(Dollars in thousands, except per share amounts)
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 December 31, 1996, the Company owned and operated 57 properties, consisting of 56 office and office/flex buildings totaling approximately 7.1 million square feet and a multi-family residential property (the "Properties"). 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 ("IPO") 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 the IPO issuing 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. In connection with the business combination, the Operating Partnership assumed net liabilities of $26,133. 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 12 office buildings and one multi-family residential property, all located in New Jersey (the "Original Properties").
Acquisitions
In 1994 and 1995, following the Company's IPO, the Company acquired 28 office and office/flex properties totaling 1.7 million square feet for approximately $157,481. These properties are all located in New Jersey, except for one, which is located in Rockland County, New York.
On March 20, 1996, the Company sold its office building located at 15 Essex Road in Paramus, Bergen County, New Jersey ("Essex Road") and concurrently acquired a 96,000 square foot office building at 103 Carnegie Center in Princeton, Mercer County, New Jersey. The concurrent transactions with unrelated parties 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 year ended December 31, 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 (see Note 5) and obtained a release of the mortgage liens on the property. On account of prepayment penalties, write-offs of loan origination fees and costs, 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)), is recorded for the year ended December 31, 1996.
On May 2, 1996, the Company acquired Rose Tree Corporate Center, a two-building suburban office complex totaling 260,000 square feet, located in Media, Delaware County, Pennsylvania, for approximately $28,100, which was drawn from one of the Company's credit facilities.
On July 23, 1996, the Company acquired 222 and 233 Mount Airy Road, two suburban office buildings totaling 115,000 square feet, located in Basking Ridge, Somerset County, New Jersey, for approximately $10,478, which was drawn from one of the Company's credit facilities.
On November 4, 1996, the Company acquired the property known as the Harborside Financial Center ("Harborside"), a 1.9 million square foot office complex located in Jersey City, Hudson County, New Jersey for approximately $292,670. The acquisition cost included the assumption of existing and seller-provided mortgage financing aggregating $150,000 (see Note 5). The balance of the cost was paid in cash and was financed substantially through drawings from the Company's credit facilities. As part of the purchase, the Company also acquired 11.3 acres of land fully zoned and permitted for an additional 4.1 million square feet of development and the water rights associated with 27.4 acres of land extending into the Hudson River immediately east of Harborside, including two piers with an area of 5.8 acres.
On November 7, 1996, the Company acquired Five Sentry Parkway East & West, a two-building office complex comprised of approximately 130,000 square feet located in Plymouth Meeting, Montgomery County, Pennsylvania for approximately $12,484, which was drawn from one of the Company's credit facilities.
On December 10, 1996, the Company acquired 300 Tice Boulevard, a 230,000 square foot office building located in Woodcliff Lake, Bergen County, New Jersey, for approximately $35,112 in cash, made available from the net proceeds received from the Company's common stock offering in November 1996 (the "November 1996 Offering").
On December 16, 1996, the Company acquired One Bridge Plaza, a 200,000 square foot office building located in Fort Lee, Bergen County, New Jersey, for approximately $26,901 in cash, made available from the net proceeds received from the November 1996 Offering.
On December 17, 1996, the Company acquired the International Court at Airport Business Center, a three-building office complex comprised of approximately 371,000 square feet located in Lester, Delaware County, Pennsylvania for approximately $43,178 in cash, made available from the net proceeds received from the November 1996 Offering.
In December 1996, the Company completed the construction of two office/flex properties on vacant land purchased in the Company's Totowa, Passaic County, New Jersey office park acquired in November 1995. The two properties, which were 19 percent leased at December 31, 1996, aggregate 47,100 square feet, and were completed for a total cost of $2,714.
On January 28, 1997, the Company acquired 1345 Campus Parkway, a 76,000 square foot office/flex property, located in Wall Township, Monmouth County, New Jersey, for approximately $6,800 in cash, made available from the net proceeds received from the November 1996 Offering. 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 (the "RM Properties") of the Robert Martin Company LLC and affiliates ("RM"), for a total cost of approximately $450,000. The cost of the transaction was financed through the assumption of $185,283 mortgage indebtedness, 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.
The Company provided an $11,600 non-recourse mortgage loan ("Mortgage Receivable") 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 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 in connection with the Mortgage Receivable.
In connection with the RM transaction, RM has made certain customary representations and warranties to the Company, most of which survive the closing for a period of one year. RM has agreed to maintain a minimum net worth of $25,000 during such period.
