<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission file number 1-8971*
RCPI Trust*
(Exact name of registrant as specified in its charter)
Delaware 13-7087445
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Tishman Speyer Properties, L.P.
45 Rockefeller Plaza, New York, N.Y. 10111
------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 332-6500
--------------
(Registrant's telephone number, including area code)
--------------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
------- ------
- ---------------------------------------------
* As successor in interest to Rockefeller Center Properties, Inc.
(Commission File No. 1-8971)
<PAGE> 2
RCPI TRUST
INDEX
<TABLE>
<CAPTION>
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.
<S> <C>
RCPI Trust, Balance Sheets as of September 30, 1997 (unaudited) and
December 31, 1996 1
RCPI Trust, Statements of Operations for the quarter and nine months ended
September 30, 1997 and for the period from July 10 to September 30, 1996
(unaudited) 2
RCPI Trust, Statements of Cash Flows for the nine months ended
September 30, 1997 and for the period from July 10 to September 30, 1996
(unaudited) 3
Rockefeller Center Properties, Inc. (Predecessor), Statements of Operations for
the period from July 1 to July 9, 1996 and for the period from January 1 to
July 9, 1996 (unaudited) 4
Rockefeller Center Properties, Inc. (Predecessor), Statement of Cash Flows for
the period from January 1 to July 9, 1996 (unaudited) 5
Notes to Financial Statements (unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 15
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 22
</TABLE>
<PAGE> 3
PART I -- FINANCIAL INFORMATION
ITEM 1. Financial Statements
RCPI TRUST
BALANCE SHEETS
($ in thousands)
<TABLE>
<CAPTION>
As of As of
September 30, 1997 December 31, 1996
---------- ---------
(Unaudited)
ASSETS
<S> <C> <C>
Real Estate:
Land $158,149 $158,149
Buildings and improvements 608,487 596,880
Tenant improvements 23,091 14,405
Furniture and fixtures 3,997 3,911
---------- ---------
793,724 773,345
Less: Accumulated depreciation (19,709) (6,718)
---------- ---------
774,015 766,627
Cash and cash equivalents 27,513 28,765
Restricted cash 9,103 10,027
Accounts receivable 10,082 19,859
Prepaid expenses 9,386 478
Deferred costs, net of accumulated
amortization of $1,657 and $329 19,778 5,486
Accrued rent 20,587 8,430
---------- ---------
Total Assets $870,464 $839,672
========== =========
LIABILITIES AND OWNERS' EQUITY
Liabilities:
Zero coupon convertible debentures, net of unamortized
discount of $189,808 and $224,030 $396,377 $362,155
14% debentures (includes premium of $25,087 and
$26,155) 100,087 101,155
NationsBank Loans 55,000 -
Floating rate notes - 10,000
Accrued interest payable 5,566 7,234
Accounts payable and accrued expenses 16,074 19,383
Tenant security deposits payable 8,773 7,279
---------- ---------
Total Liabilities 581,877 507,206
Owners' Equity 288,587 332,466
---------- ---------
Total Liabilities and Owners' Equity $870,464 $839,672
========= =========
</TABLE>
See notes to financial statements
1
<PAGE> 4
RCPI TRUST
STATEMENTS OF OPERATIONS
($ in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Quarter For the Nine For the Period
Ended Months Ended From July 10 to
September 30, 1997 September 30, 1997 September 30, 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues:
Base rental $ 42,321 $125,783 $ 31,863
Escalations and percentage rents 1,995 5,376 2,448
Interest and other income 1,865 7,077 4,179
-------- -------- --------
Total revenues 46,181 138,236 38,490
-------- -------- --------
Expenses:
Interest 15,494 43,578 18,038
Real estate taxes 8,562 25,030 7,009
Payroll and benefits 4,240 13,302 4,308
Repairs, maintenance, and supplies 3,068 8,460 1,983
Utilities 4,753 12,593 2,735
Cleaning 3,435 10,291 2,483
Professional fees 641 4,883 6,493
Insurance 315 914 691
Management and accounting fees 812 2,516 802
General and administrative 1,212 2,101 2,100
Depreciation and amortization 5,124 14,330 3,294
-------- -------- --------
Total expenses 47,656 137,998 49,936
-------- -------- --------
Net (loss) income $ (1,475) $ 238 $(11,446)
======== ======== ========
</TABLE>
See notes to financial statements
2
<PAGE> 5
RCPI TRUST
STATEMENTS OF CASH FLOWS
($ in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine For the period
Months Ended from July 10, 1996
September 30, 1997 to September 30, 1996
------------------ ---------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) $ 238 $ (11,446)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities
Amortization of original issue discount
and premium 33,154 9,246
Depreciation and amortization 14,330 3,294
Decrease in restricted cash 924 --
Decrease in accounts receivable 9,778 (2,254)
Increase in prepaid expenses (8,908) 6,990
Increase in accrued rent (12,157) (792)
Decrease in accounts payable and
accrued expenses (5,031) 1,441
Decrease in accrued interest payable (1,667) (16,259)
--------- ---------
Net cash provided by (used in) operating activities 30,661 (9,780)
--------- ---------
Cash Flows from Investing Activities:
Costs incurred to acquire property -- (12,528)
Additions to buildings and improvements (9,398) (2,401)
Additions to tenant improvements (10,443) (4,140)
Additions to furniture, fixtures and equipment (86) (254)
Additions to deferred costs (12,868) (5,160)
Repayment on mortgage loan receivable -- 440,000
Cash acquired as part of transfer -- 15,499
--------- ---------
Net cash (used in) provided by investing activities (32,795) 431,016
--------- ---------
Cash Flows from Financing Activities:
Additions from NationsBank Loans 55,000 --
Capital contributions 10 --
Distributions to owners (44,128) --
Repayment of floating rate notes (10,000) (105,766)
Repayment of current coupon debentures -- (213,700)
Repayment of GSMC facility -- (63,029)
--------- ---------
Net cash provided by (used in) financing activities 882 (382,495)
--------- ---------
(Decrease) increase in cash and cash equivalents (1,252) 38,741
Cash and cash equivalents at beginning of period 28,765 56
--------- ---------
Cash and cash equivalents at end of period $ 27,513 $ 38,797
========= =========
</TABLE>
See notes to financial statements
3
<PAGE> 6
ROCKEFELLER CENTER PROPERTIES, INC.
(Predecessor)
STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
(UNAUDITED)
<TABLE>
<CAPTION>
For the period For the period
from July 1 to from January 1 to
July 9, 1996 July 9, 1996
-------- --------
<S> <C> <C>
Revenues:
Short term investment and portfolio income $ 2 $ 38
-------- --------
Expenses:
Interest expense:
Current coupon convertible debentures 619 11,642
Zero coupon convertible debentures 1,015 18,985
14% Debentures 301 5,790
Floating rate notes 371 8,013
GSMC facility 175 2,554
-------- --------
2,481 46,984
General and administrative 125 4,774
Amortization of deferred debt issuance costs 10,656 12,421
Stock appreciation rights liability 111 2,041
Effects of execution and delivery of merger agreement (1,610) (8,232)
Expenses related to the March 25, 1996 special
meeting of stockholders 23 422
-------- --------
11,786 58,410
-------- --------
Net loss ($11,784) ($58,372)
======== ========
Net loss per share ($ 0.31) ($ 1.53)
======== ========
</TABLE>
See notes to financial statements
4
<PAGE> 7
ROCKEFELLER CENTER PROPERTIES, INC.
