==============================================================================
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 9, 1999
==============================================================================
REGISTRATION NO. 333-63547
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 4
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
(Exact name of Registrant as specified in its charter)
OHIO 34-6513657
(State of Organization) (I.R.S. Employer Identification Number)
55 PUBLIC SQUARE
SUITE 1900
CLEVELAND, OHIO 44113-1937
(216) 781-4030
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
PAUL F. LEVIN
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
55 PUBLIC SQUARE
SUITE 1900
CLEVELAND, OHIO 44113-1937
(216) 781-4030
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
--------------
COPIES TO:
STEVEN G. SCHEINFELD F. RONALD O'KEEFE
FRIED, FRANK, HARRIS, SHRIVER & HAHN LOESER & PARKS LLP
JACOBSON 3300 BP TOWER
ONE NEW YORK PLAZA 200 PUBLIC SQUARE
NEW YORK, NEW YORK 10004-1980 CLEVELAND, OHIO 44114-2301
(212) 859-8000 (216) 621-0150
--------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box: |_|
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection
with dividend or interest reinvestment plans, check the following box: |X|
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering: |_|
If this form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: |_|
If delivery of a prospectus is expected to be made pursuant to Rule
434, please check the following box: |_|
--------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
========================================================================================
PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Rights to purchase Shares of Beneficial
Interest, $1.00 par value per share......... --(2)
- ----------------------------------------------------------------------------------------
Shares of Beneficial Interest, $1.00
par value per share(3)...................... $157,155,000 $46,361
- ----------------------------------------------------------------------------------------
Total........................................ $157,155,000 $46,361(4)
- ----------------------------------------------------------------------------------------
<FN>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457.
(2) Pursuant to Rule 457(g), no registration fee is payable with respect
to the Rights because the Rights are being registered in the same
registration statement as the securities being offered pursuant
thereto.
(3) Includes rights to purchase Shares of Beneficial Interest, $1.00 par
value per share, under the Company's existing shareholder rights plan.
Prior to the occurrence of certain events, these rights will not be
evidenced separately from the Shares of Beneficial Interest, $1.00 par
value per share.
(4) Previously paid.
</FN>
</TABLE>
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO
SAID SECTION 8(A), MAY DETERMINE.
==============================================================================
<PAGE>
[RED HERRING]
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING
PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE
SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS SUPPLEMENT AND THE
ACCOMPANYING PROSPECTUS ARE NOT AN OFFER TO SELL THESE SECURITIES AND THEY
ARE NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 9, 1999
PROSPECTUS SUPPLEMENT DATED APRIL [ ], 1999
- --------------------------------------------
(TO PROSPECTUS DATED APRIL [ ], 1999)
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
12,550,442 RIGHTS TO PURCHASE
12,550,442 SHARES OF BENEFICIAL INTEREST
- ------------------------ EACH HOLDER OF OUR COMMON SHARES IS RECEIVING--
CONSIDER CAREFULLY THE
MATERIAL RISKS o one non-transferable right for every 2.5
BEGINNING ON PAGE S-9 common shares held on April [ ], 1999
OF THIS PROSPECTUS
SUPPLEMENT AND PAGE 4 EACH RIGHT ALLOWS ITS HOLDER--
OF THE ACCOMPANYING
PROSPECTUS BEFORE o to subscribe for one common share for
DECIDING TO EXERCISE $4.00 until 5:00 p.m., EST, on April
RIGHTS. [ ], 1999, or a later time and date
that we select, at which time the right
will expire
Our common shares are
listed on the New York A HOLDER WHO EXERCISES ALL OF ITS RIGHTS --
Stock Exchange under
the symbol "FUR," and o may oversubscribe for some or all common
their last reported shares not subscribed for by others so
sale price on April 7, long as such holder will not own more
1999 was $4.0625. than 9.8% of our common shares
- ------------------------
OUR STANDBY PURCHASERS --
o will be Gotham Partners, L.P., Gotham
Partners III, L.P., and Gotham Partners
International, Ltd., and may include
Elliott Associates, L.P.
o have agreed to purchase at the $4.00
subscription price any common shares not
purchased by others through the exercise
of rights or the oversubscription
privilege, up to 12,500,000 common
shares having a total subscription price
of up to $50,000,000
WE WILL USE APPROXIMATELY $39.4 MILLION OF THE
NET PROCEEDS OF THE OFFERING --
o to repay a portion of a loan made to us
by lenders that include our standby
purchasers
PER COMMON SHARE TOTAL
---------------- -----
Price to Investors $4.00 $50,201,768
Proceeds to First Union (1) $4.00 $50,201,768
- --------------------
(1) Before deducting expenses estimated at approximately $800,000 payable
by First Union.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if
this prospectus supplement or the accompanying prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
<PAGE>
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary..............................................S-4
Risk Factors...............................................................S-9
Uncertain availability of additional financing........................S-9
Control by Gotham.....................................................S-9
Limitations on subscriptions..........................................S-9
Failure to purchase standby commitment shares.........................S-9
Resale price of common shares may not equal or exceed the
subscription price..............................................S-10
Dilution in the offering.............................................S-10
Use of Proceeds...........................................................S-10
Capitalization............................................................S-11
Selected Financial Data...................................................S-12
The Offering..............................................................S-16
Federal Income Tax Consequences Regarding the Offering....................S-22
Plan of Distribution......................................................S-23
The Financial Advisor.....................................................S-23
Legal Matters.............................................................S-23
PROSPECTUS
Available Information........................................................2
Incorporation of Certain Documents By Reference..............................2
Cautionary Statements Concerning Forward-Looking Statements..................3
Risk Factors.................................................................4
New senior management lacks prior experience with First Union
and in operating public companies or REITs.........................4
Proposed departure of some members of senior management.................4
Difficulties in servicing debt..........................................4
Default under the FUR Credit Facility, the Impark Credit
Facility and the Bridge Loan.......................................5
Debt covenants restrict operating flexibility; failure to
comply with debt instruments could cause acceleration of
debt...............................................................5
Contemplated asset sales will shrink portfolio and returns to
shareholders; replacement assets resulting from other
asset sales may not provide greater shareholder value..............5
Income and activities of FUMI may be attributed to First Union
under recent anti-stapling legislation and may threaten
REIT status........................................................6
Improved properties may become subject to anti-stapling
legislation under certain circumstances and may threaten
REIT status........................................................6
Other legislation could adversely affect First Union's REIT
qualification......................................................6
Dependence on qualification as a REIT; tax and other
consequences if REIT qualification lost............................7
Adverse effects of REIT minimum dividend requirements...................7
Ability to operate properties directly affects First Union's
financial condition................................................8
Illiquidity of real estate..............................................8
Increases in property taxes could affect ability to make
expected shareholder distributions.................................8
Environmental liabilities...............................................8
Compliance with the ADA may affect expected distributions to
First Union's shareholders.........................................9
Uninsured and underinsured losses.......................................9
Inability to refinance..................................................9
Rising interest rates...................................................9
Impact of Year 2000 issues..............................................9
Exchange rate losses...................................................10
Results of operations adversely affected by factors beyond
First Union's control.............................................10
The Company.................................................................11
Use of Proceeds.............................................................17
Price Range of Common Shares and Distributions..............................17
Management..................................................................20
Description of Capital Stock................................................24
Federal Income Tax Consequences.............................................30
Plan of Distribution........................................................40
Legal Matters...............................................................41
Glossary...................................................................G-1
----------------
You should rely only on the information contained or incorporated by
reference in this prospectus supplement and the accompanying prospectus. We
have not authorized any other person to provide you with different
information. If anyone provides you with different or inconsistent
information, you should not rely on it. We are not making an offer to sell
these securities in any jurisdiction where the offer or sale is not
permitted.
You should assume that the information appearing in this prospectus
supplement and the accompanying prospectus is accurate as of the date on
the front cover of this prospectus supplement only. Our business, financial
condition, results of operations and prospects may have changed since that
date.
<PAGE>
PROSPECTUS SUPPLEMENT SUMMARY
This summary may not contain all the information that may be important
to you. You should read this entire prospectus supplement and the
accompanying prospectus, including the financial data and the related
notes, before deciding to exercise your rights. References in this
prospectus supplement and the accompanying prospectus to
o "First Union" or "we" are to First Union Real Estate Equity and
Mortgage Investments and its subsidiaries
o "FUMI" are to First Union Management, Inc. and its subsidiaries
o "First Union Companies" are to First Union and FUMI and
o "Impark" are to Imperial Parking Limited and its subsidiaries and
Impark Services Limited and its subsidiaries,
unless it is clear that those terms mean only the parent company in each
instance.
FIRST UNION
We are a real estate investment trust, and our primary business has
been to buy, manage, improve cash flow of and own retail, apartment, office
and parking properties throughout the United States and Canada. FUMI, one
of our affiliates, owns a controlling interest in Impark. We and FUMI have
an organizational structure commonly referred to as "stapled," where our
common shares are "stapled to" a proportionately equal interest in the
common stock of FUMI, with some exceptions which are described in
"Description of Capital Stock -- Common Shares -- Beneficial Ownership of
FUMI" in the accompanying prospectus. Our common shares may not be issued
or transferred without their "stapled" counterparts in FUMI. The common
stock of FUMI is held in trust for the benefit of the holders of our common
shares.
We own regional enclosed shopping malls, apartment complexes, office
buildings and parking facilities. Our portfolio is diversified by type of
property, geographical location, tenant mix and rental market. As of
December 31, 1998, we owned, including under long-term ground leases, 21
shopping malls, eight apartment complexes, five office properties and seven
parking facilities in the United States, and ten parking lots in Canada. We
also own 50% of an additional mall in a joint venture with an unrelated
party. We are currently in the process of selling some of our properties.
Background of the Offering
In August 1998, we purchased approximately 88% or $88 million of our
then outstanding 8-7/8% Senior Notes due 2003 through a tender offer for
those notes. We also amended the indenture governing the terms of the
Senior Notes through a consent solicitation that we conducted
simultaneously with the tender offer. The purpose of the tender offer and
consent solicitation was to:
o avoid the possibility that we would be required to purchase the Senior
Notes at 101% of their principal amount, an obligation which we did
not have the financial resources to satisfy, and
o provide us with additional financial and operating flexibility.
We repurchased the Senior Notes for $970 per $1,000 principal amount
and paid all accrued interest on them. We also made a consent payment for
the indenture amendments of $30 per $1,000 principal amount of the Senior
Notes. The total purchase price for the Senior Notes and related consent
payments were financed with the proceeds of a $90 million bridge loan from
Bankers Trust Company, as agent for the lenders and as lender, and
BankBoston, N.A., Blackacre Bridge Capital, Gotham Partners, L.P., Gotham
Partners III, L.P., Elliott Associates, L.P., and Wellsford Capital, each
as lenders. Except as described below, the bridge loan is due August 11,
1999, bears interest at 12% annually, and is subject to mandatory
repayments of principal so that the outstanding principal balance under the
loan must be less than approximately $38 million by May 15, 1999. The
lenders under the bridge loan have agreed, in principle, to allow $9.0
million of the net proceeds from this offering that would otherwise be used
to repay a portion of the bridge loan extended by three of these lenders to
be used to repay amounts outstanding under our senior credit facility.
Although the $9.0 million in principal will remain outstanding under the
bridge loan, it will be considered paid for purposes of the mandatory
repayment of principal described above. This $9.0 million portion of the
bridge loan will bear interest at 15% annually and mature on August 11,
1999. We intend to pay down the bridge loan with the net proceeds of asset
sales and the remaining net proceeds of this offering. See "Use of
Proceeds."
The terms of the bridge loan required us to obtain standby purchase
commitments for this offering to ensure that the net proceeds of this
offering would be sufficient to repay all amounts due and payable under the
bridge loan, including principal, interest and fees. To satisfy this
requirement, we originally obtained a standby commitment from Gotham
Partners, L.P., Gotham Partners III, L.P. and Elliott Associates, L.P., as
standby purchasers. We have agreed, in principle, to pay the Gotham
entities as standby purchasers $2,000,000, an amount equal to 4% of their
maximum standby commitment in this offering, whether or not the offering is
completed. Each of the standby purchasers is entitled to its pro rata
portion of the payment based on its share of the standby commitment.
Although the Gotham entities are collectively entitled to receive
$2,000,000 of the payment, they agreed to accept only $1,800,000. We are
currently negotiating with Elliott Associates to include it as a standby
purchaser for 2/9ths of the standby purchasers' commitments. If we reach an
agreement with Elliott Associates, the Gotham entities' standby purchase
obligations and fee would be reduced accordingly. See "The Company --
Recent Developments" in the accompanying prospectus.
THE OFFERING
Rights
We are distributing to each record holder of our common shares as of
the close of business on April [ ], 1999, the record date, one
non-transferable right for every 2.5 common shares held.
We will issue a total of approximately 12,550,442 rights. All common
shares issued in the offering will be stapled to a proportionately equal
interest in the common stock of FUMI, with some exceptions. See
"Description of Capital Stock -- Common Shares -- Beneficial Ownership of
FUMI" in the accompanying prospectus.
Holders who own common shares through our dividend reinvestment plan
as of the record date will receive rights for those shares only if they
follow the procedures described in "The Offering -- Holders of Common
Shares in Dividend Reinvestment Plan."
Record Date
April [ ], 1999.
Subscription Price
$4.00 per common share.
Closing Price of the Common Shares
on the NYSE on April [ ], 1999
$[ ] per common share.
Basic Subscription
Each right allows its holder to purchase one common share at the $4.00
subscription price. The number of rights a holder may exercise may be
limited by the 9.8% ownership limit described in "-- Share Ownership Limit;
Limitations on Subscription" below.
Oversubscription Privilege
A rights holder who exercises in full its basic subscription without
going over the 9.8% ownership limit may also oversubscribe at the same
subscription price for additional common shares not otherwise purchased by
others through the exercise of rights, up to the 9.8% ownership limit.
If there are not enough unsubscribed common shares available to
satisfy fully all exercises of the oversubscription privilege, the
available unsubscribed common shares will be allocated pro rata among
holders who exercise the oversubscription privilege based on the respective
numbers of rights exercised by those holders through the basic
subscription.
A holder may exercise its oversubscription privilege only concurrently
with its basic subscription. See "The Offering -- Oversubscription
Privilege."
Standby Commitment
The standby purchasers have agreed, in principle, to purchase at the
$4.00 subscription price per share any common shares not purchased through
the exercise of rights or the oversubscription privilege, up to a total of
12,500,000 common shares having a total subscription price of up to
$50,000,000. If holders subscribe for fewer than 12,500,000 common shares
through their basic subscription and oversubscription privilege, the
standby purchasers will subscribe for the difference. The standby
purchasers have customary rights to terminate their obligations to purchase
the standby commitment shares, and their obligations will in any event
expire on August 11, 1999. We and the standby purchasers are currently
seeking the consent of the lenders under the bridge loan to the revised
terms of the standby purchasers' standby commitment.
Our Board of Trustees has agreed to waive the 9.8% ownership limit to
enable the Gotham entities to exercise rights and the oversubscription
privilege and to satisfy their standby commitment obligations. An
independent committee of the Board of Trustees has approved the terms and
conditions of the standby commitment. See "The Offering -- Standby
Commitment." As of March 26, 1999, the Gotham entities beneficially owned
9.71% and Elliott Associates and an investment partnership under common
management with Elliott Associates beneficially owned 2.23% of our
outstanding common shares.
Share Ownership Limit; Limitations on Subscription
To help maintain our status as a REIT, our by-laws restrict beneficial
and constructive ownership of common shares by any person or group of
persons acting collectively to 9.8% of our outstanding common shares. See
"The Offering -- Basic Subscription; Limitations on Subscription" in this
prospectus supplement and "Federal Income Tax Consequences" and
"Description of Capital Stock -- Common Shares -- Restriction on Size of
Holdings" in the accompanying prospectus.
A holder may exercise only up to the number of rights that would allow
that holder to reach but not go over the 9.8% ownership limit. A holder's
percentage beneficial ownership interest in common shares will be
calculated promptly after the expiration of the offering by dividing
o the sum of:
(1) the total number of common shares beneficially owned by that
holder immediately before the expiration time,
(2) the total number of common shares for which that holder has
exercised rights, and
(3) the total number of common shares into which all Series A
Cumulative Redeemable Preferred Shares beneficially owned by that
holder immediately before the expiration time are convertible,
by
o the sum of:
(1) the total number of common shares outstanding immediately after
completion of this offering, and
(2) the total number of common shares into which all Series A
Preferred Shares beneficially owned by that holder immediately
after completion of this offering are convertible.
See "The Offering -- Basic Subscription; Limitations on Subscription."
The anticipated size of a holder's beneficial ownership interest in
First Union after completion of this offering cannot be determined at the
time that holder exercises its rights because the size of that interest
will depend largely on the number of common shares subscribed for by other
holders. However, in light of the standby commitment of the standby
purchasers, a holder, in calculating its beneficial ownership interest, may
assume that at least 12,500,000 common shares offered for sale in this
offering will be issued. See "The Offering -- Standby Commitment."
Any rights exercised by a holder and any common shares subscribed for
by a holder through the exercise of its oversubscription privilege that
would cause it to go over the 9.8% ownership limit will not be considered
exercised or subscribed for by that holder. The total subscription price
paid by a holder for rights that are not considered exercised and for
common shares not considered subscribed for will be returned to that
holder, without interest, as soon as practicable after completion of this
offering. See "The Offering -- Escrow Arrangements; Return of Funds."
If a holder subscribes for and, inadvertently or otherwise, is issued
a number of common shares that causes that holder to go over the 9.8%
ownership limit, the number of common shares in excess of the 9.8%
ownership limit will be "Excess Securities" under our by-laws and therefore
will not, in the hands of that holder, have dividend, voting and other
rights or be considered outstanding for quorum, voting and other purposes.
See "Description of Capital Stock -- Common Shares -- Restriction on Size
of Holdings" in the accompanying prospectus.
Transferability of Rights
Rights may not be transferred, except by operation of law.
Subscription Agent
National City Bank.
Procedure for Exercise
A holder may exercise its basic subscription and oversubscription
privilege by properly completing and executing the certificate evidencing
its rights and forwarding that rights certificate, together with payment of
the subscription price for each common share subscribed for, to the
subscription agent before the offering expires. If a holder chooses to
forward a rights certificate by mail, we recommend using insured,
registered mail. Alternatively, a holder may use the guaranteed delivery
procedures described in "The Offering -- Late Delivery of Payments and
Rights Certificates."
A rights holder may not revoke any exercise of its basic subscription
or oversubscription privilege.
No Fractional Common Shares
We will not issue any fractional common shares for the exercise of any
rights or the oversubscription privilege or through the standby purchasers'
standby commitment.
Persons Holding Through Others
Shareholders holding common shares and receiving rights through a
broker, dealer, commercial bank, trust company or other nominee, as well as
shareholders holding stock certificates who would prefer to have such
institutions exercise rights and subscribe for common shares on their
behalf, should contact the appropriate nominee or institution and request
it to effect those transactions for them. See "The Offering -- Method of
Exercising Rights and Oversubscription Privilege."
Issuance of Certificates
Certificates for common shares purchased in this offering will be
delivered to subscribers as soon as practicable after the offering expires.
See "The Offering -- Delivery of Common Shares."
<PAGE>
Common Shares Outstanding Before this Offering (1)
31,376,105.
Series A Preferred Shares Outstanding Before this Offering (2)
1,349,000.
Common Shares Outstanding After this Offering (3)
43,926,547.
- ------------------
(1) As of March 26, 1999.
(2) As of March 26, 1999. As of such date, each outstanding Series A
Preferred Share was convertible into 3.31 common shares. See
"Description of Capital Stock -- Preferred Shares -- Conversion
Rights" in the accompanying prospectus.
(3) Does not include common shares issuable upon conversion of Series A
Preferred Shares. Assumes all rights are exercised.
Use of Proceeds
We intend to use the net proceeds of this offering to repay $9.0
million of borrowings outstanding under our senior credit facility
described in "The Company -- Recent Developments" in the accompanying
prospectus and approximately $39.4 million of borrowings outstanding under
our bridge loan described in "-- First Union -- Background of the Offering"
above. See "Use of Proceeds."
Expiration Time
April [ ], 1999 at 5:00 p.m., Eastern Standard Time, unless we select
a later date and time in our sole discretion. After that time, rights will
become void and have no value.
RISK FACTORS
You should carefully consider the matters discussed under "Risk
Factors" in this prospectus supplement and the accompanying prospectus
before deciding to exercise your rights.
<PAGE>
RISK FACTORS
You should carefully consider the following matters and the matters
discussed under "Risk Factors" in the accompanying prospectus as well as
the information contained elsewhere or incorporated by reference in this
prospectus supplement and the accompanying prospectus.
UNCERTAIN AVAILABILITY OF ADDITIONAL FINANCING
We can give no assurance that our cash reserves, cash flows from
operations, anticipated proceeds from asset sales and available funding
under our credit facilities will be adequate to fund our operations through
the end of 1999 or that we will not need additional funding either during
or after this period. If we require additional financing, we can provide no
assurance that such financing will be available or, if available, that it
will be available to us on commercially reasonable terms. If adequate funds
are not available to satisfy either our short- or long-term capital
requirements, we may be required to limit our operations significantly,
sell assets on disadvantageous terms or seek protection or relief under
applicable bankruptcy laws. See "Risk Factors -- Difficulties in servicing
debt, " "-- Default under the FUR Credit Facility, the Impark Credit
Facility and the Bridge Loan" and "-- Debt covenants restrict operating
flexibility; failure to comply with debt instruments could cause
acceleration of debt" in the accompanying prospectus.
CONTROL BY GOTHAM
If no rights are exercised and the standby purchasers purchase all the
standby commitment shares they are required to purchase under the standby
commitment, the Gotham entities will own approximately 35.4% of our issued
and outstanding common shares after completion of this offering. The
purchase of common shares by the Gotham entities through the
oversubscription privilege and the standby commitment may enable them to
control the outcome of all matters submitted to shareholders for a vote,
including the election of Trustees and, therefore, our management, policies
and operations.
LIMITATIONS ON SUBSCRIPTIONS
Whether a holder may exercise all of its rights through the basic
subscription and the oversubscription privilege will depend on that
holder's total equity interest in us following such exercise. A holder may
exercise only up to the number of rights that would allow it to reach but
not go over the 9.8% ownership limit. Any rights exercised and any common
shares subscribed for through the exercise of the oversubscription
privilege that would cause a holder to go over the 9.8% ownership limit
will not be considered exercised or subscribed for by that holder. Given
the way the 9.8% ownership limit is determined, holders may be forced to
exercise fewer rights and thereby acquire fewer common shares than they
desire. If a holder subscribes for and, inadvertently or otherwise, is
issued a number of common shares that makes that holder go over the 9.8%
ownership limit, the number of common shares in excess of the 9.8%
ownership limit would be "Excess Securities" under our by-laws and
therefore would not, in the hands of that holder, have dividend, voting and
other rights or be considered outstanding for quorum, voting and other
purposes. See "Description of Capital Stock -- Common Shares -- Restriction
on Size of Holdings" in the accompanying prospectus.
FAILURE TO PURCHASE STANDBY COMMITMENT SHARES
The standby purchasers have agreed, in principle, to purchase any
common shares not purchased through the exercise of rights or the
oversubscription privilege, up to a total of 12,500,000 common shares
having a total subscription price of up to $50,000,000. However, the
standby purchasers' obligations under their standby commitment are not
secured by any collateral, and there can be no assurance that the standby
purchasers will purchase the standby commitment shares. In addition, the
standby purchasers have customary rights to terminate their standby
commitment obligations, and these obligations will in any event expire on
August 11, 1999. If for any reason any standby purchaser does not purchase
its pro rata portion of standby commitment shares, we may not receive
enough proceeds to make mandatory principal payments under the bridge loan.
A failure by any standby purchaser to purchase its pro rata portion of the
standby commitment shares would also result in an event of default under
the bridge loan. Our failure to make mandatory principal payments or the
standby purchasers' failure to purchase the standby commitment shares would
enable the lenders under the bridge loan to accelerate all amounts due
under the bridge loan and trigger cross-defaults under our other debt
obligations.
RESALE PRICE OF COMMON SHARES MAY NOT EQUAL OR EXCEED THE SUBSCRIPTION PRICE
There can be no assurance that, after we issue rights and the common
shares upon exercise of rights, a subscribing holder will be able to sell
common shares purchased in this offering at a price equal to or greater
than the $4.00 per share subscription price. The last reported sale price
of the common shares on the NYSE on April 7, 1999 was $4.0625.
DILUTION IN THE OFFERING
Holders who do not exercise their rights and subscribe for common
shares will experience dilution of their equity ownership interest in First
Union. This dilution may be significant. In addition, because rights are
not transferable, holders not exercising their rights will relinquish any
value inherent in those rights. Purchasers of common shares in the offering
will experience immediate and significant dilution in the net tangible book
value per share of those common shares.
USE OF PROCEEDS
We anticipate receiving approximately $48.4 million in net proceeds
from the sale of the common shares in this offering. This estimate of net
proceeds accounts for the approximately $1.8 million payment to the standby
purchasers but not our other estimated offering expenses. We will use $9.0
million of the net proceeds to repay borrowings under our senior credit
facility and the remainder of the net proceeds, approximately $39.4
million, to repay borrowings under the bridge loan. As of March 26, 1999,
$88.7 million in principal amount was outstanding under the senior credit
facility and $78.9 million in principal amount was outstanding under the
bridge loan. Amounts outstanding under the senior credit facility accrue
interest at either LIBOR plus 3% annually or the base rate of the agent
bank of the senior credit facility plus 1/2% annually and mature on August
11, 1999. We are obligated to make mandatory principal repayments under the
senior credit facility to reduce its outstanding principal balance to less
than $80.0 million by April 30, 1999 and less than $50.0 million by June
30, 1999. For a more detailed description of the senior credit facility,
see "The Company -- Recent Developments" in the accompanying prospectus.
Except as described below, borrowings under the bridge loan accrue interest
at a rate of 12% annually and mature on August 11, 1999. We are obligated
to make a mandatory principal repayment under the bridge loan to reduce its
outstanding principal balance to less than approximately $38 million by May
15, 1999. The lenders under the bridge loan have agreed, in principle, to
allow $9.0 million of the net proceeds from this offering that would
otherwise be used to repay a portion of the bridge loan extended by three
of these lenders to be used to repay amounts outstanding under our senior
credit facility. Although the $9.0 million in principal will remain
outstanding under the bridge loan, it will be considered paid for purposes
of the mandatory repayment of principal described above. This $9.0 million
portion of the bridge loan will bear interest at 15% annually and mature on
August 11, 1999. For a more detailed description of the bridge loan, see
"The Company -- Recent Developments" in the accompanying prospectus.
<PAGE>
CAPITALIZATION
The following table shows the capitalization of the First Union
Companies on a consolidated basis (i) at December 31, 1998 and (ii) as
adjusted to give effect to this offering and recent asset sales, which
assumes all rights are exercised, and the application of the net proceeds
therefrom:
DECEMBER 31, 1998
---------------------------------
AS ADJUSTED
FOR THE
OFFERING AND
ASSET
HISTORICAL SALES(1)(2)
----------------------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SENIOR DEBT:
Bank loans................................ $125,821 $116,821
Bridge loan(2)............................ 90,000 39,550
Mortgage debt, ranging from 6.869% to
12.25% and due 1999 to 2018(2)............ 345,042 333,572
Senior Notes(2)........................... 12,538 12,538
Notes payable............................. 4,996 4,996
--------- ---------
Total debt............................. 578,397 507,477
--------- ---------
SHAREHOLDERS' EQUITY:
Series A Preferred Shares (liquidation
preference $25 per
share); 2,300,000 shares authorized and
1,349,000 shares outstanding............. 31,737 31,737
Common shares; unlimited authorization and
31,416,326 common shares outstanding;
43,966,768 common shares, as adjusted.... 31,416 43,966
Additional paid-in capital................ 190,679 226,487
Deficit from operations................... (115,968) (115,968)
Undistributed capital gains............... 14,949 14,949
Foreign currency translation adjustment... (2,117) (2,117)
--------- ---------
Total shareholders' equity............. 150,696 199,054
--------- ---------
Total capitalization................... $729,093 $706,531
========= =========
- ------------------
(1) See "Use of Proceeds."
