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 Corporation
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Maryland 22-3305147
- ------------------------------- ----------------------
(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 |X| NO |_|
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of November 3, 1998, there were 57,180,697 shares of $0.01 par value common
stock outstanding.
<PAGE>
MACK-CALI REALTY CORPORATION
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 Stockholders'
Equity 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 - 25
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ............. 26 - 32
Item 3. Quantitative and Qualitative Disclosures about Market
Risk ............................................ 32
Part II Other Information and Signatures
Item 1. Legal Proceedings ................................... 33
Item 2. Changes in Securities and Use of Proceeds............ 33
Item 3. Defaults Upon Senior Securities...................... 33
Item 4. Submission of Matters to a Vote of Security Holders.. 33
Item 5. Other Information.................................... 34
Item 6. Exhibits .................................... 35
Signatures .................................... 36
Page 2 of 36
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MACK-CALI REALTY CORPORATION
Part I - Financial Information
Item I: Financial Statements
The accompanying unaudited consolidated balance sheets, statements of
operations, of changes in stockholders' equity, 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 Company's
Annual Report on Form 10-K and Form 10-K/A 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 36
<PAGE>
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts)
================================================================================
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Rental property
Land and leasehold interests $ 505,278 $ 374,242
Buildings and improvements 2,854,710 2,206,462
Tenant improvements 62,609 44,596
Furniture, fixtures and equipment 5,113 4,316
- ------------------------------------------------------------------------------------------
3,427,710 2,629,616
Less - accumulated depreciation and amortization (156,867) (103,133)
- ------------------------------------------------------------------------------------------
Total rental property 3,270,843 2,526,483
Cash and cash equivalents 6,854 2,704
Investments in partially-owned entities 62,079 --
Unbilled rents receivable 37,041 27,438
Deferred charges and other assets, net 36,085 18,989
Restricted cash 5,677 6,844
Accounts receivable, net of allowance for doubtful accounts
of $1,012 and $327 6,320 3,736
Mortgage note receivable -- 7,250
- ------------------------------------------------------------------------------------------
Total assets $ 3,424,899 $ 2,593,444
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------
Mortgages and loans payable $ 1,406,039 $ 972,650
Dividends and distributions payable 40,059 28,089
Accounts payable and accrued expenses 35,323 31,136
Rents received in advance and security deposits 29,100 21,395
Accrued interest payable 2,327 3,489
- ------------------------------------------------------------------------------------------
Total liabilities 1,512,848 1,056,759
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Minority interest of unitholders in Operating Partnership 487,640 379,245
- ------------------------------------------------------------------------------------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, 5,000,000 shares authorized, none issued -- --
Common stock, $0.01 par value, 190,000,000 shares authorized,
57,281,697 and 49,856,289 shares outstanding 573 499
Additional paid-in capital 1,514,963 1,244,883
Dividends in excess of net earnings (91,125) (87,942)
- ------------------------------------------------------------------------------------------
Total stockholders' equity 1,424,411 1,157,440
- ------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 3,424,899 $ 2,593,444
==========================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 4 of 36
<PAGE>
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share 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 $ 52,148 $ 311,753 $ 145,328
Escalations and recoveries from tenants 14,182 8,185 36,897 22,464
Parking and other 3,008 1,648 7,921 5,245
Interest income 728 628 2,187 2,268
- ----------------------------------------------------------------------------------------------------------------------------------
Total revenues 130,894 62,609 358,758 175,305
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EXPENSES
- ----------------------------------------------------------------------------------------------------------------------------------
Real estate taxes 13,488 6,584 35,415 18,513
Utilities 11,300 5,061 28,717 13,001
Operating services 15,807 7,283 44,128 21,056
General and administrative 6,118 3,675 18,708 10,601
Depreciation and amortization 21,213 9,339 56,537 25,631
Interest expense 23,881 10,694 64,146 28,398
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Total expenses 91,807 42,636 247,651 117,200
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Income before minority interest
and extraordinary item 39,087 19,973 111,107 58,105
Minority interest 8,375 2,015 23,464 5,663
- ----------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary item 30,712 17,958 87,643 52,442
Extraordinary item - loss on early retirement of debt
(net of minority interest's share of $297 in 1998 and
$402 in 1997) -- 3,583 2,373 3,583
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 30,712 $ 14,375 $ 85,270 $ 48,859
==================================================================================================================================
Net income per share - Basic:
Income before extraordinary item $ 0.53 $ 0.49 $ 1.58 $ 1.44
Extraordinary item - loss on early
retirement of debt -- (0.10) (0.04) (0.10)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.53 $ 0.39 $ 1.54 $ 1.34
==================================================================================================================================
Net income per share - Diluted:
Income before extraordinary item $ 0.53 $ 0.49 $ 1.57 $ 1.42
Extraordinary item - loss on early
retirement of debt -- (0.10) (0.04) (0.10)
- ----------------------------------------------------------------------------------------------------------------------------------
