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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): May 21, 1998
PRENTISS PROPERTIES TRUST
(Exact Name of Registrant as Specified in its Charter)
Maryland
(State or Other Jurisdiction of
Incorporation or Organization)
1-14516 75-2661588
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(Commission File Number) (I.R.S. Employer Identification No.)
3890 West Northwest Highway, Suite 400, Dallas, Texas 75220
(Address of Registrant's Principal Executive Office)
(214) 654-0886
(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name or Former Address, if Changed Since Last Report)
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ITEM 5. OTHER EVENTS
ACQUISITION OF PROPERTIES
On May 21, 1998, the Company completed the acquisition of a single Class
"A" suburban office property (the "Ordway Property"). The Ordway Property
totals 525,951 square feet and is located in Oakland, California. The Ordway
Property was purchased for a purchase price of approximately $76.3 million which
was funded primarily with borrowings under the Company's line of credit.
On August 18, 1998, the Company completed the acquisition of two Class "A"
office properties (the "Willow Oaks Properties"). The properties total 387,469
square feet and are located in the suburban Washington, D.C. area. The Willow
Oaks Properties were purchased for a purchase price of approximately $76.0
million (inclusive of 4.05 acres of undeveloped land) which was funded primarily
with borrowings under the Company's line of credit.
In addition to the Ordway and Willow Oaks Properties, the Company has
acquired, between January 1, 1998 and the filing date of this Form 8-K, 81
Properties containing 4.1 million square feet for a purchase price of
approximately $410.3 million.
The acquisitions of the Ordway Property and Willow Oaks Properties do not
individually constitute acquisitions of a "significant amount of assets" as
defined under Item 2 of Form 8-K or Rule 3-14 of Regulation S-X. Rather, these
acquisitions when combined with other individually insignificant acquisitions as
previously filed in the Company's Current Report on Form 8-K date February 5,
1998, constitute a mathematical majority of individually insignificant 1998
acquisitions, for which audited combined statements of revenues and certain
operating expenses are required under Rule 3-14 of Regulation S-X. Accordingly,
the audited statement of revenues and certain operating expenses of the Ordway
Property and the audited combined statement of revenues and certain operating
expenses of the Willow Oaks Properties are filed herewith.
RISK FACTORS
Prentiss Properties Trust (referred to in this Form 8-K as "we," "us,"
"our," or the "Company") is filing in this Form 8-K a description of certain
factors that in some cases may have affected, and in the future could affect,
our actual operating results and could cause such results to differ materially
from those in any forward looking statements. This list is not necessarily
exhaustive, and new risk factors emerge periodically. We can give no assurance
that the factors described below list all material risks to the Company at any
specific point in time. Many of the important factors discussed below have been
disclosed in the Company's previous filings with the Securities and Exchange
Commission.
An investment in the Company involves various risks. You should carefully
consider the following information before making a decision to invest.
POTENTIAL ADVERSE EFFECT ON OPERATING PERFORMANCE OF RELIANCE ON MAJOR TENANT
For the six months ended June 30, 1998, rent from our largest tenant,
International Business Machines Corporation ("IBM"), accounted for approximately
6.7% of the Company's earnings before interest, taxes, depreciation and
amortization ("EBITDA"). We have two leases with IBM. We have negotiated with
IBM lease extensions for both leases, extending 60% of the rentable area for one
lease to 2009 and 70% of the rentable area for the other lease to 2011. Also,
we have leased the majority of the remaining rentable area under the 2009 lease.
The bankruptcy or insolvency of, or a downturn in the business of, any major
tenant such as IBM could result in a failure or delay in the tenant's rent
payments which may adversely affect our business.
PROBLEMS ASSOCIATED WITH THE GEOGRAPHIC CONCENTRATION OF OUR PROPERTIES
Properties located in the Dallas, Austin, suburban Chicago and Northern
Virginia areas provided approximately 21%, 11%, 11% and 10% of EBITDA in 1997,
respectively. Like other real estate markets, these commercial real estate
markets have experienced economic downturns in the past, and future declines in
any of these economies or real estate markets could adversely affect our cash
available for distribution. Our financial
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performance and ability to make distributions to shareholders are, therefore,
particularly sensitive to the economic conditions in these markets. A number of
factors, including the local economic climate (which may be adversely impacted
by business layoffs or downsizing, industry slowdowns, changing demographics and
other factors) and local real estate conditions (such as oversupply of or
reduced demand for office, industrial and other competing commercial properties)
may affect our revenues and the value of our properties (including properties to
be acquired). We can provide no assurances that these local economies will
continue to grow.
POTENTIAL PROBLEMS IN ACQUISITION, REDEVELOPMENT, DEVELOPMENT AND CONSTRUCTION
ACTIVITIES
Acquisition. We intend to acquire office and industrial properties to the
extent that they can be acquired on advantageous terms and meet our investment
criteria. Acquisitions of office and industrial properties involve risks that
investments will fail to perform in accordance with expectations. Estimates of
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove
inaccurate. In addition, there are general investment risks associated with any
new real estate investment.
Problems Associated with the Acquisition of Substantial New Properties and
Lack of Operating History. Our ability to manage our growth effectively will
require us to integrate successfully our new acquisitions into our existing
management structure. Many of our properties have relatively short or no
operating history under our management. We have had limited control over the
operation of these buildings and buildings that will be acquired in the future,
and such properties may have unknown characteristics or deficiencies affecting
their valuation or revenue potential. We can give no assurance that the
operating performance of acquired properties will increase or be maintained
under our management.
Redevelopment, Development and Construction. We intend to continue
redevelopment, development and construction of office and industrial buildings
in accordance with our growth policies. Risks associated with our
redevelopment, development and construction activities may include the
following:
. abandonment of redevelopment or development opportunities;
. construction costs of a property exceeding original estimates;
. occupancy rates and rents at a newly renovated or completed property
may not be sufficient to make the property profitable;
. financing may not be available on favorable terms for redevelopment or
development of a property;
. permanent financing may not be available on favorable terms to replace
a short-term construction loan and construction and lease-up may not be
completed on schedule, resulting in increased interest expense and
construction costs; and
. all necessary zoning, land-use, building, occupancy and other required
governmental permits and authorizations may not be obtained or may not
be obtained on a timely basis.
In addition, redevelopment or development activities, regardless of whether
they are ultimately successful, typically require a substantial portion of our
management's time and attention. These risks may adversely affect our results
of operations.
FACTORS THAT COULD CAUSE POOR OPERATING PERFORMANCE OF THE PROPERTIES
General Risks. Real property investments are subject to varying degrees of
risk. The yields available from equity investments in real estate depend in
large part on the amount of income generated and expenses incurred. If our
properties or any properties acquired in the future do not generate revenues
sufficient to meet operating expenses, including debt service, tenant
improvements, leasing commissions and other capital expenditures, we may
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have to borrow additional amounts to cover fixed costs, and our cash flow and
ability to make distributions to our shareholders may be adversely affected.
In general, the following factors, among others, may affect our revenues
and the value of our properties:
. the national, state and local economic climate and real estate
conditions (such as oversupply of or reduced demand for space and
changes in market rental rates);
. the perceptions of prospective tenants of the safety, convenience and
attractiveness of the properties;
. the ability of the owner to provide adequate management, maintenance
and insurance;
. the ability to collect on a timely basis all rent from tenants;
. the expense of periodically renovating, repairing and reletting spaces;
and
. increasing operating costs (including real estate taxes and utilities)
which may or may not be passed through to tenants.