(2) First Union sold a shopping center in February 1999 for approximately
$21.6 million and applied the net proceeds from the sale to repay
$11.5 million principal amount of debt secured by a mortgage on the
property and $9.3 million principal amount of the bridge loan. First
Union also sold an office building in March 1999 for approximately
$2.2 million and applied the net proceeds from the sale to repay $1.8
million principal amount of the bridge loan.
<PAGE>
SELECTED FINANCIAL DATA
Set forth below is selected consolidated financial data of the First
Union Companies for the years ended December 31, 1998, 1997, 1996, 1995 and
1994. The selected financial data has been derived from, and should be read
in conjunction with, the audited combined financial statements and
accompanying notes included in First Union's Annual Reports on Form 10-K
for the years ended December 31, 1998, 1996 and 1994 and Form 10-K/A for
the years ended December 31, 1997 and 1995. The selected financial data
below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the First
Union Companies' financial statements and notes thereto contained in the
Annual Reports.
<PAGE>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997(1) 1996(1) 1995(1) 1994(1)
--------- -------- ------- ------- -------
OPERATING RESULTS
Revenues (2)................. $324,526 $235,544 $81,867 $79,205 $76,339
Interest expense (2)......... 50,859 29,864 23,426 22,397 21,280
Depreciation and
amortization (2)(3)....... 33,389 22,892 15,890 14,276 12,779
Income (loss) before capital
gain or loss,
extraordinary loss,
cumulative effect of
accounting change and
minority
interest (2)(4)(5)......... (91,465) 3,490 1,681 881 4,261
Unrealized loss on carrying
value of assets identified
for disposition............ -- -- -- (14,000) --
Capital gains, net........... 10,346 1,468 -- 31,577 --
Extraordinary loss from
early extinguishment of
debt (6)................... (2,399) (226) (286) (910) --
Cumulative effect of change
in accounting for internal
lease costs (3)............ -- -- -- ( 4,325) --
Allocation of minority
interest................... -- 944 -- -- --
Net income (loss) before
preferred
dividend (4)(5)............ (83,518) 5,676 1,395 13,223 4,261
Preferred dividend........... (2,999) (4,831) (845) -- --
Net income (loss) applicable
to shares of beneficial
interest (4)(5)............ (86,517) 845 550 13,223 4,261
Net income (loss) applicable
to shares of beneficial
interest, basic and
diluted.................... $ (2.81) $ 0.03 $ 0.03 $ 0.72 $ 0.24
Basic weighted average
shares..................... 30,772 24,537 17,172 18,059 18,105
Stock options, treasury
method..................... 243 571 367 -- --
Restricted shares, treasury
method..................... -- 307 167 58 15
Diluted weighted average
shares..................... 31,015 25,415 17,706 18,117 18,120
FINANCIAL POSITION AT END OF
PERIOD (2)
Gross investment in real
estate assets............. $ 806,859 $756,308 $458,963 $449,080 $436,394
Total assets............... 768,684 790,226 413,054 376,144 352,005
Total debt................. 578,397 483,459 254,868 258,454 238,296
Shareholders' equity....... 150,696 235,310 124,947 77,500 78,756
OTHER DATA
Net cash provided by (used for)
Operations................. $6,413 $15,740 $11,085 $12,989 $19,053
Investing.................. (52,429) (112,233) (47,002) (28,345) (26,507)
Financing.................. 74,327 110,406 35,466 15,783 (28,094)
Property net operating
income (2)(7).............. 86,184 64,428 47,349 44,086 41,759
EBIDA (7).................... 40,784 51,415 40,152 37,554 38,320
Funds from (used in)
operations after preferred
dividends (3)(7)........... (12,469) 21,150 16,010 14,291 16,472
Preferred dividend accrued... 2,999 4,831 845 -- --
Dividends declared........... 3,478 11,651 7,684 7,542 7,273
Dividends declared per
share...................... $ 0.11 $ 0.44 $ 0.44 $ 0.41 $ 0.40
Dividends payout as a
percent of funds from
operations (3)(4)(7)....... --(8) 55% 48% 53% 44%
- -----------------------------
(1) As a result of First Union's review of lives assigned to real estate
assets for calculation of depreciation expense during the fourth
quarter of 1998, reduced asset lives have been assigned effective
January 1, 1998. Consequently, First Union has restated its Combined
Financial Statements for the years 1994 through 1998. Shareholders'
equity at December 31, 1993 was restated from $103,766,000 to
$81,806,000.
(2) In September 1997, First Union acquired the interests of its joint
venture partners in eight shopping malls and 50% of another mall for
$88 million in cash and the assumption of $203 million of mortgage
debt. First Union acquired voting control of Impark in April 1997 for
$36.6 million in cash, the assumption of $26 million in debt and the
issuance of $12.4 million of stock in Impark to Impark employees and
to its former owner.
(3) In December 1995, First Union changed its method to directly expense
internal leasing costs and recorded a $4.3 million noncash charge for
the cumulative effect of the accounting change as of the beginning of
1995. Funds from operations and depreciation and amortization for
previous years have been restated for the change in accounting method
on a basis comparable to 1995.
(4) In 1998, First Union recognized $20.5 million of expenses primarily in
connection with the proxy contest waged by Gotham in the first half of
1998 and the resulting change in the composition of First Union's
Board of Trustees. These expenses included
First Union's proxy and legal fees $1.7 million
Gotham's proxy and legal fees 3.1 million
Other professional fees relating to the
change in the composition of the Board 1.5 million
Expenses associated with termination of
First Union's Chairman, President and
Chief Executive Officer 3.4 million
Vesting of restricted stock upon the change
in a majority of the Board of Trustees 4.7 million
Severance expenses for employee change in
control agreements 6.1 million
First Union also recognized the loss of a $2.25 million deposit when
First Union did not close on the purchase of a parking facility
because the Board of Trustees believed that the contract to acquire
the parking facility, which was approved prior to a change in June
1998 of a majority of the Board, was on disadvantageous terms. First
Union partially offset this loss by assigning the contract to a third
party for $200,000.
The above expenses also negatively affected net income and funds from
operations.
In 1995, First Union recognized $1.6 million of litigation and proxy
expenses related to a minority-shareholder lawsuit and proxy contest.
(5) In 1998, First Union recognized $36 million in unrealized losses on
the carrying value of properties identified for disposition and Impark
recognized a $15 million reduction of goodwill.
(6) In August 1998, $87.5 million of the Senior Notes were repaid,
resulting in $1.6 million of issuance costs and solicitation fees
being expensed. Additionally, in the fourth quarter of 1998, First
Union renegotiated the terms of its senior credit facility and the
bridge loan resulting in $0.8 million of deferred costs being
expensed. In 1997 and 1996, First Union renegotiated its bank credit
agreements, resulting in a $226,000 and $286,000 charge, respectively,
related to the write-off of unamortized costs.
In November 1995, First Union paid approximately $36 million of
mortgage debt resulting in a $910,000 charge for the write-off of
unamortized costs and prepayment premiums.
(7) In addition to net income, First Union believes that three additional
measures of operating performance -- property net operating income,
EBIDA and funds from operations -- are helpful in understanding First
Union's financial performance. Property net operating income (as
defined below) measures the performance of First Union's real estate
assets and is often used by investors and others in valuing real estate
assets. EBIDA (as defined below) is used by lenders and others as an
indication of an entity's ability to incur and service debt, to make
capital expenditures and to fund other cash needs. Funds from
operations (as defined below) is widely used by industry analysts as
the appropriate measure of the performance of an equity REIT and
provides a relevant basis for comparison among REITs. None of
property net operating income, EBIDA or funds from operations (1)
represent net income or cash flow from operations as defined by
generally accepted accounting principles, (2) should be considered as
an alternative to net income as a measure of operating performance or
cash flows from operating, investing and financing activities, or (3)
should be considered as an alternative to cash flows as a measure of
liquidity. First Union's calculations of property net operating
income, EBIDA and funds from operations may not be comparable to
similarly titled measures of other REITs. In addition, all of these
measures of operating performance exclude depreciation and amortization
expenses and property net operating income and EBIDA also exclude
interest expense. These excluded items are significant components in
understanding and assessing First Union's financial performance.
o Property net operating income is property revenue, equity in
income of joint venture, management fees and mortgage investment
income, less property operating expenses and real estate taxes.
This supplemental measure is determined before debt service and
depreciation and amortization expense.
o EBIDA is calculated by starting with the line that appears on the
income statement for income (loss) before capital gain or loss,
extraordinary loss, cumulative effect of accounting change and
minority interest. Interest expense and the noncash charges for
depreciation and amortization are added back and the preferred
dividend is deducted. In 1998, EBIDA is calculated before the $51
million unrealized loss on the carrying value of assets
identified for disposition and impaired assets.
o Funds from operations is a multi-step calculation:
Income (loss) before capital gain or loss, extraordinary
loss, cumulative effect of accounting changes and after
minority interest, plus
Noncash charges for depreciation and amortization of First
Union and the joint venture interest, plus
Amortization of intangible assets from the Impark
acquisition, less
Amortization allocated to the minority interest and
depreciation and amortization of debt issuance costs and
other corporate assets, less
Preferred dividend.
In 1998, funds from operations is calculated before the $51
million unrealized loss on the carrying value of assets
identified for disposition and impaired assets.
First Union adopted this definition of funds from operations in
1997 as recommended by the National Association of Real Estate
Investment Trusts (NAREIT), which does not add back depreciation
and amortization of debt issuance costs and other corporate
assets. Previously, First Union added back all depreciation and
amortization. Accordingly, funds from operations and dividend
payout as a percentage of funds from operations for the years
1994 through 1996 have been restated to conform to the NAREIT
definition.
(8) Not meaningful.
<PAGE>
THE OFFERING
BASIC SUBSCRIPTION; LIMITATIONS ON SUBSCRIPTION
First Union is distributing to each holder of common shares of record
as of the close of business on April [ ], 1999, the record date, one right
for every 2.5 common shares held. Each right entitles its holder to
purchase one common share for $4.00. Holders who own common shares through
First Union's dividend reinvestment plan as of the record date will not
receive rights for those common shares unless they follow the procedures
described in "-- Holders of Common Shares in Dividend Reinvestment Plan."
Any common shares issued in the offering will be stapled to a
proportionately equal interest in the common stock of FUMI, with some
exceptions. See "Description of Capital Stock -- Common Shares --
Beneficial Ownership of FUMI" in the accompanying prospectus.
A holder may exercise only up to the number of rights that would cause
that holder to beneficially and constructively own no more than 9.8% of the
outstanding common shares. See "Description of Capital Stock -- Common
Shares -- Restriction on Size of Holdings" in the accompanying prospectus.
A holder's beneficial ownership interest will be calculated promptly after
the offering expires by
dividing
o the sum of:
(1) the total number of common shares beneficially owned by that
holder immediately before the expiration time,
(2) the total number of common shares for which that holder has
exercised rights, and
(3) the total number of common shares into which all Series A
Preferred Shares beneficially owned by that holder
immediately before the expiration time are convertible,
by
o the sum of:
(1) the total number of common shares outstanding immediately
after completion of this offering, and
(2) the total number of common shares into which all Series A
Preferred Shares beneficially owned by that holder
immediately after completion of this offering are
convertible.
The anticipated size of a holder's beneficial ownership interest after
consummation of this offering cannot be determined at the time that holder
exercises its rights because the size of that interest will depend largely
on the number of common shares subscribed for by other holders. However, in
light of the standby commitment of the standby purchasers, a holder, in
calculating its beneficial ownership interest, may assume that at least
12,500,000 common shares offered for sale in the offering will be issued.
See "-- Standby Commitment." Any rights exercised by that holder and any
common shares subscribed for by that holder through the exercise of its
oversubscription privilege that would cause it to go over the 9.8%
ownership limit will not be considered exercised or subscribed for by that
holder. The total subscription price paid by a holder for rights that are
not considered exercised and for common shares not considered subscribed
for will be returned to that holder, without interest, as soon as
practicable after completion of this offering. See "-- Escrow Arrangements;
Return of Funds."
If a holder subscribes for and, inadvertently or otherwise, is issued
a number of common shares that causes that holder to go over the 9.8%
ownership limit, the number of common shares in excess of the 9.8%
ownership limit will be "Excess Securities" under First Union's by-laws and
therefore will not, in the hands of that holder, have dividend, voting and
other rights or be considered outstanding for quorum, voting and other
purposes. See "Description of Capital Stock -- Common Shares -- Restriction
on Size of Holdings" in the accompanying prospectus.
Rights are represented by rights certificates which shareholders will
receive with the delivery of this prospectus supplement. A holder of rights
may
o subscribe for common shares through the exercise of all of its
rights, including the exercise of the oversubscription privilege,
if that holder elects,
o subscribe for common shares through the exercise of some of its
rights, or
o allow some or all of its rights to expire unexercised.
No fractional rights or cash in place of fractional rights will be
issued or paid by First Union.
Certificates representing common shares purchased through the basic
subscription will be delivered to holders as soon as practicable after the
offering expires. Any amounts paid by holders in respect of rights not
considered exercised will be refunded as soon as practicable after the
offering expires without interest.
EXPIRATION TIME
The rights will expire at 5:00 p.m., Eastern Standard Time, on April
[ ], 1999 or at a later date and time as First Union may determine in its
sole discretion. After that time, rights will become void and have no
value. Notice will be given to shareholders of record on the record date,
by mail or by publication in a newspaper of national circulation, of a new
expiration time if First Union extends the period for the exercise of the
rights.
OVERSUBSCRIPTION PRIVILEGE
A holder of rights who validly exercises in full its basic
subscription without exceeding the 9.8% ownership limit may also
oversubscribe at the $4.00 per share subscription price for additional
common shares that have not been purchased through the exercise of rights,
up to the 9.8% ownership limit.
If an insufficient number of unsubscribed common shares is available
to satisfy fully all elections to exercise the oversubscription privilege,
the available unsubscribed common shares will be allocated pro rata among
holders who exercise the oversubscription privilege based on the respective
numbers of rights exercised by those holders through the basic
subscription. If that allocation, however, results in any holder being
allocated a greater number of unsubscribed common shares than that holder
subscribed for through the exercise of the oversubscription privilege, then
that holder will be allocated only the number of unsubscribed common shares
as that holder subscribed for, and the remaining unsubscribed common shares
otherwise allocable to that holder will be allocated among all other
holders exercising the oversubscription privilege pro rata based upon the
number of rights exercised by each of those holders. No fractional common
shares will be issued to satisfy any exercise of the oversubscription
privilege. A holder may exercise the oversubscription privilege only
concurrently with its basic subscription.
Certificates representing the common shares purchased through the
oversubscription privilege will be delivered to holders as soon as
practicable after the offering expires and after all prorations have been
effected. Any amounts overpaid by holders will be refunded as soon as
practicable after the offering expires without interest.
SUBSCRIPTION PRICE
The subscription price for one common share, which may be purchased
upon the exercise of one right, is $4.00. Common shares purchased by a
holder through the oversubscription privilege or by a standby purchaser
through its standby commitment shall have the same subscription price as
common shares purchased through the basic subscription.
HOLDERS OF COMMON SHARES IN DIVIDEND REINVESTMENT PLAN
As of March 26, 1999, approximately 269,045 common shares were held by
929 shareholders through the First Union Dividend Investment Service, the
Company's dividend reinvestment plan. Those common shares are registered in
the name of a nominee of the plan administrator. Shareholders who own
common shares through the plan will not receive rights for those common
shares unless at least 48 hours prior to the record date for the offering
those holders request certificates for some or all of those common shares
so that those common shares are held directly by such holders and not by
the plan. Holders who so request certificates in accordance with the plan
will receive rights only for the number of common shares covered by the
certificates. The plan administrator will not exercise any rights issued
for the common shares held by the plan.
WITHDRAWAL
First Union reserves the right to withdraw the offering at any time
before or at the time it is due to expire and for any reason. If First
Union withdraws the offering, all funds received from holders will be
refunded promptly without interest.
SUBSCRIPTION AGENT
The subscription agent and escrow agent for this offering is National
City Bank. The address to which rights certificates, Notices of Guaranteed
Delivery and payments, other than wire transfers, should be mailed or
delivered is:
By Hand or Overnight
By Regular Mail: By Facsimile Transmission: Courier:
National City Bank, 216-252-9163 National City Bank,
Subscription Agent (for Eligible Subscription Agent
Corporate Trust Operations Institutions only) Corporate Trust
P.O. Box 94720 Operations
Cleveland, Ohio 44101-4720 Confirm by Telephone 3rd Floor, North Annex
216-476-8936 4100 West 150th Street
(for Facsimile Cleveland, Ohio 44135
Confirmation Only)
Other than as set forth above, delivery of rights certificates,
Notices of Guaranteed Delivery and payments, other than wire transfers,
will not constitute a valid delivery.
ANY QUESTIONS OR REQUESTS FOR ASSISTANCE CONCERNING THE METHOD OF
SUBSCRIBING FOR COMMON SHARES OR FOR ADDITIONAL COPIES OF THIS PROSPECTUS
SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS SHOULD BE DIRECTED TO NATIONAL
CITY BANK, THE SUBSCRIPTION AGENT, AT 800-622-6757.
FRACTIONAL COMMON SHARES
No fractional common shares will be issued in this offering. Rights
certificates may not be divided in any manner as to create fractional
rights. Banks, trust companies, securities dealers and brokers that hold
common shares as nominees for more than one beneficial owner may have a
rights certificate divided by the subscription agent or may, upon proper
showing to the subscription agent, exercise their rights on the same basis
as if the beneficial owners were record holders on the record date. First
Union reserves the right to deny any division of rights certificates if in
its opinion the result would be inconsistent with the intent of this
privilege.
METHOD OF EXERCISING RIGHTS AND OVERSUBSCRIPTION PRIVILEGE
A holder may exercise its basic subscription and oversubscription
privilege by properly completing and executing the rights certificate
accompanying this prospectus supplement and related prospectus and
forwarding the rights certificate, together with payment of the
subscription price for each common share subscribed for through the basic
subscription and the oversubscription privilege, to the subscription agent
at the appropriate address set forth above. Persons holding common shares
and receiving rights through a broker, dealer, commercial bank, trust
company or other nominee, as well as persons holding stock certificates who
would prefer to have such institutions effect transactions relating to
rights on their behalf, should contact the appropriate nominee or
institution and request it to effect the transactions for them. Banks,
trust companies, securities dealers and brokers that hold common shares as
nominee for more than one beneficial owner may, upon proper showing to the
subscription agent, exercise their basic subscription and oversubscription
privilege on the same basis as if the beneficial owners were record holders
on the record date. In the case of holders of rights that are held of
record through The Depository Trust Company ("DTC"), those rights may be
exercised by instructing DTC to transfer rights from that holder's DTC
account to the subscription agent's DTC account, together with payment of
the full subscription price. Except as described under "-- Late Delivery of
Payments and Rights Certificates," to be accepted, the properly completed
and duly executed rights certificate and the payment must be received by
the subscription agent before the offering expires. Rights certificates
received after that time will not be honored.
Payments must be made in full in United States currency by either
o a check or bank draft drawn upon a U.S. bank or postal,
telegraphic or express money order payable to National City Bank,
as subscription agent, or
o a wire transfer of funds to the account maintained by the
subscription agent for that purpose at National City Bank,
Cleveland, Ohio.
Any wire transfer of funds should clearly indicate the identity of the
subscriber who is paying the subscription price by the wire transfer.
Holders should contact the subscription agent at 800-622-6757 for specific
payment instructions. The subscription price will be deemed to have been
received by the subscription agent only upon
o clearance of any uncertified check,
o receipt by the subscription agent of any certified check or bank
draft drawn upon a U.S. bank or of any postal, telegraphic or
express money order, or
o receipt of good funds in the subscription agent's account
designated above.
The instruction letter accompanying the rights certificate should be
read carefully and strictly followed. DO NOT SEND RIGHTS CERTIFICATES OR
PAYMENTS TO FIRST UNION. Except as described under "-- Late Delivery of
Payments and Rights Certificates," no subscription will be considered
received until the subscription agent has received delivery of a properly
completed and duly executed rights certificate and payment of the full
subscription price. The risk of delivery of all documents and payments is
on holders, not First Union or the subscription agent.
THE METHOD OF DELIVERY OF RIGHTS CERTIFICATES AND PAYMENT OF THE
SUBSCRIPTION PRICE TO THE SUBSCRIPTION AGENT WILL BE AT THE RISK OF THE
RIGHTS HOLDERS, BUT IF SENT BY MAIL, IT IS RECOMMENDED THAT THOSE
CERTIFICATES AND PAYMENTS BE SENT BY REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED, AND THAT A SUFFICIENT NUMBER OF DAYS BE
ALLOWED TO ENSURE DELIVERY TO THE SUBSCRIPTION AGENT AND CLEARANCE OF
PAYMENT BEFORE THE OFFERING EXPIRES. BECAUSE UNCERTIFIED PERSONAL CHECKS
MAY TAKE UP TO FIVE BUSINESS DAYS TO CLEAR, YOU ARE STRONGLY URGED TO PAY
OR ARRANGE FOR PAYMENT BY MEANS OF CERTIFIED OR CASHIER'S CHECK, MONEY
ORDER OR WIRE TRANSFER OF FUNDS.
LATE DELIVERY OF PAYMENTS AND RIGHTS CERTIFICATES
If, before the offering expires, the subscription agent has received a
properly completed and duly executed Notice of Guaranteed Delivery
substantially in the form accompanying this prospectus supplement and
related prospectus either by hand, mail, telegram or facsimile
transmission, specifying the name of the holder of rights and the number of
common shares subscribed for, stating separately the number of common
shares subscribed for through the exercise of the basic subscription and
the oversubscription privilege and guaranteeing that the properly completed
and executed rights Certificate and payment of the full subscription price
for all common shares subscribed and oversubscribed for will be delivered
to the subscription agent within three business days after the offering
expires, that subscription may be accepted, subject to the subscription
agent's withholding the certificates for common shares until receipt of the
properly completed and duly executed rights certificate and payment of the
appropriate subscription price within that time period. In the case of
holders of rights that are held of record through DTC, those rights may be
exercised by instructing DTC to transfer rights from that holder's DTC
account to the subscription agent's DTC account, together with payment of
the full subscription price. The Notice of Guaranteed Delivery must be
guaranteed by a commercial bank, trust company or credit union having an
office, branch or agency in the United States or by a member of a Stock
Transfer Association approved medallion program such as STAMP, SEMP or MSP.
Notices of Guaranteed Delivery and payments should be mailed or delivered
to the appropriate addresses set forth under "-- Subscription Agent."
TRANSFERABILITY OF RIGHTS
The rights may not be transferred, except by operation of law in the
event of death or dissolution of their holder.
VALIDITY OF SUBSCRIPTIONS
All questions regarding the validity and form of the exercise of the
basic subscription or the oversubscription privilege, including time of
receipt and eligibility to participate in the offering, will be determined
solely by First Union, which determination shall be final and binding. Once
made, subscriptions and directions are irrevocable, and no alternative,
conditional or contingent subscriptions or directions will be accepted.
First Union reserves the absolute right to reject any subscriptions or
directions not properly submitted or the acceptance of which, in the
opinion of First Union's counsel, would be unlawful. See "-- Basic
Subscription; Limitations on Subscription." Any irregularities in
connection with subscriptions must be cured before the offering expires
unless waived by First Union in its sole discretion. Neither First Union
nor the subscription agent shall be under any duty to give notification of
defects in subscriptions or incur any liability for failure to give that
notification. A subscription will be considered accepted, subject to First
Union's right to withdraw or terminate the offering or to limit the size of
the subscription as described in "-- Basic Subscription; Limitations on
Subscription," only when a properly completed and duly executed rights
certificate, any other required documents and payment of the full
subscription price with respect to that subscription have been received by
the subscription agent. First Union's interpretations of the terms and
conditions of the offering shall be final and binding.
ESCROW ARRANGEMENTS; RETURN OF FUNDS
Funds received in payment of the subscription price for common shares
subscribed for will be held in a segregated account by the subscription
agent pending completion of this offering. Monies will be held in escrow
until this offering is completed or is canceled. If the offering is
canceled for any reason, monies will be returned to subscribers without
interest or deduction promptly thereafter. If a rights holder exercising
the basic subscription or the oversubscription privilege is allocated fewer
than the number of common shares that that holder wished to subscribe for
through the basic subscription or the oversubscription privilege, the
excess funds paid by such holder will be returned without interest as soon
as practicable after the offering expires.
RIGHTS OF SUBSCRIBERS
Holders will have no rights as shareholders of First Union with
respect to common shares subscribed for until certificates representing
those common shares are issued to them. Holders will have no right to
revoke their subscriptions after delivery to the subscription agent of a
completed rights certificate and any other required documents.
FOREIGN SHAREHOLDERS
Rights certificates will not be mailed to holders whose addresses are
outside the United States or who have an army post office or foreign post
office address, but will be held by the subscription agent for their
account. To exercise rights, those holders must notify the subscription
agent by completing an International Holder Subscription Form which will be
delivered to those holders in lieu of a rights certificate, and sending it
by mail or telecopy to the subscription agent at the address and telecopy
number specified above.
NO REVOCATION
ONCE A HOLDER OF RIGHTS HAS EXERCISED THE BASIC SUBSCRIPTION OR THE
OVERSUBSCRIPTION PRIVILEGE THAT EXERCISE MAY NOT BE REVOKED.
STANDBY COMMITMENT
The standby purchasers have agreed, in principle, to purchase, at the
subscription price and subject to customary rights to terminate, including
as a result of a material adverse change in First Union's business,
financial condition or results of operations, those common shares that are
not purchased through the exercise of rights or the oversubscription
privilege, up to 12,500,000 common shares having an aggregate subscription
price of up to $50,000,000. If holders subscribe for fewer than 12,500,000
common shares in the aggregate through their basic subscription and
oversubscription privilege, the standby purchasers will subscribe for the
difference. The standby purchasers' obligations to purchase the standby
commitment shares will expire on August 11, 1999. First Union and the
standby purchasers are currently seeking the consent of the lenders under
the bridge loan to the terms of the standby commitment.
The Board of Trustees has agreed to waive the 9.8% ownership limit to
enable Gotham to exercise rights and the oversubscription privilege and to
satisfy its obligations under the standby commitment. An independent
committee of the Board of Trustees has approved the terms and conditions of
the standby commitment.
As of March 26, 1999, the Gotham entities beneficially owned 9.71% and
Elliott Associates and an investment partnership under common management with
Elliott Associates beneficially owned 2.23% of the outstanding common
shares.
DELIVERY OF COMMON SHARES
Certificates representing common shares purchased through the exercise
of the basic subscription, the oversubscription privilege or the standby
commitment will be delivered as soon as practicable after the offering
expires, the receipt of all required documents and payment in full of the
aggregate subscription price due for such common shares. In the case of
shareholders whose common shares are held through DTC and third-party
investors who arrange for delivery and payment through DTC, the appropriate
participant account will be credited.
