UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 1-13274 Cali Realty Corporation - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Maryland 22-3305147 - --------------------------------- ---------------------- (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) 11 Commerce Drive, Cranford, New Jersey 07016-3501 - -------------------------------------------------------------------------------- (Address of principal executive office) (Zip Code) (908) 272-8000 - -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Not Applicable - -------------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 twelve (12) months (or such shorter period that the Registrant was required to file such report) YES [ X ] NO [ ] and (2) has been subject to such filing requirements for the past ninety (90) days YES [ X ] NO [ ] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. There were 15,206,361 shares of $.01 par value common stock outstanding at August 6, 1996. CALI REALTY CORPORATION Form 10-Q INDEX Part I - Financial Information Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 1996 and December 31, 1995 Consolidated Statements of Operations for the three and six month periods ended June 30, 1996 and 1995 Consolidated Statement of Cash Flows for the six months ended June 30, 1996 and 1995 Consolidated Statement of Stockholders' Equity for the six months ended June 30, 1996 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Part II - Other Information and Signatures Item 1. Exhibits Signatures CALI REALTY CORPORATION Part I - Financial Information Item 1 Financial Statements The information furnished in the accompanying consolidated balance sheets, statements of operations, of cash flows, and of stockholders' equity reflect all adjustments (consisting of normal, recurring adjustments), which are, in the opinion of management, necessary for a fair presentation of the aforementioned financial statements for the interim periods. The aforementioned financial statements should be read in conjunction with the notes to the aforementioned financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations and the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. The results of operations for the three and six month periods ended June 30, 1996 are not necessarily indicative of the results to be expected for the entire fiscal year or any other period.
CALI REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) - ---------------------------------------------------------------------------------- June 30, December 31, 1996 1995 --------- --------- ASSETS Rental property Land ................................................ $ 43,797 $ 38,962 Buildings and improvements .......................... 348,013 319,028 Tenant improvements ................................. 33,366 28,588 Furniture, fixtures and equipment ................... 1,099 1,097 --------- --------- 426,275 387,675 Less - accumulated depreciation and amortization ........ (61,310) (59,095) --------- --------- Total rental property ............................... 364,965 328,580 Cash and cash equivalents ............................... 1,907 967 Unbilled rents receivable ............................... 18,930 18,855 Deferred charges and other assets, net of accumulated amortization ..................... 11,297 10,873 Restricted cash ......................................... 3,785 3,229 Accounts receivable, net of allowance for doubtful accounts of $157 and $134 .................. 1,326 1,341 Other receivables ....................................... 56 104 --------- --------- Total assets ........................................ $ 402,266 $ 363,949 ========= ========= (Continued) CALI REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) - ---------------------------------------------------------------------------------- (Continued) June 30, December 31, 1996 1995 --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY Mortgages and loans payable ............................. $ 169,147 $ 135,464 Dividends and distributions payable ..................... 7,610 7,606 Accounts payable and accrued expenses ................... 4,044 3,245 Rents received in advance and security deposits ......... 4,214 3,114 Accrued interest payable ................................ 485 629 --------- --------- Total liabilities ................................... 185,500 150,058 --------- --------- Minority interest of unitholders in Operating Partnership 27,545 28,083 --------- --------- Commitments and contingencies Stockholders' equity: Preferred stock, authorized 5,000,000 shares, none issued Common stock, $.01 par value, 95,000,000 shares authorized, 15,206,361 shares and 15,104,725 shares outstanding .................................. 152 151 Additional paid-in capital .............................. 186,808 185,657 Retained earnings ....................................... 2,261 -- --------- --------- Total stockholders' equity .......................... 189,221 185,808 --------- --------- Total liabilities and stockholders' equity .......... $ 402,266 $ 363,949 ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
CALI REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) - -------------------------------------------------------------------------------------------------------------- Three Months Ended June 30, Six Months Ended June 30, --------------------------- ------------------------- 1996 1995 1996 1995 ------- ------- ------- ------- REVENUES Base rents ........................................ $17,264 $12,200 $33,276 $23,440 Escalations and recoveries ........................ 3,151 2,414 6,232 4,535 Parking and other ................................. 519 471 923 872 Interest income ................................... 79 66 153 176 ------- ------- ------- ------- Total revenues ................................ 21,013 15,151 40,584 29,023 ------- ------- ------- ------- EXPENSES Real estate taxes ................................. 2,194 1,437 4,153 2,751 Utilities ......................................... 1,873 1,473 3,755 2,837 Operating services ................................ 2,512 1,962 5,315 3,824 General and administrative ........................ 1,128 1,001 2,064 1,934 Depreciation and amortization ..................... 3,614 3,095 6,908 5,927 Interest expense .................................. 2,999 2,173 5,568 3,814 ------- ------- ------- ------- Total expenses ................................ 14,320 11,141 27,763 21,087 ------- ------- ------- ------- Income before gain on sale of rental property, minority interest and extraordinary item ...... 6,693 4,010 12,821 7,936 Gain on sale of rental property ................... -- -- 5,658 -- ------- ------- ------- ------- Income before minority interest and extraordinary item ........................ 6,693 4,010 18,479 7,936 Minority interest ................................. 1,009 873 2,821 1,709 ------- ------- ------- ------- Income before extraordinary item .................. 5,684 3,137 15,658 6,227 Extraordinary item-loss on early retirement of debt (net of minority interest's share of $86) ..... -- -- 475 -- ------- ------- ------- ------- Net income ........................................ $ 5,684 $ 3,137 $15,183 $ 6,227 ======= ======= ======= ======= Net income per common share: Income before extraordinary item- loss on early retirement of debt .............. $ 0.37 $ 0.30 $ 1.03 $ 0.60 Extraordinary item-loss on early retirement of debt -- -- 0.03 -- ------- ------- ------- ------- Net income ........................................ $ 0.37 $ 0.30 $ 1.00 $ 0.60 ======= ======= ======= ======= Dividends declared per common share ............... $ 0.43 $ 0.40 $ 0.85 $ 0.81 ======= ======= ======= ======= Weighted average shares outstanding ............... 15,203 10,400 15,175 10,436 ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial statements.
