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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED 12-31-98 COMMISSION FILE NUMBER 1-6249
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
(Exact name of registrant as specified in its charter)
OHIO 34-6513657
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
SUITE 1900, 55 PUBLIC SQUARE
CLEVELAND, OHIO 44113-1937
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(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (216) 781-4030
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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SHARES OF BENEFICIAL INTEREST
(PAR VALUE $1 PER SHARE) NEW YORK STOCK EXCHANGE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Yes [X] No [ ]
State the aggregate market value of the voting stock held by non-affiliates of
the registrant. The aggregate market value shall be computed by reference to the
price at which the stock was sold, or the average bid and asked prices of such
stock, as of a specified date within 60 days prior to the date of filing.
As of January 31, 1999, 26,069,303 Shares of Beneficial Interest were held by
non-affiliates, and the aggregate market value of such shares was approximately
$130,346,515.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
31,376,105 SHARES OF BENEFICIAL INTEREST WERE OUTSTANDING AS OF JANUARY 31, 1999
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DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated: (1) Any annual report
to security holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of
1933. The listed documents should be clearly described for identification
purposes.
1999 Proxy Statement
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FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
CROSS REFERENCE SHEET PURSUANT TO ITEM G,
GENERAL INSTRUCTIONS TO FORM 10-K
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ITEM OF FORM 10-K LOCATION
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(PAGE OR PAGES)
PART I
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1. Business 3 through 6
2. Properties 7 through 12
3. Legal Proceedings 13
4. Submission of Matters to a Vote of Security Holders 13
PART II
5. Market for Registrant's Common Equity and Related Stockholder
Matters 13; Exhibit 13, 1
6. Selected Financial Data 13; Exhibit 13, 2
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 13; Exhibit 13, 25 through 31
8. Financial Statements 13; Exhibit 13, 4 through 7
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 13
PART III
10. Directors and Executive Officers of the Registrant 14; 1999 Proxy Statement
11. Executive Compensation 14; 1999 Proxy Statement
12. Security Ownership of Certain Beneficial
Owners and Management 14; 1999 Proxy Statement
13. Certain Relationships and Related Transactions 14; 1999 Proxy Statement
PART IV
14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K
(a) Financial Statements and Financial
Statement Schedules 14 and 22 through 28;
Exhibit 13, 4 through 7
(b) Exhibits 15 through 20;
Exhibit Index, 29 through 34
(c) Reports on Form 8-K 28
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PART I
ITEM 1. BUSINESS.
The registrant is an unincorporated association in the form of a
business trust organized in Ohio under a Declaration of Trust dated August 1,
1961, as amended from time to time through July 25, 1986 (the "Declaration of
Trust"), which has as its principal business activity the ownership and
management of real estate investments. The registrant qualifies as a real estate
investment trust ("REIT") under Sections 856 through 860 of the Internal Revenue
Code (the "Code").
To encourage efficient operation and management of its property, and
after receiving a ruling from the Internal Revenue Service with respect to the
proposed form of organization and operation, the registrant, in 1971, caused a
management company to be organized pursuant to the laws of the State of Delaware
under the name First Union Management, Inc. (the "Management Company"), to lease
property from the registrant and to operate such property for its own account as
a separate taxable entity. At December 31, 1998, the registrant net leased 47 of
its properties to the Management Company. The shares of the Management Company
are held in trust, with the shareholders of the registrant, as exist from time
to time, as contingent beneficiaries. The Management Company, in April 1997,
acquired voting control of Imperial Parking Limited and its affiliates
("Impark") which is primarily a parking management and transit ticketing
manufacturing company based in Canada. Because the Management Company owns
voting control of Impark, the financial statements of Impark are consolidated
with the Management Company. Additionally, for financial reporting purposes, the
financial statements of the Management Company are combined with those of the
registrant.
On July 22, 1998, tax legislation was enacted limiting the
"grandfathering rules" applicable to stapled REITS, such as the registrant (the
"Stapled REIT Legislation"). As a result, the income and activities of the
Management Company with respect to any real property interests acquired by the
registrant and the Management Company after March 26, 1998, for which there was
no binding written agreement, public announcement or filing with the Securities
and Exchange Commission on or before March 26, 1998, will be attributed to the
registrant for purposes of determining whether the registrant qualifies as a
REIT under the Code. The registrant terminated its management arrangements with
the Management Company in March 1999, and self-manages its retail, apartment and
office portfolios. The registrant entered into third-party management
arrangements for the parking facilities it owns. Accordingly, the registrant no
longer receives any rents from the Management Company.
The registrant owns regional enclosed shopping malls, apartment
complexes, large downtown office buildings and parking facilities. The
registrant's portfolio is diversified by type of property, geographical
location, tenant mix and rental market. As of December 31, 1998, the registrant
owned (in fee or pursuant to long-term ground leases under which the registrant
is lessee) 21 shopping malls, 8 apartment complexes, 5 office properties, 7
parking garages and 2 surface parking lots in the United States and 1 parking
garage and 10 surface parking lots in Canada. The registrant also owns 50% of
another mall in a joint venture with an unrelated party.
All of the registrant's shopping malls compete for tenants on the basis
of the rent charged and location, and encounter competition from other retail
properties in their respective market areas. Some of the registrant's shopping
malls compete with other shopping malls in the environs. However, the principal
competition for the registrant's shopping malls may come from future shopping
malls locating in their market areas. Additionally, the overall economic health
of retail tenants impacts the registrant's shopping malls. Due to the
overbuilding of retail space and a demand for large, open area, administrative
service space in Denver, CO, in 1995, the registrant has repositioned a former
retail mall into an office property and released approximately 64% of the former
mall. Additionally, due to excess mall space in Abilene, TX in 1997, the
registrant demolished its enclosed mall and constructed the first phase of a
strip shopping center which opened in 1998. In February 1999, the registrant
sold its shopping center in Buffalo Grove, IL and signed contracts to sell 8
shopping malls and 1 shopping center.
The registrant's apartment complexes compete with other apartments and
residential housing in the immediate areas in which they are located and may
compete with apartments and residential housing constructed in the same areas in
the future.
The registrant's office properties compete for tenants principally with
office buildings throughout the respective areas in which they are located. In
most areas where the registrant's office buildings are located, competition for
tenants has been and continues to be intense on the basis of rent, location and
age of the building. The registrant sold its office building in Shreveport, LA
in March 1999. The registrant currently has its Indianapolis, IN and Marysville,
CA office properties under contract with closings scheduled to occur in April
1999. The registrant plans to hold and redevelop its Cleveland, OH office
building.
The registrant's parking facilities compete with other parking
facilities in the immediate areas in which they are located and may compete with
new parking facilities constructed in the same areas in the future.
The registrant's mortgage investments are collateralized by an
apartment complex and the management contract of another apartment complex. The
risks inherent with the registrant's mortgage portfolio relate to the
performance and the value of the apartment complexes that secure the mortgage
investments. These risks may impair the realizability of the mortgage
investments.
The registrant's segment data may be found in footnote 23 to the
Combined Financial Statements on page 19 to Exhibit 13.
The registrant has approximately $206 million in debt due in 1999. The
registrant intends to fund the repayment by using cash available at December 31,
1998, a rights offering to shareholders, mortgage financing and the net proceeds
from property sales. The registrant's credit rating, leverage, share price and
liquidity limit the flexibility of the registrant to avail itself of other types
of capital markets transactions at this time.
Impark operations consist primarily of parking management in Canada.
Impark also has a market presence in Buffalo, NY, Minneapolis, MN, and
Milwaukee, WI. Currently, Impark derives 87%, 12% and 1% of revenue from its
management of facilities in Canada, the United States and Asia, respectively.
Impark's Canadian operations are not hedged against currency fluctuations.
Impark faces competition from local and national parking operators in procuring
management contracts from third party parking lot and garage owners. Transit
ticketing products, manufactured by a wholly-owned subsidiary of Impark, are
targeted to be sold to predominantly U.S. mass transit operators, and the sales
of these products represent approximately 3% of Impark's gross revenues.
RISK FACTORS
An investment in the registrant's securities involves various risks.
The following factors should be carefully considered in addition to the other
information set forth in this report.
NEW SENIOR MANAGEMENT LACKS PRIOR EXPERIENCE WITH THE REGISTRANT AND IN
OPERATING PUBLIC COMPANIES OR REITS
In June 1998, William A. Ackman was elected as Chairman of the Board.
In October 1998, William A. Scully was appointed Vice Chairman of the Board. In
November 1998, the registrant appointed Daniel P. Friedman as its President and
Chief Executive Officer, 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 the registrant
or with the Management Company or with either of their senior management or
other personnel. The failure of the new management team to work effectively with
the registrant's or the Management Company's other senior management could
result in the departure of key personnel or disruptions in the operations of the
registrant, which in turn could have a material adverse effect on the
registrant's or the Management Company'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 the registrant and
thereby could have an adverse effect on the registrant'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 the registrant and
are in discussions with the registrant 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 the registrant,
which in turn could have a material adverse effect on the registrant's business,
financial condition or results of operations.
DIFFICULTIES IN SERVICING DEBT
The registrant 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 Impark, an affiliate of the registrant
and subsidiary of the Management Company (the "Impark Credit Facility" and,
together with the FUR Credit Facility, the "Credit Facilities"), and a loan to
the registrant from a syndicate of lenders led by BT Alex.Brown (the "Bridge
Loan") in an original principal amount of $90 million. Among other things, the
amendments, in principle, require the registrant to make significant principal
prepayments in April, May and June 1999. As of March 26, 1999, the registrant
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 the registrant 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, $130.0 million in
the aggregate in May 1999 and $100.0 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. The registrant is relying on its cash reserves, cash flow from
operations, net proceeds from assets sales, financing assets and net proceeds
from offerings
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to make these principal payments, but there can be no assurance that these
sources will provide sufficient funds to enable the registrant to make these
payments.
DEFAULT UNDER THE FUR CREDIT FACILITY, THE IMPARK CREDIT FACILITY AND THE BRIDGE
LOAN
The registrant 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 and the debt instruments have
been amended, there can be no assurance that either the registrant 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 the
registrant or Impark is unable to satisfy its obligations under either of these
facilities or the Bridge Loan, the lenders 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 the registrant 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 registrant or the Management Company is currently a
party, and to which either may become a party in the future, contain and may
contain a number of significant covenants that, among other things, restrict in
varying degrees either of the registrant or the Management Company 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 registrant's and the Management Company's 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 registrant or the Management
Company 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 registrant or the Management Company, 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 registrant or the Management Company and may cause the
registrant or the Management Company to seek protection or relief under
applicable bankruptcy laws.
CONTEMPLATED ASSET SALES WILL SHRINK PORTFOLIO AND RETURNS TO SHAREHOLDERS;
REPLACEMENT ASSETS RESULTING FROM OTHER ASSET SALES MAY NOT PROVIDE GREATER
SHAREHOLDER VALUE
The registrant is in the process of selling various of its residential,
retail, office and parking properties. Because the registrant 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, the registrant 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, the registrant's
portfolio of properties will be similarly affected. There can be no assurance
that the registrant 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 the registrant will be able to acquire
replacement assets that will be as valuable as the assets they replace or
provide greater returns to the registrant and its shareholders.
INCOME AND ACTIVITIES OF MANAGEMENT COMPANY MAY BE ATTRIBUTED TO THE REGISTRANT
UNDER RECENT ANTI-STAPLING LEGISLATION AND MAY THREATEN REIT STATUS
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 registrant or the Management Company, or a
subsidiary or partnership in which a 10% or greater interest is owned by either
the registrant or the Management Company 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 Securities
and Exchange Commission on or before March 26, 1998.
Consequently, the income and activities of the Management Company with respect
to any property acquired by the registrant or the Management Company after March
26, 1998, for which there was no binding written agreement, public announcement
or filing with the Securities and Exchange Commission on or before March 26,
1998, will be attributed to the registrant for purposes of determining whether
the registrant qualifies as a REIT under the Code. These attribution rules may
make it more difficult for the registrant to qualify as a REIT and may subject
the registrant 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% 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 registrant or the Management
Company 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 registrant and the Management Company through, such properties would be
attributed to the registrant for purposes of determining whether the registrant
qualifies as a REIT under the Code. These attribution rules may make it more
difficult for the registrant to qualify as a REIT and may subject the registrant
to various additional taxes.
OTHER LEGISLATION COULD ADVERSELY AFFECT THE REGISTRANT'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 the registrant'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 the results of operations, financial condition and prospects of the
registrant and could restrict the registrant's ability to grow.
DEPENDENCE ON QUALIFICATION AS A REIT; TAX AND OTHER CONSEQUENCES IF REIT
QUALIFICATION LOST
There can be no assurance that the registrant 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 the registrant.
Qualification as a REIT also involves the determination of various factual
matters and circumstances not entirely within the registrant's control. In
addition, the registrant'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 the registrant 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 "--Income and
Activities of Management Company May Be Attributable to the Registrant 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,
the registrant was stapled with the Management Company. There are, however, no
judicial or administrative authorities interpreting this "grandfathering" rule.
Moreover, if for any reason the registrant failed to qualify as a REIT in 1983,
the benefit of the "grandfathering" rule would not be available to the
registrant, in which case the registrant would not qualify as a REIT for any
taxable year from and after 1983. The failure of the registrant to qualify as a
REIT would have a material adverse effect on the registrant's ability to make
dividends to its shareholders and to pay amounts due on its indebtedness.
If it is determined that the registrant did not qualify as a REIT
during any of the preceding five fiscal years, the registrant potentially could
incur corporate tax with respect to a year that is still open to adjustment by
the Internal Revenue Service ("IRS"). If the registrant 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
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income at corporate rates. In addition, unless entitled to relief under certain
statutory provisions and subject to the discussion above regarding the impact if
the registrant failed to qualify as a REIT in 1983, the registrant 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 the registrant for the year or years
involved. In addition, the registrant 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 the registrant's qualifying as a REIT,
the registrant might be required to borrow funds or to liquidate certain of its
investments on disadvantageous terms to pay the applicable tax.
The failure to qualify as a REIT would also constitute a default under
certain debt obligations of the registrant, 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 the registrant 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, the registrant 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 the registrant were to dispose
of assets acquired in certain acquisitions during the ten-year period following
the acquisitions, the registrant would be required to distribute at least 95% of
the amount of any "built-in gain" attributable to such assets that the
registrant recognizes in the disposition, less the amount of any tax paid with
respect to such recognized built-in gain. The registrant 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,
- 95% of its capital gain net income for that year, and
- 100% of its undistributed income from prior years.
The registrant 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 the registrant 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 the registrant are determined by the
registrant's board of trustees ("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. The registrant will
provide shareholders with annual statements as to the taxability of
distributions.
ABILITY TO OPERATE PROPERTIES DIRECTLY AFFECTS THE REGISTRANT'S FINANCIAL
CONDITION
The registrant's investments will be subject to the risks inherent in
owning real estate. The underlying value of the registrant'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 the registrant'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. The registrant's
ability to vary its portfolio in response to changes in economic and other
conditions will therefore be limited. If the registrant decides to sell an
investment, no assurance can be given that the registrant 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 the registrant's investment.
INCREASES IN PROPERTY TAXES COULD AFFECT ABILITY TO MAKE EXPECTED SHAREHOLDER
DISTRIBUTIONS
The registrant's real estate investments are all subject to real
property taxes. The real property taxes on properties in which the registrant
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 the registrant 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 the registrant. 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 the
registrant'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 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 the registrant's
properties, the registrant, the Management Company 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
registrant and the Management Company and their ability to pay amounts due on
their indebtedness and with respect to the registrant, to make distributions to
its shareholders.
Prior to undertaking major transactions, the registrant has hired
independent environmental experts to review specific properties. Thirty-six
properties have been reviewed and no significant environmental hazards have been
uncovered. The registrant has no reason to believe that any environmental
contamination or violation of any applicable law, statute, regulation or
ordinance governing hazardous or toxic substances has occurred or is occurring.
However, no assurance can be given that hazardous or toxic substances are not
located on any of the properties. The registrant will also endeavor to protect
itself from acquiring contaminated properties or properties with significant
compliance problems by obtaining site assessments and property reports at the
time of acquisition when it deems such investigations to be appropriate. There
is no guarantee, however, that these measures will successfully insulate the
registrant from all such liabilities.
COMPLIANCE WITH THE ADA MAY AFFECT EXPECTED DISTRIBUTIONS TO THE REGISTRANT'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 the registrant 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 the registrant 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
The registrant 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. The registrant 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 the registrant might
not be adequate to restore its economic position with respect to such property.
INABILITY TO REFINANCE
The registrant is subject to the normal risks associated with debt and
preferred stock financings, including the risk that the registrant'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 the registrant were unable to refinance the
indebtedness on acceptable terms, or at all, the registrant might be forced to
dispose of one or more of its properties on disadvantageous terms, which might
result in losses to the registrant, which losses could have a material adverse
effect on the registrant 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 the registrant 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
5
<PAGE> 6
the registrant. Foreclosures could also create taxable income without
accompanying cash proceeds, thereby hindering the registrant's ability to meet
the REIT distribution requirements of the Code.
RISING INTEREST RATES
The registrant has incurred and expects in the future to incur
indebtedness which bears interest at variable rates. Accordingly, increases in
interest rates would increase the registrant'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 the registrant and
its ability to make distributions to shareholders and to pay amounts due on its
indebtedness or cause the registrant to be in default under certain debt
instruments. In addition, an increase in market interest rates may cause holders
to sell their shares of beneficial interest of the registrant ("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 registrant and the Management Company 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 registrant and the
Management Company 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 the registrant 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 registrant and the Management Company 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 affect on the registrant's and the Management
Company's results of operations, liquidity and financial condition.
EXCHANGE RATE LOSSES
At December 31, 1998, the Management Company had approximately $157
million of revenues attributable to Impark's Canadian operations, representing
approximately 48% of the registrant's and the Management Company's total
revenues. The registrant does not hedge its foreign currency exposure and does
not currently intend to do so in the future.
The registrant 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, the registrant 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 the registrant's business, financial
condition or results of operations in the future.
RESULTS OF OPERATIONS ADVERSELY AFFECTED BY FACTORS BEYOND THE REGISTRANT'S
CONTROL
Results of operations of the registrant'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.
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
Any statements in this report, 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 the registrant
or the Management Company,
- the ownership, management and operation of properties,
- potential acquisitions or dispositions of properties, assets
or other businesses by the registrant or the Management
Company,
- the policies of the registrant or the Management Company
regarding investments, acquisitions, dispositions, financings
and other matters,
- the qualification of the registrant as a REIT under 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 registrant or the Management Company,
- the effect of acquisitions or dispositions on capitalization
and financial flexibility,
- the anticipated performance of the registrant or the
Management Company and of acquired properties and businesses,
including, without limitation, statements regarding
anticipated revenues, cash flows, funds from operations,
earnings before interest, depreciation and amortization,
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 registrant or the Management Company 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" below
or in any risk factors in documents that are incorporated by reference in this
report, identifies important factors that could cause such differences. Neither
the registrant nor Management Company undertakes any obligation to publicly
release the results of any revisions to these forward-looking statements that
may reflect any future events or circumstances.
The number of persons employed by the registrant is 43.
6
<PAGE> 7
ITEM 2. PROPERTIES
- ------- ----------
The following table sets forth certain information relating to the
registrant's investments at December 31, 1998:
<TABLE>
<CAPTION>
Square Year Total
Date of Ownership feet(1) Occupancy construction cost
Direct equity investments Location acquisition percentage (000) rate(2) completed (000)
- ------------------------- -------- ----------- ---------- ------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Shopping Malls:
Eastern
- -------
Mountaineer Morgantown, WV 1/29/78 100% 676(4) 87% 1975 $ 33,513
Fingerlakes Auburn, NY 9/28/81 100 405 60 1980 27,967
Fairgrounds Square Reading, PA 9/30/81 100 723(5) 91 1980 42,359
Crossroads St. Cloud, MN 1/01/72 100 738(9) 99 1966 35,201
Two Rivers Clarksville, TN 9/26/75 100 231(10) 45 1968 8,771
Crossroads Fort Dodge, IA 4/22/77 100 429(11) 92 1967 13,748
Kandi Willmar, MN 3/12/79 100 448 85 1973 21,009
Woodland Commons(12) Buffalo Grove, IL 4/03/95 100 170 100 1991 22,204
Westgate Towne Centre Abilene, TX 4/22/77 100 163(13) 98 1962 16,900
--------
221,672
--------
Western
- -------
Valley North Wenatchee, WA 8/30/73 100 267 87 1966 5,262
Mall 205 Portland, OR 3/01/75 100 432(14) 94 1970 14,371
Plaza 205 Portland, OR 4/26/78 100 167 100 1970 4,558
Valley Yakima, WA 5/01/80 100 390(15) 89 1972 11,737
--------
35,928
--------
Southwestern:
- -------------
Alexandria Alexandria, LA 09/01/97 100 898 95 1973 31,681
Brazos Lake Jackson, TX 09/01/97 100 707 92 1976 25,938
Killeen Killeen, TX 09/01/97 100 579 93 1981 42,625
Mesilla Valley Las Cruces, NM 09/01/97 100 593 90 1981 40,191
Park Plaza Little Rock, AR 09/01/97 100 547 100 1988 64,145
Pecanland Monroe, LA 09/01/97 100 923 99 1985 46,462
Shawnee Shawnee, OK 09/01/97 100 445 95 1989 19,717
Villa Linda Santa Fe, NM 09/01/97 100 569 92 1985 43,978
--------
314,737
--------
572,337
--------
Apartments:
Midwestern
- ----------
Somerset Lakes Indianapolis, IN 11/10/88 100 360 units 93 1975 21,135
Hunter's Creek Cincinnati, OH 12/11/96 100 146 units 98 1980 5,785
Steeplechase Cincinnati, OH 06/30/95 100 272 units 96 1987 12,246
-------
39,166
-------
Southern
- --------
Briarwood Fayetteville, NC 6/30/91 100 274 units 95 1968-70 8,425
Woodfield Gardens Charlotte, NC 6/30/91 100 132 units 90 1974 3,933
Windgate Place Charlotte, NC 6/30/91 100 196 units 94 1974-78 6,554
Walden Village Atlanta, GA 6/01/92 100 372 units 96 1973 14,376
Beech Lake Durham, NC 8/19/94 100 345 units 94 1986 20,217
-------
53,505
-------
92,671
-------
<CAPTION>
Mortgage Loans
----------------------------------------------------------
Balance Principal
Original at repayment
balance(s) 12/31/98 for 1999 Interest Year of
Direct Equity Investments (000) (000) (000) rate maturity
- ------------------------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Shopping Malls:
Eastern
- -------
Mountaineer $ 4,600(3) $ 3,734 $ 236 8.250% 2009
Fingerlakes --- --- --- --- ---
Fairgrounds Square --- ---(6) --- --- ---
Crossroads 49,500(3) 47,528 743 7.485 2002
Two Rivers --- --- --- --- ---
Crossroads --- ---(6) --- --- ---
Kandi --- ---(6) --- --- ---
Woodland Commons(12) 12,000(3) 11,491 256 7.750 2006
Westgate Towne Centre --- --- --- --- ---
------- ------- ------
66,100 62,753 1,235
------- ------- ------
Western
- -------
Valley North --- --- --- --- ---
Mall 205 --- ---(6) --- --- ---
Plaza 205 --- ---(6) --- --- ---
Valley --- ---(6) --- --- ---
------ ------ -----
--- --- ---
------ ------ -----
Southwestern:
- -------------
Alexandria 21,463 21,223(7) 199 8.430 2006
Brazos 15,749 15,573(7) 146 8.430 2006
Killeen 28,319 28,002(7) 262 8.430 2006
Mesilla Valley 24,643 24,367(7) 228 8.430 2006
Park Plaza 37,511 37,091(7) 347 8.430 2006
Pecanland 39,344 38,711(8) 543 12.250 2017
Shawnee 11,576 11,447(7) 107 8.430 2006
Villa Linda 24,692 24,416(7) 228 8.430 2006
-------- ------- ------
203,297 200,830 2,060
-------- ------- ------
269,397 263,583 3,295
-------- ------- ------
Apartments:
Midwestern
- ----------
Somerset Lakes 15,000(3) 14,410 254 7.650 2006
Hunter's Creek 2,738 2,706 24 8.470 2002
Steeplechase 9,000(3) 8,632 158 7.395 2006
------- ------- ------
26,738 25,748 436
------ ------ ------
Southern
- --------
Briarwood --- ---(6) --- --- ---
Woodfield Gardens --- ---(6) --- --- ---
Windgate Place --- ---(6) --- --- ---
Walden Village --- ---(6) --- --- ---
Beech Lake 12,500(3) 11,984 202 6.869 2005
------ ------ -----
12,500 11,984 202
------ ------ -----
39,238 37,732 638
------ ------ -----
</TABLE>
<PAGE> 8
<TABLE>
<CAPTION>
ITEM 2. PROPERTIES
- ------- ----------
-CONTINUED
Square Year Total
Date of Ownership feet(1) Occupancy construction cost
Direct equity investments Location acquisition percentage (000) rate(2) completed (000)
- ------------------------- -------- ----------- ---------- ------- --------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C>
Office Buildings:
Midwestern
- ----------
55 Public Square Cleveland, OH 01/15/63 100% 396 82% 1959 $ 38,945
Circle Tower Indianapolis, IN 10/16/74 100 102 87 1930 4,919
--------
43,864
--------
Southern
- --------
Henry C. Beck(16) Shreveport, LA 08/30/74 100 185 84 1958 10,196
--------
10,196
--------
Western Redevelopment
- ---------------------
North Valley Tech Center Denver, CO 12/03/69 100 484 57(17) 1967 28,392
Sutter Buttes Center Marysville, CA 12/19/79 100 427 54(18) 1972 13,868
--------
42,260
--------
96,320
--------
Parking Facilities:
United States
- -------------
Huntington Garage Cleveland, OH 12/31/75 100 1,100 spcs --- 1969 8,127
West Third St. lot Cleveland, OH 09/19/77 100 300 spcs --- --- 2,443
5th and Marshall Garage Richmond, VA 02/24/98 100 793 spcs --- 1985 9,192
Long Street Garage Columbus, OH 01/16/98 100 550 spcs --- 1978 3,928
Madison & Wells Garage Chicago, IL 01/28/98 100 1,107 spcs --- 1998 43,184
Magic Mile Lot Arlington, TX 03/26/98 100 1,000 spcs --- 1997 3,011
Printer's Alley Garage Nashville, TN 07/01/98 100 275 spcs --- 1926 6,650
--------
76,535
--------
Canada:
- -------
10th Ave. Lot Calgary, Alberta 05/05/97 100 55 spcs --- --- 228
1009-9th Ave. Lot Calgary, Alberta 05/05/97 100 142 spcs --- --- 587
Parkade Edmonton, Alberta 05/05/97 100 562 spcs --- 1958 1,241
103 St. Lot Edmonton, Alberta 05/05/97 100 61 spcs --- --- 310
107th St. Edmonton, Alberta 05/05/97 100 -- (18) 100 1973 196
221 9th Ave. Lot Calgary, Alberta 05/05/97 100 148 (19) --- --- 1,370
Blanchard St. Victoria, Br.Columbia 05/05/97 100 -- (19) 100 1982 312
Graham Ave. Lot Winnipeg, Manitoba 05/05/97 100 175 spcs --- --- 1,124
Water Ave. Lot Winnipeg, Manitoba 05/05/97 100 235 spcs --- --- 595
Young St. Lot Winnipeg, Manitoba 05/05/97 100 40 spcs --- --- 98
Broadway Lot Winnipeg, Manitoba 05/05/97 100 67 spcs --- --- 415
Donald St. Lot Winnipeg, Manitoba 05/05/97 100 -- (20) --- --- 113
Broad St. Lot Regina, Saskatchewan 05/05/97 100 20 spcs --- --- 35
Queens Quay Toronto, Ontario 05/05/97 100 -- (19) 100 1950 1,206
351 Smith St. Winnipeg, Manitoba 09/09/97 100 110 spcs --- --- 800
--------
8,630
--------
85,165
--------
$846,493
Write-down for unrealized loss on carrying value of real estate (21) (39,634)
Total equity investments --------
$806,859
========
<CAPTION>
Mortgage Loans
---------------------------------------------------------
Balance Principal
Original at repayment
balance(s) 12/31/98 for 1999 Interest Year of
Direct equity investments (000) (000) (000) rate maturity
- ------------------------- --------- --------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Office Buildings:
Midwestern
- ----------
55 Public Square $ --- $ ---(6) $ --- --- ---
Circle Tower --- --- --- --- ---
-------- ------ ------
--- --- ---
-------- ------ ------
Southern
- --------
Henry C. Beck --- --- --- --- ---
-------- ----- ------
--- --- ---
-------- ----- ------
Western Redevelopment
- ---------------------
North Valley Tech Center --- --- --- --- ---
Sutter Buttes Center --- --- --- --- ---
-------- ----- -----
--- --- ---
-------- ----- -----
--- --- ---
-------- ----- -----
Parking Facilities:
United States
- -------------
Huntington Garage 9,300(3) 8,201 282 8.550% 2014
West Third St. Garage --- --- --- --- ---
5th and Marshall Garage --- ---(6) --- --- ---
Long Street Garage 1,602(3) 1,526(21) 93(21) (21) ---(21)
Madison & Wells Garage 30,000(3) 30,000 --- LIBOR+1.75% 2001
Magic Mile Lot --- --- --- --- ---
Printer's Alley Garage 4,468(3) 4,000 --- LIBOR+1.75% 2001
------- ------ -------
45,370 43,727 375
------- ------ -------
Canada:
- -------
10th Ave. Lot --- --- --- --- ---
1009-9th Ave. Lot --- --- --- --- ---
Parkade --- --- --- --- ---
103 St. Lot --- --- --- --- ---
107th St. --- --- --- --- ---
221 9th Ave. Lot --- --- --- --- ---
Blanchard St. --- --- --- --- ---
Graham Ave. Lot --- --- --- --- ---
Water Ave. Lot --- --- --- --- ---
Young St. Lot --- --- --- --- ---
Broadway Lot --- --- --- --- ---
Donald St. Lot --- --- --- --- ---
Broad St. Lot --- --- --- --- ---
Queens Quay --- --- --- --- ---
351 Smith St. --- --- --- --- ---
-------- ------- -------
--- --- ---
-------- ------- -------
45,370 43,727 375
-------- ------- -------
--- --- ---
--------- -------- -------
$ 354,005 $345,042 $ 4,308
========= ======== =======
</TABLE>
<PAGE> 9
(1) The square footage shown represents gross leasable area for shopping
malls and net rentable area for office buildings. The apartments are
shown as number of units. The parking garages and parking facilities
are shown as number of parking spaces.
(2) Occupancy rates shown are as of December 31, 1998, and are based on the
total square feet at each property, except apartments which are based
on the number of units and occupied at the end of the year.
(3) The registrant obtained mortgages on the following properties
subsequent to acquisition: Huntington Parking Garage in the amount of
$9,300,000 in 1993; Mountaineer Mall in the amount of $4,600,000 in
1994; Crossroads Shopping Center (St. Cloud, MN) in the amount of
$49,500,000 in 1995; Woodland Commons in the amount of $12,000,000 in
1996; Somerset Lakes in the amount of $15,000,000 in 1996; Steeplechase
in the amount of $9,000,000 in 1996; Beech Lake in the amount of
$12,500,000 in 1996; Hunter's Creek in the amount of $2.7 million;
Madison & Wells Garage in the amount of $30,000,000 in 1998. The
registrant assumed $4,468,000 and $1,602,000 in mortgage debt upon the
acquisition of the Printer's Alley Garage and the Long Street Garage,
respectively.
(4) The total mall contains 676,000 square feet; the registrant owns
618,000 square feet, the balance being ground leased to Giant Eagle
Markets, Inc.
(5) The total mall contains 723,000 square feet; the registrant owns
537,000 square feet, the balance being separately ground leased to
Boscov's Department Store, Inc.
(6) These properties are the collateral for the registrant's $110 million
revolving line of credit.
(7) The mortgage secured by these malls requires that all rents and other
tenant charges be deposited into a bank account which serves as
additional security for the lender.
(8) The mortgage loan participates in 55% of revenues, as defined, in
excess of $5,970,516.
(9) The total mall contains 738,000 square feet; the registrant owns
626,000 square feet, the balance being separately owned by Target
Stores.
(10) The mall is currently being converted to an office complex in 1998.
Approximately 58,000 square feet of office space has been leased to an
office tenant opening in the second quarter of 1999.
(11) The total mall contains 429,000 square feet; the registrant owns
332,000 square feet, the balance being separately owned by an unrelated
third party with Sears, Roebuck and Co. as tenant.
(12) This property was sold in February 1999 for $21.6 million resulting net
proceeds of $9.3 million after repayment of debt.
(13) The mall is currently being redeveloped as a power strip center with
Winn-Dixie occupying 65,000 square feet in July 1998. Currently, 95,000
square feet is separately owned by Montgomery Ward & Co., Incorporated.
(14) The total mall contains 432,000 square feet; the registrant owns
255,000 square feet, the balance being separately owned by Montgomery
Ward Development
9
<PAGE> 10
Corporation.
(15) The total mall contains 390,000 square feet; the registrant owns
272,000 square feet, the balance being separately ground leased to
Sears, Roebuck and Co.
(16) The registrant sold this building in March 1999 for $2.1 million
resulting in net proceeds of $1.8 million.
(17) North Valley Technical Center was repositioned from a shopping mall to
an office complex during 1995. Montgomery Ward vacated the complex in
1997 allowing the registrant to continue to retenant the former mall as
an office center.
(18) The property was inundated by a flood which occurred in February 1986.
The mall was subsequently rebuilt and re-opened in November 1986. A
temporary tenant occupied approximately 70,000 square feet as of
December 31, 1998. The Trust is pursuing a mixed use strategy for this
former retail facility.
(19) These properties are general use buildings currently being used as
regional and city offices by Impark Limited.
(20) This property is currently demolished and awaiting redevelopment.
(21) This property has two mortgages. Interest rates are 8.25% and 8.625%.
The mortgages mature in 2003 and 2009, respectively. The 8.25%
mortgage, in the principal amount of $863,000 has a principal payment
for 1999 of $50,000. The 8.625% mortgage, in the principal amount of
$663,000, has a principal payment for 1999 of $43,000.
(22) In December 1995, the registrant recorded a $14 million unrealized loss
on the carrying value of assets identified for disposition. Subsequent
to the disposition of three office buildings and one shopping mall,
this reserve was $3,630,000 as of December 31, 1997 after restatement
due to the retroactive restatement of depreciation expense. In
December 1998, the registrant recorded a $36 million unrealized loss
on the carrying value of assets identified for disposition.
As of December 31, 1998, the registrant owned in fee its interests in
Crossroads Center (St. Cloud, MN), Woodland Commons, Mall 205, Crossroads Mall
(Ft. Dodge, IA), Westgate Towne Centre, Mountaineer Mall, Plaza 205, Valley
Mall, Fingerlakes Mall, Fairgrounds Square Mall, 55 Public Square Building,
Henry C. Beck Building, Sutter Buttes Center, Brazos Mall, Killeen Mall, Mesilla
Valley Mall, Park Plaza Mall, Pecanland Mall, Shawnee Mall, Villa Linda Mall,
Somerset Lakes Apartments, Briarwood Apartments, Woodfield Gardens Apartments,
Windgate Place Apartments, Walden Village Apartments, Beech Lake Apartments,
Steeplechase Apartments, Hunter's Creek Apartments, Parkade, West Third Lot,
10th Avenue, 1009 9th Avenue, 103 St., 107 St., 221 9th Avenue, Graham Ave.,
Water Ave., Young St., Broad St., Broadway, 357 Smith St., Blanchard St., Queens
Quay, Donald St., St. Clair Development Property, Madison & Wells Garage, Long
Street Garage, 5th & Marshall Garage, Magic Mile Lot, Printer's Alley Garage.
The registrant holds a leasehold estate or estates, or a fee interest and one or
more leasehold estates in Valley North Mall, Two Rivers Mall, Kandi Mall,
Alexandria Mall, Circle Tower Building and North Valley Technical Center and the
Huntington Garage.
10
<PAGE> 11
RENTALS FROM NET LEASES
The registrant leases 47 of its properties to its Management Company.
The Management Company operates these properties and pays the registrant a fixed
based rent and participation rent based on property revenues (Percentage Rents)
The following table sets forth the rentals paid to the registrant from
the Management Company for the year ended December 31, 1998, under net leases of
the properties indicated:
<TABLE>
<CAPTION>
ANNUAL
PROPERTY BASE RENT PERCENTAGE RENTS
- -------- --------- ----------------
<S> <C> <C>
SHOPPING MALLS:
EASTERN
- -------
Mountaineer (1) $ 755,000 $ 712,000
Fingerlakes (1)(3) 780,000 174,000
Fairgrounds Square (1) 2,850,000 921,000
Crossroads
(St. Cloud, MN.) (1)(4) 3,307,500 3,397,000
Two Rivers (1) --- 32,000
Crossroads
(Ft. Dodge, IA) (1) 736,000 809,000
Westgate Towne Centre (1) --- 35,000
Kandi (1) 712,000 545,000
Woodland Commons (1) 1,600,000 416,000
WESTERN
- -------
Valley North (1) 400,000 142,000
Mall 205 (1) 1,232,000 534,000
Plaza 205 (1) 276,000 272,000
Valley (1) 463,000 472,000
SOUTHWESTERN
- ------------
Alexandria (2)
Brazos (2)
Killeen (2)
Mesilla Valley (2)
Park Plaza (2)
Pecanland (2)
Shawnee (2)
Villa Linda (2)
APARTMENTS:
MIDWESTERN
- ----------
Somerset Lakes (1) 971,000 1,207,000
Steeplechase (1) 800,000 595,000
Hunter's Creek (1) 500,000 36,000
SOUTHERN
- --------
Briarwood (1) 435,000 232,000
Woodfield Gardens (1) 100,000 54,000
</TABLE>
11
<PAGE> 12
<TABLE>
<CAPTION>
<S> <C> <C>
Windgate Place (1) 235,000 103,000
Walden Village (1) 850,000 568,000
Beech Lake (1) 955,000 722,000
OFFICE BUILDINGS:
MIDWESTERN
- ----------
55 Public Square (1),(5) $1,650,000 1,260,000
Circle Tower (1) 209,000 134,000
SOUTHERN
- --------
Henry C. Beck (1) 179,000 166,000
WESTERN
- -------
North Valley Technical Center (1) 500,000 57,000
Sutter Buttes Center (1) 292,000 271,000
PARKING:
UNITED STATES
- -------------
Huntington Garage (1) 825,000 154,000
West Third Lot (1) 150,000 74,000
201 West Madison Garage (1) 2,400,000 1,458,000
60 East Long Street Garage (1) 400,000 ---
5th & Marshall Garage (1) 500,000 57,000
Magic Mile Lot (1) --- 92,000
Printer's Alley Garage (1) 450,000 ---
CANADIAN
- --------
10th Avenue (1) 15,600 ---
1009 9th Avenue (1) 39,000 ---
Parkade (1) 130,000 ---
103 St.(1) 27,000 ---
221 9th Ave. (1) 95,000 ---
245 Graham Ave. (1) 60,000 ---
168 Water Ave. (1) 65,000 ---
336 Young St. (1) 7,000 ---
304 Broadway (1) 8,000 ---
1724 Broad St. (1) 4,000 ---
351 Smith St. (1) 3,000 ---
(1) Leased to the Management Company.
(2) The Management Company manages these shopping malls for the registrant
and receives a management fee of 4% of gross receipts as a management
fee, as defined, and a leasing fee of 4.5% of base rent, as defined,
over the term of the lease, for new and renewal tenants, respectively.
(3) Includes a separate lease for Fingerlakes Storage.
(4) Includes a separate lease for the Stearns County Building.
(5) Includes a separate lease for the Illuminating Parking Garage.
12
</TABLE>
<PAGE> 13
ITEM 3. LEGAL PROCEEDINGS.
REGISTRANT VS. THE STATE OF CALIFORNIA
The registrant has pursued legal action against the State of California
associated with the 1986 flood of Sutter Buttes Center, formerly Peach Tree
Mall. In September 1991, the court ruled in favor of the registrant on the
liability portion of this inverse condemnation suit, which the State of
California appealed. The registrant is proceeding with its damage claim in
Superior Court of the State of California. No recognition of potential income
has been made in the December 31, 1998 Combined Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
"Market Price and Dividend Record" presented on page 1 of Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA.
"Selected Financial Data" presented on page 2 and 3 of Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" presented on pages 25 through 31 of Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES REGARDING MARKET RISK.
Quantitative and Qualitative disclosures regarding market risk
presented on page 31 of Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS.
The "Combined Balance Sheets" as of December 31, 1998 and 1997, and the
"Combined Statements of Operations, Combined Statements of Comprehensive Income,
Combined Statements of Changes in Cash, Combined Statements of Shareholders'
Equity" for the years ended December 31, 1998, 1997 and 1996, of the registrant,
"Notes to Combined Financial Statements" and "Report of Independent Public
Accountants" are presented on pages 4 through 24 of Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
13
<PAGE> 14
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(A) DIRECTORS.
"Election of Trustees" presented in the registrant's 1999 Proxy
Statement is incorporated herein by reference.
(B) EXECUTIVE OFFICERS.
Executive offices as presented in the registrant's 1999 Proxy Statement
is incorporated by reference.
ITEM 11. EXECUTIVE COMPENSATION.
"Compensation of Trustees" and "Executive Compensation", presented in
the registrant's 1999 Proxy Statement are incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
"Security Ownership of Trustees, Officers and Others" presented in the
registrant's 1999 Proxy Statement is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
"Certain Transactions and Relationships" presented in the registrant's
1999 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES.
(1) FINANCIAL STATEMENTS:
Combined Balance Sheets - December 31, 1998 and 1997 on page 4
of Exhibit 13.
Combined Statements of Operations - For the Years Ended
December 31, 1998, 1997 and 1996 on page 5 of Exhibit 13.
Combined Statements of Comprehensive Income - For the Years
Ended December 31, 1998, 1997 and 1996 on page 5 of
Exhibit 13.
Combined Statements of Changes in Cash - For the Years Ended
December 31, 1998, 1997 and 1996 on page 6 of Exhibit 13.
Combined Statements of Shareholders' Equity - For the Years
Ended December 31, 1998, 1997 and 1996 on page 7 of
Exhibit 13.
Notes to Combined Financial Statements on pages 8 to 23 of
Exhibit 13.
Report of Independent Public Accountants on page 24 of
Exhibit 13.
(2) FINANCIAL STATEMENT SCHEDULES:
Report of Independent Public Accountants on Financial
Statement Schedules.
Schedule III - Real Estate and Accumulated Depreciation.
Schedule IV - Mortgage Loans on Real Estate.
All Schedules, other than III and IV, are omitted, as the
information is not required or is otherwise furnished.
14
<PAGE> 15
(B) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO PAGE
- ------ ----------- ------------ ----
<S> <C> <C> <C>
(3)(a) Declaration of Trust of Registrant dated August 1, 1961, Registration Statement on Form S-3 No.
as amended through July 25, 1986 33-4493
----
(3)(b) By-laws of Registrant, as amended Registration Statement on Form S-3 No.
33-4493 ----
(3)(c) By-laws of Registrant, as amended March 31, 1997
Form 10-Q ----
(3)(d) By-laws of Registrant as amended 1998 10-K
X
----
(4)(a) Form of certificate for Shares of Beneficial Interest Registration Statement on Form S-3 No.
33-2818 ----
(4)(b) Form of Indenture governing Debt Securities, dated Registration Statement on Form S-3 No.
February 1, 1983 between Registrant and Ameritrust 2-81605
Company ----
(4)(c) Form of Debt Security Registration Statement on Form S-3 No.
33-4493 ----
(4)(d) Form of Indenture governing Debt Securities, dated Registration Statement on Form S-3 No.
October 1, 1993 between Registrant and Society National 33-68002
Bank ----
(4)(e) Form of Note Registration Statement on Form S-3 No.
33-68002 ----
(4)(f) Form of Indenture governing Debt Securities Registration Statement on Form S-3 No.
333-00953
----
(4)(g) Rights Agreement between Registrant and National City Form 8-A dated March 30, 1990 No. 0-18411
Bank dated March 7, 1990 ----
(4)(h) Certificate of Designations relating to Registrant's Form 8-K dated October 24, 1996
Series A Cumulative Redeemable Preferred Shares of ----
Beneficial Interest
(4)(i) Standby Purchase Agreement between Registrant and Gotham Schedule 13D dated August 11, 1998
Partners, L.P. dated August 11, 1998 ----
(4)(j) Standby Purchase Agreement between Registrant and Gotham Schedule 13D dated August 11, 1998
Partners III, L.P. dated August 11, 1998 ----
X
(4)(l) Warrant to purchase 500,000 shares of beneficial interest ----
of Registrant
</TABLE>
15
<PAGE> 16
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO PAGE
- ------ ----------- ------------ ----
<S> <C> <C> <C>
(4)(k) Standby Purchase Agreement between Registrant and Schedule 13D dated August 11, 1998
Elliott Associates, L.P. dated August 11, 1998 ----
(10)(a) Share Purchase Agreement dated as of December 31, 1983 Registration Statement No. 2-88719
between registrant and First Union Management, Inc. ----
(10)(b) First Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-2818
December 10, 1985 between registrant and First Union ----
Management, Inc.
(10)(c) Second Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-11524
December 9, 1986 between registrant and First Union ----
Management, Inc.
(10)(d) Third Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-19812
December 2, 1987 between registrant and First Union ----
Management, Inc.
(10)(e) Fourth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-26758
December 7, 1988 between registrant and First Union ----
Management, Inc.