(Predecessor)
STATEMENT OF CASH FLOWS
($ in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
For the period from
January 1 to July 9, 1996
-------------------------
<S> <C>
Cash Flow from Operating Activities:
Other interest income received $ 38
Interest paid on current coupon convertible debentures (27,712)
Interest paid on floating rate notes (7,626)
Interest paid on 14% debentures (5,308)
Payments for accounts payable, accrued expenses and other assets (13,463)
--------
Net cash used in operating activities (54,071)
--------
Cash flows from financing activities:
Net proceeds from GSMC facility 52,829
Net cash provided by financing activities 52,829
--------
Net decrease in cash and cash equivalents (1,242)
Cash and cash equivalents at the beginning of the period 1,298
--------
Cash and cash equivalents at the end of the period $ 56
========
Reconciliation of net loss to net cash used in operating activities:
Net loss $(58,372)
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of discount:
Zero coupon convertible debentures 18,985
14% debentures 188
Decrease in deferred debt issuance costs and other assets, net 12,280
Decrease in accrued interest payable (12,836)
Increase in stock appreciation rights liability 2,041
Decrease in accounts payable and accrued expenses (16,357)
--------
Net cash used in operating activities ($54,071)
========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE> 8
RCPI TRUST
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND PURPOSE
RCPI Trust (the "Company"), was established in the State of Delaware on
March 26, 1996 as a Delaware business trust. The Company was organized
pursuant to the Trust Agreement dated July 10, 1996 (the "Trust Agreement")
between Rockefeller Center Properties, Inc. (the "Predecessor"), a
wholly-owned subsidiary of RCPI Holdings, Inc. ("Holdings") and RCPI
Investors L.L.C. ("LLC"), each owning a 50% undivided beneficial interest.
The primary purpose of the Company is to acquire, manage and operate the
landmarked buildings and public space known as Rockefeller Center (the
"Property") and to be successor in interest to the Predecessor.
The Predecessor was incorporated in Delaware on July 17, 1985. The
Predecessor qualified and elected to be treated, for Federal income tax
reporting purposes, as a real estate investment trust (a "REIT") under the
Internal Revenue Code of 1986, as amended (the "Code"). The Predecessor was
originally formed to permit public investment in two convertible,
participating mortgages on the Property. From the proceeds of its offering
of common stock (the "Common Stock") and the offerings of its Current
Coupon Convertible Debentures ("Current Coupons") due December 31, 2000 and
Zero Coupon Convertible Debentures ("Zero Coupons") due December 31, 2000
(collectively, the "Convertible Debentures"), the Predecessor made a $1.3
billion convertible, participating mortgage loan (the "Mortgage Loan") to
two partnerships, Rockefeller Center Properties and RCP Associates
(collectively, the "Previous Owners"). The partners of the Previous Owners
were Rockefeller Group, Inc. ("RGI") and Radio City Music Hall Productions,
Inc. ("RCMHP"), a wholly owned subsidiary of RGI. Mitsubishi Estate
Company, Ltd. controlled an 80% equity interest in RGI, and Rockefeller
family interests held the remaining 20%.
On July 10, 1996, pursuant to the Merger Agreement (as described below),
Holdings purchased all the outstanding Common Stock of the Predecessor with
approximately $172 million of its own equity and approximately $172 million
obtained through a note payable to LLC. The note payable was then
transferred to the Predecessor prior to the transfer of all the
Predecessor's assets and liabilities to the Company in exchange for a 50%
undivided beneficial ownership interest. At the same time, LLC contributed
its note receivable of $172 million to the Company which was in exchange
for a 50% undivided beneficial ownership interest.
Prior to July 10, 1996, the Company's activities were limited to
organizational matters.
Merger Agreement
Pursuant to an Agreement and Plan of Merger dated November 7, 1995, (the
"Merger Agreement"), entered into between the Predecessor and a group of
investors (the "Investor Group") the members of which were Exor Group S.A.,
Prometheus Investors, L.L.C., Rockprop, L.L.C., Troutlet Investments
Corporation, Gribble Investments (Tortola) BVI, Inc., Weevil Investments
(Tortola) BVI, Inc. and Whitehall Street Real Estate Limited Partnership V
("Whitehall"), RCPI Merger Inc., a wholly owned subsidiary of Holdings, was
merged (the "Merger") with and into the Predecessor. Consequently, the
Predecessor became a subsidiary of Holdings, a Delaware corporation
controlled by the Investor Group.
The Merger Agreement was approved by the stockholders of the Predecessor on
March 25, 1996 and became effective on July 10, 1996 (the "Effective
Date"). Pursuant to the Merger, each share of the Predecessor's Common
Stock outstanding as of the Effective Date (other than (i) shares of Common
Stock held by the Predecessor or any of its subsidiaries, (ii) shares of
Common Stock held by Holdings or any of its subsidiaries
6
<PAGE> 9
RCPI TRUST
NOTES TO FINANCIAL STATEMENTS (cont'd)
(UNAUDITED)
(including RCPI Merger Inc. ) and (iii) any shares of Common Stock held by
a stockholder who was entitled to demand, and who properly demanded and had
not withdrawn such demand, appraisal for such shares in accordance with
Section 262 of the Delaware General Corporation Law) was converted into the
right to receive $8.00 in cash, without interest thereon. As of the
Effective Date, the Common Stock of the Predecessor was held by Holdings
and the Warrants and Stock Appreciation Rights (see Note 4), previously
held by Whitehall were contributed through Holdings to the Predecessor and
canceled. Thereafter, on the Effective Date, the Predecessor transferred
substantially all of its assets (including the Mortgage Loan) and
liabilities to the Company and the Company became the successor to the
Predecessor under the Indenture governing the Convertible Debentures (see
Note 4).
Borrower's Chapter 11 Plan
On May 11, 1995, the Previous Owners filed for protection under Chapter 11
of the Federal Bankruptcy Code in the United States Bankruptcy Court in the
Southern District of New York. The Previous Owners and their partners filed
a Chapter 11 reorganization plan (the "Chapter 11 Plan") that contemplated
ownership of the Property being turned over to the Predecessor or its
designee upon consummation of the Chapter 11 Plan. Pursuant to the order of
the Bankruptcy Court, the Chapter 11 Plan was confirmed on May 29, 1996,
and became effective on July 17, 1996, upon the transfer of the Property by
the Previous Owners to the Company in satisfaction of the Mortgage Loan
(the "Transfer").
NBC Sale
Pursuant to the Agreement dated April 23, 1996, among the Investor Group,
General Electric Company ("GE"), National Broadcasting Company, Inc.
("NBC") and NBC Trust No. 1996A ("NBC Trust"), on July 17, 1996,
immediately preceding the transfer of the Property, the Previous Owners
sold to GE, NBC and NBC Trust (the "NBC Sale"), interests in certain
buildings in the Property (the "NBC Space") previously leased by GE or its
affiliates, including NBC. Pursuant to the Chapter 11 Plan, proceeds of
$440 million from the NBC Sale were paid directly to the Company reducing
the outstanding Mortgage Loan. Goldman Sachs Mortgage Company ("GSMC"), an
affiliate of Whitehall, was paid $4.4 million by the Company in connection
with securing the proceeds of the NBC Sale as a partial repayment of the
Mortgage Loan. Upon satisfaction of the Mortgage Loan, this fee was
expensed by the Company during the third quarter of 1996.