Net income $ 0.53 $ 0.39 $ 1.53 $ 1.32
==================================================================================================================================
Dividends declared per common share $ 0.55 $ 0.50 $ 1.55 $ 1.40
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - basic 57,720 36,457 55,391 36,469
- ----------------------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding - diluted 65,884 41,421 63,093 41,152
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 5 of 36
<PAGE>
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (in thousands)
================================================================================
<TABLE>
<CAPTION>
Retained
Earnings
Additional (Dividends in Total
Common Stock Paid-In Excess of Stockholders'
Shares Par Value Capital Net Earnings) Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 49,856 $ 499 $ 1,244,883 $(87,942) $ 1,157,440
Net income -- -- -- 85,270 85,270
Dividends -- -- -- (88,453) (88,453)
Net proceeds from common stock offerings 7,835 78 284,375 -- 284,453
Conversion of common units to shares of
common stock 22 -- 848 -- 848
Proceeds from stock options exercised 263 3 5,375 -- 5,378
Repurchase of common stock (694) (7) (20,518) -- (20,525)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1998 57,282 $ 573 $ 1,514,963 $(91,125) $ 1,424,411
==============================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 6 of 36
<PAGE>
MACK-CALI REALTY CORPORATION 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 $ 85,270 $ 48,859
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 56,537 25,631
Amortization of stock compensation -- 1,613
Amortization of deferred financing costs 1,122 723
Minority interest 23,464 5,663
Extraordinary item - loss on early retirement of debt 2,373 3,583
Changes in operating assets and liabilities:
Increase in unbilled rents receivable (9,603) (5,912)
Increase in deferred charges and other assets, net (15,098) (11,214)
Increase in accounts receivable, net (2,584) (3,563)
Increase in accounts payable and
accrued expenses 4,187 10,510
Increase in rents received in advance and
security deposits 7,705 6,306
(Decrease) increase in accrued interest payable (1,162) 753
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities $ 152,211 $ 82,952
=======================================================================================================
CASH FLOWS FROM INVESTING ACTIVITIES
- -------------------------------------------------------------------------------------------------------
Additions to rental property $ (666,513) $ (357,043)
Issuance of mortgage note receivable (20,000) (11,600)
Repayment of mortgage note receivable 20,000 --
Investments in partially-owned entities (53,327) --
Decrease in restricted cash 1,167 2,763
- -------------------------------------------------------------------------------------------------------
Net cash used in investing activities $ (718,673) $ (365,880)
=======================================================================================================
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) (270,693)
Debt prepayment premiums and other costs -- (1,812)
Repurchase of common stock (20,525) (4,680)
Redemption of common units (3,163) --
Payment of financing costs (8,347) --
Net proceeds from common stock offerings 284,453 --
Proceeds from stock options exercised 5,378 2,713
Payment of dividends and distributions (99,760) (54,078)
- -------------------------------------------------------------------------------------------------------
Net cash provided by financing activities $ 570,612 $ 81,530
=======================================================================================================
Net increase (decrease) in cash and cash equivalents $ 4,150 $ (201,398)
Cash and cash equivalents, beginning of period $ 2,704 $ 204,807
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 6,854 $ 3,409
=======================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
Page 7 of 36
<PAGE>
MACK-CALI REALTY CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per share/unit amounts)
================================================================================
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization
Mack-Cali Realty Corporation (formerly Cali Realty Corporation), a Maryland
corporation, and subsidiaries (the "Company"), is a fully-integrated,
self-administered, self-managed real estate investment trust ("REIT") providing
leasing, management, acquisition, development, construction and tenant-related
services for its portfolio of properties. As of September 30, 1998, the
Company'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
Company and its majority-owned subsidiaries, which consist principally of
Mack-Cali Realty, L.P. (the "Operating Partnership"). See Investments in
Partially-Owned Entities in Note 2 for the Company's treatment of unconsolidated
partnership interests. All significant intercompany accounts and transactions
have been eliminated.
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.
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.
Page 8 of 36
<PAGE>
Investments in
Partially-Owned
Entities The Company accounts for its investments in partially-owned
entities under the equity method of accounting as the Company
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 4).
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 $723 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
of the Operating Partnership 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 $335 for the three months
ended September 30, 1998 and 1997, respectively, and $1,825
and $875 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 12).
Income and
Other Taxes The Company has elected to be taxed as a REIT under Sections
856 through 860 of the Internal Revenue Code of 1986, as
amended (the "Code"). As a REIT, the Company generally will
not be subject to federal income tax to the extent it
distributes at least 95 percent of its REIT taxable income to
its shareholders and satisfies certain other requirements.
REITs are subject to a number of organizational and
operational requirements. If the Company fails to qualify as a
REIT in any taxable year, the Company will be subject to
federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate tax
rates. The Company is subject to certain state and local
taxes.
