UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .............to...............
Commission file number 1-13274
Mack-Cali Realty, L.P.
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(Exact name of registrant as specified in its charter)
Delaware 22-3315804
- --------------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
11 Commerce Drive, Cranford, New Jersey 07016-3501
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(Address of principal executive office)
(Zip Code)
(908) 272-8000
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(Registrant's telephone number, including area code)
Not Applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve (12) months (or such shorter period that the
Registrant was required to file such report) YES |X| NO |_| and (2) has been
subject to such filing requirements for the past ninety (90) days YES |_| NO |X|
<PAGE>
MACK-CALI REALTY, L.P.
Form 10-Q
INDEX
Part I Financial Information Page
----
Item 1. Financial Statements:
Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 ...............................4
Consolidated Statements of Operations for the three
and nine month periods ended
September 30, 1998 and 1997 .........................5
Consolidated Statement of Changes in Partners' Capital
for the nine months ended September 30, 1998 ........6
Consolidated Statements of Cash Flows for the nine
months ended September 30, 1998 and 1997 ............7
Notes to Consolidated Financial Statements ..............8 - 29
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ................30 - 37
Item 3. Quantitative and Qualitative Disclosures
about Market Risk ..................................37
Part II Other Information and Signatures
Item 1. Legal Proceedings .....................................38
Item 2. Changes in Securities and Use of Proceeds..............38
Item 3. Defaults Upon Senior Securities........................38
Item 4. Submission of Matters to a Vote of Security Holders....38
Item 5. Other Information......................................39
Signatures ............................................40
Page 2 of 40
<PAGE>
MACK-CALI REALTY, L.P.
Part I - Financial Information
Item I: Financial Statements
The accompanying unaudited consolidated balance sheets, statements
of operations, of changes in partners' capital, and of cash flows
and related notes, have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial
information and in conjunction with 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. The financial statements reflect all
adjustments consisting only of normal, recurring adjustments, which
are, in the opinion of management, necessary for a fair presentation
for the interim periods.
The aforementioned financial statements should be read in
conjunction with the notes to the aforementioned financial
statements and Management's Discussion and Analysis of Financial
Condition and Results of Operations and the financial statements and
notes thereto included in the Operating Partnership's Registration
Statement under the Securities Act of 1933 on Form S-3 for the
fiscal year ended December 31, 1997.
The results of operations for the three and nine month periods ended
September 30, 1998 are not necessarily indicative of the results to
be expected for the entire fiscal year or any other period.
Page 3 of 40
<PAGE>
MACK-CALI REALTY, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands, except per unit amounts)
================================================================================
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rental property
Land and leasehold interests $ 505,278 $ 9,881
Buildings and improvements 2,854,710 52,113
Tenant improvements 62,609 --
Furniture, fixtures and equipment 5,113 3,598
- ---------------------------------------------------------------------------------------------------------
3,427,710 65,592
Less - accumulated depreciation and amortization (156,867) (644)
- ---------------------------------------------------------------------------------------------------------
Total rental property 3,270,843 64,948
Cash and cash equivalents 6,854 2,176
Investments in unconsolidated
majority-owned Property Partnerships -- 1,821,614
Investments in partially-owned entities 62,079 --
Unbilled rents receivable 37,041 6
Deferred charges and other assets, net 36,085 4,666
Restricted cash 5,677 --
Accounts receivable, net of allowance for doubtful accounts
of $1,012 and $327 6,320 514
Mortgage note receivable -- 7,250
- ---------------------------------------------------------------------------------------------------------
Total assets $ 3,424,899 $ 1,901,174
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------
Mortgages and loans payable $ 1,406,039 $ 322,100
Distributions payable 40,059 28,089
Accounts payable and accrued expenses 35,323 11,814
Rents received in advance and security deposits 29,100 1,115
Accrued interest payable 2,327 1,371
- ---------------------------------------------------------------------------------------------------------
Total liabilities 1,512,848 364,489
- ---------------------------------------------------------------------------------------------------------
Commitments and contingencies
Redeemable Partnership Units:
Preferred units, none and 230,562 units outstanding at
redemption value -- 272,815
Limited partners, none and 6,097,477 common units
outstanding at redemption value -- 249,997
- ---------------------------------------------------------------------------------------------------------
Total redeemable partnership units -- 522,812
- ---------------------------------------------------------------------------------------------------------
Partners' Capital:
Preferred units, 250,256 and none units outstanding 223,330 --
General partner, 57,281,697 and 49,856,289 common units outstanding 1,388,178 1,005,349
Limited partners, 8,626,266 and none common units outstanding 292,019 --
Unit warrants, 2,000,000 and 2,000,000 outstanding 8,524 8,524
- ---------------------------------------------------------------------------------------------------------
Total partners' capital 1,912,051 1,013,873
- ---------------------------------------------------------------------------------------------------------
Total liabilities and partners' capital $ 3,424,899 $ 1,901,174
=========================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4 of 40
<PAGE>
MACK-CALI REALTY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per unit amounts)
================================================================================
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
REVENUES 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Base rents $ 112,976 $ -- $ 311,753 $ --
Escalations and recoveries from tenants 14,182 -- 36,897 --
Management fees from Property Partnerships -- 1,557 -- 4,589
Parking and other 3,008 490 7,921 1,492
Interest income 728 4,784 2,187 10,452
- ----------------------------------------------------------------------------------------------------------------------------
Total revenues 130,894 6,831 358,758 16,533
- ----------------------------------------------------------------------------------------------------------------------------
EXPENSES
- ----------------------------------------------------------------------------------------------------------------------------
Real estate taxes 13,488 -- 35,415 --
Utilities 11,300 6 28,717 15
Operating services 15,807 426 44,128 1,665
General and administrative 6,118 3,593 18,708 10,339
Depreciation and amortization 21,213 13 56,537 40
Interest expense 23,881 3,677 64,146 6,778
- ----------------------------------------------------------------------------------------------------------------------------
Total expenses 91,807 7,715 247,651 18,837
- ----------------------------------------------------------------------------------------------------------------------------
Income (loss) before equity in net income of unconsolidated
majority-owned Property Partnerships and
extraordinary item 39,087 (884) 111,107 (2,304)
Equity in net income of unconsolidated majority-owned
Property Partnerships -- 24,072 -- 63,624
- ----------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 39,087 23,188 111,107 61,320
Extraordinary item - loss on early retirement of debt -- 7,200 2,670 7,200
- ----------------------------------------------------------------------------------------------------------------------------
Net income 39,087 15,988 108,437 54,120
Preferred unit distributions 4,194 -- 12,090 --
- ----------------------------------------------------------------------------------------------------------------------------
Net income available to common unitholders $ 34,893 $ 15,988 $ 96,347 $ 54,120
============================================================================================================================
Net income per unit - Basic:
Income before extraordinary item $ 0.53 $ 0.57 $ 1.58 $ 1.52
Extraordinary item - loss on early
retirement of debt -- (0.18) (0.04) (0.18)
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 0.53 $ 0.39 $ 1.54 $ 1.34
============================================================================================================================
Net income per unit - Diluted:
Income before extraordinary item $ 0.53 $ 0.55 $ 1.57 $ 1.48
Extraordinary item - loss on early
retirement of debt -- (0.17) (0.04) (0.18)
- ----------------------------------------------------------------------------------------------------------------------------
Net income $ 0.53 $ 0.38 $ 1.53 $ 1.30
============================================================================================================================
Distributions declared per common unit $ 0.55 $ 0.50 $ 1.55 $ 1.40
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average units outstanding - basic 65,577 40,547 62,580 40,406
- ----------------------------------------------------------------------------------------------------------------------------
Weighted average units outstanding - diluted 65,884 41,987 63,093 41,489
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5 of 40
<PAGE>
MACK-CALI REALTY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL (in thousands)
================================================================================
<TABLE>
<CAPTION>
General Limited
Preferrred Partner Partner Preferred
Units Units Units Unitholders
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 -- 49,856 -- $ --
Net income -- -- -- 1,823
Distributions -- -- -- (4,194)
Contributions - net proceeds from
common stock offerings -- 7,835 -- --
Conversion of limited partner
units to shares of common stock -- 22 -- --
Contributions - proceeds from
stock options exercised -- 263 -- --
Repurchase of common units -- (694) -- --
Adjustment to reflect preferred
unitholders'and limited partners'
capital at redemption value -- -- -- --
Reclassification of previously redeemable
partnership units 248 -- 7,727 223,443
Issuance of units in connection with
acquisitions -- -- 899 --
Issuance of Preferred Units 2 -- -- 2,258
- -----------------------------------------------------------------------------------------------------
Balance at September 30, 1998 250 57,282 8,626 $ 223,330
=====================================================================================================
<CAPTION>
General Limited Unit
Partner Partners Warrants Total
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at January 1, 1998 $ 1,005,349 $ -- $ 8,524 $ 1,013,873
Net income 85,270 1,817 -- 88,910
Distributions (88,453) (4,360) -- (97,007)
Contributions - net proceeds from
common stock offerings 284,453 -- -- 284,453
Conversion of limited partner
units to shares of common stock 848 -- -- 848
Contributions - proceeds from
stock options exercised 5,378 -- -- 5,378
Repurchase of common units (20,525) -- -- (20,525)
Adjustment to reflect preferred
unitholders'and limited partners'
capital at redemption value 115,858 -- -- 115,858
Reclassification of previously
redeemable partnership units -- 266,875 -- 490,318
Issuance of units in connection with
acquisitions -- 27,687 -- 27,687
Issuance of Preferred Units -- -- -- 2,258
- -----------------------------------------------------------------------------------------------------
Balance at September 30, 1998 $ 1,388,178 $ 292,019 $ 8,524 $ 1,912,051
=====================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6 of 40
<PAGE>
MACK-CALI REALTY, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
================================================================================
<TABLE>
<CAPTION>
Nine Months Ended September 30,
CASH FLOWS FROM OPERATING ACTIVITIES 1998 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Net income $ 108,437 $ 54,120
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 56,537 40
Amortization of stock compensation -- 1,613
Amortization of premium on loans receivable -- 924
Amortization of deferred financing costs 1,122 324
Extraordinary item - loss on early retirement of debt 2,670 7,200
Changes in operating assets and liabilities:
Increase in unbilled rents receivable (9,603) --
Increase in deferred charges and other assets, net (15,098) (6,457)
(Increase) decrease in accounts receivable, net (2,584) 1
Increase in accounts payable and
accrued expenses 4,187 4,139
Increase in rents received in advance and
security deposits 7,705 --
(Decrease) increase in accrued interest payable (1,162) 790
- -------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 152,211 $ 62,694
===========================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
- -------------------------------------------------------------------------------------------
Additions to rental property $ (666,513) $ (1,913)
Issuance of mortgage note receivable (20,000) (11,600)
Repayment of mortgage note receivable 20,000 --
Decrease in loans receivable from
Property Partnerships -- 77,802
Distributions in excess of equity in net income
of majority-owned Property Partnerships -- 105,895
Contributions to Property Partnerships -- (584,833)
Investments in partially-owned entities (53,327) --
Decrease in restricted cash 1,167 2,102
- -------------------------------------------------------------------------------------------
Net cash used in investing activities $ (718,673) $ (412,547)
===========================================================================================
CASH FLOWS FROM FINANCING ACTIVITIES
- -------------------------------------------------------------------------------------------
Proceeds from mortgages and loans payable $ 1,489,746 $ 410,080
Repayments of mortgages and loans payable (1,077,170) (205,880)
Redemption of common units (3,163) --
Payment of financing costs (8,347) --
Purchase of treasury units (20,525) (4,680)
Net proceeds from common stock offerings 284,453 --
Proceeds from stock options exercised 5,378 2,713
Payment of distributions (99,760) (54,078)
- -------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 570,612 $ 148,155
===========================================================================================
Net increase (decrease) in cash and cash equivalents $ 4,150 $ (201,698)
Cash and cash equivalents, beginning of period $ 2,704 $ 204,721
- -------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 6,854 $ 3,023
===========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 7 of 40
<PAGE>
MACK-CALI REALTY, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per unit amounts)
================================================================================
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Mack-Cali Realty, L.P. (formerly Cali Realty, L.P.), a Delaware limited
partnership, and subsidiaries (the "Operating Partnership"), was formed on
August 31, 1994 to conduct the business of leasing, management, acquisition,
development, construction, and tenant-related services for its sole general
partner, Mack-Cali Realty Corporation (formerly Cali Realty Corporation) (the
"Corporation" or "General Partner") and subsidiaries. The Operating Partnership,
through its operating divisions and subsidiaries, including the Mack-Cali
Property Partnerships (the "Property Partnerships"), as described below, is the
entity through which all of the General Partner's operations are conducted.
The Property Partnerships, not a legal entity, consist of partnerships which are
engaged in the ownership and operation of the Properties (as hereinafter
defined) of the Operating Partnership, excluding certain Properties which are
wholly-owned by the Operating Partnership. Prior to January 1, 1998 the Property
Partnerships were owned 99 percent by the Operating Partnership as a
non-controlling limited partner, and one percent by the General Partner, as a
controlling general partner. During 1998, the Operating Partnership obtained
control of the Property Partnerships pursuant to agreements with the General
Partner.
The General Partner is a fully-integrated, self-administered, self-managed real
estate investment trust ("REIT"). The General Partner controls the Operating
Partnership as its sole general partner, and owned an 86.9 percent and 89.1
percent common unit interest in the Operating Partnership at September 30, 1998
and December 31, 1997, respectively.
The General Partner's business is the ownership of interests in and operation of
the Operating Partnership, and all of the General Partner's expenses are
incurred for the benefit of the Operating Partnership. The General Partner is
reimbursed by the Operating Partnership for all expenses it incurs relating to
the ownership and operation of the Operating Partnership. The Operating
Partnership earns a management fee of between three percent and five percent of
revenues, as defined, for its management of the Property Partnerships.
As of September 30, 1998, the Operating Partnership's portfolio was comprised of
247 properties plus developable land (collectively, the "Properties"). The
Properties aggregate approximately 27.6 million square feet, and are comprised
of 235 office and office/flex buildings totaling approximately 27.2 million
square feet, six industrial/warehouse buildings totaling approximately 387,400
square feet, two multi-family residential complexes consisting of 453 units, two
stand-alone retail properties and two land leases. The Properties are located in
12 states, primarily in the Northeast and Southwest, plus the District of
Columbia.
Basis of Presentation
The accompanying consolidated financial statements include all accounts of the
Operating Partnership and its subsidiaries, including the Property Partnerships.
During 1998, the Operating Partnership obtained control of the Property
Partnerships pursuant to agreements with the General Partner, as discussed
above. Accordingly, the accounts of the Property Partnerships are consolidated
with the financial statements of the Operating Partnership effective January 1,
1998. Prior to January 1, 1998, the Operating Partnership accounted for the
Property Partnerships under the equity method of accounting. All significant
intercompany accounts and transactions have been eliminated. See "Investments in
Unconsolidated Majority-Owned Property Partnerships" and "Investments in
Partially-Owned Entities" in Note 2 for the Operating Partnership's accounting
treatment of unconsolidated partnership interests.
