<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended June 30, 1998 Commission File Number 1-14516
PRENTISS PROPERTIES TRUST
(Exact Name of Registrant as Specified in its Charter)
MARYLAND 75-2661588
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
3890 West Northwest Highway, Suite 400, Dallas, Texas 75220
(Address of Registrant's Principal Executive Office)
(214) 654-0886
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such report), and (ii) has been subject to such
filing requirements for the past 90 days.
Yes X No
------- -------
The number of Common Shares of Beneficial Interest, $0.01 par value, outstanding
as of August 10, 1998, was 39,254,680 and the number of outstanding
Participating Cumulative Redeemable Preferred Shares of Beneficial Interest,
Series A, was 3,773,585.
<PAGE>
PRENTISS PROPERTIES TRUST
INDEX
-----
PART I: FINANCIAL INFORMATION PAGE NUMBER
-----------
Item 1. Financial Statements
Consolidated Balance Sheets of Prentiss
Properties Trust at June 30, 1998 (unaudited)
and December 31, 1997 3
Consolidated Statements of Income of Prentiss
Properties Trust for the three month periods
ended June 30, 1998 and 1997 and the six month
periods ended June 30, 1998 and 1997 (unaudited) 4
Consolidated Statements of Cash Flows of Prentiss
Properties Trust for the six month periods ended
June 30, 1998 and 1997 (unaudited) 5
Notes to Consolidated Financial Statements 6-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15-20
Item 3. Quantitative and Qualitative Disclosures about
Market Risk 20
PART II: OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities 21
Item 3. Defaults Upon Mortgages and Notes Payable 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22-23
SIGNATURE 24
2
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
-------------------- --------------------
(Unaudited)
ASSETS
<S> <C> <C>
Real estate..................................................... $1,592,625 $1,170,992
Less: accumulated depreciation............................... (50,345) (36,143)
---------- ----------
1,542,280 1,134,849
Deferred charges and other assets, net.......................... 40,562 24,636
Mortgage note receivable........................................ 36,246 36,331
Receivables, net................................................ 17,274 10,865
Cash and cash equivalents....................................... 11,347 7,075
Escrowed cash................................................... 9,612 4,524
Other receivables (affiliates).................................. - 1,928
Investments in joint venture and unconsolidated subsidiary...... 11,468 19,638
---------- ----------
Total assets................................................... $1,668,789 $1,239,846
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debt on real estate............................................ $ 593,913 $ 420,030
Accounts payable and other liabilities......................... 47,648 35,795
Other liabilities (affiliates)................................. 5,043 -
Distributions payable.......................................... 18,225 14,782
---------- ----------
Total liabilities........................................... 664,829 470,607
---------- ----------
Minority interest in operating partnership...................... 128,126 71,547
---------- ----------
Minority interest in real estate partnerships................... 1,277 1,060
---------- ----------
Commitments and contingencies
Shareholders' equity:
Preferred shares $.01 par value, 20,000,000 shares
authorized, 3,773,585 and 2,830,189 shares issued and
outstanding at June 30, 1998 and December 31, 1997,
respectively................................................. 100,000 75,000
Common shares $.01 par value, 100,000,000 shares
authorized, 39,905,363 and 33,191,483 shares issued
and outstanding at June 30, 1998 and
December 31, 1997, respectively............................... 399 332
Additional paid-in capital..................................... 786,563 628,086
Distributions in excess of accumulated earnings................ (12,405) (6,786)
---------- ----------
Total shareholders' equity................................... 874,557 696,632
---------- ----------
Total liabilities and shareholders' equity................... $1,668,789 $1,239,846
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Rental income............................................. $53,974 $29,118 $103,939 $51,093
Mortgage interest......................................... 960 - 1,920 -
Management fees........................................... 228 225 490 472
Development, leasing, sale and other fees................. 287 435 473 867
------- ------- -------- -------
Total revenues........................................... 55,449 29,778 106,822 52,432
------- ------- -------- -------
Expenses:
Property operating and maintenance......................... 12,085 6,697 23,581 12,010
Real estate taxes.......................................... 5,993 3,246 11,268 5,703
General and administrative................................. 1,347 747 2,131 1,301
Personnel costs, net....................................... 660 655 1,748 1,364
Interest expense........................................... 8,533 4,380 16,679 7,033
Amortization of deferred financing costs................... 200 194 396 367
Depreciation and amortization.............................. 9,644 5,051 18,159 8,886
------- ------- -------- -------
Total expenses........................................... 38,462 20,970 73,962 36,664
------- ------- -------- -------
Equity in income of joint venture and unconsolidated
subsidiary................................................. 1,704 1,363 2,950 2,782
------- ------- -------- -------
Income before gain on sale, minority interest, and
extraordinary item......................................... 18,691 10,171 35,810 18,550
Gain on sale................................................ 1,269 243 3,824 243
Minority interest........................................... (909) (1,267) (2,179) (2,455)
------- ------- -------- -------
Income before extraordinary item............................ 19,051 9,147 37,455 16,338
Extraordinary item.......................................... - - (8,908) (111)
------- ------- -------- -------
Net income.................................................. 19,051 9,147 28,547 16,227
Preferred dividends......................................... 1,505 - 2,641 -
------- ------- -------- -------
Net income applicable to common shareholders................ $17,546 $ 9,147 $ 25,906 $16,227
======= ======= ======== =======
Net income per Common Share before extraordinary item basic. $ 0.44 $ 0.38 $ 0.91 $ 0.73
Extraordinary item.......................................... - - (0.23) -
------- ------- -------- -------
Net income per Common Share basic.......................... $ 0.44 $ 0.38 $ 0.68 $ 0.73
------- ------- -------- -------
Weighted average number of Common Shares outstanding basic. 39,873 24,303 38,340 22,303
======= ======= ======== =======
Net income per Common Share before
extraordinary item diluted................................ $ 0.43 $ 0.37 $ 0.89 $ 0.72
Extraordinary item.......................................... - - (0.21) -
------- ------- -------- -------
Net income per Common Share diluted........................ $ 0.43 $ 0.37 $ 0.68 $ 0.72
======= ======= ======== =======
Weighted average number of Common Shares and
Common Share equivalents outstanding diluted.............. 43,936 24,538 41,992 22,630
======= ======= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(dollars in thousands)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 28,547 $ 16,227
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interest.................................................. 2,179 2,455
Extraordinary item................................................. 8,908 111
Gain on sale....................................................... (3,824) (243)
Depreciation and amortization...................................... 18,159 8,886
Amortization of deferred financing costs........................... 396 367
Equity in income of joint venture and unconsolidated subsidiary.... (2,950) (2,782)
Non-cash compensation.............................................. 50 25
Changes in assets and liabilities, net of non-cash effect of
acquisitions:
Provision for doubtful accounts.................................... 427 5
Receivables........................................................ (6,778) (3,628)
Deferred charges and other assets.................................. 670 (2,879)
Escrowed cash...................................................... (4,403) (558)
Accounts payable and other liabilities............................. 7,276 4,547
Amounts due to/from affiliates..................................... 6,561 4,007
--------- ---------
Net cash provided by operating activities................................ 55,218 26,540
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of real estate.................................................. (375,830) (248,296)
Investment in real estate................................................ (20,949) (17,300)
Investment in mortgage note receivable................................... 85 (597)
Proceeds from sale of real estate........................................ 12,905 3,030
Distributions received from joint venture and unconsolidated subsidiary.. 4,543 3,669
--------- ---------
Net cash used in investing activities.................................... (379,246) (259,494)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from sale of Common Shares.................................. 106,412 135,775
Net proceeds from sale of Preferred Shares............................... 25,000 -
Net proceeds from sale of Preferred Units................................ 95,000 -
Distributions paid to limited partners................................... (2,050) (2,357)
Distributions paid to common shareholders................................ (29,222) (14,399)
Distributions paid to preferred shareholders............................. (1,161) -
Proceeds from debt on real estate........................................ 411,097 306,756
Repayments of debt on real estate........................................ (276,776) (193,600)
--------- ---------
Net cash provided by financing activities................................ 328,300 232,175
--------- ---------
Net increase in cash and cash equivalents................................ 4,272 (779)
Cash and cash equivalents, beginning of period........................... 7,075 7,226
--------- ---------
Cash and cash equivalents, end of period................................. $ 11,347 $ 6,447
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest................................................... $ 17,523 $ 6,113
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1. THE ORGANIZATION
The Company is a self-administered and self-managed Real Estate Investment
Trust ("REIT") that acquires, owns, manages, leases, develops and builds office
and industrial properties throughout the United States. The Company operates
principally through Prentiss Properties Acquisition Partners, L.P. and its
subsidiaries (the "Operating Partnership") and Prentiss Properties Limited, Inc.
(the "Manager") (collectively referred to herein as the "Company"). As of June
30, 1998, the Company owned interests in a diversified portfolio of 240
primarily suburban Class "A" office and suburban industrial properties (the
"Properties") containing approximately 22.2 million net rentable square feet.
The Properties are located in 20 major U.S. markets and consist of 115 office
buildings (the "Office Properties") containing approximately 13.0 million net
rentable square feet and 125 industrial buildings (the "Industrial Properties")
containing approximately 9.2 million net rentable square feet. The Properties
include 11 office and 2 industrial development projects, including one expansion
of an existing Property, totaling approximately 1.8 million square feet.
Exclusive of the development projects, as of June 30, 1998, the Office
Properties were approximately 95% leased to approximately 1,142 tenants and the
Industrial Properties were approximately 96% leased to approximately 348
tenants. In addition to the 240 Properties owned, the Company manages
approximately 29.2 million net rentable square feet in 256 office and industrial
properties, in 19 U.S. markets, that are owned by third-parties.
At December 31, 1997, the Company owned a total of 170 Properties. During
the six month period ended June 30, 1998, the Company acquired 72 Properties
comprising 3.7 million square feet, and sold one office and six industrial
properties totaling 336,821 square feet. Additionally, the Company began
development on 5 new Office Properties during the six months ended June 30,
1998, totaling 768,000 square feet.
The Company's property related transactions for the six months ended June
30, 1998 are summarized by fiscal quarter in the table below:
<TABLE>
<CAPTION>
# OF BLDGS. SQ. FT.
--------------- ---------------
(square feet in thousands)
<S> <C> <C>
PROPERTIES AS OF DECEMBER 31, 1997 170 18,082
ACTIVITY FOR THREE MONTHS ENDED MARCH 31, 1998
Property Acquisitions 59 1,769
Property Dispositions (1) (118)
Development Starts 1 97
--------------- ---------------
59 1,748
ACTIVITY FOR THREE MONTHS ENDED JUNE 30, 1998
Property Acquisitions 13 1,928
Property Dispositions (6) (218)
Development Starts 4 671
--------------- ---------------
11 2,381
--------------- ---------------
PROPERTIES AS OF JUNE 30, 1998 240 22,211
=============== ===============
</TABLE>
The Direct Placement Offerings, Unit Conversion, Preferred Shares, and
Share Repurchase Program
On February 2, 1998, the Company closed a direct placement of 1.1 million
common shares of beneficial interest, $0.01 par value per share ("Common
Shares") to an affiliate of Union Bank of Switzerland ("UBS") for gross
consideration of $29.7 million or $27.00 per share. In a related transaction,
the Company entered into a forward stock contract with UBS which provides that
during the first year after the closing of the direct placement, the Company
will have the right to periodically consummate a share settlement with UBS based
on the then market price of the Company's Common Shares. Alternatively, the
Company, at its option, may complete such settlement for cash consideration.
The net proceeds from the sale to UBS and its affiliates were contributed to the
Operating Partnership in exchange for Operating Partnership units ("Units").
6
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
On February 18, 1998, the Company closed two direct placements totaling
1,816,006 Common Shares resulting in gross proceeds of approximately $49.5
million or $27.25 per share. The Common Shares were underwritten in two
separate transactions by Prudential Securities Incorporated ("Prudential") and
Smith Barney Inc. ("Smith Barney"). Prudential underwrote 922,676 Common Shares
and Smith Barney underwrote 893,330 Common Shares. The net proceeds from the
sales to Prudential and Smith Barney were contributed to the Operating
Partnership in exchange for Units.
On February 23, 1998, the Company closed a direct placement of 1,198,157
Common Shares resulting in gross proceeds of approximately $32.5 million or
$27.125 per share. The Common Shares were underwritten by A.G. Edwards & Sons,
Inc. ("AG Edwards") The net proceeds from the sale to AG Edwards were
contributed to the Operating Partnership in exchange for Units.
In connection with the Company's initial public offering ("IPO"), certain
entities affiliated with the Company (the "Merged Entities") received Units in
exchange for certain assets they contributed to the Operating Partnership. In
February 1998, (i) the Merged Entities distributed 113,500 Units to certain
employees of the Merged Entities (the "Merged Entity Employees"), (ii) the
Company issued 2,432,541 Common Shares in exchange for all of the capital stock
of the Merged Entities to the owners of the Merged Entities (the "Merged Entity
Owners"), and (iii) the Merged Entity Employees redeemed their 113,500 Units in
exchange for an equal number of Common Shares. These transactions were approved
by a quorum of the independent members of the Company's Board of Trustees.
On March 31, 1998, pursuant to an agreement entered into between the
Company and Security Capital Preferred Growth Incorporated ("SCPG"), the Company
issued 943,396 Series "A" Cumulative Convertible Redeemable Preferred Shares
("Series A Convertible Preferred Shares") for $26.50 per share. The Company
contributed the net proceeds from the sale of the Series A Convertible Preferred
Shares to the Operating Partnership in exchange for preferred Units. The 943,396
Series A Convertible Preferred Shares are convertible into an equal number of
Common Shares and have rights to a dividend equal to the dividend paid on Common
Shares.
On June 26, 1998, the Company privately placed 1,900,000 Series B
Cumulative Redeemable Perpetual Preferred Units (the "Series B Perpetual
Preferred Units") with an institutional investor. The issue resulted in gross
consideration of $95.0 million. Such proceeds were used to repay borrowings
under the Company's Line of Credit (as defined in Note 4). The Series B
Perpetual Preferred Units are callable by the Company in five years at par value
and have a coupon rate of 8.3%.
On June 30, 1998, the Company's Board of Trustees authorized the repurchase
of up to 2.0 million Common Shares in the open market or negotiated private
transactions. On July 2, 1998, the Company began purchasing shares in the open
market. As of August 10, 1998, the Company has repurchased 669,700 Common Shares
at an average price of $24.32 per share.
The Properties
During the six months ended June 30, 1998, the Company acquired 72
Properties containing approximately 3.7 million square feet (collectively the
"Acquired Properties"), sold one office property containing 118,316 square feet
and six industrial properties totaling 218,505 square feet, began development of
five office projects comprising 768,000 square feet and transitioned into
operations two industrial development projects totaling 299,400 square feet.
The Acquired Properties consist of 21 Class "A" suburban Office Properties
(the "Acquired Office Properties") totaling 2.5 million square feet and 51
suburban Industrial Properties (the "Acquired Industrial Properties") totaling
1.2 million square feet.
