<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended September 30, 2000 Commission File Number 1-14516
PRENTISS PROPERTIES TRUST
(Exact Name of Registrant as Specified in its Charter)
Maryland 75-2661588
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3890 West Northwest Highway, Suite 400, Dallas, Texas 75220
(Address of Registrant's Principal Executive Office)
(214) 654-0886
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (i) 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 (ii) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of Common Shares of Beneficial Interest, $0.01 par value,
outstanding as of November 10, 2000, was 36,466,842 and the number of
outstanding Participating Cumulative Redeemable Preferred Shares of Beneficial
Interest, Series A, was 3,773,585.
<PAGE>
PRENTISS PROPERTIES TRUST
INDEX
-----
<TABLE>
<CAPTION>
<S> <C> <C>
Part I: FINANCIAL INFORMATION Page Number
-----------
Item 1. Financial Statements
Consolidated Balance Sheets of Prentiss Properties Trust at
September 30, 2000 (unaudited) and December 31, 1999 5
Consolidated Statements of Income of Prentiss Properties
Trust for the three month periods and the nine month
periods ended September 30, 2000 and 1999 (unaudited) 6
Consolidated Statements of Cash Flows of Prentiss Properties
Trust for the nine month periods ended September 30, 2000
and 1999 (unaudited) 7
Notes to Consolidated Financial Statements 8-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-24
Item 3. Quantitative and Qualitative Disclosures about Market Risk 24-25
Part II: OTHER INFORMATION
Item 1. Legal Proceedings 26
Item 2. Changes in Securities 26
Item 3. Default Upon Mortgages and Notes Payable 26
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 5. Other Information 26
Item 6. Exhibits and Reports on Form 8-K 26-28
SIGNATURE 29
</TABLE>
2
<PAGE>
FORWARD-LOOKING STATEMENTS
This Form 10-Q and the documents incorporated by reference herein contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). When used in
this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect,"
"intend," "predict," "project," and similar expressions, as they relate to us or
our management, identify forward-looking statements. Such forward-looking
statements are based on the beliefs of our management as well as assumptions
made by and information currently available to us. These forward-looking
statements are subject to certain risks, uncertainties and assumptions,
including, but not limited to, risks, uncertainties and assumptions related to
the following:
. the geographic concentration . conflicts of interest;
of our properties;
. our real estate acquisition, . change in our investment,
redevelopment, development and financing and borrowing policies
construction activities; without shareholder approval;
. the operating performance of . our dependence on key personnel;
our properties;
. our incurrence of debt; . our third party property management,
leasing, development and construction
business and related services; and
. the limited ability of . the effect of shares available
shareholders to effect a change for future sale on the price of
of control; common shares.
. our failure to qualify as a REIT;
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect our current views with respect to future events and are subject to these
and other risks, uncertainties and assumptions, relating to our operations,
results of operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us or individuals acting on our
behalf are expressly qualified in their entirety by this paragraph. A detailed
discussion of risks is included, under the caption "Risk Factors," in the
Company's Form 10-K, filed on March 24, 2000.
3
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
(this page intentionally left blank)
4
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
ASSETS 2000 1999
------------- ------------
Real estate: (unaudited)
Land..................................................... $ 306,040 $ 298,555
Buildings and improvements............................... 1,570,979 1,481,831
Construction in progress................................. 64,762 87,860
Land held for development................................ 52,580 30,236
------------- ------------
1,994,361 1,898,482
Less: accumulated depreciation........................... (116,703) (91,461)
------------- ------------
Total real estate assets................................. 1,877,658 1,807,021
Deferred charges and other assets, net.................... 136,582 115,250
Receivables, net.......................................... 34,393 28,277
Cash and cash equivalents................................. 4,935 13,313
Escrowed cash............................................. 23,221 6,481
Other receivables (affiliates)............................ 3,617
Investments in joint ventures and unconsolidated
subsidiaries............................................. 20,107 20,704
------------- ------------
Total assets............................................. $ 2,096,896 $ 1,994,663
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt on real estate....................................... $ 990,396 $ 896,810
Accounts payable and other liabilities.................... 77,942 68,144
Deferred merger termination fee........................... 17,000
Other payables (affiliates)............................... 3,306
Distributions payable..................................... 23,471 18,896
------------- ------------
Total liabilities......................................... 1,112,115 983,850
------------- ------------
Minority interest in operating partnership................ 177,575 177,817
------------ ------------
Minority interest in real estate partnerships............. 1,391 1,503
------------ ------------
Commitments and contingencies
Preferred shares $.01 par value, 20,000,000
shares authorized, 3,773,585 shares issued and
outstanding.............................................. 100,000 100,000
Common shares $.01 par value, 100,000,000 shares
authorized, 40,543,276 and 40,078,643 (includes
4,104,371 and 2,591,900 in treasury) shares issued and
outstanding at September 30, 2000 and December 31,
1999, respectively..................................... 405 401
Additional paid-in capital................................ 799,702 789,554
Unearned compensation..................................... (3,543)
Retained earnings......................................... 1,887 5,329
Common shares in treasury, at cost, 4,104,371 and
2,591,900 shares at September 30, 2000 and December 31,
1999, respectively..................................... (92,636) (63,791)
------------- ------------
Total shareholders' equity........................... 805,815 831,493
------------- ------------
Total liabilities and shareholders' equity........... $ 2,096,896 $ 1,994,663
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Rental income........................................... $ 83,104 $ 76,119 $ 247,769 $ 220,179
Management and other fees, net.......................... 1,308 609 3,040 1,804
--------------- --------------- --------------- ---------------
Total revenues......................................... 84,412 76,728 250,809 221,983
--------------- --------------- --------------- ---------------
Expenses:
Property operating and maintenance...................... 19,022 18,218 56,723 51,037
Real estate taxes....................................... 9,432 8,699 29,004 26,116
General and administrative and personnel costs, net..... 2,339 2,122 7,465 6,532
Interest expense........................................ 17,521 15,442 51,988 43,530
Amortization of deferred financing costs................ 415 276 1,104 795
Depreciation and amortization........................... 16,458 14,216 46,727 39,700
--------------- --------------- --------------- ---------------
Total expenses......................................... 65,187 58,973 193,011 167,710
--------------- --------------- --------------- ---------------
Equity in income of joint ventures and unconsolidated
subsidiaries............................................. 929 973 2,733 3,217
Merger termination fee, net............................... 4,091 4,091
--------------- --------------- --------------- ---------------
Income before (loss)/gain on sales and minority interests. 24,245 18,728 64,622 57,490
(Loss)/gain on sales...................................... (2,038) 1,354 208 1,643
Minority interests........................................ (3,949) (2,886) (11,790) (8,281)
--------------- --------------- --------------- ---------------
Net income................................................ $ 18,258 $ 17,196 $ 53,040 $ 50,852
Preferred dividends....................................... (1,830) (1,660) (5,321) (4,830)
--------------- --------------- --------------- ---------------
Net income applicable to common shareholders.............. $16,428 $15,536 $ 47,719 $ 46,022
=============== =============== =============== ===============
Net income per common share - basic....................... $ 0.45 $ 0.41 $ 1.32 $ 1.21
=============== =============== =============== ===============
Weighted average number of common shares outstanding -
basic.................................................... 36,375 37,930 36,203 37,973
=============== =============== =============== ===============
Net income per common share - diluted..................... $ 0.45 $ 0.41 $ 1.31 $ 1.21
=============== =============== =============== ===============
Weighted average number of common shares and
common share equivalents outstanding - diluted........... 36,720 38,063 36,405 38,068
=============== =============== =============== ===============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
Cash Flows from Operating Activities: Sept. 30, 2000 Sept. 30, 1999
------------------ -----------------
<S> <C> <C>
Net income........................................................ $ 53,040 $ 50,852
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interests............................................ 11,790 8,281
Gain on sales................................................. (208) (1,643)
Provision for doubtful accounts............................... 1,062 1,076
Depreciation and amortization................................. 46,727 39,700
Amortization of deferred financing costs...................... 1,104 795
Equity in income of joint ventures and unconsolidated
subsidiaries................................................ (2,733) (3,217)
Non-cash compensation......................................... 819 75
Changes in assets and liabilities:
Deferred charges and other assets............................. (7,771) (2,593)
Receivables................................................... (7,638) (4,955)
Escrowed cash................................................. (16,740) (2,113)
Other payables/receivables (affiliates)....................... 6,923 (2,443)
Accounts payable and other liabilities........................ 27,353 (5,216)
--------- ---------
Net cash provided by operating activities......................... 113,728 78,599
--------- ---------
Cash Flows from Investing Activities:
Purchase and development of real estate........................... (196,255) (69,692)
Investment in real estate......................................... (33,018) (43,370)
Investment in joint ventures...................................... (541) (9,918)
Proceeds from sale of real estate................................. 98,010 29,291
Distributions received from joint ventures and unconsolidated
subsidiaries.................................................... 3,218 3,800
--------- ---------
Net cash used in investing activities............................. (128,586) (89,889)
--------- ---------
Cash Flows from Financing Activities:
Net proceeds from sale of common shares........................... 5,704 829
Net proceeds from the sale of preferred units..................... 50,000
Purchase of treasury shares....................................... (28,845) (28,847)
Distributions paid to limited partners............................ (2,298) (2,126)
Distributions paid to common shareholders......................... (49,982) (47,399)
Distributions paid to preferred shareholders...................... (5,151) (4,679)
Distributions paid to preferred unitholders....................... (6,305) (3,943)
Distributions paid for minority interest in real estate
partnerships..................................................... (229)
Proceeds from debt on real estate................................. 274,845 355,844
Repayments of debt on real estate................................. (181,259) (301,265)
--------- ---------
Net cash provided by financing activities......................... 6,480 18,414
--------- ---------
Net change in cash and cash equivalents........................... (8,378) 7,124
Cash and cash equivalents, beginning of period.................... 13,313 5,523
--------- ---------
Cash and cash equivalents, end of period.......................... $ 4,935 $ 12,647
========= =========
Supplemental Cash Flow Information:
Cash paid for interest............................................ $ 51,205 $ 45,932
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
7
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1. The Organization
Prentiss Properties Trust is a Maryland Real Estate Investment Trust
("REIT") that acquires, owns, manages, leases, develops and builds office and
industrial properties throughout the United States. The Company is self-
administered in that it provides its own administrative services, such as
accounting, tax and legal, internally through its own employees. The Company is
self-managed in that it internally provides all the management and maintenance
services that its properties require through its own employees such as property
managers, leasing professionals and engineers. The Company operates principally
through Prentiss Properties Acquisition Partners, L.P. and its subsidiaries (the
"Operating Partnership") and Prentiss Properties Limited, Inc. (the "Manager")
(collectively referred to herein as the "Company"). As of September 30, 2000,
the Company owned interests in a diversified portfolio of 186 primarily suburban
Class A office and suburban industrial properties containing approximately 19.2
million net rentable square feet. The properties consist of 134 office buildings
(the "Office Properties") containing approximately 15.3 million net rentable
square feet and 52 industrial buildings (the "Industrial Properties" and
together with the Office Properties, the "Properties") containing approximately
3.9 million net rentable square feet. The Properties include 6 Office Properties
containing 645,000 square feet that are in various stages of development or that
have been recently developed by the Company and are in various stages of lease-
up (the "Development Properties"). As of September 30, 2000, the Office
Properties and Industrial Properties, exclusive of the Development Properties,
were 96% leased to approximately 1,200 tenants and 94% leased to approximately
115 tenants, respectively. In addition to managing the Properties that the
Company owns or has ownership interests in, the Company manages approximately
22.2 million net rentable square feet in office, industrial and other properties
that are owned by third parties.
