-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, pJkm3mkggyVXdMsTaHm1KYuW+9ZAEzKgZ5+9Fs80udP6xwfImri1UlOA1nPe7RuB PxlqM27cQDJXve1t4aXpZA== 0000950152-94-000288.txt : 19940323 0000950152-94-000288.hdr.sgml : 19940323 ACCESSION NUMBER: 0000950152-94-000288 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19931231 FILED AS OF DATE: 19940322 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIRST UNION REAL ESTATE EQUITY & MORTGAGE INVESTMENTS CENTRAL INDEX KEY: 0000037008 STANDARD INDUSTRIAL CLASSIFICATION: 6798 IRS NUMBER: 346513657 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 34 SEC FILE NUMBER: 001-06249 FILM NUMBER: 94517195 BUSINESS ADDRESS: STREET 1: 55 PUBLIC SQUARE STREET 2: SUITE 1910 CITY: CLEVELAND STATE: OH ZIP: 44113 BUSINESS PHONE: 2167814030 MAIL ADDRESS: STREET 1: 55 PUBLIC SQUARE, SUITE 1910 CITY: CLEVELAND STATE: OH ZIP: 44113 FORMER COMPANY: FORMER CONFORMED NAME: FIRST UNION REALTY DATE OF NAME CHANGE: 19691012 10-K 1 FIRST UNION 10-K 1 ============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended 12-31-93 Commission file number 1-6249 -------- -------- First Union Real Estate Equity and Mortgage Investments - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 34-6513657 ------------------------------ --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) Suite 1900, 55 Public Square Cleveland, Ohio 44113-1937 --------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (216) 781-4030 --------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------- Shares of Beneficial Interest (Par Value $1 Per Share) New York Stock Exchange - ------------------------------ ------------------------ Securities registered pursuant to Section 12(g) of the Act: None - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes /X/ No / / State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing. As of January 31, 1994, 18,108,640 Shares of Beneficial Interest were held by non-affiliates, and the aggregate market value of such shares was approximately $183,349,980. (APPLICABLE ONLY TO CORPORATE REGISTRANTS) Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 18,108,725 Shares of Beneficial Interest were outstanding as of January 31, 1994. - -------------------------------------------------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents if incorporated by reference and the Part of the Form 10-K into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. The listed documents should be clearly described for identification purposes. Annual Report to Shareholders for the year ended December 31, 1993 (Parts II and IV). Proxy Statement dated March 11, 1994 for the Annual Meeting of Shareholders to be held on April 12, 1994 (Part III). 2 FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS CROSS REFERENCE SHEET PURSUANT TO ITEM G, GENERAL INSTRUCTIONS TO FORM 10-K
ITEM OF FORM 10-K LOCATION - ------------------------------------------------------------------------- -------------------------- (page or pages) PART I ------ 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 and 4 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . 5 through 11 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 12 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . 12 PART II ------- 5. Market for Registrant's Common Equity and Related Stockholder Matters. . . . . . . . . . . . . . . . . 12; Annual Report, Inside Front Cover 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . 12; Annual Report, 18 and 19 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . 12; Annual Report, 30 through 31 8. Financial Statements . . . . . . . . . . . . . . . . . . . . . 12; Annual Report, 20 through 29 9. Changes in and Disagreements with Accountants and Financial Disclosure . . . . . . . . . . . . . . . . . . 12 PART III -------- 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . 13 and 14; Proxy Statement, 1 through 4 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . 14; Proxy Statement, 4 and 7 through 10 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . 14; Proxy Statement, 6 13. Certain Relationships and Related Transactions . . . . . . . . 14 PART IV ------- 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Financial Statements and Financial Statement Schedules . . . . . . . . . . . . . . . . . 14, 15 and 19 through 25; Annual Report, 20 through 29 (b) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . 15 and 16; Exhibit Index, 26 (c) Reports on Form 8-K . . . . . . . . . . . . . . . . . . . 16
2 3 PART I ITEM 1. BUSINESS. The registrant is an unincorporated association in the form of a business trust organized in Ohio under a Declaration of Trust dated August 1, 1961, as amended from time to time through July 25, 1986 (the "Declaration of Trust"), which has as its principal investment policy the purchase of interests in real estate equities. The registrant qualifies as a real estate investment trust under Sections 856 through 860 of the Internal Revenue Code. In order to encourage efficient operation and management of its property, and after receiving a ruling from the Internal Revenue Service with respect to the proposed form of organization and operation, the registrant, in 1971, caused a management company to be organized pursuant to the laws of the State of Delaware under the name First Union Management, Inc. (the "Management Company"), to lease property from the registrant and to operate such property for its own account as a separate taxable entity. The registrant presently net leases 30 of its properties to the Management Company. The shares of the Management Company are held in trust, with the shareholders of the registrant, as exist from time to time, as contingent beneficiaries. For financial reporting purposes, the financial statements of the Management Company are combined with those of the registrant. The registrant owns regional enclosed shopping malls, large downtown office buildings and apartment complexes. Its portfolio is diversified by type of property, geographical location, tenant mix and rental market. As of December 31, 1993, the registrant owned (in fee or pursuant to long-term ground leases under which the registrant is lessee) seven office buildings, 15 shopping malls, 50% interests in two shopping malls, six apartment complexes, a 1,100-car parking garage, and a 300-car parking facility, as well as other miscellaneous properties (see Item 2 - Properties). The investment portfolio also includes two mortgage loans secured by an office building and an apartment complex. Currently, the registrant intends to concentrate its portfolio in retail and apartment properties while investments in office buildings will be de-emphasized. Although not presently seeking new mortgage investments, the registrant intends to hold its remaining two mortgage investments as long term investments. The registrant's office buildings compete for tenants principally with office buildings throughout the respective areas in which they are located. In most areas where the registrant's office buildings are located, there has been extensive new office building construction and competition for tenants has been and continues to be intense on the basis of rent, location and age of the building. High vacancy rates in the cities in which the registrant has properties continue to negatively impact the registrant's occupancy rates and its ability to raise rental rates. All of the registrant's shopping malls compete for tenants on the basis of the rent charged and location, and encounter competition from other retail properties in their respective market areas, and some of the registrant's shopping malls compete with other shopping malls in the environs. However, the principal competition for the registrant's shopping malls may come from future shopping malls locating in their market areas. In four markets in which the registrant competes, overbuilding of retail projects has caused occupancy levels to be negatively impacted. Additionally, the overall economic health of retail tenants impacts the registrant's shopping malls. The registrant's apartment complexes compete with other apartments and residential housing in the immediate areas in which they are located and may 3 4 compete with apartments and residential housing constructed in the same areas in the future. The registrant's parking facilities compete with other parking facilities in the immediate areas in which they are located and may compete with new parking facilities constructed in the same areas in the future. Additionally, the registrant's mortgage investments are collateralized by an office building and an apartment complex. Risks inherent with the registrant's portfolio are applicable to the collateral securing the mortgage investments. These risks may impair the realizability of the mortgage investments. The registrant also experiences considerable competition when attempting to acquire equity interests in desirable real estate at operating yields below the registrant's cost of funds. The competition is provided by other real estate investment trusts, insurance companies, private pension plans and private developers. Additionally, the opportunities for mortgage and public debt financing have increased from the prior year, although available financing requires restrictive covenants and conservative loan-to-value ratios. Moreover, the increase in publicly traded real estate investment trusts during 1993 may affect the registrant's competitive position in the public capital markets. The Federal Government and a number of states have adopted environmental, handicapped facilities and energy laws and regulations relative to the develop- ment and use of real estate. Such laws and regulations may operate to reduce the number and attractiveness of investment opportunities available to the registrant. The registrant has reviewed the properties which it owns or in which it has a leasehold interest to determine the extent and amount of capital expenditures to comply with the requirements for handicapped facilities. While the registrant is and will continue to make modifications to the properties which it owns, the amount is not expected to be material. The registrant is not aware of any other requirements to make capital expenditures to comply with such laws and regulations. Other effects upon the registrant's investments of the application of such laws and regulations cannot be predicted. The number of persons employed by the registrant is 34. 4 5
ITEM 2. PROPERTIES - ------ ---------- The following table sets forth certain information relating to the registrant's investments at December 31, 1993: Square Year Total Date of Ownership feet(1) Occupancy construction Cost Direct equity investments Location acquisition percentage (000) rate(2) completed (000) - ------------------------- -------- ----------- ---------- ------- --------- ----------- ----------- Shopping Malls: Eastern ---------- Middletown Fairmont, WV 12/03/70 50 % 471 88 % 1970 $ 6,446 Wyoming Valley Wilkes-Barre, PA 6/12/72 50 909 97 1972 12,172 Mountaineer Morgantown, WV 1/29/78 100 656(5) 64(5) 1975 32,393 Fingerlakes Auburn, NY 9/28/81 100 403 84 1980 26,044 Fairgrounds Square Reading, PA 9/30/81 100 528(6) 97 1980 29,720 Wilkes Wilkesboro, NC 5/04/83 100 359 69 1982 18,685 ------- 125,460 ------- Midwestern ------------ North Valley Denver, CO 12/03/69 100 452 66 1967 11,236 Crossroads St. Cloud, MN 1/01/72 100 743(8) 99 1966 22,138 Two Rivers Clarksville, TN 9/26/75 100 233 73 1968 7,975 Crossroads Fort Dodge, IA 4/22/77 100 425(10) 85 1967 11,137 Westgate Towne Centre Abilene, TX 4/22/77 100 386(11) 36(12) 1962 9,826 Kandi Willmar, MN 3/12/79 100 448 83 1973 18,648 ------- 80,960 ------- Western --------- Valley North Wenatchee, WA 8/30/73 100 170 97 1966 4,203 Mall 205 Portland, OR 3/01/75 100 434(13) 96 1970 13,700 Plaza 205 Portland, OR 4/26/78 100 167 100 1970 4,123 Peach Tree Marysville, CA 12/19/79 100 435 51(14) 1972 13,920 Valley Yakima, WA 5/01/80 100 418(15) 91 1972 11,791 ------- 47,737 ------- 254,157 ------- Apartments: Midwestern ------------ Somerset Lakes Indianapolis, IN 11/10/88 100 360 units 93 1975 19,950 Meadows of Catalpa Dayton, OH 7/11/89 100 323 units 94 1972 10,056 ------- 30,006 ------- Southern ---------- Briarwood Fayetteville, NC 6/30/91 100 273 units 97 1968-70 7,606 Woodfield Gardens Charlotte, NC 6/30/91 100 132 units 89 1974 3,613 Windgate Place Charlotte, NC 6/30/91 100 196 units 90 1974-78 5,785 Walden Village Atlanta, GA 6/01/92 100 380 units 91 1973 12,886 ------- 29,890 ------- $59,896 ------- 5
Mortgage Loans ----------------------------------------------------------- Balance Principal Original at repayment Direct equity balance(s) 12/31/93 for 1994 Interest Year of investments (000) (000) (000) rate maturity - --------------- ---------- -------- -------- -------- -------- Shopping Malls: Eastern --------- Middletown $ 2,950 $ 1,095 $ 187 8.25% 1998 Wyoming Valley 8,509(3) 4,266(4) 492(4) ---(4) ---(4) Mountaineer 9,847 5,891 594 9.10 2002 Fingerlakes --- --- --- --- --- Fairgrounds Square --- ---(7) --- --- --- Wilkes --- --- --- --- --- ------- ------- ------ 21,306 11,252 1,273 ------- ------- ------ Midwestern ------------ North Valley $ 2,037 $ 736 $123 7.75% 1999 Crossroads 35,000(3) 34,907 589 ---(9) 2003(9) Two Rivers --- --- --- --- --- Crossroads --- --- --- --- --- Westgate Towne Centre --- --- --- --- --- Kandi --- --- --- --- --- ------- ------- ------ 37,037 35,643 712 ------- ------- ------ Western --------- Valley North --- --- --- --- --- Mall 205 --- --- --- --- --- Plaza 205 1,716 825 114 8.50% 1999 Peach Tree --- --- --- --- --- Valley 5,300 1,095 532 8.25 1995 ------- ------- ------ 7,016 1,920 646 ------- ------- ------ 65,359 48,815 2,631 ------- ------- ------ Apartments: Midwestern ------------ Somerset Lakes $12,000(3) $12,000 $ ---(16) 9.875 1995 Meadows of Catalpa 8,000(3) 7,927 64 8.75 2002 ------- ------- ------ 20,000 19,927 64 ------- ------- ------ Southern ---------- Briarwood 2,542 2,233(17) 8(17) ---(17) ---(17) Woodfield Gardens 1,074 960 53 8.875 2005 Windgate Place 1,794 1,627(18) 78(18) ---(18) ---(18) Walden Village 3,342 2,924(19) 296(19) ---(19) ---(19) ------- ------- ------ 8,752 7,744 435 ------- ------- ------ 28,752 27,671 499 ------- ------- ------
5 6 ITEM 2. PROPERTIES -Continued
Square Year Total Date of Ownership feet(1) Occupancy construction cost Direct equity investments Location acquisition percentage (000) rate(2) completed (000) - ------------------------- -------- ----------- ---------- ------- --------- ----------- ------- Office Buildings: Midwestern - ---------------- 55 Public Square Cleveland, OH 1/15/63 100% 397 88% 1959 $28,896 Circle Tower Indianapolis, IN 10/16/74 100 103 74 1930 3,712 Rockwell Avenue Cleveland, OH 4/30/79 100 237 64 1916 12,451 300 Sixth Avenue Pittsburgh, PA 5/01/79 100 226 74 1906 7,955 Ninth Street Plaza Cleveland, OH 10/11/85 100 147 63 1981 7,072 ------- 60,086 Southern ------- ---------- Henry C. Beck Shreveport, LA 8/30/74 100 185 82 1958 7,161 Landmark Towers Oklahoma City, OK 10/01/77 100 259 73 1967-71 14,086 ------- 21,247 ------- 81,333 Other: ------- Land-Huntington Bldg. Cleveland, OH 10/25/61 100(21) --- -- --- 4,501 Parking Garage Cleveland, OH 12/31/75 100 1,100 spcs. -- 1969 6,887 Parking Facility Cleveland, OH 9/19/77 100 300 spcs. -- --- 2,286 ------- 13,674 ------- $409,060 ========
Mortgage Loans ------------------------------------------------------------------------ Balance Principal Original at repayment balance(s) 12/31/93 for 1994 Interest Year of Direct equity investments (000) (000) (000) rate maturity - ------------------------- --------- --------- -------- -------- -------- Office Buildings: Midwestern - ----------------- 55 Public Square --- --- --- --- --- Circle Tower --- --- --- --- --- Rockwell Avenue --- --- --- --- --- 300 Sixth Avenue $ 1,003(20) $ 972(20) $ 3(20) 10.0 % 2031 Ninth Street Plaza --- --- --- --- --- ------ ----- ------ 1,003 972 3 Southern ------ ----- ------ ---------- Henry C. Beck --- --- --- --- --- Landmark Towers 2,909 1,337 239 8.375 1998 ------ ----- ----- 2,909 1,337 239 ------- ------ ----- 3,912 2,309 242 ------- ------ ----- Other: Land-Huntington Bldg. --- --- --- --- --- Parking Garage 9,300(3) 9,300 168 8.55 2014 Parking Facility --- --- --- --- ------- ------ ----- 9,300 9,300 168 ------- ------ ----- Total equity investments $107,323 88,095 3,540 ======== Senior debt underlying wraparound mortgage loan investments 4,260 248 ------- ----- $92,355 $ 3,788
