1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934
---------------------------------
Date of Report June 12, 1996
First Union Real Estate Equity and Mortgage Investments
(Exact name of registrant as specified in its charter)
Ohio 1-6249 34-6513657
State or other jurisdiction (Commission File Number) (I.R.S. Employer
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
Former name or former address, if changed since last report.
Total number of pages in report 5.
2
ONLY THOSE ITEMS AMENDED ARE REPORTED HEREIN
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On June 12, 1996, First Union signed a Purchase and Sale Agreement with
Marathon U.S. Realties, Inc. for the purchase by First Union of a portfolio of
nine retail shopping malls as previously reported in a Form 8-K dated June 12,
1996.
As of September 27, 1996, First Union completed the transaction by
investing $30 million as equity in a joint venture which purchased the portfolio
of nine retail shopping malls, comprising approximately 5,800,000 square feet of
gross leasable area, located in mid-size markets in Louisiana, Arkansas, Texas,
Oklahoma and New Mexico. The joint venture's purchase price for the nine malls
was $311.7 million which included the assumption of approximately $50 million in
existing mortgage debt and a new mortgage loan for $165 million provided by an
affiliate of one of the members of the joint venture, as described below. Eight
of the mall properties were acquired in fee and one was acquired through the
purchase of a 50% partnership interest in the mall. The acquisition of Pecanland
Mall, one of the eight malls acquired in fee, is contingent upon the receipt of
a consent by the mortgagee, which consent First Union expects the joint venture
to receive.
The members of the joint venture are First Union and affiliates of
General Motors Acceptance Corporation ("GMAC") and Cargill, Incorporated
("Cargill"). First Union's $30 million investment in the joint venture is
comprised of $3.5 million in common and $26.5 million in preferred equity. The
aggregate equity investment of the other parties is $83.5 million which is
comprised of $10 million in common ($6.6 million owned by GMAC and $3.4 million
owned by Cargill) and $73.5 million in preferred equity owned by GMAC and
Cargill, as described below.
The preferred equity is divided into three series, of which First
Union's is the most junior in distribution and liquidation priority. First
Union's preferred equity is entitled to distributions at a fixed rate of 10% for
the first five years and 4% thereafter. The two senior series of preferred
equity consist of a $35 million series owned by Cargill (the "Senior Preferred")
and a $38.5 million series owned by GMAC (the "Series B Preferred"). The Senior
Preferred is entitled to distributions at a floating rate equal to LIBOR plus
500 basis points (which increases by 50 basis points after each three month
period). The joint venture has the right to redeem the Senior Preferred at any
time. First Union and GMAC will seek an investment by a third party to replace
Cargill's Senior Preferred and common equity as soon as practicable. The Series
B Preferred is entitled to distributions at a floating rate equal to LIBOR plus
600 basis points. The joint venture has purchased an interest rate cap that
limits its exposure to LIBOR increasing above 7%. Generally, additional income
and cash, if any, after preferred distributions will be allocated and
distributed proportionately to the joint venture members according to their
common equity ownership.
First Union has call options on all of the preferred equity held by the
other joint venture members, commencing immediately with respect to the Senior
Preferred and commencing after six months with respect to the Series B
Preferred. The call price of the Senior Preferred is equal to 100% of its face
amount plus accumulated distributions thereon, with interest but without any
additional premium. The call price of the Series B Preferred is equal to 100% of
its face
2
3
amount plus the amount necessary to provide the holder thereof with a 15.75%
annualized internal rate of return, after taking into account distributions
previously made on the Series B Preferred.
The holders of the Senior Preferred and the Series B Preferred have put
options back to the joint venture with respect to their preferred equity
commencing after two years in the aggregate amount of $10 million; put options
on the remainder of the preferred equity are exercisable in the third and fourth
years. First Union has the right to contribute capital to the joint venture in
order to enable the joint venture to satisfy those puts. Any such capital
contributed by First Union will constitute additional amounts of First Union's
series of preferred equity. The put prices are identical to the call prices, as
described above.