Termination of the Merger
On September 21, 2000, the Company, Mack-Cali Realty Corporation, a
Maryland corporation ("Mack-Cali") and Mack-Cali Realty, L.P., a Delaware
limited partnership of which Mack- Cali is the sole general partner ("Mack-Cali
Partnership"), entered into a Termination and Release Agreement (the
"Termination Agreement"). The Termination Agreement provides for termination of
the Agreement and Plan of Merger (the "Merger Agreement") among the parties
dated June 27, 2000.
In connection with the Termination Agreement, and pursuant to an Escrow
Agreement dated September 21, 2000 (the "Escrow Agreement"), Mack-Cali deposited
$25,000,000 in escrow for the benefit of the Company (the "Termination Fee").
Per the Escrow Agreement, the funds are to be held pending delivery to Chicago
Title Insurance Company (the "Escrow Agent") and Mack-Cali by the Company of
either (i) a letter from the Company's independent accountants indicating the
maximum amount of money that can be paid at that time to the Company without
causing the Company to fail to maintain its REIT status or (ii) a Fee Tax
Opinion (as defined below).
A "Fee Tax Opinion" shall mean a letter from outside counsel of the Company
indicating that the Company has received a ruling from the Internal Revenue
Service holding that the receipt by the Company of the funds held in escrow
would not cause the Company to fail to maintain its REIT status.
If any funds remain in the escrow account subsequent to December 31, 2005,
the Escrow Agent shall return such funds to Mack-Cali. The Company anticipates
having the capacity to request the entire $25.0 million prior to December 31,
2005.
Also, in connection with the Termination Agreement, the Company and Mack-
Cali Texas Property L.P., a Texas limited partnership ("Mack-Cali Texas"),
entered into a Purchase and Sale Contract dated September 21, 2000 (the
"Purchase and Sale Contract") pursuant to which Mack-Cali Texas sold and the
Company acquired the Cielo Center in Austin, Texas for a purchase price of $47.2
million.
On September 26, 2000, the Company requested and received $8.0 million from
the escrow account. The proceeds received were recorded net of merger related
cost totaling $3.9 million. The remaining $17.0 million
8
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
termination fee is presented on the Company's September 30, 2000 consolidated
balance sheet in the line items escrowed cash and deferred merger termination
fee.
Real Estate Transactions
During the three months ended September 30, 2000, the Company: (i) sold
three office properties, in the Houston area, for approximately $8.5 million;
(ii) sold its remaining Dallas industrial property for approximately $3.6
million; (iii) acquired a beneficial interest in the Lake Merritt Tower I
building containing approximately 201,000 square feet in the San Francisco Bay
Area for $42.9 million, (iv) acquired a 2.5 acre parcel of land adjacent to the
Lake Merritt Tower I building for $19.9 million, (v) acquired the Cielo Center
buildings which consist of three Office Properties containing approximately
271,000 square feet in the Austin area as discussed above, (vi) transitioned one
Property, totaling approximately 148,000 square feet in the Metropolitan
Washington D.C. area, from development into operations and as a result moved the
real estate from construction in progress to the respective land and buildings
and improvements line items on the consolidated balance sheet; (vii) began
development of the Salton project, a 59,000 square foot Office Property in the
Chicago area; and (viii) moved 935 First Avenue, a 119,000 square foot project
slated for demolition in the suburban Philadelphia area, from operations to land
held for development.
2. Basis of Presentation
The accompanying financial statements are unaudited; however, the financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and
the rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the disclosures required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results for the three and nine month periods ended September 30,
2000, are not necessarily indicative of the results to be obtained for the full
fiscal year. These financial statements should be read in conjunction with the
audited financial statements and notes thereto of the Company, included in its
annual report on Form 10-K for the fiscal year ended December 31, 1999.
3. Debt on Real Estate
At September 30, 2000, the Company had debt on real estate of $990.4
million, excluding the Company's proportionate share of debt on its 50% and 20%
equity investments in the joint ventures owning the Broadmoor Austin Properties
and the Burnett Plaza Property, respectively. See note (5) - Investment in
Joint Ventures and Unconsolidated Subsidiaries for further information on the
Company's equity investments.
The Company's debt transactions for the three months ended September 30,
2000 are summarized in the table below:
(in thousands)
Debt on real estate at June 30, 2000..................... $942,141
Activity for the 3 months ending September 30, 2000:
Property mortgage loans completed....................... 49,500
Net payments under the line of credit................... (6,000)
Construction loan draws................................. 6,010
Net payments on mortgage loans.......................... (1,255)
--------
Debt on real estate at September 30, 2000................ $990,396
========
On July 31, 2000, the Company closed a $49.5 million, 10-year non-recourse
mortgage loan with Metropolitan Life Insurance Company. The loan has an interest
rate of 7.95% and is collateralized by the Ordway Office Property in the San
Francisco Bay Area.
9
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The Company's debt balance at September 30, 2000 consisted of $650.0
million of fixed rate, non-recourse, long-term mortgages and $340.4 million of
floating rate debt, of which $50.0 million is hedged until June 2003 and $110.0
million is hedged until September 2004. Future scheduled principal repayments
of debt on real estate are as follows:
(in thousands)
2000................................... $ 5,416
2001................................... 20,486
2002................................... 106,977
2003................................... 215,364
2004................................... 111,883
Thereafter............................. 530,270
--------
$990,396
========
4. Distribution
On September 13, 2000, the Company declared a cash distribution for the
third quarter of 2000 in the amount of $0.485 per share, payable on October 13,
2000 to common shareholders of record on September 30, 2000. Additionally, it
was determined that a distribution of $0.485 per unit would be made to the
partners of the Operating Partnership, and the holders of the Company's Series A
Convertible Preferred Shares (the "Series A Convertible Preferred Shares"). The
distributions were paid on October 13, 2000, totaling approximately $20.3
million. In addition, a quarterly distribution totaling $3.2 million in the
aggregate was declared on September 13, 2000, for the holders of the Series B
Perpetual Preferred Units (the "Series B Perpetual Preferred Units") and the
Series C Perpetual Preferred Units (the "Series C Perpetual Preferred Units").
The quarterly distribution, which equates to an annualized 8.3% of the face
amount of the Series B Perpetual Preferred Units and an annualized 9.45% of the
face amount of the Series C Perpetual Preferred Units, was paid on October 3,
2000.
5. Investment in Joint Ventures and Unconsolidated Subsidiaries
The Investment in Joint Ventures and Unconsolidated Subsidiaries includes
(i) the Company's 50% interest in the joint venture owning the Broadmoor Austin
Properties; (ii) the Company's 60% interest in the joint ventures owning the
Oaklands 21/27 Development Properties; (iii) the Company's 20% interest in the
joint venture owning the Burnett Plaza Property; (iv) the Company's 95% interest
in the Manager; (v) the Company's recently acquired interest in PPS Partners
LLC; (vi) the Company's investment in Urban Media Communications Corporation
("Urban Media"); and (vi) the Company's investment in Narrowcast Communications
Corporation ("Narrowcast"). The following information summarizes the financial
position at September 30, 2000 and December 31, 1999 and the results of
operations for the three and nine months ended September 30, 2000 and 1999 for
the investments in which the Company held an interest during the periods
presented.
