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 September 30, 1997
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
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(Exact name of registrant as specified in its charter)
Maryland 22-3305147
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11 Commerce Drive, Cranford, New Jersey 07016-3501
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(Address of principal executive office)
(Zip Code)
(908) 272-8000
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(Registrant's telephone number, including area code)
Not Applicable
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(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 49,664,622 shares of $.01 par value common stock outstanding at
October 31, 1997.
CALI REALTY CORPORATION
Form 10-Q
INDEX
Part I Financial Information
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996.................................
Consolidated Statements of Operations for the three and
nine month periods ended September 30, 1997 and 1996..
Consolidated Statement of Stockholders' Equity for the
nine months ended September 30, 1997..................
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1997 and 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 6. Exhibits................................................
Signatures..............................................
2
CALI REALTY CORPORATION
Part I - Financial Information
Item I: Financial Statements
The accompanying unaudited consolidated balance sheets,
statements of operations, of stockholders' equity, and of
cash flows and related notes, have been prepared in
accordance with generally accepted accounting principles
("GAAP") for interim financial information and in
conjunction with the rules and regulations of the
Securities and Exchange Commission ("SEC"). Accordingly,
they do not include all of the disclosures required by
GAAP for complete financial statements. The financial
statements reflect all adjustments consisting only of
normal, recurring adjustments, which are, in the opinion
of management, necessary for a fair presentation 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, 1996.
The results of operations for the three and nine month
periods ended September 30, 1997 are not necessarily
indicative of the results to be expected for the entire
fiscal year or any other period.
3
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except per share amounts)
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September 30, December 31,
ASSETS 1997 1996
Rental property ------------- ------------
Land $ 141,604 $ 98,127
Buildings and improvements 1,258,895 718,466
Tenant improvements 41,490 35,626
Furniture, fixtures and equipment 2,101 1,133
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1,444,090 853,352
Less - accumulated depreciation and amortization (92,549) (68,610)
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Total rental property 1,351,541 784,742
Cash and cash equivalents (includes $201,269 in
Overnight Investments at December 31, 1996) 3,409 204,807
Unbilled rents receivable 25,617 19,705
Deferred charges and other assets, net of
accumulated amortization 18,571 11,840
Restricted cash 5,154 3,160
Accounts receivable, net of allowance for doubtful
accounts of $505 and $189 5,637 2,074
Mortgage note receivable 7,250 --
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Total assets $1,417,179 $1,026,328
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LIABILITIES AND STOCKHOLDERS' EQUITY
Mortgages and loans payable $ 593,058 $ 268,010
Dividends and distributions payable 20,377 17,554
Accounts payable and accrued expenses 15,578 5,068
Rents received in advance and security deposits 17,088 6,025
Accrued interest payable 2,081 1,328
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Total liabilities 648,182 297,985
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Minority interest of unitholders in Operating
Partnership 70,479 26,964
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Commitments and contingencies
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized, none issued
Common stock, $.01 par value, 190,000,000 shares authorized,
36,662,322 and 36,318,937 shares outstanding 366 363
Additional paid-in capital 723,617 714,052
Distributions in excess of net earnings (15,560) (13,036)
Unamortized stock compensation (9,905) --
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Total stockholders' equity 698,518 701,379
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Total liabilities and stockholders' equity $1,417,179 $1,026,328
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The accompanying notes are an integral part of these consolidated
financial statements.
4
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts)
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Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
REVENUES
- --------
Base rents $ 52,148 $ 18,438 $ 145,328 $ 51,713
Escalations and recoveries from tenants 8,185 3,414 22,464 9,646
Parking and other 1,648 538 5,245 1,453
Interest income 628 128 2,268 282
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Total revenues 62,609 22,518 175,305 63,094
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EXPENSES
- --------
Real estate taxes 6,584 2,188 18,513 6,342
Utilities 5,061 2,222 13,001 5,965
Operating services 7,283 2,625 21,056 7,952
General and administrative 3,675 1,371 10,601 3,427
Depreciation and amortization 9,339 3,469 25,631 9,850
Interest expense 10,694 2,999 28,398 9,093
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Total expenses 42,636 14,874 117,200 42,629
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Income before gain on sale of rental property,
minority interest and extraordinary items 19,973 7,644 58,105 20,465
Gain on sale of rental property -- -- -- 5,658
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Income before minority interest
and extraordinary items 19,973 7,644 58,105 26,123
Minority interest 2,015 1,045 5,663 3,866
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Income before extraordinary items 17,958 6,599 52,442 22,257
Extraordinary items-loss on early retirement of debt
(net of minority interest's share
of $402 in 1997 and $86 in 1996) 3,583 -- 3,583 475
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Net income $ 14,375 $ 6,599 $ 48,859 $ 21,782
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Net income per common share:
- ----------------------------
Income before extraordinary items $ 0.49 $ 0.39 $ 1.44 $ 1.41
Extraordinary items-loss on early retirement of debt (0.10) -- (0.10) (.03)
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Net income $ 0.39 $ 0.39 $ 1.34 $ 1.38
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Dividends declared per common share $ 0.50 $ 0.45 $ 1.40 $ 1.30
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Weighted average common shares outstanding 36,457 17,045 36,469 15,803
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The accompanying notes are an integral part of these consolidated
financial statements.
5
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (in thousands)
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Retained
Earnings
Additional (Distributions Unamortized Total
Common Stock Paid-in in Excess of Stock Stockholders'
Shares Par Value Capital Net Earnings) Compensation Equity
------ --------- ---------- -------------- ------------ -------------
BALANCE AT JANUARY 1, 1997 36,319 $ 363 $ 714,052 $(13,036) -- $ 701,379
Net income -- -- -- 48,859 -- 48,859
Dividends -- -- -- (51,383) -- (51,383)
Issuance of Stock Award Rights
and Stock Purchase Rights 351 4 11,514 -- $(11,518) --
Amortization of Stock Compensation -- -- -- -- 1,613 1,613
Repurchase of Common Stock (152) (2) (4,678) -- -- (4,680)
Conversion of Units to
shares of Common Stock 1 -- 17 -- -- 17
Proceeds from exercise of
stock options 143 1 2,712 -- -- 2,713
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BALANCE AT SEPTEMBER 30, 1997 36,662 $ 366 $ 723,617 $(15,560) $(9,905) $ 698,518
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The accompanying notes are an integral part of these consolidated
financial statements.
6
CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
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Nine Months Ended
September 30,
CASH FLOWS FROM OPERATING ACTIVITIES 1997 1996
- ------------------------------------ -------- ----------
Net income $ 48,859 $ 21,782
Adjustments to reconcile net income to net cash
flows provided by operating activities:
Depreciation and amortization 25,631 9,850
Minority interest 5,663 3,866
Amortization of Stock Compensation 1,613 --
Gain on sale of rental property -- (5,658)
Extraordinary items-loss on early retirement of debt, net 3,583 475
Changes in operating assets and liabilities:
Increase in unbilled rents receivable (5,912) (233)
Increase in deferred charges and other assets, net (10,491) (2,762)
Increase in accounts receivable, net (3,563) (31)
Increase in accounts payable and
accrued expenses 10,510 247
Increase in rents received in advance and
security deposits 6,306 705
Increase (decrease) in accrued interest payable 753 (280)
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Net cash provided by operating activities $ 82,952 $ 27,961
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CASH FLOWS FROM INVESTING ACTIVITIES
- ------------------------------------
Additions to rental property $ (357,043) $ (60,836)
Issuance of mortgage note receivable (11,600) --
Proceeds from sale of rental property -- 10,324
Decrease in restricted cash 2,763 579
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Net cash used in investing activities $ (365,880) $ (49,933)
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CASH FLOWS FROM FINANCING ACTIVITIES
- ------------------------------------
Proceeds from mortgages and loans payable $ 410,080 $ 125,900
Repayments of mortgages and loans payable (270,693) (148,508)
Debt prepayment premiums and other costs (1,812) (312)
Proceeds from Common Stock offering -- 76,830
Proceeds from exercise of stock options 2,713 260
Repurchase of Common Stock (4,680) --
Payment of dividends and distributions (54,078) (22,814)
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Net cash provided by financing activities $ 81,530 $ 31,356
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Net (decrease) increase in cash and cash equivalents $ (201,398) $ 9,384
Cash and cash equivalents, beginning of period 204,807 967
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Cash and cash equivalents, end of period $ 3,409 $ 10,351
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The accompanying notes are an integral part of these consolidated
financial statements.
