FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
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 005-78477
METROPOLIS REALTY HOLDINGS LLC
(Exact name of registrant as specified in its charter)
DELAWARE 74-3043954
(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
c/o Capital Trust, Inc.
410 Park Avenue
14th Floor
New York, New York 10022
(Address of principal executive offices)
(Zip Code)
(212) 655-0220
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |_| No |X|
As of November 1, 2002, there were 13,006,346 units of the Company's limited
liability company units issued and outstanding.
METROPOLIS REALTY HOLDINGS LLC
INDEX
PAGE
PART I. FINANCIAL INFORMATION..................................................1
ITEM 1. Financial Statements.............................................1
The accompanying unaudited, interim financial statements have been
prepared in accordance with the instructions to Form 10-Q. In the opinion
of management, all adjustments necessary for a fair presentation have been
included.
Consolidated Balance Sheets as of September 30, 2002 (unaudited) and
December 31,
2001.....................................................................1
Consolidated Statements of Income and Comprehensive Income (Loss) for the
Quarters and Nine Months Ended September 30, 2002 and 2001 (unaudited)...2
Consolidated Statements of Cash Flows for the Nine Months Ended September
30, 2002 and 2001 (unaudited)............................................3
Notes to Consolidated Financial Statements (unaudited)...................4
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations..............................................9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk........12
ITEM 4. Controls and Procedures...........................................12
PART II. OTHER INFORMATION....................................................13
ITEM 1. Legal Proceedings.................................................13
ITEM 2. Changes in Securities.............................................13
ITEM 3. Defaults Upon Senior Securities...................................13
ITEM 4. Submission of Matters To a Vote of Security Holders...............13
ITEM 5. Other Information.................................................13
ITEM 6. Exhibits and Reports on Form 8-K..................................13
SIGNATURES....................................................................14
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
METROPOLIS REALTY HOLDINGS LLC
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30,
2002 December 31,
(unaudited) 2001
----------- ------------
ASSETS
Assets held for Sale:
Rental property - net of accumulated depreciation of $0 and
$48,077, respectively $ -- $358,709
Cash and cash equivalents -- 10,562
Escrow deposits and restricted cash -- 7,506
Tenant security deposits -- 203
Due from tenants -- 2,138
Note receivable -- 275
Deferred rent receivable -- 50,119
Prepaid real estate taxes -- 8,986
Deferred leasing costs, net of amortization of $0 and $4,132,
respectively -- 17,016
Deferred financing costs - net of amortization of $0 and $8,830,
respectively -- 4,101
Other receivables -- 281
-------- --------
Total Assets held for Sale -- 459,896
-------- --------
Assets Related to Continuing Operations:
Cash and cash equivalents 15,162 450
Escrow deposits and restricted cash 1,247 --
Other receivables 2,420 --
-------- --------
TOTAL ASSETS $ 18,829 $460,346
======== ========
LIABILITIES AND MEMBERS' EQUITY
Liabilities Related To Assets Held For Sale:
Mortgage loan $ -- $425,000
Accounts payable and accrued expenses -- 7,854
Tenant security deposits, unearned revenue and credits due tenants -- 2,135
Derivative investment -- 17,897
-------- --------
Total Liabilities Related To Assets Held For Sale -- 452,886
-------- --------
Accounts Payable Related To Continuing Operations 2,340 155
-------- --------
Total Liabilities 2,340 453,041
-------- --------
TOTAL MEMBERS' EQUITY 16,489 7,305
-------- --------
TOTAL LIABILITIES AND MEMBERS' EQUITY $ 18,829 $460,346
======== ========
See notes to consolidated financial statements.
1
METROPOLIS REALTY HOLDINGS LLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands)
Quarter Ended Nine Months Ended
------------- -----------------
September 30, September 30,
------------- -------------
2002 2001 2002 2001
--------- --------- --------- ---------
OPERATING EXPENSES:
General and administrative $ 169 $ 228 $ 449 $ 561
--------- --------- --------- ---------
Total operating expenses 169 228 449 561
--------- --------- --------- ---------
OTHER ITEMS:
Gain on repurchase of minority interest -- -- -- 13,009
--------- --------- --------- ---------
INCOME (LOSS) FROM CONTINUING OPERATIONS: (169) (228) (449) 12,448
INCOME FROM DISCONTINUED OPERATIONS:
Income (loss) from discontinued operations (5,025) 348 (1,106) 1,620
Gain on sale of discontinued operations 298,443 -- 298,443 --
--------- --------- --------- ---------
Total income (loss) from discontinued
operations 293,418 348 297,337 1,620
--------- --------- --------- ---------
NET INCOME 293,249 120 296,888 14,068
OTHER COMPREHENSIVE INCOME (LOSS) 9,955 (6,239) 17,897 (19,705)
--------- --------- --------- ---------
COMPREHENSIVE INCOME (LOSS) $ 303,204 $ (6,119) $ 314,785 $ (5,637)
========= ========= ========= =========
See notes to consolidated financial statements.