======= ======= 6 7 ITEM 2. PROPERTIES - Continued NOTES (1) The square footage shown represents gross leasable area for shopping malls and net rentable area for office buildings. The apartments are shown as number of units. The parking garage and parking facility are shown as number of parking spaces. (2) Occupancy rates shown are as of December 31, 1993, and are based on the total square feet at each property, except apartments which are based on the number of units. (3) The registrant obtained mortgages on the following properties subsequent to acquisition: Wyoming Valley Mall in the amount of $259,000 in 1982; Somerset Lakes Apartments in the amount of $12,000,000 in 1990; Meadows of Catalpa Apartments in the amount of $8,000,000 in 1992; Crossroads Shopping Center (St. Cloud, MN) in the amount of $35,000,000 in 1993; and Huntington Parking Garage in the amount of $9,300,000 in 1993. (4) This property has two mortgages. Interest rates are 9.75% and 9.5%. The mortgages mature in 2000 and 2005, respectively. The 9.75% mortgage, in the principal amount of $4,084,000, has a principal repayment for 1994 of $482,000. The 9.5% mortgage, in the principal amount of $182,000, has a principal repayment for 1994 of $10,000. (5) The total mall contains 656,000 square feet; the registrant owns 598,000 square feet, the balance being ground leased to Giant Eagle Markets, Inc. The occupancy rate at December 31, 1993 is non-inclusive of Wal-Mart which opened in January 1994. Wal-Mart is currently occupying 126,390 square feet, which increased total mall occupancy to 81% in January 1994. (6) The total mall contains 528,000 square feet; the registrant owns 429,000 square feet, the balance being separately ground leased to Boscov Depart- ment Store, Inc. (7) This property serves as collateral for borrowings in excess of $30 million on the registrant's $60 million five-year term loan. (8) The total mall contains 743,000 square feet; the registrant owns 636,000 square feet, the balance being separately owned by Target Stores. (9) The mortgage has a variable interest rate which was 5.63% at December 31, 1993. The interest is tied to LIBOR with a maximum rate of 9.5%. At maturity in 2003, a lump sum payment will be due of approximately $25,682,000. (10) The total mall contains 425,000 square feet; the registrant owns 328,000 square feet, the balance being separately owned by an unrelated third party with Sears, Roebuck and Co. as tenant. (11) The total mall contains 386,000 square feet; the registrant owns 291,000 square feet, the balance being separately owned by Montgomery Ward & Co., Incorporated. (12) Highly competitive market conditions have made leasing space difficult. The registrant continues to seek tenants and alternative retail strategies for this property. 7 8 ITEM 2. PROPERTIES - Continued (13) The total mall contains 434,000 square feet; the registrant owns 257,000 square feet, the balance being separately owned by Montgomery Ward Development Corporation. (14) The property was inundated by a flood which occurred in February 1986. The mall was subsequently rebuilt and re-opened in November 1986. In May 1992, a 60,000 square foot supermarket opened. Additionally, a temporary tenant occupied approximately 70,000 square feet as of December 31, 1993. The Trust is pursuing a mixed use strategy for this former retailing facility. (15) The total mall contains 418,000 square feet; the registrant owns 308,000 square feet, the balance being separately ground leased to Sears, Roebuck and Co. (16) This mortgage is interest only until maturity in December 1995. (17) This property has two mortgages. The interest rate on both mortgages is 10%. The mortgage in the principal amount of $8,000 fully amortizes through maturity in 1994. The mortgage in the principal amount of $2,225,000 is interest only and matures in 1998. (18) This property has two mortgages. Interest rates are 8.875% and 9.375%. The mortgages mature in 2005 and 2007, respectively. The 8.875% mortgage, in the principal amount of $930,000, has a principal repayment for 1994 of $51,000. The 9.375% mortgage, in the principal amount of $697,000, has a principal repayment for 1994 of $27,000. (19) This property has two mortgages. Interest rates are 8.50% and 9.25%, and both mature in 2000. The 8.50% mortgage, in the principal amount of $1,579,000, has a principal repayment for 1994 of $191,000. The 9.25% mortgage, in the principal amount of $1,345,000, has a principal repayment for 1994 of $105,000. (20) Represents a long-term leasehold estate interest which was capitalized in accordance with Statement of Financial Accounting Standards No. 13. (21) The registrant has ground leased the land until October 30, 2011, with seven 10-year renewal options. 8 9 ITEM 2. PROPERTIES - Continued As of December 31, 1993, the registrant owned in fee its interests in Middletown Mall, Crossroads Center (St. Cloud, Minnesota), Wyoming Valley Mall, Mall 205, Crossroads Mall (Ft. Dodge, Iowa), Westgate Towne Centre, Mountaineer Mall, Plaza 205, Peach Tree Mall, Valley Mall, Fingerlakes Mall, Fairgrounds Square Mall, Wilkes Mall, 55 Public Square Building, Henry C. Beck Building, Landmark Towers, Ninth Street Plaza, Somerset Lakes Apartments, Meadows of Catalpa Apartments, Briarwood Apartments, Woodfield Gardens Apartments, Windgate Place Apartments, Walden Village Apartments, Land - Huntington Building, and the Parking Facility. The registrant holds a leasehold estate or estates, or a fee interest and one or more leasehold estates in North Valley Mall, Valley North Mall, Two Rivers Mall, Kandi Mall, Circle Tower Building, Rockwell Avenue Building, 300 Sixth Avenue Building and the Parking Garage. 9 10 ITEM 2. PROPERTIES -Continued RENTALS FROM NET LEASES The following table sets forth the rentals payable to the registrant for the year ended December 31, 1993, under net leases of the properties indicated:
Annual Property Base Rent Percentage Rents -------- --------- ---------------- SHOPPING MALLS: EASTERN ------- Middletown $ 682,000(2) 25% of gross receipts in excess of $1,502,146 Wyoming Valley 1,292,583(2) First $8,000 of gross receipts in excess of $2,985,488 plus 25% of gross receipts in excess of $2,993,488 Mountaineer (1) 705,000 45% of gross receipts in excess of $1,506,000 Fingerlakes (1) 968,000 40% of gross receipts in excess of $2,505,000 Fairgrounds Square (1) 2,850,000 55% of gross receipts in excess of $3,944,000 Wilkes (1) 507,000 55% of gross receipts in excess of $931,000 MIDWESTERN ---------- North Valley (1) --- 5% of gross receipts Crossroads (St. Cloud, Mn.) (1) 3,300,000 60% of gross receipts in excess of $4,868,000 Two Rivers (1) 125,000 20% of gross receipts in excess of $625,000 Crossroads (Ft. Dodge, Iowa) (1) 736,000 55% of gross receipts in excess of $1,302,000 Westgate Towne Centre (1) --- 10% of gross receipts (3) Kandi (1) 712,000 45% of gross receipts in excess of $1,631,000 WESTERN ------- Valley North (1) 543,000 55% of gross receipts in excess of $976,000 Mall 205 (1) 1,232,000 55% of gross receipts in excess of $2,146,000 Plaza 205 (1) 276,000 60% of gross receipts in excess of $463,000 Peach Tree (1) 292,000 45% of gross receipts in excess of $672,000 Valley (1) 463,000 50% of gross receipts in excess of $898,000
10 11 ITEM 2. PROPERTIES -Continued Annual Base Property Rent Percentage Rents - ----------- ----------- ---------------- APARTMENTS: MIDWESTERN ---------- Somerset Lakes (1) $ 971,000 55% of gross receipts in excess of $1,744,000 Meadows of Catalpa (1) 900,000 35% of gross receipts in excess of $2,300,000 SOUTHERN -------- Briarwood (1) 335,000 35% of gross receipts in excess of $1,000,000 Woodfield Gardens (1) 100,000 20% of gross receipts in excess of $500,000 Windgate Place (1) 135,000 20% of gross receipts in excess of $700,000 Walden Village (1) 850,000 55% of gross receipts in excess of $1,545,000 OFFICE BUILDINGS: MIDWESTERN ---------- 55 Public Square (1) 1,550,000 40% of gross receipts in excess of $3,400,000 (4) Circle Tower (1) 189,000 25% of gross receipts in excess of $709,000 Rockwell Avenue (1) 157,000 35% of gross receipts in excess of $1,261,000 (5) 300 Sixth Avenue (1) --- 25% of gross receipts Ninth Street Plaza (1) 322,000 25% of gross receipts in excess of $1,288,000 SOUTHERN -------- Henry C. Beck (1) 179,000 25% of gross receipts in excess of $784,000 Landmark Towers East (1) --- 15% of gross receipts Landmark Towers Center (1) 56,000 15% of gross receipts in excess of $408,000 Landmark Towers West (1) 56,000 15% of gross receipts in excess of $347,000 OTHER: Land-Huntington Building 170,000 First $130,000 plus 50% of all additional rental, as defined, received by registrant as land- lord under a net lease of the building and improvements situated on the land Parking Garage (1) 800,000 70% of gross receipts in excess of $1,168,000 Parking Facility (1) 217,000 70% of gross receipts in excess of $416,000 (1) Leased to the Management Company. (2) Includes mortgage interest and principal amortization paid by lessee. (3) An additional net lease for an 8,000 square foot office building adjacent to the mall, the Social Security Building, provides for a base rent of $17,000 and a percentage rent of 40% of gross receipts in excess of $46,000. (4) An additional net lease for the 55 Public Square Building garage provides for a base rent of $281,000 and a percentage rent of 70% of gross receipts in excess of $537,000. (5) An additional net lease for the Rockwell Avenue Building garage provides for a base rent of $316,000 and percentage rent of 70% of gross receipts in excess of $397,000.
11 12 ITEM 3. LEGAL PROCEEDINGS. The Trust has pursued legal action agaist the State of California associated with the 1986 flood of Peach Tree Mall. In September 1991, the court ruled in favor of the Trust on the liability portion of this inverse condemnation suit, which the State of California appealed. The Trust is proceeding with its damage claim. No recognition of potential income has been made in the accompanying financial statements. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET PRICE AND DIVIDEND RECORD. "Market Price and Dividend Record" presented on the inside front cover of registrant's 1993 Annual Report to Shareholders is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA. "Selected Financial Data" presented on pages 18 and 19 of registrant's 1993 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. "Management's Discussion and Analysis of Financial Condition and Results of Operations" presented on pages 30 through 31 of registrant's 1993 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS. The "Combined Balance Sheets" as of December 31, 1993 and 1992, and the "Combined Statements of Income, Combined Statements of Changes in Cash, Combined Statements of Shareholders' Equity" for the years ended December 31, 1993, 1992 and 1991, of the registrant, "Notes to Combined Financial Statements" and "Report of Independent Public Accountants" are presented on pages 20 through 29 of registrant's 1993 Annual Report to Shareholders and are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE. None. 12 13 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. (a) DIRECTORS. "Election of Trustees" presented on pages 1 through 4 of registrant's 1994 Proxy Statement is incorporated herein by reference. (b) EXECUTIVE OFFICERS.
PERIOD POSITIONS, OFFICES OF NAME AGE AND BUSINESS EXPERIENCE SERVICE - ------------------ --- ------------------------------- ------- James C. Mastandrea 50 Chairman, President and Chief 1993 to Chief Executive Officer since date January 1994 and President and Chief Operating Officer from July 1993 to December 1993. President and Chief Executive Officer of Triam Corporation, Chicago, Illinois, an investment adviser to various real estate investment funds, from 1991 to 1993. Chairman, President and Chief Executive Officer of Midwest Development Corporation, Buffalo Grove, Illinois from 1978 to 1991. Served in various capacities in the field of commercial and real estate lending from 1971 to 1978, including Vice President of Continental Bank, Chicago, Illinois, and with Mellon Bank, Pittsburgh, Pennsylvania Gregory D. Bruhn 46 Executive Vice President and Chief Financial Officer since March 1994. Executive Vice President, Real Estate, Bank of America, Los Angeles, from April 1992 to February 1994. Executive Vice President, Real Estate, Security Pacific National Bank, Los Angeles, from July 1991 to April 1992. Executive Vice President, Real Estate, Union Bank, Los Angeles, from 1989 to 1991. Senior Vice President, Real Estate, Union Bank, Los Angeles, from 1987 to 1989. Vice President, Real Estate, Continental Bank, Chicago, from 1977 to 1987; and various capacities involving real estate from 1971 to 1977. Paul F. Levin 47 Vice President, General Counsel 1989 to and Secretary since May 1989. date Principal of Schwarzwald, Robiner, Rock & Levin, a Legal Professional Association, from 1981 to 1989. Associate of Gaines, Stern, Schwarzwald & Robiner Co., L.P.A. from 1979 to 1980. Assistant Director of Law, City of Cleveland, Ohio, from 1975 to 1978.
13 14 John J. Dee 42 Senior Vice President and Con- 1978 to troller since July 1992. Vice date President and Controller from December 1986 to July 1992, Controller from April 1981 to December 1986, Assistant Controller from December 1979 to April 1981, Accounting Manager from August 1978 to December 1979.
The above-named executive officers of the registrant hold office at the pleasure of the Trustees of the registrant, and until their successors are chosen and qualified. ITEM 11. EXECUTIVE COMPENSATION. "Compensation of Trustees" and "Executive Compensation", presented on page 4 and pages 7 through 10, respectively, of registrant's 1994 Proxy Statement are incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. "Security Ownership of Trustees, Officers and Others" presented on page 6 of registrant's 1994 Proxy Statement is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES. (1) FINANCIAL STATEMENTS: Combined Balance Sheets - December 31, 1993 and 1992 (incorporated by reference to page 20 of registrant's 1993 Annual Report to Shareholders). Combined Statements of Income - For the Years Ended December 31, 1993, 1992 and 1991 (incorporated by reference to page 21 of registrant's 1993 Annual Report to Shareholders). Combined Statements of Changes in Cash - For the Years Ended December 31, 1993, 1992 and 1991 (incorporated by reference to page 22 of registrant's 1993 Annual Report to Shareholders). Combined Statements of Shareholders' Equity - For the Years Ended December 31, 1993, 1992 and 1991 (incorporated by reference to page 23 of registrant's 1993 Annual Report to Shareholders). 14 15 Notes to Combined Financial Statements (incorporated by reference to pages 24 through 28 of registrant's 1993 Annual Report to Shareholders). Report of Independent Public Accountants (incorporated by reference to page 29 of registrant's 1993 Annual Report to Shareholders). (2) FINANCIAL STATEMENT SCHEDULES: Report of Independent Public Accountants on Financial Statement Schedules. SCHEDULE IX - Short-Term Borrowings. SCHEDULE XI - Real Estate and Accumulated Depreciation. SCHEDULE XII - Mortgage Loans on Real Estate. All Schedules, other than IX, XI and XII, are omitted, as the information is not required or is otherwise furnished. (b) EXHIBITS. Exhibit (10)(a) - Share Purchase Agreement dated as of December 31, 1983 between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 2-88719). Exhibit (10)(b) - First Amendment to Share Purchase Agreement dated as of December 10, 1985 between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-2818). Exhibit (10)(c) - Second Amendment to Share Purchase Agreement dated as of December 9, 1986 between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-11524). Exhibit (10)(d) - Third Amendment to Share Purchase Agreement dated as of December 2, 1987 between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-19812). Exhibit (10)(e) - Fourth Amendment to Share Purchase Agreement dated as of December 7, 1988, between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-26758). Exhibit (10)(f) - Fifth Amendment to Share Purchase Agreement dated as of November 29, 1989, between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-33279). Exhibit (10)(g) - Sixth Amendment to Share Purchase Agreement dated as of November 28, 1990, between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-38754). 15 16 Exhibit (10)(h) - Seventh Amendment to Share Purchase Agreement dated as of November 27, 1991, between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-45355). Exhibit (10)(i) - Eighth Amendment to Share Purchase Agreement dated as of November 30, 1992, between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-57756). Exhibit (11) - Statements Re: Computation of Per Share Earnings. Exhibit (12) - Statements Re: Computation of Ratios. Exhibit (13) - 1993 Annual Report to Shareholders. Exhibit (23) - Consent of Independent Public Accountants. Exhibit (24) - Powers of Attorney. (c) REPORTS ON FORM 8-K. None. 16 17 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS By: /S/James C. Mastandrea _____________________________ James C. Mastandrea, Chairman, President and Chief Executive Officer March 21, 1994 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. SIGNATURE TITLE DATE Principal Executive Officer Chairman, President March 21, 1994 and Chief Executive Officer /S/James C. Mastandrea ________________________ James C. Mastandrea Principal Financial Officer Executive Vice- March 21, 1994 President and Chief Financial Officer /S/Gregory D. Bruhn ________________________ Gregory D. Bruhn Principal Financial and Senior Vice President- March 21, 1994 Accounting Officer Controller /S/John J. Dee ________________________ John J. Dee 17 18 TRUSTEES: ) DATE ) *Otes Bennett, Jr. ) ) *William E. Conway ) ) *Allen H. Ford ) ) *Russell R. Gifford ) ) March 21, 1994 *James C. Mastandrea ) ) ) ) ) *By: /S/Paul F. Levin ) _________________________________ ) Paul F. Levin, Attorney-in-fact ) 18 19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To First Union Real Estate Equity and Mortgage Investments: We have audited in accordance with generally accepted auditing standards, the combined financial statements included in the registrant's 1993 Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 1, 1994. Our audit was made for the purpose of forming an opinion on those combined statements taken as a whole. The schedules listed under Item 14(a)(2) on page 15 are the responsibility of management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic combined financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic combined financial statements taken as a whole. ARTHUR ANDERSEN & CO. Cleveland, Ohio, February 1, 1994. 19 20 SCHEDULE IX ----------- SHORT-TERM BORROWINGS --------------------- (IN THOUSANDS, EXCEPT PERCENTAGES)
Weighted Maximum Average Weighted average amount amount average interest outstanding outstanding interest rate Category of aggregate Balance at rate at during the during the during the short-term borrowings period end period end period period (1) period (2) - ---------------------- ---------- ---------- ----------- ----------- ------------- Year Ended December 31, 1993 - ---------------------------- Bank loans $ 60,000(3) 4.18% $71,035 $55,179 3.91% Year Ended December 31, 1992 - ---------------------------- Bank loans $ 67,000 4.06% $80,000 $70,798 4.49% Year Ended December 31, 1991 - ---------------------------- Bank loans $ 80,000 5.12% $80,000 $74,574 6.45% - -------------- (1) Average borrowings were computed by dividing the borrowed amounts, which were weighted on the basis of the number of days outstanding, by the number of calendar days in each of the respective years. (2) Weighted average interest rate was computed by dividing short-term interest expense by average borrowings outstanding, without consideration of commitment fees or compensating balances. (3) As of December 31, 1993, the registrant's $60 million revolving credit agreement was converted to a five year loan, requiring a 20% reduction on the last day of the following five years. The registrant's $20 million revolving credit agreement terminates in July 1996 and, as of December 31, 1993, there were no amounts borrowed under this agreement.