<TABLE>
<CAPTION>
Company's
Summary of Financial Position: Total Assets Total Debt Total Equity Investment
(in thousands) ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sept. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30, Dec. 31,
2000 1999 2000 1999 2000 1999 2000 1999
--------- -------- --------- -------- --------- -------- --------- --------
Broadmoor Austin Properties/(1)/ $ 118,943 $121,813 $154,000 $154,000 $(35,721) $(34,544) $ 4,859 $ 5,638
Oaklands 21/27/(2)/ 6,077 4,597 3,923 1,943 2,080 2,057 1,248 1,216
Burnett Plaza Property 94,411 94,066 47,000 47,000 45,021 44,327 9,038 8,899
Manager 8,848 15,827 4,192 4,190 3,951 3,951
PPS Partners LLC/(3)/ 96 68 50
Urban Media/(4)/ 538 1,000
Narrowcast/(4)/ 423
--------- -------- --------- -------- --------- -------- --------- --------
$ 228,375 $236,303 $ 204,923 $202,943 $ 15,640 $ 16,030 $ 20,107 $ 20,704
========= ======== ========= ======== ========= ======== ========= ========
</TABLE>
10
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the Three Months Ended September 30,
Company's Share
Summary of Operations: Total Revenue Net Income of Net Income
(in thousands) ------------------ ---------------- -----------------
2000 1999 2000 1999 2000 1999
-------- -------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Broadmoor Austin Properties $ 4,951 $ 4,950 $ 948 $ 948 $ 474 $ 474
Oaklands 21/27/(2)/ 187 14 8
Burnett Plaza Property 4,428 3,384 847 233 170 47
Manager 4,124 5,498 201 452 201 452
PPS Partners LLC/(3)/ 167 101 76
-------- -------- ------ ------ ------ ------
$ 13,857 $ 13,832 $2,111 $1,633 $ 929 $ 973
======== ======== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30,
Company's Share
Summary of Operations: Total Revenue Net Income of Net Income
(in thousands) ------------------ ---------------- -----------------
2000 1999 2000 1999 2000 1999
-------- -------- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Broadmoor Austin Properties $ 14,849 $ 14,845 $2,886 $2,923 $1,443 $1,462
Oaklands 21/27/(2)/ 383 34 20
Burnett Plaza Property/(5)/ 12,738 6,723 2,251 507 451 101
Manager 14,076 15,939 604 1,654 604 1,654
PPS Partners LLC/(3)/ 453 287 215
-------- -------- ------ ------ ------ ------
$ 42,499 $ 37,507 $6,062 $5,084 $2,733 $3,217
======== ======== ====== ====== ====== ======
</TABLE>
/(1)/ The difference between the carrying value of the Company's interest in the
Broadmoor Austin Properties and the book value of the underlying equity is
being amortized over 40 years.
/(2)/ Oaklands 21/27 consist of two Development Properties in the suburban
Philadelphia area.
/(3)/ PPS Partners LLC is a joint venture, entered into by the Operating
Partnership and a third party property owner. The third party property
owner will from time to time, at its sole discretion, contribute property
management contracts to PPS Partners LLC. The Operating Partnership
through a submanagement contract manages the properties and participates
in the net income of the venture.
/(4)/ The Company's investments in Urban Media, a provider of broad band
internet access to tenants of commercial office buildings and Narrowcast
which provides an electronic tenant information service known as Elevator
News Network/TM /are investments in marketable securities which are
carried on the Company's balance sheet at cost.
/(5)/ The Company's 20% interest in the Burnett Plaza Property was acquired in
March, 1999.
6. Supplemental Disclosure of Non-Cash Activities
During the three months ended September 30, 2000, the Company declared cash
distributions totaling $20.3 million payable to holders of common shares,
Operating Partnership units and Series A Convertible Preferred Shares. The
distributions were paid October 13, 2000. In addition, a distribution totaling
$3.2 million in the aggregate was declared on September 13, 2000, payable to
holders of the Company's Series B Perpetual Preferred Units and Series C
Perpetual Preferred Units. The distribution was paid on October 3, 2000.
During the nine months ended September 30, 2000, the Company sold a portion
of its investment in Urban Media Communications Corporation to certain key
employees of the Company as part of the Company's long-term incentive plan to
retain such employees. In return for the investment in Urban Media
Communications
11
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Corporation, the Company received, from each employee participating in the plan,
an individual note receivable. The note receivables from the employees total
$462,500 in the aggregate.
Pursuant to the Company's long-term incentive plan, during the nine months
ended September 30, 2000, the Company issued 191,500 restricted shares of the
Company's stock to various key employees of the Company. An amount equal to the
market price of the shares on the respective date of grant, totaling $4.3
million in the aggregate, was recorded as unearned compensation in the
shareholders' equity section of the Company's consolidated balance sheet. The
unearned compensation is amortized quarterly as compensation expense over the
three-year vesting period.
In relation to properties disposed of during the nine months ended
September 30, 2000, the Company removed from real estate and deferred charges
$5.1 million and $760,000 of fully depreciated assets, respectively, as well as
receivables of $922,000, liabilities of $2.7 million and prepaid assets of
$380,000. In connection with properties acquired during the nine months ended
September 30, 2000, the Company assumed liabilities of $2.1 million and prepaid
assets of $245,000. The Company removed an additional $3.5 million of deferred
charges related to fully depreciated leasing costs.
7. Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, the FASB
issued Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 133 was originally
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
SFAS No. 137 deferred the effective date of SFAS No. 133 to all fiscal quarters
of all fiscal years beginning after June 15, 2000. In June 2000, the FASB
issued Statement of Financial Accounting Standards No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - an Amendment of
Statement No. 133" ("SFAS No. 138"). This statement amends the accounting and
reporting standards of SFAS No. 133 for certain derivative instruments and
certain hedging activities. The impact of SFAS No. 133 and SFAS No. 138 will be
dependent upon the extent of derivative instruments held by the Company and the
market for such instruments as of January 1, 2001 and each measurement date
thereafter.
8. Segment Information
The Company's primary business is the ownership and operation of office and
industrial Properties throughout the United States. The Company has determined
that its reportable segments are those that are based on the Company's method of
internal reporting, which disaggregates its business by geographic region.
Effective January 1, 2000, the Company changed its method of internal reporting
to consolidate the results of operations and assets for the Southeast region
into the Company's Mid-Atlantic region. For comparative purposes, the results of
operations for the three and nine month periods ended September 30, 1999 and
assets as of September 30, 1999 for the Southeast region have been combined into
the Company's Mid-Atlantic region. The Company's reportable segments are the
Company's five regions which include (1) Mid-Atlantic; (2) Midwest; (3)
Northeast; (4) Southwest; and (5) West.
The tables below present information about net income/(loss) and segment
assets used by the chief operating decision maker of the Company as of and for
the three and nine month periods ended September 30, 2000 and 1999.
12
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 2000
(in thousands)
Corporate
Mid- Total not Allocable Consolidated
Atlantic Midwest Northeast Southwest West Segments to Segments Total
-------- --------- --------- --------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 20,217 $ 20,052 $ 7,648 $ 19,760 $ 16,703 $ 84,380 $ 32 $ 84,412
======== ======== ========== ========= ======== ========== =========== ===========
Net income/(loss) $ 10,224 $ 10,239 $ 3,835 $ 5,478 $ 8,940 $ 38,716 $ (20,458) $ 18,258
======== ======== ========== ========= ======== ========== =========== ===========
Assets $449,192 $412,134 $ 214,375 $ 506,572 $472,980 $2,055,253 $ 41,643 $ 2,096,896
======== ======== ========== ========= ======== ========== =========== ===========
For the Three Months Ended September 30, 1999
(in thousands)
Corporate
Mid- Total not Allocable Consolidated
Atlantic Midwest Northeast Southwest West Segments to Segments Total
-------- --------- --------- --------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 17,735 $ 14,789 $ 7,043 $ 19,734 $ 17,386 $ 76,687 $ 41 $ 76,728
======== ========= ========= ========= ======== ========== =========== ===========
Net income/(loss) $ 8,577 $ 6,568 $ 3,752 $ 8,599 $ 10,321 $ 37,817 $ (20,621) $ 17,196
======== ========= ========= ========= ======== ========== =========== ===========
Assets $446,465 $ 367,871 $ 207,706 $ 454,090 $428,025 $1,904,157 $ 35,721 $ 1,939,878
======== ========= ========= ========= ======== ========== =========== ===========
For the Nine Months Ended September 30, 2000
(in thousands)
Corporate
Mid- Total not Allocable Consolidated
Atlantic Midwest Northeast Southwest West Segments to Segments Total
-------- --------- --------- --------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 59,224 $ 60,303 $ 22,263 $ 59,136 $ 49,387 $ 250,313 $ 496 $ 250,809
======== ========= ========= ========= ======== ========== =========== ===========
Net income/(loss) $ 29,090 $ 31,287 $ 11,360 $ 22,406 $ 25,964 $ 120,107 $ (67,067) $ 53,040
======== ========= ========= ========= ========= ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
(in thousands)
Corporate
Mid- Total not Allocable Consolidated
Atlantic Midwest Northeast Southwest West Segments to Segments Total
-------- --------- --------- --------- -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 53,188 $ 43,172 $ 20,150 $ 54,112 $ 51,281 $ 221,903 $ 80 $ 221,983
======== ========= ========= ========= ======== ========== =========== ===========
Net income/(loss) $ 26,084 $ 20,607 $ 10,768 $ 23,018 $ 28,162 $ 108,639 $ (57,787) $ 50,852
======== ========= ========= ========= ======== ========== =========== ===========
</TABLE>
9. Earnings per Share
The Company calculates earnings per share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128").
SFAS No. 128 requires a dual presentation of basic and diluted Earnings per
Share on the face of the income statements. Additionally, SFAS No. 128 requires
a reconciliation of the numerator and denominator used in computing basic and
diluted Earnings per Share.