2
METROPOLIS REALTY HOLDINGS LLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Nine Months Ended September 30,
2002 2001
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 296,888 $ 14,068
Adjustments to reconcile net income to net cash provided
by operating activities:
Gain on sale of discontinued operations (298,443) --
Depreciation and amortization 7,051 12,416
Gain on repurchase of minority interest -- (13,009)
Change in:
Decrease (increase) in escrow deposits and restricted cash 6,259 (4,719)
Decrease in due from tenants 2,138 2,374
Decrease in prepaid expenses and other assets 7,051 4,500
Decrease/(increase) in deferred rent receivable 136 (1,219)
Decrease in accounts payable and accrued expenses (2,925) (781)
Decrease in tenant security deposits, unearned revenue, and
credits due tenants (2,136) (781)
--------- ---------
Net cash provided by operating activities 16,019 12,849
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of discontinued operations 718,875 --
Additions to building, equipment and leasing costs from discontinued
operations (419) (3,327)
Change in notes receivable 275 --
Change in deferred costs -- 10
--------- ---------
Net cash used in investing activities 718,731 (3,317)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of minority interest -- (1,400)
Change in mortgage payable (425,000) --
Proceeds from mortgage loan 275,000 --
Proceeds from loan 150,000 --
Repayment of mortgage loan (275,000) --
Repayment of loan (150,000) --
Dividends paid (305,648) (6,501)
Other 48 (16)
--------- ---------
Net cash used in financing activities (730,600) (7,917)
--------- ---------
INCREASE IN CASH AND CASH EQUIVALENTS 4,150 1,615
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 11,012 15,066
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 15,162 $ 16,681
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during period $ 27,968 $ 27,810
========= =========
Dividends declared $ 305,648 $ 9,751
========= =========
See notes to consolidated financial statements.
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands)
- --------------------------------------------------------------------------------
1. BACKGROUND, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization - Metropolis Realty Holdings LLC, a Delaware limited
liability company (the "Company"), was formed on May 6, 2002 to facilitate
the consummation of the sale (the "Sale Transaction") by the Company's
former parent company, Metropolis Realty Trust, Inc., a Maryland
corporation ("Metropolis Realty Trust"), of its principal asset, the real
property and building located at 1290 Avenue of the Americas (the "1290
Property") to Jamestown 1290, L.P., a Delaware limited partnership (the
"Jamestown Partnership").
Prior to the consummation of the Sale Transaction, on September 4, 2002,
Metropolis Realty Trust merged (the "Merger") with Metropolis Realty Lower
Tier LLC, a Delaware limited liability company and a wholly-owned
subsidiary of the Company ("Metropolis Lower Tier"), with Metropolis
Realty Trust as the surviving entity of the Merger. As a result of the
Merger, Metropolis Realty Trust became a 99.99% subsidiary of the Company.
Following the Sale Transaction, Metropolis Realty Trust deregistered with
the Securities and Exchange Commission. In the Merger, each holder of
shares of Common Stock, par value $10.00 per share, of Metropolis Realty
Trust ("Metropolis Trust Common Stock"), received a number of Company
limited liability company units ("LLC Units") equal to the number of
shares of Metropolis Trust Common Stock held by such holder immediately
prior to the Merger. The LLC Units have been registered under the
Securities Act of 1933, as amended, pursuant to a Registration Statement
on Form S-4 declared effective by the Securities and Exchange Commission
on August 9, 2002. No established trading market exists for the LLC Units.
The LLC Units of the Company are not listed on any exchange, and the
Company does not intend to list the LLC Units on any exchange in the near
term.
Metropolis Realty Trust consummated the Sale Transaction on September 9,
2002. From the date of formation until the consummation of the Sale
Transaction, the Company did not conduct any operations other than
activities incidental to the Sale Transaction. Since the consummation of
the Sale Transaction, the Company has not conducted any operations, and
does not expect to conduct any operations, other than to wind-up property
activities and to settle and/or satisfy indemnification claims in
accordance with the terms of the Amended and Restated Purchase Agreement,
dated as of May 7, 2002, by and between Metropolis Realty Trust and the
Jamestown Partnership (the "Purchase Agreement").
Since September 9, 2002, the date of the consummation of the Sale
Transaction, Metropolis Realty Trust has not conducted any operations or
owned any income generating assets other than cash and cash equivalents.
Basis of Presentation - The consolidated financial statements include the
Company, Metropolis Realty Trust and each of the entities through which
Metropolis Realty Trust indirectly owned the 1290 Property. All
significant intercompany accounts and transactions have been eliminated in
consolidation. The Company's intent is to liquidate, but the timing is
uncertain and not imminent. Therefore, the consolidated financial
statements have been presented on the historical cost basis.
The accompanying interim financial statements have been prepared without
audit. In the opinion of management, the financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial statements of the interim periods. However,
the operating results for the interim periods may not be indicative of the
results for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America ("GAAP") have been
condensed or omitted. It is suggested that these financial statements
should be read in conjunction with the financial statements and notes
thereto included in Metropolis Realty Trust's Form 10-K/A for the year
ended December 31, 2001.