CALI REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) - ------------------------------------------------------------------------------------ Six Months Ended June 30, ------------------------- 1996 1995 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income ............................................. $ 15,183 $ 6,227 Adjustments to reconcile net income to net cash flows provided by operating activities Depreciation and amortization ...................... 6,908 5,927 Gain on sale of rental property .................... (5,658) -- Minority interest .................................. 2,821 1,709 Extraordinary item-loss on early retirement of debt 475 -- Changes in operating assets and liabilities Increase in unbilled rents receivable .............. (204) (223) Increase in deferred charges and other assets, net . (2,180) (983) Decrease (increase) in accounts receivable, net .... 15 (543) Decrease in other receivables ...................... 48 170 Increase in accounts payable and accrued expenses ................................ 799 56 Increase (decrease) in rents received in advance and security deposits ............................... 1,100 (24) (Decrease) increase in accrued interest payable .... (144) 251 --------- --------- Net cash provided by operating activities ........... 19,163 12,567 --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to rental property ........................... (46,321) (17,900) Proceeds from sale of rental property .................. 10,324 -- Increase in restricted cash ............................ (556) (536) --------- --------- Net cash used in investing activities ............... (36,553) (18,436) --------- --------- (Continued) CALI REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) - ------------------------------------------------------------------------------------ (Continued) Six Months Ended June 30, ------------------------- 1996 1995 --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from mortgages and loans payable .............. 109,500 16,000 Repayments of mortgages and loans payable .............. (75,817) (3,000) Debt prepayment premiums and other costs ............... (312) -- Purchase of treasury stock ............................. -- (1,595) Proceeds from stock options exercised .................. 173 -- Payment of dividends and distributions ................. (15,214) (10,715) --------- --------- Net cash provided by financing activities ........... 18,330 690 --------- --------- Net increase (decrease) in cash and cash equivalents ... 940 (5,179) Cash and cash equivalents, beginning of period ......... 967 6,394 --------- --------- Cash and cash equivalents, end of period ............... $ 1,907 $ 1,215 ========= ========= Supplemental Cash Flow Information: Cash paid for interest ................................. $ 5,800 $ 3,563 ========= ========= Interest capitalized ................................... $ 88 $ -- ========= =========
The accompanying notes are an integral part of these consolidated financial statements.
CALI REALTY CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands) - ------------------------------------------------------------------------------------------------------------------------------------ Additional Total Common Stock Paid-In Retained Stockholders' Shares Par Value Capital Earnings Equity --------- --------- --------- --------- ------------ Balance at January 1, 1996 .................. 15,105 $ 151 $ 185,657 -- $ 185,808 Conversions of 92 Units to shares ........... 92 1 978 -- 979 Net income .................................. -- -- -- $ 15,183 15,183 Dividends ................................... -- -- -- (12,922) (12,922) Stock options exercised ..................... 9 -- 173 -- 173 --------- --------- --------- --------- --------- Balance at June 30, 1996 .................... 15,206 $ 152 $ 186,808 $ 2,261 $ 189,221 ========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial statements. CALI REALTY CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in thousands, except per share amounts) - -------------------------------------------------------------------------------- 1. ORGANIZATION AND BASIS OF PRESENTATION Organization Cali Realty Corporation (the "Company"), a Maryland corporation, is a fully integrated, self-administered, self-managed real estate investment trust (REIT) providing leasing, management, acquisition, development, construction and tenant- related services for its properties. As of June 30, 1996, the Company owned and operated 43 properties, consisting of 42 office and office/flex buildings totaling approximately 4.2 million square feet and a 327 unit residential complex. The properties are located in New Jersey, New York, and Pennsylvania. The Company was incorporated on May 24, 1994 and commenced operations on August 31, 1994. On August 31, 1994, the Company completed an initial public offering and effected a business combination with the Cali Group (not a legal entity). The Company raised (net of offering costs) approximately $165,518 of capital through an initial public offering of 10,500,000 shares of common stock, and used the proceeds to acquire a 78.94 percent interest in Cali Realty, L.P. (the "Operating Partnership") and related entities, which are the successors to the operations of the Cali Group. Prior to the completion of the business combination with the Company, the Cali Group was engaged in development, ownership and operation of a portfolio of twelve office buildings and one multi-family residential property, all located in New Jersey (the "Initial Properties"). In 1994 and 1995, following the Company's initial public offering, the Company acquired 28 office and office/flex properties totaling 1,723,000 square feet for approximately $157,000. These acquisitions are all located in New Jersey and New York. On March 20, 1996, the Company sold its office building located at 15 Essex Road in Paramus, New Jersey ("Essex Road") and concurrently acquired a 95,000 square foot office building at 103 Carnegie Center in Princeton, New Jersey. The concurrent transactions qualified as a tax free exchange, as the Company used substantially all of the proceeds from the sale of Essex Road to acquire the Princeton property. The financial statements for the six months ended June 30, 1996 include a gain of $5,658 relating to this transaction. In advance of the sale of Essex Road, on March 12, 1996, the Company prepaid $5,492 of the Mortgage Financing (Note 5) and obtained a release of the mortgage liens on the property. On account of prepayment penalties, loan origination fees, legal fees and other costs incurred in