge for
the cumulative effect of the accounting change as of the beginning of
1995. Funds from operations and depreciation and amortization for
previous years have been restated for the change in accounting method
on a basis comparable to 1995.
(4) In 1998, First Union recognized $20.5 million of expenses primarily in
connection with the proxy contest waged by Gotham in the first half of
1998 and the resulting change in the composition of First Union's
Board of Trustees. These expenses included
<TABLE>
<S> <C>
First Union's proxy and legal fees $ 1.7 million
Gotham's proxy and legal fees 3.1 million
Other professional fees to avoid change in the composition of
the Board 1.5 million
Expenses associated with termination of First Union's Chairman,
President and Chief Executive Officer 3.4 million
Vesting of restricted stock upon the change in a majority of the
Board of Trustees 4.7 million
Severance expenses for employee change in control agreements 6.1 million
</TABLE>
First Union also recognized the loss of a $2.25 million deposit when
First Union did not close on the purchase of a parking facility
because the Board of Trustees believed that the contract to acquire
the parking facility, which was approved prior to a change in June
1998 of a majority of the Board, was on disadvantageous terms. First
Union partially offset this loss by assigning the contract to a third
party for $200,000.
The above expenses also negatively affected net income and funds from
operations.
In 1995, First Union recognized $1.6 million of litigation and proxy
expenses related to a minority-shareholder lawsuit and proxy contest.
(5) In 1998, First Union recognized $36 million in unrealized losses on
the carrying value of properties identified for disposition and Impark
recognized a $15 million reduction of goodwill.
(6) In August 1998, $87.5 million of the Senior Notes were repaid,
resulting in $1.6 million of issuance costs and solicitation fees
being expensed. Additionally, in the fourth quarter of 1998, First
Union renegotiated the terms of its senior credit facility and the
bridge loan resulting in $0.8 million of deferred costs being
expensed. In 1997 and 1996, First Union renegotiated its bank credit
agreements, resulting in a $226,000 and $286,000 charge, respectively,
related to the write-off of unamortized costs.
In November 1995, First Union paid approximately $36 million of
mortgage debt resulting in a $910,000 charge for the write-off of
unamortized costs and prepayment premiums.
(7) In addition to net income, First Union believes that three additional
measures of operating performance -- property net operating income,
EBIDA and funds from operations -- are helpful in understanding First
Union's financial performance. Property net operating income (as
defined below) measures the performance of First Union's real estate
assets and is often used by investors and others in valuing real
estate assets. EBIDA (as defined below) is used by lenders and others
as an indication of an entity's ability to incur and service debt, to
make capital expenditures and to fund other cash needs. Funds from
operations (as defined below) is widely used by industry analysts as
the appropriate measure of the performance of an equity REIT and
provides a relevant basis for comparison among REITs. None of property
net operating income, EBIDA or funds from operations (1) represent net
income or cash flow from operations as defined by generally accepted
accounting principles, (2) should be considered as an alternative to
net income as a measure of operating performance or cash flows from
operating, investing and financing activities, or (3) should be
considered as an alternative to cash flows as a measure of liquidity.
First Union's calculations of property net operating income, EBIDA and
funds from operations may not be comparable to similarly titled
measures of other REITs. In addition, all of these measures of
operating performance exclude depreciation and amortization expenses
and property net operating income and EBIDA also exclude interest
expense. These excluded items are significant components in
understanding and assessing First Union's financial performance.
o Property net operating income is property revenue, equity in
income of joint venture, management fees and mortgage
investment income, less property operating expenses and real
estate taxes. This supplemental measure is determined before
debt service and depreciation and amortization expense.
S-14
<PAGE> 15
o EBIDA is calculated by starting with the line that appears on
the income statement for income (loss) before capital gain or
loss, extraordinary loss, cumulative effect of accounting
change and minority interest. Interest expense and the
noncash charges for depreciation and amortization are added
back and the preferred dividend is deducted. In 1998, EBIDA
is calculated before the $51 million unrealized loss on the
carrying value of assets identified for disposition and
impaired assets.
o Funds from operations is a multi-step calculation:
Income (loss) before capital gain or loss, extraordinary
loss, cumulative effect of accounting changes and after
minority interest, plus Noncash charges for depreciation
and amortization of First Union and the joint venture
interest, plus Amortization of intangible assets from the
Impark acquisition, less Amortization allocated to the
minority interest and depreciation and amortization of
debt issuance costs and other corporate assets, less
Preferred dividend.
In 1998, funds from operations is calculated before the $51
million unrealized loss on the carrying value of assets
identified for disposition and impaired assets.
First Union adopted this definition of funds from operations
in 1997 as recommended by the National Association of Real
Estate Investment Trusts (NAREIT), which does not add back
depreciation and amortization of debt issuance costs and
other corporate assets. Previously, First Union added back
all depreciation and amortization. Accordingly, funds from
operations and dividend payout as a percentage of funds from
operations for the years 1994 through 1996 have been restated
to conform to the NAREIT definition.
(8) Not meaningful.
S-15
<PAGE> 16
THE OFFERING
BASIC SUBSCRIPTION; LIMITATIONS ON SUBSCRIPTION
First Union is distributing to each holder of common shares of record
as of the close of business on April 21, 1999, the record date, one right for
every 2.5 common shares held. Each right entitles its holder to purchase one
common share for $4.00. Holders who own common shares through First Union's
dividend reinvestment plan as of the record date will not receive rights for
those common shares unless they follow the procedures described in "-- Holders
of Common Shares in Dividend Reinvestment Plan." Any common shares issued in
the offering will be stapled to a proportionately equal interest in the common
stock of FUMI, with some exceptions. See "Description of Capital Stock --
Common Shares -- Beneficial Ownership of FUMI" in the accompanying prospectus.
A holder may exercise only up to the number of rights that would cause
that holder to beneficially and constructively own no more than 9.8% of the
outstanding common shares. See "Description of Capital Stock -- Common Shares
- -- Restriction on Size of Holdings" in the accompanying prospectus. A holder's
beneficial ownership interest will be calculated promptly after the offering
expires by
dividing
o the sum of:
(1) the total number of common shares beneficially owned
by that holder immediately before the expiration
time,
(2) the total number of common shares for which that
holder has exercised rights, and
(3) the total number of common shares into which all
Series A Preferred Shares beneficially owned by that
holder immediately before the expiration time are
convertible,
by
o the sum of:
(1) the total number of common shares outstanding
immediately after completion of this offering, and
(2) the total number of common shares into which all
Series A Preferred Shares beneficially owned by that
holder immediately after completion of this offering
are convertible.
The anticipated size of a holder's beneficial ownership interest after
consummation of this offering cannot be determined at the time that holder
exercises its rights because the size of that interest will depend largely on
the number of common shares subscribed for by other holders. However, in light
of the standby commitment of the standby purchasers, a holder, in calculating
its beneficial ownership interest, may assume that at least 12,500,000 common
shares offered for sale in the offering will be issued. See "-- Standby
Commitment." Any rights exercised by that holder and any common shares
subscribed for by that holder through the exercise of its oversubscription
privilege that would cause it to go over the 9.8% ownership limit will not be
considered exercised or subscribed for by that holder. The total subscription
price paid by a holder for rights that are not considered exercised and for
common shares not considered subscribed for will be returned to that holder,
without interest, as soon as practicable after completion of this offering. See
"-- Escrow Arrangements; Return of Funds."
If a holder subscribes for and, inadvertently or otherwise, is issued
a number of common shares that causes that holder to go over the 9.8% ownership
limit, the number of common shares in excess of the 9.8% ownership limit will
be "Excess Securities" under First Union's by-laws and therefore will not, in
the hands of that holder, have dividend, voting and other rights or be
considered outstanding for quorum, voting and other purposes.
S-16
<PAGE> 17
See "Description of Capital Stock -- Common Shares -- Restriction on Size of
Holdings" in the accompanying prospectus.
Rights are represented by rights certificates which shareholders will
receive with the delivery of this prospectus supplement. A holder of rights may
o subscribe for common shares through the exercise of all of
its rights, including the exercise of the oversubscription
privilege, if that holder elects,
o subscribe for common shares through the exercise of some of
its rights, or
o allow some or all of its rights to expire unexercised.
No fractional rights or cash in place of fractional rights will be
issued or paid by First Union.
Certificates representing common shares purchased through the basic
subscription will be delivered to holders as soon as practicable after the
offering expires. Any amounts paid by holders in respect of rights not
considered exercised will be refunded as soon as practicable after the offering
expires without interest.
EXPIRATION TIME
The rights will expire at 5:00 p.m., Eastern Daylight Time, on May 12,
1999 or at a later date and time as First Union may determine in its sole
discretion. After that time, rights will become void and have no value. Notice
will be given to shareholders of record on the record date, by mail or by
publication in a newspaper of national circulation, of a new expiration time if
First Union extends the period for the exercise of the rights. First Union has
agreed not to extend this offering beyond the 45th day following the date this
offering commences.
OVERSUBSCRIPTION PRIVILEGE
A holder of rights who validly exercises in full its basic
subscription without exceeding the 9.8% ownership limit may also oversubscribe
at the $4.00 per share subscription price for additional common shares that
have not been purchased through the exercise of rights, up to the 9.8%
ownership limit.
If an insufficient number of unsubscribed common shares is available
to satisfy fully all elections to exercise the oversubscription privilege, the
available unsubscribed common shares will be allocated pro rata among holders
who exercise the oversubscription privilege based on the respective numbers of
rights exercised by those holders through the basic subscription. If that
allocation, however, results in any holder being allocated a greater number of
unsubscribed common shares than that holder subscribed for through the exercise
of the oversubscription privilege, then that holder will be allocated only the
number of unsubscribed common shares as that holder subscribed for, and the
remaining unsubscribed common shares otherwise allocable to that holder will be
allocated among all other holders exercising the oversubscription privilege pro
rata based upon the number of rights exercised by each of those holders. No
fractional common shares will be issued to satisfy any exercise of the
oversubscription privilege. A holder may exercise the oversubscription
privilege only concurrently with its basic subscription.
Certificates representing the common shares purchased through the
oversubscription privilege will be delivered to holders as soon as practicable
after the offering expires and after all prorations have been effected. Any
amounts overpaid by holders will be refunded as soon as practicable after the
offering expires without interest.
SUBSCRIPTION PRICE
The subscription price for one common share, which may be purchased
upon the exercise of one right, is $4.00. Common shares purchased by a holder
through the oversubscription privilege or by a standby purchaser through its
standby commitment shall have the same subscription price as common shares
purchased through the basic subscription.
S-17
<PAGE> 18
HOLDERS OF COMMON SHARES IN DIVIDEND REINVESTMENT PLAN
As of April 19, 1999, approximately 247,469 common shares were held by
921 shareholders through the First Union Dividend Investment Service, the
Company's dividend reinvestment plan. Those common shares are registered in the
name of a nominee of the plan administrator. Shareholders who own common shares
through the plan will not receive rights for those common shares unless at
least 48 hours prior to the record date for the offering those holders request
certificates for some or all of those common shares so that those common shares
are held directly by such holders and not by the plan. Holders who so request
certificates in accordance with the plan will receive rights only for the
number of common shares covered by the certificates. The plan administrator
will not exercise any rights issued for the common shares held by the plan.
WITHDRAWAL
First Union reserves the right to withdraw the offering at any time
before or at the time it is due to expire and for any reason. If First Union
withdraws the offering, all funds received from holders will be refunded
promptly without interest.
SUBSCRIPTION AGENT
The subscription agent and escrow agent for this offering is National
City Bank. The address to which rights certificates, Notices of Guaranteed
Delivery and payments, other than wire transfers, should be mailed or delivered
is:
<TABLE>
<S> <C> <C>
By Regular Mail: By Facsimile Transmission: By Hand or Overnight Courier:
National City Bank, Subscription Agent 216-252-9163 National City Bank, Subscription
Corporate Trust Operations (for Eligible Institutions only) Agent
P.O. Box 94720 Corporate Trust Operations
Cleveland, Ohio 44101-4720 Confirm by Telephone 3rd Floor, North Annex
216-476-8936 4100 West 150th Street
(for Facsimile Confirmation Only) Cleveland, Ohio 44135
</TABLE>
Other than as set forth above, delivery of rights certificates,
Notices of Guaranteed Delivery and payments, other than wire transfers, will
not constitute a valid delivery.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE METHOD OF
SUBSCRIBING FOR COMMON SHARES OR FOR ADDITIONAL COPIES OF THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHOULD BE DIRECTED TO NATIONAL CITY
BANK, THE SUBSCRIPTION AGENT, AT 800-622-6757.
FRACTIONAL COMMON SHARES
No fractional common shares will be issued in this offering. Rights
certificates may not be divided in any manner as to create fractional rights.
Banks, trust companies, securities dealers and brokers that hold common shares
as nominees for more than one beneficial owner may have a rights certificate
divided by the subscription agent or may, upon proper showing to the
subscription agent, exercise their rights on the same basis as if the
beneficial owners were record holders on the record date. First Union reserves
the right to deny any division of rights certificates if in its opinion the
result would be inconsistent with the intent of this privilege.
METHOD OF EXERCISING RIGHTS AND OVERSUBSCRIPTION PRIVILEGE
A holder may exercise its basic subscription and oversubscription
privilege by properly completing and executing the rights certificate
accompanying this prospectus supplement and related prospectus and forwarding
the rights certificate, together with payment of the subscription price for
each common share subscribed for through the basic subscription and the
oversubscription privilege, to the subscription agent at the appropriate
address set forth above. Persons holding common shares and receiving rights
through a broker, dealer, commercial bank, trust company or other nominee, as
well as persons holding stock certificates who would prefer
S-18
<PAGE> 19
to have such institutions effect transactions relating to rights on their
behalf, should contact the appropriate nominee or institution and request it to
effect the transactions for them. Banks, trust companies, securities dealers
and brokers that hold common shares as nominee for more than one beneficial
owner may, upon proper showing to the subscription agent, exercise their basic
subscription and oversubscription privilege on the same basis as if the
beneficial owners were record holders on the record date. In the case of
holders of rights that are held of record through The Depository Trust Company
("DTC"), those rights may be exercised by instructing DTC to transfer rights
from that holder's DTC account to the subscription agent's DTC account,
together with payment of the full subscription price. Except as described under
"-- Late Delivery of Payments and Rights Certificates," to be accepted, the
properly completed and duly executed rights certificate and the payment must be
received by the subscription agent before the offering expires. Rights
certificates received after that time will not be honored.
Payments must be made in full in United States currency by either
o a check or bank draft drawn upon a U.S. bank or postal,
telegraphic or express money order payable to National City
Bank, as subscription agent, or
o a wire transfer of funds to the account maintained by the
subscription agent for that purpose at National City Bank,
Cleveland, Ohio.
Any wire transfer of funds should clearly indicate the identity of the
subscriber who is paying the subscription price by the wire transfer. Holders
should contact the subscription agent at 800-622-6757 for specific payment
instructions. The subscription price will be deemed to have been received by
the subscription agent only upon
o clearance of any uncertified check,
o receipt by the subscription agent of any certified check or
bank draft drawn upon a U.S. bank or of any postal,
telegraphic or express money order, or
o receipt of good funds in the subscription agent's account
designated above.
The instruction letter accompanying the rights certificate should be
read carefully and strictly followed. DO NOT SEND RIGHTS CERTIFICATES OR
PAYMENTS TO FIRST UNION. Except as described under "-- Late Delivery of
Payments and Rights Certificates," no subscription will be considered received
until the subscription agent has received delivery of a properly completed and
duly executed rights certificate and payment of the full subscription price.
The risk of delivery of all documents and payments is on holders, not First
Union or the subscription agent.
THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE RISK OF THE RIGHTS
HOLDERS, BUT IF SENT BY MAIL, IT IS RECOMMENDED THAT THOSE CERTIFICATES AND
PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT
REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE ALLOWED TO ENSURE DELIVERY
TO THE SUBSCRIPTION AGENT AND CLEARANCE OF PAYMENT BEFORE THE OFFERING EXPIRES.
BECAUSE UNCERTIFIED PERSONAL CHECKS MAY TAKE UP TO FIVE BUSINESS DAYS TO CLEAR,
YOU ARE STRONGLY URGED TO PAY OR ARRANGE FOR PAYMENT BY MEANS OF CERTIFIED OR
CASHIER'S CHECK, MONEY ORDER OR WIRE TRANSFER OF FUNDS.
LATE DELIVERY OF PAYMENTS AND RIGHTS CERTIFICATES
If, before the offering expires, the subscription agent has received a
properly completed and duly executed Notice of Guaranteed Delivery
substantially in the form accompanying this prospectus supplement and related
prospectus either by hand, mail, telegram or facsimile transmission, specifying
the name of the holder of rights and the number of common shares subscribed
for, stating separately the number of common shares subscribed for through the
exercise of the basic subscription and the oversubscription privilege and
guaranteeing that the properly completed and executed rights Certificate and
payment of the full subscription price for all common shares subscribed and
oversubscribed for will be delivered to the subscription agent within three
business days after the offering expires, that subscription may be accepted,
subject to the subscription agent's withholding the certificates for common
shares until receipt of the properly completed and duly executed rights
certificate and payment of the appropriate subscription price within that time
period. In the case of holders of rights that are held of record through DTC,
those rights may be exercised by instructing DTC to transfer rights from that
holder's DTC account to the subscription agent's DTC account, together with
payment of the full subscription price. The Notice of Guaranteed Delivery must
be guaranteed by a commercial bank, trust company or credit union having
S-19
<PAGE> 20
an office, branch or agency in the United States or by a member of a Stock
Transfer Association approved medallion program such as STAMP, SEMP or MSP.
Notices of Guaranteed Delivery and payments should be mailed or delivered to
the appropriate addresses set forth under "-- Subscription Agent."
TRANSFERABILITY OF RIGHTS
The rights may not be transferred, except by operation of law in the
event of death or dissolution of their holder.
VALIDITY OF SUBSCRIPTIONS
All questions regarding the validity and form of the exercise of the
basic subscription or the oversubscription privilege, including time of receipt
and eligibility to participate in the offering, will be determined solely by
First Union, which determination shall be final and binding. Once made,
subscriptions and directions are irrevocable, and no alternative, conditional
or contingent subscriptions or directions will be accepted. First Union
reserves the absolute right to reject any subscriptions or directions not
properly submitted or the acceptance of which, in the opinion of First Union's
counsel, would be unlawful. See "-- Basic Subscription; Limitations on
Subscription." Any irregularities in connection with subscriptions must be
cured before the offering expires unless waived by First Union in its sole
discretion. Neither First Union nor the subscription agent shall be under any
duty to give notification of defects in subscriptions or incur any liability
for failure to give that notification. A subscription will be considered
accepted, subject to First Union's right to withdraw or terminate the offering
or to limit the size of the subscription as described in "-- Basic
Subscription; Limitations on Subscription," only when a properly completed and
duly executed rights certificate, any other required documents and payment of
the full subscription price with respect to that subscription have been
received by the subscription agent. First Union's interpretations of the terms
and conditions of the offering shall be final and binding.
ESCROW ARRANGEMENTS; RETURN OF FUNDS
Funds received in payment of the subscription price for common shares
subscribed for will be held in a segregated account by the subscription agent
pending completion of this offering. Monies will be held in escrow until this
offering is completed or is canceled. If the offering is canceled for any
reason, monies will be returned to subscribers without interest or deduction
promptly thereafter. If a rights holder exercising the basic subscription or
the oversubscription privilege is allocated fewer than the number of common
shares that that holder wished to subscribe for through the basic subscription
or the oversubscription privilege, the excess funds paid by such holder will be
returned without interest as soon as practicable after the offering expires.
RIGHTS OF SUBSCRIBERS
Holders will have no rights as shareholders of First Union with
respect to common shares subscribed for until certificates representing those
common shares are issued to them. Holders will have no right to revoke their
subscriptions after delivery to the subscription agent of a completed rights
certificate and any other required documents.
FOREIGN SHAREHOLDERS
Rights certificates will not be mailed to holders whose addresses are
outside the United States or who have an army post office or foreign post
office address, but will be held by the subscription agent for their account.
To exercise rights, those holders must notify the subscription agent by
completing an International Holder Subscription Form which will be delivered to
those holders in lieu of a rights certificate, and sending it by mail or
telecopy to the subscription agent at the address and telecopy number specified
above.
S-20
<PAGE> 21
NO REVOCATION
ONCE A HOLDER OF RIGHTS HAS EXERCISED THE BASIC SUBSCRIPTION OR THE
OVERSUBSCRIPTION PRIVILEGE THAT EXERCISE MAY NOT BE REVOKED.
STANDBY COMMITMENT
The standby purchasers have agreed to purchase, at the subscription
price and subject to customary rights to terminate, including as a result of a
material adverse change in First Union's business, financial condition or
results of operations, those common shares that are not purchased through the
exercise of rights or the oversubscription privilege, up to 12,500,000 common
shares having an aggregate subscription price of up to $50,000,000. If holders
subscribe for fewer than 12,500,000 common shares in the aggregate through
their basic subscription and oversubscription privilege, the standby purchasers
will subscribe for the difference. The standby purchasers' obligations to
purchase the standby commitment shares in this offering will expire on the 45th
day following the date this offering commences. First Union has agreed not to
extend this offering beyond such date.
