Annual Report (Form 10-K), fiscal year 1994

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 31 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, 1994, 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, seven apartment complexes, a 1,100-car parking garage, and a 300-car parking facility, as well as other miscellaneous properties (see Item 2



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, 1994, 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; Huntington Parking Garage in the amount of $9,300,000 in 1993; and Mountaineer Mall in the amount of $4,600,000 in 1994.
(4) The registrant sold these two joint venture investments in January 1995.
(5) The total mall contains 674,000 square feet; the registrant owns 616,000 square feet, the balance being ground leased to Giant Eagle Markets, Inc.
(6) This property has two mortgages. Interest rates are 9.10% and 8.25%. The mortgages mature in 2002 and 2009. The 9.10% mortgage, in the principal amount of $5,298,000, has a principal payment for 1995 of $650,000. The 8.25% mortgage, in the principal amount of $4,507,000, has a principal payment for 1995 of $170,000.
(7) The total mall contains 529,000 square feet; the registrant owns 431,000 square feet, the balance being separately ground leased to Boscov Department Store, Inc.
(8) These properties are the collateral for the registrant's $60 million revolving line of credit.
(9) The total mall contains 733,000 square feet; the registrant owns 625,000 square feet, the balance being separately owned by Target Stores.
(10) The mortgage has a variable interest rate which was 8.97% at December 31, 1994. 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.
(11) A major tenant declared bankruptcy and vacated 60,000 square feet during 1994. The registrant is seeking replacement tenants.
(12) 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.
(13) 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.
Item 2. Properties ------- ---------- - Continued
(14) Highly competitive market conditions have made leasing space difficult. The registrant continues to seek tenants and alternative retail strategies for this property.
(15) 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.
(16) 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, 1994. The Trust is pursuing a mixed use strategy for this former retailing facility.
(17) The total mall contains 419,000 square feet; the registrant owns 309,000 square feet, the balance being separately ground leased to Sears, Roebuck and Co.
(18) This mortgage is interest only until maturity in December 1995.
(19) 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 $881,000, has a principal repayment for 1995 of $56,000. The 9.375% mortgage, in the principal amount of $667,000, has a principal repayment for 1995 of $30,000.
(20) 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 $1,388,000, has a principal repayment for 1995 of $208,000. The 9.25% mortgage, in the principal amount of $1,240,000, has a principal repayment for 1995 of $115,000.
(21) Represents a long-term leasehold estate interest which was capitalized in accordance with Statement of Financial Accounting Standards No. 13.
(22) The registrant has ground leased the land until October 30, 2011, with seven 10-year renewal options.
Item 2. Properties ------- ---------- - Continued
As of December 31, 1994, 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, Beech Lake 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.
Item 2. Properties ------- ---------- - Continued
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS. ------- ------------------
Registrant vs. The State of California --------------------------------------
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 in Superior Court of the State of California. No recognition of potential income has been made in the accompanying financial statements.
Registrant vs. Richard M. Osborne, et. al. ------------------------------------------
On February 3, 1995, the registrant filed a lawsuit in the United States District Court for the Northern District of Ohio (the "Lawsuit"). The defendants in the Lawsuit, as amended, include Turkey Vulture Fund XIII, Ltd., and its Managing Partner, Richard M. Osborne, who at the time the Lawsuit was filed, claimed to own 5.2% of the Company's shares. Other defendants are The Wolstein Group, Bert Wolstein, Scott Wolstein, Heritage Capital Corporation, Developers Diversified Realty Corporation, and Mark P. Escaja (all collectively the "Defendants"). The Lawsuit, as amended, alleges that the Defendants have violated Sections 10(b), 13(d), 14(a), 14(d), 14(e) and 20(a) of the Securities Exchange Act of 1934 and the rules and regulations promulgated thereunder, Section 1707.041 of the Ohio Revised Code, and the registrant's Amended Declaration of Trust and By-Laws. The Lawsuit, as amended, seeks preliminary and permanent injunctive relief against the Defendants, damages, costs, and such other and further relief as may be just and proper.
Richard M. Osborne and Turkey Vulture Fund XIII, Ltd., filed a Counterclaim against the registrant on February 10, 1995 (the "Osborne Counterclaim"). The Osborne Counterclaim, as amended, alleges, among other things, that the registrant's Rights Agreement and certain of the registrant's By-Laws violate certain provisions of the registrant's Amended Declaration of Trust; that the registrant has violated its fiduciary duties; and that the registrant committed abuse of process.