20 21 SCHEDULE XI ----------- REAL ESTATE AND ACCUMULATED DEPRECIATION ---------------------------------------- AS OF DECEMBER 31, 1993 ----------------------- (IN THOUSANDS)
Cost capitalized subsequent Gross amount at which Intitial cost to to carried at close of registrant acquisition period --------------------- ----------- ------------------------------- Buildings Buildings Encum- and Land and and Description brances Land Improvements Improvements Land Improvements Total - ---------------------------------- ------- ------ ------------ ------------ ------ --------------- ------- Shopping Malls: EASTERN ------- Middletown, Fairmont, WV (A) $ 1,095 $ 250 $ 5,591 $ 605 $ 250 $ 6,196 $ 6,446 Wyoming Valley, Wilkes-Barre, PA (A) 4,266 544 10,997 631 525 11,647 12,172 Mountaineer, Morgantown, WV 5,891 1,450 12,693 18,250 1,615 30,778 32,393 Fingerlakes, Auburn, NY -- 1,300 23,698 1,046 1,370 24,674 26,044 Fairgrounds Square, Reading, PA -- 2,400 22,635 4,685 2,369 27,351 29,720 Wilkes, Wilkesboro, NC -- 1,168 13,891 3,626 1,168 17,517 18,685 ------- ------- -------- ------- ------- -------- -------- 11,252 7,112 89,505 28,843 7,297 118,163 125,460 ------- ------- -------- ------- ------- -------- -------- MIDWESTERN ---------- North Valley, Denver, CO 736 -- 7,666 3,570 -- 11,236 11,236 Crossroads, St. Cloud, MN 34,907 1,680 8,303 12,155 2,548 19,590 22,138 Two Rivers, Clarksville, TN -- -- 3,206 4,769 -- 7,975 7,975 Crossroads, Ft. Dodge, IA -- 1,151 2,792 7,194 1,151 9,986 11,137 Westgate Towne Centre, Abilene, TX -- 1,425 3,050 5,351 1,485 8,341 9,826 Kandi, Willmar, MN -- -- 5,035 13,613 -- 18,648 18,648 ------- ------- -------- ------- ------- -------- -------- 35,643 4,256 30,052 46,652 5,184 75,776 80,960 ------- ------- -------- ------- ------- -------- -------- WESTERN -------- Valley North, Wenatchee, WA -- 405 2,916 882 406 3,797 4,203 Mall 205, Portland, OR -- 1,228 6,140 6,332 1,228 12,472 13,700 Plaza 205, Portland, OR 825 -- 1,677 2,446 695 3,428 4,123 Peach Tree, Marysville, CA -- 985 3,622 9,313 985 12,935 13,920 Valley, Yakima, WA 1,095 -- 8,731 3,060 623 11,168 11,791 ------- ------- -------- ------- ------- -------- -------- 1,920 2,618 23,086 22,033 3,937 43,800 47,737 ------- ------- -------- ------- ------- -------- -------- $48,815 $13,986 $142,643 $97,528 $16,418 $237,739 $254,157 ------- ------- -------- ------- ------- -------- --------
Accumu- Year lated Construc- Depreci- tion Date Description ation Completed Acquired Life - ----------------------------------- ------- --------- ------------ ------ Shopping Malls: EASTERN ------- Middletown, Fairmont, WV (A) $ 2,855 1970 12-03-70 50 Wyoming Valley, Wilkes-Barre, PA (A) 5,131 1972 06-12-72 49 Mountaineer, Morgantown, WV 6,012 1975 01-29-78 60 Fingerlakes, Auburn, NY 6,244 1980 09-28-81 50 Fairgrounds Square, Reading, PA 6,039 1980 09-30-81 57 Wilkes, Wilkesboro, NC 3,728 1982 05-04-83 50 ------- 30,009 ------- 21 Accumu- Year lated Construc- Depreci- tion Date Description ation Completed Acquired Life - ----------------------------------- ------- --------- ------------ ------ Shopping Malls: MIDWESTERN ---------- North Valley, Denver, CO $ 3,851 1967 12-03-69 60 Crossroads, St. Cloud, MN 5,841 1966 01-01-72 64 Two Rivers, Clarksville, TN 2,006 1968 09-26-75 50 Crossroads, Ft. Dodge, IA 3,007 1967 04-22-77 57 Westgate Towne Centre, Abilene, TX 2,074 1962 04-22-77 60 Kandi, Willmar, MN 4,677 1973 03-12-79 55 ------- 21,456 ------- WESTERN -------- Valley North, Wenatchee, WA 1,920 1966 08-30-73 40 Mall 205, Portland, OR 4,240 1970 03-01-75 59 Plaza 205, Portland, OR 1,110 1970 04-26-78 47 Peach Tree, Marysville, CA 3,017 1972 12-19-79 50 Valley, Yakima, WA 2,728 1972 05-01-80 54 ------- 13,015 ------- $64,480 -------
21 22
Cost capitalized subsequent Gross amount at which Intitial cost to to carried at close of registrant acquisition period --------------------- ----------- ------------------------------- Buildings Encum- and Land and Building and Description brances Land Improvements Improvements Land Improvements Total - ---------------------------------- ------- ------ ------------ ------------ ------ ----------- -------- Apartments: MIDWESTERN ---------- Somerset Lakes, Indianapolis, IN $12,000 $ 2,172 $ 16,400 $ 1,378 $ 2,172 $ 17,778 $ 19,950 Meadows of Catalpa, Dayton, OH 7,927 1,270 7,955 831 1,270 8,786 10,056 ------- ------- -------- ------- ------- -------- -------- 19,927 3,442 24,355 2,209 3,442 26,564 30,006 ------- ------- -------- ------- ------- -------- -------- SOUTHERN -------- Briarwood, Fayetteville, NC 2,233 495 6,614 497 495 7,111 7,606 Woodfield Gardens, Charlotte, NC 960 171 3,087 355 171 3,442 3,613 Windgate Place, Charlotte, NC 1,627 353 4,818 614 353 5,432 5,785 Walden Village, Atlanta, GA 2,924 2,768 9,288 830 2,768 10,118 12,886 ------- ------- -------- ------- ------- -------- -------- 7,744 3,787 23,807 2,296 3,787 26,103 29,890 ------- ------- -------- ------- ------- -------- -------- 27,671 7,229 48,162 4,505 7,229 52,667 59,896 ------- ------- -------- ------- ------- -------- -------- Office Buildings: MIDWESTERN ---------- 55 Public Square, Cleveland OH -- 2,500 19,055 7,341 2,500 26,396 28,896 Circle Tower, Indianapolis, IN -- 270 1,609 1,833 270 3,442 3,712 Rockwell Avenue, Cleveland, OH -- 1,964 6,160 4,327 1,969 10,482 12,451 300 Sixth Avenue, Pittsburgh, PA 972(B) 144 2,667 5,144 144 7,811 7,955 Ninth Street Plaza, Cleveland, OH -- 710 5,718 644 710 6,362 7,072 ------- ------- -------- ------- ------- -------- -------- 972 5,588 35,209 19,289 5,593 54,493 60,086 ------- ------- -------- ------- ------- -------- -------- Southern -------- Henry C. Beck, Shreveport, LA -- 717 3,906 2,538 717 6,444 7,161 Landmark Towers, Oklahoma City, OK 1,337 1,940 7,234 4,912 1,940 12,146 14,086 ------- ------- -------- ------- ------- -------- -------- 1,337 2,657 11,140 7,450 2,657 18,590 21,247 ------- ------- -------- ------- ------- -------- -------- 2,309 8,245 46,349 26,739 8,250 73,083 81,333 ------- ------- -------- ------- ------- -------- -------- Other: Land-Huntington Bldg., Cleveland, OH -- 4,501 -- -- 4,501 -- 4,501 Parking Garage, Cleveland, OH 9,300 1,600 4,407 880 1,600 5,287 6,887 Parking Facility, Cleveland, OH -- 2,030 -- 256 2,286 -- 2,286 ------- ------- -------- ------- ------- -------- -------- 9,300 8,131 4,407 1,136 8,387 5,287 13,674 ------- ------- -------- ------- ------- -------- -------- Totals, December 31, 1993 $88,095 $37,591 $241,561 $129,908 $ 40,284 $368,776 $409,060(C) ======= ======= ======== ======= ======= ======== ========
Accumu- Year lated construc- depreci- tion Date ation completed Acquired Life --------- --------- -------- ---- Apartments: MIDWESTERN ---------- Somerset Lakes, Indianapolis, IN $2,434 1975 11-10-88 40 Meadows of Catalpa, Dayton, OH 1,163 1972 07-11-89 40 ------ 3,597 SOUTHERN ------ -------- Briarwood, Fayetteville, NC 499 1968-70 06-30-91 40 Woodfield Gardens, Charlotte, NC 263 1974 06-30-91 40 Windgate Place, Charlotte, NC 455 1974-78 06-30-91 40 Walden Village, Atlanta, GA 424 1973 06-01-92 40 ------ 1,641 ------ 5,238 ------ 22
23
Accumu- Year lated construc- depreci- tion Date ation completed Acquired Life ---------- ------------ ---------- --------- Office Buildings: MIDWESTERN ---------- 55 Public Square, Cleveland, Ohio 14,188 1959 01-15-63 63 Circle Tower, Indianapolis, IN 1,589 1930 10-16-74 40 Rockwell Avenue, Cleveland, OH 4,060 1916 04-30-79 40 300 Sixth Avenue, Pittsburgh, PA 2,463 1906 05-01-79 52 Ninth Street Plaza, Cleveland, OH 1,190 1981 10-11-85 50 -------- 23,490 -------- SOUTHERN -------- Henry C. Beck, Shreveport, LA 2,613 1958 08-30-74 51 Landmark Towers, Oklahoma City, OK 3,777 1967-71 10-01-77 60 -------- 6,390 -------- 29,880 -------- Other: Land-Huntington Bldg., Cleveland, OH --- --- 10-25-61 --- Parking Garage, Cleveland, OH 1,989 1969 12-31-75 53 Parking Facility, Cleveland, OH 237 --- 09-19-77 10 -------- 2,226 -------- Totals, December 31, 1993 $101,824 ======== (A) Registrant's ownership represents an undivided 50% interest. (B) Represents long-term leasehold estate interest which has been capitalized in accordance with Statement of Financial Accounting Standards No. 13. (C) Aggregate cost for federal tax purposes is $389,751,000.
22 24 SCHEDULE XI ----------- - Continued The following is a reconciliation of real estate assets and accumulated depreciation for the years ended December 31, 1993, 1992 and 1991:
(In thousands) Years Ended December 31, -------------------------------------------- 1993 1992 1991 ---------- ---------- ---------- Asset reconciliation: Balance, beginning of period $397,493 $377,218 $357,035 Additions during the period: Property acquisitions 67 12,080 15,538 Improvements 11,974 9,013 5,227 Equipment and Appliances 822 1,247 649 Deductions during the period: Sales of real estate ( 13) (416) --- Other - write-off of assets and certain fully depreciated tenant alterations (1,283) (1,649) (1,231) -------- -------- -------- Balance, end of period $409,060 $397,493(A) $377,218(A) ======== ======== ======== Accumulated depreciation reconciliation: Balance, beginning of period $ 92,426 $ 83,801 $ 75,928 Additions during the period: Depreciation 10,681 10,274 9,084 Deductions during the period: Write-off of assets and certain fully depreciated tenant alterations (1,283) (1,649) (1,211) -------- -------- -------- Balance, end of period $101,824 $ 92,426(A) $ 83,801(A) ======== ======== ======== (A) Certain amounts for 1992 and 1991 have been restated to conform with the presentation of 1993 balances. At December 31, 1993, 1992, and 1991, Building and Improvements included $9.5 million, $9.5 million and $9.3 million, respectively, of leasing costs. Also included in Building and Improvements were equipment and appliances of $3.7 million, $2.9 million and $1.7 million at December 31, 1993, 1992 and 1991, respectively. Accumulated depreciation at December 31, 1993, 1992 and 1991 has also been restated for $4.1 million, $3.9 million and $3.7 million of depreciation for leasing costs. Accumulated depreciation for equipment and appliances of $1.4 million, $1 million and $0.6 million for December 31, 1993, 1992 and 1991, respectively, was also included in accumulated depreciation.
23 25 Schedule XII MORTGAGE LOANS ON REAL ESTATE AS OF DECEMBER 31, 1993 (IN THOUSANDS, EXCEPT FOR PAYMENT TERMS AND FOOTNOTES)
Current effective Final Face Carrying rate on net maturity amount of amount of Prior Net Description investment date Periodic payment terms mortgage mortgage liens investment - -------------- ---------- ------- ----------------------- --------- ---------- ------ ---------- First Mortgage Loan: Secured by 10% 10-31-11 Interest calculated at stated $11,387 $19,585 $ --- $19,585 office bldg. rate of 9.65%, with install- in Cleveland, ments of principal and interest Ohio payable monthly through maturity; $13,013,000 due at maturity; prepayment without penalty sub- ject to certain conditions. Wraparound Mortgage Loan: Secured by 14% 11-30-99 Monthly installments of interest 18,060 15,965 4,260 11,705 garden payable through November 1999; apartments difference between interest paid in Atlanta, and interest calculated at the Georgia stated rate of 10% will increase registrant's equity investment until January 1998; equity invest- ment and deferred interest total- ing $22,434,000 due at maturity; prepayment without penalty. ------- ------- ------ ------- Totals, December 31, 1993 $29,447 $35,550(A) $4,260 $31,290 ======= ======= ====== ======= (A) Aggregate cost for federal tax purposes is $39,973,000.