7
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
2. BASIS OF PRESENTATION
The consolidated financial statements of the Company include all the
accounts of the Company, its majority-owned Operating Partnership and
subsidiaries. The financial statements for the three and six months ended June
30, 1998, include (i) the results of operations of 147 operating Properties and
10 development projects (including one expansion of an existing Property) for
the entire periods presented, (ii) the results of operations of the 72 Acquired
Properties and 5 development projects for the portion of the periods subsequent
to acquisition or commencement of development by the Company, (iii) the results
of operations of the 5307 East Mockingbird, Oceanside Distribution Center and
West Loop Business Park Properties (the "Sold Properties") for the portion of
the periods before the Company sold the Sold Properties, (v) a 50% equity
interest in the 7 Broadmoor Austin Properties, and (vi) results of operations of
the Prentiss Properties Service Business conducted primarily by the Manager in
the periods presented. The financial statements for the three and six months
ended June 30, 1997, include (i) the results of operations of 88 operating
Properties (inclusive of the Sold Properties) and 3 development projects
(including one expansion of an existing Property) for the entire periods
presented, (ii) the results of operations of 29 Properties acquired during the
period and 3 development projects for the portion of the period subsequent to
acquisition or commencement of development by the Company, (iii) an approximate
50% equity interest in the 7 Broadmoor Austin Properties, and (iv) results of
operations of the Prentiss Properties Service Business conducted primarily by
the Manager in the period presented. All significant intercompany balances and
transactions have been eliminated.
The accompanying financial statements are unaudited; however, the financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and
the rules and regulations of the Securities and Exchange Commission ("SEC").
Accordingly, they do not include all of the disclosures required by GAAP for
complete financial statements. In the opinion of management, all adjustments
(consisting solely of normal recurring matters) necessary for a fair
presentation of the financial statements for these interim periods have been
included. The results for the three and six months ended June 30, 1998 are not
necessarily indicative of the results to be obtained for the full fiscal year.
These financial statements should be read in conjunction with the December 31,
1997 audited financial statements and notes thereto of the Company, included in
its annual report on Form 10-K for the fiscal year ended December 31, 1997.
3. REAL ESTATE
A brief description of the Properties acquired and other significant real
estate transactions occurring during the six months ended June 30, 1998 follows:
On January 9, 1998, the Company acquired three Class "A" Office Properties
containing 141,139 square feet located in the suburban Philadelphia,
Pennsylvania, area. The purchase price of the Properties (the "Creamery Way
Properties"), excluding closing costs, totaled approximately $13.8 million.
On January 13, 1998, the Company acquired six Industrial Properties
containing 382,234 square feet located in the San Jose, California, area. The
purchase price of the Properties, excluding closing costs, totaled approximately
$26.6 million.
On January 30, 1998, the Company acquired a single Class "A" Office
Property containing 234,222 square feet located in the Denver, Colorado, area.
The purchase price of the Property, excluding closing costs, totaled
approximately $31.0 million.
On February 4, 1998, the Company acquired four Class "A" Office Properties
and 45 Industrial Properties containing 1.0 million square feet located in the
San Diego, California, and Tucson, Arizona, areas. The purchase price of the
Properties, excluding closing costs, totaled approximately $80.4 million.
On March 31, 1998, the Company sold the 5307 East Mockingbird Property for
total sale proceeds of approximately $8.2 million resulting in a gain on sale of
approximately $2.6 million.
8
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
On April 24, 1998, the Company acquired two Class "A" Office Properties
containing 52,665 square feet located in the suburban Philadelphia,
Pennsylvania, area. The purchase price of the Properties, excluding closing
costs, totaled approximately $5.2 million.
On May 18, 1998, the Company acquired two Class "A" Office Properties
totaling 148,108 square feet located in the Kansas City, Missouri, area. The
purchase price of the Properties, excluding closing costs, totaled approximately
$19.9 million.
On May 21, 1998, the Company acquired a single Class "A" Office Property
containing 525,951 square feet located in the Oakland, California, area. The
purchase price of the Property, excluding closing costs, totaled approximately
$77.0 million.
On May 22, 1998, the Company disposed of the Oceanside Distribution Center
property for total proceeds of approximately $8.0 million resulting in a gain on
sale of approximately $455,000.
On June 12, 1998, the Company acquired seven Class "A" Office Properties
totaling 1,044,858 square feet located in the Houston, Texas, area.
Additionally, the Company acquired the related property management and leasing
operations for 700,000 square feet of office properties for third-party clients.
The purchase price of the Properties (the "Fidinam Office Portfolio"), excluding
closing costs, totaled approximately $87.0 million, including approximately
$31.6 million of debt assumed, approximately $50.8 million in cash, and the
issuance of 187,720 Units valued at $4.5 million.
On June 30, 1998, the Company acquired a single Class "A" Office Property
containing 156,000 square feet located in the metropolitan Washington, D.C.
area. The purchase price of the Property, excluding closing costs, totaled
approximately $22.4 million.
On June 30, 1998, the Company disposed of the West Loop Business Park
Properties for total sale proceeds of approximately $4.9 million resulting in a
gain on sale of approximately $1.3 million.
4. DEBT ON REAL ESTATE
At December 31, 1997, the Company had debt on real estate of $420.0
million, excluding the Company's proportionate share of the debt on the
Broadmoor Austin Properties. The Company owns a 50% equity interest in the
Broadmoor Austin Properties and accounts for its interest using the equity
method of accounting.
On March 11, 1998, the Company closed a $35.0 million non-recourse mortgage
with CIGNA collateralized by the Walnut Glen Tower Property. The new loan has a
6.92% interest rate and a seven-year term with an option to extend for one year.
The existing $10.0 million loan, which had a rate of 7.50%, was repaid with the
proceeds.
The Company is obligated under three loans (the "Construction Loans") to
fund the construction and development of four Properties. The Construction
Loans provide for total funding of $44.5 million, of which $11.7 million and
$10.0 million were drawn during the three month periods ending March 31, 1998
and June 30, 1998, respectively, resulting in an outstanding balance of $31.7
million at June 30, 1998. The Construction Loans bear interest at varying
rates, from LIBOR plus 165 basis points to LIBOR plus 175 basis points, and
mature on dates from September 2000 to December 2000.
In connection with the acquisition of certain of the Acquired Properties
during the six months ended June 30, 1998 the Company assumed debt totaling
$35.5 million. Such debt instruments are fixed rate, amortizing loans with
interest rates ranging from 7.84% to 8.38% and amortization periods of 20 years.
The loans are collateralized by the related Properties and mature on varying
dates from February 2004 to September 2006.
On June 30, 1998, the Company entered into a note payable agreement with
the former owners of one of the Acquired Properties in the amount of $4.0
million. The note is unsecured, has a fixed rate of 7.75% and matures on
December 31, 2000.
9
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
During the six months ended June 30, 1998, the Company repaid, to First
Union National Bank, $5.5 million of borrowings under a construction loan which
was assumed by the Company in connection with the acquisition of certain
Properties in October 1997. The loan which was repaid with proceeds from
borrowings under the Company's Line of Credit (as defined below) had a maturity
of April 10, 1998 and bore interest at LIBOR plus 250 basis points.
On December 31, 1997, the Company replaced the existing line of credit with
a new $300 million unsecured line of credit with a group of 12 banks (the "Line
of Credit"). The Line of Credit reduced the interest rate on borrowings from
LIBOR plus 175 basis points to LIBOR plus 137.5 basis points. The Line of
Credit is unsecured and has a term of three years. Additionally, the Company is
required to pay an average daily unused commitment fee of 20 basis points per
annum if the daily unused portion of the Line of Credit is greater than the
related daily balance outstanding. The fee is reduced to 15 basis points per
annum if the daily unused portion is less than the daily balance outstanding.
At December 31, 1997, the Company had no borrowings outstanding under the Line
of Credit. The Company had net borrowings of $5.0 million and $88.4 million
during the periods ending March 31, 1998 and June 30, 1998, respectively,
resulting in an outstanding balance of $93.4 million at June 30, 1998
At December 31, 1997, the Company had outstanding borrowings of $120
million under the short-term variable rate acquisition loan (the "Acquisition
Loan"). The Acquisition Loan has an interest rate of LIBOR plus 125 basis
points and will mature on August 29,1998. The Company expects to receive an
extension of the facility to January 1, 1999 and is currently negotiating
permanent financing to convert the facility into one or more multi-year
facilities.
Future scheduled principal repayments of debt on real estate are as
follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1998.......................................... $120,000
1999..........................................
2000.......................................... 135,132
2001..........................................
2002.......................................... 3,040
Thereafter.................................... 335,741
--------
$593,913/(A)/
========
</TABLE>
/(A)/ The amount shown excludes the Company's 50% share of the mortgage
indebtedness which is collateralized by the Broadmoor Austin
Properties.
5. DISTRIBUTION
On June 17, 1998, the Company declared a cash distribution for the second
quarter of 1998 in the amount of $.40 per share, payable on July 17, 1998 to
common shareholders of record on June 30, 1998. Additionally, it was determined
that a distribution of $.40 per Unit would be made to the partners of the
Operating Partnership, and the holders of the Company's Series A Convertible
Preferred Shares. The total distributions were paid on July 17, 1998, totaling
approximately $18.1 million. In addition, a pro-rated distribution equal to 8.3%
of the face amount of the Series B Perpetual Preferred Units or $131,417 was
declared on June 26, 1998 and paid on July 2, 1998.
6. INVESTMENT IN JOINT VENTURE AND UNCONSOLIDATED SUBSIDIARIES
Included in investments in joint venture and unconsolidated subsidiaries
are the Company's investment in the Broadmoor Austin Associates Joint Venture
("Broadmoor Austin") and the Company's investment in the Manager. The Company
accounts for its 50% investment in Broadmoor Austin and its 95% investment in
the Manager using the equity method of accounting, and thus reports its share of
income and losses based on its ownership interest in the respective entities. At
June 30, 1998, the carrying value of the Company's interest in Broadmoor Austin
and the Manager totaled $7.5 million and $4.0 million, respectively. The
difference between the carrying value of the Company's interest in Broadmoor
Austin and the book value of the underlying equity is being amortized over 40
years.
10
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The following is summarized financial information for 100% of Broadmoor
Austin at June 30, 1998 and December 31, 1997 and for the three and six
months ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
JUNE 30, 1998 DEC. 31, 1997
------------------ ------------------
BALANCE SHEET: (DOLLARS IN THOUSANDS)
<S> <C> <C>
Real estate and deferred charges, net......... $110,174 $111,524
Total assets.................................. $123,078 $126,341
Mortgage note payable......................... $154,000 $140,000
Venturers' deficit............................ $(31,561) $(17,134)
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
----------------- ----------------- ------------------ -----------------
INCOME STATEMENT: (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Rental income.................................. $5,017 $4,871 $ 9,896 $9,741
Interest expense............................... $2,711 $3,403 $ 6,069 $6,769
Depreciation and amortization.................. $1,082 $1,084 $ 2,166 $2,167
Extraordinary item............................. - - $ 12,900 -
Net income (loss).............................. $1,080 $ 237 $(11,562) $ 512
</TABLE>
On March 31, 1998 the Company closed a $154.0 million refinancing of its
Broadmoor Austin Properties. Broadmoor Austin is a joint venture between the
Operating Partnership and IBM who leases 100% of the Properties. The
refinancing, which was funded by an affiliate of Lehman Brothers Inc., is a 13-
year non-recourse term loan at a fixed rate of 7.04%. The Company repaid the
existing $140.0 million mortgage which had an interest rate of 9.75%. In
connection with the repayment of the existing loan, Broadmoor Austin paid $12.7
million in prepayment penalties and wrote off unamortized financing costs of
approximately $200,000, both of which the joint venture recorded as
extraordinary charges during the period. Concurrent with this refinancing, IBM
extended the lease on 70% of its space from 2006 to 2011.
The following is summarized financial information for 100% of the Manager at
June 30, 1998 and December 31, 1997 and for the three and six months ended
June 30, 1998 and 1997:
<TABLE>
<CAPTION>
JUNE 30, 1998 DEC. 31, 1997
----------------- -----------------
BALANCE SHEET: (DOLLARS IN THOUSANDS)
<S> <C> <C>
Total assets................................... $10,820 $21,668
Total liabilities.............................. $ 3,566 $16,700
Owners' equity................................. $ 7,254 $ 4,968
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
----------------- ----------------- ----------------- -----------------
INCOME STATEMENT: (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Fee income..................................... $7,401 $6,489 $14,849 $11,835
Personnel costs, net........................... $4,889 $3,016 $ 9,745 $ 5,966
General office and administrative.............. $1,643 $1,780 $ 2,930 $ 2,747
Net income..................................... $1,169 $1,273 $ 2,286 $ 2,563
</TABLE>
7. SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES
During the three months ended June 30, 1998, the Company declared cash
distributions totaling $18.1 million payable to holders of Common Shares,
Operating Partnership Units and Series A Convertible Preferred Shares. The
distributions were paid July 17, 1998. In addition, a distribution totaling
$131,417 was declared on June 26, 1998 payable to holders of the Company's
Series B Perpetual Preferred Units. The distribution was paid on July 2, 1998.
On February 6, 1998, the owners of the Merged Entities (as earlier defined)
paid deferred compensation to certain Merged Entity Employees in the form of
113,500 Units. The transaction resulted in a non-cash charge to the
11
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Company of $2.9 million (net of the minority interest holders share of the
charge of approximately $193,000) during the three month period ended March 31,
1998.
In addition, in connection with the acquisition of Properties during the
six months ended June 30, 1998, the Company assumed $35.5 million of mortgage
debt and $3.0 million of net liabilities, entered into other corporate debt of
$4.0 million and issued Units valued at $10.9 million.
8. IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer program
that has date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, prepare financial statements,
send invoices, or engage in similar normal business activities.
The Company is near completion of an assessment of Year 2000 issues on its
existing computer systems. The Company has also substantially completed plans to
resolve the issues identified in such assessment. The Company recently engaged
the independent consulting firms of PricewaterhouseCoopers LLP, Computer
Services Corporation and DMR Consulting Group, Inc. to review the Year 2000 plan
and progress to date. Based on the findings of these engagements, the Company
believes its plans for substantially all of the Company's existing systems to be
Year 2000 compliant by March 31, 1999 are reasonable.
Based on information currently available from the Company's internal
assessment, management does not believe the costs and expenses associated with
its Year 2000 activities over the next 18 months will have a materially adverse
effect on the Company's consolidated results of operations or financial
position. Since future acquisitions, developments and dispositions can cause
these amounts to fluctuate, the Company will consider Year 2000 issues for all
future acquisitions and developments.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("FAS No. 131").
