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. At December 31, 1997, the registrant net leased 41 of its properties to the Management Company. The shares of the Management Company are held in trust, with the shareholders of the registrant, as exist from time to time, as contingent beneficiaries. The Management Company, in April 1997, acquired voting control of ("Impark") which is primarily a parking management and transit ticketing manufacturing company based in Canada. As the Management Company owns voting control of Impark, the financial statements of Impark are consolidated with the Management Company. Additionally, for financial reporting purposes, the financial statements of the Management Company are combined with those of the registrant.
The registrant owns regional enclosed shopping malls, apartment complexes, large downtown office buildings and parking facilities. The registrant's portfolio is diversified by type of property, geographical location, tenant mix and rental market. As of December 31, 1997, the registrant owned (in fee or pursuant to long-term ground leases under which the registrant is lessee) 21 shopping malls, 8 apartment complexes, 5 office properties, a 1,100-car parking garage, a 300-car parking facility, a 562 car parking garage and 10 parking lots in Canada as well as land leased to a third party (see Item 2
ITEM 2. PROPERTIES - ------- ---------- The following table sets forth certain information relating to the registrant's investments at December 31, 1997:
ITEM 2. PROPERTIES - ------- ---------- -CONTINUED
(1) The square footage shown represents gross leasable area for shopping malls and net rentable area for office buildings. The apartments are shown as number of units. The parking garages and parking facilities are shown as number of parking spaces.
(2) Occupancy rates shown are as of December 31, 1997, and are based on the total square feet at each property, except apartments which are based on the number of units and average occupancy during the year.
(3) The registrant obtained mortgages on the following properties subsequent to acquisition: Huntington Parking Garage in the amount of $9,300,000 in 1993; Mountaineer Mall in the amount of $4,600,000 in 1994; Crossroads Shopping Center (St. Cloud, MN) in the amount of $49,500,000 in 1995; Woodland Commons in the amount of $12,000,000 in 1996; Somerset Lakes in the amount of $15,000,000 in 1996; Steeplechase in the amount of $9,000,000 in 1996; Beech Lake in the amount of $12,500,000 in 1996.
(4) The total mall contains 676,000 square feet; the registrant owns 618,000 square feet, the balance being ground leased to Giant Eagle Markets, Inc.
(5) The total mall contains 723,000 square feet; the registrant owns 537,000 square feet, the balance being separately ground leased to Boscov Department Store, Inc.
(6) These properties are the collateral for the registrant's $125 million revolving line of credit.
(7) The mortgage secured by these malls requires that all rents and other tenant charges be deposited into a bank account which serves as additional security for the lender.
(8) The mortgage loan participates in 55% of revenues, as defined, in excess of $5,970,516.
(9) The total mall contains 733,000 square feet; the registrant owns 624,000 square feet, the balance being separately owned by Target Stores.
(10) The total mall contains 429,000 square feet; the registrant owns 327,000 square feet, the balance being separately owned by an unrelated third party with Sears, Roebuck and Co. as tenant.
(11) The mall is currently being redeveloped as an open air shopping center. Currently, 95,000 square feet is separately owned by Montgomery Ward & Co., Incorporated. Winn-Dixie will occupy 65,000 square feet in July 1998 when the initial phase of redevelopment is completed.
(12) The total mall contains 432,000 square feet; the registrant owns 255,000 square feet, the balance being separately owned by Montgomery Ward Development Corporation.
(13) The total mall contains 390,000 square feet; the registrant owns 272,000 square feet, the balance being separately ground leased to Sears, Roebuck and Co.
(14) North Valley Technical Center was repositioned from a shopping mall to an office complex during 1995. Montgomery Ward vacated the complex in 1997 allowing the registrant to continue to retenant the former mall as an office center.
(15) The property was inundated by a flood which occurred in February 1986. The mall was subsequently rebuilt and re-opened in November 1986. A temporary tenant occupied approximately 70,000 square feet as of December 31, 1997. The Trust is pursuing a mixed use strategy for this former retail facility.
(16) These properties are general use buildings currently being used as regional and city offices by Impark Limited.
(17) This property is currently demolished and awaiting redevelopment.
(18) The registrant has ground leased the land until October 30, 2011, with seven, 10-year renewal options.
(19) In December 1995, the registrant recorded a $14 million unrealized loss on the carrying value of assets identified for disposition. Subsequent to the disposition of three office buildings and one shopping mall, this reserve was $2,058,000 as of December 31, 1997.