Merger with Holdings
On June 30, 1997, the Predecessor merged with and into Holdings, with
Holdings being the surviving corporation. Pursuant to the merger, Holdings
succeeded to the Predecessor's beneficial interest in the Company and
Holdings was renamed Rockefeller Center Properties, Inc.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
Basis of preparation
The accompanying financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP"). The preparation of
financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
7
<PAGE> 10
RCPI TRUST
NOTES TO FINANCIAL STATEMENTS (cont'd)
(UNAUDITED)
The accompanying financial statements present the Company's balance sheet,
as successor to the Predecessor, as of September 30, 1997 and December 31,
1996 and the results of operations for the quarter and nine months ended
September 30, 1997 and for the period from July 10, 1996 to September 30,
1996 and the cash flows for the nine months ended September 30, 1997 and
the period from July 10, 1996 to September 30, 1996. The accompanying
financial statements also present the Predecessor's results of operations
for the periods from July 1, 1996 to July 9, 1996 and January 1, 1996 to
July 9, 1996 and cash flows for the period from January 1, 1996 to July 9,
1996.
These financial statements should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
Pursuant to Accounting Principles Bulletin No.16, Business Combinations,
the Merger was accounted for using purchase accounting, pursuant to which
the purchase price was allocated among the assets and liabilities of the
Company based on the fair market value of the assets and liabilities on the
Effective Date. As of September 30, 1996 these allocations had not been
finalized. Statement of Financial Accounting Standards No. 38, Accounting
for Preacquisition Contingencies of Purchased Enterprises, allows the
acquiring company up to one year to adjust the fair market value of the
assets and liabilities acquired. Certain purchase accounting adjustments
were recorded in the fourth quarter of 1996 which were not reflected in the
accompanying statement of operations for the Company for the period from
July 10, 1996 to September 30, 1996. These adjustments were to properly
record the fair value of the 14% Debentures, the buildings and the land. If
these adjustments had been recorded during the period from July 10, 1996 to
September 30, 1996, the net loss would have decreased from $11,446 to
$9,504.
There have been no significant changes in accounting principals or the
estimates used in the preparation of the financial statements since the end
of the most recently completed fiscal year.
3. MORTGAGE LOAN AND INTEREST INCOME
Due to the significant uncertainties caused by the filing of the Chapter 11
Plan, the Predecessor limited recognition of income on the Mortgage Loan
for the periods from July 1, 1996 to July 9, 1996 and from January 1, 1996
to July 9, 1996 to the cash actually received from the Previous Owners. No
cash was received by the Company during the period from July 10, 1996 to
September 30, 1996.
4. DEBT
Convertible Debentures
The Convertible Debentures were issued pursuant to an Indenture, dated as
of September 15, 1985 (as amended, the "Indenture"), between the
Predecessor and Manufacturers Hanover Trust Company (now the United States
Trust Company) as Trustee. The Convertible Debentures were convertible into
shares of Common Stock of the Predecessor on the maturity date, December
31, 2000, and upon certain other events. On July 10, 1996, pursuant to the
terms of the Indenture, the Indenture was amended in connection with the
Merger to provide that the holder of a Convertible Debenture shall, after
the Effective Date and only at such times as may be provided by the terms
and conditions of the Indenture and such Convertible Debenture, have the
right to convert such Convertible Debenture only into cash in an amount
equal to eight dollars ($8.00) in respect of each share of Common Stock of
the Predecessor into which such Convertible Debenture could otherwise have
been converted at the time of conversion pursuant to the terms and
conditions of the Indenture and such Convertible Debenture. At such time,
the Company became the successor to the Predecessor under the amended
Indenture.
8
<PAGE> 11
RCPI TRUST
NOTES TO FINANCIAL STATEMENTS (cont'd)
(UNAUDITED)
Upon maturity, the Convertible Debentures are also exchangeable into
nonconvertible floating rate notes, at the holder's option. In the event a
holder of a Convertible Debenture fails to timely surrender such
Convertible Debenture for conversion or exchange, such holder shall be
deemed to have elected to exchange such Convertible Debenture, unless the
holders of 90% of the aggregate principal amount of such series of
Convertible Debentures have elected to convert their Convertible
Debentures, in which case such holder shall be deemed to have elected to
convert such Convertible Debenture. After exchange, the floating rate notes
would mature on December 31, 2007 and, would be prepayable anytime at the
Company's option, at par. The notes will bear interest at the three-month
London Interbank Offering Rate ("LIBOR") plus 1/4% or such greater spread
(not in excess of 1%) as would, in the opinion of a major international
investment bank selected by the Company, cause such notes to trade at par.
Prior to 1994, the Predecessor had repurchased and retired 36.4% of
original principal amount of the Current Coupons and 38.4% of the face
amount of the Zero Coupons. The Predecessor's repurchase of its Convertible
Debentures was initially funded through floating rate short-term unsecured
bank loans which were later fully repaid when the Predecessor initiated a
commercial paper program. The commercial paper borrowings were fully repaid
in 1994 with proceeds from sales of the Predecessor's portfolio securities,
operating cash flow and the issuance of 14% Debentures and Floating Rate
Notes (see below).
Interest expense recognized by the Predecessor on the Convertible
Debentures was based on the average yields to the maturity date. The
average yields were computed (using the interest method with semiannual
compounding) by (1) combining the differing coupon rates on the Current
Coupons and (2) amortizing the original issue discount related to the Zero
Coupons. The resulting effective annual interest rates were 9.23% and
10.23% through the Effective Date for the Current Coupons and Zero Coupons,
respectively. Upon consummation of the Merger, the carrying value of the
Zero Coupons was adjusted by the Company to reflect the fair market value
using an imputed interest rate of 12.10%. The face amount of the Zero
Coupons is approximately $586.2 million.
The Current Coupons bore interest from the date of issuance until December
31, 1994 at the rate of 8% per annum, and therefore at the rate of 13% per
annum payable annually on December 31 of each year. On August 28, 1996, the
Current Coupons were redeemed at the principal amount of approximately
$213.2 million plus accrued interest.
GSMC Facility
Pursuant to a Loan Agreement dated December 18, 1994, between the
Predecessor and GSMC (as Agent and as Lender), the Predecessor issued
Floating Rate Notes totaling $150 million (the "GSMC Facility"). The
Predecessor made mandatory principal payments on the Floating Rate Notes of
approximately $33.7 million, which reduced the principal balance to
approximately $116.3 million prior to the Effective Date. On July 17, 1996,
a total of approximately $106.3 million of the outstanding principal,
approximately $1.2 million of accrued interest and a prepayment penalty of
approximately $1.6 million was prepaid by the Company. Pursuant to the
Amended and Restated Loan Agreement dated July 17, 1996, the Company was
named as successor in interest to the Predecessor. The GSMC Facility, among
other things, was amended to change the maturity date of the Floating Rate
Notes to January 31, 1997 and provided for an Additional Advance, as
defined, up to a maximum outstanding balance of $60 million. Subsequent
amendments to the Amended and Restated Loan Agreement had extended the
maturity date to May 31, 1997. On May 16, 1997, the remaining $10 million
of principal was prepaid, plus accrued interest of approximately $196,000
and a prepayment penalty of $150,000. At that time the GSMC Facility was
terminated.
9
<PAGE> 12
RCPI TRUST
NOTES TO FINANCIAL STATEMENTS (cont'd)
(UNAUDITED)
The Floating Rate Notes bore interest based on 90-day LIBOR plus 4% which
was reset two business days prior to each interest payment date. The
weighted average interest rate for the period from January 1, 1997 through
the repayment date, May 16, 1997, was 9.52% for the Company, and 9.48% for
the nine months ended September 30, 1996 for the Company and the
Predecessor. Interest was payable quarterly on March 1, June 1, September
1, and December 1 of each year.
The Merger Agreement provided that GSMC would make a line of credit (the
"GSMC Loan") available to the Predecessor during the period between
November 7, 1995 and the earlier of (1) the consummation of the Merger as
contemplated by the Merger Agreement or (2) any termination of the Merger
Agreement. The GSMC Loan accrued interest at the rate of 10% per annum
(compounded quarterly) and was prepayable at any time without penalty. The
Predecessor borrowed a total of approximately $63.7 million under the GSMC
Loan which was repaid, along with accrued interest, on July 17, 1996 by the
Company.