FAS No. 131 requires disclosure of segment data in an entity's annual
financial statements and selected segment information in their quarterly report
to shareholders. FAS No. 131 also requires entity-wide disclosures about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers. FAS No. 131
supersedes FAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," and is effective for fiscal years beginning after December 15,
1997. FAS No. 131 is not required for interim reporting in the first year of
application. Thus, FAS No. 131 will be implemented by the Company for its year-
end December 31, 1998 reporting. The Company believes that upon implementation,
FAS No. 131 will not have a material impact on the financial statements of the
Company.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("FAS No. 132").
FAS No. 132 provides additional information to facilitate financial
analysis and eliminates certain disclosures which are no longer useful. To the
extent practicable, the Statement also standardizes disclosures for retiree
benefits. FAS No. 132 is effective for financial statements issued for periods
ending after December 15, 1997. The Company believes that FAS No. 132 will not
have a material impact on the financial statements of the Company.
12
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("FAS
No. 133").
FAS No. 133 establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, (collectively referred to as derivatives) and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments
at fair value. FAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. The Company believes that upon implementation,
FAS 133 will not have a material impact on the financial statements of the
Company.
10. PRO FORMA FINANCIAL INFORMATION
Due to the Company's significant acquisition activity between January 1,
1997 and June 30, 1998, the historical results of operations for the periods
presented may not be indicative of future results of operations. The following
Pro Forma Condensed Statements of Income for the six months ended June 30, 1998
and 1997 are presented as if the acquisitions and related transactions occurred
at the beginning of the periods presented. The pro forma information is based
upon historical information and does not purport to present what actual results
would have been had such transactions, in fact, occurred at the beginning of the
periods presented, or to project results for any future period.
PRO FORMA CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997
---------------- ----------------
(in thousands, except per share data)
<S> <C> <C>
Total revenues....................................... $129,335 $123,878
Property operating and maintenance................... 29,277 30,685
Real estate taxes.................................... 13,617 12,014
General and administrative........................... 2,131 1,301
Personnel costs, net................................. 1,748 1,364
Interest expense..................................... 22,449 22,449
Amortization of deferred financing costs............. 396 367
Depreciation and amortization........................ 20,966 20,966
Equity in income of joint venture and unconsolidated
subsidiaries........................................ 2,950 2,782
-------- --------
Net income before minority interest.................. 41,701 37,514
Minority interest.................................... (5,552) (5,368)
-------- --------
Net income before preferred dividends................ 36,149 32,146
Preferred dividends.................................. (3,018) (3,018)
-------- --------
Net income applicable to common shareholders......... $ 33,131 $ 29,128
======== ========
Net income per Common Share basic................... $ 0.83 $ 0.73
======== ========
Net income per Common Share diluted................. $ 0.82 $ 0.73
======== ========
</TABLE>
11. EARNINGS PER SHARE
The Company calculates Earnings per Share in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS No. 128").
FAS No. 128 requires a dual presentation of basic and diluted Earnings per Share
on the face of the income statements. Additionally, FAS No. 128 requires a
reconciliation of the numerator and denominator used in computing basic and
diluted Earnings per Share.
13
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THREE MONTHS
Reconciliation of Earnings per Share Numerator THREE MONTHS ENDED ENDED SIX MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
-------------------- ----------------- ------------------ -----------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net Income...................................... $19,051 $ 9,147 $28,547 $16,227
Preferred dividends............................. (1,505) - (2,641) -
------- ------- ------- -------
Net Income available to common shareholders..... $17,546 $ 9,147 $25,906 $16,227
======= ======= ======= =======
Reconciliation of Earnings per Share Denominator
Weighted average common shares outstanding...... 39,873 24,303 38,340 22,303
======= ======= ======= =======
Basic Earnings per Share........................ $ 0.44 $ 0.38 $ 0.68 $ 0.73
======= ======= ======= =======
Dilutive Effect of Common Share Equivalents
Dilutive options................................ 290 235 342 327
Dilutive preferred shares....................... 3,773 - 3,310 -
Weighted average common shares outstanding...... 39,873 24,303 38,340 22,303
------- ------- ------- -------
Weighted average common shares and common share
Equivalents.................................. 43,936 24,538 41,992 22,630
======= ======= ======= =======
Diluted Earnings per Share...................... $ 0.43 $ 0.37 $ 0.68 $ 0.72
======= ======= ======= =======
</TABLE>
12. SUBSEQUENT EVENTS
The Company has acquired or is in the process of finalizing acquisitions of
four properties for a total estimated purchase price of $98 million. The
agreements relating to such properties are subject to customary closing
conditions; therefore, there can be no assurances that the Company will acquire
all of the properties.
On June 30, 1998, the Company's Board of Trustees authorized the repurchase
of up to 2.0 million common shares in the open market or negotiated private
transactions. On July 2, 1998, the Company began purchasing shares in the open
market. As of the close of business on August 10, 1998, the Company has
repurchased 669,700 common shares at an average price of $24.32 per share.
On July 10, 1998, the Company disposed of the Glendale Federal Bank
Building ("Glendale Federal Property") for gross proceeds of approximately $30.0
million resulting in an estimated gain on sale of approximately $4.5 million.
On August 6, 1998, the Company filed with the SEC a Registration Statement
on Form S-3 relating to the Company's Dividend Reinvestment and Share Purchase
plan for all shareholders. This allows shareholders to buy and sell shares
directly through the Company. The plan provides for the automatic reinvestment
of cash dividends as well as for the direct monthly purchase of shares.
14
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q may include 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. These statements are identified by phrases such as the
Company "expects" or "anticipates" and words of similar effect. The Company's
actual results may differ materially from those projected. Factors that could
cause such a difference include: the Company's inability or failure to acquire
properties under contract or additional properties; difficulties in integrating
and operating acquired properties; bankruptcy or default of major tenants
resulting in a failure or delay in payment of rent; and general risks associated
with investments in real estate, including the effect of changes in economic,
competitive and other market conditions in the markets where the Company's
properties are concentrated, non-renewal of expiring leases or inability to re-
let vacated space at adequate rates, the inability of properties to generate
adequate cash flow to fund debt service and operating expenses, financing and
refinancing risks related to the Company's floating rate debt and new debt
necessary to support growth. For additional information, please refer to the
detailed discussion of risks included in the Company's Registration Statement on
Form S-3 (file no. 333-49433) dated April 3, 1998, under the caption "Risk
Factors."
OVERVIEW
The Company is a self-administered and self-managed Real Estate Investment
Trust ("REIT") that acquires, owns, manages, leases, develops and builds office
and industrial properties throughout the United States. The Company operates
principally through Prentiss Properties Acquisition Partners, L.P. and its
subsidiaries (the "Operating Partnership") and Prentiss Properties Limited, Inc.
(the "Manager") (collectively referred to herein as the "Company").
RESULTS OF OPERATIONS
As of June 30, 1998, the Company owned interests in a diversified portfolio
of 240 primarily suburban Class "A" office and suburban industrial properties
(the "Properties") containing approximately 22.2 million net rentable square
feet. The Properties are located in 20 major U.S. markets and consist of 115
office buildings (the "Office Properties") containing approximately 13.0 million
net rentable square feet and 125 industrial buildings (the "Industrial
Properties") containing approximately 9.2 million net rentable square feet. The
Properties include 11 office and 2 industrial development projects, including
one expansion of an existing Property, totaling approximately 1.8 million square
feet.
The consolidated financial statements of the Company include all the
accounts of the Company, its majority-owned Operating Partnership and
subsidiaries. The financial statements for the three and six months ended June
30, 1998, include (i) the results of operations of 147 operating Properties and
10 development projects (including one expansion of a existing Property) for the
entire periods presented, (ii) the results of operations of the 72 Acquired
Properties and 5 development projects for the portion of the periods subsequent
to acquisition or commencement of development by the Company, (iii) the results
of operations of the 5307 East Mockingbird, Oceanside Distribution Center and
West Loop Business Park Properties (the "Sold Properties") for the portion of
the periods before the Company sold the Sold Properties, (v) a 50% equity
interest in the 7 Broadmoor Austin Properties, and (vi) results of operations of
the Prentiss Properties Service Business conducted primarily by the Manager in
the periods presented. The financial statements for the three and six months
ended June 30, 1997, include (i) the results of operations of 88 operating
Properties (inclusive of the Sold Properties) and 3 development projects
(including one expansion of an existing Property) for the entire periods
presented, (ii) the results of operations of 29 Properties acquired during the
period and 3 development projects for the portion of the period subsequent to
acquisition or commencement of development by the Company, (iii) an approximate
50% equity interest in the 7 Broadmoor Austin Properties, and (iv) results of
operations of the Prentiss Properties Service Business conducted primarily by
the Manager in the period presented. All significant intercompany balances and
transactions have been eliminated.
The results of operations for the periods ended June 30, 1998 and 1997
include the respective operations of the Company. For comparative purposes, the
Company had a total of 95 of the Properties for the entire three month periods
ended June 30, 1998 and 1997 and a total of 88 of the Properties for the entire
six month periods ended June 30, 1998 and 1997. Consequently, the comparisons of
the periods provide only limited information regarding the operations of the
Company as currently constituted.
Comparison of Three Months Ended June 30, 1998 to the Three Months Ended June
- -----------------------------------------------------------------------------
30, 1997
- --------
15
<PAGE>
Rental income increased by $24.9 million, or 85.4%, to $54.0 million from
$29.1 million primarily as a result of the Properties acquired subsequent to
April 1, 1997. As described above, the Company includes comparative results of
operations of 95 operating Properties for the three month periods ended June 30,
1998 and 1997. The rental income for the combined 95 operating Properties
increased by a net $321,000, or 1.4%, from the three months ended June 30, 1997
to the three months ended June 30, 1998. Exclusive of the effect of the
$511,000 of past due rents collected on the Milwaukee Industrial Properties
during the three months ended June 30, 1997, the increase from the 95 Properties
totaled $832,000, or 3.7%. Rental income from the Sold Properties and the
Property acquisitions subsequent to April 1, 1997 account for a net $24.6
million increase in rental income.
Property operating and maintenance expenses increased by $5.4 million, or
80.5%, primarily as a result of the Properties acquired subsequent to April 1,
1997. The property operating and maintenance expenses for the 95 operating
Properties decreased by approximately $402,000, or 6.6%, from the three month
period ended June 30, 1997 to the three month period ended June 30, 1998.
Property operating and maintenance expenses of the Sold Properties and the
Property acquisitions subsequent to April 1, 1997 account for an approximate
$5.8 million increase from the three month period ended June 30, 1997 to the
same period in 1998.
Real estate taxes increased by $2.7 million, or 84.6%, primarily as a
result of the Properties acquired subsequent to April 1, 1997. Such acquired
Properties, when combined with the Sold Properties, account for a $2.5 million
increase in real estate expenses for the three month period ended June 30, 1998
compared to the prior year comparative period. The real estate tax expense for
the 95 operating Properties increased by approximately $233,000, or 8.6%, from
the three months ended June 30, 1997 to the comparative period in 1998.
Interest expense increased by $4.2 million, or 94.8%, primarily as a result
of the increase in debt on real estate from $257.0 million at June 30, 1997 to
$593.9 million at June 30, 1998. The increase in debt on real estate is
attributable to borrowings incurred in connection with Property acquisitions
subsequent to June 30, 1997.
Depreciation and amortization expense increased by $4.6 million, or 90.9%,
primarily as a result of the Properties acquired subsequent to April 1, 1997.
Such acquired Properties, when combined with Sold Properties, account for a $4.0
million increase in depreciation and amortization for the three months ended
June 30, 1998 from the prior year comparative period. The depreciation and
amortization expense for the 95 operating Properties increased by approximately
$570,000, or 13.9%, from the three months ended June 30, 1997 to the comparative
period in 1998.
During the three months ended June 30, 1998, the Company recorded a gain on
sale of $1.3 million. The gain on sale resulted from the Company's sale of the
West Loop Business Park Properties during the three months ended June 30, 1998.
Comparison Of The Six Months Ended June 30, 1998 To The Six Months Ended June
- -----------------------------------------------------------------------------
30, 1997
- --------
Rental income increased by $52.8 million, or 103.4%, to $103.9 million from
$51.1 million primarily as a result of the Properties acquired subsequent to
January 1, 1997. As described above, the Company includes comparative results
of operations of 88 operating Properties for the six month periods ended June
30, 1998 and 1997. The rental income for the combined 88 operating Properties
increased by $1.4 million, or 3.3%, from the six months ended June 30, 1997 to
the six months ended June 30, 1998. Exclusive of the effect of the $511,000 of
past due rents collected on the Milwaukee Industrial Properties during the six
months ended June 30, 1997, the increase from the 88 Properties totaled $1.9
million, or 4.5%. Rental income from the Sold Properties, and the Property
acquisitions subsequent to January 1, 1997 account for a $51.4 million increase
in rental income.
Property operating and maintenance expenses increased by $11.6 million, or
96.3%, primarily as a result of the Properties acquired subsequent to January 1,
1997. The property operating and maintenance expenses for the 88 operating
Properties decreased by approximately $258,000, or 2.3%, from the six month
period ended June 30, 1997 to the six month period ended June 30, 1998.
Property operating and maintenance expenses of the Sold Properties and the
Property acquisitions subsequent to January 1, 1997 account for an approximate
net $11.9 million increase from the six month period ended January 1, 1997 to
the same period in 1998.
Real estate taxes increased by $5.6 million, or 97.6%, primarily as a
result of the Properties acquired subsequent to January 1, 1997. Such acquired
Properties, when combined with the Sold Properties, account for a net $4.9
million increase in real estate expenses for the six month period ended June 30,
1998 compared to the prior year
16
<PAGE>
comparative period. The real estate tax expense for the 88 operating Properties
increased by approximately $680,000, or 13.8%, from the six months ended June
30, 1997 to the comparative period in 1998.
Interest expense for the six months ended June 30, 1998 increased by $9.6
million, or 137.2%, primarily as a result of the increase in debt on real estate
from $257.0 million at June 30, 1997 to $593.9 million at June 30, 1998. The
increase in debt on real estate is attributable to borrowings incurred in
connection with the Property acquisitions subsequent to June 30, 1997.
Depreciation and amortization expense increased by $9.3 million, or 104.4%,
primarily as a result of the Properties acquired subsequent to January 1, 1997.
Such acquired Properties, when combined with Sold Properties, account for a net
$8.2 million increase in depreciation and amortization for the six months ended
June 30, 1998 from the prior year comparative period. The depreciation and
amortization expense for the 88 operating Properties increased by approximately
$1.1 million, or 15.8%, from the six months ended June 30, 1997 to the
comparative period in 1998.
During the six months ended June 30, 1998, the Company recorded gains on
sale totaling $3.8 million and extraordinary items of $8.9 million. The gains
on sale resulted from the Company's sale of the 5307 East Mockingbird and West
Loop Business Park Properties. The extraordinary item resulted from two items
including (i) the Company's recognition of its 50% proportionate share of $12.9
million, or $6.45 million, of prepayment penalties and unamortized financing
costs written-off, both of which were recorded as extraordinary charges by the
Broadmoor Austin joint venture during the period; and (ii) the distribution of
113,500 Operating Partnership units ("Units") by an affiliate of the Company to
certain employees of the Company resulting in a non-cash charge to the Company
of $3.1 million. The transactions were recorded net of the minority interest
proportionate share of each charge totaling $406,000 and $193,000, respectively.