4
Cash and Cash Equivalents - Cash and cash equivalents includes investments
purchased with an original maturity of three months or less.
Depreciation and Amortization - The 1290 Property was sold in the Sale
Transaction on September 9, 2002. Accordingly, depreciation is no longer
being recorded for the 1290 Property. Building and building improvements
were depreciated over their useful lives of 40 years using the
straight-line method through March 31, 2002. Furniture and fixtures were
depreciated over their useful lives, ranging from 5 to 7 years, through
March 31, 2002. Tenant improvements were amortized on a straight-line
basis over the terms of the respective leases through March 31, 2002.
Deferred Charges - Deferred financing costs were amortized over the term
of the related loan and were included as a component of interest expense
through September 6, 2002, the date that the GE Capital Loan (as
hereinafter defined) was repaid. Direct costs related to leasing were
amortized over the related lease term through March 31, 2002.
Rental Income - Rental income was recognized on a straight-line basis over
the terms of the related leases. Differences between actual base amounts
due from tenant leases and the straight-line basis were included in
deferred rent receivable.
Escrow Deposits and Restricted Cash - Escrow deposits and restricted cash
as of September 30, 2002 includes amounts held in reserve for real estate
tax refunds due to former tenants and miscellaneous escrows related to the
sale. Escrow deposits and restricted cash as of December 31, 2001 includes
amounts held in reserve for tenant improvements, leasing commissions,
insurance, real estate taxes and real estate tax refunds due to former
tenants.
Accounts Payable and Accrued Expenses - Accounts payable and accrued
expenses as of June 30, 2002 and December 31, 2001 include property
operating expenses payable and tenant claims against real estate tax
proceeds.
Derivative Instruments - Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging
Activities, was implemented by the Company on January 1, 2001. SFAS No.
133, as amended and interpreted, establishes accounting and reporting
standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. All
derivatives, whether designated as hedging relationships or not, are
required to be recorded on the balance sheet at fair value. If the
derivative is designated as a fair-value hedge, the changes in the fair
value of the derivative and the hedged item are recognized in earnings. If
the derivative is designated as a cash-flow hedge, the effective portion
of changes in the fair value of the derivative is recorded in other
comprehensive income (loss) and will be recognized in the income statement
when the hedged item affects earnings. The ineffective portion of changes
in the fair value of the derivative designated as a cash flow hedge is
recognized in the income statement. SFAS No. 133 defines new requirements
for designation and documentation of hedging relationships as well as
ongoing effectiveness assessments in order to use hedge accounting. For a
derivative that does not qualify as a hedge, changes in fair value are
recognized in earnings.
On January 1, 2001, the Company recorded approximately $6,900 in other
comprehensive loss as a cumulative transition adjustment to record its
interest rate swap agreement at its estimated fair value as of that date.
Use of Estimates - The presentation of the financial statements requires
estimates and assumptions that affect the reported amounts of assets and
liabilities as of September 30, 2002 and December 31, 2001 and the
reported amounts of revenues and expenses during the reporting periods.
Actual results could differ from those estimates.
Fair Value of Financial Instruments - The carrying amount of cash and cash
equivalents, escrow deposits and restricted cash, tenant security
deposits, accounts receivable, other receivables and accounts payable are
a reasonable estimate of their fair value due to their short-term nature.
Management believes the fair market value of the mortgage loan payable
approximates the carrying value at December 31, 2001. The fair
5
value estimates presented herein are based on pertinent information
available to management as of September 30, 2002 and December 31, 2001.
Income Taxes - The Company qualifies as a partnership under the Internal
Revenue Code, as amended. Metropolis Realty Trust qualifies as a real
estate investment trust ("REIT") under the Internal Revenue Code, as
amended, and will generally not be taxed at the corporate level on income
it currently distributes to its stockholders so long as it, among other
things, distributes at least 90% of its REIT taxable income.
Results of Discontinued Operations
The Company has implemented SFAS No. 144, Accounting for the Impairment or
Disposal of Long Lived Assets, effective January 1, 2002. As a result, all
income and expense related to the 1290 Property have been reclassified to
discontinued operations. The following table summarizes the results of
operations for the 1290 Property:
Quarters Ended Nine Months Ended
September 30, September 30,
-------------- --------------
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES:
Base rental income $ 15,876 $ 21,629 $ 57,366 $ 65,027
Operating escalation income 1,422 981 3,966 3,002
Miscellaneous income 1,402 666 3,689 1,752
--------- --------- --------- ---------
Total revenues 18,700 23,276 65,021 69,781
--------- --------- --------- ---------
OPERATING EXPENSES:
Real estate taxes 3,742 4,548 12,733 13,274
Operating and maintenance 883 1,266 3,620 3,540
Utilities 2,144 2,887 5,769 7,266
Payroll 721 786 2,490 2,424
Management fees 346 331 1,257 1,047
Professional fees (510) (10) 614 93
General and administrative 37 8 244 153
Bad debt expense -- -- -- 1,269
Depreciation and amortization -- 2,974 2,950 9,177
--------- --------- --------- ---------
Total operating expenses 7,363 12,790 29,677 38,243
--------- --------- --------- ---------
OTHER ITEMS:
Gain on property transaction 298,443 -- 298,443 --
Interest income 102 206 306 822
Interest expense (16,464) (10,344) (36,756) (30,740)
--------- --------- --------- ---------
Total other items 282,081 (10,138) 261,993 (29,918)
--------- --------- --------- ---------
INCOME FROM DISCONTINUED OPERATIONS $ 293,418 $ 348 $ 297,337 $ 1,620
========= ========= ========= =========
2. FINANCING TRANSACTIONS
Jamestown Loan. On September 6, 2002, the Company borrowed $150,000 (the
"Jamestown Loan") from Jamestown 1290 Partners, a Georgia general
partnership and a limited partner of the Jamestown Partnership, pursuant
to a Promissory Note the terms of which included a 7% annual rate of
interest, prepayment without penalty and a maturity date of March 9, 2003.