the retirement of the debt, an extraordinary loss of $475, net of minority interest's share of the loss ($86), was recorded for the six months ended June 30, 1996. On May 2, 1996, the Company acquired Rose Tree Corporate Center, a two- building suburban office complex totaling approximately 260,000 square feet, located in Media, Pennsylvania. The complex was acquired for approximately $28 million, which was drawn on one of the Company's credit facilities. Additionally, on July 23, 1996, the Company acquired 222 and 233 Mount Airy Road, two suburban office buildings totaling approximately 115,000 square feet, located in Basking Ridge, New Jersey. The buildings were acquired for approximately $10.5 million, which was drawn on one of the Company's credit facilities. Basis of Presentation The accompanying consolidated financial statements include all accounts of the Company and its majority owned subsidiaries which consist principally of the Operating Partnership. The Company's investment in Cali Services, Inc. (an entity formed to provide third party property management services, in which the Operating Partnership has a 99 percent interest) is accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. SIGNIFICANT ACCOUNTING POLICIES Rental Property Rental properties are stated at cost less accumulated depreciation. Costs include interest, property taxes, insurance and other project costs incurred during the period of construction. Ordinary repairs and maintenance are expensed as incurred; major replacements and betterments are capitalized and depreciated over their estimated useful lives. Fully depreciated assets are removed from the accounts. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets as follows: Buildings and improvements 39 to 40 years ----------------------------------------------------- Tenant improvements The shorter of the term of the related lease or useful lives ----------------------------------------------------- Furniture, fixtures and equipment 5 to 10 years ----------------------------------------------------- On a periodic basis, management assesses whether there are any indicators that the value of the real estate properties may be impaired. A property's value is impaired only if management's estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property are less than the carrying value of the property. Management does not believe that the value of any of its real estate properties are impaired. Deferred Financing Costs incurred in obtaining financing are capitalized Costs and amortized on a straight-line basis, which approximates the effective interest method, over the term of the related indebtedness. Amortization of such costs were $267 and $435 for the three month periods ended June 30, 1996 and 1995, respectively, and $527 and $877 for the six month periods ended June 30, 1996 and 1995, respectively. Deferred Leasing Costs incurred in connection with leases are Costs capitalized and amortized on a straight-line basis over the terms of the related leases. Unamortized deferred leasing costs are charged to amortization expense upon early termination of the lease. Revenue Recognition The Company recognizes base rental revenue on a straight-line basis over the terms of the respective leases. Unbilled rents receivable represents the amount by which straight-line rental revenue exceeds rents currently billed in accordance with the lease agreements. Parking revenue includes income from parking spaces leased to tenants. Rental income on residential property under operating leases having terms generally of one year or less is recognized when earned. Cash and Cash Equivalents All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. Income and Other Taxes The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a REIT, the Company will not be subject to federal income tax to the extent it distributes at least 95 percent of its REIT taxable income to its shareholders. REITs are subject to a number of organizational and operational requirements. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to federal income tax (including any applicable alternative minimum tax) on its taxable income at regular corporate tax rates. The Company may be subject to certain state and local taxes. Net Income Per Share Net income per share is computed using the weighted average common shares outstanding during the period. The weighted average shares outstanding during the three month periods ended June 30, 1996 and 1995 were 15,202,912 and 10,400,000 respectively, and six month periods ended June 30, 1996 and 1995 were 15,174,500 and 10,436,464, respectively. The assumed exercise of outstanding stock options using the Treasury Stock method is not considered dilutive in any period. Dividends and Distributions Payable The dividends and distributions payable at June 30, 1996 represent dividends payable to shareholders of record on July 3, 1996 (15,206,361 shares) and distributions payable to minority interest unitholders (2,699,002 Units) on that same date. The second quarter dividends and distributions of $0.425 per share and per Unit were approved by the Board of Directors on June 20, 1996 and were paid on July 19, 1996. 3. RESTRICTED CASH Restricted cash includes security deposits for the residential property, and escrow and reserve funds for debt service, real estate taxes, property insurance, capital improvements, tenant improvements, and leasing costs established pursuant to certain mortgage financing arrangements and is comprised of the following:
June 30, December 31, 1996 1995 -------- -------- Escrow and other reserve funds ................... $ 3,453 $ 2,901 Residential security deposits .................... 332 328 -------- -------- Total restricted cash ......................... $ 3,785 $ 3,229 ======== ========
4. DEFERRED CHARGES AND OTHER ASSETS
June 30, December 31, 1996 1995 -------- -------- Deferred leasing costs ........................... $ 13,630 $ 13,498 Deferred financing costs ......................... 5,347 5,778 -------- -------- 18,977 19,276 Accumulated amortization ......................... (8,350) (9,035) -------- -------- Deferred charges, net ............................ 10,627 10,241 Prepaid expenses and other assets ................ 670 632 -------- -------- Total deferred charges and other assets ....... $ 11,297 $ 10,873 ======== ========
5. MORTGAGES AND LOANS PAYABLE
June 30, December 31, 1996 1995 -------- -------- Mortgage Financing [a] ........................... $ 64,508 $ 70,000 Fair Lawn Property Loan [b] ...................... 18,639 18,764 Initial Credit Facility [c] ...................... 15,000 46,700 Additional Credit Facility [d] ................... 71,000 -- -------- -------- Total mortgages and loans payable .......... $169,147 $135,464 ======== ========