Interest Rate
Contracts Interest rate contracts are utilized by the Company to reduce
interest rate risks. The Company 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
Page 9 of 36
<PAGE>
deferred and amortized to interest expense over the remaining
life of the associated debt to the extent that such debt
remains outstanding.
Earnings
Per Share In accordance with the Statement of Financial Accounting
Standards No. 128 ("FASB No. 128"), the Company presents both
basic and diluted earnings per share ("EPS"). Basic EPS
excludes dilution and is computed by dividing net income
available to common stockholders by the weighted average
number of shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities
or other contracts to issue common stock were exercised or
converted into common stock, where such exercise or conversion
would result in a lower EPS amount.
Dividends and
Distributions
Payable The dividends and distributions payable at September 30, 1998
represents dividends payable to shareholders of record on
October 5, 1998 (57,281,697 shares), distributions payable to
minority interest common unitholders (8,626,266 common units)
on that same date and preferred distributions to preferred
unitholders (250,256 preferred units) for the third quarter
1998. The third quarter 1998 dividends and common unit
distributions of $0.55 per share and 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 Board of Directors 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 Company's stock offerings are reflected as a reduction of
additional paid-in-capital.
Stock Options The Company 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 Company'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 Company's policy is to
grant options with an exercise price equal to the quoted
closing market price of the Company's stock on the business
day preceding the grant date. Accordingly, no compensation
cost has been recognized for the Company's stock option plans.
See Note 13.
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 Company 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 Company'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 Company was granted a three-year
option to acquire two properties (the "Option Properties"), under certain
conditions, which were subsequently acquired by the Company in August 1997 and
Page 10 of 36
<PAGE>
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 Company in conjunction with the RM Transaction in
1997. Such mortgage note receivable was subsequently repaid in connection with
the Company's acquisitions of the Option Properties.
On December 11, 1997, the Company 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 Company's cash reserves and from the $200,000
Prudential Term Loan (see Note 8), (ii) $291,879 in debt assumed by the Company
(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 9).
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 Company 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 Company's
credit facilities.
On January 23, 1998, the Company acquired 10 acres of vacant land in the
Stamford Executive Park, located in Stamford, Fairfield County, Connecticut for
approximately $1,341, funded from the Company's cash reserves. The vacant land,
on which the Company 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 Company 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 Company 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
Company is under contract to acquire an additional four office/flex properties
in the same locations. The Company also obtained an option to purchase a
property for approximately $3,700, which was subsequently acquired by the
Company on July 14, 1998. The purchase contract also provides the Company 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 Company'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 Company 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 Company's credit facilities. The Company is
currently redeveloping the property for future lease-up and operation.
On February 5, 1998, the Company 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
Page 11 of 36
<PAGE>
approximately $20,125, funded from drawing on one of the Company's credit
facilities, as well as 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 Company 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 Company's
February 1998 offering of common stock (see Note 13).
On March 12, 1998, the Company 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 Company's credit facilities.
On March 27, 1998, the Company 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
Company's cash reserves (provided in part from the proceeds received from the
sale of 2,705,628 shares of the Company'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
13) and from drawing on one of the Company's credit facilities.
Also, on March 27, 1998, the Company 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 Company's credit
facilities and the issuance of common units (see Note 9). 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 Company 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 Company's credit facilities and the issuance of
common units (see Note 9). The Company 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 Company, was an indirect
owner of an interest in certain of the buildings contained in the Pacifica
portfolio.
On March 30, 1998, the Company 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 Company's credit facilities.
On May 13, 1998, the Company 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 Company's credit facilities.
On May 14, 1998, the Company 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 Company's cash
reserves. Subsequently, on August 20, 1998, the Company 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 4).
On May 22, 1998, the Company 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 Company'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 12 of 36
<PAGE>
On June 1, 1998, the Company 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 Company 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 Company's credit facilities.
Subsequently, on July 16, 1998, the Company 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 Company's credit facilities.
On June 3, 1998, the Company 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 Company's credit facilities.
On June 8, 1998, the Company completed construction of Two Center Court, a
30,600 square-foot office/flex building, located in the Company'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 Company 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 Company's credit facilities. As previously
mentioned, the property was acquired through the Company'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 Company acquired 40 Richards Avenue, a 146,000
square-foot office building, located in Norwalk, Fairfield County, Connecticut.
The Company acquired the property for a total cost of approximately $19,444,
which was funded through the issuance of common units (see Note 9) and from the
Company's cash reserves.
On September 15, 1998, the Company 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 Company's cash reserves, net of the repayment by the seller
of the remaining balance of the RM Note Receivable (see Note 7).
4. INVESTMENTS IN PARTIALLY-OWNED ENTITIES
On March 27, 1998, the Company 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 Company 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 Company is required to
make capital contributions to the venture totaling up to $19,200, pursuant to
the partnership agreement. Through September 30, 1998, the Company has invested
approximately $12,814 in the venture. Amongst other things, the partnership
agreement provides for a preferred return on the Company's invested capital in
the venture, in addition to the Company's proportionate share of the venture's
profit, as defined in the agreement.