7
CALI REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share amounts)
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1. ORGANIZATION, ACQUISITIONS/TRANSACTIONS AND BASIS OF PRESENTATION
Organization
Cali Realty Corporation and subsidiaries (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 September 30, 1997, the Company owned and
operated 132 properties (the "Properties") aggregating 12.2 million
square feet, consisting of 120 office and office/flex buildings totaling
approximately 11.8 million square feet, six industrial/warehouse
buildings totaling approximately 400,000 square feet, two
multi-family residential complexes consisting of 453 units, two
stand-alone retail properties and two land leases. The Properties are
located in New Jersey, New York, Pennsylvania and Connecticut.
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 ("IPO") and effected a business combination with the
Cali Group (not a legal entity). The Company raised its initial capital
through the IPO issuing 10,500,000 shares of common stock, and used the
proceeds to acquire a majority interest in Cali Realty, L.P. (the
"Operating Partnership") and related entities, which are the successors
to the operations of the Cali Group.
Acquisitions/Transactions
From 1994 through 1996, following the Company's IPO, the Company acquired 44
office and office/flex properties totaling 4.9 million square feet for
approximately $610,000. The acquired properties are all located in New
Jersey, New York and Pennsylvania.
On January 28, 1997, the Company acquired 1345 Campus Parkway ("1345
Campus"), a 76,300 square foot office/flex property, located in Wall
Township, Monmouth County, New Jersey, for approximately $6,800 in cash, made
available from the Company's cash reserves. The property is located in the
same office park in which the Company previously acquired two office
properties and four office/flex properties in November 1995.
On January 31, 1997, the Company acquired 65 properties ("RM Properties") of
Robert Martin Company, LLC and affiliates ("RM") for a total cost of
approximately $450,000. The cost of the transaction (the "RM Transaction")
was financed through the assumption of $185,283 of mortgage indebtedness
("TIAA Mortgage"), approximately $220,000 in cash, substantially all of which
was obtained from the Company's cash reserves, and the issuance of 1,401,225
Units in the Operating Partnership.
The RM Properties consist primarily of 54 office and office/flex properties
aggregating approximately 3.7 million square feet and six
industrial/warehouse properties aggregating approximately 400,000 square
feet. The RM Properties are located primarily in established business parks
in Westchester County, New York and Fairfield County, Connecticut. The
Company has agreed not to sell certain of the RM Properties for a period of
seven years without the consent of the RM principals, except for sales made
under certain circumstances and/or conditions.
In connection with the RM Transaction, the Company was granted a three-year
option to acquire a 115,000 square foot office property and an 84,000 square
foot office/flex property (the "Option Properties") for an aggregate minimum
price of $19,000 and has granted RM the right to put such properties to the
Company between a range of an aggregate purchase price of $11,600 to $21,300,
under certain conditions. The purchase prices, under the agreement, are
subject to adjustment based on different formulas and are payable in cash or
Units.
8
In connection with the RM Transaction, the Company provided an $11,600 mortgage
loan ("Mortgage Note Receivable") secured by the Option Properties (see Note 5).
As part of the RM Transaction, Brad W. Berger, formerly President and Chief
Executive Officer of RM, and Timothy M. Jones, formerly Chief Operating
Officer of RM, joined the Company as Executive Vice Presidents under
three-year employment agreements. The agreements provided, among other
things, that both Berger and Jones be issued warrants to purchase 170,000
shares of the Company's common stock at a price of $33 per share, which vest
equally over a three-year period and expire on January 31, 2007.
On May 8, 1997, the Company acquired four buildings in the Westlakes Office
Park ("Westlakes"), a suburban office complex located in Berwyn, Chester County,
Pennsylvania, totaling approximately 444,000 square feet. The properties were
acquired for approximately $74,700, which was made available primarily from
drawing on one of the Company's credit facilities.
On July 21, 1997, the Company acquired two vacant office buildings in the
Moorestown Corporate Center, a suburban office complex located in Moorestown,
Burlington County, New Jersey. The properties, each consisting of 74,000 square
feet, were acquired for approximately $10,200, which was made available from
drawing on one of the Company's credit facilities.
On August 1, 1997, the Company acquired 1000 Bridgeport Avenue ("Shelton
Place"), a 133,000 square-foot office building located in Shelton, Fairfield
County, Connecticut. The property was acquired for approximately $15,787,
which was made available from drawing on one of the Company's credit facilities.
On August 15, 1997, the Company acquired one of the Option Properties, 200
Corporate Boulevard South ("200 Corporate"), an 84,000 square-foot
office/flex building located in Yonkers, Westchester County, New York. The
property was acquired for approximately $8,078 through the exercise of a
purchase option obtained in connection with the RM Transaction. The
acquisition cost, net of the mortgage prepayment described below, was
financed from the Company's cash reserves.
In conjunction with the acquisition of 200 Corporate, the sellers of the
property, certain RM principals, prepaid $4,350 of the $11,600 Mortgage
Note Receivable between the Company and such RM principals (See Note 5).
On September 3, 1997, the Company acquired Three Independence Way ("Three
Independence"), a 111,300 square foot suburban office property located in South
Brunswick, Middlesex County, New Jersey, for approximately $13,400. The funds
were made available from drawing on one of the Company's credit facilities.
As of October 31, 1997, the Company's portfolio consists of 132 properties
aggregating approximately 12.2 million square feet, consisting primarily of
office, office/flex and industrial/warehouse buildings, located in New
Jersey, New York, Pennsylvania and Connecticut.
On September 18, 1997, the Company entered into a Contribution and Exchange
Agreement (the "Agreement") with certain contributing partnerships and other
entities affiliated with The Mack Company and Patriot American Office Group
(collectively, "The Mack Group"). The Agreement, as amended, provides for,
among other things, the Company to acquire 54 office properties, aggregating
approximately 9.2 million square feet, (the "Mack Properties") for a total
cost of approximately $1,200,000. According to terms of the Agreement, the
cost of the transaction (the "Mack Transaction") will be financed through:
(i) the assumption of an aggregate of $299,737 in mortgage financing
(the "Mack Assumed Debt"); (ii) approximately $469,000 in cash, (using excess
proceeds from its October 1997 common stock offering, see Note 11, as well as
drawing on the Company's revolving credit facilities); (iii) the issuance of
3,972,318 common units ("Common Units") in the Operating Partnership; (iv)
the issuance of 250,256 preferred units ("Preferred Units") in the Operating
Partnership convertible into Common Units; and (v) the issuance of two
million warrants ("Warrants") to purchase Common Units. A portion of the
Common Units may be contingent, non-participating, Common Units, (the
"Contingent Units"), which will convert, in whole or in part, into ordinary
Common Units upon the satisfaction within two years from the consummation
of the transactions contemplated by the Agreement of certain conditions
relating to the Mack Properties. Until such conversion, such Contingent Units
shall not be entitled to any economic, voting or other rights associated with
the participating Common Units.
9
Following completion of the Mack Transaction, the Company's portfolio will
consist of 186 properties, primarily office and office/flex buildings,
aggregating approximately 21.5 million square feet, located in ten states.