Funds from Operations
The Company generally considers Funds from Operations, in conjunction with
cash flows, to be an appropriate measure of liquidity of an equity REIT. "Funds
from Operations" as defined by the National Association of Real Estate
Investment Trusts ("NAREIT") means net income (computed in accordance with
Generally Accepted Accounting Principles ("GAAP")) excluding gains (or losses)
from debt restructuring and sale of property, plus depreciation and amortization
on real estate assets, and after adjustments for unconsolidated partnerships and
joint ventures. The Company's Funds from Operations may not be comparable to
Funds from Operations reported by other REITs that do not define that term using
the current NAREIT definition. Funds from Operations does not represent cash
generated from operating activities in accordance with GAAP and should not be
considered as an alternative to net income as an indication of the Company's
performance or to cash flows as a measure of liquidity or ability to make
distributions. The following is a reconciliation of net income to Funds from
Operations for the three and six month periods ended June 30, 1998 and 1997:
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS SIX MONTHS SIX MONTHS
ENDED ENDED ENDED ENDED
JUNE 30, 1998 JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1997
------------------ ------------------ ------------------ ------------------
(dollars in (dollars in (dollars in (dollars in
thousands) thousands) thousands) thousands)
<S> <C> <C> <C> <C>
Net income $19,051 $ 9,147 $28,547 $16,227
Add:
Real estate depreciation and amortization... 9,644 5,051 18,159 8,886
Real estate depreciation and amortization
of unconsolidated subsidiary and joint
venture.................................. 559 530 1,132 1,072
Minority interest in operating partnership.. 877 1,240 2,116 2,404
Extraordinary item.......................... - - 8,908 111
Less:
Gain on sale................................ (1,269) (243) (3,824) (243)
Dividend on perpetual preferred units....... (131) - (131) -
------- ------- ------- -------
Funds from Operations $28,731 $15,725 $54,907 $28,457
======= ======= ======= =======
</TABLE>
17
<PAGE>
Liquidity and Capital Resources
Cash and cash equivalents were $11.3 million and $6.4 million at June 30,
1998 and June 30, 1997, respectively. Net cash provided by operating activities
was $55.2 million for the six months ended June 30, 1998, compared to $26.5
million for the six months ended June 30, 1997. The increase is due primarily to
the operating results of the Properties acquired subsequent to January 1, 1997.
Net cash used in investing activities increased from $259.5 million for the
six months ended June 30, 1997 to $379.2 million for the six months ended June
30, 1998. This increase is due primarily to the 72 real estate Properties
acquired during the six months ended June 30, 1998 compared to 29 acquired
during the same period in 1997, as well as an increase in cash invested in real
estate due to an increase in the number of development projects from 6 in this
period of 1997 to 13 in 1998.
Net cash provided by financing activities increased from $232.2 million for
the six months ended June 30, 1997 to $328.3 million for the six months ended
June 30, 1998. This increase is primarily attributable to the net proceeds from
the sale of common shares of beneficial interest, $0.01 par value per share
("Common Shares"), Series "A" Cumulative Convertible Redeemable Preferred Shares
("Series A Convertible Preferred Shares") and Series "B" Cumulative Redeemable
Perpetual Preferred Units ("Series B Perpetual Preferred Units") during the six
months ended June 30, 1998.
The following table sets forth the Company's mortgage debt as of June 30, 1998:
MORTGAGE DEBT
<TABLE>
<CAPTION>
PROPERTY(IES) PRINCIPAL INTEREST ANNUAL INTEREST
------------- AMOUNT RATE AMORTIZATION MATURITY PAYMENT
--------------- ------------ ------------ ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Mortgage Loan................................ $180,100,000/(1)/ 7.58% None February 27, 2007 $13,651,580
Acquisition Loan............................. 120,000,000/(2)/ 7.46%/(3)/ None August 29, 1998 8,952,000
Line of Credit............................... 93,350,000 7.03%/(4)/ None December 31, 2000 6,563,672
PacifiCare Building.......................... 6,000,000 7.30% None November 1, 2000 438,000
Walnut Glen Tower............................ 35,000,000 6.92% None April 1, 2005 2,422,000
Crescent Centre.............................. 12,000,000 7.95% None March 1, 2004 954,000
Bachman Creek West.......................... 3,040,319 8.63% 25 yr November 30, 2002 262,380
Broadmoor Austin Properties/(5)/............. 77,000,000 7.04% None April 10, 2011 5,420,800
Southpoint (III)............................. 8,073,601 7.75% 20 yr April 14, 2014 625,704
CIGNA Loan /(6)/............................. 60,000,000 6.80% None December 10, 2003 4,080,000
Highland Court............................... 5,075,468 7.27% 25 yr April 1, 2006 368,987
Creamery Way................................. 3,860,203 8.30% 20 yr September 19, 2006 320,397
Westheimer Central........................... 6,103,545 8.38% 25 yr August 1, 2006 511,172
One Westheimer Center........................ 25,528,384 7.84% 25 yr February 1, 2004 2,001,425
2500 Cumberland Building K................... 11,395,017 7.41%/(7)/ None August 1, 2000 844,370
Exec. Center Del Mar......................... 9,491,244 7.31%/(8)/ None December 14, 2000 643,810
Westpoint.................................... 10,861,893 7.31%/(8)/ None November 15, 2000 794,004
Other Corporate Debt......................... 4,033,896 7.75% None December 31, 2000 312,627
------------ ---- -----------
Total/Weighted Average....................... $670,913,570 7.33% $49,166,928
============ ==== ===========
</TABLE>
(1) The Mortgage Loan is collateralized by the following 53 Properties: Park
West E1, Park West E2, One Northwestern Plaza, 3141 Fairview Park Drive,
O'Hare Plaza II, 1717 Deerfield, 2411 Dulles Corner Road, 4401 Fair Lakes
Court, Kansas City Industrial Properties (7 Properties), certain of the Los
Angeles Industrial Properties (18 Properties), certain of the Milwaukee
Industrial Properties (17 Properties), and the certain of the Chicago
Industrial Properties (3 Properties).
(2) The Acquisition Loan is collateralized by the following 16 Properties:
Natomas Corporate Center (6 Properties), The Academy (3 Properties), Seven
Mile Crossing (2 Properties), and Corporetum Office Campus (5 Properties).
The Company expects to receive an extension of the facility to January 1999
and is currently negotiating permanent financing to convert the facility
into one or more multi-year facilities.
(3) Represents the weighted average interest rate for the Interest Rate Swap of
$50 million at an effective rate of 7.503% and $60 million at an effective
rate of 7.498%. Additionally, rate shown reflects a variable rate on $10
million equal to LIBOR + 1.25%; on August 4, 1998, LIBOR was equal to
5.66%.
(4) Represents a variable rate equal to LIBOR + 1.38%; on August 4, 1998, LIBOR
was equal to 5.66%.
(5) The Company, through the Operating Partnership, owns a 50% general
partnership interest in the entity that owns the Broadmoor Austin
Properties, which interest is accounted for under the equity method of
accounting. The amount shown reflects the Company's proportionate share of
the mortgage indebtedness collateralized by the Properties.
(6) The CIGNA Loan is collateralized by the following 11 Properties: Lake
Center (2 Properties), Southpoint I and II (2 Properties), Valleybrooke (5
Properties) and Woodland Falls I and IV (2 Properties).
(7) Represents a variable rate equal to LIBOR + 1.75%; on August 4, 1998, LIBOR
was equal to 5.66%.
(8) Represents a variable rate equal to LIBOR + 1.65%; on August 4, 1998, LIBOR
was equal to 5.66%.
18
<PAGE>
The Company's policy is to limit combined indebtedness plus its pro rata
share of joint venture debt so that at the time such debt is incurred, it does
not exceed 50% of the Company's total market capitalization (the "Debt
Limitation"). As of June 30, 1998, the Company had outstanding total
indebtedness, including its pro rata share of joint venture debt of
approximately $670.9 million, or approximately 35.89% of total market
capitalization based on a Common Share price of $24.313 per share. As of June
30, 1998, the Company had the approximate capacity to borrow up to an additional
$527.5 million under the Debt Limitation. The amount of indebtedness that the
Company may incur, and the policies with respect thereto, are not limited by the
Company's Declaration of Trust and Bylaws, and are solely within the discretion
of the Company's Board of Trustees.
The Company's Properties require periodic investments of capital for
tenant-related capital expenditures and for general capital improvements. For
the three months ended June 30, 1998, the Company's recurring non-incremental
revenue-generating capital expenditures totaled $1.0 million.
The Company has considered its short-term liquidity needs and the adequacy
of adjusted estimated cash flows and other expected liquidity sources to meet
these needs. The Company believes that its principal short-term liquidity needs
are to fund normal recurring expenses, debt service requirements and the minimum
distribution required to maintain the Company's REIT qualification under the
Code. The Company anticipates that these needs will be fully funded from the
Company's cash flows provided by operating activities and, when necessary to
fund shortfalls resulting from the timing of collections of accounts receivable
in the ordinary course of business, from the Line of Credit, leasing development
and construction business and from the Manager. The Manager's sole sources of
income are fees generated by its office and industrial real estate management,
leasing, development and construction business.
The Company has acquired or is in the process of finalizing the acquisition
of four properties for an estimated purchase price of $98 million. The
agreements relating to these properties are subject to customary closing
conditions; therefore, there can be no assurances that the Company will acquire
all of these properties. Subsequent to such closings, the Company expects to
have approximately $768.9 million of mortgage indebtedness outstanding,
including its pro rata share of joint venture debt.
The Company expects to meet its long-term liquidity requirements for the
funding of activities such as development, property acquisitions, scheduled debt
maturities, major renovations, expansions and other non-recurring capital
improvements through long-term collateralized and unsecured indebtedness and the
issuance of additional equity securities from the Company. The Company also
intends to use proceeds from the Line of Credit to fund property acquisitions,
development, redevelopment, expansions and capital improvements on an interim
basis.
The Company expects to make distributions to its shareholders primarily
based on its distributions from the Operating Partnership. The Operating
Partnership's income will be derived primarily from lease revenues from the
Properties and, to a limited extent, from fees generated by its office and
industrial real estate management properties.
Inflation
Most of the leases on the Properties require tenants to pay increases in
operating expenses, including common area charges and real estate taxes, thereby
reducing the impact on the Company of the adverse effects of inflation. Leases
also vary in term from one month to 15 years, further reducing the impact on the
Company of the adverse effects of inflation.
Impact of the Year 2000 Issue
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any computer program
that has date-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruption of operations, including, among other things,
a temporary inability to process transactions, prepare financial statements,
send invoices, or engage in similar normal business activities.
The Company is near completion of an assessment of Year 2000 issues on its
existing computer systems. The
19
<PAGE>
Company has also substantially completed plans to resolve the issues identified
in such assessment. The Company recently engaged the independent consulting
firms of PricewaterhouseCoopers LLP, Computer Services Corporation and DMR
Consulting Group, Inc. to review the Year 2000 plan and progress to date. Based
on the findings of these engagements, the Company believes its plans for
substantially all of the Company's existing systems to be Year 2000 compliant by
March 31, 1999 are reasonable.
Based on information currently available from the Company's internal
assessment, management does not believe the costs and expenses associated with
its Year 2000 activities over the next 18 months will have a materially adverse
effect on the Company's consolidated results of operations or financial
position. Since future acquisitions, developments and dispositions can cause
these amounts to fluctuate, the Company will consider Year 2000 issues for all
future acquisitions and developments.
Recently Issued Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 131, "Disclosures about Segments
of an Enterprise and Related Information" ("FAS No. 131").
FAS No. 131 requires disclosure of segment data in an entity's annual
financial statements and selected segment information in their quarterly report
to shareholders. FAS No. 131 also requires entity-wide disclosures about the
products and services an entity provides, the material countries in which it
holds assets and reports revenues, and its major customers. FAS No. 131
supersedes FAS No. 14, "Financial Reporting for Segments of a Business
Enterprise," and is effective for fiscal years beginning after December 15,
1997. FAS No. 131 is not required for interim reporting in the first year of
application. Thus, FAS No. 131 will be implemented by the Company for its year-
end December 31, 1998 reporting. The Company believes that upon implementation,
FAS No. 131 will not have a material impact on the financial statements of the
Company.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("FAS No. 132").
FAS No. 132 provides additional information to facilitate financial
analysis and eliminates certain disclosures which are no longer useful. To the
extent practicable, the Statement also standardizes disclosures for retiree
benefits. FAS No. 132 is effective for financial statements issued for periods
ending after December 15, 1997. The Company believes that FAS No. 132 will not
have a material impact on the financial statements of the Company.
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("FAS No. 133").
FAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts, (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivative as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. FAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company believes that upon
implementation, FAS 133 will not have a material impact on the financial
statements of the Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
20
<PAGE>
PART II: OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
On June 26, 1998, the Company privately placed 1,900,000 Series B
Cumulative Redeemable Perpetual Preferred Units (the "Series B Perpetual
Preferred Units") with an institutional investor. The issue resulted in gross
consideration of $95.0 million. Such proceeds were used to repay borrowings
under the Company's Line of Credit (as earlier defined). The Series B Perpetual
Preferred Units are callable by the Company in five years at par value and have
a coupon rate of 8.3%. The private placement is exempt from registration under
the Securities Act pursuant to Section 4(2) thereof.
ITEM 3. DEFAULTS UPON MORTGAGES AND NOTES PAYABLE
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 5, 1998, the Company held its Annual Meeting of Shareholders.
At the meeting, two Class II Trustees, Dr. Leonard M. Riggs, Jr. and
Ronald G. Steinhart, and one Class I Trustee, Thomas F. August, were elected to
serve as Trustees until the 2001 and 2000 Annual Meetings of the Shareholders,
respectively, and until each respective successor is duly elected and qualified.
Michael V. Prentiss, Thomas J. Hynes, Jr., Barry J.C. Parker, and Lawrence A.
Wilson, the remaining trustees, have terms that continued after the Annual
Meeting and did not, therefore, stand for election at the 1998 Annual Meeting of
Shareholders.
The votes cast for the Trustees were:
Dr. Leonard M. Riggs, Jr.
Votes for: 28,270,971
Votes withheld: 163,563
Ronald G. Steinhart
Votes for: 28,293,771
Votes withheld: 140,763
Thomas F. August
Votes for: 28,294,793
Votes withheld: 139,741
In addition, the Shareholders approved an increase in the maximum
number of common shares of beneficial interest, $0.01 par value per share,
("Common Shares") issuable under the Company's 1996 Share Incentive Plan from
2,980,000 to 4,500,000 with 25,622,251 shares voting in favor, 2,745,150 shares
voting against and 67,133 shares abstaining.