On April 30, 1998, the Company 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
Company acquired its interest in the venture for a total initial investment of
approximately $11,818, through the issuance of common units (see Note 9) and
funds drawn from the Company's credit facilities.
On May 20, 1998, the Company 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
Page 13 of 36
<PAGE>
on the Hudson River waterfront in Jersey City, Hudson County, New Jersey,
adjacent to the Company's Harborside property. The Company 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 Company's invested capital in the venture, in
addition to the Company's proportionate share of the venture's profit, as
defined in the agreement. The joint venture has acquired land 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 Company entered into a second joint 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 Company is required to make capital
contributions to the venture totaling up to $5,600, pursuant to the partnership
agreement. Through September 30, 1998, the Company has invested approximately
$2,727 in the venture. Amongst other things, the partnership agreement provides
for a preferred return on the Company's invested capital in the venture, in
addition to the Company's proportionate share of the venture's profit, as
defined in the agreement.
On August 20, 1998, the Company 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 Company has
invested approximately $3,749 in the joint venture through September 30, 1998,
and holds a 50 percent interest.
On September 18, 1998, the Company 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 Company 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 Company 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 Company has investment interests (from the
date of the Company's initial investment through the end of the period for
existing joint ventures) for the three and nine month periods ended September
30, 1998:
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
- --------------------------------------------------------------------------------
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
================================================================================
Company's share of net income $ 323 $ 419
- --------------------------------------------------------------------------------
Page 14 of 36
<PAGE>
5. DEFERRED CHARGES AND OTHER ASSETS
September 30, December 31,
1998 1997
- --------------------------------------------------------------------------------
Deferred leasing costs $ 30,331 $ 20,297
Deferred financing costs 8,203 3,640
- --------------------------------------------------------------------------------
38,534 23,937
Accumulated amortization (12,061) (9,535)
- --------------------------------------------------------------------------------
Deferred charges, net 26,473 14,402
Prepaid expenses and other assets 9,612 4,587
- --------------------------------------------------------------------------------
Total deferred charges and other assets, net $ 36,085 $ 18,989
================================================================================
6. RESTRICTED CASH
Restricted cash includes security deposits for the Company'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 $ 1,278
Security deposits 5,358 5,566
- --------------------------------------------------------------------------------
Total restricted cash $ 5,677 $ 6,844
================================================================================
7. MORTGAGE NOTE RECEIVABLE
In connection with the RM Transaction on January 31, 1997, the Company 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 Company 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
Company 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
Company received a prepayment fee of $200 with the retirement of the mortgage
loan.
8. MORTGAGES AND LOANS PAYABLE
September 30, December 31,
1998 1997
- --------------------------------------------------------------------------------
Prudential Mortgages $ 210,744 $262,205
TIAA Mortgage 185,283 185,283
Harborside Mortgages 150,000 150,000
Mitsubishi Mortgages 72,204 72,204
CIGNA Mortgages 47,359 86,650
Other Mortgages 78,815 88,474
Revolving Credit Facilities 655,588 122,100
Contingent Obligation 6,046 5,734
- --------------------------------------------------------------------------------
Total mortgages and loans payable $1,406,039 $972,650
================================================================================
Page 15 of 36
<PAGE>
PRUDENTIAL MORTGAGES
The Company has mortgage debt from The Prudential Insurance Company of America
and its subsidiaries (the "Prudential Mortgages") aggregating $210,744 and
$262,205 as of September 30, 1998 and December 31, 1997, respectively, comprised
of the following:
The Company 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 Company 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 Company and located in
New Jersey. The Prudential Term Loan was retired in April 1998, simultaneous
with the Company 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 $46, net of minority interest's share of the loss ($6),
was recorded for the nine months ended September 30, 1998.
On April 30, 1998, the Company 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 Company's properties, has an effective annual
interest rate of 7.10 percent and a seven-year term. The Company, at its option,
may convert the mortgage loan to unsecured debt upon achievement by the Company
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
Company'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, the Company 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 Company, at its option, may convert, without any yield maintenance
obligation or prepayment premium, the TIAA Mortgage to unsecured public debt
upon achievement by the Company 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, the Company assumed existing mortgage debt
and was provided seller-financed mortgage debt aggregating $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 Company 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 Company 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.
Page 16 of 36
<PAGE>
CIGNA MORTGAGES
In connection with the Mack Transaction, the Company 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
Company obtaining the $150,000 Prudential Mortgage Loan, as described above, the
Company retired one of the CIGNA Mortgages with a principal balance of $27,835.
OTHER MORTGAGES
The Company has 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 Company 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 $124, net of minority
interest's share of the loss ($16), was recorded for the nine months ended
September 30, 1998.