14% Debentures
The 14% Debentures were issued pursuant to a Debenture Purchase Agreement
dated as of December 18, 1994 between the Predecessor and Whitehall and
amended effective July 10, 1996 to, among other things, name the Company as
the successor in interest to the Predecessor. The unsecured 14% Debentures
mature on December 31, 2007 and bear interest at a rate of 14% per annum.
On May 16, 1997, the agreement was further amended in conjunction with the
execution of the NationsBank Loan (see below), to change the semi-annual
interest payment dates from each June 2 and December 2 to each July 31 and
January 31, respectively.
The Company's interest expense for the 14% Debentures includes the
amortization of a premium adjustment to reflect the carrying amount of the
14% Debentures at their estimated fair value as of the Effective Date. The
premium on the 14% Debentures is being amortized on the effective interest
method until maturity. The Predecessor's interest expense on the 14%
Debentures includes the straight line amortization of the original issue
discount related to the Warrants and SARs (see below) through the maturity
date, December 31, 2007.
Under the terms of the 14% Debentures, to the extent that Net Cash Flow, as
defined, is insufficient to pay interest on an interest payment date, the
Company will not be obligated to pay interest on the 14% Debentures on such
date and such interest will accrue. If an Event of Default, as defined,
were to occur and be continuing, the 14% Debentures would bear interest at
18% per annum. Upon the occurrence of an Event of Default, the holders of
the 14% Debentures may declare the unpaid principal thereof and accrued
interest thereon due and payable. The 14% Debentures are redeemable in
whole or in part at any time after December 30, 2000 provided the Floating
Rate Notes have been paid in full. The Debenture Purchase Agreement
provides for decreasing penalties for early redemption of the 14%
Debentures before December 31, 2003.
In connection with the issuance of the 14% Debentures in December 1994, the
Predecessor issued to Whitehall 4,155,927 Warrants, to acquire shares of
newly issued Common Stock of the Predecessor and 5,349,541 Stock
Appreciation Rights ("SARs"),which were exchangeable for 14% Debentures or,
under certain circumstances, for Warrants on a one-for-one basis. The
Predecessor was required to make adjustments to earnings for the difference
between the aggregate principal amount of 14% Debentures issuable upon
exchange of the SARs (SARs liability) and the value at which the SARs
liability was carried. In connection with the Merger (see Note 1), all
outstanding Warrants and SARs were contributed by Whitehall through
Holdings to the Predecessor at a value of $4.00 per Warrant and SAR and
were then canceled.
10
<PAGE> 13
RCPI TRUST
NOTES TO FINANCIAL STATEMENTS (cont'd)
(UNAUDITED)
NationsBank Credit Facility
The Company entered into a Credit Agreement (the "NationsBank Credit
Agreement") dated as of May 16, 1997, with NationsBank of Texas, N.A.
("NationsBank"), pursuant to which NationsBank agreed to make term loans
(the "NationsBank Loans") to the Company in an aggregate principal amount
of up to $100 million. On May 16, 1997, NationsBank made a term loan to the
Company in the principal amount of $55 million. The Company may elect
interest periods based on one, two, three, or six month LIBOR rates.
Interest accrues at LIBOR plus 1.75% and is payable at the end of each
interest period. As of September 30, 1997, interest was accruing at 7.5% on
the initial $55 million and no other NationsBank Loans have been made. The
maximum amount of NationsBank Loans which may be outstanding at any time
reduces quarterly commencing March 31, 1998 through the May 16, 2000
maturity date. Subject to the satisfaction of certain conditions precedent,
the Company may extend the maturity date of the NationsBank Loans to
12/31/00 and such loans will bear interest based on LIBOR plus 2.125%
during such extension period.
In connection with the NationsBank Loans, the Company purchased an interest
rate protection agreement from Goldman Sachs Capital Markets L.P. capping
LIBOR at 7.69% during the first two years of the initial term and at 8.69%
thereafter including the extension period.
As a condition to making the NationsBank Loans, the holder of the 14%
Debentures and the Company executed an intercreditor and subordination
agreement pursuant to which the holder of the 14% Debentures agreed (i) to
subordinate payment on the 14% Debentures to the NationsBank Loans, (ii)
that in certain circumstances interest would accrue but not be paid on the
14% Debentures, and (iii) that NationsBank may take certain actions on
behalf of the holder of the 14% Debentures upon the occurrence of certain
bankruptcy related events in respect of the Company.
In addition, certain members of the Investor Group and/or certain of their
affiliates entered into a Limited Recourse Agreement dated as of May 16,
1997, in favor of NationsBank.
Interest rate swap agreements
In connection with its short term floating rate debt, the Predecessor
entered into interest rate swap agreements with financial institutions that
were intended to fix a portion of the Predecessor's interest rate risk on
floating rate debt. The Predecessor paid a fixed rate of interest
semi-annually and received a variable rate of interest semi-annually based
on 180-day LIBOR. In connection with the issuance of the Floating Rate
Notes and 14% Debentures in December 1994, the Predecessor retired all but
three of its interest rate swap agreements. The remaining three contracts
have an aggregate notional amount of $105 million and each expires during
1998.
The amount to be paid or received from interest rate swap agreements is
accrued as floating interest rates are reset semi-annually.
On the Effective Date, the Company assumed the three remaining interest
rate swap agreements and adjusted the carrying value of the swap
liabilities to reflect their estimated fair value of approximately $5.3
million. For each swap, the Company and the Predecessor paid a net weighted
average rate of interest of 3.76% and 3.91% for the nine months ended
September 30, 1997 and 1996, respectively. As of September 30, 1997 and
December 31, 1996, the net weighted average interest rate of swaps
outstanding for the Company was 3.69% and 3.93%, respectively.
11
<PAGE> 14
RCPI TRUST
NOTES TO FINANCIAL STATEMENTS (cont'd)
(UNAUDITED)
The interest rate swaps were used by the Predecessor for hedging purposes,
therefore the fair value of these swaps are not reflected in the
Predecessor's balance sheet and the incremental revenue or expense is
recognized in the Predecessor's statements of operations.
The interest rate swaps are reported in the Company's financial statements
on a mark to market basis. As of September 30, 1997 and December 31, 1996,
the carrying amount of all interest rate swap agreements was reported as a
liability by the Company of approximately $2.5 million and $5.2 million
respectively, based on information supplied by the swap counterparties to
the swap contracts. During the nine months ended September 30, 1997, the
Company recorded an adjustment of approximately $2.7 million to properly
mark to market the swaps as of September 30, 1997 and reflected the
adjustment as reduction of interest expense in the Company's statement of
operations.
5. CONTRIBUTIONS, DISTRIBUTION AND NET LOSS PER SHARE
Pursuant to the Stock Subscription and Stockholders Agreement dated July 9,
1996 that organized Holdings, the Limited Liability Company Agreement dated
July 9, 1996 that organized LLC (hereinafter Holdings, and LLC will be
collectively referred to as the "Owners") and the Amendment Agreement dated
May 1, 1997 among the Owners, the Owners are required to provide additional
contributions up to the Maximum Additional Mandatory Contribution, as
defined, totaling $82.5 million. The Maximum Additional Mandatory
Contribution shall be used to fund unforeseen capital expenditures and
similar contingencies reasonably necessary to protect and maintain the
value of the Property. During the nine months ended September 30, 1997, the
company made cash distributions to each of its Owners in an aggregate
amount of $44,127,504. RCPI and LLC would have each received 50% of the
distribution but for the preferred return earned by the LLC. During the
nine months ended September 30, 1997 LLC contributed an additional $10,000
to the Company and LLC receives an 8% cumulative preferred return on the
$10,000 contribution.