13
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Reconciliation of Earnings per Share Numerator Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
-------------- --------------- --------------- --------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net income........................................... $ 18,258 $ 17,196 $ 53,040 $ 50,852
Preferred dividends.................................. (1,830) (1,660) (5,321) (4,830)
-------------- --------------- --------------- --------------
Net income available to common shareholders.......... $ 16,428 $ 15,536 $ 47,719 $ 46,022
============== =============== =============== ==============
Reconciliation of Earnings per Share Denominator
Weighted average common shares outstanding........... 36,375 37,930 36,203 37,973
============== =============== =============== ==============
Basic Earnings per Share............................. $ 0.45 $ 0.41 $ 1.32 $ 1.21
============== =============== =============== ==============
Dilutive Effect of Common Share Equivalents
Dilutive options..................................... 345 133 202 95
Dilutive preferred shares/(1)/.......................
Weighted average common shares outstanding........... 36,375 37,930 36,203 37,973
-------------- --------------- --------------- --------------
Weighted average common shares and common share
Equivalents....................................... 36,720 38,063 36,405 38,068
============== =============== =============== ==============
Diluted Earnings per Share........................... $ 0.45 $ 0.41 $ 1.31 $ 1.21
============== =============== =============== ==============
</TABLE>
/(1)/ Preferred shares for the three and nine month periods ended September
30, 2000 and 1999 are excluded from the calculation of Dilutive
Earnings per Share as such shares are anti-dilutive for the respective
periods.
10. Subsequent Events
On October 27, 2000, the Company sold all of its assets located in the
Tucson, Arizona area for gross proceeds of approximately $5.7 million. The
assets consisted of seven buildings totaling 139,000 square feet.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Prentiss Properties Trust is a Maryland Real Estate Investment Trust (the
"REIT") that acquires, owns, manages, leases, develops and builds office and
industrial properties throughout the United States. The REIT operates
principally through Prentiss Properties Acquisition Partners, L.P. and its
subsidiaries (the "Operating Partnership") and Prentiss Properties Limited, Inc.
(the "Manager" and together with the REIT and the Operating Partnership, the
"Company"). The Company is self-administered in that it provides its own
administrative services, such as accounting, tax and legal, internally through
its own employees. The Company is self-managed in that it internally provides
all the management and maintenance services that its properties require through
its own employees such as property managers, leasing professionals and
engineers.
At December 31, 1999, the Company owned 199 properties consisting of 133
office and 66 industrial properties containing in the aggregate 19.8 million net
rentable square feet. During the nine months ended September 30, 2000, the
Company: (i) took ownership of and concurrently sold an office building totaling
225,000 square feet in the Chicago area; (ii) sold 14 industrial properties
totaling approximately 1.0 million square feet; (iii) sold a 27,000 square foot
development project; (iv) sold three office properties totaling approximately
189,000 square feet; (v) sold 10.7 acres of land in the San Francisco Bay Area;
(vi) acquired the beneficial interest in an office property containing
approximately 201,000 square feet and 2.5 acres of adjacent land in the San
Francisco Bay Area; (vii) acquired three office properties containing
approximately 271,000 square feet in the Austin area; (viii) transitioned five
properties, totaling approximately 600,000 square feet, from development into
operations; (ix) began development of one office project in the Austin area
containing 173,000 square feet and one office project in the Chicago area
containing 59,000 square feet; and (x) moved the Company's 935 First Avenue
property, a 119,000 square foot project slated for demolition, from operations
to land held for development. Inclusive of the Company's development projects,
at September 30, 2000, the Company owned 186 properties (the "Properties")
totaling approximately 19.2 million net rentable square feet.
Termination of the Merger
On September 21, 2000, the Company, Mack-Cali Realty Corporation, a
Maryland corporation ("Mack- Cali") and Mack-Cali Realty, L.P., a Delaware
limited partnership of which Mack- Cali is the sole general partner ("Mack-Cali
Partnership"), entered into a Termination and Release Agreement (the
"Termination Agreement"). The Termination Agreement provides for termination of
the Agreement and Plan of Merger (the "Merger Agreement") among the parties
dated June 27, 2000.
In connection with the Termination Agreement, and pursuant to an Escrow
Agreement dated September 21, 2000 (the "Escrow Agreement"), Mack-Cali deposited
$25,000,000 in escrow for the benefit of the Company (the "Termination Fee").
Per the Escrow Agreement, the funds are to be held pending delivery to Chicago
Title Insurance Company (the "Escrow Agent") and Mack-Cali by the Company of
either (i) a letter from the Company's independent accountants indicating the
maximum amount of money that can be paid at that time to the Company without
causing the Company to fail to maintain its REIT status or (ii) a Fee Tax
Opinion (as defined below).
A "Fee Tax Opinion" shall mean a letter from outside counsel of the Company
indicating that the Company has received a ruling from the Internal Revenue
Service holding that the receipt by the Company of the funds held in escrow
would not cause the Company to fail to maintain its REIT status.
If any funds remain in the escrow account subsequent to December 31, 2005,
the Escrow Agent shall return such funds to Mack-Cali. The Company anticipates
having the capacity to request the entire $25.0 million prior to December 31,
2005.
Also, in connection with the Termination Agreement, the Company and Mack-
Cali Texas Property L.P., a Texas limited partnership ("Mack-Cali Texas"),
entered into a Purchase and Sale Contract dated September 21,
15
<PAGE>
2000 (the "Purchase and Sale Contract") pursuant to which Mack-Cali Texas sold
and the Company acquired the Cielo Center in Austin, Texas for a purchase price
of $47.2 million.
Results of Operations
Effective January 1, 2000, the Company changed its method of internal
reporting to consolidate the results of operations for the Southeast region into
the Company's Mid-Atlantic region. For comparative purposes, the results of
operations for the three and nine month periods ended September 30, 1999 for the
Southeast region have been combined into the Company's Mid-Atlantic region.
The results of operations for the three month periods ended September 30,
2000 and 1999 include the respective regional operations of the Company.
General. When comparing the results of operations for the three months
ended September 30, 2000 to the three months ended September 30, 1999, the
following should be considered:
. 155 Properties that consolidated into the Company's results of
operations were owned and fully operational at July 1, 1999 and
remained in the Company's portfolio at September 30, 2000;
. 8 Properties, including the Broadmoor Austin Properties and the
Burnett Plaza Property, are accounted for using the equity method
of accounting;
. 8 Properties were acquired subsequent to July 1, 1999 and remained
in the Company's portfolio at September 30, 2000;
. 61 Properties were sold subsequent to July 1, 1999;
. 9 Properties that were developed by the Company became operational
subsequent to July 1, 1999 and remained in the portfolio at
September 30, 2000; and
. 6 Properties were in various stages of development or in various
stages of lease-up at September 30, 2000.
Rental Revenue. Rental revenues increased by $7.0 million, or 9.2%, to
$83.1 million from $76.1 million primarily as a result of Properties acquired or
development Properties becoming operational subsequent to July 1, 1999, offset
by properties that were sold subsequent to July 1, 1999. Rental income for the
155 Properties that were owned and fully operational at July 1, 1999 and
remained in the Company's portfolio at September 30, 2000, increased by $1.5
million, or 2.2%, from $67.5 million for the three months ended September 30,
1999 to $68.9 million for the three months ended September 30, 2000. The
increase for these 155 Properties was attributable to the Company's five regions
as follows:
. 33 Properties in the Mid-Atlantic Region increased $1.1 million, or
6.3%;
. 18 Properties in the Midwest Region increased $723,000, or 6.1%;
. 27 Properties in the Northeast Region increased $145,000, or 2.2%;
. 19 Properties in the Southwest Region decreased $231,000, or 1.4%;
and
. 58 Properties in the West Region decreased $220,000, or 1.4%.
Property Operating and Maintenance. Property operating and maintenance
increased by $804,000, or 4.4%, to $19.0 million from $18.2 million primarily as
a result of Properties acquired or development Properties becoming operational
subsequent to July 1, 1999, offset by properties that were sold subsequent to
July 1, 1999. Property operating and maintenance for the 155 Properties that
were owned and fully operational at July 1, 1999 and remained in the Company's
portfolio at September 30, 2000, increased by $1.0 million, or 5.5%, from $18.4
million for the three months ended September 30, 1999 to $19.4 million for the
three months ended September 30, 2000. The increase for these 155 Properties was
attributable to the Company's five regions as follows:
. 33 Properties in the Mid-Atlantic Region increased $150,000, or
3.1%;
. 18 Properties in the Midwest Region decreased $70,000, or 2.3%;
. 27 Properties in the Northeast Region increased $152,000, or 10.7%;
. 19 Properties in the Southwest Region increased $618,000, or 13.1%;
and
. 58 Properties in the West Region increased $160,000, or 3.7%.
16
<PAGE>
Real Estate Taxes. Real estate taxes increased by $733,000, or 8.4%, to
$9.4 million from $8.7 million primarily as a result of Properties acquired or
development Properties becoming operational subsequent to July 1, 1999, offset
by properties that were sold subsequent to July 1, 1999. Real estate taxes for
the 155 Properties that were owned and fully operational at July 1, 1999 and
remained in the Company's portfolio at September 30, 2000, decreased by
$745,000, or 9.5%, from $7.8 million for the three months ended September 30,
1999, to $7.1 million for the three months ended September 30, 2000. The
decrease for these 155 Properties was attributable to the Company's five regions
as follows:
. 33 Properties in the Mid-Atlantic Region increased $115,000, or 9.1%;
. 18 Properties in the Midwest Region decreased $549,000, or 24.0%;
. 27 Properties in the Northeast Region increased $77,000, or 14.0%;
. 19 Properties in the Southwest Region decreased $491,000, or 19.3%;
and
. 58 Properties in the West Region increased $103,000, or 8.5%.
General and Administrative and Personnel Costs, Net. General and
administrative and personnel costs increased by $217,000, or 10.2%, to $2.3
million from $2.1 million primarily due to amortization of stock grants issued
in 2000.