REVOLVING CREDIT FACILITIES
Original Unsecured Facility
On August 6, 1997, the Company 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 Company 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 Company 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 $2,203, net of minority interest's share of the loss
($275), was recorded for the nine months ended September 30, 1998.
1998 Unsecured Facility
On April 17, 1998, the Company 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 Company'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 Company to continue to qualify as a
REIT under the Code, the Company 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
Page 17 of 36
<PAGE>
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 Company 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 Company's equity 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 Company 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 Company had no outstanding borrowings at September 30,
1998 and December 31, 1997 under the Prudential Facility.
CONTINGENT OBLIGATION
As part of the Harborside acquisition, the Company 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
Company commences construction on the acquired site during the next several
years. However, the agreement provides, among other things, that even if the
Company does not commence construction, the seller may nevertheless require the
Company 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 Company 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 Company entered into an interest rate swap agreement with a
commercial bank. The swap agreement fixes the Company'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 Company 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 Company's one-month LIBOR base to 5.265
percent per annum.
On October 1, 1998, the Company entered into a forward treasury rate lock
agreement with a commercial bank. This agreement locked a forward yield of 4.089
perecent 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 company'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 Company is exposed to credit loss in the event of non-performance by the
other parties to the interest rate contracts. However, the Company does not
anticipate non-performance by either of the counter parties.
Page 18 of 36
<PAGE>
CASH PAID FOR INTEREST & INTEREST CAPITALIZED
Cash paid for interest for the nine months ended September 30, 1998 and 1997 was
$67,550 and $26,922, respectively. Interest capitalized by the Company for the
nine months ended September 30, 1998 and 1997 was $1,996 and none, respectively.
9. MINORITY INTEREST
Minority interest in the accompanying consolidated financial statements relates
to common units in the Operating Partnership, in addition to Preferred Units and
Unit Warrants issued in connection with the Mack Transaction, held by parties
other than the Company.
Preferred Units
As described in Note 3, in connection with the funding of the Mack Transaction,
the Company 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 Company, 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 Company 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 stockholders'
equity. 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 Company 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 Company 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 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 Company 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, minority interest is reduced and the Company's investment in the
Operating Partnership is increased.
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 Company.
As described in Note 3, the Company 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.
Page 19 of 36
<PAGE>
On March 26, 1998, in connection with the Pacifica I Acquisition, the Company
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 4), the Company issued 218,105
common units, valued at approximately $8,334.
On June 8, 1998, in connection with the Pacifica II Acquisition, the Company
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 Company issued 52,245 common units, valued at approximately
$1,632.
On September 10, 1998, in connection with the acquisition of 40 Richards Avenue,
the Company issued 414,114 common units, valued at approximately $12,615.
During the nine months ended September 30, 1998, the Company 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 Company 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.
Unit Warrants
As described in Note 3, in connection with the funding of the Mack Transaction,
the Company 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.
Minority Ownership
As of September 30, 1998 and December 31, 1997, the minority interest common
unitholders owned 13.1 percent (21.7 percent, including the effect of the
conversion of Preferred Units into common units) and 10.9 percent (20.4 percent
including the effect of the conversion of Preferred Units into common units) of
the Operating Partnership, respectively (excluding any effect for the exercise
of Unit Warrants).
10. EMPLOYEE BENEFIT PLAN
All employees of the Company 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 Company, at management's discretion, may match
employee contributions, although no employer contributions have been made to
date.
11. 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 Company is required to make payments in lieu of property
taxes ("PILOT") on its property at 95 Christopher Columbus Drive, Jersey
Page 20 of 36
<PAGE>
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 Company
as part of the acquisition of the property in November 1996, the Company is
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 Company is the lessee, 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 Company'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
Company believes that this lawsuit was factually and legally baseless, the
Company on May 4, 1998 agreed to a settlement which included making certain
changes to employment agreements of certain of its executive officers. The
Company incurred $750 in costs associated with this action, which was provided
for at December 31, 1997.
The Company 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 Company.
12. 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
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.
13. STOCKHOLDERS' EQUITY
To maintain its qualification as a REIT, not more than 50 percent in value of
the outstanding shares of the Company may be owned, directly or indirectly, by
five or fewer individuals at any time during the last half of any taxable year
of the Company, other than its initial taxable year (defined to include certain
entities), applying certain constructive ownership rules. To help ensure that
the Company will not fail this test, the Company's Articles of Incorporation
provide for, among other things, certain restrictions on the transfer of the
common stock to prevent further concentration of stock ownership. Moreover, to
evidence compliance with these requirements, the Company must maintain records
that disclose the actual ownership of its outstanding common stock and will
demand written statements each year from the holders of record of designated
percentages of its common stock requesting the disclosure of the beneficial
owners of such common stock.
On May 15, 1997, the stockholders approved an increase in the authorized shares
of common stock in the Company to 190,000,000.