24 26 Schedule XII ------------ - Continued The following is a reconciliation of the carrying amounts of the mortgage loans outstanding for the years ended December 31, 1993, 1992 and 1991:
(In thousands) Years Ended December 31, --------------------------------- 1993 1992 1991 --------------------------------- Balance, beginning of period $39,573 $61,903 $82,244 Additions during the period: - --------------------------- Deferred interest on wrap- around mortgage loans, net: Secured by office building in Cleveland, Ohio -- -- 1,240 Secured by wraparound mortgages on garden apartments in Atlanta, Georgia 401 387 539 Secured by garden apartments in Charlotte and Fayetteville, North Carolina -- -- (75) Recognition of discount from senior mortgage loans purchased on wrap- around mortgage investments -- -- 51 Deductions during the period: - ---------------------------- Collection of principal (4,424) (11,326) (7,007) Transfer from mortgage investments to investments in real estate resulting from: Foreclosure of three wraparound mortgages secured by garden apart- ments in Charlotte and Fayetteville, North Carolina -- -- (15,089) Deed in lieu of foreclosure of a wraparound mortgage secured by a garden apartment complex in Atlanta, Georgia -- (11,391) -- ------- ------- ------- Balance, end of period $35,550 $39,573 $61,903 ======= ======= =======
25 27 EXHIBIT INDEX -------------
Exhibit Page --------------- ---- Exhibit (10)(a) - Share Purchase Agreement dated as of December 31, 1983 between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 2-88719)................. ------ Exhibit (10)(b) - First Amendment to Share Purchase Agreement dated as of December 10, 1985 between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-2818)........................................................ ------ Exhibit (10)(c) - Second Amendment to Share Purchase Agreement dated as of December 9, 1986 between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-11524)....................................................... ------ Exhibit (10)(d) - Third Amendment to Share Purchase Agreement dated as of December 2, 1987 between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-19812)....................................................... ------ Exhibit (10)(e) - Fourth Amendment to Share Purchase Agreement dated as of December 7, 1988 between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-26758)....................................................... ------ Exhibit (10)(f) - Fifth Amendment to Share Purchase Agreement dated as of November 29, 1989 between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-33279)....................................................... ------ Exhibit (10)(g) - Sixth Amendment to Share Purchase Agreement dated as of November 28, 1990 between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-38754)....................................................... ------ Exhibit (10)(h) - Seventh Amendment to Share Purchase Agreement dated as of November 27, 1991 between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-45355)....................................................... ------ Exhibit (10)(i) - Eighth Amendment to Share Purchase Agreement dated as of November 30, 1992 between registrant and First Union Management, Inc., (incorporated by reference to Registration Statement No. 33-57756)...................................................... ------ Exhibit (11) - Statements Re: Computation of Per Share Earnings............ 27 ------ Exhibit (12) - Statements Re: Computation of Ratios........................ 28 ------ Exhibit (13) - 1993 Annual Report to Shareholders......................... 29 ------ Exhibit (23) - Consent of Independent Public Accountants.................. 30 ------ Exhibit (24) - Powers of Attorney......................................... 31 ------
26 EX-11 2 FIRST UNION EXHIBIT 11 1 Exhibit 11 ---------- FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS AND ----------------------------------------------------------- FIRST UNION MANAGEMENT, INC. ---------------------------- STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS ------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31, --------------------------------------------------------------- 1993 1992 1991 1990 1989 -------- -------- -------- -------- -------- Shares Outstanding (a): For computation of primary net income per share - Weighted average 18,086 18,086 18,098 18,134 18,350 Share equivalents - Options 10 -- -- -- --- ------- ------- ------- ------- ------- Adjusted shares outstanding 18,096 18,086 18,098 18,134 18,350 ======= ====== ====== ====== ======= For computation of fully diluted net income per share - Weighted average, without regard to, exercise under share option plans, or purchase of outstanding shares 18,086 18,086 18,133 18,184 18,385 Assumption of exercise under share option plans 10 -- -- -- 9 Weighted average of outstanding shares purchased and retired -- -- (35) (50) ( 44) ------- ------ ------ ------ ------- 18,096 18,086 18,098 18,134 18,350 ======= ====== ====== ====== ======= Net Income: Net income applicable to shares of beneficial interest (used for computing primary and fully diluted net income per share) $13,984 $18,432 $18,236 $20,639 $30,004 ======= ====== ====== ====== ======= Net income per share of beneficial interest (a): Primary and fully diluted Income from operations $ .57 $ .70 $ .74 $ .88 $ .94 Capital gains .27 .32 .27 .26 .69 ------- ------- ------- ------- ------- Income before extraordinary loss from early extinguishment of debt .84 1.02 1.01 1.14 1.63 Extraordinary loss from early extinguishment of debt .07 -- -- -- -- ------- ------- ------- ------- ------- Net income $ .77 $ 1.02 $ 1.01 $ 1.14 $ 1.63 ======= ======= ======= ======= ======= (a) The shares of beneficial interest and per share data have been restated for a 4% share dividend declared December 5, 1990 and distributed February 1, 1991.
27 EX-12 3 FIRST UNION EXHIBIT 12 1 Exhibit 12 ---------- FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS AND ----------------------------------------------------------- FIRST UNION MANAGEMENT, INC. ---------------------------- STATEMENTS OF RATIOS OF COMBINED INCOME FROM OPERATIONS ------------------------------------------------------- AND COMBINED NET INCOME TO FIXED CHARGES ---------------------------------------- (IN THOUSANDS, EXCEPT RATIOS)
Years Ended December 31, ---------------------------------------------------------------- 1993 1992 1991 1990 1989 -------- -------- -------- -------- --------- Income from operations $10,276 $12,657 $13,330 $15,917 $17,280 Add fixed charges 19,103 19,469 21,513 23,096 23,018 ------- ------- ------- ------- ------- Income from operations, as defined 29,379 32,126 34,843 39,013 40,298 Capital gains 4,948 5,775 4,906 4,722 12,724 ------- ------- ------- ------- ------- Net income, as defined $34,327 $37,901 $39,749 $43,735 $53,022 ======= ======= ======= ======= ======= Fixed charges: Interest - Mortgage loans $ 5,777 $ 6,182 $ 6,493 $ 7,045 $ 6,710 - Senior notes 5,779 4,199 4,199 6,386 9,449 - 10.25% Debentures 3,214 3,858 3,858 3,861 3,869 - Bank loans and other 3,747 4,694 6,221 4,986 2,133 Amortization of debt issue costs 162 122 95 131 180 Rents (1) 424 414 647 687 677 ------- ------- ------- ------- ------- Fixed charges, as defined $19,103 $19,469 $21,513 $23,096 $23,018 ======= ======= ======= ======= ======= Ratio of income from operations, as defined, to fixed charges 1.54 1.65 1.62 1.69 1.75 ======= ======= ======= ======= ======= Ratio of net income, as defined, to fixed charges 1.80 1.95 1.85 1.89 2.30 ======= ======= ======= ======= ======= - ---------------------- (1) The interest portion of rentals is assumed to be one-third of all ground rental and net lease payments.
28 EX-13 4 FIRST UNION EXHIBIT 13 1 Exhibit 13 ---------- 1993 ANNUAL REPORT FIRST UNION REAL ESTATE INVESTMENTS 2 CONTENTS - -------- Company Profile 1 Letter to Securityholders 2 First Union in Focus 9 Summaries of Equity Investments 14 Selected Financial Data 18 Combined Financial Statements 20 Notes to Combined Financial Statements 24 Report of Independent Public Accountants 29 Management's Discussion and Analysis of Financial Condition and Results of Operations 30
FINANCIAL HIGHLIGHTS - -------------------- Years Ended December 31, 1993 1992 (In thousands, except per share data) Revenues $ 74,339 $ 74,567 Income from operations 10,276 12,657 Income before extraordinary loss(1) 15,224 18,432 Net income 13,984 18,432 Funds from operations (2) 21,301 23,300 Dividends declared 13,031 13,022 Per share Income from operations $ .57 $ .70 Income before extraordinary loss (1) .84 1.02 Net income .77 1.02 Dividends declared .72 .72
MARKET PRICE AND DIVIDEND RECORD - -------------------------------- DIVIDENDS 1993 QUARTERS ENDED HIGH LOW DECLARED December 31 $ 11 7/8 $ 9 5/8 $.18 September 30 11 1/8 9 5/8 .18 June 30 12 5/8 9 5/8 .18 March 31 12 1/8 9 .18 ---- $.72 ==== 1992 QUARTERS ENDED December 31 $ 10 1/4 $ 8 1/4 $.18 September 30 9 8 .18 June 30 8 5/8 7 1/2 .18 March 31 8 5/8 6 3/4 .18 ---- $.72 ==== The Trust's shares are traded on the New York Stock Exchange (Ticker Symbol: FUR). As of December 31, 1993, the most recent record date, there were 6,408 record holders of the Trust's shares of beneficial interest. The Trust estimates the number of beneficial owners at approximately 15,000. (1) On November 1, 1993, the Trust repaid prior to their maturity dates $45 million of senior notes and $37.6 million of convertible debentures resulting in a $1.2 million charge for the write off of unamortized issue costs and payment of a redemption premium. (2) The amount of funds from operations is calculated as income from operations plus noncash charges for depreciation and amortization.
3 COMPANY PROFILE --------------- First Union Real Estate Investments (Trust) is an equity real estate investment trust specializing in acquiring, holding and managing real estate for current yield and long-term appreciation for its owners. Each property in the portfolio is managed separately; collectively all of the properties of the Trust are managed as a business. The Trust's investment portfolio presently includes equity ownership of properties in three categories: retail, apartments and office buildings. The Trust's ownership going forward will be focused in retail and apartments while investments in office buildings will be de-emphasized. Retail properties represent 62% of the Trust's assets on a historical cost basis, while apartments and office buildings represent 15% and 20%, respectively. Other Trust investments include parking facilities, mortgage investments and land. The Trust's 33 properties are located in 17 states across the United States. All Trust property investment decisions are market driven supported by a research department that gathers and analyzes information on existing and prospective markets for competitive purposes. Property management services are provided by First Union Management, Inc. (FUMI), a separate property management company whose shares are owned in trust for the benefit of First Union shareholders. The properties are managed as individual entities and management is organized into specialty categories by property type and geographic region. Retail experts, for example, are involved only in retail properties and do not lease or manage apartments. Each specialty category is supported by FUMI's construction department which oversees all capital and tenant improvements. Property management decisions concerning the various assets are made by FUMI managers in their respective property categories. Within the Trust, asset management and strategic planning decisions are made by senior management. Asset acquisitions, divestitures and major capital expenditures are evaluated by the Trust management and recommended to the Board of Trustees for approval. First Union's shares are traded on the New York Stock Exchange (Ticker Symbol: FUR) and as a qualified real estate investment trust, First Union pays no federal income tax provided 95% of its taxable income is distributed to its owners. 4 February 1, 1994 TO OUR SECURITYHOLDERS: December 31, 1993 marked the end of an era at First Union with the retirement of our former Chairman and Chief Executive Officer, Donald S. Schofield. On behalf of our management and trustees, we wish Don the very best in his retirement. As First Union's new Chairman and Chief Executive Officer, I look forward to leading the Trust through the remainder of the 90's and into the next century. My first priority will be to focus on the existing portfolio and maximize the intrinsic value of our properties, set and attain targeted return on shareholders' equity, and consistently work to improve both operating earnings and funds from operations. My second priority will be to sell properties that do not meet either our short-term earnings criteria or our long-term targeted investment goals. My third priority will be to seek prudent acquisitions to profitably grow the Trust. Our philosophy will be product focused and market driven, rather than operations driven. Our strategic plan is to specialize in retail and apartment properties with investments in stable and growing markets. Our corporate culture and structure will be molded around developing and training our human resources, and will include incentives for increased share ownership by management. Our annual report is designed to provide you with information relating to your investment. In it we have set forth data with which you, the owners, can measure our performance. As you know, measuring a real estate business, and in particular a REIT, is different from other businesses, because 95% of the taxable earnings must be distributed to the shareholders as dividends. Thus, it is virtually impossible to accumulate retained earnings to grow the business. Under these circumstances, increased earnings over the long run may be derived from increased rents, decreased expenditures, profitable acquisitions and, very often, inflation. The financial information provided reflects the historic performance of the company. We will provide you, our owners, who stay with us for the long term, the information and opportunity to assess our future performance. The most common measure of performance of a REIT is funds from operations, which excludes the non-cash charges for depreciation and amortization. "Funds From Operations," (FFO) as defined by the National Association of Real Estate Investment Trusts (NAREIT), is net income, excluding gains (or losses) from debt restructuring and sales of property, plus depreciation and amortization. "Income From Operations," (IFO) is net income excluding gains (or losses) from debt restructuring and sales of property. A significant component of IFO is property "Net Operating Income" (NOI). Property NOI is property revenue and mortgage investment income less real estate taxes and property expenses before debt service, depreciation and amortization. We will report property net operating income, income from operations, funds from operations, and dividend distribution, along with return on shareholders' equity and other pertinent information going forward on a consistent basis. 2 5 PROPERTY NET OPERATING INCOME Property Net Operating Income is a measure of revenue generated from rents collected and mortgage investments, less property expenses, for each property and collectively for each investment category. Property NOI for 1993 was $40.9 million compared to $42.2 million in 1992, or a decrease of 3%. Property NOI for the past five years by investment category is as follows (amounts in thousands):
1989 1990 1991 1992 1993 RETAIL $24,563 $25,596 $24,451 $24,685 $23,593 - ----------------------------------------------------------------------------------------- APARTMENTS 1,822 2,412 2,936 3,879 5,303 - ----------------------------------------------------------------------------------------- OFFICE 5,148 4,996 4,808 5,295 4,957 - ----------------------------------------------------------------------------------------- PARKING 3,291 3,408 2,993 2,749 3,002 - ----------------------------------------------------------------------------------------- MORTGAGES 11,631 10,411 8,773 5,611 4,033 - ----------------------------------------------------------------------------------------- $46,455 $46,823 $43,961 $42,219 $40,888
During the past five years each of our asset investment categories has been managed through interrelated services. With our restructuring in 1994, each category will function independently from the others as separate operations. Significant events relating to each category are reported below. RETAIL OPERATIONS Our retail portfolio consists of 17 malls totaling approximately 7.6 million square feet and is 62% of our investments on a cost basis. In 1993, retail operations generated 58% of our total property net operating income. Retail property NOI was down 4% from 1992 primarily because of the recognition of a $1.7 million lease termination fee in 1992, which did not recur in 1993. Occupancy at year end for both 1993 and 1992 was 82%. During 1993, we signed new leases for 413,000 square feet while 449,000 square feet were vacated, for a net loss of 36,000 square feet. Four new anchor tenants signed long-term leases at Two Rivers Mall, in Clarksville, Tennessee, and Mountaineer Mall in Morgantown, West Virginia. These include U.S. Factory Outlet (USFO), an off-price manufacturers' outlet for approximately 300 suppliers operating 24 stores in 10 states; Wholesale Depot, a cash and carry membership wholesale warehouse; and Wal-Mart. The impact of the Wal-Mart lease was not realized in 1993, as the store opened on January 4, 1994. APARTMENT OPERATIONS Our apartment portfolio consists of six communities totaling 1,700 units located in two geographic areas, the Midwest and Southeast, and is 15% of our investments on a cost basis. In 1993, apartment property NOI was up 37% from 1992, and generated 13% of total property net operating income. The increase in apartment NOI resulted primarily from the full year recognition of operating income from Walden Village in Atlanta, Georgia, which was classified as a mortgage investment for part of 1992. Overall occupancy at year-end 1993 was 93%, compared to 95% in 1992. 3 6 OFFICE BUILDING OPERATIONS Our seven office buildings totaling nearly 1.6 million square feet, located primarily in the midwestern and southern United States, make up approximately 20% of our investments on a cost basis. In 1993, office building operations generated 12% of total property net operating income. Office building NOI was down by 6% in 1993 compared to 1992. The primary reason for the decline was the impact of a major tenant (totaling 46,000 square feet) vacating in December 1992. Average occupancy at the end of 1993 was 76%, compared to 75% for 1992. A total of 96,000 square feet was leased in 1993 while 94,000 square feet vacated, for a net gain of 2,000 square feet. PARKING FACILITIES OPERATIONS Parking facilities in Cleveland are approximately 3% of our investments on a cost basis. Parking facilities operations generated 7% of the total property net operating income in 1993. Parking facilities property NOI was up 9% from 1992, primarily because of a relatively low supply of well located parking spaces in downtown Cleveland, coupled with strong demand. MORTGAGE INVESTMENTS Income from mortgage investments decreased by 28% primarily because a mortgage loan secured by an office building in Pittsburgh, Pennsylvania, matured June 1993 and is now fully paid. The Trust's only remaining mortgage loans are a first mortgage loan secured by an office building in Cleveland, maturing in 2011, and a wraparound mortgage loan secured by an apartment building in Atlanta, Georgia, maturing in 1999. INCOME FROM OPERATIONS Income from operations is the combined NOI for our property and mortgage categories less net financing costs and corporate overhead expenses. It is the underlying key ingredient of funds from operations, and was $10.3 million, or $0.57 per share, in 1993. This compares with $12.7 million, or $.70 per share, in 1992. The five-year trend of income from operations is as follows (amounts in thousands, except per share):
1989 1990 1991 1992 1993 INCOME FROM OPERATIONS $17,280 $15,917 $13,330 $12,657 $10,276 ----------------------------------------------------------------------------------------- PER SHARE $ 0.94 $ 0.88 $ 0.74 $ 0.70 $ 0.57
CAPITAL GAINS Capital gains have been recognized from the sale of appreciated properties and reflect increased value of acquisitions. In 1993, capital gains totaled $4.9 million primarily from an installment sale of a Pittsburgh 4 7 office building by the Trust in 1983 to a partnership formed by Mellon Bank Corporation. This property had been purchased by the Trust in 1972. Capital gains were not comparable in 1993 and 1992 because the 10-year mortgage note resulting from the installment sale matured in June 1993 (amounts in thousands, except per share).