The Indenture governing the Convertible Debentures limits cash
distributions to the Owners of the Company to the amount of cumulative
Distributable Cash. The Indenture defines Distributable Cash as cash
receipts from operations less operating expenses and interest. The amount
of Distributable Cash, net of dividends and distributions paid (including
the distribution referred to above), at September 30, 1997 and December 31,
1996 was approximately $49 million and $63 million respectively. This
amount includes cash flows from operating activities and certain investing
activities, net of dividends paid, from the Predecessor's inception through
July 9, 1996 of approximately $70 million. As interest income was not
received by the Predecessor during the period when the Previous Owners were
under Chapter 11 protection, net cash flows from operations of the
Property, which accrued to the benefit of the Company during this period,
are also included.
Net loss per share for the Predecessor is based upon 38,260,704 average
shares of Common Stock outstanding during the six months ended June 30,
1996. For this period, fully diluted net loss per share is not presented
since the effect of the assumed conversion of the Convertible Debentures,
Warrants and SARs would be anti-dilutive.
6. LEGAL MATTERS
On January 23, 1995, Bear, Stearns & Co., Inc. and Donaldson, Lufkin &
Jenrette Securities Corporation commenced an action against the Predecessor
in the Supreme Court of New York, County of New York. The plaintiffs
alleged that the Predecessor breached a contract relating to the
plaintiffs' provision of investment banking services to the Predecessor in
connection with a proposed 1994 transaction. The plaintiffs sought $5.1
million, plus costs, attorneys' fees and interest. On October 19, 1995, the
Predecessor filed an answer to the complaint which denied the plaintiffs'
allegations and asserted numerous affirmative defenses. On June 11,
12
<PAGE> 15
RCPI TRUST
NOTES TO FINANCIAL STATEMENTS (cont'd)
(UNAUDITED)
1996, the plaintiffs moved for partial summary judgment on their claim for
$950,000 in advisory fees and reimbursement of expenses incurred in
connection with the underlying proposed transaction. On December 19, 1996,
the court granted plaintiffs' motion, and on February 5, 1997, the court
entered judgment on that claim in the total amount, including pre-judgment
interest, of $1,115,612.33. The Company satisfied that judgment prior to
trial. The trial regarding the plaintiffs' claims for its "success fees"
and indemnification of legal fees and expenses commenced on February 24,
1997. On March 3, 1997, during the course of the trial, the parties agreed
to a settlement. Pursuant to the settlement agreement, the Company paid
plaintiffs $2 million, and plaintiffs dismissed the lawsuit with prejudice.
Plaintiffs and the Company executed mutual releases of all claims arising
out of the engagement of plaintiffs in connection with the proposed 1994
transaction.
On May 24, 1995, Jerry Krim commenced an action encaptioned Krim v.
Rockefeller Center Properties, Inc. and Peter D. Linneman. On June 7, 1995,
Kathy Knight and Moishe Malamud commenced an action encaptioned Knight, et
al. v. Rockefeller Center Properties, Inc. and Peter D. Linneman. Both
actions were filed in the United States District Court for the Southern
District of New York and purport to be brought on behalf of a class of
plaintiffs comprised of all persons who purchased the Predecessor's Common
Stock between March 20, 1995 and May 10, 1995. The complaints allege that
the Predecessor and Dr. Linneman violated the federal securities laws by
their purported failure to disclose, prior to May 11, 1995, that the
Previous Owner would file for bankruptcy protection. The cases have been
consolidated. On July 28, 1995, Predecessor and Dr. Linneman filed answers
to the complaints denying plaintiffs' substantive allegations and asserting
numerous affirmative defenses. On September 22, 1995, plaintiffs served an
Amended Class Action Complaint adding the Predecessor's remaining directors
and its president as defendants. In addition to the foregoing claims, the
Amended Complaint also asserts a cause of action for breach by the
Predecessor's directors and its president of their fiduciary duties by
approving the Agreement and Plan of Combination dated as of September 11,
1995, between the Predecessor and Equity Office Holdings, L.L.C. ("EOH")
(the "Combination Agreement"). The plaintiffs are seeking damages in such
amount as may be proved at trial. Plaintiffs are also seeking injunctive
relief, plus costs, attorneys' fees and interest. Plaintiffs' counsel has
advised that they may further amend the complaints in both actions. The
Company intends to vigorously contest these actions.
On November 15, 1996, Charal Investment Co., Inc. and C.W. Sommer & Co.
filed a purported class action complaint in the United States District
Court for the District of Delaware against certain former directors and
officers of the Predecessor and against certain of the Company's indirect
shareholders. Plaintiffs alleged that the defendants violated Section 10(b)
of the Securities and Exchange Act of 1934 (the "Act") and Rule 10b-5
promulgated thereunder, and Section 14 of the Act and Rule 14a-9
promulgated thereunder by allegedly failing to provide adequate disclosure
of the alleged possibility of a sale or lease financing of a portion of the
Property to NBC and its parent corporation, GE, prior to the shareholder
vote on the Merger. The complaint sought unspecified damages, recession of
the Merger and/or disgorgement. The Company may have indemnity obligations
with respect to one or more of the defendants. On December 11, 1996 and
December 18, 1996, identical complaints were filed in the federal court in
Delaware by additional plaintiffs. On January 13, 1997, all these actions
were consolidated under the caption In re Rockefeller Center Properties,
Inc. Securities Litigation, Cons. C.A. No 96-543 (RRM) ("In re RCPI"). On
January 31, 1997, all defendants moved to dismiss the complaint for failure
to state a claim. On March 3, 1997, the plaintiffs in In re RCPI responded
to the motion to dismiss by filing an amended complaint. The two federal
securities law claims remain the same, but the plaintiffs added new
allegations that defendants failed adequately to disclose (i) the existence
of certain transferable development rights, or air rights, that were
obtained by the Company in connection with the Merger, and (ii) alleged
negotiations with Christie's Auction House and the Walt Disney Company to
become new tenants at Rockefeller Center. On April 30, 1997, defendants
supplemented their initial motion to dismiss by moving to dismiss the
amended complaint for failure to state a claim. On May 9, 1997, the court
signed a supplemental order of consolidation admitting four new plaintiffs.
Oral argument was held in connection with the motion to dismiss on October
7, 1997 and the motion is currently under consideration by the Court.
13
<PAGE> 16
RCPI TRUST
NOTES TO FINANCIAL STATEMENTS (cont'd)
(UNAUDITED)
On January 21, 1997, an action entitled Flashman v. Goldman, Sachs & Co.,
97 Civ. 0403 (MGC) (S.D.N.Y.), was filed in New York Federal court
containing allegations substantially similar to those in the original
complaint in In re RCPI. Subsequently, the plaintiff in Flashman joined as
a plaintiff in the amended complaint filed in In re RCPI and voluntarily
dismissed the New York action without prejudice.
On February 25, 1997, an action entitled Debora v. Rockefeller, et. al., 97
Civ. 01312 (LLS) ("Debora"), was filed in the United States District Court
for the Southern District of New York. The complaint in Debora was
substantially similar to the original complaint in In re RCPI. The
defendants are the same in both actions. Subsequently, the plaintiff in
Debora voluntarily dismissed the action without prejudice and joined as a
plaintiff in In re RCPI.