Certain significant expenditures associated with investments in real
estate, such as mortgage payments, real estate taxes, insurance and maintenance
costs, are generally not reduced when circumstances cause a reduction in rental
revenues from the property. In addition, factors such as compliance with laws,
including tax laws, interest rate levels and the availability of financing, also
affect real estate values and income from our properties. Also, market
conditions often affect the amount of available rentable square feet which, as a
result, may fluctuate over time.
Adverse Effect of Tenant Defaults and Bankruptcy. A significant portion of
our income is and will be derived from rental income on our properties. As a
result, our distributable cash flow and ability to make expected distributions
to shareholders would be adversely affected if a significant number of tenants
of these properties failed to meet their lease obligations. At any time, a
tenant at any property may seek the protection of the bankruptcy laws, which
could result in delays in rental payments or in the rejection and termination of
such tenant's lease. These events would cause a reduction in our cash flow and
the amounts available for distributions to our shareholders. We can give no
assurance as to whether tenants will file for bankruptcy protection in the
future or, if any tenants file, whether they will affirm their leases and
continue to make rental payments in a timely manner. In addition, a tenant from
time to time may experience a downturn in its business. Such a downturn may
weaken its financial condition and result in the failure to make rental payments
when due. If tenant leases are not affirmed following bankruptcy or if a
tenant's financial condition weakens, our cash flow and the amounts available
for distributions to our shareholders may be adversely affected.
Operating Risks. Our properties, including properties to be acquired in
the future, are and will be subject to operating risks common to commercial real
estate in general. Any and all of these risks may adversely affect occupancy or
rental rates. Our properties are subject to increases in operating expenses
such as cleaning; electricity; heating, ventilation and air conditioning;
elevator repair and maintenance; insurance and administrative costs; and other
general costs associated with security, landscaping, repairs and maintenance.
While the tenants at these properties generally are obligated to pay a portion
of these escalating costs, there can be no assurance that tenants will agree to
pay such costs upon renewal or that new tenants will agree to pay such costs.
If operating expenses increase, the local rental market may limit the extent to
which rents may be increased to meet increased expenses without decreasing
occupancy rates. Although we implement cost-saving incentive measures at each
of our properties, our ability to make distributions to shareholders could be
adversely affected if operating expenses increase without a corresponding
increase in revenues.
Uncertainty of Non-Renewal of Leases and Non-Reletting of Space. We are
subject to several risks upon expiration of leases for space located at our
properties, including properties that may be acquired. The leases may not be
renewed, the space may not be relet or the terms of renewal or reletting,
including the costs of required renovations, may be less favorable than current
lease terms. Leases on a total of approximately 22% of the total net
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rentable square feet in our properties will expire in the eighteen months ending
December 31, 1999. If we are unable to relet promptly or renew the leases for a
particular property or properties, if the rental rates upon such renewal or
reletting are significantly lower than expected rates or if our reserves for
these purposes prove to be inadequate, then our cash flow and ability to make
expected distributions to shareholders may be adversely affected.
Potential Adverse Effect of Competition on Operating Performance. Numerous
office and industrial properties compete with our properties in attracting
tenants to lease space. Some of these competing properties may be newer, better
located or better capitalized than our properties.
Possible Environmental Liabilities. Under various federal, state, and
local environmental laws, ordinances and regulations, a current or previous
owner or operator of real property may be liable for the costs of removal or
remediation of hazardous or toxic substances on, under or in such property. Such
laws often impose liability whether or not the owner or operator knew of, or was
responsible for, the presence of such hazardous or toxic substances. In
addition, the presence of hazardous or toxic substances, or the failure to
remediate such property properly, may adversely affect the owner's ability to
borrow using such real property as collateral. Persons who arrange for the
disposal or treatment of hazardous or toxic substances may also be liable for
the costs of removal or remediation of hazardous substances at the disposal or
treatment facility, whether or not such facility is or ever was owned or
operated by such person. Certain environmental laws and common law principles
impose liability for release of and exposure to hazardous substances, including
asbestos-containing materials into the air, and third parties may seek recovery
from owners or operators of real property for personal injury or property damage
associated with exposure to released hazardous substances, including asbestos-
containing materials.
As the owner of the properties, we may be liable for any such costs. Phase
I environmental site assessments have been obtained on all of our properties and
will be obtained on all of the properties acquired in the future, prior to their
acquisition. The purpose of Phase I environmental site assessments is to
identify potential sources of contamination for which the Company may be
responsible and to assess the status of environmental regulatory compliance.
For some of the properties, Phase II environmental site assessments were
obtained on such properties. Phase II environmental site assessments generally
involve more invasive procedures than Phase I environmental site assessments,
such as soil sampling and testing or the installation and monitoring of
groundwater wells.
Certain land (the "Plant Site") in the vicinity of and underlying the
Company's Los Angeles industrial properties was formerly the site of a synthetic
rubber manufacturing plant owned by the United States Government and
subsequently owned or operated by numerous companies, including Shell Oil
Company ("Shell") and Dow Chemical Company ("Dow"). During the operation of the
plant, wastes were disposed of in pits and ponds located south of the
properties.
On September 25, 1997, we were notified that an undefined area, which may
or may not include the Los Angeles industrial properties, associated with the
operation of the plant would be listed on the National Priorities List, which is
a federal list of abandoned hazardous waste sites that must be cleaned up by
either the government or the potentially responsible parties. At this time, the
EPA has not indicated the precise boundaries of the National Priorities List
site. The Company, along with surrounding land owners, is challenging the
listing. All past and present owners of the land underlying the Los Angeles
industrial properties, including the United States Government, Dow, Shell and
the former owner, LAPCO Industrial Parks ("LAPCO"), from whom the Company
purchased the Los Angeles industrial properties, are potentially responsible
parties for the investigation and remediation of the Plant Site. Shell has
agreed to (1) indemnify and hold harmless any successor of LAPCO, including the
Company and any subsequent purchasers, tenants and lenders, from any liability
relating to clean up or remediation costs for the Plant Site or for any
contamination resulting from the Plant Site, and (2) indemnify and hold harmless
LAPCO and any successor of LAPCO, including the Company, from any liability
arising out of any third party tort claims for bodily injury or property damage.
Except as noted above, the environmental site assessments have not revealed
any environmental condition, liability or compliance concern that we believe
could have a material adverse affect on our business, assets or results of
operations, nor are we aware of any such condition, liability or concern. It is
possible that the environmental site assessments relating to any one of the
properties or properties to be acquired do not reveal all environmental
conditions, liabilities or compliance concerns. In addition, there could be
material environmental conditions,
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liabilities or compliance concerns that arose at such property after the related
environmental site assessments report was completed of which we are otherwise
unaware.
Effect of Americans with Disabilities Act Compliance on Cash Flow and
Distributions. The Americans with Disabilities Act of 1990 (the "ADA") requires
all public accommodations and commercial facilities to meet certain federal
requirements related to access and use by disabled persons. Compliance with the
ADA requirements could require removal of access barriers, and non-compliance
could result in imposition of fines by the U.S. government or an award of
damages to private litigants. Although we believe that our properties are
substantially in compliance with these requirements, a determination that we are
not in compliance with the ADA could result in the imposition of fines or an
award of damages to private litigants. If we were required to make
unanticipated expenditures to comply with the ADA, our cash flow and the amounts
available for distributions to our shareholders may be adversely affected.