If First Union is unable or unwilling to contribute capital to the
joint venture so that the put options can be satisfied, GMAC and Cargill have
the right to offset the dollar amount of such put option by transferring an
equivalent amount of capital from First Union's capital account and increasing
their own accounts by such amount. As long as First Union has any capital
balance remaining in the joint venture, it has the right to subsequently have
its capital account restored by meeting the put and paying certain additional
amounts. There can be no assurance that First Union will have sufficient funds
available to make the capital contributions which may be required to satisfy the
put options of the other joint venture members or that First Union will choose
to make such capital contributions at that time. The failure to make such
capital contributions would have a material adverse effect on the financial
condition of First Union.
Once all the Senior Preferred and the Series B Preferred have been
acquired, First Union will have call options on all of the common equity of the
other joint venture members as well. The call price of the common equity is
equal to 100% of the face amount plus the amount necessary to provide the holder
thereof with a 20% annualized internal rate of return, after taking into account
distributions previously made on the common equity. In addition, for so long as
Cargill's common equity is outstanding, Cargill is entitled to receive $75,000
per month. There are no put options on the common equity.
GMAC Commercial Mortgage Corporation provided an aggregate of $165
million in new first mortgage financing for this acquisition. The financing
encumbers seven of the properties and those properties are cross-collateralized
and their mortgages have cross default provisions. The mortgages are at an
interest rate of 8.43% and provide for amortization on a 30-year schedule. The
unpaid balances are due ten years after commencement.
The joint venture members selected First Union to be the managing
member of the joint venture, and First Union has in turn retained its affiliate,
First Union Management, Inc. (the "Management Company") as property manager for
all nine malls. Although presently a minority investor in the joint venture,
First Union has approval rights over major business and operating issues, such
as capital expenditures, leasing criteria, dispositions of any one of the nine
mall properties and changes to the joint venture arrangements.
3
4
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
Listed below are the financial statements, pro forma financial
information and exhibits filed as a part of this report:
a. Financial Statements of Business Acquired.
The financial statements of the Marathon Centers are filed as
part of this report on Form 8-K/A beginning on page F-2.
b. Pro Forma Financial Information.
The pro forma financial information of First Union Real Estate
Equity and Mortgage Investments is filed as part of this report on Form
8-K/A beginning on page F-6.
c. Exhibits.
23.1 Consent of Price Waterhouse LLP
99.1 Press Release, dated October 1, 1996
99.2 Purchase and Sale Agreement, dated as of June 12, 1996,
between Marathon U.S. Realties, Inc., as Seller and
First Union Real Estate Equity and Mortgage Investments,
as Purchaser, as amended
99.3 Investment Agreement, dated as of September 27, 1996,
between GMAC Commercial Equity Investments, Inc., a
Pennsylvania corporation, First Union Real Estate
Equity and Mortgage Investments, an Ohio business
trust, and Cargill Financial Services Corporation, a
Delaware corporation.
99.4 Limited Liability Company Agreement of Southwest
Shopping Centers Co. I, L.L.C., a Delaware limited
liability company, dated as of September 27, 1996
99.5 Form of Management and Leasing Agreement, dated as of
September 30, 1996, between
_________________________________________ and First
Union Management, Inc., a Delaware corporation
99.6 Joinder Agreement, dated as of September 26, 1996,
among Marathon U.S. Realties, Inc., Centrixx Realty
Holdings Limited, Southwest Shopping Centers Co. I,
L.L.C. and First Union Real Estate Eqity and Mortgage
Investments
99.7 Joinder Agreement, dated as of September 26, 1996, among
Marathon U.S. Realties, Inc., Centrixx Realty Holdings
Limited, Southwest Shopping Centers Co. II, L.L.C. and
First Union Real Estate Equity and Mortgage Investments
99.8 Joinder Agreement, dated as of September 26, 1996, among
Marathon U.S. Realties, Inc., Centrixx Realty Holdings
Limited, Temple Shopping Center Co., L.L.C. and
First Union Real Estate Equity and Mortgage Investments
99.9 Escrow Agreement, dated as of September 26, 1996 among
Marathon U.S. Realties, Inc., First Union Real Estate
Equity and Mortgage Investments, Southwest Shopping
Centers Co. I, L.L.C. and First American Title
Insurance Company
4
5
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
FIRST UNION REAL ESTATE EQUITY AND
MORTGAGE INVESTMENTS
By: /s/ James C. Mastandrea
----------------------------------------
James C. Mastandrea, Chairman, President,
Chief Executive Officer, and Chief
Financial Officer
Date: October 7, 1996
5
6
INDEX TO FINANCIAL STATEMENTS AND
PRO FORMA FINANCIAL INFORMATION
The following financial statements and pro forma financial information are
included in Item 7 of this report on Form 8-K/A:
THE MARATHON CENTERS PAGE
Report of Independent Accountants F-2
Schedule of Operating Revenues and F-3
Certain Expenses for the Years Ended
December 31, 1995, 1994 and 1993
Notes to Schedule of Operating Revenues and
Certain Expenses for the Years Ended
December 31, 1995, 1994 and 1993 F-4 - F-5
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
Pro Forma Condensed Combined Statements of
Income for the Year Ended December 31, 1995
and the Nine Months Ended September 30, 1996 (Unaudited) F-7 - F-8
Condensed Combined Balance
Sheet as of September 30, 1996 (Unaudited) F-9
F-1
7
REPORT OF INDEPENDENT ACCOUNTANTS
To the Owners of the Marathon Centers:
We have audited the accompanying schedule of operating revenues and
certain expenses of the Marathon Centers (the "Properties") for each of the
three years in the period ended December 31, 1995. This schedule is the
responsibility of the Properties' management. Our responsibility is to express
an opinion on this schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the schedule of operating revenues and
certain expenses is free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
schedule. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
schedule presentation. We believe that our audit provides a reasonable basis for
our opinion.