1989 1990 1991 1992 1993 INSTALLMENT GAIN $ 3,805 $ 4,319 $4,906 $5,577 $4,696 - ----------------------------------------------------------------------------------------- OTHER GAINS 8,919 403 -0- 198 252 - ----------------------------------------------------------------------------------------- TOTAL GAINS $12,724 $ 4,722 $4,906 $5,775 $4,948 - ----------------------------------------------------------------------------------------- PER SHARE $ 0.69 $ 0.26 $ 0.27 $ 0.32 $ 0.27
FUNDS FROM OPERATIONS Funds from operations were $21.3 million, or $1.18 per share, in 1993. Comparable 1992 amounts were $23.3 million, or $1.29 per share. The depreciation and amortization component of funds from operations was $11 million in 1993 and $10.6 million in 1992. Funds from operations for the past five years are as follows (amounts in thousands):
1989 1990 1991 1992 1993 INCOME FROM OPERATIONS $17,280 $ 15,917 $13,330 $12,657 $10,276 - ----------------------------------------------------------------------------------------- DEPRECIATION & AMORTIZATION 8,142 8,370 9,351 10,643 11,025 - ----------------------------------------------------------------------------------------- FUNDS FROM OPERATIONS $25,422 $ 24,287 $22,681 $23,300 $21,301
Funds from operations per share for the past five years are as follows:
1989 1990 1991 1992 1993 INCOME FROM OPERATIONS $0.94 $ 0.88 $0.74 $0.70 $0.57 - ----------------------------------------------------------------------------------------- DEPRECIATION & AMORTIZATION 0.44 0.46 0.51 0.59 0.61 - ----------------------------------------------------------------------------------------- FUNDS FROM OPERATIONS $1.38 $ 1.34 $1.25 $1.29 $1.18
DIVIDEND DISTRIBUTION The dividend payout of a REIT is often presented as a percentage of funds from operations. Currently, a sampling of the industry average payout percentage is approximately 80%. In 1993, our dividend payout percentage was 61% and totaled $0.72 per share, representing a 7.5% yield based on the year-end closing share price of $9.63. In 1992, our dividend of $0.72 was a lower payout percentage compared to 1993. 5 8 Shareholders of record on January 3, 1994, received their fourth quarter dividend check dated February 1, 1994, or Dividend Investment Service statement dated February 2, 1994, which reflected a dividend of $0.18 per share.
1989 1990 1991 1992 1993 DIVIDENDS DECLARED PER SHARE $1.44 $ 1.08 $0.93 $0.72 $ 0.72 - ------------------------------------------------------------------------------------------ DIVIDENDS DECLARED AS A % OF FFO 104% 81% 74% 56% 61%
RETURN ON EQUITY Return on shareholders' equity is measured by comparing income from operations to the amount of shareholders' equity (amounts in thousands).
1989 1990 1991 1992 1993 INCOME FROM OPERATIONS $ 17,280 $ 15,917 $ 13,330 $12,657 $ 10,276 - ------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY 96,062 96,228 97,188 102,672 103,766 - ------------------------------------------------------------------------------------------- RETURN ON SHAREHOLDERS' EQUITY 18% 17% 14% 12% 10%
CAPITAL AND TENANT IMPROVEMENTS Capital and tenant improvements are accomplished with funds that are re-invested in the properties to maintain the asset and enhance future value. Improvements made over the last five years were as follows (amounts in thousands):
1989 1990 1991 1992 1993 RETAIL $ 1,662 $ 2,855 $ 884 $4,509 $ 8,330 - ------------------------------------------------------------------------------------------- APARTMENTS 11 479 678 1,809 1,467 - ------------------------------------------------------------------------------------------- OFFICE 1,838 1,931 2,760 1,946 1,658 - ------------------------------------------------------------------------------------------- PARKING 11 87 112 55 - - ------------------------------------------------------------------------------------------- $ 3,522 $ 5,352 $ 4,434 $8,319 $11,455
FINANCINGS First Union raised a total of nearly $250 million through the public debt markets over its 32-year history. During the third quarter of 1993, liabilities were restructured by raising $135 million in additional debt via a senior note offering and a mortgage loan. During 1993, the company maintained its investment grade senior debt rating of BBB- with Standard and Poor's and Duff and Phelps, while Moody's lowered the rating to Ba2. The result of this split rating was an 8 7/8% rate on 6 9 the $100 million senior notes. The notes, which were sold at 99.187 to yield 9%, are non-callable and are due October 1, 2003. A portion of the net proceeds was used to reduce mortgage debt by $8.4 million and reduce bank borrowings by approximately $6.2 million. The remainder of the net proceeds was used to call, at par, the Trust's outstanding $45 million, 8 3/8% senior notes due in December 1994, and at 101.025 the Trust's $37.6 million, 10 1/4% convertible subordinated debentures due 2009. These new notes contain certain covenants requiring maintenance of a minimum tangible net worth and limitations on additional borrowings. The mortgage loan was a $35 million, 10-year, LIBOR-based loan secured by our shopping mall in St. Cloud, Minnesota. The initial rate for the first year is 5.6%, and the rate is capped at 9.5% over the life of the loan. The loan may be prepaid at any time during its 10-year term without a penalty. The net proceeds from this loan was used to reduce the Trust's short-term bank borrowings. In December, one of our revolving lines of credit was converted to a $60 million five-year term loan, which will be amortized equally over five years. We have an additional $20 million revolving credit line available that terminates in July 1996. At December 31, 1993, there were no borrowings outstanding under the $20 million line. The combination of these financing transactions significantly increases our financial flexibility, while extending our debt maturities. We had $38.5 million of available cash invested in short-term instruments on December 31, 1993. A LOOK TOWARD OUR FUTURE We have developed a five-year strategic plan that will become an integral component of First Union's future. It is designed to maximize income and value appreciation of real estate ownership by capitalizing on market opportunities and extracting intrinsic value from real estate we presently own and will acquire, while divesting ourselves of assets which do not meet our yield or market requirements. Our energies will be market and real estate driven, which is a shift from our previous operations-driven philosophy. Our mission will be understanding the businesses and needs of our retail tenants and apartment residents, and expanding and developing our relationships and market knowledge to serve both our existing and future tenants. Our key assets are our public entity, our people and our existing portfolio of properties, which provide a base of financial stability. While the overall quality and condition of our portfolio has changed over the past five years, we are hopeful that First Union can capitalize on opportunities within targeted markets. 7 10 Our vision is to create opportunities within the real estate industry, with our primary focus remaining on retail and apartment categories. We intend to accomplish strategic plan objectives with the program we have developed for each property in our existing portfolio, including the sale of properties that do not meet our return expectations, and an aggressive acquisition program. Our organization will be realigned to meet these goals. A major consideration in First Union's strategic plan is its corporate restructuring. For instance, the retail management group consists solely of retail experts with no overlap into apartment or office building decision making, and will be geographically organized with representation and specialization within each market. Each property category will have the support of our construction department, a market research department and centralized financial controls. Finally, and most importantly, our strategic plan will provide for a commonality of interests on the part of management and shareholders through an incentive ownership program. This program will reward management for those activities which most directly benefit and enhance shareholder value, and will make it incumbent upon management to act in a manner that ensures the greatest overall return to the owners of the Trust -- its shareholders. With the information provided in this report, you should have a better understanding of your investment as well as my priorities, vision and direction for the Trust. I look forward to meeting many of you for the first time at our Annual Meeting at 10:00 A.M. on Tuesday, April 12, 1994, in the National City Bank Auditorium in downtown Cleveland. For those of you who plan to attend our shareholder meeting, an invitation is enclosed. Kindly return the RSVP so that we may accommodate all those who wish to attend. We welcome everyone who would like to join us. The quality of our meeting will be reflected in the questions posed by our shareholders, and while I'm presently one of the newest members of the First Union team, I will do my best to answer all of them. /S/ James C. Mastandrea James C. Mastandrea Chairman, President and Chief Executive Officer 8 11 FIRST UNION IN FOCUS - -------------------- First Union -- a real estate company specializing in retail and apartment properties -- is sharpening its focus on Markets, on Growth, and on Performance. First Union has a strategic plan to improve shareholder value through targeted acquisitions, enhanced management, and the sale of assets that do not meet its investment goals, in order to achieve superior performance. 9 12 FOCUS: THE MARKET First Union is focused on consumer driven real estate markets -- shopping centers and apartments. These categories of real estate have historically demonstrated a greater stability in performance than other commercially focused investments such as office buildings, and are well-suited to First Union's particular real estate expertise. Changing buying patterns among retail consumers, especially the shift to value-conscious shopping, requires flexibility and both depth and breadth of leasing experience in order to maintain competitiveness. First Union's retail strategy, its value-oriented retail portfolio, and its relationships with key tenants result in excellent positioning for superior future operating performance. Multi-family housing investments also offer significant potential returns for those investors already located in growth markets or with the savvy to select acquisition properties without overpaying in what has recently become a seller's market in many cities. First Union's value-added capabilities and market research will enable it to continue acquiring quality apartment communities with the greatest opportunity for maximum overall returns. By realigning its operating units and establishing a market driven investment policy, First Union is positioning itself to take advantage of changing consumer behavior in both the retail and apartment marketplaces. First Union has organized its management team into specialized units by property type and geographic region. As part of the initiative to strengthen the skills of the management team, a research department and training facility have been created. First Union recognizes that specialized knowledge and depth of experience can provide competitive advantages to enhance portfolio growth. We believe that informed, market driven decisions and actions afford greater opportunity to enhance shareholder value. FOCUS: GROWTH First Union is committed to continuous growth in rental revenues, property net operating income and portfolio asset values. We are long-term investors with the skills required to make critical decisions over the short term which protect rental revenues and enable us to grow our portfolio from a solid foundation. As investors in shopping centers and apartments, we are implementing the following strategies to achieve our growth plans: o Tenant and Resident Relationships: We are focused on relationships with our community of retail tenants and apartment residents who ultimately drive our success. This is because successful retail tenant relationships result in increased retail sales and percentage rents, expansions into new space, cost effective multiple leasing relationships throughout our portfolio, and leasing renewals over the long term. With our apartments, successful resident relationships result in high occupancy rates, leasing referrals, and reduced maintenance costs and turnover. For these reasons, tenant and resident relationships are of the highest priority for our management team. 10 13 [PHOTO OF MOUNTAINEER MALL] FIRST UNION'S MOUNTAINEER MALL IN MORGANTOWN, WEST VIRGINIA, HAS RECOVERED FROM THE LOSS OF TWO OF ITS FOUR ANCHOR TENANTS WHEN A COMPETING MALL OPENED NEARBY. LAST YEAR, OUR RETAIL SPECIALISTS RESPONDED BY SIGNING TWO NEW VALUE-PRICED ANCHOR TENANTS, INCLUDING WAL-MART. ONE OF THE MOST SUCCESSFUL RETAILERS IN THE COUNTRY, WAL-MART OCCUPIES 126,000 SQUARE FEET OF SELLING SPACE AND OPENED IN JANUARY 1994. [PHOTO OF MEADOWS OF CATALPA APARTMENT COMPLEX] IN THE MEADOWS OF CATALPA, FIRST UNION OWNS A 323-UNIT APARTMENT COMMUNITY IN DAYTON, OHIO, WHERE THE LOCAL ECONOMY'S TRADITIONALLY STRONG MANUFACTURING BASE IS NOW EVOLVING INTO ADVANCED TECHNOLOGY INDUSTRIES. EXCELLENT RECREATIONAL FACILITIES ADD TO THE APPEAL OF THIS PROPERTY, WHICH HAS STABILIZED AN OCCUPANCY RATE NEAR 95%. [PHOTO OF KANDI MALL] KANDI MALL, IN WILLMAR, MINNESOTA, WAS ACQUIRED BY FIRST UNION IN 1979. AFTER SEVERAL EXPANSIONS AND RENOVATIONS, IT IS NOW A 448,000-SQUARE-FOOT REGIONAL MALL WITH SUCCESSFUL ANCHORS LEADING ITS STEADILY IMPROVING OCCUPANCY AND SALES. 11 14 o Leasing and Management: We are committed to more effective marketing and management of our existing properties to produce higher income yields. By restructuring management into teams responsible for specific property types and geographic regions, we are positioned to apply new strength to this process. o Expansion and Renovation: First Union's management team and construction staff are continually evaluating opportunities to expand and renovate properties. To better serve the needs of our tenants, expansions and renovations take advantage of the opportunities to create and enhance asset values throughout our portfolio. o Portfolio and Individual Property Acquisitions: As an experienced public real estate company, First Union is positioned to evaluate and acquire attractive retail and apartment assets located in targeted markets in accordance with our growth strategy. The execution of First Union's growth strategy will be accomplished through the acquisition of complementary real estate portfolios and individual properties. o Risk Management: First Union's management recognizes that the activities relating to our future growth entail risks that must be carefully managed. For this reason, management has successfully restructured the Trust's liabilities to significantly extend debt maturities and enhance financial flexibility. Management's acquisition philosophy will be to reduce risk by minimizing the downside of an investment, while maximizing the potential upside. Prudent risk management enables First Union to operate with flexibility as we implement our growth strategy. o Management Incentives: To reinforce First Union's growth objectives, we have adopted a program to provide ownership incentives for management that reward performance which enhances shareholder value. We believe that sharing our success, as well as our risk, with management is the most effective method to motivate our team to achieve superior results in the interest of shareholders. FOCUS: PERFORMANCE First Union believes that the strengths and talents of its people are the keys to achieving superior performance and providing greater value to shareholders. As part of management's initiative to improve performance, we have delegated property decision making responsibility to the managers of the respective property categories. Each member of the organization has been asked to focus on personal and professional growth in order to complement the growth we anticipate from our portfolio. Improved relations, with all those whose businesses, personal lives, and investment programs are connected to our company, is a key goal for all of us at First Union. We have established a program to improve our relationships with investors, tenants, bankers, and vendors, based on better communications and responsiveness. Our expectation is that this continuing effort to improve our relationships will provide significant benefits to our real estate operations which will translate into enhanced shareholder value over the long term. 12 15 [PHOTO OF FAIRGROUNDS SQUARE MALL] FAIRGROUNDS SQUARE, A 528,000-SQUARE-FOOT ENCLOSED MALL IN READING, PENNSYLVANIA, BENEFITS FROM ITS LOCATION WITHIN THE MARKET, AS DEMONSTRATED BY ITS HISTORICAL OCCUPANCY RATE OF NEARLY 100%. FIRST UNION RETAIL SPECIALISTS ASSIGNED TO THE REGION PROVIDE THE TYPE OF ATMOSPHERE SHOPPERS EXPECT AND MERCHANTS DEMAND. [PHOTO OF SOMERSET LAKES APARTMENT COMPLEX] WITH SOMERSET LAKES, A 360-UNIT APARTMENT PROPERTY IN INDIANAPOLIS, INDIANA, FIRST UNION IS POSITIONED IN A STABLE MARKET, WITHIN AN ECONOMICALLY STRONG MIDWEST METROPOLIS. ACQUIRED IN 1988 AND RECENTLY UPGRADED, IT WAS 93% OCCUPIED AS OF THE END OF 1993. MANAGEMENT OF THIS PROPERTY IS THE RESPONSIBILITY OF FIRST UNION'S MIDWESTERN APARTMENT SPECIALIST TEAM. [PHOTO OF CROSSROADS CENTER (ST. CLOUD, MN)] CROSSROADS CENTER, LOCATED IN ST. CLOUD, MINNESOTA, IS FIRST UNION'S LARGEST MALL. IT HAS SUSTAINED A HISTORICAL OCCUPANCY RATE GREATER THAN 95%. AT 743,000 SQUARE FEET WITH EXPANSION POSSIBILITIES, THIS MAJOR RETAIL HOLDING IS A STABLE INVESTMENT WITH GROWTH POTENTIAL. 13 16