In addition, the Shareholders approved the amendment to the Company's
Trustees' Share Incentive Plan to increase the annual compensation to the
Independent Trustees from $10,000 per year, paid in Common Shares, to $20,000
per year, paid in Common Shares and to provide for the annual grant to the
Independent Trustees of 5,000 options to purchase Common Shares with 26,938,637
shares voting in favor, 1,426,928 shares voting against and 68,969 shares
abstaining.
21
<PAGE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Unless otherwise indicated, the exhibits listed below are filed as part
of this report or incorporated by reference * to the Company's
Registration Statement on Form S-11, File No. 333-9863 (the
"Registration Statement").
EXHIBIT NO. DESCRIPTION
- ----------- -----------
3.1* -- Form of Amended and Restated Declaration of Trust of the
Registrant
3.2* -- Bylaws of the Registrant
3.3 -- Articles Supplementary, dated December 18, 1997,
Classifying and Designating a Series of Preferred Shares of
Beneficial Interest as Series A Cumulative Convertible
Redeemable Preferred Shares of Beneficial Interest and
Fixing Distribution and Other Preferences and Rights of
Such Shares (filed as Exhibit 3.1 to the Company's Current
Report on Form 8-K, filed January 15, 1998)
3.4 -- Articles Supplementary, dated February 17, 1998,
Classifying and Designating a Series of Preferred Shares of
Beneficial Interest as Junior Participating Cumulative
Convertible Redeemable Preferred Shares of Beneficial
Interest, Series B, and Fixing Distribution and Other
Preferences and Rights of Such Shares (filed as an Exhibit
to the Company's Registration Statement on Form 8-A filed
on February 17, 1998, SEC File No. 000-23813)
3.5 -- Articles Supplementary, dated June 25, 1998, Classifying
and Designating a Series of Preferred Shares of Beneficial
Interest as Series B Cumulative Redeemable Perpetual
Preferred Shares of Beneficial Interest and Fixing
Distribution and Other Preferences and Rights of Such
Shares
4.1* -- Form of Common Share Certificate
4.2 -- Rights Agreement, dated February 6, 1998, between the
Company and First Chicago Trust Company of New York, as
Rights Agent (filed as Exhibit 4.1 to the Company's Current
Report on Form 8-K, filed on February 10, 1998)
4.3 -- Form of Rights Certificate (included as Exhibit A to the
Rights Agreement [Exhibit 4.2])
10.1 -- Second Amended and Restated Agreement of Limited
Partnership (included as exhibit 10.2 in the Company's
Annual Report on Form 10-K, filed March 25, 1997)
10.2 -- First Amendment to Second Amended and Restated Agreement of
Limited Partnership of Prentiss Properties Acquisition
Partners, L.P. (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K, filed January 15, 1998)
10.3 -- Second Amendment to Second Amended and Restated Agreement
of Limited Partnership of Prentiss Properties Acquisition
Partners, L.P.
10.4 -- Credit Agreement, dated December 30, 1997, among Prentiss
Properties Acquisition Partners, L.P., as Borrower, each of
the lenders that are a signatory therein, Bank One, Texas,
N.A., as Administrative Agent, and Nationsbank of Texas,
N.A., as Syndication Agent (filed as Exhibit 10.4 to the
Company's Current Report on Form 8-K, filed on February 10,
1998)
10.5* -- Form of Employment Agreement for Michael V. Prentiss
10.6* -- Form of Employment Agreement for Thomas F. August
10.7* -- Form of Agreement Not to Compete for Dennis J. DuBois
10.8* -- Contribution Agreement by and between the Operating
Partnership and PPL
10.9* -- Agreement of Purchase and Sale of Partnership Interest by
and Among Prentiss Properties Austin, L.P. and PPL
10.10* -- 1996 Share Incentive Plan
10.11 -- Contribution Agreement between Prentiss Properties
Acquisition Partners, L.P. , and certain Pennsylvania
limited partnerships named therein (filed as Exhibit 10.1
to the Company's Current Report on Form 8-K, filed on
October 16, 1997)
22
<PAGE>
10.12 -- Contribution Agreement between Prentiss Properties
Acquisition Partners, L.P., and certain New Jersey limited
partnerships named therein (filed as Exhibit 10.2 to the
Company's Current Report on Form 8-K, filed on October 16,
1997)
10.13 -- Agreement to Acquire Limited Partnership Interests between
OTR and Prentiss Properties Acquisition Partners,
L.P.(filed as Exhibit 10.3 to the Company's Current Report
on Form 8-K, filed on October 16, 1997)
10.14 -- Agreement to Assign Property Agreements and Other Assets
between Terramics Management Company, Terramics Property
Associates, Terramics Property Company and Prentiss
Properties Acquisition Partners, L.P. (filed as Exhibit
10.4 to the Company's Current Report on Form 8-K, filed on
October 16, 1997)
10.15 -- Stock Purchase Agreement among Southpoint Land Holdings,
Inc., Valleybrooke Land Holdings, Inc., certain
shareholders thereof and Prentiss Properties Limited, Inc.
(filed as Exhibit 10.5 to the Company's Current Report on
Form 8-K, filed on October 16, 1997)
10.16 -- Put and Call Option Agreement For Remaining Shares among
certain sellers named therein and Prentiss Properties
Limited, Inc. (filed as Exhibit 10.6 to the Company's
Current Report on Form 8-K, filed on October 16, 1997)
10.17 -- Purchase Agreement entered into by and between Jacob
Brouwer and Jeanette Brouwer (as "Sellers") and Prentiss
Properties Acquisition Partners, L.P. (as "Buyer") in
respect to the purchase and sale of the properties referred
to therein as "Carlsbad Pacifica" (filed as Exhibit 10.1 to
the Company's Current Report on Form 8-K, filed on February
10, 1998)
10.18 -- Purchase Agreement entered into by and between JJB Land
Company, LLC, (as "Seller") and Prentiss Properties
Acquisition Partners, L.P. (as "Buyer") in respect to the
purchase and sale of the properties referred to therein as
"The Plaza" (filed as Exhibit 10.2 to the Company's Current
Report on Form 8-K, filed on February 10, 1998)
10.19 -- Contribution/Purchase Agreement entered into by and between
the Sellers (therein identified) and Prentiss Properties
Acquisition Partners, L.P. (as "Buyer") in respect to the
purchase and sale of the properties referred to therein as
the "Shiley Interests" and "NNC Interests" (filed as
Exhibit 10.3 to the Company's Current Report on Form 8-K,
filed on February 10, 1998)
27.1 -- Financial Data Schedule
(b) Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the three
month period ended June 30, 1998. The Company did file a Current Report on Form
8-K on July 1, 1998, dated June 30, 1998, to report under Item 5 the Board of
Trustees' authorization of the repurchase of 2.0 million Common Shares by the
Company from time to time in the open market or in negotiated private
transactions.
23
<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: August 10, 1998 By: /s/ Thomas P. Simon
---------------------------------------------
Thomas P. Simon
(Vice President and Chief Accounting Officer)
24
<PAGE>
EXHIBIT 3.5
PRENTISS PROPERTIES TRUST
ARTICLES SUPPLEMENTARY OF BOARD OF TRUSTEES CLASSIFYING AND DESIGNATING A SERIES
OF PREFERRED SHARES OF BENEFICIAL INTEREST AS SERIES B CUMULATIVE REDEEMABLE
PERPETUAL PREFERRED SHARES OF BENEFICIAL INTEREST AND FIXING DISTRIBUTION AND
OTHER PREFERENCES AND RIGHTS OF SUCH SHARES
Prentiss Properties Trust, a Maryland real estate investment trust
(the "TRUST"), hereby certifies to the State Department of Assessments and
Taxation of Maryland pursuant to Section 8-203(b) of the Corporations and
Associations Article of the Annotated Code of Maryland that:
FIRST: Pursuant to the authority granted by the Amended and Restated
Declaration of Trust of the Trust filed with the Department on October 16, 1996
(the "DECLARATION"), the Board of Trustees of the Trust (the "BOARD OF
TRUSTEES"), by resolutions duly adopted on June 17, 1998, has designated and
classified 1,900,000 shares of the authorized but unissued and unclassified
preferred shares of beneficial interest, par value $.01 per share, of the Trust
as Series B Cumulative Redeemable Perpetual Preferred Shares of Beneficial
Interest, authorized the issuance of a maximum of 1,900,000 shares of such class
of Preferred Shares, and set the preferences, conversion and other rights,
voting powers, restrictions, limitations as to dividends, qualifications, terms
and conditions of redemption and other terms and conditions of such class of
Preferred Shares.
SECOND: The Series B Cumulative Redeemable Preferred Shares of
Beneficial Interest created by the resolutions duly adopted by the Board of
Trustees of the Trust referred to in Article FIRST of these Articles
Supplementary shall have the following designation, number of shares,
preferences, conversion and other rights, voting powers, restrictions and
limitation as to dividends, qualifications, terms and conditions of redemption
and other terms and conditions which, upon any restatement of the Declaration,
may be made a part of Article VI of the Declaration with any appropriate changes
in enumeration or lettering of any section or subsection thereof:
SECTION 1. DESIGNATION AND NUMBER. A series of preferred shares of
beneficial interest, designated the "8.30% Series B Cumulative Redeemable
Perpetual Preferred Shares" (the "SERIES B PREFERRED SHARES") is hereby
established. The number of shares of Series B Preferred Shares shall be
__________________, which number may be decreased (but not below the aggregate
number thereof then outstanding and which have been reserved for issuance) from
time to time by the Board of Trustees.
SECTION 2. RANK. The Series B Preferred Shares will, with respect to
distributions or rights upon voluntary or involuntary liquidation, winding-up or
dissolution of the Trust, or both, rank senior to all classes or series of
Common Shares (as defined in the Declaration) and to all classes or series of
equity securities of the Trust now or hereafter authorized, issued or
outstanding, other than any class or series of equity securities of the Trust
<PAGE>
expressly designated as ranking on a parity with or senior to the Series B
Preferred Shares as to distributions or rights upon voluntary or involuntary
liquidation, winding-up or dissolution of the Trust, or both. For purposes of
these Articles Supplementary, the term "PARITY PREFERRED SHARES" shall be used
to refer to any class or series of equity securities of the Trust now or
hereafter authorized, issued or outstanding expressly designated by the Trust to
rank on a parity with Series B Preferred Shares with respect to distributions or
rights upon voluntary or involuntary liquidation, winding-up or dissolution of
the Trust, or both, as the context may require, and includes the Series A
Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest, par
value $.01 per share, of the Trust. The term "equity securities" does not
include debt securities, which will rank senior to the Series B Preferred
Shares.
SECTION 3. DISTRIBUTIONS. (a) Payment of Distributions. Subject to
the rights of holders of Parity Preferred Shares as to the payment of
distributions and holders of equity securities ranking senior to the Series B
Preferred Shares issued after the date hereof in accordance herewith as to
payment of distributions, holders of Series B Preferred Shares shall be entitled
to receive, when, as and if declared by the Board of Trustees of the Trust, out
of funds legally available for the payment of distributions, cumulative
preferential cash distributions at the rate per annum of 8.30% of the $50.00
liquidation preference per share of Series B Preferred Shares. Such
distributions shall be cumulative and shall accrue from the first day of the
applicable Distribution Period (as defined herein), and will be payable (A)
quarterly in arrears, not later than the third calendar day after the end of the
applicable Distribution Period and, (B) in the event of a redemption, on the
redemption date (each a "PREFERRED SHARES DISTRIBUTION PAYMENT DATE"). For
purposes of these Articles Supplementary, the term "DISTRIBUTION PERIOD" shall
mean quarterly distribution periods commencing on January 1, April 1, July 1 and
October 1 of each year and ending on and including the day preceding the first
day of the next succeeding Distribution Period with respect to any Series B
Preferred Shares (other than the initial Distribution Period, which shall
commence on the original date of issuance for such Series B Preferred Shares and
end on and include the last day of the calendar quarter immediately following
the original date of issuance, and other than the Distribution Period during
which any Series B Preferred Shares shall be redeemed or exchanged, which shall
end on and include the date of such redemption or exchange). The amount of the
distribution payable for any period will be computed on the basis of a 360-day
year of twelve 30-day months and for any period shorter than a full quarterly
period for which distributions are computed, the amount of the distribution
payable will be computed on the basis of the actual number of days elapsed in
such a 30-day month. If any date on which distributions are to be made on the
Series B Preferred Shares is not a Business Day (as defined herein), then
payment of the distribution to be made on such date will be made on the next
succeeding day that is a Business Day (and without any interest or other payment
in respect of any such delay) except that, if such Business Day is in the next
succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date. Distributions on the Series B Preferred Shares will be made to
the holders of record of the Series B Preferred Shares on the relevant record
dates to be fixed by the Board of Trustees of the Trust, which record dates
shall in no event exceed 15 Business Days prior to the relevant Preferred Shares
Distribution Payment Date (each a "DISTRIBUTION RECORD DATE"). Notwithstanding
anything to the contrary set forth herein, each share of Series B Preferred
Shares shall also continue to accrue all accrued and
2
<PAGE>
unpaid distributions, whether or not declared, up to the exchange date on any
Series B Preference Unit (as defined in the Second Amendment to the Second
Amended and Restated Agreement of Limited Partnership of Prentiss Properties
Acquisition Partners, L.P., dated as of the date hereof, the "PARTNERSHIP
AGREEMENT") validly exchanged into such share of Series B Preferred Shares in
accordance with the provisions of such Partnership Agreement.
The term "BUSINESS DAY" shall mean each day, other than a Saturday or
a Sunday, which is not a day on which banking institutions in New York, New York
are authorized or required by law, regulation or executive order to close.
(b) Distributions Cumulative. Distributions on the Series B Preferred
Shares will accrue and accumulate as of each Preferred Shares Distribution
Payment Date whether or not the terms and provisions of any agreement of the
Trust, including any agreement relating to its indebtedness at any time prohibit
the current payment of distributions, whether or not the Trust has earnings,
whether or not there are funds legally available for the payment of such
distributions and whether or not such distributions are authorized or declared.
Distributions on account of arrears for any past Distribution Periods may be
declared and paid at any time, without reference to a regular Preferred Shares
Distribution Payment Date to holders of record of the Series B Preferred Shares
on the record date fixed by the Board of Trustees which date shall not exceed 15
Business Days prior to the payment date. Accumulated and unpaid distributions
will not bear interest.
