<PAGE> 1
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
Commission file number 1-11918
TRINET CORPORATE REALTY TRUST, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 94-3175659
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
ONE EMBARCADERO CTR., 33RD FLOOR, SAN FRANCISCO, CA 94111
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(415) 391-4300
(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 [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
25,066,760 shares of Common Stock, $.01 par value as of August 13, 1999
<PAGE> 2
TRINET CORPORATE REALTY TRUST, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
- ------------------------------ ----
<S> <C>
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets
as of June 30, 1999 and December 31, 1998 3
Consolidated Statements of Operations
for the six months ended June 30, 1999 and 1998 4
Consolidated Statements of Cash Flows
for the six months ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings 25
Item 2. Changes in Securities 25
Item 3. Defaults Upon Senior Securities 25
Item 4. Submission of Matters to a Vote of
Security Holders 25
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26
Signatures 27
</TABLE>
2
<PAGE> 3
TRINET CORPORATE REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
(Unaudited)
ASSETS
Real estate $ 1,507,567 $ 1,500,789
Less accumulated depreciation (85,847) (71,950)
------------- -------------
1,421,720 1,428,839
Cash and cash equivalents 7,559 19,323
Restricted cash 8,110 17,768
Deferred rent receivable 28,690 27,235
Loan costs, net 11,382 12,238
Other assets, net 17,565 21,164
------------- -------------
$ 1,495,026 $ 1,526,567
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Debt $ 622,334 $ 647,720
Dividends payable 16,215 16,167
Other liabilities 45,884 56,655
------------- -------------
Total liabilities 684,433 720,542
------------- -------------
Commitments and contingencies (notes 2,5) - -
Minority interest 2,565 2,565
Stockholders' equity:
Preferred stock, $0.01 par value, 10,000,000 shares authorized:
Series A: 2,000,000 shares issued and outstanding
at June 30, 1999 and December 31, 1998 20 20
(aggregate liquidation preference $50,000)
Series B: 1,300,000 shares issued and outstanding
at June 30, 1999 and December 31, 1998 13 13
(aggregate liquidation preference $32,500)
Series C: 4,000,000 shares issued and outstanding
at June 30, 1999 and December 31, 1998 40 40
(aggregate liquidation preference $100,000)
Common stock, $0.01 par value, 40,000,000 shares authorized:
25,066,760 and 24,872,429 shares issued and outstanding at
June 30, 1999 and December 31, 1998 251 249
Paid-in-capital 861,476 855,568
Accumulated deficit (53,772) (52,430)
------------- -------------
Total stockholders' equity 808,028 803,460
------------- -------------
$ 1,495,026 $ 1,526,567
============= =============
</TABLE>
The accompanying notes are an integral
part of these financial statements
3
<PAGE> 4
TRINET CORPORATE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Rent $ 78,573 $ 71,955 $ 39,287 $ 36,689
Joint venture income 1,515 1,510 596 1,062
Property management fees 1,437 596 778 331
Interest income 3,279 580 1,723 459
Other income 1,624 898 960 126
---------- ---------- ---------- ----------
Total revenues 86,428 75,539 43,344 38,667
---------- ---------- ---------- ----------
Expenses:
Property operating costs 4,034 2,931 2,208 1,671
General and administrative 6,307 5,355 3,229 2,845
Interest 22,171 17,569 11,009 8,863
Depreciation and amortization 14,264 13,099 7,160 6,642
---------- ---------- ---------- ----------
Income before minority interest, gain on sale,
extraordinary item and cumulative effect 39,652 36,585 19,738 18,646
Minority interest (81) (46) (40) (34)
Gain on sale of real estate 1,153 1,115 - -
---------- ---------- ---------- ----------
Income before extraordinary item and cumulative effect 40,724 37,654 19,698 18,612
Extraordinary loss from early extinguishment of debt - (1,272) - (1,272)
Cumulative effect of a change in accounting principle (1,810) - - -
---------- ---------- ---------- ----------
Net income 38,914 36,382 19,698 17,340
Preferred dividend requirement (7,839) (7,839) (3,920) (3,920)
---------- ---------- ---------- ----------
Earnings available to common shares:
Basic $ 31,075 $ 28,543 $ 15,778 $ 13,420
========== ========== ========== ==========
Diluted $ 31,259 $ 28,543 $ 15,909 $ 13,420
========== ========== ========== ==========
Earnings available per common share, basic:
Income available before extraordinary item $ 1.32 $ 1.24 $ 0.63 $ 0.59
Earnings available $ 1.25 $ 1.19 $ 0.63 $ 0.54
Earnings available per common share, assuming dilution:
Income available before extraordinary item $ 1.30 $ 1.23 $ 0.63 $ 0.59
Earnings available $ 1.23 $ 1.18 $ 0.63 $ 0.54
Weighted average number of common shares outstanding:
Basic 24,917 23,894 24,957 24,649
Diluted 25,335 24,141 25,449 24,853
Dividends declared per common share $ 1.30 $ 1.28 $ 0.65 $ 0.64
</TABLE>
The accompanying notes are an integral
part of these financial statements
4
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TRINET CORPORATE REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 38,914 $ 36,382
Adjustments to reconcile net income to net cash
provided by operating activities:
Extraordinary loss - 1,272
Minority interest 81 46
Depreciation and amortization 14,264 13,099
Amortization of loan costs and discounts 974 1,261
Straight-line rent adjustments (2,708) (4,477)
Gain on sale of real estate (1,153) (1,115)
Joint venture income (1,515) (1,510)
Distributions from operations of joint ventures 2,842 701
Cumulative effect of a change in accounting principle 1,810 -
Cash provided by (used in) operating assets and liabilities:
Other assets 2,828 (6,634)
Other liabilities (9,626) 18,656
---------- ----------
Net cash provided by operating activities 46,711 57,681
---------- ----------
Cash flows from investing activities:
Real estate acquisitions (16,864) (218,480)
Net proceeds from sale of real estate 14,480 12,299
Net investments in and advances to unconsolidated joint ventures (2,072) (76,889)
Other capital expenditures and investments (2,648) (5,609)
---------- ----------
Net cash used in investing activities (7,104) (288,679)
---------- ----------
Cash flows from financing activities:
Net (repayments)/borrowings on Acquisition Facilities (25,000) 16,700
Mortgage note principal payments (426) (190)
Preferred dividends paid (7,839) (7,839)
Common dividends paid (32,368) (28,809)
Proceeds from issuance of common stock 4,763 143,227
Proceeds from senior unsecured debt offering - 124,633
Minority interest contributions, net of distributions (81) 1,746
Decrease/(increase) in restricted cash and investments 9,658 (11,432)
Increase in loan costs (78) (1,634)
---------- ----------
Net cash (used in)/provided by financing activities (51,371) 236,402
---------- ----------
(Decrease)/increase in cash and cash equivalents (11,764) 5,404
Cash and cash equivalents, at beginning of period 19,323 303
---------- ----------
Cash and cash equivalents, at end of period $ 7,559 $ 5,707
========== ==========
Supplemental Schedule of Noncash Investing and Financing Activities:
Mortgages assumed in connection with property acquisitions $ - $ 18,890
========== ==========
</TABLE>
The accompanying notes are an integral
part of these financial statements
5
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Financial Statements:
Principles of Consolidation and Basis of Presentation:
The accompanying consolidated financial statements include the accounts
of TriNet Corporate Realty Trust, Inc. (the "Company" or "TriNet"), its
wholly-owned subsidiary corporations and partnerships, and its majority-owned
and controlled partnership. The equity interests in the consolidated partnership
not owned and controlled by the Company are reflected as minority interest in
the consolidated financial statements. All significant intercompany balances and
transactions have been eliminated in consolidation.
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of TriNet's consolidated
financial position, results of operations and cash flows for the interim period.
The results of operations for the six months ended June 30, 1999, are not
necessarily indicative of the results that may be expected for the entire year.
Proposed Merger Transaction:
TriNet, Starwood Financial Trust ("Starwood") and a newly-formed
wholly-owned subsidiary of Starwood executed an agreement and plan of merger on
June 15, 1999 providing for the merger of the newly-formed subsidiary with and
into TriNet. TriNet will survive the merger as a subsidiary of Starwood.