Pursuant to the Agreement, the Cali Realty Corporation name will be changed,
subject to shareholder approval, to Mack-Cali Realty Corporation, and the
name of the Operating Partnership will be changed from Cali Realty, L.P. to
Mack-Cali Realty, L.P. If shareholder approval is not obtained, the Company
will operate under its new name pursuant to a fictitious name certificate,
and continue to obtain shareholder approval in the future.
With the completion of the Transaction, the composition of the Company's
13-member Board of Directors will also change. The Mack Group will be
permitted to name three designees to the Board, who will be: William Mack,
currently Senior Managing Partner of the Mack Company, Mitchell Hersh,
currently Partner and Chief Operating Officer of the Mack Company, and Earle
Mack, all of whom will be considered "inside" members of the Board because of
their relationship with the Company's management. The other inside members
of the Board will be John J. Cali, who will remain as Chairman of the Board,
Thomas A. Rizk, and Robert Weinberg. The remaining seven independent
directors will include three current independent Board members: Brendan
Byrne, Irvin Reid and Alan Philibosian; with four new independent members to
be selected by Mack and reasonably approved by the Company. It is anticipated
that these four new independent members will be Paul A. Nussbaum, Vincent
Tese, Jeffrey B. Lane and Martin D. Gruss.
In accordance with the Agreement, Thomas A. Rizk will remain Chief Executive
Officer and will resign as President of the Company, with Mitchell Hersh
being appointed President and Chief Operating Officer. The Company's other
existing officers will retain their current positions and responsibilities,
except that Brant Cali will resign as Chief Operating Officer and John R.
Cali will resign as Chief Administrative Officer. Brant Cali and John R.
Cali will remain as officers of the Company as Executive Vice Presidents.
Additionally, the Agreement calls for the Company to enter into
non-competition agreements with each of William, Earle, David and Frederic
Mack, which will restrict the business dealings of such individuals relative
to their involvement in commercial real estate activities to those specified
in the Agreement. The agreements are to have a term of the later of (a)
three years from the completion of the Mack Transaction, or (b) the
occurrence of specified circumstances including, but not limited to, the
removal of William, Earle, David or Frederic Mack, respectively, from the
Company's Board of Directors and a decrease in certain ownership levels.
On or before December 12, 1997, the Company may terminate the Agreement for
any reason. During the period beginning October 28, 1997 through December
12, 1997, the Mack Group may terminate the Agreement under certain situations
and conditions relative to material adverse changes in the activities and
stock price of the Company during that period.
The completion of the Mack Transaction is subject to certain conditions,
including approval by the Company's stockholders. There can be no assurance
that the Mack Transaction will be consummated or that the Agreement will not
be modified or amended. Subject to the foregoing, the Company expects the
Mack Transaction to be completed in or about December 1997.
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. All significant intercompany accounts and
transactions have been eliminated.
The preparation of financial statements in conformity with GAAP 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.
10
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 5 to 40 years
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Tenant improvements The shorter of the term of the related
lease or useful life
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Furniture, fixtures and equipment 5 to 10 years
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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.
Cash and Cash
Equivalents All highly liquid investments with a maturity of three
months or less when purchased are considered to be cash
equivalents. At December 31, 1996, cash and cash
equivalents included investments in overnight reverse
repurchase agreements ("Overnight Investments") totaling
$201,269. Investments in Overnight Investments are
subject to the risks that the counter-party will default
and the collateral will decline in market value. The
Overnight Investments held by the Company at December 31,
1996 matured on January 2, 1997. The entire balance,
including interest income earned, was realized by the
Company and ultimately used in the funding of the RM
Transaction on January 31, 1997.
Deferred
Financing Costs Costs incurred in obtaining financing are
capitalized and amortized on a straight-line basis,
which approximates the effective interest method,
over the term of the related indebtedness.
Amortization of such costs are recorded in interest
expense and were $171 and $278 for the three month
periods ended September 30, 1997 and 1996,
respectively, and $723 and $805 for the nine month
periods ended September 30, 1997 and 1996,
respectively.
Deferred
Leasing Costs Costs incurred in connection with leases are 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.
11
Income and
Other Taxes The Company has elected to be taxed as a REIT under
Sections 856 through 860 of the Internal Revenue Code
(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.
Interest Rate
Swap Agreements The Company enters into interest rate swap
agreements which are designated as a means of
managing interest rate exposure on its variable rate
debt. The differential paid or received under these
agreements is recognized in interest expense.
Earnings
Per Share Net income per common share is computed in accordance with APB
Opinion No.15, "Earnings per Share," and uses the weighted
average common shares outstanding during the period. The
weighted average shares outstanding during the three month
periods ended September 30, 1997 and 1996 were 36,457,234 and
17,045,063, respectively, and for the nine month periods ended
September 30, 1997 and 1996 were 36,468,974 and 15,802,573,
respectively.
Dividends and
Distributions
Payable The dividends and distributions payable at September 30,
1997 represents dividends payable to shareholders of
record on October 3, 1997 (36,664,322 shares) and
distributions payable to minority interest unitholders
(4,090,170 Units) on that same date. The third quarter
dividends and distributions of $0.50 per share and per
Unit were approved by the Board of Directors on September
15, 1997 and were paid on October 17, 1997.
Extraordinary
Items Extraordinary items represent the effect resulting from
the early settlement of certain debt obligations, net of
write-off's of related deferred financing costs,
prepayment penalties, yield maintenance payments and
other related items.
Underwriting
Commissions
and Offering
Costs Underwriting commissions and offering costs incurred in
connection with the Company's stock offerings are
reflected as a reduction of additional paid-in-capital.
Stock Options The Company accounts for stock-based compensation using
the intrinsic value method prescribed in Accounting
Principles Board Opinion (APB) No. 25, "Accounting for
Stock Issued to Employees," and related Interpretations.
Under APB No. 25, compensation cost is measured as the
excess, if any, of the quoted market price of the
Company's stock at the date of grant over the exercise
price of the option granted. Compensation cost for stock
options, if any, is recognized ratably over the vesting
period. The Company's policy is to grant options with an
exercise price equal to the quoted closing market price
of the Company's stock on the business day preceding the
grant date. Accordingly, no compensation cost has been
recognized for the Company's stock option plans. See
Note 11 for discussion of stock compensation.
Reclassifications Certain reclassifications have been made to prior
period balances in order to conform with current
period presentation.
12
3. DEFERRED CHARGES AND OTHER ASSETS
September 30, December 31,
1997 1996
---- ----
Deferred leasing costs $ 17,611 $ 14,031
Deferred financing costs 3,559 5,390
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21,170 19,421
Accumulated amortization (8,667) (8,994)
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Deferred charges, net 12,503 10,427
Prepaid expenses and other assets 6,068 1,413
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Total deferred charges and other assets, net $18,571 $ 11,840
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- --------------------------------------------------------------------------------
4. RESTRICTED CASH
Restricted cash includes security deposits for all of the Company's
residential properties and certain commercial properties, 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:
September 30, December 31,
1997 1996
---- ----
Escrow and other reserve funds -- $ 2,814
Security deposits $ 5,154 346
- --------------------------------------------------------------------------------
Total restricted cash $ 5,154 $ 3,160
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5. MORTGAGE NOTE RECEIVABLE
In connection with the RM Transaction on January 31, 1997, the Company
provided an $11,600 non-recourse mortgage loan to entities controlled by
the RM principals, bearing interest at an annual rate of 450 basis
points over the one-month London Inter-Bank Offered Rate (LIBOR). The
Mortgage Note Receivable, which is secured by the Option Properties and
guaranteed by certain of the RM principals, matures on February 1, 2000.
In addition, the Company received a three percent origination fee with
the Mortgage Note Receivable.
In conjunction with the acquisition of 200 Corporate, one of the Option
Properties, on August 15, 1997, the sellers of the property, certain RM
principals, prepaid $4,350 of the Mortgage Note Receivable, leaving a
remaining principal balance of $7,250. The Company also received a
prepayment fee of $163.