As of December 31, 1997, the registrant owned in fee its interests in Crossroads Center (St. Cloud, MN), Woodland Commons, Mall 205, Crossroads Mall (Ft. Dodge, IA), Westgate Town Center, Mountaineer Mall, Plaza 205, Valley Mall, Fingerlakes Mall, Fairgrounds Square Mall, 55 Public Square Building, Henry C. Beck Building, Sutter Buttes Center, Alexandria Mall, Brazos Mall, Killeen Mall, Mesilla Valley Mall, Park Plaza Mall, Pecanland Mall, Shawnee Mall, Villa Linda Mall, Somerset Lakes Apartments, Briarwood Apartments, Woodfield Gardens Apartments, Windgate Place Apartments, Walden Village Apartments, Beech Lake Apartments, Steeplechase Apartments, Hunter's Creek Apartments, and the Parkade Land - Huntington Building, the West Third Lot, 10th Avenue, 1009 9th Avenue, 103 St., 107 St., 221 9th St., Graham Ave., Water Ave., Young St., Broad St., Broadway, Smith St., Blanchard St., Queens Quay, and Donald St. The registrant holds a leasehold estate or estates, or a fee interest and one or more leasehold estates in Valley North Mall, Two Rivers Mall, Kandi Mall, Circle Tower Building and North Valley Technical Center and the Huntington Garage.
RENTALS FROM NET LEASES
The following table sets forth the rentals payable to the registrant for the year ended December 31, 1997, under net leases of the properties indicated:
(1) Leased to the Management Company.
(2) An additional net lease for the Stearns County Building, which is part of the Crossroads, St. Cloud, MN mall, provides for a base rent of $14,000.
(3) The management company manages these shopping malls for the registrant and receives 4% of gross receipts, as a management fee, as defined, and a leasing fee of 4.5%, and 3%, of base rent, as defined, for new and renewal tenants, respectively.
(4) An additional net lease for the 55 Public Square Building garage provides for a base rent of $331,000 and a percentage rent of 70% of gross receipts in excess of $537,000.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
REGISTRANT VS. THE STATE OF CALIFORNIA
The registrant has pursued legal action against the State of California associated with the 1986 flood of Sutter Buttes Center, formerly Peach Tree Mall. In September 1991, the court ruled in favor of the registrant on the liability portion of this inverse condemnation suit, which the State of California appealed. The registrant is proceeding with its damage claim in Superior Court of the State of California. No recognition of potential income has been made in the December 31, 1997 Combined Financial Statements.
REGISTRANT VS. GOTHAM PARTNERSHIPS
In August and October 1997, the registrant requested information pursuant to its Declaration of Trust and By-Laws in order to ascertain the ownership of shares held by two of its beneficiaries, Gotham Partners, L.P. ("Gotham I") and Gotham Partners II, L.P. (collectively, the "Gotham Partnerships"). The requests were made in furtherance of the Trustees' obligation to preserve the registrant's tax status as a real estate investment trust. The Gotham Partnerships refused to comply with such requests. On January 16, 1998, the registrant commenced a civil action (Case No. 347063) in the Court of Common Pleas, Cuyahoga County, Ohio (the "State Court Action"), against the Gotham Partnerships to, among other things, enforce the Declaration of Trust and to declare a proposal, set forth in a letter dated January 8, 1998 from Gotham I to the registrant, to increase the number of Trustees constituting the full Board of Trustees by six, and to elect six additional Trustees at the annual meeting (the "Proposal"), unlawful, null and void. The registrant also seeks, among other things, to enjoin the Gotham Partnerships from soliciting proxies for the Proposal or the Gotham Partnerships' nominees for the Board of Trustees. Initially, the Gotham Partnerships unsuccessfully sought to remove the State Court Action to federal district court. On January 20, 1998, the Gotham Partnerships filed counterclaims, alleging, among other things, that the registrant had violated its purported fiduciary obligations to the Gotham Partnerships and violated the proxy rules under federal securities laws. The Gotham Partnerships also sought, among other things, a declaration that Gotham I was entitled to submit the Proposal and nominations for a vote at the annual meeting and to enjoin the registrant from soliciting the registrant's beneficiaries until the registrant complied with the federal proxy rules. The registrant has moved to dismiss the counterclaims for failure to state legally cognizable claims.
On March 27, 1998, the State Court denied the registrant's motion to enforce the Declaration of Trust and By-laws which deem the Gotham Partnership's interest in the registrant to be "Excess Shares," the equivalent of treasury shares, by virtue of their failure to comply with the registrant's requests for ownership information, and to enjoin them from soliciting Proxies for the annual meeting.