The Board of Trustees has agreed to waive the 9.8% ownership limit to
enable Gotham to exercise rights and the oversubscription privilege and to
satisfy its obligations under the standby commitment. An independent committee
of the Board of Trustees has approved the terms and conditions of the standby
commitment.
As of April 19, 1999, the Gotham entities beneficially owned 9.71% of
the outstanding common shares.
DELIVERY OF COMMON SHARES
Certificates representing common shares purchased through the exercise
of the basic subscription, the oversubscription privilege or the standby
commitment will be delivered as soon as practicable after the offering expires,
the receipt of all required documents and payment in full of the aggregate
subscription price due for such common shares. In the case of shareholders
whose common shares are held through DTC and third-party investors who arrange
for delivery and payment through DTC, the appropriate participant account will
be credited.
SHAREHOLDER RIGHTS PLAN
In connection with First Union's Shareholder Rights Plan, the Board of
Trustees has agreed, with respect to each holder who acquires common shares
through the basic subscription, the oversubscription privilege or the standby
commitment, to increase the 15% threshold for triggering a "flip-in" event by
an amount equal to the increase in the percentage of beneficial ownership of
common shares achieved by that holder as a result of the acquisition of those
common shares. Accordingly, any acquisition of common shares through the
offering will not be considered a "flip-in" event under First Union's
Shareholder Rights Plan. For a description of First Union's Shareholder Rights
Plan, see "Description of Capital Stock -- Common Shares -- Shareholder Rights
Plan."
S-21
<PAGE> 22
FEDERAL INCOME TAX CONSEQUENCES REGARDING THE OFFERING
In the opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel to
First Union, the following discussion summarizes all material U.S. federal
income tax consequences of this offering to First Union and its shareholders.
The following discussion is based upon the current provisions of the Internal
Revenue Code of 1986, as amended, its legislative history, administrative
pronouncements, judicial decisions and Treasury regulations, all of which are
subject to change, possibly with retroactive effect. The following discussion
does not purport to be a complete discussion of all U.S. federal income tax
considerations. The following discussion does not address the tax consequences
of the offering under state, local or non-U.S. tax laws. In addition, the
following discussion may not apply, in whole or in part, to particular
categories of First Union shareholders, such as dealers in securities,
insurance companies, foreign persons, tax-exempt organizations, financial
institutions and persons who hold common shares or rights as part of a hedging,
straddle, integrated or conversion transaction. The discussion of U.S. federal
income tax considerations of the offering set forth below assumes that the
common shares owned by a shareholder and the common shares or rights issued
pursuant to the offering constitute capital assets in the hands of that
shareholder. It should be noted that under current law, net capital gains of
individuals who hold capital assets with a holding period in excess of one year
are taxed at lower rates than items of ordinary income, and the deductibility
of capital losses is subject to limitations.
TAXATION OF FIRST UNION'S SHAREHOLDERS
Receipt of Right. A shareholder, including a foreign shareholder, will
not recognize any gain or loss upon such shareholder's receipt of a right.
Tax Basis of Right. A shareholder's tax basis in a right will depend
on whether (1) the shareholder exercises the right, or alternatively (2) the
shareholder allows the right to lapse unexercised.
If a shareholder exercises a right, the tax basis of that right in the
hands of the shareholder will be determined by allocating the shareholder's
existing tax basis of such holder's common shares with respect to which the
right was distributed ("Old Common Shares") between that holder's Old Common
Shares and the right, in proportion to their relative fair market values on the
date of distribution. If, however, the fair market value of the rights
distributed to the shareholder on the date of distribution is less than 15% of
the fair market value of such holder's Old Common Shares, the tax basis of each
right will be deemed to be zero unless the shareholder affirmatively elects, by
attaching an election statement to that holder's federal income tax return for
the year in which that holder receives such holder's rights, to compute the tax
basis of that holder's rights in accordance with the preceding sentence. Once
made, such an election is irrevocable.
A right will not be treated as having any tax basis if it lapses and,
therefore, the holder of an expired right will not recognize a loss for tax
purposes.
Exercise of Right. No gain or loss will generally be recognized by a
shareholder, including a foreign shareholder, upon the purchase of a common
share through the exercise of a right.
The tax basis of a common share purchased through the exercise of a
right shall be equal to the sum of (1) the shareholder's tax basis of the right
exercised and (2) the subscription price paid for that common share.
The holding period of the common shares purchased through the exercise
of rights will commence on the date of exercise. Upon the subsequent sale of
common shares, other than to First Union pursuant to a redemption, the
shareholder will generally recognize capital gain or loss in an amount equal to
the difference between the proceeds of the sale and the shareholder's tax basis
of those common shares. Such gain or loss will be long-term capital gain or
loss if the shareholder's holding period for such common shares is more than
one year on the date of sale.
FOREIGN PERSONS
Assuming that First Union currently qualifies and has qualified as a
domestically controlled REIT, which First Union believes is the case (see
"Federal Income Tax Consequences -- Taxation of First Union's Shareholders --
Taxation of Non-U.S. Shareholders" in the accompanying prospectus), and
continues to so qualify through the
S-22
<PAGE> 23
time of any sale of common shares by a foreign person, any gain from such sale
should not be subject to U.S. taxation, unless such gain is effectively
connected with that person's U.S. trade or business or, in the case of an
individual foreign person, such person is present within the U.S. for 183 days
or more in such taxable year.
TAXATION OF FIRST UNION
First Union will not recognize any gain or loss upon (1) the issuance
of rights, (2) the receipt of cash for common shares pursuant to the exercise
of rights or (3) the lapse of rights.
PLAN OF DISTRIBUTION
The common shares offered hereby are being offered by First Union
through the issuance of rights to holders of common shares on the record date.
Holders of rights who desire to subscribe for common shares in this
offering are urged to complete, date and sign the rights certificate and return
it to the subscription agent before the offering expires, together with payment
in full of the subscription price. See "The Offering." Any questions concerning
the procedure for subscribing for the purchase of common shares should be
directed to the subscription agent.
The standby purchasers may be deemed statutory "underwriters" under
the Securities Act of 1933 with respect to any common shares they acquire in
the offering. Any broker-dealers that participate in the distribution of those
common shares may also be deemed to be "underwriters" under the Securities Act
of 1933.
THE FINANCIAL ADVISOR
The Company has engaged PaineWebber Incorporated to act as financial
advisor in connection with this offering. In this capacity, PaineWebber has
provided advice to the Board of Trustees of First Union regarding the terms,
structure and timing of this offering. PaineWebber has not agreed to any
standby or other arrangements to purchase any rights or any common shares or to
solicit exercises of the rights. In addition, PaineWebber does not intend to
engage in any stabilization activities with respect to any of First Union's
securities and PaineWebber will not engage in any bids for or market making
activities in First Union's securities subsequent to the date hereof and prior
to the time the offering expires.
First Union has agreed to pay PaineWebber a fee of $375,000 for its
services and has agreed to indemnify PaineWebber against losses incurred by it
that arise out of material misstatements or omissions of fact in this
prospectus. Of the total fee payable, $187,500 has been paid, and the remaining
portion is payable at the time this offering is consummated. PaineWebber has
also been engaged by First Union to explore strategic alternatives for Impark
and to sell a parking garage in Chicago for customary compensation.
Other than PaineWebber, First Union has not engaged any financial
advisors, brokers or dealers to perform any services for this offering.
LEGAL MATTERS
The validity of the common shares offered through this prospectus
supplement and the accompanying prospectus under Ohio law will be passed upon
for First Union by Hahn Loeser & Parks LLP.
S-23
<PAGE> 24
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
SHARES OF BENEFICIAL INTEREST
AND
RIGHTS TO PURCHASE SHARES OF BENEFICIAL INTEREST
--------------
First Union Real Estate Equity and Mortgage Investments ("First Union")
is a real estate investment trust (a "REIT") whose primary business has been to
buy, manage, improve cash flow of and own retail, apartment, office and parking
properties throughout the United States and Canada. Currently, First Union is in
the process of selling some of its properties. First Union Management, Inc., an
affiliate of First Union ("FUMI"), owns a controlling interest in a Canadian
parking and management services company. First Union and FUMI have an
organizational structure commonly referred to as "stapled," whereby First
Union's shares of beneficial interest, par value $1.00 per share ("Common
Shares"), are "stapled to" a proportionately equal interest in the common stock
of FUMI, subject to certain exceptions. Common Shares may not be issued or
transferred without their "stapled" counterparts in FUMI. FUMI's common stock is
held in trust for the benefit of the holders of Common Shares.
Through this prospectus, First Union may periodically offer Common
Shares or rights to purchase Common Shares ("Rights"). The specific terms of any
offering of Common Shares or Rights by First Union will be described in a
prospectus supplement that will accompany this prospectus. If Common Shares are
offered, the number of shares, the public offering price and other terms
relating to the offer and sale of those shares will be described. If Rights are
offered, the number of Rights to be distributed, the record date for
shareholders entitled to receive Rights, the number of Common Shares for which
Rights are exercisable, the subscription price for each Common Share for which
Rights are exercisable, whether Rights are transferable and other terms of the
offer and sale of the Common Shares underlying Rights will be described. The
total offering price of all Common Shares to be issued under this prospectus may
not exceed $157,155,000.
Common Shares trade on the New York Stock Exchange (the "NYSE") under
the symbol "FUR." First Union will apply to list any Common Shares sold under
this prospectus on the NYSE.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 HEREIN FOR A DISCUSSION OF THE
MATERIAL RISKS THAT SHOULD BE CONSIDERED BEFORE MAKING AN INVESTMENT IN COMMON
SHARES.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
THE DATE OF THIS PROSPECTUS IS APRIL 13, 1999.
<PAGE> 25
AVAILABLE INFORMATION
First Union is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the Securities and
Exchange Commission (the "Commission"). Reports, proxy material and other
information concerning First Union can be inspected and copied at the offices of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 or at its
regional offices, Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661-2511 and Seven World Trade Center, Suite 1300, New York, New York 10048.
Copies of such material can be obtained from the Public Reference Section of the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Information regarding the operation of the Public Reference
Section of the Commission may be obtained by calling the Commission at 1 (800)
SEC-0330. In addition, the Commission maintains a Web site on the Internet at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission, including First Union. First Union's outstanding Common Shares and
outstanding Series A Cumulative Redeemable Preferred Shares of Beneficial
Interest, $1.00 par value per share (the "Series A Preferred Shares"), are
listed on the NYSE under the symbols, "FUR" and "FURPrA," respectively, and all
such reports, proxy material and other information filed by First Union with the
NYSE may be inspected at the offices of the NYSE at 20 Broad Street, New York,
New York 10005.
First Union has filed with the Commission a registration statement on
Form S-3 (together with all amendments and exhibits, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the securities offered hereby. This prospectus, which
constitutes a part of the Registration Statement, does not contain all the
information set forth in the Registration Statement, certain items of which are
contained in exhibits to the Registration Statement as permitted by the rules
and regulations of the Commission. Statements made in this prospectus as to the
content of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contract, agreement or other
document filed or incorporated by reference as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by First Union with the Commission (File
No. 1-6249) pursuant to the Exchange Act are incorporated by reference into this
Prospectus:
(1) First Union's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998;
(2) First Union's Current Report on Form 8-K filed March 29, 1999;
(3) First Union's Amendment to Annual Report on Form 10-K/A for
the fiscal year ended December 31, 1998 filed April 13, 1999;
and
(4) Description of First Union's Share Purchase Rights included in
First Union's Registration Statement on Form 8-A dated March
30, 1990.
All documents filed by First Union pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering made hereby shall be deemed to be
incorporated by reference into this Prospectus and to be a part hereof from the
date of the filing of such documents. Any statement contained in a document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this prospectus to the extent that a
statement contained herein, or in any other subsequently filed document which is
or is deemed to be incorporated by reference herein, modifies or supersedes any
such statement. Any such statement so modified or superseded will not be deemed,
except as so modified or superseded, to constitute a part of this prospectus.
First Union will provide without charge to each person, including any
beneficial owner, to whom this prospectus is delivered, on the oral or written
request of such person, a copy of any of the foregoing documents incorporated
herein by reference (other than the exhibits to such documents unless such
exhibits are specifically
-2-
<PAGE> 26
incorporated by reference into such documents). Requests should be directed to
First Union Real Estate Equity and Mortgage Investments, 55 Public Square, Suite
1900, Cleveland, Ohio 44113-1937, Attention: Jeanne Gibson, Director of Investor
Relations, telephone (216) 781-4030.
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
Any statements in this prospectus and any accompanying prospectus
supplement, including any statements in the documents that are incorporated by
reference herein that are not strictly historical are forward-looking statements
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995. Any such forward-looking statements contained or
incorporated by reference herein should not be relied upon as predictions of
future events. Certain such forward-looking statements can be identified by the
use of forward-looking terminology such as "believes," "expects," "may," "will,"
"should," "seeks," "approximately," "intends," "plans," "pro forma," "estimates"
or "anticipates" or the negative thereof or other variations thereof or
comparable terminology, or by discussions of strategy, plans, intentions or
anticipated or projected events, results or conditions. Such forward-looking
statements are dependent on assumptions, data or methods that may be incorrect
or imprecise and they may be incapable of being realized. Such forward-looking
statements include statements with respect to:
- the declaration or payment of distributions by First Union and
FUMI (the "First Union Companies"),
- the ownership, management and operation of properties,
- potential acquisitions or dispositions of properties, assets
or other businesses by the First Union Companies,
- the policies of the First Union Companies regarding
investments, acquisitions, dispositions, financings and other
matters,
- the qualification of First Union as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code") and the
"grandfathering" rules under Section 269B of the Code,
- the real estate industry and real estate markets in general,
- the availability of debt and equity financing,
- interest rates,
- general economic conditions,
- supply and customer demand,
- trends affecting the First Union Companies,
- the effect of acquisitions or dispositions on capitalization
and financial flexibility,
- the anticipated performance of the First Union Companies and
of acquired properties and businesses, including, without
limitation, statements regarding anticipated revenues, cash
flows, funds from operations, earnings before interest,
depreciation and amortization ("EBIDA"), property net
operating income, operating or profit margins and sensitivity
to economic downturns or anticipated growth or improvements in
any of the foregoing, and
- the ability of the First Union Companies and of acquired
properties and businesses to grow.
Shareholders are cautioned that, while forward-looking statements
reflect the respective companies' good faith beliefs, they are not guarantees of
future performance and they involve known and unknown risks and uncertainties.
Actual results may differ materially from those in the forward-looking
statements as a result of various factors. The information contained or
incorporated by reference in this prospectus and any accompanying prospectus
supplement, including, without limitation, the information set forth in "Risk
Factors" or in any risk factors in documents that are incorporated by reference
in this prospectus and any accompanying prospectus supplement, identifies
important factors that could cause such differences. The First Union Companies
undertake no obligation to publicly release the results of any revisions to
these forward-looking statements that may reflect any future events or
circumstances.
-3-
<PAGE> 27
RISK FACTORS
Investors should carefully review the information contained elsewhere
or incorporated by reference in this prospectus and should particularly consider
the following matters with respect to the First Union Companies:
NEW SENIOR MANAGEMENT LACKS PRIOR EXPERIENCE WITH FIRST UNION AND IN OPERATING
PUBLIC COMPANIES OR REITS
In June 1998, First Union appointed William A. Ackman as Chairman of
the Board. In November 1998, First Union appointed Daniel P. Friedman as its
President and Chief Executive Officer, William A. Scully as Vice Chairman of the
Board and David Schonberger and Anne N. Zahner, each as Executive Vice
Presidents. Until their appointments, these individuals had little, if any,
previous working experience or relationships with First Union or its senior
management and other personnel. The failure of the new management team to work
effectively with First Union's other senior management could result in the
departure of key personnel or disruptions in the operations of First Union,
which in turn could have a material adverse effect on First Union's business,
financial condition or results of operations.
In addition, none of the members of the new management team has ever
operated or served as an executive officer, director or trustee of a public
company or a REIT. The lack of experience with or knowledge of issues that
confront public companies or REITs could have an adverse effect on the ability
of such individuals to effectively manage the operations of First Union and
thereby could have an adverse effect on First Union's business, financial
condition or results of operations.
PROPOSED DEPARTURE OF SOME MEMBERS OF SENIOR MANAGEMENT
Some members of the senior management team that was in place prior to
Mr. Friedman's appointment have expressed a desire to leave First Union and are
in discussions with First Union regarding the timing and terms of their
departure. The departure of these individuals could result in the departure of
additional key personnel or disruptions in the operations of First Union, which
in turn could have a material adverse effect on First Union's business,
financial condition or results of operations.
DIFFICULTIES IN SERVICING DEBT
As described in "The Company -- Recent Developments," First Union
recently negotiated amendments to its principal credit facilities, including its
senior credit facility (the "FUR Credit Facility"), the Cdn.$38.8 million credit
facility of Imperial Parking Limited, an affiliate of First Union (the "Impark
Credit Facility" and, together with the FUR Credit Facility, the "Credit
Facilities"), and a loan to First Union from a syndicate of lenders led by
Bankers Trust Company (the "Bridge Loan") in an original principal amount of $90
million. Among other things, the amendments require First Union to make
significant principal prepayments in April, May and June 1999. As of March 26,
1999, First Union had $167.6 million in principal outstanding under the FUR
Credit Facility and the Bridge Loan and Cdn.$35.4 million in principal
outstanding under the Impark Credit Facility. The upcoming amortization payments
require First Union to reduce the principal amounts outstanding under the FUR
Credit Facility and the Bridge Loan to $158.9 million in the aggregate in April
1999, $118.0 million in the aggregate in May 1999 and $88.0 million in the
aggregate in June 1999. All remaining principal under the FUR Credit Facility
and the Bridge Loan is due on August 11, 1999. First Union is relying on its
cash reserves, cash flow from operations, net proceeds from assets sales, net
proceeds from financing assets and net proceeds from offerings of Rights and
Common Shares under this prospectus to make these principal payments, but there
can be no assurance that these sources will provide sufficient funds to enable
First Union to make these payments. See "The Company -- Recent Developments" for
more information on asset sales. See also "-- Default under the FUR Credit
Facility, the Impark Credit Facility and the Bridge Loan" and "-- Debt covenants
restrict operating flexibility; failure to comply with debt instruments could
cause acceleration of debt."
-4-
<PAGE> 28
DEFAULT UNDER THE FUR CREDIT FACILITY, THE IMPARK CREDIT FACILITY AND THE
BRIDGE LOAN
As described in "The Company --Recent Developments," First Union and
Impark recently negotiated amendments to, and waivers of any defaults under, the
Credit Facilities and the Bridge Loan. The defaults resulted primarily from the
failure to comply with various financial covenants. Although the defaults have
been waived in principle and the debt instruments have been amended in
principle, there can be no assurance that either First Union or Impark will
satisfy their respective financial covenants or their respective obligations,
including principal and interest repayment obligations, under the FUR Credit
Facility, the Bridge Loan or the Impark Credit Facility. If First Union or
Impark is unable to satisfy its obligations under either of these facilities or
the Bridge Loan, the lenders thereunder may declare all indebtedness outstanding
thereunder, together with any accrued interest thereon, due and payable
immediately and by such action trigger cross-defaults under other debt
instruments. There can be no assurance that First Union or Impark will be able
to refinance any of such indebtedness.
DEBT COVENANTS RESTRICT OPERATING FLEXIBILITY; FAILURE TO COMPLY WITH DEBT
INSTRUMENTS COULD CAUSE ACCELERATION OF DEBT
Debt instruments, including the Credit Facilities and the Bridge Loan,
to which either of the First Union Companies is currently a party, and to which
either of the First Union Companies may become a party, contain and may contain
a number of significant covenants that, among other things, restrict in varying
degrees either of the First Union Companies from selling assets, incurring
additional indebtedness, repaying other indebtedness, paying dividends, creating
liens on assets, entering into leases, making investments, loans or advances,
making acquisitions, engaging in mergers or consolidations, engaging in certain
transactions with affiliates and certain other corporate activities. Each of the
First Union Companies' ability to remain in compliance with certain such
covenants will depend upon, among other things, its results of operations and
may be affected by events beyond its control, including economic, financial and
industry conditions. Accordingly, there can be no assurance that either of the
First Union Companies will remain in compliance with such agreements and
covenants.
In the event of a default under such instruments or agreements relating
to any indebtedness of either of the First Union Companies, the holders of such
indebtedness generally will be able to declare all such indebtedness, together
with accrued interest thereon, to be due and payable immediately and, in the
case of collateralized indebtedness, to proceed against their collateral. In
addition, default under one debt instrument could in turn permit lenders under
other debt instruments to declare borrowings outstanding thereunder to be due
and payable pursuant to cross-default clauses. Accordingly, the occurrence of a
default under any debt instrument could have a material adverse effect on the
First Union Companies and may cause First Union to seek protection or relief
under applicable bankruptcy laws.