[a] Concurrent with the Company's initial public offering, the Company's initial operating subsidiaries, which own the Initial Properties, issued five-year mortgage notes with an aggregate principal balance of $144,500 secured and cross- collateralized by the Initial Properties to an affiliate ("PSI") of Prudential Securities Inc. PSI then issued commercial mortgage pay-through bonds ("Bonds") collateralized by the mortgage notes. Bonds with an aggregate principal balance of $70,000 were purchased by unrelated third parties. Bonds with an aggregate principal balance of $74,500 were purchased by the Company. As a result, the Company's initial mortgage financing was $70,000 (the "Mortgage Financing"). Approximately $38,000 of the $70,000 is guaranteed under certain conditions by certain partners of the partnerships which owned the Initial Properties. The Mortgage Financing requires monthly payments of interest only, with all principal and any accrued but unpaid interest due in August 1999. $46,000 of the $70,000 Mortgage Financing bears interest at a net cost to the Company equal to a fixed rate of 8.02 percent per annum and the remaining $24,000 bears interest at a net cost to the Company equal to a floating rate of 100 basis points over 30-day London Inter Bank Offered Rate (LIBOR) with a lifetime interest rate cap of 11.6 percent. In advance of the sale of Essex Road, on March 12, 1996, the Company prepaid $5,492 ($1,687-fixed rate, $3,805-floating rate debt) of the Mortgage Financing, resulting in outstanding balances of $44,313 for the 8.02 percent fixed rate debt and $20,195 for the floating rate debt. [b] In connection with the acquisition of an office building in Fair Lawn, New Jersey on March 3, 1995, the Company assumed an $18,764 non-recourse mortgage loan ("Fair Lawn Property Loan") bearing interest at a fixed rate of 8.25 percent per annum. The loan requires payment of interest only through March 15, 1996 and payment of principal and interest thereafter, on a 20-year amortization schedule, with the remaining principal balance due October 1, 2003. For the six months ended June 30, 1996, the Company has paid $125 for amortization of the principal on the Fair Lawn Property Loan. [c] The Company has a $70,000 revolving credit facility ("Initial Credit Facility"), which may be used to fund acquisitions and new development projects and for general working capital purposes, including capital expenditures and tenant improvements. In connection with the Mortgage Financing, the Company obtained a $6,005 letter of credit, secured by the Initial Credit Facility, to meet certain tenant improvement and capital expenditure reserve requirements. The Initial Credit Facility currently bears interest at a floating rate equal to 150 basis points over LIBOR. The Initial Credit Facility is a recourse liability of the Operating Partnership and is secured by a pledge of the $74,500 Bonds held by the Company. The Initial Credit Facility requires monthly payments of interest only, with outstanding advances and any accrued but unpaid interest due May 31, 1997 and is subject to renewal at the lender's sole discretion. The Initial Credit Facility also requires a fee equal to one quarter of one percent of the unused balance payable quarterly in arrears. Since June 30, 1996, the Company has drawn an additional $16,400 on the Initial Credit Facility. [d] On February 1, 1996, the Company obtained an additional credit facility (the "Additional Credit Facility") secured by certain of its properties in the amount of $75,000 from two participating banks. The Additional Credit Facility has a three- year term and bears interest at 150 basis points over 30-day LIBOR. The terms of the Additional Credit Facility include certain restrictions and covenants which limit, among other things, dividend payments and additional indebtedness and which require compliance with specified financial ratios and other financial measurements. The Additional Credit Facility also requires a fee equal to one quarter of one percent of the unused balance payable quarterly in arrears. Since June 30, 1996, the Company has repaid $2,000 on the Additional Credit Facility. Interest Rate Swap Agreements: On May 24, 1995, the Company entered into an interest rate swap agreement with a commercial bank. The swap agreement fixes the Company's one-month LIBOR base to a fixed 6.285 percent per annum on a notional amount of $24,000 through August 1999. On January 23, 1996, the Company entered into an interest rate swap agreement with one of the participating banks in its Additional Credit Facility. The swap agreement has a three-year term and a notional amount of $26,000 which fixes the Company's one-month LIBOR base to 5.265 percent (with a 150 basis point spread, an interest rate of 6.765 percent) on its floating rate credit facilities. The Company is exposed to credit loss in the event of non-performance by the other parties to the interest rate swap agreements. However, the Company does not anticipate non-performance by either counterparty. 6. MINORITY INTEREST In conjunction with the Company's initial public offering, individuals contributing interests to the Operating Partnership had the right to elect either to receive common stock of the Company or Units. A Unit and a share of common stock of the Company have substantially the same economic characteristics in as much as they effectively share equally in the net income or loss of the Operating Partnership. Minority interest in the accompanying consolidated financial statements relates to Units held by parties other than the Company. Beginning one year after the closing of the Company's initial public stock offering (which occurred on August 31, 1994), certain Units are able to be redeemed by the unitholders at their option on the basis of one Unit for either one share of common stock or cash equal to the fair market value of a share at the time of the redemption. The Company has the option to deliver shares of common stock in exchange for all or any portion of the cash requested. When a unitholder redeems a Unit, minority interest is reduced and the Company's investment in the Operating Partnership is increased. During the six months ended June 30, 1996, 91,614 Units were redeemed for common stock of the Company. 7. RELATED PARTY TRANSACTIONS Certain employees of the Operating Partnership provide leasing services to the Properties and receive fees as compensation ranging from 0.667 to 2.667 percent of adjusted rents. For the three and six month periods ended June 30, 1996, such fees, which are capitalized and amortized, approximated $112 and $192, respectively. 8. SIGNIFICANT TENANT At December 31, 1995, Donaldson, Lufkin, and Jenrette Securities Corporation ("DLJ") leased approximately 55 percent of the space in the Company's 95 Christopher Columbus Drive, Jersey City, New Jersey property. On April 9, 1996, DLJ signed a lease with the Company for an additional 73,200 square feet of space ("DLJ Expansion"), increasing its occupancy to approximately 66 percent of the property. Total rental income from DLJ, including escalations and recoveries, for the three and six month periods ending June 30, 1996 and 1995 were as follows:
Three Months Ended: Six Months Ended: ------------------------ ------------------------ June 30, June 30, June 30, June 30, 1996 1995 1996 1995 -------- -------- -------- -------- $2,559 $2,409 $4,983 $4,840 ====== ====== ====== ======
At June 30, 1996 and December 31, 1995, unbilled rents receivable included $12,521 and $12,164, respectively, from DLJ. 9. STOCK OPTION PLAN In 1994, and as amended on May 13, 1996, the Company established the Cali Employee Stock Option Plan ("Employee Plan") and the Cali Director Stock Option Plan ("Directors Plan"), under which a total of 1,880,188 (subject to adjustment) of the Company's shares of common stock have been reserved for issuance (1,780,188 shares under the Employee Plan and 100,000 under the Directors Plan). Options granted under the Employee Plan generally become exercisable over a three to five year period, while options under the Directors Plan become exercisable in one year. All options were granted at not less than fair market value at dates of grant and have a term of ten years. Information regarding the Company's stock option plans is summarized below:
Cali Employee Cali Director Stock Option Stock Option Shares under option: Plan Plan -------------------- ------------- -------------- Granted on August 31, 1994 at $17.25 per share 600,000 25,000 ------------------------------------------------------------------------------------------------ Outstanding at December 31, 1994 600,000 25,000 Granted at $17.25-$19.875 per share 220,200 10,000 Less-- Lapsed or canceled (3,588) -- ------------------------------------------------------------------------------------------------ Outstanding at December 31, 1995 816,612 35,000 $17.25 - $19.875 per share Granted at $21.50 per share 361,750 -- Less-- Lapsed or canceled (4,447) -- Exercised at $17.25 per share (1,143) (5,000) ------------------------------------------------------------------------------------------------ Outstanding at March 31, 1996 1,172,772 30,000 $17.25 - $21.50 per share Granted at $21.50 per share -- 14,000 Less-- Lapsed or canceled (380) -- Exercised at $17.25 per share (3,879) -- ------------------------------------------------------------------------------------------------ Outstanding at June 30, 1996 1,168,513 44,000 $17.25-$21.50 per share ----------------------------------------------------------------------------------------------- Exercisable at June 30, 1996 267,245 30,000 ----------------------------------------------------------------------------------------------- Available for grant at December 31, 1995 463,576 15,000 ----------------------------------------------------------------------------------------------- Available for grant at June 30, 1996 606,653 51,000 -----------------------------------------------------------------------------------------------
10. EMPLOYEE BENEFIT PLAN All employees of the Company who meet certain minimum age and period of service requirements are eligible to participate in a Section 401(k) plan (the "Plan") as defined by the Internal Revenue Code. The Plan allows eligible employees to defer up to 15 percent of their annual compensation. The amounts contributed by employees are immediately vested and non-forfeitable. The Company, at management's discretion, may match employee contributions. No employer contributions have been made to date. 11. COMMITMENTS AND CONTINGENCIES Pursuant to the terms of the Mortgage Financing, the Company is required to escrow $143 per month for tenant improvements and leasing commissions and $53 per month for capital improvements. Pursuant to an agreement with the City of Jersey City, New Jersey expiring in 2009, the Company is required to make payments in lieu of property taxes ("PILOT") on its property in Jersey City. Such PILOT is determined based on the greater of 2 percent of the property cost, as defined, or $1,131 per annum, through 1999 and 2.5 percent, or $1,414 per annum, through 2004. 12. TENANT LEASES The Properties are leased to tenants under operating leases with various expiration dates through 2011. Substantially all of the leases provide for annual base rents plus recoveries and escalation charges based upon the tenant's proportionate share of and/or increases in real estate taxes and certain operating costs as defined and the pass through of charges for electrical usage. 13. STOCKHOLDERS' EQUITY To maintain its qualification as a REIT, not more than 50 percent in value of the outstanding shares of the Company may be owned, directly or indirectly, by five or fewer individuals (defined to include certain entities), applying certain constructive ownership rules. To help ensure that the Company will not fail this test, the Company's Articles of Incorporation provides for, among other things, certain restrictions on the transfer of the common stock to prevent further concentration of stock ownership. Moreover, to evidence compliance with these requirements, the Company must maintain records that disclose the actual ownership of its outstanding common stock and will demand written statements each year from the holders of record of designated percentages of its common stock requesting the disclosure of the beneficial owners of such common stock. On March 7, 1995, the Board of Directors authorized the Company to purchase up to 100,000 shares of its outstanding common stock so that the total number of shares and Units may be reduced to approximately 13,300,000. On March 8, 1995, the Company purchased, for constructive retirement, 100,000 shares of its outstanding common stock for $1,595. The excess of the purchase price over par value was recorded as a reduction to additional paid-in capital. Concurrent with this purchase, the Company sold to the Operating Partnership 100,000 Units for $1,595. On November 6, 1995, the Company completed a second public offering of 4,000,000 shares of its common stock at $19.50 per share (the "Second Offering"). Net