Interest Expense. Interest expense increased by $2.1 million, or 13.5%, to
$17.5 million from $15.4 million primarily as a result of the increase in debt
on real estate from $883.6 million at July 1, 1999 to $990.4 million at
September 30, 2000. The increase in debt on real estate resulted primarily from
borrowings incurred for the repurchase of common shares and the Company's
development and acquisition activity during the period, offset by net proceeds
received from the issuance of 2,000,000, $25 par value, Series C Perpetual
Preferred Units (the "Series C Perpetual Preferred Units") and asset
dispositions during the period.
Depreciation and Amortization. Depreciation and amortization increased by
$2.2 million, or 15.8%, to $16.5 million from $14.2 million primarily as a
result of Properties acquired or development Properties becoming operational
subsequent to July 1, 1999, offset by properties that were sold subsequent to
July 1, 1999. Depreciation and amortization for the 155 Properties that were
owned and fully operational at July 1, 1999 and remained in the Company's
portfolio at September 30, 2000, increased by $781,000, or 6.5%, from $12.1
million for the three months ended September 30, 1999, to $12.8 million for the
three months ended September 30, 2000. The increase for these 155 Properties was
attributable to the Company's five regions as follows:
. 33 Properties in the Mid-Atlantic Region increased $18,000, or less
than 1.0%;
. 18 Properties in the Midwest Region increased $109,000, or 5.6%;
. 27 Properties in the Northeast Region increased $170,000, or 15.0%;
. 19 Properties in the Southwest Region increased $149,000, or 4.9%;
and
. 58 Properties in the West Region increased $336,000, or 13.5%.
Equity in Income of Joint Ventures and Unconsolidated Subsidiaries. Equity
in income of joint ventures and unconsolidated subsidiaries decreased from
$973,000 for the three months ended September 30, 1999 to $929,000 for the three
months ended September 30, 2000. The net decrease was primarily attributable to
a decrease of $251,000 in the Company's proportionate share of net income from
the Manager, offset by increases of $123,000 attributable to the Company's share
of the net income from the Burnett Plaza Property and $76,000 from the Company's
share of the net income from the PPS Partners LLC joint venture. The decrease in
net income from the Manager for the three months ended September 30, 2000 from
the three months ended September 30, 1999 results from a decrease in revenues of
$1.4 million, partially offset by a decrease in expenses of $1.1 million.
Merger Termination Fee, Net. On September 26, 2000, the Company received
$8.0 million from the Mack-Cali escrow account. The proceeds were recorded net
of merger related cost totaling $3.9 million.
(Loss)/Gain on Sales. (Loss)/gain on sales decreased from a gain on sale
of $1.4 million for the three months ended September 30, 1999 to a loss on sale
of $2.0 million for the three months ended September 30, 2000. During the three
months ended September 30, 1999, the Company sold 12 properties totaling 189,000
square feet. During the three months ended September 30, 2000, the Company sold
one industrial property and three office properties comprising, in the
aggregate, 310,000 square feet. During the three months ended September 30,
2000,
17
<PAGE>
the Company recognized a loss on the sale of two of its Houston properties
totaling $3.5 million, partially offset by $1.5 million in gains on the
remaining property dispositions. It is the Company's strategy to obtain the
maximum value from each of its Properties, which is occasionally achieved
through the sale of properties.
Minority Interests. Minority interests increased by $1.1 million, or 36.8%,
from $2.9 million for the three months ended September 30, 1999, to $3.9 million
for the three months ended September 30, 2000. The increase was primarily due to
the income allocation related to the Series C Perpetual Preferred Units issued
in September 1999.
The results of operations for the nine month periods ended September 30,
2000 and 1999 include the respective regional operations of the Company.
General. When comparing the results of operations for the nine months ended
September 30, 2000 to the nine months ended September 30, 1999, the following
should be considered:
. 151 Properties that consolidated into the Company's results of
operations were owned and fully operational at January 1, 1999 and
remained in the Company's portfolio at September 30, 2000;
. 8 Properties, including the Broadmoor Austin Properties and the
Burnett Plaza Property, are accounted for using the equity method
of accounting;
. 9 Properties, including Burnett Plaza, were acquired subsequent to
January 1, 1999 and remained in the Company's portfolio at
September 30, 2000;
. 63 properties were sold subsequent to January 1, 1999;
. 13 Properties that were developed by the Company became operational
subsequent to January 1, 1999 and remained in the portfolio at
September 30, 2000; and
. 6 Properties were in various stages of development or in various
stages of lease-up at September 30, 2000.
Rental Revenue. Rental revenues increased by $27.6 million, or 12.5%, to
$247.8 million from $220.2 million primarily as a result of Properties acquired
or development Properties becoming operational subsequent to January 1, 1999,
offset by properties that were sold subsequent to January 1, 1999. Rental income
for the 151 Properties that were owned and fully operational at January 1, 1999
and remained in the Company's portfolio at September 30, 2000, increased by $5.7
million, or 3.0%, from $190.1 million for the nine months ended September 30,
1999 to $195.8 million for the nine months ended September 30, 2000. The
increase for these 151 Properties was attributable to the Company's five regions
as follows:
. 31 Properties in the Mid-Atlantic Region increased $1.9 million, or
4.1%;
. 18 Properties in the Midwest Region increased $2.0 million, or 5.6%;
. 27 Properties in the Northeast Region increased $222,000, or 1.2%;
. 19 Properties in the Southwest Region increased $490,000, or 1.0%;
and
. 56 Properties in the West Region increased $1.1 million, or 2.6%.
Property Operating and Maintenance. Property operating and maintenance
increased by $5.7 million, or 11.1%, to $56.7 million from $51.0 million
primarily as a result of Properties acquired or development Properties becoming
operational subsequent to January 1, 1999, offset by properties that were sold
subsequent to January 1, 1999. Property operating and maintenance for the 151
Properties that were owned and fully operational at January 1, 1999 and remained
in the Company's portfolio at September 30, 2000, increased by $2.2 million or
4.4%, from $50.2 million for the nine months ended September 30, 1999 to $52.4
million for the nine months ended September 30, 2000. The increase for these 151
Properties was attributable to the Company's five regions as follows:
. 31 Properties in the Mid-Atlantic Region increased $177,000, or 1.4%;
. 18 Properties in the Midwest Region increased $177,000, or 2.1%;
. 27 Properties in the Northeast Region increased $432,000, or 10.1%;
. 19 Properties in the Southwest Region increased $555,000, or 4.0%;
and
. 56 Properties in the West Region increased $888,000, or 8.1%.
18
<PAGE>
Real Estate Taxes. Real estate taxes increased by $2.9 million, or 11.1%,
to $29.0 million from $26.1 million primarily as a result of Properties acquired
or development Properties becoming operational subsequent to January 1, 1999,
offset by properties that were sold subsequent to January 1, 1999. Real estate
taxes for the 151 Properties that were owned and fully operational at January 1,
1999, and remained in the Company's portfolio at September 30, 2000, decreased
by $1.5 million, or 6.3%, from $23.4 million for the nine months ended September
30, 1999, to $21.9 million for the nine months ended September 30, 2000. The
decrease for these 151 Properties was attributable to the Company's five regions
as follows:
. 31 Properties in the Mid-Atlantic Region increased $134,000, or 3.9%;
. 18 Properties in the Midwest Region decreased $769,000, or 11.0%;
. 27 Properties in the Northeast Region increased $87,000, or 5.8%;
. 19 Properties in the Southwest Region decreased $1.0 million, or
13.0%; and
. 56 Properties in the West Region increased $87,000, or 2.5%.
General and Administrative and Personnel Costs, Net. General and
administrative and personnel costs increased by $933,000, or 14.3%, from $6.5
million to $7.5 million. The increase is primarily due to amortization of stock
grants issued during 2000.
Interest Expense. Interest expense increased by $8.5 million, or 19.4%, to
$52.0 million from $43.5 million primarily as a result of the increase in debt
on real estate from $800.3 million at January 1, 1999 to $990.4 million at
September 30, 2000. The increase in debt on real estate resulted primarily from
borrowings incurred for the repurchase of common shares and the Company's
development and acquisition activity during the period, offset by net proceeds
received from the issuance of the Series C Perpetual Preferred Units and asset
dispositions during the period.
Depreciation and Amortization. Depreciation and amortization increased by
$7.0 million, or 17.7%, to $46.7 million from $39.7 million primarily as a
result of Properties acquired or development Properties becoming operational
subsequent to January 1, 1999, offset by properties that were sold subsequent to
January 1, 1999. Depreciation and amortization for the 151 Properties that were
owned and fully operational at January 1, 1999 and remained in the Company's
portfolio at September 30, 2000, increased by $2.6 million, or 8.1%, from $32.1
million for the nine months ended September 30, 1999 to $34.7 million for the
nine months ended September 30, 2000. The increase for these 151 Properties was
attributable to the Company's five regions as follows:
. 31 Properties in the Mid-Atlantic Region increased $413,000, or 5.0%;
. 18 Properties in the Midwest Region increased $221,000, or 4.0%;
. 27 Properties in the Northeast Region increased $413,000, or 12.4%;
. 19 Properties in the Southwest Region increased $778,000, or 9.1%;
and
. 56 Properties in the West Region increased $778,000, or 12.1%.
Equity in Income of Joint Ventures and Unconsolidated Subsidiaries. Equity
in income of joint ventures and unconsolidated subsidiaries decreased from $3.2
million for the nine months ended September 30, 1999 to $2.7 million for the
nine months ended September 30, 2000. The net decrease was primarily
attributable to a decrease of $1.0 million in the Company's proportionate share
of net income from the Manager, offset by increases of $350,000 in the Company's
proportionate share of income from the Burnett Plaza Property, which was
acquired on March 25, 1999, and $215,000 in the Company's proportionate share of
the income from PPS Partners LLC, a joint venture recently entered into by the
Company. The decrease in net income from the Manager results from a decrease in
revenues of $1.8 million, partially offset by a decrease in expenses of
$800,000.