On July 26, 1999, TriNet and Starwood filed with the Securities and
Exchange Commission a joint proxy statement and prospectus for the merger. The
terms of the merger are governed by the merger agreement filed as an exhibit to
TriNet's current report on Form 8-K dated June 15, 1999. The joint proxy
statement and prospectus was filed with the SEC on a confidential basis and
will be circulated to TriNet and Starwood shareholders once it has been
declared effective by the SEC.
Recent Accounting Pronouncement:
On June 15, 1998, the Financial Accounting Standards Board ("FASB")
issued Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). On June 23, 1999, the FASB
voted to defer the effective date of SFAS 133 for one year. SFAS 133 is
effective for fiscal years beginning after June 15, 2000, but earlier
application is permitted as of the beginning of any fiscal quarter subsequent to
June 15, 1998. SFAS 133 requires all derivatives to be recognized in the
statement of financial position as either assets or liabilities and measured at
fair value. The Company plans to adopt this pronouncement for its fiscal year
beginning on January 1, 2001, and will determine the impact of adoption prior to
that date.
Change in Accounting Principle:
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires all costs of start-up activities, including
organization costs, to be charged to operations as incurred for fiscal years
beginning after December 15, 1998. The initial application of SOP 98-5 requires
that prior years' unamortized start-up costs be charged to income as a
cumulative effect of a change in accounting principle. Accordingly, the Company
reported a $1.8 million charge to net income during the first quarter as a
cumulative effect of a change in accounting principle.
6
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
2. Real Estate:
The following summarizes the Company's real estate investments as of
June 30, 1999 and December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------ ------------
<S> <C> <C>
(Unaudited) (Audited)
Buildings and improvements $ 1,138,262 $ 1,119,425
Improved land 232,982 230,401
Real estate held for sale - 3,500
Less accumulated depreciation (85,847) (71,950)
------------ ------------
1,285,397 1,281,376
Convertible mortgage 15,898 27,725
Investments in and advances to
unconsolidated joint ventures 120,425 119,738
------------ ------------
Net Real estate $ 1,421,720 $ 1,428,839
============ ============
</TABLE>
Investments in and Advances to Unconsolidated Joint Ventures
At June 30, 1999, TriNet had $120.4 million invested in six
unconsolidated real estate joint ventures: TriNet Sunnyvale Partners, L.P.
("Sunnyvale"), W9/TriNet Poydras, LLC ("Poydras"), Corporate Technology
Associates LLC ("CTC I"), Sierra Land Ventures ("Sierra"), Corporate Technology
Centre Associates II LLC ("CTC II"), and TriNet Milpitas Associates, LLC
("Milpitas"), for the purpose of acquiring, operating, and, in certain cases,
developing properties. At June 30, 1999, the ventures assets consisted of 24
operating properties totaling 2.4 million square feet, 19.4 acres of land under
development and 41.7 acres of land held for development. The 24 operating
properties owned at June 30, 1999 had a total purchase price of $331.8 million.
The purchase price of the land, both under development, or held for development,
was approximately $63.0 million. Third party debt related to these investments
totaled $253.7 million at June 30, 1999. In the aggregate, the joint ventures
had total assets of $437.6 million, total liabilities of $328.9 million, and net
income of $2.9 million. TriNet accounts for these investments under the equity
method, because TriNet's joint venture partners have certain participating
rights which limit the Company's control.
TriNet's investments in and advances to unconsolidated joint ventures,
its percentage ownership interests and their respective revenues as of and for
the six months ended June 30, 1999, are presented below (in thousands):
<TABLE>
<CAPTION>
Accrued Joint
Unconsolidated Ownership Equity Notes Interest Total Venture Interest Total Third Party
Joint Venture % Investment Receivable Receivable Investment Income Income Income Debt @ 100%
-------------- --------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Operating:
Sunnyvale 44.7% $ 6,170 $ - $ - $ 6,170 $ 541 $ - $ 541 $ 16,796
Poydras 50.0% 12,537 14,890 408 27,835 184 812 996 78,610
CTC II 50.0% 1,690 28,733 2,130 32,553 (409) 1,814 1,405 16,764
Milpitas 50.0% 28,232 - - 28,232 1,188 - 1,188 82,724
Developments:
Sierra 50.0% 6,233 - - 6,233 4 - 4 4,951
CTC I 50.0% 19,402 - - 19,402 7 - 7 53,807
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Total $ 74,264 $ 43,623 $ 2,538 $ 120,425 $ 1,515 $ 2,626 $ 4,141 $ 253,652
========== ========== ========== ========== ========== ========== ========== ==========
</TABLE>
7
<PAGE> 8
TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
At June 30, 1999, TriNet was the guarantor for 25% of Poydras' $78.6
million third party debt. TriNet was also the guarantor of 50% of CTC I's $53.8
million construction and land loans. This guarantee will reduce to 25% upon
achievement of certain leasing targets. Additionally, under certain
circumstances, the Company has commitments to fund further development costs for
the potential future development of phase two of CTC I, up to a maximum of $13.9
million. The Company has the right, however, to arrange financing secured by the
development project to reduce this funding commitment.
The limited partners of the Sunnyvale partnership have the option to
convert their partnership interests into cash; however, the Company may elect to
deliver 258,894 shares of the Company's common stock in lieu of cash.
Additionally, commencing in March 2001 and February 2002, subject to
acceleration under certain circumstances, including a change of ownership of
TriNet, partnership units held by certain partners of Poydras and Milpitas may
be converted into 304,977 and 856,066 shares, respectively, of TriNet's common
stock.
3. Debt:
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
Balance as of
-------------------------------- Interest Rate
June 30, December 31, as of June 30, Maturity
Loan 1999 1998 1999 Date
---- ----------- ------------ -------------- --------
<S> <C> <C> <C> <C>
(Unaudited) (Audited)
Acquisition Facility $ 163,900 $ 188,900 LIBOR + 0.750% 05/31/2001
7.30% Notes due 2001 100,000 100,000 7.300% 05/15/2001
1994 Mortgage Loan 55,013 55,013 LIBOR + 1.000% 12/01/2004
7.95% Notes due 2006 50,000 50,000 7.950% 05/15/2006
7.70% Notes due 2017 100,000 100,000 7.700% 07/15/2017
6.75% Drs. Due 2013 (1) 125,000 125,000 6.750% 03/01/2013
Other Mortgage Loans 29,300 29,726 6.000% - 11.375% (2)
--------- ---------
623,213 648,639
Less debt discount (879) (919)
--------- ---------
$ 622,334 $ 647,720
========= =========
</TABLE>
(1) Subject to mandatory tender on 3/1/2003. Initial coupon of 6.75%
applies to first five year term only.
(2) Other Mortgage Loans mature at various dates through 2010.
The 30-day LIBOR rate as of June 30, 1999, was 5.24%. Effective October
1, 1995, the Company entered into an interest rate swap agreement which,
together with certain existing interest rate cap agreements, effectively fixes
the interest rate on $75.0 million of the Company's LIBOR-based borrowings at
5.58% plus the applicable margin. The actual borrowing cost to the Company with
respect to indebtedness covered by the protection agreements will depend upon
the applicable margin over LIBOR for such indebtedness, which will be determined
by the terms of the relevant debt instruments. At June 30, 1999, the swap
agreement, together with the cap agreements had a fair market value totaling
$2.5 million.
8
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
The following table sets forth the components of interest expense for the
periods presented (in thousands):
<TABLE>
<CAPTION>
For the Six Months
Ended June 30,
------------------------------
1999 1998
----------- -----------
(Unaudited)
<S> <C> <C>
Interest incurred $ 22,259 $ 17,372
Capitalized interest (1,062) (1,064)
Amortization of loan costs, interest rate protection
agreements, and loan discounts 974 1,261
----------- -----------
$ 22,171 $ 17,569
=========== ===========
</TABLE>
Cash interest paid for the six months ended June 30, 1999 and 1998 was
$23.1 million and $15.3 million, respectively.