(10)(f) Fifth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-33279
November 29, 1989 between registrant and First Union
Management, Inc. ----
(10)(g) Sixth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-38754
November 28, 1990 between registrant and First Union
Management, Inc. ----
(10)(h) Seventh Amendment to Share Purchase Agreement dated as Registration Statement No. 33-45355
of November 27, 1991 between registrant and First Union
Management, Inc. ----
(10)(i) Eighth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-57756
November 30, 1992 between registrant and First Union
Management, Inc. ----
(10)(j) Employment and Consulting Agreement with Donald S. 1991 Form 10-K
Schofield dated September 1, 1991 ----
</TABLE>
16
<PAGE> 17
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO PAGE
- ------ ----------- ------------ ----
<S> <C> <C> <C>
(10)(k) Employment Agreement with James C. Mastandrea dated June 30, 1994 Form 10-Q
July 13, 1994 ----
(10)(l) Employment Agreement with Gregory D. Bruhn dated June 30, 1994 Form 10-Q
July 13, 1994 ----
(10)(m) Credit Agreement with National City Bank dated 1994 Form 10-K
December 5, 1994 ----
(10)(n) Credit Agreement with Society National Bank dated 1995 Form 10-K
March 4, 1996 ----
(10)(o) 1981 Employee Share Option Plan 1992 Proxy Statement ----
(10)(p) 1994 Long Term Incentive Performance Plan 1994 Proxy Statement ----
(10)(q) Bank Credit Agreement dated September 30, 1996 September 30, 1996 Form 10-Q ----
(10)(r) Credit agreement between Imperial Parking Limited and BT March 31, 1997
Bank of Canada Form 10-Q ----
(10)(s) Put agreement entered into between BT Bank of Canada, March 31, 1997
Hong Kong Bank of Canada and First Union Real Estate Form 10-Q
Equity and Mortgage Investment ----
(10)(t) Share Purchase Agreement and amendments Impark March 31, 1997
Investments Inc. and First Union Real Estate Equity and Form 10-Q
Mortgage Investments ----
(10)(u) Put agreement entered into between Impark E Investments March 31, 1997
Inc., the Onex Associates and First Union Real Estate Form 10-Q
Equity and Mortgage Investments ----
(10)(v) Senior subordinated note by 3357392 Canada Inc. to March 31, 1997
3006302 Nova Scotia Company Form 10-Q ----
(10)(w) Senior subordinated note by 504463 N.B. Inc. to 3006302 March 31, 1997
Nova Scotia Company Form 10-Q ----
(10)(x) Shareholders Agreement dated April 17, 1997 between March 31, 1997
3357392 Canada, Inc. and 3355489 Canada, Inc. and the Form 10-Q
individuals and trusts listed on Schedule A. ----
</TABLE>
17
<PAGE> 18
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO PAGE
- ------ ----------- ------------ ----
<S> <C> <C> <C>
(10)(y) Shareholders Agreement dated April 17, 1997 between March 31, 1997
504308 N.B., Inc. First Union Management, Inc. and the Form 10-Q
individuals listed on Schedule A. ----
(10)(z) Assignment dated March 27, 1997 between First Union Real March 31, 1997
Estate Equity and Mortgage Investments and First Union Form 10-Q
Management, Inc. ----
(10)(aa) Assignment dated April 16, 1997 between First Union March 31, 1997
Management, Inc. and 335489 Canada, Inc. Form 10-Q ----
(10)(ab) Assignment dated April 16, 1997 between 335489 Canada, March 31, 1997
Inc. and 3357392 Canada, Inc. Form 10-Q ----
(10)(ac) Amendment to assignment made May 8, 1997 between First March 31, 1997
Union Real Estate Equity and Mortgage Investments and Form 10-Q
Imperial Parking Limited. ----
(10)(ad) Bank credit agreement dated December 5, 1997 1997 Form 10-K ----
(10)(ae) First amendment to employment agreement of James C. 1997 Form 10-K
Mastandrea ----
(10)(af) Form of charge in control agreement 1997 Form 10-K/A
(10)(ag) Fixed Rate Loan Agreement dated as of August 11, 1998 by Registration Statement on Form S-3 No.
and among the Registrant, as borrower, Bankers Trust 333-63547 ----
Company, as agent, and Wellsford Capital and BankBoston,
N.A., as lenders
(10)(ah) Fixed Rate Loan Agreement dated as of August 11, 1998 by Registration Statement on Form S-3 No.
and among the Registrant, as borrower, Bankers Trust 333-63547 ----
Company, as agent, and Gotham Partners, L.P., Gotham
Partners III, L.P., Elliott Associates, L.P. and
Blackacre Bridge Capital, L.L.C., as lenders
(10)(ai) Employment contract for Daniel P. Friedman
X
----
X
(10)(aj) Employment contract for Anne N. Zahner ----
X
(10)(ak) Employment contract for David Schonberger ----
</TABLE>
18
<PAGE> 19
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO PAGE
- ------ ----------- ------------ ----
<S> <C> <C> <C>
(10)(al) Amendment No. 2, dated as January 8, 1999, to Amended Form 8-K dated February 2, 1999.
and Restated Credit Agreement, dated as of November 1, ----
1997, among First Union Real Estate Equity and Mortgage
Investments, and First Union Management, Inc., as
borrower, and National City Bank, Bankers Trust Company,
Key Bank National Associates, The Huntington National
Bank, Mellon Bank, N.A. and First Merit Bank, as Lenders.
First Amendment to Fixed Rate Loan Agreement between First Union
Real Estate Equity and Mortgage Investments, as Borrower; and
Blackacre Bridge Capital, L.L.C., Gotham Partners, L.P., Gotham
Partners III, L.P. and Elliott Associates, L.P., as Lenders,
dated January 8, 1999.
Letter Agreement between First Union Real Estate Equity
and Mortgage Investments, as Borrower; and Blackacre
Bridge Capital, L.L.C. Gotham Partners, L.P., Gotham
Partners III, L.P. and Elliott Associates, L.P., as
Lenders, dated January 8, 1999
First Amendment to Fixed Rate Loan Agreement between First Union
Real Estate Equity and Mortgage Investments, as Borrower; and
BankBoston, N.A., Wellsford Capital and Bankers Trust Company,
as Lenders, dated January 8, 1999.
Letter Agreement between First Union Real Estate Equity
and Mortgage Investments, as Borrower; and BankBoston,
N.A., Wellsford Capital and Bankers Trust Company, as
Lenders, dated January 8, 1999.
</TABLE>
19
<PAGE> 20
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO PAGE
- ------ ----------- ------------ ----
<S> <C> <C> <C>
Second Amendment, dated as of December 30, 1998, to the Amended
and Restated Credit Agreement Dated as of April 17, 1997 between
Imperial Parking Limited, as Borrower, Impark Services Limited,
as Guarantor, and HongKong Bank of Canada and BT Bank of Canada,
as Lenders.
(12) Statements of Ratios of Combined Income from Operations
and Combined Net Income to Fixed Charges X
----
(13) 1998 Annual Report X
----
(23) Consent of Independent Public Accountants X
----
(24) Powers of Attorney X
----
(27) Financial Data Schedule X
----
(C) REPORTS ON FORM 8-K.
--------------------
None.
</TABLE>
20
<PAGE> 21
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS
BY: /s/ DANIEL P. FRIEDMAN
--------------------------
Daniel P. Friedman, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
Principal Executive Officer President, and Chief March 29, 1999
Executive Officer
/s/ DANIEL P. FRIEDMAN
- ----------------------
Daniel P. Friedman
Principal Financial Officer Executive Vice President- March 29, 1999
Chief Financial Officer
/s/ STEVEN M. EDELMAN
- ---------------------
Steven M. Edelman
Principal Accounting Controller March 29, 1999
Officer
/s/ GREGORY C. SCOTT
- --------------------
Gregory C. Scott
Trustees: ) Date
William A. Ackman* ) March 29, 1999
Daniel J. Altobello* )
David P. Berkowitz* )
William E. Conway* )
Allen H. Ford* )
Daniel P. Friedman* )
Stephen J. Garchik* )
Russell R. Gifford* )
David S. Klafter* )
William Scully* )
Daniel Shuchman* )
Stephen S. Snider* )
Mary Ann Tighe* )
James A. Williams* )
SIGNATURE )
--------- )
)
*By: /s/ Paul F. Levin )
)
Paul F. Levin, Attorney-in-fact )
</TABLE>
21
<PAGE> 22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON
-------------------------------------------
FINANCIAL STATEMENT SCHEDULES
-----------------------------
To First Union Real Estate Equity
and Mortgage Investments:
We have audited in accordance with generally accepted auditing
standards, the combined financial statements included in the registrant's
1998 Annual Report, included as Exhibit 13 of this Form 10-K, and have
issued our report thereon dated March 29, 1999. Our audit was made for the
purpose of forming an opinion on those combined statements taken as a whole.
The schedules listed under Item 14(a)(2) on page 14 are the responsibility
of management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
combined financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic combined financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
combined financial statements taken as a whole.
Cleveland, Ohio, Arthur Andersen LLP
March 29, 1999.
22
<PAGE> 23
SCHEDULE III
<TABLE>
<CAPTION>
REAL ESTATE AND ACCUMULATED DEPRECIATION
----------------------------------------
AS OF DECEMBER 31, 1998
-----------------------
(IN THOUSANDS)
Cost
capitalized
Initial cost to subsequent to
Registrant acquisition
--------------------- ---------------
Buildings Land Currency
Encum- and and revaluation of
Description brances Land Improvements Improvements foreign assets
- ----------------------------------- ------- ---- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C>
Shopping Malls:
Eastern
-------
Mountaineer, Morgantown, WV $ 3,734 $ 1,450 $ 12,693 $ 19,370 --
Fingerlakes, Auburn, NY -- 1,300 23,698 2,969 --
Fairgrounds Square, Reading, PA -- 2,400 22,635 17,324 --
Crossroads, St. Cloud, MN 47,528 1,680 8,303 25,218 --
Two Rivers, Clarksville, TN -- -- 3,206 5,565 --
Crossroads, Ft. Dodge, IA -- 1,151 2,792 9,805 --
Kandi, Willmar, MN -- --- 5,035 15,974 --
Woodland Commons, Buffalo Grove, IL 11,491 6,744 15,093 367 --
Westgate Towne Centre, Abilene, TX -- 1,425 3,050 12,425 --
------- ------- ------- ------- -------
62,753 16,150 96,505 109,017 --
------- ------- ------- ------- -------
Western
-------
Valley North, Wenatchee, WA -- 405 2,916 1,941 --
Mall 205, Portland, OR -- 1,228 6,140 7,003 --
Plaza 205, Portland, OR -- -- 1,677 2,881 --
Valley, Yakima, WA -- -- 8,731 3,006 --
-------- -------- -------- -------- -------
-- 1,633 19,464 14,831 --
-------- -------- -------- -------- -------
Southwestern
------------
Alexandria, Alexandra, LA 21,223 8,097 23,112 472 --
Brazos, Lake Jackson, TX 15,573 4,877 19,506 1,555 --
Killeen, Killeen, TX 28,002 6,453 34,865 1,307 --
Mesilla Valley, Las Cruces, NM 24,367 9,126 30,630 435 --
Park Plaza, Little Rock, AR 37,091 5,816 58,037 292 --
Pecanland, Monroe, LA 38,711 8,874 36,891 697 --
Shawnee, Shawnee, OK 11,447 3,864 15,306 547 --
Villa Linda, Santa Fe, NM 24,416 5,652 37,799 527 --
-------- -------- -------- --------- -------
200,830 52,759 256,146 5,832 --
-------- ------- -------- --------- -------
263,583 70,542 372,115 129,680 --
======== ======== ======== ========= =======
Apartments:
Midwestern
----------
Somerset Lakes, Indianapolis, IN 14,410 2,172 16,400 2,563 --
Hunter's Creek, Cincinnati, OH 2,706 1,098 4,395 292 --
Steeplechase, Cincinnati, OH 8,632 1,782 10,114 350 --
-------- ----- ------ ----- -------
25,748 5,052 30,909 3,205 --
-------- ----- ------ ----- -------
Southern
--------
Briarwood, Fayetteville, NC -- 495 6,614 1,316 --
Woodfield Gardens, Charlotte, NC -- 171 3,087 675 --
Windgate Place, Charlotte, NC -- 353 4,818 1,383 --
Walden Village, Atlanta, GA -- 2,768 9,288 2,320 --
Beech Lake, Durham, NC 11,984 3,760 15,707 750 --
-------- ------ ------ ----- -------
11,984 7,547 39,514 6,444 --
-------- ------ ------ ----- -------
37,732 12,599 70,423 9,649 --
======== ====== ====== ===== =======
<CAPTION>
Accumu- Year
------------------------- lated construc-
Building and depreci- tion Date
Description Land Improvements Total ation completed Acquired Life
- ----------------------------------- ---- ------------ ----- ------- --------- -------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Shopping Malls:
Eastern
-------
Mountaineer, Morgantown, WV $ 1,615 $ 31,898 $ 33,513 $13,270 1975 01-29-78 40
Fingerlakes, Auburn, NY 1,331 26,636 27,967 11,063 1980 09-28-81 40
Fairgrounds Square, Reading, PA 2,369 39,990 42,359 12,908 1980 09-30-81 40
Crossroads, St. Cloud, MN 5,484 29,717 35,201 12,750 1966 01-01-72 40
Two Rivers, Clarksville, TN -- 8,771 8,771 4,195 1968 09-26-75 40
Crossroads, Ft. Dodge, IA 1,328 12,420 13,748 5,605 1967 04-22-77 40
Kandi, Willmar, MN -- 21,009 21,009 8,969 1973 03-12-79 40
Woodland Commons, Buffalo Grove, IL 6,807 15,397 22,204 1,544 1991 04-03-95 40
Westgate Towne Centre, Abilene, TX 1,616 15,284 16,900 4,074 1962 04-22-77 40
------ ------- -------- -------
20,550 201,122 221,672 74,378
------ ------- -------- -------
Western
-------
Valley North, Wenatchee, WA 1,026 4,236 5,262 2,407 1966 08-30-73 40
Mall 205, Portland, OR 1,228 13,143 14,371 6,912 1970 03-01-75 40
Plaza 205, Portland, OR 695 3,863 4,558 1,881 1970 04-26-78 40
Valley, Yakima, WA 623 11,114 11,737 4,804 1972 05-01-80 40
------- ------- -------- -------
3,572 32,356 35,928 16,004
------- ------- -------- -------
Southwestern
------------
Alexandria, Alexandra, LA 8,097 23,584 31,681 828 1973 09-01-97 40
Brazos, Lake Jackson, TX 4,877 21,061 25,938 737 1976 09-01-97 40
Killeen, Killeen, TX 6,453 36,172 42,625 1,309 1981 09-01-97 40
Mesilla Valley, Las Cruces, NM 9,126 31,065 40,191 1,067 1981 09-01-97 40
Park Plaza, Little Rock, AR 5,816 58,329 64,145 2,017 1988 09-01-97 40
Pecanland, Monroe, LA 8,961 37,501 46,462 1,300 1985 09-01-97 40
Shawnee, Shawnee, OK 3,864 15,853 19,717 537 1989 09-01-97 40
Villa Linda, Santa Fe, NM 5,652 38,326 43,978 1,319 1985 09-01-97 40
------- ------- -------- -------
52,846 261,891 314,737 9,114
------ ------- -------- -------
76,968 495,369 572,337 99,496
======= ======= ======== =======
Apartments:
Midwestern
----------
Somerset Lakes, Indianapolis, IN 2,172 18,963 21,135 5,565 1975 11-10-88 40
Hunter's Creek, Cincinnati, OH 1,098 4,687 5,785 266 1980 12-11-96 40
Steeplechase, Cincinnati, OH 1,782 10,464 12,246 980 1987 06-30-95 40
----- ------ ------ -----
5,052 34,114 39,166 6,811
----- ------ ------ -----
Southern
--------
Briarwood, Fayetteville, NC 495 7,930 8,425 1,860 1968-70 06-30-91 40
Woodfield Gardens, Charlotte, NC 171 3,762 3,933 937 1974 06-30-91 40
Windgate Place, Charlotte, NC 353 6,201 6,554 1,593 1974-78 06-30-91 40
Walden Village, Atlanta, GA 2,768 11,608 14,376 2,473 1973 06-01-92 40
Beech Lake, Durham, NC 3,760 16,457 20,217 1,976 1986 08-19-94 40
------ ------ ------ ------
7,547 45,958 53,505 8,839
------ ------ ------ ------
12,599 80,072 92,671 15,650
====== ====== ====== ======
</TABLE>
<PAGE> 24
SCHEDULE III
<TABLE>
<CAPTION>
Cost
capitalized
Initial cost to subsequent to
Registrant acquisition
--------------------- ---------------
Buildings Land Currency
Encum- and and revaluation of
Description brances Land Improvements Improvements Foreign Assets
- ----------------------------------- ------- ---- ------------ --------------- -------------
<S> <C> <C> <C> <C> <C>
Office Buildings:
Midwestern
----------
55 Public Square, Cleveland OH -- 2,500 19,055 17,390 --
Circle Tower, Indianapolis, IN -- 270 1,609 3,040 --
------- ----- ------ ------ -------
-- 2,770 20,664 20,430 --
----- ------ ------ -------
Southern
--------
Henry C. Beck, Shreveport, LA -- 717 3,906 5,573 --
------- ------ ------ ------ -------
-- 717 3,906 5,573 --
------- ------ ------ ------ -------
Western
-------
North Valley Tech Center, Denver, CO -- -- 7,666 20,726 --
Sutter Buttes Center, Marysville, CA -- 985 3,622 9,261 --
------- ------ ------ ------ -------
-- 985 11,288 29,987 --
------- ------ ------ ------ -------
-- 4,472 35,858 55,990 --
======= ====== ====== ====== =======
Parking Facilities:
United States
-------------
Huntington Garage, Cleveland, OH 8,201 1,600 4,407 2,120 --
West Third St. Lot, Cleveland, OH -- 2,030 -- 413 --
5th and Marshall Garage, Richmond, VA -- 1,102 8,090 -- --
Long Street Garage, Columbus, OH 1,526 1,886 2,042 -- --
Madison & Wells Garage, Chicago, IL 30,000 16,266 26,918 -- --
Magic Mile Lot, Arlington, TX -- 3,011 -- -- --
Printer's Alley Garage, Nashville, TN 4,000 1,914 4,736 -- --
------- ------ -------- -------- -------
43,727 27,809 46,193 2,533 --
------- ------- -------- -------- -------
Canada
------
10th Ave, Lot, Calgary, Alberta -- 255 -- -- (27)
1009-9th Ave. Lot, Calgary, Alberta -- 655 -- -- (68)
Parkade, Edmonton, Alberta -- 656 582 -- 3
103 St. Lot, Edmonton, Alberta -- 346 -- -- (36)
107th St., Edmonton, Alberta -- 83 136 -- (23)
221 9th Ave. Lot, Calgary, Alberta -- 1,529 -- -- (159)
Blanchard St., Victoria, Br.Columbia -- 226 121 -- (35)
Graham Ave. Lot, Winnipeg, Manitoba -- 1,254 -- -- (130)
Water Ave. Lot, Winnipeg, Manitoba -- 664 -- -- (69)
Young St. Lot, Winnipeg, Manitoba -- 110 -- -- (12)
Broadway Lot, Winnipeg, Manitoba -- 464 -- -- (49)
Donald St. Lot, Winnipeg, Manitoba -- 117 -- -- (4)
Broad St. Lot, Regina, Saskatchewan -- 33 -- -- 2
Queens Quay, Toronto, Ontario -- 404 942 -- (140)
351 Smith St., Winnipeg, Manitoba -- 863 -- -- (63)
------- ------- -------- -------- -------
-- 7,659 1,781 -- (810)
------- ------- -------- -------- -------
43,727 35,468 47,974 2,533 (810)
======= ======= ======== ======== =======
Other:
Write-down on carrying value of real
estate assets -- -- -- -- --
-------- -------- -------- -------- -------
Real Estate net carrying value at
December 31, 1998 $345,042 $123,081 $526,370 $197,852 $ (810)
======== ======== ======== ======== =======
Aggregate cost for federal tax purposes is $821,774,000.
<CAPTION>
Accumu- Year
------------------------- lated construc-
Building and depreci- tion Date
Description Land Improvements Total ation Completed Acquired Life
- ----------------------------------- ---- ------------ ----- --------- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Office Buildings:
Midwestern
----------
55 Public Square, Cleveland OH 5,822 33,123 38,945 23,716 1959 01-15-63 45
Circle Tower, Indianapolis, IN 270 4,649 4,919 2,554 1930 10-16-74 40
----- ------ ------ ------
6,092 37,772 43,864 26,270
----- ------ ------ ------
Southern
--------
Henry C. Beck, Shreveport, LA 717 9,479 10,196 4,418 1958 08-30-74 40
----- ------ ------ -----
717 9,479 10,196 4,418
----- ------ ------ -----
Western
-------
North Valley Tech Center, Denver, CO -- 28,392 28,392 9,667 1967 12-03-69 40
Sutter Buttes Center, Marysville, CA 948 12,920 13,868 5,398 1972 12-19-79 40
----- ------ ------ ------
948 41,312 42,260 15,065
----- ------ ------ ------
7,757 88,563 96,320 45,753
===== ====== ====== ======
Parking Facilities:
United States
-------------
Huntington Garage, Cleveland, OH 1,600 6,527 8,127 3,027 1969 12-31-75 40
West Third St. Lot, Cleveland, OH 2,286 157 2,443 268 -- 09-19-77 10
5th and Marshall Garage, Richmond, VA 1,102 8,090 9,192 202 -- 02-24-98 40
Long Street Garage, Columbus, OH 1,886 2,042 3,928 68 -- 01-15-98 30
Madison & Wells Garage, Chicago, IL 16,266 26,918 43,184 673 1998 01-26-98 40
Magic Mile Lot, Arlington, TX 3,011 -- 3,011 54 1997 03-26-98 10
Printer's Alley Garage, Nashville, TN 1,914 4,736 6,650 94 -- 07-01-98 25
------- --------- --------- --------
28,065 48,470 76,535 4,386
------- --------- --------- --------
Canada
------
10th Ave, Lot, Calgary, Alberta 228 -- 228 -- -- 05-05-97
1009-9th Ave. Lot, Calgary, Alberta 587 -- 587 -- -- 05-05-97
Parkade, Edmonton, Alberta 588 653 1,241 27 1958 05-05-97 40
103 St. Lot, Edmonton, Alberta 310 -- 310 -- -- 05-05-97
107th St., Edmonton, Alberta 74 122 196 5 1973 05-05-97 40
221 9th Ave. Lot, Calgary, Alberta 1,370 -- 1,370 -- -- 05-05-97
Blanchard St., Victoria, Br.Columbia 202 110 312 5 1982 05-05-97 40
Graham Ave. Lot, Winnipeg, Manitoba 1,124 -- 1,124 -- -- 05-05-97
Water Ave. Lot, Winnipeg, Manitoba 595 -- 595 -- -- 05-05-97
Young St. Lot, Winnipeg, Manitoba 98 -- 98 -- -- 05-05-97
Broadway Lot, Winnipeg, Manitoba 415 -- 415 -- -- 05-05-97
Donald St. Lot, Winnipeg, Manitoba 113 -- 113 -- -- 05-05-97
Broad St. Lot, Regina, Saskatchewan 35 -- 35 -- -- 05-05-97
Queens Quay, Toronto, Ontario 362 844 1,206 35 1950 05-05-97
351 Smith St., Winnipeg, Manitoba 800 -- 800 -- -- 05-05-97
------- -------- --------- --------
6,901 1,729 8,630 72
------- -------- --------- --------
34,966 50,199 85,165 4,458
======= ======== ========= ========
Other:
Write-down on carrying value of real
estate assets (1,950) (37,684) (39,634) --
--------- -------- -------- --------
Real Estate net carrying value at
December 31, 1998 $130,340 $676,519 $806,859 $165,357
======== ======== ======== ========
Aggregate cost for federal tax purposes is $821,774,000.
</TABLE>
<PAGE> 25
Schedule III
------------
- Continued
The following is a reconciliation of real estate assets and accumulated
depreciation for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------------------
Restated Restated
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Asset reconciliation:
Balance, beginning of period $756,308 $459,084 $449,560
Additions during the period:
Property acquisitions 69,551 318,345 5,491
Improvements 21,515 20,258 19,148
Equipment and appliances 1,588 1,396 1,116
Capital lease obligation 133 --- ---
Reduction in reserve on carrying
value of real estate assets --- 3,855 5,575
Deductions during the period:
Sales of real estate (4,878) (45,632) (20,385)
Reserve on carrying value of real
estate assets (36,000) --- ---
Prior period adjustment of reserve
balance(1) (479)
Currency revaluation of foreign
real estate (810) --- ---
Other - write-off of assets and
certain fully depreciated
tenant alterations (548) ( 998) ( 942)
--------- --------- ---------
Balance, end of period $806,859 $756,308 $459,084
======== ======== ========
Accumulated depreciation
reconciliation:
Balance, beginning of period $142,082 $139,614 $107,701
Prior period adjustment(1) 24,379
Additions during the period:
Depreciation 23,761 17,301 14,808
Deductions during the period:
Sales of real estate --- (14,480) (6,332)
Write-off of assets and
certain fully depreciated
tenant alterations (486) ( 353) ( 942)
-------- -------- --------
Balance, end of period $165,357 $142,082 $139,614
======== ======== ========
</TABLE>
- ---------------------
(1) The registrant reduced the asset lives used to calculate depreciation
expense and accumulated depreciation in 1998 and for the five years then
ended and restated accumulated depreciation and reserves required for
sold properties. The adjustment for the periods prior to 1996 is
$24,379,000 and adjustment to reserves for property losses prior to 1996
is $479,000.
26
<PAGE> 26
SCHEDULE IV
<TABLE>
<CAPTION>
MORTGAGE LOANS ON REAL ESTATE
-----------------------------
AS OF DECEMBER 31, 1998
-----------------------
(IN THOUSANDS, EXCEPT FOR PAYMENT TERMS AND FOOTNOTES)
Current
effective rate Final
on net maturity
Description Investment Date Periodic Payment Terms
- ----------- ---------- ---- ----------------------
<S> <C> <C> <C>
Second Mortgage Loan: 8.75% 12-1-02 Interest calculated at stated rate of 8.75% with installments
Secured by apartment of principal and interest payable monthly through maturity;
complex in Dayton, OH prepayment without penalty subject to certain conditions.
Note Receivable: 10% 3-1-08 Interest calculated at stated rate of 10% with installments
Secured by management of principal and interest payable monthly through maturity;
contract on apartment prepayment without penalty subject to certain conditions.
complex in Atlanta, GA
Note Receivable: 6% 10-19-23 Monthly interest on principal at LIBOR plus .375%, principal
Secured by Temple due at maturity, no prepayment penalty.
Mall Company
Totals, December 31, 1998
<CAPTION>
Carrying
Face amount amount of
Description of Mortgage Mortgage
- ----------- ----------- --------
<S> <C> <C>
Second Mortgage Loan: $2,600 $2,581
Secured by apartment
complex in Dayton, OH
Note Receivable: 1,800 1,727
Secured by management
contract on apartment
complex in Atlanta, GA
Note Receivable: 1,200 1,200
Secured by Temple
Mall Company
$ 5,600 $ 5,508(A)
========= ==========
</TABLE>
(A) Aggregate cost for federal
tax purposes is the carrying
amount of the mortgages.
<PAGE> 27
Schedule IV
-----------
- Continued
The following is a reconciliation of the carrying amounts of the
mortgage loans outstanding for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Balance, beginning of period $30,686 $42,266 $42,042
Additions during the period:
- ----------------------------
Mortgage loan on mall in
Fairmount, WV secured by the mall
and partnership units of Crown
American Properties, L.P.
Second mortgage loan on apartment
complex in Dayton, OH 2,600
Note receivable on apartment complex
in Atlanta, GA 1,800
Note receivable on Temple Mall
Company 1,200
Deferred interest on:
Wraparound mortgage
on garden apartments in
Atlanta, GA 48 332
Mortgage on mall in
Fairmount, WV 6 74 68
Deductions during the period:
- -----------------------------
Payoff of wraparound mortgage
loan on garden apartments in
Atlanta, GA (17,086)
Payoff of mortgage loan on Mall
In Fairmount, WV (6,206)
Payoff of first mortgage loan on
office building in Cleveland, OH (18,839)
Collection of principal (139) (216) (176)
------- ------ ------
Balance, end of period $ 5,508 $30,686 $42,266
====== ====== ======
</TABLE>
28
<PAGE> 28
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO PAGE
- ------ ----------- ------------ ----
<S> <C> <C> <C>
(3)(a) Declaration of Trust of Registrant dated August 1, 1961, Registration Statement on Form S-3 No.
as amended through July 25, 1986 33-4493 ----
(3)(b) By-laws of Registrant, as amended Registration Statement on Form S-3 No.
33-4493 ----
(3)(c) By-laws of Registrant, as amended March 31, 1997
Form 10-Q ----
(3)(d) By-laws of Registrant as amended 1998 10-K X
----
(4)(a) Form of certificate for Shares of Beneficial Interest Registration Statement on Form S-3 No.
33-2818 ----
(4)(b) Form of Indenture governing Debt Securities, dated Registration Statement on Form S-3 No.
February 1, 1983 between Registrant and Ameritrust 2-81605
Company ----
(4)(c) Form of Debt Security Registration Statement on Form S-3 No.
33-4493 ----
(4)(d) Form of Indenture governing Debt Securities, dated Registration Statement on Form S-3 No.
October 1, 1993 between Registrant and Society National 33-68002
Bank ----
(4)(e) Form of Note Registration Statement on Form S-3 No.
33-68002 ----
(4)(f) Form of Indenture governing Debt Securities Registration Statement on Form S-3 No.
333-00953 ----
(4)(g) Rights Agreement between Registrant and National City Form 8-A dated March 30, 1990 No. 0-18411
Bank dated March 7, 1990 ----
(4)(h) Certificate of Designations relating to Registrant's Form 8-K dated October 24, 1996
Series A Cumulative Redeemable Preferred Shares of
Beneficial Interest
(4)(i) Standby Purchase Agreement between Registrant and Gotham Schedule 13D dated August 11, 1998
Partners, L.P. dated August 11, 1998
(4)(j) Standby Purchase Agreement between Registrant and Gotham Schedule 13D dated August 11, 1998
Partners III, L.P. dated August 11, 1998
</TABLE>
29
<PAGE> 29
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO PAGE
- ------ ----------- ------------ ----
<S> <C> <C> <C>
(4)(k) Standby Purchase Agreement between Registrant and Schedule 13D dated August 11, 1998
Elliott Associates, L.P. dated August 11, 1998 ----
(4)(l) Warrant to purchase 500,000 shares of Beneficial 1999 Form 10-K X
Interest of Registrant ----
(10)(a) Share Purchase Agreement dated as of December 31, 1983 Registration Statement No. 2-88719
between registrant and First Union Management, Inc. ----
(10)(b) First Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-2818
December 10, 1985 between registrant and First Union
Management, Inc. ----
(10)(c) Second Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-11524
December 9, 1986 between registrant and First Union
Management, Inc. ----
(10)(d) Third Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-19812
December 2, 1987 between registrant and First Union
Management, Inc. ----
(10)(e) Fourth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-26758
December 7, 1988 between registrant and First Union
Management, Inc. ----
(10)(f) Fifth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-33279
November 29, 1989 between registrant and First Union
Management, Inc. ----
(10)(g) Sixth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-38754
November 28, 1990 between registrant and First Union
Management, Inc. ----
(10)(h) Seventh Amendment to Share Purchase Agreement dated as Registration Statement No. 33-45355
of November 27, 1991 between registrant and First Union
Management, Inc. ----
(10)(i) Eighth Amendment to Share Purchase Agreement dated as of Registration Statement No. 33-57756
November 30, 1992 between registrant and First Union
Management, Inc. ----
(10)(j) Employment and Consulting Agreement with Donald S. 1991 Form 10-K
Schofield dated September 1, 1991 ----
</TABLE>
30
<PAGE> 30
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO PAGE
- ------ ----------- ------------ ----
<S> <C> <C> <C>
(10)(k) Employment Agreement with James C. Mastandrea dated July June 30, 1994 Form 10-Q
13, 1994 ----
(10)(l) Employment Agreement with Gregory D. Bruhn dated July June 30, 1994 Form 10-Q
13, 1994 ----
(10)(m) Credit Agreement with National City Bank dated December 1994 Form 10-K
5, 1994 ----
(10)(n) Credit Agreement with Society National Bank dated March 1995 Form 10-K
4, 1996 ----
(10)(o) 1981 Employee Share Option Plan 1992 Proxy Statement ----
(10)(p) 1994 Long Term Incentive Performance Plan 1994 Proxy Statement ----
(10)(q) Bank Credit Agreement dated September 30, 1996 September 30, 1996 Form 10-Q ----
(10)(r) Credit agreement between Imperial Parking Limited and BT March 31, 1997
Bank of Canada Form 10-Q ----
(10)(s) Put agreement entered into between BT Bank of Canada, March 31, 1997
Hong Kong Bank of Canada and First Union Real Estate Form 10-Q
Equity and Mortgage Investment ----
(10)(t) Share Purchase Agreement and amendments Impark March 31, 1997
Investments Inc. and First Union Real Estate Equity and Form 10-Q
Mortgage Investments ----
(10)(u) Put agreement entered into between Empark Investments March 31, 1997
Inc., the Onex Associates and First Union Real Estate Form 10-Q
Equity and Mortgage Investments ----
(10)(v) Senior subordinated note by 3357392 Canada Inc. to March 31, 1997
3006302 Nova Scotia Company Form 10-Q ----
(10)(w) Senior subordinated note by 504463 N.B. Inc. to 3006302 March 31, 1997
Nova Scotia Company Form 10-Q ----
(10)(x) Shareholders Agreement dated April 17, 1997 between March 31, 1997
3357392 Canada, Inc. and 3355489 Canada, Inc. and the Form 10-Q
individuals and trusts listed on Schedule A. ----
31
</TABLE>
<PAGE> 31
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO PAGE
- ------ ----------- ------------ ----
<S> <C> <C> <C>
(10)(y) Shareholders Agreement dated April 17, 1997 between March 31, 1997
504308 N.B., Inc. First Union Management, Inc. and the Form 10-Q
individuals listed on Schedule A. ----
(10)(z) Assignment dated March 27, 1997 between First Union Real March 31, 1997
Estate Equity and Mortgage Investments and First Union Form 10-Q
Management, Inc. ----
(10)(aa) Assignment dated April 16, 1997 between First Union March 31, 1997
Management, Inc. and 335489 Canada, Inc. Form 10-Q ----
(10)(ab) Assignment dated April 16, 1997 between 335489 Canada, March 31, 1997
Inc. and 3357392 Canada, Inc. Form 10-Q ----
(10)(ac) Amendment to assignment made May 8, 1997 between First March 31, 1997
Union Real Estate Equity and Mortgage Investments and Form 10-Q
Imperial Parking Limited. ----
(10)(ad) Bank credit agreement dated December 5, 1997 1997 10-K ----
(10)(ae) First amendment to employment agreement of James C. 1997 10-K
Mastandrea ----
(10)(af) Form of change in control agreement 1997 10-K/A ----
(10)(ag) Fixed Rate Loan Agreement dated as of August 11, 1998 by Registration Statement on Form S-3 No.
and among the Registrant, as borrower, Bankers Trust 333-63547 ----
Company, as agent, and Wellsford Capital and BankBoston,
N.A., as lenders
(10)(ah) Fixed Rate Loan Agreement dated as of August 11, 1998 by Registration Statement on Form S-3 No.
and among the Registrant, as borrower, Bankers Trust 333-63547 ----
Company, as agent, and Gotham Partners, L.P., Gotham
Partners III, L.P., Elliott Associates, L.P. and
Blackacre Bridge Capital, L.L.C., as lenders
(10)(ai) Employment contract for Daniel P. Friedman.
1998 10-K X
----
(10)(aj) Employment contract for Anne N. Zahner 1998 10-K X
----
(10)(ak) Employment contract for David Schonberger 1998 10-K X
----
</TABLE>
32
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO PAGE
- ------ ----------- ------------ ----
<S> <C> <C> <C>
(10)(al) Amendment No. 2, dated as January 8, 1999, to Amended Form 8-K dated February 2, 1999.
and Restated Credit Agreement, dated as of November 1, ----
1997, among First Union Real Estate Equity and Mortgage
Investments, as Borrower, First Union Management, Inc.,
and National City Bank, Bankers Trust Company, Key Bank
National Associates, The Huntington National Bank,
Mellon Bank, N.A. and First Merit Bank, as Lenders.
First Amendment to Fixed Rate Loan Agreement between First Union
Real Estate Equity and Mortgage Investments, as Borrower; and
Blackacre Bridge Capital, L.L.C., Gotham Partners, L.P., Gotham
Partners III, L.P. and Elliott Associates, L.P., as Lenders,
dated January 8, 1999.
Letter Agreement between First Union Real Estate Equity
and Mortgage Investments, as Borrower; and Blackacre
Bridge Capital, L.L.C. Gotham Partners, L.P., Gotham
Partners III, L.P. and Elliott Associates, L.P., as
Lenders, dated January 8, 1999
First Amendment to Fixed Rate Loan Agreement between First Union
Real Estate Equity and Mortgage Investments, as Borrower; and
BankBoston, N.A., Wellsford Capital and Bankers Trust Company,
as Lenders, dated January 8, 1999.
Letter Agreement between First Union Real Estate Equity
and Mortgage Investments, as Borrower; and BankBoston,
N.A., Wellsford Capital and Bankers Trust Company, as
Lenders, dated January 8, 1999.
</TABLE>
33
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT INDEX
-------------
EXHIBIT INCORPORATED HEREIN BY
NUMBER DESCRIPTION REFERENCE TO PAGE
- ------ ----------- ------------ ----
<S> <C> <C> <C>
Second Amendment, dated as of December 30, 1998, to the Amended
and Restated Credit Agreement Dated as of April 17, 1997 between
Imperial Parking Limited, as Borrower, Impark Services Limited,
as Guarantor, and HongKong Bank of Canada and BT Bank of Canada,
as Lenders.
(12) Statements of Ratios of Combined Income from Operations
and Combined Net Income to Fixed Charges X
----
(13) 1998 Annual Report X
----
(23) Consent of Independent Public Accountants X
----
(24) Powers of Attorney X
----
(27) Financial Data Schedule X
----
</TABLE>
34
<PAGE> 1
Exhibit 3d.
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE
INVESTMENTS
BY-LAWS
AS AMENDED THROUGH
FEBRUARY 9, 1999
<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE I - MEETING OF BENEFICIARIES.
Section 1. - Annual Meeting........................................................................................3
Section 2. - Special Meetings......................................................................................3
Section 3. - Place of Meetings.....................................................................................3
Section 4. - Notice of Meetings....................................................................................3
Section 5. - Procedure at Meetings.................................................................................3
Section 6. - Quorum................................................................................................3
Section 7. - Nominations and Beneficiary Business..................................................................3
ARTICLE II - TRUSTEES
Section 1. - Regular Meetings......................................................................................4
Section 2. - Special Meetings......................................................................................5
Section 3. - Notice of Meetings....................................................................................5
Section 4. - Quorum................................................................................................5
Section 5. - Compensation of Trustees..............................................................................5
Section 6. - Committees of the Board of Trustees...................................................................5
Section 7. - Qualifications of Nominees-Age........................................................................5
ARTICLE III - OFFICERS
Section 1. - Designation of Officers...............................................................................5
Section 2. - Tenure of Office......................................................................................6
Section 3. - Delegation of Duties..................................................................................6
Section 4. - Compensation..........................................................................................6
Section 5. - Signing Checks and Other Instruments..................................................................6
Section 6. - Control by Trustees...................................................................................6
ARTICLE IV - SHARES IN TRUST
Section 1. - Issue of Certificate of Beneficial Ownership..........................................................6
ARTICLE V - AMENDMENTS
Section 1. - Amendment of By-laws..................................................................................6
ARTICLE VI - MISCELLANEOUS PROVISIONS
Section 1. - Fiscal Year...........................................................................................7
Section 2. - Notice and Waiver of Notice...........................................................................7
Section 3. - Checks for Money......................................................................................7
Section 4. - Form of Certificate of Beneficial Interest............................................................7
Section 5. - Regulations on Transfer of Shares to Prevent Disqualification
of the Trust Under the Internal Revenue Code.....................................................8
Section 6. - Restrictions on Issuance and Transfer of Securities...................................................8
</TABLE>
2
<PAGE> 3
ARTICLE I
MEETINGS OF BENEFICIARIES.
SECTION 1. ANNUAL MEETING.
The annual meeting of the Beneficiaries of the Trust for the transacting of such
business as shall be specified in the notice of the meeting shall be held as
provided in the Declaration of Trust.
SECTION 2. SPECIAL MEETINGS.
Special meetings may be called at any time as provided in the Declaration of
Trust.
SECTION 3. PLACE OF MEETING.
All meetings of the Beneficiaries shall be held at the office of the Trust, or
at such other place within or without the State of Ohio as may be designated, in
the case of an annual meeting, by the Trustees, or, in the case of a special
meeting, by the Trustees calling such meeting or by the person or persons
requesting such meeting pursuant to the Declaration of Trust.
SECTION 4. NOTICE OF MEETINGS.
Written notice of each annual or special meeting of the Beneficiaries, stating
the time, place and purpose thereof shall be given in accordance with the
Declaration of Trust.
SECTION 5. PROCEDURE AT MEETINGS.
At each meeting of the Beneficiaries, the Trustees shall appoint one of their
number or one of the Beneficiaries to preside thereat. The Trustees shall
appoint a Secretary for each such meeting, who shall be duly sworn to the
faithful discharge of his duties and to keep the minutes of such meeting, which
minutes shall be signed and attested by him and filed with the records of the
Trust.
SECTION 6. QUORUM.
A majority of the outstanding shares of the Trust present in person or by proxy
shall constitute a quorum for any annual or special meeting of Beneficiaries.
SECTION 7. NOMINATIONS AND BENEFICIARY BUSINESS.
(a) With respect to any Annual or Special Meeting of Beneficiaries, (a
"Meeting") nominations for election to the Board of Trustees and the proposal of
matters to be considered by the Beneficiaries may be made only (i) by or at the
direction of the Board of Trustees or (ii) by any Beneficiary who was a
Beneficiary of record at the record date for the Meeting, as defined in the
Declaration of Trust,
3
<PAGE> 4
who is entitled to vote at the Meeting and who complied with the notice
procedures set forth in this Section 7.
(b) For a nomination or proposal to be properly brought before a Meeting by a
Beneficiary, other than a shareholder proposal included in the Trust's proxy
statement pursuant to Rule 14a-8 of the Securities Exchange Act of 1934, as
amended, the Beneficiary must have given timely notice thereof in writing to the
Secretary of the Trust, and such Beneficiary or his representative must be
present in person at the Meeting. A Beneficiary's notice shall be timely if
delivered to, or mailed and received at, the principal executive offices of the
Trust (i) for an Annual Meeting not less than 120 days prior to the anniversary
date of the immediately preceding Annual Meeting of Beneficiaries, or Special
Meeting held in lieu thereof and (ii) for a Special Meeting, not less than 120
days prior to the date requested for such meeting.
(c) A Beneficiary's notice to the Secretary shall set forth as to each
nomination or proposal the Beneficiary intends to bring before the Meeting (i)
as to any nomination, the name and address of any proposed nominee, the
nominee's business affiliation, the information required as to nominees by Item
401 of Regulation S-K under the Securities Act of 1933 and the Securities
Exchange Act of 1934, all as may be amended from time to time, a certification
of the proponent that such nominee meets all the qualifications for Trustees set
forth in the Declaration of Trust, including, but not limited to, Section 8.10
thereof and the written consent of such nominee to serve as Trustee if elected,
(ii) as to any proposal, a brief description of the proposal desired to be
brought before the Meeting, (iii) the name and address of the Beneficiary
offering such nomination or proposal, (iv) the class and number of shares of the
Trust's capital shares which are beneficially owned by the Beneficiary, and (v)
any financial interest of the Beneficiary in such proposal. Nothing contained in
this Subsection (c) shall be deemed to supersede the provisions of Section 7.2
of the Declaration of Trust relating to business that may be transacted at a
Special Meeting.
ARTICLE II
SECTION 1. REGULAR MEETINGS.
Regular meetings of the Trustees may be held at such times and places within or
without the State of Ohio as may be provided for in resolution adopted by the
Trustees.
SECTION 2. SPECIAL MEETINGS.
Special meetings of the Trustees may be held at any time or place within or
without the State of Ohio upon call of the Chairman of the Board or any two of
the Trustees at the time and place designated in the notice of meeting.
SECTION 3. NOTICE OF AND PARTICIPATION IN MEETINGS.
Notice of each meeting, regular or special, shall be given by mailing or by
sending to each Trustee (addressed to the address last furnished to the Trust by
the Trustee) a letter at least 4 days before the
4
<PAGE> 5
meeting, or a facsimile transmittal at least 24 hours before the meeting. Notice
of any special or regular meeting, as provided in the Declaration of Trust, may
be waived in writing or by facsimile transmittal by any Trustee either before or
after such meeting, and such notice shall be deemed to have been waived by the
Trustees attending such meeting. Except as provided in Article VI hereof, unless
otherwise indicated in the notice thereof, any business may be transacted at any
regular or special meeting. Meetings of the Trustees may be held through any
communications equipment if all persons participating can hear each other and
participation in a meeting pursuant to this sentence shall constitute presence
at such meeting.
SECTION 4. QUORUM.
At any meeting a majority of the Trustees then in office shall constitute a
quorum.
SECTION 5. COMPENSATION OF TRUSTEES.
The Trustees are authorized to fix a reasonable retainer for members of the
Board of Trustees and the Chairman and a reasonable fee for attendance at
meetings. In addition to such compensation there shall be reimbursement for
expenses for traveling to and from such meetings.
SECTION 6. COMMITTEES OF THE BOARD OF TRUSTEES.
The Trustee may elect from their members committees of the Board and give them
any or all powers of the Trustees during intervals between the meetings of the
Trustees, except that such committees shall not be empowered to declare
dividends or fill vacancies in the Board of Trustees or committees. All actions
of such committees shall be reported to the Trustees at their next meeting.
SECTION 7. QUALIFICATIONS OF NOMINEES - AGE.
No nominee for Trustee shall be more than 72 years of age at the time of his
election as Trustee, nor shall any Trustee nominated for a subsequent term be
more than 72 years of age at the time of his election for such subsequent term,
provided that any Trustee elected prior to attaining age 72 may continue to
serve the remainder of his term despite attaining the age of 72 before the
expiration of his term.
ARTICLE III OFFICERS
SECTION 1. DESIGNATION OF OFFICERS.
The Trustees shall elect a Chairman of the Board, a President, a Secretary, a
Treasurer, and such Vice Presidents and other officers, or assistant officers,
as they shall deem advisable. Each officer and assistant officer shall have such
functions and duties as the Trustees shall from time to time designate, and, in
the absence of such designation, such duties as are usually associated with such
office. Except as otherwise determined by the Trustees, any two or more offices
may be held by the same person.
5
<PAGE> 6
SECTION 2. TENURE OF OFFICE.
The officers of the Trust shall hold office at the pleasure of the Trustees, and
until successors are chosen and qualified. A vacancy in any office, however
created, may be filled by election by the Trustees.
SECTION 3. DELEGATION OF DUTIES.
The Trustees may delegate the duties of any officer to any other officer and
generally may control the action of the officers and require the performance of
duties in addition to those mentioned herein.
SECTION 4. COMPENSATION.
The Trustees are authorized to determine or to provide the method of determining
the compensation of officers.
SECTION 5. SIGNING CHECKS AND OTHER INSTRUMENTS.
The Trustees shall determine or provide the method of determining how checks,
notes, bills of exchange and similar instruments issued by or on behalf of the
Trust shall be signed, countersigned, or endorsed.
SECTION 6. CONTROL BY TRUSTEES.
Nothing contained herein shall be interpreted to relieve the Trustees, in any
manner, of their duty to control and manage the Trust property.
ARTICLE IV
SHARES IN TRUST
SECTION 1. ISSUE OF CERTIFICATE OF BENEFICIAL OWNERSHIP.
