FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
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 0-21849
METROPOLIS REALTY TRUST, INC.
.............................
(Exact name of registrant as specified in its charter)
MARYLAND 13-3910684
............................. ............................
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
c/o Victor Capital Group, L.P.
605 Third Avenue
26th Floor
New York, New York 10016
..................................................
(Address of principal executive offices)
(Zip Code)
(212) 655-0220
..................................................
(Registrant's telephone number, including area code)
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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
The Common Stock is not listed on any exchange, the Company does not intend to
list the Common Stock on any exchange in the near term, there is not currently a
public market for the Common Stock and there can be no assurance that an active
trading market for the Common Stock will develop or be sustained.
<PAGE>
As of October 27, 1999, there were issued and outstanding 8,034,586 shares of
the Company's Class A Common Stock, par value $10.00 per share and 4,936,060
shares of the Company's Class B Common Stock, par value $10.00 per share.
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995, which
involve certain risks and uncertainties. The Company's actual results or
outcomes may differ materially from those anticipated. Each forward-looking
statement that the Company believes is material is accompanied by a cautionary
statement or statements identifying important factors that could cause actual
results to differ materially from those described in the forward-looking
statement. The cautionary statements are set forth following the forward-looking
statement, and/or elsewhere in this Form 10-Q and the Company's other documents
filed with the Securities and Exchange Commission, whether or not such documents
are incorporated herein by reference. In assessing the forward-looking
statements contained in this Form 10-Q, readers are urged to read carefully all
cautionary statements.
ii
<PAGE>
METROPOLIS REALTY TRUST, INC.
INDEX
PAGE
PART I--FINANCIAL INFORMATION
ITEM 1. Financial Statements
The accompanying unaudited, interim financial statements
have been prepared in accordance with the instructions to
Form 10-Q. In the opinion of management, all adjustments
necessary for a fair presentation have been included.
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998 (audited) 1
Consolidated Statements of Income for the quarters and nine
months ended September 30, 1999 and 1998 (unaudited) 2
Consolidated Statements of Cash Flows for the quarters and
nine months ended September 30, 1999 and 1998 (unaudited) 3
Notes to Consolidated Financial Statements (unaudited) 4
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk 18
PART II--OTHER INFORMATION
ITEM 1. Legal Proceedings 18
ITEM 2. Changes in Securities 18
ITEM 3. Defaults Upon Senior Securities 19
ITEM 4. Submission of Matters to a Vote of Security Holders 19
ITEM 5. Other Information 19
ITEM 6. Exhibits and Reports on Form 8-K 19
SIGNATURES S-1
iii
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
METROPOLIS REALTY TRUST, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
September 30, 1999 December 31, 1998
(Unaudited) (Audited)
ASSETS
Rental property - net of accumulated depreciation of
$24,831 and $30,172, respectively $374,438 $651,003
Property held for sale 291,585 --
Cash and cash equivalents 43,100 25,358
Escrow deposits 7,996 3,084
Tenants' security deposits 580 644
Due from tenants - net of allowance for doubtful accounts
of $2,280 and $2,696, respectively 3,913 4,089
Deferred financing costs - net of amortization of
$6,653 and $4,863, respectively 4,423 6,062
Real estate tax refunds 3,175 3,175
Notes receivable - net of unamortized discount of
$29 and $187, respectively 8,326 9,307
Deferred rent receivable 41,416 39,831
Prepaid real estate taxes 7,228 14,138
Deferred leasing costs, net of accumulated amortization of
$2,261 and $538, respectively 11,742 10,628
Other assets 419 452
------------ -----------
TOTAL ASSETS $798,341 $767,771
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Secured notes $405,000 $410,625
Accounts payable and accrued expenses 13,284 11,927
Dividends payable 6,485 --
Tenants' security deposits and unearned revenue 1,668 3,292
--------- ---------
Total Liabilities 426,437 425,844
--------- ---------
Subordinated Minority Interest 14,855 14,855
--------- ---------
Stockholders' Equity
Common Stock - $10 par value
(Class A - 8,034,586 shares outstanding and
Class B - 4,936,060 shares outstanding) 129,706 129,706
Paid-in capital 175,844 175,844
Retained earnings 51,499 21,522
--------- ---------
Total Stockholders' Equity 357,049 327,072
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $798,341 $767,771
========= =========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(In thousands, except share amounts)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------------------- ------------------------------------
1999 1998 1999 1998
------------------- ---------------- --------------- ------------------
REVENUES:
<S> <C> <C> <C> <C>
Base rental income $31,040 $29,697 $86,152 $89,430
Escalation income 2,054 3,540 9,780 10,987
Lease termination income -- -- 25,855 --
Miscellaneous income 537 3,522 3,803 4,435
Interest income 703 863 2,290 2,325
--------- --------- --------- --------
Total revenues 34,334 37,622 127,880 107,177
--------- --------- ---------- ---------
OPERATING EXPENSES:
Real estate taxes 7,320 7,025 21,467 20,610
Operating and maintenance 2,093 1,437 5,493 5,210
Utilities 2,674 2,519 5,588 5,410
Payroll 1,124 1,074 3,350 3,259
General and administrative 773 2,598 1,429 3,375
Management fees 618 574 1,683 1,720
--------- -------- ---------- ---------
Total operating expenses 14,602 15,227 39,010 39,584
OTHER ITEMS:
Write off of note receivable (1,088) -- (1,088) --
Interest expense (8,245) (8,454) (24,689) (25,200)
Depreciation and amortization (4,867) (4,233) (13,662) (12,476)
--------- --------- ---------- ----------
Total other expenses (14,200) (12,687) (39,439) (37,676)
--------- --------- ---------- ----------
NET INCOME $5,532 $9,708 $49,431 $29,917
========= ========= ========== ==========
NET INCOME PER COMMON SHARE:
Net Income $0.43 $0.75 $3.81 $2.31
========== ========== ========== ==========
Weighted Average
Common Shares Outstanding 12,970,646 12,966,646 12,970,646 12,966,646
========== ========== ========== ==========
NET INCOME PER COMMON SHARE
(assuming dilution):
Net Income $0.43 $0.75 $3.80 $2.30
========== ========== =========== ==========
Weighted Average Common Shares
Outstanding (including 28,000 shares of
Common Stock issuable upon the exercise of
outstanding options as of September 30, 1999
and 1998) 12,998,646 12,991,646 12,998,646 12,991,646
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
Nine Months ended September 30,
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $49,431 $29,917
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,662 12,476
Amortization of discount - notes receivable (353) (405)
Write off of note receivable 1,088 --
Change in:
(Increase) in escrow deposits (4,912) (13,052)
Decrease/(Increase) in due from tenants 176 (477)
Decrease in prepaid expenses 6,910 --
(Increase) in deferred rent receivable (6,093) (10,225)
Increase/(Decrease) in accounts payable
and accrued expenses 1,357 (117)
(Decrease)/Increase in unearned revenue (1,624) 1,191
Decrease in real estate tax refunds -- 10,913
Decrease in tenant security deposits 64 --
(Increase)/Decrease in other assets (33) 6,772
-------- ------
Net cash provided by operating activities 59,673 36,993
-------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to building and equipment (9,680) (9,171)
Additions to deferred leasing costs (13,902) (2,778)
Collections of notes receivable 246 251
-------- --------
Net cash used in investing activities (23,336) (11,698)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on secured notes (5,625) (5,625)
Dividends paid (12,970) (6,483)
--------- --------
Net cash used in financing activities (18,595) (12,108)
-------- --------
INCREASE IN CASH AND CASH EQUIVALENTS 17,742 13,187
CASH AND CASH EQUIVALENTS, beginning of period 25,358 24,627
--------- --------
CASH AND CASH EQUIVALENTS, end of period $43,100 $37,814
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid during period $24,689 $25,265
======= =======
Dividends declared $19,455 $ 6,483
======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except share information)
- -------------------------------------------------------------------------------
1. BACKGROUND, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization - Metropolis Realty Trust, Inc., a Maryland corporation
("Metropolis" or the "Company"), was formed on May 13, 1996 to facilitate
the consummation of the Second Amended Joint Plan of Reorganization of
237 Park Avenue Associates, L.L.C. ("237 LLC") and 1290 Associates,
L.L.C. ("1290 LLC" and, together with 237 LLC, the "Predecessors"), dated
September 20, 1996 (the "Plan"). Pursuant to the Plan, on October 10,
1996, the date operations commenced ("Effective Date"), the Company
acquired the interests of 237 LLC and 1290 LLC in the properties located
at 237 Park Avenue (the "237 Property") and 1290 Avenue of the Americas
(the "1290 Property," and together with the 237 Property, the
"Properties"). The Predecessors were two of the many companies,
partnerships and joint ventures that collectively constituted the United
States operations of the Olympia & York group of companies.