As part of the RM transaction, Brad W. Berger, President and Chief Executive Officer of RM, and Timothy M. Jones, Chief Operating Officer of RM, joined the Company as Executive Vice- Presidents under three year employment agreements. The agreements provide for, among other things, both Berger and Jones to 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.
Robert F. Weinberg, co-founder of RM, and Berger will serve on the Company's Board of Directors for an initial term of three years. The Company intends to appoint two additional independent Board members, thereby increasing the size of the Board from nine to thirteen members.
Following the transaction, the Company's portfolio consists of 123 properties, aggregating 11.4 million square feet of office, office/flex and industrial/warehouse properties, located in New Jersey, New York, Pennsylvania and Connecticut.
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 management services in which the Operating Partnership has a 99 percent interest) is accounted for under the equity method.
The accompanying combined statements of operations, cash flows, and partners' deficit of the Cali Group include all the operations of the entities comprising the Cali Group and are presented on a combined basis because of common management and because all of the entities became wholly-owned by the Operating Partnership and the Company.
Certain other properties affiliated with the Cali Group have been excluded from the statements as they were not included in the business combination described above.
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 improvement 39 to 40 years ________________________________________________________________________ Tenant improvements The shorter of the term of the related lease or useful life ________________________________________________________________________ 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 - 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 were $1,081, $1,456, $445 and $361 for the years ended December 31, 1996 and 1995, and the periods August 31, 1994 to December 31, 1994 and January 1, 1994 to August 30, 1994, 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.
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 counterparty will default and the collateral will decline in market value. The Overnight Investments 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.
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. Taxes were not provided for in the Cali Group combined financial statements because the entities that comprised the Cali Group were partnerships and any taxable income or loss was included in the income tax returns of the individual partners.
Net Income Per Share - Net income per share is computed using the weighted average common shares outstanding during the period. 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 December 31, 1996 represent dividends payable to shareholders of record on January 6, 1997 (36,318,937 shares) and distributions payable to minority interest unitholders (2,689,945 Units) on that same date. The fourth quarter dividends and distributions of $0.45 per share and per Unit were approved by the Board of Directors on December 19, 1996 and were paid on January 21, 1997. All dividends paid and declared during the year ended December 31, 1996 are considered ordinary income to the Company's shareholders for federal income tax purposes. The status of such dividend is subject to final determination by the Internal Revenue Service.
Extraordinary Items - The extraordinary items represent the net effects resulting from the early settlement of certain mortgage obligations, including accrued interest, net of write-offs of related deferred financing costs and prepayment penalties.
Participation Agreement Settlement - In connection with its original ten-year lease entered into in 1988, a tenant was granted a rent concession in the form of a residual share, as defined, of the proceeds of any sale or refinancing of the property during the tenants' lease term. In connection with the IPO, the tenant was paid $1,135 in settlement of this participation agreement, of which $653 was expensed during the period ended August 30, 1994 and the balance of $482 is being amortized over the remaining term of the original ten-year term of the lease.
Underwriting Commissions and Offering Costs - Underwriting commissions and offering costs incurred in connection with the Company's common stock offerings have been 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 market price of the Company's stock on the grant date. Accordingly, no compensation cost has been recognized for the Company's stock option plans. The Company provides additional pro forma disclosures as required under Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation." (See Note 8.)
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:
December 31, 1996 1995 ___________________________________________________________ Escrow and other reserve funds $2,814 $2,901 Residential security deposits 346 328 Total restricted cash $3,160 $3,229 ===========================================================
4. DEFERRED CHARGES AND OTHER ASSETS
December 31, 1996 1995 ___________________________________________________________ Deferred leasing costs $14,031 $13,498 Deferred financing costs 5,390 5,778 ___________________________________________________________ 19,421 19,276 Accumulated amortization (8,994) (9,035) ___________________________________________________________ Deferred charges, net 10,427 10,241 Prepaid expenses & other assets 1,413 632 ___________________________________________________________ Total deferred charges & other assets $11,840 $10,873 ===========================================================
5. MORTGAGES AND LOANS PAYABLE
December 31, 1996 1995 ___________________________________________________________ Harborside Mortgages $150,000 $ - Mortgage Financing 64,508 70,000 Fair Lawn Mortgage 18,445 18,764 First Prudential Facility 6,000 46,700 Bank Facility 23,805 - Contingent Obligation 5,252 - Total mortgages and loans payable $ 268,01 $135,464 ===========================================================
Harborside Mortgages
In connection with the acquisition of Harborside, on November 4, 1996, the Company assumed existing mortgage debt and was provided seller-mortgage debt aggregating $150,000. The existing financing of approximately $107,480 bears interest at a fixed rate of 7.32 percent for a term of approximately nine years. The seller-provided financing of approximately $42,520 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 Original Properties, issued five-year mortgage notes with an aggregate principal balance of $144,500 secured and cross-collateralized by the Original 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 Cali Group partnerships which owned the Original 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 one-month LIBOR (5.53 percent at December 31, 1996) with a lifetime interest rate cap of 11.6 percent. 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.