The preparation of financial statements in conformity with generally accepted
accounting principles ("GAAP") requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Page 8 of 40
<PAGE>
2. SIGNIFICANT ACCOUNTING POLICIES
Rental
Property Rental properties are stated at cost less accumulated
depreciation and amortization. Costs directly related to the
acquisition and development of rental properties are
capitalized. Capitalized development costs include interest,
property taxes, insurance and other project costs incurred
during the period of construction. Ordinary repairs and
maintenance are expensed as incurred; major replacements and
betterments, which improve or extend the life of the asset,
are capitalized and depreciated over their estimated useful
lives. Fully-depreciated assets are removed from the accounts.
Properties are depreciated using the straight-line method over
the estimated useful lives of the assets. The estimated useful
lives are as follows:
Leasehold interests 34 years
--------------------------------------------------------------
Buildings and improvements 5 to 40 years
--------------------------------------------------------------
Tenant improvements The shorter of the term of
the related lease or useful life
--------------------------------------------------------------
Furniture, fixtures and equipment 5 to 10 years
--------------------------------------------------------------
On a periodic basis, management assesses whether there are any
indicators that the value of the real estate properties may be
impaired. A property's value is impaired only if management's
estimate of the aggregate future cash flows (undiscounted and
without interest charges) to be generated by the property are
less than the carrying value of the property. To the extent an
impairment has occurred, the loss shall be measured as the
excess of the carrying amount of the property over the fair
value of the property. Management does not believe that the
value of any of its rental properties is impaired.
Redeemable
Partnership
Units Prior to August 21, 1998, the Operating Partnership accounted
for the outstanding common and preferred units not held by the
Corporation as redeemable partnership units. These units are
classified outside of permanent partners' capital in the
accompanying December 31, 1997 balance sheet. These units were
initially recorded at their fair value and subsequently
adjusted based on the fair value at the balance sheet date as
measured by the closing price of the Corporation's common
stock on that date multiplied by the total number of units
outstanding (see Note 11).
Effective August 21, 1998, pursuant to an amendment to the
Operating Partnership agreement, in which the Operating
Partnership obtained control over the redemption rights of the
units, these units were reclassified as a component of
permanent partners' capital. The fair value of the
reclassified units was measured by the closing price of the
Corporation's common stock on that date multiplied by the
total number of units outstanding.
Investments in
Unconsolidated
Majority-Owned
Property
Partnerships Prior to January 1, 1998, the Operating Partnership accounted
for its non-controlling 99 percent limited partner interest in
the Property Partnerships under the equity method of
accounting. These investments were recorded initially at cost,
as Investments in Unconsolidated Majority-Owned Property
Partnerships, and subsequently adjusted for contributions and
distributions and equity in income. During 1998, the Operating
Partnership obtained control of the Property Partnerships
pursuant to agreements with the General Partner. Accordingly,
the accounts of the Property Partnerships are consolidated
with the Operating Partnership effective January 1, 1998.
Page 9 of 40
<PAGE>
Investments in
Partially-Owned
Entities The Operating Partnership accounts for its investments in
partially-owned entities under the equity method of accounting
as the Operating Partnership exercises significant influence.
These investments are recorded initially at cost, as
Investments in Partially-Owned Entities, and subsequently
adjusted for equity in net income (loss) and cash
contributions and distributions. Equity in net income (loss)
is included in Parking and Other in the Consolidated
Statements of Operations for the three and nine month periods
ended September 30, 1998 (see Note 5).
Cash and Cash
Equivalents All highly liquid investments with a maturity of three months
or less when purchased are considered to be cash equivalents.
Deferred
Financing Costs Costs incurred in obtaining financing are capitalized and
amortized on a straight-line basis, which approximates the
effective interest method, over the term of the related
indebtedness. Amortization of such costs is included in
interest expense and was $468 and $171 for the three months
ended September 30, 1998 and 1997, respectively, and $1,122
and $324 for the nine months ended September 30, 1998 and
1997, respectively.
Deferred
Leasing Costs Costs incurred in connection with leases are capitalized and
amortized on a straight-line basis over the terms of the
related leases and included in depreciation and amortization.
Unamortized deferred leasing costs are charged to amortization
expense upon early termination of the lease. Certain employees
provide leasing services to the Properties and receive fees as
compensation based on a percentage of adjusted rents. Such
fees, which are capitalized and amortized, approximated $589
and none for the three months ended September 30, 1998 and
1997, respectively, and $1,825 and none for the nine months
ended September 30, 1998 and 1997, respectively.
Revenue
Recognition Base rental revenue is recognized on a straight-line basis
over the terms of the respective leases. Unbilled rents
receivable represents the amount by which straight-line rental
revenue exceeds rents currently billed in accordance with the
lease agreements. Parking revenue includes income from parking
spaces leased to tenants. Rental income on residential
property under operating leases having terms generally of one
year or less is recognized when earned.
Reimbursements are received from tenants for certain costs as
provided in the lease agreements. These costs generally
include real estate taxes, utilities, insurance, common area
maintenance and other recoverable costs (see Note 14).
Income and
Other Taxes The Operating Partnership is a partnership and, as a result,
all income and losses of the partnership are allocated to the
partners for inclusion in their respective income tax returns.
Accordingly, no provision or benefit for income taxes has been
made in the accompanying financial statements.
Interest Rate
Contracts Interest rate contracts are utilized by the Operating
Partnership to reduce interest rate risks. The Operating
Partnership does not hold or issue derivative financial
instruments for trading purposes.
The differentials to be received or paid under contracts
designated as hedges are recognized in income over the life of
the contracts as adjustments to interest expense. Gains and
losses are deferred and amortized to interest expense over the
remaining life of the associated debt to the extent that such
debt remains outstanding.
Page 10 of 40
<PAGE>
Earnings
Per Unit In accordance with the Statement of Financial Accounting
Standards No. 128 ("FASB No. 128"), the Operating Partnership
presents both basic and diluted earnings per unit ("EPU").
Basic EPU excludes dilution and is computed by dividing net
income available to common unitholders by the weighted average
number of units outstanding for the period. Diluted EPU
reflects the potential dilution that could occur if securities
or other contracts to issue common units were exercised or
converted into common units, where such exercise or conversion
would result in a lower EPU amount.
Distributions
Payable The distributions payable at September 30, 1998 represents
distributions payable to common unitholders of record on
October 5, 1998 (65,907,963 units), and preferred
distributions to preferred unitholders (250,256 preferred
units) for the third quarter 1998. The third quarter 1998
common unit distribution of $0.55 per common unit (pro-rated
for units issued during the quarter), as well as the third
quarter preferred unit distribution of $16.875 per preferred
unit (pro-rated for units issued during the quarter), were
approved by the General Partner on September 17, 1998 and were
paid on October 23, 1998.
Extraordinary
Item Extraordinary item represents the effect resulting from the
early settlement of certain debt obligations, net of
write-offs of related deferred financing costs, prepayment
penalties, yield maintenance payments and other related items.
Underwriting
Commissions
and Costs Underwriting commissions and costs incurred in connection with
the Corporation's stock offerings are reflected as a reduction
of additional paid-in-capital.
Stock Options The Corporation accounts for stock-based compensation using
the intrinsic value method prescribed in Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related Interpretations ("APB No. 25"). Under
APB No. 25, compensation cost is measured as the excess, if
any, of the quoted market price of the Corporation's stock at
the date of grant over the exercise price of the option
granted. Compensation cost for stock options, if any, is
recognized ratably over the vesting period. The Corporation's
policy is to grant options with an exercise price equal to the
quoted closing market price of the Corporation's stock on the
business day preceding the grant date. Accordingly, no
compensation cost has been recognized for the Corporation's
stock option plans. See Note 10.
Reclassifications Certain reclassifications have been made to prior period
balances in order to conform with current period presentation.
3. ACQUISITIONS/TRANSACTIONS
On January 31, 1997, the Operating Partnership acquired 65 properties ("RM
Properties") from Robert Martin Company, LLC and affiliates ("RM") for a total
cost of approximately $450,000. The cost of the transaction (the "RM
Transaction") was financed through the assumption of $185,283 of mortgage
indebtedness, the payment of approximately $220,000 in cash, substantially all
of which was obtained from the Operating Partnerhip's cash reserves, and the
issuance of 1,401,225 common units, valued at $43,788. The RM Properties consist
primarily of 54 office and office/flex properties, aggregating approximately 3.7
million square feet, and six industrial/warehouse properties, aggregating
approximately 387,400 square feet.
In connection with the RM Transaction, the Operating Partnership was granted a
three-year option to acquire two properties (the "Option Properties"), under
certain conditions, which were subsequently acquired by the Operating
Partnership in August 1997 and September 1998. The Option Properties
collateralized a mortgage note receivable which carried an original principal
balance of $11,600 ("RM Note Receivable"), which was provided by the Operating
Partnership in conjunction with the RM Transaction in 1997. Such mortgage note
receivable was subsequently repaid in connection with the Operating
Partnership's acquisitions of the Option Properties.
Page 11 of 40
<PAGE>
On December 11, 1997, the Operating Partnership acquired 54 office properties,
aggregating approximately 9.2 million square feet, (the "Mack Properties") from
the Mack Company and Patriot American Office Group (the "Mack Transaction"),
pursuant to a Contribution and Exchange Agreement (the "Agreement"), for a total
cost of approximately $1,102,024.
The total cost of the Mack Transaction was financed as follows: (i) $498,757 in
cash made available from the Operating Partnership's cash reserves and from the
$200,000 Prudential Term Loan (see Note 9), (ii) $291,879 in debt assumed by the
Property Partnerships (the "Mack Mortgages"), (iii) the issuance of 1,965,886
common units, valued at approximately $66,373, (iv) the issuance of 15,237
Series A preferred units and 215,325 Series B preferred units, valued at
approximately $236,491 (collectively, the "Preferred Units"), (v) warrants to
purchase 2,000,000 common units (the "Unit Warrants"), valued at approximately
$8,524, and (vi) the issuance of Contingent Units, as described below.
The 2,006,432 contingent common units, 11,895 Series A contingent preferred
units and 7,799 Series B contingent preferred units (collectively, the
"Contingent Units") were issued as contingent non-participating units. Such
Contingent Units have no voting, distribution or other rights until such time as
they are redeemed into common units, Series A preferred units, and Series B
preferred units, respectively. Redemption of such Contingent Units shall occur
upon the achievement of certain performance goals relating to certain of the
Mack Properties, specifically the achievement of certain leasing activity.
On account of the achievement of certain of the performance goals during the
nine months ended September 30, 1998, certain of the Contingent Units were
redeemed for a specified amount of common and preferred units (see Note 11).
With the completion of the Mack Transaction on December 11, 1997, the Cali
Realty Corporation name was changed to Mack-Cali Realty Corporation, and the
name of the Operating Partnership was changed from Cali Realty, L.P. to
Mack-Cali Realty, L.P.
In 1997, the Operating Partnership also acquired 13 additional office and
office/flex properties, aggregating approximately 1,495,950 square feet, in nine
separate transactions with separate sellers, for an aggregate cost of
approximately $204,446. Such acquisitions were funded primarily from drawings on
the Operating Partnership's credit facilities.
On January 23, 1998, the Operating Partnership acquired 10 acres of vacant land
in the Stamford Executive Park, located in Stamford, Fairfield County,
Connecticut for approximately $1,341, funded from the Operating Partnership's
cash reserves. The vacant land, on which the Operating Partnership has commenced
development of a 40,000 square-foot office/flex property, was acquired from RMC
Development Co., LLC. In conjunction with the acquisition of the developable
land, the Operating Partnership signed a 15-year lease, on a triple-net basis,
with a single tenant to occupy the entire property being developed.
On January 30, 1998, the Operating Partnership acquired a 17-building
office/flex portfolio, aggregating 748,660 square feet located in the Moorestown
West Corporate Center in Moorestown, Burlington County, New Jersey and in
Bromley Commons in Burlington, Burlington County, New Jersey. The 17 properties
("McGarvey Properties") were acquired for a total cost of approximately $47,526.
The Operating Partnership is under contract to acquire an additional four
office/flex properties in the same locations. The Operating Partnership also
obtained an option to purchase a property for approximately $3,700, which was
subsequently acquired by the Operating Partnership on July 14, 1998. The
purchase contract also provides the Operating Partnership a right of first
refusal to acquire up to six additional office/flex properties totaling 202,000
square feet upon their development and lease-up. The initial transaction was
funded primarily from drawing on one of the Operating Partnership's credit
facilities as well as the assumption of mortgage debt with an estimated fair
value of approximately $8,354 (the "McGarvey Mortgages"). The McGarvey Mortgages
currently have a weighted average annual effective interest rate of 6.24 percent
and are secured by five of the office/flex properties acquired.
On February 2, 1998, the Operating Partnership acquired 2115 Linwood Avenue, a
68,000 square-foot vacant office building located in Fort Lee, Bergen County,
New Jersey. The building was acquired for approximately $5,164, which was made
available from drawing on one of the Operating Partnership's credit facilities.
The Operating Partnership is currently redeveloping the property for future
lease-up and operation.
On February 5, 1998, the Operating Partnership acquired 500 West Putnam Avenue
("500 West Putnam"), a 121,250 square-foot office building located in Greenwich,
Fairfield County, Connecticut. The property was acquired for a total cost of
approximately $20,125, funded from drawing on one of the Operating Partnership's
credit facilities, as well as
Page 12 of 40
<PAGE>
the assumption of mortgage debt with an estimated fair value of approximately
$12,104, which bears interest at an annual effective interest rate of 6.52
percent.
On February 25, 1998, the Operating Partnership acquired 10 Mountainview Road
("Mountainview"), a 192,000 square-foot office property, located in Upper
Saddle River, Bergen County, New Jersey. The property was acquired for
approximately $24,754, which was made available from proceeds received from the
Operating Partnership's February 1998 offering of common stock (see Note 10).
On March 12, 1998, the Operating Partnership acquired 1250 Capital of Texas
Highway South, a 270,703 square-foot office building located in Austin, Travis
County, Texas. The property was acquired for a total cost of approximately
$37,266, which was made available from drawing on one of the Operating
Partnership's credit facilities.
On March 27, 1998, the Operating Partnership acquired four office buildings, a
day care center, plus land parcels, and a 50 percent interest in another office
building, all of such properties aggregating 859,946 square feet and located in
the Prudential Business Campus office complex in Parsippany and Hanover
Township, Morris County, New Jersey. The properties and land parcels were
acquired for a total cost of approximately $175,895, which funds were made
available from the Operating Partnership's cash reserves (provided in part from
the proceeds received from the sale of 2,705,628 shares of the Corporation's
common stock pursuant to a Stock Purchase Agreement with The Prudential
Insurance Company of America, Strategic Value Investors, LLC and Strategic Value
Investors International, LLC) (see Note 10) and from drawing on one of the
Operating Partnership's credit facilities.