SHAREHOLDER RIGHTS PLAN
In connection with First Union's Shareholder Rights Plan, the Board of
Trustees has agreed, with respect to each holder who acquires common shares
through the basic subscription, the oversubscription privilege or the
standby commitment, to increase the 15% threshold for triggering a
"flip-in" event by an amount equal to the increase in the percentage of
beneficial ownership of common shares achieved by that holder as a result
of the acquisition of those common shares. Accordingly, any acquisition of
common shares through the offering will not be considered a "flip-in" event
under First Union's Shareholder Rights Plan. For a description of First
Union's Shareholder Rights Plan, see "Description of Capital Stock --
Common Shares -- Shareholder Rights Plan."
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES REGARDING THE OFFERING
In the opinion of Fried, Frank, Harris, Shriver & Jacobson, counsel to
First Union, the following discussion summarizes all material U.S. federal
income tax consequences of this offering to First Union and its
shareholders. The following discussion is based upon the current provisions
of the Internal Revenue Code of 1986, as amended, its legislative history,
administrative pronouncements, judicial decisions and Treasury regulations,
all of which are subject to change, possibly with retroactive effect. The
following discussion does not purport to be a complete discussion of all
U.S. federal income tax considerations. The following discussion does not
address the tax consequences of the offering under state, local or non-U.S.
tax laws. In addition, the following discussion may not apply, in whole or
in part, to particular categories of First Union shareholders, such as
dealers in securities, insurance companies, foreign persons, tax-exempt
organizations, financial institutions and persons who hold common shares or
rights as part of a hedging, straddle, integrated or conversion
transaction. The discussion of U.S. federal income tax considerations of
the offering set forth below assumes that the common shares owned by a
shareholder and the common shares or rights issued pursuant to the offering
constitute capital assets in the hands of that shareholder. It should be
noted that under current law, net capital gains of individuals who hold
capital assets with a holding period in excess of one year are taxed at
lower rates than items of ordinary income, and the deductibility of capital
losses is subject to limitations.
TAXATION OF FIRST UNION'S SHAREHOLDERS
Receipt of Right. A shareholder, including a foreign shareholder, will
not recognize any gain or loss upon such shareholder's receipt of a right.
Tax Basis of Right. A shareholder's tax basis in a right will depend
on whether (1) the shareholder exercises the right, or alternatively (2)
the shareholder allows the right to lapse unexercised.
If a shareholder exercises a right, the tax basis of that right in the
hands of the shareholder will be determined by allocating the shareholder's
existing tax basis of such holder's common shares with respect to which the
right was distributed ("Old Common Shares") between that holder's Old
Common Shares and the right, in proportion to their relative fair market
values on the date of distribution. If, however, the fair market value of
the rights distributed to the shareholder on the date of distribution is
less than 15% of the fair market value of such holder's Old Common Shares,
the tax basis of each right will be deemed to be zero unless the
shareholder affirmatively elects, by attaching an election statement to
that holder's federal income tax return for the year in which that holder
receives such holder's rights, to compute the tax basis of that holder's
rights in accordance with the preceding sentence. Once made, such an
election is irrevocable.
A right will not be treated as having any tax basis if it lapses and,
therefore, the holder of an expired right will not recognize a loss for tax
purposes.
Exercise of Right. No gain or loss will generally be recognized by a
shareholder, including a foreign shareholder, upon the purchase of a common
share through the exercise of a right.
The tax basis of a common share purchased through the exercise of a
right shall be equal to the sum of (1) the shareholder's tax basis of the
right exercised and (2) the subscription price paid for that common share.
The holding period of the common shares purchased through the exercise
of rights will commence on the date of exercise. Upon the subsequent sale
of common shares, other than to First Union pursuant to a redemption, the
shareholder will generally recognize capital gain or loss in an amount
equal to the difference between the proceeds of the sale and the
shareholder's tax basis of those common shares. Such gain or loss will be
long-term capital gain or loss if the shareholder's holding period for such
common shares is more than one year on the date of sale.
FOREIGN PERSONS
Assuming that First Union currently qualifies and has qualified as a
domestically controlled REIT, which First Union believes is the case (see
"Federal Income Tax Consequences -- Taxation of First Union's Shareholders
- -- Taxation of Non-U.S. Shareholders" in the accompanying prospectus), and
continues to so qualify through the time of any sale of common shares by a
foreign person, any gain from such sale should not be subject to U.S.
taxation, unless such gain is effectively connected with that person's U.S.
trade or business or, in the case of an individual foreign person, such
person is present within the U.S. for 183 days or more in such taxable
year.
TAXATION OF FIRST UNION
First Union will not recognize any gain or loss upon (1) the issuance
of rights, (2) the receipt of cash for common shares pursuant to the
exercise of rights or (3) the lapse of rights.
PLAN OF DISTRIBUTION
The common shares offered hereby are being offered by First Union
through the issuance of rights to holders of common shares on the record
date.
Holders of rights who desire to subscribe for common shares in this
offering are urged to complete, date and sign the rights certificate and
return it to the subscription agent before the offering expires, together
with payment in full of the subscription price. See "The Offering." Any
questions concerning the procedure for subscribing for the purchase of
common shares should be directed to the subscription agent.
The standby purchasers and Elliott Associates, if it becomes a standby
purchaser, may be deemed statutory "underwriters" under the Securities Act
of 1933 with respect to any common shares they acquire in the offering. Any
broker-dealers that participate in the distribution of those common shares
may also be deemed to be "underwriters" under the Securities Act of 1933.
THE FINANCIAL ADVISOR
The Company has engaged PaineWebber Incorporated to act as financial
advisor in connection with this offering. In this capacity, PaineWebber has
provided advice to the Board of Trustees of First Union regarding the
terms, structure and timing of this offering. PaineWebber has not agreed to
any standby or other arrangements to purchase any rights or any common
shares or to solicit exercises of the rights. In addition, PaineWebber does
not intend to engage in any stabilization activities with respect to any of
First Union's securities and PaineWebber will not engage in any bids for or
market making activities in First Union's securities subsequent to the date
hereof and prior to the time the offering expires.
First Union has agreed to pay PaineWebber a fee of $375,000 for its
services and has agreed to indemnify PaineWebber against losses incurred by
it that arise out of material misstatements or omissions of fact in this
prospectus. Of the total fee payable, $187,500 has been paid, and the
remaining portion is payable at the time this offering is consummated.
PaineWebber has also been engaged by First Union to explore strategic
alternatives for Impark and to sell a parking garage in Chicago for
customary compensation.
Other than PaineWebber, First Union has not engaged any financial
advisors, brokers or dealers to perform any services for this offering.
LEGAL MATTERS
The validity of the common shares offered through this prospectus
supplement and the accompanying prospectus under Ohio law will be passed
upon for First Union by Hahn Loeser & Parks LLP.
<PAGE>
[RED HERRING]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF
ANY SUCH STATE.
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 9, 1999
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
SHARES OF BENEFICIAL INTEREST
AND
RIGHTS TO PURCHASE SHARES OF BENEFICIAL INTEREST
------------------
First Union Real Estate Equity and Mortgage Investments ("First
Union") is a real estate investment trust (a "REIT") whose primary business
has been to buy, manage, improve cash flow of and own retail, apartment,
office and parking properties throughout the United States and Canada.
Currently, First Union is in the process of selling some of its properties.
First Union Management, Inc., an affiliate of First Union ("FUMI"), owns a
controlling interest in a Canadian parking and management services company.
First Union and FUMI have an organizational structure commonly referred to
as "stapled," whereby First Union's shares of beneficial interest, par
value $1.00 per share ("Common Shares"), are "stapled to" a proportionately
equal interest in the common stock of FUMI, subject to certain exceptions.
Common Shares may not be issued or transferred without their "stapled"
counterparts in FUMI. FUMI's common stock is held in trust for the benefit
of the holders of Common Shares.
Through this prospectus, First Union may periodically offer Common
Shares or rights to purchase Common Shares ("Rights"). The specific terms
of any offering of Common Shares or Rights by First Union will be described
in a prospectus supplement that will accompany this prospectus. If Common
Shares are offered, the number of shares, the public offering price and
other terms relating to the offer and sale of those shares will be
described. If Rights are offered, the number of Rights to be distributed,
the record date for shareholders entitled to receive Rights, the number of
Common Shares for which Rights are exercisable, the subscription price for
each Common Share for which Rights are exercisable, whether Rights are
transferable and other terms of the offer and sale of the Common Shares
underlying Rights will be described. The total offering price of all Common
Shares to be issued under this prospectus may not exceed $157,155,000.
Common Shares trade on the New York Stock Exchange (the "NYSE") under
the symbol "FUR." First Union will apply to list any Common Shares sold
under this prospectus on the NYSE.
SEE "RISK FACTORS" BEGINNING ON PAGE 4 HEREIN FOR A DISCUSSION OF THE
MATERIAL RISKS THAT SHOULD BE CONSIDERED BEFORE MAKING AN INVESTMENT IN
COMMON SHARES.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------
THE DATE OF THIS PROSPECTUS IS APRIL [ ], 1999.
<PAGE>
AVAILABLE INFORMATION
First Union is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports and other information with the
Securities and Exchange Commission (the "Commission"). Reports, proxy
material and other information concerning First Union can be inspected and
copied at the offices of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 or at its regional offices, Citicorp Center, 500
West Madison Street, Chicago, Illinois 60661-2511 and Seven World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can
be obtained from the Public Reference Section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at
prescribed rates. Information regarding the operation of the Public
Reference Section of the Commission may be obtained by calling the
Commission at 1 (800) SEC-0330. In addition, the Commission maintains a Web
site on the Internet at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that
file electronically with the Commission, including First Union. First
Union's outstanding Common Shares and outstanding Series A Cumulative
Redeemable Preferred Shares of Beneficial Interest, $1.00 par value per
share (the "Series A Preferred Shares"), are listed on the NYSE under the
symbols, "FUR" and "FURPrA," respectively, and all such reports, proxy
material and other information filed by First Union with the NYSE may be
inspected at the offices of the NYSE at 20 Broad Street, New York, New York
10005.
First Union has filed with the Commission a registration statement on
Form S-3 (together with all amendments and exhibits, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to the securities offered hereby. This prospectus,
which constitutes a part of the Registration Statement, does not contain
all the information set forth in the Registration Statement, certain items
of which are contained in exhibits to the Registration Statement as
permitted by the rules and regulations of the Commission. Statements made
in this prospectus as to the content of any contract, agreement or other
document referred to are not necessarily complete. With respect to each
such contract, agreement or other document filed or incorporated by
reference as an exhibit to the Registration Statement, reference is made to
the exhibit for a more complete description of the matter involved, and
each such statement shall be deemed qualified in its entirety by such
reference.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by First Union with the Commission (File
No. 1-6249) pursuant to the Exchange Act are incorporated by reference into
this Prospectus:
(1) First Union's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998;
(2) First Union's Current Report on Form 8-K filed March 29, 1999;
and
(3) Description of First Union's Share Purchase Rights included in
First Union's Registration Statement on Form 8-A dated March 30,
1990.
All documents filed by First Union pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus
and prior to the termination of the offering made hereby shall be deemed to
be incorporated by reference into this Prospectus and to be a part hereof
from the date of the filing of such documents. Any statement contained in a
document incorporated or deemed to be incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this
prospectus to the extent that a statement contained herein, or in any other
subsequently filed document which is or is deemed to be incorporated by
reference herein, modifies or supersedes any such statement. Any such
statement so modified or superseded will not be deemed, except as so
modified or superseded, to constitute a part of this prospectus.
First Union will provide without charge to each person, including any
beneficial owner, to whom this prospectus is delivered, on the oral or
written request of such person, a copy of any of the foregoing documents
incorporated herein by reference (other than the exhibits to such documents
unless such exhibits are specifically incorporated by reference into such
documents). Requests should be directed to First Union Real Estate Equity
and Mortgage Investments, 55 Public Square, Suite 1900, Cleveland, Ohio
44113-1937, Attention: Jeanne Gibson, Director of Investor Relations,
telephone (216) 781-4030.
<PAGE>
CAUTIONARY STATEMENTS CONCERNING FORWARD-LOOKING STATEMENTS
Any statements in this prospectus and any accompanying prospectus
supplement, including any statements in the documents that are incorporated
by reference herein that are not strictly historical are forward-looking
statements within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Any such forward-looking
statements contained or incorporated by reference herein should not be
relied upon as predictions of future events. Certain such forward-looking
statements can be identified by the use of forward-looking terminology such
as "believes," "expects," "may," "will," "should," "seeks,"
"approximately," "intends," "plans," "pro forma," "estimates" or
"anticipates" or the negative thereof or other variations thereof or
comparable terminology, or by discussions of strategy, plans, intentions or
anticipated or projected events, results or conditions. Such
forward-looking statements are dependent on assumptions, data or methods
that may be incorrect or imprecise and they may be incapable of being
realized. Such forward-looking statements include statements with respect
to:
o the declaration or payment of distributions by First Union and
FUMI (the "First Union Companies"),
o the ownership, management and operation of properties,
o potential acquisitions or dispositions of properties, assets or
other businesses by the First Union Companies,
o the policies of the First Union Companies regarding investments,
acquisitions, dispositions, financings and other matters,
o the qualification of First Union as a REIT under the Internal
Revenue Code of 1986, as amended (the "Code") and the
"grandfathering" rules under Section 269B of the Code,
o the real estate industry and real estate markets in general,
o the availability of debt and equity financing,
o interest rates,
o general economic conditions,
o supply and customer demand,
o trends affecting the First Union Companies,
o the effect of acquisitions or dispositions on capitalization and
financial flexibility,
o the anticipated performance of the First Union Companies and of
acquired properties and businesses, including, without
limitation, statements regarding anticipated revenues, cash
flows, funds from operations, earnings before interest,
depreciation and amortization ("EBIDA"), property net operating
income, operating or profit margins and sensitivity to economic
downturns or anticipated growth or improvements in any of the
foregoing, and
o the ability of the First Union Companies and of acquired
properties and businesses to grow.
Shareholders are cautioned that, while forward-looking statements
reflect the respective companies' good faith beliefs, they are not
guarantees of future performance and they involve known and unknown risks
and uncertainties. Actual results may differ materially from those in the
forward-looking statements as a result of various factors. The information
contained or incorporated by reference in this prospectus and any
accompanying prospectus supplement, including, without limitation, the
information set forth in "Risk Factors" or in any risk factors in documents
that are incorporated by reference in this prospectus and any accompanying
prospectus supplement, identifies important factors that could cause such
differences. The First Union Companies undertake no obligation to publicly
release the results of any revisions to these forward-looking statements
that may reflect any future events or circumstances.
<PAGE>
RISK FACTORS
Investors should carefully review the information contained elsewhere
or incorporated by reference in this prospectus and should particularly
consider the following matters with respect to the First Union Companies:
NEW SENIOR MANAGEMENT LACKS PRIOR EXPERIENCE WITH FIRST UNION AND IN
OPERATING PUBLIC COMPANIES OR REITS
In June 1998, First Union appointed William A. Ackman as Chairman of
the Board. In November 1998, First Union appointed Daniel P. Friedman as
its President and Chief Executive Officer, William A. Scully as Vice
Chairman of the Board and David Schonberger and Anne N. Zahner, each as
Executive Vice Presidents. Until their appointments, these individuals had
little, if any, previous working experience or relationships with First
Union or its senior management and other personnel. The failure of the new
management team to work effectively with First Union's other senior
management could result in the departure of key personnel or disruptions in
the operations of First Union, which in turn could have a material adverse
effect on First Union's business, financial condition or results of
operations.
In addition, none of the members of the new management team has ever
operated or served as an executive officer, director or trustee of a public
company or a REIT. The lack of experience with or knowledge of issues that
confront public companies or REITs could have an adverse effect on the
ability of such individuals to effectively manage the operations of First
Union and thereby could have an adverse effect on First Union's business,
financial condition or results of operations.
PROPOSED DEPARTURE OF SOME MEMBERS OF SENIOR MANAGEMENT
Some members of the senior management team that was in place prior to
Mr. Friedman's appointment have expressed a desire to leave First Union and
are in discussions with First Union regarding the timing and terms of their
departure. The departure of these individuals could result in the departure
of additional key personnel or disruptions in the operations of First
Union, which in turn could have a material adverse effect on First Union's
business, financial condition or results of operations.
DIFFICULTIES IN SERVICING DEBT
As described in "The Company -- Recent Developments," First Union
recently negotiated amendments to its principal credit facilities,
including its senior credit facility (the "FUR Credit Facility"), the
Cdn.$38.8 million credit facility of Imperial Parking Limited, an affiliate
of First Union (the "Impark Credit Facility" and, together with the FUR
Credit Facility, the "Credit Facilities"), and a loan to First Union from a
syndicate of lenders led by Bankers Trust Company (the "Bridge Loan") in an
original principal amount of $90 million. Among other things, the
amendments require First Union to make significant principal prepayments in
April, May and June 1999. As of March 26, 1999, First Union had $167.6
million in principal outstanding under the FUR Credit Facility and the
Bridge Loan and Cdn.$35.4 million in principal outstanding under the Impark
Credit Facility. The upcoming amortization payments require First Union to
reduce the principal amounts outstanding under the FUR Credit Facility and
the Bridge Loan to $158.9 million in the aggregate in April 1999, $118.0
million in the aggregate in May 1999 and $88.0 million in the aggregate in
June 1999. All remaining principal under the FUR Credit Facility and the
Bridge Loan is due on August 11, 1999. First Union is relying on its cash
reserves, cash flow from operations, net proceeds from assets sales, net
proceeds from financing assets and net proceeds from offerings of Rights
and Common Shares under this prospectus to make these principal payments,
but there can be no assurance that these sources will provide sufficient
funds to enable First Union to make these payments. See "The Company --
Recent Developments" for more information on asset sales. See also "--
Default under the FUR Credit Facility, the Impark Credit Facility and the
Bridge Loan" and "-- Debt covenants restrict operating flexibility; failure
to comply with debt instruments could cause acceleration of debt."
DEFAULT UNDER THE FUR CREDIT FACILITY, THE IMPARK CREDIT FACILITY AND THE
BRIDGE LOAN
As described in "The Company --Recent Developments," First Union and
Impark recently negotiated amendments to, and waivers of any defaults
under, the Credit Facilities and the Bridge Loan. The defaults resulted
primarily from the failure to comply with various financial covenants.
Although the defaults have been waived in principle and the debt
instruments have been amended in principle, there can be no assurance that
either First Union or Impark will satisfy their respective financial
covenants or their respective obligations, including principal and interest
repayment obligations, under the FUR Credit Facility, the Bridge Loan or
the Impark Credit Facility. If First Union or Impark is unable to satisfy
its obligations under either of these facilities or the Bridge Loan, the
lenders thereunder may declare all indebtedness outstanding thereunder,
together with any accrued interest thereon, due and payable immediately and
by such action trigger cross-defaults under other debt instruments. There
can be no assurance that First Union or Impark will be able to refinance
any of such indebtedness.
DEBT COVENANTS RESTRICT OPERATING FLEXIBILITY; FAILURE TO COMPLY WITH DEBT
INSTRUMENTS COULD CAUSE ACCELERATION OF DEBT
Debt instruments, including the Credit Facilities and the Bridge Loan,
to which either of the First Union Companies is currently a party, and to
which either of the First Union Companies may become a party, contain and
may contain a number of significant covenants that, among other things,
restrict in varying degrees either of the First Union Companies from
selling assets, incurring additional indebtedness, repaying other
indebtedness, paying dividends, creating liens on assets, entering into
leases, making investments, loans or advances, making acquisitions,
engaging in mergers or consolidations, engaging in certain transactions
with affiliates and certain other corporate activities. Each of the First
Union Companies' ability to remain in compliance with certain such
covenants will depend upon, among other things, its results of operations
and may be affected by events beyond its control, including economic,
financial and industry conditions. Accordingly, there can be no assurance
that either of the First Union Companies will remain in compliance with
such agreements and covenants.
In the event of a default under such instruments or agreements
relating to any indebtedness of either of the First Union Companies, the
holders of such indebtedness generally will be able to declare all such
indebtedness, together with accrued interest thereon, to be due and payable
immediately and, in the case of collateralized indebtedness, to proceed
against their collateral. In addition, default under one debt instrument
could in turn permit lenders under other debt instruments to declare
borrowings outstanding thereunder to be due and payable pursuant to
cross-default clauses. Accordingly, the occurrence of a default under any
debt instrument could have a material adverse effect on the First Union
Companies and may cause First Union to seek protection or relief under
applicable bankruptcy laws.
CONTEMPLATED ASSET SALES WILL SHRINK PORTFOLIO AND RETURNS TO SHAREHOLDERS;
REPLACEMENT ASSETS MAY NOT PROVIDE GREATER SHAREHOLDER VALUE
As described in "The Company -- Recent Developments," First Union is
in the process of selling various of its residential, retail, office and
parking properties. Because First Union intends to apply the net proceeds
of these asset sales to repay outstanding indebtedness, its portfolio of
properties will be smaller, less diverse and less valuable and will
generate less revenue for ultimate distribution to its shareholders. In
addition, First Union may elect in the future to sell other assets. To the
extent that the net proceeds of any of those asset sales are not used to
acquire replacement assets or assets of at least equivalent value, First
Union's portfolio of properties will be similarly affected. There can be no
assurance that First Union will be able to sell the properties described
above on advantageous terms, expeditiously or at all. Moreover, if any of
these assets are sold and their net proceeds are applied towards the
purchase of replacement assets, there can be no assurance that First Union
will be able to acquire replacement assets that will be as valuable as the
assets they replace or provide greater returns to First Union and its
shareholders.
INCOME AND ACTIVITIES OF FUMI MAY BE ATTRIBUTED TO FIRST UNION UNDER RECENT
ANTI-STAPLING LEGISLATION AND MAY THREATEN REIT STATUS
On July 22, 1998, tax legislation was enacted limiting the
"grandfathering" rule applicable to stapled REITs such as First Union (the
"Stapled REIT Legislation"). See "-- Dependence on Qualification as a REIT;
Tax and Other Consequences if REIT Qualification Lost." Under the Stapled
REIT Legislation, the anti-stapling rules provided in the Code apply to
real property interests acquired or substantially improved after March 26,
1998 by the First Union Companies, or a subsidiary or partnership in which
a ten percent or greater interest is owned by the First Union Companies
unless:
o the real property interests are acquired pursuant to a written
agreement that was binding on March 26, 1998 and at all times
thereafter or
o the acquisition of such real property interests was described in
a public announcement or in a filing with the Commission on or
before March 26, 1998.
Consequently, the income and activities of FUMI with respect to any
property acquired by the First Union Companies after March 26, 1998, for
which there was no binding written agreement, public announcement or filing
with the Commission on or before March 26, 1998, will be attributed to
First Union for purposes of determining whether First Union qualifies as a
REIT under the Code. As described under "Federal Income Tax Consequences --
Taxation of First Union -- General" and "-- Taxation of First Union --
Stapled Stock," these attribution rules may make it more difficult for
First Union to qualify as a REIT and may subject First Union to various
additional taxes.
IMPROVED PROPERTIES MAY BECOME SUBJECT TO ANTI-STAPLING LEGISLATION UNDER
CERTAIN CIRCUMSTANCES AND MAY THREATEN REIT STATUS
The Stapled REIT Legislation also provides that a property held by a
stapled REIT but not subject to the anti-stapling rules would become
subject to such rules in the event of either
o an improvement placed in service after December 31, 1999 that
changes the use of the property and the cost of which is greater
than 200 percent of
(1) the undepreciated cost of the property (prior to the
improvement) or
(2) in the case of property acquired where there is a
substituted basis, the fair market value of the property on
the date it was acquired by the stapled REIT or
o an addition or improvement that expands beyond the boundaries of
the land included in such property.
The Stapled REIT Legislation contains an exception for improvements placed in
service before January 1, 2004 pursuant to a binding contract in effect on
December 31, 1999 and at all times thereafter.
If previously exempt property of the First Union Companies becomes
subject to the anti-stapling rules upon the occurrence of any of the events
described above, any income generated by, and activities conducted by the
First Union Companies through, such properties would be attributed to First
Union for purposes of determining whether First Union qualifies as a REIT
under the Code. As described under "Federal Income Tax Consequences --
Taxation of First Union -- General" and "-- Taxation of First Union --
Stapled Stock," these attribution rules may make it more difficult for
First Union to qualify as a REIT and may subject First Union to various
additional taxes.
OTHER LEGISLATION COULD ADVERSELY AFFECT FIRST UNION'S REIT QUALIFICATION
Other legislation (including legislation previously introduced, but
not yet passed), as well as regulations, administrative interpretations or
court decisions, also could change the tax law with respect to First
Union's qualification as a REIT and the federal income tax consequence of
such qualification. The adoption of any such legislation, regulations or
administrative interpretations or court decisions could have a material
adverse effect on the results of operations, financial condition and
prospects of First Union and could restrict First Union's ability to grow.
DEPENDENCE ON QUALIFICATION AS A REIT; TAX AND OTHER CONSEQUENCES IF REIT
QUALIFICATION LOST
There can be no assurance that First Union has operated in a manner to
qualify as a REIT for federal income tax purposes in the past or that it
will so qualify in the future. Qualification as a REIT involves the
application of highly technical and complex provisions of the Code, for
which there are only limited judicial or administrative interpretations.
The complexity of these provisions is greater in the case of a stapled REIT
such as First Union. Qualification as a REIT also involves the
determination of various factual matters and circumstances not entirely
within First Union's control. In addition, First Union's ability to qualify
as a REIT is dependent upon its continued exemption from the anti-stapling
rules of Section 269B(a)(3) of the Code, which, if they were to apply,
would prevent First Union from qualifying as a REIT. The "grandfathering"
rules governing Section 269B generally provide, however, that Section
269B(a)(3) does not apply to a stapled REIT (except with respect to new
real property interests, as described above in "-- Income and Activities of
FUMI May be Attributed to First Union Under Recent Anti-Stapling
Legislation and May Threaten REIT Status") if the REIT and its stapled
operating company were stapled on June 30, 1983. On June 30, 1983, First
Union was stapled with FUMI. There are, however, no judicial or
administrative authorities interpreting this "grandfathering" rule.
Moreover, if for any reason First Union failed to qualify as a REIT in
1983, the benefit of the "grandfathering" rule would not be available to
First Union, in which case First Union would not qualify as a REIT for any
taxable year from and after 1983. The failure of First Union to qualify as
a REIT would have a material adverse effect on First Union's ability to
make dividends to its shareholders and to pay amounts due on its
indebtedness. See "Federal Income Tax Consequences -- Taxation of First
Union."
If it is determined that First Union did not qualify as a REIT during
any of the preceding five fiscal years, First Union potentially could incur
corporate tax with respect to a year that is still open to adjustment by
the Internal Revenue Service ("IRS"). If First Union were to fail to
qualify as a REIT, it would be subject to federal income tax (including any
applicable alternative minimum tax) on its taxable income at corporate
rates. In addition, unless entitled to relief under certain statutory
provisions and subject to the discussion above regarding the impact if
First Union failed to qualify as a REIT in 1983, First Union also would be
disqualified from re-electing REIT status for the four taxable years
following the year during which qualification is lost. Failure to qualify
as a REIT would result in additional tax liability to First Union for the
year or years involved. In addition, First Union would no longer be
required by the Code to make dividends to its shareholders. To the extent
that dividends to shareholders would have been made in anticipation of
First Union's qualifying as a REIT, First Union might be required to borrow
funds or to liquidate certain of its investments on disadvantageous terms
to pay the applicable tax. See "Federal Income Tax Consequences -- Taxation
of First Union."
The failure to qualify as a REIT would also constitute a default under
certain debt obligations of First Union, which would generally allow the
holders thereof to demand the immediate repayment of such indebtedness. Any
acceleration of this indebtedness (including through cross-defaults) could
have a material adverse effect on First Union and its ability to make
dividends to shareholders and to pay amounts due on this and other
indebtedness.