Potential Adverse Effect on Results of Operations due to Changes in Laws.
Because increases in income, service or transfer taxes are generally not passed
through to tenants under leases, such increases may adversely affect our cash
flow and ability to make distributions to shareholders. Our properties also are
subject to various federal, state and local regulatory requirements and to state
and local fire and life-safety requirements. Failure to comply with these
requirements could result in the imposition of fines by governmental authorities
or awards of damages to private litigants. We believe that our properties are
currently in compliance with all such regulatory requirements. However, we can
give no assurance that these requirements will not be changed or that new
requirements will not be imposed which would require significant unanticipated
expenditures and could have an adverse effect on our cash flow and expected
distributions.
Potential Adverse Effects of Uninsured Losses. We carry commercial
liability, fire, flood and earthquake (where appropriate), extended coverage and
rental loss insurance with respect to our properties, with policy specifications
and insured limits customarily carried for similar properties. We intend to
carry similar insurance policies on the properties we acquire in the future.
There are, however, certain types of losses, such as from earthquakes at
properties located outside of California or from wars, that may be either
uninsurable or not economically insurable. Should an uninsured loss or a loss
in excess of insured limits occur, we could lose both capital invested in a
property as well as the anticipated future revenue from such property, and would
continue to be obligated on any mortgagee indebtedness or other obligations
related to the property. Any such loss would adversely affect our business,
financial condition and results of operations.
Potential Problems Associated with Property Ownership through Partnerships
and Joint Ventures. Through an affiliate of Prentiss Properties Acquisition
Partners, L.P. (the "Operating Partnership"), we own a 50% general partnership
interest in Broadmoor Austin Associates, which leases the Broadmoor Austin
Office Properties in Austin, Texas. Through this general partnership interest,
we act as managing partner and have the sole authority to conduct the business
and affairs of the Broadmoor Austin Partnership subject to certain limitations.
IBM, the tenant leasing 100% of the space at that property, owns the remaining
50% interest in the Broadmoor Austin Associates through an affiliated entity.
We may also participate with other entities in property ownership through
joint ventures or partnerships. Partnership or joint venture investments may,
under certain circumstances, involve risks not otherwise present. These risks
include the possibility that our partners or co-venturers might become bankrupt,
that such partners or co-venturers might at any time have economic or other
business interests or goals that are inconsistent with our business interests or
goals, and that such partners or co-venturers may be in a position to take
action contrary to our instructions or make requests contrary to our policies or
objectives, including our policy with respect to maintaining our qualification
as a real estate investment trust ("REIT"). We will, however, seek to maintain
sufficient control of such partnerships or joint ventures to permit our business
objectives to be achieved. Our organizational documents do not limit the amount
of available funds that we may invest in partnerships or joint ventures.
In addition, we may acquire in the future either a limited partnership
interest in a property partnership without partnership management responsibility
or a co-venturer interest or co-general partnership interest in a property
partnership with shared responsibility for managing the affairs of a property
partnership or joint venture. In such cases, we will not be in a position to
exercise sole decision-making authority regarding the property partnership or
joint venture.
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Potential Problems Associated with Illiquidity of Real Estate. Equity real
estate investments are relatively illiquid. Such liquidity will tend to limit
our ability to vary our portfolio promptly in response to changes in economic or
other conditions.
POTENTIAL ADVERSE EFFECTS OF INCURRENCE OF THE DEBT
Variable Rate Debt. We have incurred and may incur in the future
indebtedness that bears interest at variable rates. Variable rate debt creates
higher debt service requirements if market interest rates increase, which would
adversely affect our cash flow and the amounts available for distributions to
our shareholders. We have entered into two interest rate hedge agreements
covering $110 million of our outstanding indebtedness. Pursuant to these hedge
agreements, we have fixed our cost of seven year funds (before adding the
spread) at an average of 6.25%. Further we have entered into two hedge
agreements covering $98.5 million in anticipation of funding permanent
mortgages. The agreements have terms of six months. On October 6, 1998 we
terminated one $49.25 million agreement and incurred settlement costs of $4.3
million due to the substantial downward movement in the underlying treasury
security. The settlement cost is expected to be amortized over the life of a
portion of two collaterized mortgage financings on which we have locked interest
rates with a life insurance lender. In the event this transaction is not
consummated, related settlement costs will be charged as interest expense in the
current period. The remaining hedge of $49.25 million is expected to be
terminated once the Company locks interest rates on various other mortgage
financings which it is currently pursuing.
Debt Financing and Potential Adverse Effects on Cash Flows and
Distributions. We are subject to risks normally associated with debt financing,
including the risk that our cash flow may be insufficient to pay distributions
at expected levels and meet required payments of principal and interest, the
risk that indebtedness on our properties (which will not have been fully
amortized at maturity in all cases) will not be able to be refinanced or that
the terms of such refinancing will not be as favorable as the terms of existing
indebtedness. If principal payments due at maturity cannot be refinanced,
extended or paid with proceeds of other capital transactions, such as the
issuance of new equity capital, we expect that our cash flow will not be
sufficient in all years to pay distributions at expected levels and to repay all
maturing debt. Furthermore, if prevailing interest rates or other factors at
the time of refinancing result in higher interest rates upon refinancing, the
interest expense relating to such refinanced indebtedness would increase. This
increase would adversely affect our cash flow and the amounts available for
distributions to our shareholders. If a property or properties are mortgaged to
collateralize payment of indebtedness and we are unable to meet mortgage
payments, the property could be foreclosed upon by or otherwise transferred to
the mortgagee with a consequent loss of income and asset value.
Construction Loans and Risks Associated with Sale or Foreclosure. If new
developments are financed through construction loans or if acquisitions are
financed with short-term bridge loans in anticipation of later, permanent
financing, there is a risk that upon completion of construction or the maturity
of the bridge loans, permanent financing may not be available or may be
available only on disadvantageous terms. In the event that we are unable to
obtain permanent financing for a property, we could be forced to sell such
property at a loss or the property could be foreclosed upon by the lender and
result in loss of income and asset value.
LIMITED ABILITY OF SHAREHOLDERS TO EFFECT A CHANGE OF CONTROL
Potential Effects of Shareholder Rights Plan. In February 1998, we adopted
a Shareholder Rights Plan (the "Rights Plan") and declared a dividend of one
right ("Right") for each common share of beneficial interest, par value $0.01
per share (the "Common Shares"). The Rights may have the effect of delaying,
inhibiting or preventing a transaction or a change in control of the Company
that might involve a premium price for the Common Shares or otherwise be in the
best interest of the shareholders. The Rights will cause substantial dilution
to a person or group that acquires 10% or more of our outstanding Common Shares
if certain events thereafter occur without the Rights having been redeemed.
However, because the Rights are redeemable by the Board of Trustees in certain
circumstances, the Rights should not interfere with any merger or other business
combination approved by the Board of Trustees.
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Potential Effects of Ownership Limitation. In order to maintain our
qualification as a REIT under the Internal Revenue Code of 1986, as amended (the
"Code"), no more than 50% in value of our outstanding shares of beneficial
interest may be owned, directly or indirectly, by five or fewer individuals (as
defined in the Code to include certain entities) at any time during the last
half of our taxable year (other than its 1996 taxable year).