On July 31, 1995, L.L. Capital Partners, L.P. commenced an action against
the Predecessor in the United States District Court in the Southern
District of New York. The plaintiff alleged that, the Predecessor's
prospectus dated November 3, 1993, failed to disclose its purported belief
that the Rockefeller Interests and Mitsubishi Estate would cease to fund
the Previous Owner's cash flow shortfalls. On January 3, 1997, the parties
entered into a settlement agreement and executed and filed stipulations of
dismissals and releases dismissing all claims, counterclaims and third
party claims with prejudice. In connection with the dismissal, the Company
paid L.L. Capital Partners, L.P. the sum of $50,000.
On September 13 and 14, 1995, five class action complaints, captioned
Faegheh Moezinia v. Peter D. Linneman, Benjamin D. Holloway, Peter G.
Peterson, William F. Murdoch, Jr. and Rockefeller Center Properties, Inc.;
Martin Zacharias v. B.D. Holloway, P.G. Peterson, W.F. Murdoch, P.D.
Linneman Rockefeller Center Properties, Inc.; James Cosentino v. Peter D.
Linneman, Benjamin D. Holloway, Peter G. Peterson, William F. Murdoch, Jr.
and Rockefeller Center Properties, Inc.; Mary Millstein v. Peter D.
Linneman, Peter G. Peterson, Benjamin D. Holloway, William F. Murdoch, Jr.
and Rockefeller Center Properties, Inc.; and Robert Markewich v. Peter D.
Linneman and Daniel M. Neidich, et al. were filed in the Delaware Court of
Chancery. On October 11, 1995, an additional complaint captioned Hunter
Hogan v. Rockefeller Center Properties, Inc., et al. was filed in the
Delaware Court of Chancery. Each of the complaints purports to be brought
on behalf of a class of plaintiffs comprised of stockholders of the
Predecessor who have been or will be adversely affected by the Combination
Agreement. All of the complaints allege that the Predecessor's directors
breached their fiduciary duties by approving the Combination Agreement. The
plaintiffs seek damages in such amount as may be proved at trial.
Plaintiffs also seek injunctive relief, plus costs and attorneys fees. On
November 8, 1995, the Delaware Court of Chancery entered an order
consolidating these actions under the caption In re Rockefeller Center
Properties, Inc. Shareholders Litigation, Consol. C.A. No. 14612. In a
status report filed with the court on February 28, 1997, plaintiffs counsel
represented to the court that the actions "had been mooted" and that an
application for counsel fees was being prepared. The Company intends to
contest any such application vigorously.
On July 31, 1996, a Petition for Appraisal, captioned Solomon v.
Rockefeller Center Properties, Inc., C.A. No. 15155, was filed in the
Delaware Court of Chancery. The petitioners allege that the consideration
paid to RCPI's stockholders in conjunction with the Merger was inadequate
and they request that the Court determine the fair value of their stock at
the time of the Merger. Predecessor filed its Response to the Petition for
Appraisal on October 7, 1996, in which it asserts that the fair value of
Predecessor common stock at the time of the Merger was not more than $8.00
per share and asks the Court to so determine.
Although the outcome of claims, litigation and disputes cannot be predicted
with certainty, in the opinion of management based on facts known at this
time, the resolution of such matters are not anticipated to have a material
adverse effect on the financial position or results of operations of the
Company. As these matters continue to proceed through the process to
ultimate resolution, it is reasonably possible that the Company's
estimation of the effect of such matters could change within the next year.
14
<PAGE> 17
RCPI TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Due to the change in ownership on July 10, 1996, a full nine month period
ended September 30, 1996 does not exist for either the Company or the
Predecessor. As there are no comparable nine month periods, the discussion
below relates only to the results of operations of the Predecessor for the
six months ended June 30, 1996 and the financial condition and results of
operation of the Company for the six months ended June 30, 1997. A
comparison of the results of operations of the Company for the quarter
ended September 30, 1997 and the period from July 10, 1996 to September 30,
1996 is included in the section captioned "Results of Operations - RCPI
Trust". Management believes that the variation resulting from the nine days
difference between periods is not material. In addition, pro forma
operating statements are presented in this section to provide a meaningful
comparison of the results of operation of the Property for the nine months
ended September 30, 1997 and 1996 as if the acquisition of the Property and
the NBC Sale (see below) had occurred on January 1, 1996.
RESULTS OF OPERATIONS - ROCKEFELLER CENTER PROPERTIES, INC.
The Predecessor's principle source of revenue was interest income received
on the Mortgage Loan. For the six months ended June 30, 1996 the
Predecessor limited recognition of income on the Mortgage Loan to the cash
actually received. Since the Previous Owner filed for Chapter 11 protection
on May 11, 1995, and through the Effective Date, the Predecessor did not
receive any interest payments and accordingly no income was recognized.
Other income for the six months ended June 30, 1996 was approximately
$36,000, and relates to interest earned on cash deposits.
Amortization of deferred debt issuance costs for the six months ended June
30, 1996 was approximately $1.8 million. The total relates to normal
amortization of deferred debt issuance costs related to the Current
Coupons, Zero Coupons, 14% Debentures, and Floating Rate Notes.
The Predecessor was required to adjust the SAR liability to reflect the
aggregate principal amount of 14% Debentures that would have been issuable
upon exchange of the SARs on June 30, 1996. This adjustment, which is
directly related to the increase in the Predecessor's stock price, resulted
in an expense of approximately $1.9 million for the six months ended June
30, 1996. Concurrent with the Merger, the Predecessor's SARs and Warrants
were canceled.
During the six months ended June 30, 1996 the Predecessor recognized
approximately $398,000 in expenses related to the March 25, 1996 special
meeting of stockholders. The stockholders approved the Merger Agreement on
that date.
All debt of the Predecessor was transferred to the Company on the Effective
Date. To provide a more meaningful analysis, interest expense recognized by
the Company for the six months ended June 30, 1997 is compared to interest
expense recognized by the Predecessor for the six months ended June 30,
1996. The following table illustrates comparative interest expense for the
six months ended June 30, 1997 and 1996.
15
<PAGE> 18
RCPI TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION (cont'd)
<TABLE>
<CAPTION>
($ In Thousands)
For the six months ended June 30
1997 1996
-------- --------
<S> <C> <C>
Zero coupon convertible debentures $ 22,470 $ 17,971
Current coupon convertible debentures -- 11,022
14% debentures 4,579 5,489
NationsBank Loan 541 --
Floating rate notes 507 5,588
GSMC Loan -- 2,379
Interest rate swaps and other (13) 2,054
-------- --------
Total $ 28,084 $ 44,503
======== ========
</TABLE>
Interest expense on the Zero Coupons increased partially as a result of the
accretion of the principal amount, which increases the carrying value of
the Zero Coupons each year. In addition, the accretion had compounded at an
effective interest rate of 10.23% prior to the Merger. As of the Effective
Date, the fair market value of the Zero Coupons was adjusted, and the
carrying amount of the Zero Coupons has been accreting at 12.10% since that
date.
The Predecessor recognized approximately $11.0 million of interest expense
on the Current Coupons for the six months ended June 30, 1996. As the
Current Coupons were redeemed on August 28, 1996, the Company did not
recognize any interest expense for the six months ended June 30, 1997.
Interest expense on the 14% Debentures accrued at the pay rate of 14%, plus
amortization of the discount related to the warrants and SARs, prior to the
Effective Date. As of the Effective Date, the fair market value of these
Debentures was adjusted resulting in a premium. As a result of premium
amortization related to this adjustment, the effective interest rate on the
14% Debentures has been approximately 9.03% since the Effective Date.
Accordingly, interest expense is lower for the six months ended June 30,
1997.
On May 16, 1997 the Company entered into the NationsBank Credit Agreement.
As of June 30, 1997 the Company had borrowed $55 million under the
NationsBank Credit Agreement. Interest expense for the six months ended
June 30, 1997 was approximately $541,000. There is no corresponding expense
for the six months ended June 30, 1996.