CONTEMPLATED ASSET SALES WILL SHRINK PORTFOLIO AND RETURNS TO SHAREHOLDERS;
REPLACEMENT ASSETS MAY NOT PROVIDE GREATER SHAREHOLDER VALUE
As described in "The Company -- Recent Developments," First Union is in
the process of selling various of its residential, retail, office and parking
properties. Because First Union intends to apply the net proceeds of these asset
sales to repay outstanding indebtedness, its portfolio of properties will be
smaller, less diverse and less valuable and will generate less revenue for
ultimate distribution to its shareholders. In addition, First Union may elect in
the future to sell other assets. To the extent that the net proceeds of any of
those asset sales are not used to acquire replacement assets or assets of at
least equivalent value, First Union's portfolio of properties will be similarly
affected. There can be no assurance that First Union will be able to sell the
properties described above on advantageous terms, expeditiously or at all.
Moreover, if any of these assets are sold and their net proceeds are applied
towards the purchase of replacement assets, there can be no assurance that First
Union will be able to acquire replacement assets that will be as valuable as the
assets they replace or provide greater returns to First Union and its
shareholders.
-5-
<PAGE> 29
INCOME AND ACTIVITIES OF FUMI MAY BE ATTRIBUTED TO FIRST UNION UNDER RECENT
ANTI-STAPLING LEGISLATION AND MAY THREATEN REIT STATUS
On July 22, 1998, tax legislation was enacted limiting the
"grandfathering" rule applicable to stapled REITs such as First Union (the
"Stapled REIT Legislation"). See "-- Dependence on Qualification as a REIT; Tax
and Other Consequences if REIT Qualification Lost." Under the Stapled REIT
Legislation, the anti-stapling rules provided in the Code apply to real property
interests acquired or substantially improved after March 26, 1998 by the First
Union Companies, or a subsidiary or partnership in which a ten percent or
greater interest is owned by the First Union Companies unless:
- the real property interests are acquired pursuant to a written
agreement that was binding on March 26, 1998 and at all times
thereafter or
- the acquisition of such real property interests was described
in a public announcement or in a filing with the Commission on
or before March 26, 1998.
Consequently, the income and activities of FUMI with respect to any property
acquired by the First Union Companies after March 26, 1998, for which there was
no binding written agreement, public announcement or filing with the Commission
on or before March 26, 1998, will be attributed to First Union for purposes of
determining whether First Union qualifies as a REIT under the Code. As described
under "Federal Income Tax Consequences -- Taxation of First Union -- General"
and "-- Taxation of First Union -- Stapled Stock," these attribution rules may
make it more difficult for First Union to qualify as a REIT and may subject
First Union to various additional taxes.
IMPROVED PROPERTIES MAY BECOME SUBJECT TO ANTI-STAPLING LEGISLATION UNDER
CERTAIN CIRCUMSTANCES AND MAY THREATEN REIT STATUS
The Stapled REIT Legislation also provides that a property held by a
stapled REIT but not subject to the anti-stapling rules would become subject to
such rules in the event of either
- an improvement placed in service after December 31, 1999 that
changes the use of the property and the cost of which is
greater than 200 percent of
(1) the undepreciated cost of the property (prior to the
improvement) or
(2) in the case of property acquired where there is a
substituted basis, the fair market value of the
property on the date it was acquired by the stapled
REIT or
- an addition or improvement that expands beyond the boundaries
of the land included in such property.
The Stapled REIT Legislation contains an exception for improvements placed in
service before January 1, 2004 pursuant to a binding contract in effect on
December 31, 1999 and at all times thereafter.
If previously exempt property of the First Union Companies becomes
subject to the anti-stapling rules upon the occurrence of any of the events
described above, any income generated by, and activities conducted by the First
Union Companies through, such properties would be attributed to First Union for
purposes of determining whether First Union qualifies as a REIT under the Code.
As described under "Federal Income Tax Consequences -- Taxation of First Union
- -- General" and "-- Taxation of First Union -- Stapled Stock," these attribution
rules may make it more difficult for First Union to qualify as a REIT and may
subject First Union to various additional taxes.
OTHER LEGISLATION COULD ADVERSELY AFFECT FIRST UNION'S REIT QUALIFICATION
Other legislation (including legislation previously introduced, but not
yet passed), as well as regulations, administrative interpretations or court
decisions, also could change the tax law with respect to First Union's
qualification as a REIT and the federal income tax consequence of such
qualification. The adoption of any such legislation, regulations or
administrative interpretations or court decisions could have a material adverse
effect on
-6-
<PAGE> 30
the results of operations, financial condition and prospects of First Union and
could restrict First Union's ability to grow.
DEPENDENCE ON QUALIFICATION AS A REIT; TAX AND OTHER CONSEQUENCES IF REIT
QUALIFICATION LOST
There can be no assurance that First Union has operated in a manner to
qualify as a REIT for federal income tax purposes in the past or that it will so
qualify in the future. Qualification as a REIT involves the application of
highly technical and complex provisions of the Code, for which there are only
limited judicial or administrative interpretations. The complexity of these
provisions is greater in the case of a stapled REIT such as First Union.
Qualification as a REIT also involves the determination of various factual
matters and circumstances not entirely within First Union's control. In
addition, First Union's ability to qualify as a REIT is dependent upon its
continued exemption from the anti-stapling rules of Section 269B(a)(3) of the
Code, which, if they were to apply, would prevent First Union from qualifying as
a REIT. The "grandfathering" rules governing Section 269B generally provide,
however, that Section 269B(a)(3) does not apply to a stapled REIT (except with
respect to new real property interests, as described above in "-- Income and
Activities of FUMI May be Attributed to First Union Under Recent Anti-Stapling
Legislation and May Threaten REIT Status") if the REIT and its stapled operating
company were stapled on June 30, 1983. On June 30, 1983, First Union was stapled
with FUMI. There are, however, no judicial or administrative authorities
interpreting this "grandfathering" rule. Moreover, if for any reason First Union
failed to qualify as a REIT in 1983, the benefit of the "grandfathering" rule
would not be available to First Union, in which case First Union would not
qualify as a REIT for any taxable year from and after 1983. The failure of First
Union to qualify as a REIT would have a material adverse effect on First Union's
ability to make dividends to its shareholders and to pay amounts due on its
indebtedness. See "Federal Income Tax Consequences -- Taxation of First Union."
If it is determined that First Union did not qualify as a REIT during
any of the preceding five fiscal years, First Union potentially could incur
corporate tax with respect to a year that is still open to adjustment by the
Internal Revenue Service ("IRS"). If First Union were to fail to qualify as a
REIT, it would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at corporate rates. In addition,
unless entitled to relief under certain statutory provisions and subject to the
discussion above regarding the impact if First Union failed to qualify as a REIT
in 1983, First Union also would be disqualified from re-electing REIT status for
the four taxable years following the year during which qualification is lost.
Failure to qualify as a REIT would result in additional tax liability to First
Union for the year or years involved. In addition, First Union would no longer
be required by the Code to make dividends to its shareholders. To the extent
that dividends to shareholders would have been made in anticipation of First
Union's qualifying as a REIT, First Union might be required to borrow funds or
to liquidate certain of its investments on disadvantageous terms to pay the
applicable tax. See "Federal Income Tax Consequences -- Taxation of First
Union."
The failure to qualify as a REIT would also constitute a default under
certain debt obligations of First Union, which would generally allow the holders
thereof to demand the immediate repayment of such indebtedness. Any acceleration
of this indebtedness (including through cross-defaults) could have a material
adverse effect on First Union and its ability to make dividends to shareholders
and to pay amounts due on this and other indebtedness.
ADVERSE EFFECTS OF REIT MINIMUM DIVIDEND REQUIREMENTS
In order to qualify as a REIT, First Union is generally required each
year to distribute to its shareholders at least 95% of its taxable income
(excluding any net capital gain). In addition, if First Union were to dispose of
assets acquired in certain acquisitions during the ten-year period following the
acquisitions, First Union would be required to distribute at least 95% of the
amount of any "built-in gain" attributable to such assets that First Union
recognizes in the disposition, less the amount of any tax paid with respect to
such recognized built-in gain. See "Federal Income Tax Consequences -- Taxation
of First Union." First Union generally is subject to a 4% nondeductible excise
tax on the amount, if any, by which certain distributions paid by it with
respect to any calendar year are less than the sum of:
- 85% of its ordinary income for that year,
-7-
<PAGE> 31
- 95% of its capital gain net income for that year, and
- 100% of its undistributed income from prior years.
First Union intends to make distributions to its shareholders to comply
with the 95% distribution requirement and to avoid the nondeductible excise tax.
Differences in timing between the recognition of taxable income and the receipt
of cash available for distribution could require First Union to borrow funds on
a short-term basis on disadvantageous terms to meet the 95% distribution
requirement and to avoid the nondeductible excise tax.
Distributions to shareholders by First Union are determined by the
Board of Trustees and depend on a number of factors, including the amount of
cash available for distribution, financial condition, results of operations, any
decision by the Board of Trustees to reinvest funds rather than to distribute
such funds, capital expenditures, the annual distribution requirements under the
REIT provisions of the Code and such other factors as the Board of Trustees
deems relevant. For federal income tax purposes, distributions paid to
shareholders may consist of ordinary income, capital gains, return of capital,
or a combination thereof. First Union will provide shareholders with annual
statements as to the taxability of distributions.
ABILITY TO OPERATE PROPERTIES DIRECTLY AFFECTS FIRST UNION'S FINANCIAL CONDITION
First Union's investments will be subject to the risks inherent in
owning real estate. The underlying value of First Union's real estate
investments, the results of its operations and its ability to make distributions
to its shareholders and to pay amounts due on its indebtedness will depend on
its ability to operate First Union's properties in a manner sufficient to
maintain or increase revenues and to generate sufficient revenues in excess of
its operating and other expenses.
ILLIQUIDITY OF REAL ESTATE
Real estate investments are relatively illiquid. First Union's ability
to vary its portfolio in response to changes in economic and other conditions
will therefore be limited. If First Union decides to sell an investment, no
assurance can be given that First Union will be able to dispose of it in the
time period it desires or that the sales price of any investment will recoup or
exceed the amount of First Union's investment.
INCREASES IN PROPERTY TAXES COULD AFFECT ABILITY TO MAKE EXPECTED SHAREHOLDER
DISTRIBUTIONS
First Union's real estate investments are all subject to real property
taxes. The real property taxes on properties in which First Union invests may
increase or decrease as property tax rates change and as the value of the
properties are assessed or reassessed by taxing authorities. Increases in
property taxes may have an adverse effect on First Union and its ability to make
distributions to shareholders and to pay amounts due on its indebtedness.
ENVIRONMENTAL LIABILITIES
The obligation to pay for the cost of complying with existing
environmental laws, ordinances and regulations, as well as the cost of complying
with future legislation, may affect the operating costs of First Union. Under
various federal, state and local environmental laws, ordinances and regulations,
a current or previous owner or operator of real property may be liable for the
costs of removal or remediation of hazardous or toxic substances on or under the
property. Environmental laws often impose liability whether or not the owner or
operator knew of, or was responsible for, the presence of such hazardous or
toxic substances and whether or not such substances originated from the
property. In addition, the presence of hazardous or toxic substances, or the
failure to remediate such property properly, may adversely affect First Union's
ability to borrow by using such real property as collateral.
Certain environmental laws and common law principles could be used to
impose liability for releases of hazardous materials, including
asbestos-containing materials or "ACMs," into the environment. In addition,
third parties may seek recovery from owners or operators of real properties for
personal injury associated with exposure
-8-
<PAGE> 32
to released ACMs or other hazardous materials. Environmental laws may also
impose restrictions on the use or transfer of property, and these restrictions
may require expenditures. In connection with the ownership and operation of any
of First Union's properties, First Union, FUMI and the other lessees of these
properties may be liable for any such costs. The cost of defending against
claims of liability or remediating contaminated property and the cost of
complying with environmental laws could materially adversely affect the First
Union Companies and their ability to pay amounts due on their indebtedness and
with respect to First Union, to make distributions to its shareholders.
COMPLIANCE WITH THE ADA MAY AFFECT EXPECTED DISTRIBUTIONS TO FIRST UNION'S
SHAREHOLDERS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all
public accommodations are required to meet certain federal requirements related
to access and use by disabled persons. A determination that First Union is not
in compliance with the ADA could also result in the imposition of fines and/or
an award of damages to private litigants. If First Union were required to make
modifications to comply with the ADA, there could be a material adverse effect
on its ability to pay amounts due on its indebtedness or to make distributions
to its shareholders.
UNINSURED AND UNDERINSURED LOSSES
First Union may not be able to insure its properties against losses of
a catastrophic nature, such as earthquakes and floods, because such losses are
uninsurable or not economically insurable. First Union will use its discretion
in determining amounts, coverage limits and deductibility provisions of
insurance, with a view to maintaining appropriate insurance coverage on its
investments at a reasonable cost and on suitable terms. This may result in
insurance coverage that, in the event of a substantial loss, would not be
sufficient to pay the full current market value or current replacement cost of
the lost investment and also may result in certain losses being totally
uninsured. Inflation, changes in building codes, zoning or other land use
ordinances, environmental considerations, lender imposed restrictions and other
factors also might make it not feasible to use insurance proceeds to replace the
property after such property has been damaged or destroyed. Under such
circumstances, the insurance proceeds, if any, received by First Union might not
be adequate to restore its economic position with respect to such property.
INABILITY TO REFINANCE
First Union is subject to the normal risks associated with debt and
preferred stock financings, including the risk that First Union's cash flow will
be insufficient to meet required payments of principal and interest and
distributions, the risk that indebtedness on its properties, or unsecured
indebtedness, will not be able to be renewed, repaid or refinanced when due or
that the terms of any renewal or refinancing will not be as favorable as the
terms of such indebtedness. If First Union were unable to refinance the
indebtedness on acceptable terms, or at all, First Union might be forced to
dispose of one or more of its properties on disadvantageous terms, which might
result in losses to First Union, which losses could have a material adverse
effect on First Union and its ability to make distributions to shareholders and
to pay amounts due on its indebtedness. Furthermore, if a property is mortgaged
to secure payment of indebtedness and First Union is unable to meet mortgage
payments, the mortgagee could foreclose upon the property, appoint a receiver
and receive an assignment of rents and leases or pursue other remedies, all with
a consequent loss of revenues and asset value to First Union. Foreclosures could
also create taxable income without accompanying cash proceeds, thereby hindering
First Union's ability to meet the REIT distribution requirements of the Code.
RISING INTEREST RATES
First Union has incurred and expects in the future to incur
indebtedness which bears interest at variable rates. Accordingly, increases in
interest rates would increase First Union's interest costs (to the extent that
the related indebtedness was not protected by interest rate protection
arrangements), which could have a material adverse effect on First Union and its
ability to make distributions to shareholders and to pay amounts due on its
indebtedness or cause First Union to be in default under certain debt
instruments. In addition, an increase in
-9-
<PAGE> 33
market interest rates may cause holders to sell their Common Shares and reinvest
the proceeds thereof in higher yielding securities, which could adversely affect
the market price for the Common Shares.
IMPACT OF YEAR 2000 ISSUES
In June 1998, the First Union Companies implemented a multi-step Year
2000 Compliance Project (the "Project") that was intended to assess the ability
of their computer systems to properly recognize dates prior to, on, or after
January 1, 2000. Any failure by the First Union Companies to correct a material
Year 2000 issue could result in the interruption or failure of certain normal
business activities or operations. The most reasonable worst case scenarios for
First Union are
- a significant number of tenants at shopping centers will not
be able to record sales transactions using their automated
equipment or accept credit card transactions, and
- electric utility companies will not be able to provide power
to operate shopping centers, office buildings, apartment
complexes or parking facilities.
The most reasonable worst case scenarios for Impark are
- its financial reporting system will not work on or after
January 1, 2000, and
- parking equipment that has been identified as non-compliant
will not accept credit cards from parking patrons at the
facilities it manages.
The First Union Companies expect the total cost of required
modifications to achieve Year 2000 compliance to be between $1.0 million and
$2.0 million, including enhancements to software programs and upgrades to
hardware. If these most reasonable worst case scenarios occurred, they could
have a material adverse effect on the First Union Companies' results of
operations, liquidity and financial condition.
EXCHANGE RATE LOSSES
At December 31, 1998, FUMI had approximately $157 million of revenues
attributable to Impark's Canadian operations, representing approximately 48% of
the First Union Companies' total revenues. First Union does not hedge its
foreign currency exposure and does not currently intend to do so in the future.
First Union recognized a $2.2 million charge during 1998 related to
unrealized exchange rate losses on loans to affiliated Canadian companies. As of
December 31, 1998, First Union also has recorded a $2.1 million loss from the
translation of the Canadian operations as a separate component of shareholders'
equity. There can be no assurance that foreign currency rate fluctuations will
not have a material adverse effect on First Union's business, financial
condition or results of operations in the future.
RESULTS OF OPERATIONS ADVERSELY AFFECTED BY FACTORS BEYOND FIRST UNION'S CONTROL
Results of operations of First Union's properties may also be adversely
affected by, among other things:
- changes in national economic conditions, changes in local
market conditions due to changes in general or local economic
conditions and neighborhood characteristics;
- changes in interest rates and in the availability, cost and
terms of financing;
- the impact of present or future environmental legislation and
compliance with environmental laws and other regulatory
requirements;
- the ongoing need for capital improvements, particularly in
older structures;
- changes in real estate tax rates and assessments and other
operating expenses;
- adverse changes in governmental rules and fiscal policies;
- adverse changes in zoning and other land use laws; and
- earthquakes and other natural disasters (which may result in
uninsured losses) and other factors which are beyond its
control.
-10-
<PAGE> 34
THE COMPANY
As used in this prospectus, the terms (1) "First Union" or the
"Company" refer to First Union Real Estate Equity and Mortgage Investments and
its subsidiaries, (2) "FUMI" refers to First Union Management, Inc. and its
subsidiaries, and (3) "Impark" refers to Imperial Parking Limited and its
subsidiaries and Impark Services Limited and its subsidiaries, except where it
is clear that such terms mean only the parent company in each instance. See also
"Glossary" beginning on page G-1 for the definitions of certain other
capitalized terms used in this prospectus.
First Union is a REIT whose primary business has been to purchase,
manage, improve cash flow of and own retail, apartment, office and parking
properties throughout the United States and Canada. FUMI, an affiliate of First
Union, owns a controlling interest in Impark. The First Union Companies have an
organizational structure commonly referred to as "stapled," whereby Common
Shares are "stapled to" a proportionately equal interest in shares of common
stock of FUMI (the "FUMI Shares"), subject to certain exceptions. Common Shares
may not be issued or transferred without their "stapled" counterparts in FUMI.
FUMI Shares are held in trust for the benefit of the holders of Common Shares.
First Union owns regional enclosed shopping malls, apartment complexes,
office buildings and parking facilities. First Union's portfolio is diversified
by type of property, geographical location, tenant mix and rental market. As of
December 31, 1998, First Union owned (in fee or under long-term ground leases
where First Union is lessee) 21 shopping malls, eight apartment complexes, five
office properties, seven parking facilities, and ten parking lots in Canada, as
well as land leased to a third party. First Union also owns 50% of another mall
in a joint venture with an unrelated party. Currently, First Union is in the
process of selling some of its properties.
First Union was formed as an Ohio business trust in 1961. First Union's
principal executive offices are located at 55 Public Square, Suite 1900,
Cleveland, Ohio 44113-1937 (telephone number (216) 781-4030) and 551 Fifth
Avenue, Suite 1416, New York, New York 10176 (telephone number (212) 905-1100).
RECENT DEVELOPMENTS
On May 18, 1998, First Union announced that its Board of Trustees had
terminated the employment of James C. Mastandrea, Chairman of the Board, Chief
Executive Officer and President of First Union prior to such termination, and
had appointed Steven M. Edelman, Executive Vice President and Chief Financial
Officer of the Company, as Interim Chief Executive Officer. Mr. Edelman served
as Interim Chief Executive Officer until November 2, 1998, when the Board of
Trustees appointed Daniel P. Friedman as President and Chief Executive Officer.
Mr. Friedman was formerly President and Chief Operating Officer of Enterprise
Asset Management Inc., a real estate investment firm located in New York City
("Enterprise"). The Board of Trustees also appointed David Schonberger and Anne
N. Zahner as Executive Vice Presidents of First Union. Mr. Schonberger and Ms.
Zahner were also previously employed by Enterprise.
At First Union's Special Meeting of Beneficiaries held on May 19, 1998,
following a proxy contest successfully waged by Gotham Partners, L.P. ("Gotham
LP"), nine new Trustees were elected to the Board of Trustees and the Board's
size was increased from nine to 15 Trustees. Four of the nine new Trustees are
principals or employees of Gotham LP and Gotham Partners III, L.P. ("Gotham III
LP"), including William A. Ackman, Chairman of the Board. At the time the new
Trustees took office on June 3, 1998, three of the six then incumbent Trustees
resigned, resulting in three vacancies. William A. Scully and Daniel P. Friedman
were elected to the Board of Trustees on October 8, 1998 and November 2, 1998,
respectively, filling two of the three vacancies. On November 16, 1998, Mr.