The Chairman shall cause to be issued to each Beneficiary one or more
certificates, under the seal of the Trust, signed as provided in Article III,
Section 5 hereof, certifying the number of shares owned by such Beneficiary in
the Trust. Such certificates shall be countersigned by the Transfer Agent and
registered by the Registrar and shall be transferable on the books of the Trust
as provided in the Declaration of Trust.
ARTICLE V
AMENDMENTS.
SECTION 1. AMENDMENT OF BY-LAWS.
The Trustees, by the affirmative vote of a majority, may at any meeting,
provided the substance of the proposed amendment shall have been stated in a
notice of the meeting, alter, change, or amend
6
<PAGE> 7
in any respect, or supersede by new by-laws, in whole or in part, any of these
by-laws.
ARTICLE VI
MISCELLANEOUS PROVISIONS.
SECTION 1. FISCAL YEAR.
The fiscal year of the Trust shall be as determined from time to time by the
Trustees.
SECTION 2. NOTICE AND WAIVER OF NOTICE.
Whenever any notice is required by these by-laws to be given, personal notice is
not required unless expressly so stated; and any notice so required shall be
deemed to be sufficient if given (i) by letter, by depositing the same in a
post-office box in a sealed post-paid wrapper, addressed to the person entitled
thereto (at his last known post-office address as shown by the register of the
Trust) and such notice shall be deemed to have been given on the day of such
mailing; or (ii) by facsimile transmittal if transmitted via facsimile with
evidence of receipt by the sender, and such notice shall be deemed to have been
given on the day of such facsimile transmittal.
SECTION 3. CHECKS FOR MONEY.
All checks, drafts or orders for the payment of money shall be signed by the
Treasurer or Assistant Treasurer or by such other officer, officers, Trustee or
Trustees as the Trustees may from time to time designate.
SECTION 4. FORM OF CERTIFICATE OF BENEFICIAL INTEREST.
The form of certificate of beneficial interest representing shares of $1 par
value shall be substantially as follows:
No._______________________________ Shares
FIRST UNION
Real Estate Equity and Mortgage Investments
THIS CERTIFIES THAT_________________________ is the registered holder of
______________ Fully Paid and Non-assessable Share of Beneficial Interest, $1
Par Value. in
FIRST UNION
Real Estate Equity and Mortgage Investments
a Trust established in business trust from under the laws of the State of Ohio
under a Declaration of Trust dated as of August 1, 1961, as amended from time to
time, a copy of which is on file with the Transfer Agents of the Trust by all
the terms and provisions of which the holder or
7
<PAGE> 8
transferee hereof by accepting this certificate agrees to be bound. The Trust is
not a bank or trust company and does not and will not solicit, receive or accept
deposits as a business. The shares represented hereby are transferable on the
records of the Trust only by the registered holder hereof or by his agent duly
authorized in writing on delivery to a Transfer Agent of the Trust of this
certificate properly endorsed or accompanied by duly executed instrument of
transfer together with such evidence of the genuineness thereof and such other
matters as may reasonably be required. The transferability of the shares
represented hereby is subject to such regulation. as may from time to time be
adopted by the Trustees of the Trust and set forth in the By-Laws to which
reference is hereby made to prevent transfers of shares which would result in
disqualification of the Trust for taxation as a real estate investment trust
under the Internal Revenue Code an amended.
This certificate is not valid unless countersigned by a Transfer Agent and
registered by a Registrar of the Trust.
IN WITNESS WHEREOF, the Trustees of this Trust have caused this certificate to
be signed by facsimile signatures.
[ON REVERSE SIDE]
The By-Laws of the Trust provide, among other things, that no person may acquire
Trust securities (including these securities) if, thereafter, he would
beneficially own more than 9.8% of the Trust's shares of beneficial interest. In
applying this restriction, convertible securities of the Trust beneficially
owned by such person (including convertible securities) are to be treated as if
already converted into shares of beneficial interest. A copy of the By-Laws and
information about the limitation on ownership may be obtained from the Secretary
of the Trust.
Section 5. Regulations on Transfer of Shares to Prevent Disqualification of the
Trust Under the Internal Revenue Code
Notification of the Trust Under the Internal Revenue Code.
The Chief Executive Officer of the Trust or an officer designated by him shall:
(a) From time to time cause to be prepared a list of holders of record (with
their holdings) of shares of the Trust (preferred and common) and shall
designate those holders which the officer acting shall have reason to believe
are not also the beneficial owners of the holdings of record in their respective
names;
(b) Review the list with counsel and impose such restrictions on transfer of
shares as counsel shall advise should be imposed to prevent disqualification of
the Trust as a Real Estate Investment Trust under Section 856 et seq. of the
Internal Revenue Code.
8
<PAGE> 9
Section 6. Restrictions on Issuance and Transfer of Securities.
(a) No person may own more than 9.8% of the outstanding Shares (the Limit), and
no Securities shall be issued or transferred to any person if, following such
issuance or transfer, such person's ownership of Shares would exceed the Limit.
For purposes of computing the Limit, Convertible Securities owned by such person
shall be treated as if the Convertible Securities owned by such person had been
converted into Shares.
(b) If any Securities in excess of the Limit are issued or transferred to any
person in violation of Paragraph a) hereof (the "Excess Securities"), such
issuance or transfer shall be valid only with respect to such amount of
Securities as does not result in a violation of Paragraph a) hereof, and such
issuance or transfer shall be null and void with respect to such Excess
Securities.
If the last clause of the foregoing sentence is determined to be invalid by
virtue of any legal decision, statute, rule or regulation, such person shall be
conclusively deemed to have acted as an agent on behalf of the Trust in
acquiring the Excess Securities and to hold such Excess Securities on behalf of
the Trust. As the equivalent of treasury Securities for such purposes, the
Excess Securities shall not be entitled to any voting rights; shall not be
considered to be outstanding for quorums or voting purposes; and shall not be
entitled to receive dividends. Interest or any other distribution with respect
to the Securities. Any person who receives dividends, interest or any other
distribution in respect to Excess Securities shall hold the same as agent for
the Trust and (following a permitted transfer) for the transferee thereof.
Notwithstanding the foregoing, any holder of Excess Securities may transfer the
same (together with any distributions thereon) to any person who, following such
transfer, would not own Shares (within the meaning of Paragraph (a)) in excess
of the Limit. Upon such permitted transfer, the Trust shall pay or distribute to
the transferee any distributions on the Excess Securities not previously paid or
distributed.
(c) Ownership of Securities is conditional upon the owner or prospective owner
having provided to the Trust definitive written information respecting his
ownership of Securities. Failure to provide such information, upon reasonable
request shall result in the Securities so owned being treated as Excess
Securities pursuant to Paragraph b) for so long as such failure continues.
(d) For purposes of this Section 6:
(i) Person. includes an individual, corporation, partnership, association, joint
stock company, trust, unincorporated association or other entity.
(ii) Shares. means Shares of Beneficial Interest, par value $1 per share.
(iii) Convertible Securities. means any securities of the Trust that are
convertible into Shares.
9
<PAGE> 10
(iv) Securities. means Shares and Convertible Securities.
(v) Ownership. means beneficial ownership. Beneficial ownership, for this
purpose, may be determined on the basis of the beneficial ownership rules
applicable under the Securities Exchange Act of 1934, as amended, or such other
basis as management reasonably determines to be appropriate to effectuate the
purposes hereof.
(e) Nothing herein contained shall limit the ability of the Trust to impose, or
to seek judicial or other imposition of additional restrictions if deemed
necessary or advisable to protect the Trust and the interests of its security
holders by preservation of the Trust's status as a qualified real estate
investment trust under the Code.
(f) These restrictions on issuance and transfer of Securities shall be applied
only on a prospective basis. Accordingly, Paragraphs (a) and (b) hereof shall
not apply to Shares in excess of the limit that were owned (within the meaning
of Paragraph (a) by any person at the close of business on June 3, 1981, but
Paragraph (a) and (b) shall prospectively apply to the transfer of such Shares
and to further acquisitions of Securities by any such person. Similarly,
Paragraphs (a) and (b) shall not apply to the conversion of Convertible
Securities that were owned by any person at the close of business on such date
or to the resultant Shares owned by such person, but Paragraph (a) and (b) shall
prospectively apply to such Shares and to such person.
(g) Notwithstanding any other provision of this Section 6, a lower percentage
(the Temporary Limit) shall operate in place of the 9.8% ownership Limit set
forth in Paragraph (a) hereof for so long as there are outstanding Securities
excepted from the restrictions of this Section 6 pursuant to Paragraph (f)
hereof ("Exempt Securities"). The Temporary Limit shall initially be 6%, but
upon the transfer of Exempt Securities the Temporary Limit shall be fixed by the
Trustees from time to time but shall in no event exceed an amount equal to 25%
of the difference between (i) 49% of the Shares outstanding and (ii) the number
of Shares owned by any person who owns Exempt Securities. For purposes of this
calculation, Convertible Securities owned by such person shall be treated as if
the Convertible Securities owned by such person had been converted into Shares.
(h) If any provision of this Section 6 or any application of any such provision
is determined to be invalid by any federal or state court having jurisdiction
over the issue, the validity of the remaining provisions shall not be affected
and other applications of such provision shall be affected only to the extent
necessary to comply with the determination of such court.
10
<PAGE> 1
Exhibit 4(l)
NEITHER THE WARRANTS REPRESENTED BY THIS CERTIFICATE NOR THE SHARES ISSUABLE
UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT. NEITHER SUCH WARRANTS
NOR SUCH SHARES MAY BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN
COMPLIANCE WITH SUCH ACT.
WARRANT TO PURCHASE
500,000 SHARES OF BENEFICIAL INTEREST,
$1 PAR VALUE PER SHARE,
OF
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
NO. A-1
This certifies that Enterprise Asset Management, Inc. (the
"Warrantholder"), is entitled to purchase from First Union Real Estate Equity
and Mortgage Investments, a business trust organized under the laws of the State
of Ohio (the "Trust"), subject to the terms and conditions hereof, at any time
at or after 9:00 A.M., Cleveland, Ohio time, November 9, 1998 and before 5:00
P.M., Cleveland, Ohio time on the Expiration Date (as defined herein), the
number of fully paid and non-assessable Common Shares of the Trust stated above
at the Exercise Price (as defined herein).
ARTICLE I
SECTION 1.01: DEFINITION OF TERMS. As used in this Warrant, the
following capitalized terms shall have the following respective meanings:
(a) COMMON SHARES: Shares of beneficial interest, $1 par value per
share, of the Trust.
(b) EXERCISE PRICE: $10.00 per Warrant Share as such price may be
adjusted from time to time pursuant to Article III hereof.
(c) EXPIRATION DATE: The tenth anniversary of the Issuance Date.
(d) ISSUANCE DATE: November 9, 1998.
(e) MERGER: A consolidation or merger of the Trust with or into any
other trust or corporation (other than a consolidation or merger in which the
Trust is the surviving entity.
(f) PERSON: An individual, partnership, joint venture, corporation,
trust, limited liability company, unincorporated organization or government of
any department or
<PAGE> 2
agency thereof.
(g) WARRANT SHARES: Common Shares purchased or purchasable upon
exercise of this Warrant.
ARTICLE II
DURATION AND EXERCISE OF WARRANT
SECTION 2.01: DURATION OF WARRANT. The Warrantholder may exercise this
Warrant at any time and from time to time after 9:00 A.M., Cleveland, Ohio time,
November 9, 1998, and before 5:00 P.M., Cleveland, Ohio time, on the Expiration
Date. If this Warrant is not exercised on the Expiration Date, it shall expire,
and all rights hereunder shall thereupon cease.
SECTION 2.02: EXERCISE OF WARRANT.
(a) The Warrantholder may exercise this Warrant, in whole or in part,
by presentation and surrender of this Warrant to the Trust at its principal
office or at the office of its stock transfer agent, if any, with the
subscription form attached hereto as Exhibit A (the "Subscription Form") duly
executed and accompanied by payment of the full Exercise Price for each Warrant
Share to be purchased.
(b) Upon receipt of this Warrant with the Subscription Form fully
executed and accompanied by payment of the aggregate Exercise Price for the
Warrant Shares for which this Warrant is then being exercised, the Trust shall
cause to be issued certificates for the total number of whole Common Shares for
which this Warrant is being exercised in such denominations as are requested for
delivery to the Warrantholder registered in the name of the Warrantholder, and
the Trust shall thereupon deliver such certificates to the Warrantholder.
(c) In case the Warrantholder shall exercise this Warrant with respect
to less than all of the Warrant Shares that may be purchased under this Warrant,
the Trust shall execute a new warrant in the form of this Warrant for the
balance of such Warrant Shares and deliver such new warrant to the
Warrantholder.
(d) The Trust shall pay any and all stock transfer and similar taxes
which may be payable in respect of the issue of any Warrant Shares to the
Warrantholder.
SECTION 2.03: RESERVATION OF SHARES. The Trust hereby agrees that at
all times there shall be reserved for issuance and delivery upon exercise of
this Warrant such number of Common Shares from time to time issuable upon
exercise of this Warrant. All such shares shall be duly authorized, and when
issued upon such exercise, shall be validly issued, fully paid and
nonassessable, and payment therefor, free and clear of all
<PAGE> 3
liens, security interests, charges and other encumbrances and free and clear of
all preemptive rights.
SECTION 2.04: FRACTIONAL SHARES. The Trust shall not be required to
issue any fraction of a Common Share in connection with the exercise of this
Warrant.
SECTION 2.05: LISTING. During such time as Common Shares are listed on
a national securities exchange or automated quotation system, prior to the
issuance of any Common Shares upon exercise of this Warrant, the Trust shall
secure the listing of such Common Shares upon each national securities exchange
or automated quotation system, if any, upon which Common Shares are then listed
(subject to official notice of issuance upon exercise of this Warrant) and shall
maintain, so long as any other Common Shares shall be so listed, such listing of
all Common Shares from time to time issuable upon the exercise of this Warrant.
ARTICLE III
ADJUSTMENT OF COMMON SHARES
PURCHASABLE AND OF EXERCISE PRICE
The Exercise Price and the number and kind of Warrant Shares shall be
subject to adjustment from time to time upon the happening of certain events as
provided in this Article III.
SECTION 3.01: MECHANICAL ADJUSTMENTS.
(a) In case the Trust shall at any time or from time to time after the
date hereof (i) pay any dividend, or make any distribution, on the outstanding
Common Shares in Common Shares, (ii) subdivide the outstanding Common Shares,
(iii) combine the outstanding Common Shares into a smaller number of shares or
(iv) issue by reclassification of the Common Shares any shares of capital stock
of the Trust (each of the events described in the foregoing clauses (i) through
(iv) referred to as an "Adjustment Event"), then and in each such case, the
Exercise Price in effect immediately prior to such Adjustment Event or the
record date therefor, whichever is earlier, shall be adjusted so that the
Warrantholder shall be entitled to receive the number and type of Common Shares
which such Warrantholder would have owned or have been entitled to receive after
the happening of any of the Adjustment Events described above, had such Warrant
been converted into Common Shares immediately prior to the happening of such
Adjustment Event or the record date therefor, whichever is earlier. An
adjustment made pursuant to this Section 3.01(a) shall become effective (x) in
the case of any such dividend or distribution, immediately after the close of
business on the record date for the determination of holders of Common Shares
entitled to receive such dividend or distribution, or (y) in the case of such
subdivision, reclassification or combination, at the close of business on the
day upon which such trust action becomes effective.
<PAGE> 4
(b) If the Trust shall take a record of the holders of its Common
Shares for the purpose of entitling them to receive a dividend or other
distribution and shall thereafter, and before such dividend or distribution is
paid or delivered to shareholders entitled thereto, legally abandon its plan to
pay or deliver such dividend or distribution, then no adjustment in the Exercise
Price then in effect shall be made by reason of the taking of such record, and
any such adjustment previously made as a result of the taking of such record
shall be reversed.
(c) In the case of a Merger or a proposed reorganization of the Trust
or a proposed reclassification of the capital stock of the Trust (except a
transaction for which provision for adjustment is otherwise made in this Section
3.01), the Warrant shall thereafter be exerciseable into the number of shares of
stock or other securities or property to which a holder of the number of Common
Shares of the Trust deliverable upon exercise of such Warrant would have been
entitled upon such Merger, reorganization or reclassification; and, in any such
case, appropriate adjustment (as determined by the Board of Trustees) shall be
made in the application of the provisions herein set forth with respect to the
rights and interest thereafter of the holders of the Warrant, to the end that
the provisions set forth herein (including provisions with respect to changes in
and other adjustments of the applicable conversion price) shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other property thereafter deliverable upon the exercise of the Warrant. The
Trust shall not effect any such Merger unless prior to or simultaneously with
the consummation thereof the successor entity shall assume by written instrument
the obligation to deliver to the Warrantholder such shares of stock, securities
or assets as, in accordance with the foregoing provisions, each such holder is
entitled to receive.
(d) Whenever the Exercise Price payable upon exercise of each Warrant
is adjusted pursuant to paragraph (a) of this Section 3.01, the Warrant Shares
shall simultaneously be adjusted by multiplying the number of Warrant Shares
initially issuable upon exercise of each Warrant (as set forth on the front page
of this Warrant) by $10.00 and dividing the product so obtained by the Exercise
Price, as adjusted.
(e) In the event that at any time, as a result of any adjustment made
pursuant to Section 3.01(a), the Warrantholder thereafter shall become entitled
to receive any shares of capital stock of the Trust other than Common Shares,
thereafter the number of such other shares so receivable upon exercise of any
Warrant shall be subject to adjustment from time to time in a manner and on
terms as nearly equivalent as practicable to the provisions with respect to the
Common Shares contained in Section 3.01.
SECTION 3.02: NOTICES OF ADJUSTMENT. Whenever the number of Warrant
Shares or the Exercise Price is adjusted as herein provided, the Trust shall
prepare and deliver forthwith to the Warrantholder a certificate signed by its
Treasurer or an Assistant
<PAGE> 5
Treasurer or the Secretary or an Assistant Secretary, setting forth the adjusted
number of shares purchasable upon the exercise of this Warrant and the Exercise
Price of such shares after such adjustment, setting forth a brief statement of
the facts requiring such adjustment and setting forth the computation by which
adjustment was made.
SECTION 3.03: FORM OF WARRANT AFTER ADJUSTMENTS. The form of this
Warrant need not be changed because of any adjustments in the Exercise Price or
the number or kind of the Warrant Shares, and Warrants theretofore or thereafter
issued may continue to express the same price and number and kind of shares as
are stated in this Warrant, as initially issued.
ARTICLE IV
OTHER PROVISIONS RELATING TO RIGHTS OF WARRANTHOLDER
SECTION 4.01: NO RIGHTS AS SHAREHOLDERS. Nothing contained in this
Warrant shall be construed as conferring upon the Warrantholder the right to
vote or to receive dividends or to consent or to receive notice as a shareholder
in respect of any meeting of shareholders for the election of trustees of the
Trust or of any other matter, or any rights whatsoever as shareholders of the
Trust.
SECTION 4.02: LOST, STOLEN, MUTILATED OR DESTROYED WARRANTS. If this
Warrant is lost, stolen, mutilated or destroyed, the Trust may, on such
reasonable terms as to indemnity or otherwise as it may in its reasonable
discretion impose (which shall, in the case of a mutilated Warrant, include the
surrender thereof), issue a new Warrant of like denomination and tenor as, and
in substitution for, this Warrant.
ARTICLE V
TRANSFER OF WARRANTS
SECTION 5.01: TRANSFER. Any sale, transfer or other disposition, in
whole or in part, of this Warrant or any rights hereunder shall be made in
accordance with and subject to the provisions of the Securities Act of 1933, as
amended (the "Securities Act"), and the rules and regulations promulgated
thereunder.
SECTION 5.02: RESTRICTIVE LEGEND. Each Warrant Share issued upon
exercise of this Warrant shall bear a legend containing the following words:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE SECURITIES
HAVE BEEN ACQUIRED FOR
<PAGE> 6
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
EXCEPT IN COMPLIANCE WITH SUCH ACT."
"IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN
EXAMINATION OF THE PERSON OR ENTITY CREATING THE SECURITIES AND THE
TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE
SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES
COMMISSION OR REGULATORY AUTHORITY. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE."
"THE BY-LAWS OF THE TRUST PROVIDE, AMONG OTHER THINGS, THAT NO PERSON
MAY ACQUIRE TRUST SECURITIES (INCLUDING THESE SECURITIES) IF,
THEREAFTER, HE WOULD BENEFICIALLY OWN MORE THAN 9.8% OF THE TRUST'S
SHARES OF BENEFICIAL INTEREST. IN APPLYING THIS RESTRICTION,
CONVERTIBLE SECURITIES OF THE TRUST BENEFICIALLY OWNED BY SUCH PERSON
(INCLUDING CONVERTIBLE SECURITIES) ARE TO BE TREATED AS IF ALREADY
CONVERTED INTO SHARES OF BENEFICIAL INTEREST. A COPY OF THE BY-LAWS AND
INFORMATION ABOUT THE LIMIT ON OWNERSHIP MAY BE OBTAINED FROM THE
SECRETARY OF THE TRUST."
The requirement that the above legend be placed upon certificates evidencing any
such securities shall cease and terminate upon the earliest of the following
events: (i) when such shares are transferred in an underwritten public offering,
(ii) when such shares are transferred pursuant to Rule 144 under the Securities
Act or (iii) when such shares are transferred in any other transaction if the
seller delivers to the Trust an opinion of its counsel, which counsel and
opinion shall be reasonably satisfactory to the Trust, or a "no-action" letter
from the Staff of the Securities and Exchange Commission, in either case to the
effect that such legend is no longer necessary in order to protect the Trust
against a violation by it of the Securities Act upon any sale or other
disposition of such shares without registration thereunder. Upon the occurrence
of such event, the Trust, upon the surrender of certificates containing such
legend, shall, at its own expense, deliver to the holder of any such securities
as to which the requirement for such legend shall have terminated, one or more
new certificates evidencing such securities not bearing such legend.
<PAGE> 7
ARTICLE VI
OTHER MATTERS
SECTION 6.01: SUCCESSORS AND ASSIGNS. The terms and provisions of this
Warrant shall bind and inure to the benefit of the Warrantholder and its
permitted successors and assigns.
SECTION 6.02: ENTIRE AGREEMENT. This Warrant and the Exhibit hereto
contain the entire agreement among the parties with respect to the subject
matter hereof and supersede all prior and contemporaneous arrangements or
understandings with respect thereto.
SECTION 6.03: AMENDMENTS AND WAIVERS. The terms and provisions of this
Warrant, including the provisions of this sentence, may be modified or amended,
or any of the provisions hereof waived, temporarily or permanently, pursuant to
the written consent of the Trust and the Warrantholder.
SECTION 6.04: COUNTERPARTS. This Warrant may be executed in any number
of counterparts, and each such counterpart hereof shall be deemed to be an
original instrument, but all such counterparts together shall constitute but one
agreement.
SECTION 6.05: GOVERNING LAW. This Warrant shall be governed by and
construed in accordance with the laws of the State of Ohio without giving effect
to the principles of conflicts of law. Each of the parties hereto hereby
irrevocably and unconditionally consents to submit to the jurisdiction of the
courts of the State of Ohio and of the United States of America, in each case
located in the County of Cuyahoga, for any action, proceeding or investigation
in any court or before any governmental authority ("Litigation") arising out of
or relating to this Warrant and the transactions contemplated hereby (and agrees
not to commence any Litigation relating thereto except in such courts), and
further agrees that service of any process, summons, notice or document by U.S.
registered mail to its respective address set forth in this Warrant shall be
effective service of process for any Litigation brought against it in any such
court. Each of the parties hereto hereby irrevocably and unconditionally waives
any objection to the laying of venue of any Litigation arising out of this
Warrant or the transactions contemplated hereby in the courts of the State of
Ohio or the United States of America, in each case located in the County of
Cuyahoga, and hereby further irrevocably and unconditionally waives and agrees
not to plead or claim in any such court that any such Litigation brought in any
such court has been brought in an inconvenient forum.
SECTION 6.06: NOTICE. All notices, requests, consents and other
communications
<PAGE> 8
hereunder to any party shall be deemed to be sufficient if contained in a
written instrument delivered in person or sent by telecopy,
nationally-recognized overnight courier or first class registered or certified
mail, return receipt requested, postage prepaid, addressed to such party at the
address set forth below or such other address as may hereafter be designated in
writing by such party to the other parties:
(i) if to the Trust, to:
First Union Real Estate Equity and Mortgage Investments
55 Public Square, Suite 1900
Cleveland, Ohio 44113-1937
Telephone: (216) 781-4030
Attention: GENERAL COUNSEL
(ii) if to the Warrantholder, to:
Enterprise Asset Management, Inc.
11 East 44th Street
New York, New York
Telephone: (212) 824-1100
Attention: GENERAL COUNSEL
All such notices, requests, consents and other communications shall be
deemed to have been given when received.
SECTION 6.07: SEVERABILITY. Whenever possible, each provision of this
Warrant shall be interpreted in such manner as to be effective and valid, but if
any provision of this Warrant is held to be invalid or unenforceable in any
respect, such invalidity or unenforceability shall not render invalid or
unenforceable any other provision of this Warrant.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Trust
under seal as of the __th day of November, 1998.
FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS
By:
Name:
Title:
Attest: _______________________
Secretary
<PAGE> 9
EXHIBIT A TO WARRANT
FORM OF SUBSCRIPTION
(To be executed only upon exercise of Warrant)
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
The undersigned registered holder of the within Warrant hereby irrevocably
exercises such Warrant for, and purchases thereunder, _____________ Common
Shares covered by the within Warrant and requests that the certificates for such
shares be issued in the name of, and delivered to the undersigned, whose address
is set forth below. The undersigned herewith makes payment in full therefor of
the Exercise Price therefor (or $___________ in the aggregate).
-------------------------------------------
(Signature must conform in all respects to
name of holder as specified on the face of
Warrant)
-------------------------------------------
(Street Address)
-------------------------------------------
(City) (State) (Zip Code)
Date
--------------------------------------
<PAGE> 1
Exhibit 10(ai)
EMPLOYMENT AGREEMENT
FOR
DANIEL P. FRIEDMAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Employment......................................................................................1
2. Employment Period...............................................................................1
3. Services/Place of Employment....................................................................2
4. Compensation and Benefits.......................................................................2
5. Termination of Employment and Change in Control.................................................9
6. Compensation Upon Termination of Employment....................................................14
7. Mitigation; Payments Pending Resolution
of Disputes....................................................................................17
8. Non-compete....................................................................................17
9. No Solicitation; Confidentiality...............................................................18
10. Previous Employer..............................................................................19
11. Arbitration....................................................................................21
12. Indemnification/Legal Fees.....................................................................21
13. Successors and Assigns.........................................................................23
14. Modification or Waiver.........................................................................23
15. Notices........................................................................................24
16. Governing Law..................................................................................24
17. Severability...................................................................................24
18. Counterparts...................................................................................24
19. Headings.......................................................................................24
20. Entire Agreement...............................................................................25
21. Exculpation....................................................................................25
</TABLE>
Schedules
---------
Schedule A Existing Investments
Schedule B Prior Employer Agreements
i
<PAGE> 3
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "AGREEMENT") is entered into as of
November 2, 1998, by and between DANIEL P. FRIEDMAN, an individual residing in
the State of New York ("EXECUTIVE"), and FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS, an Ohio business trust with offices at 55 Public Square,
Suite 1900, Cleveland, Ohio 44113(the "COMPANY").
RECITALS
WHEREAS, the Company desires to employ Executive as President and Chief
Executive Officer and Executive desires to be employed by the Company as
President and Chief Executive Officer.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
1. EMPLOYMENT.
The Company hereby agrees to employ Executive, and Executive hereby
agrees to accept such employment during the period and upon the terms and
conditions set forth in this Agreement.
2. EMPLOYMENT PERIOD.
(1) EMPLOYMENT PERIOD. Except as otherwise provided in this
Agreement to the contrary, the terms and conditions of this Agreement shall be
and remain in effect during the period of employment (the "EMPLOYMENT PERIOD")
established under this Paragraph 2. The initial Employment Period shall be for a
term commencing on the date of this Agreement and ending on the fourth
anniversary of the date of this Agreement, unless earlier terminated as provided
in this Agreement. Immediately following the execution hereof, the Executive
shall resign from all positions as an employee, officer and director of his
current employer and its affiliates.
(2) UNEXPIRED EMPLOYMENT PERIOD. If Executive's employment with the
Company is terminated, for purposes of this Agreement the term "UNEXPIRED
EMPLOYMENT PERIOD" shall mean the period commencing on the date of such
termination and ending on the last day of the Employment Period.
<PAGE> 4
3. SERVICES/PLACE OF EMPLOYMENT.
(1) SERVICES. During the Employment Period, Executive shall hold the
position of President and Chief Executive Officer. Executive shall devote his
best efforts and such business time, skill and attention exclusively to the
business of the Company (other than absences due to vacation, illness,
disability or approved leave of absence) as is necessary to perform such duties
as are customarily performed by similar executive officers together with such
other reasonable duties as may be more specifically enumerated from time to time
by the Company's board of trustees ("BOARD OF TRUSTEES" or "BOARD") PROVIDED,
HOWEVER, that the foregoing is not intended to preclude Executive from (i)
owning and managing personal investments, including real estate investments, in
accordance with Paragraph 8 hereof or (ii) engaging in charitable activities and
community affairs, provided that (x) with respect to the activities referenced
in clause (ii), Executive obtains the prior approval of the Board as to the
amount of time Executive will devote to such activities and (y) the performance
of the activities referred to in clauses (i) and (ii) of this Paragraph 3(a)
does not prevent Executive from devoting sufficient business time to the Company
to carry out Executive's duties as President and Chief Executive Officer.
(2) PLACE OF EMPLOYMENT. The principal place of employment of
Executive shall be at the Company's executive offices in New York (Manhattan
County), New York.
(3) MEMBERSHIP ON THE BOARD. During the Employment Period, the Company
shall cause Executive to be nominated as a member of the management slate of the
Board of Trustees and shall use its reasonable best efforts to cause you to be
elected a trustee and a member of the Executive Committee (if such committee
exists). The Company hereby confirms that Executive has been elected as a member
of the Board with a term expiring in calendar year 2000.
4. Compensation and Benefits.
(1) SALARY. During the first twelve (12) months of the Employment
Period, the Company shall pay Executive an annual base salary in the amount of
$340,000 payable in accordance with the Company's regular payroll practices.
Executive's annual base salary shall be reviewed annually in accordance with the
policy of the Company and shall be subject to upward adjustment based upon,
among other things, Executive's performance, as determined in the sole
discretion of the Board PROVIDED HOWEVER that the annual increase in base salary
for each year of the Term shall be at least 5% over the annual base salary for
the previous year
2
<PAGE> 5
(the annual base salary as adjusted from time to time is hereinafter referred to
as the "ANNUAL BASE SALARY"). In no event shall Executive's Annual Base Salary
in effect at a particular time be reduced without his prior written consent.
(2) TAXES AND WITHHOLDING. The Company shall have the right to deduct
and withhold from all compensation all social security and other federal, state
and local taxes and charges which currently are or which hereafter may be
required by law to be so deducted and withheld.
(3) ADDITIONAL BENEFITS. In addition to the other compensation payable
pursuant to this Agreement, Executive shall be entitled to the following.
(1) BENEFITS. All fringe benefits and perquisites as are generally
made available from time to time to all employees and/or to
executives of the Company generally and to participate in any
pension, profit-sharing or similar plan or program established
from time to time by the Company for the benefit of its employees
and/or executives generally, subject to the provisions of such
plans. In any event, Executive's health insurance coverage shall
commence on the date of this Agreement (or the Company shall
reimburse Executive for COBRA payments until such coverage can
commence).
(2) MEMBERSHIP FEES. Membership fees and costs for reasonable and
customary memberships in professional organizations.
(3) EXPENSE REIMBURSEMENT. Reimbursement for reasonable business
expenses incurred by Executive in furtherance of the interests of
the Company, subject to the reasonable procedures established by
the Company from time to time with respect to substantiation and
approval.
(4) VACATION AND SICK LEAVE/PERSONAL DAYS. Such periods of paid
vacation and sick leave/personal days allowance each year (not
less than four (4)weeks vacation and seven (7) days of sick
leave/personal days per full twelve (12) month period) that are
consistent with the Company's vacation and sick leave/personal
days policy for senior management.
(5) SHARE OPTIONS. GRANT. The grant upon execution of this Agreement
of share options ("SHARE OPTIONS") to acquire 1,080,000 shares of
the Company's common shares of beneficial interest ("COMMON
SHARES").
3
<PAGE> 6
The parties acknowledge that the Company's 1994 Long Term Incentive
Performance Plan (the "PLAN") does not contain a sufficient number of Common
Shares issuable under the Plan to cover the full amount of the Share Options as
of the date of this Agreement. Notwithstanding the foregoing, the Company hereby
grants Executive the full number of Share Options subject to the condition that
the grant of such Share Options ("CONDITIONAL OPTIONS") shall be conditioned on
the approval by the shareholders of the Company of such grant (if required) and
amendments to the Plan increasing the number of Common Shares issuable
thereunder and otherwise permitting the Share Options and Additional Share
Options (as defined herein) to be issued in accordance with the terms of this
Agreement. The Company shall use its reasonable best efforts to obtain such
approval. If the Company has not obtained such shareholder approval by June 30,
1999, such failure shall permit Executive to terminate this Agreement for Good
Reason in accordance with the terms of this Agreement, in which case such
Conditional Options shall be forfeited.
VESTING/EXERCISE. All of the Share Options shall vest as of the date of
this Agreement but may only be exercised as follows: twenty-five (25%) percent
of each of the $6.50 Options (as defined herein) and $8.50 Options (as defined
herein) shall become exercisable on each anniversary of the Employment Period
whether or not the Executive is employed by the Company on such anniversary.
Notwithstanding the foregoing, Share Options granted to Executive shall (I)
become exercisable in full upon (a) a Change in Control (as defined herein); (b)
a termination by the Company without Cause (as defined herein); (c) a
termination by the Executive for Good Reason (as defined herein); or (d) the
eighteen (18) month anniversary of the Company being placed into voluntary or
involuntary bankruptcy if Executive has not terminated his employment prior to
such eighteen (18) month anniversary; (II) become exercisable Pro Rata (as
defined herein) in the event of a termination due to death or Disability (as
defined herein) (the Share Options in clauses (I) and (II) being collectively
defined together with any Share Options which have previously become exercisable
by their terms, as the "EXERCISABLE OPTIONS"); and (III) be forfeited
4
<PAGE> 7
in full (whether exercisable (unless previously exercised) or unexercisable)
upon a termination by the Company for Cause (as defined herein). "PRO RATA"
means an amount of Share Options (half of which shall be $6.50 Options and half
of which shall be $8.50 Options) equal to (x) the percentage equal to (i) the
number of days from the commencement of the Exercise Year (as defined herein)
through the date of the termination event divided by (ii) 365; MULTIPLIED BY (y)
the number of Share Options which would otherwise have become exercisable during
the Exercise Year in which the termination event occurs. "EXERCISE YEAR" means
the twelve months commencing on the last date prior to termination on which the
Share Options became exercisable (or from commencement of the Employment Period
if termination occurs during the first twelve months of such commencement).
The Company shall provide Executive 30 days' prior written notice of the
record date for any dividends or other distributions being paid with respect to
the Common Shares. If such dividend or other distribution would trigger
Executive's right to terminate this Agreement due to a Change in Control (the
"TRIGGER EVENT"), then, notwithstanding anything herein to the contrary, the
Share Options shall become exercisable in full as of the date of such notice;
PROVIDED, HOWEVER, that (i) any exercise of such Share Options by Executive
shall only become effective upon the Trigger Event being consummated and (ii) if
the Trigger Event is not consummated, any such Share Options which were not yet
exercisable as of the date of the Trigger Event shall again become unexercisable
until the date they would have otherwise become exercisable in accordance with
the terms of this Agreement.
Notwithstanding anything herein to the contrary, if the exercise price
adjustment (see below) results in the exercise price of a Share Option equaling
zero, such Share Option shall immediately become exercisable.
EXERCISE PRICE. The option exercise price with regard to the Share Options
granted shall be as follows: 50% at $6.50 per Common Share (the "$6.50 OPTIONS")
and 50% at $8.50 per Common Share (the "$8.50 OPTIONS"). The exercise price of
each Share Option will be adjusted (but
5
<PAGE> 8
not below zero) on each anniversary of its grant by an amount equal to (i) an
increase of 10% per annum (compounded annually) MINUS (ii) all dividends or
other distributions (including the value of non-cash dividends, including
without limitation, share dividends and spin-off distributions) declared per
Common Share for the applicable year. Notwithstanding the foregoing, the
adjustment to the exercise price set forth in clause (i) in the preceding
sentence shall (x) not commence until the eighteen (18) month anniversary of the
commencement of the Employment Period; and (y) be applied ratably at the time(s)
Executive exercises the Share Options (e.g. if Share Options are exercised on
the 20-month anniversary of the commencement of the Employment Term, the
exercise price in effect on that date would be increased by 1.667% (2/12 of 10%)
minus any dividends paid on or prior to the date of exercise (to the extent such
dividends were not previously deducted)).
OPTION EXERCISE TERM. Subject to the terms of this Agreement, all Share
Options shall be exercisable for 10 years following the date upon which they are
granted unless they expire earlier in accordance with this Agreement. In the
event of the non-renewal of this Agreement after the expiration of the
Employment Period, a Change of Control (unless Executive does not terminate his
employment under this Agreement in which event the Share Options shall remain
exercisable until they would otherwise expire under the terms of this
Agreement), a termination without Cause, a termination for Good Reason, death or
a termination by reason of Disability, all Exercisable Options shall remain
exercisable for six (6) months following such event after which they shall
expire. In the event of a termination without Good Reason, (i) all Share Options
which were already exercisable prior to the date of termination shall remain
exercisable for thirty (30) days after such event of termination after which
they shall expire, and (ii) all the Share Options which are not yet exercisable
prior to the date of termination shall be exercisable for thirty (30) days after
the date on which they become exercisable in accordance with the terms of this
Agreement after which they shall expire (the "POST-EXERCISABLE OPTIONS").
6
<PAGE> 9
Notwithstanding the foregoing, the option exercise term of all Share
Options intended to be treated as incentive stock options shall be such shorter
period of time as may be required for incentive stock option treatment pursuant
to Section 422 of the Internal Revenue Code of 1986, as amended (the "CODE").
COMPANY CALL OPTION. With respect to the Post-Exercisable Options, the
Company shall have the right (the "CALL OPTION") to require Executive to
transfer the Post-Exercisable Options to the Company at any time after the date
of termination by Executive of his employment Without Good Reason for a price
equal to the "Exercise Spread" (as defined herein). If such Exercise Spread is
zero or less, the Company may purchase the Post-Exercisable Options for no
consideration. The Company shall provide written notice to Executive that it is
exercising the Call Option and the date on which such notice is deemed to have
been given under the terms of this Agreement shall be deemed the "VALUATION
DATE". The "EXERCISE SPREAD" shall be (i) the difference between (a) the
exercise price of a Post-Exercisable option and (b) the "Closing Price" of a
Common Share on the Valuation Date. The "CLOSING PRICE" means (i) if the Common
Shares are listed or admitted to trading on the New York Stock Exchange (the
"NYSE"), the American Stock Exchange ("AMEX") any national securities exchange
or the Nasdaq Stock Market ("NASDAQ"), the closing price on the Valuation Date,
or if no such sale takes place on such day, the average of the closing bid and
asked prices on such day; (ii) if the Common Shares are not listed or admitted
to trading on the NYSE, the AMEX, any national securities exchange or the
Nasdaq, the last reported sale price on the Valuation Date or, if no sale takes
place on such day, the average of the closing bid and asked prices on such day,
as reported by a reliable quotation source designated by the Company; or (iii)
if the Common Shares are not listed or admitted to trading on the NYSE, the
AMEX, any national securities exchange or the Nasdaq and no such last reported
sale price or closing bid and asked prices are available, the average of the
reported high bid and low asked prices on the Valuation Date, as reported by a
reliable quotation source designated by the Company, or
7
<PAGE> 10
if there shall be no bid and asked prices on the Valuation Date, the
average of the high bid and low asked prices, as so reported, on the
most recent day (not more than five (5) days prior to the date in
question) for which prices have been so reported; PROVIDED, HOWEVER,
that if there are no bid and asked prices reported during the five (5)
days prior to the date in question, the Closing Price of the Common
Shares shall be determined by the independent trustees of the Company
acting in good faith on the basis of such quotations and other
information as they consider, in their reasonable judgment,
appropriate.
ISOS. Any Share Options granted hereunder shall be "INCENTIVE
STOCK OPTIONS" under Section 422 of the Code to the maximum extent
possible under the Code, subject to Executive satisfying applicable
employment and holding period requirements under the Code.
TRANSFERABILITY. Executive shall not be entitled to assign,
hypothecate, alienate, pledge or otherwise transfer the Share Options
except to a member of Executive's Immediate Family or an entity
controlled by Executive or Executive's Immediate Family (other than
Share Options intended to be incentive stock options within the
meaning of Section 422 of the Code which shall not be transferable).
"IMMEDIATE FAMILY" shall mean a spouse, child, parent, sibling or
in-law. Any such transferee shall be bound by the terms of this
Agreement and the Plan with respect to such Share Options.
(6) ADDITIONAL SHARE OPTIONS. The grant of additional share options
("ADDITIONAL SHARE OPTIONS") in an amount equal to 3% of the first $120
million of equity (common or convertible preferred securities) ("NEW
EQUITY") raised by the Company subsequent to October 15, 1998. The
Additional Share Options shall be considered "Share Options" for purposes
of this Agreement except that (i) such options shall be granted and shall
vest as of the date of issuance of the New Equity; (ii) the per share
exercise price of such options shall be equal to the per share issue price
of the New Equity; and (iii) such options shall become and remain
exercisable (or be immediately exercisable) in the same proportion and same
manner and duration that the previously granted Share Options are already
8
<PAGE> 11
exercisable or become exercisable (E.G. if 25% of the previously
granted Share Options have already become exercisable at the time
the Additional Share Options are granted, 25% of all the
Additional Share Options shall be immediately exercisable upon
grant, with the balance of the Additional Share Options
proportionally becoming exercisable on the same timetable as the
previously granted Share Options). In addition, Executive shall
be entitled to receive such other share options as may be granted
by the Board in its sole discretion.
(vii) LEGAL FEES AND COSTS. Payment of the Executive's reasonable
legal fees incurred in connection with the preparation and
negotiation of this Agreement, up to an aggregate maximum of
$35,000 for Executive, David Schonberger and Anne N. Zahner.
5. TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL.
(1) REASON FOR TERMINATION. Executive's employment hereunder may be
terminated during the Employment Period under the following circumstances:
(1) CAUSE. The Company shall have the right to terminate Executive's
employment for Cause upon Executive's: (A) conviction of, or plea
of guilty or no contest to, an illegal act with respect to the
Company; (B) conviction of, or plea of guilty or no contest to, a
felony involving moral turpitude; or (C) Executive's willful and
continued failure to use best efforts to substantially perform
his duties hereunder (other than any such failure resulting from
Executive's (x) incapacity due to Disability or (y) inability due
to the unreasonableness of the duties requested to be performed)
or willful misconduct or gross negligence in the performance of
his duties hereunder for a period of thirty (30) days after
written demand for substantial performance is delivered by the
Company specifically identifying the manner in which the Company
believes Executive has not substantially performed his duties or
engaged in actions which constitute willful misconduct or gross
negligence, PROVIDED, HOWEVER, that no termination for Cause
shall occur unless a majority of the Board has voted to terminate
Executive for Cause after Executive has received notice and an
opportunity to cure the alleged Cause in accordance with this
Paragraph 5(a)(i) and has failed to do so. If the Executive is
terminated for Cause, the date of termination shall be the date
9
<PAGE> 12
such written demand is delivered. Additionally, no act, or
failure to act, on Executive's part shall be considered "WILLFUL"
unless done, or omitted to be done, by him (I) not in good faith
and (II) without reasonable belief that his action or omission
was in furtherance of the interests of the Company.
(2) DEATH. Executive's employment hereunder shall terminate upon his
death.
(3) DISABILITY. The Company shall have the right to terminate
Executive's employment due to "Disability" in the event that
there is a determination by the Company, upon the advice of an
independent qualified physician mutually selected by Executive
and the Company, that Executive has become physically or mentally
incapable of performing his duties under this Agreement and such
disability has disabled Executive for a period of one hundred
eighty (180) days out of three hundred and sixty (360) days. (1)
(4) GOOD REASON. Executive shall have the right to terminate his
employment for "Good Reason": (A) upon the occurrence of any
material breach of this Agreement by the Company which shall
include but not be limited to: (1) an assignment to Executive of
duties materially inconsistent with Executive's status as
President and Chief Executive Officer or a material and adverse
alteration in the nature of, or material diminution in,
Executive's duties and/or responsibilities, reporting
obligations, titles or authority; (2) upon a reduction in
Executive's Annual Base Salary or a material reduction in other
benefits (not affecting the Company's executives generally) or a
failure to pay such amounts when due; and (3) upon the relocation
of the Company's principal executive offices or Executive's own
office location to a location outside of Manhattan, it being
acknowledged that the Company shall establish an office in
Manhattan although as of the date hereof the Company does not yet
have such an office; (B) upon the Company's failure to nominate
Executive for election to the Board of Trustees or the Company's
failure to use its reasonable best efforts to elect Executive to
the Board; (C) upon Executive being forced to resign from the
Board without Cause; (D) upon the Company being placed into
voluntary or involuntary bankruptcy; or (E) the Company's failure
to obtain shareholder approval pursuant to Paragraph 4(c)(v);
PROVIDED, HOWEVER, that no termination for Good Reason shall
occur unless the Company has received notice from
10
<PAGE> 13
Executive of termination for Good Reason and the Company has
failed to cure such alleged action which may have given rise to
Executive's right to terminate for Good Reason within thirty (30)
days after written notice of such alleged actions is delivered to
the Company specifically identifying such alleged actions. Any
dispute between the parties as to an alleged breach by the
Company as set forth in clause (A)(1) above shall be resolved by
arbitration pursuant to Paragraph 11.
(5) WITHOUT CAUSE. The Company shall have the right to terminate the
Executive's employment hereunder without Cause subject to the
terms and conditions of this Agreement.
(6) WITHOUT GOOD REASON. The Executive shall have the right to
terminate his employment hereunder without Good Reason subject to
the terms and conditions of this Agreement.
(7) CHANGE IN CONTROL. Executive shall have the right to terminate
his employment hereunder following a Change in Control. For
purposes of this Agreement "Change in Control" shall mean that
any of the following events has occurred:
(A) An acquisition (other than directly from the Company) of
any voting securities of the Company (treating all classes
of outstanding voting securities or other securities
convertible into voting securities as if they were converted
into voting securities) (the "VOTING SECURITIES") by any
"person", "entity" or "group of affiliated persons" (as such
terms are used for purposes of Section 13(d) or 14(d)
(collectively, "PERSONS") of the Securities Exchange Act of
1934, as amended (the "1934 Act") (other than Gotham
Partners, L.P. ("GOTHAM"), Apollo Real Estate Advisors, L.P.