The Jamestown Loan was secured by a pledge of the Company's 99.99% equity
interest in Metropolis Realty Trust. Also on September 6, 2002, the
Company contributed the proceeds of the Jamestown Loan to Metropolis
Realty Trust, and immediately thereafter, Metropolis Realty Trust used
such proceeds to acquire from General Electric Capital Corporation ("GE
Capital") $150,000 of the outstanding $425,000 GE Capital indebtedness
(the
6
"GE Capital Loan"). On September 9, 2002, Metropolis Realty Trust sold the
1290 Property and distributed the net proceeds it received in the Sale
Transaction to the Company. Upon receipt of such distribution, the Company
prepaid the Jamestown Loan in full with accrued interest thereon.
Morgan Stanley Loan. On September 6, 2002, Metropolis Realty Trust
borrowed $275,000 (the "Morgan Stanley Loan") from Morgan Stanley Dean
Witter Mortgage Capital Inc. ("Morgan Stanley") pursuant to a Loan
Agreement, the terms of which included an interest rate of 4.31% per
annum, prepayment in whole without penalty and a maturity date of April 1,
2003. The Morgan Stanley Loan was secured by a mortgage of the 1290
Property and an assignment of the leases and rents relating to the 1290
Property. Also on September 6, 2002, Metropolis Realty Trust used the
proceeds of the Morgan Stanley Loan to acquire $275,000 of the outstanding
GE Capital Loan and Metropolis Realty Trust assigned its rights thereunder
to Morgan Stanley. On September 9, 2002, Metropolis Realty Trust used the
net proceeds it received in the Sale Transaction to prepay the Morgan
Stanley Loan in full with accrued interest thereon.
3. TERMINATION OF THE SWAP AGREEMENT
In connection with the repayment of the GE Capital Loan, on September 6,
2002, 1290 Partners, L.P., a Delaware limited partnership and an indirect
wholly-owned subsidiary of the Company, terminated that certain ISDA
Master Agreement (the "Swap Agreement"), dated as of December 13, 1999, by
and between 1290 Partners and Morgan Stanley Derivative Products, Inc.
("MSD") that was used to hedge interest rate risk associated with the GE
Capital Loan and paid a termination fee to MSD in an amount equal to
$6,769, plus interest expense for the remainder of the current interest
period ending on September 30, 2002 in an amount equal to $741. This
amount is included in interest expense in the Results of Discontinued
Operations for the quarter ended September 30, 2002 and in interest paid
during the period on the Statements of Cash Flow for the nine months ended
September 30, 2002.
4. SALE OF THE 1290 PROPERTY
The Sale Transaction was consummated on September 9, 2002. As a result of
the consummation of the Sale Transaction, neither the Company nor
Metropolis Realty Trust owns any interest in any real estate assets, and
Metropolis Realty Trust intends to liquidate and dissolve prior to
December 31, 2002. On September 9, 2002, Metropolis Realty Trust
distributed the approximately $450,000 of net proceeds that it received in
the Sale Transaction to the Company which, in turn, used $150,000 to
prepay the Jamestown Loan, and an aggregate of approximately $300,000 to
make a distribution to the holders of LLC Units of $23.00 per LLC Unit. In
connection with the Sale Transaction, Metropolis Realty Trust realized a
gain on the sale of the 1290 Property of approximately $298,443.
Metropolis Realty Trust is a real estate investment trust for U.S. federal
income tax purposes and intends to liquidate and dissolve prior to
December 31, 2002. As a result of the Sale Transaction and the
distribution of the net proceeds received by it in the Sale Transaction,
Metropolis Realty Trust no longer has any assets nor does it expect to
acquire any assets prior to December 31, 2002.
5. STOCKHOLDERS' EQUITY
The Company has the authority to issue 50,000,000 LLC Units. As of
September 30, 2002, there were 13,006,346 LLC Units issued and
outstanding.
On September 9, 2002, John R.S. Jacobsson, a Director, Vice President and
Secretary of each of Metropolis Realty Trust and the Company, exercised
options ("Options") to purchase 3,000 LLC Units of the Company for an
exercise price of $12.50 per LLC Unit. The Options were granted to Mr.