proceeds to the Company after the underwriting discounts and other offering costs were approximately $72,512 which was used along with funds drawn on the Initial Credit Facility to acquire certain properties. Additionally, on November 17, 1995, pursuant to an over-allotment option granted to the underwriters of the Second Offering, the Company issued an additional 600,000 shares of its common stock at $19.50 per share. Net proceeds to the Company after underwriting discounts totaled approximately $11,082, which was used to repay an equal amount of indebtedness on the Initial Credit Facility. The $89.7 million in total proceeds from the Second Offering and over-allotment option were obtained off of the Company's $250 million shelf registration, leaving $160.3 million of available funds under the shelf. On May 13, 1996, the Company's stockholders approved an increase in the authorized shares of common stock in the Company from 25,000,000 to 95,000,000. On July 29, 1996, the Company filed an additional shelf registration statement with the Securities and Exchanges Commission ("SEC") for an aggregate amount of $500 million in securities of the Company. The registration statement was declared effective by the SEC on August 2, 1996. * * * * MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the Consolidated Financial Statements of Cali Realty Corporation and the notes thereto. The following comparisons for the three and six month periods ended June 30, 1996 ("1996"), as compared to the three and six month periods ended June 30, 1995 ("1995") make reference to the following: (i) the effect of the "Pre-Acquisition Properties," which represents all properties owned by the Company at March 31, 1995 (for the three-month periods comparisons), and which represents all properties owned by the Company at December 31, 1994 (for the six-month periods comparisons), (ii) the effect of the "Acquired Properties," which represents all properties acquired by the Company since April 1, 1995 (for the three-month periods comparisons), and which represents all properties acquired since January 1, 1995 (for the six-month period comparisons), and (iii) the effect of the "Disposition," which refers to the Company's sale of Essex Road on March 20, 1996 (for both the three and six month periods comparisons). Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995 Total revenues increased $5.9 million, or 38.7 percent, for the three months ended June 30, 1996 over 1995. Base rents increased $5.1 million, or 41.5 percent, of which $5.3 million, or 43.8 percent, was attributable to the Acquired Properties, $0.1 million, or 0.8 percent, to occupancy changes at the Pre- Acquisition Properties, offset by a decrease of $0.4 million, or 3.1 percent, as a result of the Disposition. Escalations and recoveries increased $0.7 million, or 30.5 percent, of which $0.8 million, or 34.4 percent, was attributable to the Acquired Properties, offset by a decrease of $0.1 million, or 2.9 percent, due to the Pre-Acquisition Properties. Total expenses for the three months ended March 31, 1996 increased $3.2 million, or 28.5 percent, as compared to the same period in 1995. Real estate taxes increased $0.8 million, or 52.7 percent, for 1996 over 1995 substantially attributable to the Acquired Properties. Additionally, operating services increased $0.6 million, or 28.0 percent, and utilities increased $0.4 million, or 27.2 percent for 1996 over 1995. The aggregate increase in operating services and utilities of $1.0 million, or 27.7 percent, consists of $1.1 million, or 31.6 percent, attributable to the Acquired Properties, offset by a decrease of $0.1 million, or 4.6 percent, as a result of the Disposition. General and administrative expenses increased $0.1 million, or 12.7 percent, primarily due to the additional costs associated with the Acquired Properties. Depreciation and amortization increased $0.5 million, or 16.8 percent, for 1996 over 1995, of which $0.9 million, or 29.2 percent, relates to depreciation on the Acquired Properties, offset by decreases of $0.1 million, or 3.1 percent, for depreciation and $0.2 million, or 6.2 percent, for amortization of deferred financing costs due to a reduction in debt outstanding on the Pre-Acquisition Properties, and $0.1 million, or 3.0 percent, of a reduction in depreciation as a result of the Disposition. Interest expense increased by $0.8 million, or 38.0 percent, primarily due to an increase in indebtedness resulting from drawings on the Company's credit facilities in connection with property acquisitions. Income before minority interest and extraordinary item increased to $6.7 million in 1996 from $4.0 million in 1995. The increase of $2.7 million was due to the factors discussed above. Net income increased $2.5 million for the three months ended June 30, 1996 from $3.2 million (net of minority interest of $0.9 million) in 1995 to $5.7 million (net of minority interest of $1.0 million) in 1996, as a result of the increase in income before minority interest and extraordinary item of $2.7 million. Six Months Ended June 30, 1996 to Six Months Ended June 30, 1995 Total revenues increased $11.6 million, or 39.8 percent, for the six months ended June 30, 1996 over 1995. Base rents increased $9.8 million, or 42.0 percent, of which $10.5 million, or 44.8 percent, was attributable to the Acquired Properties, offset by decreases of $0.1 million, or 0.3 percent, as a result of occupancy changes at the Pre-Acquisition Properties and $0.6 million, or 2.5 percent, as a result of the Disposition. Escalations and recoveries increased $1.7 million, or 37.4 percent, of which $1.8 million, or 39.1 percent, was attributable to the Acquired Properties, offset by a decrease of $0.1 million, or 1.1 percent, as a result of the combined effect of both the Disposition and occupancy changes at the Pre-Acquisition Properties. Total expenses for the six months ended June 30, 1996 increased $6.7 million, or 31.7 percent, as compared to the same period in 1995. Real estate taxes increased $1.4 million, or 51.0 percent, for 1996 over 1995 of which $1.5 million, or 53.5 percent, was as a result of the Acquired Properties, offset by a decrease $0.1 million, or 2.4 percent, due to the Disposition. Additionally, operating services increased $1.5 million, or 39.0 percent, and utilities increased $0.9 million, or 32.4 percent. The aggregate increase in operating services and utilities of $2.4 million, or 36.2 percent, consists of $2.3 million, or 34.7 percent, attributable to the Acquired Properties, $0.2 million, or 3.2 percent, at the Pre- Acquisition Properties which was due primarily