("APOLLO") or any affiliate of Gotham or Apollo or entity in
which Gotham or Apollo own at least a 50% interest
(collectively, the "GOTHAM/APOLLO ENTITIES")) immediately
after which such Person has "Beneficial Ownership" (within
the meaning of Rule 13d-3 promulgated under the 1934 Act and
irrespective of any vesting or waiting periods) of thirty
(30%) percent or more of the combined voting power of the
Company's then outstanding Voting Securities; provided,
however, that in determining whether a Change in Control has
occurred, Voting Securities which are acquired
11
<PAGE> 14
in a "Non-Control Acquisition" (as hereinafter defined)
shall not constitute an acquisition which would cause a
Change in Control. A "NON-CONTROL ACQUISITION" shall mean an
acquisition by (1) an employee benefit plan (or a trust
forming a part thereof) maintained by (x) the Company or (y)
any corporation or other Person of which a majority of its
voting power or its equity securities or equity interest is
owned directly or indirectly by the Company (a
"Subsidiary"), (2) the Company or any Subsidiary, or (3) any
Person in connection with a "Non-Control Transaction."
(B) Six (6) of the ten (10) individuals who were appointed
to the Board after April 1, 1998 (the "INCUMBENT BOARD")
cease for any reason to be members of the Board; PROVIDED,
HOWEVER, that if the election, or nomination for election by
the Company's shareholders, of any new trustee was approved
by Friedman, such new trustee shall, for purposes of this
Agreement, be considered as a member of the Incumbent Board.
(C) A merger, consolidation or reorganization involving the
Company, unless
(1) the shareholders of the Company, immediately before
such merger, consolidation or reorganization, own, directly
or indirectly, immediately following such merger,
consolidation or reorganization, more than seventy (70%)
percent of the combined voting power of the outstanding
Voting Securities of the entity resulting from such merger
or consolidation or reorganization (the "SURVIVING ENTITY")
in substantially the same proportion as their ownership of
the Voting Securities immediately before such merger,
consolidation or reorganization, and
(2) the individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization
constitute at least two-thirds of the members of the board
of directors of the Surviving Entity or an entity
beneficially owning, directly or indirectly, a majority of
the Voting Securities of the Surviving Entity, and
12
<PAGE> 15
(3) no Person (other than the Company, any Subsidiary,
any employee benefit plan (or any trust forming a part
thereof) maintained by the Company, the Surviving Entity or
any Subsidiary, or any Person who, immediately prior to such
merger, consolidation or reorganization had Beneficial
Ownership of thirty (30%) percent or more of the then
outstanding Voting Securities) owns, directly or indirectly,
thirty percent or more of the combined voting power of the
Surviving Entity's then outstanding voting securities.
A transaction described in clauses (1) through (3) shall
herein be referred to as a "NON-CONTROL TRANSACTION".
(D) A complete liquidation or dissolution of the Company.
(E) the Company makes aggregate cash or non-cash
distributions to its shareholders of the proceeds from the
sales of assets equal to or greater than $4.00 per Common
Share and immediately following such distribution the "Net
Asset Value" of the Company is less than $150 million. "NET
ASSET VALUE" shall be the fair market value of all of the
Company's assets (as determined by mutual agreement of
Executive and the Company or, if the parties cannot agree,
by an arbitrator in accordance with Paragraph 11) less all
Company liabilities.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
solely because any Person (the "SUBJECT PERSON") acquired Beneficial Ownership
of more than the permitted amount of the outstanding Voting Securities as a
result of the acquisition of Voting Securities by the Company which, by reducing
the number of Voting Securities outstanding, increases the proportional number
of shares Beneficially Owned by the Subject Person, provided that if a Change in
Control would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Company, and after such share
acquisition by the Company, the Subject Person becomes the Beneficial Owner of
any additional Voting Securities which increases the percentage of the then
outstanding Voting Securities Beneficially Owned by the Subject Person, then a
Change in Control shall occur.
(2) NOTICE OF TERMINATION. Any termination of Executive's employment
by the Company or any such termination by Executive (other than on account of
death) shall be communicated
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<PAGE> 16
by written Notice of Termination to the other party hereto. For purposes of this
Agreement, a "NOTICE OF TERMINATION" shall mean a notice which shall indicate
the specific termination provision in this Agreement relied upon and shall set
forth in reasonable detail the facts and circumstances claimed to provide a
basis for termination of Executive's employment under the provision so
indicated. In the event of the termination of Executive's employment on account
of death, written Notice of Termination shall be deemed to have been provided on
the date of death.
6. COMPENSATION UPON TERMINATION OF EMPLOYMENT.
(1) BY THE COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. In
the event the Company terminates Executive's employment for Cause or Executive
terminates his employment without Good Reason, the Company shall pay Executive
and Executive shall be entitled to receive any (i) unpaid Annual Base Salary at
the rate then in effect accrued through and including the date of termination
and (ii) reimbursement of expenses incurred prior to the date of termination
("EXPENSE REIMBURSEMENT").
Except for any rights which Executive may have to unpaid salary amounts,
the LTC Payment (as defined herein) and Expense Reimbursement through and
including the date of termination and Exercisable Options (and, with respect to
a termination by Executive without Good Reason, any Share Options which have not
yet become exercisable on the date of termination), the Company shall have no
further obligations hereunder following such termination other than pursuant to
Paragraphs 6(d), 10 and 12. The aforesaid amounts shall be payable in full
immediately upon such termination.
(2) UPON DEATH OR DISABILITY. In the event of termination of
Executive's employment as a result of either Executive's death or Disability,
the Company shall pay to Executive, his estate or his personal representative
(i) the accrued but unpaid Annual Base Salary at the rate then in effect; (ii)
earned but unpaid incentive compensation or bonuses for completed performance
periods; (iii) an amount equal to 12 months of the Annual Base Salary at the
rate then in effect (the "SALARY PAYMENT"); and (iv) Expense Reimbursement. The
aforesaid amounts shall be payable in cash without discount for early payment,
at the option of Executive, his estate or his personal representative, either in
full immediately upon such termination or monthly over the Unexpired Employment
Period (the "PAYMENT ELECTION"). In the event of termination of employment due
to Disability, Executive shall also receive continuation of health coverage
through the end of the Unexpired Employment Period on the same basis as health
coverage is provided by the Company for active employees and as may be amended
from time to time ("MEDICAL CONTINUATION").
14
<PAGE> 17
Except for any rights which Executive may have hereunder including the
accrued Annual Base Salary, the Salary Payment, Exercisable Options, the LTC
Payment, Expense Reimbursement and in the event of a termination of employment
due to Disability, Medical Continuation, the Company shall have no further
obligations hereunder following such termination other than pursuant to
Paragraphs 6(d), 10 and 12. The foregoing payments shall be in addition to any
benefits to which Executive may be entitled under any insurance maintained by
the Company.
(3) BY THE COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON OR IN
THE EVENT OF A CHANGE IN CONTROL.
(i) NO BANKRUPTCY. In the event the Company terminates
Executive's employment for any reason other than Cause, death or Disability or
Executive terminates his employment for Good Reason (other than as set forth in
Paragraph 6(c)(ii)), or in the event of a Change of Control, the Company shall
pay to Executive and Executive shall be entitled to receive the sum total of:
(A) the accrued but unpaid Annual Base Salary at the rate then in effect; (B)
earned but unpaid incentive compensation and/or bonuses for completed
performance periods; (C)(1) if the effective date of termination is on or prior
to the eighteen (18) month anniversary of the commencement of the Employment
Term, an amount equal to three (3) times the Annual Base Salary at the rate then
in effect or (2) if the effective date of termination is after the eighteen (18)
month anniversary of the commencement of the Employment Term, an amount equal to
two and one-half (2.5) times the Annual Base Salary at the rate then in effect
(as applicable, the "TERMINATION PAYMENT"); and (D) continuation of Executive's
participation in all benefit plans, programs or arrangements of the Company
(except tax-qualified plans), including, without limitation, Medical
Continuation, for a period of two years following such termination. The
aforesaid amount shall be payable in cash without discount for early payment, at
the option of Executive, in accordance with the Payment Election.
(ii) BANKRUPTCY. Executive may not terminate employment for Good
Reason due to the Company being placed in bankruptcy until the eighteen (18)
month anniversary thereof. If Executive thereafter terminates this Agreement,
the Company shall pay to Executive and Executive shall be entitled to receive
the same payments and benefits set forth in Paragraph 6(c)(i); PROVIDED,
HOWEVER, that if the date of being placed in bankruptcy is (x) on or prior to
the eighteen (18) month anniversary of the commencement of the Employment Term,
Executive shall receive the Termination Payment set forth in Paragraph
6(c)(i)(C)(1) and (y) after the eighteen (18) month anniversary of the
commencement of the Employment Term, Executive shall receive the Termination
Payment set forth in Paragraph 6(c)(i)(C)(2).
15
<PAGE> 18
(iii) SECTION 280G. Notwithstanding anything contained in this
Agreement to the contrary, to the extent that any payment or distribution of any
type to or for Executive by the Company, any affiliate of the Company, any
person who acquires ownership or effective control of the Company or ownership
of a substantial portion of the Company's assets (within the meaning of Section
280G of the Code and the regulations thereunder), or any affiliate of such
person, whether paid or payable or distributed or distributable pursuant to the
terms of this Agreement or otherwise (the "TOTAL PAYMENTS") is or will be
subject to the excise tax imposed under Section 4999 of the Code (the "EXCISE
TAX"), then the Total Payments shall be reduced (but not below zero) if and to
the extent that a reduction in the Total Payments would result in the Executive
retaining a larger amount, on an after-tax basis (taking into account federal,
state and local income taxes and the Excise Tax), than if the Executive received
the entire amount of such Total Payments. Executive shall have the right to
specify the order in which the Company shall reduce or eliminate the Total
Payments in order to effectuate the foregoing.
Except for any rights which Executive may have hereunder including the
accrued Annual Base Salary, the Termination Payment, Exercisable Options, the
LTC Payment, Expense Reimbursement and Medical Continuation, the Company shall
have no further obligations hereunder following such termination other than
pursuant to Paragraphs 6(d), 10 and 12.
(4) GENERAL. The parties agree to cooperate to structure all
termination payments made pursuant to this Agreement in a manner so that such
payments are not subject to the Excise Tax.
16
<PAGE> 19
7. MITIGATION; PAYMENTS PENDING RESOLUTION OF DISPUTES.
Executive shall not be required to mitigate amounts payable under this
Agreement by seeking other employment or otherwise, and there shall be no offset
against amounts due Executive under this Agreement on account of subsequent
employment. Amounts owed to Executive under this Agreement shall not be offset
by any claims the Company may have against Executive and such payment shall not
be affected by any other circumstances, including, without limitation, any
counterclaim, recoupment, defense, or other right which the Company may have
against Executive or others. During the pendency of any dispute between the
Company and Executive with respect to the termination of this Agreement, the
Company shall establish and maintain an escrow account ("ESCROW ACCOUNT") with
Battle Fowler LLP ("ESCROW AGENT") pursuant to an agreement reasonably
acceptable to Executive and the Escrow Agent. The Company shall pay into the
Escrow Account from time to time the compensation and cash-value of the benefits
which would otherwise be payable to Executive if there were no dispute. Upon
resolution of the dispute, the Escrow Agent shall pay the funds in the Escrow
Account as required by the court or arbitrator with jurisdiction over the
dispute or in accordance with the joint instructions of the parties.
8. NON-COMPETE.
(1) NON-COMPETITION. Executive agrees that, without the prior written
consent of a majority of the Board and in accordance with applicable law, and
except as provided in subparagraph 8(b), during the Employment Period, Executive
shall not invest, manage or otherwise be engaged in commercial real estate.
(2) EXCLUDED ACTIVITIES. Nothing contained in this Paragraph 8 shall
preclude Executive from:
(1) Continuing to own, manage in accordance with past practices or
make additional capital contributions to Executive's existing
investments listed on SCHEDULE A attached hereto.
(2) making passive investments of 5% or less in publicly listed or
traded real estate companies.
9. NO SOLICITATION; CONFIDENTIALITY.
(1) NO SOLICITATION. During the Restricted Period (as defined herein),
Executive shall not, nor cause any other person to, without the prior written
consent of the Board, directly or indirectly, solicit for employment, employ in
any capacity or make an unsolicited recommendation to any other person that it
employ or solicit for employment any person who is or was, at any
17
<PAGE> 20
time during the Employment Period or the Restricted Period, an officer,
executive or key employee of the Company or of any of its affiliates (other than
David Schonberger and Anne N. Zahner, whose solicitation, employment or
recommendation by Executive shall not be prohibited by the terms of this
Agreement). As used in this Agreement, "RESTRICTED PERIOD" shall mean the six
(6) months following Executive's termination of employment for any reason.
(2) CONFIDENTIALITY. Executive acknowledges that, through his status
as Chief Executive Officer and President of the Company, he has, and will have,
possession of Confidential Information (as defined herein) as to the business of
the Company. Executive agrees that all such Confidential Information constitutes
a vital part of the business of the Company and its affiliates and is by its
nature trade secrets and confidential information proprietary to the Company and
its affiliates. Executive agrees that he shall not divulge, communicate, furnish
or make accessible (whether orally or in writing or in books, articles or any
other medium) to any individual, firm, partnership, corporation or other entity
or person, any knowledge or information with respect to Confidential Information
directly or indirectly relating to the business of the Company or any of its
affiliates. The term "CONFIDENTIAL INFORMATION" shall mean any information not
generally known in the relevant trade or industry or otherwise not generally
available to the public, which was obtained from the Company or which was
learned, discovered, developed, conceived, originated or prepared during or as a
result of the performance of any services by Executive on behalf of the Company.
(3) RETURN OF COMPANY DOCUMENTS. All memoranda, notes, lists,
notebooks, records and other documents or papers (and all copies thereof),
including such items stored in computer memories, portable computers and the
like, on microfiche, disk or by any other means, made or compiled by or on
behalf of Executive or made available to Executive relating to the Company are
and shall be the Company's property and shall be delivered to the Company
promptly upon the termination of Executive's employment with the Company or at
any other time after such termination on request.
(4) UNENFORCEABILITY. The provisions contained in Paragraphs 8 and 9
as to the time periods and scope of activities, persons or entities affected
shall be deemed divisible so that, if any provision contained in Paragraphs 8 or
9 is determined to be invalid or unenforceable, such provision shall be deemed
modified so as to be valid and enforceable to the full extent lawfully
permitted.
(5) REMEDIES. Executive agrees that (i) the provisions of Paragraphs 8
and 9 are reasonable and necessary for the
18
<PAGE> 21
protection of the Company; (ii) the Company would not have entered into this
Agreement unless the Executive agreed to the inclusion of such provisions; (iii)
such provisions may not be adequately enforced by an action for damages and (iv)
in the event of a breach thereof by Executive, the Company shall be entitled to
apply for and obtain injunctive relief in any court of competent jurisdiction to
restrain the breach or threatened breach of such violation or otherwise to
enforce specifically such provisions against such violation, without the
necessity of the posting of any bond by the Company. The forgoing remedies are
in addition to any rights the Company may have against Executive for damages in
the event Executive breaches any of the provisions of Paragraphs 8 and 9.
10. PREVIOUS EMPLOYER.
(1) COMMITMENT TO PAY/FUND. The Company agrees to take the following
actions with respect to the following commitments with respect to Executive's
immediately prior employer, Enterprise Asset Management, Inc. ("EAM") and
Executive:
(i) LONG-TERM COMPENSATION ("LTC"). The Company shall pay the LTC to
Executive as follows: (x) 1/3 on commencement of the Employment
Period and 1/3 on each of the second and fourth anniversaries of
the commencement of the Employment Period and (y) if this
Agreement is terminated for any reason, Company shall make a
lump sum payment equal to the present value (discounted at 10%
per annum) of any unpaid LTC (the "LTC PAYMENT"). Executive
shall reimburse Company to the extent Executive receives payment
from EAM of LTC paid by the Company.
(ii) LOAN GUARANTEES. If EAM fails to continue to guarantee existing
loans owed by Executive, the Company shall provide replacement
loans on the same or better terms and conditions as the existing
loans ("REPLACEMENT LOANS").
(iii) LOAN REPAYMENT. If EAM demands repayment prior to maturity of
existing loans to Executive from EAM, the Company shall provide
replacement loans on the same or better terms and conditions as
the existing loans ("NEW LOANS").
Executive's LTC, guarantees and loans are listed in SCHEDULE B attached
hereto.
In the event this Agreement is terminated for any reason, Executive
shall repay all Replacement Loans and New Loans within ninety (90) days of such
date of termination. The Replacement
19
<PAGE> 22
Loans and New Loans shall be nonrecourse to Executive and the Company's sole
recourse for the repayment of any Replacement Loans or New Loans shall be any
payments due to Executive from the Company under this Agreement, the Share
Options and the assets which were purchased with the proceeds from the loans
which have been replaced by the Replacement Loan or the New Loan.
(2) INDEMNITY. In the event the Executive is made party or threatened
to be made a party to any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "PROCEEDING"), by EAM, its officers,
directors, equity owners or Affiliates, by reason of Executive's having
negotiated or entered into this Agreement or otherwise having become an employee
of the Company, the Company shall indemnify, hold harmless and defend Executive
against any and all claims, demands, suits, judgments, assessments and
settlements including all expenses incurred or suffered by Executive in
connection therewith (including, without limitation, all legal fees incurred
using counsel reasonably acceptable to Executive) (collectively, "DAMAGES").
Expenses incurred by Executive in connection with any Proceeding shall be paid
by the Company in advance upon request of Executive that the Company pay such
expenses.
(3) REPRESENTATIONS. Executive hereby represents and warrants to the
Company that Executive has not entered into any written or oral agreement for
employment with EAM or any other person or entity other than the letter
agreement dated May 3, 1993; regarding the payment of LTC.
(4) SURVIVAL. The provisions of this Paragraph shall remain in effect
after this Agreement is terminated irrespective of the reasons for termination.
11. ARBITRATION.
The parties hereto will endeavor to resolve in good faith any controversy,
disagreement or claim arising between them with respect to the interpretation,
performance or operation of Paragraphs 5(a)(iv)(A)(1) and 5(a)(vii)(E) of this
Agreement. If they are unable to do so, any such controversy, disagreement or
claim will be submitted to binding arbitration, for final resolution without
appeal, by either party giving written notice to the other of the existence of a
dispute with respect to such Paragraph which it desires to have arbitrated. The
arbitration will be conducted in New York, New York by a panel of three (3)
arbitrators and will be held in accordance with the rules of the American
Arbitration Association. Of the three arbitrators, one will be selected by the
Company, one will be selected by Executive and the third will be selected by the
two arbitrators so selected. Each party will notify the other party of the
arbitrator selected by [him] [her] or it within fifteen (15) days after the
giving of the written notice referred to in this
20
<PAGE> 23
Paragraph 11. The decision and award of the arbitrators must be in writing and
will be final and binding upon the parties hereto. Judgment upon the award may
be entered in any court having jurisdiction thereof, or application may be made
to such court for a judicial acceptance of the award and an order of
enforcement, as the case may be. Subject to the provisions of Paragraph 12(b),
the expenses of arbitration will be borne in accordance with the determination
of the arbitrators.
12. INDEMNIFICATION/LEGAL FEES/"KEY MAN" INSURANCE.
(1) INDEMNIFICATION. In the event the Executive is made party or
threatened to be made a party to any Proceeding, by reason of Executive's
employment with or serving as an officer or director of the Company, the Company
shall indemnify, hold harmless and defend Executive to the fullest extent
authorized by Ohio law, as the same exists and may hereafter be amended, against
any and all Damages and such indemnification shall continue as to Executive even
after Executive is no longer employed by the Company and shall inure to the
benefit of his heirs, executors, and administrators. Notwithstanding the
foregoing, Executive shall not be entitled to indemnification pursuant to this
Paragraph 12(a) if a court or other tribunal conclusively determines that
Executive engaged in actions in connection with Executive's employment with the
Company which were committed in bad faith, were the result of active and
deliberate dishonesty, or constitute willful misconduct, fraud or gross
negligence.
Expenses incurred by Executive in connection with any Proceeding
referred to in this Paragraph 12 shall be paid by the Company in advance upon
request of Executive that the Company pay such expenses; but only in the event
that Executive shall have delivered in writing to the Company an undertaking to
reimburse the Company for expenses with respect to which Executive is not
entitled to indemnification.
The provisions of this Paragraph shall remain in effect after this
Agreement is terminated irrespective of the reasons for termination. The
indemnification provisions of this Paragraph shall not supersede or reduce any
indemnification provided to Executive under any separate agreement, or the
by-laws of the Company since it is intended that this Agreement shall expand and
extend the Executive's rights to receive indemnity.
The Company shall maintain in effect during the Employment Period a
directors' and officers' liability insurance policy, with a policy limit of at
least $10,000,000, subject to customary exclusions, with respect to claims made
against officers and directors of the Company.
21
<PAGE> 24
(2) LEGAL FEES. Except as set forth below, if any contest or dispute
shall arise between the Company and Executive regarding or as a result of any
provision of this Agreement, the Company shall pay, or reimburse Executive for,
all legal fees and expenses reasonably incurred by Executive in connection with
such contest or dispute; PROVIDED, HOWEVER, that if Executive is not successful
in respect of substantially all of Executive's claims pursued or defended in
connection with such contest or dispute, Executive shall pay or reimburse the
Company for all such fees and expenses advanced by the Company. Executive shall
pay the first $50,000 of his fees or expenses as they are incurred and the
Company shall pay all such fees and expenses over $50,000 as they are incurred.
If Executive is successful in respect of substantially all of such claims, the
Company shall reimburse Executive for any amounts paid by Executive as soon as
practicable following the final resolution of such contest or dispute.
(3) KEY MAN INSURANCE. Executive shall cooperate with, and take such
actions as may be reasonably requested by, the Company in the event the Company
determines to obtain "key man" insurance with respect to Executive.
13. SUCCESSORS AND ASSIGNS.
(1) COMPANY. Unless Executive elects to terminate this Agreement as a
result of a Change in Control, the Company shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
(2) EXECUTIVE. This Agreement and all rights of Executive hereunder
may be transferred only by will or the laws of descent and distribution. Upon
Executive's death, this Agreement and all rights of Executive hereunder shall
inure to the benefit of and be enforceable by Executive's beneficiary or
beneficiaries, personal or legal representatives, or estate, to the extent any
such person succeeds to Executive's interests under this Agreement. Executive
shall be entitled to select and change a beneficiary or beneficiaries to receive
any benefit or compensation payable hereunder following Executive's death by
giving Company written notice thereof. If Executive should die following the
date of termination while any amounts would still be payable to him hereunder if
he had continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to such person or
persons so appointed in writing by Executive, including, without limitation,
under any applicable plan, or otherwise to his legal representatives or estate.
22
<PAGE> 25
14. MODIFICATION OR WAIVER.
No amendment, modification, waiver, termination or cancellation of this
Agreement shall be binding or effective for any purpose unless it is made in a
writing signed by the party against whom enforcement of such amendment,
modification, waiver, termination or cancellation is sought. No course of
dealing between or among the parties to this Agreement shall be deemed to affect
or to modify, amend or discharge any provision or term of this Agreement. No
delay on the part of the Company or Executive in the exercise of any of their
respective rights or remedies shall operate as a waiver thereof, and no single
or partial exercise by the Company or Executive of any such right or remedy
shall preclude other or further exercise thereof. A waiver of right or remedy on
any one occasion shall not be construed as a bar to or waiver of any such right
or remedy on any other occasion.
The respective rights and obligations of the parties hereunder shall
survive the Executive's termination of employment and termination of this
Agreement to the extent necessary for the intended preservation of such rights
and obligations.
15. NOTICES.
All notices or other communications required or permitted hereunder shall
be made in writing and shall be deemed to have been duly given if delivered by
hand or delivered by a recognized delivery service or mailed, postage prepaid,
by express, certified or registered mail, return receipt requested, and
addressed to the Company at the address set forth above or Executive at his
address as set forth in the Company records (or to such other address as shall
have been previously provided in accordance with this Paragraph 15).
16. GOVERNING LAW.
This agreement will be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflicts of laws
thereunder.
17. SEVERABILITY.
Whenever possible, each provision and term of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision or term of this Agreement shall be held to be prohibited by
or invalid under such applicable law, then, such provision or term shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating or affecting in any manner whatsoever the remainder of such
provisions or term or the remaining provisions or terms of this Agreement.
23
<PAGE> 26
18. COUNTERPARTS.
This Agreement may be executed in separate counterparts, each of which is
deemed to be an original and both of which taken together shall constitute one
and the same agreement.
19. HEADINGS.
The headings of the Paragraphs of this Agreement are inserted for
convenience only and shall not be deemed to constitute a part hereof and shall
not affect the construction or interpretation of this Agreement.
20. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement of the parties with respect
to the subject matter hereof and supersedes all other prior agreements and
undertakings, both written and oral, among the parties with respect to the
subject matter hereof.
21. EXCULPATION.
Notwithstanding anything contained herein to the contrary, this Agreement
is made and executed on behalf of the Company by its officer(s) on behalf of the
trustees thereof, and none of the trustees or any additional or successor
trustee hereafter appointed, or any beneficiary, officer, employee or agent of
the Company shall have any liability in his personal or individual capacity, but
instead, Executive shall look solely to the property and assets of the Company
for satisfaction of claims of any nature arising from or in connection with this
Agreement.
[SIGNATURE PAGE FOLLOWS]
24
<PAGE> 27
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of the
date first above written.
COMPANY:
--------
FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS
By:
---------------------------------
Name:
Title:
EXECUTIVE:
----------
------------------------------------
<PAGE> 28
Schedule A
----------
Existing Investments
--------------------
Dan Friedman
- ------------
Investments Owned
-----------------
1. Greenburgh, NY
2. Mt. Kisco, NY (T.J. Maxx)
3. 150 Bay Street
4. 299 Broadway
5. 349 East 149th Street
6. 379 West Broadway
7. NYC Holdings
8. Angelene
9. Cheshire Properties
10. Chester Apartments
11. Emax Securities (various entities)
12. Manor Building
13. Peripheral Land
14. Peru Mall
15. Sigma LLC
16. Dancor Investments (various)
Investments Managed
-------------------
None
A-1
<PAGE> 29
Schedule B
----------
Long Term Compensation $379,241.89
Loans from EAM $336,000.00
Loans Guaranteed by EAM $115,000.00
B-1
<PAGE> 1
Exhibit 10(aj)
EMPLOYMENT AGREEMENT
FOR
ANNE NELSON ZAHNER
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. Employment......................................................................................1
2. Employment Period...............................................................................1
3. Services/Place of Employment....................................................................2
4. Compensation and Benefits.......................................................................2
5. Termination of Employment and Change in Control.................................................9
6. Compensation Upon Termination of Employment....................................................14
7. Mitigation; Payments Pending Resolution
of Disputes....................................................................................17
8. Non-compete....................................................................................17
9. No Solicitation; Confidentiality...............................................................18
10. Previous Employer..............................................................................19
11. Arbitration....................................................................................21
12. Indemnification/Legal Fees.....................................................................21
13. Successors and Assigns.........................................................................23
14. Modification or Waiver.........................................................................23
15. Notices........................................................................................24
16. Governing Law..................................................................................24
17. Severability...................................................................................24
18. Counterparts...................................................................................24
19. Headings.......................................................................................24
20. Entire Agreement...............................................................................24
21. Exculpation....................................................................................25
</TABLE>
Schedules
---------
Schedule A Existing Investments
Schedule B Prior Employer Agreements
i
<PAGE> 3
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "AGREEMENT") is entered into as of
November 2, 1998, by and between ANNE NELSON ZAHNER, an individual residing in
the State of New York ("EXECUTIVE"), and FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS, an Ohio business trust with offices at 55 Public Square,
Suite 1900, Cleveland, Ohio 44113(the "COMPANY").
RECITALS
WHEREAS, the Company desires to employ Executive as Executive Vice
President and Executive desires to be employed by the Company as Executive Vice
President.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
1. EMPLOYMENT.
The Company hereby agrees to employ Executive, and Executive hereby
agrees to accept such employment during the period and upon the terms and
conditions set forth in this Agreement.
2. EMPLOYMENT PERIOD.
(1) EMPLOYMENT PERIOD. Except as otherwise provided in this Agreement
to the contrary, the terms and conditions of this Agreement shall be and remain
in effect during the period of employment (the "EMPLOYMENT PERIOD") established
under this Paragraph 2. The initial Employment Period shall be for a term
commencing on the date of this Agreement and ending on the fourth anniversary of
the date of this Agreement, unless earlier terminated as provided in this
Agreement. Immediately following the execution hereof, the Executive shall
resign from all positions as an employee, officer and director of her current
employer and its affiliates.
(2) UNEXPIRED EMPLOYMENT PERIOD. If Executive's employment with the
Company is terminated, for purposes of this Agreement the term "UNEXPIRED
EMPLOYMENT PERIOD" shall mean the period commencing on the date of such
termination and ending on the last day of the Employment Period.
<PAGE> 4
3. SERVICES/PLACE OF EMPLOYMENT.
(1) SERVICES. During the Employment Period, Executive shall hold the
position of Executive Vice President. Executive shall devote her best efforts
and such business time, skill and attention exclusively to the business of the
Company (other than absences due to vacation, illness, disability or approved
leave of absence) as is necessary to perform such duties as are customarily
performed by similar executive officers together with such other reasonable
duties as may be more specifically enumerated from time to time by the Company's
board of trustees ("BOARD OF TRUSTEES" or "BOARD") PROVIDED, HOWEVER, that the
foregoing is not intended to preclude Executive from (i) owning and managing
personal investments, including real estate investments, in accordance with
Paragraph 8 hereof or (ii) engaging in charitable activities and community
affairs, provided that (x) with respect to the activities referenced in clause
(ii), Executive obtains the prior approval of the Board as to the amount of time
Executive will devote to such activities and (y) the performance of the
activities referred to in clauses (i) and (ii) of this Paragraph 3(a) does not
prevent Executive from devoting sufficient business time to the Company to carry
out Executive's duties as Executive Vice President.
(2) PLACE OF EMPLOYMENT. The principal place of employment of Executive
shall be at the Company's executive offices in New York (Manhattan County), New
York.
4. Compensation and Benefits.
(1) SALARY. During the first twelve (12) months of the Employment
Period, the Company shall pay Executive an annual base salary in the amount of
$200,000 payable in accordance with the Company's regular payroll practices.
Executive's annual base salary shall be reviewed annually in accordance with the
policy of the Company and shall be subject to upward adjustment based upon,
among other things, Executive's performance, as determined in the sole
discretion of the Board PROVIDED HOWEVER that the annual increase in base salary
for each year of the Term shall be at least 5% over the annual base salary for
the previous year (the annual base salary as adjusted from time to time is
hereinafter referred to as the "ANNUAL BASE SALARY"). In no event shall
Executive's Annual Base Salary in effect at a particular time be reduced without
her prior written consent.
(2) TAXES AND WITHHOLDING. The Company shall have the right to deduct
and withhold from all compensation all social security and other federal, state
and local taxes and charges which currently are or which hereafter may be
required by law to be so deducted and withheld. (1)
2
<PAGE> 5
(3) ADDITIONAL BENEFITS. In addition to the other compensation payable
pursuant to this Agreement, Executive shall be entitled to the following.
(1) BENEFITS. All fringe benefits and perquisites as are generally made
available from time to time to all employees and/or to executives of
the Company generally and to participate in any pension,
profit-sharing or similar plan or program established from time to
time by the Company for the benefit of its employees and/or
executives generally, subject to the provisions of such plans. In
any event, Executive's health insurance coverage shall commence on
the date of this Agreement (or the Company shall reimburse Executive
for COBRA payments until such coverage can commence).
(2) MEMBERSHIP FEES. Membership fees and costs for reasonable and
customary memberships in professional organizations.
(3) EXPENSE REIMBURSEMENT. Reimbursement for reasonable business
expenses incurred by Executive in furtherance of the interests of
the Company, subject to the reasonable procedures established by the
Company from time to time with respect to substantiation and
approval.
(4) VACATION AND SICK LEAVE/PERSONAL DAYS. Such periods of paid
vacation and sick leave/personal days allowance each year (not less
than four (4)weeks vacation and seven (7) days of sick
leave/personal days per full twelve (12) month period) that are
consistent with the Company's vacation and sick leave/personal days
policy for senior management.
(5) SHARE OPTIONS. GRANT. The grant upon execution of this Agreement of
share options ("SHARE OPTIONS") to acquire 360,000 shares of the
Company's common shares of beneficial interest ("COMMON SHARES").
The parties acknowledge that the Company's 1994 Long
Term Incentive Performance Plan (the "PLAN") does not
contain a sufficient number of Common Shares issuable under
the Plan to cover the full amount of the Share Options as of
the date of this Agreement. Notwithstanding the foregoing,
the Company hereby grants Executive the full number of Share
Options subject to the condition that the grant of such
Share Options ("CONDITIONAL OPTIONS") shall be conditioned
on
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the approval by the shareholders of the Company of such
grant (if required) and amendments to the Plan increasing
the number of Common Shares issuable thereunder and
otherwise permitting the Share Options and Additional Share
Options (as defined herein) to be issued in accordance with
the terms of this Agreement. The Company shall use its
reasonable best efforts to obtain such approval. If the
Company has not obtained such shareholder approval by June
30, 1999, such failure shall permit Executive to terminate
this Agreement for Good Reason in accordance with the terms
of this Agreement, in which case such Conditional Options
shall be forfeited.
VESTING/EXERCISE. All of the Share Options shall vest
as of the date of this Agreement but may only be exercised
as follows: twenty-five (25%) percent of each of the $6.50
Options (as defined herein) and $8.50 Options (as defined
herein) shall become exercisable on each anniversary of the
Employment Period whether or not the Executive is employed
by the Company on such anniversary. Notwithstanding the
foregoing, Share Options granted to Executive shall (I)
become exercisable in full upon (a) a Change in Control (as
defined herein); (b) a termination by the Company without
Cause (as defined herein); (c) a termination by the
Executive for Good Reason (as defined herein); or (d) the
eighteen (18) month anniversary of the Company being placed
into voluntary or involuntary bankruptcy if Executive has
not terminated her employment prior to such eighteen (18)
month anniversary; (II) become exercisable Pro Rata (as
defined herein) in the event of a termination due to death
or Disability (as defined herein) (the Share Options in
clauses (I) and (II) being collectively defined together
with any Share Options which have previously become
exercisable by their terms, as the "EXERCISABLE OPTIONS");
and (III) be forfeited in full (whether exercisable (unless
previously exercised) or unexercisable) upon a termination
by the Company for Cause (as defined herein). "PRO RATA"
means an amount of Share Options (half of which shall be
$6.50 Options and half of which shall be $8.50 Options)
equal to (x) the percentage equal to (i) the number of days
from the commencement of the Exercise Year (as defined
herein) through the date of the termination event divided by
(ii) 365;
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MULTIPLIED BY (y) the number of Share Options which would
otherwise have become exercisable during the Exercise Year
in which the termination event occurs. "EXERCISE YEAR" means
the twelve months commencing on the last date prior to
termination on which the Share Options became exercisable
(or from commencement of the Employment Period if
termination occurs during the first twelve months of such
commencement).
The Company shall provide Executive 30 days' prior
written notice of the record date for any dividends or other
distributions being paid with respect to the Common Shares.
If such dividend or other distribution would trigger
Executive's right to terminate this Agreement due to a
Change in Control (the "TRIGGER EVENT"), then,
notwithstanding anything herein to the contrary, the Share
Options shall become exercisable in full as of the date of
such notice; PROVIDED, HOWEVER, that (i) any exercise of
such Share Options by Executive shall only become effective
upon the Trigger Event being consummated and (ii) if the
Trigger Event is not consummated, any such Share Options
which were not yet exercisable as of the date of the Trigger
Event shall again become unexercisable until the date they
would have otherwise become exercisable in accordance with
the terms of this Agreement.
Notwithstanding anything herein to the contrary, if the
exercise price adjustment (see below) results in the
exercise price of a Share Option equaling zero, such Share
Option shall immediately become exercisable.
EXERCISE PRICE. The option exercise price with regard
to the Share Options granted shall be as follows: 50% at
$6.50 per Common Share (the "$6.50 OPTIONS") and 50% at
$8.50 per Common Share (the "$8.50 OPTIONS"). The exercise
price of each Share Option will be adjusted (but not below
zero) on each anniversary of its grant by an amount equal to
(i) an increase of 10% per annum (compounded annually) MINUS
(ii) all dividends or other distributions (including the
value of non-cash dividends, including without limitation,
share dividends and spin-off distributions) declared per
Common Share for the applicable year. Notwithstanding the
foregoing, the adjustment to the exercise price set forth in
clause (i) in the preceding sentence shall
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(x) not commence until the eighteen (18) month anniversary
of the commencement of the Employment Period; and (y) be
applied ratably at the time(s) Executive exercises the Share
Options (e.g. if Share Options are exercised on the 20-month
anniversary of the commencement of the Employment Term, the
exercise price in effect on that date would be increased by
1.667% (2/12 of 10%) minus any dividends paid on or prior to
the date of exercise (to the extent such dividends were not
previously deducted)).
OPTION EXERCISE TERM. Subject to the terms of this
Agreement, all Share Options shall be exercisable for 10
years following the date upon which they are granted unless
they expire earlier in accordance with this Agreement. In
the event of the non-renewal of this Agreement after the
expiration of the Employment Period, a Change of Control
(unless Executive does not terminate her employment under
this Agreement in which event the Share Options shall remain
exercisable until they would otherwise expire under the
terms of this Agreement), a termination without Cause, a
termination for Good Reason, death or a termination by
reason of Disability, all Exercisable Options shall remain
exercisable for six (6) months following such event after
which they shall expire. In the event of a termination
without Good Reason, (i) all Share Options which were
already exercisable prior to the date of termination shall
remain exercisable for thirty (30) days after such event of
termination after which they shall expire, and (ii) all the
Share Options which are not yet exercisable prior to the
date of termination shall be exercisable for thirty (30)
days after the date on which they become exercisable in
accordance with the terms of this Agreement after which they
shall expire (the "POST-EXERCISABLE Options").
Notwithstanding the foregoing, the option exercise term
of all Share Options intended to be treated as incentive
stock options shall be such shorter period of time as may be
required for incentive stock option treatment pursuant to
Section 422 of the Internal Revenue Code of 1986, as amended
(the "CODE").
COMPANY CALL OPTION. With respect to the
Post-Exercisable Options, the Company shall have
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the right (the "CALL OPTION") to require Executive to
transfer the Post-Exercisable Options to the Company at any
time after the date of termination by Executive of her
employment Without Good Reason for a price equal to the
"Exercise Spread" (as defined herein). If such Exercise
Spread is zero or less, the Company may purchase the
Post-Exercisable Options for no consideration. The Company
shall provide written notice to Executive that it is
exercising the Call Option and the date on which such notice
is deemed to have been given under the terms of this
Agreement shall be deemed the "VALUATION DATE". The
"EXERCISE SPREAD" shall be (i) the difference between (a)
the exercise price of a Post-Exercisable option and (b) the
"Closing Price" of a Common Share on the Valuation Date. The
"CLOSING PRICE" means (i) if the Common Shares are listed or
admitted to trading on the New York Stock Exchange (the
"NYSE"), the American Stock Exchange ("AMEX") any national
securities exchange or the Nasdaq Stock Market ("NASDAQ"),
the closing price on the Valuation Date, or if no such sale
takes place on such day, the average of the closing bid and
asked prices on such day; (ii) if the Common Shares are not
listed or admitted to trading on the NYSE, the AMEX, any
national securities exchange or the Nasdaq, the last
reported sale price on the Valuation Date or, if no sale
takes place on such day, the average of the closing bid and
asked prices on such day, as reported by a reliable
quotation source designated by the Company; or (iii) if the
Common Shares are not listed or admitted to trading on the
NYSE, the AMEX, any national securities exchange or the
Nasdaq and no such last reported sale price or closing bid
and asked prices are available, the average of the reported
high bid and low asked prices on the Valuation Date, as
reported by a reliable quotation source designated by the
Company, or if there shall be no bid and asked prices on the
Valuation Date, the average of the high bid and low asked
prices, as so reported, on the most recent day (not more
than five (5) days prior to the date in question) for which
prices have been so reported; PROVIDED, HOWEVER, that if
there are no bid and asked prices reported during the five
(5) days prior to the date in question, the Closing Price of
the Common Shares shall be determined by the independent
trustees of the
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<PAGE> 10
Company acting in good faith on the basis of such quotations
and other information as they consider, in their reasonable
judgment, appropriate.
ISOS. Any Share Options granted hereunder shall be
"INCENTIVE STOCK OPTIONS" under Section 422 of the Code to
the maximum extent possible under the Code, subject to
Executive satisfying applicable employment and holding
period requirements under the Code.
TRANSFERABILITY. Executive shall not be entitled to
assign, hypothecate, alienate, pledge or otherwise transfer
the Share Options except to a member of Executive's
Immediate Family or an entity controlled by Executive or
Executive's Immediate Family (other than Share Options
intended to be incentive stock options within the meaning of
Section 422 of the Code which shall not be transferable).
"IMMEDIATE FAMILY" shall mean a spouse, child, parent,
sibling or in-law. Any such transferee shall be bound by the
terms of this Agreement and the Plan with respect to such
Share Options.
(6) ADDITIONAL SHARE OPTIONS. The grant of additional share options
("ADDITIONAL SHARE OPTIONS") in an amount equal to 1% of the
first $120 million of equity (common or convertible preferred
securities) ("NEW EQUITY") raised by the Company subsequent to
October 15, 1998. The Additional Share Options shall be
considered "Share Options" for purposes of this Agreement except
that (i) such options shall be granted and shall vest as of the
date of issuance of the New Equity; (ii) the per share exercise
price of such options shall be equal to the per share issue price
of the New Equity; and (iii) such options shall become and remain
exercisable (or be immediately exercisable) in the same
proportion and same manner and duration that the previously
granted Share Options are already exercisable or become
exercisable (E.G. if 25% of the previously granted Share Options
have already become exercisable at the time the Additional Share
Options are granted, 25% of all the Additional Share Options
shall be immediately exercisable upon grant, with the balance of
the Additional Share Options proportionally becoming exercisable
on the same timetable as the previously granted Share Options).
In addition, Executive shall be entitled to receive
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such other share options as may be granted by the Board in its
sole discretion.
(vii) LEGAL FEES AND COSTS. Payment of the Executive's reasonable
legal fees incurred in connection with the preparation and
negotiation of this Agreement, up to an aggregate maximum of
$35,000 for Executive, Daniel P. Friedman and David Schonberger.
5. TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL.
(1) REASON FOR TERMINATION. Executive's employment hereunder may be
terminated during the Employment Period under the following circumstances:
(1) CAUSE. The Company shall have the right to terminate Executive's
employment for Cause upon Executive's: (A) conviction of, or plea
of guilty or no contest to, an illegal act with respect to the
Company; (B) conviction of, or plea of guilty or no contest to, a
felony involving moral turpitude; or (C) Executive's willful and
continued failure to use best efforts to substantially perform
her duties hereunder (other than any such failure resulting from
Executive's (x) incapacity due to Disability or (y) inability due
to the unreasonableness of the duties requested to be performed)
or willful misconduct or gross negligence in the performance of
her duties hereunder for a period of thirty (30) days after
written demand for substantial performance is delivered by the
Company specifically identifying the manner in which the Company
believes Executive has not substantially performed her duties or
engaged in actions which constitute willful misconduct or gross
negligence, PROVIDED, HOWEVER, that no termination for Cause
shall occur unless a majority of the Board has voted to terminate
Executive for Cause after Executive has received notice and an
opportunity to cure the alleged Cause in accordance with this
Paragraph 5(a)(i) and has failed to do so. If the Executive is
terminated for Cause, the date of termination shall be the date
such written demand is delivered. Additionally, no act, or
failure to act, on Executive's part shall be considered "WILLFUL"
unless done, or omitted to be done, by her (I) not in good faith
and (II) without reasonable belief that her action or omission
was in furtherance of the interests of the Company.
(2) DEATH. Executive's employment hereunder shall terminate upon her
death.
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(3) DISABILITY. The Company shall have the right to terminate
Executive's employment due to "Disability" in the event that
there is a determination by the Company, upon the advice of an
independent qualified physician mutually selected by Executive
and the Company, that Executive has become physically or mentally
incapable of performing her duties under this Agreement and such
disability has disabled Executive for a period of one hundred
eighty (180) days out of three hundred and sixty (360) days. (1)
(4) GOOD REASON. Executive shall have the right to terminate her
employment for "Good Reason": (A) upon the occurrence of any
material breach of this Agreement by the Company which shall
include but not be limited to: (1) an assignment to Executive of
duties materially inconsistent with Executive's status as
Executive Vice President or a material and adverse alteration in
the nature of, or material diminution in, Executive's duties
and/or responsibilities, reporting obligations, titles or
authority; (2) upon a reduction in Executive's Annual Base Salary
or a material reduction in other benefits (not affecting the
Company's executives generally) or a failure to pay such amounts
when due; and (3) upon the relocation of the Company's principal
executive offices or Executive's own office location to a
location outside of Manhattan, it being acknowledged that the
Company shall establish an office in Manhattan although as of the
date hereof the Company does not yet have such an office; (B)
upon the Company's failure to nominate Daniel P. Friedman
("FRIEDMAN") for election to the Board of Trustees or the
Company's failure to use its reasonable best efforts to elect
Friedman to the Board; (C) upon Friedman being forced to resign
from the Board without Cause; (D) upon Friedman's termination of
his Employment Agreement for Good Reason; (E) upon the Company
being placed into voluntary or involuntary bankruptcy; or (F) the
Company's failure to obtain shareholder approval pursuant to
Paragraph 4(c)(v); PROVIDED, HOWEVER, that no termination for
Good Reason shall occur unless the Company has received notice
from Executive of termination for Good Reason and the Company has
failed to cure such alleged action which may have given rise to
Executive's right to terminate for Good Reason within thirty (30)
days after written notice of such alleged actions is delivered to
the Company specifically identifying such alleged actions.
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Any dispute between the parties as to an alleged breach by the
Company as set forth in clause (A)(1) above shall be resolved by
arbitration pursuant to Paragraph 11.
(5) WITHOUT CAUSE. The Company shall have the right to terminate the
Executive's employment hereunder without Cause subject to the terms
and conditions of this Agreement.
(6) WITHOUT GOOD REASON. The Executive shall have the right to terminate
her employment hereunder without Good Reason subject to the terms and
conditions of this Agreement.