ADVERSE EFFECTS OF REIT MINIMUM DIVIDEND REQUIREMENTS
In order to qualify as a REIT, First Union is generally required each
year to distribute to its shareholders at least 95% of its taxable income
(excluding any net capital gain). In addition, if First Union were to
dispose of assets acquired in certain acquisitions during the ten-year
period following the acquisitions, First Union would be required to
distribute at least 95% of the amount of any "built-in gain" attributable
to such assets that First Union recognizes in the disposition, less the
amount of any tax paid with respect to such recognized built-in gain. See
"Federal Income Tax Consequences -- Taxation of First Union." First Union
generally is subject to a 4% nondeductible excise tax on the amount, if
any, by which certain distributions paid by it with respect to any calendar
year are less than the sum of:
o 85% of its ordinary income for that year,
o 95% of its capital gain net income for that year, and
o 100% of its undistributed income from prior years.
First Union intends to make distributions to its shareholders to
comply with the 95% distribution requirement and to avoid the nondeductible
excise tax. Differences in timing between the recognition of taxable income
and the receipt of cash available for distribution could require First
Union to borrow funds on a short-term basis on disadvantageous terms to
meet the 95% distribution requirement and to avoid the nondeductible excise
tax.
Distributions to shareholders by First Union are determined by the
Board of Trustees and depend on a number of factors, including the amount
of cash available for distribution, financial condition, results of
operations, any decision by the Board of Trustees to reinvest funds rather
than to distribute such funds, capital expenditures, the annual
distribution requirements under the REIT provisions of the Code and such
other factors as the Board of Trustees deems relevant. For federal income
tax purposes, distributions paid to shareholders may consist of ordinary
income, capital gains, return of capital, or a combination thereof. First
Union will provide shareholders with annual statements as to the taxability
of distributions.
ABILITY TO OPERATE PROPERTIES DIRECTLY AFFECTS FIRST UNION'S FINANCIAL
CONDITION
First Union's investments will be subject to the risks inherent in
owning real estate. The underlying value of First Union's real estate
investments, the results of its operations and its ability to make
distributions to its shareholders and to pay amounts due on its
indebtedness will depend on its ability to operate First Union's properties
in a manner sufficient to maintain or increase revenues and to generate
sufficient revenues in excess of its operating and other expenses.
ILLIQUIDITY OF REAL ESTATE
Real estate investments are relatively illiquid. First Union's ability
to vary its portfolio in response to changes in economic and other
conditions will therefore be limited. If First Union decides to sell an
investment, no assurance can be given that First Union will be able to
dispose of it in the time period it desires or that the sales price of any
investment will recoup or exceed the amount of First Union's investment.
INCREASES IN PROPERTY TAXES COULD AFFECT ABILITY TO MAKE EXPECTED SHAREHOLDER
DISTRIBUTIONS
First Union's real estate investments are all subject to real property
taxes. The real property taxes on properties in which First Union invests
may increase or decrease as property tax rates change and as the value of
the properties are assessed or reassessed by taxing authorities. Increases
in property taxes may have an adverse effect on First Union and its ability
to make distributions to shareholders and to pay amounts due on its
indebtedness.
ENVIRONMENTAL LIABILITIES
The obligation to pay for the cost of complying with existing
environmental laws, ordinances and regulations, as well as the cost of
complying with future legislation, may affect the operating costs of First
Union. Under various federal, state and local environmental laws,
ordinances and regulations, a current or previous owner or operator of real
property may be liable for the costs of removal or remediation of hazardous
or toxic substances on or under the property. Environmental laws often
impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances and
whether or not such substances originated from the property. In addition,
the presence of hazardous or toxic substances, or the failure to remediate
such property properly, may adversely affect First Union's ability to
borrow by using such real property as collateral.
Certain environmental laws and common law principles could be used to
impose liability for releases of hazardous materials, including
asbestos-containing materials or "ACMs," into the environment. In addition,
third parties may seek recovery from owners or operators of real properties
for personal injury associated with exposure to released ACMs or other
hazardous materials. Environmental laws may also impose restrictions on the
use or transfer of property, and these restrictions may require
expenditures. In connection with the ownership and operation of any of
First Union's properties, First Union, FUMI and the other lessees of these
properties may be liable for any such costs. The cost of defending against
claims of liability or remediating contaminated property and the cost of
complying with environmental laws could materially adversely affect the
First Union Companies and their ability to pay amounts due on their
indebtedness and with respect to First Union, to make distributions to its
shareholders.
COMPLIANCE WITH THE ADA MAY AFFECT EXPECTED DISTRIBUTIONS TO FIRST UNION'S
SHAREHOLDERS
Under the Americans with Disabilities Act of 1990 (the "ADA"), all
public accommodations are required to meet certain federal requirements
related to access and use by disabled persons. A determination that First
Union is not in compliance with the ADA could also result in the imposition
of fines and/or an award of damages to private litigants. If First Union
were required to make modifications to comply with the ADA, there could be
a material adverse effect on its ability to pay amounts due on its
indebtedness or to make distributions to its shareholders.
UNINSURED AND UNDERINSURED LOSSES
First Union may not be able to insure its properties against losses of
a catastrophic nature, such as earthquakes and floods, because such losses
are uninsurable or not economically insurable. First Union will use its
discretion in determining amounts, coverage limits and deductibility
provisions of insurance, with a view to maintaining appropriate insurance
coverage on its investments at a reasonable cost and on suitable terms.
This may result in insurance coverage that, in the event of a substantial
loss, would not be sufficient to pay the full current market value or
current replacement cost of the lost investment and also may result in
certain losses being totally uninsured. Inflation, changes in building
codes, zoning or other land use ordinances, environmental considerations,
lender imposed restrictions and other factors also might make it not
feasible to use insurance proceeds to replace the property after such
property has been damaged or destroyed. Under such circumstances, the
insurance proceeds, if any, received by First Union might not be adequate
to restore its economic position with respect to such property.
INABILITY TO REFINANCE
First Union is subject to the normal risks associated with debt and
preferred stock financings, including the risk that First Union's cash flow
will be insufficient to meet required payments of principal and interest
and distributions, the risk that indebtedness on its properties, or
unsecured indebtedness, will not be able to be renewed, repaid or
refinanced when due or that the terms of any renewal or refinancing will
not be as favorable as the terms of such indebtedness. If First Union were
unable to refinance the indebtedness on acceptable terms, or at all, First
Union might be forced to dispose of one or more of its properties on
disadvantageous terms, which might result in losses to First Union, which
losses could have a material adverse effect on First Union and its ability
to make distributions to shareholders and to pay amounts due on its
indebtedness. Furthermore, if a property is mortgaged to secure payment of
indebtedness and First Union is unable to meet mortgage payments, the
mortgagee could foreclose upon the property, appoint a receiver and receive
an assignment of rents and leases or pursue other remedies, all with a
consequent loss of revenues and asset value to First Union. Foreclosures
could also create taxable income without accompanying cash proceeds,
thereby hindering First Union's ability to meet the REIT distribution
requirements of the Code.
RISING INTEREST RATES
First Union has incurred and expects in the future to incur
indebtedness which bears interest at variable rates. Accordingly, increases
in interest rates would increase First Union's interest costs (to the
extent that the related indebtedness was not protected by interest rate
protection arrangements), which could have a material adverse effect on
First Union and its ability to make distributions to shareholders and to
pay amounts due on its indebtedness or cause First Union to be in default
under certain debt instruments. In addition, an increase in market interest
rates may cause holders to sell their Common Shares and reinvest the
proceeds thereof in higher yielding securities, which could adversely
affect the market price for the Common Shares.
IMPACT OF YEAR 2000 ISSUES
In June 1998, the First Union Companies implemented a multi-step Year
2000 Compliance Project (the "Project") that was intended to assess the
ability of their computer systems to properly recognize dates prior to, on,
or after January 1, 2000. Any failure by the First Union Companies to
correct a material Year 2000 issue could result in the interruption or
failure of certain normal business activities or operations. The most
reasonable worst case scenarios for First Union are
o 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
o 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
o its financial reporting system will not work on or after January
1, 2000, and
o parking equipment that has been identified as non-compliant will
not accept credit cards from parking patrons at the facilities it
manages.
The First Union Companies expect the total cost of required
modifications to achieve Year 2000 compliance to be between $1.0 million
and $2.0 million, including enhancements to software programs and upgrades
to hardware. If these most reasonable worst case scenarios occurred, they
could have a material adverse effect on the First Union Companies' results
of operations, liquidity and financial condition.
EXCHANGE RATE LOSSES
At December 31, 1998, FUMI had approximately $157 million of revenues
attributable to Impark's Canadian operations, representing approximately
48% of the First Union Companies' total revenues. First Union does not
hedge its foreign currency exposure and does not currently intend to do so
in the future.
First Union recognized a $2.2 million charge during 1998 related to
unrealized exchange rate losses on loans to affiliated Canadian companies.
As of December 31, 1998, First Union also has recorded a $2.1 million loss
from the translation of the Canadian operations as a separate component of
shareholders' equity. There can be no assurance that foreign currency rate
fluctuations will not have a material adverse effect on First Union's
business, financial condition or results of operations in the future.
RESULTS OF OPERATIONS ADVERSELY AFFECTED BY FACTORS BEYOND FIRST UNION'S
CONTROL
Results of operations of First Union's properties may also be
adversely affected by, among other things:
o changes in national economic conditions, changes in local market
conditions due to changes in general or local economic conditions
and neighborhood characteristics;
o changes in interest rates and in the availability, cost and terms
of financing;
o the impact of present or future environmental legislation and
compliance with environmental laws and other regulatory
requirements;
o the ongoing need for capital improvements, particularly in older
structures;
o changes in real estate tax rates and assessments and other
operating expenses;
o adverse changes in governmental rules and fiscal policies;
o adverse changes in zoning and other land use laws; and
o earthquakes and other natural disasters (which may result in
uninsured losses) and other factors which are beyond its control.
<PAGE>
THE COMPANY
As used in this prospectus, the terms (1) "First Union" or the
"Company" refer to First Union Real Estate Equity and Mortgage Investments
and its subsidiaries, (2) "FUMI" refers to First Union Management, Inc. and
its subsidiaries, and (3) "Impark" refers to Imperial Parking Limited and
its subsidiaries and Impark Services Limited and its subsidiaries, except
where it is clear that such terms mean only the parent company in each
instance. See also "Glossary" beginning on page G-1 for the definitions of
certain other capitalized terms used in this prospectus.
First Union is a REIT whose primary business has been to purchase,
manage, improve cash flow of and own retail, apartment, office and parking
properties throughout the United States and Canada. FUMI, an affiliate of
First Union, owns a controlling interest in Impark. The First Union
Companies have an organizational structure commonly referred to as
"stapled," whereby Common Shares are "stapled to" a proportionately equal
interest in shares of common stock of FUMI (the "FUMI Shares"), subject to
certain exceptions. Common Shares may not be issued or transferred without
their "stapled" counterparts in FUMI. FUMI Shares are held in trust for the
benefit of the holders of Common Shares.
First Union owns regional enclosed shopping malls, apartment
complexes, office buildings and parking facilities. First Union's portfolio
is diversified by type of property, geographical location, tenant mix and
rental market. As of December 31, 1998, First Union owned (in fee or under
long-term ground leases where First Union is lessee) 21 shopping malls,
eight apartment complexes, five office properties, seven parking
facilities, and ten parking lots in Canada, as well as land leased to a
third party. First Union also owns 50% of another mall in a joint venture
with an unrelated party. Currently, First Union is in the process of
selling some of its properties.
First Union was formed as an Ohio business trust in 1961. First
Union's principal executive offices are located at 55 Public Square, Suite
1900, Cleveland, Ohio 44113-1937 (telephone number (216) 781-4030) and 551
Fifth Avenue, Suite 1416, New York, New York 10176 (telephone number (212)
905-1100).
RECENT DEVELOPMENTS
On May 18, 1998, First Union announced that its Board of Trustees had
terminated the employment of James C. Mastandrea, Chairman of the Board,
Chief Executive Officer and President of First Union prior to such
termination, and had appointed Steven M. Edelman, Executive Vice President
and Chief Financial Officer of the Company, as Interim Chief Executive
Officer. Mr. Edelman served as Interim Chief Executive Officer until
November 2, 1998, when the Board of Trustees appointed Daniel P. Friedman
as President and Chief Executive Officer. Mr. Friedman was formerly
President and Chief Operating Officer of Enterprise Asset Management Inc.,
a real estate investment firm located in New York City ("Enterprise"). The
Board of Trustees also appointed David Schonberger and Anne N. Zahner as
Executive Vice Presidents of First Union. Mr. Schonberger and Ms. Zahner
were also previously employed by Enterprise.
At First Union's Special Meeting of Beneficiaries held on May 19,
1998, following a proxy contest successfully waged by Gotham Partners, L.P.
("Gotham LP"), nine new Trustees were elected to the Board of Trustees and
the Board's size was increased from nine to 15 Trustees. Four of the nine
new Trustees are principals or employees of Gotham LP and Gotham Partners
III, L.P. ("Gotham III LP"), including William A. Ackman, Chairman of the
Board. At the time the new Trustees took office on June 3, 1998, three of
the six then incumbent Trustees resigned, resulting in three vacancies.
William A. Scully and Daniel P. Friedman were elected to the Board of
Trustees on October 8, 1998 and November 2, 1998, respectively, filling two
of the three vacancies. On November 16, 1998, Mr. Scully was appointed Vice
Chairman of the Board, succeeding David P. Berkowitz, who had been Vice
Chairman of the Board since June 3, 1998. Mr. Scully is a partner of Apollo
Real Estate Advisors, LP, a real estate investment firm located in New York
City ("Apollo").
In June 1998, the lenders under the Credit Facilities determined that
a default had occurred under their respective Credit Facilities as a result
of the change in the Board's composition (the "Board Change Default").
However, the lenders under both Credit Facilities granted temporary waivers
with respect to the Board Change Default and also granted First Union and
Impark relief from compliance with certain financial covenants under the
Credit Facilities.
To help stabilize First Union's financial condition, the Board
suspended First Union's quarterly dividend on its Common Shares, effective
as of the quarter ended June 30, 1998, and instituted an annual dividend
policy. The Board intends to make the minimum amount of distributions to
shareholders required to maintain First Union's REIT status. See "Federal
Income Tax Consequences -- Taxation of First Union -- Annual Distribution
Requirements."
On July 22, 1998, the Stapled REIT Legislation was enacted limiting
the "grandfathering" rule applicable to Stapled REITs, such as First Union.
As a result, the income and activities of FUMI with respect to any real
property interests acquired by the First Union Companies after March 26,
1998 will be attributed to First Union for purposes of determining whether
First Union qualifies as a REIT under the Code. First Union believes that
there may be certain advantages, however, to maintaining its stapled REIT
status and is in the process of considering the advantages of retaining
such structure. The Stapled REIT Legislation nevertheless limits the
benefits of the stapled REIT structure, and there can be no assurance that
First Union will be able to take advantage of its stapled REIT status or
maintain such structure in the future. See "Risk Factors -- Income and
activities of FUMI may be attributed to First Union under recent
anti-stapling legislation and may threaten REIT status."
In July 1998, First Union commenced a tender offer to repurchase all
$100 million principal amount of its 8-7/8% Senior Notes due 2003 (the
"Senior Notes") for $970 per $1,000 principal amount of Senior Notes, plus
accrued and unpaid interest. Concurrently with the tender offer, First
Union conducted a consent solicitation and offered a consent payment of $30
per $1,000 principal amount of Senior Notes to amend the indenture
governing the Senior Notes and to terminate listing of the Senior Notes on
the NYSE. Prior to its amendment, the Senior Notes indenture required First
Union to offer to repurchase the Senior Notes at 101% of their principal
amount if within 90 days following the date of a "change of control," the
rating of the Senior Notes by both Standard & Poor's Corporation ("S&P")
and Moody's Investors Services, Inc. ("Moody's") declined by one or more
rating gradations. In April 1998, S&P placed First Union on Credit Watch
and in November 1998, S&P downgraded First Union's debt rating. In June
1998, Moody's placed the Senior Notes under review for possible downgrade
and in October 1998, Moody's downgraded its rating for the Senior Notes.
In August 1998, through the tender offer and consent solicitation,
holders of approximately 88% of the outstanding Senior Notes consented to
the indenture amendments and delisting, and First Union purchased
approximately $88 million principal amount of the Senior Notes. The
repurchase of the Senior Notes was financed with the proceeds of the Bridge
Loan. The lenders under the Bridge Loan were Bankers Trust Company, as
agent for the lenders and as a lender, and BankBoston, N.A., Blackacre
Bridge Capital, Elliott Associates, Gotham LP, Gotham III LP and Wellsford
Capital, each as syndicate members.
At the time the Bridge Loan was funded, the terms of the Bridge Loan
required that First Union conduct a Rights offering to raise funds to repay
all amounts outstanding under the Bridge Loan. To satisfy these
obligations, First Union filed this Registration Statement to register for
issuance Rights and Common Shares and secured standby purchase commitments
to ensure that the proceeds of the Rights offering would be at least
sufficient to repay all amounts outstanding under the Bridge Loan. The
standby purchasers were Elliott Associates, Gotham LP and Gotham III LP.
In 1998, First Union recognized $20.5 million of expenses primarily in
connection with the proxy contest and the change in the Board's
composition. These expenses included $4.8 million of proxy expenses and
related legal fees incurred by First Union, Gotham LP and Gotham III LP;
$1.5 million in other professional fees to avoid the change of the Board's
composition; $3.4 million for cash severance and vesting of restricted
stock for Mr. Mastandrea, First Union's terminated Chairman of the Board,
Chief Executive Officer and President; $4.7 million for vesting of
restricted stock granted to other employees of the First Union Companies;
and $6.1 million of severance expenses related to employee
change-in-control and termination agreements (the "Change-in-Control
Expenses"). First Union also recognized the loss of a $2.25 million deposit
when First Union did not close on the purchase of a parking facility
because the Board of Trustees believed that the contract to acquire the
parking facility, which was approved prior to a change in June 1998 of a
majority of the Board, was on disadvantageous terms. First Union partially
offset this loss by assigning the contract to a third party for $200,000 in
the fourth quarter of 1998. In addition, because of the adoption of a new
accounting pronouncement related to "contingent rents," First Union
recorded no percentage rent from tenants in the third quarter of 1998,
which resulted in a decrease of $1.5 million in revenues in the quarter
(the "Percentage Rent Deferral"). The Change-in-Control Expenses and
Percentage Rent Deferral also negatively affected net income and funds from
operations.
The Change-in-Control Expenses and the Percentage Rent Deferral, as
well as certain foreign currency mark-to-market losses, were largely
responsible for First Union's inability to satisfy financial covenants
under the FUR Credit Facility and the Bridge Loan during the third quarter
of 1998. In addition, Impark was not in compliance with the leverage and
interest coverage ratios under the Impark Credit Facility. In January 1999,
First Union and Impark reached an agreement with their respective lenders
to amend the FUR Credit Facility, the Impark Credit Facility and the Bridge
Loan. See "Risk Factors -- Default under the FUR Credit Facility, the
Impark Credit Facility and the Bridge Loan."
The lenders under the FUR Credit Facility agreed to modify the debt
service and interest coverage requirements and the methodology for
calculating net income by excluding certain non-recurring or extraordinary
charges or expenses, including percentage rent on a pro forma basis, and
eliminating any expense or adjustment in any fiscal quarter relating to any
non-cash foreign currency mark-to-market expense or adjustment. In
addition, the lenders under the FUR Credit Facility extended the waiver
with respect to the Board Change Default until June 30, 1999. In
consideration for these modifications, First Union paid the lenders an
$825,000 fee. Concomitantly with the covenant modifications and the waiver
extension, the lenders reduced their maximum commitment under the FUR
Credit Facility from $125 million to $110 million. The lenders also
increased the interest rate under the facility from the Eurodollar rate
plus 200 basis points or the prime rate to the Eurodollar rate plus 300
basis points or the prime rate plus 50 basis points. The lenders and First
Union have more recently agreed, in principle, that the maximum commitment
under the FUR Credit Facility will be $105 million, and on April 30, 1999
it will be reduced to $80 million, and on June 30, 1999 it will be reduced
to $50 million. This agreement in principle also contemplates that First
Union's minimum net worth requirement will be modified, that there will be
restrictions on future borrowings for purposes other than tenant
improvement costs and that $9.0 million of the net proceeds from First
Union's proposed Rights offering will be used to repay amounts outstanding
under the FUR Credit Facility.
The lenders under the Impark Credit Facility agreed to
o 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
o decrease the margin added to the Canadian Bankers Acceptance
interest rate from 175 basis points to 150 basis points.
In addition, the lenders extended the waiver with respect to the Board
Change Default until June 30, 1999. In consideration for these amendments
and the waiver extension, the principal balance under the Impark Credit
Facility was reduced from Cdn.$50 million to Cdn.$38.8 million, Impark paid
the lenders a fee of Cdn.$388,400, and First Union issued an $8 million
letter of credit under the FUR Credit Facility as collateral for Impark's
obligations and agreed to provide an additional $5 million in collateral
for such obligations on August 11, 1999.
The lenders under the Bridge Loan agreed to amend the Bridge Loan by
extending the maturity of the loan to August 11, 1999, incorporating the
revised covenants in the FUR Credit Facility into the Bridge Loan and
modifying First Union's obligation to conduct a Rights offering to raise
funds to repay all amounts outstanding under the Bridge Loan. The Bridge
Loan originally contemplated a Rights offering that would raise proceeds at
least sufficient to repay all amounts outstanding under the Bridge Loan.
The amendments to the Bridge Loan now enable First Union to conduct one or
more Rights offerings sufficient to pay off amounts outstanding under the
Bridge Loan when due and payable. In consideration for these amendments,
First Union paid such lenders a fee of $300,000 and agreed to
o reduce the outstanding principal balance under the Bridge Loan to
less than $70 million by March 31, 1999 and to less than $50
million by May 31, 1999,
o increase the lenders' interest rate on the loan from 9.875% to
12% per annum, and
o pay
(1) on February 11, 1999 a fee of 1% of the outstanding
principal amount of the loan on such date,
(2) a fee in an amount equal to 50 basis points of the
outstanding principal amount of the loan on March 31, 1999
if the outstanding principal balance of the loan is in
excess of $60 million on March 31, 1999, and
(3) a fee in an amount equal to 50 or 100 basis points of the
outstanding principal amount of the loan on May 31, 1999,
depending on the loan balance outstanding at May 31, 1999.
The lenders under the Bridge Loan and First Union have more recently agreed,
in principle, to require First Union to reduce the outstanding principal
balance under the Bridge Loan to less than approximately $38 million by May
15, 1999 and to allow $9.0 million of the net proceeds from First Union's
proposed Rights offering that would otherwise be used to repay a portion of
the Bridge Loan extended by three of these lenders to be used to repay
amounts outstanding under the FUR Credit Facility. Although the $9.0 million
in principal will remain outstanding under the Bridge Loan, it will be
considered paid for purposes of the mandatory repayment of principal
described above. This $9.0 million portion of the Bridge Loan will bear
interest at 15% per annum and mature on August 11, 1999. See "Risk Factors
- --Default under the FUR Credit Facility, the Impark Credit Facility and the
Bridge Loan." First Union and Impark intend to repay, to the extent
possible, the amounts outstanding under the Credit Facilities by June 30,
1999, the date the waivers with respect to the Board Change Default expire.
However, if they are unable to do so, they will either refinance the
indebtedness or negotiate extensions of those waivers.
In November 1998, Mr. Friedman, Ms. Zahner and Mr. Schonberger entered
into four-year employment agreements, which provide total cash compensation
of $340,000, $200,000 and $200,000 per annum (increasing 5% per year),
respectively, and option grants on 1,080,000, 360,000 and 360,000 Common
Shares, respectively. The options are exercisable ratably over four years.
The options for 50% of the Common Shares have an exercise price of $6.50
and the options for the other 50% of the Common Shares have an exercise
price of $8.50. The options also have a cost of capital feature, which
provides that starting May 3, 2000, the exercise price will increase by 10%
per annum, less the amount of per share dividends or other distributions to
shareholders. Mr. Friedman, Ms. Zahner and Mr. Schonberger are also
entitled to options to purchase additional shares equal to 3%, 1% and 1%,
respectively, of the shares issued by the Company in connection with
raising an additional $120,000,000 of equity. Such options will have an
exercise price equal to the purchase price of the shares offered for sale.
Also in November 1998, in consideration for various services
previously provided to First Union, the Company paid Enterprise a
consulting fee and expense reimbursement of $750,000 and issued Enterprise
ten-year warrants for 500,000 Common Shares exercisable at $10.00 per
Common Share.
In January 1999, Charles E. Huntzinger was appointed President and
Chief Executive Officer of Impark. He was formerly Regional Vice President
of Central Parking, one of the largest parking companies in North America.
Paul T. Clough, the former President and Chief Executive Officer of Impark,
remains Chairman of Impark.
In March 1999, First Union agreed, in principle, to amend its standby
purchase arrangements with Gotham LP and Gotham III LP. Among other things,
the parties agreed, in principle, that
o Gotham Partners International, Ltd. would be added as another
standby purchaser,
o First Union would conduct a Rights offering for at least $20
million (the "First Offering") and for which the standby
purchasers would "standby" to purchase up to such number of
Common Shares that would result in gross proceeds to First Union
of the lesser of $50 million and the amount of the First
Offering,
o First Union would pay the standby purchasers an amount equal to
4% of their maximum standby commitment in the First Offering,
whether or not the First Offering is completed. Each of the
standby purchasers is entitled to its pro rata portion of the
payment based on its share of the standby commitment. Although
the Gotham entities are collectively entitled to receive
$2,000,000 of the payment, they agreed to accept only $1,800,000,
o the standby purchasers would have certain customary rights to
terminate their respective obligations, and
o the standby purchase commitment would expire August 11, 1999.
First Union is currently negotiating with Elliott Associates to
include it as a standby purchaser for 2/9ths of the standby purchasers'
commitments. If First Union reaches an agreement with Elliott Associates,
the Gotham entities' standby purchase obligations and fee would be reduced
accordingly. To enable First Union to conduct a second Rights offering (the
"Second Offering"), First Union and the Gotham entities have agreed, in
principle, that the Gotham entities would "standby" to purchase such number
of Common Shares that would result in gross proceeds to First Union of the
lesser of $40 million and the aggregate principal amount outstanding under
the Bridge Loan. The standby purchasers would be entitled to an aggregate
payment of 4% of their maximum standby commitment in connection with any
Second Offering, which would not be contingent upon the closing of such
Second Offering. First Union and the standby purchasers are currently
seeking the consent of the lenders under the Bridge Loan to the revised
terms of the standby commitments.
First Union sold its Woodland Commons shopping center in Buffalo
Grove, Illinois in February 1999, its Beck Building in Shreveport,
Louisiana in March 1999, and its Sutter Buttes office center in Marysville,
California in April 1999. First Union has also signed contracts to sell one
office building and nine shopping centers. It is also presently engaged in
arranging new non-recourse financing for four apartment complexes, two
office properties and a shopping center. The net book value as of December
31, 1998 and net operating income for 1998 of the assets sold in 1999 and
being sold are $144.0 million and $17.0 million, respectively. The net book
value as of such date and net operating income for such period of the
assets being financed are $73.1 million and $8.8 million, respectively. If
these transactions are completed on terms and conditions substantially
similar to those expected by management, First Union anticipates it will
receive aggregate gross proceeds of approximately $197.3 million and net
proceeds of approximately $179.9 million after payment of mortgage
indebtedness, transaction expenses, and prepayment penalties (but before
any payment of indebtedness under the Credit Facilities, which indebtedness
is secured by certain of these assets). If the assets securing the
indebtedness under the FUR Credit Facility are financed, the net proceeds
will be applied towards the repayment of that indebtedness. First Union
estimates that those assets would generate approximately $47.3 million of
the approximately $179.9 million in net proceeds described above. The net
proceeds generated from sales of assets and from other financings will be
used to repay all of the then outstanding indebtedness under the Bridge
Loan (after applying the net proceeds from any offering of Rights or Common
Shares under this prospectus). As a result of these transactions, First
Union is likely to incur approximately $20.6 million of taxable gain. There
can be no assurance, however, that these sales or financings will be
consummated or that they will be consummated based upon the above terms and
conditions. See "Risk Factors - Contemplated asset sales will shrink
portfolio and returns to shareholders; replacement assets resulting from
other assets sales may not provide greater shareholder value," " -
Illiquidity of real estate" and " - Inability to refinance."