Jacobsson under Metropolis Realty Trust's 1996 Stock Option Plan, and were
converted into options to purchase LLC Units on a one-for-one basis
pursuant to the Merger.
6. RELATED PARTY TRANSACTIONS
Asset Management - Prior to September 9, 2002, Metropolis Realty Trust was
party to an Asset Management Agreement with a company ("Asset Manager")
that is affiliated with two of its stockholders. One of these stockholders
is also a Director and Officer of Metropolis Realty Trust and the Company.
The
7
Asset Management Agreement was terminated on September 9, 2002, the date
that the Sale Transaction was consummated. The Asset Manager provided
asset advisory, consultation and management services for Metropolis Realty
Trust. Fees for such services were payable in arrears at a rate of $25 per
month. The Asset Management Agreement also provided for reimbursement of
costs and expenses for contractors and professional fees, as incurred.
Asset management fees incurred for the three and nine months ended
September 30, 2002 aggregated approximately $57 and $207, respectively.
Asset management fees incurred for the three and nine months ended
September 30, 2001 aggregated approximately $75 and $225, respectively.
On the closing of the Sale Transaction, the Asset Manager was paid a fee
in the amount of $2,000 in consideration for services rendered to
Metropolis Realty Trust in connection with the Sale Transaction. These
services included the Asset Manager's participation in the negotiation and
structuring of the Sale Transaction, marketing of the 1290 Property,
oversight of the building's property tours, management of the Jamestown
Partnership's due diligence process, and supervision of the building's
property manager in connection with these due diligence activities. Upon
the consummation of the Sale Transaction, Metropolis Realty Trust paid a
$50 bonus to each of four of its officers in recognition of the
contribution made by each of these officers to the negotiation,
structuring and consummation of the Sale Transaction. One of the officers
that received such bonus is affiliated with the Asset Manager.
Property Management - Prior to September 9, 2002, Metropolis Realty Trust
was a party to a Management and Leasing Agreement with a company
("Property Manager/Leasing Agent") that is an affiliate of a stockholder.
The Property Management Agreement was terminated on September 9, 2002, the
date that the Sale Transaction was consummated, and on such date
Metropolis Realty Trust paid to the Property Manager/Leasing Agent, on an
accelerated basis, approximately $800 of leasing commissions due to the
Property Manager/Leasing Agent under its leasing agreement. The Property
Manager/Leasing Agent managed and operated the 1290 Property and provided
all supervisory, management and leasing services. Fees incurred under the
Management and Leasing Agreement for the three and nine months ended
September 30, 2002 aggregated aggregated approximately $340 and $1,182,
respectively. Fees incurred under the Management and Leasing Agreement for
the three and nine months ended September 30, 2001 aggregated
approximately $777 and $1,507, respectively.
REIT Management - The Company has entered into a REIT Management Agreement
with the Property Manager/Leasing Agent ("REIT Manager"). The REIT Manager
performs certain accounting, administrative and monitoring services. The
REIT Management Agreement provides for compensation to the REIT Manager of
a monthly fee and reimbursement of documented out-of-pocket expenses. Fees
incurred under the REIT Management Agreement for each of the three and
nine months ended September 30, 2002 and 2001 aggregated approximately $31
and $94, respectively.
Participation in the Sale Transaction- As described above in the Note
titled "Sale of the 1290 Property", the Sale Transaction was consummated
on September 9, 2002.
As described below, certain parties affiliated with, or that have
performed services for, the Company and Metropolis Realty Trust had an
interest in the Sale Transaction.
Apollo Real Estate Advisors. Apollo Real Estate Advisors, L.P., a Delaware
limited partnership ("AREA"), is the general partner of Apollo Real Estate
Investment Fund, L.P. ("AREIF") which beneficially owned approximately 38%
of the outstanding shares of Metropolis Realty Trust Common Stock prior to
the Merger and currently owns approximately 38% of the outstanding LLC
Units. Certain of the Company's and Metropolis Realty Trust's existing
directors and officers are also partners of AREA and officers of the
general partner of AREA. Four of AREA's partners serve on the Company's
and Metropolis Realty Trust's boards of directors (the "Apollo
Directors"). The Apollo Directors indirectly control, through AP-1290
Partners LLC, an approximate 23% limited partnership interest in the
Jamestown Partnership that acquired the 1290 Property. Through its
continued affiliation with the Jamestown Partnership, an affiliate of AREA
receives a portion of the property management fees that are paid with
respect to the 1290 Property, and another affiliate of AREA serves as the
leasing agent for the 1290 Property and receives leasing commissions if
and when a lease relating to the 1290 Property is executed. In addition,
if the 1290 Property is sold by the Jamestown Partnership, an affiliate of
AREA will be entitled to a sales fee equal to 1.2% of the gross sales
price. Upon the consummation of the Sale Transaction,
8
Metropolis Realty Trust paid a $50 bonus to each of four of its officers
in recognition of the contribution made by each of these officers to the
negotiation, structuring and consummation of the Sale Transaction. Three
of the officers that received such bonus are affiliated with AREA.