SUMMARY OF EQUITY INVESTMENTS BY PROPERTY TYPE As of December 31, 1993 (square feet in thousands) YEAR MOST RECENTLY SQUARE TOTAL DIRECT EQUITY YEAR EXPANDED/ FEET SQUARE TOTAL INVESTMENTS LOCATION ACQUIRED RENOVATED OWNED FEET(1) OCCUPANCY(2) ANCHOR TENANTS - ------------------------------------------------------------------------------------------------------------------------------------ SHOPPING MALLS EASTERN Middletown(3) Fairmont, WV 1970 1990 471(3) 471 88% Hill's, Hess's, Stone & Thomas Wyoming Valley(3) Wilkes Barre, PA 1972 1991 909(3) 909 97% JCPenney, Sears, Bon-Ton, Hess's Mountaineer Morgantown, WV 1978 1993 598 656 64%(4) Montgomery Ward, Stone & Thomas U.S. Factory Outlet, Giant Eagle(5), Wal-Mart(4) Fingerlakes Auburn, NY 1981 1992 403 403 84% JCPenney, Sears, Kmart Fairgrounds Square Reading, PA 1981 1989 429 528 97% JCPenney, Phar-Mor, Boscov's(6) Wilkes Wilkesboro, NC 1983 1984 359 359 69% JCPenney, Belk, F.W. Woolworth(7) MIDWESTERN North Valley Denver, CO 1969 1988 452 452 66% Montgomery Ward, Burlington Coat Factory Crossroads St. Cloud, MN 1972 1986 636 743 99% Sears, JCPenney, Dayton's(5), Target(8) Two Rivers Clarksville, TN 1975 1993 233 233 73% Wholesale Depot, U.S. Factory Outlet Crossroads Fort Dodge, IA 1977 1988 328 425 85% JCPenney, Sears(9), Younkers Westgate Towne Centre Abilene, TX 1977 1987 291 386 36% Montgomery Ward(8), 50-Off Kandi Willmar, MN 1979 1992 448 448 83% Kmart, JCPenney, Herberger's WESTERN Valley North Wenatchee, WA 1973 1981 170 170 97% JCPenney, Payless Drug Mall 205 Portland, OR 1975 1988 257 434 96% Montgomery Ward(8), Emporium, Payless Drug Plaza 205 Portland, OR 1978 1983 167 167 100% Nautilus Plus(5), Office Max Peach Tree Marysville, CA 1979 1985 435 435 51%(10) Food 4 Less Valley Yakima, WA 1980 1988 308 418 91% Sears(5), Lamonts, Payless Drug ----- ----- --- 6,894 7,637 82% ===== ===== === ANCHOR STORES 4,092 95% ----- --- SPECIALTY STORES 3,545 67% ----- --- (1) Total leasable area of property includes retail tenant stores not owned by the Trust. (2) Occupancy rates shown are as of December 31, 1993 and are based on the total square feet at each property, except apartments which are based on the number of units. (3) The Trust owns a 50% interest in these malls, but lists 100% of the square feet. (4) The occupancy rate at December 31, 1993 does not include Wal-Mart for 126,390 square feet, which opened in January 1994. When Wal-Mart opened, total occupancy increased to 81%. (5) These anchor tenants own their buildings and ground lease the land from First Union. (6) Boscov's owns its building and pad site. (7) Store is vacant but F.W. Woolworth is obligated to pay rent until the end of the lease. (8) Target and Montgomery Ward own their pad sites and buildings and operate at the malls under construction, operation and reciprocal easement agreements. (9) Sears occupies its store under a lease with an unrelated third party. (10) A temporary tenant occupied 70,162 square feet as of December 31, 1993.
14 17
YEAR MOST DIRECT EQUITY YEAR RECENTLY TOTAL INVESTMENTS LOCATION ACQUIRED RENOVATED UNITS OCCUPANCY(2) - --------------------------------------------------------------------------------------------- APARTMENTS MIDWESTERN Somerset Lakes Indianapolis, IN 1988 1992 360 93% Meadows of Catalpa Dayton, OH 1989 1992 323 94% SOUTHEASTERN Briarwood Fayetteville, NC 1991 1992 273 97% Woodfield Gardens Charlotte, NC 1991 1992 132 89% Windgate Place Charlotte, NC 1991 1992 196 90% Walden Village Atlanta, GA 1992 1993 380 91% ----- ---- 1,664 93% ===== ==== - --------------------------------------------------------------------------------------------- OFFICE BUILDINGS TOTAL SQUARE FEET MIDWESTERN OWNED 55 Public Square Cleveland, OH 1963 1992 397 88% Rockwell Avenue Cleveland, OH 1979 1993 237 64% Ninth Street Plaza Cleveland, OH 1985 1993 147 63% Circle Tower Indianapolis, IN 1974 1988 103 74% 300 Sixth Avenue Pittsburgh, PA 1979 1991 226 74% SOUTHERN Henry C. Beck Shreveport, LA 1974 - 185 82% Landmark Towers Oklahoma City, OK 1977 1987 259 73% ----- ---- 1,554 76% ===== ==== - --------------------------------------------------------------------------------------------- OTHER SPACES Land - Huntington Building Cleveland, OH 1961 - - Parking Garage Cleveland, OH 1975 1988 1,100 Parking Facility Cleveland, OH 1977 - 300
15 18 SUMMARY OF EQUITY INVESTMENTS BY GEOGRAPHIC REGION [MAP OF THE UNITED STATES SHOWING THE LOCATION OF EACH PROPERTY, BY TYPE, THAT IS LISTED ON PAGES 14 AND 15.] REGION PROPERTY TYPE o Eastern Shopping Malls o Southeastern Office Buildings o Southern Apartments o Midwestern Other o Western Mortgage Loan Investments [Chart] PIE CHART SHOWING THE PERCENT OF ASSETS OWNED BY PROPERTY TYPE: Shopping Malls 62% Office Buildings 20% Apartments 15% Other 3% 16 19 FINANCIAL CONTENTS Selected Financial Data 18 Combined Balance Sheets 20 Combined Statements of Income 21 Combined Statements of Changes in Cash 22 Combined Statements of Shareholders' Equity 23 Notes to Combined Financial Statements 24 Report of Independent Public Accountants 29 Management's Discussion and Analysis of Financial Condition and Results of Operations 30 Trustees, Directors and Officers 32 17 20
SELECTED FINANCIAL DATA YEARS ENDED DECEMBER 31, 1983 1984 1985 1986 1987 (In thousands, except per share data) OPERATING RESULTS Revenues $66,486 $70,271 $73,043 $72,570 $73,892 Income from operations 16,727 19,932 21,890 21,403 19,360 Capital gains 3,495 3,755 2,314 4,093 6,656 Income before extraordinary loss(1) 20,222 23,687 24,204 25,496 26,016 Net income 20,222 23,687 24,204 25,496 26,016 Funds from operations(2) 23,290 26,316 28,673 28,477 26,445 Dividends declared 14,966 19,372 24,031 26,357 27,202 - ------------------------------------------------------------------------------------------------------------------ Per share of beneficial interest(3) Income from operations $1.03 $1.13 $1.15 $1.13 $1.02 Income before extraordinary loss(1) 1.22 1.32 1.27 1.35 1.37 Net income 1.22 1.32 1.27 1.35 1.37 Dividends declared(3) .91 1.11 1.27 1.40 1.44 - ------------------------------------------------------------------------------------------------------------------ FINANCIAL POSITION AT YEAR END Gross Assets before deducting accumulated depreciation(4) $373,990 $430,775 $416,221 $495,424 $429,815 Long-term obligations(5) 137,915 172,329 154,890 177,810 162,960 Total equity(6) 107,866 149,778 147,714 147,102 145,083 Total equity before deducting accumulated depreciation(4)(6) 147,971 194,637 198,325 201,304 203,739 - ------------------------------------------------------------------------------------------------------------------ Per share of beneficial interest(3)(4)(6)(7) Net assets $5.71 $7.21 $7.15 $7.13 $7.05 Net assets before deducting accumulated depreciation 7.82 9.35 9.58 9.72 9.86 - ------------------------------------------------------------------------------------------------------------------ This selected financial data should be read in conjunction with the Combined Financial Statements and notes thereto. (1) On November 1, 1993, the Trust repaid prior to their maturity dates $45 million of senior notes and $37.6 million of convertible debentures resulting in a $1.2 million charge for the write off of unamortized issue costs and payment of a redemption premium. (2) The amount of funds from operations is calculated as income from operations plus noncash charges for depreciation and amortization. (3) All per share amounts have been adjusted for a 4% share dividend declared December 5, 1990, and distributed February 1, 1991. (4) Certain amounts for 1983 through 1992 have been reclassified to conform with the presentation of 1993 balances. (See Note 1 to Combined Financial Statements, Summary of Significant Accounting Policies). (5) Includes senior notes and mortgage loans, including current portion, for all years. Also, included in 1993 is the $60 million five-year term loan. (See Note 5 to Combined Financial Statements, Bank Loans). (6) Includes shareholders' equity and convertible securities net of unamortized issue costs through 1992 as the convertible debentures were repaid on November 1, 1993. (See footnote(1) above). (7) Includes the effect of vested options.
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SELECTED FINANCIAL DATA YEARS ENDED DECEMBER 31, 1988 1989 1990 1991 1992 1993 (In thousands, except per share data) OPERATING RESULTS Revenues $73,390 $76,963 $76,861 $74,941 $74,567 $74,339 Income from operations 18,129 17,280 15,917 13,330 12,657 10,276 Capital gains 5,269 12,724 4,722 4,906 5,775 4,948 Income before extraordinary loss(1) 23,398 30,004 20,639 18,236 18,432 15,224 Net income 23,398 30,004 20,639 18,236 18,432 13,984 Funds from operations(2) 25,602 25,422 24,287 22,681 23,300 21,301 Dividends declared 26,967 26,438 19,632 16,827 13,022 13,031 - --------------------------------------------------------------------------------------------------------- Per share of beneficial interest(3) Income from operations $ .97 $ .94 $ .88 $ .74 $ .70 $ .57 Income before extraordinary loss(1) 1.25 1.63 1.14 1.01 1.02 .84 Net income 1.25 1.63 1.14 1.01 1.02 .77 Dividends declared(3) 1.44 1.44 1.08 .93 .72 .72 - --------------------------------------------------------------------------------------------------------- FINANCIAL POSITION AT YEAR END Gross Assets Before Deducting accumulated depreciation(4) $441,909 $442,304 $454,778 $461,077 $445,881 $495,445 Long-term obligations(5) 173,880 178,174 122,659 119,049 109,733 257,355 Total equity(6) 132,689 132,994 133,073 134,047 139,547 103,766 Total equity before deducting accumulated depreciation(4)(6) 197,245 201,274 209,001 217,848 231,973 205,590 - --------------------------------------------------------------------------------------------------------- Per share of beneficial interest(3)(4)(6)(7) Net assets $6.61 $6.73 $6.80 $6.89 $7.18 $5.93 Net assets before deducting accumulated depreciation 9.79 10.11 10.58 11.06 11.77 11.45 - ----------------------------------------------------------------------------------------------------------
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COMBINED BALANCE SHEETS 1993 1992 As of December 31, (In thousands) ASSETS INVESTMENTS IN REAL ESTATE Land $ 40,284 $ 40,219 Buildings and improvements 368,776 357,274 --------- --------- 409,060 397,493 Less -- Accumulated depreciation (101,824) (92,426) --------- --------- Total investments in real estate 307,236 305,067 MORTGAGE LOANS RECEIVABLE, including current portion of $146,000 35,550 39,573 OTHER ASSETS Cash and cash equivalents 38,523 992 Accounts receivable and prepayments 4,621 3,941 Deferred charges, net 2,506 2,469 Unamortized debt issue costs 5,185 1,413 --------- --------- $ 393,621 $ 353,455 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES Mortgage loans, including current portion of $3,788,000 $ 92,355 $ 59,733 Senior notes 105,000 50,000 Bank loans 60,000 67,000 Accounts payable and accrued liabilities 14,356 13,294 Deferred obligations 10,394 10,588 Deferred capital gains and other deferred income 7,750 12,528 --------- --------- 289,855 213,143 --------- --------- Convertible subordinated debentures (less $750,000 held in treasury) 37,640 --------- SHAREHOLDERS' EQUITY Shares of beneficial interest, $1 par, unlimited authorization, outstanding 18,109 18,086 Additional paid-in capital 59,446 59,328 Undistributed income from operations 20,732 19,358 Undistributed capital gains 5,479 5,900 --------- --------- Total shareholders' equity 103,766 102,672 --------- --------- $ 393,621 $ 353,455 ========= ========= The accompanying notes are an integral part of these statements.
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COMBINED STATEMENTS OF INCOME 1993 1992 1991 For the years ended December 31, (In thousands, except per share data) REVENUES Rents $ 70,131 $ 68,626 $ 65,669 Interest -- Mortgage loans 4,033 5,611 8,773 -- Short term investments 175 330 499 -------- --------- ---------- 74,339 74,567 74,941 -------- --------- ---------- EXPENSES Property operating 24,887 23,085 21,843 Real estate taxes 7,726 7,749 7,597 Depreciation and amortization 11,025 10,643 9,351 Interest -- Mortgage loans 5,777 6,182 6,493 -- Senior notes 5,779 4,199 4,199 -- Convertible debentures 3,214 3,858 3,858 -- Bank loans and other 3,747 4,694 6,221 General and administrative 1,908 1,500 2,049 -------- --------- ---------- 64,063 61,910 61,611 -------- --------- ---------- INCOME FROM OPERATIONS 10,276 12,657 13,330 CAPITAL GAINS 4,948 5,775 4,906 -------- --------- ---------- Income before extraordinary loss from early extinguishment of debt 15,224 18,432 18,236 Extraordinary loss from early extinguishment of debt 1,240 -------- --------- ---------- NET INCOME $ 13,984 $ 18,432 $ 18,236 ======== ========= ========== PER SHARE DATA Income from operations $ .57 $ .70 $ .74 Capital gains .27 .32 .27 -------- --------- ---------- Income before extraordinary loss from early extinguishment of debt .84 1.02 1.01 Extraordinary loss from early extinguishment of debt .07 -------- --------- ---------- Net income $ .77 $ 1.02 $ 1.01 ======== ========= ========== Dividends declared $ .72 $ .72 $ .93 ======== ========= ========== ADJUSTED SHARES OF BENEFICIAL INTEREST 18,096 18,086 18,098 ======== ========= ========== The accompanying notes are an integral part of these statements.