To comply with the reporting requirements of Statement of Financial
Accounting Standards No. 121 (Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of), First Union recorded a
noncash charge for the year ended December 31, 1998 to reflect a loss on
assets held for sale and an impairment on assets held for use of $51
million. First Union recorded $36 million in unrealized losses on the
carrying value of assets held for sale based on the receipt of initial bids
from potential purchasers at lower than the net book value of these assets.
With respect to the assets held for use, Impark recorded a $15 million
reduction in goodwill. In calculating the charge for impaired assets held
for use, management estimated future undiscounted cash flows, which
indicated impairment of the net book value of the assets to be written
down, including goodwill. The cash flows were discounted to a present
value, which was compared to the net book value of the assets, including
goodwill. The difference was recognized as an expense and reduced the
amount of goodwill. Although the write-off for assets held for sale is
based on actual bids, there can be no assurance that these bids will remain
firm or that the actual sale prices of these assets will ultimately reflect
at least the values of the bids. Although management determined the
impairment on assets held for use based on its best estimate of the future
undiscounted cash flows for these assets and used what it deemed to be a
reasonable discount rate, there can be no assurance that the estimate will
approximate actual cash flows or that the discount rate applied is
appropriate.
BUSINESS STRATEGY
In light of the change in the Board's composition, the Stapled REIT
Legislation and other strategic and business considerations, the Board is
currently re-evaluating First Union's overall business plan. Among other
things, the Board is reviewing First Union's capital, operational and
management structure, analyzing First Union's assets to assess their
ongoing potential to contribute to shareholder value and marketing its
retail portfolio. Various professionals have been engaged by First Union
and are assisting the Board in its reviews and analyses.
In the short-term, First Union intends to repay the amounts due under
the Bridge Loan and the FUR Credit Facility, in whole or in part, with the
proceeds of certain asset sales and offerings of Common Shares (including
through Rights offerings) and with any proceeds from the refinancing of any
of the Company's indebtedness. First Union has terminated its management
agreements with FUMI, and now manages its retail, apartment and office
portfolios, and has entered into third-party leases for the parking
facilities it owns. Other than Messrs. Friedman and Schonberger and Ms.
Zahner, the individuals who now manage, as employees of First Union, First
Union's retail, apartment and office portfolios, are the individuals who
previously managed such portfolios as employees of FUMI.
In the long-term, the Board will, among other things, consider certain
opportunistic real estate investments where, for example,
o sellers are seeking liquidity for their private real estate
portfolios and may be interested in maintaining management
positions with respect to such real estate assets,
o management talent is an instrumental part of the overall real
estate acquisition or
o legal, tax, financing or other complexities make it difficult for
traditional purchasers to pursue the transaction. First Union may
also in the future transfer its assets to an operating
partnership to be controlled by First Union (commonly referred to
as an "UPREIT") in exchange for interests in such operating
partnership.
YEAR 2000 COMPLIANCE PROJECT
In June 1998, the First Union Companies implemented the Project which
was intended to assess the ability of their computer systems to properly
recognize dates prior to, on, or after January 1, 2000 and to ensure that
such systems were Year 2000 compliant as soon as possible. The Project
addresses three main areas: (a) Information Technology Systems; (b) Process
Control and Instrumentation; and (c) Third Party Tenants, Suppliers and
Customers. The general phases of the Project are as follows:
o inventorying systems and equipment that may be affected by the
Year 2000 issue;
o assigning priorities to the items identified;
o evaluating the Year 2000 compliance of items deemed to be
critical to the First Union Companies' operations;
o testing critical items;
o repairing or replacing critical items that are determined not to
be Year 2000 compliant; and
o developing and implementing contingency plans for each location.
As of September 30, 1998, the inventory and priority assessment phases
of the Project were completed. The testing of critical items, which are
those believed by the First Union Companies to involve a risk to the safety
of individuals, or that may cause damage to property, or affect revenues,
is being performed and is expected to be completed in the first quarter of
1999.
The Information Technology Systems section of the Project consists of
all computer hardware and software. These systems are primarily used for
accounting and financial reporting as well as property management purposes
throughout the First Union Companies' operations. Impark uses other
systems, mainly for revenue control purposes at the parking facility level.
The testing phase is ongoing as hardware and software are remediated,
upgraded or replaced. Currently, Impark's accounting and financial
reporting systems are not Year 2000 compliant; these systems will be
replaced by a new general-purpose financial reporting and general ledger
package by September 30, 1999. In addition, new hardware and software are
being installed at various properties and subsidiaries, which is
anticipated to be completed by June 30, 1999.
The Process Control and Instrumentation section of the Project
includes the hardware, software and associated embedded computer chips that
are used in the operations of certain facilities owned by the First Union
Companies. Testing and repair of this equipment is in process. The First
Union Companies' evaluation of these items and communications with
manufacturers and suppliers revealed that the majority of this equipment is
mechanical in nature and is not date-sensitive, and accordingly will not
require remediation or replacement to function properly in the Year 2000.
Contingency planning is in process, and all repair and testing is expected
to be completed by June 30, 1999.
The Third Party Tenants, Suppliers and Customers section of the
Project includes the process of identifying critical suppliers and
customers and obtaining information from them regarding their plans and
progress in addressing the Year 2000 issue. A written notice regarding the
Year 2000 issue was sent to all tenants occupying space at properties owned
by First Union and to landlords of parking facilities operated by Impark.
Additionally, inquiries have been forwarded to critical third parties
(primarily financial institutions and utility service providers), and
responses are currently being obtained and evaluated. These evaluations
will be followed by the development of contingency plans. All activities
for this section are expected to be completed by June 30, 1999.
For information regarding the anticipated remaining cost of Year 2000
compliance and possible impact of Year 2000 issues on the First Union
Companies operations and financial condition, see "Risk Factors -- Impact
of Year 2000 issues."
USE OF PROCEEDS
Except as may be otherwise specified in any prospectus supplement,
First Union intends to use the net proceeds from the sale of any Common
Shares hereunder for general corporate purposes, including the repayment of
indebtedness under the Bridge Loan and the FUR Credit Facility. As of March
26, 1999, approximately $78.9 million was outstanding under the Bridge Loan
and approximately $88.7 million was outstanding under the FUR Credit
Facility. Borrowings under the Bridge Loan generally accrue interest at a
rate of 12% per annum and mature on August 11, 1999. Amounts outstanding
under the FUR Credit Facility bear interest at either LIBOR plus 3%
annually or the base rate of the agent bank of the FUR Credit Facility plus
1/2% annually and mature on August 11, 1999. As described in "The Company
- -- Recent Developments," indebtedness under the Bridge Loan was incurred by
First Union to fund the repurchase of the Senior Notes in August 1998.
<PAGE>
PRICE RANGE OF COMMON SHARES AND DISTRIBUTIONS
The Common Shares are listed on the NYSE under the symbol "FUR." The
following table sets forth the high and low sales prices of the Common
Shares on the NYSE and the distributions declared, for the periods
indicated.
HIGH LOW DISTRIBUTION
1997
First Quarter................. $ 14 1/2 $ 11 5/8 $ .11
Second Quarter................ 14 1/4 12 3/4 .11
Third Quarter................. 14 1/8 12 5/8 .11
Fourth Quarter................ 16 5/16 13 5/16 .11
1998
First Quarter................. $ 16 5/16 $ 10 5/8 $ .11
Second Quarter................ 11 5/16 8 1/2 (1)
Third Quarter................. 9 5/8 5 1/8 (1)
Fourth Quarter................ 6 1/8 3 3/8 (1)
1999
First Quarter................. $ 6 1/4 $ 3 7/8 (1)
Second Quarter (through
April 7, 1999)............... 4 5/16 3 7/8 (1)
- -------------
(1) On June 15, 1998, the Board of Trustees announced that it was
suspending First Union's quarterly distribution and instituting a new annual
distribution policy.
The closing price of the Common Shares on the NYSE on April 7, 1999
was $4.0625 per share. On March 26, 1999, First Union had approximately
31,376,105 Common Shares outstanding, owned by approximately 11,000
beneficial holders. First Union had 1,349,000 Series A Preferred Shares
outstanding as of March 26, 1999. The Series A Preferred Shares are listed
on the NYSE under the symbol "FURPrA." The closing price of the Series A
Preferred Shares on the NYSE on March 26, 1999 was $20.875 per share.
To qualify as a REIT, First Union is required to make distributions
(other than capital gain distributions) to its shareholders in amounts at
least equal to
o the sum of
(1) 95% of its "REIT taxable income" (computed without regard to
the dividends-paid deduction and its net capital gain) and
(2) 95% of the net income (after tax), if any, from foreclosure
property,
minus
o the sum of certain items of noncash income.
On June 15, 1998, First Union suspended its quarterly distributions on
its Common Shares and, in lieu thereof, instituted an annual distribution
policy. With this new policy, First Union intends to make only the minimum
required distributions to maintain REIT status and to maximize the amount
of capital retained for operations, debt repayment or future acquisitions.
To the extent that First Union does not distribute all of its net capital
gain or distributes at least 95%, but less than 100%, of its "REIT taxable
income," as adjusted, it will be subject to tax on the undistributed amount
at regular capital gains or ordinary corporate tax rates, as the case may
be. See "Federal Income Tax Consequences -- Taxation of First Union --
Annual Distribution Requirements" elsewhere in this prospectus.
Furthermore, if First Union fails to distribute for each calendar year
at least the sum of
o 85% of its REIT ordinary income for such year,
o 95% of its capital gain net income for such year, and
o 100% of its undistributed taxable income from prior calendar
years,
First Union will be subject to a 4% nondeductible excise tax on the excess of
such required distributions over the amounts actually distributed.
The declaration and payment of distributions is subject to the
discretion of the Board of Trustees and is dependent upon the financial
condition and operating results of First Union.
For federal income tax purposes, distributions may consist of ordinary
income, capital gains, non-taxable return of capital or a combination
thereof. For a discussion of the federal income taxation of distributions
to holders of Common Shares, see "Federal Income Tax Consequences --
Taxation of First Union's Shareholders -- Taxation of Taxable U.S.
Shareholders," and "Federal Income Tax Consequences -- Taxation of Non-U.S.
Shareholders -- Distributions from First Union" as applicable, elsewhere in
this prospectus. First Union annually notifies shareholders of the
taxability of distributions paid during the preceding year. For federal
income tax purposes, approximately 96.9% of the distributions for 1998 were
treated as capital gain and approximately 3.1% of such distributions were
treated as ordinary income.
Under federal income tax rules, First Union's earnings and profits are
first allocated to its Series A Preferred Shares, to the extent any Series
A Preferred Shares are outstanding, which may increase the portion of the
Common Share distribution classified as a return of capital. All of the
distributions on the Common Shares were taxable income to First Union's
holders for calendar year 1998.
<PAGE>
MANAGEMENT
The executive officers and Trustees of First Union, and their ages as
of March 29, 1999, are as follows:
NAME AGE POSITION
William A. Ackman...................... 32 Chairman of the Board and
Trustee
William A. Scully...................... 37 Vice Chairman of the Board
and Trustee
Daniel P. Friedman..................... 41 President, Chief Executive
Officer and Trustee
Steven M. Edelman...................... 44 Executive Vice President and
Chief Financial Officer
John J. Dee............................ 47 Senior Vice President and
Chief Accounting Officer
Paul F. Levin.......................... 52 Senior Vice President,
General Counsel and Secretary
David Schonberger...................... 44 Executive Vice President
Anne N. Zahner......................... 43 Executive Vice President
Daniel J. Altobello.................... 58 Trustee
David P. Berkowitz..................... 37 Trustee
William E. Conway...................... 71 Trustee
Allen H. Ford.......................... 70 Trustee
Stephen J. Garchik..................... 45 Trustee
Russell R. Gifford..................... 59 Trustee
David S. Klafter....................... 44 Trustee
Daniel Shuchman........................ 33 Trustee
Stephen S. Snider...................... 42 Trustee
Mary Ann Tighe......................... 50 Trustee
James A. Williams...................... 56 Trustee
William A. Ackman. Mr. Ackman has been Chairman of the Board of
Trustees of First Union since June 1998. Since January 1, 1993, through a
company he owns, Mr. Ackman has acted as co-investment manager of Gotham
LP, Gotham III LP and Gotham International Advisors, L.L.C. ("Gotham
International"). From January 1, 1993 until October 1, 1998, through a
company he owns, Mr. Ackman acted as a co-investment manager of Gotham
Partners II, L.P. ("Gotham II LP"). Gotham II LP was dissolved in October
1998. Since before January 1, 1993, Mr. Ackman has served as Vice
President, Secretary and Treasurer of GPLP Management Corp. ("GPLP"), the
Managing Member of Gotham Partners Management Co. LLC, an investment
management firm ("GPM"). Mr. Ackman was a general partner of Section H
Partners, L.P. ("Section H"), the General Partner of the Gotham LP and
Gotham II LP investment funds, from before January 1993 through September
1993. Mr. Ackman has been the President, Secretary and Treasurer of
Karenina Corporation, a general partner of Section H, since October 1993.
William A. Scully. Mr. Scully has been a Trustee of First Union since
September 1998 and Vice Chairman of the Board of Trustees of First Union
since November 1998. Mr. Scully has been a partner of Apollo since 1996 and
is responsible for new investments and investment management. From 1994 to
1996, Mr. Scully was a Senior Vice President of O'Connor Capital, Inc., the
general partner of The Argo Funds, and the Director of Acquisitions for The
Argo Funds. From 1993 to 1994, Mr. Scully directed private investment
activities for entities related to Clark Construction and The Carlyle
Group, primarily in land development projects in suburban Washington, D.C.
Mr. Scully was a member of GE Capital's portfolio acquisitions group from
1991 to 1993.
Daniel P. Friedman. Mr. Friedman has been President, Chief Executive
Officer and a Trustee of First Union since November 1998. He was President
and Chief Operating Officer of Enterprise from June 1996 to November 1998
and was Executive Vice President and Chief Operating Officer of Enterprise
from February 1992 to June 1996. At Enterprise, he was responsible for
asset management and new business development. From September 1994 to
November 1998, Mr. Friedman was a manager of all the Cheshire Limited
Liability Companies ("Cheshire"). Cheshire acquires and restructures
non-performing underlying residential co-op mortgage loans and unsold co-op
apartments. From May 1993 to December 1997, Mr. Friedman was a board member
of Emax Advisors, Inc. From May 1993 to December 1996, he was a board
member of Emax Securities, Inc. (a NASD broker/dealer) (together with Emax
Advisors, Inc., the "Emax Companies"). The Emax Companies are real estate
investment banking companies that provide capital and advisory services for
real estate transactions.
Steven M. Edelman. Mr. Edelman has been Chief Financial Officer of
First Union since February 1997 and Executive Vice President since November
1998. From June 1998 until November 1998, he served as Interim Chief
Executive Officer of First Union. From January 1996 to January 1997, Mr.
Edelman served as Executive Vice President, Chief Investment Officer of
First Union. He was Senior Vice President, Chief Investment Officer of
First Union from March 1995 to December 1995, Senior Vice President, Asset
Management from July 1992 to February 1995, Vice President, Acquisitions
from December 1985 to June 1992, Assistant Vice President, Acquisitions
from January 1985 to November 1985, Acquisition Analyst from February 1984
to December 1985, Assistant Controller from July 1982 to January 1984 and
an internal auditor from June 1980 to June 1982. Mr. Edelman was an auditor
with Touche Ross & Co. from 1978 to 1980.
John J. Dee. Mr. Dee has been Senior Vice President and Chief
Accounting Officer of First Union since February 1996. He served as Senior
Vice President and Controller of First Union from July 1992 to February
1996, Vice President and Controller from December 1986 to July 1992,
Controller from April 1981 to December 1986, Assistant Controller from
December 1979 to April 1981 and Accounting Manager from August 1978 to
December 1979.
Paul F. Levin. Mr. Levin has been Senior Vice President, General
Counsel and Secretary since December 1994. He served as Vice President,
General Counsel and Secretary from May 1989 to November 1994. Mr. Levin was
a principal of Schwarzwald, Robiner, Rock & Levin, a Legal Professional
Association, from 1981 to 1989, an Associate of Gaines, Stern, Schwarzwald
& Robiner Co., L.P.A. from 1979 to 1980 and an Assistant Director of Law,
City of Cleveland, Ohio, from 1975 to 1978.
David Schonberger. Mr. Schonberger has been Executive Vice President
of First Union since November 1998, where he is primarily responsible for
retail, office and residential projects. From November 1997 to November
1998, he was Senior Vice President of Enterprise. At Enterprise, he was
responsible for retail and raw land development projects. Since January
1990, Mr. Schonberger has been Director of Legacy Construction Corp., a
privately held leasing and project management company specializing in
institutional property management and oversight of specialty construction
and development projects. In February 1996, Legacy Construction Corp.
merged with Peter Elliot Corporation to form Peter Elliot LLC. From
February 1996 to October 1997, Mr. Schonberger served as treasurer and
manager of Peter Elliot LLC.
Anne N. Zahner. Ms. Zahner has been Executive Vice President of First
Union since November 1998, where she is primarily responsible for the
retail division. She was Executive Vice President of Enterprise from March
1996 until November 1998. At Enterprise, she was primarily responsible for
Enterprise's asset management and new business development. From November
1990 until March 1996, Ms. Zahner was a director and Vice President of
Travelers Insurance Company, at Travelers Realty Investment Co., where she
was responsible for asset management and sales and investment recovery.
Daniel J. Altobello. Mr. Altobello has been a Trustee of First Union
since June 1998. He has been the Chairman of the Board of ONEX Food
Services, Inc., an airline catering company and a partner in Ariston
Investment Partners, a consulting firm, since September 1995. Mr. Altobello
was the Chairman, President and Chief Executive Officer of Caterair
International Corporation, an airline catering company, from before January
1, 1993 until September 1995. Mr. Altobello is a member of the Boards of
Directors of American Management Systems, Inc., Colorado Prime Corporation,
Care First, Inc., Care First of Maryland, Inc., Mesa Air Group, Inc., World
Airways, Inc. and Sodexho Marriott Services, Inc.
David P. Berkowitz. Mr. Berkowitz has been a Trustee of First Union
since June 1998. From June 1998 until November 1998, he was Vice Chairman
of the Board of Trustees of First Union. Since January 1, 1993, through a
company he owns, Mr. Berkowitz has acted as a co-investment manager of
Gotham LP, Gotham III LP and Gotham International. From January 1, 1993
until October 1, 1998, through a company he owns, Mr. Berkowitz acted as a
co-investment manager of Gotham II LP. Gotham II LP was dissolved in
October 1998. Since before January 1, 1993, Mr. Berkowitz has served as
President of GPLP. Mr. Berkowitz was a general partner of Section H from
before January 1993 through September 1993. Mr. Berkowitz has been the
President, Secretary and Treasurer of DPB Corporation, a general partner of
Section H, since October 1993.
William E. Conway. Mr. Conway has been a Trustee of First Union since
1985. Mr. Conway has been Chairman of Fairmont Minerals Ltd. ("Fairmont"),
a miner and processor of industrial minerals, since 1978, and was Chairman
and Chief Executive Officer of Fairmont from 1978 to 1996. Mr. Conway was a
Group Vice President of Midland-Ross Corporation, a diversified capital
goods manufacturer, from 1974 to 1978, and was Executive Vice President,
Administration of Diamond Shamrock Corporation ("Diamond Shamrock"), a
producer of chemicals, petroleum and related products, from 1970 to 1974.
Mr. Conway is a director of The Huntington National Bank of Ohio and a
trustee of The Cleveland Clinic Foundation and University School.
Allen H. Ford. Mr. Ford has been a Trustee of First Union since 1983.
He is a consultant and was, from 1981 to 1986, Senior Vice President -
Finance and Administration of The Standard Oil Company (BP America), an
integrated domestic petroleum company. Mr. Ford was Corporate Executive
Vice President and Unit President from 1976 to 1980, Vice President,
Finance, from 1969 to 1976, and Treasurer during 1969 of Diamond Shamrock.
Mr. Ford is a director of Gliatech, Inc. and Parker Hannifin Corporation,
and is a trustee and former Chairman of Case Western Reserve University, a
trustee of the Musical Arts Association (Cleveland Orchestra), University
Hospitals of Cleveland, the Western Reserve Historical Society, and
University Circle, Inc. He is also a trustee and former Chairman of the
Edison BioTechnology Center.
Stephen J. Garchik. Mr. Garchik has been a Trustee of First Union
since June 1998. He has served as President of The Evans Company, a
commercial real estate development and management firm, since before
January 1, 1993. Since July 1996, Mr. Garchik has been the Chairman of
Gotham Golf Partners, L.P.
Russell R. Gifford. Mr. Gifford has been a Trustee of First Union
since 1991. He is a partner with The Gifford Group, a corporate and
customer consulting company. He was Chief Operating Officer of the
Cleveland Public School System from June 1998 to March 1999. He was
President of CNG Energy Services Corporation ("CNG"), an unregulated energy
marketing company providing gas and electric energy services throughout
North America, from 1994 to 1997. He was President and Chief Executive
Officer of The East Ohio Gas Company ("East Ohio"), Cleveland, Ohio, a
distributor of natural gas, from 1989 to 1994. He was also President of
West Ohio Gas Company ("West Ohio"), Lima, Ohio, and River Gas Company
("River"), Marietta, Ohio. CNG, East Ohio, West Ohio and River are
subsidiaries of Consolidated Natural Gas Co. of Pittsburgh, Pennsylvania.
Mr. Gifford was Senior Vice President of East Ohio from 1985 to 1988. Mr.
Gifford is a director of Applied Industrial Technologies, Inc., a trustee
of Baldwin Wallace College, and a member of the National Board of Governors
of the American Red Cross.
David S. Klafter. Mr. Klafter has been a Trustee of First Union since
June 1998. He has been an in-house counsel and a principal of GPM since
April 1996. Mr. Klafter was counsel at White & Case, a law firm, from
before January 1, 1993 until December 1993, and a partner at White & Case
from January 1994 until April 1996. Mr. Klafter's law practice was in
general commercial litigation, with an emphasis on real-estate related
matters, including leases, mortgages and loan work-outs.
Daniel Shuchman. Mr. Shuchman has been a Trustee of First Union since
June 1998. He has been a principal of GPM since October 1994. Mr. Shuchman
was an investment banker at Goldman, Sachs & Co., an investment banking
firm, from before January 1, 1993 until August 1994.
Steven S. Snider. Mr. Snider has been a Trustee of First Union since
June 1998. Since before January 1, 1993, Mr. Snider has been a senior
partner at Hale and Dorr LLP, a law firm.
Mary Ann Tighe. Ms. Tighe has been a Trustee of First Union since June
1998. She has been an Executive Managing Director and a member of the
Executive and Strategic Planning Committees of Insignia/ESG, a commercial
real estate firm, since before January 1, 1993 and she has been Vice
Chairman of Insignia/ESG since January 1999. She is on the Board of
Directors of The New 42nd Street, a New York City-based community
revitalization organization.
James A. Williams. Mr. Williams has been a Trustee of First Union
since June 1998. He has been the President of Williams, Williams, Ruby &
Plunkett PC, a law firm, since before January 1, 1993. Mr. Williams has
also been the Chairman of Michigan National Bank and Michigan National
Corporation since November 1995. Mr. Williams is Chairman of the Henry Ford
Hospital in West Bloomfield, Michigan. He is a Trustee of Henry Ford Health
System and the Oakland University (Michigan) Foundation and a member of the
Board of Governors of the Cranbrook School.
TERMS OF OFFICE OF THE TRUSTEES
The Board of Trustees is divided into three classes: Messrs. Shuchman,
Snider, Gifford, Conway and Friedman are Class I Trustees and their terms
end upon the election of their successors at First Union's annual meeting
of shareholders in 2000. Messrs. Ackman, Berkowitz, Williams, and Garchik
and Ms. Tighe are Class II Trustees and their terms end upon the election
of their successors at First Union's annual meeting of shareholders in
2001. Messrs. Klafter, Altobello, Ford and Scully are Class III Trustees
and their terms end upon the election of their successors at First Union's
annual meeting of shareholders in 1999.
KEY EMPLOYEE
Brenda J. Mixson. Ms. Mixson will be First Union's interim Chief
Financial Officer upon the departure of Mr. Edelman on April 13, 1999. Ms.
Mixson has served as a Managing Director/Chief Investment and Financial
Officer of Prime Capital Holding, LLC, a privately owned commercial real
estate finance company. From 1995 to 1997, Ms. Mixson held positions with
ING Capital Corp. and ING Baring Securities, Inc., initially as Portfolio
Manager for all real estate investment activity and then as global head of
ING Barings Emerging Markets International Finance Business. Prior to
joining ING, Ms. Mixson was Executive Vice President and Chief Operating
Officer of Reichmann International, the manager of Quantum North American
Realty Fund. From 1989 to 1994, she was at Travelers Realty Investment
Corp., where she was Managing Director and Executive Vice President. From
1986 to 1989, she was Manager and Vice President of Chemical Bank's Chicago
Region.
<PAGE>
DESCRIPTION OF CAPITAL STOCK
COMMON SHARES
General
The following description sets forth certain general terms and
provisions of the Common Shares. The statements below describing the Common
Shares are in all respects subject to and qualified in their entirety by
reference to the applicable provisions of First Union's Declaration of
Trust (the "Declaration of Trust") and By-Laws.
The number of Common Shares which First Union is authorized to issue
is unlimited. All Common Shares are entitled to participate equally in any
distributions thereon declared by First Union. Subject to the provisions of
the By-Laws regarding Excess Securities, each outstanding Common Share
entitles the holder thereof to one vote on all matters voted on by
shareholders (as described below), including the election of Trustees.
Shareholders have no preemptive rights. The outstanding Common Shares are
fully paid and non-assessable and have equal liquidation rights. The Common
Shares are fully transferable except that their issuance and transfer may
be regulated or restricted by First Union in order to assure qualification
by First Union for taxation as a REIT. See "-- Restriction on Size of
Holdings." The Common Shares are not redeemable at the option of First
Union or of any shareholder. The Board of Trustees is generally authorized
without shareholder approval to borrow money and issue obligations and
equity securities which may or may not be convertible into Common Shares
and warrants, rights or options to purchase Common Shares; and to issue
other securities of any class or classes which may or may not have
preferences or restrictions not applicable to the Common Shares. The
issuance of additional Common Shares or such conversion rights, warrants or
options may have the effect of diluting the interest of shareholders.
Annual meetings of the shareholders are held on the second Tuesday of the
fourth month following the close of each fiscal year at such place in the
State of Ohio as the Trustees may from time to time determine. Special
meetings may be called at any time and place when ordered by a majority of
the Trustees, or upon written request of the holders of not less than 25%
of the outstanding Common Shares.
Shareholder Liability
The Declaration of Trust provides that no shareholder shall be
personally liable in connection with the property or the affairs of First
Union, and that all persons shall look solely to property of First Union
for satisfaction of claims of any nature arising in connection with the
affairs of First Union.