4. Stockholders' Equity:
On June 15 and March 15, 1999, the Company paid a quarterly dividend of
$0.5859 per cumulative Series A preferred share, $0.5750 per cumulative Series B
preferred share and $0.50 per cumulative Series C preferred share to preferred
shareholders of record on June 1 and February 26, 1999, respectively.
On May 27, 1999, the Company declared a distribution of $0.65 per common
share, payable July 15, 1999, to common shareholders of record as of June 30,
1999.
On February 25, 1999, the Company declared a distribution of $0.65 per
common share, payable April 15, 1999, to common shareholders of record as of
March 31, 1999.
9
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
5. Commitments and Contingencies:
The Company is subject to option agreements with four existing tenants
which could require the Company to fund tenant improvements on approximately
25,000 square feet and to construct approximately 541,000 square feet of
additional adjacent space on which the Company would receive additional rent
under the terms of the option agreements. The option agreements commence and
expire at various dates through 2012.
At June 30, 1999, TriNet had an obligation to loan TN-CP Venture One
("TN-CP") up to $40.4 million. TN-CP, a Texas joint venture between TriNet and
Sierra Office Venture Three, Ltd. ("SOVT"), was formed to provide a take-out
commitment to SOVT to acquire Sierra III, a build-to-suit office building,
located in Irving, Texas, which will be 100% leased under a 10-year net lease
arrangement upon completion in January 2000. TriNet's obligation to make such
loan is conditioned upon TN-CP acquiring Sierra III from SOVT. TN-CP's
obligation to purchase Sierra III from SOVT is conditioned upon satisfaction of
certain requirements related to the completion of the project and the tenant's
occupancy of the building. TriNet is the Managing Partner of TN-CP and has an
option to acquire Sierra III from TN-CP, at its sole election, based upon a
pre-determined formula.
10
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TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
6. Earnings per Share:
The following table presents the basic and diluted earnings per share
calculations for the six months ended (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
June 30, June 30,
1999 1998
------------ ------------
<S> <C> <C>
(Unaudited)
NUMERATOR
Basic:
Income before cumulative effect and extraordinary item $ 40,724 $ 37,654
Cumulative effect of a change in accounting principle (1,810) -
Extraordinary loss from early extinguishment of debt - (1,272)
------------ ------------
Net income 38,914 36,382
Preferred dividend requirement (7,839) (7,839)
------------ ------------
Earnings available to common shares 31,075 28,543
------------ ------------
Diluted:
Earnings available to common shares 31,075 28,543
Equity earnings in joint ventures attributable to convertible
partnership units 184 -
------------ ------------
Earnings available to common shares, as adjusted $ 31,259 $ 28,543
============ ============
DENOMINATOR
Basic:
Weighted average common shares outstanding 24,917 23,894
============ ============
Diluted:
Weighted average common shares outstanding 24,917 23,894
Shares issuable from assumed conversion of common stock options 18 247
Shares issuable in exchange for land 95 -
Partnership units as if converted 305 -
------------ ------------
Weighted average common shares outstanding, as adjusted 25,335 24,141
============ ============
EARNINGS AVAILABLE PER COMMON SHARE - BASIC:
Income available before extraordinary items $ 1.32 $ 1.24
Extraordinary items (0.07) (0.05)
------------ ------------
Earnings available $ 1.25 $ 1.19
============ ============
EARNINGS AVAILABLE PER COMMON SHARE - DILUTED:
Income available before extraordinary items $ 1.30 $ 1.23
Extraordinary items (0.07) (0.05)
------------ ------------
Earnings available $ 1.23 $ 1.18
============ ============
</TABLE>
For the six months ended June 30, 1999 and 1998, there were 323,971 and
613,956 weighted average partnership units outstanding, on an as converted
basis, respectively, that were not assumed converted into common shares since
they were not dilutive to earnings per share. These securities may become
dilutive to earnings per share in subsequent periods.
11
<PAGE> 12
TRINET CORPORATE REALTY TRUST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(unaudited)
7. Subsequent Events:
On July 17, 1999, TriNet Management Operating Company, Inc. ("TMOC"), a
taxable subsidiary of TriNet, collected a $750,000 fee pursuant to an agreement
by TMOC to amend its Partnership Agreement dated December 4, 1998 with G.
Accion, S.A. de C.V., ("G. Accion"), a Mexican real estate company. Under the
amendment, G. Accion was allowed to enter a comprehensive funding arrangement
with another party and TMOC relinquished certain governance and other rights it
had with G. Accion. A TriNet representative continues to serve on the G. Accion
Board or Directors.
As part of its announced property disposition plan, on July 22, 1999,
TriNet realized a $1.3 million gain on the $31.5 million sale of a Long Island,
New York office property. TriNet originally acquired the 270,000 square foot
office building, which is leased to Olympus America, in September of 1996 for
$30 million. The net proceeds from the disposition were used to pay down the
Company's $350 million unsecured revolving credit facility.
On August 2, 1999, TriNet realized a $462,000 loss on the $8.8 million
sale of two industrial properties located in the greater Syracuse, New York
area. TriNet originally acquired the two 240,000 square foot industrial
buildings, which are leased to GATX Logistics, Inc., in June of 1993 for $10.0
million. The proceeds from this sale, along with additional cash reserves, were
used to partially repay $10.6 million of the 1994 Mortgage Loan which has a
current principal balance of $44.4 million. In connection with this partial
paydown the Company incurred certain prepayment penalties and wrote off a
proportionate amount of unamortized loan costs which resulted in an
extraordinary charge of $665,000 during the third quarter.
12
<PAGE> 13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
report and also with the Company's Annual Report for the fiscal year ended
December 31, 1998, filed on Form 10-K. Unless otherwise defined in this report,
or unless the context otherwise requires, the capitalized words or phrases
referred to in this section have the meaning ascribed to them in such financial
statements and the notes thereto.
OVERVIEW
TriNet is the largest publicly-traded company specializing in the net
leasing of corporate office and warehouse distribution facilities. TriNet
provides investment capital to major corporations and real estate owners
nationwide by structuring purchase/leaseback transactions and acquiring
properties subject to existing long-term leases to creditworthy office and
industrial tenants. TriNet uses its real estate and credit underwriting
expertise to structure transactions that seek to generate consistent,
predictable cash flow growth, income growth and substantial residual value. As
of June 30, 1999, TriNet's portfolio consisted of 145 properties, which
comprised more than 19.5 million rentable square feet in 25 states.
First six month highlights include:
Proposed Merger Transaction
TriNet, Starwood Financial Trust ("Starwood") and a newly-formed
wholly-owned subsidiary of Starwood executed an agreement and plan of merger on
June 15, 1999 providing for the merger of the newly-formed subsidiary with and
into TriNet. TriNet will survive the merger as a subsidiary of Starwood. In this
transaction, each holder of common stock of TriNet will receive 1.15 common
shares of Starwood for each share of TriNet common stock owned. Each holder of
Starwood common shares will retain its shares. Each holder of Series A, Series
B, Series C, Cumulative Redeemable Preferred Stock of TriNet will receive,
respectively, for each such share, a share of Series B, Series C, or Series D
Cumulative Redeemable Preferred Stock of Starwood. Starwood's preferred stock
issued to the former TriNet preferred stockholders will have substantially the
same terms as the TriNet preferred stock, except that the new Series B, C and D
preferred stock will have certain additional voting rights not associated with
the TriNet preferred stock.
The combined company will have approximately 87 million shares of common
stock outstanding, and TriNet's shareholders will own approximately 33% of the
total (before taking into account the exercise of outstanding stock options,
warrants and other outstanding securities that are convertible into, or
exchangeable for, the common equity of Starwood or TriNet). The merger is
conditioned upon, among other things, the affirmative vote in favor of the
merger and the merger agreement by the holders of at least two thirds of the
shares of TriNet common stock outstanding. TriNet has agreed with Starwood that
if the merger agreement is terminated under certain circumstances, TriNet will
pay Starwood certain fees and expenses. Starwood has agreed with TriNet that if
the merger agreement is terminated under certain other circumstances, Starwood
will pay TriNet certain fees and expenses.