On September 1, 1995, the Predecessor repaid $33.7 million of the $150
million of Floating Rate Notes originally issued in December 1994. On July
17, 1996, the Company prepaid an additional $106.3 million of outstanding
principal plus accrued interest. On May 16, 1997 the remaining $10 million
of principal was repaid. Interest expense related to the Floating Rate
Notes is lower for the six months ended June 30, 1997 due to the smaller
principal balance outstanding during that period. Interest expense on the
swap agreement, which the Predecessor had accounted for as a component of
interest expense related to the Floating Rate Notes, has been reclassified
for this analysis.
Interest expense related to the GSMC Loan was approximately $2.4 million
for the six months ended June 30, 1996. The GSMC Loan was repaid in full on
July 17, 1996, thus there is no related expense for the six months ended
June 30, 1997.
16
<PAGE> 19
RCPI TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION (cont'd)
Other interest expense for the six months ended June 30, 1997 resulted in a
credit of $13,000 as a result of the mark to market adjustment of
approximately $2.0 million, which fully offset interest expense related to
the interest rate swap agreements. The Predecessor did not account for the
interest rate swap agreements on a mark to market basis, thus there is no
corresponding adjustment for the six months ended June 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES - RCPI TRUST
Land and Building
As discussed above, on July 17, 1996, the Property was transferred to the
Company and the related Mortgage Loan was canceled. Concurrently, the
Previous Owners sold the NBC Space to GE, NBC, and their affiliates for
$440 million. The NBC Space, measured in accordance with the standards
promulgated by the New York Real Estate Board in 1987, accounted for
approximately 1.5 million square feet, or 20.5% of the total area of the
Property. At September 30, 1997 the Property, exclusive of the NBC Space,
was approximately 86.3% occupied. Occupancy rates for the Property at
various dates are presented in the following table. Occupancy rates for
dates prior to the Effective Date have been adjusted to account for the
sale of the NBC space.
June 31, 1997 86.4% September 30, 1996 82.8%
March 31, 1997 83.3% June 30, 1996 82.2%
December 31, 1996 83.6% March 31, 1996 83.8%
The following table shows selected lease expirations and vacancy of the
Property as of September 30, 1997. Area, as presented below and discussed
above, is measured based on standards promulgated by the New York Real
Estate Board in 1987. Lease turnover could offer an opportunity to
increase the revenue of the Property or might have a negative impact on
the Property's revenue. Actual renewal and rental income will be affected
significantly by market conditions at the time and by the terms at which
the Company can then lease space.
Square Feet Percent
Year Expiring Expiring
---- -------- --------
Vacant 809,538 13.7%
1997 * 121,000 2.1%
1998 331,184 5.5%
1999 203,646 3.5%
2000 446,581 7.6%
2001 125,545 2.1%
Thereafter 3,862,203 65.5%
--------- -----
Total 5,899,697 100.0%
========= ======
* Represents square feet and vacancy percentage for the quarter
ended December 31, 1997.
17
<PAGE> 20
RCPI TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION (cont'd)
Debt
The Zero Coupons due December 31, 2000 accrete to a face value of
approximately $586.2 million at an effective annual interest rate of
12.10%. Concurrent with the Merger, the carrying value of the Zero Coupons
was adjusted to reflect the fair market value as of the Effective Date. As
a result, the effective annual interest rate was adjusted from 10.23% to
12.10%. At September 30, 1997 and December 31, 1996, the carrying value of
the Zero Coupons, net of unamortized discount, was approximately $396.4
million and $362.2 million, respectively.
The Current Coupons were redeemed on August 28, 1996. Principal in the
amount of $213.2 million plus accrued interest of $18.3 million was paid
on that date. Interest accrued at the pay rate of 13% from the Effective
Date through the redemption date. Prior to the Effective Date, interest
accrued at an effective annual interest rate of 9.23%.
The GSMC Loan was repaid in full on July 17, 1996. The total payment of
$65.8 million included accrued interest of $2.8 million. Interest accrued
at 10% from inception through the payment date.
On July 17, 1996, outstanding principal and accrued interest on the
Floating Rate Notes in the amount of $106.3 million was prepaid and on May
16, 1997, the remaining $10 million of principal was repaid. Interest had
accrued at LIBOR plus 4%. Interest was paid quarterly on March 1, June 1,
September 1, and December 1.
The 14% Debentures have a principal balance of $75 million and mature on
December 31, 2007. On the Effective Date, the carrying value of the 14%
Debentures was adjusted to reflect their estimated fair value at that
date, resulting in a premium. The effective interest rate, which is net of
the amortization of this premium, is approximately 9.03%. Interest
payments are made semi-annually on January 31 and July 31. As of September
30, 1997 and December 31, 1996, the carrying value of the 14% Debentures
was approximately $100.1 million and $101.2 million, respectively.
On May 16, 1997, the Company entered into the NationsBank Credit Agreement
and as of September 30, 1997 has drawn $55 million under its $100 million
facility and has incurred $1.6 million in interest.
Cash Flow
During the nine months ended September 30, 1997 the Company received cash
flows of approximately $30.7 million from operations of the Property. The
Company used this cash flow from operations and its existing cash balance
to fund tenant improvements of approximately $10.4 million and other
leasing costs of approximately $12.9 million. In addition, the Company
expended approximately $9.5 million for building improvements, furniture,
fixtures and equipment. Legal costs and placement fees incurred in
connection with the closing of the NationsBank Credit Agreement were
approximately $3.4 million.
The Company believes that its current cash balance and future cash flows
from operations, together with the remaining undrawn amount pursuant to
the NationsBank Credit Agreement, will be sufficient to fund its
requirements for the foreseeable future.
18
<PAGE> 21
RCPI TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION (cont'd)
Inflation
Inflation and changing prices during the current period did not
significantly affect the markets in which the Company conducts its
business. In view of the moderate rate of inflation, its impact on the
Company's business has not been significant.
RESULTS OF OPERATIONS - RCPI TRUST
As the Company has only been active since July 10, 1996, pro forma
operating statements for the nine months ended September 30, 1997 and 1996
have been prepared as if the Property had been acquired on January 1,
1996. The discussion below highlights certain items included on the
Company's operating statement for the nine months ended September 30,
1997, which are not otherwise discussed. For a discussion of comparative
results of operations of the Property related to the pro forma operating
statements, refer to the caption "Pro Forma Results of Operations - The
Property." The remaining information in this section is a discussion of
comparative results of operations for the Company for the quarter ended
September 30, 1997 and for the period from July 10 to September 30, 1996.
Base rent increased for the quarter ended September 30, 1997 in part due
to an increase in occupancy to 86.3% from 82.8% as of September 30, 1996.
In addition, base rent for the quarter ended September 30, 1997, as
compared to the period from July 10, 1996 to September 30, 1996 increased
due to new leases signed with higher rental rates in 1997. It should also
be noted that although the Company began operations on July 9, 1996, it
did not own the Property and therefore record rental income until July 17,
1996.
Interest and other income has decreased for the quarter ended September
30, 1997, as compared to the period from July 10 to September 30, 1996,
primarily due to the fact that a one time termination payment was received
in 1996 totaling $1.2 million.
Interest expense has decreased in the quarter ended September 30, 1997, as
compared to the period from July 10, 1996 to September 30, 1996, primarily
due to the fact that prior year results include a prepayment penalty on
the Floating Rate Notes of $1.8 million.
Real estate taxes have increased in the quarter ended September 30, 1997,
as compared to the period from July 10, 1996 to September 30, 1996,
partially due to a slight increase in the assessed value of the Property.