Scully was appointed Vice Chairman of the Board, succeeding David P. Berkowitz,
who had been Vice Chairman of the Board since June 3, 1998. Mr. Scully is a
partner of Apollo Real Estate Advisors, LP, a real estate investment firm
located in New York City ("Apollo").
In June 1998, the lenders under the Credit Facilities determined that a
default had occurred under their respective Credit Facilities as a result of the
change in the Board's composition (the "Board Change Default"). However, the
lenders under both Credit Facilities granted temporary waivers with respect to
the Board Change Default and also granted First Union and Impark relief from
compliance with certain financial covenants under the Credit Facilities.
-11-
<PAGE> 35
To help stabilize First Union's financial condition, the Board
suspended First Union's quarterly dividend on its Common Shares, effective as of
the quarter ended June 30, 1998, and instituted an annual dividend policy. The
Board intends to make the minimum amount of distributions to shareholders
required to maintain First Union's REIT status. See "Federal Income Tax
Consequences -- Taxation of First Union -- Annual Distribution Requirements."
On July 22, 1998, the Stapled REIT Legislation was enacted limiting the
"grandfathering" rule applicable to Stapled REITs, such as First Union. As a
result, the income and activities of FUMI with respect to any real property
interests acquired by the First Union Companies after March 26, 1998 will be
attributed to First Union for purposes of determining whether First Union
qualifies as a REIT under the Code. First Union believes that there may be
certain advantages, however, to maintaining its stapled REIT status and is in
the process of considering the advantages of retaining such structure. The
Stapled REIT Legislation nevertheless limits the benefits of the stapled REIT
structure, and there can be no assurance that First Union will be able to take
advantage of its stapled REIT status or maintain such structure in the future.
See "Risk Factors -- Income and activities of FUMI may be attributed to First
Union under recent anti-stapling legislation and may threaten REIT status."
In July 1998, First Union commenced a tender offer to repurchase all
$100 million principal amount of its 8-7/8% Senior Notes due 2003 (the "Senior
Notes") for $970 per $1,000 principal amount of Senior Notes, plus accrued and
unpaid interest. Concurrently with the tender offer, First Union conducted a
consent solicitation and offered a consent payment of $30 per $1,000 principal
amount of Senior Notes to amend the indenture governing the Senior Notes and to
terminate listing of the Senior Notes on the NYSE. Prior to its amendment, the
Senior Notes indenture required First Union to offer to repurchase the Senior
Notes at 101% of their principal amount if within 90 days following the date of
a "change of control," the rating of the Senior Notes by both Standard & Poor's
Corporation ("S&P") and Moody's Investors Services, Inc. ("Moody's") declined by
one or more rating gradations. In April 1998, S&P placed First Union on Credit
Watch and in November 1998, S&P downgraded First Union's debt rating. In June
1998, Moody's placed the Senior Notes under review for possible downgrade and in
October 1998, Moody's downgraded its rating for the Senior Notes.
In August 1998, through the tender offer and consent solicitation,
holders of approximately 88% of the outstanding Senior Notes consented to the
indenture amendments and delisting, and First Union purchased approximately $88
million principal amount of the Senior Notes. The repurchase of the Senior Notes
was financed with the proceeds of the Bridge Loan. The lenders under the Bridge
Loan were Bankers Trust Company, as agent for the lenders and as a lender, and
BankBoston, N.A., Blackacre Bridge Capital, Elliott Associates, Gotham LP,
Gotham III LP and Wellsford Capital, each as syndicate members.
At the time the Bridge Loan was funded, the terms of the Bridge Loan
required that First Union conduct a Rights offering to raise funds to repay all
amounts outstanding under the Bridge Loan. To satisfy these obligations, First
Union filed this Registration Statement to register for issuance Rights and
Common Shares and secured standby purchase commitments to ensure that the
proceeds of the Rights offering would be at least sufficient to repay all
amounts outstanding under the Bridge Loan. The standby purchasers were Elliott
Associates, Gotham LP and Gotham III LP.
In 1998, First Union recognized $20.5 million of expenses primarily in
connection with the proxy contest and the change in the Board's composition.
These expenses included $4.8 million of proxy expenses and related legal fees
incurred by First Union, Gotham LP and Gotham III LP; $1.5 million in other
professional fees to avoid the change of the Board's composition; $3.4 million
for cash severance and vesting of restricted stock for Mr. Mastandrea, First
Union's terminated Chairman of the Board, Chief Executive Officer and President;
$4.7 million for vesting of restricted stock granted to other employees of the
First Union Companies; and $6.1 million of severance expenses related to
employee change-in-control and termination agreements (the "Change-in-Control
Expenses"). First Union also recognized the loss of a $2.25 million deposit when
First Union did not close on the purchase of a parking facility because the
Board of Trustees believed that the contract to acquire the parking facility,
which was approved prior to a change in June 1998 of a majority of the Board,
was on disadvantageous terms. First Union partially offset this loss by
assigning the contract to a third party for $200,000 in the fourth quarter of
1998. In addition, because of the adoption of a new accounting pronouncement
related to "contingent rents," First Union recorded no percentage rent from
tenants in the third quarter of 1998, which resulted in a
-12-
<PAGE> 36
decrease of $1.5 million in revenues in the quarter (the "Percentage Rent
Deferral"). The Change-in-Control Expenses and Percentage Rent Deferral also
negatively affected net income and funds from operations.
The Change-in-Control Expenses and the Percentage Rent Deferral, as
well as certain foreign currency mark-to-market losses, were largely responsible
for First Union's inability to satisfy financial covenants under the FUR Credit
Facility and the Bridge Loan during the third quarter of 1998. In addition,
Impark was not in compliance with the leverage and interest coverage ratios
under the Impark Credit Facility. In January 1999, First Union and Impark
reached an agreement with their respective lenders to amend the FUR Credit
Facility, the Impark Credit Facility and the Bridge Loan. See "Risk Factors --
Default under the FUR Credit Facility, the Impark Credit Facility and the Bridge
Loan."
The lenders under the FUR Credit Facility agreed to modify the debt
service and interest coverage requirements and the methodology for calculating
net income by excluding certain non-recurring or extraordinary charges or
expenses, including percentage rent on a pro forma basis, and eliminating any
expense or adjustment in any fiscal quarter relating to any non-cash foreign
currency mark-to-market expense or adjustment. In addition, the lenders under
the FUR Credit Facility extended the waiver with respect to the Board Change
Default until June 30, 1999. In consideration for these modifications, First
Union paid the lenders an $825,000 fee. Concomitantly with the covenant
modifications and the waiver extension, the lenders reduced their maximum
commitment under the FUR Credit Facility from $125 million to $110 million. The
lenders also increased the interest rate under the facility from the Eurodollar
rate plus 200 basis points or the prime rate to the Eurodollar rate plus 300
basis points or the prime rate plus 50 basis points. The lenders and First Union
have more recently agreed, in principle, that the maximum commitment under the
FUR Credit Facility will be $105 million, and on April 30, 1999 it will be
reduced to $80 million, and on June 30, 1999 it will be reduced to $50 million.
This agreement in principle also contemplates that First Union's minimum net
worth requirement will be modified, that there will be restrictions on future
borrowings for purposes other than tenant improvement costs and that $9.0
million of the net proceeds from First Union's proposed Rights offering will be
used to repay amounts outstanding under the FUR Credit Facility.
The lenders under the Impark Credit Facility agreed to
- modify the interest coverage and leverage requirements and the
methodology for determining earnings before interest, taxes,
depreciation and amortization by adjusting for certain
non-recurring or extraordinary charges or expenses for each of
the quarters ended September 30, 1998 through September 30,
1999 and
- decrease the margin added to the Canadian Bankers Acceptance
interest rate from 175 basis points to 150 basis points.
In addition, the lenders extended the waiver with respect to the Board Change
Default until June 30, 1999. In consideration for these amendments and the
waiver extension, the principal balance under the Impark Credit Facility was
reduced from Cdn.$50 million to Cdn.$38.8 million, Impark paid the lenders a fee
of Cdn.$388,400, and First Union issued an $8 million letter of credit under the
FUR Credit Facility as collateral for Impark's obligations and agreed to provide
an additional $5 million in collateral for such obligations on August 11, 1999.
The lenders under the Bridge Loan agreed to amend the Bridge Loan by
extending the maturity of the loan to August 11, 1999, incorporating the revised
covenants in the FUR Credit Facility into the Bridge Loan and modifying First
Union's obligation to conduct a Rights offering to raise funds to repay all
amounts outstanding under the Bridge Loan. The Bridge Loan originally
contemplated a Rights offering that would raise proceeds at least sufficient to
repay all amounts outstanding under the Bridge Loan. The amendments to the
Bridge Loan now enable First Union to conduct one or more Rights offerings
sufficient to pay off amounts outstanding under the Bridge Loan when due and
payable. In consideration for these amendments, First Union paid such lenders a
fee of $300,000 and agreed to
- reduce the outstanding principal balance under the Bridge Loan
to less than $70 million by March 31, 1999 and to less than
$50 million by May 31, 1999,
- increase the lenders' interest rate on the loan from 9.875% to
12% per annum, and
- pay
-13-
<PAGE> 37
(1) on February 11, 1999 a fee of 1% of the outstanding
principal amount of the loan on such date,
(2) a fee in an amount equal to 50 basis points of the
outstanding principal amount of the loan on March 31,
1999 if the outstanding principal balance of the loan
is in excess of $60 million on March 31, 1999, and
(3) a fee in an amount equal to 50 or 100 basis points of
the outstanding principal amount of the loan on May
31, 1999, depending on the loan balance outstanding
at May 31, 1999.
The lenders under the Bridge Loan and First Union have more recently agreed, in
principle, to require First Union to reduce the outstanding principal balance
under the Bridge Loan to less than approximately $38 million by May 15, 1999 and
to allow $9.0 million of the net proceeds from First Union's proposed Rights
offering that would otherwise be used to repay a portion of the Bridge Loan
extended by three of these lenders to be used to repay amounts outstanding under
the FUR Credit Facility. Although the $9.0 million in principal will remain
outstanding under the Bridge Loan, it will be considered paid for purposes of
the mandatory repayment of principal described above. This $9.0 million portion
of the Bridge Loan will bear interest at 15% per annum and mature on August 11,
1999. See "Risk Factors --Default under the FUR Credit Facility, the Impark
Credit Facility and the Bridge Loan." First Union and Impark intend to repay, to
the extent possible, the amounts outstanding under the Credit Facilities by June
30, 1999, the date the waivers with respect to the Board Change Default expire.
However, if they are unable to do so, they will either refinance the
indebtedness or negotiate extensions of those waivers.
In November 1998, Mr. Friedman, Ms. Zahner and Mr. Schonberger entered
into four-year employment agreements, which provide total cash compensation of
$340,000, $200,000 and $200,000 per annum (increasing 5% per year),
respectively, and option grants on 1,080,000, 360,000 and 360,000 Common Shares,
respectively. The options are exercisable ratably over four years. The options
for 50% of the Common Shares have an exercise price of $6.50 and the options for
the other 50% of the Common Shares have an exercise price of $8.50. The options
also have a cost of capital feature, which provides that starting May 3, 2000,
the exercise price will increase by 10% per annum, less the amount of per share
dividends or other distributions to shareholders. Mr. Friedman, Ms. Zahner and
Mr. Schonberger are also entitled to options to purchase additional shares equal
to 3%, 1% and 1%, respectively, of the shares issued by the Company in
connection with raising an additional $120,000,000 of equity. Such options will
have an exercise price equal to the purchase price of the shares offered for
sale.
Also in November 1998, in consideration for various services previously
provided to First Union, the Company paid Enterprise a consulting fee and
expense reimbursement of $750,000 and issued Enterprise ten-year warrants for
500,000 Common Shares exercisable at $10.00 per Common Share.
In January 1999, Charles E. Huntzinger was appointed President and
Chief Executive Officer of Impark. He was formerly Regional Vice President of
Central Parking, one of the largest parking companies in North America. Paul T.
Clough, the former President and Chief Executive Officer of Impark, remains
Chairman of Impark.
In March 1999, First Union agreed, in principle, to amend its standby
purchase arrangements with Gotham LP and Gotham III LP. Among other things, the
parties agreed, in principle, that
- Gotham Partners International, Ltd. would be added as another
standby purchaser,
- First Union would conduct a Rights offering for at least $20
million (the "First Offering") and for which the standby
purchasers would "standby" to purchase up to such number of
Common Shares that would result in gross proceeds to First
Union of the lesser of $50 million and the amount of the First
Offering,
- First Union would pay the standby purchasers an amount equal
to 4% of their maximum standby commitment in the First
Offering, whether or not the First Offering is completed. Each
of the standby purchasers is entitled to its pro rata portion
of the payment based on its share of the
-14-
<PAGE> 38
standby commitment. Although the Gotham entities are
collectively entitled to receive $2,000,000 of the payment,
they agreed to accept only $1,800,000,
- the standby purchasers would have certain customary rights to
terminate their respective obligations, and
- the standby purchase commitment would expire August 11, 1999.
First Union is currently negotiating with Elliott Associates to include
it as a standby purchaser for 2/9ths of the standby purchasers' commitments. If
First Union reaches an agreement with Elliott Associates, the Gotham entities'
standby purchase obligations and fee would be reduced accordingly. To enable
First Union to conduct a second Rights offering (the "Second Offering"), First
Union and the Gotham entities have agreed, in principle, that the Gotham
entities would "standby" to purchase such number of Common Shares that would
result in gross proceeds to First Union of the lesser of $40 million and the
aggregate principal amount outstanding under the Bridge Loan. The standby
purchasers would be entitled to an aggregate payment of 4% of their maximum
standby commitment in connection with any Second Offering, which would not be
contingent upon the closing of such Second Offering. First Union and the standby
purchasers are currently seeking the consent of the lenders under the Bridge
Loan to the revised terms of the standby commitments.
First Union sold its Woodland Commons shopping center in Buffalo Grove,
Illinois in February 1999, its Beck Building in Shreveport, Louisiana in March
1999, and its Sutter Buttes office center in Marysville, California in April
1999. First Union has also signed contracts to sell one office building and nine
shopping centers. It is also presently engaged in arranging new non-recourse
financing for four apartment complexes, two office properties and a shopping
center. The net book value as of December 31, 1998 and net operating income for
1998 of the assets sold in 1999 and being sold are $144.0 million and $17.0
million, respectively. The net book value as of such date and net operating
income for such period of the assets being financed are $73.1 million and $8.8
million, respectively. If these transactions are completed on terms and
conditions substantially similar to those expected by management, First Union
anticipates it will receive aggregate gross proceeds of approximately $197.3
million and net proceeds of approximately $179.9 million after payment of
mortgage indebtedness, transaction expenses, and prepayment penalties (but
before any payment of indebtedness under the Credit Facilities, which
indebtedness is secured by certain of these assets). If the assets securing the
indebtedness under the FUR Credit Facility are financed, the net proceeds will
be applied towards the repayment of that indebtedness. First Union estimates
that those assets would generate approximately $54.1 million of the
approximately $179.9 million in net proceeds described above. The net proceeds
generated from sales of assets and from other financings will be used to repay
all of the then outstanding indebtedness under the Bridge Loan (after applying
the net proceeds from any offering of Rights or Common Shares under this
prospectus). As a result of these transactions, First Union is likely to incur
approximately $20.8 million of taxable gain. There can be no assurance, however,
that these sales or financings will be consummated or that they will be
consummated based upon the above terms and conditions. See "Risk Factors -
Contemplated asset sales will shrink portfolio and returns to shareholders;
replacement assets resulting from other assets sales may not provide greater
shareholder value," " - Illiquidity of real estate" and " - Inability to
refinance."
To comply with the reporting requirements of Statement of Financial
Accounting Standards No. 121 (Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of), First Union recorded a noncash
charge for the year ended December 31, 1998 to reflect a loss on assets held for
sale and an impairment on assets held for use of $51 million. First Union
recorded $36 million in unrealized losses on the carrying value of assets held
for sale based on the receipt of initial bids from potential purchasers at lower
than the net book value of these assets. With respect to the assets held for
use, Impark recorded a $15 million reduction in goodwill. In calculating the
charge for impaired assets held for use, management estimated future
undiscounted cash flows, which indicated impairment of the net book value of the
assets to be written down, including goodwill. The cash flows were discounted to
a present value, which was compared to the net book value of the assets,
including goodwill. The difference was recognized as an expense and reduced the
amount of goodwill. Although the write-off for assets held for sale is based on
actual bids, there can be no assurance that these bids will remain firm or that
the actual sale prices of these assets will ultimately reflect at least the
values of the bids. Although management determined the impairment on assets held
for use based on its best estimate of the future
-15-
<PAGE> 39
undiscounted cash flows for these assets and used what it deemed to be a
reasonable discount rate, there can be no assurance that the estimate will
approximate actual cash flows or that the discount rate applied is appropriate.
BUSINESS STRATEGY
In light of the change in the Board's composition, the Stapled REIT
Legislation and other strategic and business considerations, the Board is
currently re-evaluating First Union's overall business plan. Among other things,
the Board is reviewing First Union's capital, operational and management
structure, analyzing First Union's assets to assess their ongoing potential to
contribute to shareholder value and marketing its retail portfolio. Various
professionals have been engaged by First Union and are assisting the Board in
its reviews and analyses.
In the short-term, First Union intends to repay the amounts due under
the Bridge Loan and the FUR Credit Facility, in whole or in part, with the
proceeds of certain asset sales and offerings of Common Shares (including
through Rights offerings) and with any proceeds from the refinancing of any of
the Company's indebtedness. First Union has terminated its management agreements
with FUMI, and now manages its retail, apartment and office portfolios, and has
entered into third-party leases for the parking facilities it owns. Other than
Messrs. Friedman and Schonberger and Ms. Zahner, the individuals who now manage,
as employees of First Union, First Union's retail, apartment and office
portfolios, are the individuals who previously managed such portfolios as
employees of FUMI.
In the long-term, the Board will, among other things, consider certain
opportunistic real estate investments where, for example,
- sellers are seeking liquidity for their private real estate
portfolios and may be interested in maintaining management
positions with respect to such real estate assets,
- management talent is an instrumental part of the overall real
estate acquisition or
- legal, tax, financing or other complexities make it difficult
for traditional purchasers to pursue the transaction. First
Union may also in the future transfer its assets to an
operating partnership to be controlled by First Union
(commonly referred to as an "UPREIT") in exchange for
interests in such operating partnership.
YEAR 2000 COMPLIANCE PROJECT
In June 1998, the First Union Companies implemented the Project which
was intended to assess the ability of their computer systems to properly
recognize dates prior to, on, or after January 1, 2000 and to ensure that such
systems were Year 2000 compliant as soon as possible. The Project addresses
three main areas: (a) Information Technology Systems; (b) Process Control and
Instrumentation; and (c) Third Party Tenants, Suppliers and Customers. The
general phases of the Project are as follows:
- inventorying systems and equipment that may be affected by the
Year 2000 issue;
- assigning priorities to the items identified;
- evaluating the Year 2000 compliance of items deemed to be
critical to the First Union Companies' operations;
- testing critical items;
- repairing or replacing critical items that are determined not
to be Year 2000 compliant; and
- developing and implementing contingency plans for each
location.
As of September 30, 1998, the inventory and priority assessment phases
of the Project were completed. The testing of critical items, which are those
believed by the First Union Companies to involve a risk to the safety of
individuals, or that may cause damage to property, or affect revenues, is being
performed and is expected to be completed in the first quarter of 1999.
The Information Technology Systems section of the Project consists of
all computer hardware and software. These systems are primarily used for
accounting and financial reporting as well as property
-16-
<PAGE> 40
management purposes throughout the First Union Companies' operations. Impark
uses other systems, mainly for revenue control purposes at the parking facility
level. The testing phase is ongoing as hardware and software are remediated,
upgraded or replaced. Currently, Impark's accounting and financial reporting
systems are not Year 2000 compliant; these systems will be replaced by a new
general-purpose financial reporting and general ledger package by September 30,
1999. In addition, new hardware and software are being installed at various
properties and subsidiaries, which is anticipated to be completed by June 30,
1999.
The Process Control and Instrumentation section of the Project includes
the hardware, software and associated embedded computer chips that are used in
the operations of certain facilities owned by the First Union Companies. Testing
and repair of this equipment is in process. The First Union Companies'
evaluation of these items and communications with manufacturers and suppliers
revealed that the majority of this equipment is mechanical in nature and is not
date-sensitive, and accordingly will not require remediation or replacement to
function properly in the Year 2000. Contingency planning is in process, and all
repair and testing is expected to be completed by June 30, 1999.