(c) Priority as to Distributions. (i) So long as any Series B
Preferred Shares are outstanding, no distribution of cash or other property
shall be authorized, declared, paid or set apart for payment on or with respect
to any class or series of Common Shares or any class or series of other shares
of beneficial interest of the Trust ranking junior as to the payment of
distributions to the Series B Preferred Shares (such Common Shares or other
junior shares of beneficial interest, collectively, "JUNIOR SHARES"), nor shall
any cash or other property be set aside for or applied to the purchase,
redemption or other acquisition for consideration of any Series B Preferred
Shares, any Parity Preferred Shares with respect to distributions or any Junior
Shares, unless, in each case, all distributions accumulated on all Series B
Preferred Shares and all classes and series of outstanding Parity Preferred
Shares as to payment of distributions have been paid in full. The foregoing
sentence will not prohibit (i) distributions payable solely in Junior Shares,
(ii) the conversion of Series B Preferred Shares, Junior Shares or Parity
Preferred Shares into stock of the Trust ranking junior to the Series B
Preferred Shares as to distributions, (iii) purchase by the Trust of such Series
B Preferred Shares, Parity Preferred Shares with respect to distributions or
Junior Shares pursuant to Article VII of the Declaration to the extent required
to preserve the Trust's status as a real estate investment trust, and (iv) the
purchase, redemption or other acquisition of Common Shares made for the purpose
of an employee incentive or benefit plan of the Trust or any subsidiary.
(ii) So long as distributions have not been paid in full (or a sum
sufficient for such full payment is not irrevocably deposited in trust for
payment) upon the Series B Preferred Shares, all distributions authorized and
declared on the Series B Preferred Shares and all classes or series of
outstanding Parity Preferred Shares with respect to distributions shall be
3
<PAGE>
authorized and declared so that the amount of distributions authorized and
declared per share of Series B Preferred Shares and such other classes or series
of Parity Preferred Shares shall in all cases bear to each other the same ratio
that accrued distributions per share on the Series B Preferred Shares and such
other classes or series of Parity Preferred Shares (which shall not include any
accumulation in respect of unpaid distributions for prior distribution periods
if such class or series of Parity Preferred Shares do not have cumulative
distribution rights) bear to each other.
(e) No Further Rights. Holders of Series B Preferred Shares shall not
be entitled to any distributions, whether payable in cash, other property or
otherwise, in excess of the full cumulative distributions described herein.
(f) No Declaration of Distributions. No distributions on Series B
Preferred Shares shall be declared by the Board of Trustees or paid or set apart
for payment by the Trust at such time as the terms and provisions of any
agreement of the Trust (other than any agreement with a holder or Affiliate of a
holder of Equity Shares of the Trust), including any agreement relating to its
indebtedness, prohibits such declaration, payment or setting apart for payment
or provides that such declaration, payment or setting apart for payment would
constitute a breach thereof or a default thereunder, or if such declaration or
payment shall be restricted or prohibited by law. Nothing in this subsection (f)
shall be deemed to modify or affect in any manner the accrual provisions set
forth in Section 3(b) or the distribution priorities set forth in Section 3(c).
(g) Determination of Distributions. In determining whether a
distribution by dividend, redemption or other acquisition of Preferred Shares or
otherwise is permitted under Maryland law, no effect shall be given to amounts
that would be needed, if the Trust were to be dissolved at the time of the
distribution, to satisfy the preferential rights upon dissolution of
shareholders whose preferential rights on dissolution are superior to those
receiving the distribution.
SECTION 4. LIQUIDATION PREFERENCE. (a) Payment of Liquidating
Distributions. Subject to the rights of holders of Parity Preferred Shares with
respect to rights upon any voluntary or involuntary liquidation, dissolution or
winding-up of the Trust and subject to equity securities ranking senior to the
Series B Preferred Shares with respect to rights upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Trust, the holders of
Series B Preferred Shares shall be entitled to receive out of the assets of the
Trust legally available for distribution or the proceeds thereof, after payment
or provision for debts and other liabilities of the Trust, but before any
payment or distributions of the assets shall be made to holders of Common Shares
or any other class or series of shares of the Trust that ranks junior to the
Series B Preferred Shares as to rights upon liquidation, dissolution or winding-
up of the Trust, an amount equal to the sum of (i) a liquidation preference of
$50 per share of Series B Preferred Shares, and (ii) an amount equal to any
accumulated and unpaid distributions thereon, whether or not declared, to the
date of payment. In the event that, upon such voluntary or involuntary
liquidation, dissolution or winding-up, there are insufficient assets to permit
full payment of liquidating distributions to the holders of Series B Preferred
Shares and any Parity Preferred Shares as to rights upon liquidation,
dissolution or winding-up of the Trust, all payments of
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liquidating distributions on the Series B Preferred Shares and such Parity
Preferred Shares shall be made so that the payments on the Series B Preferred
Shares and such Parity Preferred Shares shall in all cases bear to each other
the same ratio that the respective rights of the Series B Preferred Shares and
such other Parity Preferred Shares (which shall not include any accumulation in
respect of unpaid distributions for prior distribution periods if such Parity
Preferred Shares do not have cumulative distribution rights) upon liquidation,
dissolution or winding-up of the Trust bear to each other.
(b) Notice. Written notice of any such voluntary or involuntary
liquidation, dissolution or winding-up of the Trust, stating the payment date or
dates when, and the place or places where, the amounts distributable in such
circumstances shall be payable, shall be given by (i) fax (if the holder of the
Series B Preferred Shares shall have provided the Trust with such holder's fax
number) and (ii) first class mail, postage pre-paid, not less than 30 and not
more that 60 days prior to the payment date stated therein, to each record
holder of the Series B Preferred Shares at the respective addresses of such
holders as the same shall appear on the share transfer records of the Trust.
(c) No Further Rights. After payment of the full amount of the
liquidating distributions to which they are entitled, the holders of Series B
Preferred Shares will have no right or claim to any of the remaining assets of
the Trust.
(d) Consolidation, Merger or Certain Other Transactions. The
voluntary sale, conveyance, lease, exchange or transfer (for cash, shares of
stock, securities or other consideration) of all or substantially all of the
property or assets of the Trust to, or the consolidation or merger or other
business combination of the Trust with or into, any corporation, trust or other
entity (or of any corporation, trust or other entity with or into the Trust) or
a statutory share exchange shall not be deemed to constitute a liquidation,
dissolution or winding-up of the Trust.
SECTION 5. OPTIONAL REDEMPTION. (a) Right of Optional Redemption.
The Series B Preferred Shares may not be redeemed prior to June 25, 2003. On or
after such date, the Trust shall have the right to redeem the Series B Preferred
Shares, in whole or in part, at any time or from time to time out of funds
legally available therefor, upon not less than 30 nor more than 60 days' written
notice, at a redemption price, payable in cash, equal to $50 per share of Series
B Preferred Shares plus accumulated and unpaid distributions, whether or nor
declared, to the date of redemption. If fewer than all of the outstanding
shares of Series B Preferred Shares are to be redeemed, the shares of Series B
Preferred Shares to be redeemed shall be selected pro rata (as nearly as
practicable without creating fractional shares).
(b) Limitation on Redemption. (i) The redemption price of the Series
B Preferred Shares (other than the portion thereof consisting of accumulated but
unpaid distributions) will be payable solely out of the sale proceeds of capital
stock of the Trust and from no other source. For purposes of the preceding
sentence, "capital stock" means any equity securities (including Common Shares
and Preferred Shares), shares, participation or other
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ownership interests (however designated) and any rights (other than debt
securities convertible into or exchangeable for equity securities) or options to
purchase any of the foregoing.
(ii) The Trust may not redeem fewer than all of the outstanding shares
of Series B Preferred Shares unless all accumulated and unpaid distributions
have been paid on all outstanding Series B Preferred Shares for all quarterly
Distribution Periods terminating on or prior to the date of redemption.
(c) Procedures for Redemption. (i) Notice of redemption will be (i)
faxed (if the holder of the Series B Preferred Shares shall have provided the
Trust with such holder's fax number) and (ii) mailed by the Trust, postage
prepaid, not less than 30 nor more than 60 days prior to the redemption date,
addressed to the respective holders of record of the Series B Preferred Shares
to be redeemed at their respective addresses as they appear on the transfer
records of the Trust. No failure to give or defect in such notice shall affect
the validity of the proceedings for the redemption of any Series B Preferred
Shares except as to the holder to whom such notice was defective or not given.
In addition to any information required by law or by the applicable rules of any
exchange upon which the Series B Preferred Shares may be listed or admitted to
trading, each such notice shall state: (i) the redemption date, (ii) the
redemption price, (iii) the number of shares of Series B Preferred Shares to be
redeemed, (iv) the place or places where such shares of Series B Preferred
Shares are to be surrendered for payment of the redemption price, (v) that
distributions on the Series B Preferred Shares to be redeemed will cease to
accumulate on such redemption date and (vi) that payment of the redemption price
and any accumulated and unpaid distributions will be made upon presentation and
surrender of such Series B Preferred Shares. If fewer than all of the shares of
Series B Preferred Shares held by any holder are to be redeemed, the notice
mailed to such holder shall also specify the number of shares of Series B
Preferred Shares held by such holder to be redeemed.
(ii) If the Trust gives a notice of redemption in respect of Series B
Preferred Shares (which notice will be irrevocable) then, by 12:00 noon, New
York City time, on the redemption date, the Trust will deposit irrevocably in
trust for the benefit of the Series B Preferred Shares being redeemed funds
sufficient to pay the applicable redemption price, plus any accumulated and
unpaid distributions, whether or not declared, if any, on such shares to the
date fixed for redemption, without interest, and will give irrevocable
instructions and authority to pay such redemption price and any accumulated and
unpaid distributions, if any, on such shares to the holders of the Series B
Preferred Shares upon surrender of the certificate evidencing the Series B
Preferred Shares by such holders at the place designated in the notice of
redemption. If fewer than all Series B Preferred Shares evidenced by any
certificate is being redeemed, a new certificate shall be issued upon surrender
of the certificate evidencing all Series B Preferred Shares, evidencing the
unredeemed Series B Preferred Shares without cost to the holder thereof. On and
after the date of redemption, distributions will cease to accumulate on the
Series B Preferred Shares or portions thereof called for redemption, unless the
Trust defaults in the payment thereof, such shares will no longer be deemed
outstanding, and all rights of the holders thereof as holders of Series B
Preferred Shares will cease (except the right to receive the redemption price
and any accrued and unpaid distributions upon surrender and endorsement of the
certificates evidencing the Series B Preferred Shares). If any date fixed for
redemption of Series B Preferred Shares is
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not a Business Day, then payment of the redemption price payable on such date
will be made on the next succeeding day that is a Business Bay (and without any
interest or other payment in respect of any such delay) except that, if such
Business Day falls in the next calendar year, such payment will be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on such date fixed for redemption. If payment of the redemption price
or any accumulated or unpaid distributions in respect of the Series B Preferred
Shares is improperly withheld or refused and not paid by the Trust,
distributions on such Series B Preferred Shares will continue to accumulate from
the original redemption date to the date of payment, in which case the actual
payment date will be considered the date fixed for redemption for purposes of
calculating the applicable redemption price and any accumulated and unpaid
distributions.
(d) Status of Redeemed Shares. Any Series B Preferred Shares that
shall at any time have been redeemed shall after such redemption, have the
status of authorized but unissued preferred shares of beneficial interest,
without designation as to class or series until such shares are once more
designated as part of a particular class or series by the Board of Trustees.
(e) Shares-in-Trust. Nothing in this Section 5 shall restrict the
Trust's right to purchase Shares-in-Trust pursuant to Article VII of the
Declaration.
SECTION 6. VOTING RIGHTS. (a) General. Holders of the Series B
Preferred Shares will not have any voting rights, except as set forth below.
(b) Right to Elect Trustees. (i) If at any time distributions shall
be in arrears with respect to six (6) prior quarterly Distribution Periods
(including quarterly periods on the Series B Preferred Units prior to the
exchange into Series B Preferred Shares), whether or not consecutive, and shall
not have been paid in full (a "PREFERRED DISTRIBUTION DEFAULT"), the authorized
number of members of the Board of Trustees shall automatically be increased by
two and the holders of record of such Series B Preferred Shares, voting together
as a single class with the holders of each class or series of Parity Preferred
Shares upon which like voting rights have been conferred and are exercisable,
will be entitled to fill the vacancies so created by electing two additional
trustees to serve on the Trust's Board of Trustees (the "PREFERRED SHARES
TRUSTEES") at a special meeting called in accordance with SECTION 6(b)(ii) or at
the next annual meeting of stockholders, and at each subsequent annual meeting
of stockholders or special meeting held in place thereof, until all such
distributions in arrears and distributions for the current quarterly period on
the Series B Preferred Shares and each such class or series of Parity Preferred
Shares have been paid in full.
(ii) At any time when such voting rights shall have vested, a proper
officer of the Trust shall call or cause to be called, upon written request of
holders of record of at least 10% of the outstanding Shares of Series B
Preferred Shares, a special meeting of the holders of Series B Preferred Shares
and all the series of Parity Preferred Shares upon which like voting rights have
been conferred and are exercisable (collectively, the "PARITY SECURITIES") by
mailing or causing to be mailed to such holders a notice of such special meeting
to be held not less than ten and not more than 45 days after the date such
notice is given. The record date for determining holders of the Parity
Securities entitled to notice of and to vote at such special meeting will be the
close of
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business on the third Business Day preceding the day on which such notice is
mailed. At any such special meeting, all of the holders of the Parity
Securities, by plurality vote, voting together as a single class without regard
to series will be entitled to elect two trustees on the basis of one vote per
$25.00 of liquidation preference to which such Parity Securities are entitled by
their terms (excluding amounts in respect of accumulated and unpaid dividends)
and not cumulatively. The holder or holders of a majority of the Parity
Securities then outstanding, present in person or by proxy, will constitute a
quorum for the election of the Preferred Shares Trustees except as otherwise
provided by law. Notice of all meetings at which holders of the Series B
Preferred Shares shall be entitled to vote will be given to such holders at
their addresses as they appear in the transfer records. At any such meeting or
adjournment thereof in the absence of a quorum, subject to the provisions of any
applicable law, a majority of the holders of the Parity Securities present in
person or by proxy shall have the power to adjourn the meeting for the election
of the Preferred Shares Trustees, without notice other than an announcement at
the meeting, until a quorum is present. If a Preferred Distribution Default
shall terminate after the notice of a special meeting has been given but before
such special meeting has been held, the Trust shall, as soon as practicable
after such termination, mail or cause to be mailed notice of such termination to
holders of the Series B Preferred Shares that would have been entitled to vote
at such special meeting.