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (In thousands, except share information)
General
As a result of the Sale Transaction, neither the Company nor Metropolis
Realty Trust either directly or indirectly conducts any operations or owns any
real estate or other income generating assets, other than the Company's $15,162
of available cash on hand.
Overview
The Company was formed on May 6, 2002 to facilitate the consummation of
the Sale Transaction, which occurred on September 9, 2002. On September 4, 2002,
the Merger of Metropolis Realty Trust with Metropolis Lower Tier was
consummated, with Metropolis Realty Trust as the surviving entity of such
Merger. As a result of the Merger, Metropolis Realty Trust became a 99.99%
subsidiary of the Company. In the Merger, each holder of shares of Metropolis
Trust Common Stock received a number of LLC Units equal to the number of shares
of Metropolis Trust Common Stock held by such holder immediately prior to the
Merger. No established trading market exists for the LLC Units. The LLC Units of
the Company are not listed on any exchange, and the Company does not intend to
list the LLC Units on any exchange in the near term.
From the date of its formation until the consummation of the Sale
Transaction, the Company did not conduct any operations. Since the consummation
of the Sale Transaction, the Company has not conducted any operations, and does
not expect to conduct any operations, other than to settle and/or satisfy
indemnification claims in accordance with the terms of the Purchase Agreement
and to pay any post-closing Sale Transaction costs that the Company, Metropolis
Realty Trust or 1290 Partners may be required to pay under the Purchase
Agreement. As of the date of this filing, neither the Company nor Metropolis
Realty Trust has received notice of any indemnification claims under the
Purchase Agreement.
Metropolis Realty Trust was formed on May 13, 1996 and commenced
operations on October 10, 1996. The Company is a Maryland corporation that
qualifies as a REIT for tax purposes. Prior to the consummation of the Sale
Transaction, Metropolis Realty Trust's principal business objective was the
operation of the 1290 Property. Since September 9, 2002, the date of the
consummation of the Sale Transaction, Metropolis Realty Trust no longer conducts
any operations nor does it own any income generating assets.
Sale of the 1290 Property
The Sale Transaction was consummated on September 9, 2002. As a result of
the consummation of the Sale Transaction, neither the Company nor Metropolis
Realty Trust owns any interest in any real estate assets. On September 9, 2002,
Metropolis Realty Trust distributed $449,146 of net proceeds that it received in
the Sale Transaction to the Company which, in turn, used $150,000 to prepay the
Jamestown Loan, and an aggregate of $299,146 to make a distribution to the
holders of LLC Units of $23.00 per LLC Unit. In connection with the Sale
Transaction, Metropolis Realty Trust realized a gain on the sale of the 1290
Property of approximately $298,443.
Metropolis Realty Trust is a real estate investment trust for U.S. federal
income tax purposes and intends to liquidate and dissolve prior to December 31,
2002. Metropolis Realty Trust has no assets nor does it expect to acquire any
assets on or prior to December 31, 2002.
Results of Operations
The discussion below relates primarily to the financial condition and
results of operations of the Company and Metropolis Realty Trust for the third
quarter of 2002. Holders of LLC Units are encouraged to review the consolidated
financial statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations contained in Metropolis Realty Trust's
Annual Report on Form 10-K/A for the year ended December 31, 2001 for a more
complete understanding of Metropolis Realty Trust's financial condition and
results of operations.
9
Results of Discontinued Operations
As a result of the Sale Transaction, neither the Company nor Metropolis
Realty Trust either directly or indirectly conducts any operations or owns any
real estate or other income generating assets, other than the Company's $15,162
of available cash on hand.
The Company has implemented SFAS No. 144, Accounting for the Impairment or
Disposal of Long Lived Assets, effective January 1, 2002. As a result, all
income and expense related to the 1290 Property have been reclassified to
discontinued operations. The following table summarizes the results of
operations for the 1290 Property:
Quarter Ended Nine Months Ended
------------- -----------------
September 30, September 30,
------------- -------------
2002 2001 2002 2001
--------- --------- --------- ---------
REVENUES:
Base rental income $ 15,876 $ 21,629 $ 57,366 $ 65,027
Operating escalation income 1,422 981 3,966 3,002
Miscellaneous income 1,402 666 3,689 1,752
--------- --------- --------- ---------
Total revenues 18,700 23,276 65,021 69,781
--------- --------- --------- ---------
OPERATING EXPENSES:
Real estate taxes 3,742 4,548 12,733 13,274
Operating and maintenance 883 1,266 3,620 3,540
Utilities 2,144 2,887 5,769 7,266
Payroll 721 786 2,490 2,424
Management fees 346 331 1,257 1,047
Professional fees (510) (10) 614 93
General and administrative 37 8 244 153
Bad debt expense -- -- -- 1,269
Depreciation and amortization -- 2,974 2,950 9,177
--------- --------- --------- ---------
Total operating expenses 7,363 12,790 29,677 38,243
--------- --------- --------- ---------
OTHER ITEMS:
Gain on property transaction 298,443 -- 298,443 --
Interest income 102 206 306 822
Interest expense (16,464) (10,344) (36,756) (30,740)
--------- --------- --------- ---------
Total other items 282,081 (10,138) 261,993 (29,918)
--------- --------- --------- ---------
INCOME FROM DISCONTINUED OPERATIONS $ 293,418 $ 348 $ 297,337 $ 1,620
========= ========= ========= =========
Quarters Ended September 30, 2002 and 2001
Base rental income decreased by approximately $5,753 for the quarter ended
September 30, 2002 as compared to the same period in the prior year primarily
due to the sale of the 1290 Property on September 9, 2002, as well as the
expiration of a lease in September 2001 where a former tenant continued to pay
base rental income on space no longer occupied by them, offset by scheduled rent
increases in existing leases, and the commencement of new leases at higher
market rents.