The Third Party Tenants, Suppliers and Customers section of the Project
includes the process of identifying critical suppliers and customers and
obtaining information from them regarding their plans and progress in addressing
the Year 2000 issue. A written notice regarding the Year 2000 issue was sent to
all tenants occupying space at properties owned by First Union and to landlords
of parking facilities operated by Impark. Additionally, inquiries have been
forwarded to critical third parties (primarily financial institutions and
utility service providers), and responses are currently being obtained and
evaluated. These evaluations will be followed by the development of contingency
plans. All activities for this section are expected to be completed by June 30,
1999.
For information regarding the anticipated remaining cost of Year 2000
compliance and possible impact of Year 2000 issues on the First Union Companies
operations and financial condition, see "Risk Factors -- Impact of Year 2000
issues."
USE OF PROCEEDS
Except as may be otherwise specified in any prospectus supplement,
First Union intends to use the net proceeds from the sale of any Common Shares
hereunder for general corporate purposes, including the repayment of
indebtedness under the Bridge Loan and the FUR Credit Facility. As of March 26,
1999, approximately $78.9 million was outstanding under the Bridge Loan and
approximately $88.7 million was outstanding under the FUR Credit Facility.
Borrowings under the Bridge Loan generally accrue interest at a rate of 12% per
annum and mature on August 11, 1999. Amounts outstanding under the FUR Credit
Facility bear interest at either LIBOR plus 3% annually or the base rate of the
agent bank of the FUR Credit Facility plus 1/2% annually and mature on August
11, 1999. As described in "The Company -- Recent Developments," indebtedness
under the Bridge Loan was incurred by First Union to fund the repurchase of the
Senior Notes in August 1998.
-17-
<PAGE> 41
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
The Common Shares are listed on the NYSE under the symbol "FUR." The
following table sets forth the high and low sales prices of the Common Shares on
the NYSE and the distributions declared, for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW DISTRIBUTION
---- --- ------------
1997
<S> <C> <C> <C>
First Quarter................................ $ 14 1/2 $ 11 5/8 $ .11
Second Quarter............................... 14 1/4 12 3/4 .11
Third Quarter................................ 14 1/8 12 5/8 .11
Fourth Quarter............................... 16 5/16 13 5/16 .11
1998
First Quarter................................ $ 16 5/16 $ 10 5/8 $ .11
Second Quarter............................... 11 5/16 8 1/2 (1)
Third Quarter............................... 9 5/8 5 1/8 (1)
Fourth Quarter............................... 6 1/8 3 3/8 (1)
1999
First Quarter................................ $ 6 1/4 $ 3 7/8 (1)
Second Quarter (through April 7, 1999)....... 4 5/16 3 7/8 (1)
</TABLE>
- -------------
(1) On June 15, 1998, the Board of Trustees announced that it was suspending
First Union's quarterly distribution and instituting a new annual distribution
policy.
The closing price of the Common Shares on the NYSE on April 7, 1999 was
$4.0625 per share. On March 26, 1999, First Union had approximately 31,376,105
Common Shares outstanding, owned by approximately 11,000 beneficial holders.
First Union had 1,349,000 Series A Preferred Shares outstanding as of March 26,
1999. The Series A Preferred Shares are listed on the NYSE under the symbol
"FURPrA." The closing price of the Series A Preferred Shares on the NYSE on
March 26, 1999 was $20.875 per share.
To qualify as a REIT, First Union is required to make distributions
(other than capital gain distributions) to its shareholders in amounts at least
equal to
- the sum of
(1) 95% of its "REIT taxable income" (computed without
regard to the dividends-paid deduction and its net
capital gain) and
(2) 95% of the net income (after tax), if any, from
foreclosure property,
minus
- the sum of certain items of noncash income.
On June 15, 1998, First Union suspended its quarterly distributions on
its Common Shares and, in lieu thereof, instituted an annual distribution
policy. With this new policy, First Union intends to make only the minimum
required distributions to maintain REIT status and to maximize the amount of
capital retained for operations, debt repayment or future acquisitions. To the
extent that First Union does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its "REIT taxable income," as
adjusted, it will be subject to tax on the undistributed amount at regular
capital gains or ordinary corporate tax rates, as the case may be. See "Federal
Income Tax Consequences -- Taxation of First Union -- Annual Distribution
Requirements" elsewhere in this prospectus.
Furthermore, if First Union fails to distribute for each calendar year
at least the sum of
- 85% of its REIT ordinary income for such year,
-18-
<PAGE> 42
- 95% of its capital gain net income for such year, and
- 100% of its undistributed taxable income from prior calendar
years,
First Union will be subject to a 4% nondeductible excise tax on the excess of
such required distributions over the amounts actually distributed.
The declaration and payment of distributions is subject to the
discretion of the Board of Trustees and is dependent upon the financial
condition and operating results of First Union.
For federal income tax purposes, distributions may consist of ordinary
income, capital gains, non-taxable return of capital or a combination thereof.
For a discussion of the federal income taxation of distributions to holders of
Common Shares, see "Federal Income Tax Consequences -- Taxation of First Union's
Shareholders -- Taxation of Taxable U.S. Shareholders," and "Federal Income Tax
Consequences -- Taxation of Non-U.S. Shareholders -- DISTRIBUTIONS FROM FIRST
UNION" as applicable, elsewhere in this prospectus. First Union annually
notifies shareholders of the taxability of distributions paid during the
preceding year. For federal income tax purposes, approximately 96.9% of the
distributions for 1998 were treated as capital gain and approximately 3.1% of
such distributions were treated as ordinary income.
Under federal income tax rules, First Union's earnings and profits are
first allocated to its Series A Preferred Shares, to the extent any Series A
Preferred Shares are outstanding, which may increase the portion of the Common
Share distribution classified as a return of capital. All of the distributions
on the Common Shares were taxable income to First Union's holders for calendar
year 1998.
-19-
<PAGE> 43
MANAGEMENT
The executive officers and Trustees of First Union, and their ages as
of March 29, 1999, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
William A. Ackman......................................... 32 Chairman of the Board and Trustee
William A. Scully......................................... 37 Vice Chairman of the Board and Trustee
Daniel P. Friedman........................................ 41 President, Chief Executive Officer and
Trustee
Steven M. Edelman......................................... 44 Executive Vice President and Chief
Financial Officer
John J. Dee............................................... 47 Senior Vice President and Chief
Accounting Officer
Paul F. Levin............................................. 52 Senior Vice President, General Counsel
and Secretary
David Schonberger......................................... 44 Executive Vice President
Anne N. Zahner............................................ 43 Executive Vice President
Daniel J. Altobello....................................... 58 Trustee
David P. Berkowitz........................................ 37 Trustee
William E. Conway......................................... 71 Trustee
Allen H. Ford............................................. 70 Trustee
Stephen J. Garchik........................................ 45 Trustee
Russell R. Gifford........................................ 59 Trustee
David S. Klafter.......................................... 44 Trustee
Daniel Shuchman........................................... 33 Trustee
Stephen S. Snider......................................... 42 Trustee
Mary Ann Tighe............................................ 50 Trustee
James A. Williams......................................... 56 Trustee
</TABLE>
William A. Ackman. Mr. Ackman has been Chairman of the Board of
Trustees of First Union since June 1998. Since January 1, 1993, through a
company he owns, Mr. Ackman has acted as co-investment manager of Gotham LP,
Gotham III LP and Gotham International Advisors, L.L.C. ("Gotham
International"). From January 1, 1993 until October 1, 1998, through a company
he owns, Mr. Ackman acted as a co-investment manager of Gotham Partners II, L.P.
("Gotham II LP"). Gotham II LP was dissolved in October 1998. Since before
January 1, 1993, Mr. Ackman has served as Vice President, Secretary and
Treasurer of GPLP Management Corp. ("GPLP"), the Managing Member of Gotham
Partners Management Co. LLC, an investment management firm ("GPM"). Mr. Ackman
was a general partner of Section H Partners, L.P. ("Section H"), the General
Partner of the Gotham LP and Gotham II LP investment funds, from before January
1993 through September 1993. Mr. Ackman has been the President, Secretary and
Treasurer of Karenina Corporation, a general partner of Section H, since October
1993.
William A. Scully. Mr. Scully has been a Trustee of First Union since
September 1998 and Vice Chairman of the Board of Trustees of First Union since
November 1998. Mr. Scully has been a partner of Apollo since 1996 and is
responsible for new investments and investment management. From 1994 to 1996,
Mr. Scully was a Senior Vice President of O'Connor Capital, Inc., the general
partner of The Argo Funds, and the Director of Acquisitions for The Argo Funds.
From 1993 to 1994, Mr. Scully directed private investment activities for
-20-
<PAGE> 44
entities related to Clark Construction and The Carlyle Group, primarily in land
development projects in suburban Washington, D.C. Mr. Scully was a member of GE
Capital's portfolio acquisitions group from 1991 to 1993.
Daniel P. Friedman. Mr. Friedman has been President, Chief Executive
Officer and a Trustee of First Union since November 1998. He was President and
Chief Operating Officer of Enterprise from June 1996 to November 1998 and was
Executive Vice President and Chief Operating Officer of Enterprise from February
1992 to June 1996. At Enterprise, he was responsible for asset management and
new business development. From September 1994 to November 1998, Mr. Friedman was
a manager of all the Cheshire Limited Liability Companies ("Cheshire"). Cheshire
acquires and restructures non-performing underlying residential co-op mortgage
loans and unsold co-op apartments. From May 1993 to December 1997, Mr. Friedman
was a board member of Emax Advisors, Inc. From May 1993 to December 1996, he was
a board member of Emax Securities, Inc. (a NASD broker/dealer) (together with
Emax Advisors, Inc., the "Emax Companies"). The Emax Companies are real estate
investment banking companies that provide capital and advisory services for real
estate transactions.
Steven M. Edelman. Mr. Edelman has been Chief Financial Officer of
First Union since February 1997 and Executive Vice President since November
1998. From June 1998 until November 1998, he served as Interim Chief Executive
Officer of First Union. From January 1996 to January 1997, Mr. Edelman served as
Executive Vice President, Chief Investment Officer of First Union. He was Senior
Vice President, Chief Investment Officer of First Union from March 1995 to
December 1995, Senior Vice President, Asset Management from July 1992 to
February 1995, Vice President, Acquisitions from December 1985 to June 1992,
Assistant Vice President, Acquisitions from January 1985 to November 1985,
Acquisition Analyst from February 1984 to December 1985, Assistant Controller
from July 1982 to January 1984 and an internal auditor from June 1980 to June
1982. Mr. Edelman was an auditor with Touche Ross & Co. from 1978 to 1980.
John J. Dee. Mr. Dee has been Senior Vice President and Chief
Accounting Officer of First Union since February 1996. He served as Senior Vice
President and Controller of First Union from July 1992 to February 1996, Vice
President and Controller from December 1986 to July 1992, Controller from April
1981 to December 1986, Assistant Controller from December 1979 to April 1981 and
Accounting Manager from August 1978 to December 1979.
Paul F. Levin. Mr. Levin has been Senior Vice President, General
Counsel and Secretary since December 1994. He served as Vice President, General
Counsel and Secretary from May 1989 to November 1994. Mr. Levin was a principal
of Schwarzwald, Robiner, Rock & Levin, a Legal Professional Association, from
1981 to 1989, an Associate of Gaines, Stern, Schwarzwald & Robiner Co., L.P.A.
from 1979 to 1980 and an Assistant Director of Law, City of Cleveland, Ohio,
from 1975 to 1978.
David Schonberger. Mr. Schonberger has been Executive Vice President of
First Union since November 1998, where he is primarily responsible for retail,
office and residential projects. From November 1997 to November 1998, he was
Senior Vice President of Enterprise. At Enterprise, he was responsible for
retail and raw land development projects. Since January 1990, Mr. Schonberger
has been Director of Legacy Construction Corp., a privately held leasing and
project management company specializing in institutional property management and
oversight of specialty construction and development projects. In February 1996,
Legacy Construction Corp. merged with Peter Elliot Corporation to form Peter
Elliot LLC. From February 1996 to October 1997, Mr. Schonberger served as
treasurer and manager of Peter Elliot LLC.
Anne N. Zahner. Ms. Zahner has been Executive Vice President of First
Union since November 1998, where she is primarily responsible for the retail
division. She was Executive Vice President of Enterprise from March 1996 until
November 1998. At Enterprise, she was primarily responsible for Enterprise's
asset management and new business development. From November 1990 until March
1996, Ms. Zahner was a director and Vice President of Travelers Insurance
Company, at Travelers Realty Investment Co., where she was responsible for asset
management and sales and investment recovery.
-21-
<PAGE> 45
Daniel J. Altobello. Mr. Altobello has been a Trustee of First Union
since June 1998. He has been the Chairman of the Board of ONEX Food Services,
Inc., an airline catering company and a partner in Ariston Investment Partners,
a consulting firm, since September 1995. Mr. Altobello was the Chairman,
President and Chief Executive Officer of Caterair International Corporation, an
airline catering company, from before January 1, 1993 until September 1995. Mr.
Altobello is a member of the Boards of Directors of American Management Systems,
Inc., Colorado Prime Corporation, Care First, Inc., Care First of Maryland,
Inc., Mesa Air Group, Inc., World Airways, Inc. and Sodexho Marriott Services,
Inc.
David P. Berkowitz. Mr. Berkowitz has been a Trustee of First Union
since June 1998. From June 1998 until November 1998, he was Vice Chairman of the
Board of Trustees of First Union. Since January 1, 1993, through a company he
owns, Mr. Berkowitz has acted as a co-investment manager of Gotham LP, Gotham
III LP and Gotham International. From January 1, 1993 until October 1, 1998,
through a company he owns, Mr. Berkowitz acted as a co-investment manager of
Gotham II LP. Gotham II LP was dissolved in October 1998. Since before January
1, 1993, Mr. Berkowitz has served as President of GPLP. Mr. Berkowitz was a
general partner of Section H from before January 1993 through September 1993.
Mr. Berkowitz has been the President, Secretary and Treasurer of DPB
Corporation, a general partner of Section H, since October 1993.
William E. Conway. Mr. Conway has been a Trustee of First Union since
1985. Mr. Conway has been Chairman of Fairmont Minerals Ltd. ("Fairmont"), a
miner and processor of industrial minerals, since 1978, and was Chairman and
Chief Executive Officer of Fairmont 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 ("Diamond Shamrock"), 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.
Allen H. Ford. Mr. Ford has been a Trustee of First Union since 1983.
He is a consultant and was, from 1981 to 1986, Senior Vice President Finance and
Administration of The Standard Oil Company (BP America), an integrated domestic
petroleum company. 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. 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.
Stephen J. Garchik. Mr. Garchik has been a Trustee of First Union since
June 1998. He has served as President of The Evans Company, a commercial real
estate development and management firm, since before January 1, 1993. Since July
1996, Mr. Garchik has been the Chairman of Gotham Golf Partners, L.P.
Russell R. Gifford. Mr. Gifford has been a Trustee of First Union since
1991. He is a partner with The Gifford Group, a corporate and customer relations
consulting company. He was Chief Operating Officer of the Cleveland Public
School System from June 1998 to March 1999. He was President of CNG Energy
Services 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 1989 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.
David S. Klafter. Mr. Klafter has been a Trustee of First Union since
June 1998. He has been an in-house counsel and a principal of GPM since April
1996. Mr. Klafter was counsel at White & Case, a law firm, from before January
1, 1993 until December 1993, and a partner at White & Case from January 1994
until April
-22-
<PAGE> 46
1996. Mr. Klafter's law practice was in general commercial litigation, with an
emphasis on real-estate related matters, including leases, mortgages and loan
work-outs.
Daniel Shuchman. Mr. Shuchman has been a Trustee of First Union since
June 1998. He has been a principal of GPM since October 1994. Mr. Shuchman was
an investment banker at Goldman, Sachs & Co., an investment banking firm, from
before January 1, 1993 until August 1994.
Steven S. Snider. Mr. Snider has been a Trustee of First Union since
June 1998. Since before January 1, 1993, Mr. Snider has been a senior partner at
Hale and Dorr LLP, a law firm.
Mary Ann Tighe. Ms. Tighe has been a Trustee of First Union since June
1998. She has been an Executive Managing Director and a member of the Executive
and Strategic Planning Committees of Insignia/ESG, a commercial real estate
firm, since before January 1, 1993 and she has been Vice Chairman of
Insignia/ESG since January 1999. She is on the Board of Directors of The New
42nd Street, a New York City-based community revitalization organization.
James A. Williams. Mr. Williams has been a Trustee of First Union since
June 1998. He has been the President of Williams, Williams, Ruby & Plunkett PC,
a law firm, since before January 1, 1993. Mr. Williams has also been the
Chairman of Michigan National Bank and Michigan National Corporation since
November 1995. Mr. Williams is Chairman of the Henry Ford Hospital in West
Bloomfield, Michigan. He is a Trustee of Henry Ford Health System and the
Oakland University (Michigan) Foundation and a member of the Board of Governors
of the Cranbrook School.
TERMS OF OFFICE OF THE TRUSTEES
The Board of Trustees is divided into three classes: Messrs. Shuchman,
Snider, Gifford, Conway and Friedman are Class I Trustees and their terms end
upon the election of their successors at First Union's annual meeting of
shareholders in 2000. Messrs. Ackman, Berkowitz, Williams, and Garchik and Ms.
Tighe are Class II Trustees and their terms end upon the election of their
successors at First Union's annual meeting of shareholders in 2001. Messrs.
Klafter, Altobello, Ford and Scully are Class III Trustees and their terms end
upon the election of their successors at First Union's annual meeting of
shareholders in 1999.
KEY EMPLOYEE
Brenda J. Mixson. Ms. Mixson will be First Union's interim Chief
Financial Officer upon the departure of Mr. Edelman on April 13, 1999. Ms.
Mixson has served as a Managing Director/Chief Investment and Financial Officer
of Prime Capital Holding, LLC, a privately owned commercial real estate finance
company. From 1995 to 1997, Ms. Mixson held positions with ING Capital Corp. and
ING Baring Securities, Inc., initially as Portfolio Manager for all real estate
investment activity and then as global head of ING Barings Emerging Markets
International Finance Business. Prior to joining ING, Ms. Mixson was Executive
Vice President and Chief Operating Officer of Reichmann International, the
manager of Quantum North American Realty Fund. From 1989 to 1994, she was at
Travelers Realty Investment Corp., where she was Managing Director and Executive
Vice President. From 1986 to 1989, she was Manager and Vice President of
Chemical Bank's Chicago Region.
-23-
<PAGE> 47
DESCRIPTION OF CAPITAL STOCK
COMMON SHARES
General
The following description sets forth certain general terms and
provisions of the Common Shares. The statements below describing the Common
Shares are in all respects subject to and qualified in their entirety by
reference to the applicable provisions of First Union's Declaration of Trust
(the "Declaration of Trust") and By-Laws.
The number of Common Shares which First Union is authorized to issue is
unlimited. All Common Shares are entitled to participate equally in any
distributions thereon declared by First Union. Subject to the provisions of the
By-Laws regarding Excess Securities, each outstanding Common Share entitles the
holder thereof to one vote on all matters voted on by shareholders (as described
below), including the election of Trustees. Shareholders have no preemptive
rights. The outstanding Common Shares are fully paid and non-assessable and have
equal liquidation rights. The Common Shares are fully transferable except that
their issuance and transfer may be regulated or restricted by First Union in
order to assure qualification by First Union for taxation as a REIT. See "--
Restriction on Size of Holdings." The Common Shares are not redeemable at the
option of First Union or of any shareholder. The Board of Trustees is generally
authorized without shareholder approval to borrow money and issue obligations
and equity securities which may or may not be convertible into Common Shares and
warrants, rights or options to purchase Common Shares; and to issue other
securities of any class or classes which may or may not have preferences or
restrictions not applicable to the Common Shares. The issuance of additional
Common Shares or such conversion rights, warrants or options may have the effect
of diluting the interest of shareholders. Annual meetings of the shareholders
are held on the second Tuesday of the fourth month following the close of each
fiscal year at such place in the State of Ohio as the Trustees may from time to
time determine. Special meetings may be called at any time and place when
ordered by a majority of the Trustees, or upon written request of the holders of
not less than 25% of the outstanding Common Shares.
Shareholder Liability
The Declaration of Trust provides that no shareholder shall be
personally liable in connection with the property or the affairs of First Union,
and that all persons shall look solely to property of First Union for
satisfaction of claims of any nature arising in connection with the affairs of
First Union.
Under present Ohio law, no personal liability will attach to
shareholders of First Union, but with respect to tort claims, contract claims
where liability of shareholders is not expressly negated, claims for taxes and
certain statutory liabilities, the shareholders may in some jurisdictions other
than the State of Ohio be held personally liable to the extent that such claims
are not satisfied by First Union, in which event the shareholders would, in the
absence of negligence or misconduct on their part, be entitled to reimbursement
from the general assets of First Union. First Union carries insurance which the
Trustees consider adequate to cover any probable tort claims. To the extent the
assets and insurance of First Union would be insufficient to reimburse a
shareholder who has been required to pay a claim against First Union, the
shareholder would suffer a loss. The statements in this paragraph and the
previous paragraph also apply to holders of the preferred shares of beneficial
interest, $1.00 par value per share ("Preferred Shares"), although any possible
liability of such holders would be further reduced by the greater limitations on
their voting power.