(7) CHANGE IN CONTROL. Executive shall have the right to terminate her
employment hereunder following a Change in Control. For purposes of
this Agreement "Change in Control" shall mean that any of the
following events has occurred: (1)
(A) An acquisition (other than directly from the Company) of any
voting securities of the Company (treating all classes of
outstanding voting securities or other securities convertible
into voting securities as if they were converted into voting
securities) (the "VOTING SECURITIES") by any "person", "entity"
or "group of affiliated persons" (as such terms are used for
purposes of Section 13(d) or 14(d) (collectively, "PERSONS") of
the Securities Exchange Act of 1934, as amended (the "1934 Act")
(other than Gotham Partners, L.P. ("GOTHAM"), Apollo Real Estate
Advisors, L.P. ("APOLLO") or any affiliate of Gotham or Apollo or
entity in which Gotham or Apollo own at least a 50% interest
(collectively, the "GOTHAM/APOLLO ENTITIES")) immediately after
which such Person has "Beneficial Ownership" (within the meaning
of Rule 13d-3 promulgated under the 1934 Act and irrespective of
any vesting or waiting periods) of thirty (30%) percent or more
of the combined voting power of the Company's then outstanding
Voting Securities; provided, however, that in determining whether
a Change in Control has occurred, Voting Securities which are
acquired in a "Non-Control Acquisition" (as hereinafter defined)
shall not constitute an acquisition which would cause a Change in
Control. A "NON-CONTROL ACQUISITION" shall mean an acquisition by
(1) an employee benefit plan (or a trust forming a part thereof)
maintained by (x) the
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Company or (y) any corporation or other Person of which a
majority of its voting power or its equity securities or equity
interest is owned directly or indirectly by the Company (a
"Subsidiary"), (2) the Company or any Subsidiary, or (3) any
Person in connection with a "Non-Control Transaction."
(B) Six (6) of the ten (10) individuals who were appointed to the
Board after April 1, 1998 (the "INCUMBENT BOARD") cease for any
reason to be members of the Board; PROVIDED, HOWEVER, that if the
election, or nomination for election by the Company's
shareholders, of any new trustee was approved by Friedman, such
new trustee shall, for purposes of this Agreement, be considered
as a member of the Incumbent Board.
(C) A merger, consolidation or reorganization involving the
Company, unless
(1) the shareholders of the Company, immediately before such
merger, consolidation or reorganization, own, directly or
indirectly, immediately following such merger, consolidation or
reorganization, more than seventy (70%) percent of the combined
voting power of the outstanding Voting Securities of the entity
resulting from such merger or consolidation or reorganization
(the "SURVIVING ENTITY") in substantially the same proportion as
their ownership of the Voting Securities immediately before such
merger, consolidation or reorganization, and
(2) the individuals who were members of the Incumbent Board
immediately prior to the execution of the agreement providing for
such merger, consolidation or reorganization constitute at least
two-thirds of the members of the board of directors of the
Surviving Entity or an entity beneficially owning, directly or
indirectly, a majority of the Voting Securities of the Surviving
Entity, and
(3) no Person (other than the Company, any Subsidiary, any
employee benefit plan (or any trust forming a part thereof)
maintained by the Company, the Surviving Entity or any
Subsidiary, or any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of
thirty (30%) percent or
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more of the then outstanding Voting Securities) owns, directly or
indirectly, thirty percent or more of the combined voting power
of the Surviving Entity's then outstanding voting securities.
A transaction described in clauses (1) through (3) shall herein
be referred to as a "Non-Control Transaction".
(D) A complete liquidation or dissolution of the Company.
(E) the Company makes aggregate cash or non-cash distributions to
its shareholders of the proceeds from the sales of assets equal
to or greater than $4.00 per Common Share and. immediately
following such distribution the "Net Asset Value" of the Company
is less than $150 million. "NET ASSET VALUE" shall be the fair
market value of all of the Company's assets (as determined by
mutual agreement of Executive and the Company or, if the parties
cannot agree, by an arbitrator in accordance with Paragraph 11)
less all Company liabilities.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
solely because any Person (the "SUBJECT PERSON") acquired Beneficial Ownership
of more than the permitted amount of the outstanding Voting Securities as a
result of the acquisition of Voting Securities by the Company which, by reducing
the number of Voting Securities outstanding, increases the proportional number
of shares Beneficially Owned by the Subject Person, provided that if a Change in
Control would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Company, and after such share
acquisition by the Company, the Subject Person becomes the Beneficial Owner of
any additional Voting Securities which increases the percentage of the then
outstanding Voting Securities Beneficially Owned by the Subject Person, then a
Change in Control shall occur.
(2) NOTICE OF TERMINATION. Any termination of Executive's employment
by the Company or any such termination by Executive (other than on account of
death) shall be communicated by written Notice of Termination to the other party
hereto. For purposes of this Agreement, a "NOTICE OF TERMINATION" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of Executive's
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employment under the provision so indicated. In the event of the termination of
Executive's employment on account of death, written Notice of Termination shall
be deemed to have been provided on the date of death.
6. COMPENSATION UPON TERMINATION OF EMPLOYMENT.
(1) BY THE COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. In
the event the Company terminates Executive's employment for Cause or Executive
terminates her employment without Good Reason, the Company shall pay Executive
and Executive shall be entitled to receive any (i) unpaid Annual Base Salary at
the rate then in effect accrued through and including the date of termination
and (ii) reimbursement of expenses incurred prior to the date of termination
("EXPENSE REIMBURSEMENT").
Except for any rights which Executive may have to unpaid salary amounts,
the LTC Payment (as defined herein) and Expense Reimbursement through and
including the date of termination and Exercisable Options (and, with respect to
a termination by Executive without Good Reason, any Share Options which have not
yet become exercisable on the date of termination), the Company shall have no
further obligations hereunder following such termination other than pursuant to
Paragraphs 6(d), 10 and 12. The aforesaid amounts shall be payable in full
immediately upon such termination.
(2) UPON DEATH OR DISABILITY. In the event of termination of
Executive's employment as a result of either Executive's death or Disability,
the Company shall pay to Executive, her estate or her personal representative
(i) the accrued but unpaid Annual Base Salary at the rate then in effect; (ii)
earned but unpaid incentive compensation or bonuses for completed performance
periods; (iii) an amount equal to 12 months of the Annual Base Salary at the
rate then in effect (the "SALARY PAYMENT"); and (iv) Expense Reimbursement. The
aforesaid amounts shall be payable in cash without discount for early payment,
at the option of Executive, her estate or her personal representative, either in
full immediately upon such termination or monthly over the Unexpired Employment
Period (the "PAYMENT ELECTION"). In the event of termination of employment due
to Disability, Executive shall also receive continuation of health coverage
through the end of the Unexpired Employment Period on the same basis as health
coverage is provided by the Company for active employees and as may be amended
from time to time ("MEDICAL CONTINUATION").
Except for any rights which Executive may have hereunder including the
accrued Annual Base Salary, the Salary Payment, Exercisable Options, the LTC
Payment, Expense Reimbursement and in the event of a termination of employment
due to Disability, Medical Continuation, the Company shall have no further
obligations hereunder following such termination other than
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pursuant to Paragraphs 6(d), 10 and 12. The foregoing payments shall be in
addition to any benefits to which Executive may be entitled under any insurance
maintained by the Company.
(3) BY THE COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON OR IN THE
EVENT OF A CHANGE IN CONTROL.
(i) NO BANKRUPTCY. In the event the Company terminates Executive's
employment for any reason other than Cause, death or Disability or Executive
terminates her employment for Good Reason (other than as set forth in Paragraph
6(c)(ii)), or in the event of a Change of Control, the Company shall pay to
Executive and Executive shall be entitled to receive the sum total of: (A) the
accrued but unpaid Annual Base Salary at the rate then in effect; (B) earned but
unpaid incentive compensation and/or bonuses for completed performance periods;
(C)(1) if the effective date of termination is on or prior to the eighteen (18)
month anniversary of the commencement of the Employment Term, an amount equal to
three (3) times the Annual Base Salary at the rate then in effect or (2) if the
effective date of termination is after the eighteen (18) month anniversary of
the commencement of the Employment Term, an amount equal to two and one-half
(2.5) times the Annual Base Salary at the rate then in effect (as applicable,
the "TERMINATION PAYMENT"); and (D) continuation of Executive's participation in
all benefit plans, programs or arrangements of the Company (except tax-qualified
plans), including, without limitation, Medical Continuation, for a period of two
years following such termination. The aforesaid amount shall be payable in cash
without discount for early payment, at the option of Executive, in accordance
with the Payment Election.
(ii) BANKRUPTCY. Executive may not terminate employment for Good
Reason due to the Company being placed in bankruptcy until the eighteen (18)
month anniversary thereof. If Executive thereafter terminates this Agreement,
the Company shall pay to Executive and Executive shall be entitled to receive
the same payments and benefits set forth in Paragraph 6(c)(i); PROVIDED,
HOWEVER, that if the date of being placed in bankruptcy is (x) on or prior to
the eighteen (18) month anniversary of the commencement of the Employment Term,
Executive shall receive the Termination Payment set forth in Paragraph
6(c)(i)(C)(1) and (y) after the eighteen (18) month anniversary of the
commencement of the Employment Term, Executive shall receive the Termination
Payment set forth in Paragraph 6(c)(i)(C)(2).
(iii) SECTION 280G. Notwithstanding anything contained in this
Agreement to the contrary, to the extent that any payment or distribution of any
type to or for Executive by the Company, any affiliate of the Company, any
person who acquires ownership or effective control of the Company or ownership
of a substantial portion of the Company's assets (within the meaning of Section
280G of the Code and the
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regulations thereunder), or any affiliate of such person, whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise (the "TOTAL PAYMENTS") is or will be subject to the excise tax
imposed under Section 4999 of the Code (the "EXCISE TAX"), then the Total
Payments shall be reduced (but not below zero) if and to the extent that a
reduction in the Total Payments would result in the Executive retaining a larger
amount, on an after-tax basis (taking into account federal, state and local
income taxes and the Excise Tax), than if the Executive received the entire
amount of such Total Payments. Executive shall have the right to specify the
order in which the Company shall reduce or eliminate the Total Payments in order
to effectuate the foregoing.
Except for any rights which Executive may have hereunder including the
accrued Annual Base Salary, the Termination Payment, Exercisable Options, the
LTC Payment, Expense Reimbursement and Medical Continuation, the Company shall
have no further obligations hereunder following such termination other than
pursuant to Paragraphs 6(d), 10 and 12.
(4) GENERAL. The parties agree to cooperate to structure all
termination payments made pursuant to this Agreement in a manner so that such
payments are not subject to the Excise Tax.
7. MITIGATION; PAYMENTS PENDING RESOLUTION OF DISPUTES.
Executive shall not be required to mitigate amounts payable under this
Agreement by seeking other employment or otherwise, and there shall be no offset
against amounts due Executive under this Agreement on account of subsequent
employment. Amounts owed to Executive under this Agreement shall not be offset
by any claims the Company may have against Executive and such payment shall not
be affected by any other circumstances, including, without limitation, any
counterclaim, recoupment, defense, or other right which the Company may have
against Executive or others. During the pendency of any dispute between the
Company and Executive with respect to the termination of this Agreement, the
Company shall establish and maintain an escrow account ("ESCROW ACCOUNT") with
Battle Fowler LLP ("ESCROW AGENT") pursuant to an agreement reasonably
acceptable to Executive and the Escrow Agent. The Company shall pay into the
Escrow Account from time to time the compensation and cash-value of the benefits
which would otherwise be payable to Executive if there were no dispute. Upon
resolution of the dispute, the Escrow Agent shall pay the funds in the Escrow
Account as required by the court or arbitrator with jurisdiction over the
dispute or in accordance with the joint instructions of the parties.
8. NON-COMPETE.
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(1) NON-COMPETITION. Executive agrees that, without the prior written
consent of a majority of the Board and in accordance with applicable law, and
except as provided in subparagraph 8(b), during the Employment Period, Executive
shall not invest, manage or otherwise be engaged in commercial real estate.
(2) EXCLUDED ACTIVITIES. Nothing contained in this Paragraph 8 shall
preclude Executive from:
(1) Continuing to own, manage in accordance with past practices or make
additional capital contributions to Executive's existing investments
listed on SCHEDULE A attached hereto.
(2) making passive investments of 5% or less in publicly listed or traded
real estate companies.
9. NO SOLICITATION; CONFIDENTIALITY.
(1) NO SOLICITATION. During the Restricted Period (as defined herein),
Executive shall not, nor cause any other person to, without the prior written
consent of the Board, directly or indirectly, solicit for employment, employ in
any capacity or make an unsolicited recommendation to any other person that it
employ or solicit for employment any person who is or was, at any time during
the Employment Period or the Restricted Period, an officer, executive or key
employee of the Company or of any of its affiliates (other than Friedman and
David Schonberger, whose solicitation, employment or recommendation by Executive
shall not be prohibited by the terms of this Agreement). As used in this
Agreement, "RESTRICTED PERIOD" shall mean the six (6) months following
Executive's termination of employment for any reason.
(2) CONFIDENTIALITY. Executive acknowledges that, through her status
as Executive Vice President of the Company, she has, and will have, possession
of Confidential Information (as defined herein) as to the business of the
Company. Executive agrees that all such Confidential Information constitutes a
vital part of the business of the Company and its affiliates and is by its
nature trade secrets and confidential information proprietary to the Company and
its affiliates. Executive agrees that she shall not divulge, communicate,
furnish or make accessible (whether orally or in writing or in books, articles
or any other medium) to any individual, firm, partnership, corporation or other
entity or person, any knowledge or information with respect to Confidential
Information directly or indirectly relating to the business of the Company or
any of its affiliates. The term "CONFIDENTIAL INFORMATION" shall mean any
information not generally known in the relevant trade or industry or otherwise
not generally available to the public, which was obtained from the Company or
which was learned, discovered, developed,
17
<PAGE> 20
conceived, originated or prepared during or as a result of the performance of
any services by Executive on behalf of the Company. (1)
(3) RETURN OF COMPANY DOCUMENTS. All memoranda, notes, lists,
notebooks, records and other documents or papers (and all copies thereof),
including such items stored in computer memories, portable computers and the
like, on microfiche, disk or by any other means, made or compiled by or on
behalf of Executive or made available to Executive relating to the Company are
and shall be the Company's property and shall be delivered to the Company
promptly upon the termination of Executive's employment with the Company or at
any other time after such termination on request.
(4) UNENFORCEABILITY. The provisions contained in Paragraphs 8 and 9
as to the time periods and scope of activities, persons or entities affected
shall be deemed divisible so that, if any provision contained in Paragraphs 8 or
9 is determined to be invalid or unenforceable, such provision shall be deemed
modified so as to be valid and enforceable to the full extent lawfully
permitted.
(5) REMEDIES. Executive agrees that (i) the provisions of Paragraphs 8
and 9 are reasonable and necessary for the protection of the Company; (ii) the
Company would not have entered into this Agreement unless the Executive agreed
to the inclusion of such provisions; (iii) such provisions may not be adequately
enforced by an action for damages and (iv) in the event of a breach thereof by
Executive, the Company shall be entitled to apply for and obtain injunctive
relief in any court of competent jurisdiction to restrain the breach or
threatened breach of such violation or otherwise to enforce specifically such
provisions against such violation, without the necessity of the posting of any
bond by the Company. The forgoing remedies are in addition to any rights the
Company may have against Executive for damages in the event Executive breaches
any of the provisions of Paragraphs 8 and 9.
10. PREVIOUS EMPLOYER.
(1) COMMITMENT TO PAY/FUND. The Company agrees to take the following
actions with respect to the following commitments with respect to Executive's
immediately prior employer, Enterprise Asset Management, Inc. ("EAM") and
Executive:
(i) LONG-TERM COMPENSATION ("LTC"). The Company shall pay the LTC to
Executive as follows: (x) 1/3 on commencement of the Employment
Period and 1/3 on each of the second and fourth anniversaries of
the commencement of the Employment Period and (y) if this
Agreement is terminated for any reason,
18
<PAGE> 21
Company shall make a lump sum payment equal to the present value
(discounted at 10% per annum) of any unpaid LTC (the "LTC
PAYMENT"). Executive shall reimburse Company to the extent
Executive receives payment from EAM of LTC paid by the Company.
(ii) LOAN GUARANTEES. If EAM fails to continue to guarantee existing
loans owed by Executive, the Company shall provide replacement
loans on the same or better terms and conditions as the existing
loans ("REPLACEMENT LOANS").
(iii) LOAN REPAYMENT. If EAM demands repayment prior to maturity of
existing loans to Executive from EAM, the Company shall provide
replacement loans on the same or better terms and conditions as
the existing loans ("NEW LOANS").
Executive's LTC, guarantees and loans are listed in SCHEDULE B attached
hereto.
Notwithstanding the foregoing, the Replacement Loans and New Loans shall
have a term of no less than three (3) years with principal payable from time to
time from the net after-tax proceeds received by Executive (the "NET PROCEEDS")
from (i) the LTC Payment; (ii) the exercise of Share Options; (iii) payments due
to Executive from the Company upon termination of Executive's employment under
this Agreement; and (iv) the assets which were purchased with the proceeds from
the loans which have been replaced by the Replacement Loan or the New Loan
(collectively, the "COLLATERAL"). The Company may offset Net Proceeds payable by
it to Executive against the Replacement Loan or the New Loan and any such offset
shall reduce the then outstanding principal amount of such loan. The Replacement
Loans and New Loans shall be nonrecourse to Executive and the Company's sole
recourse for the repayment of any Replacement Loans or New Loans shall be to the
Collateral.
(2) INDEMNITY. In the event the Executive is made party or threatened
to be made a party to any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "PROCEEDING"), by EAM, its officers,
directors, equity owners or Affiliates, by reason of Executive's having
negotiated or entered into this Agreement or otherwise having become an employee
of the Company, the Company shall indemnify, hold harmless and defend Executive
against any and all claims, demands, suits, judgments, assessments and
settlements including all expenses incurred or suffered by Executive in
connection therewith (including, without limitation, all legal fees incurred
using counsel reasonably acceptable to Executive) (collectively, "DAMAGES").
Expenses incurred by Executive in connection with
19
<PAGE> 22
any Proceeding shall be paid by the Company in advance upon request of Executive
that the Company pay such expenses.
(3) REPRESENTATIONS. Executive hereby represents and warrants to the
Company that Executive has not entered into any written or oral agreement for
employment with EAM or any other person or entity other than the letter
agreement dated February 1, 1998 regarding the payment of LTC.
(4) SURVIVAL. The provisions of this Paragraph shall remain in effect
after this Agreement is terminated irrespective of the reasons for termination.
11. ARBITRATION.
The parties hereto will endeavor to resolve in good faith any
controversy, disagreement or claim arising between them with respect to the
interpretation, performance or operation of Paragraphs 5(a)(iv)(A)(1) and
5(a)(vii)(E) of this Agreement. If they are unable to do so, any such
controversy, disagreement or claim will be submitted to binding arbitration, for
final resolution without appeal, by either party giving written notice to the
other of the existence of a dispute with respect to such Paragraph which it
desires to have arbitrated. The arbitration will be conducted in New York, New
York by a panel of three (3) arbitrators and will be held in accordance with the
rules of the American Arbitration Association. Of the three arbitrators, one
will be selected by the Company, one will be selected by Executive and the third
will be selected by the two arbitrators so selected. Each party will notify the
other party of the arbitrator selected by her or it within fifteen (15) days
after the giving of the written notice referred to in this Paragraph 11. The
decision and award of the arbitrators must be in writing and will be final and
binding upon the parties hereto. Judgment upon the award may be entered in any
court having jurisdiction thereof, or application may be made to such court for
a judicial acceptance of the award and an order of enforcement, as the case may
be. Subject to the provisions of Paragraph 12(b), the expenses of arbitration
will be borne in accordance with the determination of the arbitrators.
12. INDEMNIFICATION/LEGAL FEES/"KEY MAN" INSURANCE.
(1) INDEMNIFICATION. In the event the Executive is made party or
threatened to be made a party to any Proceeding, by reason of Executive's
employment with or serving as an officer or director of the Company, the Company
shall indemnify, hold harmless and defend Executive to the fullest extent
authorized by Ohio law, as the same exists and may hereafter be amended, against
any and all Damages and such indemnification shall continue as to Executive even
after Executive is no longer employed by the Company and shall inure to the
benefit of her
20
<PAGE> 23
heirs, executors, and administrators. Notwithstanding the foregoing, Executive
shall not be entitled to indemnification pursuant to this Paragraph 12(a) if a
court or other tribunal conclusively determines that Executive engaged in
actions in connection with Executive's employment with the Company which were
committed in bad faith, were the result of active and deliberate dishonesty, or
constitute willful misconduct, fraud or gross negligence.
Expenses incurred by Executive in connection with any Proceeding
referred to in this Paragraph 12 shall be paid by the Company in advance upon
request of Executive that the Company pay such expenses; but only in the event
that Executive shall have delivered in writing to the Company an undertaking to
reimburse the Company for expenses with respect to which Executive is not
entitled to indemnification.
The provisions of this Paragraph shall remain in effect after this
Agreement is terminated irrespective of the reasons for termination. The
indemnification provisions of this Paragraph shall not supersede or reduce any
indemnification provided to Executive under any separate agreement, or the
by-laws of the Company since it is intended that this Agreement shall expand and
extend the Executive's rights to receive indemnity.
The Company shall maintain in effect during the Employment Period a
directors' and officers' liability insurance policy, with a policy limit of at
least $10,000,000, subject to customary exclusions, with respect to claims made
against officers and directors of the Company.
(2) LEGAL FEES. Except as set forth below, if any contest or dispute
shall arise between the Company and Executive regarding or as a result of any
provision of this Agreement, the Company shall pay, or reimburse Executive for,
all legal fees and expenses reasonably incurred by Executive in connection with
such contest or dispute; PROVIDED, HOWEVER, that if Executive is not successful
in respect of substantially all of Executive's claims pursued or defended in
connection with such contest or dispute, Executive shall pay or reimburse the
Company for all such fees and expenses advanced by the Company. Executive shall
pay the first $25,000 of her fees or expenses as they are incurred and the
Company shall pay all such fees and expenses over $25,000 as they are incurred.
If Executive is successful in respect of substantially all of such claims, the
Company shall reimburse Executive for any amounts paid by Executive as soon as
practicable following the final resolution of such contest or dispute.
(3) KEY MAN INSURANCE. Executive shall cooperate with, and take such
actions as may be reasonably requested by,
21
<PAGE> 24
the Company in the event the Company determines to obtain "key man" insurance
with respect to Executive.
13. SUCCESSORS AND ASSIGNS.
(1) COMPANY. Unless Executive elects to terminate this Agreement as a
result of a Change in Control, the Company shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
(2) EXECUTIVE. This Agreement and all rights of Executive hereunder
may be transferred only by will or the laws of descent and distribution. Upon
Executive's death, this Agreement and all rights of Executive hereunder shall
inure to the benefit of and be enforceable by Executive's beneficiary or
beneficiaries, personal or legal representatives, or estate, to the extent any
such person succeeds to Executive's interests under this Agreement. Executive
shall be entitled to select and change a beneficiary or beneficiaries to receive
any benefit or compensation payable hereunder following Executive's death by
giving Company written notice thereof. If Executive should die following the
date of termination while any amounts would still be payable to him hereunder if
he had continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to such person or
persons so appointed in writing by Executive, including, without limitation,
under any applicable plan, or otherwise to her legal representatives or estate.
14. MODIFICATION OR WAIVER.
No amendment, modification, waiver, termination or cancellation of this
Agreement shall be binding or effective for any purpose unless it is made in a
writing signed by the party against whom enforcement of such amendment,
modification, waiver, termination or cancellation is sought. No course of
dealing between or among the parties to this Agreement shall be deemed to affect
or to modify, amend or discharge any provision or term of this Agreement. No
delay on the part of the Company or Executive in the exercise of any of their
respective rights or remedies shall operate as a waiver thereof, and no single
or partial exercise by the Company or Executive of any such right or remedy
shall preclude other or further exercise thereof. A waiver of right or remedy on
any one occasion shall not be construed as a bar to or waiver of any such right
or remedy on any other occasion.
22
<PAGE> 25
The respective rights and obligations of the parties hereunder shall
survive the Executive's termination of employment and termination of this
Agreement to the extent necessary for the intended preservation of such rights
and obligations.
15. NOTICES.
All notices or other communications required or permitted hereunder
shall be made in writing and shall be deemed to have been duly given if
delivered by hand or delivered by a recognized delivery service or mailed,
postage prepaid, by express, certified or registered mail, return receipt
requested, and addressed to the Company at the address set forth above or
Executive at her address as set forth in the Company records (or to such other
address as shall have been previously provided in accordance with this Paragraph
15).
16. GOVERNING LAW.
This agreement will be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflicts of laws
thereunder.
17. SEVERABILITY.
Whenever possible, each provision and term of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision or term of this Agreement shall be held to be prohibited by
or invalid under such applicable law, then, such provision or term shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating or affecting in any manner whatsoever the remainder of such
provisions or term or the remaining provisions or terms of this Agreement.
18. COUNTERPARTS.
This Agreement may be executed in separate counterparts, each of which
is deemed to be an original and both of which taken together shall constitute
one and the same agreement.
19. HEADINGS.
The headings of the Paragraphs of this Agreement are inserted for
convenience only and shall not be deemed to constitute a part hereof and shall
not affect the construction or interpretation of this Agreement.
20. ENTIRE AGREEMENT.
This Agreement constitutes the entire agreement of the parties with
respect to the subject matter hereof and supersedes
23
<PAGE> 26
all other prior agreements and undertakings, both written and oral, among the
parties with respect to the subject matter hereof.
21. EXCULPATION.
Notwithstanding anything contained herein to the contrary, this Agreement
is made and executed on behalf of the Company by its officer(s) on behalf of the
trustees thereof, and none of the trustees or any additional or successor
trustee hereafter appointed, or any beneficiary, officer, employee or agent of
the Company shall have any liability in her personal or individual capacity, but
instead, Executive shall look solely to the property and assets of the Company
for satisfaction of claims of any nature arising from or in connection with this
Agreement.
[SIGNATURE PAGE FOLLOWS]
24
<PAGE> 27
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
COMPANY:
FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS
By:
---------------------------------
Name:
Title:
EXECUTIVE:
------------------------------------
<PAGE> 28
Schedule A
----------
Existing Investments
--------------------
Anne Zahner
- -----------
Investments Owned
-----------------
22. Greenburgh, NY
23. NYC Holdings
24. Angelene
25. Chester Apartments
26. Emax Securities (various entities)
27. Peru Mall
Investments Managed
-------------------
None
A-1
<PAGE> 29
Schedule B
----------
Anne Zahner
-----------
Long Term Compensation $ 27,184.56
Loans from EAM None
Loans Guaranteed by EAM $139,000.00
B-1
<PAGE> 1
Exhibit 10(ak)
EMPLOYMENT AGREEMENT
FOR
DAVID SCHONBERGER
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
1. Employment......................................................................................1
2. Employment Period...............................................................................1
3. Services/Place of Employment....................................................................2
4. Compensation and Benefits.......................................................................2
5. Termination of Employment and Change in Control.................................................9
6. Compensation Upon Termination of Employment....................................................14
7. Mitigation; Payments Pending Resolution
of Disputes....................................................................................17
8. Non-compete....................................................................................17
9. No Solicitation; Confidentiality...............................................................18
10. Previous Employer..............................................................................19
11. Arbitration....................................................................................21
12. Indemnification/Legal Fees.....................................................................21
13. Successors and Assigns.........................................................................22
14. Modification or Waiver.........................................................................23
15. Notices........................................................................................23
16. Governing Law..................................................................................24
17. Severability...................................................................................24
18. Counterparts...................................................................................24
19. Headings.......................................................................................24
20. Entire Agreement...............................................................................24
21. Exculpation....................................................................................24
</TABLE>
SCHEDULES
---------
Schedule A Existing Investments
Schedule B Prior Employer Agreements
<PAGE> 3
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT (the "AGREEMENT") is entered into as of
November 2, 1998, by and between DAVID SCHONBERGER, an individual residing in
the State of New York ("EXECUTIVE"), and FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS, an Ohio business trust with offices at 55 Public Square,
Suite 1900, Cleveland, Ohio 44113(the "COMPANY").
RECITALS
WHEREAS, the Company desires to employ Executive as Executive Vice
President and Executive desires to be employed by the Company as Executive Vice
President.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and agreements set forth herein, the parties hereby agree as follows:
1. EMPLOYMENT
The Company hereby agrees to employ Executive, and Executive hereby
agrees to accept such employment during the period and upon the terms and
conditions set forth in this Agreement.
2. EMPLOYMENT PERIOD
(1) EMPLOYMENT PERIOD. Except as otherwise provided in this Agreement to
the contrary, the terms and conditions of this Agreement shall be and remain in
effect during the period of employment (the "EMPLOYMENT PERIOD") established
under this Paragraph 2. The initial Employment Period shall be for a term
commencing on the date of this Agreement and ending on the fourth anniversary of
the date of this Agreement, unless earlier terminated as provided in this
Agreement. Immediately following the execution hereof, the Executive shall
resign from all positions as an employee, officer and director of his current
employer and its affiliates.
(2) UNEXPIRED EMPLOYMENT PERIOD. If Executive's employment with the Company
is terminated, for purposes of this Agreement the term "UNEXPIRED EMPLOYMENT
PERIOD" shall mean the period commencing on the date of such termination and
ending on the last day of the Employment Period.
<PAGE> 4
3. SERVICES/PLACE OF EMPLOYMENT
(1) SERVICES. During the Employment Period, Executive shall hold the
position of Executive Vice President. Executive shall devote his best efforts
and such business time, skill and attention exclusively to the business of the
Company (other than absences due to vacation, illness, disability or approved
leave of absence) as is necessary to perform such duties as are customarily
performed by similar executive officers together with such other reasonable
duties as may be more specifically enumerated from time to time by the Company's
board of trustees ("BOARD OF TRUSTEES" or "BOARD") PROVIDED, HOWEVER, that the
foregoing is not intended to preclude Executive from (i) owning and managing
personal investments, including real estate investments, in accordance with
Paragraph 8 hereof or (ii) engaging in charitable activities and community
affairs, provided that (x) with respect to the activities referenced in clause
(ii), Executive obtains the prior approval of the Board as to the amount of time
Executive will devote to such activities and (y) the performance of the
activities referred to in clauses (i) and (ii) of this Paragraph 3(a) does not
prevent Executive from devoting sufficient business time to the Company to carry
out Executive's duties as Executive Vice President.
(2) PLACE OF EMPLOYMENT. The principal place of employment of Executive
shall be at the Company's executive offices in New York (Manhattan County), New
York.
4. Compensation and Benefits
(1) SALARY. During the first twelve (12) months of the Employment Period,
the Company shall pay Executive an annual base salary in the amount of $200,000
payable in accordance with the Company's regular payroll practices. Executive's
annual base salary shall be reviewed annually in accordance with the policy of
the Company and shall be subject to upward adjustment based upon, among other
things, Executive's performance, as determined in the sole discretion of the
Board PROVIDED HOWEVER that the annual increase in base salary for each year of
the Term shall be at least 5% over the annual base salary for the previous year
(the annual base salary as adjusted from time to time is hereinafter referred to
as the "ANNUAL BASE SALARY"). In no event shall Executive's Annual Base Salary
in effect at a particular time be reduced without his prior written consent.
(2) TAXES AND WITHHOLDING. The Company shall have the right to deduct and
withhold from all compensation all social security and other federal, state and
local taxes and charges which currently are or which hereafter may be required
by law to be so deducted and withheld.
2
<PAGE> 5
(3) ADDITIONAL BENEFITS. In addition to the other compensation payable
pursuant to this Agreement, Executive shall be entitled to the following.
(1) BENEFITS. All fringe benefits and perquisites as are generally made
available from time to time to all employees and/or to executives of
the Company generally and to participate in any pension,
profit-sharing or similar plan or program established from time to
time by the Company for the benefit of its employees and/or executives
generally, subject to the provisions of such plans. In any event,
Executive's health insurance coverage shall commence on the date of
this Agreement (or the Company shall reimburse Executive for COBRA
payments until such coverage can commence).
(2) MEMBERSHIP FEES. Membership fees and costs for reasonable and customary
memberships in professional organizations.
(3) EXPENSE REIMBURSEMENT. Reimbursement for reasonable business expenses
incurred by Executive in furtherance of the interests of the Company, subject to
the reasonable procedures established by the Company from time to time with
respect to substantiation and approval.
(4) VACATION AND SICK LEAVE/PERSONAL DAYS. Such periods of paid vacation
and sick leave/personal days allowance each year (not less than four (4)weeks
vacation and seven (7) days of sick leave/personal days per full twelve (12)
month period) that are consistent with the Company's vacation and sick
leave/personal days policy for senior management.
(5) SHARE OPTIONS. GRANT. The grant upon execution of this Agreement of
share options ("SHARE OPTIONS") to acquire 360,000 shares of the Company's
common shares of beneficial interest ("COMMON SHARES").
The parties acknowledge that the Company's 1994 Long Term
Incentive Performance Plan (the "PLAN") does not contain a
sufficient number of Common Shares issuable under the Plan to
cover the full amount of the Share Options as of the date of this
Agreement. Notwithstanding the foregoing, the Company hereby
grants Executive the full number of Share Options subject to the
condition that the grant of such Share Options ("CONDITIONAL
OPTIONS") shall be conditioned on
3
<PAGE> 6
the approval by the shareholders of the Company of such grant (if
required) and amendments to the Plan increasing the number of
Common Shares issuable thereunder and otherwise permitting the
Share Options and Additional Share Options (as defined herein) to
be issued in accordance with the terms of this Agreement. The
Company shall use its reasonable best efforts to obtain such
approval. If the Company has not obtained such shareholder
approval by June 30, 1999, such failure shall permit Executive to
terminate this Agreement for Good Reason in accordance with the
terms of this Agreement, in which case such Conditional Options
shall be forfeited.
VESTING/EXERCISE. All of the Share Options shall vest as of
the date of this Agreement but may only be exercised as follows:
twenty-five (25%) percent of each of the $6.50 Options (as
defined herein) and $8.50 Options (as defined herein) shall
become exercisable on each anniversary of the Employment Period
whether or not the Executive is employed by the Company on such
anniversary. Notwithstanding the foregoing, Share Options granted
to Executive shall (I) become exercisable in full upon (a) a
Change in Control (as defined herein); (b) a termination by the
Company without Cause (as defined herein); (c) a termination by
the Executive for Good Reason (as defined herein); or (d) the
eighteen (18) month anniversary of the Company being placed into
voluntary or involuntary bankruptcy if Executive has not
terminated his employment prior to such eighteen (18) month
anniversary; (II) become exercisable Pro Rata (as defined herein)
in the event of a termination due to death or Disability (as
defined herein) (the Share Options in clauses (I) and (II) being
collectively defined together with any Share Options which have
previously become exercisable by their terms, as the "EXERCISABLE
OPTIONS"); and (III) be forfeited in full (whether exercisable
(unless previously exercised) or unexercisable) upon a
termination by the Company for Cause (as defined herein). "PRO
RATA" means an amount of Share Options (half of which shall be
$6.50 Options and half of which shall be $8.50 Options) equal to
(x) the percentage equal to (i) the number of days from the
commencement of the Exercise Year (as defined herein) through the
date of the termination event divided by (ii) 365;
4
<PAGE> 7
MULTIPLIED BY (y) the number of Share Options which would
otherwise have become exercisable during the Exercise Year in
which the termination event occurs. "EXERCISE YEAR" means the
twelve months commencing on the last date prior to termination on
which the Share Options became exercisable (or from commencement
of the Employment Period if termination occurs during the first
twelve months of such commencement).
The Company shall provide Executive 30 days' prior written
notice of the record date for any dividends or other
distributions being paid with respect to the Common Shares. If
such dividend or other distribution would trigger Executive's
right to terminate this Agreement due to a Change in Control (the
"TRIGGER EVENT"), then, notwithstanding anything herein to the
contrary, the Share Options shall become exercisable in full as
of the date of such notice; PROVIDED, HOWEVER, that (i) any
exercise of such Share Options by Executive shall only become
effective upon the Trigger Event being consummated and (ii) if
the Trigger Event is not consummated, any such Share Options
which were not yet exercisable as of the date of the Trigger
Event shall again become unexercisable until the date they would
have otherwise become exercisable in accordance with the terms of
this Agreement.
Notwithstanding anything herein to the contrary, if the
exercise price adjustment (see below) results in the exercise
price of a Share Option equaling zero, such Share Option shall
immediately become exercisable.
EXERCISE PRICE. The option exercise price with regard to the
Share Options granted shall be as follows: 50% at $6.50 per
Common Share (the "$6.50 OPTIONS") and 50% at $8.50 per Common
Share (the "$8.50 OPTIONS"). The exercise price of each Share
Option will be adjusted (but not below zero) on each anniversary
of its grant by an amount equal to (i) an increase of 10% per
annum (compounded annually) MINUS (ii) all dividends or other
distributions (including the value of non-cash dividends,
including without limitation, share dividends and spin-off
distributions) declared per Common Share for the applicable year.
Notwithstanding the foregoing, the adjustment to the exercise
price set forth in clause (i) in the preceding sentence shall
5
<PAGE> 8
(x) not commence until the eighteen (18) month anniversary of the
commencement of the Employment Period; and (y) be applied ratably
at the time(s) Executive exercises the Share Options (e.g. if
Share Options are exercised on the 20-month anniversary of the
commencement of the Employment Term, the exercise price in effect
on that date would be increased by 1.667% (2/12 of 10%) minus any
dividends paid on or prior to the date of exercise (to the extent
such dividends were not previously deducted)).
OPTION EXERCISE TERM. Subject to the terms of this
Agreement, all Share Options shall be exercisable for 10 years
following the date upon which they are granted unless they expire
earlier in accordance with this Agreement. In the event of the
non-renewal of this Agreement after the expiration of the
Employment Period, a Change of Control (unless Executive does not
terminate his employment under this Agreement in which event the
Share Options shall remain exercisable until they would otherwise
expire under the terms of this Agreement), a termination without
Cause, a termination for Good Reason, death or a termination by
reason of Disability, all Exercisable Options shall remain
exercisable for six (6) months following such event after which
they shall expire. In the event of a termination without Good
Reason, (i) all Share Options which were already exercisable
prior to the date of termination shall remain exercisable for
thirty (30) days after such event of termination after which they
shall expire, and (ii) all the Share Options which are not yet
exercisable prior to the date of termination shall be exercisable
for thirty (30) days after the date on which they become
exercisable in accordance with the terms of this Agreement after
which they shall expire (the "POST-EXERCISABLE Options").
Notwithstanding the foregoing, the option exercise term of
all Share Options intended to be treated as incentive stock
options shall be such shorter period of time as may be required
for incentive stock option treatment pursuant to Section 422 of
the Internal Revenue Code of 1986, as amended (the "CODE").
COMPANY CALL OPTION. With respect to the Post-Exercisable
Options, the Company shall have
6
<PAGE> 9
the right (the "CALL OPTION") to require Executive to transfer
the Post-Exercisable Options to the Company at any time after the
date of termination by Executive of his employment Without Good
Reason for a price equal to the "Exercise Spread" (as defined
herein). If such Exercise Spread is zero or less, the Company may
purchase the Post-Exercisable Options for no consideration. The
Company shall provide written notice to Executive that it is
exercising the Call Option and the date on which such notice is
deemed to have been given under the terms of this Agreement shall
be deemed the "VALUATION DATE". The "EXERCISE SPREAD" shall be
(i) the difference between (a) the exercise price of a
Post-Exercisable option and (b) the "Closing Price" of a Common
Share on the Valuation Date. The "CLOSING PRICE" means (i) if the
Common Shares are listed or admitted to trading on the New York
Stock Exchange (the "NYSE"), the American Stock Exchange ("AMEX")
any national securities exchange or the Nasdaq Stock Market
("NASDAQ"), the closing price on the Valuation Date, or if no
such sale takes place on such day, the average of the closing bid
and asked prices on such day; (ii) if the Common Shares are not
listed or admitted to trading on the NYSE, the AMEX, any national
securities exchange or the Nasdaq, the last reported sale price
on the Valuation Date or, if no sale takes place on such day, the
average of the closing bid and asked prices on such day, as
reported by a reliable quotation source designated by the
Company; or (iii) if the Common Shares are not listed or admitted
to trading on the NYSE, the AMEX, any national securities
exchange or the Nasdaq and no such last reported sale price or
closing bid and asked prices are available, the average of the
reported high bid and low asked prices on the Valuation Date, as
reported by a reliable quotation source designated by the
Company, or if there shall be no bid and asked prices on the
Valuation Date, the average of the high bid and low asked prices,
as so reported, on the most recent day (not more than five (5)
days prior to the date in question) for which prices have been so
reported; PROVIDED, HOWEVER, that if there are no bid and asked
prices reported during the five (5) days prior to the date in
question, the Closing Price of the Common Shares shall be
determined by the independent trustees of the
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Company acting in good faith on the basis of such quotations and
other information as they consider, in their reasonable judgment,
appropriate.
ISOS. Any Share Options granted hereunder shall be "INCENTIVE
STOCK OPTIONS" under Section 422 of the Code to the maximum
extent possible under the Code, subject to Executive satisfying
applicable employment and holding period requirements under the
Code.
TRANSFERABILITY. Executive shall not be entitled to assign,
hypothecate, alienate, pledge or otherwise transfer the Share
Options except to a member of Executive's Immediate Family or an
entity controlled by Executive or Executive's Immediate Family
(other than Share Options intended to be incentive stock options
within the meaning of Section 422 of the Code which shall not be
transferable). "IMMEDIATE FAMILY" shall mean a spouse, child,
parent, sibling or in-law. Any such transferee shall be bound by
the terms of this Agreement and the Plan with respect to such
Share Options.
(6) ADDITIONAL SHARE OPTIONS. The grant of additional share options
("ADDITIONAL SHARE OPTIONS") in an amount equal to 1% of the
first $120 million of equity (common or convertible preferred
securities)("NEW EQUITY") raised by the Company subsequent to
October 15, 1998. The Additional Share Options shall be
considered "Share Options" for purposes of this Agreement except
that (i) such options shall be granted and shall vest as of the
date of issuance of the New Equity; (ii) the per share exercise
price of such options shall be equal to the per share issue price
of the New Equity; and (iii) such options shall become and remain
exercisable (or be immediately exercisable) in the same
proportion and same manner and duration that the previously
granted Share Options are already exercisable or become
exercisable (E.G. if 25% of the previously granted Share Options
have already become exercisable at the time the Additional Share
Options are granted, 25% of all the Additional Share Options
shall be immediately exercisable upon grant, with the balance of
the Additional Share Options proportionally becoming exercisable
on the same timetable as the previously granted Share Options).
In addition, Executive shall be entitled to receive
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such other share options as may be granted by the Board in
its sole discretion.
(vii)LEGAL FEES AND COSTS. Payment of the Executive's reasonable
legal fees incurred in connection with the preparation and
negotiation of this Agreement, up to an aggregate maximum of
$35,000 for Executive, Daniel P. Friedman and Anne N.
Zahner.
5. TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
(1) REASON FOR TERMINATION. Executive's employment hereunder may be
terminated during the Employment Period under the following circumstances:
(1) CAUSE. The Company shall have the right to terminate
Executive's employment for Cause upon Executive's: (A)
conviction of, or plea of guilty or no contest to, an
illegal act with respect to the Company; (B) conviction
of, or plea of guilty or no contest to, a felony
involving moral turpitude; or (C) Executive's willful
and continued failure to use best efforts to
substantially perform his duties hereunder (other than
any such failure resulting from Executive's (x)
incapacity due to Disability or (y) inability due to
the unreasonableness of the duties requested to be
performed) or willful misconduct or gross negligence in
the performance of his duties hereunder for a period of
thirty (30) days after written demand for substantial
performance is delivered by the Company specifically
identifying the manner in which the Company believes
Executive has not substantially performed his duties or
engaged in actions which constitute willful misconduct
or gross negligence, PROVIDED, HOWEVER, that no
termination for Cause shall occur unless a majority of
the Board has voted to terminate Executive for Cause
after Executive has received notice and an opportunity
to cure the alleged Cause in accordance with this
Paragraph 5(a)(i) and has failed to do so. If the
Executive is terminated for Cause, the date of
termination shall be the date such written demand is
delivered. Additionally, no act, or failure to act, on
Executive's part shall be considered "WILLFUL" unless
done, or omitted to be done, by him (I) not in good
faith and (II) without reasonable belief that his
action or omission was in furtherance of the interests
of the Company.
(2) DEATH. Executive's employment hereunder shall terminate
upon his death.
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(3) DISABILITY. The Company shall have the right to
terminate Executive's employment due to "Disability" in
the event that there is a determination by the Company,
upon the advice of an independent qualified physician
mutually selected by Executive and the Company, that
Executive has become physically or mentally incapable
of performing his duties under this Agreement and such
disability has disabled Executive for a period of one
hundred eighty (180) days out of three hundred and
sixty (360) days. (1)
(4) GOOD REASON. Executive shall have the right to
terminate his employment for "Good Reason": (A) upon
the occurrence of any material breach of this Agreement
by the Company which shall include but not be limited
to: (1) an assignment to Executive of duties materially
inconsistent with Executive's status as Executive Vice
President or a material and adverse alteration in the
nature of, or material diminution in, Executive's
duties and/or responsibilities, reporting obligations,
titles or authority; (2) upon a reduction in
Executive's Annual Base Salary or a material reduction
in other benefits (not affecting the Company's
executives generally) or a failure to pay such amounts
when due; and (3) upon the relocation of the Company's
principal executive offices or Executive's own office
location to a location outside of Manhattan, it being
acknowledged that the Company shall establish an office
in Manhattan although as of the date hereof the Company
does not yet have such an office; (B) upon the
Company's failure to nominate Daniel P. Friedman
("FRIEDMAN") for election to the Board of Trustees or
the Company's failure to use its reasonable best
efforts to elect Friedman to the Board; (C) upon
Friedman being forced to resign from the Board without
Cause;(D) upon Friedman's termination of his Employment
Agreement for Good Reason; (E) upon the Company being
placed into voluntary or involuntary bankruptcy; or (F)
the Company's failure to obtain shareholder approval
pursuant to Paragraph 4(c)(v); provided, HOWEVER, that
no termination for Good Reason shall occur unless the
Company has received notice from Executive of
termination for Good Reason and the Company has failed
to cure such alleged action which may have given rise
to Executive's right to terminate for Good Reason
within thirty (30) days after written notice of such
alleged actions is delivered to the Company
specifically identifying such alleged actions.
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Any dispute between the parties as to an alleged breach by the
Company as set forth in clause (A)(1) above shall be resolved by
arbitration pursuant to Paragraph 11.
(5) WITHOUT CAUSE. The Company shall have the right to terminate the
Executive's employment hereunder without Cause subject to the
terms and conditions of this Agreement.
(6) WITHOUT GOOD REASON. The Executive shall have the right to
terminate his employment hereunder without Good Reason subject to
the terms and conditions of this Agreement.