To ensure that we will not fail to qualify as a REIT under this and other
tests under the Code, our Declaration of Trust, subject to certain exceptions,
authorizes the Board of Trustees to take such actions as are necessary and
desirable to preserve our qualification as a REIT. In particular, it provides
that no person may own, directly or indirectly, more than 8.5% of the number of
outstanding Common Shares, other than Michael V. Prentiss, who currently may own
up to 15% of the number of outstanding Common Shares, or more than 9.8% of the
number of outstanding preferred shares of beneficial interest, par value $0.01
per share (the "Preferred Shares") of any series (the "Ownership Limitation").
The Board of Trustees, upon receipt of a ruling from the Internal Revenue
Service (the "Service"), an opinion of counsel or other evidence satisfactory to
the Board of Trustees and upon such other conditions as the Board of Trustees
may establish, may exempt a proposed transferee from the Ownership Limitation.
For example, the Board of Trustees has exempted Security Capital Preferred
Growth Incorporated ("Security Capital") from the Ownership Limitation on the
condition that Security Capital not own more than 11% of the number of
outstanding Common Shares. See "--Possible Adverse Effect of Shares Available
for Future Sale on Price of Common Shares."
The Board of Trustees may not grant an exemption from the Ownership
Limitation to any proposed transferee if such exemption would result in the
termination of our status as a REIT. The foregoing restrictions on
transferability and ownership will continue to apply until (1) the Board of
Trustees determines that it is no longer in the best interests of the Company to
continue to qualify as a REIT and (2) there is an affirmative vote of a majority
of the votes entitled to be cast on such matter at a regular or special meeting
of our shareholders. The Ownership Limitation may have the effect of delaying,
inhibiting or preventing a transaction or a change in control of the Company
that might involve a premium price for the Common Shares or otherwise be in the
best interests of the shareholders.
Potential Effects of Staggered Board. The Board of Trustees is divided
into three classes, with only a portion of the Board of Trustees standing for
election at each annual meeting. The staggered terms of trustees may reduce the
possibility of a tender offer or an attempt to change control of the Company,
even though a tender offer or change in control might be in the best interest of
the shareholders.
Potential Effects of Issuance of Additional Shares. The Declaration of
Trust authorizes the Board of Trustees to do the following:
(1) amend the Declaration of Trust, without shareholder approval, to
increase or decrease the aggregate number of shares of beneficial
interest or the number of shares of beneficial interest of any class
that the Company has the authority to issue;
(2) cause the Company to issue additional authorized but unissued Preferred
or Common Shares; and
(3) classify or reclassify any unissued Common or Preferred Shares and to
set the preferences, rights and other terms of such classified or
unclassified shares.
Although the Board of Trustees has no such intention to do so at the
present time, it could establish a class or series of shares of beneficial
interest that could, depending on the terms of such series, delay, defer or
prevent a transaction or a change in control of the Company that might involve a
premium price for the Common Shares or otherwise be in the best interest of the
shareholders. The Declaration of Trust and Bylaws also contain other provisions
that may have the effect of delaying, deferring or preventing a transaction or a
change in control of the Company that might involve a premium price for the
Common Shares or otherwise be in the best interest of the shareholders.
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ADVERSE IMPACT ON DISTRIBUTIONS OF FAILURE TO QUALIFY AS A REIT
Failure to Qualify as a REIT. We have operated and intend to continue to
operate so as to continue to qualify as a REIT for federal income tax purposes.
We have not requested, and do not expect to request, a ruling from the Service
that we qualify as a REIT. Our REIT status will depend on our continuing
ability to meet various requirements concerning, among other things, the
ownership of our outstanding stock, the nature of our assets, the sources of our
income, and the amount of our distributions to shareholders. Because we have a
limited history of operating as a REIT, we can give no assurance that we will be
able to maintain our status as a REIT.
If we fail to qualify as a REIT for any taxable year, we would not be
allowed a deduction for distributions to our shareholders in computing our
taxable income and would be subject to federal income tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate
rates. Unless entitled to relief under certain Code provisions, the Company
also would be disqualified from treatment as a REIT for the four taxable years
following the year during which qualification was lost. As a result, cash
available for distribution would be reduced for each of the years involved.
Although we intend to continue to operate as a REIT, it is possible that future
economic, market, legal, tax or other considerations may cause the Board of
Trustees, with the consent of shareholders holding at least two-thirds of all
the outstanding Common Shares, to revoke the REIT election.
REIT Minimum Distribution Requirements; Possible Incurrence of Additional
Debt. In order to avoid corporate income taxation of the earnings that it
distributes, we are required each year to distribute to our shareholders at
least 95% of our net taxable income, excluding any net capital gain. In
addition, we will be subject to a 4% nondeductible excise tax on the amount, if
any, by which certain distributions paid by us with respect to any calendar year
are less than the sum of (1) 85% of our ordinary income for that year, (2) 95%
of our capital gain net income for that year, and (3) 100% of our undistributed
taxable income from prior years. Beginning with the 1998 taxable year, we may
elect to retain and pay income tax on net capital gains. Any such retained
amounts will be treated as having been distributed for purposes of the 4% excise
tax.
We have made and intend to continue to make distributions to our
shareholders to comply with the 95% distribution requirement and to avoid the
nondeductible excise tax. Our income consists primarily of our share of the
income of the Operating Partnership, and the cash available for distribution to
shareholders consists of our share of cash distributions from the Operating
Partnership. Differences in timing between (1) the actual receipt of income and
actual payment of deductible expenses and (2) the inclusion of such income and
deduction of such expenses in arriving at taxable income could require us,
through the Operating Partnership, to borrow funds on a short-term basis to meet
the 95% distribution requirement and to avoid the nondeductible excise tax. The
requirement to distribute a substantial portion of our net taxable income could
cause us to distribute amounts that otherwise would be spent on future
acquisitions, unanticipated capital expenditures or repayment of debt, which
would require us to borrow funds or to sell assets to fund the costs of such
items.
Failure of the Operating Partnership to be Classified as a Partnership for
Federal Income Tax Purposes; Negative Impact on REIT Status. We have not
requested, and do not expect to request, a ruling from the Service that the
Operating Partnership and each of its noncorporate subsidiaries have been and
will continue to be classified as partnerships for federal income tax purposes.
If the Service were to challenge successfully the tax status of the Operating
Partnership or a noncorporate subsidiary as a partnership for federal income tax
purposes, the Operating Partnership or such noncorporate subsidiary would be
taxable as a corporation. In such event, we would likely cease to qualify as a
REIT for a variety of reasons. Furthermore, the imposition of a corporate
income tax on the Operating Partnership would reduce substantially the amount of
cash available for distribution from the Operating Partnership.
Changes in Tax Laws. At any time, future legislation or administrative or
judicial decisions or actions could affect our tax treatment of or qualification
as a REIT. For example, on February 2, 1998, President Clinton released his
budget proposal for fiscal year 1999. Several provisions of his proposal
potentially could have affected us if enacted in final form as then proposed.
Specifically, one proposal would prohibit a REIT from owning, directly or
indirectly, more than 10% of the voting power or value of all classes of a C
corporation's stock (other than the stock of a qualified REIT subsidiary) after
the effective date of such proposal. Although this proposal was not enacted, we
can give no assurance regarding whether this proposal will be enacted or whether
any future tax legislation or administrative or judicial decisions will
adversely affect our tax treatment or qualification as a REIT.