The Company owns a 95% interest, as general partner, and an approximately
.05% interest, as limited partner through its .999% general partnership
interest in 237/1290 Upper Tier Associates, L.P. (the "Upper Tier Limited
Partnership") in 237/1290 Lower Tier Associates, L.P., a Delaware limited
partnership (the "Lower Tier Limited Partnership") which owns a 99%
partnership interest, as limited partner in each of 237 Park Partners,
L.P., a Delaware limited partnership (the "237 Property Owning
Partnership"), and 1290 Partners, L.P., a Delaware limited partnership
(the "1290 Property Owning Partnership," and together with the 237
Property Owning Partnership, the "Property Owning Partnerships"). The
Property Owning Partnerships were formed to own the Properties. The
remaining 1% general partnership interest in each of the Property Owning
Partnerships is owned by 237 GP Corp. and 1290 GP Corp. (the "GP Corps")
which are wholly-owned subsidiaries of the Company.
Basis of Presentation - The consolidated balance sheets include
Metropolis, the Lower Tier Limited Partnership, the GP Corps and each of
the Property Owning Partnerships.
The presentation of the consolidated balance sheets requires estimates
and assumptions that affect the reported amounts of assets and
liabilities at the balance sheet date. Actual results could differ from
those estimates.
Rental Property - As of September 30, 1999, the 1290 Property is
classified as rental property, which is carried at cost, net of
accumulated depreciation and amortization, and includes land, building,
tenant improvements and building improvements as of such date. As of
December 31, 1998, the 237 Property and the 1290 Property were classified
as rental property, which is carried at cost, net of accumulated
depreciation and amortization, and included land, building, tenant
improvements and building improvements as of such date. As of September
30, 1999, land with respect to the 1290 Property is valued at $63,500. As
of December 31, 1998, land with respect to the 237 Property and the 1290
Property, collectively, was valued at $134,518. As of September 30, 1998,
building, tenant improvements and building improvements with respect to
the 1290 Property are carried at $335,769. As of December 31, 1998,
building, tenant improvements and building improvements with respect to
the 237 Property and the 1290 Property, collectively, were carried at
$546,656. In accordance with SFAS No. 121, impairment of property is
determined to exist when estimated amounts recoverable through future
operations and sale of property on an undiscounted basis are below that
property's carrying value. If a property is determined to be impaired, it
must be written down to its estimated fair value. Fair value is defined
as the amount for which the asset could be bought or sold in a current
transaction, that is, other than a forced or liquidation sale.
Property Held For Sale - The 237 Property is classified as held for sale
as of September 30, 1999. Accordingly, all property, including deferred
charges and deferred rent related to the 237 Property is recorded at the
lower of cost or estimated fair value. Depreciation will no longer be
recorded for the 237 Property.
Cash and Cash Equivalents - Cash and cash equivalents includes
investments purchased with an original maturity of three months or less.
Depreciation and Amortization - Building and building improvements are
depreciated over their useful lives of 40 years. Furniture and fixtures
are depreciated over their useful lives, ranging from 5 to 7 years.
Tenant improvements are amortized on a straight-line basis over the terms
of the respective leases.
4
<PAGE>
Deferred Charges - Deferred financing costs are amortized over the term
of the related loan. Deferred costs related to leasing are amortized over
the related lease term on a straight-line basis.
Rental Income - Rental income is recognized on a straight-line basis over
the terms of the related leases. Differences between actual base amounts
due from tenant leases and the straight-line basis are included in
deferred rent receivable.
Escrow Deposits - Escrow deposits include reserves for certain claims
made in conjunction with the Plan and escrow deposits for tenant
improvements, insurance, real estate taxes and utility taxes.
Income Taxes - The Company qualifies as a REIT under the Internal Revenue
Code, as amended, and will generally not be taxed at the corporate level
on income it currently distributes to its stockholders so long as it,
among other things, distributes at least 95% of its REIT taxable income.
Amounts Per Share - In 1997, the Financial Accounting Standards Board
issued Statement No. 128, Earnings per Share (SFAS 128). SFAS 128
replaced the calculation of primary and fully diluted earnings per share
with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very
similar to the previously reported fully diluted earnings per share. All
earnings per share amounts for all periods have been presented to conform
to the requirements of SFAS 128.
Organization Costs - In 1998, the AICPA issued SOP 98-5, "Reporting on
the Costs of Start-up Activities." This SOP provides guidance on the
financial reporting of start-up and organizational costs. Specifically,
it requires costs of start-up activities and organization costs to be
expensed as incurred and is effective for financial statements for fiscal
years beginning after December 15, 1998. Beginning 1999, the Company's
financial statements reflect the application of this SOP.
2. PROPERTY HELD FOR SALE
In July 1999, the Company's board of directors (the "Board of Directors")
approved the retention of Victor Capital Group, L.P. ("Victor Capital
Group") and Eastdil Realty Company ("Eastdil," and together with Victor
Capital Group, the "Representatives") to explore strategic alternatives
for the Company, including a possible sale of the Company's interests in
the 237 Property. The Representatives commenced formal marketing of the
237 Property on or about July 20, 1999. On or about August 25, 1999, the
Representatives received nine all-cash bids. On September 13, 1999, the
Company began negotiations with 237 Park Investors, L.L.C. ("Buyer"). On
September 23, 1999, the Company and Buyer entered into an agreement (as
amended, the "Purchase Agreement") pursuant to which the Company has
agreed to sell all of its direct and indirect interests in the 237
Property for an aggregate purchase price of $372,000 (the "Transaction"),
subject to customary prorations and certain adjustments, including, (a)
an adjustment to increase the purchase price by 2.75% of the principal
amount of the mortgage securing the 237 Property that is assigned to
Buyer's lender, and (b) an adjustment to reduce the purchase price by the
amount of unpaid tenant improvements, leasing commissions and the
remaining amount of free rent with respect to the lease with Credit
Suisse Asset Management ("CSAM") as of the closing date of the
Transaction (the "Closing Date").