Page 21 of 36
<PAGE>
On October 15, 1997, the Company completed an underwritten public offer and sale
of 13,000,000 shares (the "1997 Offering") of its common stock. The Company
received approximately $489,116 in net proceeds (after offering costs) from the
1997 Offering. The Company 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 Company 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 Company'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 Company 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 Company 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 Company's credit facilities.
On April 29, 1998, the Company 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 Company's credit facilities.
On May 29, 1998, the Company 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 Company's credit facilities.
On August 6, 1998, the Board of Directors of the Company authorized a share
repurchase program ("Repurchase Program") under which the Company was permitted
to purchase up to $100,000 of the Company'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 Company purchased, for constructive retirement 694,700 shares of its
common stock for an aggregate cost of approximately $20,525. Concurrent with
these purchases, the Company sold to the Operating Partnership 694,700 common
units for approximately $20,525. Subsequently, through November 3, 1998, the
Company 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 Company sold to the Operating Partnership
103,000 common units for approximately $2,873.
The Company 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.
Stock Option Plans
In 1994, and as subsequently amended, the Company 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 Company'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 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.
Page 22 of 36
<PAGE>
Information regarding the Company'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 Company 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 Company 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 Company 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 Company 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 Company 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 Company-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 Company's common stock vesting over a five-year period
contingent on the Company meeting certain performance objectives. Additionally,
pursuant to the terms of the Stock Purchase Rights, the Company provided fixed
rate, non-recourse loans, aggregating $4,750, to such executives to finance
their purchase of 152,000 shares of the Company's common stock, which the
Company agreed to forgive ratably over five years, subject to continued
employment. Such loans were for amounts equal to the fair market value of the
associated shares at the date of grant. Subsequently, from April 18, 1997
through April 24, 1997, the Company 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 Company 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 Company's executive officers' employment agreements, which were
triggered by the Mack Transaction on December 11, 1997, the loans provided by
the Company under the Stock Purchase Rights were forgiven by the
Page 23 of 36
<PAGE>
Company, 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 Share
FASB No. 128 requires a dual presentation of basic and diluted earnings per
share ("EPS") 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
EPS excludes dilution and is computed by dividing net income available to common
stockholders by the weighted average number of shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock.
The following information presents the Company's results for the three and nine
month periods ended September 30, 1998 and 1997 in accordance with FASB No. 128.
<TABLE>
<CAPTION>
Three Months
Ended September 30,
1998 1997
---- ----
Basic EPS Diluted EPS Basic EPS Diluted EPS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 30,712 $ 30,712 $ 14,375 $ 14,375
Add: Net income attributable
to potentially dilutive
securities -- 4,181 -- 1,613
- --------------------------------------------------------------------------------------------
Adjusted net income $ 30,712 $ 34,893 $ 14,375 $ 15,988
============================================================================================
Weighted average shares 57,720 65,884 36,457 41,421
- --------------------------------------------------------------------------------------------
Per Share $ 0.53 $ 0.53 $ 0.39 $ 0.39
============================================================================================
<CAPTION>
Nine Months
Ended September 30,
1998 1997
---- ----
Basic EPS Diluted EPS Basic EPS Diluted EPS
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income $ 85,270 $ 85,270 $ 48,859 $ 48,859
Add: Net income attributable
to potentially dilutive
securities -- 11,077 -- 5,261
- --------------------------------------------------------------------------------------------
Adjusted net income $ 85,270 $ 96,347 $ 48,859 $ 54,120
============================================================================================
Weighted average shares 55,391 63,093 36,469 41,152
- --------------------------------------------------------------------------------------------
Per Share $ 1.54 $ 1.53 $ 1.34 $ 1.32
============================================================================================
</TABLE>
The following schedule reconciles the shares used in the basic EPS calculation
to the shares used in the diluted EPS calculation.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
1998 1997 1998 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Basic EPS Shares: 57,720 36,457 55,391 36,469
Add: Operating Partnership units 7,857 4,090 7,189 3,937
Stock options 307 636 455 534
Restricted Stock Awards -- 199 -- 199
Stock Warrants -- 39 58 13
- --------------------------------------------------------------------------------------------
Diluted EPS Shares: 65,884 41,421 63,093 41,152
============================================================================================
</TABLE>
Pursuant to the Repurchase Program, from August 7, 1998 through November 3,
1998, the Company purchased for constructive retirement, 797,700 shares of its
outstanding common stock for approximately $23,398.
Page 24 of 36
<PAGE>
14. IMPACT OF RECENTLY-ISSUED ACCOUNTING STANDARDS
The Company 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 Company's financial
statement presentation. The Company 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 Company). 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 Company anticipates that, due to its
limited use of derivative instruments, the adoption of FASB No. 133 will not
have a significant effect on the Company's results of operations or its
financial position.
15. 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.