On January 30, 1998, the Gotham Partnerships filed a separate civil action in the District Court (Case No. 1:98CV 0272) (the "Federal Action"). Therein, the Gotham Partnerships sought to enjoin the registrant from taking actions allegedly in violation of federal securities laws and to permit Gotham I to solicit proxies with respect to its Proposal and purported nominations. The registrant filed an answer and counterclaims on February 10, 1998 to the Gotham Partnerships' Federal Action, denying any wrongdoing, and alleging, among other things, that the Gotham Partnerships violated federal securities laws, tortuously interfered with the registrant's business, and caused the registrant and its beneficiaries to suffer damage. The registrant's counterclaims, as amended, seek compensatory and punitive damages, injunctive relief and a trial by jury. On February 17, 1998, the registrant filed a motion to dismiss the Federal Action on the basis that, inter alia, it fails to state legally cognizable claims against the registrant for breach of the federal securities laws or breach of fiduciary duty. On March 6, 1998, the registrant filed a motion for preliminary injuction in the Federal Action seeking to enjoin the Gothan Partnerships from soliciting proxies for the Annual Meeting on the basis that they have failed to disclose their group in violation of Federal securities laws.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. MARKET PRICE AND DIVIDEND RECORD.
"Market Price and Dividend Record" presented on page 1 of Exhibit 13.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
"Selected Financial Data" presented on page 2 and 3 of Exhibit 13.
ITEM 7.
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 18 through 20 of Exhibit 13.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS.
The "Combined Balance Sheets" as of December 31, 1997 and 1996, and the "Combined Statements of Income, Combined Statements of Changes in Cash, Combined Statements of Shareholders' Equity" for the years ended December 31, 1997, 1996 and 1995, of the registrant, "Notes to Combined Financial Statements" and "Report of Independent Public Accountants" are presented on pages 4 through 17 of Exhibit 13.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
(a) DIRECTORS.
"Election of Trustees" presented in the registrant's 1998 Proxy Statement is incorporated herein by reference.
(a) EXECUTIVE OFFICERS.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION. - -------- -----------------------
"Compensation of Trustees" and "Executive Compensation", presented in the registrant's 1998 Proxy Statement are incorporated herein by reference.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND - -------- --------------------------------------------------- MANAGEMENT. -----------
"Security Ownership of Trustees, Officers and Others" presented in registrant's 1998 Proxy Statement is incorporated herein by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS - -------- ----------------------------------------------
"Certain Relationships and Related Transactions" presented in the registrant's 1998 Proxy Statement is incorporated herein by reference.
PART IV
ITEM 14.
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, 1997 and 1996 on page 4 of Exhibit 13.
Combined Statements of Income - For the Years Ended December 31, 1997, 1996 and 1995 on page 5 of Exhibit 13.
Combined Statements of Changes in Cash - For the Years Ended December 31, 1997, 1996 and 1995 on page 6 of Exhibit 13.
Combined Statements of Shareholders' Equity - For the Years Ended December 31, 1997, 1996 and 1995 on page 7 of Exhibit 13.
Notes to Combined Financial Statements on pages 8 to 16 of Exhibit 13.
Report of Independent Public Accountants on page 17 of Exhibit 13.
(2) FINANCIAL STATEMENT SCHEDULES:
Report of Independent Public Accountants on Financial Statement Schedules.
Schedule III - Real Estate and Accumulated Depreciation.
Schedule IV - Mortgage Loans on Real Estate.
All Schedules, other than III and IV, are omitted, as the information is not required or is otherwise furnished.
(b) EXHIBITS.
(c) REPORTS ON FORM 8-K.
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
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.
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 1997 Annual Report included as Exhibit 13 of this Form 10-K and have issued our report thereon dated February 4, 1998. 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 18 are the responsibility of management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic combined financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic combined financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic combined financial statements taken as a whole.
Cleveland, Ohio, February 4, 1998. Arthur Andersen LLP
Schedule III ------------
REAL ESTATE AND ACCUMULATED DEPRECIATION AS OF DECEMBER 31, 1997 (IN THOUSANDS)
Schedule III ------------ Continued
Aggregate cost for federal tax purposes is $727,734,000.
Schedule III ------------ - Continued
The following is a reconciliation of real estate assets and accumulated depreciation for the years ended December 31, 1997, 1996 and 1995:
Schedule IV -----------
MORTGAGE LOANS ON REAL ESTATE -----------------------------
AS OF DECEMBER 31, 1997 ----------------------- (IN THOUSANDS, EXCEPT FOR PAYMENT TERMS AND FOOTNOTES)
Schedule IV ----------- - Continued
The following is a reconciliation of the carrying amounts of the mortgage loans outstanding for the years ended December 31, 1997, 1996 and 1995:
EXHIBIT INDEX -------------