Merger Termination Fee, Net. On September 26, 2000, the Company received
$8.0 million from the Mack-Cali escrow account. The proceeds were recorded net
of merger related cost totaling $3.9 million.
Gain on Sales. Gain on sales decreased by $1.4 million, to $208,000, from
$1.6 million. During the nine months ended September 30, 1999, the Company sold
a 12.6 acre parcel of land in the Chicago, Illinois area and 14 properties
containing 417,000 square feet. During the nine months ended September 30,
2000, the Company sold 17 properties and one development project comprising, in
the aggregate, 1.3 million square feet. During the nine months ended September
30, 2000, the Company recognized a gain from sales of $3.7 million, offset by a
19
<PAGE>
$3.5 million loss on sale from the disposition of two of its Houston properties.
It is the Company's strategy to obtain the maximum value from each of its
Properties, which is occasionally achieved through the sale of properties.
Minority Interests. Minority interests increased by $3.5 million, or 42.4%,
from $8.3 million for the nine months ended September 30, 1999, to $11.8 million
for the nine months ended September 30, 2000. The increase was primarily
attributable to the income allocation related to the Series C Perpetual
Preferred Units issued in September 1999.
Liquidity and Capital Resources
Cash and cash equivalents were $4.9 million and $13.3 million at September
30, 2000 and December 31, 1999, respectively. The decrease in cash and cash
equivalents is primarily a result of cash flows used in investing activities
exceeding those provided by operating and financing activities. Net cash
provided by operating activities was $113.7 million for the nine months ended
September 30, 2000 compared to $78.6 million for the nine months ended September
30, 1999.
Net cash used in investing activities increased from $89.9 million for the
nine months ended September 30, 1999 to $128.6 million for the nine months ended
September 30, 2000. This increase is due primarily to an increase in asset
acquisitions during the nine months ended September 30, 2000 from the nine
months ended September 30, 1999, partially offset by an increase in asset sales
during 2000.
Net cash provided by financing activities totaled $6.5 million for the nine
months ended September 30, 2000, a decrease from $18.4 million for the nine
months ended September 30, 1999. This decrease is primarily attributable to net
proceeds from the sale of preferred units of $50.0 million in 1999, partially
offset by an increase in net borrowings in 2000.
As of September 30, 2000, the Company had outstanding total indebtedness,
including its pro rata share of joint venture debt and construction loans of
approximately $1.1 billion, or approximately 46.49% of total market
capitalization based on a common share price of $26.125 per common share. The
Company's policy is to limit combined indebtedness plus its pro rata share of
joint venture debt and construction loans so that at the time such debt is
incurred, it does not exceed 50% of the Company's total market capitalization.
As of September 30, 2000, the Company had the approximate capacity to borrow up
to an additional $162.7 million under the debt limitation. The amount of
indebtedness that the Company may incur, and the policies with respect thereto,
are not limited by the Company's declaration of trust and bylaws, and are solely
within the discretion of the Company's board of trustees.
20
<PAGE>
The following table sets forth the Company's debt as of September 30, 2000:
<TABLE>
<CAPTION>
Current Interest
Description Balance Amortization Rate Maturity
------------------------------------ ------------- ------------ ------------------ -----------------------
(in thousands)
<S> <C> <C> <C> <C>
Executive Center Del Mar $ 13,267 None LIBOR+1.35% December 19, 2001/(10)/
Burnett Plaza /(1)/ 9,400 None 7.50% February 1, 2002
Bank Term Facility 100,000 None LIBOR+1.375% October 13, 2002
Del Mar Gateway 14,918 None LIBOR+1.75% March 21, 2003
Barton Skyway II 14,371 None LIBOR+1.75% April 12, 2003
Line of Credit 120,000 None LIBOR+1.375% May 2, 2003
Bachman West 2,940 25 yr. 8.63% December 1, 2003
Northeast Portfolio Loan /(2)/ 59,377 25 yr. 6.80% December 10, 2003
One Westchase Center 24,612 25 yr. 7.84% February 1, 2004
Crescent Centre 12,000 None 7.95% March 1, 2004
Bank Term Loan /(3)/ 72,500 None/(7)/ LIBOR+1.625% September 30, 2004
Walnut Glen Tower 34,853 30 yr. 6.92% April 1, 2005
Highland Court 4,863 25 yr. 7.27% April 1, 2006
Oaklands Corporate Center /(4)/ 1,294 20 yr. 8.65% August 1, 2006
Westheimer Central Plaza 5,890 25 yr. 8.38% August 1, 2006
Creamery Way /(4)/ 3,638 20 yr. 8.30% September 19, 2006
PPREFI Portfolio Loan /(5)/ 180,100 None 7.58% February 26, 2007
Oaklands Corporate Center /(4)/ 6,228 25 yr. 8.55% July 1, 2007
Oaklands Corporate Center /(4)/ 2,626 25 yr. 8.40% November 1, 2007
Corporetum Office Campus 25,617 30 yr. 7.02% February 1, 2009
Natomas Corporate Center 37,439 30 yr. 7.02% February 1, 2009
7101 Wisconsin Avenue 21,201 30 yr. 7.25% April 1, 2009
2500 Cumberland Parkway 14,500 None /(8)/ 7.46% July 15, 2009
The Ordway 49,467 30 yr. 7.95% April 1, 2010
World Savings Center 29,326 30 yr. 7.91% November 1, 2010
Park West C2 35,015 30 yr. 6.63% November 10, 2010
One O'Hare Centre 41,489 30 yr. 6.80% January 10, 2011
3130 Fairview Park Drive 23,178 30 yr. 7.00% April 1, 2011
Broadmoor Austin /(6)/ 77,000 None /(9)/ 7.04% April 10, 2011
Bannockburn Centre 26,946 30 yr. 8.05% June 1, 2012
Southpoint (III) /(4)/ 7,434 20 yr. 7.75% April 14, 2014
Other Corporate Debt 5,307 None 7.40% Various
----------
Total $1,076,796
==========
</TABLE>
/(1)/ The Company, through the Operating Partnership, owns a 20% non-controlling
partnership interest in the entity that owns the Burnett Plaza Property,
which interest is accounted for using the equity method of accounting. The
amount shown reflects the Company's proportionate share of the mortgage
indebtedness collateralized by the Property.
/(2)/ The Northeast Portfolio Loan is collateralized by the following 11
Properties: Valleybrooke (five Properties), Lake Center (two Properties),
certain of the Southpoint Properties (two Properties), and certain of the
Woodland Falls Properties (two Properties).
/(3)/ The Bank Term Loan is collateralized by the following four Properties:
Willow Oaks I & II (two Properties), 8521 Leesburg Pike and Croton Road
Corporate Center.
/(4)/ The mortgage loan is collateralized by certain of the Properties in the
respective office Property grouping.
/(5)/ The PPREFI Portfolio Loan is collateralized by the following 36
Properties: certain of the Los Angeles Industrial Properties (18
Properties), certain of the Chicago Industrial Properties (four
Properties), the Cottonwood Office Center Properties (three Properties),
Park West E1 and E2 (two Properties), One Northwestern Plaza, 3141
Fairview Park Drive, 2455 Horsepen Road, O'Hare Plaza II, 1717 Deerfield
Road, 2411 Dulles Corner Road, 4401 Fair Lakes Court, the WestPoint Office
Building and the PacifiCare Building.
/(6)/ The Company, through the Operating Partnership, owns a 50% non-controlling
partnership interest in the entity that owns the Broadmoor Austin
Properties, which interest is accounted for using the equity method of
accounting. The amount shown reflects the Company's proportionate share of
the mortgage indebtedness collateralized by the Properties.
/(7)/ The loan, which was entered into in October 1999, has no principal
amortization during the first 24 months of the loan term. Principal and
interest are payable for the remaining loan term based on a 25-year
amortization.
/(8)/ The loan, which was entered into in May 1999, has no principal
amortization during the first 58 months of the loan term. Principal and
interest are payable for the remaining loan term based on a 30-year
amortization.
21
<PAGE>
/(9)/ The loan, which was entered into in March 1998, has no principal
amortization during the first 36 months of the loan term. Principal and
interest are payable for the remaining loan term based on a 16.25-year
amortization.
/(10)/ December 19, 2001 represents a maturity date based on the Company's
anticipated execution of its option to extend the term of the loan one
year beyond the original maturity date of December 19, 2000.
In September 1997, the Company entered into a seven-year interest rate swap
locking in cost of funds of 6.25% (before the spread over LIBOR) on $110
million. In June 1999, the Company entered into a four-year interest rate swap
locking in cost of funds of 6.16% (before the spread over LIBOR) on $50 million
(collectively, the "Interest Rate Swaps"). The Interest Rate Swaps consist of
the four separate agreements intended to manage the relative mix of the
Company's debt between fixed and variable rate instruments. The Interest Rate
Swaps modify a portion of the interest characteristics of the Company's variable
rate debt, effectively converting in the aggregate, $160.0 million of variable
rate debt to fixed rate debt. The fixed rates to be paid, the effective fixed
rate and the variable rate to be received by the Company, are summarized in the
following table:
<TABLE>
<CAPTION>
Swap Rate Received
(Variable) at
Notional Amount Swap Rate Paid (Fixed) Effective Fixed Rate September 30, 2000 Swap Maturity
---------------------- ---------------------- ----------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
$20 million 6.155% 7.780% 6.618% June 2, 2003
$30 million 6.155% 7.780% 6.618% June 2, 2003
$50 million 6.253% 7.628% 6.618% September 30, 2004
$60 million 6.248% 7.623% 6.618% September 30, 2004
</TABLE>
The differences to be paid or received by the Company under the terms of
the Interest Rate Swaps are accrued as interest rates change and recognized as
an adjustment to interest expense by the Company pursuant to the terms of the
agreements and will have a corresponding effect on its future cash flows.