Also, on March 27, 1998, the Operating Partnership acquired ten office
properties (the "Pacifica I Acquisition"), located in suburban Denver and
Colorado Springs, Colorado from Pacifica Holding Company ("Pacifica"), a private
real estate owner and operator in Denver, Colorado, for a total cost of
approximately $74,966. Such funds were made available from drawing on one of the
Operating Partnership's credit facilities and the issuance of common units (see
Note 11). The Pacifica I Acquisition comprises an aggregate of 620,017 square
feet of Pacifica's entire 1.2 million square-foot office portfolio, which
consists of 18 office buildings and related operations. On June 8, 1998, the
Operating Partnership acquired six of the remaining office buildings and vacant
land, located in the Denver Tech Center, as part of the second phase of the
Pacifica acquisition (the "Pacifica II Acquisition"). The Pacifica II
Acquisition is comprised of an aggregate of approximately 514,427 square feet,
as well as 2.5 acres of developable land, and was acquired for a total cost of
approximately $80,841, which was made available from drawing on one of the
Operating Partnership's credit facilities and the issuance of common units (see
Note 11). The Operating Partnership currently is a party to a letter of intent
to acquire the remaining two office buildings, encompassing 95,360 square feet
from Pacifica for an aggregate purchase price of approximately $12,000. William
L. Mack, a director and equity holder of the Operating Partnership, was an
indirect owner of an interest in certain of the buildings contained in the
Pacifica portfolio.
On March 30, 1998, the Operating Partnership acquired two office buildings,
aggregating 303,940 square feet, in the Morris County Financial Center located
in Parsippany, Morris County, New Jersey. The properties were acquired for a
total cost of approximately $52,763, which was made available from drawing on
one of the Operating Partnership's credit facilities.
On May 13, 1998, the Operating Partnership acquired 3600 South Yosemite, a
133,743 square-foot office building located in Denver, Denver County, Colorado.
The property was acquired for approximately $13,555, which was made available
from drawing on one of the Operating Partnership's credit facilities.
On May 14, 1998, the Operating Partnership acquired One Ramland Road, a 232,000
square-foot office/flex building plus adjacent developable land, located in
Orangeburg, Rockland County, New York. The property and land were acquired for a
total cost of approximately $7,000, which was made available from the Operating
Partnership's cash reserves. Subsequently, on August 20, 1998, the Operating
Partnership contributed the property and land to a joint venture with a third
party. The purpose of the joint venture is the ownership, management and
operation of the building and ownership of the land parcel for future
development (see Note 5).
On May 22, 1998, the Operating Partnership acquired 500 College Road East, a
158,235 square-foot office building, located in Princeton, Mercer County, New
Jersey. The property was acquired for approximately $21,334, which was made
available from drawing on one of the Operating Partnership's credit facilities.
The property was acquired subject to a ground lease which is prepaid through
2031, and has two 10-year renewal options, at rent levels as defined in the
ground lease agreement.
Page 13 of 40
<PAGE>
On June 1, 1998, the Operating Partnership acquired two office buildings and
entered into a contract to acquire a third office building and developable land,
all from related sellers, as further described below. The Operating Partnership
acquired on June 1, 1998, 1709 New York Avenue Northwest and 1400 L Street
Northwest, two office properties aggregating 325,000 square feet located in
Washington, D.C. The properties were acquired for a total cost of approximately
$90,375, which was made available from drawing on one of the Operating
Partnership's credit facilities. Subsequently, on July 16, 1998, the Operating
Partnership acquired 4200 Parliament Drive, a 122,000 square-foot office
property, plus adjacent developable land, located in Lanham, Prince George's
County, Maryland. The property and land were acquired for a total cost of
approximately $15,771, which was made available from drawing on one of the
Operating Partnership's credit facilities.
On June 3, 1998, the Operating Partnership acquired 400 South Colorado
Boulevard, a 125,415 square-foot office building, located in Denver, Denver
County, Colorado. The property was acquired for approximately $12,082, which was
made available from drawing on one of the Operating Partnership's credit
facilities.
On June 8, 1998, the Operating Partnership completed construction of Two Center
Court, a 30,600 square-foot office/flex building, located in the Operating
Partnership's Commercenter Office Park, in Totowa, Passaic County, New Jersey.
The property was constructed for a cost of approximately $2,231.
On July 14, 1998, the Operating Partnership acquired 1510 Lancer Road, an 88,000
square-foot office/flex building, located in Moorestown West Corporate Center in
Moorestown, Burlington County, New Jersey, for approximately $3,700, which was
made available from drawing on one of the Operating Partnership's credit
facilities. As previously mentioned, the property was acquired through the
Operating Partnership's exercise of a purchase option obtained in the
acquisition of the McGarvey Properties from the same seller on January 30, 1998.
On September 10, 1998, the Operating Partnership acquired 40 Richards Avenue, a
146,000 square-foot office building, located in Norwalk, Fairfield County,
Connecticut. The Operating Partnership acquired the property for a total cost of
approximately $19,444, which was funded through the issuance of common units
(see Note 11) and from the Operating Partnership's cash reserves.
On September 15, 1998, the Operating Partnership acquired Seven Skyline Drive, a
117,000 square-foot office building, located in Hawthorne, Westchester County,
New York, through the exercise of a purchase option obtained in the RM
Transaction. The acquisition of the Option Property, with a total cost of
approximately $13,343, was funded from the Operating Partnership's cash
reserves, net of the repayment by the seller of the remaining balance of the RM
Note Receivable (see Note 8).
With respect to the acquisitions completed prior to January 1, 1998, except for
four Properties aggregating $61,994 which are wholly-owned by the Operating
Partnership, all acquisitions were made by the Property Partnerships, in which
the Operating Partnership owns a 99 percent limited partnership interest.
4. INVESTMENTS IN UNCONSOLIDATED MAJORITY-OWNED PROPERTY PARTNERSHIPS
Prior to January 1, 1998, the Operating Partnership accounted for its
non-controlling 99 percent limited partner interests in the Property
Partnerships under the equity method of accounting. During 1998, the Operating
Partnership obtained control of the Property Partnerships pursuant to agreements
with the General Partner. Accordingly, the accounts of the Property Partnerships
are consolidated with the Operating Partnership effective January 1, 1998.
Page 14 of 40
<PAGE>
The following is the summarized financial data of the Property Partnerships:
December 31
1997
- --------------------------------------------------------------------------------
Assets:
Rental property, net $2,461,535
Other assets 52,349
- --------------------------------------------------------------------------------
Total assets $2,513,884
================================================================================
Liabilities and partners' capital:
Mortgages and loans payable $ 650,550
Other liabilities 41,720
Partners' capital 1,821,614
- --------------------------------------------------------------------------------
Total liabilities and partners' capital $2,513,884
================================================================================
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
- --------------------------------------------------------------------------------
Rental and other revenues $ 61,550 $ 171,719
Operating and other expenses (20,192) (55,911)
Interest expense (7,960) (26,593)
Depreciation and amortization (9,326) (25,591)
Extraordinary item (6,746) (6,746)
- --------------------------------------------------------------------------------
Net income $ 17,326 $ 56,878
================================================================================
5. INVESTMENTS IN PARTIALLY-OWNED ENTITIES
On March 27, 1998, the Operating Partnership acquired a 50 percent interest in
an existing joint venture, which owns and operates Nine Campus Drive, a 156,495
square-foot office building, located in the Prudential Business Campus office
complex in Parsippany, Morris County, New Jersey, as previously mentioned (see
Note 3).
On April 23, 1998, the Operating Partnership entered into a joint venture
agreement with HCG Development, L.L.C. and Summit Partners I, L.L.C. to form
HPMC Development Partners, L.P. The venture was formed for the purpose of
investing in, holding, rehabilitating, developing, managing, maintaining, and
operating real estate investments, primarily in California. The venture's
efforts have focused on two development projects, commonly referred to as
Continental Grand and Summit Ridge. Continental Grand is a 4.2 acre site located
in El Segundo, Los Angeles County, California, where the venture owns and has
commenced construction of a 237,000 square-foot office property. Summit Ridge is
a 7.3 acre site located in San Diego, San Diego County, California, which the
venture plans to acquire and build a 132,000 square-foot office/flex property.
The Operating Partnership is required to make capital contributions to the
venture totaling up to $19,200, pursuant to the partnership agreement. Through
September 30, 1998, the Operating Partnership has invested approximately $12,814
in the venture. Amongst other things, the partnership agreement provides for a
preferred return on the Operating Partnership's invested capital in the venture,
in addition to the Operating Partnership's proportionate share of the venture's
profit, as defined in the agreement.
On April 30, 1998, the Operating Partnership acquired a 49.9 percent interest in
an existing joint venture, which owns Convention Plaza, a 305,000 square-foot
office building, located in San Francisco, San Francisco County, California. The
Operating Partnership acquired its interest in the venture for a total initial
investment of approximately $11,818, through the issuance of common units (see
Note 11) and funds drawn from the Operating Partnership's credit facilities.
On May 20, 1998, the Operating Partnership entered into a joint venture
agreement with Columbia Development Corp. to form American Financial Exchange
L.L.C. The venture was formed to initially acquire land for future development,
located on the Hudson River waterfront in Jersey City, Hudson County, New
Jersey, adjacent to the Operating Partnership's Harborside property. The
Operating Partnership has invested approximately $10,443 in the joint venture
through September 30, 1998 and holds a 50 percent interest. Amongst other
things, the partnership agreement provides for a preferred return on the
Operating Partnership's invested capital in the venture, in addition to the
Operating Partnership's proportionate share of the venture's profit, as defined
in the agreement. The joint venture has acquired land
Page 15 of 40
<PAGE>
on which it has constructed a parking facility, which is currently leased to a
parking operator under a 10-year lease. Such parking facility serves the
recently-commenced ferry service between the Harborside property and Manhattan.
On July 21, 1998, the Operating Partnership entered into a second venture
agreement with HCG Development, L.L.C. and Summit Partners I, L.L.C. to form
HPMC Lava Ridge Partners, L.P. The venture was formed for the purpose of
investing in, holding, rehabilitating, developing, managing, maintaining, and
operating real estate investments. The venture has commenced construction of
three two-story buildings aggregating 183,200 square-feet of office space on a
12.1 acre site located in Roseville, Placer County, California. The Operating
Partnership is required to make capital contributions to the venture totaling up
to $5,600, pursuant to the partnership agreement. Through September 30, 1998,
the Operating Partnership has invested approximately $2,727 in the venture.
Amongst other things, the partnership agreement provides for a preferred return
on the Operating Partnership's invested capital in the venture, in addition to
the Operating Partnership's proportionate share of the venture's profit, as
defined in the agreement.
On August 20, 1998, the Operating Partnership entered into a joint venture
agreement with S.B. New York Realty Corp. to form Ramland Realty Associates
L.L.C. The venture was formed to own, manage and operate One Ramland Road, a
232,000 square-foot office/flex building plus adjacent developable land, located
in Orangeburg, Rockland County, New York, as previously mentioned (see Note 3).
The Operating Partnership has invested approximately $3,749 in the joint venture
through September 30, 1998, and holds a 50 percent interest.
On September 18, 1998, the Operating Partnership entered into a joint venture
agreement with The Prudential Insurance Company of America to form Ashford Loop
Associates L.P. The venture was formed to own, manage and operate 1001 South
Dairy Ashford, a 130,000 square-foot office building, located in Houston, Harris
County, Texas, and a second office property which is currently under contract.
The Operating Partnership has invested approximately $2,110 in the joint venture
through September 30, 1998, and holds a 20 percent interest.
The following is a combined summary of the financial position of the
partially-owned entities in which the Operating Partnership has investment
interests as of September 30, 1998:
September 30,
1998
- --------------------------------------------------------------------------------
Assets:
Rental property, net $82,845
Other assets 14,136
- --------------------------------------------------------------------------------
Total assets $96,981
================================================================================
Liabilities and partners' equity:
Mortgage payable $39,566
Other liabilities 2,303
Partners' equity 55,112
- --------------------------------------------------------------------------------
Total liabilities and partners' equity $96,981
================================================================================
The following is a combined summary of the results of operations of the
partially-owned entities in which the Operating Partnership has investment
interests (from the date of the Operating Partnership's initial investment
through the end of the period for existing joint ventures) for the three and
nine month periods ended September 30, 1998:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Rental and other revenues $ 2,912 $ 4,718
Operating and other expenses (1,112) (1,769)
Interest expense (787) (1,293)
Depreciation and amortization (591) (1,070)
- ------------------------------------------------------------------------------------------------------
Net income $ 422 $ 586
======================================================================================================
Operating Partnership's share of net income $ 323 $ 419
- ------------------------------------------------------------------------------------------------------
</TABLE>
Page 16 of 40
<PAGE>
6. DEFERRED CHARGES AND OTHER ASSETS
September 30, December 31,
1998 1997
- --------------------------------------------------------------------------------
Deferred leasing costs $ 30,331 $ 45
Deferred financing costs 8,203 3,187
- --------------------------------------------------------------------------------
38,534 3,232
Accumulated amortization (12,061) (490)
- --------------------------------------------------------------------------------
Deferred charges, net 26,473 2,742
Prepaid expenses and other assets 9,612 1,924
- --------------------------------------------------------------------------------
Total deferred charges and other assets, net $ 36,085 $ 4,666
================================================================================
7. RESTRICTED CASH
Restricted cash includes security deposits for the Operating Partnership's
residential properties and certain commercial properties, and escrow and reserve
funds for debt service, real estate taxes, property insurance, capital
improvements, tenant improvements, and leasing costs established pursuant to
certain mortgage financing arrangements, and is comprised of the following:
September 30, December 31,
1998 1997
- --------------------------------------------------------------------------------
Escrow and other reserve funds $ 319 $ --
Security deposits 5,358 --
- --------------------------------------------------------------------------------
Total restricted cash $ 5,677 $ --
================================================================================
8. MORTGAGE NOTE RECEIVABLE
In connection with the RM Transaction on January 31, 1997, the Operating
Partnership provided a $11,600 non-recourse mortgage loan (the "RM Note
Receivable") to entities controlled by the RM principals, which bore interest at
an annual rate of 450 basis points over one-month LIBOR (5.38 percent at
September 30, 1998). The RM Note Receivable, which was secured by the Option
Properties and guaranteed by certain of the RM principals, was scheduled to
mature on February 1, 2000. In conjunction with the acquisition of one of the
Option Properties on August 15, 1997, the sellers of the property, certain RM
principals, prepaid $4,350 of the RM Note Receivable. The RM Note Receivable was
subsequently prepaid in full in connection with the acquisition of the second
Option Property on September 15, 1998 (see Note 3). The Operating Partnership
received a prepayment fee of $152 with the retirement of the RM Note Receivable.
On March 6, 1998, prior to the completion of the Pacifica I Acquisition, the
Operating Partnership provided a $20,000 mortgage loan to an entity controlled
by certain principals of Pacifica. Such mortgage loan was secured by an office
property in California and bore interest at an annual rate of 9.25 percent. The
mortgage loan was subsequently prepaid in full by the borrower on June 10, 1998.
The Operating Partnership received a prepayment fee of $200 with the retirement
of the mortgage loan.