to a harsher winter in 1996, offset by a decrease of $0.1 million, or 1.3 percent, as a result of the Disposition. General and administrative expenses increased $0.1 million, or 6.7 percent, primarily due to the additional costs associated with the Acquired Properties. Depreciation and amortization increased $1.0 million, or 16.6 percent, for 1996 over 1995, of which $1.7 million, or 28.7 percent, related to depreciation on the Acquired Properties, offset by decreases of $0.2 million, or 3.5 percent, for depreciation and $0.4 million, or 7.1 percent, for amortization of deferred leasing and financing costs due to a reduction of debt on the Pre-Acquisition Properties, and $0.1 million as a result of the Disposition. Interest expense increased by $1.8 million, or 46.0 percent, primarily due to an increase in indebtedness resulting from drawings on the Company's credit facilities in connection with property acquisitions. Income before minority interest and extraordinary item increased to $18.5 million in 1996 from $7.9 million in 1995. The increase of $10.5 million was due to the gain on sale of rental property (the Disposition) of $5.7 million in 1996, as well as due to the factors discussed above. Net income increased $9.0 million for the six months ended June 30, 1996 from $6.2 million (net of minority interest of $1.7 million) in 1995 to $15.2 million (net of minority interest of $2.8 million) in 1996, as a result of an increase in income before minority interest and extraordinary item of $10.5 million, partially offset by the recognition in 1996 of an extraordinary loss for the early retirement of debt of $0.5 million (net of minority interest's share of $0.1 million). Liquidity and Capital Resources Statement of Cash Flows During the six months ended June 30, 1996, the Company generated $19.2 million in cash flow from operating activities, and, together with $10.3 million of proceeds from the sale of a rental property, $39.2 million in net borrowings on its credit facilities and $0.2 million of proceeds from stock options exercised, used an aggregate $68.9 million to (i) purchase two rental properties for $38.5 million, (ii) acquire tenant improvements and building improvements for $7.8 million (includes $2.9 million from tenant improvements costs in connection with the DLJ Expansion and $1.8 million in tenant improvement costs in connection with the leasing of 62,275 square feet to Berlitz International at the Company's 400 Alexander Park, Princeton, New Jersey office property), (iii) pay quarterly dividends and distributions of $15.2 million, (iv) prepay a portion of its mortgage notes in the amount of $5.5 million, (v) increase the escrow cash balances relating to the Mortgage Financing by $0.6 million, (vi) pay debt prepayment penalties and other related costs of $0.3 million, (vii) pay the amortization on mortgage principal of $0.1 million, and (viii) increase its cash and cash equivalents balance by $0.9 million. Capitalization On November 6, 1995, the Company completed a second public offering of 4,000,000 shares of its common stock at $19.50 per share (the "Second Offering"). Net proceeds to the Company after the underwriting discounts and other offering costs were approximately $72,512 which was used along with funds drawn on the Initial Credit Facility to acquire certain properties, as fully described in the Company's Form 10-K for the year ended December 31, 1995. Additionally, on November 17, 1995, pursuant to an over-allotment option granted to the underwriters of the Second Offering, the Company issued an additional 600,000 shares of its common stock at $19.50 per share. Net proceeds to the Company after underwriting discounts totaled approximately $11,082, which was used to repay an equal amount of indebtedness on the Initial Credit Facility. The $89.7 million in total proceeds from the Second Offering and over-allotment option were obtained off of the Company's $250 million shelf registration, leaving $160.3 million of available funds under the shelf. On February 1, 1996, the Company obtained from two participating banks the $75 million Additional Credit Facility. The Additional Credit Facility bears interest at a floating rate equal to 150 basis points over LIBOR. The Additional Credit Facility is also subject to certain financial covenants, including the ratio of earnings before interest, taxes, depreciation and amortization to debt service, minimum net worth and debt-to-market capitalization. In addition, the Additional Credit Facility restricts distributions by the Company in excess of 100 percent of Funds from Operations for three successive quarters, provided that the Company retains the right to make distributions necessary to maintain its status as a REIT. The Additional Credit Facility is secured by a first lien mortgage on certain of the Company's properties. Additional Credit Facility borrowings are recourse to the Operating Partnership and guaranteed by the Company. On May 24, 1995, the Company entered into an interest rate swap agreement with a commercial bank. The swap agreement fixes the Company's one-month LIBOR base to a fixed 6.285 percent per annum on a notional amount of $24,000 through August 1999. In addition, on January 23, 1996, the Company entered into a second interest rate swap agreement with one of the participating banks in its Additional Credit Facility. This swap agreement has a three-year term and a notional amount of $26,000 which fixes the Company's one-month LIBOR base at 5.265 percent on its floating rate credit facilities. On March 20, 1996, the Company sold its office building located at 15 Essex Road in Paramus, New Jersey ("Essex Road") and concurrently acquired a 95,000 square foot office building at 103 Carnegie Center in Princeton, New Jersey. The concurrent transactions qualified as a tax free exchange, as the Company used substantially all of the proceeds from the sale of Essex Road to acquire the Princeton property. The financial statements for the six months ended June 30, 1996 include a gain of $5,658 relating to this transaction. On May 2, 1996, the Company acquired Rose Tree Corporate Center, a two-building suburban office complex totaling approximately 260,000 square feet, located in Media, Pennsylvania. The complex was acquired for approximately $28 million, which was drawn on the Initial Credit Facility. Additionally, on July 23, 1996, the Company acquired 222 and 233 Mount Airy Road, two suburban office buildings totaling approximately 115,000 square feet located in Basking Ridge, New Jersey. The buildings were acquired for approximately $10.5 million, which was drawn on one of