9
<PAGE>
CONFLICTS OF INTERESTS IN OUR BUSINESS COULD RESULT IN DECISION NOT IN YOUR BEST
INTEREST
Risk of Differing Objectives between Prentiss Principals and the Company
upon Sale, Refinancing or Prepayment of Indebtedness of Properties. Messrs.
Prentiss, August and DuBois (the "Prentiss Principals"), who are senior
executive officers of the Company, and their affiliates may have unrealized
taxable gain associated with their units of limited partnership interest in the
Operating Partnership ("Units"). Because the Prentiss Principals may suffer
different and more adverse tax consequences than the Company upon the sale or
refinancing of certain properties that were contributed to the Operating
Partnership by the Prentiss Principals, the Prentiss Principals and the Company
may have different objectives regarding the appropriate pricing and timing of
any sale or refinancing of such properties. While we, through Prentiss
Properties I, Inc. (the "General Partner"), have the exclusive authority as to
whether and on what terms to sell or refinance an individual property, the
Prentiss Principals, through their status as senior executives and/or trustees,
and those members of the Company's management and Board of Trustees who directly
or indirectly hold Units (i.e., the Prentiss Principals), may influence the
Company not to sell, or refinance or prepay the indebtedness associated with,
certain properties even though such event might otherwise be financially
advantageous to the Company, or may influence the Company to refinance certain
properties with a high level of debt. We have agreed that we will not dispose
of The Plaza on Bachman Creek Property prior to December 31, 1999, unless such
disposition is structured as a tax-deferred like-kind exchange under Section
1031 of the Code.
Risks That Policies with Respect to Conflicts of Interests May Not
Eliminate Influence of Conflicts. We have adopted certain policies intended to
minimize conflicts of interest. For example, we have a bylaw provision
requiring all transactions in which executive officers or trustees have a
conflicting interest to that of the Company to be approved by a majority of our
trustees that are not affiliated with any affiliate of the Company (the
"Independent Trustees") or by the holders of a majority of the Common Shares
held by disinterested shareholders. There can be no assurance that our policies
will be successful in eliminating the influence of such conflicts, and if they
are not successful, decisions could be made that might fail to reflect fully the
interests of all shareholders. The Declaration of Trust includes a provision
permitting each individual trustee, including each Independent Trustee, to
engage in the type of business activities conducted by us without first
presenting any investment opportunities to us, even though such investment
opportunities may be within the scope of our investment policies.
CHANGES IN POLICIES WITHOUT SHAREHOLDER APPROVAL; NO LIMITATION ON DEBT
The Board of Trustees determines our investment, financing, borrowing and
distribution policies, and our policies with respect to all other activities,
including growth, capitalization and operations. The Board of Trustees has
adopted a policy limiting our total combined indebtedness plus our pro rata
share of Joint Venture Debt to 50% or less of our total market capitalization
(the "Debt Limitation"), but our organizational documents do not contain any
limitation on the amount of indebtedness we may incur. Although the Board of
Trustees has no present intention to do so, these policies may be amended or
revised at any time and from time to time at the discretion of the Board of
Trustees without a vote of the shareholders. A change in these policies could
adversely affect our financial condition, results of operations or the market
price of the Common Shares.
PROBLEMS ASSOCIATED WITH DEPENDENCE ON KEY PERSONNEL
We are dependent on the efforts of our executive officers, particularly
Messrs. Prentiss and August. The loss of their services could have an adverse
effect on our operations. Each of Messrs. Prentiss and August have entered into
an employment agreement. Certain assets of affiliates of the predecessor
entities were not contributed to the Company in the transactions in which the
Company was formed (the "Formation Transactions"), and certain of the executive
officers of the Company, including Messrs. Prentiss and August, may devote some
of their management time towards those excluded assets.
RISKS OF THIRD-PARTY PROPERTY MANAGEMENT, LEASING, DEVELOPMENT AND CONSTRUCTION
BUSINESS AND RELATED SERVICES
Risks Associated with Termination of Management and Leasing Contracts.
Through the Operating Partnership and Prentiss Properties Limited, Inc. (the
"Manager"), we engage in the business of management, leasing, development and
construction of properties owned by third parties. Risks associated with these
activities include the following:
10
<PAGE>
. the risk that the related contracts, which are typically cancelable upon
30-days notice or upon certain events, including sale of the property,
will be terminated by the property owner or will be lost in connection
with a sale of such property;
. the risk that contracts may not be renewed upon expiration or may not be
renewed on terms consistent with current terms; and
. the risk that the rental revenues upon which management, leasing and
development fees are based will decline as a result of general real
estate market conditions or specific market factors affecting properties
that we manage, lease or develop, resulting in decreased management or
leasing fee income.
Adverse Consequences of Lack of Control over the Business of the Manager.
The capital stock of the Manager is divided into two classes: voting common
stock, all of which is owned by Mr. Prentiss; and nonvoting common stock, all of
which we hold through the Operating Partnership. The voting common stock and
the nonvoting common stock represent 5% and 95%, respectively, of the ownership
interests in the Manager. Mr. Prentiss, as the holder of all of the Manager's
voting common stock, has the ability to elect the directors of the Manager. We
are not able to elect directors and, therefore, are not able to influence the
day-to-day management decisions of the Manager. As a result, the board of
directors and management of the Manager may implement business policies or
decisions that we would not have implemented and that are adverse to our
interests and which could adversely impact our net operating income and cash
flow.
POSSIBLE ADVERSE EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON SHARES
One of the factors that influences the market price of the Common Shares in
public markets is the annual distribution rate on the Common Shares and the
effective yield on an investment in the Common Shares. An increase in market
interest rates may lead prospective purchasers of the Common Shares to bid down
the market price of the Common Shares in order to increase the effective yield
from future distributions.
POSSIBLE ADVERSE EFFECT OF SHARES AVAILABLE FOR FUTURE SALE ON PRICE OF COMMON
SHARES
Under the Declaration of Trust, we have the authority to (1) amend the
Declaration of Trust, without shareholders approval, to increase or decrease the
aggregate number of shares of beneficial interest or the number of shares of
beneficial interest of any class, including Common Shares, that we have the
authority to issue and (2) to issue additional authorized but unissued Common or
Preferred Shares. We have authorized 100,000,000 Common Shares, of which
60,094,637 Common Shares are unissued or held in treasury. In addition, we have
granted options to purchase 2,735,937 Common Shares to certain executive
officers, employees and trustees, of which options to purchase 2,591,525 Common
Shares remain outstanding. Sales or issuances of a substantial number of Common
Shares, or the perception that such sales or issuances could occur, could
adversely affect prevailing market prices of the Common Shares and dilute the
percentage ownership of the Company held by our shareholders.
The holders of units of limited partnership interest in the Operating
Partnership have the right to receive either cash or one Common Share (subject
to adjustments) in exchange for each such unit they now hold if and to the
extent they tender such units for redemption and we or the General Partner elect
to redeem such units for Common Shares. We are party to certain registration
rights agreements under which we are required to register the issuance of Common
Shares which we may issue upon the redemption by certain holders of units of
limited partnership interest in the Operating Partnership. We can make no
prediction concerning the effect that such issuances or future sales of any such
Common Shares will have no market prices.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS FOR PROPERTIES ACQUIRED
Statement of revenues and certain operating expenses of the Ordway for the
year ended December 31, 1997 is presented as prescribed by Rule 3-14 of
Regulation S-X.