Page 17 of 40
<PAGE>
9. MORTGAGES AND LOANS PAYABLE
September 30, December 31,
1998 1997
- --------------------------------------------------------------------------------
Prudential Mortgages $ 210,744 $ 200,000
TIAA Mortgage 185,283 --
Harborside Mortgages 150,000 --
Mitsubishi Mortgages 72,204 --
CIGNA Mortgages 47,359 --
Other Mortgages 78,815 --
Revolving Credit Facilities 655,588 122,100
Contingent Obligation 6,046 --
- --------------------------------------------------------------------------------
Total mortgages and loans payable $ 1,406,039 $ 322,100
================================================================================
PRUDENTIAL MORTGAGES
The Operating Partnership has mortgage debt from The Prudential Insurance
Company of America and its subsidiaries (the "Prudential Mortgages") aggregating
$210,744 and $200,000 as of September 30, 1998 and December 31, 1997,
respectively, comprised of the following:
The Operating Partnership has certain non-recourse mortgage debt, aggregating
$60,744 in principal as of September 30, 1998, with The Prudential Insurance
Company of America ("Prudential"), substantially all of which was assumed in the
Mack Transaction. Such mortgages, which are secured by three properties, bear
interest at a weighted average fixed rate of 8.31 percent, all of which require
monthly payments of interest. Certain of the mortgages require monthly payments
of principal, in addition to interest, on various term amortization schedules.
The mortgages mature between October 2003 and July 2004.
On December 10, 1997, the Operating Partnership obtained a $200,000 term loan
(the "Prudential Term Loan") from Prudential Securities Corp. ("PSC"). The
proceeds of the loan were used to fund a portion of the cash consideration in
completion of the Mack Transaction. The loan had a one-year term and interest
payments were required monthly at an interest rate of 110 basis points over
one-month LIBOR. The loan was a recourse loan secured by 11 properties owned by
the Property Partnership and located in New Jersey. The Prudential Term Loan was
retired in April 1998, simultaneous with the Operating Partnership obtaining the
$150,000 Prudential Mortgage Loan, as described below. On account of prepayment
fees, loan origination fees, legal fees and other costs incurred in the
retirement of the Prudential Term Loan, an extraordinary loss of $52 was
recorded for the nine months ended September 30, 1998.
On April 30, 1998, the Operating Partnership obtained a $150,000, interest-only,
non-recourse mortgage loan from Prudential ("$150,000 Prudential Mortgage
Loan"). The loan, which is secured by 12 of the Operating Partnership's
properties, has an effective annual interest rate of 7.10 percent and a
seven-year term. The Operating Partnership, at its option, may convert the
mortgage loan to unsecured debt upon achievement by the Operating Partnership of
a credit rating of Baa3/BBB- or better. The mortgage loan is prepayable in whole
or in part subject to certain provisions, including yield maintenance. The
proceeds of the new loan were used, along with funds drawn from one of the
Operating Partnership's credit facilities, to retire the Prudential Term Loan,
as well as approximately $48,224 of the Other Mortgages, as hereinafter defined.
TIAA MORTGAGE
In connection with the RM Transaction, on January 31, 1997, one of the Property
Partnerships assumed a $185,283 non-recourse mortgage loan with Teachers
Insurance and Annuity Association of America ("TIAA"), with interest only
payable monthly at a fixed annual rate of 7.18 percent (the "TIAA Mortgage").
The TIAA Mortgage is secured and cross-collateralized by 43 of the RM Properties
and matures on December 31, 2003. The Property Partnership, at its option, may
convert, without any yield maintenance obligation or prepayment premium, the
TIAA Mortgage to unsecured public debt upon achievement by the Operating
Partnership of a credit rating of Baa3/BBB- or better. The TIAA Mortgage is
prepayable in whole or in part subject to certain provisions, including yield
maintenance which is generally 100 basis points over United States Treasury
obligations or similar maturity to the remaining maturity of the TIAA Mortgage
at the time prepayment is being sought.
HARBORSIDE MORTGAGES
In connection with the acquisition of Harborside Financial Center
("Harborside"), on November 4, 1996, one of the Property Partnerships assumed
existing mortgage debt and was provided seller-financed mortgage debt
aggregating
Page 18 of 40
<PAGE>
$150,000. The existing non-recourse mortgage financing, with a principal balance
of $102,601 and $104,768 as of September 30, 1998 and December 31, 1997,
respectively, bears interest at a fixed rate of 7.32 percent and matures on
January 1, 2006. The seller-provided mortgage financing, with a principal
balance of $47,399 and $45,232 as of September 30, 1998 and December 31, 1997,
respectively, matures on January 1, 2006 and initially bears interest at an
annual rate of 6.99 percent. The interest rate on the seller-provided financing
will be reset at the end of the third and sixth loan years based on the yield of
the three-year treasury obligation at that time, with spreads of 110 basis
points in years four through six and 130 basis points in years seven through
maturity. The Operating Partnership has entered into an interest rate hedging
agreement on the seller-provided financing for years four through six (see
"Interest Rate Contracts").
MITSUBISHI MORTGAGES
In connection with the Mack Transaction, the Property Partnerships assumed
non-recourse, variable-rate mortgage debt (the "Mitsubishi Mortgages")
aggregating $72,204 in principal as of September 30, 1998 and December 31, 1997
with Mitsubishi Trust and Banking Corporation. Such mortgages, which are secured
by two of the Mack Properties, bear interest at a variable rate of 65 basis
points over LIBOR and mature between January 2008 and January 2009.
CIGNA MORTGAGES
In connection with the Mack Transaction, the Property Partnerships assumed
non-recourse mortgage debt (the "CIGNA Mortgages") aggregating $47,359 and
$86,650 in principal as of September 30, 1998 and December 31, 1997,
respectively, with Connecticut General Life Insurance Company (CIGNA). Such
mortgages, which are secured by five of the Mack Properties, bear interest at a
weighted average annual fixed rate of 7.85 percent and require monthly payments
of interest and principal on various term amortization schedules. The various
mortgages mature between December 1998 and October 2003. In April 1998,
simultaneous with the Operating Partnership obtaining the $150,000 Prudential
Mortgage Loan, as described above, the Property Partnerships retired one of the
CIGNA Mortgages with a principal balance of $27,835.
OTHER MORTGAGES
The Property Partnerships have mortgage debt ("Other Mortgages") aggregating
$78,815 and $88,474 in principal as of September 30, 1998 and December 31, 1997,
respectively, with eight different lenders, all of which were assumed in the
Mack Transaction as well as the 1998 acquisitions of the McGarvey Properties and
500 West Putnam, and are secured by 14 individual properties. As of September
30, 1998, the Other Mortgages bear interest at a weighted average annual fixed
effective rate of 6.92 percent, and require monthly payments of principal and
interest on various term amortization schedules. The Other Mortgages mature
between February 1999 and October 2010. Variable rate debt included in Other
Mortgages, aggregating $20,338, which bore interest at 115 basis points over
LIBOR, was retired in April 1998, simultaneous with the Operating Partnership
obtaining the $150,000 Prudential Mortgage Loan, as described above. On account
of prepayment fees, legal fees and other costs incurred in the retirement of
certain of the Other Mortgages in April 1998, an extraordinary loss of $140 was
recorded for the nine months ended September 30, 1998.
MORTGAGE FINANCING
Concurrent with the Corporation's initial public offering in August 1994
("IPO"), the Corporation's initial operating subsidiaries, which are certain
entities included in the Property Partnerships, issued five-year mortgage notes
with an aggregate principal balance of $144,500 secured and cross-collateralized
by the original properties included in the IPO ("Original Properties") to an
affiliate ("PSI") of Prudential Securities Inc. PSI then issued commercial
mortgage pay-through bonds ("Bonds") collateralized by the mortgage notes.
Bonds with an aggregate principal balance of $70,000 were purchased by unrelated
third parties. Bonds with an aggregate principal balance of $74,500 were
purchased by the Operating Partnership which are reflected as loans receivable
in the accompanying financial statements. As a result, the Corporation's
combined initial mortgage financing was $70,000 (the "Mortgage Financing").
Approximately $38,000 of the $70,000 was guaranteed under certain conditions by
certain partners of the Cali Group partnerships which owned the Original
Properties. The Mortgage Financing required monthly payments of interest only,
with all principal and any accrued but unpaid interest due in August 1999.
$62,000 of loans bore interest equal to a fixed rate of 8.02 percent per annum
and the remaining $82,500 bore interest at floating rates ranging from 100 basis
points over one-month LIBOR to 290 basis points over one month LIBOR with a
lifetime interest rate cap of 11.6 percent. Pursuant to the terms of the loans,
the Property Partnerships were required to escrow $143 per month for tenant
improvements and leasing commissions and $53 per month for capital improvements.
On August 12, 1997, the Property Partnerships retired the Mortgage Financing and
the Bonds held by the Operating Partnership with funds made available primarily
from drawing on the Original Unsecured Facility (see below). As a result of
prepayment fees, loan origination fees, legal fees and other costs incurred in
the retirement of the Mortgage
Page 19 of 40
<PAGE>
Financing, an extraordinary loss of $6,746 (including the prepayment of $3,425
paid to the Operating Partnership described below), was recorded by the Property
Partnerships for the year ended December 31, 1997. Prepayment fees of $3,425
were paid to the Operating Partnership to retire the $74,500 Bonds held by the
Operating Partnership, which was recorded by the Operating Partnership as
interest income in the accompanying financial statements.
REVOLVING CREDIT FACILITIES
Original Unsecured Facility
On August 6, 1997, the Operating Partnership obtained an unsecured
revolving credit facility (the "Original Unsecured Facility") in the
amount of $400,000 from a group of 13 lender banks. The facility carried a
three-year term and bore interest at 125 basis points over one-month
LIBOR.
The terms of the Original Unsecured Facility included certain restrictions
and covenants which limited, among other things, dividend payments and
additional indebtedness and which required compliance with specified
financial ratios and other financial measurements. The facility also
required a fee on the unused balance payable quarterly in arrears, at a
rate ranging from one-eighth of one percent to one-quarter of one percent
of such balance, depending on the level of borrowings outstanding in
relation to the total facility commitment.
The Operating Partnership had outstanding borrowings of $122,100 at
December 31, 1997, under the Original Unsecured Facility. The Original
Unsecured Facility was repaid in full and retired in connection with the
Operating Partnership obtaining the 1998 Unsecured Facility in April 1998,
as described below. On account of prepayment fees, loan origination fees,
legal fees and other costs incurred in the retirement of the Original
Unsecured Facility, an extraordinary loss of $2,478 was recorded for the
nine months ended September 30, 1998.
1998 Unsecured Facility
On April 17, 1998, the Operating Partnership repaid in full and terminated
the Original Unsecured Facility and obtained a new unsecured revolving
credit facility (the "1998 Unsecured Facility") in the amount of $870,000
from a group of 25 lender banks, led by The Chase Manhattan Bank and Fleet
National Bank. In July 1998, the 1998 Unsecured Facility was expanded to
$900,000 with the addition of two new lender banks into the facility,
bringing the total number of participants to 27 banking institutions. The
1998 Unsecured Facility has a three-year term and currently bears interest
at 110 basis points over LIBOR, a reduction of 15 basis points from the
retired Original Unsecured Facility. Based upon the Operating
Partnership's achievement of an investment grade unsecured debt rating,
the interest rate will be reduced, on a sliding scale, and a competitive
bid option will become available.
The terms of the 1998 Unsecured Facility include certain restrictions and
covenants which limit, among other things, the payment of dividends (as
discussed below), the incurrence of additional indebtedness, the
incurrence of liens and the disposition of assets, and which require
compliance with financial ratios relating to the maximum leverage ratio,
the maximum amount of secured indebtedness, the minimum amount of tangible
net worth, the minimum amount of debt service coverage, the minimum amount
of fixed charge coverage, the maximum amount of unsecured indebtedness,
the minimum amount of unencumbered property debt service coverage and
certain investment limitations. The dividend restriction referred to above
provides that, except to enable the Corporation to continue to qualify as
a REIT under the Code, the Corporation will not during any four
consecutive fiscal quarters make distributions with respect to common
stock or other equity interests in an aggregate amount in excess of 90
percent of funds from operations for such period, subject to certain other
adjustments. The 1998 Unsecured Facility also requires a 17.5 basis point
fee on the unused balance payable quarterly in arrears.
The lending group for the 1998 Unsecured Facility consists of: The Chase
Manhattan Bank, as administrative agent; Fleet National Bank, as
syndication agent; PNC Bank, N.A., as documentation agent; Bankers Trust,
Commerzbank, AG, The First National Bank of Chicago, First Union National
Bank and NationsBank, as managing agents; Creditanstalt Corporate Finance,
Inc., Dresdner Bank, AG, European American Bank, Hypo Bank, Societe
Generale and Summit Bank, as co-agents; and Kredietbank, N.V., Key Bank,
Mellon Bank, N.A., The Bank of New York, Citizens Bank, Crestar, DG Bank,
Tokai Bank, US Trust, Bayerische Landesbank, Erste Bank, BankLeumi USA and
Bank One, Arizona, NA.
Prudential Facility
The Operating Partnership has a revolving credit facility (the "Prudential
Facility") from PSC in the amount of $100,000, which currently bears
interest at 110 basis points over one-month LIBOR, with a maturity date of
March 31, 1999. In July 1998, the Prudential Facility's maturity date was
extended to September 30, 1999. The Prudential Facility is a recourse
liability of the Operating Partnership and is secured by the Operating
Partnership's equity
Page 20 of 40
<PAGE>
interest in Harborside. The Prudential Facility limits the ability of the
Operating Partnership to make any distributions during any fiscal quarter
in an amount in excess of 100 percent of the Operating Partnership's
available funds from operations for the immediately preceding fiscal
quarter (except to the extent such excess distributions or dividends are
attributable to gains from the sale of the Operating Partnership's assets
or are required for the Corporation to maintain its status as a REIT under
the Code); provided, however, that the Operating Partnership may make
distributions and pay dividends in excess of 100 percent of available
funds from operations for the preceding fiscal quarter for not more than
three consecutive quarters. In addition to the foregoing, the Prudential
Facility limits the liens placed upon the subject property and certain
collateral, the use of proceeds from the Prudential Facility, and the
maintenance of ownership of the subject property and assets derived from
said ownership. The Operating Partnership had no outstanding borrowings at
September 30, 1998 and December 31, 1997 under the Prudential Facility.
CONTINGENT OBLIGATION
As part of the Harborside acquisition, a Property Partnership agreed to make
payments (with an estimated net present value of approximately $5,252 at
acquisition date) to the seller for development rights ("Contingent Obligation")
if and when the Property Partnership commences construction on the acquired site
during the next several years. However, the agreement provides, among other
things, that even if the Property Partnership does not commence construction,
the seller may nevertheless require the Property Partnership to acquire these
rights during the six-month period after the end of the sixth year. After such
period, the seller's option lapses, but any development in years 7 through 30
will require a payment, on an increasing scale, for the development rights. The
Property Partnership is currently in the pre-development phase of a long-range
plan to develop the Harborside site on a multi-property, multi-use basis.
For the nine months ended September 30, 1998, interest was imputed on the
Contingent Obligation, thereby increasing the balance of the Contingent
Obligation from $5,734 as of December 31, 1997 to $6,046 as of September 30,
1998.
INTEREST RATE CONTRACTS
On May 24, 1995, the Operating Partnership entered into an interest rate swap
agreement with a commercial bank. The swap agreement fixes the Operating
Partnership's one-month LIBOR base for 6.285 percent per annum on a notional
amount of $24,000 through August 1999.
On January 23, 1996, the Operating Partnership entered into an interest rate
swap agreement with a commercial bank. This swap agreement has a three-year term
and a notional amount of $26,000, which fixes the Operating Partnership's
one-month LIBOR base to 5.265 percent per annum.