the Company's credit facilities. On July 29, 1996, the Company filed an additional shelf registration statement with the Securities and Exchanges Commission ("SEC") for an aggregate amount of $500 million in securities of the Company. The registration statement was declared effective by the SEC on August 2, 1996. Historically, rental revenue has been the principal source of funds to pay operating expenses, debt service and capital expenditures, excluding non-recurring capital expenditures. Management believes that the Company will have access to the capital resources necessary to expand and develop its business. To the extent that the Company's cash flow from operating activities is insufficient to finance its non-recurring capital expenditures such as property acquisition costs and other capital expenditures, the Company expects to finance such activities through the credit facilities and other debt and equity financing. The Company presently has no plans for major capital improvements to the existing properties, other than normal recurring expenditures. The Company is currently constructing two office/flex buildings aggregating approximately 47,000 square feet of space at its Commercenter complex, located in Totowa, New Jersey. As of June 30, 1996, the Company has incurred $0.6 million of costs out of a total of $3.1 million anticipated to be incurred in connection with the construction project. The Company expects to meet its short-term liquidity requirements generally through its working capital and net cash provided by operating activities along with the Initial Credit Facility and Additional Credit Facility. The Company is frequently examining potential property acquisitions and, at any one given time, one or more of such acquisitions may be under consideration. Accordingly, being able to fund property acquisitions is a major part of the Company's financing requirements. The Company expects to meet its financing requirements through funds generated from operations, long-term or short-term borrowings (including draws on the Company's credit facilities) and the issuance of debt securities or additional equity securities. The Company does not intend to reserve funds to retire the existing Mortgage Financing, indebtedness under the credit facilities or other mortgages and loans payable upon maturity. Instead, the Company will seek to refinance such debt at maturity or retire such debt through the issuance of additional equity securities. The Company anticipates that its available cash and cash equivalents and cash flows from operating activities, together with cash available from borrowings and other sources, will be adequate to meet the Company's capital and liquidity needs both in the short and long-term. However, if these sources of funds are insufficient or unavailable, the Company's ability to make the expected distributions discussed below may be adversely affected. To maintain its qualification as a real estate investment trust, the Company must make annual distributions to its stockholders of at least 95 percent of its REIT taxable income, excluding the dividends paid deduction and net capital gains. Moreover, the Company intends to make regular quarterly distributions to its stockholders which, based upon current policy, in the aggregate would equal approximately $25.9 million on an annual basis. However, any such distribution, whether for federal income tax purposes or otherwise, would only be paid out of available cash after meeting both operating requirements and scheduled debt service on mortgages and loans payable and required annual capital expenditure reserves pursuant to its mortgage indenture. Funds from Operations The Company considers Funds from Operations after adjustment for the straight-lining of rents one measure of REIT performance. Funds from Operations is defined as net income (loss) before minority interest of unitholders, computed in accordance with Generally Accepted Accounting Principles, excluding gains (or losses) from debt restructuring and sales of property, plus real estate-related depreciation and amortization. Funds from Operations should not be considered as an alternative to net income as an indication of the Company's performance or to cash flows as a measure of liquidity. Funds from Operations for the three and six month periods ended June 30, 1996 and 1995, as calculated in accordance with the National Association of Real Estate Investment Trusts definition published in March 1995, are summarized in the following table (in thousands):
Three Months Ended June 30, Six Months Ended June 30, --------------------------- -------------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Income before gain on sale of property, minority interest, and extraordinary item ........................... $ 6,693 $ 4,010 $ 12,821 $ 7,936 Add: Real estate related depreciation and amortization ............................................... 3,334 2,651 6,355 5,020 -------- -------- -------- -------- 10,027 6,661 19,176 12,956 Funds from Operations Deduct: Rental income adjustment for straight-lining of rents ................................ (135) (188) (204) (223) -------- -------- -------- -------- Funds from Operations after adjustment for straight-line rents .......................................... $ 9,892 $ 6,473 $ 18,972 $ 12,733 ======== ======== ======== ======== Weighted average shares outstanding (1) ........................ 17,902 13,295 17,900 13,301 ======== ======== ======== ========
- -------------- (1) Assumes redemption of all Units, calculated on a weighted average basis, for shares of common stock in the Company. Inflation The Company's leases with the majority of its tenants provide for recoveries and escalation charges based upon the tenant's proportionate share of and/or increases in real estate taxes and certain operating costs, which reduce the Company's exposure to increases in operating costs resulting from inflation. CALI REALTY CORPORATION Part II -- Other Information and Signatures Item 6. Exhibits The following exhibits are filed herewith: Exhibit 10.40 Purchase Agreement between Metfer - I and Mounty Airy Realty Associates L.P., dated July 23, 1996 Exhibit 10.41 Purchase Agreement between Metfer - II and Mount Airy Realty Associates L.P., dated July 23, 1996. Signatures Pursuant to the requirements 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. Cali Realty Corporation ------------------------------- (Registrant) /s/ Barry Lefkowitz Date: August 7, 1996 ------------------------------- Barry Lefkowitz Vice President - Finance and Chief Financial Officer (signing on behalf of the Registrant)