REIT Qualification
Under regulations of the IRS, the Trustees must have continuing
exclusive authority over the management of First Union and the conduct of its
affairs, free from any control by the shareholders, other than the right to
elect or remove Trustees, to terminate the Declaration of Trust, to ratify
amendments to the Declaration of Trust, and certain other permitted rights, if
First Union is to continue to qualify as a REIT under the applicable sections of
the Code. Consequently, the only voting power presently granted to the
shareholders is the right by a majority vote or a supermajority vote, as the
case may be, (i) to elect Trustees, (ii) to approve or disapprove
-24-
<PAGE> 48
certain transfers of assets or mergers of First Union, (iii) to approve or
disapprove amendments to the Declaration of Trust or termination of the
Declaration of Trust, and (iv) when removal is proposed by all other Trustees,
to approve removal of any Trustee. First Union has no fixed duration and will
continue indefinitely, unless terminated as provided in the Declaration of
Trust.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Shares is National City
Bank.
Restriction on Size of Holdings
The By-Laws restrict beneficial or constructive ownership of First
Union's outstanding capital stock by a single person, or persons acting as a
group, to 9.8% of the Common Shares, which limitation assumes that all
securities convertible into Common Shares owned by such person or group of
persons have been converted. The purposes of these provisions are to assist in
protecting and preserving First Union's REIT status. For First Union to qualify
as a REIT under the Code, not more than 50% in value of its outstanding capital
stock may be owned by five or fewer individuals at any time during the last half
of First Union's taxable year. The provision permits five persons each to
acquire up to a maximum of 9.8% of the Common Shares, or an aggregate of 49% of
the outstanding Common Shares, and thus, assists the Trustees in protecting and
preserving REIT status for tax purposes.
Unless a waiver of such restrictions is granted by the Board, Common
Shares owned by a person or group of persons in excess of 9.8% of First Union's
outstanding Common Shares ("Excess Securities") shall not be entitled to any
voting rights; shall not be considered outstanding for quorums or voting
purposes; and shall not be entitled to dividends, interest or any other
distributions with respect to the securities.
The Declaration of Trust provides that the Share Ownership Limit
contained in the By-Laws may be amended from time to time with the approval of
either (i) 70% of the Trustees then in office or (ii) a majority of the Trustees
then in office and the approval of at least 70% of the holders of the
outstanding Common Shares.
Trustee Liability
The Declaration of Trust provides that Trustees shall not be
individually liable for any obligation or liability incurred by or on behalf of
First Union or by Trustees for the benefit and on behalf of First Union. Under
the Declaration of Trust and Ohio law respecting business trusts, Trustees are
not liable to First Union or the shareholders for any act or omission except for
acts or omissions which constitute bad faith, willful misfeasance, gross
negligence or reckless disregard of duties to First Union and its shareholders.
Beneficial Ownership of FUMI
All of the shares of FUMI are owned in trust (the "Trust") for the
benefit of owners of Common Shares pursuant to an amended and restated
declaration of trust dated as of October 1, 1996. FUMI's Declaration of Trust
provides that the net income of the Trust estate shall be paid from time to time
to the First Union shareholders in proportion to the number of Common Shares
held by them. Upon termination of the Trust, each holder of Common Shares is
entitled to a proportionate share of the net proceeds received upon the sale of
the assets of the Trust estate. The trustees of the trust may require, as a
condition to the receipt of any payment of the net income or of the net proceeds
upon termination, that a shareholder demonstrate that the Common Shares owned by
it, together with any Common Shares the ownership of which is attributed to it
by the Code, do not exceed 5% of the then outstanding Common Shares. In
addition, FUMI's Declaration of Trust provides that any person who owns,
directly or by attribution, 5% or more of the outstanding shares of First Union,
is deemed to have no beneficial interest in the Trust. These restrictions on
ownership of the Trust are intended to avoid implicating constructive ownership
rules which could otherwise cause rental payments from FUMI to First Union to be
non-qualifying income for purposes of determining whether First Union qualifies
as a REIT. FUMI's Declaration of Trust provides that the Trust shall terminate
upon the termination of First Union. See "Federal Income Tax Considerations --
Taxation of First Union -- Stapled Stock."
-25-
<PAGE> 49
Shareholder Rights Plan
In March 1990, the Board of Trustees declared a dividend with respect
to each Common Share consisting of one right to purchase one Common Share at an
exercise price of $50 per right. Pursuant to the Rights Agreement, dated as of
March 7, 1990, between the Company and National City Bank, as Rights Agent,
which governs First Union's Shareholder Rights Plan, if a person or group,
excluding certain affiliated entities of First Union, who acquires 15% or more
of the outstanding Common Shares (except in a tender offer or exchange offer
approved by the Board of Trustees), is declared to be an "adverse person" by the
Board of Trustees or engages in certain self-dealing transactions with First
Union ("flip-in events"), each right, other than rights owned by a 15% owner or
an "adverse person," entitles the holder to purchase one Common Share for its
par value (currently $1 per share). If First Union is acquired in a merger or
other business combination ("flip-over events"), each right entitles the holder
to purchase, for $1, shares of the acquiring company having a market value equal
to the market value of one Common Share. The rights may be redeemed by First
Union at a price of $0.01 per right at any time prior to the earlier of a
"flip-in" or "flip-over" event or the expiration of the rights on March 30,
2000.
PREFERRED SHARES
General
Subject to limitations as may be prescribed by Ohio law and First
Union's by-laws (the "By-Laws") and Declaration of Trust, the Board of Trustees
is authorized to issue without the approval of the shareholders, Preferred
Shares in series and to establish from time to time the number of Preferred
Shares to be included in such series and to fix the designation and any
preferences, conversion and other rights, voting powers, restrictions,
limitations as to distributions, qualifications and terms and conditions of
redemption of the shares of each such series. First Union currently has
outstanding the Series A Preferred Shares. The following description sets forth
certain general terms and provisions of the Series A Preferred Shares. The
statements below describing the Series A Preferred Shares do not purport to be
complete and are in all respects subject to, and qualified in their entirety by
reference to, the terms and provisions of the Certificate of Designations
authorizing the Series A Preferred Shares (the "Certificate of Designations"),
the Declaration of Trust and the By-Laws.
The outstanding Series A Preferred Shares have been validly issued,
fully paid and, except as set forth under "-- Common Shares -- Shareholder
Liability," non-assessable. The holders of the Series A Preferred Shares have no
pre-emptive rights with respect to any shares of the capital stock of First
Union or any other securities of First Union convertible into or carrying rights
or options to purchase any such shares. The Series A Preferred Shares are not
subject to any sinking fund or other obligation of First Union to redeem or
retire the Series A Preferred Shares. Unless converted into Common Shares or
redeemed by First Union, the Series A Preferred Shares have a perpetual term,
with no maturity.
The Series A Preferred Shares, unlike the Common Shares, are not
entitled to the benefit of FUMI's Declaration of Trust. See "-- Common Shares --
Beneficial Ownership of FUMI."
Distributions
Holders of the Series A Preferred Shares are entitled to receive, when,
as and if declared by the Board of Trustees, out of funds legally available for
the payment of distributions, cumulative preferential cash distributions in an
amount per share equal to the greater of $2.10 per share (equivalent to 8.4% of
the liquidation preference per annum) or the cash distributions on the Common
Shares, or portion thereof, into which a Series A Preferred Share is
convertible. Such distributions shall equal the number of Common Shares, or
portion thereof, into which a Series A Preferred Share is convertible,
multiplied by the most current quarterly cash dividend on a Common Share on or
before the applicable dividend payment date.
Distributions on the Series A Preferred Shares accrue whether or not
First Union has earnings, whether or not there are funds legally available for
the payment of such distributions and whether or not such distributions are
declared. Accrued but unpaid distributions on the Series A Preferred Shares do
not bear interest. Holders of the Series A Preferred Shares are not entitled to
any distributions in excess of full cumulative distributions as described above.
-26-
<PAGE> 50
Unless full cumulative distributions on the Series A Preferred Shares
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past
distribution periods and the then current distribution period, no distributions
(other than in Common Shares or other Junior Shares will be declared or paid or
set aside for payment upon the Common Shares or any other Junior Shares, nor
will any Common Shares or any other Junior Shares be redeemed, purchased or
otherwise acquired for any consideration (or any moneys be paid to or made
available for a sinking fund for the redemption of any such shares) by First
Union (except by conversion into or exchange for Junior Shares).
Liquidation Rights
Upon any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of First Union, then, before any distribution or payment is
made to the holders of any Common Shares or any other class or series of capital
shares of First Union ranking junior to the Series A Preferred Shares in the
distribution of assets upon any liquidation, dissolution or winding up of First
Union, the holders of Series A Preferred Shares will be entitled to receive out
of assets of First Union (excluding the assets of FUMI) legally available for
distribution to shareholders, liquidating distributions in the amount of the
liquidation preference ($25.00 per share), plus an amount equal to all
distributions accrued and unpaid thereon, if any. After payment of the full
amount of the liquidating distributions to which they are entitled, the holders
of Series A Preferred Shares will have no right or claim to any of the remaining
assets of First Union.
If liquidating distributions have been made in full to all holders of
Series A Preferred Shares and all other classes or series of capital shares of
First Union ranking on a parity with the Series A Preferred Shares in the
distribution of assets, the remaining assets of First Union will be distributed
among the holders of any other classes or series of capital shares ranking
junior to the Series A Preferred Shares in the distribution of assets upon any
liquidation, dissolution or winding up of First Union, according to their
respective rights and preferences and in each case according to their respective
number of shares. For such purposes, the consolidation or merger of First Union
with or into any other entity, the sale, lease or conveyance of all or
substantially all of the property or business of First Union or a statutory
share exchange will not be deemed to constitute a liquidation, dissolution or
winding up of First Union.
Redemption
The Series A Preferred Shares are not redeemable by the Company prior
to October 29, 2001, and at no time are the Series A Preferred Shares redeemable
for cash (except to the extent provided below in lieu of the issuance of
fractional Common Shares). On and after October 29, 2001, the Series A Preferred
Shares will be redeemable at the option of the Company, in whole or in part, for
such number of Common Shares as equals the liquidation preference of the Series
A Preferred Shares to be redeemed (without regard to accrued and unpaid
distributions) divided by the Conversion Price (as defined herein under "--
Conversion Rights") as of the opening of business on the date set for such
redemption (equivalent to a conversion rate of 3.31 Common Shares for each
Series A Preferred Share), subject to adjustment in certain circumstances as
described below. See "-- Conversion Price Adjustments." The Company may exercise
this option only if for 20 trading days, within any period of 30 consecutive
trading days, including the last trading day of such period, the closing price
of the Common Shares on the NYSE equals or exceeds the Conversion Price per
share, subject to adjustments in certain circumstances as described below. See
"-- Conversion Price Adjustments."
Voting Rights
Except as indicated below, or except as otherwise from time to time
required by applicable law, the holders of Series A Preferred Shares have no
voting rights.
If six quarterly distributions (whether or not consecutive) payable on
the Series A Preferred Shares or any shares of beneficial interest ranking on a
parity with the Series A Preferred Shares with respect to the payment of
distributions and amounts upon liquidation, dissolution and winding up ("Parity
Shares") are in arrears, whether or not earned or declared, the number of
Trustees then constituting the Board of Trustees will be increased by two, and
the holders of Series A Preferred Shares, voting together as a class with the
holders of any other series of Parity Shares (any such other series, the "Voting
Preferred Shares"), will have the right to elect two additional Trustees to
serve on the Board of Trustees at any annual meeting of shareholders or a
properly called special meeting of the holders of Series A Preferred Shares and
such Voting Preferred Shares and at each subsequent
-27-
<PAGE> 51
annual meeting of shareholders until all such distributions and distributions
for the current quarterly period on the Series A Preferred Shares and such other
Voting Preferred Shares have been paid or declared and paid or set aside for
payment. The term of office of all Trustees so elected will terminate with the
termination of such voting rights.
The approval of two-thirds of the outstanding Series A Preferred Shares
and all other series of Voting Preferred Shares similarly affected, voting as a
single class, is required in order to (i) amend the Declaration of Trust,
By-Laws or the Certificate of Designations to affect materially and adversely
the rights, preferences or voting power of the holders of the Series A Preferred
Shares or the Voting Preferred Shares, (ii) enter into a share exchange that
affects the Series A Preferred Shares, consolidate with or merge into another
entity, or permit another entity to consolidate with or merge into First Union,
unless in each such case each Series A Preferred Share remains outstanding
without a material adverse change to its terms and rights or is converted into
or exchanged for convertible preferred stock of the surviving entity having
preferences, conversion and other rights, voting powers, restrictions,
limitations as to distributions, qualifications and terms or conditions of
redemption thereof identical to that of a Series A Preferred Share (except for
changes that do not materially and adversely affect the holders of the Series A
Preferred Shares) or (iii) authorize, reclassify, create or increase the
authorized amount of any class of shares of beneficial interest having rights
senior to the Series A Preferred Shares as to distributions or in the
distribution of assets. However, First Union may create additional classes of
Parity Shares and shares ranking junior to the Series A Preferred Shares as to
distributions or in the distribution of assets ("Junior Shares"), increase the
authorized number of Parity Shares and Junior Shares and issue additional series
of Parity Shares and Junior Shares without the consent of any holder of Series A
Preferred Shares.
Conversion Rights
The Series A Preferred Shares are convertible, in whole or in part, at
any time, unless previously redeemed, at the option of the holders thereof, into
Common Shares at a conversion price of $7.5625 per Common Share (equivalent to a
conversion rate of 3.31 Common Shares for each Series A Preferred Share),
subject to adjustment as described below (the "Conversion Price"). See "--
Conversion Price Adjustments." The right to convert Series A Preferred Shares
called for redemption will terminate at the close of business on the redemption
date for such Series A Preferred Shares.
Conversion Price Adjustments
The Conversion Price is subject to adjustment upon certain events,
including without duplication (i) distributions payable in Common Shares, (ii)
the issuance to all holders of Common Shares of certain rights, options or
warrants entitling them to subscribe for or purchase Common Shares at a price
per share less than the fair market value per Common Share (which, as defined,
includes an adjustment for underwriting commissions avoided in rights offerings
to shareholders), (iii) subdivisions, combinations and reclassifications of
Common Shares, (iv) distributions to all holders of Common Shares of any capital
stock of First Union (other than Common Shares), evidences of indebtedness of
First Union or assets (including securities, but excluding those rights,
warrants and distributions referred to above and excluding Permitted Common
Share Cash Distributions, as hereinafter defined) and (v) payment in respect of
a tender or exchange offer by First Union or any subsidiary of First Union for
Common Shares if the cash and value of any other consideration included in such
payment per Common Share (as determined by the Board of Trustees) exceeds the
current market price (as defined) per Common Share on the trading day next
succeeding the last date tenders or exchanges may be made pursuant to such
tender or exchange offer. "Permitted Common Share Cash Distributions" are those
cumulative cash distributions paid with respect to the Common Shares after
December 31, 1995 which are not in excess of the following: the sum of (i) First
Union's cumulative undistributed income from operations and capital gains and
cumulative depreciation and amortization at December 31, 1995, plus (ii) the
cumulative amount of net income before distributions accrued or paid on the
Series A Preferred Shares, plus depreciation and amortization, after December
31, 1995, minus (iii) the cumulative amount of distributions accrued or paid on
the Series A Preferred Shares or any other class of Preferred Shares after the
date of original issue of the Series A Preferred Shares. In addition to the
foregoing adjustments, First Union is permitted to make such reductions in the
Conversion Price as it considers to be advisable in order that any event treated
for federal income tax purposes as a distribution of stock or stock rights will
not be taxable to the holders of the Common Shares.
-28-
<PAGE> 52
Restrictions on Ownership
With limited exceptions, no person, or persons acting as a group, may
beneficially own more than 25% of the Series A Preferred Shares outstanding at
any time, except as a result of First Union's redemption of any Series A
Preferred Shares; provided that after any redemption, additional Series A
Preferred Shares acquired by such person will be subject to the Preferred Shares
Ownership Limit Provision. Series A Preferred Shares owned in excess of the
Preferred Shares Ownership Limit Provision are not entitled to dividends,
interest or any other distribution with respect to such shares, are not entitled
to any conversion rights, are not entitled to any voting rights, and shall not
be considered outstanding for quorums or voting purposes.
With limited exceptions, no person or persons acting as a group may
beneficially own more than 9.8% of the Common Shares, which limitation assumes
that all securities convertible into Common Shares owned by such person or group
of persons, such as the Series A Preferred Shares, have been converted. In
addition, in order for a holder of Common Shares to be entitled to the benefit
of FUMI's Declaration of Trust, such shareholder may not own, after taking into
consideration all Common Shares owned by such person together with any Common
Shares attributed to such person under the Code, which would include the Series
A Preferred Shares on an as converted basis, more than 5% of the outstanding
Common Shares of First Union. See "-- Common Shares -- Restriction on Size of
Holdings" and "-- Common Shares -- Beneficial Ownership of FUMI."
-29-
<PAGE> 53
FEDERAL INCOME TAX CONSEQUENCES
The following is a description of the material federal income tax
consequences to First Union and its shareholders of the treatment of First Union
as a REIT. The discussion is general in nature and not exhaustive of all
possible tax considerations, nor does the discussion give a detailed description
of any state, local, or foreign tax considerations. The tax treatment of a
shareholder will vary depending upon the holder's particular situation, and this
discussion addresses only holders that hold Common Shares as capital assets and
does not purport to deal with all aspects of taxation that may be relevant to
particular holders in light of their personal investment or tax circumstances,
or to certain types of holders (including dealers in securities or currencies,
traders in securities that elect to mark-to-market, banks, tax-exempt
organizations, life insurance companies, persons that hold Common Shares that
are a hedge or that are hedged against currency risks or that are part of a
straddle or conversion transaction, or persons whose functional currency is not
the U.S. dollar) subject to special treatment under the federal income tax laws.
This summary is based on the Code, its legislative history, existing and
proposed regulations thereunder, published rulings and court decisions, all as
currently in effect and all subject to change at any time, perhaps with
retroactive effect.
Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations) ("Fried Frank"), counsel to First Union, has rendered
an opinion that, commencing with First Union's taxable year ended December 31,
1994, First Union has been organized as, and has operated in conformity with the
requirements for qualification as, a REIT, and its method of operation, as
described in this prospectus and as represented by it, will enable it to satisfy
the requirements for qualification as a REIT. This opinion is based on certain
assumptions relating to the organization and operation of FUMI and of any
partnerships in which First Union will hold an interest, and is conditioned upon
representations made by First Union as to certain factual matters relating to
First Union's and FUMI's organization and manner of operation. Fried Frank's
opinion also relies upon the opinion of Mayer, Brown & Platt, dated July 21,
1997, which is based upon certain factual representations and assumptions,
stating that, as of that date, First Union's then existing legal organization
and method of operation enabled First Union to satisfy the requirements for
qualification as a REIT. In addition, Fried Frank's opinion is based on the law
existing and in effect on the date hereof. First Union's qualification and
taxation as a REIT in the future will depend upon First Union's ability to meet
on a continuing basis, through actual operating results, asset composition,
distribution levels and diversity of stock ownership, the various qualification
tests imposed under the Code discussed below. Fried Frank will not review
compliance with these tests on a continuing basis. No assurance can be given
that First Union will satisfy such tests on a continuing basis.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX
PLANNING, AND EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT WITH ITS TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE PURCHASE, OWNERSHIP
AND SALE OF COMMON SHARES, INCLUDING THE FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE, AND OF POTENTIAL
CHANGES IN APPLICABLE TAX LAWS.
If certain detailed conditions imposed by the REIT provisions of the
Code are met, entities, such as First Union, that invest primarily in real
estate and that otherwise would be treated for federal income tax purposes as
corporations, are generally not taxed at the corporate level on their "REIT
taxable income" that is currently distributed to shareholders. This treatment
substantially eliminates the "double taxation" (i.e., at both the corporate and
shareholder levels) that generally results from the use of corporations.
However, as noted below under "-- Taxation of First Union's Shareholders --
Taxation of Taxable U.S. Shareholders," corporate shareholders will not be
entitled to a dividends received deduction with respect to dividends paid on
their shares.
If First Union fails to qualify as a REIT in any year, however, it will
be subject to federal income taxation as if it were a domestic corporation, and
its shareholders will be taxed in the same manner as shareholders of ordinary
corporations. In this event, First Union could be subject to potentially
significant tax liabilities, and therefore the amount of cash available for
distribution to its shareholders would be reduced or eliminated.
First Union, based on internal calculations and advice of counsel,
believes it properly elected and continued to elect REIT status for all taxable
years since its filing of a REIT election and that it has operated and expects
that it will continue to operate in a manner that will permit it to elect REIT
status in each taxable year
-30-
<PAGE> 54
thereafter. There can be no assurance, however, that this belief or expectation
will be fulfilled, since qualification as a REIT depends on First Union
continuing to satisfy numerous asset, income and distribution tests described
below, which in turn will be dependent in part on First Union's operating
results.