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COMBINED STATEMENTS OF CHANGES IN CASH 1993 1992 1991 For the years ended December 31, (In thousands) CASH PROVIDED BY (USED FOR) OPERATIONS: Net income $ 13,984 $ 18,432 $ 18,236 Adjustments to reconcile net income to net cash provided by operations - Depreciation and amortization 11,025 10,643 9,351 Extraordinary loss from early extinguishment of debt 1,240 Capital Gains (4,948) (5,775) (4,906) Increase in deferred charges, net (96) (53) (731) Increase in deferred interest on mortgage investments, net (401) (387) (1,795) Increase in deferred obligations 110 95 1,215 Recognition of deferred income, net (82) (1,865) (1,082) Net changes in other assets and liabilities 79 501 (396) -------- --------- ---------- Net cash provided by operations 20,911 21,591 19,892 -------- --------- ---------- CASH PROVIDED BY (USED FOR) INVESTING: Principal received from mortgage investments 4,424 11,326 7,007 Investments in properties (12,863) (10,305) (5,876) Proceeds from sales of properties, net 266 641 Other (31) -------- --------- ---------- Net cash provided by (used for) investing (8,173) 1,662 1,100 -------- --------- ---------- CASH PROVIDED BY (USED FOR) FINANCING: Increase (decrease) in short term loans (7,000) (13,000) 3,600 Issuance of senior notes 100,000 Repayment of senior notes (45,000) Repayment of convertible debentures (37,591) Increase in mortgage loans 44,300 8,000 Repayment of mortgage loans -- Normal payments (3,245) (3,615) (3,610) -- Balloon payments (8,433) (13,701) Purchase of First Union securities (420) Debt issue costs paid (4,913) (357) (126) Dividends paid (13,026) (13,022) (13,571) Other (299) 74 (29) -------- --------- ---------- Net cash provided by (used for) financing 24,793 (35,621) (14,156) -------- --------- ---------- Increase (decrease) in cash and cash equivalents 37,531 (12,368) 6,836 Cash and cash equivalents at beginning of year 992 13,360 6,524 -------- --------- ---------- Cash and cash equivalents at end of year $ 38,523 $ 992 $ 13,360 ======== ========= ========== The accompanying notes are an integral part of these statements.
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COMBINED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands, except footnotes) SHARES OF ADDITIONAL UNDISTRIBUTED UNDISTRIBUTED BENEFICIAL PAID-IN INCOME FROM CAPITAL INTEREST CAPITAL OPERATIONS(1) GAINS BALANCE DECEMBER 31, 1990 $18,133 $59,656 $12,960 $5,479 Net income 13,330 4,906 Dividends paid or accrued (11,921) (4,906) Shares purchased (47) (373) Other (29) ---------- --------- ---------- -------- BALANCE DECEMBER 31, 1991 18,086 59,254 14,369 5,479 Net income 12,657 5,775 Dividends paid or accrued (7,668) (5,354) Other 74 ---------- --------- ---------- -------- BALANCE DECEMBER 31, 1992 18,086 59,328 19,358 5,900 Net income 9,036 4,948 Dividends paid or accrued (7,662) (5,369) Shares issued - Under share option agreements 21 174 Upon conversion of debentures, net 2 47 Other (103) ----------- --------- ---------- -------- BALANCE DECEMBER 31, 1993 $18,109 $59,446(2) $20,732 $5,479 =========== ========= ========== ======== (1) Includes the balance of cumulative undistributed net loss of First Union Management, Inc. of $331,000; $230,000; $73,000 and $71,000 as of December 31, 1990, 1991, 1992 and 1993, respectively. (2) Cumulative distributions in excess of the Trust's net income from inception are $11,330,000. The accompanying notes are an integral part of these statements.
[FIRST UNION LOGO] 23 26 NOTES TO COMBINED FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES First Union Real Estate Investments ("Trust") and First Union Management, Inc., ("Company") are in the real estate industry and do not have operations outside this industry. The accounting policies of the Trust and Company conform to generally accepted accounting principles and give recognition, as appropriate, to common practices within the real estate industry. Under a trust agreement, the shares of the Company are held for the benefit of the shareholders of the Trust. Accordingly, the financial statements of the Company and the Trust have been combined. Most of the Trust's properties are currently leased to the Company. The remaining properties are leased to other parties, under net leases with original terms expiring by 1998 and with renewal options available thereafter. The Trust and Company capitalize costs related to investments in mortgage loans and the acquisition and leasing of real estate, including employees' salaries and related costs. These acquisition and leasing costs capitalized were approximately $0.9 million, $1.7 million and $1.4 million in 1993, 1992 and 1991, respectively. The Trust also charges against capital gains a portion of those costs related to the sale of such real estate interests. The Trust follows the recommendations set forth in the Statement of Position on Accounting Practices of Real Estate Investment Trusts issued by the American Institute of Certified Public Accountants in evaluating the need for an allowance for loan losses. Tenant leases generally provide for billings of certain operating costs, and retail tenant leases generally provide for percentage rentals, in addition to fixed minimum rentals. The Company accrues the recovery of operating costs based on actual costs incurred and accrues percentage rentals based on current estimates of each retail tenant's sales. For the years ended December 31, 1993, 1992 and 1991, such additional income approximated $17.9 million, $16.4 million, and $16.3 million, respectively. At December 31, 1993 and 1992, buildings and improvements included $9.5 million of leasing costs. Also included in buildings and improvements were equipment and appliances of $3.7 million at December 31, 1993 and $2.9 million at December 31, 1992. Depreciation for financial reporting purposes is computed using the straight-line method. Buildings and improvements are depreciated over their estimated useful lives of 40 to 64 years and equipment and appliances over five to 10 years. Leasing costs are amortized over the lives of the respective leases. Routine maintenance and repairs, including replacements, are charged to expense; however, replacements which improve or extend the lives of existing properties are capitalized. Net income per share of beneficial interest has been computed based on weighted average shares and share equivalents outstanding for the applicable period. Certain amounts for 1992 and 1991 have been reclassified to conform with the presentation of 1993 balances. 2. COMBINED STATEMENTS OF CHANGES IN CASH The Trust considers all highly liquid short term investments with original maturities of three months or less to be cash equivalents. In June 1992, the Trust became the owner of an apartment complex in Atlanta, Georgia, through a deed in lieu of foreclosure. The Trust transferred $11.4 million from its mortgage investments to investments in real estate while recognizing $371,000 of income in accordance with the accounting Statement of Position 92-3, "Accounting for Foreclosed Assets." This was a noncash transaction. In June 1991, the Trust became the owner of three apartment complexes in North Carolina through foreclosure sales. In these noncash transactions, the Trust transferred $15.1 million from its mortgage investments to investments in real estate. The Trust paid interest expense of $17.9 million, $18.7 million and $19.6 million in 1993, 1992 and 1991, respectively. [FIRST UNION LOGO] 24 27 3. EXTRAORDINARY LOSS FROM EARLY EXTINGUISHMENT OF DEBT On November 1, 1993, the Trust repaid prior to their maturity dates $45 million of 8 3/8% senior notes at par and $37.6 million of 10 1/4% convertible subordinated debentures at a premium of 1.025%. The maturity date of the senior notes was December 1994 and the convertible debentures was July 2009. The early extinguishment of debt resulted in an extraordinary charge of $1.2 million for the write-off of unamortized issue costs and payment of a redemption premium. 4. INVESTMENTS IN MORTGAGE LOANS As of December 31, 1993, the Trust had the following investments in mortgage loans (dollar amounts in thousands):
CURRENT EFFECTIVE RATE ON NET LOAN PRIOR NET INVESTMENT AMOUNT LIENS INVESTMENT First mortgage loan secured by office building in Cleveland, Ohio, maturing in 2011 10% $19,585 $19,585 Wraparound mortgage loan secured by apartment building in Atlanta, Georgia, maturing in 1999 14% 15,965 $ 4,260 11,705 ------- ------- ------- $35,550 $ 4,260 $31,290 ======= ======= =======
5. BANK LOANS As of December 31, 1993, the Trust's $60 million revolving credit agreement was converted to a five year term loan, requiring a 20% reduction on the last day of the following five years. Any amounts borrowed between $30 million and $60 million are secured by real estate assets. The $60 million outstanding is at a variable interest rate averaging 4.18% at December 31, 1993. The Trust also has a $20 million revolving credit with another bank which terminates in July 1996. As of December 31, 1993, there were no amounts borrowed under this credit agreement. The agreements can be terminated by the Trust upon one or seven days notice to the banks. Interest under these agreements may be calculated based on various alternatives, at the option of the Trust, including the lenders' base rate, LIBOR, certificate of deposit rate or current bank cost of funds. Commitment fees not greater than 1/4% per annum are payable on the unused portion of the revolving credits. These agreements contain certain requirements including maintaining minimum cash flow, net worth, leverage and fixed charges ratios, as defined. The Trust was in compliance with all the requirements as of December 31, 1993. 6. MORTGAGE LOANS PAYABLE As of December 31, 1993, the Trust had outstanding $92.4 million of mortgage loans due in installments extending to the year 2031. Interest rates on fixed rate mortgages range from 7.75% to 10%. A $35 million mortgage is at a variable rate presently 5.63% for the first year which is tied to LIBOR with a maximum rate of 9.5%. The mortgage requires the Trust to maintain minimum net worth, liquidity and debt service coverage ratios, of which the Trust was in compliance at December 31, 1993. Principal payments due during the five years following December 31, 1993, are $3.8 million, $16.1 million, $3.9 million, $4.3 million and $8.7 million, respectively. 7. SENIOR NOTES As of December 31, 1993, the Trust had $105 million in senior notes outstanding. The interest rate is 8 7/8% on $100 million maturing in October 2003 and 8.6% on $5 million maturing in July 1996. The $100 million senior notes are noncallable, limit future borrowings by the Trust and require maintenance of a minimum net worth. The Trust was in compliance with all requirements as of December 31, 1993. 8. SHARE OPTIONS The Trust has a share option plan for key personnel. The plan provides that option prices be at the fair market value of the shares at the date of grant and that option rights granted expire ten years after the date granted. This plan, adopted in 1981, originally reserved 624,000 shares for the granting of incentive and nonstatutory share options. Subsequently, the [FIRST UNION LOGO] 25 28 shareholders approved amendments to the plan reserving an additional 200,000 shares, for a total of 824,000 shares, for the granting of options and extending the expiration date to December 31, 1996. The amendments do not affect previously issued options. The activity of the plan is summarized for the years ended December 31 in the following table:
1993 1992 1991 Granted 25,000 63,000 55,000 Exercised 20,925 - - Cancelled 9,500 3,619 2,080 Available 239,610 255,110 114,491
As of December 31, 1993, options on 437,897 shares were outstanding at prices ranging from $8.25 to $24.76 per share. The Trust and Company have an agreement whereby, as of December 31, 1993, the Company may purchase up to 176,490 shares from the Trust at prices ranging from $8.25 to $24.76 per share to satisfy the Company's obligations to deliver shares to certain of its key employees pursuant to options previously granted. The option agreements with the Company's employees provide that option prices be at the fair market value of the Trust shares at the date of grant and that option rights granted expire ten years after the date granted. 9. ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS The disclosure of the estimated fair value of financial instruments is made in accordance with the requirements of Statement of Financial Accounting Standards (SFAS) No. 107, "Disclosures about Fair Value of Financial Instruments." The estimated fair value amounts have been determined by the Trust, using available market information as of December 31, 1993, and appropriate valuation methods. Considerable judgement is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Trust could realize in a current market exchange. The use of different market assumptions and methods of estimation may have a material effect on the estimated fair value amounts. As of December 31, 1993, the carrying amount and estimated fair value of financial instruments were as follows
(dollar amounts in thousands): CARRYING ESTIMATED AMOUNT FAIR VALUE ASSETS Cash and cash equivalents $38,523 $38,523 Accounts receivable and prepayments 4,621 4,621 Mortgage loans receivable 35,550 40,417 LIABILITIES Accounts payable and accrued liabilities 14,356 14,356 Bank loans 60,000 60,000 Mortgage loans payable 92,355 93,507 Senior notes 105,000 105,000 Deferred obligations 10,394 14,801
Cash and cash equivalents, accounts receivable and prepayments, accounts payable and accrued liabilities - The carrying amounts are a reasonable estimate of their fair value because each item is of short duration. Mortgage loans receivable - The fair value of the wraparound mortgage investment secured by a property in Atlanta, Georgia and a first mortgage secured by an office building in Cleveland, Ohio, are calculated as the net present value of future cash flows. The discount rates used are an estimate based on current lending rates and market conditions. Management intends to hold the mortgage loans receivable to maturity. Mortgage loans payable and deferred obligations - The mortgage loans payable are aggregated by maturity and discounted at rates based on current lending rates and market conditions to determine their fair value. The deferred obligations are [FIRST UNION LOGO] 26 29 discounted based on current lending rates and market conditions. Management intends to repay the mortgage loans and deferred obligations as they become due. Senior notes and bank loans - The fair value is the carrying amount because market interest rates approximate the interest rates of these debt securities. Management intends to repay these debt securities as they become due. 10. SHAREHOLDER RIGHTS PLAN In March 1990, the Board of Trustees declared a dividend consisting of one right to purchase one share of beneficial interest of the Trust with respect to each share of beneficial interest. The rights may be exercised only if a person or group acquires 15% or more of the outstanding shares of beneficial interest, makes a tender offer for at least 15% of the outstanding shares of beneficial interest, or is declared to be an "adverse person." The exercise price of each right is $50. If a person or group acquires 15% or more of the outstanding shares of beneficial interest (except in a tender offer approved by the Board of Trustees), is declared to be an "adverse person," or engages in certain self-dealing transactions with the Trust ("flip-in events"), each right (other than rights owned by a 15% owner of an "adverse person") entitles the holder to purchase one share of beneficial interest of the Trust for par value (now $1 per share). If the Trust is acquired in a merger or other business combination ("flip-over events"), each right entitles the holder to purchase, for $1, shares of the acquiring company having a market value equal to the market value of one share of beneficial interest of the Trust. The rights may be redeemed by the Trust at a price of $0.01 per right at any time prior to the earlier of a "flip-in" or "flip-over" event or the expiration of the rights on March 30, 2000. 11. CAPITAL GAINS In 1993, 1992 and 1991, the Trust recognized capital gains of $4.7 million, $5.6 million and $4.9 million, respectively, from an installment sale which occurred in a prior year. Also, in 1993 and 1992 the Trust recognized approximately $250,000 and $200,000, respectively, from sales of small land parcels. The final portion of the capital gain from the prior year installment sale was recognized during 1993. 12. FEDERAL INCOME TAXES No provision for current or deferred income taxes has been made by the Trust on the basis that it qualified under Sections 850-860 of the Internal Revenue Code as a real estate investment trust and has distributed all of its taxable income to shareholders. The Trust and Company treat certain items of income and expense differently in determining net income reported for financial reporting and tax purposes. Such items resulted in a net reduction in income for tax reporting purposes of approximately $2.9 million for 1993, $4.4 million for 1992 and $3.3 million for 1991. As of December 31, 1993, net investments in real estate for financial reporting purposes were approximately $62 million greater than for tax purposes. The 1993 quarterly allocation of cash dividends per share for individual shareholders' income tax purposes was as follows:
LONG-TERM ORDINARY TOTAL DATE PAID CAPITAL GAINS INCOME PAID February 1 $.058 $.122 $.18 April 30 .058 .122 .18 July 30 .058 .122 .18 October 29 .058 .122 .18 ----- ----- ---- $.232 $.488 $.72 ===== ===== ====
The total long-term capital gains and ordinary income per share amounts for the year ended December 31, 1992 were $0.332 and $0.388, respectively, and for the year ended December 31, 1991, were $0.302 and $0.448, respectively. [FIRST UNION LOGO] 27 30 13. LEGAL CONTINGENCY The Trust has pursued legal action against the State of California associated with the 1986 flood of Peach Tree Mall. In September 1991, the court ruled in favor of the Trust on the liability portion of this inverse condemnation suit, which the State of California appealed. The Trust is proceeding with its damage claim. No recognition of potential income has been made in the accompanying financial statements. 14. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is an unaudited condensed summary of the combined results of operations by quarter for the years ended December 31, 1993 and 1992. In the opinion of the Trust and Company, all adjustments (consisting of normal recurring accruals) necessary to present fairly such interim combined results in conformity with generally accepted accounting principles have been included.