The accompanying schedule of operating revenues and certain expenses
was prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission in connection with the proposed sale of the
properties as described in Note 1 and is not intended to be a complete
presentation of the Properties' revenues and expenses.
In our opinion, the schedule of operating revenues and certain expenses
referred to above presents fairly, in all material respects, the operating
revenues and certain expenses of the Marathon Centers on the basis describe in
Note 1, for each of the three years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles.
PRICE WATERHOUSE LLP
Dallas, Texas
July 3, 1996
F-2
8
MARATHON CENTERS
SCHEDULE OF OPERATING REVENUES AND CERTAIN EXPENSES
(IN THOUSANDS)
Year Ended December 31,
1995 1994 1993
---- ---- ----
Operating revenues $62,168 $60,457 $57,385
Operating expenses:
Property operating expenses 20,234 20,618 19,501
Property taxes 3,375 3,392 3,363
------- -------- --------
Excess of revenues over operating expenses 38,559 36,447 34,521
General and administrative expenses 4,690 4,518 3,890
------- -------- --------
Excess of operating revenues over certain expenses $33,869 $31,929 $30,631
======= ======== ========
The accompanying notes are an integral part of this schedule.
F-3
9
MARATHON CENTERS
NOTES TO THE SCHEDULE OF OPERATING REVENUES AND CERTAIN EXPENSES
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The accompanying schedule of operating revenues and certain expenses
relates to the operations of the Marathon Centers (the Properties). The
Properties consist of the following nine regional malls:
Alexandria Mall, Alexandria, Louisiana
Brazos Mall, Lake Jackson, Texas
Killeen Mall, Killeen, Texas
Mesilla Valley Mall, Las Cruces, New Mexico
Park Plaza, Little Rock, Arkansas
Pecanland Mall, Monroe, Louisiana
Shawnee Mall, Shawnee, Oklahoma
Temple Mall, Temple, Texas
Villa Linda Mall, Santa Fe, New Mexico
Except for Temple Mall and Villa Linda Mall, the Properties are owned
by Marathon U.S. Realties, Inc. (MUSRI). Temple Mall is owned by Temple Mall
Company, a Texas general partnership, in which MUSRI owns a 50% general
partnership interest. Villa Linda Mall is owned by Centrixx Realty Holdings
Limited, an affiliate of MUSRI. MUSRI, Temple Mall Company and Centrixx Realty
Holdings Limited are collectively referred to as the Owners. The accompanying
schedule of operating revenues and certain expenses includes the following
amounts for MUSRI's 50% interest in Temple Mall Company (in thousands):
Year Ended December 31,
1995 1994 1993
---- ---- ----
Revenues $3,049 $3,162 $2,828
Property operating expenses 1,161 1,059 986
Property taxes 214 266 266
Basis of Presentation
The Owners are contemplating the sale of the Properties to First Union
Real Estate Equity and Mortgage Investments. Accordingly, certain expenses which
may not be comparable to the expenses expected to be incurred in the proposed
future operations of the Properties, have been excluded under the assumption
that the potential sale will be consummated. Expenses excluded consist of
depreciation and valuation adjustments to the buildings and improvements,
interest expense on debt incurred by the Properties to acquire and develop the
property, and amortization of expenses not directly related to the proposed
future operations of the Properties. Certain general and administrative expenses
incurred net of fee revenues earned by MUSRI in 1995, 1994, and 1993 of $93,464,
$403,536, and $406,627, respectively, related to properties not included in the
potential sale have been excluded. Limited administrative services are provided
at no cost to MUSRI by an affiliate.