TriNet and Starwood have developed a preliminary plan to integrate the
two organizations and have already commenced the integration process. In this
regard, both companies have: (i) established integration task forces comprised
of senior executives from TriNet and Starwood in each of six key disciplines;
(ii) created a unified organizational chart and preliminary roles and
responsibilities for key management personnel; and (iii) begun coordinating
their investment, financing and asset management activities. In the integration
process, TriNet and Starwood have adopted a "best practices" policy to leverage
the complementary strengths of both companies. The companies have also retained
an experienced third-party management consultant to assist in the integration
process.
The merger has been structured as a tax-free reorganization under
federal tax law and will be accounted for as a purchase of TriNet by Starwood.
On July 26, 1999, TriNet and Starwood filed with the Securities and
Exchange Commission a joint proxy statement and prospectus for the merger. The
terms of the merger are governed by the merger agreement filed as an exhibit to
TriNet's current report on Form 8-K dated June 15, 1999. The joint proxy
statement and prospectus was filed with the SEC on a confidential basis and will
be circulated to TriNet and Starwood shareholders once it has been declared
effective by the SEC.
For additional information regarding the merger and the merger
agreement please read TriNet's current report on Form 8-K dated June 15, 1999.
13
<PAGE> 14
Acquisitions and Dispositions
- - During the first quarter of 1999, TriNet structured a $15.9 million
convertible mortgage on a 109,043 square foot office building in Richardson,
Texas. TriNet is earning an 11% initial yield on the mortgage and has the
option to acquire the building in October 1999 by funding an additional
$0.5 million.
- - As part of its asset disposition program, announced in October 1998, TriNet
has completed the sale of twelve properties, from December 18, 1998 through
August 2, 1999, with gross proceeds totaling $92.3 million.
Leasing Activity
TriNet executed 21 new leases and/or lease extensions on 911,565 square
feet of office and industrial space during the first six months of 1999,
generating approximately a 12% increase in annual rent on those leases. The
larger leasing transactions include:
- - An agreement with AT&T Capital/Newcourt Credit Group ("Newcourt") which
permits Newcourt to remain in the 420,000 square foot Gatehall Corporate
Center office property in Parsippany, N.J., for approximately seven months
following the July 2000 expiration of its current lease. This arrangement
gives TriNet two full years of lead time to re-lease the property. Newcourt
continues to pay rent at its current contractual rate during the extension
period and has paid TriNet $2.5 million as consideration for the right to
occupy the property past the lease expiration date. The $2.5 million is
being amortized over the remaining lease term.
- - A new, five-year lease on 41,068 square feet of R&D space in suburban Boston
effective June 15, 1999. Stream International Services Corporation, the new
tenant, will occupy more than half the space of an 80,000 square foot
building that was vacant when TriNet acquired it in December 1997 as part of
a portfolio of 14 properties.
- - A five-year extension option exercised by Lockheed Martin on a 174,600
square foot Silicon Valley office property. The extension begins July 1,
1999, at a rent that will be calculated based on CPI increases over the
five-year period immediately preceding the beginning of the lease extension.
- - An early lease renewal by CitiCorp Universal Card on a 46,002 square foot
office building in Jacksonville, Florida. The rent on the five-year lease
renewal represents an 18% increase in base rent over the original lease.
- - A seven-year lease signed by a new tenant, Kulicke & Soffa, on a 34,954
square foot Silicon Valley office property. The new lease became effective
July 21, 1999, and generates a 6% increase in base rent over the prior
lease.
- - A five-year lease signed by a new tenant, Active Touch, on a 40,320 square
foot Silicon Valley office property. The new lease becomes effective August
1, 1999, and will generate a 34% increase in base rent over the prior lease.
14
<PAGE> 15
- - The execution of an early lease renewal by Harris Microwave Semiconductor on
a 36,669 square foot Silicon Valley R&D facility. The new five-year lease
becomes effective November 14, 2001, at a rent that will be calculated based
on CPI increases over the five-year period immediately preceding the
beginning of the new lease. TriNet estimates that the new rent will
represent a 12% increase in base rent over the prior lease.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 VS. SIX MONTHS ENDED JUNE 30, 1998
Earnings Available to Common Shares
Earnings available to diluted common shares increased by $2.8 million,
or 9.8%, to $31.3 million for the six months ended June 30, 1999, from $28.5
million for the same period in 1998. The increase is net of a $1.8 million
charge to earnings in the first quarter of 1999 for a cumulative effect of a
change in accounting principle.
Rent Revenues
Rental revenues for the first six months of 1999 increased by $6.6
million, or 9.2%, to $78.6 million, as compared to $72.0 million for the same
period in 1998. The increase was primarily attributable to 1998 and 1999
acquisitions, which generated an increase in revenues of $10.4 million, offset
by a decrease in revenues of approximately $3.8 million for properties sold in
1998 and 1999.
Joint Venture Income
For the six months ended June 30, 1999 and 1998, joint venture income
was $1.5 million. The Milpitas joint venture, formed in the second half of 1998,
increased joint venture income by $1.2 million during the first six months of
1999 as compared to the same period of 1998. Additionally, joint venture income
attributable to the Sunnyvale joint venture increased $67,000 in 1999 compared
to the same period in 1998. These increases were offset by a decrease in joint
venture income of approximately $851,000 from Poydras when compared to the same
period in 1998, and a loss from the CTC II joint venture, which wasn't acquired
until the third quarter of 1998, of $409,000 in the first six months of 1999.
This decrease in Poydras joint venture income is from interest expense on the
debt of the venture which was outstanding for a full six month period during
1999 compared to less than one month during 1998. TriNet earns interest income,
advisory fees and management fees in addition to its income from equity
investments in joint ventures (see "Interest Income," "Management Fees" and
"Other Income" below).
Management Fees
Management fees increased by $841,000 for the six months ended June 30,
1999 to $1.4 million from $596,000 for the same period in 1998. The increase
relates primarily to fees earned on the management of 24 properties acquired
during 1998, 15 of which were acquired through joint ventures.
15
<PAGE> 16
Interest Income
Interest income increased to $3.3 million for the six months ended June
30, 1999 from $580,000 for the same period in 1998. Interest income consists of
$2.6 million of interest income earned on mezzanine loan investments made to
the CTC II and Poydras joint ventures, $114,000 of interest earned on the
Company's investment in G. Accion, a Mexican real estate company, and $538,000
of interest earned on cash balances during 1999.
Other Income
Other income for the six months ended June 30, 1999 totaled $1.6
million and consisted of a $250,000 non-compete fee on a property sold in 1998,
amortization of $508,000 in connection with the Newcourt lease restructuring
(see "Overview - Leasing Activity"), a $196,000 credit enhancement fee, and
$260,000 of dividend income.
Other income also includes $385,000 received in connection with the
default and bankruptcy of one of its tenants, MJ Designs. TriNet received
approximately $3.0 million of collateral, which was primarily applied to
uncollected rent and operating expenses for the period of January 1, 1999
through the lease termination. The $385,000 represents the remaining excess
collateral after the payment of rent and operating expenses for the period. As
of June 18, 1999, the tenant no longer occupies the property. TriNet is
currently marketing the property for lease. Additionally, the Company currently
has claims pending with the bankruptcy court representing back rent, operating
expenses and other damages arising from the tenant's default.
Other income of $898,000 for the six months ended June 30, 1998,
consisted primarily of fees from the Company's advisory services provided in
connection with the formation of the Poydras and CTC I joint ventures.
Property Operating Costs
For the six months ended June 30, 1999, property-operating costs
increased $1.1 million, or 37.9%, to $4.0 million from $2.9 million for the same
period of 1998. The increase in property operating costs is due to the costs
associated with the net growth in the Company's real estate portfolio during
1998.
General and Administrative
For the six months ended June 30, 1999, general and administrative
expenses increased by $900,000, or 16.7%, to $6.3 million compared to $5.4
million for the same period in 1998. This increase is primarily a result of a
full six months of operations reflecting the Company's net growth during 1998.
General and administrative expenses as a percentage of average joint venture
investments and undepreciated real estate were 0.42% for the first six months of
1999 and 0.38% for the same period in 1998.