Operating escalation income increased by approximately $441 for the
quarter ended September 30, 2002 as compared to the quarter ended September 30,
2001. This increase is primarily due to growth of escalatable operating expense
billings in 2002 as compared to 2001, offset by the sale of the 1290 Property on
September 9, 2002.
10
Miscellaneous income for the quarter ended September 30, 2002 increased by
$736 as compared to the quarter ended September 30, 2001. This increase is due
to the expiration of a lease in September 2001 where a former tenant was
receiving a sublease credit on a space no longer occupied by them, and an
increase in tenant submetered electric charges in 2002, offset by the sale of
the 1290 Property on September 9, 2002.
Operating expenses for the quarter ended September 30, 2002 were $7,363, a
decrease of 42.4% from the quarter ended September 30, 2001. The decrease is
primarily attributable to depreciation and amortization on the real estate
assets of the 1290 Property not being recorded since April 1, 2002 as a result
of the Company's decision to sell this property, as described in Note 4, and to
treat the 1290 Property as an asset held for sale, and the overall reduction of
expenses due to the sale of the 1290 Property on September 9, 2002. Certain
transaction costs for the sale of the 1290 Property were included in
professional fees during the second quarter of 2002. Upon consummation of the
sale on September 9, 2002, these costs were reclassified from professional fees
to the gain on sale.
Nine Months Ended September 30, 2002 and 2001
Base rental income decreased by approximately $7,661 for the nine months
ended September 30, 2002 as compared to the same period in the prior year
primarily due to the sale of the 1290 Property on September 9, 2002, as well as
the expiration of a lease in September 2001 where a former tenant continued to
pay base rental income on space no longer occupied by them, offset by scheduled
rent increases in existing leases, and the commencement of new leases at higher
market rents.
Operating escalation income increased by approximately $964 for the nine
months ended September 30, 2002 as compared to the nine months ended September
30, 2001. This increase is primarily due to growth of escalatable operating
expense billings in 2002 as compared to 2001, offset by the sale of the 1290
Property on September 9, 2002.
Miscellaneous income for the nine months ended September 30, 2002
increased by $1,937 as compared to the nine months ended September 30, 2001.
This increase is due to the expiration of a lease in September 2001 where a
former tenant was receiving a sublease credit on a space no longer occupied by
them, and an increase in tenant submetered electric charges in 2002, offset by
the sale of the 1290 Property on September 9, 2002.
Operating expenses for the nine months ended September 30, 2002 were
$29,677, a decrease of 22.4% from the nine months ended September 30, 2001. The
decrease is primarily attributable to depreciation and amortization on the real
estate assets of the 1290 Property not being recorded since April 1, 2002 as a
result of the Company's decision to sell this property, as described in Note 4,
and to treat the 1290 Property as an asset held for sale, and the overall
reduction of expenses due to the sale of the 1290 Property on September 9, 2002.
In addition, bad debt expense resulting from the write-off of certain tenant
receivables acquired from the Company's Predecessors was recorded in June 2001.
Bad debt expense has not been incurred in 2002.
On March 23, 2001, Metropolis Realty Trust acquired the limited
partnership interest held by 237/1290 Upper Tier Associates, L.P., a Delaware
limited partnership (the "Upper Tier LP"), for $1,400 in accordance with the
Agreement of Limited Partnership of the 1290 Property Owning Partnership ("1290
LP Agreement"). The exercise of such repurchase right resulted in a payment of
approximately $1,400 by the Company to the Upper Tier LP and a gain to
Metropolis Realty Trust of $13,009.
Liquidity and Capital Resources
The Company has $15,162 of available cash on hand, of which $10,000 is
required under the Purchase Agreement to be held by the Company in order to
settle and/or satisfy any indemnification claims made by the Jamestown
Partnership on or prior to December 30, 2002. As of the date of this filing,
neither the Company nor Metropolis Realty Trust has received notice of any
indemnification claims arising under the Purchase Agreement.
Termination of the Swap
In connection with the repayment of the GE Capital Loan, on September 6,
2002, 1290 Partners, L.P., a Delaware limited partnership and an indirect
wholly-owned subsidiary of the Company, terminated that certain ISDA Master
Agreement (the "Swap Agreement"), dated as of December 13, 1999, by and between
1290 Partners
11
and Morgan Stanley Derivative Products, Inc. ("MSD") that was used to hedge
interest rate risk associated with the GE Capital Loan and paid a termination
fee to MSD in an amount equal to $6,769, plus interest expense for the remainder
of the current interest period ending on September 30, 2002 in an amount equal
to $741.