6. MORTGAGES AND LOANS PAYABLE
September 30, December 31,
1997 1996
---- ----
TIAA Mortgage $ 185,283 --
Harborside Mortgages 150,000 $ 150,000
Mortgage Financing -- 64,508
Fair Lawn Mortgage 18,140 18,445
First Prudential Facility -- 6,000
Bank Facility -- 23,805
Unsecured Facility 230,000 --
Second Prudential Facility 4,005 --
Contingent Obligation 5,630 5,252
- --------------------------------------------------------------------------------
Total mortgages and loans payable $ 593,058 $268,010
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
13
TIAA Mortgage
In connection with the RM Transaction, on January 31, 1997, the Company
assumed a $185,283 non-recourse mortgage loan with Teachers Insurance
and Annuity Association of America ("TIAA"), with interest only payable
monthly at a fixed annual rate of 7.18 percent (the "TIAA Mortgage").
The TIAA Mortgage is secured and cross-collateralized by 43 of the RM
Properties and matures on December 31, 2003. The Company, at its
option, may convert the TIAA Mortgage to unsecured debt upon
achievement by the Company of an investment credit rating of Baa3/BBB-
or better. The TIAA Mortgage is prepayable in whole or in part subject
to certain provisions, including yield maintenance.
Harborside Mortgages
In connection with the acquisition of Harborside Financial Center
("Harborside"), on November 4, 1996, the Company assumed existing
mortgage debt and was provided seller-financed mortgage debt aggregating
$150,000. The existing financing, with a principal balance of $105,465
at September 30, 1997, bears interest at a fixed rate of 7.32 percent
for a term of approximately nine years. The seller-provided financing,
with a principal balance of $44,535 at September 30, 1997, also has a
term of nine years and initially bears interest at a rate of 6.99
percent. The interest rate on the seller-provided financing will be
reset at the end of the third and sixth loan years based on the yield of
the three-year treasury obligation at that time, with spreads of 110
basis points in years four through six and 130 basis points in years
seven through maturity.
Mortgage Financing
Concurrent with the IPO, the Company's initial operating subsidiaries,
which own the Company's remaining initial 11 office properties and the
initial multi-family residential property, (collectively 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 was guaranteed under certain conditions by certain partners of
the Cali Group partnerships which owned the Initial Properties. The
Mortgage Financing required 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 bore interest at a net cost to
the Company equal to a fixed rate of 8.02 percent per annum and the
remaining $24,000 bore interest at a net cost to the Company equal to a
floating rate of 100 basis points over one-month LIBOR (5.65625 percent
at September 30, 1997) with a lifetime interest rate cap of 11.6
percent. Pursuant to the terms of the Mortgage Financing, the Company
was required to escrow $143 per month for tenant improvements and
leasing commissions and $53 per month for capital improvements. On
March 12, 1996, the Company prepaid $5,492 ($1,687 -- fixed rate debt,
$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. On August 12, 1997, the Company
prepaid in full the remaining balance and retired the Mortgage Financing
from funds made available primarily from drawing on the Unsecured
Facility (see below). On account of prepayment fees, loan origination
fees, legal fees and other costs incurred in the retirement of the
Mortgage Financing, an extraordinary loss of $3,583, net of minority
interest's share of the loss ($402) was recorded for the three and nine
months ended September 30, 1997.
Fair Lawn Mortgage
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 Mortgage") collateralized by the property,
bearing interest at a fixed rate of 8.25 percent per annum. The loan
required payment of interest only through March 15, 1996 and requires
payment of principal and interest thereafter, on a 20-year amortization
schedule, with the remaining principal balance due October 1, 2003. For
the nine months ended September 30, 1997, the Company paid $305 for
amortization of principal on the Fair Lawn Mortgage.
First Prudential Facility
The Company has a $70,000 revolving credit facility (the "First
Prudential Facility") with Prudential Securities Credit Corp. ("PSC"),
which may be used to fund acquisitions and new development projects and
for general working capital
14
purposes, including capital expenditures and tenant improvements. In
connection with the Mortgage Financing, the Company obtained a $6,005
letter of credit (the "Letter of Credit"), secured by the First
Prudential Facility, to meet certain tenant improvement and capital
expenditure reserve requirements. The First Prudential Facility bore
interest at a floating rate equal to 150 basis points over one-month
LIBOR for January 1, 1996 through August 31, 1996. Effective September
1, 1996, the interest rate was reduced to a floating rate equal to 125
basis points over one-month LIBOR. The First Prudential Facility was a
recourse liability of the Operating Partnership and was secured by a
pledge of the $74,500 Bonds held by the Company. In conjunction with
obtaining the Unsecured Facility (see below), the Company repaid in full
and terminated the First Prudential Facility on August 7, 1997.
Additionally, the Letter of Credit was canceled in conjunction with
prepayment of the Mortgage Financing on August 12, 1997.
Bank Facility
On February 1, 1996, the Company obtained a credit facility (the "Bank
Facility") secured by certain of its properties in the amount of $75,000
from two participating banks. The Bank Facility had a three-year term
and bore interest at 150 basis points over one-month LIBOR. The terms
of the Bank 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 Bank Facility also required a fee equal to
one quarter of one percent of the unused balance payable quarterly in
arrears. In conjunction with obtaining the Unsecured Facility (see
below), the Company repaid in full and terminated the Bank Facility on
August 7, 1997.
Second Prudential Facility
On November 4, 1996, the Company obtained a revolving credit facility
("Second Prudential Facility") from PSC totaling $80,000 which bears
interest at 125 basis points over one-month LIBOR, and matures on
January 15, 1998. The Second Prudential Facility is a recourse
liability of the Operating Partnership and is secured by the Company's
equity interest in Harborside. The terms of the Second Prudential
Facility include certain restrictions and covenants that limit, among
other things, dividend payments and additional indebtedness and that
require compliance with specified financial ratios and other financial
measurements. Additionally, on August 12, 1997, the Second Prudential
Facility was amended increasing the total commitment from $80,000 to
$100,000 and extending the maturity date to August 31, 1998. On October
10, 1997, the Company repaid the $4,005 remaining outstanding balance
under the Second Prudential Facility from the Company's cash reserves.
Unsecured Facility
On August 6, 1997, the Company obtained an unsecured revolving credit
facility (the "Unsecured Facility") in the amount of $400,000 from a
group of 13 lender banks. The Unsecured Facility has a three-year term
and currently bears interest at 125 basis points over one-month LIBOR.
Based upon the Company's achievement of an investment grade long-term
unsecured debt rating, the interest rate will be reduced, on a sliding
scale, and a competitive bid option will become available.
The terms of the Unsecured 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 Unsecured
Facility also requires a fee on the unused balance payable quarterly in
arrears, at a rate ranging from one-eighth of one percent to one-quarter
of one percent of such balance, depending on the level of borrowings
outstanding in relation to the total facility commitment.
The lending group for the Unsecured Facility includes: Fleet National
Bank, The Chase Manhattan Bank, and Bankers Trust Company, as agents;
PNC Bank, N.A., Bank of America National Trust and Savings Association,
Commerzbank, and First National Bank of Chicago, as co-agents; and
Keybank, Summit Bank, Crestar Bank, Mellon Bank, N.A., Signet Bank, and
Kredeitbank NV.
In conjunction with the Company obtaining the Unsecured Facility, the
Company drew funds on the new facility to repay in full and terminate
both the First Prudential Facility and the Bank Facility. On October
15, 1997, the Company repaid $160,000 of the outstanding balance on the
Unsecured Facility in proceeds received from the Company's common stock
offering completed on such date (See Note 11).