Under present Ohio law, no personal liability will attach to
shareholders of First Union, but with respect to tort claims, contract
claims where liability of shareholders is not expressly negated, claims for
taxes and certain statutory liabilities, the shareholders may in some
jurisdictions other than the State of Ohio be held personally liable to the
extent that such claims are not satisfied by First Union, in which event
the shareholders would, in the absence of negligence or misconduct on their
part, be entitled to reimbursement from the general assets of First Union.
First Union carries insurance which the Trustees consider adequate to cover
any probable tort claims. To the extent the assets and insurance of First
Union would be insufficient to reimburse a shareholder who has been
required to pay a claim against First Union, the shareholder would suffer a
loss. The statements in this paragraph and the previous paragraph also
apply to holders of the preferred shares of beneficial interest, $1.00 par
value per share ("Preferred Shares"), although any possible liability of
such holders would be further reduced by the greater limitations on their
voting power.
REIT Qualification
Under regulations of the IRS, the Trustees must have continuing
exclusive authority over the management of First Union and the conduct of
its affairs, free from any control by the shareholders, other than the
right to elect or remove Trustees, to terminate the Declaration of Trust,
to ratify amendments to the Declaration of Trust, and certain other
permitted rights, if First Union is to continue to qualify as a REIT under
the applicable sections of the Code. Consequently, the only voting power
presently granted to the shareholders is the right by a majority vote or a
supermajority vote, as the case may be, (i) to elect Trustees, (ii) to
approve or disapprove certain transfers of assets or mergers of First
Union, (iii) to approve or disapprove amendments to the Declaration of
Trust or termination of the Declaration of Trust, and (iv) when removal is
proposed by all other Trustees, to approve removal of any Trustee. First
Union has no fixed duration and will continue indefinitely, unless
terminated as provided in the Declaration of Trust.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Shares is National
City Bank.
Restriction on Size of Holdings
The By-Laws restrict beneficial or constructive ownership of First
Union's outstanding capital stock by a single person, or persons acting as
a group, to 9.8% of the Common Shares, which limitation assumes that all
securities convertible into Common Shares owned by such person or group of
persons have been converted. The purposes of these provisions are to assist
in protecting and preserving First Union's REIT status. For First Union to
qualify as a REIT under the Code, not more than 50% in value of its
outstanding capital stock may be owned by five or fewer individuals at any
time during the last half of First Union's taxable year. The provision
permits five persons each to acquire up to a maximum of 9.8% of the Common
Shares, or an aggregate of 49% of the outstanding Common Shares, and thus,
assists the Trustees in protecting and preserving REIT status for tax
purposes.
Unless a waiver of such restrictions is granted by the Board, Common
Shares owned by a person or group of persons in excess of 9.8% of First
Union's outstanding Common Shares ("Excess Securities") shall not be
entitled to any voting rights; shall not be considered outstanding for
quorums or voting purposes; and shall not be entitled to dividends,
interest or any other distributions with respect to the securities.
The Declaration of Trust provides that the Share Ownership Limit
contained in the By-Laws may be amended from time to time with the approval
of either (i) 70% of the Trustees then in office or (ii) a majority of the
Trustees then in office and the approval of at least 70% of the holders of
the outstanding Common Shares.
Trustee Liability
The Declaration of Trust provides that Trustees shall not be
individually liable for any obligation or liability incurred by or on
behalf of First Union or by Trustees for the benefit and on behalf of First
Union. Under the Declaration of Trust and Ohio law respecting business
trusts, Trustees are not liable to First Union or the shareholders for any
act or omission except for acts or omissions which constitute bad faith,
willful misfeasance, gross negligence or reckless disregard of duties to
First Union and its shareholders.
Beneficial Ownership of FUMI
All of the shares of FUMI are owned in trust (the "Trust") for the
benefit of owners of Common Shares pursuant to an amended and restated
declaration of trust dated as of October 1, 1996. FUMI's Declaration of
Trust provides that the net income of the Trust estate shall be paid from
time to time to the First Union shareholders in proportion to the number of
Common Shares held by them. Upon termination of the Trust, each holder of
Common Shares is entitled to a proportionate share of the net proceeds
received upon the sale of the assets of the Trust estate. The trustees of
the trust may require, as a condition to the receipt of any payment of the
net income or of the net proceeds upon termination, that a shareholder
demonstrate that the Common Shares owned by it, together with any Common
Shares the ownership of which is attributed to it by the Code, do not
exceed 5% of the then outstanding Common Shares. In addition, FUMI's
Declaration of Trust provides that any person who owns, directly or by
attribution, 5% or more of the outstanding shares of First Union, is deemed
to have no beneficial interest in the Trust. These restrictions on
ownership of the Trust are intended to avoid implicating constructive
ownership rules which could otherwise cause rental payments from FUMI to
First Union to be non-qualifying income for purposes of determining whether
First Union qualifies as a REIT. FUMI's Declaration of Trust provides that
the Trust shall terminate upon the termination of First Union. See "Federal
Income Tax Considerations -- Taxation of First Union -- Stapled Stock."
Shareholder Rights Plan
In March 1990, the Board of Trustees declared a dividend with respect
to each Common Share consisting of one right to purchase one Common Share
at an exercise price of $50 per right. Pursuant to the Rights Agreement,
dated as of March 7, 1990, between the Company and National City Bank, as
Rights Agent, which governs First Union's Shareholder Rights Plan, if a
person or group, excluding certain affiliated entities of First Union, who
acquires 15% or more of the outstanding Common Shares (except in a tender
offer or exchange offer approved by the Board of Trustees), is declared to
be an "adverse person" by the Board of Trustees or engages in certain
self-dealing transactions with First Union ("flip-in events"), each right,
other than rights owned by a 15% owner or an "adverse person," entitles the
holder to purchase one Common Share for its par value (currently $1 per
share). If First Union is acquired in a merger or other business
combination ("flip-over events"), each right entitles the holder to
purchase, for $1, shares of the acquiring company having a market value
equal to the market value of one Common Share. The rights may be redeemed
by First Union at a price of $0.01 per right at any time prior to the
earlier of a "flip-in" or "flip-over" event or the expiration of the rights
on March 30, 2000.
PREFERRED SHARES
General
Subject to limitations as may be prescribed by Ohio law and First
Union's by-laws (the "By-Laws") and Declaration of Trust, the Board of
Trustees is authorized to issue without the approval of the shareholders,
Preferred Shares in series and to establish from time to time the number of
Preferred Shares to be included in such series and to fix the designation
and any preferences, conversion and other rights, voting powers,
restrictions, limitations as to distributions, qualifications and terms and
conditions of redemption of the shares of each such series. First Union
currently has outstanding the Series A Preferred Shares. The following
description sets forth certain general terms and provisions of the Series A
Preferred Shares. The statements below describing the Series A Preferred
Shares do not purport to be complete and are in all respects subject to,
and qualified in their entirety by reference to, the terms and provisions
of the Certificate of Designations authorizing the Series A Preferred
Shares (the "Certificate of Designations"), the Declaration of Trust and
the By-Laws.
The outstanding Series A Preferred Shares have been validly issued,
fully paid and, except as set forth under "-- Common Shares -- Shareholder
Liability," non-assessable. The holders of the Series A Preferred Shares
have no pre-emptive rights with respect to any shares of the capital stock
of First Union or any other securities of First Union convertible into or
carrying rights or options to purchase any such shares. The Series A
Preferred Shares are not subject to any sinking fund or other obligation of
First Union to redeem or retire the Series A Preferred Shares. Unless
converted into Common Shares or redeemed by First Union, the Series A
Preferred Shares have a perpetual term, with no maturity.
The Series A Preferred Shares, unlike the Common Shares, are not
entitled to the benefit of FUMI's Declaration of Trust. See "-- Common Shares
- -- Beneficial Ownership of FUMI."
Distributions
Holders of the Series A Preferred Shares are entitled to receive,
when, as and if declared by the Board of Trustees, out of funds legally
available for the payment of distributions, cumulative preferential cash
distributions in an amount per share equal to the greater of $2.10 per
share (equivalent to 8.4% of the liquidation preference per annum) or the
cash distributions on the Common Shares, or portion thereof, into which a
Series A Preferred Share is convertible. Such distributions shall equal the
number of Common Shares, or portion thereof, into which a Series A
Preferred Share is convertible, multiplied by the most current quarterly
cash dividend on a Common Share on or before the applicable dividend
payment date.
Distributions on the Series A Preferred Shares accrue whether or not
First Union has earnings, whether or not there are funds legally available
for the payment of such distributions and whether or not such distributions
are declared. Accrued but unpaid distributions on the Series A Preferred
Shares do not bear interest. Holders of the Series A Preferred Shares are
not entitled to any distributions in excess of full cumulative
distributions as described above.
Unless full cumulative distributions on the Series A Preferred Shares
have been or contemporaneously are declared and paid or declared and a sum
sufficient for the payment thereof set apart for payment for all past
distribution periods and the then current distribution period, no
distributions (other than in Common Shares or other Junior Shares will be
declared or paid or set aside for payment upon the Common Shares or any
other Junior Shares, nor will any Common Shares or any other Junior Shares
be redeemed, purchased or otherwise acquired for any consideration (or any
moneys be paid to or made available for a sinking fund for the redemption
of any such shares) by First Union (except by conversion into or exchange
for Junior Shares).
Liquidation Rights
Upon any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of First Union, then, before any distribution or payment
is made to the holders of any Common Shares or any other class or series of
capital shares of First Union ranking junior to the Series A Preferred
Shares in the distribution of assets upon any liquidation, dissolution or
winding up of First Union, the holders of Series A Preferred Shares will be
entitled to receive out of assets of First Union (excluding the assets of
FUMI) legally available for distribution to shareholders, liquidating
distributions in the amount of the liquidation preference ($25.00 per
share), plus an amount equal to all distributions accrued and unpaid
thereon, if any. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Series A Preferred
Shares will have no right or claim to any of the remaining assets of First
Union.
If liquidating distributions have been made in full to all holders of
Series A Preferred Shares and all other classes or series of capital shares
of First Union ranking on a parity with the Series A Preferred Shares in
the distribution of assets, the remaining assets of First Union will be
distributed among the holders of any other classes or series of capital
shares ranking junior to the Series A Preferred Shares in the distribution
of assets upon any liquidation, dissolution or winding up of First Union,
according to their respective rights and preferences and in each case
according to their respective number of shares. For such purposes, the
consolidation or merger of First Union with or into any other entity, the
sale, lease or conveyance of all or substantially all of the property or
business of First Union or a statutory share exchange will not be deemed to
constitute a liquidation, dissolution or winding up of First Union.
Redemption
The Series A Preferred Shares are not redeemable by the Company prior
to October 29, 2001, and at no time are the Series A Preferred Shares
redeemable for cash (except to the extent provided below in lieu of the
issuance of fractional Common Shares). On and after October 29, 2001, the
Series A Preferred Shares will be redeemable at the option of the Company,
in whole or in part, for such number of Common Shares as equals the
liquidation preference of the Series A Preferred Shares to be redeemed
(without regard to accrued and unpaid distributions) divided by the
Conversion Price (as defined herein under "-- Conversion Rights") as of the
opening of business on the date set for such redemption (equivalent to a
conversion rate of 3.31 Common Shares for each Series A Preferred Share),
subject to adjustment in certain circumstances as described below. See "--
Conversion Price Adjustments." The Company may exercise this option only if
for 20 trading days, within any period of 30 consecutive trading days,
including the last trading day of such period, the closing price of the
Common Shares on the NYSE equals or exceeds the Conversion Price per share,
subject to adjustments in certain circumstances as described below. See "--
Conversion Price Adjustments."
Voting Rights
Except as indicated below, or except as otherwise from time to time
required by applicable law, the holders of Series A Preferred Shares have
no voting rights.
If six quarterly distributions (whether or not consecutive) payable on
the Series A Preferred Shares or any shares of beneficial interest ranking
on a parity with the Series A Preferred Shares with respect to the payment
of distributions and amounts upon liquidation, dissolution and winding up
("Parity Shares") are in arrears, whether or not earned or declared, the
number of Trustees then constituting the Board of Trustees will be
increased by two, and the holders of Series A Preferred Shares, voting
together as a class with the holders of any other series of Parity Shares
(any such other series, the "Voting Preferred Shares"), will have the right
to elect two additional Trustees to serve on the Board of Trustees at any
annual meeting of shareholders or a properly called special meeting of the
holders of Series A Preferred Shares and such Voting Preferred Shares and
at each subsequent annual meeting of shareholders until all such
distributions and distributions for the current quarterly period on the
Series A Preferred Shares and such other Voting Preferred Shares have been
paid or declared and paid or set aside for payment. The term of office of
all Trustees so elected will terminate with the termination of such voting
rights.
The approval of two-thirds of the outstanding Series A Preferred
Shares and all other series of Voting Preferred Shares similarly affected,
voting as a single class, is required in order to (i) amend the Declaration
of Trust, By-Laws or the Certificate of Designations to affect materially
and adversely the rights, preferences or voting power of the holders of the
Series A Preferred Shares or the Voting Preferred Shares, (ii) enter into a
share exchange that affects the Series A Preferred Shares, consolidate with
or merge into another entity, or permit another entity to consolidate with
or merge into First Union, unless in each such case each Series A Preferred
Share remains outstanding without a material adverse change to its terms
and rights or is converted into or exchanged for convertible preferred
stock of the surviving entity having preferences, conversion and other
rights, voting powers, restrictions, limitations as to distributions,
qualifications and terms or conditions of redemption thereof identical to
that of a Series A Preferred Share (except for changes that do not
materially and adversely affect the holders of the Series A Preferred
Shares) or (iii) authorize, reclassify, create or increase the authorized
amount of any class of shares of beneficial interest having rights senior
to the Series A Preferred Shares as to distributions or in the distribution
of assets. However, First Union may create additional classes of Parity
Shares and shares ranking junior to the Series A Preferred Shares as to
distributions or in the distribution of assets ("Junior Shares"), increase
the authorized number of Parity Shares and Junior Shares and issue
additional series of Parity Shares and Junior Shares without the consent of
any holder of Series A Preferred Shares.
Conversion Rights
The Series A Preferred Shares are convertible, in whole or in part, at
any time, unless previously redeemed, at the option of the holders thereof,
into Common Shares at a conversion price of $7.5625 per Common Share
(equivalent to a conversion rate of 3.31 Common Shares for each Series A
Preferred Share), subject to adjustment as described below (the "Conversion
Price"). See "-- Conversion Price Adjustments." The right to convert Series
A Preferred Shares called for redemption will terminate at the close of
business on the redemption date for such Series A Preferred Shares.
Conversion Price Adjustments
The Conversion Price is subject to adjustment upon certain events,
including without duplication (i) distributions payable in Common Shares,
(ii) the issuance to all holders of Common Shares of certain rights,
options or warrants entitling them to subscribe for or purchase Common
Shares at a price per share less than the fair market value per Common
Share (which, as defined, includes an adjustment for underwriting
commissions avoided in rights offerings to shareholders), (iii)
subdivisions, combinations and reclassifications of Common Shares, (iv)
distributions to all holders of Common Shares of any capital stock of First
Union (other than Common Shares), evidences of indebtedness of First Union
or assets (including securities, but excluding those rights, warrants and
distributions referred to above and excluding Permitted Common Share Cash
Distributions, as hereinafter defined) and (v) payment in respect of a
tender or exchange offer by First Union or any subsidiary of First Union
for Common Shares if the cash and value of any other consideration included
in such payment per Common Share (as determined by the Board of Trustees)
exceeds the current market price (as defined) per Common Share on the
trading day next succeeding the last date tenders or exchanges may be made
pursuant to such tender or exchange offer. "Permitted Common Share Cash
Distributions" are those cumulative cash distributions paid with respect to
the Common Shares after December 31, 1995 which are not in excess of the
following: the sum of (i) First Union's cumulative undistributed income
from operations and capital gains and cumulative depreciation and
amortization at December 31, 1995, plus (ii) the cumulative amount of net
income before distributions accrued or paid on the Series A Preferred
Shares, plus depreciation and amortization, after December 31, 1995, minus
(iii) the cumulative amount of distributions accrued or paid on the Series
A Preferred Shares or any other class of Preferred Shares after the date of
original issue of the Series A Preferred Shares. In addition to the
foregoing adjustments, First Union is permitted to make such reductions in
the Conversion Price as it considers to be advisable in order that any
event treated for federal income tax purposes as a distribution of stock or
stock rights will not be taxable to the holders of the Common Shares.
Restrictions on Ownership
With limited exceptions, no person, or persons acting as a group, may
beneficially own more than 25% of the Series A Preferred Shares outstanding
at any time, except as a result of First Union's redemption of any Series A
Preferred Shares; provided that after any redemption, additional Series A
Preferred Shares acquired by such person will be subject to the Preferred
Shares Ownership Limit Provision. Series A Preferred Shares owned in excess
of the Preferred Shares Ownership Limit Provision are not entitled to
dividends, interest or any other distribution with respect to such shares,
are not entitled to any conversion rights, are not entitled to any voting
rights, and shall not be considered outstanding for quorums or voting
purposes.
With limited exceptions, no person or persons acting as a group may
beneficially own more than 9.8% of the Common Shares, which limitation
assumes that all securities convertible into Common Shares owned by such
person or group of persons, such as the Series A Preferred Shares, have
been converted. In addition, in order for a holder of Common Shares to be
entitled to the benefit of FUMI's Declaration of Trust, such shareholder
may not own, after taking into consideration all Common Shares owned by
such person together with any Common Shares attributed to such person under
the Code, which would include the Series A Preferred Shares on an as
converted basis, more than 5% of the outstanding Common Shares of First
Union. See "-- Common Shares -- Restriction on Size of Holdings" and "--
Common Shares -- Beneficial Ownership of FUMI."
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES
The following is a description of the material federal income tax
consequences to First Union and its shareholders of the treatment of First
Union as a REIT. The discussion is general in nature and not exhaustive of
all possible tax considerations, nor does the discussion give a detailed
description of any state, local, or foreign tax considerations. The tax
treatment of a shareholder will vary depending upon the holder's particular
situation, and this discussion addresses only holders that hold Common
Shares as capital assets and does not purport to deal with all aspects of
taxation that may be relevant to particular holders in light of their
personal investment or tax circumstances, or to certain types of holders
(including dealers in securities or currencies, traders in securities that
elect to mark-to-market, banks, tax-exempt organizations, life insurance
companies, persons that hold Common Shares that are a hedge or that are
hedged against currency risks or that are part of a straddle or conversion
transaction, or persons whose functional currency is not the U.S. dollar)
subject to special treatment under the federal income tax laws. This
summary is based on the Code, its legislative history, existing and
proposed regulations thereunder, published rulings and court decisions, all
as currently in effect and all subject to change at any time, perhaps with
retroactive effect.
Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations) ("Fried Frank"), counsel to First Union, has
rendered an opinion that, commencing with First Union's taxable year ended
December 31, 1994, First Union has been organized as, and has operated in
conformity with the requirements for qualification as, a REIT, and its
method of operation, as described in this prospectus and as represented by
it, will enable it to satisfy the requirements for qualification as a REIT.
This opinion is based on certain assumptions relating to the organization
and operation of FUMI and of any partnerships in which First Union will
hold an interest, and is conditioned upon representations made by First
Union as to certain factual matters relating to First Union's and FUMI's
organization and manner of operation. Fried Frank's opinion also relies
upon the opinion of Mayer, Brown & Platt, dated July 21, 1997, which is
based upon certain factual representations and assumptions, stating that,
as of that date, First Union's then existing legal organization and method
of operation enabled First Union to satisfy the requirements for
qualification as a REIT. In addition, Fried Frank's opinion is based on the
law existing and in effect on the date hereof. First Union's qualification
and taxation as a REIT in the future will depend upon First Union's ability
to meet on a continuing basis, through actual operating results, asset
composition, distribution levels and diversity of stock ownership, the
various qualification tests imposed under the Code discussed below. Fried
Frank will not review compliance with these tests on a continuing basis. No
assurance can be given that First Union will satisfy such tests on a
continuing basis.
THIS DISCUSSION IS NOT INTENDED AS A SUBSTITUTE FOR CAREFUL TAX
PLANNING, AND EACH PROSPECTIVE INVESTOR IS ADVISED TO CONSULT WITH ITS TAX
ADVISOR REGARDING THE SPECIFIC TAX CONSEQUENCES TO IT OF THE PURCHASE,
OWNERSHIP AND SALE OF COMMON SHARES, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE,
AND OF POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
If certain detailed conditions imposed by the REIT provisions of the
Code are met, entities, such as First Union, that invest primarily in real
estate and that otherwise would be treated for federal income tax purposes
as corporations, are generally not taxed at the corporate level on their
"REIT taxable income" that is currently distributed to shareholders. This
treatment substantially eliminates the "double taxation" (i.e., at both the
corporate and shareholder levels) that generally results from the use of
corporations. However, as noted below under "-- Taxation of First Union's
Shareholders -- Taxation of Taxable U.S. Shareholders," corporate
shareholders will not be entitled to a dividends received deduction with
respect to dividends paid on their shares.
If First Union fails to qualify as a REIT in any year, however, it
will be subject to federal income taxation as if it were a domestic
corporation, and its shareholders will be taxed in the same manner as
shareholders of ordinary corporations. In this event, First Union could be
subject to potentially significant tax liabilities, and therefore the
amount of cash available for distribution to its shareholders would be
reduced or eliminated.
First Union, based on internal calculations and advice of counsel,
believes it properly elected and continued to elect REIT status for all
taxable years since its filing of a REIT election and that it has operated
and expects that it will continue to operate in a manner that will permit
it to elect REIT status in each taxable year thereafter. There can be no
assurance, however, that this belief or expectation will be fulfilled,
since qualification as a REIT depends on First Union continuing to satisfy
numerous asset, income and distribution tests described below, which in
turn will be dependent in part on First Union's operating results.
TAXATION OF FIRST UNION
General. In any year in which First Union qualifies as a REIT, in
general it will not be subject to federal income tax on that portion of its
REIT taxable income or capital gain which is distributed to shareholders.
First Union may, however, be subject to tax at normal corporate rates upon
any taxable income or capital gain not distributed.
Notwithstanding its qualification as a REIT, First Union may also be
subject to taxation in certain other circumstances. If First Union should
fail to satisfy either the 75% or the 95% gross income test (as discussed
below), and nonetheless maintains its qualification as a REIT because
certain other requirements are met, it will be subject to a 100% tax on the
greater of the amount by which First Union fails to satisfy either the 75%
test or the 95% test, multiplied by a fraction intended to reflect First
Union's profitability. First Union will also be subject to a tax of 100% on
net income from any "prohibited transaction," as described below, and if
First Union has
o net income from the sale or other disposition of "foreclosure
property" which is held primarily for sale to customers in the
ordinary course of business or
o other non-qualifying income from foreclosure property, it will be
subject to tax on such income from foreclosure property at the
highest corporate rate.
In addition, if First Union should fail to distribute during each
calendar year at least the sum of
o 85% of its REIT ordinary income for such year,
o 95% of its REIT capital gain net income for such year and
o any undistributed taxable income from prior years,
First Union would be subject to a 4% excise tax on the excess of such
required distribution over the amounts actually distributed.
For taxable years beginning after August 5, 1997, the Taxpayer Relief
Act of 1997 (the "1997 Act") permits a REIT, with respect to undistributed
net long-term capital gains it received during the taxable year, to
designate in a notice mailed to shareholders within 60 days of the end of
the taxable year (or in a notice mailed with its annual report for the
taxable year) such amount of such gains which its shareholders are to
include in their taxable income as long-term capital gains. Thus, if First
Union made this designation, the shareholders of First Union would include
in their income as long-term capital gains their proportionate share of the
undistributed net capital gains as designated by First Union and First
Union would have to pay the tax on such gains within 30 days of the close
of its taxable year. Each shareholder of First Union would be deemed to
have paid such shareholder's share of the tax paid by First Union on such
gains, which tax would be credited or refunded to the shareholder. A
shareholder would increase its tax basis in its First Union stock by the
difference between the amount of income to the holder resulting from the
designation less the holder's credit or refund for the tax paid by First
Union. First Union may also be subject to the corporate "alternative
minimum tax", as well as tax in certain situations and on certain
transactions not presently contemplated. First Union will use the calendar
year both for federal income tax purposes and for financial reporting
purposes.
Stapled Stock. First Union and FUMI are "stapled entities" as defined
in Section 269B of the Code. Section 269B of the Code defines the term
"stapled entities" to mean any group of two or more entities if more than
50% in value of the beneficial ownership in each of such entities consists
of interests which, by reason of form of ownership, restrictions on
transfers, or other terms or conditions, the transfer of one of such
interests requires the transfer of the other of such interests. Section
269B of the Code provides that if the shares of a group of entities that
include a REIT are stapled, then such entities shall be treated as one
entity for purposes of applying the REIT provisions of the Code. If Section
269B of the Code were to apply to First Union and FUMI, then First Union
might not be able to satisfy the "Gross Income Tests" as described below
that are necessary to qualify as a REIT.
Prior to the enactment of Section 269B of the Code, First Union
received two rulings from the IRS sanctioning the stapling of First Union
and FUMI. These rulings provided that (i) even though First Union and FUMI
were "stapled," such stapling would not preclude First Union from
qualifying as a REIT, and (ii) amounts otherwise qualifying as rents from
real property under the REIT rules would not fail to meet that definition
by reason of the fact that First Union and FUMI were stapled. The effective
date provision for Section 269B provides that Section 269B of the Code does
not apply if a group of stapled entities that included a REIT on June 30,
1983 were stapled on that date. First Union believes that because First
Union and FUMI were stapled on June 30, 1983, Section 269B should not apply
to First Union and FUMI. However, as described above in "Risk Factors --
Income and activities of FUMI may be attributed to First Union under recent
anti-stapling legislation and may threaten REIT status" and "Risk Factors
- -- Dependence on qualification as a REIT; tax and other consequences if
REIT qualification lost," newly enacted legislation provides that the
income and activities of FUMI with respect to any real property acquired by
the First Union Companies after March 26, 1998, for which there was no
binding written agreement, public announcement or filing with the
Commission on or before March 26, 1998, will be attributed to First Union
for purposes determining whether First Union qualifies as a REIT.
Under the Code, rents from real property do not include amounts
received or accrued, directly or indirectly, from any person if the REIT
owns, directly or indirectly, in the case of a corporation, stock of such
corporation possessing 10% or more of the total combined voting power of
all classes of stock entitled to vote, or 10% or more of the total number
of shares of all classes of stock of such corporation. For purposes of this
provision, certain attribution rules are applicable. Under this provision,
even though Section 269B of the Code does not apply to First Union and
FUMI, if any person were to acquire, directly or indirectly, a 10% or
greater beneficial interest in the Trust (taking into account such
attribution rules), then rents received from FUMI would not qualify as
rents from real property under the REIT rules. In such a case, First Union
would likely not satisfy the "Gross Income Tests" described below, and
accordingly, would not qualify as a REIT.
FUMI's Declaration of Trust provides that any person who owns,
directly or by attribution, 5% or more of the outstanding shares of First
Union, is deemed to have no beneficial interest in the Trust. Assuming this
restriction precludes any person from owning 10% or more of the voting
power of all classes of stock of FUMI, First Union believes that amounts
otherwise qualifying as rents from real property received from FUMI will
qualify as rents from real property for REIT purposes. First Union has
terminated its management arrangements with FUMI, and now manages its
retail, apartment and office portfolios and has entered into third-party
leases for the parking facilities it owns. Therefore, First Union no longer
receives any rents from FUMI.
The Code defines a REIT as an electing corporation, trust or
association
o which is managed by one or more trustees or directors,
o the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest,
o which would otherwise be taxable as a domestic corporation, but
for Section 856 through 859 of the Code,
o which is neither a financial institution nor an insurance company
subject to certain provisions of the Code, and
o which meets the share ownership, asset and income tests described
below.