On September 23, 1999, Buyer deposited $20,000 (the "Deposit") with the
Escrow Agent. The Deposit is non-refundable in the event of a breach of
the Purchase Agreement by Buyer. Immediately prior to the Closing Date,
the existing debt on the 237 Property will be refinanced with new debt of
at least $200,000 encumbering the 237 Property. After payment of the
release price under the existing debt encumbering the 237 Property and
any other costs associated with the refinancing, any excess proceeds from
such refinancing will be distributed to the Company as part of the
purchase price. In connection with such refinancing, the Company has
agreed to cooperate with Buyer in connection with (a) converting the 237
Property Owning Partnership to a Delaware limited liability company ("237
Park LLC"), (b) forming wholly owned subsidiaries of 237 Park LLC, and
(c) effecting a transfer of the 237 Property to such subsidiaries, in
each case, immediately prior to the closing of the Transaction (the
"Closing"). Management expects to distribute approximately $194,600 ($15
per share of Common Stock) to the Company's stockholders shortly after
the Closing Date, although there can be no assurance that the
distribution will be made or that the Transaction will be consummated.
In order to facilitate consummation of the Transaction, on October 28,
1999, the Company entered into an agreement (the "Restructuring
Agreement") with Buyer, JMB/NYC Office Building Associates, L.P.
("JMB/NYC") and certain of their respective affiliates, pursuant to which
the Company agreed to:
5
<PAGE>
(a) liquidate the Lower Tier Limited Partnership, and distribute to
the Company and Upper Tier Limited Partnership interests in the Property
Owning Partnerships;
(b) cause the Upper Tier Limited Partnership to contribute its
interest in the 237 Property Owning Partnership to a partnership
affiliated with Buyer (the "Buyer Affiliated Partnership") in exchange
for partnership units in the Buyer Affiliated Partnership having a market
value as of the Closing Date of $505;
(c) assign to an affiliate of JMB/NYC, a limited partner of the
Upper Tier Limited Partnership, the Company's interest in certain notes
made by another affiliate of JMB/NYC held by the Company (the "JMB
Notes"), and the security agreement and participation agreement related
thereto, pursuant to which the Company might otherwise have been able to
receive payments of up to $750 in respect of such notes upon the
distribution of cash flow from the Property Owning Partnerships to the
Upper Tier Limited Partnership;
(d) amend the indemnity agreement between the Company and JMB/NYC
and certain of its affiliates (the "JMB Indemnitors"), by reducing the
maximum amount for which the JMB Indemnitors could be liable to the
Company and its affiliates from $25,000 to approximately $14,286 and
releasing approximately 43% of the $10,000 collateral securing such
indemnity obligations; and
(e) amend and restate the partnership agreements of 1290 Property
Owning Partnership and the Upper Tier Limited Partnership to provide that
(i) if JMB/NYC exercises its right to cause the 1290 Property Owning
Partnership to acquire the Upper Tier Limited Partnership's interest in
the 1290 Property Owning Partnership (the "JMB Put Right"), which is
exercisable only in September of any calendar year, commencing with the
calendar year 2000, the Company will be required to pay to JMB/NYC the
greater of (x) $1,000 and (y) a price based upon a multiple of the net
operating income of 1290 Property for the immediately preceding calendar
year reduced by the debt encumbering the 1290 Property and any priority
distributions to which the Company is entitled as general partner of the
Lower Tier Limited Partnership (the "JMB Formula Rate"), (ii) if the
Company exercises its right to acquire the Upper Tier Limited
Partnership's interest in the 1290 Property Owning Partnership (the
"Company Call Right"), which is exercisable in March and April of each
year, at any time after March 1, 2001, the Company would be required to
pay to the JMB/NYC, the greater of (x) $1,400 and (y) a price based upon
a multiple of twice the net operating income of 1290 Property for the
period of January 1, 2000 through June 30, 2000 reduced by the debt
encumbering the 1290 Property and any priority distributions to which the
Company is entitled as general partner of the Lower Tier Limited
Partnership (the "Company Formula Rate"), and (iii) if the Company sells
the 1290 Property or its direct or indirect ownership interests therein
or greater than a 51% interest in the Company is transferred through a
single transaction or series of related transactions prior to the
exercise of the Company Call Right or the JMB Put Right, the Company
would be required to pay $4,500 to JMB/NYC. The Company does not intend
to engage in any of the transactions described in clause (iii) prior to
March 1, 2001, and intends to exercise the Company Call Right in March
2001. If the Company exercises the Company Call Right in March 2001, the
Company expects that it would be required to pay $1,400 to JMB/NYC.
Pursuant to the existing partnership agreements of the Upper Tier Limited
Partnership and the 1290 Property Owning Partnership, prior to amendment
thereof in accordance with the Restructuring Agreement, the Company
estimates that it would be required to pay JMB/NYC significantly less
than $1,000 upon the exercise of the JMB Put Right or $1,400 upon the
exercise of the Company Call Right.
The Board of Directors approved the Transaction, and stockholders
representing 72.9% of the Company's outstanding common stock executed
voting agreements in favor of Buyer and delivered proxies directing the
holders thereof to vote their shares "for" the Transaction. A special
meeting of the Company's stockholders to consider and act upon the
approval of the Transaction will be held at 11:00 a.m. on November 19,
1999 at the offices of Battle Fowler LLP, 75 East 55th Street, New York,
New York 10022. The Company expects the Closing to occur on or about
November 19, 1999, although there can be no assurance that the sale will
be consummated. For a more comprehensive discussion of the Transaction,
see the Company's definitive Information Statement on Schedule 14C, filed
with the Securities and Exchange Commission on October 29, 1999.
6
<PAGE>
The following summarizes the condensed results of operations for the 237
Property for the quarter and nine months ended September 30, 1999:
<TABLE>
<S> <C> <C>
Quarter Ended Nine Months Ended
September 30, 1999 September 30, 1999
------------------ ------------------
REVENUES:
Base rental income $ 9,929 $27,478
Escalation income 1,795 8,431
Lease termination income -- 25,855
Miscellaneous income 153 415
Interest income 459 844
------- -------
Total revenues 12,336 63,023
------- -------
OPERATING EXPENSES:
Real estate taxes 2,769 7,929
Operating and maintenance 693 2,001
Utilities 255 626
Payroll 431 1,278
General and administrative 116 405
Management fees 238 549
------- -------
Total operating expenses 4,502 12,788
------- -------
OTHER ITEMS:
Interest expense (3,319) (9,947)
Depreciation and amortization (555) (3,834)
-------- --------
Total other expenses (3,874) (13,781)
-------- --------
NET INCOME $ 3,960 $36,454
======== ========
</TABLE>
3. REAL ESTATE TAX REFUNDS
Real estate tax refunds represent real estate tax proceeds expected
to be recovered by the Company as a result of real estate tax
certiorari proceedings commenced by the Predecessors, net of any fees
and expenses incurred to collect such proceeds. The Company has
reflected real estate tax proceeds of $3,175 and the corresponding
tenant reimbursements, fees and expenses of $2,800 related to the
1290 Property in the balance sheet as of September 30, 1999.
4. NOTES RECEIVABLE
Included in Notes Receivable is the estimated fair value of two
tenant notes aggregating approximately $8,367 and $9,307 as of
September 30, 1999 and December 31, 1998, respectively. The first
note dated April 1, 1989 with a face amount of $6,500 and a maturity
date of October 1, 1999 is carried at $4,000 as of September 30, 1999
and $5,232 as of December 31, 1998. On October 1, 1999 the Company
entered into a settlement agreement with an existing tenant by
agreeing to accept $4,000 in full satisfaction of such tenant's
obligations under such note. The settlement resulted in a write off
of $1,088 that is included in the results of operations for the
quarter ended September 30, 1999. The Company received $4,000 as
payment in full on such note on October 6, 1999.