15
Contingent Obligation
As part of the Harborside acquisition, the Company agreed to make payments
(with an estimated net present value of approximately $5,252 at acquisition
date) to the seller for development rights ("Contingent Obligation") if and
when the Company commences construction on the acquired site during the next
several years. However, the agreement provides, among other things, that
even if the Company does not commence construction, the seller may
nevertheless require the Company to acquire these rights during the six-month
period after the end of the sixth year. After such period, the seller's
option lapses, but any development in years 7 through 30 will require a
payment, on an increasing scale, for the development rights. For the nine
months ended September 30, 1997, interest imputed on the Contingent
Obligation was capitalized, thereby increasing the balance of the Contingent
Obligation to $5,630 as of September 30, 1997.
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 another interest rate swap
agreement with a commercial bank. This 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.
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.
Cash Paid for Interest
Cash paid for interest for the nine month periods ended September 30, 1997
and 1996 was $26,922 and $8,665, respectively.
7. MINORITY INTEREST
Certain individuals and entities own Units in the Operating Partnership. 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.
Units are redeemable by the unitholders at their option, subject to certain
restrictions, 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.
On January 31, 1997, 1,401,225 Units were issued in connection with the RM
Transaction. As of September 30, 1997 and December 31, 1996, the minority
interest unitholders owned 10.0 and 6.9 percent of the Operating Partnership,
respectively.
8. 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 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.
16
9. COMMITMENTS AND CONTINGENCIES
Tax Abatement Agreements
Grove Street Property
Pursuant to an agreement with the City of Jersey City, New Jersey, as
amended, expiring in 2004, the Company is required to make payments in lieu
of property taxes ("PILOT") on its property at 95 Christopher Columbus Drive,
Jersey City, Hudson County, New Jersey. Such PILOT, as defined, is $1,267
per annum through May 31, 1999 and $1,584 per annum through May 31, 2004.
Harborside Financial Center Property
Pursuant to a separate agreement with the City of Jersey City, New Jersey
obtained by the former owner of the Harborside property in 1988 and assumed
by the Company as part of the acquisition of the property on November 4,
1996, the Company is required to make PILOT payments on its Harborside
property. The agreement, which commenced in 1990, are for a term of 15
years. Such PILOT is equal to two percent of Total Project Costs, as
defined, in year one and increases by $75 per annum through year fifteen.
Total Project Costs, as defined, are $148,712.
10. TENANT LEASES
The Properties are leased to tenants under operating leases with various
expiration dates through 2020. 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.
11. 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 provide 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 May 13, 1996, the 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 a shelf registration statement with the
SEC for an aggregate amount of $500,000 in equity securities of the Company.
The registration statement was declared effective by the SEC on August 2,
1996.
On August 13, 1996, the Company sold 3,450,000 shares of its common stock
through a public stock offering (the "August 1996 Offering"), which included
an exercise of the underwriters over-allotment option of 450,000 shares. Net
proceeds from the August 1996 Offering (after offering costs) were
approximately $76,830. The offering was conducted using one underwriter and
the shares were issued from the Company's $250,000 shelf registration
statement (File No. 33-96538).
Pursuant to the Company's $500,000 shelf registration statement, on November
22, 1996, the Company completed an underwritten public offer and sale of
17,537,500 shares of its common stock using several different underwriters to
underwrite such public offer and sale (which included an exercise of the
underwriters' over-allotment option of 2,287,500 shares). The Company
received approximately $441,215 in net proceeds (after offering costs) from
the
17
offering, and used such funds to effect certain of the Company's property
acquisitions in November and December 1996, pay down outstanding borrowings
on its revolving credit facilities, and investing the excess funds in
Overnight Investments.
On December 31, 1996, the Company filed a shelf registration statement with
the SEC for an aggregate amount of $1,000,000 in equity securities of the
Company. The registration statement was declared effective by the SEC on
January 7, 1997.
On May 15, 1997, the stockholders approved an increase in the authorized
shares of common stock in the Company from 95,000,000 to 190,000,000.
Pursuant to the Company's $1,000,000 shelf registration statement, on October
15, 1997, the Company completed an underwritten public offer and sale of
13,000,000 shares of its common stock using several different underwriters to
underwrite such public offer and sale. The Company received approximately
$489,000 in net proceeds (after offering costs) from the offering. The
Company used $160,000 of such proceeds to repay outstanding borrowings on its
Unsecured Facility and anticipates using the remainder of the proceeds to
fund a portion of the purchase price of the Mack Transaction, for other
potential acquisitions, and for general corporate purposes.
Stock Option Plans
In 1994, and as afterwards amended, the Company established the Cali Employee
Stock Option Plan ("Employee Plan") and the Cali Director Stock Option Plan
("Director Plan") under which a total of 2,980,188 (subject to adjustment) of
the Company's shares of common stock have been reserved for issuance
(2,780,188 shares under the Employee Plan and 200,000 shares under the
Director Plan). Stock options granted under the Employee Plan in 1994 and
1995 become exercisable over a three-year period and those options granted
under the Employee Plan in 1996 and 1997 become exercisable over a five-year
period. All stock options granted under the Director Plan become exercisable
in one year. All options were granted at the fair market value at the dates
of grant and have terms of ten years.
18
Information regarding the Company's stock option plans is summarized below:
Employee Director
Shares under option: Plan Plan
---------------------------------------- -------- --------
Granted on August 31, 1994 at
$15.25-$17.25 per share 600,000 25,000
---------------------------------------------------------------------
Outstanding at December 31, 1994
$15.25 - $17.25 per share 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
$15.25 - $19.875 per share 816,612 35,000
Granted at $21.50-$26.25 per share 795,700 14,000
Less - Lapsed or canceled (7,164) --
Exercised at $17.25 per share (116,041) (10,000)
---------------------------------------------------------------------
Outstanding at December 31, 1996
$15.25 - $26.25 per share 1,489,107 39,000
Granted at $33.00 per share -- 5,000
Granted at $33.875 per share -- 5,000
Granted at $30.75 per share 171,460 --
Granted at $30.25 per share 148,000 --
Granted at $37.0625 per share 170,720 --
Less - Lapsed or canceled (27,553) --
Exercised at $17.25 - $25.25 per share (143,315) --
---------------------------------------------------------------------
Outstanding at September 30, 1997
$15.25 - $33.875 per share 1,808,419 49,000
---------------------------------------------------------------------
---------------------------------------------------------------------
Exercisable at September 30, 1997 641,254 39,000
---------------------------------------------------------------------
Available for grant at December 31, 1996 175,040 51,000
Available for grant at September 30, 1997 712,413 141,000
---------------------------------------------------------------------
Stock Compensation
In January 1997, the Company entered into employment contracts with seven of
its key executives which provide for, among other things, compensation in the
form of stock awards (the "Stock Award Rights") and Company-financed stock
purchase rights (the "Stock Purchase Rights"), and associated tax obligation
payments. In connection with the Stock Award Rights, the executives will
receive 199,070 shares of the Company's common stock vesting over a five-year
period contingent on the Company meeting certain performance objectives.
Additionally, pursuant to the terms of the Stock Purchase Rights, the Company
provided fixed rate, non-prepayable loans, aggregating $4,750, to such
executives to finance their purchase of 152,000 shares of the Company's
common stock, which the Company has agreed to forgive ratably over five
years. Such loans were for amounts equal to the fair market value of the
associated shares at the date of grant. Subsequently, from April 18, 1997
through April 24, 1997, the Company purchased, for constructive retirement,
152,000 shares of its outstanding common stock for $4,680. 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 152,000 Units for $4,680.
The value of the Stock Award Rights at September 30, 1997, net of amounts
recognized as compensation expense, is recorded as unamortized stock
compensation and shown as a separate component of stockholders' equity.
Unamortized stock compensation for the Stock Award Rights is amortized to
expense as certain performance objectives are reached.
Additionally, the balance of the loans related to the Stock Purchase Rights
at the grant date, net of amounts recognized as compensation expense, is
recorded as unamortized stock compensation and shown as a separate component
of stockholders' equity. Unamortized stock compensation is amortized to
expense ratably over the five-year vesting period.