On October 1, 1998, the Operating Partnership entered into a forward treasury
rate lock agreement with a commercial bank. This agreement locked a forward
yield of 4.089 percent for the 3-Year U.S. Treasury Note effective November 4,
1999, with a notional amount of $50,000. This agreement will be used to fix the
Index Rate on $50,000 of the Harborside mortgages, for which the Operating
Partnership's borrowing rate re-sets for three years beginning November 4, 1999
to the 3-year U.S. Treasury Note plus 110 basis points (see "Harborside
Mortgages").
The Operating Partnership is exposed to credit loss in the event of
non-performance by the other parties to the interest rate contracts. However,
the Operating Partnership does not anticipate non-performance by either of the
counter parties.
CASH PAID FOR INTEREST & INTEREST CAPITALIZED
Cash paid for interest for the nine months ended September 30, 1998 and 1997 was
$67,550 and $5,664, respectively. Interest capitalized by the Operating
Partnership for the nine months ended September 30, 1998 and 1997 was $1,996 and
none, respectively.
10. PARTNERS' CAPITAL
Partners' capital in the accompanying financial statements of the Operating
Partnership, prior to August 21, 1998, relates to common units held by the
Corporation in the Operating Partnership, in addition to certain unit warrants
in the Operating Partnership issued in conjunction with the Mack Transaction.
Subsequent to August 21, 1998, partners' capital also includes common units held
by the limited partners and Preferred Units held by the preferred unitholders.
Net income allocated to the preferred unitholders and limited partners in the
accompanying Statement of Partners' Capital reflects their pro-rata share of net
income and distributions subsequent to August 21, 1998. Net income and
distributions for the period prior to August 21, 1998 is included in the
changes in redeemable partnership units (see Note 11).
On May 15, 1997, the stockholders of the Corporation approved an increase in the
authorized shares of common stock in the Corporation to 190,000,000.
Page 21 of 40
<PAGE>
On October 15, 1997, the Corporation completed an underwritten public offer and
sale of 13,000,000 shares (the "1997 Offering") of its common stock. The
Corporation received approximately $489,116 in net proceeds (after offering
costs) from the 1997 Offering. The Corporation used $160,000 of such proceeds to
repay outstanding borrowings on its Original Unsecured Facility and the
remainder of the proceeds to fund a portion of the purchase price of the Mack
Transaction, for other potential acquisitions, and for general corporate
purposes.
On February 25, 1998, the Corporation completed an underwritten public offer and
sale of 2,500,000 shares of its common stock and used the net proceeds, which
totaled approximately $92,194 (after offering costs) to pay down a portion of
its outstanding borrowings under the Operating Partnership's credit facilities
and fund the acquisition of Mountainview (see Note 3).
On March 18, 1998, in connection with the acquisition of Prudential Business
Campus, the Corporation completed an offer and sale of 2,705,628 shares of its
common stock using the net proceeds of approximately $99,899 (after offering
costs) in the funding of such acquisition (see Note 3).
On March 27, 1998, the Corporation completed an underwritten public offer and
sale of 650,407 shares of its common stock and used the net proceeds, which
totaled approximately $23,690 (after offering costs) to pay down a portion of
its outstanding borrowings under the Operating Partnership's credit facilities.
On April 29, 1998, the Corporation completed an underwritten offer and sale of
994,228 shares of its common stock and used the net proceeds, which totaled
approximately $34,570 (after offering costs), primarily to pay down a portion of
its outstanding borrowings under the Operating Partnership's credit facilities.
On May 29, 1998, the Corporation completed an underwritten offer and sale of
984,615 shares of its common stock and used the net proceeds, which totaled
approximately $34,100 (after offering costs), primarily to pay down a portion of
its outstanding borrowings under the Operating Partnership's credit facilities.
The proceeds of the above offerings were contributed by the Corporation to the
Operating Partnership in exchange for units.
On August 6, 1998, the Board of Directors of the Corporation authorized a share
repurchase program ("Repurchase Program") under which the Corporation was
permitted to purchase up to $100,000 of the Corporation's common stock.
Purchases could be made from time to time in open market transactions at
prevailing prices or through privately negotiated transactions. For the period
ended September 30, 1998, the Corporation purchased, for constructive
retirement, 694,700 shares of its common stock for an aggregate cost of
approximately $20,525. Concurrent with these purchases, the Corporation sold to
the Operating Partnership 694,700 common units for approximately $20,525.
Subsequently, through November 3, 1998, the Corporation purchased, for
constructive retirement, an additional 103,000 shares of its outstanding common
stock for an aggregate cost of approximately $2,873. Concurrent with these
purchases, the Corporation sold to the Operating Partnership 103,000 common
units for approximately $2,873.
The Corporation and the Operating Partnership filed a registration statement for
an aggregate of $2.0 billion in debt securities, preferred stock and preferred
stock represented by depositary shares. On September 25, 1998, the registration
statement was declared effective by the SEC.
Unit Warrants
As described in Note 3, in connection with the funding of the Mack Transaction,
the Operating Partnership granted warrants to purchase 2,000,000 common units.
The Unit Warrants are exercisable at any time after one year from the date of
their issuance and prior to the fifth anniversary date thereof at an exercise
price of $37.80 per common unit.
Stock Option Plans
In 1994, and as subsequently amended, the Corporation established the Mack-Cali
Employee Stock Option Plan ("Employee Plan") and the Mack-Cali Director Stock
Option Plan ("Director Plan") under which a total of 5,380,188 shares (subject
to adjustment) of the Corporation's common stock have been reserved for issuance
(4,980,188 shares under the Employee Plan and 400,000 shares under the Director
Plan). Stock options granted under the Employee Plan in 1994 and 1995 become
exercisable over a three-year period and those options granted under the
Employee Plan in 1996 and 1997 become exercisable over a five-year period. All
stock options granted under the Director Plan become exercisable in one year.
All options were granted at the fair market value at the dates of grant and have
terms of ten
Page 22 of 40
<PAGE>
years. As of September 30, 1998, and December 31, 1997, the stock options
outstanding had a weighted average remaining contractual life of approximately
8.7 and 9.0 years, respectively.
As a result of certain provisions contained in certain of the Corporation's
executive officers' employment agreements, on December 11, 1997, the Mack
Transaction triggered the accelerated vesting of unvested stock options held by
such officers on that date.
Information regarding the Corporation's stock option plans is summarized below:
Weighted
Shares Average
Under Exercise
Options Price
-----------------------------------------------------------------------------
Outstanding at January 1, 1995 625,000 $17.23
Granted 230,200 17.69
Exercised -- --
Lapsed or canceled 3,588 17.25
-----------------------------------------------------------------------------
Outstanding at December 31, 1995 851,612 17.36
Granted 809,700 23.97
Exercised 126,041 17.25
Lapsed or canceled 7,164 19.52
-----------------------------------------------------------------------------
Outstanding at December 31, 1996 1,528,107 20.86
Granted 2,126,538 37.35
Exercised 337,282 21.33
Lapsed or canceled 30,073 22.62
-----------------------------------------------------------------------------
Outstanding at December 31, 1997 3,287,290 31.47
Granted 1,048,620 35.90
Exercised 262,930 20.47
Lapsed or canceled 119,314 36.76
-----------------------------------------------------------------------------
Outstanding at September 30, 1998 3,953,666 $33.21
=============================================================================
Options exercisable at December 31, 1997 1,004,618 $25.22
Options exercisable at September 30, 1998 1,179,407 $26.34
-----------------------------------------------------------------------------
Available for grant at December 31, 1997 1,629,575
Available for grant at September 30, 1998 700,269
-----------------------------------------------------------------------------
Stock Warrants
On January 31, 1997, in conjunction with the completion of the RM Transaction,
the Corporation granted a total of 400,000 warrants to purchase an equal number
of shares of common stock ("Stock Warrants") at $33 per share (the market price
at date of grant) to Timothy Jones, Brad Berger and certain other Corporation
employees formerly with RM. Such warrants vest equally over a three-year period
and have a term of ten years. The unvested warrants held by Timothy Jones and
Brad Berger became immediately exercisable on December 11, 1997 as a result of
provisions contained in their employment agreements, which were triggered by the
Mack Transaction.
On December 12, 1997, in conjunction with the completion of the Mack
Transaction, the Corporation granted a total of 491,756 Stock Warrants to
purchase an equal number of shares of common stock at $38.75 per share (the
market price at date of grant) to Mitchell Hersh, and certain Corporation
executives formerly with the Patriot American Office Group. Such warrants vest
equally over a five-year period and have a term of ten years.
Stock Compensation
In January 1997, the Corporation entered into employment contracts with seven of
its key executives which provided for, among other things, compensation in the
form of stock awards ("Restricted Stock Awards") and Corporation-financed stock
purchase rights ("Stock Purchase Rights"), and associated tax obligation
payments. In connection with the Restricted Stock Awards, the executives were to
receive 199,070 shares of the Corporation's common stock vesting over a
five-year period contingent on the Corporation meeting certain performance
objectives. Additionally, pursuant to the terms of the Stock Purchase Rights,
the Corporation provided fixed rate, non-recourse loans, aggregating $4,750, to
such executives to finance their purchase of 152,000 shares of the Corporation's
common stock, which the Corporation agreed to forgive ratably over five years,
subject to continued employment. Such loans were for amounts equal to the
Page 23 of 40
<PAGE>
fair market value of the associated shares at the date of grant. Subsequently,
from April 18, 1997 through April 24, 1997, the Corporation purchased, for
constructive retirement, 152,000 shares of its outstanding common stock for
$4,680. The excess of the purchase price over par value was recorded as a
reduction to additional paid-in capital. Concurrent with this purchase, the
Corporation sold to the Operating Partnership 152,000 common units for $4,680.
The value of the Restricted Stock Awards and the balance of the loans related to
the Stock Purchase Rights at the grant date were recorded as unamortized stock
compensation in stockholders' equity. As a result of provisions contained in
certain of the Corporation's executive officers' employment agreements, which
were triggered by the Mack Transaction on December 11, 1997, the loans provided
by the Corporation under the Stock Purchase Rights were forgiven by the
Corporation, and the vesting and issuance of the restricted stock issued under
the Restricted Stock Awards was accelerated, and related tax obligation payments
were made.
Earnings Per Unit
FASB No. 128 requires a dual presentation of basic and diluted earnings per unit
("EPU") on the face of the income statement for all companies with complex
capital structures even where the effect of such dilution is not material. Basic
EPU excludes dilution and is computed by dividing net income available to common
unitholders by the weighted average number of units outstanding for the period.
Diluted EPU reflects the potential dilution that could occur if securities or
other contracts to issue common units were exercised or converted into common
units.
The following information presents the Operating Partnership's results for the
three and nine month periods ended September 30, 1998 and 1997 in accordance
with FASB No. 128.
Three Months
Ended September 30,
1998 1997
---- ----
Basic EPU Diluted EPU Basic EPU Diluted EPU
- --------------------------------------------------------------------------------
Net income $ 34,893 $ 34,893 $ 15,988 $ 15,988
Weighted average units 65,577 65,884 40,547 41,987
- --------------------------------------------------------------------------------
Per Unit $ 0.53 $ 0.53 $ 0.39 $ 0.38
================================================================================
Nine Months
Ended September 30,
1998 1997
---- ----
Basic EPU Diluted EPU Basic EPU Diluted EPU
- --------------------------------------------------------------------------------
Net income $ 96,347 $ 96,347 $ 54,120 $ 54,120
Weighted average units 62,580 63,093 40,406 41,489
- --------------------------------------------------------------------------------
Per Unit $ 1.54 $ 1.53 $ 1.34 $ 1.30
================================================================================
The following schedule reconciles the units used in the basic EPU calculation to
the units used in the diluted EPU calculation.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPU Units: 65,577 40,547 62,580 40,406
Add: Stock options 307 636 455 534
Restricted Stock Awards -- 199 -- 199
Stock Warrants -- 39 58 13
Redeemable Partnership Units -- 566 -- 337
- --------------------------------------------------------------------------------------
Diluted EPU Units: 65,884 41,987 63,093 41,489
======================================================================================
</TABLE>
Pursuant to the Repurchase Program, from August 7, 1998 through November 3,
1998, the Corporation purchased for constructive retirement, 797,700 shares of
its outstanding common stock for approximately $23,398.
Page 24 of 40
<PAGE>
11. REDEEMABLE PARTNERSHIP UNITS
The outstanding preferred and common units, excluding those common units held by
the Corporation, have been classified as redeemable partnership units outside of
permanent partners' capital in the accompanying December 31, 1997 balance sheet
of the Operating Partnership. These units were initially recorded at fair value
and subsequently adjusted based on the fair value at the balance sheet date as
measured by the closing price of the Corporation's common stock on that date
multiplied by the total number of units outstanding.
Effective August 21, 1998, pursuant to an amendment to the Operating
Partnership's partnership agreement, in which the Operating Partnership obtained
the control over the redemption rights of the units, these units were
reclassified as a component of permanent partners' capital. The fair value of
the reclassified units was measured by the closing price of the Corporation's
common stock on that date multiplied by the total number of units outstanding.
Preferred Units
As described in Note 3, in connection with the funding of the Mack Transaction,
the Operating Partnership issued 15,237 Series A Preferred Units and 215,325
Series B Preferred Units, with an aggregate value of $236,491. The Preferred
Units have a stated value of $1,000 per unit and are preferred as to assets over
any class of common units or other class of preferred units of the Operating
Partnership, based on circumstances per the applicable unit certificates.
The quarterly distribution on each Preferred Unit (representing 6.75 percent of
the Preferred Unit stated value of $1,000 on an annualized basis) is an amount
equal to the greater of (i) $16.875 or (ii) the quarterly distribution
attributable to a Preferred Unit determined as if such unit had been converted
into common units, subject to adjustment for customary anti-dilution rights.
Each of the Series A Preferred Units may be converted at any time into common
units at a conversion price of $34.65 per unit, and, after the one year
anniversary of the date of the Series A Preferred Units' initial issuance,
common units received pursuant to such conversion may be redeemed into common
stock. Each of the Series B Preferred Units may be converted at any time into
common units at a conversion price of $34.65 per unit, and, after the three year
anniversary of the date of the Series B Preferred Units' initial issuance,
common units received pursuant to such conversion may be redeemed into common
stock. Each of the common units are redeemable after one year for an equal
number of shares of common stock.
The Preferred Units, issued in the Mack Transaction, are convertible into common
units at $34.65 per common unit, which is an amount less than the $39.0625
closing stock price on the date of closing of the Mack Transaction. Accordingly,
the Operating Partnership recorded, on December 11, 1997, the financial value
ascribed to the beneficial conversion feature inherent in the Preferred Units
upon issuance, which totaled $26,801 ($29,361, before allocation to minority
common unitholders) and was recorded as beneficial conversion feature in
partners' capital. The beneficial conversion feature was amortized in full as
the Preferred Units were immediately convertible upon issuance; such
amortization was included in minority interest for the year ended December 31,
1997.
During the nine months ended September 30, 1998, the Operating Partnership
issued 19,694 additional Preferred Units (11,895 of Series A and 7,799 of Series
B), valued at approximately $20,200, in connection with the achievement of
certain performance goals at the Mack Properties in redemption of an equivalent
number of contingent Preferred Units. Such Preferred Units carry the identical
terms as those issued in the Mack Transaction. As of September 30, 1998, there
are no contingent Preferred Units outstanding, as all contingent Preferred Units
were redeemed for ordinary Preferred Units.