(iii) If and when all distributions in arrears and the distribution
for the current Distribution Period on the Series B Preferred Shares shall have
been paid in full or a sum sufficient for such payment is irrevocably deposited
in trust for payment, the holders of the Series B Preferred Shares shall be
divested of the voting rights set forth in SECTION 6(b) herein (subject to
revesting in the event of each and every Preferred Distribution Default) and, if
all distributions in arrears and the distributions for the current distribution
period have been paid in full or set aside for payment in full on all other
classes or series of Parity Preferred Shares upon which like voting rights have
been conferred and are exercisable, the term and office of each Preferred Shares
Trustee so elected shall terminate and the number of members of the Board of
Trustees shall be reduced accordingly. Any Preferred Shares Trustee may be
removed at any time with or without cause by the vote of, and shall not be
removed otherwise than by the vote of, the holders of record of a majority of
the outstanding Parity Securities (including the Series B Preferred Shares when
they have the voting rights set forth in SECTION 6(b)) voting together as a
single class. So long as a Preferred Distribution Default shall continue, any
vacancy in the office of a Preferred Shares Trustee may be filled by written
consent of the Preferred Shares Trustee remaining in office, or if none remains
in office, by a vote of the holders of record of a majority of the outstanding
Parity Securities (including the Series B Preferred Shares when they have the
voting rights set forth in SECTION 6(b)) voting together as a single class. The
Preferred Shares Director shall each be entitled to one vote per trustee on any
matter.
(c) Certain Voting Rights. So long as any Series B Preferred Shares
are outstanding, the Trust shall not, without the affirmative vote of the
holders of at least two-thirds of the Series B Preferred Shares outstanding at
the time, (i) designate or create, or increase the authorized or issued amount
of, any class or series of shares ranking prior to the Series B Preferred Shares
with respect to payment of distributions or rights upon liquidation, dissolution
or winding-up or reclassify any authorized shares of the Trust into any such
shares, or create, authorize or issue any obligations or security convertible
into or evidencing the right to purchase
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any such shares, (ii) issue to an affiliate of the Trust, or reclassifying any
authorized shares of the Trust held by an affiliate of the Trust, any Parity
Preferred Shares or any obligations or security convertible into or evidencing
the right to purchase any Parity Preferred Shares, or (iii) either (A)
consolidate, merge into or with, or convey, transfer or lease its assets
substantially as an entirety, to any corporation or other entity, or (B) amend,
alter or repeal the provisions of the Trust's Declaration (including these
Articles Supplementary) or By-laws, whether by merger, consolidation or
otherwise, in each case that would materially and adversely affect the powers,
special rights, preferences, privileges or voting power of the Series B
Preferred Shares or the holders thereof; provided, however, that with respect to
the occurrence of a merger, consolidation or a sale or lease of all of the
Trust's assets as an entirety, so long as (a) the Trust is the surviving entity
and the Series B Preferred Shares remain outstanding with the terms thereof
unchanged, or (b) the resulting, surviving or transferee entity is a
corporation, trust or other entity organized under the laws of any state and
substitutes the Series B Preferred Shares for other preferred stock having
substantially the same terms and same rights as the Series B Preferred Shares,
including with respect to distributions, voting rights and rights upon
liquidation, dissolution or winding-up, then the occurrence of any such event
shall not be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers of the Series B Preferred Shares and the holders
thereof, and provided further that any increase in the amount of authorized
Preferred Shares or the creation or issuance of any other class or series of
Preferred Shares, or any increase in an amount of authorized shares of each
class or series, in each case ranking either (a) junior to the Series B
Preferred Shares with respect to payment of distributions and the distribution
of assets upon liquidation, dissolution or winding-up, or (b) on a parity with
the Series B Preferred Shares with respect to payment of distributions and the
distribution of assets upon liquidation, dissolution or winding-up, to the
extent such Preferred Shares are not issued to an affiliate of the Trust, shall
not be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers.
SECTION 7. NO CONVERSION RIGHTS. The holders of the Series B
Preferred Shares shall not have any rights to convert such shares into shares of
any other class or series of beneficial interest or into any other securities
of, or interest in, the Trust.
SECTION 8. NO SINKING FUND. No sinking fund shall be established for
the retirement or redemption of Series B Preferred Shares.
Section 9. NO PREEMPTIVE RIGHTS. No holder of the Series B Preferred
Shares of the Trust shall, as such holder, have any preemptive rights to
purchase or subscribe for additional shares of beneficial interest of the Trust
or any other security of the Trust which it may issue or sell.
Section 10. RECORD HOLDERS. The Trust and the transfer agent for the
Series B Preferred Shares may deem and treat the record holder of any Series B
Preferred Shares as the true and lawful owner thereof for all purposes, and
neither the Trust nor the transfer agent shall be affected by any notice to the
contrary.
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THIRD: The Series B Preferred Shares have been classified and
designated by the Board of Trustees under the authority contained in the
Declaration.
FOURTH: These Articles Supplementary have been approved by the Board
of Trustees in the manner and by the vote required by law.
FIFTH: The undersigned Vice President of the Trust acknowledges
these Articles Supplementary to be the corporate act of the Trust and, as to all
matters or facts required to be verified under oath, the undersigned Vice
President acknowledges that to the best of his knowledge, information and
belief, these matters and facts are true in all material respects and that this
statement is made under the penalties for perjury.
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IN WITNESS WHEREOF, the Trust has caused these Articles Supplementary
to be executed under seal in its name and on its behalf by its Vice President
and attested to by its Secretary on this 25th day of June, 1998.
PRENTISS PROPERTIES TRUST
By: /s/ MICHAEL A. ERNST
-----------------------------
Michael A. Ernst
Senior Vice President
ATTEST:
GREGORY S. IMHOFF
---------------------------
Gregory S. Imhoff
Secretary
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EXHIBIT 10.3
PRENTISS PROPERTIES ACQUISITION PARTNERS, L.P.
SECOND AMENDMENT TO THE SECOND AMENDED AND RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF PRENTISS PROPERTIES ACQUISITION PARTNERS, L.P. ESTABLISHING THE
SERIES B CUMULATIVE REDEEMABLE PERPETUAL PREFERRED UNITS OF PARTNERSHIP INTEREST
AND FIXING DISTRIBUTION AND OTHER PREFERENCES AND RIGHTS OF SUCH UNITS
RECITALS
A. Pursuant to Section 4.02 and Article XI of the Second Amended and
Restated Agreement of Limited Partnership, as amended (as so amended, the
"AGREEMENT"), of Prentiss Properties Acquisition Partners, L.P. (the
"PARTNERSHIP"), Prentiss Properties I, Inc. as the sole general partner of the
Partnership (the "GENERAL PARTNER"), desires to amend the Agreement to establish
a series of preferred units of partnership interest in the Partnership
designated as the Series B Cumulative Redeemable Perpetual Preferred Units (the
"SERIES B PREFERRED UNITS") with economic interests as set forth in this
Amendment.
NOW, THEREFORE, the General Partner hereby adopts the following
amendment to the Agreement.
Section 4.02 is amended by adding Section 4.02(e), as follows:
(e) Series B Cumulative Redeemable Perpetual Preferred Units of
Partnership Interest.
SECTION 1. DEFINITIONS. For purposes of the Series B Preferred
Units, the following terms shall have the meanings indicated:
"COMMON UNITS" shall mean all the units of the Partnership that are
not specifically designated as preferred units pursuant to Section 4.02.
"PARITY PREFERRED UNITS" shall be used to refer to any class or series
of Partnership Interests of the Partnership now or hereafter authorized, issued
or outstanding expressly designated by the Partnership to rank on a parity with
Series B Preferred Units with respect to distributions or rights upon voluntary
or involuntary liquidation, winding-up or dissolution of the Partnership, or
both, as the context may require, and includes the Series A Cumulative
Convertible Redeemable Preferred Units of Partnership Interest of the
Partnership.
"PTP" shall mean a "publicly traded partnership" within the meaning of
Section 7704 of the Code.
The definitions of "PROFIT" and "LOSS" in the Agreement shall be
modified as follows:
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Solely for purposes of allocating Profit or Loss in any fiscal
year of the Partnership to the holders of the Series B Preferred Units,
items of Profit and Loss, as the case may be, shall not include
depreciation with respect to properties that are "ceiling limited" in
respect of the holders of the Series B Preferred Units. For purposes of
the preceding sentence, Partnership property shall be considered ceiling
limited in respect of a holder of Series B Preferred Units if depreciation
attributable to such Partnership property which would otherwise be
allocable to such Partner, without regard to this paragraph, exceeded
depreciation determined for federal income tax purposes attributable to
such Partnership property which would otherwise be allocated to such
Partner by more than 5%.
SECTION 2. DESIGNATION AND NUMBER. A series of preferred units of
partnership interest in the Partnership designated as the "8.30% Series B
Cumulative Redeemable Perpetual Preferred Units" (the "SERIES B PREFERRED
UNITS") is hereby established. The number of Series B Preferred Units shall be
1,900,000, which number may be decreased (but not below the aggregate number
thereof then outstanding and/or which have been reserved for issuance) from time
to time by the General Partner.
SECTION 3. DISTRIBUTIONS. (a) Payment of Distributions. Subject
to the rights of holders of Parity Preferred Units as to the payment of
distributions and holders of preferred units ranking senior to the Series B
Preferred Units issued after the date hereof in accordance herewith as to
payment of distributions, holders of Series B Preferred Units shall be entitled
to receive, when, as and if declared by the Partnership acting through the
General Partner, out of funds legally available for the payment of
distributions, cumulative preferential cash distributions at the rate per annum
of 8.30% of the original Capital Contribution per Series B Preferred Unit. Such
distributions shall be cumulative and shall accrue from the first day of the
applicable Distribution Period (as defined herein), and will be payable (A)
quarterly in arrears, not later than the third calendar day after the end of the
applicable Distribution Period and, (B), in the event of (i) an exchange of
Series B Preferred Units into Series B Preferred Shares, or (ii) a redemption of
Series B Preferred Units, on the exchange date or redemption date, as applicable
(each a "PREFERRED UNIT DISTRIBUTION PAYMENT DATE"). For purposes of this
Amendment, the term "DISTRIBUTION PERIOD" shall mean quarterly distribution
periods commencing on January 1, April 1, July 1 and October 1 of each year and
ending on and including the day preceding the first day of the next succeeding
Distribution Period with respect to any Series B Preferred Units (other than the
initial Distribution Period, which shall commence on the original date of
issuance for such Series B Preferred Units and end on and include the last day
of the calendar quarter immediately following the original date of issuance, and
other than the Distribution Period during which any Series B Preferred Units
shall be redeemed or exchanged, which shall end on and include the date of such
redemption or exchange). The amount of the distribution payable for any period
will be computed on the basis of a 360-day year of twelve 30-day months and for
any period shorter than a full quarterly period for which distributions are
computed, the amount of the distribution payable will be computed on the basis
of the actual number of days elapsed in such a 30-day month. If any date on
which distributions are to be made on the Series B Preferred Units is not a
Business Day (as defined herein), then payment of the distribution to be made on
such date will be made on the next succeeding day that is a Business Day (and
without any interest or other
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payment in respect of any such delay) except that, if such Business Day is in
the next succeeding calendar year, such payment shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on such date. Distributions on the Series B Preferred Units will be made to the
holders of record of the Series B Preferred Units on July 1, 1998 and thereafter
on the relevant record dates to be fixed by the Partnership acting through the
General Partner, which record dates shall in no event exceed fifteen (15)
Business Days prior to the relevant Preferred Unit Distribution Payment Date
(the "PREFERRED UNIT PARTNERSHIP RECORD DATE").
The term "BUSINESS DAY" shall mean each day, other than a Saturday or a
Sunday, which is not a day on which banking institutions in New York, New York
are authorized or required by law, regulation or executive order to close.
(b) Distributions Cumulative. Distributions on the Series B Preferred
Units will accrue and accumulate as of each Preferred Unit Distribution Payment
Date whether or not the terms and provisions of any agreement of the
Partnership, including any agreement relating to its indebtedness at any time
prohibit the current payment of distributions, whether or not the Partnership
has earnings, whether or not there are funds legally available for the payment
of such distributions and whether or not such distributions are authorized.
Distributions on account of arrears for any past Distribution Periods may be
declared and paid at any time, without reference to a regular Preferred Unit
Distribution Payment Date to holders of record of the Series B Preferred Units
on the record date fixed by the Partnership acting through the General Partner
which date shall not exceed fifteen (15) Business Days prior to the payment
date. Accumulated and unpaid distributions will not bear interest.
(c) Priority as to Distributions. (i) So long as any Series B Preferred
Units are outstanding, no distribution of cash or other property shall be
authorized, declared, paid or set apart for payment on or with respect to any
class or series of Partnership Interest of the Partnership ranking junior as to
the payment of distributions to the Series B Preferred Units (collectively,
"JUNIOR UNITS"), nor shall any cash or other property be set aside for or
applied to the purchase, redemption or other acquisition for consideration of
any Series B Preferred Units, any Parity Preferred Units with respect to
distributions or any Junior Units, unless, in each case, all distributions
accumulated on all Series B Preferred Units and all classes and series of
outstanding Parity Preferred Units as to payment of distributions have been paid
in full. The foregoing sentence will not prohibit (a) distributions payable
solely in Junior Units, (b) the conversion of Junior Units or Parity Preferred
Units into Partnership Interests of the Partnership ranking junior to the Series
B Preferred Units as to distributions, (c) the redemption of Partnership
Interests corresponding to any Series B Preferred Shares, Parity Preferred
Shares with respect to distributions or Junior Shares to be purchased by
Prentiss Properties Trust (the "TRUST") pursuant to Article VII of the Amended
and Restated Declaration of Trust of the Trust (the "DECLARATION") to preserve
the Trust's status as a real estate investment trust, provided that such
redemption shall be upon the same terms as the corresponding purchase pursuant
to Article VII of the Declaration, or (d) the purchase, redemption or other
acquisition of Common Units made for the purpose of an employee incentive or
benefit plan of the Partnership or any subsidiary.
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(ii) So long as distributions have not been paid in full (or a sum
sufficient for such full payment is not irrevocably deposited in trust for
payment) upon the Series B Preferred Units, all distributions authorized and
declared on the Series B Preferred Units and all classes or series of
outstanding Parity Preferred Units with respect to distributions shall be
authorized and declared so that the amount of distributions authorized and
declared per Series B Preferred Unit and such other classes or series of Parity
Preferred Units shall in all cases bear to each other the same ratio that
accrued distributions per Series B Preferred Unit and such other classes or
series of Parity Preferred Units (which shall not include any accumulation in
respect of unpaid distributions for prior distribution periods if such class or
series of Parity Preferred Units do not have cumulative distribution rights)
bear to each other.
(d) No Further Rights. Holders of Series B Preferred Units shall not be
entitled to any distributions, whether payable in cash, other property or
otherwise, in excess of the full cumulative distributions described herein.
(e) No distributions on Series B Preferred Units shall be declared by the
General Partner or paid or set apart for payment by the Partnership at such time
as the terms and provisions of any agreement of the Partnership, including any
agreement relating to its indebtedness, prohibits such declaration, payment or
provides that such declaration, payment or setting apart for payment would
constitute a breach thereof or a default thereunder, or if such declaration or
payment shall be restricted or prohibited by law. Nothing in this subsection (e)
shall be deemed to modify or affect in any manner the accrual provisions set
forth in Section 3(b) or the distribution priorities set forth in Section 3(c).
(f) In the event of any conflict between the provisions of this Section 3
and the provisions of Section 5.02(a) of the Agreement, the provisions of this
Section 3 shall control.