19
Included in general and administrative expense for the three and nine month
periods ended September 30, 1997 is $778 and $2,257, respectively, relating
to the Stock Award Rights and Stock Purchase Rights.
12. IMPACT OF RECENTLY - ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
("FASB No. 128") which will be effective for periods ending after December
15, 1997. Earlier application is not permitted. FASB No. 128 requires a
dual presentation of basic and diluted earnings per share ("EPS") on the face
of the income statement for all companies with complex capital structures
even where the effect of such dilution is not material. Basic EPS excludes
dilution and is computed by dividing net income available to common
stockholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. The Company will adopt FASB No. 128 in its
December 31, 1997 financial statements and will restate all prior period EPS
information. The Company will continue to account for EPS under APB No. 15
until that time.
The following pro forma information presents the Company's results for the
periods indicated in accordance with FASB No. 128.
For the three month period ended September 30, 1997:
Pro Forma Pro Forma
Basic EPS Diluted EPS
------------- -----------
Net income (in $000's) $ 14,375 $ 14,375
Add: Net income attributable
to potentially dilutive securities -- 1,613
------------- -----------
$ 14,375 $ 15,988
------------- -----------
------------- -----------
Weighted average shares 36,457,234 41,183,798
------------- -----------
Per Share $ 0.39 $ 0.39
------------- -----------
------------- -----------
The following schedule reconciles the shares used in the pro forma basic EPS
calculation to the shares used in the pro forma diluted EPS calculation.
Pro Forma Basic EPS Shares: 36,457,234
Add: Stock Options 636,394
Add: Operating Partnership Units 4,090,170
----------
Pro Forma Diluted EPS Shares: 41,183,798
----------
----------
20
For the nine month period ended September 30, 1997:
Pro Forma Pro Forma
Basic EPS Diluted EPS
----------- -----------
Net income (in $000's) $ 48,859 $ 48,859
Add: Net income attributable to potentially
dilutive securities -- 5,261
----------- -----------
$ 48,859 $ 54,120
----------- -----------
----------- -----------
Weighted average shares 36,468,974 41,068,405
----------- -----------
Per Share $ 1.34 $ 1.32
----------- -----------
----------- -----------
The following schedule reconciles the shares used in the pro forma basic EPS
calculation to the shares used in the pro forma diluted EPS calculation.
Pro Forma Basic EPS Shares: 36,468,974
Add: Stock Options 662,722
Add: Operating Partnership Units 3,936,709
----------
Pro Forma Diluted EPS Shares: 41,068,405
----------
----------
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income ("FASB No. 130"), which establishes
standards for reporting and display of comprehensive income and its
components. This statement requires a separate statement to report the
components of comprehensive income for each period reported. The provisions
of this statement are effective for fiscal years beginning after December 15,
1997. Management believes that they currently do not have items that would
require presentation in a separate statement of comprehensive income.
In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, Disclosures about Segments of an Enterprise and Related
Information, ("FASB No. 131"), which establishes standards for the way that
public business enterprises report information about operating segments in
annual financial statements and require that those enterprises report
selected information about operating segments in interim financial reports
issued to shareholders. This statement is effective for financial statements
for periods beginning after December 15, 1997.
13. PRO FORMA FINANCIAL INFORMATION
The following pro forma financial information for the three and nine month
periods ended September 30, 1997 and 1996 are presented as if the
acquisitions and common stock offerings in 1996, the January 1997 RM
Transaction, and the 1997 acquisitions of 1345 Campus, Westlakes, Shelton
Place, 200 Corporate and Three Independence Way had all occurred on January 1,
1996. In management's opinion, all adjustments necessary to reflect the
effects of these transactions have been made.
21
This pro forma financial information is not necessarily indicative of what
the actual results of operations of the Company would have been assuming such
transactions had been completed as of January 1, 1996, nor do they represent
the results of operations of future periods.
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
Revenues $63,226 $57,234 $187,423 $176,319
Operating and other expenses 19,122 18,536 56,676 55,213
General and administrative 3,687 3,602 11,344 9,596
Depreciation and amortization 9,436 9,054 27,601 26,505
Interest expense 9,772 9,841 29,534 29,508
------- ------- -------- --------
Income before minority interest 21,209 16,201 62,268 55,497
Minority interest 2,140 1,649 6,280 5,661
------- ------- -------- --------
Net income $19,069 $14,552 $ 55,988 $ 49,836
------- ------- -------- --------
------- ------- -------- --------
Net income per common share $ 0.52 $ 0.40 $ 1.54 $ 1.38
------- ------- -------- --------
22
CALI REALTY CORPORATION AND SUBSIDIARIES
Item 2:
M A N A G E M E N T' S D I S C U S S I O N A N D A N A L Y S I S
O F F I N A N C I A L C O N D I T I O N A N D
R E S U L T S O F O P E R A T I O N S
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 nine month periods ended
September 30, 1997 ("1997"), as compared to the three and nine month periods
ended September 30, 1996 ("1996") make reference to the following: (i) the
effect of the "Pre-Acquisition Properties," which represents all properties
owned by the Company at June 30, 1996 (for the three-month period
comparisons), and which represents all properties owned by the Company at
December 31, 1995 (for the nine-month period comparisons), (ii) the effect of
the "Acquired Properties," which represents all properties acquired by the
Company from July 1, 1996 through September 30, 1997, excluding RM (for the
three-month period comparisons), and represents all properties acquired by
the Company from January 1, 1996 through September 30, 1997, excluding RM
(for the nine-month period comparisons), (iii) the effect of the
"Disposition," which refers to the Company's sale of its Essex Road property
on March 20, 1996, and (iv) the effect of the acquisition of the RM
Properties on January 31, 1997.
Three Months Ended September 30, 1997 Compared to
Three Months Ended September 30, 1996
Total revenues increased $40.1 million, or 178.0 percent, for the three
months ended September 30, 1997 over the same period in 1996. Base rents
increased $33.7 million, or 182.8 percent, of which an increase of $17.7
million, or 95.9 percent, was attributable to the Acquired Properties, an
increase of $15.9 million, or 86.6 percent, due to the RM Properties, and an
increase of $0.1 million, or 0.3 percent, due to occupancy changes at the
Pre-Acquisition Properties. Escalations and recoveries increased $4.8
million, or 139.7 percent, of which an increase of $3.2 million, or 92.6
percent, was attributable to the Acquired Properties, an increase of $1.3
million, or 38.0 percent, due to the RM Properties, and an increase of $0.3
million, or 9.1 percent, due to occupancy changes at the Pre-Acquisition
Properties.
Total expenses for the three months ended September 30, 1997 increased $27.8
million, or 186.6 percent, as compared to the same period in 1996. Real
estate taxes increased $4.4 million, or 200.9 percent, for 1997 over 1996, of
which an increase of $1.8 million, or 82.9 percent, was attributable to the
Acquired Properties, an increase of $2.5 million, or 111.7 percent, due to
the RM Properties, and an increase of $0.1 million, or 6.3 percent,
attributable to the Pre-Acquisition Properties. Additionally, operating
services increased $4.7 million, or 177.4 percent, and utilities increased
$2.8 million, or 127.8 percent, for 1997 over 1996. The aggregate increase
in operating services and utilities of $7.5 million, or 154.7 percent,
consists of $4.0 million, or 81.7 percent, attributable to the Acquired
Properties, an increase of $3.6 million, or 75.2 percent, due to the RM
Properties, offset by a decrease of $0.1 million, or 2.2 percent,
attributable to the Pre-Acquisition Properties. General and administrative
expense increased $2.3 million, or 168.1 percent, of which $0.7 million, or
49.5 percent, is attributable to additional costs related to the RM
Properties and $1.6 million, or 118.6 percent, is due primarily to an
increase in payroll and related costs as a result of the Company's expansion
in late 1996 and early 1997. Depreciation and amortization increased $5.9
million, or 169.2 percent, for 1997 over 1996, of which $2.9 million, or 84.2
percent, relates to depreciation on the Acquired Properties, an increase of
$2.8 million, or 79.9 percent, attributable to the RM Properties, and an
increase of $0.2 million, or 5.1 percent, due to the Pre-Acquisition
Properties. Interest expense increased $7.7 million, or 256.6 percent, for
1997 over 1996, of which $3.3 million, or 110.9 percent, was attributable to
the TIAA Mortgage, $2.7 million, or 90.9 percent, due to the Harborside
Mortgages, and an increase of $3.7 million, or 121.5 percent, due to net
additional drawings from the Company's credit facilities as a result of
Company acquisitions, as well as changes in LIBOR, offset by a decrease of
$2.0 million, or 66.7 percent, due to the August 1997 prepayment of the
Mortgage Financing.