TAXATION OF FIRST UNION
General. In any year in which First Union qualifies as a REIT, in
general it will not be subject to federal income tax on that portion of its REIT
taxable income or capital gain which is distributed to shareholders. First Union
may, however, be subject to tax at normal corporate rates upon any taxable
income or capital gain not distributed.
Notwithstanding its qualification as a REIT, First Union may also be
subject to taxation in certain other circumstances. If First Union should fail
to satisfy either the 75% or the 95% gross income test (as discussed below), and
nonetheless maintains its qualification as a REIT because certain other
requirements are met, it will be subject to a 100% tax on the greater of the
amount by which First Union fails to satisfy either the 75% test or the 95%
test, multiplied by a fraction intended to reflect First Union's profitability.
First Union will also be subject to a tax of 100% on net income from any
"prohibited transaction," as described below, and if First Union has
- net income from the sale or other disposition of "foreclosure
property" which is held primarily for sale to customers in the
ordinary course of business or
- other non-qualifying income from foreclosure property, it will
be subject to tax on such income from foreclosure property at
the highest corporate rate.
In addition, if First Union should fail to distribute during each
calendar year at least the sum of
- 85% of its REIT ordinary income for such year,
- 95% of its REIT capital gain net income for such year and
- any undistributed taxable income from prior years,
First Union would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed.
For taxable years beginning after August 5, 1997, the Taxpayer Relief
Act of 1997 (the "1997 Act") permits a REIT, with respect to undistributed net
long-term capital gains it received during the taxable year, to designate in a
notice mailed to shareholders within 60 days of the end of the taxable year (or
in a notice mailed with its annual report for the taxable year) such amount of
such gains which its shareholders are to include in their taxable income as
long-term capital gains. Thus, if First Union made this designation, the
shareholders of First Union would include in their income as long-term capital
gains their proportionate share of the undistributed net capital gains as
designated by First Union and First Union would have to pay the tax on such
gains within 30 days of the close of its taxable year. Each shareholder of First
Union would be deemed to have paid such shareholder's share of the tax paid by
First Union on such gains, which tax would be credited or refunded to the
shareholder. A shareholder would increase its tax basis in its First Union stock
by the difference between the amount of income to the holder resulting from the
designation less the holder's credit or refund for the tax paid by First Union.
First Union may also be subject to the corporate "alternative minimum tax", as
well as tax in certain situations and on certain transactions not presently
contemplated. First Union will use the calendar year both for federal income tax
purposes and for financial reporting purposes.
Stapled Stock. First Union and FUMI are "stapled entities" as defined
in Section 269B of the Code. Section 269B of the Code defines the term "stapled
entities" to mean any group of two or more entities if more than 50% in value of
the beneficial ownership in each of such entities consists of interests which,
by reason of form of ownership, restrictions on transfers, or other terms or
conditions, the transfer of one of such interests requires the transfer of the
other of such interests. Section 269B of the Code provides that if the shares of
a group of entities that include a REIT are stapled, then such entities shall be
treated as one entity for purposes of applying the REIT provisions of the Code.
If Section 269B of the Code were to apply to First Union and FUMI, then First
-31-
<PAGE> 55
Union might not be able to satisfy the "Gross Income Tests" as described below
that are necessary to qualify as a REIT.
Prior to the enactment of Section 269B of the Code, First Union
received two rulings from the IRS sanctioning the stapling of First Union and
FUMI. These rulings provided that (i) even though First Union and FUMI were
"stapled," such stapling would not preclude First Union from qualifying as a
REIT, and (ii) amounts otherwise qualifying as rents from real property under
the REIT rules would not fail to meet that definition by reason of the fact that
First Union and FUMI were stapled. The effective date provision for Section 269B
provides that Section 269B of the Code does not apply if a group of stapled
entities that included a REIT on June 30, 1983 were stapled on that date. First
Union believes that because First Union and FUMI were stapled on June 30, 1983,
Section 269B should not apply to First Union and FUMI. However, as described
above in "Risk Factors -- Income and activities of FUMI may be attributed to
First Union under recent anti-stapling legislation and may threaten REIT status"
and "Risk Factors -- Dependence on qualification as a REIT; tax and other
consequences if REIT qualification lost," newly enacted legislation provides
that the income and activities of FUMI with respect to any real property
acquired by the First Union Companies after March 26, 1998, for which there was
no binding written agreement, public announcement or filing with the Commission
on or before March 26, 1998, will be attributed to First Union for purposes
determining whether First Union qualifies as a REIT.
Under the Code, rents from real property do not include amounts
received or accrued, directly or indirectly, from any person if the REIT owns,
directly or indirectly, in the case of a corporation, stock of such corporation
possessing 10% or more of the total combined voting power of all classes of
stock entitled to vote, or 10% or more of the total number of shares of all
classes of stock of such corporation. For purposes of this provision, certain
attribution rules are applicable. Under this provision, even though Section 269B
of the Code does not apply to First Union and FUMI, if any person were to
acquire, directly or indirectly, a 10% or greater beneficial interest in the
Trust (taking into account such attribution rules), then rents received from
FUMI would not qualify as rents from real property under the REIT rules. In such
a case, First Union would likely not satisfy the "Gross Income Tests" described
below, and accordingly, would not qualify as a REIT.
FUMI's Declaration of Trust provides that any person who owns, directly
or by attribution, 5% or more of the outstanding shares of First Union, is
deemed to have no beneficial interest in the Trust. Assuming this restriction
precludes any person from owning 10% or more of the voting power of all classes
of stock of FUMI, First Union believes that amounts otherwise qualifying as
rents from real property received from FUMI will qualify as rents from real
property for REIT purposes. First Union has terminated its management
arrangements with FUMI, and now manages its retail, apartment and office
portfolios and has entered into third-party leases for the parking facilities it
owns. Therefore, First Union no longer receives any rents from FUMI.
The Code defines a REIT as an electing corporation, trust or
association
- which is managed by one or more trustees or directors,
- the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial
interest,
- which would otherwise be taxable as a domestic corporation,
but for Section 856 through 859 of the Code,
- which is neither a financial institution nor an insurance
company subject to certain provisions of the Code, and
- which meets the share ownership, asset and income tests
described below.
First Union has a number of wholly-owned subsidiaries. Code Section
856(i) provides that a corporation which is a "qualified REIT subsidiary" shall
not be treated as a separate corporation, and all assets, liabilities, and items
of income, deductions, and credit of a "qualified REIT subsidiary" shall be
treated as assets, liabilities and such items (as the case may be) of the REIT.
Thus, in applying the requirements described below, the assets, liabilities and
items of income, deduction and credit of First Union's qualified REIT
subsidiaries will be treated as assets, liabilities and items of First Union.
Furthermore, First Union's proportionate share of the assets, liabilities and
items of income of any partnership in which First Union is a partner will be
treated as assets, liabilities and items of income of First Union for purposes
of applying the requirements described below.
-32-
<PAGE> 56
Share Ownership Test. First Union's shares of stock must be held by a
minimum of 100 persons for at least 335 days in each taxable year (or a
proportional number of days in any short taxable year). In addition, at all
times during the second half of each taxable year, no more than 50% in value of
the stock of First Union may be owned, directly or indirectly and by applying
certain constructive ownership rules, by five or fewer individuals, which for
this purpose includes certain entities. Under the 1997 Act, for taxable years
beginning after August 5, 1997, if First Union complies with the Treasury
regulations for ascertaining its actual ownership and did not know, or
exercising reasonable diligence would not have reason to know, that more than
50% in value of its outstanding shares of stock were held, actually or
constructively, by five or fewer individuals, then First Union will be treated
as meeting such requirement.
In order to ensure compliance with the 50% test, First Union has placed
certain restrictions on the transfer of the shares of its stock to prevent
additional concentration of ownership. Moreover, to evidence compliance with
these requirements under Treasury regulations, First Union must maintain records
which disclose the actual ownership of its outstanding shares of stock. In
fulfilling its obligations to maintain records, First Union must and will demand
written statements each year from the record holders of designated percentages
of shares of its stock disclosing the actual owners of such shares (as
prescribed by Treasury regulations). A list of those persons failing or refusing
to comply with such demand must be maintained as a part of First Union's
records. A shareholder failing or refusing to comply with First Union's written
demand must submit with such holder's tax returns a similar statement disclosing
the actual ownership of shares of First Union's stock and certain other
information. In addition, the Bylaws provide restrictions regarding the transfer
of shares of First Union's stock that are intended to assist First Union in
continuing to satisfy the share ownership requirements. See "Description of
Capital Stock -- Common Shares -- Restriction on Size of Holdings." First Union
intends to enforce the 9.8% ownership limitation on ownership of shares of its
stock to assure that its qualification as a REIT will not be compromised.
Asset Tests. At the close of each quarter of First Union's taxable
year, First Union must satisfy certain tests relating to the nature of its
assets (determined in accordance with generally accepted accounting principles).
First, at least 75% of the value of First Union's total assets must be
represented by interests in real property, interests in mortgages on real
property, shares in other REITs, cash, cash items, and government securities,
and certain qualified temporary investments (for a period of one year from the
date of First Union's receipt of proceeds of an offering of its shares of
beneficial interest or long-term (at least five years) debt, stock or debt
instruments purchased with such proceeds). Second, although the remaining 25% of
First Union's assets generally may be invested without restriction, securities
in this class of a single issuer may not exceed either (i) 5% of the value of
First Union's total assets or (ii) 10% of the outstanding voting securities of
any one issuer.
In connection with the acquisition of equity interests in Impark by
FUMI, First Union made certain subordinated loans to Impark on an unsecured
basis. In connection with such loans, First Union has determined that
- the fair market value of each of such loans, including any
accrued interest, fees and any other amounts payable thereon,
is not in excess of 5% of the fair market value of the total
gross assets of First Union determined in accordance with
generally accepted accounting principles and
- the fair market value of all such loans and First Union's
other assets (other than assets represented by interests in
real property, interests in mortgages on real property, shares
in other REITs, cash, cash items, government securities and
qualified temporary investments) do not have an aggregate fair
market value in excess of 25% of the fair market value of the
total gross assets of First Union determined in accordance
with generally accepted accounting principles.
Based on existing facts, First Union believes that it will be able to reaffirm
this determination at the applicable times in the future. If, however, First
Union were unable to satisfy the foregoing asset tests at the applicable time,
First Union would be required to take preventative steps by disposing of certain
assets or otherwise risk a loss of REIT status.
In addition, as part of the acquisition of Impark, certain lenders of
Impark have the right to transfer certain loans of Impark to First Union at
certain times. If the transfer rights were exercised at a time when First
Union's total assets were not sufficient to satisfy the foregoing asset tests,
First Union would be required to take such preventative steps or otherwise risk
such REIT status.
-33-
<PAGE> 57
Gross Income Tests. There are currently two separate percentage tests
relating to the sources of First Union's gross income which must be satisfied
for each taxable year. Additionally, for its taxable years before 1998,
short-term gain from the sale or other disposition of stock or securities, gain
from the sale or other disposition of stock or securities, gain from prohibited
transactions and gain on the sale or other disposition or real property held for
less than four years (apart from involuntary conversions and sales of
foreclosure property) must represent less than 30% of First Union's gross income
(including gross income from prohibited transactions) for each such taxable
year. The two current tests are as follows:
1. The 75% Test. At least 75% of First Union's gross income for each
taxable year must be derived directly or indirectly from investments relating to
real property or mortgages on real property (including "rents from real
property" --which term generally includes expenses of First Union that are paid
or reimbursed by tenants) or from certain types of temporary investments.
Rents received from a tenant will not, however, qualify as rents from
real property in satisfying the 75% test (or the 95% gross income test described
below) if First Union, or an owner of 10% or more of First Union, directly or
constructively owns 10% or more of such resident. In addition, if rent
attributable to personal property leased in connection with a lease of real
property is greater than 15% of the total rent received under the lease, then
the portion of rent attributable to such personal property will not qualify as
rents from real property. Moreover, an amount received or accrued will not
qualify as rents from real property (or as interest income) for purposes of the
75% and 95% gross income tests if it is based in whole or in part on the income
or profits of any person, although an amount received or accrued generally will
not be excluded from "rents from real property" solely by reason of being based
on a fixed percentage or percentages of receipts or sales. Finally, for rents
received to qualify as rents from real property, First Union generally must not
operate or manage the property or furnish or render services to tenants of such
property, other than through an "independent contractor" from whom First Union
derives no income, except that the "independent contractor" requirement does not
apply to the extent that the services provided by First Union are "usually or
customarily rendered" in connection with the rental of space for occupancy only
or are not otherwise considered "rendered to the occupant for his convenience".
For taxable years beginning after August 5, 1997, a REIT is permitted to render
a de minimis amount of impermissible services to tenants, or in connection with
the management of property, and still treat amounts received with respect to
that property as rent from real property. The amount received or accrued by the
REIT during the taxable year for the impermissible services with respect to a
property may not exceed one percent of all amounts received or accrued by the
REIT directly or indirectly from the property. The amount received for any
service (or management operation) for this purpose shall be deemed to be not
less than 150% of the direct cost of the REIT in furnishing or rendering the
service (or providing the management or operation).
2. The 95% Test. At least 95% of First Union's gross income for each
taxable year must be derived from the real property investments included in the
75% test, dividends, interest and gain from the sale or disposition of stock or
securities (or from any combination of the foregoing).
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount depends in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "interest"
solely by reason of being based on a fixed percentage or percentages of receipts
or sales.
For purposes of determining whether First Union complies with the 75%
and 95% income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property (excluding
foreclosure property) unless such property is held by First Union for at least
four years and certain other requirements are satisfied. See "-- Taxation of
First Union -- General."
Even if First Union fails to satisfy one or both of the 75% or 95%
gross income tests for any taxable year, it may still qualify as a REIT for such
year if it is entitled to relief under certain provisions of the Code. These
relief provisions will generally be available if:
- First Union's failure to comply was due to reasonable cause
and not to willful neglect;
- First Union reports the nature and amount of each item of its
income included in the tests on a schedule attached to its tax
return; and
-34-
<PAGE> 58
- any incorrect information on this schedule is not due to fraud
with intent to evade tax.
If these relief provisions apply, however, First Union will nonetheless be
subject to a special tax upon the greater of the amount by which it fails either
the 75% or 95% gross income test for that year.
Annual Distribution Requirements. In order to qualify as a REIT, First
Union is required to make distributions (other than capital gain dividends) to
its shareholders each year in an amount at least equal to
- the sum of
(1) 95% of First Union's REIT taxable income (computed
without regard to the dividends paid deduction and
the REIT's net capital gain) and
(2) 95% of the net income (after tax), if any, from
foreclosure property,
minus
- the sum of certain items of non-cash income.
Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before First Union timely
files its tax return for such year with an appropriate election and if paid on
or before the first regular dividend payment after such declaration. To the
extent that First Union does not distribute all of its net capital gain or
distributes at least 95%, but less than 100%, of its REIT taxable income, as
adjusted, it will be subject to tax on the undistributed amount at regular
capital gains or ordinary corporate tax rates, as the case may be. For taxable
years beginning after August 5, 1997, the 1997 Act permits a REIT, with respect
to undistributed net long-term capital gains it received during the taxable
year, to designate in a notice mailed to shareholders within 60 days of the end
of the taxable year (or in a notice mailed with its annual report for the
taxable year) such amount of such gains which its shareholders are to include in
their taxable income as long-term capital gains. Thus, if First Union made this
designation, the shareholders of First Union would include in their income as
long-term capital gains their proportionate share of the undistributed net
capital gains as designated by First Union and First Union would have to pay the
tax on such gains within 30 days of the close of its taxable year. Each
shareholder of First Union would be deemed to have paid such shareholder's share
of the tax paid by First Union on such gains, which tax would be credited or
refunded to the shareholder. A shareholder would increase its tax basis in its
First Union stock by the difference between the amount of income to the holder
resulting from the designation less the holder's credit or refund for the tax
paid by First Union.
First Union intends to make timely distributions sufficient to satisfy
the annual distribution requirements. It is possible that First Union may not
have sufficient cash or other liquid assets to meet the 95% distribution
requirement, due to, among other things, timing differences between the actual
receipt of income and actual payment of expenses on the one hand, and the
inclusion of such income and deduction of such expenses in computing First
Union's REIT taxable income on the other hand. To avoid any problem with the 95%
distribution requirement, First Union will closely monitor the relationship
between its REIT taxable income and cash flow and, if necessary, intends to
borrow funds in order to satisfy the distribution requirement. However, there
can be no assurance that such borrowing would be available at such time.
If First Union fails to meet the 95% distribution requirement as a
result of an adjustment to First Union's tax return by the IRS, First Union may
retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
Failure to Qualify. If First Union fails to qualify for taxation as a
REIT in any taxable year and certain relief provisions do not apply, First Union
will be subject to tax (including applicable alternative minimum tax) on its
taxable income at regular corporate rates. Distributions to shareholders in any
year in which First Union fails to qualify as a REIT will not be deductible by
First Union, nor generally will they be required to be made under the Code. In
such event, to the extent of current and accumulated earnings and profits, all
distributions to shareholders will be taxable as ordinary income, and subject to
certain limitations in the Code, corporate distributees may be eligible for the
dividends-received deduction. Unless entitled to relief under specific statutory
provisions, First Union also will be disqualified from reelecting taxation as a
REIT for the four taxable years following the year during which qualification
was lost.
-35-
<PAGE> 59
TAXATION OF FIRST UNION'S SHAREHOLDERS
Taxation of Taxable U.S. Shareholders. As used herein, the term "U.S.
Shareholder" means a holder of Common Shares who (for United States federal
income tax purposes) is
- a citizen or resident of the United States,
- a corporation or partnership organized under the laws of the
United States, or of any political subdivision thereof,
- an estate the income of which is subject to United States
federal income taxation regardless of its source or
- a trust subject to the primary supervision of a court within
the United States and the control of one or more U.S. persons.
A "Non-U.S. Shareholder" is a shareholder other than a U.S. Shareholder.
As long as First Union qualifies as a REIT, distributions made to First
Union's taxable U.S. Shareholders out of current or accumulated earnings and
profits (and not designated as capital gain dividends) will be taken into
account by them as ordinary income and will not be eligible for the
dividends-received deduction for corporations. Distributions (and for tax years
beginning after August 5, 1997, undistributed amounts) that are designated as
capital gain dividends will be taxed as long-term capital gains (to the extent
they do not exceed First Union's actual net capital gain for the taxable year)
without regard to the period for which the shareholder has held its shares.
However, corporate U.S. Shareholders may be required to treat up to 20% of
certain capital gain dividends as ordinary income. To the extent that First
Union makes distributions in excess of current and accumulated earnings and
profits, these distributions are treated first as a tax-free return of capital
to the U.S. Shareholder, reducing the tax basis of a U.S. Shareholder's shares
by the amount of such distribution (but not below zero), with distributions in
excess of the U.S. Shareholder's tax basis taxable as capital gains (if the
shares are held as a capital asset). In addition, any dividend declared by First
Union in October, November or December of any year and payable to a shareholder
of record on a specific date in any such month shall be treated as both paid by
First Union and received by the U.S. Shareholder on December 31 of such year,
provided that the dividend is actually paid by First Union during January of the
following calendar year. U.S. Shareholders may not include in their individual
income tax returns any net operating losses or capital losses of First Union.
Federal income tax rules may also require that certain minimum tax adjustments
and preferences be apportioned to First Union shareholders.
Distributions made by First Union and gain arising from the sale or
exchange by a U.S. Shareholder of Common Shares will not be treated as passive
activity income, and, as a result, U.S. Shareholders generally will not be able
to apply any "passive losses" against such income or gain.
Upon any sale or other disposition of Common Shares, a U.S. Shareholder
will recognize gain or loss for federal income tax purposes in an amount equal
to the difference between
- the amount of cash and the fair market value of any property
received on such sale or other disposition, and
- the holder's adjusted basis in the Common Shares for tax
purposes.
Such gain or loss will be capital gain or loss if the Common Shares have been
held by the U.S. Shareholder as a capital asset and will be long-term gain or
loss if such Common Shares have been held for more than one year. Long-term
capital gain of an individual U.S. Shareholder is generally subject to a maximum
tax rate of 20%. In general, any loss recognized by a U.S. Shareholder upon the
sale or other disposition of Common Shares of First Union that have been held
for six months or less (after applying certain holding period rules) will be
treated as long-term capital loss, to the extent of distributions received by
such U.S. Shareholder from First Union which were required to be treated as
long-term capital gains.
Backup Withholding. First Union will report to its U.S. Shareholders
and to the IRS the amount of distributions paid during each calendar year, and
the amount of tax withheld, if any, with respect thereto. Under
-36-
<PAGE> 60
the backup withholding rules, a shareholder may be subject to backup withholding
at applicable rates with respect to distributions paid unless such shareholder
- is a corporation or comes within certain other exempt
categories and, when required, demonstrates this fact or
- provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise
complies with applicable requirements of the backup
withholding rules.