Interest Expense
Interest expense increased by $4.6 million, or 26.1%, to $22.2 million
for the six months ended June 30, 1999, from $17.6 million for the same period
in 1998. This increase is due to a greater weighted average debt balance of
$611.5 million for the six months ended June 30, 1999, compared to $481.0
million for the same period of 1998. The increase in the debt balance is
primarily attributable to the issuance of $125.0 million of Dealer remarketable
securities (the "Drs.") in February 1998 and a higher average balance
outstanding on the Company's $350 million revolving unsecured credit facility
used to fund real estate acquisitions. Interest expense was reduced by $1.1
million of capitalized interest costs associated with investments in certain
development projects held in joint venture partnerships for the six months ended
June 30, 1999. The Company's weighted average interest rate increased from 7.18%
for the first six months of 1998 to 7.24% for the first six months of 1999.
16
<PAGE> 17
Depreciation and Amortization
Depreciation and amortization increased by 8.9% for the six months ended
June 30, 1999, when compared to the first six months of 1998, as a result of the
Company's larger asset base.
Minority Interest
Minority interest expense of $81,000 for the first six months of 1999
represents the limited partners' share of net income from TriNet Property
Partners, L.P. ("TriNet Property Partners"), a partnership formed in December
1997. TriNet has a 96.5% interest in TriNet Property Partners and is the sole
general partner. TriNet Property Partners purchased nine office/R&D properties
in December 1997 and five additional office/R&D properties in the first six
months of 1998 from a group of private partnerships.
Gain on Sale of Real Estate
On March 12, 1999, TriNet sold an 82,600 square foot office building
located in Allen, Texas for $11.2 million and recognized a gain of $1.2 million
on the transaction. TriNet also disposed of its last retail property in the
first quarter of 1999 for $3.5 million. The retail property was classified as
held for sale at December 31, 1998, and a provision for asset held for sale of
$5.7 million was recognized in 1998.
Cumulative Effect of a Change in Accounting Principle
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities"
("SOP 98-5"). SOP 98-5 requires all costs of start-up activities, including
organization costs, to be charged to operations as incurred for fiscal years
beginning after December 15, 1998. The initial application of SOP 98-5 requires
that prior years' unamortized start-up costs be charged to income as a
cumulative effect of a change in accounting principle. Accordingly, the Company
reported a $1.8 million charge to net income during the first quarter of 1999
as a cumulative effect of a change in accounting principle.
THREE MONTHS ENDED JUNE 30, 1999 VS. THREE MONTHS ENDED JUNE 30, 1998
Rental Revenues
Rental revenues for the three months ended June 30, 1999 increased by
$2.6 million or 7.1% compared to the same period of 1998. The increase in rental
revenue is partly a result of the Company's acquisitions subsequent to June 30,
1998, which accounted for $1.4 million of rental revenue during the second
quarter of 1999. The properties acquired in the second quarter of
1998 contributed an additional $2.9 million to rental revenue in 1999 over that
of the same period in 1998. The overall increase in rental revenue was partially
offset by a decrease of approximately $1.7 million from properties sold
subsequent to June 30, 1998.
Joint Venture Income
For the three months ended June 30, 1999, joint venture income was
$596,000 as compared to $1.1 million for the same period in 1998. The Milpitas
joint venture, formed in the second half of 1998, increased joint venture income
by $537,000 during the three months ended June 30, 1999 as compared to the same
period of 1998. Additionally, joint venture income attributable to the Sunnyvale
joint venture increased $14,000 in 1999 compared to the same period in 1998.
These increases were offset by a decrease in joint venture income of
approximately $715,000 from Poydras when compared to the same period in 1998,
and a $307,000 loss from the CTC II joint venture which wasn't acquired until
the third quarter of 1998. This decrease in Poydras joint venture income is from
interest expense on the debt of the venture which was outstanding for a full
three month period during 1999, compared to less than one month during 1998.
TriNet earns interest income, advisory fees and management fees in addition to
its income from equity investments in joint ventures (see "Interest Income,"
"Management Fees" and "Other Income" below).
17
<PAGE> 18
Management Fees
Management fee income increased by $447,000, from $331,000 in the second
three months of 1998, to $778,000 in the same period this year. TriNet Property
Management, Inc., a subsidiary of the Company, realized an increase in
management fee income as a result of an increase in property management
contracts and the opening of additional on-site property management offices.
Interest Income
Interest income increased from $459,000 for the quarter ended June 30,
1998 to $1.7 million for the quarter ended June 30, 1999. The increase is
primarily the result of the origination of, and the $1.3 million of interest
income earned from, the mezzanine loan investments on Poydras and CTC II made
by TriNet. Interest income consists of $57,000 of interest earned on the
Company's investment in G. Accion, a Mexican real estate company, and $339,000
of interest earned on cash balances during the second quarter of 1999.
Other Income
Other income increased $834,000 from $126,000 for the three months ended
June 30, 1998 to $960,000 for the three months ended June 30, 1999. This
increase is the result of the recognition of $125,000 of dividend income,
amortization of $299,000 in connection with the Newcourt lease restructuring
(see "Overview - Leasing Activity") and a $98,000 credit enhancement fee.
Other income also includes $385,000 received in connection with the
default and bankruptcy of one of its tenants, MJ Designs. TriNet received
approximately $3.0 million of collateral, which was primarily applied to
uncollected rent and operating expenses for the period of January 1, 1999
through the lease termination. The $385,000 represents the remaining excess
collateral after the payment of rent and operating expenses for the period. As
of June 18, 1999, the tenant no longer occupies the property. TriNet is
currently marketing the property for lease. Additionally, the Company currently
has claims pending with the bankruptcy court representing back rent, operating
expenses and other damages arising from the tenant's default.
Property Operating Costs
Property operating costs increased to $2.2 million for the three months
ended June 30, 1999 from $1.7 million for the three months ended June 30, 1998.
The increase in property operating costs is due to the incremental costs
associated with the continued growth of the Company's real estate portfolio.
General and Administrative
For the second quarter of 1999, general and administrative expenses
increased 13.5% to $3.2 million, as compared to the same period in 1998. This
increase is the result of additional personnel and related overhead from the
Company's continued growth.
18
<PAGE> 19
Interest Expense
Interest expense increased 24% to $11.0 million for the three months
ended June 30, 1999 as compared to $8.9 million for the corresponding period of
1998. This increase is attributable to the weighted average debt balance
increasing from $524.3 million for the three months ended June 30, 1998 to
$576.2 million for the corresponding period of 1999. The increase in the debt
balance is primarily attributable to the increase in the outstanding balance on
the Acquisitions Facility from $135.0 million at June 30, 1998 to $163.9 million
at June 30, 1999. Interest expense for the three months ending June 30, 1999 was
reduced by $518,000 of capitalized interest costs associated with investments in
certain development projects held in joint venture partnerships.
Depreciation and Amortization
Depreciation and amortization increased by 8% for the three months ended
June 30, 1999 when compared to the same period in 1998 as a result of the
Company's larger asset base.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased by $11.0 million to
$46.7 million for the six months ended June 30, 1999, compared to $57.7 million
for the same period in 1998. The decrease was primarily due to the payment of
deferred liabilities during the first six months of 1999 as compared to the
first six months of 1998. Net cash used in investing activities decreased $281.6
million to $7.1 million for the six months ended June 30, 1999, compared to
$288.7 million in the first six months of 1998. The decrease was the result of a
reduction in acquisitions and investments in joint ventures during the first six
months of 1999 compared to the same period in 1998. The Company incurred $2.6
million of capital expenditures in the first six months of 1999, primarily for
improvements on existing properties.
Net cash used in financing activities was $51.4 million for the six
months ended June 30, 1999, which consisted primarily of a net decrease in the
Acquisitions Facility of $25.0 million and dividends on common and preferred
stock totaling $40.3 million. For the six months ended June 30, 1998, net cash
provided by financing activities was $236.4 million, primarily the result of
proceeds from an $89.0 million common stock offering in January, 1998, a $30.0
million common stock offering in March, 1998, a $24.0 million common stock
offering in April, 1998 and the issuance of $125.0 million of Dealer
remarketable securities in February 1998.