23
Income before gain on sale of rental property, minority interest, and
extraordinary items increased to $20.0 million in 1997 from $7.7 million in
1996. The increase of $12.3 million was due to the factors discussed above.
Net income increased $7.8 million for the three months ended September 30,
1997 from $6.6 million in 1996 to $14.4 million in 1997, as a result of the
increase in income before gain on sale of rental property, minority interest
and extraordinary items of $12.3 million, offset by the recognition in 1997
of an extraordinary loss of $3.6 million (net of minority interest), and an
increase in minority interest of $0.9 million in 1997 from 1996.
Nine Months Ended September 30, 1997 Compared to
Nine Months Ended September 30, 1996
Total revenues increased $112.2 million, or 177.8 percent, for the nine
months ended September 30, 1997 over the same period in 1996. Base rents
increased $93.6 million, or 181.0 percent, of which an increase of $50.5
million, or 97.6 percent, was attributable to the Acquired Properties, an
increase of $42.3 million, or 81.9 percent, due to the RM Properties, and an
increase of $1.1 million, or 2.0 percent, due to occupancy changes at the
Pre-Acquisition Properties, offset by a decrease of $0.3 million or 0.5
percent, as a result of the Disposition. Escalations and recoveries increased
$12.8 million, or 132.9 percent, of which an increase of $9.0 million, or
93.5 percent, was attributable to the Acquired Properties, an increase of
$3.4 million, or 35.2 percent, due to the RM Properties, and an increase of
$0.4 million, or 4.2 percent, due to occupancy changes at the Pre-Acquisition
Properties.
Total expenses for the nine months ended September 30, 1997 increased $74.6
million, or 174.9 percent, as compared to the same period in 1996. Real
estate taxes increased $12.2 million, or 191.9 percent, for 1997 over 1996,
of which an increase of $5.3 million, or 83.8 percent, was attributable to
the Acquired Properties, an increase of $6.6 million, or 103.8 percent, due
to the RM Properties, and an increase of $0.4 million, or 5.1 percent,
attributable to the Pre-Acquisition Properties, offset by a decrease of $0.1
million, or 0.8 percent, as a result of the Disposition. Additionally,
operating services increased $13.1 million, or 164.8 percent, and utilities
increased $7.0 million, or 118.0 percent, for 1997 over 1996. The aggregate
increase in operating services and utilities of $20.1 million, or 144.7
percent, consists of $11.4 million, or 81.9 percent, attributable to the
Acquired Properties, and an increase of $9.4 million, or 67.6 percent, due to
the RM Properties, offset by a decrease of $0.2 million, or 1.2 percent, as a
result of the Disposition, and a decrease of $0.5 million, or 3.6 percent,
attributable to the Pre-Acquisition Properties. General and administrative
expense increased $7.2 million, or 209.3 percent, of which $1.9 million, or
55.0 percent, is attributable to additional costs related to the RM
Properties and $5.3 million, or 154.3 percent, due primarily to an increase
in payroll and related costs as a result of the Company's expansion in late
1996 and early 1997. Depreciation and amortization increased $15.8 million,
or 160.2 percent, for 1997 over 1996, of which $8.2 million, or 83.6 percent,
relates to depreciation on the Acquired Properties, an increase of $7.2
million, or 72.7 percent, attributable to the RM Properties, and an increase
of $0.5 million, or 4.7 percent, due to the Pre-Acquisition Properties,
offset by a decrease of $0.1 million, or 0.8 percent, related to the
Disposition. Interest expense increased $19.3 million, or 212.3 percent, for
1997 over 1996, of which $8.8 million, or 97.5 percent, was attributable to
the TIAA Mortgage, $8.2 million, or 89.7 percent, due to the Harborside
Mortgages, and an increase of $4.5 million, or 48.8 percent, due to net
additional drawings from the Company's credit facilities as a result of
Company acquisitions as well as changes in LIBOR, offset by a decrease of
$0.1 million, or 0.6 percent, related to the March 1996 partial prepayment of
the Mortgage Financing, and a decrease of $2.1 million, or 23.1 percent, due
to the August 1997 prepayment of the Mortgage Financing.
Income before gain on sale of rental property, minority interest, and
extraordinary items increased to $58.1 million in 1997 from $20.5 million in
1996. The increase of $37.6 million was due to the factors discussed above.
Net income increased $27.1 million for the nine months ended September 30,
1997 from $21.8 million in 1996 to $48.9 million in 1997, as a result of the
increase in income before gain on sale of rental property, minority interest
and extraordinary items of $37.6 million and the recognition in 1996 of an
extraordinary loss of $0.5 million (net of minority interest), offset by the
recognition in 1997 of an extraordinary loss of $3.6 million (net of minority
interest), the gain on sale of rental property of $5.7 million recognized in
1996, and an increase in minority interest of $1.7 million in 1997 over 1996.
24
Liquidity and Capital Resources
Statement of Cash Flows
During the nine months ended September 30, 1997, the Company generated $82.9
million in cash flows from operating activities, and together with $410.1
million in borrowings from the Company's credit facilities, $2.7 million of
proceeds from stock options exercised, $201.4 million from the Company's cash
reserves, and $2.8 million from restricted cash, used an aggregate of $699.9
million to (i) purchase 75 rental properties and other tenant improvements
and building improvements for $357.0 million, (ii) pay $11.6 million for a
Mortgage Note Receivable, (iii) pay quarterly dividends and distributions of
$54.1 million, (iv) pay the amortization on mortgage principal of $0.3
million, (v) repay outstanding borrowings on its credit facilities by $270.4
million, (vi) repurchase 152,000 shares of the Company's common stock for
$4.7 million, and (vii) pay debt prepayment and other costs of $1.8 million.
Capitalization
On January 23, 1996, the Company entered into an interest rate swap agreement
with a commercial bank. The swap agreement has a three-year term and a
notional amount of $26 million, which fixes the Company's one-month LIBOR
base to 5.265 percent.
On February 1, 1996, the Company obtained a credit facility (the "Bank
Facility") secured by certain of its properties in the amount of $75 million
from two participating banks. The Bank Facility had a three-year term and
bore interest at 150 basis points over one-month LIBOR. The terms of the
Bank Facility included certain restrictions and covenants which limited, among
other things, dividend payments and additional indebtedness and which required
compliance with specified financial ratios and other financial measurements.
The Bank Facility also required a fee equal to one quarter of one percent of
the unused balance payable quarterly in arrears. In conjunction with
obtaining the Unsecured Facility, the Company repaid in full and terminated
the Bank Facility on August 7, 1997.
On July 29, 1996, the Company filed a shelf registration statement (File No.
333-09081) with the Securities and Exchanges Commission ("SEC") for an
aggregate amount of $500 million in equity securities of the Company. The
registration statement was declared effective by the SEC on August 2, 1996.
On August 13, 1996, the Company sold 3,450,000 shares of its common stock
through a public stock offering (the "August 1996 Offering"), which included
an exercise of the underwriters' over-allotment option of 450,000 shares.
Net proceeds from the August 1996 Offering (after offering costs) were
approximately $76.8 million. The offering was conducted using one
underwriter and the shares were issued from the Company's $250 million shelf
registration statement (File No. 33-96538).