QUARTERS ENDED MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 (In thousands, except per share data) 1993 Revenues $ 18,216 $ 18,455 $ 18,706 $ 18,962 ---------- --------- ---------- -------- Income from operations 2,847 2,879 2,901 1,649 Capital gains 1,510 3,257 181 ---------- --------- ---------- -------- Income before extraordinary loss from early extinguishment of debt 4,357 6,136 2,901 1,830 Extraordinary loss from early extinguishment of debt 1,240 ---------- --------- ---------- -------- Net income $ 4,357 $ 6,136 $ 2,901 $ 590 ========== ========= ========== ======== Per share Income from operations $ .16 $ . 16 $ .16 $ .09 Capital gains .08 .18 .01 ---------- --------- ---------- -------- Income before extraordinary loss from early extinguishment of debt .24 .34 .16 .10 Extraordinary loss from early extinguishment of debt .07 ---------- --------- ---------- -------- Net income $ .24 $ .34 $ .16 $ .03 ========== ========= ========== ======== 1992 Revenues $ 18,176 $ 18,474 $ 18,891 $ 19,026 ---------- --------- ---------- -------- Income from operations 3,024 3,273 3,207 3,153 Capital gains 1,328 1,371 1,551 1,525 ---------- --------- ---------- -------- Net income $ 4,352 $ 4,644 $ 4,758 $ 4,678 ========== ========= ========== ======== Per share Income from operations $ .17 $ .18 $ .18 $ .17 Capital gains .07 .08 .08 .09 ---------- --------- ---------- -------- Net income $ .24 $ .26 $ .26 $ .26 ========== ========= ========== ========
[FIRST UNION LOGO] 28 31 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE SECURITYHOLDERS AND TRUSTEES OF FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS: We have audited the accompanying combined balance sheets of First Union Real Estate Equity and Mortgage Investments (an unincorporated Ohio business trust, also known as First Union Real Estate Investments) and First Union Management, Inc. (a Delaware corporation) as of December 31, 1993 and 1992, and the related combined statements of income, shareholders' equity and changes in cash for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of First Union Real Estate Equity and Mortgage Investments and First Union Management, Inc. as of December 31, 1993 and 1992, and the results of their operations and their changes in cash for each of the three years in the period ended December 31, 1993, in conformity with generally accepted accounting principles. Cleveland, Ohio, February 1, 1994. ARTHUR ANDERSEN & CO. [FIRST UNION LOGO] 29 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS FINANCIAL CONDITION In September 1993, the Trust obtained a $35 million mortgage loan secured by Crossroads Center in St. Cloud, Minnesota. The loan has a variable interest rate tied to LIBOR and is presently 5.63% for the first year. The Trust purchased an interest rate cap with a ceiling of 9.5% on the loan during its 10 year term. The proceeds of the loan were used to repay short-term bank loans. Additionally, on October 1, 1993, the Trust issued $100 million of non-callable senior notes at 99.187 with a coupon rate of 8.875%, due October 1, 2003. Proceeds from this note offering were used to repay $8.4 million in mortgage loans, reduce short-term bank loans and on November 1, 1993, repay $45 million of 8.375% senior notes, at par, and $37.6 million of 10.25% convertible debentures, at 101.025. In December 1993, the Trust obtained a $9.3 million mortgage loan secured by a parking garage. The loan has a fixed interest rate of 8.55% and the proceeds were invested in short-term investments. At December 31, 1993, the Trust borrowed the entire balance of $60 million under one of its bank lines since that line converted to a five year term loan based on the outstanding balance as of that date. LIQUIDITY AND CAPITAL RESOURCES During 1993, the Trust restructured its outstanding debt maturities by issuing the $100 million of senior notes and repaying the $45 million in senior notes and the $37.6 million in convertible debentures. The $45 million in senior notes would have been due in December 1994 and the convertible debentures required sinking fund payments of $1 million in 1995 and $1.9 million thereafter until 2008. Consequently, the senior note issue extended the maturity date of outstanding debt. Although the proceeds from the $35 million mortgage loan in September 1993 were used to repay bank lines of credit during 1993, at December 31, 1993, the Trust borrowed the entire $60 million under the bank line which converted to a five year term loan. The Trust has nothing borrowed against its $20 million bank line which terminates in July 1996. This facility continues to function as a revolving credit line until it terminates. With $38.5 million in short-term investments at December 31, 1993, the Trust had a net borrowed position under the bank lines of $21.5 million. Future cash needs, such as capital expenditures, repayment of the $60 million term loan, the $5 million of 8.6% senior notes maturing in 1996, and a mortgage loan balloon of $12 million in 1995 will be met by a combination of cash from operations, short-term investments, new bank credit facilities, mortgage financing and either privately or publicly issued securities. RESULTS FROM OPERATIONS Income before the extraordinary loss in 1993 was $15.2 million, as compared to $18.4 million in 1992. In 1993, the Trust recorded an extraordinary loss of $1.2 million representing the write off of unamortized issue costs associated with the $45 million senior notes and $37.6 million convertible debentures which were repaid prior to their maturity, as well as the redemption premium required with the call of the convertible debentures. Capital gains of $4.7 million and $5.6 million were included in net income in 1993 and 1992, respectively, from a prior year installment sale. The recognition of this gain was completed in 1993. The remaining capital gains of approximately $250,000 and $200,000 in 1993 and 1992, respectively, were the result of small land parcel sales. Net income was $18.4 million in 1992, as compared to $18.2 million in 1991. Included in net income was $5.6 million and $4.9 million of capital gains in 1992 and 1991, respectively, from a prior year installment sale. Also, during 1992, capital gains of $200,000 were recognized from the sales of small land parcels. Income from property operations, which is rents less property operating expenses and real estate taxes, increased by $2.0 million when comparing properties in the portfolio for all of 1993 and 1992 and the apartment complex obtained in June 1992. However, this increase was offset by the recognition in 1992 of a lease termination fee of $1.7 million and $371,000 from the difference between the fair market value of the apartment complex acquired in June 1992 and the Trust's wraparound mortgage secured by that property. Income from property operations increased by $1.6 million in 1992 as compared to 1991. The apartment complex acquired in June 1992 and three apartment complexes acquired in June 1991 accounted for $900,000 of this increase. [FIRST UNION LOGO] 30 33 The remainder of this increase was primarily from a lease termination fee received in a prior year when an anchor tenant vacated. Mortgage investment income declined when comparing 1993 to 1992 and 1992 to 1991. The decrease, when comparing 1993 to 1992, was primarily attributed to the receipt of the final installment of a mortgage investment from the 1983 sale of an office building. Additionally, when comparing 1993 to 1992, mortgage investment income declined due to the conversion of a mortgage investment to an equity investment in the Atlanta apartment complex acquired in June 1992. When comparing 1992 to 1991, mortgage investment income decreased due to the conversion of four mortgage investments to investments in apartment complexes, one in 1992 and the other three in June 1991. The normal amortization of another mortgage investment, secured by the office building sale noted previously, accounted for the remaining decrease in mortgage investment income when comparing 1992 to 1991. Mortgage loan interest expense declined when comparing 1993 to 1992 due to the repayment of $14.8 million of mortgage loans in December 1992 and October 1993. The mortgage loan interest expense on the $35 million loan obtained in September 1993 partially offsets the effect on mortgage loan interest expense of these repayments. Mortgage loan interest expense will increase by $2.2 million in 1994 due to the $35 million and $9.3 million mortgage loans obtained during 1993. The offset to this increased expense will depend on the use of the proceeds from the loans. As of December 31, 1993, most of the net proceeds were invested in short-term investments and a portion was also used to reduce bank loans. The interest rate on the short-term investments is less than the interest rate on the mortgage loans. The Trust is reviewing other mortgage loans to prepay and real estate investments to purchase in order to increase the yield on these funds. The increase in depreciation and amortization expense when comparing 1993 to 1992 and 1992 to 1991 was the result of the apartment acquisitions in 1992 and 1991 and tenant improvements associated with leasing space to new tenants over the three year period. As noted previously, the Trust issued $100 million of senior notes at a coupon rate of 8.875% on October 1, 1993. In addition to repaying $8.4 million of mortgage loans, the proceeds from the senior note issue were used to retire the $45 million of 8.375% senior notes and the $37.6 million of 10.25% convertible debentures on November 1, 1993. Because of the one month difference between the receipt of proceeds from the issuance of the $100 million of 8.875% senior notes and the repayment of the $45 million senior notes and the $37.6 million convertible debentures (necessitated by the 30-day call provisions required by the indentures of the retired debt), additional nonrecurring interest expense of $435,000, net of short-term investment income and reduced interest expense on bank loans, was incurred in 1993. In 1994, the net effect of having issued the new senior notes and repaying other debt will be negligible. Interest expense on bank loans decreased when comparing 1993 to 1992 due to lower average interest rates of approximately 60 basis points and lower average balances outstanding during 1993. The average balance borrowed during 1993 was reduced by the proceeds from the $35 million mortgage loan. When comparing interest expense on bank loans for 1992 and 1991, interest expense declined due to a drop in average interest rates of approximately 200 basis points and the repayment of approximately $13 million of bank loans during the second and third quarters of 1992. General and administrative expenses increased in 1993 resulting primarily from expensing costs which are normally charged against acquisitions and dispositions of investments because no such transactions occurred in 1993. General and administrative expenses decreased in 1992 compared to 1991 primarily due to less legal and professional fees incurred when the acquisitions were completed for three apartment complexes in 1991. FUNDS FROM OPERATIONS AND DIVIDENDS PAID Funds from operations are calculated as income from operations plus noncash charges for depreciation and amortization. For 1993, 1992, and 1991, funds from operations were $21.3 million, $23.3 million, and $22.7 million, respectively, and dividends paid to holders of shares of beneficial interest were $13 million, $13 million, and $13.6 million, respectively. [FIRST UNION LOGO] 31 34 First Union Real Estate Investments 55 Public Square, Suite 1900 Cleveland, Ohio 44113-1937 FIRST UNION REAL ESTATE INVESTMENTS FIRST UNION MANAGEMENT, INC. TRUSTEES James C. Mastandrea Chairman, President and Chief Executive Officer Otes Bennett, Jr. Retired Chairman The North American Coal Corporation Independent coal producer and diversified manufacturer William E. Conway Chairman and Chief Executive Officer Fairmount Minerals, Ltd. Miner and processor of industrial minerals Daniel G. DeVos Chairman, President and Chief Executive Officer Landquest International Private real estate investment firm Allen H. Ford Consultant; Former Senior Vice President Finance and Administration The Standard Oil Company (BP America) Integrated domestic petroleum company Russell R. Gifford President and Chief Executive Officer The East Ohio Gas Company Natural gas distribution company Stephen R. Hardis Vice Chairman and Chief Financial and Administrative Officer Eaton Corporation Manufacturer of highly engineered products E. Bradley Jones Retired Chairman and Chief Executive Officer Republic Steel Corporation Integrated steel company William A. Parker, Jr. Chairman Cherokee Investment Company Private Investments OFFICERS James C. Mastandrea Chairman, President and Chief Executive Officer John J. Dee Senior Vice President - Controller Steven M. Edelman Senior Vice President - Asset Management Paul F. Levin Vice President - General Counsel and Secretary William L. Arnold Vice President - Special Counsel Thomas T. Kmiecik Vice President - Treasurer Edward Geller Assistant Vice President Gregory C. Scott Assistant Controller David W. Reimer Assistant Controller Helen B. Heacox Assistant Secretary DIRECTORS Adolph Posnick Retired Chairman and Chief Executive Officer Ferro Corporation Manufacturer of specialty materials for industry Henry G. Piper Retired Chairman Brush Wellman, Inc. Producer of high performance engineered materials for industry Renold D. Thompson Vice Chairman Oglebay Norton Company Raw materials and Great Lakes marine transportation company OFFICERS AND MANAGERS Adolph Posnick Chairman and Secretary Gene W. Newman President - Retail Division Daniel E. Nixon, Jr. Vice President - Eastern Retail Leasing Dennis M. Bartelme Vice President - Midwestern Retail Leasing Susan J. Niedermeyer Manager - Western Retail Leasing George S. Sirow Vice President - Apartment Division Judy N. Carroll Manager - Midwestern Apartments Karen F. Redman Manager - Southeastern Apartments Anthony J. Janca Assistant Vice President - Office Buildings Joseph W. Kearney Controller and Assistant Secretary 32 35 SECURITYHOLDER INFORMATION ANNUAL MEETING Securityholders of First Union Real Estate Investments are cordially invited to the Annual Meeting of Shareholders at 10:00 A.M. on Tuesday, April 12, 1994, in the National City Bank Auditorium on the fourth floor of the National City Center Annex Building at 1900 East Ninth Street, Cleveland, Ohio. DIVIDEND INVESTMENT SERVICE The Trust provides a Dividend Investment Service which enables shareholders of record to automatically invest dividends as well as voluntary cash payments in additional shares of beneficial interest. A brochure describing the benefits of the service and an authorization form may be obtained by writing to Thomas T. Kmiecik, Vice President - Treasurer, at First Union headquarters. FORM 10-K A copy of the annual report filed with the Securities and Exchange Commission on Form 10-K is also available to securityholders, without charge, at First Union headquarters. HEADQUARTERS 55 Public Square Suite 1900 Cleveland, Ohio 44113-1937 (216) 781-4030 (216) 781-7467 Fax TRANSFER AGENT AND REGISTRAR National City Bank Corporate Trust Department 1900 East Ninth Street Cleveland, Ohio 44114-3484 (216) 575-2497 INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen & Co. Cleveland, Ohio First Union Real Estate Investments 55 Public Square, Suite 1900 Cleveland, Ohio 44113-1937 EX-23 5 FIRST UNION EXHIBIT 23 1 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included and incorporated by reference in this Form 10-K, into the registrant's previously filed Registration Statements on Form S-3 (Registration Nos. 2-88719, 33-2818, 33-11524, 33-19812, 33-26758, 33-33279, 33-38754, 33-45355, and 33-57756). ARTHUR ANDERSEN & CO. Cleveland, Ohio March 21, 1994 30 EX-24 6 FIRST UNION EXHIBIT 24 1 Exhibit 24 ---------- FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS ------------------------------------------------------- Annual Report on Form 10-K For the Year Ended December 31, 1993 ------------------------------------ Power of Attorney of Officers and Trustees ------------------------------------------ The undersigned, an officer or Trustee or both an officer and Trustee of First Union Real Estate Equity and Mortgage Investments, an Ohio business trust (the "Trust") which anticipates filing with the Securities and Exchange Commission, Washington, D.C., under the provisions of the Securities Exchange Act of 1934, as amended, an Annual Report on Form 10-K for the year ended December 31, 1993 (hereinafter called the "Form 10-K"), does hereby constitute and appoint James C. Mastandrea and Paul F. Levin, and either of them, with full power of substitution and resubstitution, as attorneys or attorney to sign for him and in his name the Form 10-K and any and all amendments and exhibits thereto, and any and all other documents to be filed with the Securities and Exchange Commission pertaining to the Form 10-K, with full power and authority to do and perform any and all acts and things whatsoever required or necessary to be done in the premises, as fully to all intents and purposes as he could do if personally present, hereby ratifying and approving the acts of said attorneys and any of them and any such substitute. IN WITNESS WHEREOF, the undersigned has hereunto set his hand this second day of March, 1994. /S/Otes Bennet, Jr. ------------------------------------------- Otes Bennet, Jr /S/William E. Conway ------------------------------------------- William E. Conway /S/Allen M. Ford ------------------------------------------- Allen M. Ford /S/Russel R. Gifford ------------------------------------------- Russel R. Gifford /S/James C. Mastandrea ------------------------------------------- James C. Mastandrea 31 -----END PRIVACY-ENHANCED MESSAGE-----