This pro forma financial information is not necessarily indicative of what the
actual results of operations of the Company 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 $374,244
Operating and other expenses 115,946 113,003
General and administrative 20,037 19,552
Depreciation and amortization 61,029 57,085
Interest expense 78,092 81,839
- --------------------------------------------------------------------------------
Income before minority interest
and extraordinary item 111,644 102,765
Minority interest 24,238 22,078
- --------------------------------------------------------------------------------
Income before extraordinary item $ 87,406 $ 80,687
================================================================================
Basic earnings per common share $ 1.51 $ 1.40
Diluted earnings per common share $ 1.50 $ 1.39
- --------------------------------------------------------------------------------
Basic weighted average shares outstanding 57,814 57,503
Diluted weighted average shares outstanding 66,363 65,466
- --------------------------------------------------------------------------------
Page 25 of 36
<PAGE>
MACK-CALI REALTY CORPORATION 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 Corporation 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
Company at June 30, 1997 (for the three-month period comparisons), and which
represents all properties owned by the Company 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 Company 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 Company from January 1, 1997 through September 30, 1998, excluding RM
Properties and Mack Properties (for the nine-month period comparisons).
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 Company'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 Company'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, 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 Company's
credit facilities as a result of Company 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.
Income before minority interest and extraordinary item increased to $39.1
million in 1998 from $20.0 million in 1997. The increase of $19.1 million was
due to the factors discussed above.
Net income increased by $16.3 million for 1998, from $14.4 million in 1997 to
$30.7 million in 1998. This increase was a result of an increase in income
before minority interest and extraordinary item of $19.1 million, and an
extraordinary item of $3.6 million (net of minority interest), related to early
retirement of debt in 1997, offset by an increase of $6.4 million in minority
interest, primarily attributable to distributions on Preferred Units in 1998 of
$4.2 million.
Page 26 of 36
<PAGE>
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
Company'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 Company'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 Company's credit facilities as a result of Company
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,
Income before minority interest and extraordinary item increased to $111.1
million in 1998 from $58.1 million in 1997. The increase of $53.0 million was
due to the factors discussed above.
Net income increased by $36.4 million for 1998, from $48.9 million in 1997 to
$85.3 million in 1998. This increase was a result of an increase in income
before minority interest and extraordinary item of $53.0 million and an
extraordinary item of $3.6 million (net of minority interest), related to early
retirement of debt in 1997, offset by an increase of $17.8 million in minority
interest, primarily attributable to distributions on Preferred Units in 1998 of
$12.1 million, and an extraordinary item of $2.4 million (net of minority
interest), 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 Company generated $152.2
million in cash flows from operating activities, and together with $1.5 billion
in borrowings from the Company's credit facilities and additional mortgage debt,
$284.5 million in net proceeds from the Company's 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 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 dividends and 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.
Page 27 of 36
<PAGE>
Capitalization
On February 25, 1998, the Company 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 Company's credit facilities and fund the
acquisition of Mountainview.
On March 18, 1998, in connection with the acquisition of Prudential Business
Campus, the Company 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 Company
issued 100,175 common units, valued at approximately $3.8 million.
On March 27, 1998, the Company 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 Company's credit facilities.
On April 29, 1998, the Company 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 Company'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 Company issued 218,105 common units,
valued at approximately $8.3 million.
On May 29, 1998, the Company 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 Company's credit facilities.
On June 8, 1998, in connection with the Pacifica II Acquisition, the Company
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 Company 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 Company issued 414,114 common units, valued at approximately $12.6 million.
During the nine months ended September 30, 1998, the Company 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.
On August 6, 1998, the Board of Directors of the Company authorized a share
repurchase program ("Repurchase Program") under which the Company was permitted
to purchase up to $100.0 million of the Company'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 October 29,
1998, the Company 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 Company sold to the Operating Partnership
797,700 common units for approximately $23.4 million.
On April 17, 1998, the Company 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 Company'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,
Page 28 of 36
<PAGE>
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 Company to
continue to qualify as a REIT under the Code, the Company 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 Company's previously-existing
$100.0 million revolving credit facility with Prudential Securities Corp.,
provides the Company with total borrowing capacity of $1.0 billion.
On April 30, the Company 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 Company's
properties, has an effective annual interest rate of 7.10 percent and a
seven-year term. The Company, at its option, may convert the mortgage loan to
unsecured debt upon achievement by the Company 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 Company'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 Company has 169 unencumbered properties, totaling
17.0 million square feet, representing 61.4 percent of the Company's total
portfolio on a square footage basis.
The Company 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 Company will
have access to the capital resources necessary to expand and develop its
business. To the extent that the Company'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 Company expects
to finance such activities through borrowings under its credit facilities and
other debt and equity financing.
The Company 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 Company 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 Company's financing
requirements. The Company expects to meet its financing requirements through
funds generated from operating activities, long-term or short term borrowings
(including draws on the Company's credit facilities) and the issuance of debt
securities or additional equity securities. In addition, the Company anticipates
utilizing the Prudential Facility and the 1998 Unsecured Facility primarily to
fund property acquisition activities.