(7) CHANGE IN CONTROL. Executive shall have the right to terminate
his employment hereunder following a Change in Control. For
purposes of this Agreement "Change in Control" shall mean that
any of the following events has occurred: (1)
(A) An acquisition (other than directly from the Company)
of any voting securities of the Company (treating all
classes of outstanding voting securities or other
securities convertible into voting securities as if
they were converted into voting securities) (the
"VOTING SECURITIES") by any "person", "entity" or
"group of affiliated persons" (as such terms are used
for purposes of Section 13(d) or 14(d) (collectively,
"PERSONS") of the Securities Exchange Act of 1934, as
amended (the "1934 Act") (other than Gotham Partners,
L.P. ("GOTHAM"), Apollo Real Estate Advisors, L.P.
("APOLLO") or any affiliate of Gotham or Apollo or
entity in which Gotham or Apollo own at least a 50%
interest (collectively, the "GOTHAM/APOLLO ENTITIES"))
immediately after which such Person has "Beneficial
Ownership" (within the meaning of Rule 13d-3
promulgated under the 1934 Act and irrespective of any
vesting or waiting periods) of thirty (30%) percent or
more of the combined voting power of the Company's then
outstanding Voting Securities; provided, however, that
in determining whether a Change in Control has
occurred, Voting Securities which are acquired in a
"Non-Control Acquisition" (as hereinafter defined)
shall not constitute an acquisition which would cause a
Change in Control. A "NON-CONTROL ACQUISITION" shall
mean an acquisition by (1) an employee benefit plan (or
a trust forming a part thereof) maintained by (x) the
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<PAGE> 14
Company or (y) any corporation or other Person of which a
majority of its voting power or its equity securities or
equity interest is owned directly or indirectly by the
Company (a "Subsidiary"), (2) the Company or any Subsidiary,
or (3) any Person in connection with a "Non-Control
Transaction."
(B) Six (6) of the ten (10) individuals who were appointed
to the Board after April 1, 1998 (the "INCUMBENT
BOARD") cease for any reason to be members of the
Board; PROVIDED, HOWEVER, that if the election, or
nomination for election by the Company's shareholders,
of any new trustee was approved by Friedman, such new
trustee shall, for purposes of this Agreement, be
considered as a member of the Incumbent Board.
(C) A merger, consolidation or reorganization involving the
Company, unless
(1) the shareholders of the Company, immediately before
such merger, consolidation or reorganization, own, directly
or indirectly, immediately following such merger,
consolidation or reorganization, more than seventy (70%)
percent of the combined voting power of the outstanding
Voting Securities of the entity resulting from such merger
or consolidation or reorganization (the "SURVIVING ENTITY")
in substantially the same proportion as their ownership of
the Voting Securities immediately before such merger,
consolidation or reorganization, and
(2) the individuals who were members of the Incumbent
Board immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization
constitute at least two-thirds of the members of the board
of directors of the Surviving Entity or an entity
beneficially owning, directly or indirectly, a majority of
the Voting Securities of the Surviving Entity, and
(3) no Person (other than the Company, any Subsidiary,
any employee benefit plan (or any trust forming a part
thereof) maintained by the Company, the Surviving Entity or
any Subsidiary, or any Person who, immediately prior to such
merger, consolidation or reorganization had Beneficial
Ownership of thirty (30%) percent or
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more of the then outstanding Voting Securities) owns,
directly or indirectly, thirty percent or more of the
combined voting power of the Surviving Entity's then
outstanding voting securities.
A transaction described in clauses (1) through (3) shall
herein be referred to as a "Non-Control Transaction".
(D) A complete liquidation or dissolution of the Company.
(E) the Company makes aggregate cash or non-cash
distributions to its shareholders of the proceeds from the
sales of assets equal to or greater than $4.00 per Common
Share and immediately following such distribution the "Net
Asset Value" of the Company is less than $150 million. "NET
ASSET VALUE" shall be the fair market value of all of the
Company's assets (as determined by mutual agreement of
Executive and the Company or, if the parties cannot agree,
by an arbitrator in accordance with Paragraph 11) less all
Company liabilities.
Notwithstanding the foregoing, a Change in Control shall not be deemed to occur
solely because any Person (the "SUBJECT PERSON") acquired Beneficial Ownership
of more than the permitted amount of the outstanding Voting Securities as a
result of the acquisition of Voting Securities by the Company which, by reducing
the number of Voting Securities outstanding, increases the proportional number
of shares Beneficially Owned by the Subject Person, provided that if a Change in
Control would occur (but for the operation of this sentence) as a result of the
acquisition of Voting Securities by the Company, and after such share
acquisition by the Company, the Subject Person becomes the Beneficial Owner of
any additional Voting Securities which increases the percentage of the then
outstanding Voting Securities Beneficially Owned by the Subject Person, then a
Change in Control shall occur.
(2) NOTICE OF TERMINATION. Any termination of Executive's
employment by the Company or any such termination by Executive (other
than on account of death) shall be communicated by written Notice of
Termination to the other party hereto. For purposes of this Agreement,
a "NOTICE OF TERMINATION" shall mean a notice which shall indicate the
specific termination provision in this Agreement relied upon and shall
set forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Executive's
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employment under the provision so indicated. In the event of the termination of
Executive's employment on account of death, written Notice of Termination shall
be deemed to have been provided on the date of death.
6. COMPENSATION UPON TERMINATION OF EMPLOYMENT
(1) BY THE COMPANY FOR CAUSE OR BY EXECUTIVE WITHOUT GOOD REASON. In the
event the Company terminates Executive's employment for Cause or Executive
terminates his employment without Good Reason, the Company shall pay Executive
and Executive shall be entitled to receive any (i) unpaid Annual Base Salary at
the rate then in effect accrued through and including the date of termination
and (ii) reimbursement of expenses incurred prior to the date of termination
("EXPENSE REIMBURSEMENT").
Except for any rights which Executive may have to unpaid salary amounts,
the LTC Payment (as defined herein) and Expense Reimbursement through and
including the date of termination and Exercisable Options (and, with respect to
a termination by Executive without Good Reason, any Share Options which have not
yet become exercisable on the date of termination), the Company shall have no
further obligations hereunder following such termination other than pursuant to
Paragraphs 6(d), 10 and 12. The aforesaid amounts shall be payable in full
immediately upon such termination.
(2) UPON DEATH OR DISABILITY. In the event of termination of Executive's
employment as a result of either Executive's death or Disability, the Company
shall pay to Executive, his estate or his personal representative (i) the
accrued but unpaid Annual Base Salary at the rate then in effect; (ii) earned
but unpaid incentive compensation or bonuses for completed performance periods;
(iii) an amount equal to 12 months of the Annual Base Salary at the rate then in
effect (the "SALARY PAYMENT"); and (iv) Expense Reimbursement. The aforesaid
amounts shall be payable in cash without discount for early payment, at the
option of Executive, his estate or his personal representative, either in full
immediately upon such termination or monthly over the Unexpired Employment
Period (the "PAYMENT ELECTION"). In the event of termination of employment due
to Disability, Executive shall also receive continuation of health coverage
through the end of the Unexpired Employment Period on the same basis as health
coverage is provided by the Company for active employees and as may be amended
from time to time ("MEDICAL CONTINUATION").
Except for any rights which Executive may have hereunder including the
accrued Annual Base Salary, the Salary Payment, Exercisable Options, the LTC
Payment, Expense Reimbursement and in the event of a termination of employment
due to Disability, Medical Continuation, the Company shall have no further
obligations hereunder following such termination other than
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pursuant to Paragraphs 6(d), 10 and 12. The foregoing payments shall be in
addition to any benefits to which Executive may be entitled under any insurance
maintained by the Company.
(3) BY THE COMPANY WITHOUT CAUSE OR BY EXECUTIVE FOR GOOD REASON OR IN THE
EVENT OF A CHANGE IN CONTROL.
----------------------------------------------------------------------
(i) NO BANKRUPTCY. In the event the Company terminates Executive's
employment for any reason other than Cause, death or Disability or Executive
terminates his employment for Good Reason (other than as set forth in Paragraph
6(c)(ii)), or in the event of a Change of Control, the Company shall pay to
Executive and Executive shall be entitled to receive the sum total of: (A) the
accrued but unpaid Annual Base Salary at the rate then in effect; (B) earned but
unpaid incentive compensation and/or bonuses for completed performance periods;
(C)(1) if the effective date of termination is on or prior to the eighteen (18)
month anniversary of the commencement of the Employment Term, an amount equal to
three (3) times the Annual Base Salary at the rate then in effect or (2) if the
effective date of termination is after the eighteen (18) month anniversary of
the commencement of the Employment Term, an amount equal to two and one-half
(2.5) times the Annual Base Salary at the rate then in effect (as applicable,
the "TERMINATION PAYMENT"); and (D) continuation of Executive's participation in
all benefit plans, programs or arrangements of the Company (except tax-qualified
plans), including, without limitation, Medical Continuation, for a period of two
years following such termination. The aforesaid amount shall be payable in cash
without discount for early payment, at the option of Executive, in accordance
with the Payment Election.
(ii) BANKRUPTCY. Executive may not terminate employment for Good Reason due
to the Company being placed in bankruptcy until the eighteen (18) month
anniversary thereof. If Executive thereafter terminates this Agreement, the
Company shall pay to Executive and Executive shall be entitled to receive the
same payments and benefits set forth in Paragraph 6(c)(i); PROVIDED, HOWEVER,
that if the date of being placed in bankruptcy is (x) on or prior to the
eighteen (18) month anniversary of the commencement of the Employment Term,
Executive shall receive the Termination Payment set forth in Paragraph
6(c)(i)(C)(1) and (y) after the eighteen (18) month anniversary of the
commencement of the Employment Term, Executive shall receive the Termination
Payment set forth in Paragraph 6(c)(i)(C)(2).
(iii) SECTION 280G. Notwithstanding anything contained in this Agreement to
the contrary, to the extent that any payment or distribution of any type to or
for Executive by the Company, any affiliate of the Company, any person who
acquires ownership or effective control of the Company or ownership of a
substantial portion of the Company's assets (within the meaning of Section 280G
of the Code and the
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regulations thereunder), or any affiliate of such person, whether paid or
payable or distributed or distributable pursuant to the terms of this Agreement
or otherwise (the "TOTAL PAYMENTS") is or will be subject to the excise tax
imposed under Section 4999 of the Code (the "EXCISE TAX"), then the Total
Payments shall be reduced (but not below zero) if and to the extent that a
reduction in the Total Payments would result in the Executive retaining a larger
amount, on an after-tax basis (taking into account federal, state and local
income taxes and the Excise Tax), than if the Executive received the entire
amount of such Total Payments. Executive shall have the right to specify the
order in which the Company shall reduce or eliminate the Total Payments in order
to effectuate the foregoing.
Except for any rights which Executive may have hereunder including the
accrued Annual Base Salary, the Termination Payment, Exercisable Options, the
LTC Payment, Expense Reimbursement and Medical Continuation, the Company shall
have no further obligations hereunder following such termination other than
pursuant to Paragraphs 6(d), 10 and 12.
(4) GENERAL. The parties agree to cooperate to structure all
termination payments made pursuant to this Agreement in a manner so that
such payments are not subject to the Excise Tax.
7. MITIGATION; PAYMENTS PENDING RESOLUTION OF DISPUTES
Executive shall not be required to mitigate amounts payable under this
Agreement by seeking other employment or otherwise, and there shall be no offset
against amounts due Executive under this Agreement on account of subsequent
employment. Amounts owed to Executive under this Agreement shall not be offset
by any claims the Company may have against Executive and such payment shall not
be affected by any other circumstances, including, without limitation, any
counterclaim, recoupment, defense, or other right which the Company may have
against Executive or others. During the pendency of any dispute between the
Company and Executive with respect to the termination of this Agreement, the
Company shall establish and maintain an escrow account ("ESCROW ACCOUNT") with
Battle Fowler LLP ("ESCROW AGENT") pursuant to an agreement reasonably
acceptable to Executive and the Escrow Agent. The Company shall pay into the
Escrow Account from time to time the compensation and cash-value of the benefits
which would otherwise be payable to Executive if there were no dispute. Upon
resolution of the dispute, the Escrow Agent shall pay the funds in the Escrow
Account as required by the court or arbitrator with jurisdiction over the
dispute or in accordance with the joint instructions of the parties.
8. NON-COMPETE
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(1) NON-COMPETITION. Executive agrees that, without the prior written
consent of a majority of the Board and in accordance with applicable law, and
except as provided in subparagraph 8(b), during the Employment Period, Executive
shall not invest, manage or otherwise be engaged in commercial real estate.
(2) EXCLUDED ACTIVITIES. Nothing contained in this Paragraph 8 shall
preclude Executive from:
(1) Continuing to own, manage in accordance with past practices or
make additional capital contributions to Executive's existing
investments listed on SCHEDULE A attached hereto.
(2) making passive investments of 5% or less in publicly listed or
traded real estate companies.
9. NO SOLICITATION; CONFIDENTIALITY.
(1) NO SOLICITATION. During the Restricted Period (as defined herein),
Executive shall not, nor cause any other person to, without the prior written
consent of the Board, directly or indirectly, solicit for employment, employ in
any capacity or make an unsolicited recommendation to any other person that it
employ or solicit for employment any person who is or was, at any time during
the Employment Period or the Restricted Period, an officer, executive or key
employee of the Company or of any of its affiliates (other than Friedman and
Anne N. Zahner, whose solicitation, employment or recommendation by Executive
shall not be prohibited by the terms of this Agreement). As used in this
Agreement, "RESTRICTED PERIOD" shall mean the six (6) months following
Executive's termination of employment for any reason.
(2) CONFIDENTIALITY. Executive acknowledges that, through his status as
Executive Vice President of the Company, he has, and will have, possession of
Confidential Information (as defined herein) as to the business of the Company.
Executive agrees that all such Confidential Information constitutes a vital part
of the business of the Company and its affiliates and is by its nature trade
secrets and confidential information proprietary to the Company and its
affiliates. Executive agrees that he shall not divulge, communicate, furnish or
make accessible (whether orally or in writing or in books, articles or any other
medium) to any individual, firm, partnership, corporation or other entity or
person, any knowledge or information with respect to Confidential Information
directly or indirectly relating to the business of the Company or any of its
affiliates. The term "CONFIDENTIAL INFORMATION" shall mean any information not
generally known in the relevant trade or industry or otherwise not generally
available to the public, which was obtained from the Company or which was
learned, discovered, developed,
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conceived, originated or prepared during or as a result of the performance of
any services by Executive on behalf of the Company.
(3) RETURN OF COMPANY DOCUMENTS. All memoranda, notes, lists, notebooks,
records and other documents or papers (and all copies thereof), including such
items stored in computer memories, portable computers and the like, on
microfiche, disk or by any other means, made or compiled by or on behalf of
Executive or made available to Executive relating to the Company are and shall
be the Company's property and shall be delivered to the Company promptly upon
the termination of Executive's employment with the Company or at any other time
after such termination on request.
(4) UNENFORCEABILITY. The provisions contained in Paragraphs 8 and 9 as to
the time periods and scope of activities, persons or entities affected shall be
deemed divisible so that, if any provision contained in Paragraphs 8 or 9 is
determined to be invalid or unenforceable, such provision shall be deemed
modified so as to be valid and enforceable to the full extent lawfully
permitted.
(5) 20
(6) Remedies. Executive agrees that (i) the provisions of Paragraphs 8 and
9 are reasonable and necessary for the protection of the Company; (ii) the
Company would not have entered into this Agreement unless the Executive agreed
to the inclusion of such provisions; (iii) such provisions may not be adequately
enforced by an action for damages and (iv) in the event of a breach thereof by
Executive, the Company shall be entitled to apply for and obtain injunctive
relief in any court of competent jurisdiction to restrain the breach or
threatened breach of such violation or otherwise to enforce specifically such
provisions against such violation, without the necessity of the posting of any
bond by the Company. The forgoing remedies are in addition to any rights the
Company may have against Executive for damages in the event Executive breaches
any of the provisions of Paragraphs 8 and 9.
10. PREVIOUS EMPLOYER
(1) COMMITMENT TO PAY/FUND. The Company agrees to take the following
actions with respect to the following commitments with respect to Executive's
immediately prior employer, Enterprise Asset Management, Inc.("EAM") and
Executive:
(i) LONG-TERM COMPENSATION ("LTC"). The Company shall pay the LTC to
Executive as follows: (x) 1/3 on commencement of the Employment Period
and 1/3 on each of the second and fourth anniversaries of the
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commencement of the Employment Period and (y) if this Agreement
is terminated for any reason, Company shall make a lump sum
payment equal to the present value (discounted at 10% per annum)
of any unpaid LTC (the "LTC PAYMENT"). Executive shall reimburse
Company to the extent Executive receives payment from EAM of LTC
paid by the Company.
(ii) LOAN GUARANTEES. If EAM fails to continue to guarantee existing loans
owed by Executive, the Company shall provide replacement loans on the
same or better terms and conditions as the existing loans
("REPLACEMENT LOANS").
(iii)LOAN REPAYMENT. If EAM demands repayment prior to maturity of existing
loans to Executive from EAM, the Company shall provide replacement
loans on the same or better terms and conditions as the existing loans
("NEW LOANS").
Executive's LTC, guarantees and loans are listed in SCHEDULE B attached
hereto.
In the event this Agreement is terminated for any reason, Executive shall
repay all Replacement Loans and New Loans within ninety (90) days of such date
of termination. The Replacement Loans and New Loans shall be nonrecourse to
Executive and the Company's sole recourse for the repayment of any Replacement
Loans or New Loans shall be any payments due to Executive from the Company under
this Agreement, the Share Options and the assets which were purchased with the
proceeds from the loans which have been replaced by the Replacement Loan or the
New Loan.
(2) INDEMNITY. In the event the Executive is made party or threatened to be
made a party to any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "PROCEEDING"), by EAM, its officers,
directors, equity owners or Affiliates, by reason of Executive's having
negotiated or entered into this Agreement or otherwise having become an employee
of the Company, the Company shall indemnify, hold harmless and defend Executive
against any and all claims, demands, suits, judgments, assessments and
settlements including all expenses incurred or suffered by Executive in
connection therewith (including, without limitation, all legal fees incurred
using counsel reasonably acceptable to Executive) (collectively, "DAMAGES").
Expenses incurred by Executive in connection with any Proceeding shall be paid
by the Company in advance upon request of Executive that the Company pay such
expenses.
(3) REPRESENTATIONS. Executive hereby represents and warrants to the
Company that Executive has not entered into any
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written or oral agreement for employment with EAM or any other person or entity.
(4) SURVIVAL. The provisions of this Paragraph shall remain in effect after
this Agreement is terminated irrespective of the reasons for termination.
11. ARBITRATION
The parties hereto will endeavor to resolve in good faith any controversy,
disagreement or claim arising between them with respect to the interpretation,
performance or operation of Paragraphs 5(a)(iv)(A)(1) and 5(a)(vii)(E) of this
Agreement. If they are unable to do so, any such controversy, disagreement or
claim will be submitted to binding arbitration, for final resolution without
appeal, by either party giving written notice to the other of the existence of a
dispute with respect to such Paragraph which it desires to have arbitrated. The
arbitration will be conducted in New York, New York by a panel of three (3)
arbitrators and will be held in accordance with the rules of the American
Arbitration Association. Of the three arbitrators, one will be selected by the
Company, one will be selected by Executive and the third will be selected by the
two arbitrators so selected. Each party will notify the other party of the
arbitrator selected by him or it within fifteen (15) days after the giving of
the written notice referred to in this Paragraph 11. The decision and award of
the arbitrators must be in writing and will be final and binding upon the
parties hereto. Judgment upon the award may be entered in any court having
jurisdiction thereof, or application may be made to such court for a judicial
acceptance of the award and an order of enforcement, as the case may be. Subject
to the provisions of Paragraph 12(b), the expenses of arbitration will be borne
in accordance with the determination of the arbitrators.
12. INDEMNIFICATION/LEGAL FEES/"KEY MAN" INSURANCE.
(1) INDEMNIFICATION. In the event the Executive is made party or threatened
to be made a party to any Proceeding, by reason of Executive's employment with
or serving as an officer or director of the Company, the Company shall
indemnify, hold harmless and defend Executive to the fullest extent authorized
by Ohio law, as the same exists and may hereafter be amended, against any and
all Damages and such indemnification shall continue as to Executive even after
Executive is no longer employed by the Company and shall inure to the benefit of
his heirs, executors, and administrators. Notwithstanding the foregoing,
Executive shall not be entitled to indemnification pursuant to this Paragraph
12(a) if a court or other tribunal conclusively determines that Executive
engaged in actions in connection with Executive's employment with the Company
which were committed in bad faith, were the result of active and
20
<PAGE> 23
deliberate dishonesty, or constitute willful misconduct, fraud or gross
negligence.
Expenses incurred by Executive in connection with any Proceeding referred
to in this Paragraph 12 shall be paid by the Company in advance upon request of
Executive that the Company pay such expenses; but only in the event that
Executive shall have delivered in writing to the Company an undertaking to
reimburse the Company for expenses with respect to which Executive is not
entitled to indemnification.
The provisions of this Paragraph shall remain in effect after this
Agreement is terminated irrespective of the reasons for termination. The
indemnification provisions of this Paragraph shall not supersede or reduce any
indemnification provided to Executive under any separate agreement, or the
by-laws of the Company since it is intended that this Agreement shall expand and
extend the Executive's rights to receive indemnity.
The Company shall maintain in effect during the Employment Period a
directors' and officers' liability insurance policy, with a policy limit of at
least $10,000,000, subject to customary exclusions, with respect to claims made
against officers and directors of the Company.
(2) LEGAL FEES. Except as set forth below, if any contest or dispute shall
arise between the Company and Executive regarding or as a result of any
provision of this Agreement, the Company shall pay, or reimburse Executive for,
all legal fees and expenses reasonably incurred by Executive in connection with
such contest or dispute; PROVIDED, HOWEVER, that if Executive is not successful
in respect of substantially all of Executive's claims pursued or defended in
connection with such contest or dispute, Executive shall pay or reimburse the
Company for all such fees and expenses advanced by the Company. Executive shall
pay the first $25,000 of his fees or expenses as they are incurred and the
Company shall pay all such fees and expenses over $25,000 as they are incurred.
If Executive is successful in respect of substantially all of such claims, the
Company shall reimburse Executive for any amounts paid by Executive as soon as
practicable following the final resolution of such contest or dispute.
(3) KEY MAN INSURANCE. Executive shall cooperate with, and take such
actions as may be reasonably requested by, the Company in the event the Company
determines to obtain "key man" insurance with respect to Executive.
13. SUCCESSORS AND ASSIGNS.
21
<PAGE> 24
(1) COMPANY. Unless Executive elects to terminate this Agreement as a
result of a Change in Control, the Company shall require any successor (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
(2) EXECUTIVE. This Agreement and all rights of Executive hereunder may be
transferred only by will or the laws of descent and distribution. Upon
Executive's death, this Agreement and all rights of Executive hereunder shall
inure to the benefit of and be enforceable by Executive's beneficiary or
beneficiaries, personal or legal representatives, or estate, to the extent any
such person succeeds to Executive's interests under this Agreement. Executive
shall be entitled to select and change a beneficiary or beneficiaries to receive
any benefit or compensation payable hereunder following Executive's death by
giving Company written notice thereof. If Executive should die following the
date of termination while any amounts would still be payable to him hereunder if
he had continued to live, all such amounts, unless otherwise provided herein,
shall be paid in accordance with the terms of this Agreement to such person or
persons so appointed in writing by Executive, including, without limitation,
under any applicable plan, or otherwise to his legal representatives or estate.
14. MODIFICATION OR WAIVER
No amendment, modification, waiver, termination or cancellation of this
Agreement shall be binding or effective for any purpose unless it is made in a
writing signed by the party against whom enforcement of such amendment,
modification, waiver, termination or cancellation is sought. No course of
dealing between or among the parties to this Agreement shall be deemed to affect
or to modify, amend or discharge any provision or term of this Agreement. No
delay on the part of the Company or Executive in the exercise of any of their
respective rights or remedies shall operate as a waiver thereof, and no single
or partial exercise by the Company or Executive of any such right or remedy
shall preclude other or further exercise thereof. A waiver of right or remedy on
any one occasion shall not be construed as a bar to or waiver of any such right
or remedy on any other occasion.
The respective rights and obligations of the parties hereunder shall
survive the Executive's termination of employment and termination of this
Agreement to the extent necessary for the intended preservation of such rights
and obligations.
15. NOTICES
22
<PAGE> 25
All notices or other communications required or permitted hereunder
shall be made in writing and shall be deemed to have been duly given if
delivered by hand or delivered by a recognized delivery service or mailed,
postage prepaid, by express, certified or registered mail, return receipt
requested, and addressed to the Company at the address set forth above or
Executive at his address as set forth in the Company records (or to such other
address as shall have been previously provided in accordance with this Paragraph
15).
16. GOVERNING LAW
This agreement will be governed by and construed in accordance with the
laws of the State of New York without regard to principles of conflicts of laws
thereunder.
17. SEVERABILITY
Whenever possible, each provision and term of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision or term of this Agreement shall be held to be prohibited by
or invalid under such applicable law, then, such provision or term shall be
ineffective only to the extent of such prohibition or invalidity, without
invalidating or affecting in any manner whatsoever the remainder of such
provisions or term or the remaining provisions or terms of this Agreement.
18. COUNTERPARTS
This Agreement may be executed in separate counterparts, each of which
is deemed to be an original and both of which taken together shall constitute
one and the same agreement.
19. HEADINGS
The headings of the Paragraphs of this Agreement are inserted for
convenience only and shall not be deemed to constitute a part hereof and shall
not affect the construction or interpretation of this Agreement.
20. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement of the parties with respect
to the subject matter hereof and supersedes all other prior agreements and
undertakings, both written and oral, among the parties with respect to the
subject matter hereof.
21. EXCULPATION
23
<PAGE> 26
Notwithstanding anything contained herein to the contrary, this
Agreement is made and executed on behalf of the Company by its officer(s) on
behalf of the trustees thereof, and none of the trustees or any additional or
successor trustee hereafter appointed, or any beneficiary, officer, employee or
agent of the Company shall have any liability in his personal or individual
capacity, but instead, Executive shall look solely to the property and assets of
the Company for satisfaction of claims of any nature arising from or in
connection with this Agreement.
[SIGNATURE PAGE FOLLOWS]
<PAGE> 27
IN WITNESS WHEREOF, the undersigned have executed this Agreement as of
the date first above written.
COMPANY:
-------
FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS
By:
-------------------------------
Name:
-----------------------------
Title:
----------------------------
EXECUTIVE:
---------
-------------------------------
David Schonberger
<PAGE> 28
SCHEDULE A
----------
EXISTING INVESTMENTS
--------------------
DAVID SCHONBERGER
- -----------------
INVESTMENTS OWNED AND MANAGED
-----------------------------
22. Greenburgh, NY
23. Mt. Kisco, NY (T.J. Maxx)
24. Hopewell Junction - Land Contract
25. GP - Ridgefield, CT - 24,000 Sq. ft. Mixed Use
INVESTMENTS OWNED
-----------------
26. Emax Securities (various entities)
27. Peru Mall
A-1
<PAGE> 29
SCHEDULE B
----------
DAVID SCHONBERGER
-----------------
Long Term Compensation None
Loans from EAM None
Loans Guaranteed by EAM None
B-2
<PAGE> 30
SCHEDULE A
----------
EXISTING INVESTMENTS
--------------------
DAN FRIEDMAN
- ------------
None
<PAGE> 31
SCHEDULE A
----------
EXISTING INVESTMENTS
--------------------
DAVID SCHONBERGER
- -----------------
1. Greenburgh, NY
2. Mt. Kisco, NY (T.J. Maxx)
3. Hopewell Junction - Land Contract
4. GP - Ridgefiled, CT - 24,000 Sq. ft. Mixed Use
<PAGE> 32
SCHEDULE A
----------
EXISTING INVESTMENTS
--------------------
ANNE ZAHNER
- -----------
None
<PAGE> 33
Schedule B
----------
Dan Friedman
Long Term Compensation $379,241.89
Loan from EAM $336.000.0
Loans Guaranteed by EAM $115,000.00
<PAGE> 34
Schedule B
----------
David Schonberger
-----------------
Long Term Compensation None
Loans from EAM None
Loans Guaranteed by EAM None
<PAGE> 35
Schedule B
----------
Anne Zahner
-----------
Long Term Compensation $27,184.56
Loans from EAM None
Loans Guaranteed by EAM $139,000.00
<PAGE> 1
EXHIBIT 12
----------
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS AND
-----------------------------------------------------------
FIRST UNION MANAGEMENT, INC.
----------------------------
STATEMENTS OF RATIOS OF COMBINED INCOME FROM OPERATIONS
-------------------------------------------------------
AND COMBINED NET INCOME TO FIXED CHARGES
----------------------------------------
(IN THOUSANDS, EXCEPT RATIOS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------
Restated(2) Restated(2) Restated(2) Restated (2)
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income (loss) before capital gain or
loss, extraordinary loss, cumulative effect
of accounting change and after loss allocated to
minority interest $(91,465) $ 4,434 $ 1,681 $ 881 $ 4,261
Add fixed charges, exclusive of
construction interest capitalized 51,437 30,479 24,018 22,987 21,865
-------- ------ ------- ------- -------
Income (loss) from operations, as defined (40,028) 34,913 25,699 23,868 26,126
Capital gains 10,346 1,468 --- 31,577 ---
Reduction for unrealized loss on
carrying value of assets
identified for disposition --- --- --- (14,000) ---
-------- ------- ------- ------- -------
Net income (loss), as defined $(29,682) $36,381 $25,699 $41,445 $26,126
======== ======= ======= ======= =======
Fixed charges:
Interest
- Mortgage loans $ 29,032 $15,437 $ 8,877 $ 7,670 $ 7,335
- Senior notes 5,856 8,875 9,090 9,305 9,305
- Notes payable 3,757 --- --- --- ---
- Bank loans and other 12,214 5,552 5,459 5,422 4,640
- Capitalized interest --- --- 121 169 ---
Amortization of debt issue costs 150 215 196 184 168
Rents (1) 428 400 396 406 417
-------- ------- ------- ------- -------
Fixed charges, as defined $ 51,437 $30,479 $24,139 $23,156 $21,865
======== ======= ======= ======= =======
Preferred dividend accrued $ 2,999 $ 4,831 $ 845 $ --- $ ---
======== ======= ======= ======= =======
Ratio of income (loss) from operations, as
defined, to fixed charges -- 1.15 1.06 1.03 1.19
======== ======= ======= ======= =======
Ratio of net income (loss), as defined,
to fixed charges -- 1.19 1.06 1.79 1.19
======== ======= ======= ======= =======
Ratio of net income (loss) as defined, to
fixed charges and
preferred dividend -- 1.03 1.03 1.79 1.19
========= ======= ======= ======= =======
</TABLE>
- --------------------
(1) The interest portion of rentals is assumed to be one-third of all
ground rental and net lease payments.
(2) The Trust has restated its Combined Financial Statements for each of
the five years ended December 31, 1998 as a result of changing the
lives of assets used to calculate depreciation expense.
<PAGE> 1
Exhibit 13
FIRST UNION REAL ESTATE INVESTMENTS
FINANCIAL HIGHLIGHTS
YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA AND FOOTNOTE)
<TABLE>
<CAPTION>
RESTATED
1998 1997
---- ----
<S> <C> <C>
Revenues $ 324,526 $ 235,544
Income (loss) before capital gain, extraordinary loss
and after minority interest (91,465) 4,434
Net income (loss) before preferred dividend (83,518) 5,676
Net income (loss) applicable to shares of
beneficial interest (86,517) 845
Dividends declared 3,478 11,651
Per share
Loss applicable to shares of beneficial interest before
capital gain, extraordinary loss and after minority interest $ (3.07) $ (.02)
Net income (loss) applicable to shares of beneficial interest, basic and diluted (2.81) .03
Dividends declared per share of beneficial interest .11 .44
</TABLE>
MARKET PRICE AND DIVIDEND RECORD
<TABLE>
<CAPTION>
DIVIDENDS
1998 QUARTERS ENDED HIGH LOW DECLARED
---- --- --------
<S> <C> <C> <C>
December 31 $ 6 1/8 $ 3 7/16 $
September 30 9 9/16 5 3/16
June 30 11 7/8 8 3/4
March 31 16 7/8 11 .11
-----
$ .11
=====
1997 QUARTERS ENDED
December 31 $ 16 5/16 $13 5/16 $ .11
September 30 14 1/8 12 5/8 .11
June 30 14 1/4 12 3/4 .11
March 31 14 1/2 11 5/8 .11
-----
$ .44
=====
</TABLE>
The Trust's shares are traded on the New York Stock Exchange (Ticker Symbol:
FUR). As of December 31, 1998, there were 3,500 recordholders of the Trust's
shares of beneficial interest. The Trust estimates the total number of
beneficial owners at approximately 11,000.
1
<PAGE> 2
SELECTED FINANCIAL DATA
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA AND
FOOTNOTES)
<TABLE>
<CAPTION>
RESTATED(1) RESTATED(1) RESTATED(1) RESTATED(1)
1994 1995 1996 1997 1998
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS
Revenues(2) $ 76,339 $ 79,205 $ 81,867 $ 235,544 $ 324,526
Income (loss) before capital gain, extraordinary
loss, cumulative effect of accounting change and
before minority interest(2),(3),(4) 4,261 881 1,681 3,490 (91,465)
Unrealized loss on carrying value of assets
identified for disposition (14,000)
Capital gains, net 31,577 1,468 10,346
Income (loss) before extraordinary loss, cumulative
effect of accounting change and before minority
interest(2),(3),(4) 4,261 18,458 1,681 4,958 (81,119)
Extraordinary loss from early extinguishment of
debt(5) (910) (286) (226) (2,399)
Cumulative effect of change in accounting method(6) (4,325)
Loss allocated to minority interest(2) 944
Net income (loss) before preferred dividend 4,261 13,223 1,395 5,676 (83,518)
Net income (loss) applicable to shares of beneficial
interest 4,261 13,223 550 845 (86,517)
Dividends declared for shares of beneficial interest 7,273 7,542 7,684 11,651 3,478
Per share of beneficial interest
Income (loss) before capital gain, extraordinary
loss, cumulative effect of accounting change and
after minority interest(2),(3),(4) $ .24 $ .05 $ .05 $ (.02) $ (3.07)
Income (loss) before extraordinary loss, cumulative
effect of accounting change and after minority
interest(2),(3),(4) .24 1.02 .05 .04 (2.73)
Extraordinary loss from early extinguishment of
debt(5) (.05) (.02) (.01) (.08)
Cumulative effect of change in accounting method(6) (.24)
Net income (loss) applicable to shares of beneficial
interest, basic and diluted .24 .73 .03 .03 (2.81)
Dividends declared per share of beneficial interest .40 .41 .44 .44 .11
FINANCIAL POSITION AT YEAR END
Total assets $ 352,005 $ 376,144 $ 413,054 $ 790,226 $ 786,684
Current portion of debt(7) 205,910
Long-term obligations(8) 238,296 258,454 254,868 483,459 383,089
Total equity 78,756 77,500 124,957 235,310 150,696
OTHER DATA
Net cash provided by or (used for)
Operations $ 19,053 $ 12,989 $ 11,085 $ 15,740 $ 6,413
Investing (26,507) (28,345) (47,002) (112,233) (52,429)
Financing (28,094) 15,783 35,466 110,406 74,327
</TABLE>
2
<PAGE> 3
This selected financial data should be read in conjunction with the Combined
Financial statements and notes thereto.
(1) As a result of the Trust'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. Consequently, the Trust 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. In April 1997,
First Union's affiliated management company acquired voting control of
Impark for $37 million in cash, the assumption of $26 million in debt and
the issuance of $12 million of stock in Impark to Impark employees and to
its former owner.
(3) In 1998, loss before capital gain, and extraordinary loss, effect of
accounting change included the following expenses related to the proxy
contest and the resulting change in the composition of the Trust's Board of
Trustees:
<TABLE>
<CAPTION>
<S> <C>
Litigation and proxy expenses $ 4.8 million
Other professional fees to avoid change in composition of Board 1.5 million
Severance expenses for employee change in control agreements
and employment contract termination 6.1 million
Expenses related to termination of First Union's former chairman,
president and chief executive officer 3.4 million
Vesting of restricted stock upon change in composition of Board 4.7 million
---------------
$20.5 million
===============
</TABLE>
In 1995, income before capital gain, extraordinary loss, cumulative
effect of accounting change and minority interest included $1.6 million of
litigation and proxy expenses.
(4) In 1998, the Trust recognized $36 million in unrealized losses on the
carrying value of properties identified for disposition and Impark
recognized a $15 million reduction of goodwill.
(5) In 1998, the Trust repaid approximately $87.5 million of its 8 7/8% Senior
Notes resulting in $1.6 million in unamortized issue costs and solicitation
fees being expensed. Also, in the fourth quarter of 1998, the Trust
renegotiated its bank agreement and $90 million note payable resulting in
$.8 million of deferred costs being expensed. In 1997 and 1996, the Trust
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, the Trust repaid approximately $36 million of
mortgage debt resulting in a $910,000 charge for the write-off of
unamortized costs and prepayment premiums.
(6) In December 1995, the Trust changed its accounting method to directly
expense internal leasing costs and recorded a $4.3 million noncash charge
for the cumulative effect of the accounting change as of the beginning of
1995. Funds from operations for previous years have been restated for the
change in accounting method on a basis comparable to 1995.
(7) Included in the current portion of debt for 1998 is the $90 million note
payable due August 11, 1999, the $101 million bank credit facility due
August 1999, the $10.6 million deferred obligation, and 1999 mortgage
principal payments.
(8) Included in long-term obligations are senior notes and mortgage loans. Bank
loans are classified as long term for 1994 through 1997. Impark's bank loans
are classified as long term for 1997 and 1998.
3
<PAGE> 4
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, (IN THOUSANDS)
<TABLE>
<CAPTION>
RESTATED
1998 1997
---- -------
<S> <C> <C>
ASSETS
INVESTMENTS IN REAL ESTATE
Land $130,340 $109,308
Buildings and improvements 676,519 647,000
-------- --------
806,859 756,308
Less - Accumulated depreciation (165,357) (142,082)
-------- --------
Total investments in real estate 641,502 614,226
INVESTMENT IN JOINT VENTURE 1,722 1,575
MORTGAGE LOANS AND NOTES RECEIVABLE,
including current portion of $58 and $6,469, respectively 5,508 30,686
OTHER ASSETS
Cash and cash equivalents - unrestricted 28,649 2,582
- restricted 16,526 14,282
Accounts receivable and prepayments, net of allowances of
$1,395 and $1,462, respectively 21,809 20,070
Investments 5 13,103
Inventory 2,798 3,374
Goodwill, net 45,379 66,560
Management and lease agreements, net 1,852 4,113
Deferred charges and other, net 6,864 6,300
Unamortized debt issue costs, net 7,758 7,445
Other 6,312 5,910
-------- --------
Total assets $786,684 $790,226
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Mortgage loans, including current portion of $4,308 and $3,877, respectively $345,042 $313,537
Notes payable 94,996
Senior notes 12,538 100,000
Bank loans 125,821 69,922
Accounts payable and accrued liabilities 42,659 38,000
Deferred obligations 10,602 10,807
Deferred capital gains and other deferred income 3,283 10,646
Liability to former owner of Impark 10,957
-------- --------
Total liabilities 634,941 553,869
-------- --------
MINORITY INTEREST 1,047 1,047
SHAREHOLDERS' EQUITY
Preferred shares of beneficial interest, $25 liquidation preference,
2,300,000 shares authorized 1,349,000 shares and 2,300,000
shares outstanding in 1998 and 1997, respectively 31,737 54,109
Shares of beneficial interest, $1 par, unlimited authorization, outstanding 31,416 28,179
Additional paid-in capital 190,679 170,567
Undistributed loss from operations (115,968) (25,973)
Undistributed capital gains 14,949 14,949
Deferred compensation (5,643)
Accumulated other comprehensive income
Available for sale securities (66)
Foreign currency translation adjustment (2,117) (812)
-------- --------
Total shareholders' equity 150,696 235,310
-------- --------
$786,684 $790,226
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
4
<PAGE> 5
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
RESTATED RESTATED
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
REVENUES
Rents $ 320,592 $ 225,388 $ 75,555
Interest - Mortgage loans 1,211 2,907 4,732
- Short-term investments 1,337 1,525 80
- Investments 302 494
Equity in income from joint venture 148 488 528
Management fees 353 2,808 617
Other income 583 1,934 355
--------- --------- ---------
324,526 235,544 81,867
--------- --------- ---------
EXPENSES
Property operating 223,667 157,215 25,786
Real estate taxes 12,453 9,948 8,297
Depreciation and amortization 33,389 22,892 15,890
Interest - Mortgage loans 29,032 15,437 8,877
- Notes payable 3,757
- Senior notes 5,856 8,875 9,090
- Bank loans and other 12,214 5,552 5,459
General and administrative 37,577 12,135 6,787
Litigation and proxy 4,848
Foreign currency loss 2,198
Unrealized loss on carrying value of assets identified for
disposition and impaired assets 51,000
--------- --------- ---------
415,991 232,054 80,186
--------- --------- ---------
INCOME (LOSS) BEFORE CAPITAL GAIN, EXTRAORDINARY LOSS AND
MINORITY INTEREST (91,465) 3,490 1,681
Capital gains, net 10,346 1,468
--------- --------- ---------
INCOME (LOSS) BEFORE EXTRAORDINARY LOSS AND
MINORITY INTEREST (81,119) 4,958 1,681
Extraordinary loss from early extinguishment of debt (2,399) (226) (286)
Loss allocated to minority interest 944
--------- --------- ---------
NET INCOME (LOSS) BEFORE PREFERRED DIVIDEND (83,518) 5,676 1,395
Preferred dividend (2,999) (4,831) (845)
--------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO SHARES OF BENEFICIAL INTEREST $ (86,517) $ 845 $ 550
========= ========= =========
PER SHARE DATA
Income (loss) applicable to shares of beneficial
interest before capital gain, extraordinary
loss, and after minority interest $ (3.07) $ (.02) $ .05
Income (loss) before extraordinary loss and after minority interest (2.73) .04 .05
Extraordinary loss from early extinguishment of debt (.08) (.01) (.02)
--------- --------- ---------
NET INCOME (LOSS) APPLICABLE TO SHARES OF BENEFICIAL INTEREST, BASIC AND DILUTED $ (2.81) $ .03 $ .03
========= ========= =========
ADJUSTED SHARES OF BENEFICIAL INTEREST, BASIC 30,772 24,537 17,172
ADJUSTED SHARES OF BENEFICIAL INTEREST, DILUTED 31,015 25,415 17,706
COMBINED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended December 31, (In thousands)
Net income (loss) $ (86,517) $ 845 $ 550
Other comprehensive income
Available for sale securities 66 (66)
Foreign currency translation adjustment (1,305) (812)
--------- --------- ---------
Comprehensive income (loss) $ (87,756) $ (33) $ 550
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
5
<PAGE> 6
COMBINED STATEMENTS OF CHANGES IN CASH
FOR THE YEARS ENDED DECEMBER 31, (IN THOUSANDS)
<TABLE>
<CAPTION>
RESTATED RESTATED
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH PROVIDED BY (USED FOR) OPERATIONS
Net income (loss) before preferred dividend $ (83,518) $ 5,676 $ 1,395
Adjustments to reconcile net income (loss) before preferred
dividend to net cash provided by operations
Depreciation and amortization 33,389 22,892 15,890
Extraordinary loss from early extinguishment of debt 2,399 226 286
Capital gains, net (10,346) (1,468)
Unrealized loss on carrying value of assets
identified for disposition and impaired assets 51,000
Vesting of restricted shares 4,706
Foreign currency loss 2,198
Increase in deferred charges and other, net (1,316) (4,998) (963)
Increase in deferred income 355 2,073
Increase in deferred interest on mortgage
investments (6) (122) (400)
(Decrease) increase in deferred obligations (20) (18) 155
Net changes in other assets and liabilities 7,572 (8,521) (5,278)
--------- --------- ---------
Net cash provided by operations 6,413 15,740 11,085
--------- --------- ---------
CASH PROVIDED BY (USED FOR) INVESTING
Repayment of mortgage investment and note payable 25,045 16,200
Principal received from mortgage investments 139 216 176
Proceeds from sales of properties 6,507 18,374 8,825
Purchase of investments (1,771) (12,746)
Sale of investments 15,141
Investments in properties (63,022) (834) (5,491)
Acquisition of joint venture interests, net of cash acquired (72,900)
Investment in joint venture (30,248)
Deposit for property acquisitions (170) (2,315)
Investment in Impark, net of cash acquired (11,195) (36,574)
Investments in capital and tenant improvements (23,103) (21,654) (20,264)
--------- --------- ---------
Net cash used for investing (52,429) (112,233) (47,002)
--------- --------- ---------
CASH PROVIDED BY (USED FOR) FINANCING
Increase (decrease) in bank loans 57,446 19,582 (43,800)
Issuance of preferred shares of beneficial interest, net of costs 54,109
Increase in notes payable 90,000
Increase in mortgage loans 30,000 2,737 48,500
Repayment of mortgage loans - Normal payments (3,951) (2,765) (3,286)
- Balloon payments (468) (13,835)
Repayment of senior notes (87,462)
Repayment of medium term notes (5,000)
Proceeds from sale of interest rate cap 1,025
Purchase of First Union shares (1,830) (7,125)
Sale of First Union shares 2,996 121,291 252
Sale of hedge agreement 825
Debt issue costs paid (3,320) (1,261) (1,414)
Dividends paid to shares of beneficial interest (6,577) (10,473) (7,789)
Dividends paid to preferred shares of beneficial interest (3,332) (4,870)
Other (6)
--------- --------- ---------
Net cash provided by financing 74,327 110,406 35,466
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 28,311 13,913 (451)
Cash and cash equivalents at beginning of year 16,864 2,951 3,402
--------- --------- ---------
Cash and cash equivalents at end of year $ 45,175 $ 16,864 $ 2,951
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
6
<PAGE> 7
COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT FOOTNOTES)
<TABLE>
<CAPTION>
RESTATED
PREFERRED UNDISTRIBUTED
SHARES SHARES INCOME FOREIGN
OF OF ADDITIONAL (LOSS) UNDISTRIBUTED DEFERRED CURRENCY AVAILABLE
BENEFICIAL BENEFICIAL PAID-IN FROM CAPITAL COMPEN- TRANSLATION FOR SALE
INTEREST INTEREST CAPITAL OPERATIONS(1)(2) GAINS SATION ADJUSTMENT SECURITIES
-------- -------- ------- ---------------- ------- ------ ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE DECEMBER 31, 1995 $17,485 $55,081 $ 16,823 $14,949 $(1,983)
Prior period adjustment(1) (24,856)
-------- ------- -------- --------- ------- ------------ ------- -----
Balance December 31, 1995 as restated 17,485 55,081 (8,033) 14,949 (1,983)
------- -------- --------- ------- ------------
Net income before preferred dividend
(restated) 1,395
Dividends paid or accrued on shares
of beneficial interest ($.44/share) (7,684)
Dividends accrued on preferred shares
($.3674/share) (845)
Sale of 2,300,000 preferred shares of
beneficial interest, $25 per share,
net $54,109
Shares sold under long-term incentive
ownership plan and share option
agreements 31 221
Restricted shares issued 142 1,603 (1,745)
Restricted shares forfeited (36) (226)
Deferred compensation related to
restricted shares 499
Other (7)
------- ------- -------- --------- ------- ------------ ------- -----
BALANCE DECEMBER 31, 1996 (RESTATED) 54,109 17,622 56,672 (15,167) 14,949 (3,229) -- --
Net income before preferred
dividend (restated) 5,676
Dividends paid or accrued on shares
of beneficial interest ($.44/share) (11,651)
Dividends accrued on preferred shares
($2.10/share) (4,831)
Sale of 3,910,000 shares of
beneficial interest, net 3,910 42,211
Sale of 6,325,000 shares of
beneficial interest, net 6,325 68,139
Shares sold under long-term incentive
ownership plan and share option
agreements 96 611
Restricted shares issued 226 2,934 (3,160)
Deferred compensation related to
restricted shares 746
Foreign currency translation
adjustment $ (812)
Available for sale securities $ (66)
------- ------- -------- --------- ------- ------------ ------- -----
BALANCE DECEMBER 31, 1997 (RESTATED) 54,109 28,179 170,567 (25,973) 14,949 (5,643) (812) (66)
Net loss before preferred
dividend (83,518)
Dividends paid on shares of
beneficial interest ($.11/share) (3,478)
Dividends paid or accrued on
preferred shares ($2.10/share) (2,999)
Conversion of preferred shares (22,372) 3,144 19,228
Shares sold under long-term incentive
ownership plan and share option
agreements 373 2,623
Restricted shares issued 343 4,632 (4,975)
Restricted shares forfeited (453) (5,147) 5,600
Shares purchased (170) (1,660)
Issuance of 500,000 stock warrants 436
Deferred compensation related to
restricted shares 312
Vesting of restricted shares 4,706
Foreign currency translation adjustment (1,305)
Available for sale securities 66
------- ------- -------- --------- ------- ------------ ------- -----
BALANCE DECEMBER 31, 1998 $31,737 $31,416 $190,679(2) $(115,968)(3) $14,949 $ -- $(2,117) $ --
======= ======= ======== ========= ======= ============ ======= =====
</TABLE>
(1) The Trust changed its useful lives for the calculation of depreciation
expense in 1998 and restated its Combined Financial Statements for the five
years ended December 31, 1998. The cumulative effect of changing the asset
lives prior to December 31, 1994 is $24,856,000.