The second note, dated August 20, 1985, with a face value of $4,355,
is carried at $4,326 and $4,075 as of September 30, 1999 and December
31, 1998 respectively. The second note does not bear interest and is
payable on October 31, 1999. The Company received payment in full of
such note on October 29, 1999.
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5. SECURED NOTES
Secured Notes consist of promissory notes issued by the Property
Owning Partnerships in the original principal amount of $420,000
pursuant to a Credit Agreement ("Agreement") among the Property
Owning Partnerships, the lenders as signatories thereto in the
Agreement and the lead lender ("Loan"). Of the aggregate original
principal amount of the Loan, $250,000 of the Loan is allocated to
the 1290 Property and $170,000 is allocated to the 237 Property. The
Loan is cross-collateralized by the Properties. The Loan will
terminate on October 10, 2001 unless sooner prepaid or terminated by
the occurrence of an Event of Default (as defined in the Agreement).
The Loan required the Property Owning Partnerships to make interest
only payments through October 7, 1997 and principal payments of
$1,875 and $7,500 in 1997 and 1998, respectively. Principal payments
of $8,125, $11,250 and $11,250 are required to be made in each of
1999, 2000 and 2001, respectively. Scheduled principal payments have
been made each month since October 7, 1997.
Upon consummation of the Transaction, the Company will pay
approximately $178,000 as the release price for the portion of the
Secured Notes attributable to the 237 Property. If any scheduled
principal payments would cause the Company to fail to comply with any
income test requirements necessary for the Company to maintain its
status as a REIT, then the Property Owning Partnerships may, in lieu
of such principal payment, post an irrevocable letter of credit in
the amount of such payment. The Property Owning Partnerships have
entered into lock box agreements for the collection of rents and have
established escrow accounts for real estate taxes and insurance.
The Property Owning Partnerships and the lead lender entered into an
Interest Rate Exchange Agreement effective October 10, 1996 (the
"Swap Agreement"). The Swap Agreement has a term of 5 years and
provides that the Property Owning Partnerships will pay interest at
an effective rate of 7.987% per annum on the notional amount of
$420,000. Upon consummation of the Transaction, Management may
terminate a portion of the notional amount under the Swap Agreement
equal to the release price attributable to the 237 Property. As of
September 30, 1999, the cost to the Company of terminating that
portion of the notional amount under the Swap Agreement was
approximately $1,405.
6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses include funded reserves held by
the Company for utility tax claims, certain claims related to the
Plan, tenant claims against real estate tax proceeds, brokerage
commissions payable and property operating expenses payable.
7. SUBORDINATED MINORITY INTEREST
The Subordinated Minority Interest represents 4.95% of the net
reorganization value of the Lower Tier Limited Partnership
reflecting the 98.001% limited partnership interest of JMB/NYC and
the .1% special general partnership interest of Carlyle Managers,
Inc., an affiliate of JMB/NYC, in the Upper Tier Limited
Partnership. Following the Closing, (i) if JMB/NYC exercises the JMB
Put Right, the Company will be required to pay to JMB/NYC the
greater of (x) $1,000 and (y) the JMB Formula Rate, (ii) if the
Company exercises the Company Call Right, the Company would be
required to pay to the JMB/NYC, the greater of (x) $1,400 and (y)
the Company Formula Rate, and (iii) if the Company sells the 1290
Property or its direct or indirect ownership interests therein or
greater than a 51% interest in the Company is transferred through a
single transaction or series of related transactions prior to the
exercise of the Company Call Right or the JMB Put Right, the Company
would be required to pay $4,500 to JMB/NYC. The Company does not
intend to engage in any of the transactions described in clause
(iii) prior to March 1, 2001, and intends to exercise the Company
Call Right in March 2001. If the Company exercises the Company Call
Right in March 2001, the Company expects that it would be required
to pay $1,400 to JMB/NYC. Pursuant to the existing partnership
agreements of the Upper Tier Limited Partnership and the 1290
Property Owning Partnership, prior to amendment thereof in
accordance with the Restructuring Agreement, the Company estimates
that it would be required to pay JMB/NYC significantly less than
$1,000 upon the exercise of the JMB Put Right or $1,400 upon the
exercise of the Company Call Right.
Management believes, however, that no economic obligation exists to
JMB/NYC as of September 30, 1999 and, that, pursuant to the
distribution priorities set forth in the limited partnership
agreement the Lower Tier Limited Partnership (the "Lower Tier Limited
Partnership Agreement") or, unless the Company's Properties
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were sold for an amount significantly in excess of the net
reorganization value, JMB/NYC would only be entitled to receive
approximately $450 in respect of the Subordinated Minority Interest.
Management believes that, following the Closing, upon exercise by the
Company of the Company Call Right, JMB/NYC would only be entitled to
receive $1,400 in respect of the Subordinated Minority Interest.
Pursuant to the Lower Tier Limited Partnership Agreement, JMB/NYC
would be entitled to distributions only after the Company has
received certain priority distributions as more fully described
below.
As of September 30, 1999, the Company, as general partner of the
Lower Tier Limited Partnership is generally entitled to receive
$380,000 and a 12% cumulative compounded return (from October 10,
1996) on such amount (net of distributions) from the Lower Tier
Limited Partnership before any distributions are made in respect of
the Subordinated Minority Interest.
Following the Closing, the Company will be generally entitled to
receive $268,000 and a 12% cumulative compounded return (from the
Closing Date) on such amount (net of distributions) from the 1290
Property Owning Partnership before any distributions are made in
respect of the Subordinated Minority Interest.
Pursuant to the Restructuring Agreement, the Lower Tier Limited
Partnership will be dissolved, and the following distribution
priorities will be incorporated into the Amended and Restated
Partnership Agreement of the 1290 Property Owning Partnership, after
adjusting certain amounts to reflect actual distributions to the
Company's stockholders in connection with the Transaction.
The Amended and Restated Partnership Agreement of the 1290 Property
Owning Partnership will provide that the aggregate Available Cash (as
defined in such Amended and Restated Partnership Agreement), from
distributions from the 1290 Property Owning Partnership will be
distributed no less frequently than quarterly to the partners of the
1290 Property Owning Partnership as follows:
(i) 100% to the Company, until it has received, together
with all prior distributions pursuant to this clause and
clauses (i) and (iv) of the succeeding paragraph, aggregate
distributions equal to a cumulative compounded return,
commencing on the Closing Date (or with respect to capital
contributions made after the Closing Date, the date of such
capital contributions), of 12% per annum on the sum of (x)
approximately $268,000 and (y) any additional capital
contributions made by the Company, to the 1290 Property
Owning Partnership, and (the amounts in (x) and (y), as
reduced by distributions in respect of such amounts,
referred to herein as the "Adjusted GP Contribution");
(ii) 100% to the Company, until it has received in total,
taking into account distributions made to it from Available
Cash and sale or refinancing proceeds, the Adjusted GP
Contribution; and
(iii) the balance, 94.05% to the Company, 1% to 237 GP
Corp. and 4.95% to the Upper Tier Limited Partnership.