In addition, although the Company began operations on July 10, 1996, it
did not own the Property and therefore record real estate tax expense
until July 17, 1996.
The decrease in professional fees for the quarter ended September 30,
1997, as compared to the period from July 10, 1996 to September 30, 1996
is due to the fact that the Company incurred approximately $6.1 million in
costs related to the NBC Sale in 1996.
PRO FORMA RESULTS OF OPERATIONS - THE PROPERTY
To provide a more meaningful comparison of results of operations, pro
forma statements of operations have been presented for the nine months
ended September 30, 1997 and 1996 as if the acquisition of the Property by
the Company had occurred on January 1, 1996. The pro forma statements of
operations are based upon the Company's statement of operations for the
nine months ended September 30, 1997 and the Previous Owners' statement of
operations for the period from January 1, 1996 to July 17, 1996, the
"Transfer Date" and the Company's results from the transfer date to
September 30, 1996.
19
<PAGE> 22
RCPI TRUST
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION (cont'd)
The pro forma statements of operations for the nine months ended September
30, 1997 and 1996 have been adjusted to show the effect of (i) gross
revenues and operating expenses had the NBC Sale occurred on January 1,
1996; (ii) interest expense had the GSMC Loan and Current Coupons been
repaid in full, and had $106.3 million of principal on the Floating Rate
Notes been paid on January 1, 1996; (iii) depreciation and amortization
expense had the Property been purchased and had the NBC Sale occurred on
January 1, 1996, and (iv) general and administrative expenses had certain
bankruptcy related costs not been incurred by the Previous Owners and had
costs related to the NBC Sale been incurred on January 1, 1996.
The pro forma results are for illustrative purposes only, and do not
purport to be indicative of the actual results which would have occurred,
nor are they indicative of future results of operations.
<TABLE>
<CAPTION>
($ In Thousands)
Nine months ended September 30,
1997 1996
--------- ---------
<S> <C> <C>
Gross Revenue:
Rent and other tenant charges $ 137,084 $ 135,456
Interest income 1,152 2,413
--------- ---------
138,236 137,869
Operating Expenses:
Real estate taxes 25,030 25,503
Utilities 12,593 11,769
Maintenance, engineering, and other operating expenses 32,967 41,665
Depreciation and amortization 14,330 11,988
Management fee 2,516 4,428
General and administrative 6,984 10,748
--------- ---------
94,420 106,101
--------- ---------
Earnings before interest 43,816 31,768
Interest expense 43,578 38,755
--------- ---------
Net income (loss) $ 238 ($ 6,987)
========= =========
</TABLE>
Rent and other tenant charges increased by approximately $1.6 million for
the nine months ended September 30, 1997 as compared to the same period in
the prior year. Occupancy increased slightly to 86.3% at September 30,
1997 as compared to 82.2% at June 30, 1996. The increase in rent and other
tenant charges is also due in part to new leases signed at higher rental
rates than were existing in the prior year and termination payments
received totaling $1.2 million.
The decrease in utilities; maintenance, engineering and other operating
expenses; and management fees in an aggregate amount of $9.8 million is
due to achieving cost reductions during the first nine months of 1997.
The decrease in general and administrative expenses is due primarily to
legal and professional fees related to the NBC Sale of approximately $6.1
million, which were incurred during the first nine months of 1996. This
decrease in 1997 is offset by the $2.0 million settlement and $617,000 of
legal fees expended during the nine months ended September 30, 1997
related to the settlement of the Bear Sterns & Co., Inc. and Donaldson,
Lufkin & Jenrette Securities Corporation lawsuit.
Based on pro forma calculations, interest expense increased by $4.8
million for the nine months ended September 30, 1997. This increase is due
primarily to interest related to the Zero Coupons, which compound at
12.10% annually resulting in an additional $3 million of expense during
1997. In addition $1.5 of interest expense related to the NationsBank Loan
was incurred during the first nine months of 1997 with no corresponding
expense during 1996.
20
<PAGE> 23
RCPI TRUST
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
The information set forth in Note 6 to the financial statements is
incorporated herein by reference. See also the Company's Quarterly
Reports on Form 10-Q for the periods ended March 31, 1997 and June 30,
1997.
21
<PAGE> 24
ITEM 6. (a) EXHIBITS
(3.1) Certificate of Trust of RCPI Trust, dated March 22, 1996 is
incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1996.
(4.1) Amended and Restated Debenture Purchase Agreement dated as
of July 17, 1996 between the Company and WHRC Real Estate
Limited Partnership is incorporated by reference to Exhibit
4.1 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1996.
(4.2) Indenture dated as of September 15, 1985 between the
Predecessor and Manufacturers Hanover Trust Company, as
Trustee, including the forms of Current Coupon Convertible
Debenture, Zero Coupon Convertible Debenture and Floating
Rate Note, is incorporated by reference to Exhibit 4 to the
Predecessor's Quarterly Report on Form 10-Q for the period
ended September 30, 1985.
(4.3) First Supplemental Indenture dated as of December 15, 1985
between the Predecessor and the Trustee, is incorporated by
reference to the Predecessor's Annual Report on Form 10-K
for the year ended December 31, 1985.
(4.4) Second Supplemental Indenture dated as of July 10, 1996
between the Company and the United States Trust Company of
New York, as Trustee, is incorporated by reference to
Exhibit 4.4 to the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(4.5) Instrument of Resignation, Appointment and Acceptance dated
as of December 1, 1993 among the Registrant, Chemical Bank,
successor by merger to Manufacturers Hanover Trust Company,
and United States Trust Company of New York is incorporated
by reference to Exhibit 4.21 to the Predecessor's Annual
Report on Form 10-K for the year ended December 31, 1993.
(4.6) Credit Agreement, dated as of May 16, 1997, between the
Company, NationsBank of Texas, N.A. and the Lenders parties
thereto is incorporated by reference to Exhibit 4.6 to the
Company's Quarterly Report on Form 10-Q for the period ended
June 30, 1997.
(4.7) Intercreditor and Subordination Agreement, dated as of May
16, 1997, among WHRC Real Estate Limited Partnership, as
attorney-in-fact for the 14% Debenture holder, the Company
and NationsBank of Texas, N.A. is incorporated by reference
to Exhibit 4.7 to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1997.
(4.8) Limited Recourse Agreement, dated as of May 16, 1997, made
by certain members of the Investor Group and for certain of
their affiliates in favor of NationsBank of Texas, N.A. is
incorporated by reference to Exhibit 4.8 to the Company's
Quarterly Report on Form 10-Q for the period ended June 30,
1997.
(27.1) Company's Financial Data Schedule.
(b) REPORTS ON FORM 8-K
No Current Reports on Form 8-K have been filed during the last
fiscal quarter.
22
<PAGE> 25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
RCPI TRUST
Date: November 14, 1997 By: /s/ David Augarten
------------------
Vice President
(Principal Financial Officer)
23
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM RCPI TRUST'S
BALANCE SHEET AS OF SEPTEMBER 30, 1997 AND RCPI TRUST'S STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 27,513
<SECURITIES> 0
<RECEIVABLES> 10,082
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 58,854
<PP&E> 793,724
<DEPRECIATION> 19,109
<TOTAL-ASSETS> 870,464
<CURRENT-LIABILITIES> 30,413
<BONDS> 551,464
0
0
<COMMON> 0
<OTHER-SE> 288,587
<TOTAL-LIABILITY-AND-EQUITY> 870,464
<SALES> 0
<TOTAL-REVENUES> 138,236
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 94,420
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43,578
<INCOME-PRETAX> 238
<INCOME-TAX> 0
<INCOME-CONTINUING> 238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