The Company has an agreement with a group of 14 banks led by Morgan
Guaranty Trust Company of New York, which provides the Company with a $350
million unsecured revolving credit facility (the "Acquisition Facility"). The
Acquisition Facility matures on May 31, 2001 and has an automatic one-year
extension option. The Company can extend the facility for a second one-year term
and increase the facility size up to $500 million with approval of the bank
group. LIBOR-based borrowings under the facility are based on the Company's
credit ratings. The Facility bears interest at LIBOR plus 0.75% and requires an
annual facility fee of 0.15%. The Facility also has a $225 million competitive
bid feature, which allows banks in the syndicate group to bid on certain
borrowings at more competitive rates. All of the available commitment under the
facility may be borrowed for general corporate and working capital needs, as
well as for the acquisition of real estate. The facility requires interest only
payments until maturity, at which time outstanding borrowings are due and
payable. At June 30, 1999, the Company had $186.1 million available under the
Acquisition Facility. Under this agreement, the consent of the bank group is
required in connection with the proposed merger with Starwood.
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<PAGE> 20
Outstanding debt as of June 30, 1999 consisted of mortgage notes
totaling $84.3 million, unsecured long-term notes of $375.0 million and an
outstanding balance on the Acquisition Facility of $163.9 million. Future
maturities of long-term debt and mortgages from June 30, 1999 through 2003 and
thereafter are presented below (in thousands):
<TABLE>
<S> <C> <C>
Remainder of 1999 $ 444
2000 4,683
2001 264,754
2002 15,135
2003 568
Thereafter(1) 337,629
---------
Total 623,213
---------
Acquisition Facility (163,900)
---------
Long term $ 459,313
=========
</TABLE>
- ------------------
(1) On February 24, 1998, the Company sold to the public $125 million of
6.75% Drs. Notes. Upon certain terms and conditions, the Drs. are
subject to mandatory tender on March 1, 2003, to either the Dealer or
TriNet. If tendered to the Dealer, the Drs. must be remarketed by the
Dealer.
TriNet considers its liquidity and ability to generate cash from
operations and financings to be adequate and expects them to continue to be
adequate to meet the Company's acquisition, development, operating, debt service
and shareholder distribution requirements.
The Company has on file with the Securities and Exchange Commission two
Form S-3 Registration Statements. One registration statement is a universal
shelf registration statement authorizing the issuance of debt securities, common
stock, preferred stock or depository shares representing preferred stock of the
Company with a remaining availability of $232.3 million. A second registration
statement authorized the issuance of $250.0 million of debt securities and has a
remaining availability of $150.4 million. The exact amount of debt, common
stock, preferred stock, and depository shares representing preferred stock
issued will depend on acquisitions, asset sales, the Company's senior unsecured
debt and preferred stock ratings, and the general interest rate environment.
In managing the Company's long-term liquidity, consideration is given to
the weighted average maturity of the Company's fixed-rate debt instruments the
ratio of total debt to total market capitalization and to the ratio of total
debt to total book capitalization. As of June 30, 1999 and 1998, the Company's
weighted average fixed-rate debt maturity was 7.1 years and 8.1 years,
respectively, the ratio of total debt to total market capitalization was 41.6%
and 36.7%, respectively and the ratio of total debt to total book capitalization
was 43.5% and 42.1%, respectively.
20
<PAGE> 21
IMPACT OF YEAR 2000
Forward Looking Information.
The statements in the following section include Year 2000 readiness
disclosure within the meaning of the Year 2000 Information and Readiness
Disclosure Act. The Company intends such statements to be covered by the safe
harbor provisions for forward-looking statements contained in the Private
Securities Reform Act of 1995, and is including this statement for purposes of
complying with these safe harbor provisions. Forward-looking statements, which
are based on certain assumptions and describe future plans, strategies and
expectations of the Company are generally identifiable by use of the words
"believe," "expect," "intend," "anticipate," "estimate," "project" or similar
expressions. The Company's ability to predict results or the actual effect of
future plans or strategies is inherently uncertain. Although the Company
believes that the expectations reflected in such forward-looking statements are
based on reasonable assumptions, the Company's actual costs, progress and
expenses with respect to its plan to address Year 2000 issues could differ
materially from those set forth in the forward-looking statements. Factors which
could have a material adverse effect on the Company's results and progress
include, but are not limited to, changes in the expenses of or delays in: the
identification and upgrade or replacement by the Company of computer systems
that do not relate to information technology but include embedded technology;
and the Year 2000 compliance of vendors (including vendors of the Company's
computer information systems) or third-party service providers (including the
Company's primary bank and payroll processor). These risks and uncertainties
should be considered in evaluating forward-looking statements and undue reliance
should not be placed on such statements.
Introduction
The term "Year 2000 issue" is a general term used to describe various
problems that may result from the improper processing by computer systems of
dates after 1999. These problems could result in a system failure or
miscalculations causing disruptions of operations. The term "Year 2000
compliant" is used in this discussion to mean that the system or device in
question will perform its essential functions in the Year 2000 without
significant operational problems.
The Company's efforts to address its Year 2000 issues are focused in the
following three areas: (i) reviewing and taking any necessary steps to attempt
to correct the Company's computer information systems (i.e., software
applications and hardware platforms), (ii) evaluating and making any necessary
modifications to other computer systems that do not relate to information
technology but include embedded technology at its properties, such as security,
heating, ventilation, and air conditioning, elevator, fire and safety systems,
and (iii) communicating with certain significant third-party service providers
to determine whether there will be any interruption in their systems that could
affect the Company.
The Company currently expects to complete its Year 2000 compliance
program before the end of 1999. While the Company anticipates that the program
will be successful in all material respects, the Company intends to closely
monitor its Year 2000 compliance and is developing the contingency plans
described under "Risks Presented by Year 2000 Issues and the Company's
Contingency Plan."
The Company's State of Readiness
Information Technology Systems. The Company has completed an inventory
of all information technology systems and has contacted vendors to determine
whether such systems are Year 2000 compliant. Based on manufacturers'
representations, the Company has determined that its primary network operating
system, Novell Netware 5, its newly acquired property management and
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<PAGE> 22
accounting software and all of its desktop personal computers are Year 2000
compliant.
Embedded Systems. The Company has reviewed all of its properties'
operating leases to determine whether the tenant or the Company has the
responsibility to address Year 2000 issues. For those properties with respect to
which the Company is responsible for Year 2000 compliance, independent
consultants have performed on-site inventories of the embedded systems (e.g.
security, heating, ventilation and air conditioning, fire and elevator systems)
and have contacted the various manufacturers to determine whether the embedded
systems are Year 2000 compliant. Based on the inventory and responses from
manufacturers to date, the Company has identified eight embedded systems that
are not Year 2000 compliant, and may need to be replaced or repaired. There are
an additional 10 systems where further testing is necessary to determine
compliance.
For those eight systems that have been identified as non-compliant a
program has been initiated to repair, replace and test. With respect to those
properties for which the Company is not responsible for Year 2000 compliance,
written notices have been sent to tenants informing them of their obligations
under the leases. A program is in place to follow up with these tenants to
ensure that they are taking action and meeting their responsibilities under
their leases.
Third Party Relationships. With respect to the Company's relationships
with third parties (e.g., transfer agent, financial institutions, utility
companies and landlords), the Company is concurrently requesting compliance
certificates from all third parties that have an impact on the Company's
operations, but no assurance can be given that such certifications will be
received by the Company or that they will prove to be accurate. The Company is
contacting those third parties that have not responded to the initial request to
determine their readiness for Year 2000.
Costs to Address the Company's Year 2000 Issues
As of June 30, 1999, the Company has paid $426,000 and has accrued an
additional $330,000 for Year 2000 costs since the inception of the program. The
Company expects that a substantial portion of these costs will be passed back to
tenants through recoveries of operating expense and that the remaining costs of
addressing the Year 2000 issues will be funded through operating cash flows.