Following the Closing, the Amended and Restated Partnership Agreement
of the 1290 Property Owning Partnership Agreement will also provide
that distributions from the 1290 Property Owning Partnership related
to any sale, refinancing, condemnation or insurance recovery of the
1290 Property or any loan made to the 1290 Property Owning
Partnership will be distributed by the 1290 Property Owning
Partnership to its partners as follows:
(i) 100% to the Company, until it has received, together
with all prior distributions pursuant to this clause (i)
and clause (i) of the immediately preceding paragraph,
aggregate distributions equal to the product of (x) 0.5 and
(y) a 12% per annum cumulative compounded return on the
Adjusted GP Contribution from the Closing Date (or with
respect to capital contributions made after the Closing
Date, the date of such capital contributions);
(ii) 100% to the Company, until it has received, together
with all prior distributions pursuant to this clause (ii)
and clause (ii) of the immediately preceding paragraph,
aggregate distributions equal to approximately $104,000;
(iii) from the next $500, 90% (i.e., $450) to the Upper
Tier Limited Partnership and 10% to the Company;
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(iv) 100% to the Company, until it has received, together
with all prior distributions pursuant to this clause (iv),
clause (i) of this paragraph and clause (i) of the
immediately preceding paragraph, a 12% per annum cumulative
compounded return on the Adjusted GP Contribution
commencing with respect to each capital contribution, on
the date such Capital Contribution was made;
(v) 100% to the Company, until it has received, together
with all prior distributions pursuant to this clause (v),
clause (ii) of this paragraph and clause (ii) of the
immediately preceding paragraph, aggregate distributions
equal to the Adjusted GP Contribution; and
(vi) 94.05% to the Company, 1% to 237 GP Corp. and 4.95% to
the Upper Tier Limited Partnership.
8. STOCKHOLDERS' EQUITY
The Company has the authority to issue 50,000,000 shares of common
stock, par value $10 per share (the "Common Stock"), and 10,000,000
shares of Preferred Stock, par value $10 per share. Of the 12,970,646
shares issued and outstanding, 8,034,586 represent shares of Class A
Common Stock and 4,936,060 represent shares of Class B Common Stock.
The Class A Common Stock and the Class B Common Stock have identical
rights and privileges, and are treated as a single class, with
respect to all matters (other than certain voting rights) including,
without limitation, the payment of dividends and distributions upon
liquidation.
9. STOCK PLAN AND REGISTRATION RIGHTS
The Board of Directors adopted a Directors' stock plan (the "Stock
Plan") effective October 10, 1996. Pursuant to the Stock Plan, the
Board of Directors has the authority to issue to members of the Board
of Directors Common Stock and options to purchase, in the aggregate,
100,000 shares of Common Stock. On the Effective Date, the initial
members of the Board of Directors were granted options entitling each
director to purchase an aggregate of 3,000 shares of Common Stock at
an exercise price of $25 per share in accordance with the Plan.
Pursuant to the Stock Plan, each Director received 400 shares of
Common Stock in September 1997 and December 1998 in consideration for
services rendered to the Company during the Company's first and
second fiscal years of operations. The value of such shares was based
upon the most recent price at which shares of the Company's Common
Stock were traded prior to such grant of shares. Each Director will
receive an additional 400 shares of Common Stock at each subsequent
annual meeting of the Company stockholders.
In March 1998, a new director was granted 400 shares of Common Stock
and options entitling him to purchase an aggregate of 3,000 shares of
Common Stock at an exercise price of $42.50 per share. Such shares
and options were issued in July 1998. Of such options, 1,000 were
immediately exercisable, 1,000 became exercisable on October 10, 1998
and 1,000 became exercisable on October 10, 1999. Total outstanding
options at September 30, 1999 aggregated 28,000, of which 27,000 were
exercisable.
The Company has entered into a Registration Rights Agreement with the
holders of Common Stock. The Registration Rights Agreement permits
certain of the Company's stockholders to demand, subject to certain
conditions, that the Company register their Common Stock for sale and
provides all of the Company's stockholders with the right to
participate proportionally in any public offering of the Company's
securities.
10. RELATED PARTY TRANSACTIONS
Representatives - John R. Klopp, a Director, officer and a
stockholder of the Company, and Jeremy FitzGerald, an officer of the
Company, are employed by Capital Trust, the parent company of Victor
Capital Group, one of the Company's Representatives in connection
with the Transaction, pursuant to a written retention agreement
between the Company, Eastdil and Victor Capital Group, which provides
for a fee to be paid to Victor Capital Group equal to 0.25% of the
total Transaction value and a fee to be paid to Eastdil equal to
0.25% of the total Transaction value.
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Asset Management - The Company has entered into an Asset Management
Agreement with 970 Management, LLC ("Asset Manager"), which is
directly affiliated with two of Metropolis' shareholders. One of
these shareholders is also a Director and Officer of the Company. The
Asset Manager provides asset advisory, consultation and management
services for the Company. Fees for such services are payable at a
rate of $25 per month, in arrears. The Asset Management Agreement
also provides for reimbursement of costs and expenses for contractors
and professionals, as incurred. Asset management fees incurred for
three and nine months ended September 30, 1999 and 1998 aggregated
approximately $75 and $225, respectively.
The Company expects to terminate the Asset Management Agreement with
respect to the 237 Property, effective on the Closing Date.
Property Management - The Company has entered into a Management and
Leasing Agreement with Tishman Speyer Properties, L.P. ("Property
Manager/Leasing Agent"), which is an affiliate of a shareholder. The
Property Manager/Leasing Agent manages and operates the property and
provides all supervisory, management and leasing services. The
Management and Leasing Agreement provides for a fee of 1.5% of Gross
Revenues, payable monthly and reimbursement for overhead and all
reasonable out-of- pocket-expenses incurred. The Management and
Leasing Agreement also provides for leasing commissions to be
calculated on a sliding scale percentage basis of a lease's base
rent. Fees incurred under the Management and Leasing Agreement for
the three and nine months ended September 30, 1999 aggregated
approximately $1,544 and $3,110, respectively. Fees incurred for the
three and nine month period ended September 30, 1998 aggregated
approximately $873 and $2,176, respectively.
An affiliate of the Property Manager/Leasing Agent provides cleaning
services for the Properties. Fees paid for cleaning services for the
three and nine months ended September 30, 1999 totaled $1,082 and
$3,280, respectively. Fees incurred for the three and nine month
period ended September 30, 1998 aggregated approximately $1,002 and
$3,036, respectively.
The Company expects to cause the 237 Property Owning Partnership or
237 Park LLC to terminate the Property Management Agreement with
respect to the 237 Property, effective on the Closing Date.
REIT Management - The Company has entered into a REIT Management
Agreement with the Property Manager/Leasing Agent ("REIT Manager").
The REIT Manager performs certain accounting, administrative and
monitoring services. The REIT Management Agreement provides for
compensation to the REIT Manager of a monthly fee and reimbursement
of documented out-of-pocket expenses. Fees incurred under the REIT
Management Agreement for the three and nine months ended September
30, 1999 aggregated $20 and $60, respectively. Fees incurred for the
three and nine month period ended September 30, 1998 aggregated $31
and $110, respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, escrow deposits,
tenant security deposits, tax refunds receivable, and accounts
receivable are a reasonable estimate of their fair value due to their
short-term nature. The Company believes the fair value of the Swap
Agreement generally offsets gains or losses on the Secured Notes
being hedged and changes the nature of such underlying financial
instruments.
Upon consummation of the Transaction, the Company will repay
approximately $178,000 in principal amount of the Secured Notes. Upon
consummation of the Transaction, Management may terminate a portion
of the notional amount under the Swap Agreement equal to the release
price attributable to the 237 Property. As of September 30, 1999, the
cost to the Company of terminating that portion of the notional
amount under the Swap Agreement was approximately $1,405.
The fair value estimates presented herein are based on pertinent
information available to management as of September 30, 1999.
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12. REFINANCING OF 1290 PROPERTY.