In advance of the sale of Essex Road, 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.
Fair Lawn Mortgage
In connection with the acquisition of an office building in Fair Lawn, Bergen County, New Jersey on March 3, 1995, the Company assumed an $18,764 non-recourse mortgage loan ("Fair Lawn Mortgage") 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 year ended December 31, 1996, the Company has paid $319 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 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 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 is a recourse liability of the Operating Partnership and is secured by a pledge of the $74,500 Bonds held by the Company. The First Prudential Facility requires monthly payments of interest only, with outstanding advances and any accrued but unpaid interest due November 30, 1997 and is subject to renewal at the lender's sole discretion. Subsequent to December 31, 1996 and through February 18, 1997, the Company did not draw any additional funds from the First Prudential Facility.
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 has a three-year term and bears 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 requires a fee equal to one quarter of one percent of the unused balance payable quarterly in arrears. Subsequent to December 31, 1996 and through February 18, 1997, the Company had additional net borrowings of $41,195 from the Bank Facility, used for the cash portion of the financing for the RM transaction on January 31, 1997.
Contingent Obligation
As part of the Harborside acquisition, the Company agreed to make payments (with an estimated net present value of approximately $5,252) 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.
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, unless the Company or PSC elects to extend the maturity date to not earlier than June 30, 1998, or the facility is refinanced prior to such date at the election of either the Company or PSC. 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. Subsequent to December 31, 1996 and through February 18, 1997, the Company did not draw any additional funds from the Second Prudential Facility.
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 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 public 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.
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 the Bank 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 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.
Scheduled Principal Payments and Interest Paid
Scheduled principal payments on the mortgages and loans payable, as of December 31, 1996, are as follows:
Year Amount __________________________ 1997 $ 6,412 1998 448 1999 88,799 2000 527 2001 573 Thereafter 171,251 __________________________ Total $268,010 ==========================
Cash paid for interest for the years ended December 31, 1996 and 1995, and the periods from August 31, 1994 to December 31, 1994 and from January 1, 1994 to August 30, 1994 was $12,096, $8,322, $1,504, and $15,977, respectively. Additionally, interest capitalized by the Company for the years ended December 31, 1996 and 1995 was $118 and $27, respectively, while no interest was capitalized during the periods August 31, 1994 to December 31, 1994 and January 1, 1994 to August 30, 1994 .
6. MINORITY INTEREST
Certain individuals and entities contributing interests to the Operating Partnership received 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.
Units are able to be redeemed 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. During the year ended December 31, 1996, 100,671 Units were redeemed for common stock of the Company. As of December 31, 1996, the minority interest unitholders owned 6.9 percent of the Operating Partnership.
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 years ended December 31, 1996 and 1995, such fees, which are capitalized and amortized, approximated $490 and $575, respectively.
The Cali Group
Prior to the IPO, Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ") was an affiliate of a 20 percent limited partner of one property partnership. Total rental income, including escalations and recoveries, from DLJ for the period January 1, 1994 to August 30, 1994 approximated $6,472.
Prior to the IPO, two limited partners in the Roseland II Limited Partnership were tenants occupying, in the aggregate, 21 percent of the property. Total rental income, including escalations and recoveries, from these tenants for the period January 1, 1994 to August 30, 1994 approximated $578.
The Cali Group provided administrative services to certain properties not included in the accompanying combined financial statements and earned fees of $108 for such services for the period January 1, 1994 to August 30, 1994.
Certain Cali Group employees provided leasing services to the Original Properties and received fees as additional compensation ranging from .667 percent to 2.667 percent of adjusted rents. For the period January 1, 1994 to August 30, 1994 such fees, which are capitalized and amortized, approximated $108.
8. STOCK OPTION AND EXECUTIVE COMPENSATION PLANS
Stock Option Plans
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 ("Director 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 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 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 a term of ten years.