(2) Includes the balance of cumulative undistributed net loss of First Union
Management, Inc. of $5,825,000, $6,621,000, $5,497,000 and $36,346,000 as
of December 31, 1995, 1996, 1997 and 1998, respectively.
(3) Cumulative distributions in excess of the Trust's net income from inception
are $11,330,000.
The accompanying notes are an integral part of these statements.
7
<PAGE> 8
NOTES TO COMBINED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Union Real Estate Investments ("Trust") and First Union
Management Inc. ("Company") are in the real estate, parking management
and parking and transit ticketing equipment manufacturing industries
with properties and operations primarily in the United States and
Canada. The accounting policies of the Trust and Company conform to
generally accepted accounting principles and give recognition, as
appropriate, to common practices within the real estate, parking and
manufacturing industries.
Under a trust agreement, the shares of the Company are held
for the benefit of the shareholders of the Trust. Accordingly, the
financial statements of the Company and the Trust have been combined.
Additionally, as the Company owns voting control of Imperial Parking
Limited ("Impark"), the financial statements of Impark are consolidated
with those of the Company.
The preparation of the financial statements requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses during the
reporting periods. Actual results could differ from these estimates.
The Trust's properties are leased to the Company through
February 28, 1999. Thereafter, the Trust became self-managed.
At December 31, 1998 and 1997, buildings and improvements
included equipment and appliances of $8.1 million and $7.2 million,
respectively.
Tenant leases generally provide for billings of certain
operating costs and retail tenant leases generally provide for
percentage rentals, in addition to fixed minimum rentals. The Trust and
Company accrue the recovery of operating costs based on actual costs
incurred and accrue percentage rentals based on current estimates of
each retail tenant's sales. In July 1998, the Trust adopted the
Financial Accounting Standards Board's Emerging Issues Task Force
Bulletin 98-9 (EITF-98-9), "Accounting for Contingent Rent in Interim
Financial Periods" on a prospective basis. EITF-98-9 requires that
contingent rental income, such as percentage rent which is dependent on
sales of retail tenants, be recognized in the period that a tenant
exceeds its specified sales breakpoint. Consequently, the Trust will
accrue the majority of percentage rent income in the fourth quarter of
each year in accordance with EITF-98-9. For the years ended December
31, 1998, 1997 and 1996, the accrued recovery of operating costs and
percentage rent income approximated $36.2 million, $21.9 million and
$15.7 million, respectively. Impark recognizes gross revenue collected
or due from parking lots which it manages. Deferred revenue is derived
primarily from revenue received in advance of its due date.
Depreciation for financial reporting purposes is computed
using the straight-line method. Buildings are depreciated over their
estimated useful lives of 10 to 40 years, based on the property's age,
overall physical condition, type of construction materials and intended
use. Improvements to the buildings are depreciated over the remaining
useful life of the building at the time the improvement is completed.
Tenant alterations are depreciated over the life of the lease of the
tenant. The Trust annually reviews its portfolio of properties for any
impairment as required by Statement of Financial Accounting Standards
(SFAS) 121 (Accounting for Long-Lived Assets and Long-Lived Assets to
be Disposed of).
The Trust's buildings are depreciated as follows:
<TABLE>
<CAPTION>
LIFE BUILDINGS
(IN YEARS) (IN THOUSANDS)
<S> <C>
40 $669,583
30 2,042
25 4,736
10 158
--------
$676,519
</TABLE>
The Trust's useful lives for the calculation of depreciation:
<TABLE>
<S> <C>
Shopping malls 40
Apartments 40
Office buildings 40
Parking garages 25 - 40
Parking facilities 10
</TABLE>
Equipment and appliances are depreciated over useful lives of
five to ten years. Parking equipment is depreciated using the declining
balance method resulting in approximately 20 - 30% of the equipment
balance being depreciated per year. Parking leasehold improvements are
depreciated over five years. Routine maintenance and repairs, including
replacements, are charged to expense; while replacements which improve
or extend the lives of existing properties are capitalized.
8
<PAGE> 9
Goodwill represents the excess of cost over the value assigned
to the net assets from the purchase of Impark. Goodwill is amortized on
a straight-line basis over 40 years. Accumulated amortization at
December 31, 1998 and 1997, was $2.3 million and $.8 million,
respectively. Impark recorded a U.S. $15 million reduction of goodwill
in December 1998, in accordance with SFAS 121.
Lease and management agreements are recorded at cost and
represent Impark's investment in parking lot agreements acquired from
other parking lot management companies. The underlying value of this
asset is calculated by discounting future cash flows of each agreement
over its length of term. Management and lease agreements terminated
before the life of the agreements are expensed. Amortization is
provided on a straight-line basis over their useful lives of
approximately three years as of the acquisition in April 1997.
Accumulated amortization at December 31, 1998 and 1997 was $3.6 million
and $1.3 million, respectively.
Impark's inventory consists of equipment parts and supplies
and is recorded at the lower of cost determined on a first-in,
first-out basis, or replacement cost.
The Trust accounts for its investment in a joint venture which
it does not control using the equity method of accounting. This
investment, which represents a 50% non-controlling ownership interest
in a shopping mall, was recorded initially at the Trust's cost and
subsequently adjusted for the Trust's equity in income and cash
distributions.
At December 31, 1998 and 1997, $12.6 million and $14.3 million
of cash was restricted based on terms of a mortgage. Additionally, $3.9
million of cash as of December 31, 1998 was classified as restricted as
it secures benefits under change of control agreements with employees
of the Trust and Company.
Investments as of December 31, 1997, consisted of shares of
beneficial interest of other real estate investment trusts and a U.S.
Treasury Bill. The shares of beneficial interest were classified as
securities available for sale and were reported at their fair value in
the balance sheet. The U.S. Treasury Bill was classified as a
held-to-maturity security and was recorded at cost plus accrued
interest. The U.S. Treasury Bill was collateral to secure an obligation
due to the former owners of Impark. The shares of beneficial interest
of other real estate investment trusts and the U.S. Treasury Bill were
sold in 1998.
The Trust has calculated earnings per share for 1998 and 1997
in accordance with SFAS 128 (Earnings Per Share) and restated 1996.
SFAS 128 requires that common share equivalents be excluded from the
weighted average shares outstanding for the calculation of basic
earnings per share. The reconciliation of shares outstanding for the
basic and fully diluted earnings per share calculation is as follows
(in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Basic weighted average shares 30,772 24,537 17,172
Stock options, treasury method 243 571 367
Restricted shares, treasury method 307 167
------ ------ ------
Diluted weighted average shares 31,015 25,415 17,706
====== ====== ======
</TABLE>
The preferred shares and warrants to purchase shares of
beneficial interest are anti-dilutive and are not included in the
weighted average shares outstanding for the diluted earnings per share.
The assets and liabilities of the Canadian operations are
translated into U.S. dollars at the exchange rates in effect at the
balance sheet date. Income statement accounts are translated at the
weighted average exchange rates for the year. The gains or losses
resulting from these translations are recorded in a separate component
of shareholders' equity. Gains or losses resulting from realized
foreign currency and intercompany transactions are included in net
income.
Financial instruments held by the Trust and the Company
include cash and cash equivalents, accounts receivable, mortgage loans
receivable, accounts payable, revolving credit agreements, long-term
debt, interest rate caps and a currency swap contract. The Trust and
the Company do not hold or issue financial instruments or derivative
financial instruments for trading purposes.
During 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." The statement requires companies to recognize all
derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of
those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. This
statement is effective for fiscal years beginning after June 15, 1999.
The Trust will adopt this Statement on January 1, 2000, and is in the
process of determining the effect that adoption will have on its
financial statements.
In March 1998, the American Institute of Certified Public
Accountants ("AICPA") issued Statement of Position ("SOP") 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," which is effective for the Trust and Company as of
January 1, 1999. This SOP requires capitalization of certain
development costs of software to be used internally.
9
<PAGE> 10
In April 1998, the AICPA issued SOP 98-5, "Reporting on the
Costs of Start-Up Activities," which is effective for the Trust as of
January 1, 1999. This SOP requires start-up and organization costs to
be expensed as incurred and also requires previously deferred start-up
costs to be recognized as a cumulative effect adjustment in the
statement of income upon adoption.
These SOPs, which the Trust and Company plan to adopt as of
January 1, 1999, are not expected to have a material effect on the
Trust's and Company's financial statements.
Certain reclassifications have been made to prior year
balances so that they are comparable to 1998.
2. RESTATEMENT OF COMBINED FINANCIAL STATEMENTS
The Trust has restated its Combined Financial Statements for
each of the five years ended December 31, 1998 as a result of changing
the lives of assets used to calculate depreciation expense. The
cumulative effect of changing the lives of the assets for years prior
to 1994 results in a charge to undistributed income as included in
shareholders equity of approximately $22 million.
Net income and net income per share both basic and diluted
prior to and after the restatement for the change in depreciation lives
are disclosed in the following table (amounts in thousands except per
share):
<TABLE>
<CAPTION>
CHANGE IN CAPITAL
GAINS FOR SOLD
NET INCOME AS CHANGE IN PROPERTIES BASED ON
PREVIOUSLY DEPRECIATION RESTATED RESTATED NET
YEAR REPORTED EXPENSE DEPRECIATION INCOME
---- -------- ------- ------------ ------
<S> <C> <C> <C> <C>
1997 $ 3,043 $(3,441) $1,243 $ 845
1996 3,291 (2,741) --- 550
1995 13,891 (2,375) 1,707 13,223
1994 6,485 (2,224) --- 4,261
</TABLE>
<TABLE>
<CAPTION>
NET INCOME PER CHANGE IN
SHARE AS DEPRECIATION RESTATED NET
PREVIOUSLY EXPENSE PER CHANGE IN CAPITAL INCOME (LOSS)
YEAR REPORTED SHARE GAIN PER SHARE PER SHARE
---- -------- ----- -------------- ---------
<S> <C> <C> <C> <C>
1997 $.12 $(.14) $.05 $.03
1996 .19 (.16) --- .03
1995 .77 (.13) .09 .73
1994 .36 (.12) --- .24
</TABLE>
3. LIQUIDITY
The Trust has a $90 million note payable due on August 11,
1999 and the reduction of the availability of its bank loan facility
commitment during 1999 with the facility to be terminated on August 11,
1999.
As of December 31, 1998, the Trust has $90 million outstanding
under the notes payable and $101 million outstanding under the bank
credit facility. The Trust plans to repay the debt in 1999 with a
combination of property sales, a $50 million rights offering, mortgage
financing, and cash available.
The Trust sold a shopping center and an office building in the
first quarter of 1999 generating $11.1 million of net proceeds which
was used to repay a portion of the note payable. Additionally, the
Trust has entered into contracts to sell six properties to generate
$45.6 million in net proceeds and obtain $66.4 million in mortgage
financing on seven properties. The sale of the properties and mortgage
financing is to be completed throughout the second quarter of 1999. The
Trust also expects to complete a rights offering of approximately $50
million in April 1999 pending an effective registration statement. The
cash generated from these transactions is expected to approximate $162
million. Additionally, the Trust had $28.6 million of cash at December
31, 1998.
As a contingency to the aforementioned sales transactions, the
Trust has contracted to sell an additional five shopping malls which is
anticipated to generate $56.8 million in net proceeds.
Although the Trust believes that the transactions listed above
will occur as planned, there can be no assurance that each transaction
will be completed or they will occur in the time frame or at the
anticipated amounts.
10
<PAGE> 11
4. COMPREHENSIVE INCOME
Effective January 1, 1998, the Trust adopted SFAS 130
(Reporting Comprehensive Income) which requires disclosure of
comprehensive income and its components in a full set of
general-purpose financial statements. Comprehensive income is defined
as changes in shareholders' equity such as foreign currency translation
adjustments and reserves for the valuation of securities held for sale.
The adoption of this statement had no impact on the Trust's net income
or shareholders' equity. Prior year financial statements have been
reclassified to conform to the requirements of this statement.
5. WARRANTS TO PURCHASE SHARES OF BENEFICIAL INTEREST
The Trust in November 1998 issued 500,000 warrants which allow
a third party to purchase 500,000 shares of beneficial interest at $10
per share. The warrants expire in November 2008. The Trust issued the
warrants to the third party as part of the consideration for various
services provided to the Trust and recorded $.4 million in expense as a
measurement of this consideration. The fair value of the consideration
was determined using the Black-Scholes model with the warrants' term of
10 years, a 4% dividend yield, a 4% risk free interest rate and a
volatility factor of 32%.
6. FINANCIAL INSTRUMENT
In 1997, the Trust entered into a foreign currency swap
agreement maturing in 2009 to reduce the impact of foreign exchange
rates on intercompany debt. The contract was tied to a $36 million
Canadian principal, 4% per annum interest obligation with respect to a
$26 million U.S. principal, 4.065% per annum interest, intercompany
transaction. Both notional amounts increased by approximately 8% per
annum. The interest differential paid or received on the swap contract
was recognized as an adjustment to interest expense. The Trust was
required to collateralize its position in the swap contract with a $2
million U.S. interest bearing deposit as of December 31, 1997. The
collateral amount was not impaired as of December 31, 1997. In June
1998, the Trust sold the swap agreement for $825,000 in cash and was
returned its full collateral securing this agreement.
7. COMBINED STATEMENTS OF CHANGES IN CASH
The Trust and the Company consider all highly liquid
short-term investments with original maturities of three months or less
to be cash equivalents. The Trust and Company paid interest of $51.4
million, $29.9 million and $24.1 million in 1998, 1997 and 1996,
respectively. During 1996, $121,000 of interest related to construction
projects was capitalized.
8. UNREALIZED LOSS ON CARRYING VALUE OF ASSETS IDENTIFIED FOR DISPOSITION
AND IMPAIRED ASSET
Management reviews the net realizable value of the Trust's
portfolio periodically to determine whether an allowance for possible
losses is necessary. The carrying value of the Trust's investments in
real estate is evaluated on an individual property basis in accordance
with SFAS 121. In December 1998, the Trust recorded $36 million in
unrealized losses on the carrying value of three shopping centers, two
office properties and a parking facility which were identified for
disposition. The Trust determined that these assets, which are actively
being marketed for sale, were impaired based on the bids received for
these assets as compared to their net book value. The bids received for
these assets best represent the cash flow to be realized in accordance
with SFAS 121. Assets identified for disposition as of December 31,
1998, had a net book value of $44.2 million, net of the $39.6 million
balance of the asset reserve as of December 31, 1998.
Impark recorded a $15 million U.S. reduction of goodwill in
December 1998, in accordance with SFAS 121. Management annually
evaluates the amortization life for goodwill by reviewing the
recoverability of Impark's assets, including goodwill related to the
acquisition of Impark. Measurement of the recoverability of the net
book value of Impark is based on estimated undiscounted future cash
flows of Impark over a holding period and applying a multiple of
earnings of similar companies to value the entire operations, including
goodwill. When the recoverability of Impark's assets, including
goodwill, is less than its net book value, a discount factor is applied
to the estimated future cash flows and the resulting amount is then
compared to the net book value. The difference is recognized as an
impairment under SFAS 121 by reducing goodwill. The estimates used for
future cash flows may differ from actual performance due to the number
of variables having an effect on daily operations and markets in which
these operations are located.
In January 1997, the Trust sold a shopping center for $9
million in cash. The sale resulted in a capital loss of $4 million
which was provided for as part of a $14 million noncash, unrealized
loss on the carrying value of certain assets that was recorded in
December 1995.
In February 1996, the Trust sold two office buildings and an
attached parking garage in Cleveland, OH for $1.8 million in cash and a
$7 million, 8% note secured by the properties. The note was repaid in
June 1996. This sale resulted in a capital loss of $5.5 million which
was provided for as part of a $14 million noncash, unrealized loss on
the carrying value of certain assets that was recorded in December
1995.
11
<PAGE> 12
The amount of assets identified for sale, the reserve for loss
and the losses deducted from the reserve are summarized for the years
ended December 31 in the following table (amounts in thousands):
<TABLE>
<CAPTION>
RESTATED RESTATED
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Assets identified for sale
Net book value of assets identified for sale $ 5,163 $ 27,451 $ 41,527
(At historical cost less accumulated
depreciation)
Additions 79,034 808 1,362
Depreciation (360) (387) (1,312)
Sales of assets (22,709) (14,126)
-------- -------- --------
Net book value of assets identified
for sale at year end $ 83,837 $ 5,163 $ 27,451
======== ======== =======
Reserve for loss $ 3,630 $ 7,605 $ 13,060
Additions to reserve 36,000
Losses realized on sale of assets (3,975) (5,455)
-------- -------- --------
Reserve at year end $ 39,630 $ 3,630 $ 7,605
======== ======== =======
</TABLE>
Property net operating income which is rents less operating
expenses for assets identified for disposition are summarized for the
years ended December 31 in the following table (amounts in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Revenues $15,217 $17,145 $20,842
Operating expenses 7,756 8,456 9,895
------- ------- -------
Property net operating income $ 7,461 $ 8,689 $10,947
======= ======= =======
</TABLE>
9. CAPITAL GAINS AND LOSSES
In May 1998, the Trust sold its investment in the land beneath
the Huntington Building in Cleveland, OH for $6.1 million resulting in
a capital gain of $1.7 million. Additionally, an $18.8 million mortgage
investment secured by the Huntington Building was repaid in 1998
resulting in the recognition of a $7.7 million capital gain which was
deferred when the building was sold in 1982 since the Trust received
the mortgage note as consideration. In June 1998, the Trust sold a
forward exchange agreement resulting in a gain of $.8 million. The
forward exchange contract was purchased to protect the Trust from
foreign currency fluctuations resulting from notes issued in
conjunction with the acquisition of Impark. In December 1998, the Trust
sold a land parcel in Monroe, LA resulting in a gain of $.1 million.
In November 1997, the Trust sold an apartment complex in
Dayton, OH, for $.7 million in cash, a $2.6 million, 8.75% second
mortgage, secured by the property, and the assumption by the purchaser,
of a $7.6 million existing mortgage loan. The capital gain recognized
was $2.7 million. In December 1997, the Trust sold an office complex in
Oklahoma City, OK, for $4.7 million in cash resulting in a capital loss
of $1.2 million.
10. EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT
In 1998, the Trust repaid $87.5 million of its 8 7/8% senior
notes resulting in $1.6 million of unamortized issue costs and
solicitation fees being expensed. Additionally, the Trust renegotiated
its bank credit agreement and the terms of the $90 million note payable
in 1998 resulting in $.8 million of deferred costs related to the bank
credit agreement and note payable being expensed.
In 1997 and 1996, the Trust renegotiated its bank credit
agreements resulting in $226,000 and $286,000, respectively, of
deferred costs relating to its prior bank credit agreements being
expensed.
11. ACQUISITIONS
On April 17, 1997, the Company acquired voting control of
Impark for $36.6 million in cash, assuming $26 million in debt and
issuing to its former owners $10.5 million in non-voting stock in
Impark and issuing to Impark employees $.7 million of non-voting stock,
$.2 million in voting stock and $1 million in preferred stock of
Impark. The transaction was recorded using purchase accounting.
On September 1, 1997, the Trust purchased 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. The transaction was recorded using purchase accounting.
The following unaudited pro forma information presents a
summary of consolidated results of the Trust, the Company and Impark
and the former joint venture properties as if the acquisitions occurred
at the beginning of 1996 with pro forma adjustments to give effect to
the amortization of goodwill, management and lease agreements,
depreciation of property and interest expense (in thousands, except per
share data):
12
<PAGE> 13
<TABLE>
<CAPTION>
RESTATED RESTATED
(UNAUDITED) 1997 1996
---- ----
<S> <C> <C>
Revenue $323,104 $313,303
Net income (loss) applicable to shares of beneficial interest (71) 47
Net income (loss) applicable to shares of beneficial interest per
share -- --
</TABLE>
12. LIABILITY TO FORMER OWNERS OF IMPARK
The Company issued $10.5 million in non-voting common stock in
Impark to its former owners in connection with the acquisition of
Impark. The purchase price payable under the non-voting common stock
increased from the aggregate issue price as of April 17, 1997 at an 8%
per annum rate on the outstanding amount for the first six months and
compounded by an additional one percentage point per annum each six
month period thereafter up to a maximum rate of 17% per annum. To
secure the Trust's obligations under this agreement, the Trust placed
United States Treasury securities on deposit with a trustee and
classified these securities as Investments in the December 31, 1997
Combined Balance Sheets. The non-voting common stock was recorded as an
Other Liability in the Combined Balance Sheets as of December 31, 1997
and was being accreted to its final put price as a charge to expense.
On June 1, 1998 the Company purchased the remaining non-voting common
stock of Impark that it did not own for $11.2 million and the Trust
subsequently sold the United States Treasury securities that served as
collateral.
13. INVESTMENTS IN MORTGAGE LOANS AND NOTES RECEIVABLE
As of December 31, the Trust had the following investments in
mortgage loans and notes receivable (amounts in thousands):
<TABLE>
<CAPTION>
CURRENT
RATE ON
INVESTMENT 1998 1997
---------- ---- ----
<S> <C> <C> <C>
First mortgage loan secured by an office building
in Cleveland, OH, maturing in 2011 9.65% $18,908
Mortgage loan secured by a mall in Fairmount, WV,
maturing in 1998 and partnership units of Crown
American Properties, L.P. 9% 6,199
Second mortgage loan secured by
an apartment complex in Dayton, OH, maturing in 2002 8.75% $2,581 2,600
Note receivable secured by management
contract on an apartment complex in
Atlanta, GA, maturing in 2008 10% 1,727 1,779
Note receivable secured by Temple Mall Company,
maturing in 2023 6% 1,200 1,200
------ -------
$5,508 $30,686
====== =======
</TABLE>
The Cleveland, OH and Fairmont, WV mortgages were paid in full
in 1998. The book value of mortgage investments approximates fair
market value as of December 31, 1998 based on current market conditions
and market interest rates.
14. BANK LOANS
TRUST
As of December 31, 1998, the Trust has $101 million
outstanding under a fully secured $110 million credit agreement at a
weighted interest rate of 8.37% and 8.02% for December 31, 1997. In
accordance with an agreement in principle subject to final
documentation; the credit available under this agreement is reduced to
$80 million on April 30, 1999 and $50 million on June 30, 1999. The
pending agreement will amend the present commitment reduction dates of
March 17, 1999 and May 17, 1999, respectively. The Trust expects to pay
a fee of $.3 million to obtain the additional time period. The
agreement in principle also provides for a reduction in the total
credit facility commitment from $110 million. It also requires that $9
million of proceeds from an anticipated rights offering be used to
repay exiting borrowings. This credit agreement matures in August
1999. Interest under this agreement is calculated, at the option of the
Trust, based on an Eurodollar rate plus 300 basis points or the prime
rate of the lender plus 50 basis points. The Trust may not use
borrowings under this credit agreement to repay any other existing debt
of the Trust, the Company or Impark. Additionally, the Trust has posted
an $8 million letter of credit as collateral for Impark's credit
facility, reducing the Trust's available borrowing by this amount. As
the bank loans are at market interest rates, the fair value is the
carrying amount of the loans. The weighted average interest rate for
1998 and 1997 for the credit agreement was 7.9% and 8%, respectively.
Commitment fees not greater than 3/8% per annum are payable on
the unused portion of the revolving credit
13
<PAGE> 14
agreement. The agreement contains certain requirements including
maintaining minimum funds from operations (income from operations plus
depreciation and amortization), net worth, leverage, debt service and
interest coverage. The Trust obtained a waiver at September 30, 1998
for violation of its financial covenants and also obtained modification
to the debt service, interest coverage and net worth requirements and
the methodology for calculating net income by excluding certain
non-recurring or extraordinary charges or expenses through the
termination of the credit facility. Also, the Trust has received a
waiver with respect to the change in the majority of the Trust's Board
of Trustees until June 30, 1999. The waiver and modification of the
calculation of net income was obtained for an $.8 million fee. The
Trust is in compliance with the required covenants as of December 31,
1998.
The Trust has a rate guarantee contract in the notional amount
of $73.5 million which is tied to LIBOR increasing to a maximum rate of
7%. This rate contract is used by the Trust to reduce the impact of
changes for interest rates on its floating rate bank loans. The
contract expires in October 2000 and the cost is being amortized over
the life of the contract.
IMPARK
As of December 31, 1998, Impark has $33.8 million Canadian
outstanding under a secured credit agreement at an weighted average
interest rate of 7% and 6% for December 31, 1997. The credit agreement
consists of revolving, acquisition, and term bank commitments of $6.5
million, $.9 million and $31.4 million Canadian, respectively. The
revolving, acquisition and term bank facilities have $1.5 million, $.9
million, and $31.4 million Canadian outstanding, respectively, at
December 31, 1998. The credit agreement matures in April 2000. The
weighted average interest rate for the credit agreement was 7% for 1998
and 5.6% for 1997. As the bank loans are at market interest rates, the
fair value is the carrying amount of the loans.
The Trust for a fee to the bank facility lenders, provided a
letter of credit for $8 million U.S. to secure a portion of the balance
outstanding under the bank facility, and has agreed to collateralize,
on August 11, 1999, the bank facility with $5 million U.S. in
securities and to allow the bank facility to be put to the Trust in
November 1999.
The revolving and acquisition credit facilities bear interest
at the lender's prime rate plus 50 basis points and the term facility
bears interest at the Canadian Bankers Acceptance rate plus 150 basis
points. Both interest rates increase by 25 basis points after June 30,
1999. Additionally, Impark will pay a fee of 55 basis points
retroactive to the bank credit facilities inception date to the lenders
upon maturity of the credit facility. In exchange for a fee of $.4
million Canadian, Impark has obtained reduced requirements under its
interest coverage and leverage financial covenants through September
30, 1999 and may deduct certain non-recurring or extraordinary charges
for determining earnings before interest, taxes, depreciation and
amortization for covenant purposes. The fee also waived Impark's
non-compliance with its financial covenants at September 30, 1998.
Impark also received a waiver for the change in the majority of the
Trust's Board of Trustees through June 30, 1999. Impark was in
compliance with its bank covenants at December 31, 1998.
15. MORTGAGE LOANS PAYABLE AND DEFERRED OBLIGATION
As of December 31, 1998, the Trust had outstanding $345
million of mortgage loans due in installments extending to the year
2018. Interest rates on fixed rate mortgages range from 6.869% to
12.25% with $34 million of mortgage loans bearing interest based on
LIBOR. The weighted average interest rate of these mortgages is 7.32%
at December 31, 1998. Principal payments due during the five years
following December 31, 1998 are $4.3 million, $4.7 million, $39.1
million, $52.3 million and $5.6 million, respectively. A $38.7 million
mortgage at 12.25% requires participation in the cash flow of the
secured property over predefined levels. An $162.1 million mortgage
note at 8.43% requires all rents and other tenant charges from the
seven properties that are security for the mortgage to be directly
deposited into a bank account which is pledged as additional security
for the mortgage note and is restricted in use by the lender. The Trust
also has outstanding a $10.6 million deferred obligation at an interest
rate of 14.88%, which is due upon demand. The fair value of the
mortgage loans payable and deferred obligation at December 31, 1998 is
approximately book value based on current market interest rates and
market conditions.
16. SENIOR NOTES
In July 1998, the Trust commenced a tender offer to purchase
for cash all $100 million principal amount of its 8 7/8% Senior Notes
due 2003 at $970 per $1,000 principal amount of Senior Notes, plus
accrued and unpaid interest. Concurrent with the tender offer, the
Trust 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 New York Stock Exchange. In August 1998, pursuant to the tender
offer and consent solicitation, holders of approximately 88% of the
outstanding Senior Notes consented to the indenture amendments and
delisting and the Trust purchased approximately $87.5 million principal
amount of Senior Notes. The Trust has approximately $12.5 million of 8
7/8% Senior Notes outstanding at December 31, 1998. The fair value of
the Senior Notes is approximately $12.4 million based on current market
quotations.
17. PREFERRED SHARES OF BENEFICIAL INTEREST
In October 1996, the Trust issued $57.5 million of Series A
cumulative convertible redeemable preferred shares of beneficial
interest ("Series A Preferred Shares"). The 2,300,000 Series A
Preferred Shares were issued at a par value of $25 per share and are
each convertible into 3.31 shares of beneficial interest. The
distributions on the
<PAGE> 15
Series A Preferred Shares are cumulative and equal to the greater of
$2.10 per share (equivalent to 8.4% of the liquidation preference per
annum) or the cash distributions on the shares of beneficial interest
into which the Series A Preferred Shares are convertible (determined on
each of the quarterly distribution payment dates for the Series A
Preferred Shares). The Series A Preferred Shares are not redeemable
prior to October 29, 2001, and at no time will they be redeemable for
cash. On and after October 29, 2001, the Series A Preferred Shares are
redeemable at the option of the Trust at the conversion rate of one
Series A Preferred Share for 3.31 shares of beneficial interest. The
Trust may exercise its option only if for 20 trading days within any
period of 30 consecutive trading days, the closing price of the shares
of beneficial interest on the New York Stock Exchange equals or exceeds
the conversion price of $7.5625 per share of beneficial interest.
In February 1998, 951,000 preferred shares of beneficial
interest were converted to 3,144,000 shares of beneficial interest.
18. NOTES PAYABLE
The Trust as of December 31, 1998 has notes payable of $90
million and $4.9 million outstanding.
The $90 million note payable bears interest at 12% and has a
final maturity of August 11, 1999. The Trust has an agreement in
principle with the lenders, subject to final documentation, whereby
the Trust will be required to reduce the outstanding principal balance
to less than $70 million by May 15, 1999 and to less than $50 million
by May 31, 1999. Additionally, a fee of 1% of the outstanding balance
as of February 11, 1999, a fee of 50 basis points of the outstanding
principal amount of the note on March 31, 1999 if the balance exceeds
$60 million, and a fee of 50 to 100 basis points of the outstanding
note balance on May 31, 1999 depending on the balance outstanding is
required to be paid under the terms of the note. The Trust agreed, in
principle, to pay a fee of $2.0 million to obtain a stand-by purchase
commitment for two noteholders, who are also shareholders, to purchase
up to $50 million from a contemplated rights offering. The note
payable lenders have agreed, in principle, to allow $9.0 million of
the net proceeds from the rights offering, that would otherwise be
used to repay a portion of the note payable, to be used to repay the
bank loans. This $9.0 million portion of the note payable will bear
interest at 15% annually and matures on August 11, 1999. Of the $2.0
million stand-by commitment fee, Gotham entities are collectively
entitled to receive $1.6 million but agreed to accept only $1.4
million. The other stand-by purchaser will receive $.4 million. The
standby commitment fee is payable whether or not the offering is
consummated and is payable upon the earlier of the closing of the
offering or March 31, 1999. Additionally, if a second rights offering
is conducted by the Trust, the standby purchasers are entitled to
another fee of up to 4% of their standby commitment unless the Trust
cancels or decreases the standby commitment. The standby purchasers
possess certain rights to terminate their obligation as standby
purchasers under both the first and second offerings. The standby
purchase arrangements with respect to the first offering expire on
April 15, 1999 and with respect to the second offering expire on
August 11, 1999. The note payable requires that the Trust and Impark
be in compliance with all financial covenants under its bank
facilities. The note payable lenders granted the Trust a waiver under
this requirement as of September 30, 1998, in exchange for a fee of
$300,000. The Trust is in compliance with the note payable covenants
as of December 31, 1998. The fair value of the note payable is book
value based on current market conditions.
The Trust has a $4.9 million note payable to the trustee of an
escrow account which secures the change in control agreements entered
into by the Trust and the Company with their employees. The note is
payable upon demand by the trustee. The fair value of the note payable
is book value based on current market conditions.
19. SHARE OPTIONS
The Trust has the following share option plans for key personnel.
1981 STOCK OPTION PLAN
This plan provides that option prices be at the fair market
value of the shares at the date of grant and that option rights granted
expire 10 years after the date granted. Adopted in 1981, the plan
originally reserved 624,000 shares for the granting of incentive and
nonstatutory share options. Subsequently, the shareholders approved
amendments to the plan reserving an additional 200,000 shares, for a
total of 824,000 shares, for the granting of options and extending the
expiration date to December 31, 1996. The amendments did not affect
previously issued options. In June 1998, a change in the majority of
the Trust's Board of Trustees resulted in all share options not
previously vested to become fully vested as of that date.
The activity of the plan is summarized for the years ended
December 31 in the following table:
<TABLE>
<CAPTION>
1998 WEIGHTED 1997 WEIGHTED 1996 WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Granted --- --- 409,500 $7.37
Exercised 186,155 $8.51 39,809 $7.64 9,455 9.42
Canceled 317,281 8.22 13,590 13.14 96,450 15.84
Expired 16,120 17.43 22,880 17.55 21,640 24.76
Available --- --- 23,427
</TABLE>
15
<PAGE> 16
As of December 31, 1998, the following options were
outstanding under the 1981 plan:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------ ----------------------------
Weighted
Year Average Weighted Weighted
Options Number Range of Remaining Years Average Number Average
Granted Outstanding Exercise Prices of Options Exercise Price Exercisable Exercise Price
------- ----------- --------------- --------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1989 31,720 $17.07-18.87 .70 $17.51 31,720 $17.51
1990 3,120 11.06 1.80 11.06 3,120 11.06
1992 2,000 10.00 3.80 10.00 2,000 10.00
1994 6,250 7.375 5.30 7.375 6,250 7.375
1996 69,240 7.375 7.20 7.375 69,240 7.375
------- ------- ------- -------
112,330 $10.386 112,330 $10.386
======= ======= ======= =======
</TABLE>
The weighted average of 631,886 options outstanding on January
1, 1998 was $ 8.93 per share.
Included in the above table are 9,360 shares that the Company
may purchase from the Trust at prices ranging from $11.06 to $17.07 per
share to satisfy the Company's obligations to deliver shares to certain
of its key employees pursuant to options previously granted. The option
agreements with the Company's employees provide that option prices be
at the fair market value of the Trust shares at the date of grant and
that option rights granted expire 10 years after the date granted.
1994 LONG-TERM INCENTIVE OWNERSHIP PLAN
This plan, adopted in 1994, reserved 1,629,785 shares for the
granting of incentive and nonstatutory share options and restricted
shares. In accordance with the plan, 9% of the shares of beneficial
interest resulting from the conversion of preferred shares in February
1998 and the January and June 1997 shares of beneficial interest
offerings have been reserved and added to the plan for grant. The share
options expire eight to ten years after being granted. The price of the
options is the fair market value of the shares at the date of grant
with the exception of the option grants in 1998. The stock options
granted in 1998 were granted at exercise prices exceeding market.
Additionally, these options have a cost of capital feature whereby the
exercise price of the options will increase by 10%, compounded annually
and prorated monthly, beginning in May 2000 and in each November
thereafter, less the amount of per share dividends or other
distributions to shareholders. As the 1998 option grants are deemed to
be variable, compensation expense will be recorded when the market
price of shares of beneficial interest exceeds the option price for
these shares at the date of grant for these options. As of December 31,
1998, the option price of shares of beneficial interest did not exceed
the market price of shares of beneficial interest, consequently no
compensation expense was recorded for 1998. In June 1998, a change in
the majority of the Trust's Board of Trustees occurred resulting in all
stock options vesting that had been previously granted.
Since the inception of this plan and prior to the June 1998
change in the composition of the Board of Trustees, restricted shares
were issued to key employees. The restricted shares received dividends
and had voting rights but could not be sold or transferred until the
restriction period lapsed after eight years from the date of grant, or
earlier if the Trust's share price equaled or exceeded $21 for 20
consecutive days, or upon a change in control as defined in the plan.
Restricted shares were granted when defined levels of funds from
operations and net capital gains were achieved during any four
consecutive calendar quarters. Additionally, restricted shares were
granted in place of share options. These restricted shares received
dividends and had voting rights but could not be sold or transferred
for four years or upon a change in control as defined in the plan.
Beginning in 1998, other restricted shares were granted to plan
participants based on defined improvements to funds from operations and
shareholder return. These restricted shares were to vest when funds
from operations for four consecutive quarters doubled as compared to
the funds from operations in the quarter the restricted shares were
granted, or the share price of shares of beneficial interest was 50%
greater than the share price on the five trading days of the quarter
immediately preceding the grant date of the shares, or upon a change of
control as defined in the plan. The restricted shares received
dividends and were eligible to vote. In June 1998, a change in the
majority of the Trust's Board of Trustees occurred resulting in all
restrictions being removed from the restricted shares that had been
previously granted and a $4.7 million expense was recorded for the
remaining deferred compensation which had not been expensed as of that
date. Deferred compensation of $5 million in 1998, $3.2 million in 1997
and $1.7 million in 1996 was recorded. Amortization of the deferred
compensation of $312,000, $746,000 and $499,000, respectively, was
recognized in 1998, 1997 and 1996.
16
<PAGE> 17
The activity of this plan is summarized for the years ended
December 31 in the following table:
<TABLE>
<CAPTION>
1998 WEIGHTED 1997 WEIGHTED 1996 WEIGHTED
SHARES AVERAGE SHARES AVERAGE SHARES AVERAGE
----------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Share options granted 1,800,000 $ 7.50 327,000 $14.19 79,000 $7.38
Share options canceled 501,468 10.83 7,102 7.38 18,400 7.37
Share options exercised 168,382 7.10 52,754 7.31 10,700 6.84
Restricted shares granted 343,964 226,867 142,500
Restricted shares canceled 606,852 3,521 37,007
Shares purchased by employees 18,499 9,005 11,094
Additional shares reserved 282,941 921,150
Available share options
and restricted shares 270,485 1,041,687 672,786
</TABLE>
As of December 31, 1998, the 1994 plan had the following
options outstanding:
<TABLE>
<CAPTION>
Outstanding Options Options Exercisable
--------------------------------------------------------------------------------------------
Weighted
Year Average Weighted Weighted
Options Number Range of Remaining Years Average Number Average
Granted Outstanding Exercise Prices of Options Exercise Price Exercisable Exercise Price
------- --------------------------- ---------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
1995 11,003 $ 7.50-7.75 4.40 $ 7.6629 11,003 $ 7.6629
1996 21,171 7.375 5.20 7.375 21,171 7.375
1997 60,000 14.125-14.25 6.30 14.1875 60,000 14.1875
1998 1,800,000 6.50-8.50 9.83 7.50
--------- ------ ------ -------
1,892,174 $7.7116 92,174 $11.8439
========= ======= ====== ========
</TABLE>
The weighted average price of the 762,024 options outstanding
as of January 1, 1998 is $10.13 per share.
The Trust accounts for stock option awards in accordance with
APB 25 and has adopted the disclosure-only provisions of SFAS 123
(Accounting for Stock-Based Compensation). Consequently, no
compensation cost has been recognized for the share option plans. If
compensation expense for the Trust's two share option plans had been
recorded based on the fair value at the grant date for awards in 1998,
1997 and 1996, consistent with SFAS 123, the Trust's net income would
be adjusted as follows (amounts in thousands, except per share data):
<TABLE>
<CAPTION>
Restated Restated
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net income (loss) applicable to shares of $(86,517) $845 $550
beneficial interest
Effect of stock options as calculated (557) (569) (430)
-------- ----- ----
Net income (loss) as adjusted $(87,074) $ 276 $120
======== ===== ====
Per share
Basic and diluted:
Net income (loss) $(2.81) $.02 $.03
Effect of stock options as calculated (.02) (.02) (.02)
-------- ----- ----
Net income (loss), as adjusted $(2.83) $ -- $.01
======== ===== ====
</TABLE>
The fair value of each option grant is estimated on the date
of the grant using the Black-Scholes option pricing model, with the
following weighted average assumptions used for grants in 1998, 1997
and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Risk-free interest rate 5% 5.7% 6.35%
Expected option life 10 4 10
Expected volatility 32% 23% 30%
Expected dividend yield 4% 3.5% 3.5%
</TABLE>
20. SHAREHOLDER RIGHTS PLAN
In March 1990, the Board of Trustees declared a dividend
consisting of one right to purchase one share of beneficial interest of
the Trust with respect to each share of beneficial interest. The rights
may be exercised only if a person or group acquires 15% or more of the
outstanding shares of beneficial interest, makes a tender offer for at
least
17
<PAGE> 18
15% of the outstanding shares of beneficial interest or is declared to
be an "adverse person." The exercise price of each right is $50. If a
person or group acquires 15% or more of the outstanding shares of
beneficial interest (except in a tender offer approved by the Board of
Trustees), is declared to be an "adverse person" or engages in certain
self-dealing transactions with the Trust ("flip-in events"), each right
(other than rights owned by a 15% owner or an "adverse person")
entitles the holder to purchase one share of beneficial interest of the
Trust for par value (now $1 per share). The Board of Trustees has
agreed to increase the 15% threshold for shares of beneficial interest
acquired through a contemplated rights offering so that a "flip-in"
event will not occur due to the rights offering. If the Trust is
acquired in a merger or other business combination ("flip-over
events"), each right entitles the holder to purchase, for $1, shares of
the acquiring company having a market value equal to the market value
of one share of beneficial interest of the Trust. The rights may be
redeemed by the Trust at a price of $0.01 per right at any time prior
to the earlier of a "flip-in" or "flip-over" event or the expiration of
the rights on March 30, 2000.
21. FEDERAL INCOME TAXES
The Trust has made no provision for current or deferred income
taxes on the basis that it qualified under Sections 856-860 of the
Internal Revenue Code as a real estate investment trust and has
distributed all of its taxable income to shareholders. The Trust and
Company have accrued $.6 million and $1.2 million in taxes relating to
Canadian operations for 1998 and 1997, respectively.
The Trust and Company treat certain items of income and
expense differently in determining net income reported for financial
reporting and tax purposes. Such items resulted in a net increase in
income for tax reporting purposes of approximately $69 million in 1998,
$8 million for 1997, and a net increase of $1.6 million for 1996.
As of December 31, 1998, net investments after accumulated
depreciation in real estate for tax purposes was approximately $655
million.
The 1998 quarterly allocation of cash dividends per share of
beneficial interest for individual shareholders' income tax purposes
was as follows:
<TABLE>
<CAPTION>
LONG-TERM
CAPITAL ORDINARY TOTAL
DATE PAID GAINS INCOME PAID
--------- ----- ------ ----
<S> <C> <C> <C> <C>
February 2, 1998 $.1066 $.0034 $.11
April 30, 1998 .1066 .0034 .11
------ ------ ----
$.2132 $.0068 $.22
====== ====== ====
</TABLE>
For the year ended December 31, 1997, the cash dividends paid
of $.44 consisted of $.3174 per share of ordinary income and $.1226 per
share of capital gains, and for the year ended December 31, 1996, $.422
per share of ordinary income and $.018 per share of capital gains.
The 1998 quarterly allocation of cash dividends per share for
the preferred shares of beneficial interest for individual
shareholders' income tax purposes was as follows:
<TABLE>
<CAPTION>
LONG-TERM
CAPITAL ORDINARY TOTAL
DATE PAID GAINS INCOME PAID
--------- --------- -------- ------
<S> <C> <C> <C> <C>
February 2, 1998 $.5086 $.0164 $.525
April 30, 1998 .5086 .0164 .525
July 31, 1998 .5086 .0164 .525
October 30, 1998 .5086 .0164 .525
------- ------ -----
$2.0344 $.0656 $2.10
======= ====== =====
</TABLE>
For the year ended December 31, 1997, the cash dividends paid
of $2.1172 per share for the preferred shares of beneficial interest
consisted of $1.5272 per share of ordinary income and $.59 of capital
gain.
22. LEGAL CONTINGENCY
The Trust has pursued legal action against the State of
California associated with the 1986 flood of Sutter Buttes Center,
formerly Peach Tree Center. In September 1991, the court ruled in favor
of the Trust on the liability portion of this inverse condemnation
suit, which the State of California appealed. The Trust is proceeding
with its damage claim. No recognition of potential income has been made
in the accompanying Combined Financial Statements.
18
<PAGE> 19
23. BUSINESS SEGMENTS
In 1998, the Trust and Company adopted SFAS No. 131
(Disclosures about Segments of an Enterprise and Related Information).
This statement requires companies to identify segments consistent with
the manner in which management makes decisions about allocating
resources to segments and measuring their performance.