F-4
10
Revenue and Expense Recognition
The accompanying schedule of operating revenues and certain expenses
has been prepared on the accrual basis of accounting.
2. FUTURE MINIMUM RENTALS UNDER OPERATING LEASES
The future minimum lease payments to be received by the Owners under
noncancellable operating leases are as follows (in thousands):
Year Ending December 31:
1996 $ 32,927
1997 30,365
1998 28,125
1999 24,259
2000 21,306
Thereafter 82,060
--------
$219,042
========
F-5
11
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following sets forth the unaudited historical combined condensed Balance
Sheet of First Union Real Estate Equity and Mortgage Investments as of September
30, 1996 and the unaudited pro forma combined condensed Statements of Income for
the year ended December 31, 1995 and the nine months ended September 30, 1996.
The unaudited pro forma combined condensed financial information is based on the
historical financial statements of First Union and reflects First Union's
investment in a joint venture that acquired the nine mall portfolio from
Marathon U. S. Realties, Inc. Eight of the malls were acquired in fee and one
was acquired through the purchase of a 50% partnership interest in the mall. The
acquisition of one of the eight malls acquired in fee is contingent upon the
receipt of a consent by the mortgagee, which is assumed to occur in the pro
forma financial information. The unaudited pro forma information should be read
in conjunction with the historical combined financial statements and notes
related thereto of First Union.
The unaudited combined condensed Balance Sheet of First Union as of September
30, 1996 includes the investment in the joint venture which occurred as of
September 27, 1996. The unaudited combined condensed Statements of Income for
the year ended December 31, 1995 and nine months ended September 30, 1996, are
presented as if the investment in the joint venture occurred on January 1, 1995.
In management's opinion, all adjustments necessary to reflect the joint venture
investment have been included in the accompanying combined financial statements.
The unaudited pro forma combined condensed Statements of Income are not
necessarily indicative of the results which actually would have occurred if the
transaction had been consummated at the beginning of the periods presented, nor
do they purport to represent the financial results of operations for future
periods.
F-6
12
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS)
------------------------------------------
FIRST UNION
(HISTORICAL) ADJUSTMENTS PRO FORMA
------------ ------------ ---------
Revenues
Rents $74,349 $ $74,349
Management and leasing fees 4,616 (a) 4,616
Interest 4,856 4,856
Equity in earnings of joint venture 1,405 (b) 1,405
-------- -------- --------
79,205 6,021 85,226
Expenses
Property operating 25,982 25,982
Real estate taxes 8,555 8,555
Depreciation and amortization 11,901 11,901
Interest 22,397 2,337 (c) 24,734
General and administrative 7,114 2,600 (d) 9,714
-------- -------- --------
75,949 4,937 80,886
Income before capital gain or loss,
extraordinary loss and cumulative
effect of accounting change $ 3,256 $1,084 $ 4,340
Per Share Data:
Income before capital gain or loss,
extraordinary loss and cumulative
effect of accounting change $ 0.18 $ 0.06(e) $ 0.24
======== ======== ========
(a) To reflect the management and leasing fees assumed to be received by
First Union from the joint venture for management of the properties.
(b) To reflect First Union's share of equity earnings in the joint venture.
(c) To reflect the additional interest cost associated with financing First
Union's $30 million investment in the joint venture through bank loans.
(d) To reflect the additional estimated general and administrative costs
associated with managing and leasing the joint venture properties.
(e) The pro forma per share amount for income before capital gain or loss,
extraordinary loss and cumulative effect of change in accounting is based
on the weighted average shares of beneficial interest outstanding of
18,116,000.