11
<PAGE>
Combined statement of revenues and certain operating expenses of the Willow
Oaks Properties for the year ended December 31, 1997 are presented as prescribed
by Rule 3-14 of Regulation S-X.
(B) Pro Forma Financial Information
Prentiss Properties Trust Pro Forma Balance Sheet as of June 30, 1998 and
Pro Forma Statement of Income for the year ended December 31, 1997 and six month
period ended June 30, 1998.
(C) Exhibits
23.1 Consent of PricewaterhouseCoopers LLP Independent Accountants
12
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following represents certain of the properties acquired by the
Company during 1998: PAGE
NUMBER
INDIVIDUALLY INSIGNIFICANT ACQUISITIONS:
The Ordway Property
Report of Independent Accountants.................................. 14
Statement of Revenues and Certain Operating Expenses for the Year
Ended December 31, 1997............................................ 15
Notes to Statement of Revenues and Certain Operating Expenses...... 16
The Willow Oaks Properties
Report of Independent Accountants.................................. 17
Combined Statement of Revenues and Certain Operating Expenses for
the Year Ended December 31, 1997................................... 18
Notes to Combined Statement of Revenues and Certain Operating
Expenses........................................................... 19
PRO FORMA FINANCIAL STATEMENTS:
Prentiss Properties Trust Pro Forma Consolidated Balance Sheet as
of June 30, 1998................................................... 21
Prentiss Properties Trust Pro Forma Consolidated Statement of
Income for the Year Ended December 31, 1997........................ 22
Prentiss Properties Trust Pro Forma Consolidated Statement of
Income for the Six Months Ended June 30, 1998...................... 24
13
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Prentiss Properties Trust
We have audited the accompanying statement of revenues and certain
operating expenses of the Ordway Property for the year ended December 31, 1997.
The statement of revenues and certain operating expenses is the responsibility
of the Ordway Property's owners. Our responsibility is to express an opinion on
the statement of revenues and certain operating expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenues and certain
operating expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statement of revenues and certain operating expenses. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the statement of
revenues and certain operating expenses. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenues and certain operating expenses was
prepared for the purpose of complying with rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and is not intended
to be a complete presentation of the Ordway Property's revenues and expenses and
may not be comparable to results from proposed future operations of the Ordway
Property.
In our opinion, the statement of revenues and certain operating expenses
referred to above presents fairly, in all material respects, the revenues and
certain operating expenses described in Note 1 for the year ended December 31,
1997, in conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Dallas, Texas
August 12, 1998
14
<PAGE>
ORDWAY PROPERTY
STATEMENT OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S><C> <C>
Revenues:
Rental income........................................................ $11,564
Other income......................................................... 131
-------
11,695
-------
Certain operating expenses:
Real estate taxes.................................................... 803
Repairs and maintenance.............................................. 2,171
Property management.................................................. 502
Utilities............................................................ 1,061
Insurance............................................................ 324
-------
4,861
-------
Revenues in excess of certain operating expenses $ 6,834
=======
</TABLE>
The accompanying notes are an integral part of this financial statement.
15
<PAGE>
ORDWAY PROPERTY
NOTES TO STATEMENT OF REVENUES
AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The statement of revenues and certain operating expenses for the year ended
December 31, 1997 relate to the operations of the Ordway Property (the
"Property"), which was acquired on May 21, 1998 from an unaffiliated third-party
for an aggregate purchase price of $76.3 million. The Ordway Property consists
of one Class "A" suburban office property totaling approximately 525,951 net
rentable square feet in Oakland, California.
The accompanying statement excludes certain expenses such as interest,
depreciation and amortization and other costs not directly related to the future
operations of the Property that may not be comparable to the expenses expected
to be incurred in the proposed future operations of the Property. Management is
not aware of any material factors relating to the Property which would cause the
reported financial information not to be necessarily indicative of future
operating results.
The statement of revenues and certain operating expenses have been prepared
on the accrual basis of accounting.
REVENUE AND EXPENSE RECOGNITION
Rental income is recorded when due from tenants. The effects of scheduled
rent increases and rental concessions, if any, are recognized on a straight-line
basis over the term of the tenant's lease.
FUTURE RENTAL REVENUES
The Property was leased to tenants under net operating leases. Minimum
lease payments receivable, excluding tenant reimbursement of expenses, under
noncancellable operating leases in effect as of December 31, 1997, are
approximately as follows:
<TABLE>
<S> <C>
1998........................................................................................ $11,377
1999........................................................................................ 10,688
2000........................................................................................ 9,397
2001........................................................................................ 4,590
2002........................................................................................ 2,994
Thereafter.................................................................................. 4,026
-------------
$43,072
=============
</TABLE>
Office space in the Ordway Property is generally leased to tenants under
lease terms which provide for tenants to pay for increases in operating expenses
in excess of specified amounts.
USE OF ESTIMATES
The preparation of the statement of revenues and certain operating expenses
requires management to make estimates and assumptions that affect the reported
amounts of revenues and certain operating expenses during the reporting period.
Actual results could differ from those estimates.
16
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Prentiss Properties Trust
We have audited the accompanying combined statement of revenues and certain
operating expenses of the Willow Oaks Properties (the "Willow Oaks Properties")
for the year ended December 31, 1997. The combined statement of revenues and
certain operating expenses is the responsibility of the Willow Oaks Properties'
owners. Our responsibility is to express an opinion on the combined statement of
revenues and certain operating expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined statement of revenues and
certain operating expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined statement of revenues and certain operating expenses. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the combined
statement of revenues and certain operating expenses. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying combined statement of revenues and certain operating
expenses was prepared for the purpose of complying with rules and regulations of
the Securities and Exchange Commission, as described in Note 1, and is not
intended to be a complete presentation of the Willow Oaks Properties' revenues
and expenses and may not be comparable to results from proposed future
operations of the Willow Oaks Properties.
In our opinion, the combined statement of revenues and certain operating
expenses referred to above presents fairly, in all material respects, the
revenues and certain operating expenses described in Note 1 for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Dallas, Texas
September 30, 1998
17
<PAGE>
THE WILLOW OAKS PROPERTIES
COMBINED STATEMENT OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S><C> <C>
Revenues:
Rental income........................................................... $8,914
Other income............................................................ 297
------
9,211
------
Certain operating expenses:
Real estate taxes....................................................... 208
Repairs and maintenance................................................. 498
Property management..................................................... 369
Utilities............................................................... 398
Insurance............................................................... 74
------
1,547
------
Revenues in excess of certain operating expenses $7,664
======
</TABLE>
The accompanying notes are an integral part of this financial statement.
18
<PAGE>
THE WILLOW OAKS PROPERTIES
NOTES TO COMBINED STATEMENT OF REVENUES
AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The combined statement of revenues and certain operating expenses for the
year ended December 31, 1997 relate to the operations of the Willow Oaks
Properties (the "Willow Oaks Properties" or the "Properties"), which were
acquired on August 18, 1998, by the Company from an unaffiliated third-party for
an aggregate purchase price of $76.0 million. The Willow Oaks Properties consist
of two Class "A" suburban office buildings totaling approximately 387,469 net
rentable square feet and 4.05 acres of undeveloped land located in the suburban
markets of Northern Virginia near Washington, D.C.