Because the Company's Year 2000 assessment is ongoing and additional
funds may be required as a result of future findings, the Company's current
accrual amounts may increase as a result of unanticipated delays or preparedness
issues. While the Company's efforts to address its Year 2000 issues may involve
additional costs, the Company believes, based on available information, that
these costs will not have a material adverse effect on its business, financial
condition or results of operations.
Although the Company has concluded that many of its tenants are
responsible for certain Year 2000 compliance costs, there is a possibility that
certain tenants will not agree with such conclusions.
Risks Presented by Year 2000 Issues and the Company's Contingency Plan
At this time, the Company has not identified any specific business
functions that are likely to suffer material disruption as a result of Year
2000-related events. Due to the unique and pervasive nature of the Year 2000
issue, it is not possible to anticipate each of the wide variety of Year 2000
events, particularly outside of the Company, that might arise in a worst case
scenario which might
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<PAGE> 23
have a material adverse impact on the Company's business, financial condition
and results of operations.
A reasonably likely worst case scenario is the failure of an energy
management system in a building owned or managed by Trinet. Such a failure could
adversely affect the environmental conditions of the occupied space, thus
creating discomfort and inconvenience to the tenants until the condition could
be manually corrected. Persistence of this problem for a long period of time
could result in an increase in operating costs for the building until the energy
management system is restored to proper operations.
The Company's contingency plan for dealing with disruptions as a result
of Year 2000 related events includes establishment of special rapid response
technology teams, scheduling availability of key personnel, establishing rapid
decision processes, and the deployment of teams consisting of regional facility
managers, building engineers and customer service personnel to deal with
problems at affected properties.
FUNDS FROM OPERATIONS
The definition of Funds From Operations ("FFO") was clarified in the
National Association of Real Estate Investment Trusts, Inc. ("NAREIT") White
Paper, adopted by the NAREIT Board of Governors on March 3, 1995, as net income
(computed in accordance with generally accepted accounting principles ("GAAP")),
excluding gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization (in each case only on real estate related assets),
less preferred dividends, and after adjustments for unconsolidated partnerships
and joint ventures. Adjustments for unconsolidated partnerships and joint
ventures will be calculated to reflect FFO on the same basis. The Company's FFO
is not comparable to FFO reported by other real estate investment trusts (REITs)
that do not define FFO using the current NAREIT definition or that interpret the
current NAREIT definition differently than the Company. The Company believes
that to facilitate a clear understanding of the historical operating results of
the Company, FFO should be examined in conjunction with income as presented in
the Consolidated Statements of Operations. FFO should not be considered as an
alternative to net income (determined in accordance with GAAP) as an indicator
of the Company's financial performance, or cash flows from operating activity
(determined in accordance with GAAP) as a measure of the Company's liquidity,
nor is it indicative of funds available to fund the Company's cash needs,
including its ability to make distributions. The following summarizes FFO as of
June 30, 1999 and 1998 (unaudited and in thousands):
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<PAGE> 24
IMPACT OF YEAR 2000
<TABLE>
<CAPTION>
For the Six Months For the Three Months
ended June 30, ended June 30,
------------------------- -------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Funds From Operations:
Income before gain on sale of real estate, extraordinary item
and cumulative effect $ 39,571 $ 36,539 $ 19,698 $ 18,612
Real estate depreciation 13,986 13,021 7,015 6,603
Joint venture depreciation 1,683 707 852 503
Preferred dividend requirement (7,839) (7,839) (3,920) (3,920)
---------- ---------- ---------- ----------
Total Funds From Operations:
Basic $ 47,401 $ 42,428 $ 23,645 $ 21,798
========== ========== ========== ==========
Diluted $ 47,801 $ 42,428 $ 24,640 $ 21,798
========== ========== ========== ==========
</TABLE>
FORWARD LOOKING INFORMATION
This quarterly report contains forward-looking statements within the
meaning of the federal securities laws. The Company intends such forward-looking
statements to be covered by the safe harbor provisions for forward-looking
statements contained in the Private Securities Reform Act of 1995, and is
including this statement for purposes of complying with these safe harbor
provisions. Forward-looking statements, which are based on certain assumptions
and describe future plans, strategies and expectations of the Company, are
generally identifiable by use of the words "believe," "expect," "intend,"
"anticipate," "estimate," "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse effect on the
operations and future prospects of the Company include, but are not limited to,
changes in: economic conditions generally and the real estate market
specifically, the performance and financial condition of borrowers and tenants,
the actions of the Company's competitors and the Company's ability to respond
to those actions, the cost of Company's capital (which depends in part upon the
Company's portfolio quality, ratings, prospects, outlook and general market
conditions), legislative or regulatory provisions affecting the Company
(including changes to laws governing the taxation of REITs), availability of
capital, interest rates, competition, supply of and demand for office and
industrial properties in the Company's current and proposed market areas, and
general accounting principles, policies and guidelines applicable to REITs.
These risks and uncertainties, together with the other risks described from time
to time in the Company's reports and documents filed with the Securities and
Exchange Commission, should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements.
24
<PAGE> 25
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Meeting of Stockholders was held on May 26, 1999.
At that time, the stockholders voted to elect George R. Puskar as a
Class I Director of the Company for a term expiring in 2000 and Willis
Andersen, Jr. and Stephen B. Oresman as Class III Directors of the
Company for terms expiring in 2002. The total number of shares of the
Company's Common Stock entitled to vote at the Annual Meeting was
24,872,429. A total of 22,724,295 shares of the Company's Common Stock
were present in person or by proxy at the Annual Meeting. A total of
22,563,373 shares (99.3% of the total shares voted at the Annual
Meeting) were voted in favor of the election of Mr. Puskar and 160,922
shares (0.7%) were withheld. A total of 22,561,458 shares (99.3%) were
voted in favor of the election of Mr. Andersen and 162,837 shares (0.7%)
were withheld. A total of 22,561,088 shares (99.3%) were voted in favor
of the election of Mr. McDonald and 163,207 shares (0.7%) were withheld.
John G. McDonald continues to serve as a Class II Director until his
present term expires in 2001 and his successor is duly elected.
The stockholders also voted to approve a proposed amendment to the
TriNet Corporate Realty Trust, Inc. Articles of Incorporation to
increase the authorized preferred stock of the Company, as described in
the Company's proxy statement. A total of 16,961,523 shares (74.6% of
the total outstanding shares) were voted in favor of approval of this
proposal, 1,414,605 shares (6.2%) were voted against, and 173,023 shares
(0.7%) abstained.
The stockholders further voted to ratify the Board of Directors'
selection of PricewaterhouseCoopers LLP as the Company's independent
auditors for the fiscal year ending December 31, 1999. A total of
22,577,833 shares (99.4% of the total shares voted at the Annual
Meeting) were voted in favor of this proposal, 73,985 shares (0.3%) were
voted against, and 72,477 shares (0.3%) abstained.
25
<PAGE> 26
Item 5. Other Information
On July 27, 1999, the Company announced that Mr. A. William Stein
resigned as President and Chief Operating Officer of the Company,
effective August 1, 1999. Mr. Stein joined the Company in October 1995
as Senior Vice President - Capital Markets, was named Executive Vice
President - Finance and Chief Financial Officer in April 1996 and
President and Chief Operating Officer in December 1998. Robert W.
Holman, Jr., the Company's Chairman and Chief Executive Officer, has
assumed the responsibilities of the President.
Item 6. Exhibits and Reports on Form 8-K
Exhibits
2 Agreement and Plan of Merger, dated as of June 15, 1999, by and
between Starwood Financial Trust, ST Merger Sub, Inc. and TriNet
Corporate Realty Trust, Inc. (incorporated herein by reference
to Exhibit 2 to Current Report on Form 8-K dated June 15, 1999).
10.1 Form of Amendment to Agreement Regarding Change of Control,
dated as of June 7, 1999, between the Company and certain of its
executive officers.
27.1 Financial Data Schedule.
Reports on Form 8-K
<TABLE>
<CAPTION>
Financial
Date Items Reported Statements
---- -------------- ----------
<S> <C> <C>
July 12, 1999 5 & 7 No
June 15, 1999 5 & 7 No
</TABLE>
26
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TRINET CORPORATE REALTY TRUST, INC.