F-7
13
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
PRO FORMA COMBINED CONDENSED STATEMENTS OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(UNAUDITED)
(IN THOUSANDS)
---------------------------------------
FIRST UNION
(HISTORICAL) ADJUSTMENTS PRO FORMA
------------ ------------- ---------
Revenues
Rents $55,386 $ $55,386
Management and leasing fees 3,407 (a) 3,407
Interest 3,609 3,609
Equity in earnings of joint venture 444 (b) 444
-------- ------- --------
58,995 3,851 62,846
Expenses
Property operating 19,517 19,517
Real estate taxes 6,198 6,198
Depreciation and amortization 9,858 9,858
Interest 17,513 1,688 (c) 19,201
General and administrative 4,769 1,950 (d) 6,719
-------- ------- --------
57,855 3,638 61,493
Income before capital gain or loss,
extraordinary loss and cumulative
effect of accounting change $ 1,140 $ 213 $ 1,353
Per Share Data:
Income before capital gain or loss,
extraordinary loss and cumulative
effect of accounting change $ 0.07 $ 0.01(e) $ 0.08
======== ======= ========
(a) To reflect the management and leasing fees assumed to be received by
First Union from the joint venture for management of the properties.
(b) To reflect First Union's share of equity earnings in the joint venture.
(c) To reflect the additional interest cost associated with financing First
Union's investment of $30 million in the joint venture through bank loans.
(d) To reflect the additional estimated general and administrative costs
associated with managing and leasing the joint venture properties.
(e) The pro forma per share amount for income before capital gain or loss,
extraordinary loss and cumulative effect of change in accounting is based
on the weighted average shares of beneficial interest outstanding of
17,237,000.
F-8
14
FIRST UNION REAL ESTATE EQUITY AND MORTGAGE INVESTMENTS
HISTORICAL COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(UNAUDITED)
ASSETS (IN THOUSANDS)
Investments in real estate, net $ 340,715
Investment in joint venture 30,000 (a)
Mortgage loans receivable 42,206
Other assets 17,346
----------
$ 430,267
==========
LIABILITIES AND
SHAREHOLDERS' EQUITY
Liabilities
Mortgage loans $ 129,985
Senior notes 100,000
Bank loans 63,940
Accounts payable and other 38,361
----------
332,286
Shareholders' equity 97,981
----------
$ 430,267
==========
(a) Reflects First Union's investment in a joint venture which acquired real
estate properties from Marathon U.S. Realties, Inc., as of September 27,
1996.
F-9
15
EXHIBIT INDEX
EXHIBIT NUMBER
Consent of Price Waterhouse LLP 23.1
Press Release, dated October 1, 1996 99.1
Purchase and Sale Agreement, dated as of June 12, 1996, between 99.2
Marathon U.S. Realties, Inc., as Seller and First Union Real Estate
Equity and Mortgage Investments, as Purchaser, as amended
Investment Agreement, dated as of September 27, 1996, between 99.3
GMAC Commercial Equity Investments, Inc., a Pennsylvania
corporation, First Union Real Estate Equity and Mortgage
Investments, an Ohio business trust, and Cargill Financial Services
Corporation, a Delaware corporation
Limited Liability Company Agreement of Southwest Shopping 99.4
Centers Co. I, L.L.C., a Delaware limited liability company, dated as
of September 27, 1996
Form of Management and Leasing Agreement, dated as of September 99.5
30, 1996, between ___________________________ _____________ and
First Union Management, Inc., a Delaware corporation
Joinder Agreement, dated as of September 26, 1996, among Marathon 99.6
U.S. Realties, Inc., Centrixx Realty Holdings Limited, Southwest
Shopping Centers Co. I, L.L.C. and First Union Real Estate Equity
and Mortgage Investments
Joinder Agreement, dated as of September 26, 1996, among Marathon 99.7
U.S. Realties, Inc., Centrixx Realty Holdings Limited, Southwest
Shopping Centers Co. II, L.L.C. and First Union Real Estate Equity
and Mortgage Investments
Joinder Agreement, dated as of September 26, 1996, among Marathon 99.8
U.S. Realties, Inc., Centrixx Realty Holdings Limited, Temple
Shopping Center Co., L.L.C. and First Union Real Estate Equity
and Mortgage Investments
Escrow Agreement, dated as of September 26, 1996, among Marathon 99.9
U.S. Realties, Inc., First Union Real Estate Equity and Mortgage
Investments, Southwest Shopping Centers Co. I, L.L.C. and First
American Title Insurance Company