On November 4, 1996, the Company obtained a revolving credit facility
("Second Prudential Facility") from PSC totaling $80 million which bears
interest at 125 basis points over one-month LIBOR, and matures on January 15,
1998. The Second Prudential Facility is a recourse liability of the
Operating Partnership and is secured by the Company's equity interest in
Harborside. The terms of the Second Prudential Facility include certain
restrictions and covenants that limit, among other things, dividend payments
and additional indebtedness and that require compliance with specified
financial ratios and other financial measurements. On August 7, 1997, the
Company repaid in full the outstanding balance under the Second Prudential
Facility with funds drawn from the Unsecured Facility. Additionally, on
August 12, 1997, the Second Prudential Facility was amended increasing the
total commitment from $80 million to $100 million and extending the maturity
date to August 31, 1998.
In addition, on November 4, 1996, the Company assumed existing debt and was
provided seller-financed mortgage debt aggregating $150 million (as more
fully described in Note 6).
Pursuant to the Company's $500 million shelf registration statement (File No.
333-09081), on November 22, 1996, the Company completed an underwritten
public offer and sale of 17,537,500 shares of its common stock using several
different underwriters to underwrite such public offer and sale (which
included an exercise of the underwriters' over-allotment option of 2,287,500
shares). The Company received approximately $441.2 million in net proceeds
(after offering costs) from the offering, and used such funds to acquire
certain of the Company's property acquisitions in
25
November and December 1996, pay down outstanding borrowings on its revolving
credit facilities, and investing the excess funds in Overnight Investments.
On December 31, 1996, the Company filed a shelf registration statement with
the SEC for an aggregate amount of $1 billion in equity securities of the
Company. The registration statement was declared effective by the SEC on
January 7, 1997.
On May 15, 1997, the stockholders approved an increase in the authorized
shares of common stock in the Company from 95 million to 190 million.
In connection with the RM Transaction on January 31, 1997, the Company
assumed a $185.3 million non-recourse mortgage loan with TIAA (as more fully
described in Note 6).
From April 18, 1997 through April 24, 1997, the Company purchased, for
constructive retirement, 152,000 shares of its outstanding common stock for
$4.7 million. Concurrent with this purchase, the Company sold to the
Operating Partnership 152,000 Units for $4.7 million.
On August 6, 1997, the Company obtained an unsecured revolving credit
facility (the "Unsecured Facility") in the amount of $400 million from a
group of 13 lender banks. The Unsecured Facility has a three-year term and
currently bears interest at 125 basis over one-month LIBOR. Based upon the
Company's achievement of an investment grade long-term unsecured debt rating,
the interest rate will be reduced, on a sliding scale, and a competitive bid
option will become available.
The lending group for the Unsecured Facility includes: Fleet National Bank,
The Chase Manhattan Bank, and Bankers Trust Company, as agents; PNC Bank,
N.A., Bank of America National Trust and Savings Association, Commerzbank,
and First National Bank of Chicago, as co-agents; and Keybank, Summit Bank,
Crestar Bank, Mellon Bank, N.A., Signet Bank, and Kredeitbank NV.
In conjunction with the Company obtaining the Unsecured Facility, the Company
drew funds on the new facility to repay in full and terminate both the First
Prudential Facility and the Bank Facility. The Company drew an additional
$70 million to repay in full the outstanding balance under the Second
Prudential Facility. As of August 12, 1997, the Company's two remaining
revolving credit facilities consist of the Unsecured Facility and the Second
Prudential Facility.
On August 12, 1997, the Company prepaid in full and retired the secured
Mortgage Financing from funds made available primarily from drawing on the
Unsecured Facility.
Following this secured debt prepayment, the Company has four secured mortgage
debt instruments remaining; the $185.3 million TIAA Mortgage, the two
mortgages comprising the $150 million in Harborside Mortgages, and the $18.2
million Fair Lawn Mortgage.
As of October 31, 1997, the Company has 85 unencumbered properties totaling
7.2 million square feet, representing 58 percent of the Company's portfolio.
On September 18, 1997, the Company entered into a Contribution and Exchange
Agreement (the "Agreement") with certain contributing partnerships and other
entities affiliated with The Mack Company and Patriot American Office Group
(collectively, "The Mack Group"). The Agreement provides for, among other
things, the Company to acquire 54 office properties, aggregating
approximately 9.2 million square feet, (the "Mack Properties") for a total
cost of approximately $1.2 billion. According to terms of the Agreement, the
cost of the transaction (the "Mack Transaction") will be financed through:
(i) the assumption of an aggregate of $299.7 million in mortgage financing
(the "Mack Assumed Debt"); (ii) approximately $469.0 million in cash (using
excess proceeds from its October 1997 common stock offering, see Note 11, as
well as drawing on the Company's revolving credit facilities); (iii) the
issuance of 3,972,318 Common Units in the Operating Partnership, a portion of
which may be Contingent Units; (iv)
26
the issuance of 250,256 Preferred Units in the Operating Partnership
convertible into Common Units; and (v) the issuance of two million Warrants
to purchase Common Units.
Pursuant to the Company's $1 billion shelf registration statement, on October
15, 1997, the Company completed an underwritten public offer and sale of 13
million shares of its common stock using several different underwriters to
underwrite such public offer and sale. The Company received approximately
$489 million in net proceeds (after offering costs) from the offering, the
Company used $160 million of such proceeds to repay outstanding borrowings on
its Unsecured Facility, while the Company anticipates using the remainder of
the proceeds to fund a portion of the purchase price of the Mack Transaction,
for other potential acquisitions, and for general corporate purposes.
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 borrowings under its
credit facilities and other debt and equity financing.
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 Second Prudential Facility and the Unsecured 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 operating activities, long-term or
short term borrowings (including draws on the Company's credit facilities)
and the issuance of debt securities or additional equity securities. In
addition, the Company anticipates utilizing the Second Prudential Facility
and the Unsecured Facility primarily to fund property acquisition activities.
The Company does not intend to reserve funds to retire the existing TIAA
Mortgage and Harborside Mortgages, 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 distribution
discussed below may be adversely affected.
To maintain its qualification as a REIT, 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 continue to make regular quarterly
distributions to its stockholders which, based upon current policy, in the
aggregate would equal approximately $99.3 million on an annualized 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
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.
27
Funds from Operations for the three and nine month periods ended September
30, 1997 and 1996, 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 Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
------- ------- ------- -------
Income before gain on sale of
rental property, minority
interest, and extraordinary item $19,973 $ 7,644 $58,105 $20,465
Add: Real estate-related
depreciation and amortization 9,327 3,456 25,592 9,811
------- ------- ------- -------
Funds from Operations 29,300 11,100 83,697 30,276
Deduct: Rental income adjustment
for straight-lining of rents (1,969) (29) (5,913) (233)
------- ------- ------- -------
Funds from Operations after
adjustment for straight-lining
of rents $27,331 $11,071 $77,784 $30,043
------- ------- ------- -------
------- ------- ------- -------
Weighted average shares
outstanding(1) 40,547 19,744 40,406 18,519
------- ------- ------- -------
(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.
28
CALI REALTY CORPORATION
Part II -- Other Information
Item 6 - Exhibits
The following exhibit is filed herewith:
Exhibit 10.99 Purchase and Sale Agreement between Shelton Place Limited
Partnership, as Seller, and Cali Realty Acquisition
Corporation, as Purchaser, dated July 23, 1997.
Exhibit 27 Financial Data Schedule
29
CALI REALTY CORPORATION
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)
Date: November 7, 1997 /s/ Thomas A. Rizk
-------------------------------
Thomas A. Rizk
President and Chief Executive Officer
(signing on behalf of the Registrant)
Date: November 7, 1997 /s/ Barry Lefkowitz
-------------------------------
Barry Lefkowitz
Chief Financial Officer
30