(Registrant)
BY: /s/ Elisa F. DiTommaso
--------------------------------------------
Elisa F. DiTommaso
Senior Vice President, Finance and
Chief Financial Officer (Principal
Financial and Accounting Officer)
DATE: August 13, 1999
27
<PAGE> 28
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
2 Agreement and Plan of Merger, dated as of June 15, 1999, by and
between Starwood Financial Trust, ST Merger Sub, Inc. and TriNet
Corporate Realty Trust, Inc. (incorporated herein by reference
to Exhibit 2 to Current Report on Form 8-K dated June 22, 1999).
10.1 Form of Amendment to Agreement Regarding Change of Control,
dated as of June 7, 1999, between the Company and certain of its
executive officers.
27.1 Financial Data Schedule.
</TABLE>
<PAGE> 1
EXHIBIT 10.1
AMENDMENT TO AGREEMENT REGARDING CHANGE OF CONTROL
This Amendment to Agreement Regarding Change of Control ("Amendment")
is made and entered into as of June 7, 1999 by and between TRINET CORPORATE
REALTY TRUST, INC., a Maryland corporation (the "Company") and
_______________________, an individual (the "Executive").
RECITALS
A. The Company and the Executive are parties to an Agreement Regarding
Change of Control dated as of June 17, 1998 (the "Agreement"), the purposes of
which are to encourage the Executive to continue to provide management services
as an employee of the Company and to provide reasonable security to the
Executive against changes in the employment relationship in the event of a
change of control.
B. The parties wish to modify certain provisions of the Agreement, as
set forth herein.
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements hereinafter contained, the parties agree as follows:
1. Capitalized Terms. For purposes of this Amendment, capitalized terms
used herein that are defined in the Agreement shall have the meanings given in
the Agreement.
2. Definitions. In Section 1 of the Agreement, the following
definitions are amended to read as follows: --------------------
"CONSTRUCTIVE TERMINATION" shall mean, with respect to the Executive,
the occurrence of any one of the following events:
[(a) - (f) UNCHANGED]
If an event described herein occurs within twelve (12) months of a
Change of Control, the event shall constitute Constructive Termination
only if the Executive provides written notice of termination of
employment to the Company specifying the event relied upon for such
termination within twelve (12) months after the Executive has actual
notice of the occurrence of such event. If an event described herein
occurs more than twelve (12) months but less than twenty-four (24)
months following a Change of Control, the event shall constitute
Constructive Termination only if the Executive provides written notice
of termination of employment to the Company specifying the event relied
upon for such termination within six (6) months after the Executive has
actual notice of the occurrence of such event."
1
<PAGE> 2
"TERMINATION DATE" shall mean the date the Executive's employment
actually terminates as a result of a Termination Event."
3. Benefits Upon Termination of Employment Due to Change of Control.
(a) Section 2 is amended, in all places that provide for payments to be
made "within five (5) days after the Termination Date," to provide that such
payments shall be made "on the Termination Date."
(b) Section 2(a)(1) is amended to read as follows:
"(a) Multiple of Annual Compensation. On the Termination Date,
the Executive shall be paid a lump sum by the Company equal to the
amount determined by multiplying the Valuation Multiple by the greater
of the following:
(1) the sum of the Executive's annualized base salary as of
the Termination Event or as of the Termination Date
(whichever is larger), plus the largest amount of annual
incentive bonus paid by the Company to the Executive
during the current year and the preceding five (5)
fiscal years; and
(2) the largest amount of annual cash compensation
(including salary and incentive bonus) and other income,
from all sources, paid by the Company to the Executive
over the preceding five (5) fiscal years, as reported by
the Company in Box 5 of Form W-2 and/or Form 1099
furnished to the Executive, but not including any
payments or other income paid upon the acceleration of
future dividend equivalent rights payments as a result
of a Change of Control."
(c) Section 2(b) is amended to read as follows:
"(b) Unpaid Annual Incentive Bonus. On the Termination Date,
the Executive shall be paid a lump sum in respect of any unpaid annual
incentive bonuses that would have been payable pursuant to the
Company's Performance Based Management Incentive Plan which was in
effect prior to the Change of Control for the period from the first day
of the year in which the Change of Control occurred to the Termination
Date, in an amount equal to (1) the largest annual incentive bonus paid
to the Executive by the Company during the five (5) fiscal years
preceding the Change of Control, (2) multiplied by a fraction, the
numerator of which is the number of days which have elapsed from the
first day of the year in which the Change of Control occurred to the
Termination Date and the denominator of which is three hundred sixty
five (365), and (3) reduced by the aggregate amount of any annual
incentive bonuses paid to the Executive since the Change of Control."
2
<PAGE> 3
(d) Section 2(d) is amended to read as follows:
"(d) Immediate Vesting of Stock Incentive Awards and DERs;
Extension of Option Exercise Period. Notwithstanding any vesting
schedule otherwise applicable or any other provisions to the contrary
in the Company's stock incentive plans or stock option award
agreements, any outstanding stock options and dividend equivalent
rights awards previously granted to Executive shall immediately be
fully vested upon a Change of Control. Each of the Executive's stock
option awards outstanding immediately prior to a Change of Control
shall be converted on an equitable basis into an option to acquire
shares of the Company's successor, on terms no less favorable than
those provided to any other holder of a Company stock option, and shall
not expire until the earlier of (A) the expiration date specified in
such option and (B) 12 months following the Termination Date."
(e) A new subsection 2(i) is added as follows:
"(i) Outplacement Services. The Executive shall be provided
with outplacement services for the duration of the Coverage Period, at
a level of service commensurate with the Executive's position at the
Termination Event, from a provider selected by the Company in its
reasonable discretion, and at the Company's expense."
(f) A new subsection 2(j) is added as follows:
"(j) Payment Upon Constructive Termination. In the event of
Constructive Termination of the Executive, the Executive's employment
with the Company shall not be considered terminated unless and until
the Executive has received the full amount of cash payments required to
be paid hereunder upon termination of employment and the termination of
the Executive's employment shall be conditioned upon receipt in full by
the Executive of such cash payments."
4. Attached hereto as Exhibit A is an example of the calculation of the
benefits payable by the Company under Section 2 of the Agreement, based upon an
assumed Change of Control and Termination Event on September 30, 1999 and the
other assumptions set forth in Exhibit A.
3
<PAGE> 4
5. Except as modified by this Amendment, the terms and conditions of
the Agreement are unchanged and continue in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date first above written.
THE COMPANY:
TRINET CORPORATE REALTY TRUST, INC.
a Maryland corporation
By: ----------------------------------
Name: Geoffrey M. Dugan
Title: Vice President, Administration
and General Counsel
THE EXECUTIVE:
- ---------------------------------------
4
<PAGE> 5
EXHIBIT A
PricewaterhouseCoopers LLP has prepared an analysis of the Company's Agreements
Regarding Change of Control (entitled "Golden Parachute Study" draft dated June
4, 1999), including the total cash costs of such agreements based on various
assumptions. Attached hereto, and made a part hereof, are excerpts from the
analysis which calculate the cash costs to the Company, and benefits payable to
the Executive, under the Agreement Regarding Change of Control, as amended,
assuming a Change of Control and Termination Event on September 30, 1999 and
other assumptions as set forth in the attachments.
5
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT JUNE 30, 1999 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30,
1999.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,559
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,507,567
<DEPRECIATION> 85,847
<TOTAL-ASSETS> 1,495,026
<CURRENT-LIABILITIES> 0
<BONDS> 622,334
0
73
<COMMON> 251
<OTHER-SE> 861,476
<TOTAL-LIABILITY-AND-EQUITY> 1,495,026
<SALES> 78,573
<TOTAL-REVENUES> 86,428
<CGS> 0
<TOTAL-COSTS> 4,034
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,171
<INCOME-PRETAX> 32,885
<INCOME-TAX> 0
<INCOME-CONTINUING> 32,885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,810)
<NET-INCOME> 31,075
<EPS-BASIC> 1.25
<EPS-DILUTED> 1.23
</TABLE>