The Company is presently engaged in negotiations regarding the
refinancing of the 1290 Property. If such refinancing is consummated,
the mortgage debt encumbering the 1290 Property will be significantly
greater than the mortgage debt presently allocated to the 1290
Property, and the net proceeds to the Company resulting from such
increased debt are expected to be distributed by the Company to its
stockholders. There can be no assurance that the refinancing will be
consummated and that such net proceeds will be distributed.
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ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
(In thousands, except share information)
General
The discussion below relates primarily to the financial condition and
results of operations of the Company for the third quarter of 1999. Stockholders
are encouraged to review the financial statements and Management's Discussion
and Analysis of Financial Condition and Results of Operations for the year ended
December 31, 1998 contained in the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 for a more complete understanding of the Company's
financial condition and results of operations.
Overview
The Company was formed on May 13, 1996 and commenced operations on
October 10, 1996, upon acquisition of the 237 Property and the 1290 Property,
pursuant to the Plan. The Company is a Maryland corporation that qualifies as a
REIT for tax purposes. The Company's principal business objective is to operate
the Properties in a manner that will maximize the Properties' revenues and value
and in turn maximize funds from operations and stockholder value.
The 1290 Property is a 43-story Class A commercial office building
with approximately 1.9 million rentable square feet of space. The building is
centrally located in midtown Manhattan and is connected to the famed
"Rockefeller Center" complex via an underground passageway. The 1290 Property
serves as the corporate headquarters for The Equitable Life Assurance Society of
the United States, and is currently 98% leased. Through December 2005,
approximately 27% of the total rentable area of the building is subject to
expiring leases.
The 237 Property is a 21-story Class A commercial office building
with approximately 1.1 million rentable square feet of space. The building,
centrally located in midtown Manhattan, is situated off one of New York City's
most prestigious thoroughfares and is within close proximity to Grand Central
Station, a transportation hub. The 237 Property serves as the corporate
headquarters for J. Walter Thompson Company, a major advertising agency and
CSAM. The 237 Property is currently 98% leased and through December 2005,
approximately .6% of the total rentable area of the building is subject to
expiring leases.
The Company, through the Property Owning Partnerships, has retained
Tishman Speyer Properties, L.P. to serve as the Property Manager/Leasing Agent,
which is responsible for managing the daily operations of the Properties, and
970 Management, LLC, an affiliate of Victor Capital Group, L.P., to serve as the
Asset Manager. The Company has also entered into a REIT Management Agreement
with Tishman Speyer Properties, L.P. to perform certain accounting,
administrative and REIT compliance monitoring services.
As of September 30, 1999, 12,970,646 shares of common stock were
issued and outstanding. The Common Stock of the Company is not listed on any
exchange, and the Company does not intend to list the Common Stock on any
exchange in the near term.
The assets and results of operations of the Properties are reported
in the consolidated financial statements of the Company using the consolidation
method of accounting.
The Transaction
In July 1999, the Board of Directors approved the retention of the
Representatives to explore strategic alternatives for the Company, including a
possible sale of the Company's interests in the 237 Property. The
Representatives commenced formal marketing of the 237 Property on or about July
20, 1999. On or about
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August 25, 1999, the Representatives received nine all-cash bids. On September
13, 1999, the Company began negotiations with Buyer. On September 23, 1999, the
Company and Buyer entered into the Purchase Agreement. Such Purchase Agreement
was subsequently amended to facilitate Buyer's financing of the 237 Property and
the Company's ability to subsequently sell or otherwise transfer the 1290
Property.
Pursuant to the Purchase Agreement, the Company has agreed to sell
all of its direct and indirect interests in the 237 Property for an aggregate
purchase price of $372,000, subject to customary prorations and certain
adjustments, including, (a) an adjustment to increase the purchase price by
2.75% of the principal amount of the mortgage securing the 237 Property that is
assigned to Buyer's lender, and (b) an adjustment to reduce the purchase price
by the amount of unpaid tenant improvements, leasing commissions and the
remaining amount of free rent with respect to the lease with CSAM as of the
Closing Date. Management expects to distribute approximately $194,600 ($15/share
of Common Stock) to the Company's stockholders shortly after the Closing Date,
although there can be no assurance that the distribution will be made or that
the Transaction will be consummated.
On September 23, 1999, Buyer deposited the Deposit with the Escrow
Agent. The Deposit is non-refundable in the event of a breach of the Purchase
Agreement by Buyer. Immediately prior to the Closing Date, the existing debt on
the 237 Property will be refinanced with new debt of at least $200,000
encumbering the 237 Property. After payment of the release price under the
existing debt encumbering the 237 Property and any other costs associated with
the refinancing, any excess proceeds from such refinancing will be distributed
to the Company as part of the purchase price. In connection with such
refinancing, the Company has agreed to cooperate with Buyer in connection with
(a) converting the 237 Property Owning Partnership to 237 Park LLC, (b) forming
wholly owned subsidiaries of 237 LLC, and (c) effecting a transfer of the 237
Property to such subsidiaries, in each case, immediately prior to the Closing.
The Company has also agreed to:
(a) cause the Upper Tier Limited Partnership to contribute its
interest in 237 LLC to the Buyer Affiliated Partnership in exchange for
partnership units in the Buyer Affiliated Partnership having a market
value as of the Closing Date of $505;
(b) assign to an affiliate of JMB/NYC the Company's interest
in the JMB Notes, and the security agreement and participation agreement
related thereto, pursuant to which the Company might otherwise have been
able to receive payments of up to $750 in respect of such notes upon the
distribution of cash flow from the Property Owning Partnerships to the
Upper Tier Limited Partnership;
(c) amend the indemnity agreement between the Company and the
JMB Indemnitors, by reducing the maximum amount for which the JMB
Indemnitors could be liable to the Company and its affiliates from $25,000
to approximately $14,286 and releasing approximately 43% of the $10,000
collateral securing such indemnity obligations;
(d) liquidate the Lower Tier Limited Partnership; and
(e) amend and restate the partnership agreements of 1290
Property Owning Partnership and the Upper Tier Limited Partnership to
provide that (i) if JMB/NYC exercises the JMB Put Right, the Company will
be required to pay to JMB/NYC the greater of (x) $1,000 and (y) the JMB
Formula Rate, (ii) if the Company exercises the Company Call Right, the
Company would be required to pay to the JMB/NYC, the greater of (x)
$1,400 and (y) the Company Formula Rate, and (iii) if the Company sells
the 1290 Property or its direct or indirect ownership interests therein
or greater than a 51% interest in the Company is transferred through a
single transaction or series of related transactions prior to the
exercise of the Company Call Right or the JMB Put Right, the Company
would be required to pay to JMB/NYC $4,500.
The Company does not intend to engage in any of the transactions
described in (e)(iii) prior to March 1, 2001, and intends to exercise the
Company Call Right in March 2001. If the Company exercises the Company Call
Right in March 2001, the Company expects that it would be required to pay $1,400
to JMB/NYC. Pursuant to the existing partnership agreements of the Upper Tier
Limited Partnership and the 1290 Property Owning Partnership, prior to amendment
thereof in accordance with the Restructuring Agreement, the Company estimates
that it would be required to pay JMB/NYC significantly less than $1,000 upon the
exercise of the JMB Put Right or $1,400 upon the exercise of the Company Call
Right. Pursuant to the existing partnership agreements of the
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Upper Tier Limited Partnership and the 1290 Property Owning Partnership, prior
to amendment thereof in accordance with the Restructuring Agreement, the Company
estimates that it would be required to pay JMB/NYC significantly less than
$1,000 upon the exercise of the JMB Put Right or $1,400 upon the exercise of the
Company Call Right.