First Union has a number of wholly-owned subsidiaries. Code Section
856(i) provides that a corporation which is a "qualified REIT subsidiary"
shall not be treated as a separate corporation, and all assets,
liabilities, and items of income, deductions, and credit of a "qualified
REIT subsidiary" shall be treated as assets, liabilities and such items (as
the case may be) of the REIT. Thus, in applying the requirements described
below, the assets, liabilities and items of income, deduction and credit of
First Union's qualified REIT subsidiaries will be treated as assets,
liabilities and items of First Union. Furthermore, First Union's
proportionate share of the assets, liabilities and items of income of any
partnership in which First Union is a partner will be treated as assets,
liabilities and items of income of First Union for purposes of applying the
requirements described below.
Share Ownership Test. First Union's shares of stock must be held by a
minimum of 100 persons for at least 335 days in each taxable year (or a
proportional number of days in any short taxable year). In addition, at all
times during the second half of each taxable year, no more than 50% in
value of the stock of First Union may be owned, directly or indirectly and
by applying certain constructive ownership rules, by five or fewer
individuals, which for this purpose includes certain entities. Under the
1997 Act, for taxable years beginning after August 5, 1997, if First Union
complies with the Treasury regulations for ascertaining its actual
ownership and did not know, or exercising reasonable diligence would not
have reason to know, that more than 50% in value of its outstanding shares
of stock were held, actually or constructively, by five or fewer
individuals, then First Union will be treated as meeting such requirement.
In order to ensure compliance with the 50% test, First Union has
placed certain restrictions on the transfer of the shares of its stock to
prevent additional concentration of ownership. Moreover, to evidence
compliance with these requirements under Treasury regulations, First Union
must maintain records which disclose the actual ownership of its
outstanding shares of stock. In fulfilling its obligations to maintain
records, First Union must and will demand written statements each year from
the record holders of designated percentages of shares of its stock
disclosing the actual owners of such shares (as prescribed by Treasury
regulations). A list of those persons failing or refusing to comply with
such demand must be maintained as a part of First Union's records. A
shareholder failing or refusing to comply with First Union's written demand
must submit with such holder's tax returns a similar statement disclosing
the actual ownership of shares of First Union's stock and certain other
information. In addition, the Bylaws provide restrictions regarding the
transfer of shares of First Union's stock that are intended to assist First
Union in continuing to satisfy the share ownership requirements. See
"Description of Capital Stock -- Common Shares -- Restriction on Size of
Holdings." First Union intends to enforce the 9.8% ownership limitation on
ownership of shares of its stock to assure that its qualification as a REIT
will not be compromised.
Asset Tests. At the close of each quarter of First Union's taxable
year, First Union must satisfy certain tests relating to the nature of its
assets (determined in accordance with generally accepted accounting
principles). First, at least 75% of the value of First Union's total assets
must be represented by interests in real property, interests in mortgages
on real property, shares in other REITs, cash, cash items, and government
securities, and certain qualified temporary investments (for a period of
one year from the date of First Union's receipt of proceeds of an offering
of its shares of beneficial interest or long-term (at least five years)
debt, stock or debt instruments purchased with such proceeds). Second,
although the remaining 25% of First Union's assets generally may be
invested without restriction, securities in this class of a single issuer
may not exceed either (i) 5% of the value of First Union's total assets or
(ii) 10% of the outstanding voting securities of any one issuer.
In connection with the acquisition of equity interests in Impark by
FUMI, First Union made certain subordinated loans to Impark on an unsecured
basis. In connection with such loans, First Union has determined that
o the fair market value of each of such loans, including any
accrued interest, fees and any other amounts payable thereon, is
not in excess of 5% of the fair market value of the total gross
assets of First Union determined in accordance with generally
accepted accounting principles and
o the fair market value of all such loans and First Union's other
assets (other than assets represented by interests in real
property, interests in mortgages on real property, shares in
other REITs, cash, cash items, government securities and
qualified temporary investments) do not have an aggregate fair
market value in excess of 25% of the fair market value of the
total gross assets of First Union determined in accordance with
generally accepted accounting principles.
Based on existing facts, First Union believes that it will be able to
reaffirm this determination at the applicable times in the future. If,
however, First Union were unable to satisfy the foregoing asset tests at the
applicable time, First Union would be required to take preventative steps by
disposing of certain assets or otherwise risk a loss of REIT status.
In addition, as part of the acquisition of Impark, certain lenders of
Impark have the right to transfer certain loans of Impark to First Union at
certain times. If the transfer rights were exercised at a time when First
Union's total assets were not sufficient to satisfy the foregoing asset
tests, First Union would be required to take such preventative steps or
otherwise risk such REIT status.
Gross Income Tests. There are currently two separate percentage tests
relating to the sources of First Union's gross income which must be
satisfied for each taxable year. Additionally, for its taxable years before
1998, short-term gain from the sale or other disposition of stock or
securities, gain from the sale or other disposition of stock or securities,
gain from prohibited transactions and gain on the sale or other disposition
or real property held for less than four years (apart from involuntary
conversions and sales of foreclosure property) must represent less than 30%
of First Union's gross income (including gross income from prohibited
transactions) for each such taxable year. The two current tests are as
follows:
1. The 75% Test. At least 75% of First Union's gross income for each
taxable year must be derived directly or indirectly from investments
relating to real property or mortgages on real property (including "rents
from real property" --which term generally includes expenses of First Union
that are paid or reimbursed by tenants) or from certain types of temporary
investments.
Rents received from a tenant will not, however, qualify as rents from
real property in satisfying the 75% test (or the 95% gross income test
described below) if First Union, or an owner of 10% or more of First Union,
directly or constructively owns 10% or more of such resident. In addition,
if rent attributable to personal property leased in connection with a lease
of real property is greater than 15% of the total rent received under the
lease, then the portion of rent attributable to such personal property will
not qualify as rents from real property. Moreover, an amount received or
accrued will not qualify as rents from real property (or as interest
income) for purposes of the 75% and 95% gross income tests if it is based
in whole or in part on the income or profits of any person, although an
amount received or accrued generally will not be excluded from "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Finally, for rents received to qualify as
rents from real property, First Union generally must not operate or manage
the property or furnish or render services to tenants of such property,
other than through an "independent contractor" from whom First Union
derives no income, except that the "independent contractor" requirement
does not apply to the extent that the services provided by First Union are
"usually or customarily rendered" in connection with the rental of space
for occupancy only or are not otherwise considered "rendered to the
occupant for his convenience". For taxable years beginning after August 5,
1997, a REIT is permitted to render a de minimis amount of impermissible
services to tenants, or in connection with the management of property, and
still treat amounts received with respect to that property as rent from
real property. The amount received or accrued by the REIT during the
taxable year for the impermissible services with respect to a property may
not exceed one percent of all amounts received or accrued by the REIT
directly or indirectly from the property. The amount received for any
service (or management operation) for this purpose shall be deemed to be
not less than 150% of the direct cost of the REIT in furnishing or
rendering the service (or providing the management or operation).
2. The 95% Test. At least 95% of First Union's gross income for each
taxable year must be derived from the real property investments included in
the 75% test, dividends, interest and gain from the sale or disposition of
stock or securities (or from any combination of the foregoing).
The term "interest" generally does not include any amount received or
accrued (directly or indirectly) if the determination of such amount
depends in whole or in part on the income or profits of any person.
However, an amount received or accrued generally will not be excluded from
the term "interest" solely by reason of being based on a fixed percentage
or percentages of receipts or sales.
For purposes of determining whether First Union complies with the 75%
and 95% income tests, gross income does not include income from prohibited
transactions. A "prohibited transaction" is a sale of dealer property
(excluding foreclosure property) unless such property is held by First
Union for at least four years and certain other requirements are satisfied.
See "-- Taxation of First Union -- General."
Even if First Union fails to satisfy one or both of the 75% or 95%
gross income tests for any taxable year, it may still qualify as a REIT for
such year if it is entitled to relief under certain provisions of the Code.
These relief provisions will generally be available if:
o First Union's failure to comply was due to reasonable cause and
not to willful neglect;
o First Union reports the nature and amount of each item of its
income included in the tests on a schedule attached to its tax
return; and
o any incorrect information on this schedule is not due to fraud
with intent to evade tax.
If these relief provisions apply, however, First Union will nonetheless be
subject to a special tax upon the greater of the amount by which it fails
either the 75% or 95% gross income test for that year.
Annual Distribution Requirements. In order to qualify as a REIT, First
Union is required to make distributions (other than capital gain dividends)
to its shareholders each year in an amount at least equal to
o the sum of
(1) 95% of First Union's REIT taxable income (computed without
regard to the dividends paid deduction and the REIT's net
capital gain) and
(2) 95% of the net income (after tax), if any, from foreclosure
property,
minus
o the sum of certain items of non-cash income.
Such distributions must be paid in the taxable year to which they
relate, or in the following taxable year if declared before First Union
timely files its tax return for such year with an appropriate election and
if paid on or before the first regular dividend payment after such
declaration. To the extent that First Union does not distribute all of its
net capital gain or distributes at least 95%, but less than 100%, of its
REIT taxable income, as adjusted, it will be subject to tax on the
undistributed amount at regular capital gains or ordinary corporate tax
rates, as the case may be. For taxable years beginning after August 5,
1997, the 1997 Act permits a REIT, with respect to undistributed net
long-term capital gains it received during the taxable year, to designate
in a notice mailed to shareholders within 60 days of the end of the taxable
year (or in a notice mailed with its annual report for the taxable year)
such amount of such gains which its shareholders are to include in their
taxable income as long-term capital gains. Thus, if First Union made this
designation, the shareholders of First Union would include in their income
as long-term capital gains their proportionate share of the undistributed
net capital gains as designated by First Union and First Union would have
to pay the tax on such gains within 30 days of the close of its taxable
year. Each shareholder of First Union would be deemed to have paid such
shareholder's share of the tax paid by First Union on such gains, which tax
would be credited or refunded to the shareholder. A shareholder would
increase its tax basis in its First Union stock by the difference between
the amount of income to the holder resulting from the designation less the
holder's credit or refund for the tax paid by First Union.
First Union intends to make timely distributions sufficient to satisfy
the annual distribution requirements. It is possible that First Union may
not have sufficient cash or other liquid assets to meet the 95%
distribution requirement, due to, among other things, timing differences
between the actual receipt of income and actual payment of expenses on the
one hand, and the inclusion of such income and deduction of such expenses
in computing First Union's REIT taxable income on the other hand. To avoid
any problem with the 95% distribution requirement, First Union will closely
monitor the relationship between its REIT taxable income and cash flow and,
if necessary, intends to borrow funds in order to satisfy the distribution
requirement. However, there can be no assurance that such borrowing would
be available at such time.
If First Union fails to meet the 95% distribution requirement as a
result of an adjustment to First Union's tax return by the IRS, First Union
may retroactively cure the failure by paying a "deficiency dividend" (plus
applicable penalties and interest) within a specified period.
Failure to Qualify. If First Union fails to qualify for taxation as a
REIT in any taxable year and certain relief provisions do not apply, First
Union will be subject to tax (including applicable alternative minimum tax)
on its taxable income at regular corporate rates. Distributions to
shareholders in any year in which First Union fails to qualify as a REIT
will not be deductible by First Union, nor generally will they be required
to be made under the Code. In such event, to the extent of current and
accumulated earnings and profits, all distributions to shareholders will be
taxable as ordinary income, and subject to certain limitations in the Code,
corporate distributees may be eligible for the dividends-received
deduction. Unless entitled to relief under specific statutory provisions,
First Union also will be disqualified from reelecting taxation as a REIT
for the four taxable years following the year during which qualification
was lost.
TAXATION OF FIRST UNION'S SHAREHOLDERS
Taxation of Taxable U.S. Shareholders. As used herein, the term "U.S.
Shareholder" means a holder of Common Shares who (for United States federal
income tax purposes) is
o a citizen or resident of the United States,
o a corporation or partnership organized under the laws of the
United States, or of any political subdivision thereof,
o an estate the income of which is subject to United States federal
income taxation regardless of its source or
o a trust subject to the primary supervision of a court within the
United States and the control of one or more U.S. persons.
A "Non-U.S. Shareholder" is a shareholder other than a U.S. Shareholder.
As long as First Union qualifies as a REIT, distributions made to
First Union's taxable U.S. Shareholders out of current or accumulated
earnings and profits (and not designated as capital gain dividends) will be
taken into account by them as ordinary income and will not be eligible for
the dividends-received deduction for corporations. Distributions (and for
tax years beginning after August 5, 1997, undistributed amounts) that are
designated as capital gain dividends will be taxed as long-term capital
gains (to the extent they do not exceed First Union's actual net capital
gain for the taxable year) without regard to the period for which the
shareholder has held its shares. However, corporate U.S. Shareholders may
be required to treat up to 20% of certain capital gain dividends as
ordinary income. To the extent that First Union makes distributions in
excess of current and accumulated earnings and profits, these distributions
are treated first as a tax-free return of capital to the U.S. Shareholder,
reducing the tax basis of a U.S. Shareholder's shares by the amount of such
distribution (but not below zero), with distributions in excess of the U.S.
Shareholder's tax basis taxable as capital gains (if the shares are held as
a capital asset). In addition, any dividend declared by First Union in
October, November or December of any year and payable to a shareholder of
record on a specific date in any such month shall be treated as both paid
by First Union and received by the U.S. Shareholder on December 31 of such
year, provided that the dividend is actually paid by First Union during
January of the following calendar year. U.S. Shareholders may not include
in their individual income tax returns any net operating losses or capital
losses of First Union. Federal income tax rules may also require that
certain minimum tax adjustments and preferences be apportioned to First
Union shareholders.
Distributions made by First Union and gain arising from the sale or
exchange by a U.S. Shareholder of Common Shares will not be treated as
passive activity income, and, as a result, U.S. Shareholders generally will
not be able to apply any "passive losses" against such income or gain.
Upon any sale or other disposition of Common Shares, a U.S.
Shareholder will recognize gain or loss for federal income tax purposes in
an amount equal to the difference between
o the amount of cash and the fair market value of any property
received on such sale or other disposition, and
o the holder's adjusted basis in the Common Shares for tax
purposes.
Such gain or loss will be capital gain or loss if the Common Shares have been
held by the U.S. Shareholder as a capital asset and will be long-term gain or
loss if such Common Shares have been held for more than one year. Long-term
capital gain of an individual U.S. Shareholder is generally subject to a
maximum tax rate of 20%. In general, any loss recognized by a U.S.
Shareholder upon the sale or other disposition of Common Shares of First
Union that have been held for six months or less (after applying certain
holding period rules) will be treated as long-term capital loss, to the
extent of distributions received by such U.S. Shareholder from First Union
which were required to be treated as long-term capital gains.
Backup Withholding. First Union will report to its U.S. Shareholders
and to the IRS the amount of distributions paid during each calendar year,
and the amount of tax withheld, if any, with respect thereto. Under the
backup withholding rules, a shareholder may be subject to backup
withholding at applicable rates with respect to distributions paid unless
such shareholder
o is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact or
o provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding, and otherwise complies
with applicable requirements of the backup withholding rules.
A U.S. Shareholder that does not provide First Union with its correct
taxpayer identification number may also be subject to penalties imposed by
the IRS. Any amount paid as backup withholding will be credited against the
shareholder's income tax liability. In addition, First Union may be required
to withhold a portion of capital gain distributions made to any shareholders
who fail to certify their non-foreign status to First Union.
Taxation of Tax-Exempt Shareholders. The IRS has issued a revenue
ruling in which it held that amounts distributed by a REIT to a tax-exempt
employees' pension trust do not constitute unrelated business taxable
income ("UBTI"). Subject to the discussion below regarding a "pension-held
REIT," based upon the ruling, the analysis therein and the statutory
framework of the Code, distributions by First Union to a shareholder that
is a tax-exempt entity should also not constitute UBTI, provided that the
tax-exempt entity has not financed the acquisition of its shares with
"acquisition indebtedness" within the meaning of the Code, and that the
shares are not otherwise used in an unrelated trade or business of the
tax-exempt entity, and that First Union, consistent with its present
intent, does not hold a residual interest in a real estate mortgage
investment conduit.
For tax-exempt shareholders that are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and
qualified group legal services plans exempt from federal income taxation
under Sections 501(c)(7), (c)(9), (c)(17), and (c)(20) of the Code,
respectively, income from an investment in Common Shares will constitute
UBTI unless the organization is able to properly deduct amounts set aside
or placed in reserve for certain purposes so as to offset the income
generated by its Common Shares. Such prospective investors should consult
their own tax advisors concerning these "set aside" and reserve
requirements.
However, if any pension or other retirement trust that qualifies under
Section 401(a) of the Code ("qualified pension trust") holds more than 10%
by value of the interests in a "pension-held REIT" at any time during a
taxable year, a portion of the dividends paid to the qualified pension
trust by such REIT may constitute UBTI. For these purposes, a "pension-held
REIT" is defined as a REIT if
o such REIT would not have qualified as a REIT but for the
provisions of the Code which look through such a qualified
pension trust in determining ownership of stock of the REIT and
o at least one qualified pension trust holds more than 25% by value
of the interests of such REIT or one or more qualified pension
trusts (each owning more than a 10% interest by value in the
REIT) hold in the aggregate more than 50% by value of the
interests in such REIT.
Taxation of Non-U.S. Shareholders. The rules governing United States
federal income taxation of Non-U.S. Shareholders are complex, and no
attempt will be made to provide herein more than a summary of such rules.
PROSPECTIVE NON-U.S. SHAREHOLDERS ARE URGED TO CONSULT THEIR TAX
ADVISORS TO DETERMINE THE IMPACT OF U.S. FEDERAL, STATE AND LOCAL TAX LAWS
WITH REGARD TO AN INVESTMENT IN COMMON SHARES, INCLUDING ANY REPORTING
REQUIREMENTS.
Distributions From First Union
------------------------------
1. Ordinary Dividends. The portion of dividends received by
Non-U.S. Shareholders payable out of First Union's earnings and profits
that are not attributable to capital gains of First Union and that are not
effectively connected with a U.S. trade or business of the Non-U.S.
Shareholder will generally be subject to U.S. withholding tax at the rate
of 30% (unless reduced by treaty or the Non-U.S. Shareholder files an IRS
Form 4224 (or successor form) with First Union certifying that the
investment to which the distribution relates is effectively connected to a
United States trade or business of such Non-U.S. Shareholder). Under
certain limited circumstances, the amount of tax withheld may be
refundable, in whole or in part, because of the tax status of certain
partners or beneficiaries of Non-U.S. Shareholders that are either foreign
partnerships or foreign estates or trusts. In general, Non-U.S.
Shareholders will not be considered engaged in a U.S. trade or business
solely as a result of their ownership of Common Shares. In cases where the
dividend income from a Non-U.S. Shareholder's investment in Common Shares
is (or is treated as) effectively connected with the Non-U.S. Shareholder's
conduct of a U.S. trade or business, the Non-U.S. Shareholder generally
will be subject to U.S. tax at graduated rates, in the same manner as U.S.
shareholders are taxed with respect to such dividends (and may also be
subject to the 30% branch profits tax (unless reduced by treaty) in the
case of a Non-U.S. Shareholder that is a foreign corporation).
2. Capital Gain Dividends. Under the Foreign Investment in Real
Property Tax Act of 1980 ("FIRPTA"), any distribution made by First Union
to a Non-U.S. Shareholder, to the extent attributable to gains from
dispositions of United States Real Property Interests ("USRPIs") by First
Union ("USRPI Capital Gains"), will be considered effectively connected
with a U.S. trade or business of the Non-U.S. Shareholder and subject to
U.S. income tax at the rates applicable to U.S. individuals or
corporations, without regard to whether such distribution is designated as
a capital gain dividend. In addition, First Union will be required to
withhold tax equal to 35% of the amount of any distribution that could be
designated by First Union as a capital gain dividend. However, if First
Union designates as a capital gain dividend a distribution made prior to
the day First Union actually effects such designation, then (although such
distribution may be taxable to a Non-U.S. Shareholder) such distribution is
not subject to withholding under FIRPTA; rather, First Union must effect
the 35% FIRPTA withholding from distributions made on and after the date of
such designation, until the distributions so withheld equal the amount of
the prior distribution designated as a capital gain dividend. The amount
withheld is creditable against the Non-U.S. Shareholder's U.S. tax
liability. Such distribution may also be subject to the 30% branch profits
tax (unless reduced by treaty) in the case of a Non-U.S. Shareholder that
is a foreign corporation.
3. Non-Dividend Distributions. Distributions in excess of current
and accumulated earnings and profits of First Union, which are not
attributable to the gain from disposition by First Union of a USRPI, will
not be taxable to a Non-U.S. Shareholder to the extent that they do not
exceed the adjusted basis of the Non-U.S. Shareholder's Common Shares, but
rather will reduce the adjusted basis of such Common Shares. To the extent
that such distributions exceed the adjusted basis of a Non-U.S.
Shareholder's Common Shares, they will give rise to tax liability if the
Non-U.S. Shareholder otherwise would be subject to tax on any gain from the
sale or disposition of its Common Shares, as described below. If it cannot
be determined at the time a distribution is made whether such distribution
will be in excess of current and accumulated earnings and profits, the
distribution will be subject to withholding at the rate applicable to
dividends. However, the Non-U.S. Shareholder may seek a refund of such
amounts from the IRS if it is subsequently determined that such
distribution was, in fact, in excess of current accumulated earnings and
profits of First Union.
Dispositions of Common Shares
-----------------------------
Unless the Common Shares constitute USRPIs, a sale or exchange of
Common Shares by a Non-U.S. Shareholder generally will not be subject to
U.S. taxation under FIRPTA. The Common Shares will not constitute USRPIs if
First Union is a "domestically controlled REIT." A domestically controlled
REIT is a REIT in which, at all times during a specified testing period,
less than 50% in value of its shares is held directly or indirectly by
Non-U.S. Shareholders. First Union believes that it is and will continue to
be a domestically controlled REIT and, therefore, that the sale of Common
Shares will not be subject to taxation under FIRPTA. However, no assurance
can be given that First Union will continue to be a domestically controlled
REIT.
If First Union does not constitute a domestically controlled REIT, a
Non-U.S. Shareholder's sale or exchange of Common Shares generally will
still not be subject to tax under FIRPTA as a sale of USRPIs provided that
o First Union's Common Shares are "regularly traded" (as defined by
applicable Treasury regulations) on an established securities
market (e.g., the NYSE, on which the Common Shares are listed)
and
o the selling Non-U.S. Shareholder held 5% or less of First Union's
outstanding Common Shares at all times during a specified testing
period.
If gain on the sale or exchange of Common Shares were subject to
taxation under FIRPTA, the Non-U.S. Shareholder would be subject to U.S.
income tax at the rates applicable to U.S. individuals or corporations, and
the purchaser of Common Shares could be required to withhold 10% of the
purchase price and remit such amount to the IRS. The branch profits tax
generally would not apply to such sales or exchanges.
Capital gains not subject to FIRPTA will nonetheless be taxable in the
United States to a Non-U.S. Shareholder in two cases:
o if the Non-U.S. Shareholder's investment in Common Shares is
effectively connected with a U.S. trade or business conducted by
such Non-U.S. Shareholder, the Non-U.S. Shareholder will be
subject to the same treatment as U.S. Shareholders with respect
to such gain or
o if the Non-U.S. Shareholder is a nonresident alien individual who
was present in the United States for 183 days or more during the
taxable year and certain other conditions apply, in which case
the nonresident alien individual will be subject to 30% tax on
the individual's capital gain (unless reduced or eliminated by
treaty).
Treaty Benefits
---------------
Pursuant to current Treasury regulations, dividends paid to an address
in a country outside the United States are generally presumed to be paid to
a resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate.
Shareholders that are partnerships or entities that are similarly fiscally
transparent for federal income tax purposes, and persons holding Common
Shares through such entities, may be subject to restrictions on their
ability to claim benefits under U.S. tax treaties and should consult a tax
advisor.
Under recently issued Treasury regulations that are effective for
payments made after December 31, 1999 (the "Withholding Regulations"),
however, a Non-U.S. Shareholder who wishes to claim the benefit of an
applicable treaty rate would be required to satisfy applicable
certification requirements. In addition, under the Withholding Regulations,
in the case of Common Shares held by a foreign partnership,
o the certification requirement would generally be applied to the
partners in the partnership and
o the partnership would be required to provide certain information,
including a United States taxpayer identification number.
The Withholding Regulations provide look-through rules in the case of tiered
partnerships.
<PAGE>
PLAN OF DISTRIBUTION
Any Rights to be issued by First Union will be distributed to
shareholders of First Union as of a specified record date. Any Common
Shares offered pursuant to such Rights will be offered by First Union
directly to its shareholders. First Union may elect to retain dealer
managers in connection with any Rights offering to provide marketing
assistance or to solicit exercises of Rights. The identity of any such
dealer managers and any compensation provided by First Union to such dealer
managers will be described in the related prospectus supplement.
With respect to Common Shares offered other than pursuant to the
exercise of Rights, First Union may sell such Common Shares to or through
one or more underwriters or dealers and also may sell Common Shares
directly to institutional investors or other purchasers, or through agents.
The distribution of such Common Shares may be effected from time to
time in one or more transactions at a fixed price or prices, which may be
changed, or at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices.
In connection with the sale of such Common Shares, underwriters or
agents may receive compensation from First Union or from purchasers of
Common Shares for whom they may act as agents in the form of discounts,
concessions or commissions. Underwriters may sell Common Shares to or
through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters and/or
commissions from the purchasers for whom they may act as agents.
Underwriters, dealers and agents that participate in the distribution of
Common Shares may be deemed to be underwriters, and any discounts or
commissions received by them from First Union and any profit on the resale
of securities by them may be deemed to be underwriting discounts and
commissions under the Securities Act. Any such underwriter or agent will be
identified, and any such compensation received from First Union will be
described, in the related prospectus supplement.
Under agreements which may be entered into by First Union,
underwriters and agents who participate in the distribution of Common
Shares may be entitled to indemnification by First Union against certain
liabilities, including liabilities under the Securities Act, or to
contribution by First Union with respect to payments they may be required
to make in respect thereof.
If so indicated in the related prospectus supplement, First Union will
authorize underwriters or other persons acting as First Union's agents to
solicit offers by certain institutions to purchase Common Shares from First
Union pursuant to contracts providing for payment and delivery on a future
date. Institutions with which such contracts may be made include commercial
and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and others, but in all
cases such institutions must be approved by First Union. The obligations of
any purchaser under any such contract will be subject to the condition that
the purchase of Common Shares shall not at the time of delivery be
prohibited under the laws of the jurisdiction to which such purchaser is
subject. The underwriters and such other agents will not have any
responsibility in respect of the validity or performance of such contracts.
Until a distribution of the Common Shares is completed, the rules of
the Commission may limit the ability of underwriters and certain selling
group members to bid for and purchase Common Shares. As an exception to
these rules, underwriters are permitted to engage in certain transactions
that stabilize the price of the Common Shares. Such transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the
price of the Common Shares.
If any underwriters create a short position in the Common Shares in
connection with an offering, i.e., if they sell more Common Shares than are
set forth on the cover page of the applicable prospectus supplement, the
underwriters may reduce that short position by purchasing securities in the
open market.
Underwriters may also impose a penalty bid on certain selling group
members. This means that if the underwriters purchase Common Shares in the
open market to reduce the underwriters' short position or to stabilize the
price of the Common Shares, they may reclaim the amount of the selling
concession from the selling group members who sold those Common Shares as
part of the offering.
In general, purchases of a security for the purpose of stabilization
or to reduce a short position could cause the price of the security to be
higher than it might be in the absence of such purchases. The imposition of
a penalty bid might also have an effect on the price of the securities to
the extent that it discourages resales of the securities.