Agreements such as these contain a credit risk that the counterparties may be
unable to meet the terms of the agreement. The Company minimizes that risk by
evaluating the creditworthiness of its counterparties, which is limited to major
banks and financial institutions, and does not anticipate non-performance by the
counterparties.
The Company has considered its short-term liquidity needs and the adequacy
of adjusted estimated cash flows and other expected liquidity sources to meet
these needs. The Company believes that its principal short-term liquidity needs
are to fund normal recurring expenses, debt service requirements and the minimum
distribution required to maintain the Company's REIT qualification under the
Internal Revenue Code. The Company anticipates that these needs will be fully
funded from the Company's cash flows provided by operating activities and, when
necessary, to fund shortfalls resulting from the timing of collections of
accounts receivable in the ordinary course of business, from the line of credit,
and the leasing, development and construction business from the Manager. The
Manager's sole sources of income are fees generated by its office and industrial
real estate management, leasing, development, and other fee businesses.
The Company expects to meet its long-term liquidity requirements for the
funding of activities such as development, property acquisitions, scheduled debt
maturities, major renovations, expansions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness and through
the issuance of additional debt and equity securities. The Company also intends
to use proceeds from the line of credit to fund property acquisitions,
development, redevelopment, expansions and capital improvements on an interim
basis.
The Company expects to make distributions to its shareholders primarily
based on its distributions from the Operating Partnership. The Operating
Partnership's income will be derived primarily from lease revenues from the
Properties and, to a limited extent, from fees generated by its office and
industrial real estate management service business.
The Company has in place a $300 million unsecured line of credit with a
group of 12 banks (the "Line of Credit"). In May of 2000, the Company closed a
three-year renewal of its Line of Credit. The new facility has an initial
interest rate of LIBOR plus 137.5 basis points. The Line of Credit is unsecured
and matures on May 2, 2003. Additionally, the Company is required to pay an
average daily unused commitment fee of 25 basis points per annum if the daily
unused portion of the Line of Credit is greater than $200 million. The fee is
reduced to 20 basis points per annum if the daily unused portion is greater than
$100 million, but less than or equal to $200
22
<PAGE>
million. The fee is further reduced to 15 basis points per annum if the daily
unused portion of the Line of Credit is less than or equal to $100 million. The
Company made net payments on the Line of Credit during the three months ended
September 30, 2000 of $6.0 million and had an outstanding balance of $120.0
million at September 30, 2000, resulting in an available balance of $180.0
million.
The Company's Properties require periodic investments of capital for
tenant-related capital expenditures and for general capital improvements. For
the three months ended September 30, 2000, the Company's recurring non-
incremental revenue-generating capital expenditures totaled $5.8 million. The
Company's recurring non-incremental revenue-generating capital expenditures were
attributable to the Company's regions as follows: (1) Mid-Atlantic-$1.8
million; (2) Midwest-$1.6 million; (3) Northeast-$300,000; (4) Southwest-$1.5
million; and (5) West-$600,000.
Funds from Operations
"Funds from Operations" as defined by the National Association of Real
Estate Investment Trusts ("NAREIT"), means net income, computed in accordance
with generally accepted accounting principles ("GAAP") excluding extraordinary
items (as defined by GAAP) and gains (or losses) from sales of property, plus
depreciation and amortization, and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes that Funds from
Operations is helpful to investors as a measure of the performance of an equity
REIT because, along with cash flow from operating activities, financing and
investing activities, it provides investors with an indication of the ability of
the Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company's Funds from Operations is not comparable to
Funds from Operations reported by other REITs that do not define that term using
the current NAREIT definition. The Company believes that in order to facilitate
a clear understanding of its operating results, Funds from Operations should be
examined in conjunction with net income as presented in the Consolidated
Financial Statements of the Company. Funds from Operations does not represent
cash generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income as an indication of the Company's
performance or to cash flows as a measure of liquidity or ability to make
distributions.
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 2000 Sept. 30, 1999 Sept. 30, 2000 Sept. 30, 1999
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Funds from Operations
Net income................................................ $18,258 $17,196 $53,040 $50,852
Add:
Real estate depreciation and amortization................ 16,441 14,203 46,673 39,663
Real estate depreciation and amortization of
unconsolidated joint ventures........................... 721 651 2,091 1,816
Minority interests/(1)/.................................. 3,912 2,846 11,674 8,168
Less:
Merger termination fee, net/(2)/......................... (4,091) (4,091)
Loss/(gain) on sales of property......................... 2,038 (1,354) (208) (1,643)
Dividend on perpetual preferred units.................... (3,153) (2,155) (9,458) (6,098)
------- ------- ------- -------
Funds from Operations..................................... $34,126 $31,387 $99,721 $92,758
======= ======= ======= =======
</TABLE>
/(1)/ Represents the minority interests applicable to the common and preferred
unit holders of the Operating Partnership.
/(2)/ Although the fee is not considered an extraordinary item in accordance
with GAAP, it is the Company's opinion that it is appropriate to exclude
the fee from Funds from Operations.
Funds from Operations increased by $2.7 million and $7.0 million for the
three and nine months ended SeptemberE30, 2000 from the three and nine months
ended September 30, 1999, respectively, as a result of the factors discussed in
the analysis of operating results.
23
<PAGE>
Recently Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. In June 1999, the FASB
issued Statement of Financial Accounting Standards No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133" ("SFAS No. 137"). SFAS No. 133 was originally
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
SFAS No. 137 deferred the effective date of SFAS No. 133 to all fiscal quarters
of all fiscal years beginning after June 15, 2000. In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities - an Amendment of
Statement No. 133" ("SFAS No. 138"). This statement amends the accounting and
reporting standards of SFAS No. 133 for certain derivative instruments and
certain hedging activities. The impact of SFAS No. 133 and SFAS NO. 138 will be
dependent upon the extent of derivative instruments held by the Company and the
market for such instruments as of January 1, 2001 and each measurement date
thereafter.
Potential Changes in Law Regarding Ownership of Subsidiaries
At any time, future legislation or administrative or judicial decisions or
actions could affect our tax treatment or qualification as a REIT. The REIT
Modernization Act ("RMA"), signed into law in late 1999 and effective for 2001
and later years, contains several provisions affecting REITs. Currently, a REIT
may not hold more than 10% of the voting stock of another company. Under RMA,
this limitation is expanded to include 10% of the value of another company's
securities, with these exceptions: (1) a subsidiary's stock held by the REIT on
July 12, 1999; (2) straight debt; and (3) the stock of a taxable REIT subsidiary
(as defined below). Thus, the Manager's stock should be grandfathered under the
RMA.
RMA allows a REIT subsidiary to perform services for REIT tenants without
disqualifying the rents received (as under current law). These subsidiaries,
called taxable REIT subsidiaries ("TRS"), will be subject to taxation and will
be limited in the amount of debt and rental and other payments between the REIT
and the TRS. Existing subsidiaries, such as the Manager, will be grandfathered
in a one-time tax-free conversion as a TRS. They will not be subject to these
limitations, unless they engage in a new line of business or increase assets.
If either of these events occurs, new restrictions on debt and rental payments
will apply to these entities as well. It is anticipated that any new lines of
business will be conducted in a new TRS, therefore not negatively impacting the
Manager.
Under the new law, the fair market value of all TRS securities cannot
exceed 20% of the REIT's fair market value. At this time, the Company does not
believe its investments in all future TRS will exceed 20% of the value of the
Company. The RMA returns the REIT distribution requirement to 90% from 95%,
putting REITs back in line with mutual fund distribution requirements. It is
unclear at this time what impact this change will have on future dividends made
by the Company.
Inflation
Most of the leases on the Properties require tenants to pay increases in
operating expenses, including common area charges and real estate taxes, thereby
reducing the impact on the Company of the adverse effects of inflation.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary market risk exposure is to changes in interest rates
as a result of its Line of Credit and long-term debt. At September 30, 2000,
the Company had outstanding total indebtedness, including its pro rata share of
joint venture debt and construction loans, of approximately $1.1 billion, or
approximately 46.49% of total market capitalization. The Company's interest
rate risk objective is to limit the impact of interest rate
24
<PAGE>
fluctuations on earnings and cash flows and to lower its overall borrowing
costs. To achieve this objective, the Company manages its exposure to
fluctuations in market interest rates for its borrowings through the use of
fixed rate debt instruments to the extent that reasonably favorable rates are
obtainable with such arrangements and may enter into derivative financial
instruments such as interest rate swaps, caps and treasury locks to mitigate its
interest rate risk on a related financial instrument or to effectively lock the
interest rate on a portion of its variable debt. The Company does not enter into
derivative or interest rate transactions for speculative purposes. Approximately
68% of the Company's outstanding debt was subject to fixed rates with a weighted
average interest rate of 7.41% at September 30, 2000. An additional $160.0
million, or 14.9%, of the Company's outstanding debt at September 30, 2000, was
effectively locked at an interest rate (before the spread over LIBOR) of 6.22%
through its Interest Rate Swap agreements. The Company regularly reviews
interest rate exposure on its outstanding borrowings in an effort to minimize
the risk of interest rate fluctuations.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates, including Interest
Rate Swaps and debt obligations. For debt obligations outstanding at September
30, 2000, including the Company's pro rata share of joint venture debt totaling
$86.4 million, the table presents principal cash flows and related weighted
average interest rates by expected maturity dates. For Interest Rate Swaps, the
table presents notional amounts and weighted average interest rates by expected
contractual maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve as of
September 30, 2000. The fair value of the Company's fixed rate debt indicates
the estimated principal amount of debt having similar debt service requirements,
which could have been borrowed by the Company at September 30, 2000. The rate
assumed in the fair value calculation of fixed rate debt is equal to 7.71%,
which consist of the 7-year treasury of 5.96% at September 28, 2000 plus 175
basis points. The fair value of the Company's variable to fixed Interest Rate
Swaps indicates the estimated amount that would have been received by the
Company had they been sold at September 30, 2000.