The accompanying statement excludes certain expenses such as interest,
depreciation and amortization and other costs not directly related to the future
operations of the properties that may not be comparable to the expenses expected
to be incurred in the proposed future operations of these properties. Management
is not aware of any material factors relating to the properties which would
cause the reported financial information not to be necessarily indicative of
future operating results.
The combined statement of revenues and certain operating expenses have been
prepared on the accrual basis of accounting.
REVENUE AND EXPENSE RECOGNITION
Rental income is recorded when due from tenants. The effects of scheduled
rent increases and rental concessions, if any, are recognized on a straight-line
basis over the term of the tenant's lease.
During the year ended December 31, 1997, three separate tenants represented
46%, 19% and 15% of the total base rental income of one of the Willow Oaks
Properties, and one major tenant owned an interest in and leased 100% of the
other.
FUTURE RENTAL REVENUES
The properties are leased to tenants under net operating leases. Minimum
lease payments receivable, excluding tenant reimbursement of expenses, under
noncancellable operating leases in effect as of December 31, 1997, are
approximately as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 9,238
1999.............................................................. 7,767
2000.............................................................. 5,725
2001.............................................................. 5,795
2002.............................................................. 5,998
Thereafter........................................................ 12,498
--------------
$47,021
==============
</TABLE>
Office space in the Willow Oaks Properties is generally leased to tenants
under lease terms that provide for tenants to pay for increases in operating
expenses in excess of specified amounts.
USE OF ESTIMATES
The preparation of the combined statement of revenues and certain operating
expenses requires management to make estimates and assumptions that affect the
reported amounts, revenues and certain operating expenses during the reporting
period. Actual results could differ from those estimates.
19
<PAGE>
2. RELATED PARTY TRANSACTIONS (amounts in whole dollars)
Under terms of various management agreements, the Willow Oaks Properties
paid $153,160 in management fees during the year ended December 31, 1997 to
affiliates of the entities owning the Properties.
The Properties purchased insurance from affiliates of the entities owning
the Properties. Total insurance expense for the year ended December 31, 1997 was
approximately $74,000.
The Willow Oaks Properties received base rents in the amount of $5,821,910
during the year ended December 31, 1997 from entities affiliated with the
entities owning the Properties.
20
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following unaudited pro forma consolidated balance sheet is presented
as if the following transactions had been consummated on June 30, 1998: (i) the
acquisition of the Willow Oaks Properties and (ii) the acquisition of other
insignificant properties acquired subsequent to June 30, 1998, (collectively,
the "Other Acquisitions"). This pro forma consolidated balance sheet should be
read in conjunction with the pro forma consolidated statements of income of the
Company for the year ended December 31, 1997 and six month period ended June 30,
1998 included elsewhere in this Form 8-K.
The pro forma consolidated balance sheet is not necessarily indicative of
what the actual financial position would have been had the Company completed the
transactions described above, nor does it purport to represent the future
financial position of the Company.
<TABLE>
<CAPTION>
PRO FORMA
(UNAUDITED) ADJUSTMENTS PRENTISS
PRENTISS --------------------- PROPERTIES
PROPERTIES WILLOW OAKS TRUST
TRUST/(1)/ PROPERTIES AND OTHER PRO FORMA
JUNE 30, 1998 ACQUISITIONS/(2)/ JUNE 30, 1998
-------------- ---------------------- -------------
<S> <C> <C> <C>
Assets:
Real estate, net........................................... $1,542,280 $201,179 $1,819,958
Mortgage note receivable................................... 36,246 36,246
Deferred charges and other assets, net..................... 40,562 40,562
Receivables, net........................................... 17,274 17,274
Cash and cash equivalents.................................. 11,347 11,347
Escrowed cash and deposits on
real estate................................................ 9,612 9,612
Investments in joint venture and unconsolidated
subsidiaries............................................... 11,468 11,468
------------ ---------------------- ------------
Total Assets........................................... $1,668,789 $201,179 $1,869,968
============ ====================== ============
Liabilities:
Debt on real estate........................................ $ 593,913 $200,700 $ 794,613
Accounts payable and other liabilities..................... 47,648 47,648
Other liabilities (affiliates)............................. 5,043 5,043
Distributions payable...................................... 18,225 18,225
------------ ---------------------- ------------
Total Liabilities...................................... 664,829 200,700 865,529
------------ ---------------------- ------------
Minority interest in operating partnership.................... 128,126 479 128,605
------------ ---------------------- ------------
Minority interest in real estate partnership.................. 1,277 1,277
------------ ---------------------- ------------
Shareholders' Equity:
Preferred shares........................................... 100,000 100,000
Common shares.............................................. 399 399
Additional paid-in capital................................. 786,563 786,563
Distributions in excess of accumulated
Earnings................................................... (12,405) (12,405)
------------ ---------------------- ------------
Total Shareholders' Equity............................. 874,557 874,557
------------ ---------------------- ------------
Total Liabilities and Shareholders'
Equity.............................................. $1,668,789 $201,179 $1,869,968
============ ====================== ============
</TABLE>
(1) The acquisition of the Ordway Property was completed on 5/21/98; therefore,
the balance sheet at 6/30/98 included the effect of the acquisition.
(2) The financial information on the Willow Oaks Properties and Other
Acquisitions is presented as if the transaction occurred on June 30, 1998.
The Other Acquisitions include 10 Properties containing 931,000 square feet
and a purchase price totaling approximately $125.2 million.
21
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following unaudited pro forma consolidated statement of income is
presented as if (i) the acquisition of all of the properties acquired in 1997
(the "1997 Acquired Properties"), the acquisition of all of the properties
acquired in 1998 ("the 1998 Acquired Properties") between January 1, 1998 and
the filing date of this form 8-K, and (ii) all of the Company's offerings of
common and preferred shares and operating partnership units during 1997 and 1998
had occurred on January 1, 1997.
This pro forma consolidated statement of income should be read in
conjunction with the pro forma consolidated balance sheet at June 30, 1998
and the pro forma consolidated statement of income of the Company for the six
month period ended June 30, 1998 included elsewhere in this Form 8-K.
The pro forma consolidated statement of income is not necessarily
indicative of what actual results would have been had the previously described
transactions actually occurred as of January 1, 1997 nor does it purport to
represent the operations of the Company for future periods.