The Trust's and the Company's business segments include
ownership of shopping centers, apartment complexes, office buildings,
parking facilities, mortgage investments and parking management
(Impark). Corporate rent and operating expense consist primarily of
ground lease income from a property leased to a third party. Rent,
property operating expense and real estate taxes, interest expense,
depreciation, capital improvements and identifiable assets for real
estate assets and for Impark have been identified for each of the
business segments for the last three years. Impark derives 87% and 88%
of its rent from Canadian operations for 1998 and 1997, respectively.
Property net operating income is property rent less property operating
expense and real estate taxes. Corporate interest expense consists of
the Trust's non-recourse notes payable, senior note, and bank loan
interest expense. Corporate depreciation and amortization consist
primarily of the amortization of deferred issue costs on non-recourse
debt and the leasehold improvements for its corporate office. Corporate
assets consist primarily of cash and cash equivalents, leasehold
improvements for the corporate offices and deferred issue costs for
non-recourse debt and senior notes. All intercompany transactions
between segments have been eliminated. (See table of business segments
on next page.)
19
<PAGE> 20
<TABLE>
<CAPTION>
RESTATED RESTATED
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Rents
Shopping Centers $ 97,584 $ 58,284 $ 42,570
Apartments 17,056 17,835 16,306
Office Buildings 13,275 13,989 11,794
Parking Facilities 10,805 4,206 3,722
Impark 180,760 129,918 ---
Corporate 1,112 1,156 1,163
--------- --------- ---------
$ 320,592 $ 225,388 $ 75,555
Less - Operating Expenses
Shopping Centers $ 32,433 $ 17,182 $ 11,911
Apartments 6,182 6,729 6,105
Office Buildings 6,069 6,753 6,701
Parking Facilities 2,444 1,017 200
Impark 175,625 124,624 ---
Corporate 914 910 869
--------- --------- ---------
$ 223,667 $ 157,215 $ 25,786
Less - Real Estate Taxes
Shopping Centers $ 8,918 $ 6,857 $ 5,736
Apartments 975 1,382 1,234
Office Buildings 992 1,085 885
Parking Facilities 1,568 624 442
--------- --------- ---------
$ 12,453 $ 9,948 $ 8,297
Property Net Operating Income
Shopping Centers $ 56,233 $ 34,245 $ 24,923
Apartments 9,899 9,724 8,967
Office Buildings 6,214 6,151 4,208
Parking Facilities 6,793 2,565 3,080
Impark 5,135 5,294 ---
Corporate 198 246 294
--------- --------- ---------
$ 84,472 $ 58,225 $ 41,472
--------- --------- ---------
Less - Depreciation and Amortization
Shopping Centers $ 15,880 $ 10,414 $ 8,574
Apartments 2,751 2,952 2,796
Office Buildings 4,282 3,963 3,410
Parking Facilities 1,604 281 214
Impark 5,789 4,105 ---
Corporate 3,083 1,177 896
--------- --------- ---------
$ 33,389 $ 22,892 $ 15,890
Less - Interest Expense
Shopping Centers $ 23,832 $ 11,224 $ 4,693
Apartments 2,819 3,406 2,951
Office Buildings --- 15 143
Parking Facilities 2,381 784 753
Impark 2,682 2,082 ---
Corporate 19,145 12,353 14,886
--------- --------- ---------
$ 50,859 $ 29,864 $ 23,426
Mortgage Investment Income $ 1,211 $ 2,907 $ 4,732
Corporate Income (Expense)
Short-term investment income $ 1,337 $ 1,525 $ 80
Other income 1,386 5,724 1,500
General and administrative (37,577) (12,135) (6,787)
Foreign currency loss (2,198) --- ---
Litigation and proxy costs (4,848) --- ---
Unrealized loss on carrying value of
real estate and impaired assets (51,000) --- ---
--------- --------- ---------
Income (loss) before capital gain,
extraordinary loss and minority interest $ (91,465) $ 3,490 $ 1,681
========= ========= =========
Capital expenditures
Shopping Centers $ 12,585 $ 9,381 $ 10,083
Apartments 2,081 1,497 1,606
Office Buildings 8,045 9,741 8,444
Parking Facilities 392 1,035 131
--------- --------- ---------
$ 23,103 $ 21,654 $ 20,264
========= ========= =========
Identifiable assets
Shopping Centers $ 471,996 $ 498,238 $ 179,899
Apartments 79,011 79,386 89,090
Office Buildings 45,404 45,412 49,343
Parking Facilities 81,554 17,353 7,238
Impark 66,169 88,529 ---
Mortgages 5,508 30,686 42,466
Corporate 37,042 30,622 45,018
--------- --------- ---------
Total Assets $ 786,684 $ 790,226 $ 413,054
========= ========= =========
</TABLE>
20
<PAGE> 21
24 SUBSEQUENT EVENT
The Trust in February 1999 sold a shopping center for $21.6
million, resulting in net proceeds of $9.3 million after repayment of
mortgage debt. The Trust in March 1999 sold an office building
resulting in net proceeds of $1.8 million.
25. MINORITY INTEREST IN IMPARK
The Company owns 76% of the voting common stock of Impark with
the remainder owned by employees of Impark. Consequently, for financial
reporting purposes the financial statements of Impark and the Company
are consolidated with the minority interest's share of the loss
resulting from Impark being allocated to the employee shareholders. As
the equity of the minority shareholders was depleted as of December 31,
1997, no further losses have been allocated to the minority
shareholders subsequent to 1997.
26. MINIMUM RENTS
The future minimum lease payments that are scheduled to be
received under noncancellable operating leases are as follows (amounts
in thousands):
<TABLE>
<S> <C>
1999 $ 67,856
2000 60,308
2001 52,710
2002 46,936
2003 41,309
Thereafter 154,058
--------
$423,177
========
</TABLE>
27. RELATED PARTY TRANSACTIONS
In connection with the $90 million note payable, the Trust
paid fees of $1.4 million to the lenders. One of the lenders is Gotham
Partners, L.P. and another is Gotham Partners III, L.P. ("Gotham")
which received fees of $.2 million through December 31, 1998. The Trust
paid interest of $3.7 million to the lenders, of which Gotham received
$.6 million through December 31, 1998. The fees and interest were
allocated among the lenders based on the amounts they loaned to the
Trust. Gotham and one of the other lenders agreed to provide a stand-by
commitment to purchase up to $45 million from a contemplated rights
offering in exchange for a fee of $1.8 million. Gotham agreed to
acquire 7/9ths of the shares of beneficial interest required under the
stand-by commitment and, accordingly, it will receive a proportionate
share of the fee amounting to $1.4 million. Gotham and the other lender
also agreed to provide a stand-by commitment for a second rights
offering of up to $50 million in exchange for a fee of up to $1.8
million, of which Gotham would receive up to $1.4 million depending on
the amount of the rights offering. Gotham owns 9.70% of the shares of
beneficial interest as of December 31, 1998.
The Trust in 1998 reimbursed Gotham for $3.1 million in proxy
expenses.
The Company has engaged a law firm, that has a partner who is
a Trustee, to advise it on strategic matters regarding Impark. As of
December 31, 1998, no payments have been made to this firm.
The Company leases four of its parking facilities to a third
party which is partially owned by an affiliate of a Trust shareholder,
Apollo Real Estate Investment Fund II, L.P. and Apollo Real Estate
Advisors. In 1998, the Trust received $.9 million in rent from this
third party.
The Trust in December 1998 engaged a company, a shareholder of
which is a relative of a principal of Gotham, to provide mortgage
brokerage services. No fees have been paid to this party through
December 31, 1998
28. SEVERANCE ACCRUAL
During 1998, the Trust recorded severance expense of $6.1
million for change in control agreements, other compensation
arrangements for continuation of employment, and termination of an
employment contract. At December 31, 1998, the Trust had paid $1.0
million of these benefits and has a balance of $5.1 million remaining
to be paid. The Trust recognizes these expenses over the periods that
employees are required to remain in the employment of the Trust. If an
employee is terminated without any period of required continuing
employment, these benefits are expensed if and when paid.
The Trust also paid $3.4 million related to the termination of
employment of its former chairman, president and chief executive
officer. As a result of the proxy contest in 1998 and the change in the
composition of the Trust's board of Trustees, restricted stock became
unrestricted and the Trust recognized $4.7 million of deferred
compensation as an expense.
29. CONTINGENCIES
The Trust, in exchange for a fee from Impark, has provided
performance guarantees for the manufacturing and installation of
transit ticket vending equipment. The guarantees of $5.3 million and
$6.2 million expire in February 2001
21
<PAGE> 22
and 2002, respectively. As of December 31, 1998, no amounts have been
drawn against these guarantees.
30. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is an unaudited condensed summary of the
combined results of operations by quarter for the years ended December
31, 1998 and 1997. In the opinion of the Trust and Company, all
adjustments (consisting of normal recurring accruals) necessary to
present fairly such interim combined results in conformity with
generally accepted accounting principles have been included. The first
three quarters of 1998 and four quarters of 1997 have been restated to
reflect the change in the lives of assets used to calculate
depreciation. Additionally, the third quarter of 1998 has been
restated for the reduction of a severance accrual made in the fourth
quarter of 1998.
<TABLE>
<CAPTION>
QUARTERS ENDED
---------------------------------------------------------
RESTATED RESTATED RESTATED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA AND FOOTNOTES)
<S> <C> <C> <C> <C>
1998
----
Revenues $ 80,354 $ 81,847 $ 78,670 $ 83,655
-------- -------- -------- --------
Loss before preferred dividend and extraordinary
loss from early extinguishment of debt (3,579) (11,076) (8,598) (57,866)
Extraordinary loss from early extinguishment of debt (1,633) (766)
-------- -------- -------- --------
Net loss before preferred dividend (3,579)(1) (11,076)(2) (10,231)(3) (58,632)(4)
-------- -------- -------- --------
Net loss applicable to shares of beneficial interest $ (4,454) $(11,784) $(10,939) $(59,340)
======== ======== ======== ========
Comprehensive net loss $ (4,450) $(12,073) $(11,276) $(59,957)
======== ======== ======== ========
Per share
Loss applicable to shares of beneficial interest
before extraordinary loss $ (.15) $ (.38) $ (.30) $ (1.87)
Extraordinary loss from early extinguishment of debt (.05) (.02)
-------- -------- -------- --------
Net loss applicable to shares of beneficial
interest, basic and diluted $ (.15) $ (.38) $ (.35) $ (1.89)
======== ======== ======== ========
As previously reported:
Net loss previously disclosed $ (3,272) $(10,602) $(11,657)
Change in depreciation expense (1,182) (1,182) (1,182)
Change in severance accrual 1,900
-------- -------- --------
Net loss as restated $ (4,454) $(11,784) $(10,939)
======== ======== ========
Net loss per share as previously
disclosed, basic and diluted $ (0.11) $ (0.34) $ (0.37)
Net loss per share as restated, basic and
diluted (0.15) (0.38) (0.35)
</TABLE>
(1) Included $.9 million loss U.S. from Impark's manufacturing subsidiary and
$.9 million in proxy and litigation expenses.
(2) Included $3.4 million expense for the termination of the former Chairman,
President and Chief Executive Officer, $3.9 million in proxy and litigation
expenses, $4.7 million expense for the vesting of restricted shares, $2.3
million reserve on a property acquisition deposit due to the Trust
terminating the deal, $1.5 million in professional fees regarding the
Trust's restructuring, $1 million in bank loan waiver fees and a $.4
million reserve for the termination of a systems project and $1.5 million
in foreign currency translation loss.
(3) Included $1.7 million severance accrual, $.8 million in expense for
terminations of former employees, $1.6 million in legal fees for possible
corporate and financial transactions of the Trust, $1.1 million in foreign
currency translation loss for marking an intercompany receivable to the
spot rate, the reduction in the accrual of percentage rent of $1.5 million
due to the adoption of EITF 98-9 and a $1.6 million extraordinary loss from
the repayment of $87.5 of Senior Notes prior to their maturity.
(4) Included $1.1 million in expense for various services provided to the Trust
by a third party and warrants issued in connection therewith, $.8 million
in legal fees for possible corporate and financial transactions, $.5
million in professional fees resulting from an unsuccessful effort to
refinance the Trust's bridge and bank loans, $.8 extraordinary loss
resulting from amendments to the Trust's bank credit facility and $90
million note payable, $4.4 million severance accrual offset by $1.5
million in additional percentage rent accrued due to the prospective
adoption of EITF 98-9. Also includes $51 million unrealized loss on
carrying value of assets identified for disposition and impaired.
(5) Included a noncash recognition of income from the repayment of a wraparound
mortgage investment.
(6) Included recognition of income of $.5 million from a casualty loss.
22
<PAGE> 23
<TABLE>
<CAPTION>
QUARTERS ENDED
-----------------------------------------------------
RESTATED RESTATED RESTATED RESTATED
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997
- ----
Revenues $ 22,122 $ 58,946 $ 73,135 $ 81,341
-------- -------- -------- --------
Income before preferred dividend, extraordinary 1,318 1,074 1,086 2,424
loss from early extinguishment of debt
and after minority interest
Extraordinary loss from early extinguishment of debt (226)
-------- -------- -------- --------
Net income before preferred dividend 1,318 1,074 1,086 2,198
-------- -------- -------- --------
Net income applicable to shares of beneficial interest $ 110(5) $ (135)(6) $ (123) $ 993
======== ======== ======== ========
Comprehensive net income (loss) $ 114 $ (150) $ (209) $ 212
======== ======== ======== ========
Per share
Loss applicable to shares of beneficial interest
before extraordinary loss and after minority interest $ .01 $ (.01) $ (.01) $ .05
Extraordinary loss from early extinguishment of debt (.01)
-------- -------- -------- --------
Loss applicable to shares of beneficial
interest - basic and diluted $ .01 $ (.01) $ (.01) $ .04
======== ======== ======== ========
As previously reported:
Net income previously disclosed $ 970 $ 727 $ 738 $ 608
Change in depreciation expense (860) (862) (861) (860)
Change in loss on sale of property 1,245
-------- -------- -------- --------
Net income (loss) as restated $ 110 $ (135) $ (123) $ 993
======== ======== ======== ========
Net loss per share as previously disclosed, $ 0.05 $ 0.03 $ 0.03 $ 0.04
basic and diluted
Net loss per share as restated, basic and 0.01 (0.01) (0.01) 0.04
diluted
</TABLE>
23
<PAGE> 24
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SECURITYHOLDERS AND TRUSTEES OF FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS:
We have audited the accompanying combined balance sheets of First Union
Real Estate Equity and Mortgage Investments (an unincorporated Ohio business
trust, also known as First Union Real Estate Investments) and First Union
Management Inc. (a Delaware corporation) and its subsidiaries as of December 31,
1998 and 1997, and the related combined statements of operations, combined
statements of comprehensive income, shareholders' equity and changes in cash for
each of the three years in the period ended December 31, 1998 (1997 and prior as
restated - see note 2). These financial statements are the responsibility of
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the combined financial position of First Union
Real Estate Equity and Mortgage Investments and First Union Management Inc. and
its subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their changes in cash for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Cleveland, Ohio,
March 29, 1999. ARTHUR ANDERSEN LLP
24
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESTATEMENT OF COMBINED FINANCIAL STATEMENTS
- --------------------------------------------
The Trust has restated its Combined Financial Statements for each of
the five years ended December 31, 1998 as a result of changing the lives of
assets to calculate depreciation expense.
FINANCIAL CONDITION
- -------------------
In January 1998, the Trust acquired two parking garages for $44.8
million in cash, the assumption of $.7 million in mortgage debt and the issuance
of a $.9 million mortgage note payable. The parking garages are located in
Chicago, IL, and Columbus, OH. Additionally, in February 1998, the Trust
acquired a parking garage in Richmond, VA for $9.1 million in cash and a
development site in Cleveland, OH for $3.3 million in cash. The development site
is leased on a short-term basis to the former owner until construction of a
parking garage commences. In March 1998, the Trust acquired a surface parking
lot adjacent to the Ballpark at Arlington in Arlington, TX for $3 million in
cash. In July 1998, the Trust acquired a parking garage in Nashville, TN for
$2.1 million in cash and the assumption of a $4.5 million mortgage. During 1998,
the Trust acquired three parcels of land adjacent to two shopping centers that
it owns for $.7 million. The cash required for these acquisitions was funded
with proceeds from the Trust's bank credit facilities.
The Trust in January 1998 received $6.2 million in cash as full
repayment of a mortgage investment secured by a property in Fairmont, WV. In May
1998, the Trust received $18.8 million in cash as full repayment of a mortgage
investment secured by an office building in Cleveland, OH. The proceeds were
used to repay bank loans under the Trust's bank credit facilities.
In February 1998, 951,000 preferred shares of beneficial interest were
converted into approximately 3,144,000 shares of beneficial interest.
The Trust in May 1998, sold its investment in the land beneath an
office building in Cleveland for $6.1 million resulting in a capital gain of
$1.7 million. The proceeds were used to reduce short-term borrowings.
In May 1998, the Trust obtained a $30 million non-recourse mortgage
secured by its parking garage in Chicago, IL. The mortgage is for three years at
an interest rate of LIBOR plus 175 basis points and is interest only.
On June 1, 1998, the Trust's affiliated management company purchased
the remaining non-voting common shares of Impark for $11.2 million from Impark's
former owner. The non-voting common stock was recorded as an Other Liability in
the Combined Financial Statements. The Trust, for a fee from the former owner of
Impark, had provided a financial guarantee that the shares would be redeemed.
Upon completion of the redemption, the Trust sold $11.5 million of U.S. Treasury
bills which had collateralized the financial guarantee.
In July 1998, the Trust commenced a tender offer to purchase for cash
all $100 million principal amount of its 8 7/8% Senior Notes due 2003 at $970
per $1,000 principal amount of Senior Notes, plus accrued and unpaid interest.
Concurrent with the tender offer, the Trust 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 New York Stock Exchange. The purpose of the tender offer and
consent solicitation was (i) to prevent the possibility that the Trust would be
required to purchase the Senior Notes at 101% of their principal amount, an
obligation which the Trust did not have the financial resources to satisfy, and
(ii) to provide the Trust with additional financial and operating flexibility.
Prior to its amendment, the Senior Note indenture required the Trust to offer to
purchase 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.
declined by one or more rating levels. In April 1998, S&P placed the Trust on
Credit Watch and in November 1998, downgraded the Trust's debt rating. In June
1998, Moody's placed the Senior Notes under review for possible downgrade and in
October 1998, downgraded its rating for the Senior Notes.
In August 1998, pursuant to the tender offer and consent solicitation,
holders of approximately 88% of the outstanding Senior Notes consented to the
indenture amendments and the Senior Notes were delisted from the New York Stock
Exchange. The Trust purchased approximately $87.5 million principal amount of
Senior Notes. The purchase of the Senior Notes was financed with the proceeds of
a $90 million loan (the "Bridge Loan") that matures in August 1999. The lenders
under the Bridge Loan are Bankers Trust, as agent, and BankBoston, N.A.,
Blackacre Bridge Capital, Elliott Associates, Gotham Partners, L.P. and Gotham
Partners III, L.P., and Wellsford Capital, each as an equal participant.
As a result of legal fees for several matters, accrued severance
expenses for employee terminations, a new accounting pronouncement requiring the
deferral of percentage rent from tenants, and foreign currency mark-to-market
25
<PAGE> 26
losses, the Trust was not in compliance with the debt service coverage, interest
coverage, leverage ratio and funds from operations covenants under its bank
credit facility for the third quarter of 1998. Additionally, Impark was not in
compliance with covenants relating to the leverage ratio and interest coverage
under its bank credit agreement for the third quarter of 1998. Further, the
lenders under the facilities determined that a change in the majority of the
Trust's Board of Trustees occurred in June 1998. This change in the Board would
have breached covenants under both credit facilities, but the lenders waived
these breaches.
The lenders under the Trust 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 Trust's credit facility extended the waiver with respect to the Board of
Trustees' change of control until June 30, 1999. In consideration for these
modifications, the Trust paid the lenders an $825,000 fee. Concomitant with the
covenant modifications and the waiver extension, the lenders reduced their
maximum commitment under the Trust credit facility from $125 million to $110
million and will reduce such commitment further to $80 million on March 17, 1999
and to $50 million on May 17, 1999. The lenders have agreed in principle in
March 1999 in exchange for a payment fee of $300,000, extended by 45 days the
reduction of the commitment to April 30, 1999 and June 30, 1999, respectively.
As part of the Amendment to extend the dates of the commitment reduction in
March 1999, the lenders reduced the credit facility commitment by $5 million to
$105 million. Additionally, upon the completion of the rights offering, $9
million of the proceeds will be used to repay the credit facility and the
commitment will be reduced by $9 million to $96 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 under the Impark credit facility agreed to (i) 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 (ii) 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 default caused by the change in the majority of the Trust's Board
of Trustees 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 the Trust issued an $8 million U.S. letter of credit
under the Trust's credit facility as collateral for Impark's obligations and
agreed to provide an additional $5 million U.S. in collateral for such
obligations on August 11, 1999.
The lenders under the Bridge Loan agreed to extend the maturity of the
loan to August 11, 1999 and incorporate the revised covenants in the Trust's
credit facility. In consideration for these amendments, the Trust paid the
Bridge Loan lenders a fee of $300,000 and agreed, in principle, to (i) reduce
the outstanding principal balance under the Bridge Loan to less than $70 million
by May 15, 1999 (previous reduction date was March 31, 1999) and to less than
$50 million by May 31, 1999, (ii) increase the lenders' interest rate on the
loan from 9.875% to 12% per annum and (iii) pay (A) on February 11, 1999 a fee
of 1% of the outstanding principal amount of the loan on such date, (B) a fee in
an amount equal to 50 basis points of the outstanding principal amount of the
loan on March 31, 1999, if the balance outstanding is greater than $60 million
and (C) 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 Trust further amended the Bridge Loan, in
principle, to have $9.0 million of proceeds from an anticipated rights offering,
that would otherwise be used to repay a portion of the Bridge Loan, to be used
to repay the Trust's credit facility. This $9.0 million portion of the Bridge
Loan will bear interest at 15% annually.
In November 1998, in consideration for various services that it had
previously provided to the Trust, a third party was issued ten-year warrants
exercisable for 500,000 shares of beneficial interest at a price of $10 per
share and was paid $750,000. The Trust recorded $436,000 in expense as a
measurement of the consideration represented by the stock warrants based on the
Black-Scholes option pricing model.
In December 1998, the Trust, and Impark recorded a non-cash charge of
approximately $51 million in accordance with SFAS 121, "Impairment of Long Lived
Assets". The Trust determined that certain real estate assets held for sale are
impaired based on the bids received from purchasers compared to the net book
value of these assets held for sale and recorded a $36 million charge. As the
Trust intends to sell these assets, the bids received best represent the cash
flow to be realized in accordance with SFAS 121. Additionally, Impark recorded a
$15 million U.S. reduction of goodwill. A review for impairment was triggered
based on Impark's operating results being less than the proforma projection used
to purchase Impark. The impairment was indicated by projected undiscounted
future cash flows of Impark being less than the net book value of Impark's
assets, including goodwill related to the acquisition. The impairment amount was
calculated based on discounting projected cash flows of Impark, which showed the
net book value of Impark's assets, including goodwill, would not be realized by
$15 million U.S.
YEAR 2000
- ---------
In June 1998, the Trust implemented a multi-step Year 2000 Compliance
Project (the "Project"). The Project is addressing the issue of computer systems
and embedded computer chips that may not be able to properly recognize dates
prior to, on, or after January 1, 2000.
The general phases of the Project are as follows: (1) inventorying
systems and equipment that may be affected by the Year 2000 issue; (2) assigning
priorities to the items identified; (3) evaluating the Year 2000 compliance of
items deemed
26
<PAGE> 27
to be critical to the Trust's operations; (4) testing critical items; (5)
repairing or replacing critical items that are determined not to be Year 2000
compliant and (6) developing and implementing contingency plans for each
location.
As of December 31, 1998, the inventory and priority assessment phases
of the Project were completed. Critical items are those believed by the Trust to
involve a risk to the safety of individuals, or that may cause damage to
property, or affect revenues. Testing of critical items is being performed and
is expected to be completed in the first quarter of 1999.
The Project addresses three main sections: (a) Information Technology
Systems; (b) Process Control and Instrumentation; and (c) Third Party Tenants,
Suppliers and Customers.
The Information Technology Systems section consists of all computer
hardware and software. These systems are primarily used for accounting and
financial reporting as well as property management purposes throughout the
Trust's 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 October 31, 1999. Additionally, 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 includes the hardware,
software and associated embedded computer chips that are used in the operations
of certain facilities owned by the Trust. Testing and repair of this equipment
is in process. The Trust's 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 includes the
process of identifying critical suppliers and customers and obtaining
information from them regarding their plans and progress in addressing the Year
2000 problem. A written notice regarding the Year 2000 problem was sent to all
tenants occupying space at properties owned by the Trust 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.
The total cost of required modifications to achieve Year 2000
compliance is not expected to be material to the Trust's financial position.
Estimated total costs are expected to be between $1.0 million and $2.0 million,
including enhancements to software programs and upgrades to hardware, some
portion of which would have been done irrespective of the Year 2000 problem.
The failure 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 the Trust 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.
FEDERAL TAX LEGISLATION
- -----------------------
On July 22, 1998, the President of the United States signed legislation
that limits the "grandfathering rules" applicable to Real Estate Investment
Trusts (REITS) which have a paired management company. (The shares of the
affiliated management company are considered to be "paired" with the Trust.) As
a result of this legislation, the Trust and the affiliated management company
will be treated as one entity with respect to properties acquired on or after
March 26, 1998 and activities or services relating to such properties that are
undertaken or performed by one of the paired entities on or after this date.
This legislation limits the benefits of the Trust's paired structure with the
affiliated management company. The Trust is currently evaluating the potential
value of its paired structure.
27
<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash provided by operations was $6.4 million as compared to cash
provided by operations of $15.7 million when comparing 1998 to 1997. The
decrease in cash provided from operations is primarily the result of a net loss
before the preferred dividend of $83.5 million. The net loss was primarily
caused by several charges relating to the proxy contest and change in
the Board of Trustees' composition as detailed in the following section "Results
of Operations" and the non cash charge of $51 million for the unrealized loss on
the carrying value of assets held for sale and impaired. The net loss of $83.5
million is offset by the non cash charges of $33.4 million for depreciation and
amortization and the $51 million charge to recognize the unrealized loss on the
carrying value of assets held for sale and impaired. Dividends to shares of
beneficial interest paid in 1998 of $6.6 million represented 103% of net cash
from operations.
The Trust received $25 million in full repayment of two mortgage
investments secured by a mall in Fairmont, WV and an office building in
Cleveland, OH during 1998. The proceeds were used to repay borrowings under the
Trust's bank credit facilities. Additionally, the Trust in May 1998 sold land in
Cleveland, OH for $6.1 million which was also used to repay bank credit
facilities.
As noted previously, the Trust acquired five parking facilities and a
development site for $62.3 million in cash. The properties were acquired by
borrowing under the bank credit facilities, assumption of two mortgages totaling
$5.2 million and the issuance of a $.9 million second mortgage.
The Trust invested $23.1 million in its existing portfolio primarily to
construct the first phase of a shopping center in Abilene, TX and continue to
tenant the former retail center in Denver, CO, which has been converted into an
office technology center.
As noted previously, the Trust's affiliated management company
purchased the remaining non-voting common stock of Impark in June 1998 for $11.2
million.
During the second quarter of 1998, the Trust sold $2.1 million of stock
of another REIT and $11.5 in U.S. Treasury bills. The U.S. Treasury bills were
collateral for a financial guarantee that the Trust had made in conjunction with
the Trust's affiliated management company's acquisition of Impark.
In May 1998, the Trust obtained a $30 million mortgage loan on its
Chicago, IL parking garage. The proceeds were used to repay bank lines of
credit.
In June 1998, the Trust suspended its quarterly dividend to
shareholders of beneficial interest and adopted a policy of making only the
minimum required distributions to maintain its tax status as a REIT.
Additionally, the Trust has adopted a policy of making dividend distributions on
an annual basis. The Trust, for 1998, has made all distributions required to
maintain its tax status as a REIT.
As noted previously, the Trust obtained a $90 million Bridge Loan which
was used to repurchase approximately $87.5 million in Senior Notes.
The Trust in 1999 has the following debt maturities (in thousands of
dollars):
<TABLE>
<S> <C>
Bank loans $101,000
Bridge loan 90,000
Mortgage principal payments 4,308
Other obligations 10,602
----------
$205,910
==========
</TABLE>
The bank loans require paydowns to $80 million and $50 million by April
30, 1999 and June 30, 1999, respectively. The remaining $50 million must be
repaid by August 11, 1999. The Bridge Loan must be paid down to $70 million by
May 15, 1999 and to $50 million on May 31, 1999. The remaining $50 million
must be paid by August 11, 1999. The $10.6 million obligation may be called
during 1999 at the option of the creditor.
To fund the repayment of these obligations, the Trust intends to sell
certain assets, conduct a rights offering, use cash available of $28.6 million
as of December 31, 1998, refinance certain assets, and use cash from operations.
To facilitate the rights offering, the Trust, in September 1998, filed a
registration statement on Form S-3 with the Securities and Exchange Commission.
If the Trust is not able to meet the deadlines for debt repayment, it
may be forced to seek bankruptcy protection.
28
<PAGE> 29
RESULTS OF OPERATIONS - 1998 VERSUS 1997
- ----------------------------------------
Net loss applicable to shares of beneficial interest for 1998 was $86.5
million as compared to net income of $.8 million for 1997. The net loss for 1998
included a $2.25 million loss on a property acquisition deposit that was
approved prior to the change in the majority of the Board of Trustees in June
1998, and which was offset by $200,000 later in 1998 by assigning the contract
to a third party, a $3.4 million payment to the Trust's former chairman and
chief executive officer, a $4.7 million expense due to lifting of restrictions
on restricted shares which followed the change in the majority of the Trust's
Board of Trustees, $1.5 million in other professional fees to avoid a change in
the composition of the Trust's Board, $4.8 million in proxy and litigation
expenses and a $51 million noncash charge to recognize the loss on carrying
value of assets held for sale and impaired assets. Additionally, the Trust
incurred $2.2 million in foreign currency mark-to-market losses, $6.1 million in
accrued severance expenses for change in control agreements and for employee
terminations and $2.6 million in legal fees.
In February 1998, 951,000 preferred shares of beneficial interest were
converted into common shares of beneficial interest resulting in a decreased
preferred dividend when comparing 1998 to 1997.
Net loss for 1998 included $10.3 million of capital gains. The Trust
sold its land beneath a building in Cleveland, OH resulting in a capital gain of
$1.7 million. An additional capital gain of $7.7 million was recognized when a
mortgage investment was repaid. This capital gain had been deferred from a
property sale in 1982 since the Trust received the mortgage note as purchase
consideration. The Trust also realized a capital gain from the sale of a forward
exchange contract of $.8 million in the second quarter of 1998. In December
1998, the Trust sold a land parcel in Monroe, LA resulting in a $.1 million
capital gain. Additionally, the net loss for 1998 included $1.6 million of
unamortized Senior Note issue costs and professional fees which were expensed in
the third quarter of 1998 when the Trust repaid approximately $87.5 million of
the Senior Notes prior to their maturity and $.8 million of deferred costs which
were expensed when the Trust renegotiated its bank agreement and $90 million
Bridge Loan.
Mortgage loan interest income declined by $1.7 million, when comparing
1998 to 1997. The decline in interest income when comparing 1998 to 1997 was
caused by the repayment of a mortgage investment secured by a shopping mall in
Fairmont, WV in January 1998 and the repayment of a mortgage investment secured
by an office building in Cleveland, OH in May 1998.
The Trust had approximately $11.5 million invested in U.S. Treasury
bills and approximately $2.1 million invested in the stock of another REIT for
the first five months of 1998. The U.S. Treasury bills were purchased in April
1997 to secure the Trust's obligation under an agreement with the former owners
of Impark to collateralize the $10.5 million in non-voting stock and accrued
interest which the former owners of Impark received when the Trust's affiliated
management company purchased voting control of Impark in April 1997. The REIT
stock was acquired in the third and fourth quarters of 1997 as a long-term
investment. As noted previously, the non-voting common stock of Impark was
purchased in June 1998 allowing the Trust to sell the U.S. Treasury bills. The
Trust also sold its holdings in the REIT stock as a result of its change in
investment strategy.
In September 1996, the Trust invested in a joint venture that owned
eight shopping malls and 50% of another mall. The Trust in September 1997
purchased the interests of its joint venture partners. Consequently, the Trust's
investment income and management fees for the Trust's affiliated management
company declined when comparing 1998 to 1997.
Property net operating income for 1998 increased $26.2 million when
comparing 1998 to 1997 on a non-comparable basis. The acquisition of the former
joint venture properties in September 1997 and the five parking facilities in
the first three months of 1998 produced $21.8 million and $3.7 million,
respectively, of increased property net operating income when comparing 1998 to
the same period of 1997. These increases were offset by the decrease in property
net operating income of $1.5 million resulting from the sale of an office
building and an apartment complex in the last four months of 1997. Property net
operating income increased by $2.2 million for the comparable portfolio when
comparing 1998 to the same period of 1997. The increase was attributable to the
continued lease-up of the North Valley Tech Center and increased rental rates in
the apartment portfolio.
Mortgage interest expense increased when comparing 1998 to that of 1997
primarily due to the $203 million in mortgage debt assumed in September 1997 in
conjunction with the purchase of the remaining interest in the Trust's joint
venture and the $30 million mortgage obtained in May 1998.
Bank loan interest expense increased when comparing 1998 to the prior
year due to increased borrowing, exclusive of the bank debt assumed in the April
1997 acquisition of Impark. The average balance for 1998 outstanding, exclusive
of Impark's bank debt, was $90 million. The average balance outstanding for 1997
was approximately $19 million. The bank loans increased when comparing 1998 to
1997 primarily due to borrowings to fund the parking garage acquisitions and
development site, partially fund the Trust's purchase of its partners' interest
in the joint venture and to fund tenant and capital improvements during 1998 and
1997. Additionally, the bank covenant waiver fees of $.6 million for the second
quarter covenant waivers were recorded as bank loan interest expense in 1998.
Offsetting the increase in the bank credit facilities were the proceeds from
property sales during the last four months of 1997 and in May 1998, the
repayment of mortgage investments in the first and third quarters of 1998 and
29
<PAGE> 30
the $30 million mortgage obtained in May 1998. Additionally, the inclusion of
Impark for all of 1998, as compared to eight and a half months in 1997, in the
results of the affiliated management company, resulted in bank interest expense
increasing by $.8 million when comparing 1998 to 1997.
Depreciation and amortization expense for 1998 increased over 1997
primarily due to the amortization of goodwill and management contracts
associated with the acquisition of Impark in April 1997, the depreciation from
the eight shopping malls acquired in September 1997 when the Trust acquired its
joint venture partners' interest in the malls and the depreciation from the four
parking facilities which were acquired in the first quarter of 1998.
General and administrative expenses increased when comparing 1998 to
1997 primarily related to several charges as a result of the proxy contest and
the change in the majority of the Board of Trustees. The charges in the second
quarter of 1998 included $4.8 million in proxy and litigation expenses of which
$3.1 million was a reimbursement for Gotham's proxy expenses, $3.4 million
resulting from the termination of the former chairman, president and chief
executive officer, $4.7 million for the vesting of restricted shares which
occurred upon the change in the majority of the Board of Trustees, and $1.5
million in additional professional fees to avoid a change in the composition of
the Trust's Board. Additionally, in the third and fourth quarters of 1998, the
Trust accrued $6.1 million of severance expense for employee termination, change
in control and continuation of employment agreements. During the last six months
of 1998, the Trust incurred approximately $2.6 million in legal fees for
negotiation of the $90 million note payable and credit facilities, potential
sales of properties and corporate acquisitions and corporate due diligence and
preparation of a rights offering. The Trust expensed $.5 million in fees for an
unsuccessful effort to refinance its current debt in December 1998. Impark's
general and administrative expenses increased over 1997 due to its inclusion in
results for a full year in 1998 versus eight and a half months in 1997, and
approximately $2.5 million in expansion costs into U.S. markets incurred in 1998
and a $.4 million expense for the termination of a contract to replace its
computer system. The Trust also recorded a $2.25 million expense when it did not
close on the purchase of a parking facility because the Board of Trustees
believed that the contract, which was approved prior to the change in the
majority of the Board in June 1998, was on disadvantageous terms. First Union
partially offset this loss by assigning the contract to a third party for
$200,000.
RESULTS OF OPERATIONS - 1997 VERSUS 1996
- ----------------------------------------
Net income applicable to shares of beneficial interest for 1997 was $.8
million. The net income applicable to shares of beneficial interest for 1997
included a noncash recognition of $700,000 of income from the repayment of a
wraparound mortgage investment, as the proceeds of $18 million exceeded the
Trust's basis in the wraparound investment and the recognition of $500,000 in
income from a casualty loss at one of the Trust's shopping centers. Net income
applicable to shares of beneficial interest for 1997 was after the $4.8 million
preferred dividend for the preferred shares which were issued in October 1996.
In November 1997, the Trust sold an apartment complex in Dayton, OH, resulting
in a capital gain of $2.7 million; while in December 1997, the Trust sold an
office complex in Oklahoma City, OK, resulting in a loss of $1.2 million. The
net capital gain resulting from these transactions was $1.5 million.
Mortgage investment income declined when comparing 1997 to 1996 due
primarily to the repayment of a wraparound mortgage investment in February 1997,
as noted previously.
Short-term investment income increased in 1997 as compared to 1996 due
to the Trust having an average of $31 million invested in short-term securities
in 1997 versus minimal short-term investments in 1996.
Property net operating income was $16.8 million greater when comparing
1997 and 1996. The comparable office property portfolio produced $1.2 million in
increased property net operating income when comparing 1997 and 1996 primarily
due to increased occupancy at a former retail center in Denver, CO, and at
office buildings in Cleveland, OH, and Indianapolis, IN, and a real estate tax
refund in Cleveland, OH. The comparable parking portfolio had a decline of
$500,000 in property net operating income primarily due to increased real estate
tax expense and the expiration of a fixed minimum rent management contract. The
comparable retail portfolio had decreased net operating income of $1.2 million
when comparing 1997 and 1996 due primarily to the recognition of a $1.1 million
termination fee in 1996. The comparable apartment portfolio had increased
property net operating income of $600,000 when comparing 1997 and 1996 primarily
due to the increased occupancy at an apartment complex in Durham, NC, and rent
increases at the Trust's other apartment complexes. The acquisition of Impark in
April 1997 and the Trust's purchase of its partners' interest in the joint
venture in September 1997 produced $17.2 million in property operating income on
a non-comparable basis. The acquisition of an apartment complex in December 1996
and parking facilities in May 1997 partially offset the decline in property net
operating income from the shopping mall, office buildings and apartment complex
sold in January 1997 and last four months of 1997, resulting in a decline of
$400,000 in property net operating income.
30
<PAGE> 31
Mortgage interest expense increased when comparing 1997 to 1996 due to
the $203 million in mortgage debt assumed in September 1997 in conjunction with
the Trust's purchase of the remaining interest of the joint venture.
Interest on bank loans decreased when comparing 1997 to the same period
of 1996. In 1997, the Trust had an average of $19 million in bank borrowings
versus $51 million in 1996. The net proceeds from the sale of preferred shares
of beneficial interest in October 1996, the proceeds from a sale of a shopping
mall in January 1997 and a portion of the net proceeds from the sale of shares
of beneficial interest in January 1997 and June 1997 were used to repay
short-term bank loans. However, partially offsetting the decrease in bank loan
interest and other expense is the addition, in April 1997, of approximately $26
million in bank loans assumed in the acquisition of Impark and the accrual of
the liability associated with a put-right which was attached to the Impark
common shares issued to the former owners of Impark as part of the acquisition
consideration.
Depreciation and amortization expense increased when comparing 1997 to
1996. This increase in depreciation and amortization expense was primarily
attributed to the amortization of goodwill and management contracts related to
the acquisition of Impark, the depreciation of the malls acquired in September
1997, and the Trust's capital improvement program. These increases are partially
offset by the non-recurring, non-cash $680,000 write-off of a tenant allowance
which occurred in the first quarter of 1996 when the Trust replaced an anchor
tenant at one of its malls.
General and administrative expenses for 1997 increased when compared to
1996. The increase is mainly attributed to the general and administrative
expenses from the management of the nine properties acquired in a joint venture
for 1997 and the acquisition of Impark in the second quarter of 1997. The
increase in general and administrative expenses for 1997 was partially offset by
a non-recurring, noncash charge of $650,000 in 1996 for the termination of an
employment contract of a former executive.
EFFECTS OF FOREIGN CURRENCY ON THE TRUST AND COMPANY
- ----------------------------------------------------
Impark operates internationally and enters into transactions
denominated in a foreign currency. As a result, the Trust and its affiliated
management company are subject to the variability that arises from exchange rate
movements. The effects of foreign currency on operating results are discussed
above. The Trust and its affiliated management company do not hedge the risks in
foreign currency exchange rate movements. Impark derives 87% of its revenues in
Canada.
INTEREST RATE RISK
- ------------------
The Trust and Impark have entered into certain financing arrangements
that require interest payments based on floating interest rates. As such, the
Trust's and Impark's financial results are subject to changes in the market rate
of interest. To reduce the exposure to changes in the market rate of interest,
the Trust has entered into a rate guarantee contract for a portion of its
floating rate financing arrangements. The Trust does not enter into rate
guarantee contracts for trading purposes.
Certain statements contained in the annual report that are
forward-looking are based on current expectations that are subject to a number
of uncertainties and risks, and actual results may differ materially. The
uncertainties and risks include, but are not limited to, changes in market
activity, changes in local real estate conditions and markets, actions by
competitors, interest rate movements and general economic conditions. Further
information about these matters can be found in the Trust's Annual Report filed
with the SEC on Form 10K.
31
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included in this Form 10-K, into the registrant's
previously filed Registration Statements on Form S-3 (Registration Nos. 2-88719,
33-2818, 33-11524, 33-19812, 33-26758, 33-33279, 33-38754, 33-45355, 33-57756
and 333-953).
Cleveland, Ohio, Arthur Andersen LLP
March 29, 1999.
<PAGE> 1
Exhibit 24
----------
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
-------------------------------------------------------
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------
Power of Attorney of Officers and Trustees
------------------------------------------
The undersigned, an Officer or Trustee or both an Officer and Trustee
of First Union Real Estate Equity and Mortgage Investments, an Ohio business
trust (the "Trust") which anticipates filing with the Securities and Exchange
Commission, Washington, D.C., under the provisions of the Securities Exchange
Act of 1934, an Annual Report on Form 10-K for the year ended December 31, 1998
(hereinafter called the "Form 10-K"), does hereby constitute and appoint Daniel
P. Friedman and Paul F. Levin, and either of them, with full power of
substitution and resubstitution, as attorneys or attorney to sign for him and in
his name the Form 10-K and any and all amendments and exhibits thereto, and any
and all other documents to be filed with the Securities and Exchange Commission
pertaining to the Form 10-K, with full power and authority to do and perform any
and all acts and things whatsoever required or necessary to be done in the
premises, as fully to all intents and purposes as he could do if personally
present, hereby ratifying and approving the acts of said attorneys and any of
them and any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 29th
day of March, 1999.
/s/ WILLIAM A. ACKMAN
- ----------------------
/s/ DANIEL J. ALTOBELLO
- ------------------------
/s/ DAVID P. BERKOWITZ
- -----------------------
/s/ WILLIAM E. CONWAY
- ----------------------
/s/ ALLEN H. FORD
- ------------------
/s/ DANIEL P. FRIEDMAN
- -----------------------
/s/ STEPHEN J. GARCHIK
- -----------------------
/s/ RUSSELL R. GIFFORD
- -----------------------
/s/ DAVID S. KLAFTER
- ---------------------
/s/ WILLIAM SCULLY
- -------------------
/s/ DANIEL SHUCHMAN
- --------------------
/s/ STEPHEN S. SNIDER
- ----------------------
/s/ MARY ANN TIGHE
- -------------------
/s/ JAMES A. WILLIAMS
- ----------------------
<PAGE> 2
Exhibit 24
----------
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
-------------------------------------------------------
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------
Power of Attorney of Officers and Trustees
The undersigned, an Officer or Trustee or both an Officer and Trustee
of First Union Real Estate Equity and Mortgage Investments, an Ohio business
trust (the "Trust") which anticipates filing with the Securities and Exchange
Commission, Washington, D.C., under the provisions of the Securities Exchange
Act of 1934, as amended, an Annual Report on Form 10-K for the year ended
December 31, 1998 (hereinafter called the "Form 10-K"), does hereby constitute
and appoint Daniel P. Friedman and Paul F. Levin, and either of them, with full
power of substitution and resubstitution, as attorneys or attorney to sign for
him and in his name the Form 10-K and any and all amendments and exhibits
thereto, and any and all other documents to be filed with the Securities and
Exchange Commission pertaining to the Form 10-K, with full power and authority
to do and perform any and all acts and things whatsoever required or necessary
to be done in the premises, as fully to all intents and purposes as he could do
if personally present, hereby ratifying and approving the acts of said attorneys
and any of them and any such substitute.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this ___
day of _____, 1999.
- -----------------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000037008
<NAME> FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 45,175,000
<SECURITIES> 5,000
<RECEIVABLES> 21,809,000
<ALLOWANCES> 0
<INVENTORY> 2,798,000
<CURRENT-ASSETS> 69,787,000
<PP&E> 806,859,000
<DEPRECIATION> (165,357,000)
<TOTAL-ASSETS> 786,684,000
<CURRENT-LIABILITIES> 42,659,000
<BONDS> 578,397,000
0
31,737,000
<COMMON> 121,076,000
<OTHER-SE> (2,117,000)
<TOTAL-LIABILITY-AND-EQUITY> 786,684,000
<SALES> 320,592,000
<TOTAL-REVENUES> 324,526,000
<CGS> 0
<TOTAL-COSTS> 415,991,000
<OTHER-EXPENSES> 365,132,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 50,859,000
<INCOME-PRETAX> (91,465,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (91,465,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (86,517,000)
<EPS-PRIMARY> (2.81)
<EPS-DILUTED> (2.81)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000037008
<NAME> FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 16,864,000
<SECURITIES> 13,103,000
<RECEIVABLES> 20,070,000
<ALLOWANCES> 0
<INVENTORY> 3,374,000
<CURRENT-ASSETS> 53,411,000
<PP&E> 756,308,000
<DEPRECIATION> (142,082,000)
<TOTAL-ASSETS> 790,226,000
<CURRENT-LIABILITIES> 38,000,000
<BONDS> 483,459,000
182,079,000
54,109,000
<COMMON> 182,079,000
<OTHER-SE> (878,000)
<TOTAL-LIABILITY-AND-EQUITY> 790,226,000
<SALES> 225,388,000
<TOTAL-REVENUES> 235,544,000
<CGS> 0
<TOTAL-COSTS> 232,054,000
<OTHER-EXPENSES> 202,190,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 29,864,000
<INCOME-PRETAX> 3,490,000
<INCOME-TAX> 0
<INCOME-CONTINUING> 3,490,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 845,000
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