On March 6, 1995, Mark P. Escaja filed a Counterclaim for abuse of process against the registrant (the "Escaja Counterclaim").
On March 10, 1995, Heritage Capital Corporation, The Wolstein Group, Developers Diversified Realty Corporation, Bert Wolstein and Scott Wolstein filed a counterclaim for abuse of process against the registrant and a counterclaim for defamation against the registrant and its President and Chief Executive Officer, James C. Mastandrea (the "Wolstein Counterclaim").
The Osborne Counterclaimants seek declaratory relief against the registrant, damages, judgment in their favor, their costs and attorney's fees, and such other and further relief as the Court deems proper and just. The Escaja Counterclaim seeks punitive and compensatory damages from the registrant, in addition to interest, attorneys' fees and costs. The Wolstein Counterclaim seeks punitive and compensatory damages from the registrant and Mr. Mastandrea, costs, attorneys' fees, and such other further relief as the Court may deem appropriate.
The registrant denies that any of the counterclaimants are entitled to relief, and is vigorously defending against all of the counterclaims.
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 registrant's 1994 Annual Report to Shareholders is incorporated herein by reference.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA. ------ ----------------------- "Selected Financial Data" presented on pages 18 and 19 of registrant's 1994 Annual Report to Shareholders is incorporated herein by reference.
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 30 and 31 of registrant's 1994 Annual Report to Shareholders is incorporated herein by reference.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS. ------ -------------------- The "Combined Balance Sheets" as of December 31, 1994 and 1993, and the "Combined Statements of Income, Combined Statements of Changes in Cash, Combined Statements of Shareholders' Equity" for the years ended December 31, 1994, 1993 and 1992, of the registrant, "Notes to Combined Financial Statements" and "Report of Independent Public Accountants" are presented on pages 20 through 29 of registrant's 1994 Annual Report to Shareholders and are incorporated herein by reference.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL ------ ----------------------------------------------------------- DISCLOSURE. ----------
None.
PART III --------
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. ------- --------------------------------------------------
(a) Directors. --------- "Election of Trustees" presented on pages 1 through 5 of registrant's 1995 Proxy Statement is incorporated herein by reference.
(b) Executive Officers. ------------------
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION. ------- ---------------------- "Compensation of Trustees" and "Executive Compensation", presented on page 5 and pages 8 through 13, respectively, of registrant's 1995 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 on pages 7 and 8 of registrant's 1995 Proxy Statement is incorporated herein by reference.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. ------- ---------------------------------------------- None.
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, 1994 and 1993 (incorporated by reference to page 20 of registrant's 1994 Annual Report to Shareholders).
Combined Statements of Income - For the Years Ended December 31, 1994, 1993 and 1992 (incorporated by reference to page 21 of registrant's 1994 Annual Report to Shareholders).
Combined Statements of Changes in Cash - For the Years Ended December 31, 1994, 1993 and 1992 (incorporated by reference to page 22 of registrant's 1994 Annual Report to Shareholders).
Combined Statements of Shareholders' Equity - For the Years Ended December 31, 1994, 1993 and 1992 (incorporated by reference to page 23 of registrant's 1994 Annual Report to Shareholders).
Notes to Combined Financial Statements (incorporated by reference to pages 24 through 29 of registrant's 1994 Annual Report to Shareholders).
Report of Independent Public Accountants (incorporated by reference to page 29 of registrant's 1994 Annual Report to Shareholders).
(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. -------- 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 (10)(j) - $60 million credit agreement.
Exhibit (11) - Statements Re: Computation of Per Share Earnings.
Exhibit (12) - Statements Re: Computation of Ratios.
Exhibit (13) - 1994 Annual Report to Shareholders.
Exhibit (23) - Consent of Independent Public Accountants.
Exhibit (24) - Powers of Attorney
(c) Reports on Form 8-K. -------------------
None.
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 30, 1995
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 1994 Annual Report to Shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated February 1, 1995. 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 17 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 LLP
Cleveland, Ohio, February 1, 1995.
EXHIBIT INDEX -------------
EXHIBIT -------------
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 (10)(J) - $60 Million Credit Agreement............................. EXHIBIT (11) - Statements RE: Computation of Per Share Earnings............ EXHIBIT (12) - Statements RE: Computation of Ratios........................ EXHIBIT (13) - 1994 Annual Report to Shareholders.......................... EXHIBIT (23) - Consent of Independent Public Accountants................... EXHIBIT (24) - Powers Of Attorney..........................................