Common Units
Certain individuals and entities own common units in the Operating Partnership.
A common unit and a share of common stock of the General Partner have
substantially the same economic characteristics in as much as they effectively
share equally in the net income or loss of the Operating Partnership.
Common units are redeemable by the common unitholders (other than the General
Partner) at their option, subject to certain restrictions, on the basis of one
common unit for either one share of common stock or cash equal to the fair
market value of a share at the time of the redemption. The General Partner has
the option to deliver shares of common stock in exchange for all or any portion
of the cash requested. When a unitholder redeems a common unit for common stock
of the Corporation, limited partner's capital is reduced and the General
Partner's capital is increased. Effective August 21, 1998, the partnership
agreement was amended to vest this right in the Operating Partnership, rather
than in the General Partnership (see Note 2). Common units held by the General
Partner are not redeemable.
Page 25 of 40
<PAGE>
During the nine months ended September 30, 1998, the Operating Partnership
redeemed a total of 82,880 common units in exchange for an aggregate of $3,163
in cash. Additionally, the Operating Partnership redeemed an aggregate of 22,300
common units for an equivalent number of shares of common stock in the General
Partner.
As described in Note 3, the Operating Partnership issued an aggregate of
3,408,532 common units in 1997 in connection with the completion of the RM
Transaction, the Mack Transaction and a 1997 single-property acquisition.
On March 26, 1998, in connection with the Pacifica I Acquisition, the Operating
Partnership issued 100,175 common units, valued at approximately $3,779.
On April 30, 1998, in connection with the acquisition of a 49.9 percent interest
in the Convention Plaza joint venture (see Note 5), the Operating Partnership
issued 218,105 common units, valued at approximately $8,334.
On June 8, 1998, in connection with the Pacifica II Acquisition, the Operating
Partnership issued 585,263 common units, valued at approximately $20,753.
On July 20, 1998, in connection with the expansion of one of the Mack
Properties, the Operating Partnership issued 52,245 common units, valued at
approximately $1,632.
On September 10, 1998, in connection with the acquisition of 40 Richards Avenue,
the Operating Partnership issued 414,114 common units, valued at approximately
$12,615.
During the nine months ended September 30, 1998, the Operating Partnership also
issued 1,264,067 common units, valued at approximately $45,203, in connection
with the achievement of certain performance goals at the Mack Properties in
redemption of an equivalent number of contingent common units. There were
742,365 contingent common units outstanding as of September 30, 1998.
Contingent Common & Preferred Units
In conjunction with the completion of the Mack Transaction (see Note 3),
2,006,432 contingent common units, 11,895 Series A contingent Preferred Units
and 7,799 Series B contingent Preferred Units were issued as contingent
non-participating units. Such Contingent Units have no voting, distribution or
other rights until such time as they are redeemed into common units, Series A
Preferred Units, and Series B Preferred Units, respectively. Redemption of such
Contingent Units shall occur upon the achievement of certain performance goals
relating to certain of the Mack Properties, specifically the achievement of
certain leasing activity. When Contingent Units are redeemed for common and
Preferred Units, an adjustment to the purchase price of certain of the Mack
Properties is recorded, based on the value of the units issued. On account of
certain of the performance goals having been achieved during the nine months
ended September 30, 1998, the Operating Partnership redeemed 1,264,067
contingent common units and 19,694 contingent Preferred Units and issued an
equivalent number of common and Preferred Units, as indicated above. There were
no contingent Preferred Units outstanding and 742,365 contingent common units
outstanding as of September 30, 1998.
Changes in Redeemable Partnership Units
The following table sets forth the changes in redeemable partnership units for
the period presented:
<TABLE>
<CAPTION>
Limited
Preferred Partner Preferred Limited
Units Units Unitholders Partners Total
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 231 6,097 $ 272,815 $ 249,997 $ 522,812
Net income -- -- 10,267 9,260 19,527
Distributions -- -- (7,896) (6,827) (14,723)
Issuance of units in connection with acquisitions -- 1,735 -- 64,628 64,628
Conversion of units to shares of common stock -- (22) -- (848) (848)
Redemption of units -- (83) -- (3,163) (3,163)
Issuance of Preferred Units 17 -- 17,943 -- 17,943
Adjustment to reflect preferred unitholders'
and limited partners' capital at redemption value -- -- (69,686) (46,172) (115,858)
Reclassification of redeemable partnership units
as permanent partners' capital (248) (7,727) (223,443) (266,875) (490,318)
- -----------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 -- -- $ -- $ -- $ --
=======================================================================================================================
</TABLE>
Page 26 of 40
<PAGE>
12. EMPLOYEE BENEFIT PLAN
All employees of the Corporation who meet certain minimum age and period of
service requirements are eligible to participate in a 401(k) defined
contribution plan (the "Plan"). The Plan allows eligible employees to defer up
to 15 percent of their annual compensation. The amounts contributed by employees
are immediately vested and non-forfeitable. The Corporation, at management's
discretion, may match employee contributions, although no employer contributions
have been made to date.
13. COMMITMENTS AND CONTINGENCIES
Tax Abatement Agreements
Grove Street Property
Pursuant to an agreement with the City of Jersey City, New Jersey, as amended,
expiring in 2004, the Operating Partnership is required to make payments in lieu
of property taxes ("PILOT") on its property at 95 Christopher Columbus Drive,
Jersey City, Hudson County, New Jersey. Such PILOT, as defined, is $1,267 per
annum through May 31, 1999 and $1,584 per annum through May 31, 2004.
Harborside Financial Center Property
Pursuant to an agreement with the City of Jersey City, New Jersey obtained by
the former owner of the Harborside property in 1988 and assumed by the Property
Partnerships as part of the acquisition of the property in November 1996, the
Property Partnerships are required to make PILOT payments on its Harborside
property. The agreement, which commenced in 1990, is for a term of 15 years.
Such PILOT is equal to two percent of Total Project Costs, as defined, in year
one and increases by $75 per annum through year fifteen. Total Project Costs, as
defined, are $148,712.
Ground Lease Agreements
Future minimum rental payments under the terms of all non-cancelable ground
leases, under which the Operating Partnership or Property Partnerships are the
lessees, as of September 30, 1998, are as follows:
Period Amount
- ---------------------------------------------------------------------------
October 1, 1998 to December 31, 1998 $ 92
1999 377
2000 379
2001 381
2002 382
Thereafter 21,874
- ---------------------------------------------------------------------------
Total $23,485
===========================================================================
Other Contingencies
On December 10, 1997, a Shareholder's Derivative Action was filed in Maryland
Court on behalf of a shareholder. The complaint questioned certain executive
compensation decisions made by the Corporation's Board of Directors in
connection with the Mack Transaction. The Board's compensation decisions were
discussed in the proxy materials distributed in connection with the Mack
Transaction and were approved by in excess of 99 percent of the voting
shareholders. Although the Corporation believes that this lawsuit was factually
and legally baseless, the Corporation on May 4, 1998 agreed to a settlement
which included making certain changes to employment agreements of certain of its
executive officers. The Corporation incurred $750 in costs associated with this
action, which was provided for at December 31, 1997.
The Operating Partnership is a defendant in other certain litigation arising in
the normal course of business activities. Management does not believe that the
resolution of these matters will have a materially adverse effect upon the
Operating Partnership and the Property Partnerships.
14. TENANT LEASES
The Properties are leased to tenants under operating leases with various
expiration dates through 2020. Substantially all of the leases provide for
annual base rents plus recoveries and escalation charges based upon the tenant's
Page 27 of 40
<PAGE>
proportionate share of and/or increases in real estate taxes and certain
operating costs, as defined, and the pass through of charges for electrical
usage.
15. IMPACT OF RECENTLY-ISSUED ACCOUNTING STANDARDS
The Operating Partnership has adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("FASB No. 130"), which
establishes standards for the reporting and display of comprehensive income and
its components; however the adoption of this statement had no impact on the
Operating Partnership's financial statement presentation. The Operating
Partnership does not currently have any items of comprehensive income requiring
separate reporting and disclosure.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information, ("FASB
No. 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and require that those enterprises report selected information about
operating segments in interim financial reports issued to shareholders. This
statement is effective for financial statements for annual periods beginning
after December 15, 1997 and interim periods a year later, and requires that
comparative information from earlier years be restated to conform to the
requirements of this standard.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities ("FASB No.
133"). FASB No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999 (January 1, 2000 for the Operating Partnership).
FASB No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Changes in the fair value of derivatives are recorded
each period in current earnings or other comprehensive income, depending on
whether a derivative is designated as part of a hedge transaction and, if it is,
the type of hedge transaction. Management of the Operating Partnership
anticipates that, due to its limited use of derivative instruments, the adoption
of FASB No. 133 will not have a significant effect on the Operating
Partnership's results of operations or its financial position.
16. PRO FORMA FINANCIAL INFORMATION (unaudited)
The following pro forma financial information for the nine month periods ended
September 30, 1998 and 1997 are presented as if the RM Transaction, the Mack
Transaction and all other acquisitions and common stock offerings completed in
1997, and all acquisitions and common stock offerings completed during the nine
month period ended September 30, 1998 had all occurred on January 1, 1997. In
management's opinion, all adjustments necessary to reflect the effects of these
transactions have been made.
Page 28 of 40
<PAGE>
This pro forma financial information is not necessarily indicative of what the
actual results of operations of the Operating Partnership would have been
assuming such transactions had been completed as of January 1, 1997, nor do they
represent the results of operations of future periods.
Nine Months
Ended September 30,
1998 1997
- --------------------------------------------------------------------------------
Total revenues $ 386,748 $ 61,279
Operating and other expenses 115,946 14,374
General and administrative 20,037 12,436
Depreciation and amortization 61,029 8,009
Interest expense 78,092 45,655
- --------------------------------------------------------------------------------
Income before equity in net income of
unconsolidated majority-owned
Property Partnerships, extraordinary item
and Preferred Unit distributions 111,644 (19,195)
Equity in net income of unconsolidated
majority-owned Property Partnerships -- 125,853
- --------------------------------------------------------------------------------
Income before extraordinary item
and Preferred Unit distributions 111,644 106,658
Preferred Units distributions (12,090) (11,672)
- --------------------------------------------------------------------------------
Income before extraordinary item
available to common unitholders $ 99,554 $ 94,986
================================================================================
Basic earnings per common unit $ 1.51 $ 1.46
Diluted earnings per common unit $ 1.50 $ 1.45
- --------------------------------------------------------------------------------
Basic weighted average units outstanding 65,849 64,919
Diluted weighted average units outstanding 66,363 65,466
- --------------------------------------------------------------------------------
Page 29 of 40
<PAGE>
MACK-CALI REALTY, L.P. AND SUBSIDIARIES
Item 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of Mack-Cali Realty, L.P. and subsidiaries and the notes
thereto.
The following comparisons for the three and nine month periods ended September
30, 1998 ("1998"), as compared to the three and nine month periods ended
September 30, 1997 ("1997") make reference to the following: (i) the effect of
the "Same-Store Properties," which represents all properties owned by the
Operating Partnership at June 30, 1997 (for the three-month period comparisons),
and which represents all properties owned by the Operating Partnership at
December 31, 1996 (for the nine-month period comparisons), (ii) the effect of
the acquisition of the RM Properties on January 31, 1997, (iii) the effect of
the acquisition of the Mack Properties on December 11, 1997, and (iv) the effect
of the "Acquired Properties," which represents all properties acquired by the
Operating Partneship from July 1, 1997 through September 30, 1998, excluding
Mack Properties (for the three-month period comparisons), and which represents
all properties acquired by the Operating Partnership from January 1, 1997
through September 30, 1998, excluding RM Properties and Mack Properties (for the
nine-month period comparisons).
For 1998, the results of operations of the Operating Partnership and the
Property Partnerships are included in the Operating Partnership on a
consolidated basis. Prior to January 1, 1998, such results of operations were
accounted for by the Operating Partnership under the equity method of accounting
and reflected in its consolidated financial statements as Equity in Net Income
of Unconsolidated Majority-Owned Property Partnerships. Accordingly, to present
meaningful comparisons, the following discussion compares such consolidated 1998
results to the 1997 results of the Operating Partnership and Property
Partnerships on a combined basis (such combining financial schedules are
presented in the tables below).
<TABLE>
<CAPTION>
Three Months Ended September 30, 1997
-------------------------------------
(in thousands)
Mack-Cali
Mack-Cali Property
REVENUES Realty, L.P. Partnerships Eliminations Combined
----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Base rents $ -- $ 52,201 $ (53) $ 52,148
Escalations and recoveries from tenants -- 8,189 (4) 8,185
Management fees from Property Partnerships 1,557 -- (1,557) --
Parking and other 490 1,158 -- 1,648
Interest income 4,784 2 (4,158) 628
----------------------------------------------------------------------------------------------------------------
Total revenues 6,831 61,550 (5,772) 62,609
----------------------------------------------------------------------------------------------------------------
EXPENSES
----------------------------------------------------------------------------------------------------------------
Real estate taxes -- 6,584 -- 6,584
Utilities 6 5,060 (5) 5,061
Operating services 426 6,857 -- 7,283
Management fees to Operating Partnerships -- 1,557 (1,557) --
General and administrative 3,593 134 (52) 3,675
Depreciation and amortization 13 9,326 -- 9,339
Interest expense 3,677 7,960 (943) 10,694
----------------------------------------------------------------------------------------------------------------
Total expenses 7,715 37,478 (2,557) 42,636
----------------------------------------------------------------------------------------------------------------
Income (loss) before equity in net income of
unconsolidated majority-owned Property (884) 24,072 (3,215) 19,973
Partnerships and extraordinary item
Equity in net income of unconsolidated
majority-owned Property Partnerships 24,072 -- (24,072) --
----------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 23,188 24,072 (27,287) 19,973
Extraordinary item - loss on early retirement
of debt (7,200) (6,746) 9,961 (3,985)
----------------------------------------------------------------------------------------------------------------
Net income (loss) available to common
unitholders $ 15,988 $ 17,326 $ (17,326) $ 15,988
================================================================================================================
</TABLE>
Page 30 of 40
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997
------------------------------------
(in thousands)
Mack-Cali
Mack-Cali Property
REVENUES Realty, L.P. Partnerships Eliminations Combined
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Base rents $ -- $ 145,487 $ (159) $ 145,328
Escalations and recoveries from tenants -- 22,475 (11) 22,464
Management fees from Property Partnerships 4,589 -- (4,589) --
Parking and other 1,492 3,753 -- 5,245
Interest income 10,452 4 (8,188) 2,268
-----------------------------------------------------------------------------------------------------------------
Total revenues 16,533 171,719 (12,947) 175,305
-----------------------------------------------------------------------------------------------------------------
EXPENSES
-----------------------------------------------------------------------------------------------------------------
Real estate taxes -- 18,513 -- 18,513
Utilities 15 12,998 (12) 13,001
Operating services 1,665 19,391 -- 21,056
Management fees to Operating Partnerships -- 4,589 (4,589) --
General and administrative 10,339 420 (158) 10,601
Depreciation and amortization 40 25,591 -- 25,631
Interest expense 6,778 26,593 (4,973) 28,398
-----------------------------------------------------------------------------------------------------------------
Total expenses 18,837 108,095 (9,732) 117,200
-----------------------------------------------------------------------------------------------------------------
Income (loss) before equity in net income of
unconsolidated majority-owned Property
Partnerships and extraordinary item (2,304) 63,624 (3,215) 58,105
Equity in net income of unconsolidated
majority-owned Property Partnerships 63,624 -- (63,624) --
-----------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary item 61,320 63,624 (66,839) 58,105
Extraordinary item - loss on early retirement
of debt (7,200) (6,746) 9,961 (3,985)
-----------------------------------------------------------------------------------------------------------------
Net income (loss) available to common
unitholders $ 54,120 $ 56,878 $ (56,878) $ 54,120
=================================================================================================================
</TABLE>
Three Months Ended September 30, 1998 Compared to Three
Months Ended September 30, 1997
Total revenues increased by $68.3 million, or 109.1 percent, for the three
months ended September 30, 1998 over the same period in 1997. Base rents
increased by $60.8 million, or 116.6 percent, of which an increase of $37.1
million, or 71.0 percent, was due to the Mack Properties, an increase of $23.5
million, or 45.1 percent, was attributable to the Acquired Properties, and an
increase of $0.2 million, or 0.5 percent, due to occupancy and rental rate
changes at the Same-Store Properties. Escalations and recoveries increased by
$6.0 million, or 73.3 percent, of which an increase of $3.7 million, or 45.3
percent, was due to the Mack Properties, and an increase of $2.8 million, or
34.7 percent, was attributable to the Acquired Properties, offset by a decrease
of $0.5 million, or 6.7 percent, at the Same-Store Properties. Parking and other
income increased by $1.4 million, or 82.5 percent, of which $0.5 million, or
29.0 percent, was due to the Same-Store Properties, $0.5 million, or 28.3
percent, was attributable to the Mack Properties, $0.3 million, or 19.7 percent,
from equity interests in joint ventures and $0.1 million, or 5.5 percent, was
attributable to the Acquired Properties. Interest income increased by $0.1
million, or 15.9 percent, due primarily to interest received in connection with
the Operating Partnership's $20.0 million mortgage note receivable in 1998.