Information regarding the Company's stock option plans is summarized below:
Employee Director Shares under option: Plan Plan ________________________________________________________________________ Granted on August 31, 1994 at $17.25 per share 600,000 20,000 Granted at $15.25 per share - 5,000 ________________________________________________________________________ Outstanding at December 31, 1994 600,000 25,000 Granted at $17.25 per share 181,200 10,000 Granted at $19.875 per share 39,000 - Less - Lapsed or canceled (3,588) - ________________________________________________________________________ Outstanding at December 31, 1995 816,612 35,000 $15.25 $19.875 per share Granted at $21.50 per share 361,750 14,000 Granted at $25.25 per share 58,950 - Granted at $26.25 per share 375,000 - Less - Lapsed or canceled (7,164) - Exercised at $17.25 per share (116,041) (10,000) ________________________________________________________________________ Outstanding at December 31, 1996 1,489,107 39,000 $15.25 $26.25 per share Exercisable at December 31, 1996 509,710 25,000 Available for grant at December 31, 1995 463,576 15,000 Available for grant at December 31, 1996 175,040 51,000 ========================================================================
The weighted-average fair value of options granted during 1996 and 1995 were $2.41 and $1.28 per option, respectively. The fair value of each significant option grant is estimated on the date of grant using the Black-Scholes model. The following weighted average assumptions are included in the Company's fair value calculations:
1996 1995 _____________________________________________________ Expected life (years) 6 6 Risk-free interest rate 6.11% 6.58% Volatility 19.14% 1.41% Dividend yield 7.58% 10.20% =====================================================
Under the above models, the value of stock options granted under the Employee Plan and Director Plan during 1996 and 1995 totaled approximately $1,955 and $294, respectively, which would be amortized ratably on a pro forma basis over the appropriate vesting period. Had the Company determined compensation cost for these plans in accordance with SFAS No. 123, the Company's pro forma net income and earnings per share would have been $31,980 and $1.73 in 1996 and $13,553 and $1.22 in 1995. The SFAS No. 123 method of accounting does not apply to options granted prior to January 1, 1995 and accordingly, the resulting pro forma compensation cost may not be representative of that to be expected in the future.
Executive Compensation Plans
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. Pursuant to the terms of the Stock Purchase Rights, the Company provided fixed rate, non-prepayable loans 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.
9. 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.
10. DISCLOSURE OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value was determined by management using available market information and appropriate valuation methodologies. However, considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize on disposition of the financial instruments at December 31, 1996 and 1995. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.
Cash equivalents, receivables, accounts payable, and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values.
Mortgages and loans payable have an aggregate carrying value of $268,010 and $135,464 at December 31, 1996 and 1995, respectively, which approximates their estimated aggregate fair value (excluding prepayment penalties) based upon then current interest rates for debt with similar terms and remaining maturities.
The estimated net gain on settling the Company's interest rate swap agreements, at December 31, 1996, based on quoted market prices of comparable swaps, was $140.
Disclosure about fair value financial instruments is based on pertinent information available to management as of December 31, 1996 and 1995. Although management is not aware of any factors that would significantly affect the fair value amounts, such amounts have not been comprehensively revalued for purposes of these financial statements since December 31, 1996 and current estimates of fair value may differ significantly from the amounts presented herein.
11. COMMITMENTS AND CONTINGENCIES
Tax Abatement Agreements
Grove Street Property:
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 at 95 Christopher Columbus Drive, Jersey City. Such PILOT is determined based on the greater of two 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.
Harborside Financial Center Property:
Tax abatements for Harborside were obtained in 1988 by the former owner of the property of the City of Jersey City and were assumed by the Company as part of the acquisition of Harborside on November 4, 1996. The abatements, 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 increase by $75 per annum through year fifteen. Total Project Costs, as defined, are $148,712. The service charges for the remaining undeveloped parcels will be equal to two percent of Total Project Costs for each unit in year one and increase to three percent by year fifteen.
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.
At December 31, 1995, DLJ leased approximately 55 percent of the space in the Company's 95 Christopher Columbus Drive, Jersey City, Hudson County, 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, was $11,498, $10,352 and $3,324 for the years ended December 31, 1996 and 1995 and the period ended December 31, 1994, respectively. At December 31, 1996 and 1995, unbilled rents receivable included $12,862 and $12,164, respectively, from DLJ.
Future minimum rentals to be received under noncancelable operating leases at December 31, 1996 are as follows:
Year Amount _________________________________ 1997 $117,705 1998 107,399 1999 94,462 2000 76,575 2001 59,081 _________________________________ Thereafter 285,198 _________________________________ Total $740,420 =================================
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 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.