Neither First Union nor any underwriter makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Shares. In
addition, neither First Union nor any underwriter makes any representation
that the underwriter will engage in such transactions or that such
transactions, once commenced, will not be discontinued without notice.
Any Common Shares sold pursuant to a prospectus supplement will be
listed on the NYSE, subject to official notice of issuance. No assurances
can be given that there will be an active trading market for the Common
Shares.
Certain of the underwriters or agents and their affiliates may engage
in transactions with and perform services for First Union or its affiliates
in the ordinary course of their respective businesses.
EXPERTS
The combined financial statements and schedules as of December 31,
1998 and 1997, and for each of the three years in the period ended December
31, 1998, incorporated by reference in the Registration Statement of which
this prospectus is a part, have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their reports with respect
thereto, and are incorporated by reference in reliance upon the authority
of said firm as experts in giving said reports.
LEGAL MATTERS
Certain legal matters relating to the validity of the Common Shares
offered pursuant to this prospectus will be passed upon for First Union by
Hahn Loeser & Parks LLP.
<PAGE>
GLOSSARY
--------
Set forth below is a list of certain of the more significant terms
used in this prospectus.
ACMs Asbestos-containing materials.
ADA Americans with Disabilities Act of
1990.
Apollo Apollo Real Estate Advisors, LP.
Board; Board of Trustees First Union's Board of Trustees.
Board Change Default Default under the Credit Facilities
as a result of the change in the
Board's composition.
Bridge Loan Loan to First Union in an original
principal amount of $90 million from
a syndicate of lenders led by Bankers
Trust Company that, except as
otherwise described in the
Registration Statement of which this
prospectus is a part, (i) bears
interest at 12% per annum, (ii) is
subject to a mandatory reduction of
outstanding principal to less than
approximately $38 million by May 15,
1999 and (iii) terminates August 11,
1999, the proceeds of which financed
the repurchase of the Senior Notes.
Certificate of Designations First Union's Certificate of
Designations authorizing the Series A
Preferred Shares.
Change-in-Control Expenses Expenses incurred by First Union
during 1998 primarily in connection
with the proxy contest waged by
Gotham LP and Gotham III LP and the
change in the Board's composition.
These expenses included proxy
expenses and related legal fees
incurred by First Union, Gotham LP
and Gotham III LP, other professional
fees related to the change in the
composition of the Board, cash
severance and vesting of restricted
stock for Mr. Mastandrea, First
Union's terminated Chairman of the
Board, Chief Executive Officer and
President, vesting of restricted
stock granted to other employees of
the First Union Companies and
severance expenses related to
employee change-in-control and
termination agreements.
Code Internal Revenue Code of 1986, as
amended.
Commission Securities and Exchange Commission.
Common Shares Shares of beneficial interest, $1.00
par value per share, of First Union.
Conversion Price $7.5625 per Common Share, subject to
adjustment.
Credit Facilities The Impark Credit Facility and the
FUR Credit Facility.
Declaration of Trust First Union's Amended Declaration of
Trust, as amended through July 25,
1986.
Enterprise Enterprise Asset Management Inc., a
real estate investment firm located
in New York City.
Excess Securities Common Shares owned by a person or
group in excess of 9.8% of the
outstanding Common Shares.
Exchange Act Securities Exchange Act of 1934, as
amended.
FIRPTA Foreign Investment in Real Property
Tax Act of 1980.
First Offering As part of the standby purchase
arrangements between First Union and
Gotham LP, Gotham III LP and Gotham
Partners International, Ltd., each as
standby purchasers, First Union's
Rights offering that would generate
minimum gross proceeds of $20 million
and for which the standby purchasers
would "standby" to purchase such
number of Common Shares that would
result in gross proceeds to First
Union of up to $50 million.
First Union First Union Real Estate Equity and
Mortgage Investments and its
subsidiaries.
First Union Companies FUMI and First Union.
Fried Frank Fried, Frank, Harris, Shriver &
Jacobson (a partnership including
professional corporations), counsel
to First Union.
FUMI First Union Management, Inc., an
affiliate of First Union, and its
subsidiaries.
FUMI Shares Shares of common stock, without par
value, of FUMI.
FUR Credit Facility First Union's senior credit facility
which terminates on August 11, 1999.
The availability under the facility
is $105 million and will be reduced
to $80 million on April 30, 1999 and
then to $50 million on June 30, 1999.
Gotham International Gotham International Advisors, L.L.C.
Gotham II LP Gotham Partners II, L.P.
Gotham III LP Gotham Partners III, L.P.
Gotham LP Gotham Partners L.P. and Gotham
Partners III, L.P.
GPLP GPLP Management Corp.
GPM Gotham Partners Management Co. LLC.
Impark Imperial Parking Limited and its
subsidiaries and Impark Services
Limited and its subsidiaries.
Impark Credit Facility Impark's Cdn.$38.8 million credit
facility.
IRS Internal Revenue Service.
Junior Shares Capital shares of First Union ranking
junior to the Series A Preferred
Shares as to distributions and in
distribution of assets as described
in the Certificate of Designations.
1997 Act Taxpayer Relief Act of 1997, as
amended.
Moody's Moody's Investors Services, Inc.
Non-U.S. Shareholder A shareholder other than a U.S.
Shareholder.
Parity Shares Shares of beneficial interest ranking
on a parity with the Series A
Preferred Shares with respect to the
payment of distributions and amounts
upon liquidation, dissolution and
winding up as described in the
Certificate of Designations.
Percentage Rent Deferral Non-recording of percentage rent by
First Union during the third quarter
of 1998.
Permitted Common Share Cash Cumulative cash distributions paid
Distributions with respect to the Common Shares
after December 31, 1995 which are not
in excess of the following: the sum
of (i) First Union's cumulative
undistributed income from operations
and capital gains and cumulative
depreciation and amortization at
December 31, 1995, plus (ii) the
cumulative amount of net income
before distributions accrued or paid
on the Series A Preferred Shares,
plus depreciation and amortization,
after December 31, 1995, minus (iii)
the cumulative amount of
distributions accrued or paid on the
Series A Preferred Shares or any
other class of Preferred Shares after
the date of original issue of the
Series A Preferred Shares.
Preferred Shares Preferred shares of beneficial
interest, $1.00 par value per share.
Project The First Union Companies' Year 2000
Compliance Project.
Registration Statement First Union's Registration Statement
on Form S-3, together with all
amendments and exhibits, registering
under the Securities Act the Rights
and the Common Shares issuable upon
exercise of the Rights.
REIT Real estate investment trust.
Rights Rights to purchase First Union's
Common Shares.
Rights Agreement Rights Agreement, dated as of March
7, 1990, between the Company and
National City Bank, as Rights Agent.
Second Offering The Rights offering that First Union
may conduct for which Gotham LP,
Gotham III LP, Gotham Partners
International, Ltd. and Elliott
Associates, L.P. may purchase such
number of Common Shares that would
result in gross proceeds to First
Union of up to $40 million.
Securities Act Securities Act of 1933, as amended.
Senior Notes First Union's 8-7/8% Senior Notes due
2003.
Series A Preferred Shares Series A Cumulative Redeemable
Preferred Shares of Beneficial
Interest.
S&P Standard & Poor's Corporation.
Specified Offering An offering of Common Shares by First
Union under this prospectus.
Stapled REIT Legislation 1998 tax legislation limiting the
"grandfathering" rule applicable to
stapled REITs.
Trust The trust in which all of the shares
of FUMI are owned for the benefit of
the holders of Common Shares.
UBTI Unrelated business taxable income.
USRPIs United States real property interests.
USRPI Capital Gains Gains from dispositions of USRPIs.
U.S. Shareholder Holder of Common Shares who (for
United States federal income tax
purposes) is (i) a citizen or
resident of the United States, (ii) a
corporation or partnership organized
under the laws of the United States,
or of any political subdivision
thereof, (iii) an estate, the income
of which is subject to United States
federal income taxation regardless of
its source or (iv) a trust subject to
the primary supervision of a court
within the United States and the
control of one or more U.S. persons.
Voting Preferred Shares Parity Shares with voting rights.
Withholding Regulations Recently issued Treasury regulations
relating to federal withholding tax
procedures.
<PAGE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
FIRST UNION REAL ESTATE
EQUITY AND MORTGAGE
INVESTMENTS
12,550,442 RIGHTS TO PURCHASE
12,550,442 SHARES
OF BENEFICIAL INTEREST
------------------------------------
PROSPECTUS SUPPLEMENT
------------------------------------
APRIL [ ], 1999
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated expenses (other than the
SEC registration fee) in connection with the issuance and distribution of
the securities registered hereby, all of which will be paid by the
Registrant:
SEC registration fee........................................ $46,361
Printing and duplicating expenses........................... 25,000
Legal fees and expenses..................................... 650,000
Accounting fees and expenses................................ 30,000
Miscellaneous expenses...................................... 48,639
Total.................................................... $800,000
=======
ITEM 15. INDEMNIFICATION OF TRUSTEES AND OFFICERS.
Pursuant to Article III, Section 3.3 of the Amended Declaration of
Trust, each Trustee, officer, employee and agent of the Registrant is
entitled to indemnification for any loss, cost, liability or obligation in
connection with the Registrant's property or the affairs of the Registrant
except for such of his own acts as constitute bad faith, willful
misfeasance or willful disregard of his duties.
The Registrant has acquired insurance indemnifying Trustees and
officers in certain cases and with certain deductible limitations.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
See Exhibit Index included herewith which is incorporated herein by
reference.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any Prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the Registration Statement (or
the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the Registration
Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected
in the form of prospectus filed with the Commission pursuant
to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the
maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective
registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement;
provided, however, that paragraphs (a)(i) and (a)(ii) do
not apply if the information required to be included in a
post-effective amendment by those paragraphs is contained
in periodic reports filed with or furnished to the
Commission by the Registrant pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the Registration Statement.
(b) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering
thereof.
(c) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Securities Exchange Act of 1934 that is incorporated by reference in
the Registration Statement shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to Trustees, officers and
controlling persons of the Registrant pursuant to the provisions set forth
or described in Item 15 of this Registration Statement, or otherwise, the
Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registrant of expenses incurred or paid by a
Trustee, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such Trustee,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act of 1933 and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that: (1) for purposes of
determining any liability under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part of this Registration
Statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under
the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective; and (2) for the purpose
of determining any liability under the Securities Act of 1933, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements for filing on Form S-3 and has duly caused
this Amendment No. 4 to the Registration Statement on Form S-3 (File No.
333-63547) to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Cleveland, and State of Ohio, on the 9th day of
April, 1999.
FIRST UNION REAL ESTATE EQUITY
AND MORTGAGE INVESTMENTS
By: /s/ William A. Ackman
---------------------------
William A. Ackman
Chairman of the Board
of Trustees
Pursuant to the requirements of the Securities Act of 1933, this
Amendment No. 4 to the Registration Statement on Form S-3 (File No.
333-63547) has been signed by the following persons in the capacities and
on the 9th day of April, 1999.
SIGNATURE TITLE
--------- -----
/s/ William A. Ackman Chairman of the Board of Trustees
- ------------------------------
William A. Ackman
/s/ Daniel P. Friedman President and Chief Executive
- ------------------------------ Officer (Principal Executive Officer)
Daniel P. Friedman
* Executive Vice President and Chief
- ------------------------------ Financial Officer
Steven M. Edelman (Principal Financial Officer)
* Senior Vice President and Chief
- ------------------------------ Accounting Officer
John J. Dee (Principal Accounting Officer)
- ------------------------------ Vice Chairman of the Board of
William A. Scully Trustees
*
- ------------------------------ Trustee
Daniel J. Altobello
*
- ------------------------------ Trustee
David P. Berkowitz
*
- ------------------------------ Trustee
William E. Conway
*
- ------------------------------ Trustee
Allen H. Ford
*
- ------------------------------ Trustee
Stephen J. Garchick
<PAGE>
*
- ------------------------------ Trustee
Russell R. Gifford
*
- ------------------------------ Trustee
David S. Klafter
*
- ------------------------------ Trustee
Daniel Shuchman
*
- ------------------------------ Trustee
Stephen S. Snider
*
- ------------------------------ Trustee
Mary Ann Tighe
*
- ------------------------------ Trustee
James A. Williams
*/s/ William A. Ackman
- ------------------------------
William A. Ackman
Attorney-in-Fact
<PAGE>
INDEX TO EXHIBITS
3(a) -- Declaration of Trust of Registrant dated August 1, 1961,
as amended through July 25, 1986 (incorporated by
reference from Registrant's Registration Statement on
Form S-3 (No. 33-4493)).
3(b)+ -- By-laws of the Registrant, as amended, dated June 3,
1998.
4(a) -- Rights Agreement between the Registrant and National
City Bank dated March 7, 1990 (incorporated by reference
from Registrant's Form 8-A dated March 30, 1990).
4(b)+ -- Form of Amendment No. 1 to Rights Agreement between the
Registrant and National City Bank.
4(c) -- Form of certificate for Shares of Beneficial Interest
(incorporated by reference from Registrant's
Registration Statement on Form S-3 (No. 33-2818)).
4(d) -- Amended and Restated Declaration of Trust of First Union
Management, Inc. dated October 1, 1996 (incorporated by
reference from Registrant's Form 10-Q for the quarter
ended September 30, 1996 (File No. 1-6249)).
4(e) -- Certificate of Designations relating to Registrant's
Series A Cumulative Redeemable Preferred Shares of
Beneficial Interest (incorporated by reference from
Registrant's Form 8-K dated October 24, 1996).
4(f) -- Standby Purchase Agreement between Registrant and Gotham
Partners, L.P. dated August 11, 1998 (incorporated by
reference from Schedule 13D, dated August 11, 1998, of
Gotham Partners, L.P. regarding Registrant's Shares of
Beneficial Interest).
4(g) -- Standby Purchase Agreement between Registrant and Gotham
Partners III, L.P. dated August 11, 1998 (incorporated
by reference from Schedule 13D, dated August 11, 1998,
of Gotham Partners III, L.P. regarding Registrant's
Shares of Beneficial Interest).
4(h)+ -- Standby Purchase Agreement between Registrant and
Elliott Associates, L.P. dated August 11, 1998.
5+ -- Opinion of Hahn Loeser & Parks LLP as to validity of the
Shares of Beneficial Interest.
8* -- Opinion of Fried, Frank, Harris, Shriver & Jacobson as
to Federal Income Tax Consequences.
10(a)+ -- Fixed Rate Loan Agreement dated as of August 11, 1998 by
and among the Registrant, as borrower, Bankers Trust
Company, as agent, and Wellsford Capital and BankBoston,
N.A., as lenders.
10(b)+ -- Fixed Rate Loan Agreement dated as of August 11, 1998 by
and among the Registrant, as borrower, Bankers Trust
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(c) -- First Amendment to Fixed Rate Loan Agreement, dated
January 8, 1999, by and among the Registrant, as
borrower, Bankers Trust Company, as agent, and Wellsford
Capital and BankBoston, N.A., as lenders (incorporated
by reference from Registrant's Form 8-K dated February
2, 1999).
10(d) -- First Amendment to Fixed Rate Loan Agreement, dated
January 8, 1999, by and among the Registrant, as
borrower, Bankers Trust 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 (incorporated by reference from Registrant's
Form 8-K dated February 2, 1999).
10(e) -- Letter Agreement, dated January 8, 1999, by and among
the Registrant, as borrower, Bankers Trust Company, as
agent, and Wellsford Capital and BankBoston, N.A., as
lenders (incorporated by reference from Registrant's
Form 8-K dated February 2, 1999).
10(f) -- Letter Agreement, dated January 8, 1999, by and among
the Registrant, as borrower, Bankers Trust 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 (incorporated by reference
from Registrant's Form 8-K dated February 2, 1999).
23(a)* -- Consent of Arthur Andersen LLP.
23(b)+ -- Consent of Hahn Loeser & Parks LLP included as part of
Exhibit 5.
23(c)* -- Consent of Fried, Frank, Harris, Shriver & Jacobson
included as part of Exhibit 8.
23(d)* -- Consent of Mayer Brown & Platt.
24(a) -- Powers of Attorney (included on signature pages of
original filing).
99(a)+ -- Form of Rights Certificate.
99(b)+ -- Instructions as to Use of Rights Certificates.
99(c)+ -- Form of Notice of Guaranteed Delivery.
99(d)+ -- Form of Letter to Holders of Common Shares.
99(e)+ -- Form of Letter to Dealers, Banks, Brokers, etc.
99(f)+ -- Form of Letter to Clients.
99(g)+ -- Nominee Holder Certification.
99(h)+ -- Special Notice to Foreign Shareholders.
99(i)+ -- Tax Information.
99(j)+ -- Guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9.
- -----------------------
* Filed herewith.
+ Previously filed.
EXHIBIT 8
MARCH 30, 1999
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
55 PUBLIC SQUARE
CLEVELAND, OH 44113-1937
RE: U.S. FEDERAL INCOME TAX OPINION
-------------------------------
Dear Sir or Madam:
You have requested our opinion concerning the qualification of First
Union Real Estate Equity and Mortgage Investments ("First Union") as a real
estate investment trust (a "REIT") within the meaning of Section 856(a) of
the Internal Revenue Code of 1986, as amended (the "Code").
In reaching the opinion expressed below, we have reviewed and relied
upon the following: (i) the Form S-3 Registration Statement of First Union,
as filed with the Securities and Exchange Commission on March 30, 1999 (the
"Registration Statement"); (ii) the officers' certificate, dated as of the
date hereof, executed by officers of First Union (the "Officers'
Certificate"); (iii) the letters to First Union from Deloitte & Touche LLP,
independent public accountants retained by First Union, dated November 18,
1998, February 11, 1999, February 26, 1999, and March 9, 1999; (iv) the
opinion of Mayer, Brown & Platt, dated July 21, 1997, which is based upon
certain factual representations and assumptions, stating that, as of that
date, First Union's legal organization and method of operation enabled
First Union to satisfy the requirements for qualification as a REIT (the
"Mayer Brown Opinion"); and (v) such other materials and information as we
have deemed appropriate.
In rendering this opinion we have assumed, with your approval, that
(I) the statements and representations made in the Officers' Certificate
are true and correct, (II) the Officers' Certificate has been executed by
appropriate and authorized officers of First Union, and (III) the
assumptions and conditions underlying the Mayer Brown Opinion are true and
correct. We have further assumed that each of First Union and First Union
Management, Inc. (the "Management Company") has been operated and will
continue to be operated in the manner described in its applicable
organizational documents and the Registration Statement, and all terms and
provisions of such documents have been and will continue to be complied
with by all parties thereto and all shareholders and prospective
shareholders of First Union and the Management Company. We have further
assumed, without independent verification, that copies of documents
examined by us are true copies of originals thereof and that the
information concerning First Union and the Management Company set forth in
First Union's federal income tax returns, and in the Registration
Statement, as well as the representations made and the information provided
to us by First Union's management are true and correct.
The opinion expressed below is based upon existing laws, regulations,
Internal Revenue Service ("IRS") positions, and judicial decisions, any of
which may be changed at any time with retroactive effect. We assume no
obligation to modify or supplement our opinion if, after the date hereof,
any such laws, regulations, positions, or decisions change or we become
aware of any facts that might change our opinion. Furthermore, some of the
issues under existing law that could significantly affect our opinion have
not yet been authoritatively addressed by the IRS or the courts.
Based upon and subject to the foregoing, it is our opinion that
commencing with First Union's taxable year ended December 31, 1994, First
Union has been organized as, and has operated in conformity with the
requirements for qualification as, a REIT and its method of operation, as
described in the Registration Statement and as represented by it, will
enable it to satisfy the requirements for qualification as a REIT. This
opinion only addresses the operation of First Union in a manner that
qualifies as a REIT from the taxable year ended December 31, 1994 until the
date hereof. We undertake no obligation to update this opinion, or to
ascertain after the date hereof whether circumstances occurring after such
date may affect the conclusions set forth herein.
First Union's qualification as a REIT will depend upon the continuing
satisfaction by First Union and its subsidiaries of requirements of the
Code relating to qualification for REIT status, which requirements include
those that are dependent upon actual operating results, distribution
levels, diversity of stock ownership, asset composition, source of income
and recordkeeping. We do not undertake to monitor whether First Union
actually has satisfied or will continue to satisfy the various
qualification tests, and we express no opinion concerning whether First
Union actually has satisfied or will continue to satisfy these various
qualification tests.
Our opinion is not binding on the IRS. Hence, there can be no
assurance that the IRS will not assert that First Union does not qualify as
a REIT for federal income tax purposes, particularly since the
determination of whether First Union qualifies as a REIT depends upon
numerous factual issues as to which we are relying upon representations of
First Union. If the actual facts relating to the past or future operation
of First Union or the Management Company differ from those described to us
or assumed by us in any material respect, the opinion expressed herein may
become inapplicable. Moreover, our opinion is based only on the law as it
currently exists and has been interpreted. There can be no assurance that
the law (or the current interpretations thereof) will not change so as to
cause First Union to no longer qualify as a REIT.
The opinions expressed herein are for the benefit of First Union and
the holders of outstanding common shares of First Union and may not be
relied upon in any manner or for any purpose by any other person or entity,
or quoted in whole or in part, without our prior written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the references to this firm therein under the
caption "Federal Income Tax Consequences." In giving this consent, we do
not hereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act.
Very truly yours,
Fried, Frank, Harris, Shriver & Jacobson
Exhibit 23(a)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation by reference in this Amendment No. 4 to Registration
Statement (File No. 333-63547) of our reports dated March 29, 1999 included
in the Company's Form 10-K for the year ended December 31, 1998, and to all
references to our Firm included in this registration statement.
Cleveland, Ohio,
April 9, 1999. Arthur Andersen LLP
Exhibit 23(d)
[MAYER, BROWN & PLATT LETTERHEAD]
April 8, 1999
Fried, Frank, Harris,
Shriver & Jacobson
One New York Plaza
New York, New York 10004
Re: Consent to Reliance Upon Opinion Letter Dated
July 21, 1997 with Respect to REIT Qualification
------------------------------------------------
Ladies and Gentlemen:
Please refer to that certain opinion letter, dated July 21, 1997,
addressed to First Union Real Estate Equity & Mortgage Investments ("First
Union") and rendered by our firm (the "July 21, 1997 Opinion Letter"). By
this letter, we hereby inform you that we hereby consent to your reliance
upon the July 21, 1997 Opinion Letter (a copy of which is attached hereto
and made a part hereof) as though rendered to you on July 21, 1997, for the
sole purpose of your serving as tax counsel to First Union in connection
with a public rights offering being undertaken by First Union
contemporaneously herewith pursuant to a Prospectus (the "Prospectus")
forming a part of its Form S-3 Registration Statement (No. 333-63547). We
wish to note that the July 21, 1997 Opinion Letter is, among other things,
based upon facts, representations as to facts, documents, information,
assumptions, and other matters and things, as well as the law and legal
interpretations thereof, all as they were in effect and existed on July 21,
1997. Therefore, neither the July 21, 1997 Opinion Letter nor this reliance
letter addresses any change or modification in the basis for our opinion
that occurred or otherwise took effect after July 21, 1997.
In addition, we hereby consent to the references to our firm in the
second paragraph of page 31 of the Prospectus under the caption "Federal
Income Tax Consequences."
This reliance letter is rendered at the request of First Union and is
solely for its and your benefit, and is not to be relied upon or used for
any purpose except as stated herein without our written permission.
Very truly yours,
/s/MAYER, BROWN & PLATT
MAYER, BROWN & PLATT
<PAGE>
ANNEX A
[MAYER, BROWN & PLATT LETTERHEAD]
July 21, 1997
Board of Trustees
First Union Real Estate Equity and
Mortgage Investments
55 Public Square, Suite 1900
Cleveland, Ohio 44113-1937
Re: Status as a Real Estate Investment Trust ("REIT"); Information in
the Registration Statement under "FEDERAL INCOME TAX
CONSIDERATIONS" and "CERTAIN UNITED STATES TAX CONSIDERATIONS FOR
NON-U.S. SHAREHOLDERS"
Gentlemen:
In connection with the offering of Offered Securities(1) in First
Union Real Estate Equity and Mortgage Investments, a business trust subject
to the laws of Ohio ("First Union"), pursuant to the S-3 Registration
Statement filed with the Securities and Exchange Commission on the date
hereof, as amended (the "Registration Statement"), you have requested our
opinions concerning (i) the qualification of First Union as a real estate
investment trust ("REIT") for Federal income tax purposes; and (ii) the
information in the Registration Statement under the heading "FEDERAL INCOME
TAX CONSIDERATIONS" and "CERTAIN UNITED STATES TAX CONSIDERATIONS FOR
NON-U.S. SHAREHOLDERS."
In formulating our opinions, we have reviewed and relied upon (i) the
Registration Statement, (ii) First Union's Amended Declaration of Trust, as
amended through July 25, 1986, (iii) First Union's By-Laws, and (iv) such
other documents and information provided by you, and such applicable
provisions of law as we have considered necessary or desirable for purposes
of the opinions expressed herein.
In addition, we have relied upon certain representations made by First
Union and First Union Management, Inc. (the "Management Company") relating
to the organization and
- --------------
(1) Unless otherwise specifically defined herein, all capitalized terms
have the meaning assigned to them in the Registration Statement.
<PAGE>
operation of First Union and the Management Company. In rendering the
opinions set forth herein, we have also relied upon an opinion rendered by
Fasken Campbell Godfrey, as of May 27, 1997 regarding certain Canadian law
matters. The opinions also assume that First Union has not held nor will
hold a partnership interest or a membership interest, as the case may be,
directly or indirectly, in any partnership or limited liability company,
unless such partnership or limited liability company is treated for Federal
income tax purposes at all times as a partnership and not as an association
(or publicly traded partnership) taxable as a corporation.
In rendering the opinions set forth herein, we have assumed that First
Union and the Management Company each has operated and will continue to be
operated in the manner described in its applicable organizational documents
and the Registration Statement, and all terms and provisions of such
documents have been and will continue to be complied with by all parties
thereto and all shareholders and prospective shareholders of First Union
and the Management Company. In addition, we have assumed that for all of
its taxable years (or portion thereof) prior to the date of this opinion,
First Union satisfied all of the requirements necessary for qualification
as a REIT under the Code.
For purposes of the opinions set forth herein, we have not made an
independent investigation of the facts set forth in such documents and
information, representations from First Union and the Management Company,
or the Registration Statement. We have, consequently, relied upon the
representations of First Union and the Management Company that the
information presented in such documents or otherwise furnished to us
accurately and completely describes all material facts.
The opinions expressed herein are based on the applicable laws of the
State of Ohio, the Code, the Treasury regulations promulgated thereunder,
and interpretations of the Code and such regulations by the courts and the
Internal Revenue Service, all as they are in effect and exist at the date
of this letter. It should be noted that statutes, regulations, judicial
decisions, and administrative interpretations are subject to change at any
time and, in some circumstances, with retroactive effect. A material change
that is made after the date hereof in any of the foregoing bases for our
opinions could adversely affect our conclusions.
Based upon and subject to the foregoing, it is our opinion that:
1. First Union's existing legal organization and its method of
operation, as described in the Registration Statement and as
represented by First Union and the Management Company, will
enable First Union to satisfy the requirements for qualification
as a REIT.
2. The statements in the Registration Statement under the headings
"FEDERAL INCOME TAX CONSIDERATIONS" and "CERTAIN UNITED STATES
TAX CONSIDERATIONS FOR NON-U.S. SHAREHOLDERS," insofar as such
statements constitute matters of law or legal conclusions, have
been reviewed by us and are correct in all material respects.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of the name of our firm therein and
under the caption "FEDERAL INCOME TAX CONSIDERATIONS" in the Registration
Statement.
Very truly yours,
/s/ MAYER, BROWN & PLATT
MAYER, BROWN & PLATT