The Company 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 Company will seek to refinance such debt at maturity or retire such
debt through the issuance of additional equity or debt securities. The Company
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 Company's capital and liquidity needs both
in the short and long-term. However, if these sources of funds are insufficient
or unavailable, the Company's ability to make the expected distribution
discussed below may be adversely affected.
To maintain its qualification as a REIT, the Company 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. Moreover, the Company intends to continue to make
regular quarterly distributions to its stockholders which, based upon current
policy, in the aggregate would equal approximately $125.8 million on an
annualized basis. However, any such distribution, whether for federal income tax
purposes or otherwise, would only be paid out of available cash after meeting
both operating requirements and scheduled debt service on mortgages and loans
payable.
Page 29 of 36
<PAGE>
Funds from Operations
The Company 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 minority interest of 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 Company'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 Company'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 Company'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 minority interest and extraordinary item $ 39,087 $ 19,973 $ 111,107 $ 58,105
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 $ 57,252 $ 27,331 $ 158,257 $ 77,784
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 $ 27,331 $ 146,167 $ 77,784
==================================================================================================================
Cash flows provided by operating activities $ 152,211 $ 82,952
Cash flows used in investing activities $(718,673) $(365,880)
Cash flows provided by financing activities $ 570,612 $ 81,530
- ------------------------------------------------------------------------------------------------------------------
Basic weighted average shares/units outstanding (2) 65,577 40,547 62,580 40,406
- ------------------------------------------------------------------------------------------------------------------
Diluted weighted average shares/units outstanding (2) 73,044 41,222 69,983 40,953
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes FFO adjustments in 1998 related to the Company's investments in
partially-owned entitites.
(2) See calculations for the amounts presented in the reconciliation below.
Page 30 of 36
<PAGE>
The following schedule reconciles the Company's basic weighted average shares to
the basic and diluted weighted average shares/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 shares: 57,720 36,457 55,391 36,469
Add: Weighted average common units 7,857 4,090 7,189 3,937
- ----------------------------------------------------------------------------------------------
Basic weighted average shares/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 share/units: 73,044 41,222 69,983 40,953
==============================================================================================
</TABLE>
Inflation
The Company'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
Company'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 Company 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 Company 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 Company has
identified three major areas determined to be critical for successful Year 2000
compliance: (i) the Company'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 Company believes that progress in all such areas is
proceeding on schedule and that there will be no material adverse effect on the
Company 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 Company.
Central Accounting and Operating 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 Company 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 Company will be adversely affected.
The responses to these questionnaires are in the process of being received,
reviewed and evaluated. The Company 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 Company's property managers have completed a building by building survey of
all of the Company'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 Company is relying on assurances
requested from utility providers of their Year 2000 compliance and their
continued ability to provide uninterrupted service to the Company's buildings.
The Company anticipates approximately $1.0 million in costs will be incurred to
upgrade and/or replace identified building support systems.
Page 31 of 36
<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 Company anticipates in
connection with the Year 2000 issue relates to the failure of the upgrade to the
Company's accounting system to effectively become Year 2000 compliant. The
Company believes that such an event is unlikely, but an occurrence of the
foregoing would have a material adverse impact on the Company's operations. The
Company cannot currently assess the financial impact of such a worst case
scenario.
Contingency Plans
As part of the Project, the Company 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 Company'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
Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Project is expected to
significantly reduce the Company's level of uncertainty about the Year 2000
problem. The Company believes that, with the implementation and completion of
the Project as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
Readers are cautioned that forward-looking statements contained in this Year
2000 disclosure should be read in conjunction with the company's disclosures in
the following section.
Disclosure Regarding Forward-Looking Statements
The Company considers portions of this information to be forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of The Securities Exchange Act of 1934. Although the Company
believes that the expectations reflected in such forward-looking statements are
based upon reasonable assumptions, it can give no assurance that its
expectations will be achieved.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not Applicable.
Page 32 of 36
<PAGE>
MACK-CALI REALTY CORPORATION
Part II -- Other Information
Item 1. Legal Proceedings
Reference is made to "Other Contingencies" in Note 11 (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 9
(Minority Interest) 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 33 of 36
<PAGE>
MACK-CALI REALTY CORPORATION
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 Company, 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 Company's own proxy materials, the Company 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 34 of 36
<PAGE>
MACK-CALI REALTY CORPORATION
Part II -- Other Information (continued)
Item 6 - Exhibits
(a) None
(b) The Company filed a Current Report on Form 8-K/A dated June 12, 1998
during the quarter ended September 30, 1998. Item 5 was reported.
Page 35 of 36
<PAGE>
MACK-CALI REALTY CORPORATION
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 Corporation
----------------------------
(Registrant)
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 36 of 36
<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> 573
<OTHER-SE> 1,423,838
<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> 87,643
<DISCONTINUED> 0
<EXTRAORDINARY> 2,373
<CHANGES> 0
<NET-INCOME> 85,270
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.53
</TABLE>