Total expenses for the three months ended September 30, 1998 increased by $49.2
million, or 115.3 percent, as compared to the same period in 1997. Real estate
taxes increased by $6.9 million, or 104.9 percent, for 1998 over 1997, of which
an increase of $3.6 million, or 55.5 percent, was due to the Mack Properties, an
increase of $2.9 million, or 43.6 percent, was attributable to the Acquired
Properties, and an increase of $0.4 million, or 5.8 percent, attributable to the
Same-Store Properties. Additionally, operating services increased by $8.5
million, or 117.0 percent, and utilities increased by $6.3 million, or 123.3
percent, for 1998 over 1997. The aggregate increase in operating services and
utilities of $14.8 million, or 119.6 percent, consists of an increase of $10.0
million, or 80.8 percent, due to the Mack Properties, and an increase of $5.8
million, or 47.0 percent, attributable to the Acquired Properties, offset by a
decrease of $1.0 million, or 8.2 percent, attributable to the Same-Store
Properties. General and administrative expense increased by $2.4 million, or
66.5 percent, of which $1.8 million, or 48.6 percent, is due primarily to an
increase in payroll and related costs as a result of the Operating Partnership's
expansion, and $0.6 million, or 17.9 percent, due to additional costs related to
the Mack Properties. Depreciation and amortization increased by $11.9 million,
or 127.1 percent, for 1998 over 1997, of which $5.9 million, or 62.9 percent,
was due to the Mack Properties,
Page 31 of 40
<PAGE>
an increase of $5.4 million, or 57.7 percent, relates to depreciation on the
Acquired Properties, and an increase of $0.6 million, or 6.5 percent, due to the
Same-Store Properties. Interest expense increased by $13.2 million, or 123.3
percent, for 1998 over 1997, of which $6.7 million, or 62.8 percent, was due to
assumed mortgages from the Mack Properties, an increase of $6.2 million, or 57.5
percent, due to net additional drawings from the Operating Partnership's credit
facilities as a result of Operating Partnership acquisitions and the $200
million Prudential Term Loan obtained in December 1997, as well as changes in
LIBOR and $0.3 million, or 3.0 percent, was attributable to assumed mortgages on
Acquired Properties.
Net income available to common unitholders increased by $18.9 million for 1998,
from $16.0 million in 1997 to $34.9 million in 1998. This increase was due to
the factors discussed above and an extraordinary item of $4.0 million, related
to early retirement of debt in 1997, partially offset by distributions on
Preferred Units in 1998 of $4.2 million.
Nine Months Ended September 30, 1998 Compared to Nine Months
Ended September 30, 1997
Total revenues increased by $183.5 million, or 104.6 percent, for the nine
months ended September 30, 1998 over the same period in 1997. Base rents
increased by $166.4 million, or 114.5 percent, of which an increase of $109.1
million, or 75.1 percent, was due to the Mack Properties, an increase of $51.5
million, or 35.4 percent, was attributable to the Acquired Properties, an
increase of $5.7 million, or 3.9 percent, due to the RM Properties, and an
increase of $0.1 million, or 0.1 percent, due to occupancy and rental rate
changes at the Same-Store Properties. Escalations and recoveries increased by
$14.5 million, or 64.2 percent, of which an increase of $8.4 million, or 37.3
percent, was due to the Mack Properties, an increase of $6.2 million, or 27.5
percent, was attributable to the Acquired Properties, and an increase of $0.3
million, or 1.2 percent, due to the RM Properties, offset by a decrease of $0.4
million, or 1.8 percent, due to occupancy changes at the Same-Store Properties.
Parking and other income increased by $2.7 million, or 51.0 percent, of which
$1.4 million, or 26.5 percent, was due to the Mack Properties, $0.6 million, or
10.5 percent, was attributable to the Acquired Properties, $0.4 million, or 8.0
percent, from equity interests in joint ventures, an increase of $0.2 million,
or 3.3 percent, due to the RM Properties, and an increase of $0.1 million, or
2.7 percent, due to the Same-Store Properties. Interest income decreased by $0.1
million, or 3.6 percent, due primarily to the use of funds held in 1997 to fund
the RM Transaction, partially offset by interest received in connection with the
Operating Partnership's $20.0 million mortgage note receivable in 1998.
Total expenses for the nine months ended September 30, 1998 increased by $130.5
million, or 111.3 percent, as compared to the same period in 1997. Real estate
taxes increased by $16.9 million, or 91.3 percent, for 1998 over 1997, of which
an increase of $9.4 million, or 51.1 percent, was due to the Mack Properties, an
increase of $5.8 million, or 31.2 percent, was attributable to the Acquired
Properties, an increase of $0.9 million, or 4.9 percent, due to the RM
Properties, and an increase of $0.8 million, or 4.1 percent, attributable to the
Same-Store Properties. Additionally, operating services increased by $23.1
million, or 109.6 percent, and utilities increased by $15.7 million, or 120.9
percent, for 1998 over 1997. The aggregate increase in operating services and
utilities of $38.8 million, or 113.9 percent, consists of an increase of $27.2
million, or 79.9 percent, due to the Mack Properties, an increase of $12.3
million, or 36.0 percent, due to the Acquired Properties, and $0.3 million, or
0.8 percent, attributable to the RM Properties, offset by a decrease of $1.0
million, or 2.8 percent, attributable to the Same-Store Properties. General and
administrative expense increased by $8.1 million, or 76.5 percent, of which $5.9
million, or 56.3 percent, is due primarily to an increase in payroll and related
costs as a result of the Operating Partnership's expansion, $2.1 million, or
19.7 percent, due to additional costs related to the Mack Properties, and $0.1
million, or 0.5 percent, attributable to additional costs related to the RM
Properties. Depreciation and amortization increased by $30.9 million, or 120.6
percent, for 1998 over 1997, an increase of $17.2 million, or 67.1 percent, due
to the Mack Properties, $10.8 million, or 42.3 percent, due to the Acquired
Properties, an increase of $1.6 million, or 6.2 percent, attributable to the RM
Properties, and an increase of $1.3 million, or 5.0 percent, due to the
Same-Store Properties. Interest expense increased by $35.8 million, or 125.9
percent, for 1998 over 1997, of which $18.1 million, or 63.6 percent, was due to
assumed mortgages from the Mack Properties, an increase of $15.7 million, or
55.4 percent, due to net additional drawings from the Operating Partnership's
credit facilities as a result of Operating Partnership acquisitions and the $200
million Prudential Term Loan obtained in December 1997, as well as changes in
LIBOR, $1.1 million, or 3.9 percent, was attributable to the TIAA Mortgage, and
$0.9 million, or 3.0 percent, due to assumed mortgages on Acquired Properties.
Net income available to common unitholders increased by $42.2 million for 1998,
from $54.1 million in 1997 to $96.3 million in 1998. This increase was due to
the factors discussed above and an extraordinary item of $4.0 million, related
to early retirement of debt in 1997, partially offset by distributions on
Preferred Units in 1998 of $12.1 million, and an extraordinary item of $2.7
million, related to early retirement of debt in 1998.
Liquidity and Capital Resources
Statement of Cash Flows
During the nine months ended September 30, 1998, the Operating Partnership
generated $152.2 million in cash flows from operating activities, and together
with $1.5 billion in borrowings from the Operating Partnership's credit
facilities and additional mortgage debt, $284.5 million in net proceeds from
common stock offerings, $20.0 million received from a repayment of a mortgage
note receivable, $5.4 million in proceeds from stock options exercised, and $1.2
million in restricted cash, used an aggregate of approximately $2.0 billion
Page 32 of 40
<PAGE>
to acquire 54 properties and pay for other tenant improvements and building
improvements totaling $666.5 million, repay outstanding borrowings on its credit
facilities and other mortgage debt of $1.1 billion, pay quarterly distributions
of $99.8 million, invest $53.3 million in partially-owned entities, repurchase
694,700 shares of common stock for $20.5 million, provide $20.0 million for a
mortgage note receivable, pay financing costs of $8.3 million, and redeem 20,000
common units for $3.2 million.
Capitalization
On February 25, 1998, the Corporation completed an underwritten public offer and
sale of 2,500,000 shares of its common stock and used the net proceeds, which
totaled approximately $92.2 million (after offering costs) to pay down a portion
of its outstanding borrowings under the Operating Partnership's credit
facilities and fund the acquisition of Mountainview.
On March 18, 1998, in connection with the acquisition of Prudential Business
Campus, the Corporation completed an offer and sale of 2,705,628 shares of its
common stock using the net proceeds of approximately $99.9 million (after
offering costs) in the funding of such acquisition.
On March 26, 1998, in connection with the Pacifica I Acquisition, the Operating
Partnership issued 100,175 common units, valued at approximately $3.8 million.
On March 27, 1998, the Corporation completed an underwritten public offer and
sale of 650,407 shares of its common stock and used the net proceeds, which
totaled approximately $23.7 million (after offering costs) to pay down a portion
of its outstanding borrowings under the Operating Partnership's credit
facilities.
On April 29, 1998, the Corporation completed an underwritten offer and sale of
994,228 shares of its common stock and used the net proceeds, which totaled
approximately $34.6 million (after offering costs) primarily to pay down a
portion of its outstanding borrowings under the Operating Partnership's credit
facilities.
On April 30, 1998, in connection with the acquisition of a 49.9 percent interest
in the Convention Plaza joint venture, the Operating Partnership issued 218,105
common units, valued at approximately $8.3 million.
On May 29, 1998, the Corporation completed an underwritten offer and sale of
984,615 shares of its common stock and used the net proceeds, which totaled
approximately $34.1 million (after offering costs) primarily to pay down a
portion of its outstanding borrowings under the Operating Partnership's credit
facilities.
On June 8, 1998, in connection with the Pacifica II Acquisition, the Operating
Partnership issued 585,263 common units, valued at approximately $20.8 million.
On July 20, 1998, in connection with the expansion of one of the Mack
Properties, the Operating Partnership issued 52,245 common units, valued at
approimately $1.6 million.
On September 10, 1998, in connection with the acquisition of 40 Richards Avenue,
the Operating Partnership issued 414,114 common units, valued at approximately
$12.6 million.
During the nine months ended September 30, 1998, the Operating Partnership also
issued 1,264,067 common units and 19,694 preferred units, valued at
approximately $65.4 million, in connection with the achievement of certain
performance goals at the Mack Properties, in redemption of an equivalent number
of Contingent Units being redeemed.
The proceeds of the above offerings were contributed by the Corporation to the
Operating Partnership in exchange for units.
On August 6, 1998, the Board of Directors of the Corporation authorized a share
repurchase program ("Repurchase Program") under which the Corporation was
permitted to purchase up to $100.0 million of the Corporation's common stock.
Purchases could be made from time to time in open market transactions at
prevailing prices or through privately negotiated transactions. Subsequently,
through November 3, 1998, the Corporation purchased, for constructive
retirement, 797,700 shares of its outstanding common stock for an aggregate cost
of approximately $23.4 million. Concurrent with this purchase, the Corporation
sold to the Operating Partnership 797,700 common units for approximately $23.4
million.
On April 17, 1998, the Operating Partnership repaid in full and terminated its
$400 million unsecured revolving credit facility and obtained a new unsecured
revolving credit facility (the "1998 Unsecured Facility") in the amount of
$870.0 million from a group of 25 lender banks, led by The Chase Manhattan Bank
and Fleet National Bank. In July 1998, the 1998 Unsecured Facility was expanded
to $900.0 million with the addition of two new lender banks into the facility,
bringing the total number of participants to 27 banking institutions. The 1998
Unsecured Facility has a three-year term and currently bears interest at 110
basis points over LIBOR, a reduction of 15 basis points from the retired
Original Unsecured Facility. Based upon the Operating Partnership's achievement
of an
Page 33 of 40
<PAGE>
investment grade unsecured debt rating, the interest rate will be reduced, on a
sliding scale, and a competitive bid option will become available.
The terms of the 1998 Unsecured Facility include certain restrictions and
covenants which limit, among other things, the payment of dividends (as
discussed below), the incurrence of additional indebtedness, the incurrence of
liens and the disposition of assets, and which require compliance with financial
ratios relating to the maximum leverage ratio, the maximum amount of secured
indebtedness, the minimum amount of tangible net worth, the minimum amount of
debt service coverage, the minimum amount of fixed charge coverage, the maximum
amount of unsecured indebtedness, the minimum amount of unencumbered property
debt service coverage and certain investment limitations. The dividend
restriction referred to above provides that, except to enable the Corporation to
continue to qualify as a REIT under the Code, the Corporation will not during
any four consecutive fiscal quarters make distributions with respect to common
stock or other equity interests in an aggregate amount in excess of 90 percent
of funds from operations for such period, subject to certain other adjustments.
The 1998 Unsecured Facility also requires a 17.5 basis point fee on the unused
balance payable quarterly in arrears.