<TABLE>
<CAPTION>
Expected Maturity Date
(in thousands)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
Liabilities
Long-Term Debt:
Fixed Rate $1,383 $ 7,858 $ 18,724 $ 68,589 $ 43,857 $596,022 $736,433 $724,574
Average Interest Rate 7.41% 7.41% 7.41% 7.41% 7.44% 7.41%
Variable Rate 4,033 14,590 100,527 149,862 71,351 340,363 340,363
Average Interest Rate 8.15% 8.14% 8.15% 8.24% 8.36%
Interest Rate Derivatives
Interest Rate Swaps:
Variable to Fixed $ 50,000 $110,000 $ 1,447
Avg. Pay Rate 6.22% 6.22% 6.22% 6.23% 6.25%
Avg. Receive Rate 6.62% 6.62% 6.62% 6.62% 6.62%
</TABLE>
The table incorporates only those exposures that exist as of September 30,
2000 and does not consider exposures or positions which could arise after that
date. In addition, because firm commitments are not represented in the table
above, the information presented therein has limited predictive value. As a
result, the Company's ultimate realized gain or loss with respect to interest
rate fluctuations will depend on the exposures that arise during future periods,
prevailing interest rates, and the Company's hedging strategies at that time.
There is inherent rollover risk for borrowings as they mature and are renewed at
current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and the
Company's financing requirements.
25
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults Upon Mortgages and Notes Payable
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
2.1 -- Agreement and Plan of Merger as of June 27, 2000, by and
among Prentiss Properties Trust, Prentiss Properties
Acquisition Partners, L.P., Mack-Cali Realty Corporation and
Mack-Cali Realty, L.P. (filed as an exhibit to the Company's
Form 8-K dated June 27, 2000, filed on July 14, 2000).
3.1 -- Form of Amended and Restated Declaration of Trust of the
Registrant (filed as Exhibit 3.1 to the Company's Registration
Statement on Amendment No. 1 of Form S-11, File No. 333-09863,
and incorporated by reference herein).
3.2 -- Bylaws of the Registrant (filed as Exhibit 3.2 to the
Company's Registration Statement on Amendment No. 1 of Form
S-11, File No. 333-09863, and incorporated by reference
herein).
3.3 -- Articles Supplementary, dated December 18, 1997,
Classifying and Designating a Series of Preferred Shares of
Beneficial Interest as Series A Cumulative Convertible
Redeemable Preferred Shares of Beneficial Interest and Fixing
Distribution and Other Preferences and Rights of Such Shares
(filed as Exhibit 3.1 to the Company's Current Report on Form
8-K, filed January 15, 1998, File No. 001-14516).
3.4 -- Articles Supplementary, dated February 17, 1998,
Classifying and Designating a Series of Preferred Shares of
Beneficial Interest as Junior Participating Cumulative
Convertible Redeemable Preferred Shares of Beneficial
Interest, Series B, and Fixing Distribution and Other
Preferences and Rights of Such Shares (filed as an Exhibit to
the Company's Registration Statement on Form 8-A filed on
February 17, 1998, File No. 000-23813).
3.5 -- Articles Supplementary, dated June 25, 1998, Classifying
and Designating a Series of Preferred Shares of Beneficial
Interest as Series B Cumulative Redeemable Perpetual Preferred
Shares of Beneficial Interest and Fixing
26
<PAGE>
Distribution and Other Preferences and Rights of Such Shares
(filed as an exhibit to the Company's form 10-Q filed on
August 12, 1998, File No. 001-14516)
3.6 -- Articles Supplementary, dated September 17, 1999,
Classifying and Designating a Series of Preferred Shares of
Beneficial Interest as Series C Cumulative Redeemable
Perpetual Preferred Shares of Beneficial Interest and Fixing
Distribution and Other Preferences and Rights of Such Shares
(filed as Exhibit 3.6 to the Company's Report on Form 10-Q,
filed November 11, 1999, File No. 001-14516).
4.1 -- Form of Common Share Certificate (filed as Exhibit 4.1 to
the Company's Registration Statement on Amendment No. 1 of
Form S-11, File No. 333-09863, and incorporated by reference
herein).
4.2 -- Rights Agreement, dated February 6, 1998, between the
Company and First Chicago Trust Company of New York, as Rights
Agent (filed as an Exhibit 4.1 to the Company's Registration
Statement on Form 8-A filed on February 17, 1998, File No.000-
23813).
4.3 -- Form of Rights Certificate (included as Exhibit A to the
Rights agreement (Exhibit 4.2)).
4.4 -- Form of Series A Preferred Share Certificate (filed as
Exhibit 4.2 to the Company's Registration Statement on Form S-
3, filed on October 16, 1998, File No. 333-65793).
4.5 -- Amendment No. 1 to the Rights Agreement, dated as of June
27, 2000, by and between Prentiss Properties Trust and First
Chicago Trust Company, a Division of Equiserve (filed as an
exhibit to the Company's Form 8-K dated June 27, 2000, filed
on July 14, 2000).
10.1 -- Voting Agreement, dated as of June 27, 2000, by and between
William L. Mack, Mitchell E. Hersh, Earle Mack, Fredrick Mack,
David Mack and Prentiss Properties Trust (filed as an exhibit
to the Company's Form 8-K dated June 27, 2000, filed on July
14, 2000).
10.2 -- Voting Agreement, dated as of June 27, 2000, by and between
Thomas F. August, Richard J Bartel, as trustee of TFA Grantor
Retained Annuity Trust and as trustee of MJA Grantor Retained
Annuity Trust and Mack Cali Realty Corporation (filed as an
exhibit to the Company's Form 8-K dated June 27, 2000, filed
on July 14, 2000).
10.3 -- Voting Agreement, dated as of June 27, 2000, by and between
Michael V. Prentiss, Santo Bisignano Jr., as trustee of PEP
Grantor Retained Annuity Trust, as trustee of MBP Grantor
Retained Annuity Trust and as trustee of KAP Grantor Retained
Annuity Trust and Mack-Cali Realty Corporation (filed as an
exhibit to the Company's Form 8-K dated June 27, 2000, filed
on July 14, 2000).
10.4 -- Employment Agreement, dated as of June 27, 2000, by and
between Michael V. Prentiss and Mack-Cali Realty Corporation
(filed as an exhibit to the Company's Form 8-K dated June 27,
2000, filed on July 14, 2000).
10.5 -- Stock Purchase Agreement, dated as of June 27, 2000, by and
between Mitchell E. Hersh and Ampulla, LLC (filed as an
exhibit to the Company's Form 8-K/A dated June 27, 2000, filed
on July 17, 2000).
10.6 -- Termination and Release Agreement, dated as of September
21, 2000, by and among Prentiss Properties Trust, Prentiss
Properties Acquisition Partners, L.P., Mack-Cali Realty
Corporation and Mack-Cali Realty, L.P. (filed as an exhibit to
the Company's Form 8-K dated September 21, 2000, filed on
September 22, 2000).
10.7 -- Escrow Agreement, dated as of September 21, 2000, by and
among Prentiss Properties Trust, Prentiss Properties
Acquisition Partners, L.P., Mack-Cali Realty Corporation and
Mack-Cali Realty, L.P. and Chicago Title Insurance Company, as
escrow agent (filed as an exhibit to the Company's Form 8-K
dated September 21, 2000, filed on September 22, 2000).
27
<PAGE>
10.8 -- Purchase and Sale Contract, dated as of September 21, 2000,
by and among Mack-Cali Texas Property L.P. and Prentiss
Properties Acquisition Partners, L.P. (filed as an exhibit to
the Company's Form 8-K dated September 21, 2000, filed on
September 22, 2000).
27.1* -- Financial Data Schedule.
99.1 -- Press Release, dated June 28, 2000 (Incorporated by
reference to exhibit 99.1 of the Company's Current Report on
Form 8-K, dated June 27, 2000) (filed as an exhibit to the
Company's Form 8-K dated June 27, 2000, filed on July 3,
2000).
99.2 -- Press Release, dated September 22, 2000 (filed as an
exhibit to the Company's Form 8-K dated September 21, 2000,
filed on September 22, 2000).
* Filed herewith.
(b) Reports on Form 8-K
On July 3, 2000, the Company filed with the SEC a Current Report on Form
8-K, dated June 27, 2000. The Current Report on Form 8-K relates to the
Company's announcement of a definitive Agreement and Plan of Merger (the
"Merger") between the Company and Mack-Cali Realty Corporation.
On July 14, 2000, the Company filed with the SEC a Current Report on Form
8-K, dated June 27, 2000. The Current Report on Form 8-K relates to the Merger
Agreement (the "Merger Agreement") between the Company and Mack-Cali Realty
Corporation.
On July 17, 2000, the Company filed with the SEC Amendment No. 1 which
amends the Current Report on Form 8-K filed with the SEC on July 14, 2000. The
Current Report on Form 8-K relates to the Merger Agreement between the Company
and Mack-Cali Realty Corporation.
On September 22, 2000, the Company filed with the SEC a Current Report on
Form 8-K, dated September 21, 2000. The Current Report on Form 8-K relates to
the termination of the Merger between the Company and Mack-Cali Realty
Corporation.
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SIGNATURE
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRENTISS PROPERTIES TRUST
Date: November 10, 2000 By: /s/ Thomas P. Simon
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Thomas P. Simon
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer and Duly Authorized
Officer of the Company)
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