During 1995, the Company completed a public offering of 4,600,000 shares of common stock and received net proceeds of $83,594. Additionally in 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 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 (File No. 333-09081) with the Securities and Exchanges Commission ("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 Registration Statement on Form S-3 (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 $441,215 in net proceeds (after offering costs) from the November 1996 Offering, and used such funds to acquire certain of the Company's property acquisitions in November and December, pay down outstanding borrowings on its revolving credit facilities, and invested the excess funds in Overnight Investments.
On December 31, 1996, the Company filed a shelf registration statement (File No. 333-19101) 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.
14. CONDENSED QUARTERLY FINANCIAL INFORMATION (Unaudited)
The following summarizes the condensed quarterly financial information for the Company:
Quarter Ended 1996 _____________________________________________________________ December 31, September 30, June 30, March 31, _________________________________________________________________________________________________________________ Revenues $32,370 $22,518 $21,013 $19,571 Operating and other expenses 9,404 7,035 6,579 6,644 General and administrative 2,365 1,371 1,128 936 Depreciation and amortization 5,157 3,747 3,614 3,294 Interest expense 4,388 2,721 2,999 2,569 _________________________________________________________________________________________________________________ Income before gain on sale of rental property, minority interest and extraordinary item 11,056 7,644 6,693 6,128 Gain on sale of rental property - - - 5,658 _________________________________________________________________________________________________________________ Income before minority interest and extraordinary item 11,056 7,644 6,693 11,786 Minority interest 894 1,045 1,009 1,812 _________________________________________________________________________________________________________________ Income before extraordinary item 10,162 6,599 5,684 9,974 Extraordinary item - loss on early retirement debt (net of minority interest's share of $86) - - - 475 _________________________________________________________________________________________________________________ Net income $10,162 $ 6,599 $ 5,684 $ 9,499 ================================================================================================================= Net income per common share: Income before extraordinary item - loss on early retirement of debt $0.34 $0.39 $0.37 $ 0.66 Extraordinary item - loss on early retirement of debt - - - (0.03) _________________________________________________________________________________________________________________ Net income per common share $0.34 $0.39 $0.37 $ 0.63 _________________________________________________________________________________________________________________ Dividends declared per common share $0.45 $0.45 $0.43 $ 0.43 ================================================================================================================= Quarter Ended 1995 _____________________________________________________________ December 31, September 30, June 30, March 31, _________________________________________________________________________________________________________________ Revenues $17,535 $15,777 $15,151 $13,872 Operating and other expenses 5,911 5,381 4,872 4,541 General and administrative 922 856 1,001 933 Depreciation and amortization 3,175 3,009 3,095 2,832 Interest expense 2,500 2,347 2,173 1,641 _________________________________________________________________________________________________________________ Income before minority interest 5,027 4,184 4,010 3,925 Minority interest 888 911 873 836 _________________________________________________________________________________________________________________ Net income $4,139 $ 3,273 $ 3,137 $ 3,089 _________________________________________________________________________________________________________________ Net income per common share $0.31 $0.31 $0.30 $ 0.29 _________________________________________________________________________________________________________________ Dividends declared per common share $0.43 $0.43 $0.40 $ 0.40 =================================================================================================================
15. PRO FORMA FINANCIAL INFORMATION (Unaudited)
The following unaudited pro forma financial information for the years ended December 31, 1996 and 1995 are presented as if the acquisitions and common stock offerings which occurred during 1996 and 1995 had occurred on January 1, 1995. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made.
This unaudited 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 the beginning of the respective periods, nor do they represent the results of operations of future periods.
Year Ended December 31, 1996 1995 ________________________________________________________________ Revenues $153,619 $145,982 Operating and other expenses 44,571 42,424 General and administrative 8,820 7,862 Depreciation and amortization 23,945 23,778 Interest expense 19,300 19,924 Income before minority interest 56,983 51,994 Minority interest 5,043 4,742 Net income $ 51,940 $ 47,252 ________________________________________________________________ Net income per common share $1.86 $1.70 ================================================================
The following unaudited pro forma financial information for the year ended December 31, 1996 is presented as if the acquisitions and common stock offerings which occurred during 1996 and the January 1997 Robert Martin transaction had occurred on January 1, 1996. In management's opinion, all adjustments necessary to reflect the effects of these transactions have been made.
This unaudited 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 the beginning of the year, nor do they represent the results of operations of future periods.
Year Ended December 31, 1996 _________________________________________________________ Revenues $226,578 Operating and other expenses 69,260 General and administrative 12,817 Depreciation and amortization 34,070 Interest expense 34,264 Income before minority interest 76,167 Minority interest 7,769 Net income $ 68,398 _________________________________________________________ Net income per common share $ 1.89