The lending group for the 1998 Unsecured Facility consists of: The Chase
Manhattan Bank, as administrative agent; Fleet National Bank, as syndication
agent; PNC Bank, N.A., as documentation agent; Bankers Trust, Commerzbank, AG,
The First National Bank of Chicago, First Union National Bank and NationsBank,
as managing agents; Creditanstalt Corporate Finance, Inc., Dresdner Bank, AG,
European American Bank, Hypo Bank, Societe Generale and Summit Bank, as
co-agents; and Kredietbank, N.V., Key Bank, Mellon Bank, N.A., The Bank of New
York, Citizens Bank, Crestar, DG Bank, Tokai Bank, US Trust, Bayerische
Landesbank, Erste Bank, Bank Leumi USA, and Bank One, Arizona, N.A.
The new unsecured facility, together with the Operating Partnership's
previously-existing $100.0 million revolving credit facility with Prudential
Securities Corp., provides the Operating Partnership with total borrowing
capacity of $1.0 billion.
On April 30, the Operating Partnership obtained a $150.0 million, interest-only,
non-recourse mortgage loan from The Prudential Insurance Company of America
("$150.0 Million Prudential Mortgage Loan"). The loan, which is secured by 12 of
the Operating Partnership's properties, has an effective annual interest rate of
7.10 percent and a seven-year term. The Operating Partnership, at its option,
may convert the mortgage loan to unsecured debt upon achievement by the
Operating Partnership of a credit rating of Baa3/BBB- or better. The mortgage
loan is prepayable in whole or in part subject to certain provisions, including
yield maintenance. The proceeds of the new loan were used, along with funds
drawn from one of the Operating Partnership's credit facilities, to retire a
$200.0 million term loan with Prudential, as well as approximately $48.2 million
of the Other Mortgages.
As of September 30, 1998, the Operating Partnership has 169 unencumbered
properties, totaling 17.0 million square feet, representing 61.4 percent of the
Operating Partnership's total portfolio on a square footage basis.
The Corporation and the Operating Partnership filed a registration statement for
an aggregate of $2.0 billion in debt securities, preferred stock and preferred
stock represented by depositary shares. On September 25, 1998, the registration
statement was declared effective by the SEC.
Historically, rental revenue has been the principal source of funds to pay
operating expenses, debt service and capital expenditures, excluding
non-recurring capital expenditures. Management believes that the Operating
Partnership will have access to the capital resources necessary to expand and
develop its business. To the extent that the Operating Partnership's cash flow
from operating activities is insufficient to finance its non-recurring capital
expenditures such as property acquisition costs and other capital expenditures,
the Operating Partnership expects to finance such activities through borrowings
under its credit facilities and other debt and equity financing.
The Operating Partnership expects to meet its short-term liquidity requirements
generally through its working capital and net cash provided by operating
activities, along with the Prudential Facility and the 1998 Unsecured Facility.
The Operating Partnership is frequently examining potential property
acquisitions and, at any one given time, one or more of such acquisitions may be
under consideration. Accordingly, the ability to fund property acquisitions is a
major part of the Operating Partnership's financing requirements. The Operating
Partnership expects to meet its financing requirements through funds generated
from operating activities, long-term or short term borrowings (including draws
on the Operating Partnership's credit facilities) and the issuance of debt
securities or additional equity securities. In addition, the Operating
Partnership anticipates utilizing the Prudential Facility and the 1998 Unsecured
Facility primarily to fund property acquisition activities.
The Operating Partnership does not intend to reserve funds to retire the
existing TIAA mortgage, Harborside mortgages, $150.0 Million Prudential Mortgage
Loan, its various other property mortgages, and borrowings under the revolving
credit facilities or other long-term mortgages and loans payable upon maturity.
Instead, the Operating Partnership will seek to refinance such debt at maturity
or retire such debt through the issuance of additional equity or debt
securities. The Operating Partnership anticipates that its available cash and
cash equivalents and cash flows from operating activities, together with cash
available from borrowings and other sources, will be adequate to meet the
Operating Partnership's capital and liquidity needs both in the short and
long-term. However, if these sources of funds are
Page 34 of 40
<PAGE>
insufficient or unavailable, the Operating Partnership's ability to make the
expected distribution discussed below may be adversely affected.
To maintain its qualification as a REIT, the Corporation must make annual
distributions to its stockholders of at least 95 percent of its REIT taxable
income, determined without regard to the dividends paid deduction and by
excluding net capital gains. The Cororation currently relies on the
distributions it receives from the Operating Partnership to make its
distributions to its stockholders. Moreover, the Operating Partnership intends
to continue to make regular quarterly distributions to its unitholders which,
based upon current policy, in the aggregate would equal approximately $125.8
million on an annualized basis. However, any such distribution would only be
paid out of available cash after meeting operating requirements, scheduled debt
service on mortgages and loans payable, and preferred unit distributions.
Funds from Operations
The Operating Partnership considers funds from operations ("FFO"), after
adjustment for straight-lining of rents, one measure of REIT performance. Funds
from operations is defined as net income (loss) before distribution to preferred
unitholders, computed in accordance with generally accepted accounting
principles ("GAAP"), excluding gains (or losses) from debt restructuring, other
extraordinary and significant non-recurring items, and sales of property, plus
real estate-related depreciation and amortization. Funds from operations should
not be considered as an alternative to net income as an indication of the
Operating Partnership's performance or to cash flows as a measure of liquidity.
Funds from operations presented herein is not necessarily comparable to funds
from operations presented by other real estate companies due to the fact that
not all real estate companies use the same definition. However, the Operating
Partnership's funds from operations is comparable to the funds from operations
of real estate companies that use the current definition of the National
Association of Real Estate Investment Trusts ("NAREIT"), after the adjustment
for straight-lining of rents.
NAREIT's definition of funds from operations indicates that the calculation
should be made before any extraordinary item (determined in accordance with
GAAP), and before any deduction of significant non-recurring events that
materially distort the comparative measurement of the Operating Partnership's
performance.
Funds from operations for the three and nine month periods ended September 30,
1998 and 1997, as calculated in accordance with NAREIT's definition as published
in March 1995, are summarized in the following table (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Income before distribution to preferred unitholders
and extraordinary item $ 39,087 $ 23,188 $ 111,107 $ 61,320
Add: Real estate-related depreciation and
amortization (1) 21,520 9,327 56,850 25,592
Deduct: Rental income adjustment for
straight-lining of rents (1) (3,355) (1,969) (9,700) (5,913)
- ---------------------------------------------------------------------------------------------------------------------------
Funds from operations, after adjustment
for straight-lining of rents, before distributions
to preferred unitholders $ 57,252 $ 30,546 $ 158,257 $ 80,999
Deduct: Distributions to preferred unitholders (4,194) -- (12,090) --
- ---------------------------------------------------------------------------------------------------------------------------
Funds from operations, after adjustment for
straight-lining of rents, after distributions
to preferred unitholders $ 53,058 $ 30,546 $ 146,167 $ 80,999
===========================================================================================================================
Cash flows provided by operating activities $ 152,211 $ 62,694
Cash flows used in investing activities $(718,673) $(412,547)
Cash flows provided by financing activities $ 570,612 $ 148,155
- ---------------------------------------------------------------------------------------------------------------------------
Basic weighted average units outstanding (2) 65,577 40,547 62,580 40,406
- ---------------------------------------------------------------------------------------------------------------------------
Diluted weighted average units outstanding (2) 73,044 41,222 69,983 40,953
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes FFO adjustments in 1998 related to the Operating Partnership's
investments in partially-owned entitites and in 1997, investments in
unconsolidated majority-owned property partnerships.
(2) See calculations for the amounts presented in the reconciliation below.
Page 35 of 40
<PAGE>
The following schedule reconciles the Operating Partnership's basic weighted
average units to the diluted weighted average units presented above:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic weighted average units: 65,577 40,547 62,580 40,406
Add: Weighted average preferred units 7,160 -- 6,890 --
(after conversion to common units)
Stock options 307 636 455 534
Stock warrants -- 39 58 13
- ----------------------------------------------------------------------------------------------------------------------
Diluted weighted average units: 73,044 41,222 69,983 40,953
======================================================================================================================
</TABLE>
Inflation
The Operating Partnership's leases with the majority of its tenants provide for
recoveries and escalation charges based upon the tenant's proportionate share
of, and/or increases in, real estate taxes and certain operating costs, which
reduce the Operating Partnership's exposure to increases in operating costs
resulting from inflation.
Year 2000
General
The Year 2000 issue is the result of computer programs and embedded chips using
a two-digit format, as opposed to four digits, to indicate the year. Such
computer systems may be unable to interpret dates beyond the year 1999, which
could cause a system failure or other computer errors, leading to disruptions in
operations. The Operating Partnership has developed a three-phase Year 2000
project (the "Project") to determine its Year 2000 systems compliance. Phase I
is to identify those systems with which the Operating Partnership has exposure
to Year 2000 issues. Phase II is the development and implementation of action
plans to be Year 2000 compliant in all areas by early 1999. Phase III, to be
completed by mid-1999 is the final testing of each major area of exposure to
assure compliance. The Operating Partnership has identified three major areas
determined to be critical for successful Year 2000 compliance: (i) the Operating
Partnership's central accounting and operating computer system at its Cranford,
New Jersey headquarters and local networks and related systems in its regional
offices in Dallas, Texas and Elmsford, New York, (ii) inquiries of its tenants
and key vendors as to their Year 2000 compliance and (iii) assessment of its
individual buildings as to the Year 2000 compliance of their operating systems.
The Operating Partnership believes that progress in all such areas is proceeding
on schedule and that there will be no material adverse effect on the Operating
Partnership as a result of the Year 2000 issue. There can, however, be no
assurance that this will be the case. Set forth below is a more detailed
analysis of the Project and its impact on the Operating Partnership.
Central Accounting and Operating Computer Systems
The Company has completed a review of key computer hardware and software and
other equipment, and believes it has upgraded or replaced all identified
hardware and equipment in its corporate and regional offices that it believes
may be affected by problems associated with Year 2000. The Company's software
supplier of its accounting system is currently completing its Year 2000 upgrade
and is scheduled to supply the Company with Year 2000 compliant software by
March 31, 1999 at no cost to the Company. The Company is reasonably confident
that such software will be delivered as indicated. The Company anticipates
testing to be completed by June 1999. The Company also expects that all
identified secondary software systems will be compliant by June 1999.
Tenant Compliance
The Operating Partnership sent questionnaires to each of its then existing
tenants in August 1998 to assess their Year 2000 compliance status in order to
determine whether the orderly payment of monthly rent to the Operating
Partnership will be adversely affected. The responses to these questionnaires
are in the process of being received, reviewed and evaluated. The Operating
Partnership is, therefore, not yet in a position to evaluate the full impact of
tenant non-compliance on the timely payment of monthly rent and other tenant
obligations.
Property Compliance
The Operating Partnership's property managers have completed a building by
building survey of all of the Operating Partnership's properties to determine
whether building support systems such as heat, power, light, security, garages
and elevators will be affected by the advent of the Year 2000. Most of such
systems either are already Year 2000 compliant or contain no computerized parts.
The Operating Partnership is relying on assurances requested from utility
providers of their Year 2000 compliance and their continued ability to provide
uninterrupted service to the Operating Partnership's buildings. The Operating
Partnership anticipates approximately $1.0 million in costs will be incurred to
upgrade and/or replace identified building support systems.
Page 36 of 40
<PAGE>
Worst Case Exposure
We are aware that it is generally believed that the Year 2000 problem, if
uncorrected, may result in a worldwide economic crisis. We are unable to
determine whether such predictions are true or false. However, if such
predictions prove true, we assume that all companies (including ours) will
experience the effects in one way or another.
The most reasonably likely worst case scenario the Operating Partnership
anticipates in connection with the Year 2000 issue relates to the failure of the
upgrade to the Operating Partnership's accounting system to effectively become
Year 2000 compliant. The Operating Partnership believes that such an event is
unlikely, but an occurrence of the foregoing would have a material adverse
impact on the Operating Partnership's operations. The Operating Partnership
cannot currently assess the financial impact of such a worst case scenario.
Contingency Plans
As part of the Project, the Operating Partnership is currently developing
contingency plans, which are expected to be completed during 1999.
Risks
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Operating
Partnership's results of operations, liquidity and financial condition. Due to
the general uncertainty inherent in the Year 2000 problem, resulting in part
from the uncertainty of the Year 2000 readiness of third-party vendors and
tenants, the Operating Partnership is unable to determine at this time whether
the consequences of Year 2000 failures will have a material impact on the
Operating Partnership's results of operations, liquidity or financial condition.
The Project is expected to significantly reduce the Operating Partnership's
level of uncertainty about the Year 2000 problem. The Operating Partnership
believes that, with the implementation and completion of the Project as
scheduled, the possibility of significant interruptions of normal operations
should be reduced.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
Page 37 of 40
<PAGE>
MACK-CALI REALTY, L.P.
Part II -- Other Information
Item 1. Legal Proceedings
Reference is made to "Other Contingencies" in Note 13 (Commitments and
Contingencies) to the Consolidated Financial Statements, which is
specifically incorporated by reference herein.
Item 2. Changes in Securities and Use of Proceeds
(c) Reference is made to the eighth, ninth and tenth paragraphs under
"Common Units" and "Contingent Common and Preferred Units" in Note
11 (Redeemable Partnership Units) to the Consolidated Financial
Statements, which are specifically incorporated by reference herein.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Page 38 of 40
<PAGE>
MACK-CALI REALTY, L.P.
Part II -- Other Information (continued)
Item 5. Other Information
A recent change in the proxy rules of the Securities and Exchange
Commission limits the circumstances under which the proxy voting card
distributed by registered companies to their shareholders may permit those
companies to cast the votes represented by the proxy voting cards in their
sole discretion. As applied to the Corporation, the most important
limitation is as follows: For proposals made by a shareholder at the 1999
annual meeting that were not properly submitted by the shareholder for
inclusion in the Corporation's own proxy materials, the Corporation may
vote proxies in its discretion about those proposals only if it has not
received notice from the shareholder by February 14, 1999 at the latest
that the shareholder intends to make those proposals at the meeting.
Page 39 of 40
<PAGE>
MACK-CALI REALTY, L.P.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Mack-Cali Realty, L.P.
------------------------------------
(Registrant)
By: Mack-Cali Realty Corporation, as its
General Partner
Date: November 16, 1998 /s/ Thomas A. Rizk
------------------------------------
Thomas A. Rizk
Chief Executive Officer
/s/ Barry Lefkowitz
------------------------------------
Date: November 16, 1998 Barry Lefkowitz
Executive Vice President &
Chief Financial Officer
Page 40 of 40
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 12,531
<SECURITIES> 0
<RECEIVABLES> 7,332
<ALLOWANCES> 1,012
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 3,427,710
<DEPRECIATION> 156,867
<TOTAL-ASSETS> 3,424,899
<CURRENT-LIABILITIES> 0
<BONDS> 1,406,039
0
0
<COMMON> 0
<OTHER-SE> 1,912,051
<TOTAL-LIABILITY-AND-EQUITY> 3,424,899
<SALES> 0
<TOTAL-REVENUES> 358,758
<CGS> 0
<TOTAL-COSTS> 164,797
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64,146
<INCOME-PRETAX> 111,107
<INCOME-TAX> 0
<INCOME-CONTINUING> 111,107
<DISCONTINUED> 0
<EXTRAORDINARY> 2,670
<CHANGES> 0
<NET-INCOME> 108,437
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.53
</TABLE>