A U.S. Shareholder that does not provide First Union with its correct taxpayer
identification number may also be subject to penalties imposed by the IRS. Any
amount paid as backup withholding will be credited against the shareholder's
income tax liability. In addition, First Union may be required to withhold a
portion of capital gain distributions made to any shareholders who fail to
certify their non-foreign status to First Union.
Taxation of Tax-Exempt Shareholders. The IRS has issued a revenue
ruling in which it held that amounts distributed by a REIT to a tax-exempt
employees' pension trust do not constitute unrelated business taxable income
("UBTI"). Subject to the discussion below regarding a "pension-held REIT," based
upon the ruling, the analysis therein and the statutory framework of the Code,
distributions by First Union to a shareholder that is a tax-exempt entity should
also not constitute UBTI, provided that the tax-exempt entity has not financed
the acquisition of its shares with "acquisition indebtedness" within the meaning
of the Code, and that the shares are not otherwise used in an unrelated trade or
business of the tax-exempt entity, and that First Union, consistent with its
present intent, does not hold a residual interest in a real estate mortgage
investment conduit.
For tax-exempt shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Sections
501(c)(7), (c)(9), (c)(17), and (c)(20) of the Code, respectively, income from
an investment in Common Shares will constitute UBTI unless the organization is
able to properly deduct amounts set aside or placed in reserve for certain
purposes so as to offset the income generated by its Common Shares. Such
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.
However, if any pension or other retirement trust that qualifies under
Section 401(a) of the Code ("qualified pension trust") holds more than 10% by
value of the interests in a "pension-held REIT" at any time during a taxable
year, a portion of the dividends paid to the qualified pension trust by such
REIT may constitute UBTI. For these purposes, a "pension-held REIT" is defined
as a REIT if
- such REIT would not have qualified as a REIT but for the
provisions of the Code which look through such a qualified
pension trust in determining ownership of stock of the REIT
and
- at least one qualified pension trust holds more than 25% by
value of the interests of such REIT or one or more qualified
pension trusts (each owning more than a 10% interest by value
in the REIT) hold in the aggregate more than 50% by value of
the interests in such REIT.
Taxation of Non-U.S. Shareholders. The rules governing United States
federal income taxation of Non-U.S. Shareholders are complex, and no attempt
will be made to provide herein more than a summary of such rules.
PROSPECTIVE NON-U.S. SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX
ADVISORS TO DETERMINE THE IMPACT OF U.S. FEDERAL, STATE AND LOCAL TAX LAWS WITH
REGARD TO AN INVESTMENT IN COMMON SHARES, INCLUDING ANY REPORTING REQUIREMENTS.
DISTRIBUTIONS FROM FIRST UNION
1. Ordinary Dividends. The portion of dividends received by
Non-U.S. Shareholders payable out of First Union's earnings and profits that are
not attributable to capital gains of First Union and that are not effectively
connected with a U.S. trade or business of the Non-U.S. Shareholder will
generally be subject to U.S. withholding tax at the rate of 30% (unless reduced
by treaty or the Non-U.S. Shareholder files an IRS Form 4224 (or successor form)
with First Union certifying that the investment to which the distribution
relates is effectively
-37-
<PAGE> 61
connected to a United States trade or business of such Non-U.S. Shareholder).
Under certain limited circumstances, the amount of tax withheld may be
refundable, in whole or in part, because of the tax status of certain partners
or beneficiaries of Non-U.S. Shareholders that are either foreign partnerships
or foreign estates or trusts. In general, Non-U.S. Shareholders will not be
considered engaged in a U.S. trade or business solely as a result of their
ownership of Common Shares. In cases where the dividend income from a Non-U.S.
Shareholder's investment in Common Shares is (or is treated as) effectively
connected with the Non-U.S. Shareholder's conduct of a U.S. trade or business,
the Non-U.S. Shareholder generally will be subject to U.S. tax at graduated
rates, in the same manner as U.S. shareholders are taxed with respect to such
dividends (and may also be subject to the 30% branch profits tax (unless reduced
by treaty) in the case of a Non-U.S. Shareholder that is a foreign corporation).
2. Capital Gain Dividends. Under the Foreign Investment in Real
Property Tax Act of 1980 ("FIRPTA"), any distribution made by First Union to a
Non-U.S. Shareholder, to the extent attributable to gains from dispositions of
United States Real Property Interests ("USRPIs") by First Union ("USRPI Capital
Gains"), will be considered effectively connected with a U.S. trade or business
of the Non-U.S. Shareholder and subject to U.S. income tax at the rates
applicable to U.S. individuals or corporations, without regard to whether such
distribution is designated as a capital gain dividend. In addition, First Union
will be required to withhold tax equal to 35% of the amount of any distribution
that could be designated by First Union as a capital gain dividend. However, if
First Union designates as a capital gain dividend a distribution made prior to
the day First Union actually effects such designation, then (although such
distribution may be taxable to a Non-U.S. Shareholder) such distribution is not
subject to withholding under FIRPTA; rather, First Union must effect the 35%
FIRPTA withholding from distributions made on and after the date of such
designation, until the distributions so withheld equal the amount of the prior
distribution designated as a capital gain dividend. The amount withheld is
creditable against the Non-U.S. Shareholder's U.S. tax liability. Such
distribution may also be subject to the 30% branch profits tax (unless reduced
by treaty) in the case of a Non-U.S. Shareholder that is a foreign corporation.
3. Non-Dividend Distributions. Distributions in excess of current
and accumulated earnings and profits of First Union, which are not attributable
to the gain from disposition by First Union of a USRPI, will not be taxable to a
Non-U.S. Shareholder to the extent that they do not exceed the adjusted basis of
the Non-U.S. Shareholder's Common Shares, but rather will reduce the adjusted
basis of such Common Shares. To the extent that such distributions exceed the
adjusted basis of a Non-U.S. Shareholder's Common Shares, they will give rise to
tax liability if the Non-U.S. Shareholder otherwise would be subject to tax on
any gain from the sale or disposition of its Common Shares, as described below.
If it cannot be determined at the time a distribution is made whether such
distribution will be in excess of current and accumulated earnings and profits,
the distribution will be subject to withholding at the rate applicable to
dividends. However, the Non-U.S. Shareholder may seek a refund of such amounts
from the IRS if it is subsequently determined that such distribution was, in
fact, in excess of current accumulated earnings and profits of First Union.
DISPOSITIONS OF COMMON SHARES
Unless the Common Shares constitute USRPIs, a sale or exchange of
Common Shares by a Non-U.S. Shareholder generally will not be subject to U.S.
taxation under FIRPTA. The Common Shares will not constitute USRPIs if First
Union is a "domestically controlled REIT." A domestically controlled REIT is a
REIT in which, at all times during a specified testing period, less than 50% in
value of its shares is held directly or indirectly by Non-U.S. Shareholders.
First Union believes that it is and will continue to be a domestically
controlled REIT and, therefore, that the sale of Common Shares will not be
subject to taxation under FIRPTA. However, no assurance can be given that First
Union will continue to be a domestically controlled REIT.
If First Union does not constitute a domestically controlled REIT, a
Non-U.S. Shareholder's sale or exchange of Common Shares generally will still
not be subject to tax under FIRPTA as a sale of USRPIs provided that
- First Union's Common Shares are "regularly traded" (as defined
by applicable Treasury regulations) on an established
securities market (e.g., the NYSE, on which the Common Shares
are listed) and
-38-
<PAGE> 62
- the selling Non-U.S. Shareholder held 5% or less of First
Union's outstanding Common Shares at all times during a
specified testing period.
If gain on the sale or exchange of Common Shares were subject to
taxation under FIRPTA, the Non-U.S. Shareholder would be subject to U.S. income
tax at the rates applicable to U.S. individuals or corporations, and the
purchaser of Common Shares could be required to withhold 10% of the purchase
price and remit such amount to the IRS. The branch profits tax generally would
not apply to such sales or exchanges.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Shareholder in two cases:
- if the Non-U.S. Shareholder's investment in Common Shares is
effectively connected with a U.S. trade or business conducted
by such Non-U.S. Shareholder, the Non-U.S. Shareholder will be
subject to the same treatment as U.S. Shareholders with
respect to such gain or
- if the Non-U.S. Shareholder is a nonresident alien individual
who was present in the United States for 183 days or more
during the taxable year and certain other conditions apply, in
which case the nonresident alien individual will be subject to
30% tax on the individual's capital gain (unless reduced or
eliminated by treaty).
TREATY BENEFITS
Pursuant to current Treasury regulations, dividends paid to an address
in a country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate.
Shareholders that are partnerships or entities that are similarly fiscally
transparent for federal income tax purposes, and persons holding Common Shares
through such entities, may be subject to restrictions on their ability to claim
benefits under U.S. tax treaties and should consult a tax advisor.
Under recently issued Treasury regulations that are effective for
payments made after December 31, 1999 (the "Withholding Regulations"), however,
a Non-U.S. Shareholder who wishes to claim the benefit of an applicable treaty
rate would be required to satisfy applicable certification requirements. In
addition, under the Withholding Regulations, in the case of Common Shares held
by a foreign partnership,
- the certification requirement would generally be applied to
the partners in the partnership and
- the partnership would be required to provide certain
information, including a United States taxpayer identification
number.
The Withholding Regulations provide look-through rules in the case of tiered
partnerships.
-39-
<PAGE> 63
PLAN OF DISTRIBUTION
Any Rights to be issued by First Union will be distributed to
shareholders of First Union as of a specified record date. Any Common Shares
offered pursuant to such Rights will be offered by First Union directly to its
shareholders. First Union may elect to retain dealer managers in connection with
any Rights offering to provide marketing assistance or to solicit exercises of
Rights. The identity of any such dealer managers and any compensation provided
by First Union to such dealer managers will be described in the related
prospectus supplement.
With respect to Common Shares offered other than pursuant to the
exercise of Rights, First Union may sell such Common Shares to or through one or
more underwriters or dealers and also may sell Common Shares directly to
institutional investors or other purchasers, or through agents.
The distribution of such Common Shares may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices.
In connection with the sale of such Common Shares, underwriters or
agents may receive compensation from First Union or from purchasers of Common
Shares for whom they may act as agents in the form of discounts, concessions or
commissions. Underwriters may sell Common Shares to or through dealers, and such
dealers may receive compensation in the form of discounts, concessions or
commissions from the underwriters and/or commissions from the purchasers for
whom they may act as agents. Underwriters, dealers and agents that participate
in the distribution of Common Shares may be deemed to be underwriters, and any
discounts or commissions received by them from First Union and any profit on the
resale of securities by them may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from First Union will be
described, in the related prospectus supplement.
Under agreements which may be entered into by First Union, underwriters
and agents who participate in the distribution of Common Shares may be entitled
to indemnification by First Union against certain liabilities, including
liabilities under the Securities Act, or to contribution by First Union with
respect to payments they may be required to make in respect thereof.
If so indicated in the related prospectus supplement, First Union will
authorize underwriters or other persons acting as First Union's agents to
solicit offers by certain institutions to purchase Common Shares from First
Union pursuant to contracts providing for payment and delivery on a future date.
Institutions with which such contracts may be made include commercial and
savings banks, insurance companies, pension funds, investment companies,
educational and charitable institutions and others, but in all cases such
institutions must be approved by First Union. The obligations of any purchaser
under any such contract will be subject to the condition that the purchase of
Common Shares shall not at the time of delivery be prohibited under the laws of
the jurisdiction to which such purchaser is subject. The underwriters and such
other agents will not have any responsibility in respect of the validity or
performance of such contracts.
Until a distribution of the Common Shares is completed, the rules of
the Commission may limit the ability of underwriters and certain selling group
members to bid for and purchase Common Shares. As an exception to these rules,
underwriters are permitted to engage in certain transactions that stabilize the
price of the Common Shares. Such transactions consist of bids or purchases for
the purpose of pegging, fixing or maintaining the price of the Common Shares.
If any underwriters create a short position in the Common Shares in
connection with an offering, i.e., if they sell more Common Shares than are set
forth on the cover page of the applicable prospectus supplement, the
underwriters may reduce that short position by purchasing securities in the open
market.
Underwriters may also impose a penalty bid on certain selling group
members. This means that if the underwriters purchase Common Shares in the open
market to reduce the underwriters' short position or to stabilize the price of
the Common Shares, they may reclaim the amount of the selling concession from
the selling group members who sold those Common Shares as part of the offering.
-40-
<PAGE> 64
In general, purchases of a security for the purpose of stabilization or
to reduce a short position could cause the price of the security to be higher
than it might be in the absence of such purchases. The imposition of a penalty
bid might also have an effect on the price of the securities to the extent that
it discourages resales of the securities.
Neither First Union nor any underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Shares. In addition, neither
First Union nor any underwriter makes any representation that the underwriter
will engage in such transactions or that such transactions, once commenced, will
not be discontinued without notice.
Any Common Shares sold pursuant to a prospectus supplement will be
listed on the NYSE, subject to official notice of issuance. No assurances can be
given that there will be an active trading market for the Common Shares.
Certain of the underwriters or agents and their affiliates may engage
in transactions with and perform services for First Union or its affiliates in
the ordinary course of their respective businesses.
EXPERTS
The combined financial statements and schedules as of December 31, 1998
and 1997, and for each of the three years in the period ended December 31, 1998,
incorporated by reference in the Registration Statement of which this prospectus
is a part, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
incorporated by reference in reliance upon the authority of said firm as experts
in giving said reports.
LEGAL MATTERS
Certain legal matters relating to the validity of the Common Shares
offered pursuant to this prospectus will be passed upon for First Union by Hahn
Loeser & Parks LLP.
-41-
<PAGE> 65
GLOSSARY
Set forth below is a list of certain of the more significant terms used
in this prospectus.
<TABLE>
<S> <C>
ACMs Asbestos-containing materials.
ADA Americans with Disabilities Act of 1990.
Apollo Apollo Real Estate Advisors, LP.
Board; Board of Trustees First Union's Board of Trustees.
Board Change Default Default under the Credit Facilities as a result of
the change in the Board's composition.
Bridge Loan Loan to First Union in an original principal amount of
$90 million from a syndicate of lenders led by Bankers
Trust Company that, except as otherwise described in
the Registration Statement of which this prospectus is
a part, (i) bears interest at 12% per annum, (ii) is
subject to a mandatory reduction of outstanding
principal to less than approximately $38 million by
May 15, 1999 and (iii) terminates August 11, 1999,
the proceeds of which financed the repurchase of the
Senior Notes.
Certificate of Designations First Union's Certificate of Designations authorizing
the Series A Preferred Shares.
Change-in-Control Expenses Expenses incurred by First Union during 1998 primarily
in connection with the proxy contest waged by Gotham
LP and Gotham III LP and the change in the Board's
composition. These expenses included proxy expenses
and related legal fees incurred by First Union, Gotham
LP and Gotham III LP, other professional fees related
to the change in the composition of the Board, cash
severance and vesting of restricted stock for Mr.
Mastandrea, First Union's terminated Chairman of the
Board, Chief Executive Officer and President, vesting
of restricted stock granted to other employees of the
First Union Companies and severance expenses related
to employee change-in-control and termination
agreements.
Code Internal Revenue Code of 1986, as amended.
Commission Securities and Exchange Commission.
Common Shares Shares of beneficial interest, $1.00 par value per
share, of First Union.
</TABLE>
G-1
<PAGE> 66
<TABLE>
<S> <C>
Conversion Price $7.5625 per Common Share, subject to adjustment.
Credit Facilities The Impark Credit Facility and the FUR Credit Facility.
Declaration of Trust First Union's Amended Declaration of Trust, as amended
through July 25, 1986.
Enterprise Enterprise Asset Management Inc., a real estate
investment firm located in New York City.
Excess Securities Common Shares owned by a person or group
in excess of 9.8% of the outstanding Common Shares.
Exchange Act Securities Exchange Act of 1934, as amended.
FIRPTA Foreign Investment in Real Property Tax Act of 1980.
First Offering As part of the standby purchase arrangements between
First Union and Gotham LP, Gotham III LP and Gotham
Partners International, Ltd., each as standby
purchasers, First Union's Rights offering that would
generate minimum gross proceeds of $20 million and for
which the standby purchasers would "standby" to
purchase such number of Common Shares that would
result in gross proceeds to First Union of up to $50
million.
First Union First Union Real Estate Equity and Mortgage
Investments and its subsidiaries.
First Union Companies FUMI and First Union.
Fried Frank Fried, Frank, Harris, Shriver & Jacobson (a
partnership including professional corporations),
counsel to First Union.
FUMI First Union Management, Inc., an affiliate of First
Union, and its subsidiaries.
FUMI Shares Shares of common stock, without par value, of FUMI.
FUR Credit Facility First Union's senior credit facility which terminates
on August 11, 1999. The availability under the
facility is $105 million and will be reduced to $80
million on April 30, 1999 and then to $50 million on
June 30, 1999.
Gotham International Gotham International Advisors, L.L.C.
Gotham II LP Gotham Partners II, L.P.
Gotham III LP Gotham Partners III, L.P.
</TABLE>
G-2
<PAGE> 67
<TABLE>
<S> <C>
Gotham LP Gotham Partners L.P. and Gotham Partners III, L.P.
GPLP GPLP Management Corp.
GPM Gotham Partners Management Co. LLC.
Impark Imperial Parking Limited and its subsidiaries and
Impark Services Limited and its subsidiaries.
Impark Credit Facility Impark's Cdn.$38.8 million credit facility.
IRS Internal Revenue Service.
Junior Shares Capital shares of First Union ranking junior to the
Series A Preferred Shares as to distributions and in
distribution of assets as described in the
Certificate of Designations.
1997 Act Taxpayer Relief Act of 1997, as amended.
Moody's Moody's Investors Services, Inc.
Non-U.S. Shareholder A shareholder other than a U.S. Shareholder.
Parity Shares Shares of beneficial interest ranking on a parity
with the Series A Preferred Shares with respect to
the payment of distributions and amounts upon
liquidation, dissolution and winding up as described
in the Certificate of Designations.
Percentage Rent Deferral Non-recording of percentage rent by First Union
during the third quarter of 1998.
Permitted Common Share Cash Distributions Cumulative cash distributions paid with respect to the
Common Shares after December 31, 1995 which are not in
excess of the following: the sum of (i) First Union's
cumulative undistributed income from operations and
capital gains and cumulative depreciation and
amortization at December 31, 1995, plus (ii) the
cumulative amount of net income before distributions
accrued or paid on the Series A Preferred Shares, plus
depreciation and amortization, after December 31,
1995, minus (iii) the cumulative amount of
distributions accrued or paid on the Series A
Preferred Shares or any other class of Preferred
Shares after the date of original issue of the Series
A Preferred Shares.
Preferred Shares Preferred shares of beneficial interest, $1.00 par
value per share.
Project The First Union Companies' Year 2000 Compliance
Project.
</TABLE>
G-3
<PAGE> 68
<TABLE>
<S> <C>
Registration Statement First Union's Registration Statement on Form S-3,
together with all amendments and exhibits,
registering under the Securities Act the Rights and
the Common Shares issuable upon exercise of the
Rights.
REIT Real estate investment trust.
Rights Rights to purchase First Union's Common Shares.
Rights Agreement Rights Agreement, dated as of March 7, 1990, between
the Company and National City Bank, as Rights Agent.
Second Offering The Rights offering that First Union may conduct for
which Gotham LP, Gotham III LP, Gotham Partners
International, Ltd. and Elliott Associates, L.P. may
purchase such number of Common Shares that would
result in gross proceeds to First Union of up to $40
million.
Securities Act Securities Act of 1933, as amended.
Senior Notes First Union's 8-7/8% Senior Notes due 2003.
Series A Preferred Shares Series A Cumulative Redeemable Preferred Shares of
Beneficial Interest.
S&P Standard & Poor's Corporation.
Specified Offering An offering of Common Shares by First Union under this
prospectus.
Stapled REIT Legislation 1998 tax legislation limiting the "grandfathering"
rule applicable to stapled REITs.
Trust The trust in which all of the shares of FUMI are
owned for the benefit of the holders of Common
Shares.
UBTI Unrelated business taxable income.
USRPIs United States real property interests.
USRPI Capital Gains Gains from dispositions of USRPIs.
</TABLE>
G-4
<PAGE> 69
<TABLE>
<S> <C>
U.S. Shareholder Holder of Common Shares who (for United States federal
income tax purposes) is (i) a citizen or resident of
the United States, (ii) a corporation or partnership
organized under the laws of the United States, or of
any political subdivision thereof, (iii) an estate,
the income of which is subject to United States
federal income taxation regardless of its source or
(iv) a trust subject to the primary supervision of a
court within the United States and the control of one
or more U.S. persons.
Voting Preferred Shares Parity Shares with voting rights.
Withholding Regulations Recently issued Treasury regulations relating to
federal withholding tax procedures.
</TABLE>
G-5
<PAGE> 70
===============================================================================
FIRST UNION
REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
12,550,442 Rights
to Purchase
12,550,442 Shares of Beneficial Interest
------------------------
PROSPECTUS SUPPLEMENT
------------------------
April 21, 1999
===============================================================================