Other
This report contains certain "forward-looking statements" within the
protection of the statutory safe-harbors of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). All statements, other than statements of
historical facts, which address activities, events or developments that the
Company expects or anticipates will or may occur in the future, including such
statements using the words "believes," "anticipates," "expects" and similar
expressions, are forward-looking statements. Such statements are subject to
certain risks and uncertainties which could cause actual results to differ
materially from those projected or suggested in such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to publicly revise these forward-looking statements to reflect events
or circumstances occurring after the date hereof or to reflect the occurrence of
unanticipated events.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
In connection with the repayment of the GE Capital Loan, on September 6,
2002, 1290 Partners, L.P., a Delaware limited partnership and an indirect
wholly-owned subsidiary of the Company, terminated the Swap Agreement that was
used to hedge interest rate risk associated with the GE Capital Loan and paid a
termination fee to MSD in an amount equal to $6,769, plus interest expense for
the remainder of the current interest period ending on September 30, 2002 in an
amount equal to $741. As of September 9, 2002, neither the Company nor any
subsidiary of the Company is a party to any market risk sensitive instrument.
ITEM 4. Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, within the 90 days
prior to the filing date of this report, the Company carried out an evaluation
of the effectiveness of the design and operation of the Company's disclosure
controls and procedures. This evaluation was carried out under the supervision
and with the participation of the Company's management, including the Company's
President and chief executive officer along with the Company's Treasurer and
chief financial officer. Based upon that evaluation, the Company's President and
chief executive officer along with the Company's Treasurer and chief financial
officer concluded that the Company's disclosure controls and procedures are
effective. There have been no significant changes in the Company's internal
controls, or in other factors, which could significantly affect internal
controls subsequent to the date the Company carried out its evaluation.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in Company reports filed under the Exchange
Act is accumulated and communicated to management, including the Company's
President and chief executive officer and Treasurer and chief financial officer,
as appropriate, to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
There are no material pending legal proceedings against or involving
the Company.
ITEM 2. Changes in Securities and Use of Proceeds
None.
12
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Submission of Matters To a Vote of Security Holders
Metropolis Realty Trust held a special meeting ("Special Meeting")
of its stockholders on September 3, 2002. At the Special Meeting, Metropolis
Realty Trust stockholders voted on each of the Sale Transaction and the Merger.
Of the 13,004,946 shares of Metropolis Trust Common Stock outstanding,
10,278,721 shares of Metropolis Trust Common Stock were voted in favor of each
of the Sale Transaction and the Merger. No shares were voted against the Sale
Transaction or the Merger or abstained from voting.
ITEM 5. Other Information.
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits required by Item 601 of Regulation S-K
2.1 Agreement and Plan of Merger, dated as of May 22, 2002, by and among
Metropolis Realty Lower Tier LLC, Metropolis Realty Holdings LLC,
and Metropolis Realty Trust, Inc.*
10.1 Amended and Restated Purchase Agreement dated May 7, 2002 between
Metropolis Realty Trust, Inc. and Jamestown 1290, L.P.*
99.1 Certification of Chief Executive Officer Pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to Section 906 of
the Sarbanes - Oxley Act of 2002
(b) Reports on Form 8-K
None.
- -----------------
* Previously filed with the Company's Registration Statement on Form S-4/A
dated August 9, 2002.
13
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
METROPOLIS REALTY HOLDINGS LLC
By: /s/ Lee S. Neibart
-----------------------------------
Name: Lee S. Neibart
Title: President
By: /s/ Stuart Koenig
-----------------------------------
Name: Stuart Koenig
Title: Vice President and Treasurer
Dated: November 14, 2002
14
CERTIFICATIONS
I, Lee S. Neibart, President and chief executive officer of Metropolis Realty
Holdings LLC, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Metropolis Realty
Holdings LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Lee S. Neibart
----------------------------------------
Lee S. Neibart,
President (chief executive officer)
2
I, Stuart Koenig, Vice President and Treasurer of Metropolis Realty Holdings
LLC, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Metropolis Realty
Holdings LLC;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Stuart Koenig
----------------------------------------
Stuart Koenig,
Vice President and Treasurer (chief
financial officer)
2
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2.1 Agreement and Plan of Merger, dated as of May 22, 2002, by and
among Metropolis Realty Lower Tier LLC, Metropolis Realty
Holdings LLC, and Metropolis Realty Trust, Inc.*
10.1 Amended and Restated Purchase Agreement dated May 7, 2002
between Metropolis Realty Trust, Inc. and Jamestown 1290,
L.P.*
99.1 Certification of Chief Executive Officer Pursuant to Section
906 of the Sarbanes - Oxley Act of 2002
99.2 Certification of Chief Financial Officer Pursuant to Section
906 of the Sarbanes - Oxley Act of 2002
- --------------
* Previously filed with the Company's Registration Statement on Form S-4/A
dated August 9, 2002.