The Board of Directors approved the Transaction, and stockholders
representing 72.9% of the Company's outstanding common stock executed voting
agreements and proxies pursuant to which they agreed to have their shares voted
"for" the Transaction. A special meeting of the Company's stockholders to
consider and act upon the approval of the Transaction will be held at 11:00 a.m.
on November 19, 1999 at the offices of Battle Fowler LLP, 75 East 55th Street,
New York, New York 10022. The Company expects the Closing to occur on or about
November 19, 1999, although there can be no assurance that the sale will be
consummated. For a more comprehensive discussion of the Transaction, see the
Company's definitive Information Statement on Schedule 14C, filed with the
Securities and Exchange Commission on October 29, 1999.
Results of Operations
Quarters Ended September 30, 1999 and 1998
Base rental income and escalation income decreased by approximately
$143 from the quarter ended September 30, 1999 as compared to the same period in
the prior year. The decrease is comprised of an increase of $1,343 in base
rental income for the quarter ended September 30, 1999 as compared with the same
period in the prior year. This is primarily due to the higher base rents
associated with the CSAM lease at the 237 Property in comparison to the base
rents associated with the lease with Swiss Reinsurance America Corporation
("Swiss Re") at the 237 Property. Additionally, there was a decrease of $1,486
in operating escalations for the same period resulting from the early
termination of the lease with Swiss Re, a tenant of the 237 Property as of June
30, 1999.
Operating expenses for the quarter ended September 30, 1999 decreased
by approximately $625 as compared to the same period in the prior year. The
decrease is primarily attributable to fees and expenses incurred in 1998 in
connection with the settlement of tax certiorari proceedings related to 2
Broadway, totaling $2,238. Operating expenses as a percentage of base rental
income and escalation income decreased to 43% for the quarter ended September
30, 1999 from 46% for the quarter ended September 30, 1998.
Depreciation and amortization for the quarter ended September 30,
1999 was $4,867 as compared to $4,233 for the same period in the prior year. The
increase of $634 is due to building and tenant improvements made subsequent to
the third quarter of 1998. As of July 20, 1999, depreciation and amortization
has not been recorded on the real estate assets of the 237 Property as a result
of the Company's decision to sell this property, as described in Note 1 to the
Company's consolidated financial statements.
Other items include a write off for the quarter ended September 30,
1999 of $1,088 equal to the difference between the carrying amount of a tenant
note receivable ($5,088) and the settlement amount of $4,000. On October 1,
1999, the Company settled a claim with a tenant on its note receivable dated
April 1, 1989 with a face amount of $6,500 and a maturity date of October 1,
1999, whereby the Company agreed to accept $4,000 as payment in full
satisfaction of such tenant's obligation under such note. The Company received
such payment on October 6, 1999.
Nine Months Ended September 30, 1999 and 1998
Base rental income and escalation income decreased by approximately
$4,485 for the nine months ended September 30, 1999 as compared to the same
period in the prior year. This decrease is primarily attributable to the write
off of $900 of deferred rent receivable related to the early partial termination
of the lease with Warburg Pincus at the 237 Property, $2,545 related to the
lease assumption by ABN-AMRO, Incorporated of B.T. Alex Brown's lease at the
1290 Property, the expiration of two leases at the 1290 Property and the early
termination of the lease with Swiss Re at the 237 Property as of June 30, 1999.
As of June 30, 1999, the Company terminated the lease with Swiss Re.
The termination of the lease resulted in the payment by Swiss Re to the Company
of a one-time lease termination fee of $25,855, which was received by the
Company in July 1999. Contemporaneously with the termination of the Swiss Re
lease, the Company entered into a 15-year lease with CSAM with respect to
approximately 343,000 square feet of space including all of the former Swiss Re
leased space. The Company incurred leasing commissions of $6,910 in connection
with the CSAM lease that are payable prior to December 31, 1999 and agreed to
make tenant improvements in the amount of $11,491. The CSAM lease also provides
for a free rent period through December 31, 1999.
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As of June 30, 1999 the Company entered into an assignment and
assumption agreement pursuant, to which B.T. Alex Brown, a tenant of the 1290
Property assigned its lease to ABN-AMRO, Incorporated. The assignment of the
lease resulted in B.T. Alex Brown delivering its space to ABN-AMRO,
Incorporated, and the one-time payment to B.T. Alex Brown of $8,000 by the
Company in June 1999.
During the quarter ended June 30, 1999, the Company settled certain
New York City and New York State utility tax claims with respect to the property
located at 2 Broadway that was owned by the Predecessor for all tax years up to
December 31, 1995 for an amount that was approximately $2,900 less than the
amount the Company had previously reserved for such claims. The reversal of that
reserve resulted in an increase in miscellaneous income of approximately $2,900
for such period. The Company continues to maintain adequate reserves for utility
tax claims with respect to open tax years.
Operating expenses for the nine months ended September 30, 1999 were
$39,010, a decrease of 1.4% from the nine months ended September 30, 1998.
Operating expenses as a percentage of base rental income and escalation income
increased to 40% for the nine months ended September 30, 1999 from 39% for the
nine months ended September 30, 1998.
Depreciation and amortization for the nine months ended September 30,
1999 was $13,662 as compared to $12,476 for the same period in the prior year.
The increase of $1,186 is due to building and tenant improvements made
subsequent to the third quarter of 1998. As of July 20, 1999 depreciation and
amortization has not been recorded on the real estate assets of the 237 Property
as a result of the Company decision to sell this property, as described in Note
1 to the Company's financial statements.
Other items include an expense for the quarter ended September 30,
1999 of $1,088 equal to the difference between the carrying amount of a tenant
note receivable ($5,088) and the settlement amount of $4,000. On October 1,
1999, the Company settled a claim with a tenant on its note receivable dated
April 1, 1989 with a face amount of $6,500 and a maturity date of October 1,
1999 whereby the Company agreed to accept $4,000 as full satisfaction of
tenant's obligation under such Note. The Company received such payment on
October 6, 1999.
Liquidity and Capital Resources
During the nine months ended September 30, 1999, cash flow from
operations totaled $59,673. The Company used this cash flow from operations for
leasing costs of approximately $13,902, $8,000 to acquire tenant improvements
related to the early termination of a tenant lease at the 1290 Property,
principal payments on the Loan of $5,625 and $1,680 to fund building and tenant
improvements.
At September 30, 1999, the Company had unrestricted cash on hand of
approximately $43,100 of which $6,485 was used to pay a dividend on October 15,
1999 to holders of record of the Company's Common Stock on September 30, 1999.
On October 10, 1996, the Property Owning Partnerships borrowed
$420,000 secured by the 1290 Property and the 237 Property. The Loan is
cross-collateralized by the Properties and prohibits the Property Owning
Partnerships from incurring any additional indebtedness. Immediately prior to
the Closing, the existing debt on the 237 Property will be refinanced with new
debt that will be assigned to Buyer. Thereafter, the 1290 Property will be
encumbered by approximately $225,000 of debt, which will not be
cross-collateralized by the 237 Property. The Company may be able to incur
unsecured indebtedness, although it has no present plans to do so. The Company
believes that cash on hand and existing cash flow from operations are sufficient
to satisfy the Company's foreseeable cash requirements which consist primarily
of property operating expenses, real estate taxes, capital expenditures, debt
service on the Loan and distributions necessary to enable the Company to
continue to qualify as a REIT. The Loan matures on October 10, 2001. If not
repaid or refinanced prior to such date, the Property Owning Partnerships will
be required to refinance the Loan on that date. There can be no assurance,
however, that the Company will be able to refinance the Loan on that date or
what the terms of any refinancing will be.