<TABLE>
<CAPTION>
(UNAUDITED) PRENTISS
PRENTISS PRO FORMA ADJUSTMENTS PROPERTIES
PROPERTIES -------------------------------------------------- TRUST PRO
TRUST 1997 1998 FORMA
YEAR ENDED ACQUIRED ACQUIRED OTHER YEAR ENDED
DEC. 31, 1997 PROPERTIES/(1)/ PROPERTIES/(2)/ ADJUSTMENTS/(3)/ DEC. 31, 1997
------------- -------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income.............................. $ 127,089 $ 48,341 $ 73,692 $ 249,122
Mortgage interest.......................... 1,780 1,969 3,749
Management fees............................ 925 925
Development, leasing, sale and
other fees............................... 1,934 1,488 428 3,850
--------- --------- --------- --------- ---------
Total revenues........................... 131,728 51,798 74,120 257,646
--------- --------- --------- --------- ---------
Expenses:
Property operating and
maintenance.............................. 30,602 15,060 19,207 (3,451) 61,418
Real estate taxes.......................... 13,742 4,471 7,997 26,210
General and administrative................. 3,141 3,141
Personnel costs, net....................... 3,478 3,478
Interest expense........................... 21,131 31,069 52,200
Amortization of deferred financing
costs.................................... 824 824
Depreciation and amortization.............. 21,600 24,344 45,944
--------- --------- --------- --------- ---------
Total expenses........................... 94,518 19,531 27,204 51,962 193,215
--------- --------- --------- --------- ---------
Equity in income of joint venture
and unconsolidated subsidiaries............ 5,208 5,208
--------- --------- --------- --------- ---------
Income before gain on sale and
minority interest.......................... 42,418 32,267 46,916 (51,962) 69,639
Gain on sale.................................. 641 (641)
Minority interest............................. (5,235) (5,039) (10,274)
--------- --------- --------- --------- ---------
Income before extraordinary item.............. 37,824 32,267 46,916 (57,642) 59,365
Extraordinary item............................ (878) 878
--------- --------- --------- --------- ---------
Net income.................................... $ 36,946 $ 32,267 $ 46,916 $ (56,764) $ 59,365
Preferred dividends........................... (25) (6,013) (6,038)
--------- --------- --------- --------- ---------
Net income attributable to common
shareholders............................... $ 36,921 $ 32,267 $ 46,916 $ (62,777) $ 53,327
========= ========= ========= ========= =========
Net income per common share-before
extraordinary item......................... $ 1.52 $ 1.34
Extraordinary item............................ (0.04)
--------- ---------
Net income per common share-basic............. $ 1.48 $ 1.34
========= =========
Weighted average number of
shares outstanding......................... 24,930 39,905
========= =========
Net income per common share-before
extraordinary item......................... $ 1.49 $ 1.32
Extraordinary item............................ (0.03)
--------- ---------
Net income per common share-diluted........... $ 1.46 $ 1.32
========= =========
Weighted average common shares
outstanding................................ 25,307 40,282
========= =========
</TABLE>
22
<PAGE>
(1) During 1997, the Company acquired 66 properties containing approximately
6.8 million square feet for an approximate purchase price of $650 million.
The financial information of the 1997 Acquired Properties reflects the
historical revenues and certain operating expenses of the properties for
the portion of the period prior to acquisition.
(2) During 1998, the Company has acquired 84 Properties containing
approximately 5.0 million square feet for an approximate purchase price of
$562.6 million. The financial information of the 1998 Acquired Properties
reflects the historical revenues and certain operating expenses of the
properties for the period presented.
(3) The Other Adjustments reflect the adjustments that Management considers
necessary to present the revenues and expenses of the Company related to
the ownership and operations of the 1997 Acquired Properties and the 1998
Acquired Properties as if the acquisitions had occurred on January 1, 1997.
23
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following unaudited pro forma consolidated statement of income is
presented as if (i) all of the acquisitions of properties during 1998 through
the filing date of this Form 8-K, (collectively, the "1998 Acquired Properties")
and (ii) all of the Company's offerings of common and preferred shares and
operating partnership units during 1998 had occurred on January 1, 1997.
This pro forma consolidated statement of income should be read in
conjunction with the pro forma consolidated balance sheet at June 30, 1998 and
the pro forma consolidated statement of income of the Company year ended
December 31, 1997 included elsewhere in this Form 8-K.
The pro forma consolidated statement of income is not necessarily
indicative of what actual results would have been had the previously described
transactions actually occurred as of January 1, 1997 nor does it purport to
represent the operations of the Company for future periods.
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------
(UNAUDITED) PRENTISS
PRENTISS PROPERTIES TRUST
PROPERTIES TRUST PRO FORMA
SIX MONTHS ENDED 1998 ACQUIRED OTHER SIX MONTHS ENDED
JUNE 30, 1998 PROPERTIES/(1)/ ADJUSTMENTS/(2)/ JUNE 30, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Rental income ..................... $ 103,939 $ 28,567 $ 132,506
Mortgage interest ................. 1,920 1,920
Management fees ................... 490 490
Development, leasing, sale and
other fees........................ 473 214 687
---------------- ---------------- ---------------- ----------------
Total revenues .................. 106,822 28,781 135,603
---------------- ---------------- ---------------- ----------------
Expenses:
Property operating and maintenance 23,581 6,770 30,351
Real estate taxes ................. 11,268 3,669 14,937
General and administrative ........ 2,131 2,131
Personnel costs, net .............. 1,748 1,748
Interest expense .................. 16,679 9,421 26,100
Amortization of deferred financing
costs ........................... 396 396
Depreciation and amortization ..... 18,159 4,813 22,972
---------------- ---------------- ---------------- ----------------
Total expenses .................. 73,962 10,439 14,234 98,635
Equity in joint venture and
unconsolidated subsidiaries........ 2,950 2,950
---------------- ---------------- ---------------- ----------------
Income before gain on sale and
minority interest ................. 35,810 18,342 (14,234) 39,318
Gain on sale ......................... 3,824 (3,824)
Minority interest .................... (2,179) (3,178) (5,357)
---------------- ---------------- ---------------- ----------------
Income before extraordinary item ..... 37,455 18,342 (21,236) 34,561
Extraordinary item ................... (8,908) 8,908
---------------- ---------------- ---------------- ----------------
Net income ........................... $ 28,547 $ 18,342 $ (12,328) $ 34,561
Preferred dividends .................. (2,641) (378) (3,019)
---------------- ---------------- ---------------- ----------------
Net income attributable to common
shareholders ...................... $ 25,906 $ 18,342 $ (12,706) $ 31,542
================ ================ ================ ================
Net income per common share before
extraordinary item - basic ........ $ 0.91 $ 0.79
Extraordinary item.................... (0.23)
---------------- ----------------
Net income per common share - basic .. $ 0.68 $ 0.79
================ ================
Weighted average number of shares
outstanding........................ 38,340 39,905
================ ================
Net income per common share before
extraordinary item - diluted ...... $ 0.83 $ 0.78
Extraordinary item ................... (0.21)
---------------- ----------------
Net income per common share -
diluted ........................... $ 0.62 $ 0.78
================ ================
Weighted average number of
shares outstanding ................ 41,992 40,247
================ ================
</TABLE>
24
<PAGE>
(1) The financial information of the 1998 Acquired Properties reflects the
historical revenues and certain operating expenses of the properties for
the portion of the six month period ended June 30, 1998 prior to
acquisition.
(2) The Other Adjustments reflect the adjustments that Management considers
necessary to present the revenues and expenses of the Company related to
the ownership and operations of the 1998 Acquired Properties as if the
acquisitions had occurred on January 1, 1997.
25
<PAGE>
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PRENTISS PROPERTIES TRUST
Date: October 8, 1998 By: /s/ THOMAS P. SIMON
---------------------------------------------
Thomas P. Simon
(Vice President and Chief Accounting Officer)
26
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. Description
- ----------- -----------
23.1 Consent of PricewaterhouseCoopers LLP Independent Accountants.
27
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Prentiss Properties Trust on Form S-3 (File Nos. 333-38079, 333-
49295, 333-49433, and 333-60785) and Form S-8 (File No. 333-20329) of our
reports dated (i) September 30, 1998 on our audit of the combined statement of
revenues and certain operating expenses of the Willow Oaks Properties and (ii)
August 12, 1998 on our audit of the statement of revenues and certain operating
expenses of the Ordway Property, all of which reports are included in this
Current Report on Form 8-K.
Dallas, Texas
October 8, 1998