The Company is presently engaged in negotiations regarding the
refinancing of the 1290 Property. If such refinancing is consummated, the
mortgage debt encumbering the 1290 Property will be significantly greater than
the mortgage debt presently allocated to the 1290 Property, and the net proceeds
to the Company resulting from such
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increased debt are expected to be distributed by the Company to its
stockholders. There can be no assurance that the refinancing will be consummated
and that such net proceeds will be distributed.
Year 2000 Compliance
The inability of computers, software and other equipment utilizing
microprocessors to recognize and properly process data fields containing a two
digit year is commonly referred to as the Year 2000 Compliance issue. As the
year 2000 approaches, such systems may be unable to accurately process certain
date-based information.
The Company began preparations for the year 2000 in 1996 and has
identified all significant applications that will require modification to ensure
compliance. Internal and external resources have been and continue to be used to
make the required modifications and test Year 2000 Compliance. The modification
process of all significant applications is substantially complete.
In addition, the Company has communicated with others with whom it
does significant business to determine their Year 2000 Compliance readiness and
the extent to which the Company is vulnerable to any third party Year 2000
issues. However, there can be no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted, or that a failure
to convert by another company, or a conversion that is incompatible with the
Company's systems, would not have a material adverse effect on the Company.
The total cost to the Company of these Year 2000 Compliance
activities has not been and is not anticipated to be material to its financial
position or results of operations in any given year. These costs to complete the
Year 2000 modification and testing processes are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ from those
plans.
Funds from Operations
The Company generally considers Funds from Operations to be a useful
measure of the operating performance of an equity REIT because, together with
net income and cash flows, Funds from Operations provides investors with an
additional basis to evaluate the ability of a REIT to incur and service debt and
to fund acquisitions and other capital expenditures. Funds from Operations does
not represent net income or cash flows from operations as defined by generally
accepted accounting principles ("GAAP") and does not necessarily indicate that
cash flows will be sufficient to fund cash needs. It should not be considered as
an alternative to net income as an indicator of the Company's operating
performance or to cash flows as a measure of liquidity. Funds from Operations
does not measure whether cash flow is sufficient to fund all of the Company's
cash needs, including principal amortization, capital improvements and
distributions to shareholders. Funds from operations also does not represent
cash flows generated from operating, investing or financing activities as
defined by GAAP. Further, Funds from Operations as disclosed by other REITs may
not be comparable to the Company's calculation of Funds from Operations. The
Company adopted the National Association of Real Estate Investment Trusts
("NAREIT") definition of Funds from Operations in 1996 and has used it for all
periods presented. Funds from Operations is calculated as net income (loss)
computed in accordance with GAAP adjusted for depreciation expense attributable
to real property, amortization expense attributable to capitalized leasing
costs, tenant allowances and improvements, gains and losses on sales of real
estate investments and extraordinary and nonrecurring items.
17
<PAGE>
Funds from Operations is summarized in the following table.
<TABLE>
<S> <C> <C> <C> <C>
Quarter ended Nine months ended
September 30, September 30,
--------------------------------- ---------------------------------------
1999 1998 1999 1998
--------------- -------------- ---------------- ------------------
Net income $5,532 $9,708 $49,431 $29,917
Add:
Depreciation attributable to real
property and amortization
attributable to leasing costs 4,867 3,679 13,662 10,815
Write off of note receivable 1,088 -- 1,088 --
Write off deferred rent
receivable -- -- 3,500 --
Subtract:
Lease termination income -- -- 25,855 --
------------ ------------ -------------- ------------
Funds from Operations $11,487 $13,387 $41,826 $40,732
============ ============ ============== ============
Weighted Average Number of Shares of 12,998,646 12,991,646 12,998,646 12,991,646
Common Stock Outstanding1 ============ ============ ============== ============
- --------------------------
1 Includes 28,000 shares of Common Stock issuable upon the exercise of
outstanding options.
</TABLE>
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
The carrying amount of cash and cash equivalents, escrow deposits,
tenant security deposits, tax refunds receivable, and accounts receivable are a
reasonable estimate of their fair value due to their short-term nature. The
Property Owning Partnerships and the lead lender under the Loan entered into the
Swap Agreement effective October 10, 1996. The Swap Agreement has a term of 5
years and provides that the Property Owning Partnerships will pay interest at an
effective rate of 7.987% per annum on the notional amount of $420,000. The
Company believes the fair value of the Swap Agreement generally offsets gains or
losses on the Secured Notes being hedged and changes the nature of such
underlying financial instruments. Upon consummation of the Transaction,
Management may terminate a portion of the notional amount under the Swap
Agreement equal to the release price attributable to the 237 Property. As of
September 30, 1999, the cost to the Company of terminating that portion of the
notional amount under the Swap Agreement was approximately $1,405.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending legal proceedings, other than ordinary
routine litigation incidental to the business of the Company, against or
involving the Company, the Partnerships or the Properties.
Retention of Jurisdiction by Bankruptcy Court
In July 1997, the United States Bankruptcy Court for the Southern
District of New York entered a final decree closing the reorganization cases of
the Predecessors.
Item 2. Changes in Securities
None.
18
<PAGE>
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters To a Vote of Security Holders
A special meeting of the Company's stockholders (the "Meeting") to
consider and act upon the approval of the Transaction will be held on November
19, 1999 at 11 a.m. (New York City time) at the offices of Battle Fowler LLP, 75
East 55th Street, New York, New York 10022. For further details regarding the
Meeting, see the Company's definitive Information Statement on Schedule 14C,
filed with the Securities and Exchange Commission on October 29, 1999.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
10.1 Interest Purchase Agreement, dated as of September 23, 1999,
as amended, by and among the Company, 237 GP Corp., 237 Park Investors, L.L.C.
and the Escrow Agent (as defined therein), as escrow agent.*
10.2 Restructuring Agreement, dated as of October 28, 1999, by
and among the Company, 237 GP Corp., JMB/NYC Office Building Associates, L.P.,
certain other holders of indirect interests in the 237 Property and certain
affiliates of 237 Park Investors, L.L.C.*
27.1 Financial Data Schedule as of, and for the quarter ending,
September 30, 1999.
(b) Reports on Form 8-K
Current Report of Form 8-K, filed with the Securities and Exchange
Commission on October 1, 1999.
* Incorporated by reference to the Company's Information Statement on Schedule
14C, filed with the Commission on October 20, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METROPOLIS REALTY TRUST, INC.
Date: November 15, 1999 By: /s/ Lee S. Neibart
------------------------
Name: Lee S. Neibart
Title: President
Date: November 15, 1999 By: /s/ Stuart Koenig
------------------------
Name: Stuart Koenig
Title: Vice President and Treasurer
S-1
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> No
</LEGEND>
<CIK> 0001028198
<NAME> Louis Vitali
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JUL-1-1999
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 51,676
<SECURITIES> 0
<RECEIVABLES> 12,239
<ALLOWANCES> 2,280
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 399,269
<DEPRECIATION> 24,831
<TOTAL-ASSETS> 798,341
<CURRENT-LIABILITIES> 21,437
<BONDS> 0
0
0
<COMMON> 129,706
<OTHER-SE> 175,844
<TOTAL-LIABILITY-AND-EQUITY> 798,341
<SALES> 33,094
<TOTAL-REVENUES> 34,334
<CGS> 0
<TOTAL-COSTS> 14,602
<OTHER-EXPENSES> 4,867
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,245
<INCOME-PRETAX> 5,532
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 0
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