SECTION 4. LIQUIDATION PROCEEDS. (a) Subject to the rights of
holders of Parity Preferred Units with respect to rights upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Partnership and
subject to preferred units ranking senior to the Series B Preferred Units with
respect to rights upon any voluntary or involuntary liquidation, dissolution or
winding-up of the Partnership, the holders of Series B Preferred Units shall be
entitled to receive out of the assets of the Partnership legally available for
distribution or the proceeds thereof, after payment or provision for debts and
other liabilities of the Partnership, but before any payment or distributions of
the assets shall be made to holders of Common Units or any other class or series
of Partnership Interests of the Partnership that ranks junior to the Series B
Preferred Units as to rights upon liquidation, dissolution or winding-up of the
Partnership, an amount equal to the sum of (i) a liquidation preference in an
amount equal to the positive Capital Account balance of the holder of the Series
B Preferred Units, determined after taking into account all Capital Account
adjustments for the Partnership taxable year during which the liquidation occurs
(other than those made as a result of the liquidating distribution set forth in
this Section 4) and (ii) an amount equal to any accumulated and unpaid
distributions thereon, whether or not declared, to the date of payment to the
extent such distributions are not reflected in the Capital Account balance as of
the date of payment. In the event that, upon such voluntary or
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involuntary liquidation, dissolution or winding-up, there are insufficient
assets to permit full payment of liquidating distributions to the holders of
Series B Preferred Units and any Parity Preferred Units as to rights upon
liquidation, dissolution or winding-up of the Partnership, all payments of
liquidating distributions on the Series B Preferred Units and such Parity
Preferred Units shall be made so that the payments on the Series B Preferred
Units and such Parity Preferred Units shall in all cases bear to each other the
same ratio that the respective rights of the Series B Preferred Units and such
other Parity Preferred Units (which shall not include any accumulation in
respect of unpaid distributions for prior distribution periods if such Parity
Preferred Units do not have cumulative distribution rights) upon liquidation,
dissolution or winding-up of the Partnership bear to each other. In the event of
any conflict between the provisions of this Section 4 and the provisions of
Section 5.06 of the Agreement, the provisions of this Section 4 shall control.
(b) Notice. Written notice of any such voluntary or involuntary
liquidation, dissolution or winding-up of the Partnership, stating the payment
date or dates when, and the place or places where, the amounts distributable in
such circumstances shall be payable, shall be given by (i) fax (if the holder of
the Series B Preferred Units shall have provided the Partnership with such
holder's fax number) and (ii) first class mail, postage pre-paid, not less than
30 and not more that 60 days prior to the payment date stated therein, to each
record holder of the Series B Preferred Units at the respective addresses of
such holders as the same shall appear on the transfer records of the
Partnership.
(c) No Further Rights. After payment of the full amount of the liquidating
distributions to which they are entitled, the holders of Series B Preferred
Units will have no right or claim to any of the remaining assets of the
Partnership.
(d) Consolidation, Merger or Certain Other Transactions. The voluntary
sale, conveyance, lease, exchange or transfer (for cash, shares of stock,
securities or other consideration) of all or substantially all of the property
or assets of the Partnership to, or the consolidation or merger or other
business combination of the Partnership with or into, any corporation, trust or
other entity (or of any corporation, trust or other entity with or into the
Partnership) shall not be deemed to constitute a liquidation, dissolution or
winding-up of the Partnership.
SECTION 5. OPTIONAL REDEMPTION. (a) Right of Optional Redemption.
The Series B Preferred Units may not be redeemed prior to the fifth anniversary
of the issuance date. On or after such date, the Partnership shall have the
right to redeem the Series B Preferred Units, in whole or in part, at any time
or from time to time out of funds legally available therefor, upon not less than
30 nor more than 60 days' written notice, at a redemption price, payable in
cash, equal to the Capital Account balance (or, if not redeemed in full, the
applicable portion thereof) of the holder of the Series B Preferred Units (the
"REDEMPTION PRICE"); provided, however, that no redemption pursuant to this
Section 5 will be permitted if the Redemption Price does not equal or exceed the
original Capital Contribution (or, if not redeemed in full, the applicable
portion thereof) per unit of Series B Preferred Units, plus accumulated and
unpaid distributions, whether or not declared, to the date of redemption to the
extent such distributions are not reflected in the
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Capital Account balance as of the date of redemption. If fewer than all of the
outstanding Series B Preferred Units are to be redeemed, the Series B Preferred
Units to be redeemed shall be selected pro rata (as nearly as practicable
without creating fractional units).
(b) Limitation on Redemption. (i) The Redemption Price of the Series B
Preferred Units (other than the portion thereof consisting of accumulated but
unpaid distributions) will be payable solely out of the sale proceeds of capital
stock of the Trust, which will be contributed by the Trust to the Partnership as
additional capital contribution, or out of the sale of limited partner interests
in the Partnership and from no other source. For purposes of the preceding
sentence, "capital stock" means any equity securities (including Common Shares
and Preferred Shares (as such terms are defined in the Declaration)), shares,
participation or other ownership interests (however designated) and any rights
(other than debt securities convertible into or exchangeable for equity
securities) or options to purchase any of the foregoing.
(ii) The Partnership may not redeem fewer than all of the outstanding
Series B Preferred Units unless all accumulated and unpaid distributions have
been paid on all Series B Preferred Units for all quarterly Distribution Periods
terminating on or prior to the date of redemption.
(c) Procedures for Redemption. (i) Notice of redemption will be (i) faxed
(if the holder of the Series B Preferred Units shall have provided the
Partnership with such holder's fax number) and (ii) mailed by the Partnership,
by certified mail, postage prepaid, not less than 30 nor more than 60 days prior
to the redemption date, addressed to the respective holders of record of the
Series B Preferred Units at their respective addresses as they appear on the
records of the Partnership. No failure to give or defect in such notice shall
affect the validity of the proceedings for the redemption of any Series B
Preferred Units except as to the holder to whom such notice was defective or not
given. In addition to any information required by law, each such notice shall
state: (i) the redemption date, (ii) the Redemption Price, (iii) the aggregate
number of Series B Preferred Units to be redeemed and if fewer than all of the
outstanding Series B Preferred Units are to be redeemed, the number of Series B
Preferred Units to be redeemed held by such holder, (iv) the place or places
where such Series B Preferred Units are to be surrendered for payment of the
Redemption Price, (v) that distributions on the Series B Preferred Units to be
redeemed will cease to accumulate on such redemption date and (vi) that payment
of the Redemption Price will be made upon presentation and surrender of such
Series B Preferred Units.
(ii) If the Partnership gives a notice of redemption in respect of
Series B Preferred Units (which notice will be irrevocable) then, by 12:00 noon,
New York City time, on the redemption date, the Partnership will deposit
irrevocably in trust for the benefit of the Series B Preferred Units being
redeemed funds sufficient to pay the applicable Redemption Price, plus any
accumulated and unpaid distributions, whether or not declared, if any, on such
units to the date fixed for redemption, without interest, and will give
irrevocable instructions and authority to pay such Redemption Price to the
holders of the Series B Preferred Units upon surrender of the Series B Preferred
Units by such holders at the place designated in the notice of redemption. If
the Series B Preferred Units are evidenced by a certificate and if fewer than
all Series B Preferred Units evidenced by any certificate are being redeemed, a
new certificate shall be issued upon
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surrender of the certificate evidencing all Series B Preferred Units, evidencing
the unredeemed Series B Preferred Units without cost to the holder thereof. On
and after the date of redemption, distributions will cease to accumulate on the
Series B Preferred Units or portions thereof called for redemption, unless the
Partnership defaults in the payment thereof, such units will no longer be deemed
outstanding, and all rights of the holders thereof as holders of Series B
Preferred Units will cease (except the right to receive the Redemption Price and
any accrued and unpaid distributions upon surrender and endorsement of the
certificates evidencing the Series B Preferred Units, if any). If any date fixed
for redemption of Series B Preferred Units is not a Business Day, then payment
of the Redemption Price payable on such date will be made on the next succeeding
day that is a Business Bay (and without any interest or other payment in respect
of any such delay) except that, if such Business Day falls in the next calendar
year, such payment will be made on the immediately preceding Business Day, in
each case with the same force and effect as if made on such date fixed for
redemption. If payment of the Redemption Price is improperly withheld or refused
and not paid by the Partnership, distributions on such Series B Preferred Units
will continue to accumulate from the original redemption date to the date of
payment, in which case the actual payment date will be considered the date fixed
for redemption for purposes of calculating the applicable Redemption Price.
SECTION 6. VOTING RIGHTS. (a) General. Holders of the Series B
Preferred Units will not have any voting rights or right to consent to any
matter requiring the consent or approval of the Limited Partners, except as set
forth below.
(b) Certain Voting Rights. So long as any Series B Preferred Units
remains outstanding, the Partnership shall not, without the affirmative vote of
the holders of at least two-thirds of the Series B Preferred Units outstanding
at the time, (i) authorize or create, or increase the authorized or issued
amount of, any class or series of Partnership Interests ranking prior to the
Series B Preferred Units with respect to payment of distributions or rights upon
liquidation, dissolution or winding-up or reclassify any Partnership Interests
of the Partnership into any such Partnership Interest, or create, authorize or
issue any obligations or security convertible into or evidencing the right to
purchase any such Partnership Interests, (ii) create in favor of or issue to an
affiliate of the Partnership any Parity Preferred Units or reclassify any
Partnership Interest of the Partnership held by an affiliate of the Partnership
into any such Partnership Interest or create, authorize or issue in favor of or
to any affiliate of the Partnership any obligations or security convertible into
or evidencing the right to purchase any Parity Preferred Units, other than to
the Trust to the extent the issuance of such interests was to allow the Trust to
issue corresponding preferred shares to persons who are not affiliates of the
Partnership or (iii) either (A) consolidate, merge into or with, or convey,
transfer or lease its assets substantially as an entirety to, any corporation or
other entity or (B) amend, alter or repeal the provisions of the Agreement or
this Amendment, whether by merger, consolidation or otherwise, that would
materially and adversely affect the powers, special rights, preferences,
privileges or voting power of the Series B Preferred Units or the holders
thereof; provided, however, that with respect to the occurrence of a merger,
consolidation or a sale or lease of all of the Partnership's assets as an
entirety, so long as (a) the Partnership is the surviving entity and the Series
B Preferred Units remain outstanding without a change to the terms thereof, or
(b) the resulting, surviving or transferee entity is a partnership, limited
liability company or other pass-through entity organized under the laws of any
state and
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substitutes the Series B Preferred Units for other interests in such entity
having substantially the same terms and rights as the Series B Preferred Units,
including with respect to distributions, voting rights and rights upon
liquidation, dissolution or winding-up, then the occurrence of any such event
shall not be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers of the Series B Preferred Units and the holders
thereof, and provided further that any increase in the amount of Partnership
Interests or the creation or issuance of any other class or series of
Partnership Interests, in each case ranking (a) junior to the Series B Preferred
Units with respect to payment of distributions and the distribution of assets
upon liquidation, dissolution or winding-up, or (b) on a parity to the Series B
Preferred Units with respect to payment of distributions and the distribution of
assets upon liquidation, dissolution or winding-up, to the extent such
Partnership Interests are not issued to an affiliate of the Partnership, other
than the Trust to the extent the issuance of such interests was to allow the
Trust to issue corresponding preferred shares to persons who are not affiliates
of the Partnership, shall not be deemed to materially and adversely affect such
rights, preferences, privileges or voting powers.
SECTION 7. TRANSFER RESTRICTIONS. The Series B Preferred Units shall
be subject to the provisions of Article IX of the Partnership Agreement.
SECTION 8. EXCHANGE RIGHTS. (a) Right to Exchange. (i) Series B
Preferred Units will be exchangeable in whole or in part at anytime on or after
the tenth anniversary of the date of issuance, at the option of the holders
thereof, for authorized but previously unissued shares of 8.30% Series B
Cumulative Redeemable Preferred Shares of the Trust (the "SERIES B PREFERRED
SHARES") at an exchange rate of one share of Series B Preferred Shares for one
Series B Preferred Unit, subject to adjustment as described below (the "EXCHANGE
PRICE"), provided that the Series B Preferred Units will become exchangeable at
any time, in whole or in part, at the option of the holders of Series B
Preferred Units for Series B Preferred Shares if (y) at any time full
distributions shall not have been timely made on any Series B Preferred Unit
with respect to six (6) prior quarterly distribution periods, whether or not
consecutive, provided, however, that a distribution in respect of Series B
Preferred Units shall be considered timely made if made within two (2) Business
Days after the applicable Preferred Unit Distribution Payment Date if at the
time of such late payment there shall not be any prior quarterly distribution
periods in respect of which full distributions were not timely made or (z) upon
receipt by a holder or holders of Series B Preferred Units of (A) notice from
the General Partner that the General Partner or a Subsidiary of the General
Partner has taken the position that the Partnership is, or upon the occurrence
of a defined event in the immediate future will be, a PTP and (B) an opinion
rendered by an outside nationally recognized independent counsel familiar with
such matters addressed to a holder or holders of Series B Preferred Units, that
the Partnership is or likely is, or upon the occurrence of a defined event in
the immediate future will be or likely will be, a PTP. In addition, the Series
B Preferred Units may be exchanged for Series B Preferred Stock, in whole or in
part, at the option of any holder prior to the tenth anniversary of the issuance
date and after the third anniversary thereof if such holder of a Series B
Preferred Units shall deliver to the General Partner either (i) a private ruling
letter addressed to such holder of Series B Preferred Units or (ii) an opinion
of independent counsel reasonably acceptable to the General Partner based on the
enactment of temporary or final Treasury Regulations or the publication of a
Revenue Ruling, in either case to
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the effect that an exchange of the Series B Preferred Units at such earlier time
would not cause the Series B Preferred Units to be considered "stock and
securities" within the meaning of section 351(e) of the Code for purposes of
determining whether the holder of such Series B Preferred Units is an
"investment company" under section 721(b) of the Code if an exchange is
permitted at such earlier date. Furthermore, the Series B Preferred Units may be
exchanged in whole or in part for Series B Preferred Shares at any time after
the date hereof, if both (1) the holder thereof concludes based on results or
projected results that there exists (in the reasonable judgment of the holder)
an imminent and substantial risk that the holder's interest in the Partnership
does or will represent more than 19.5% of the total profits or capital interests
in the Partnership (determined in accordance with Treasury Regulations Section
1.731-2(e)(4)) for a taxable year, and (2) the holder delivers to the General
Partner an opinion of nationally recognized independent counsel to the effect
that there is an imminent and substantial risk that the holder's interest in the
Partnership does or will represent more than 19.5% of the total profits or
capital interests in the Partnership (determined in accordance with Treasury
Regulations Section 1.731-2(e)(4)) for a taxable year.
(ii) Notwithstanding anything to the contrary set forth in SECTION 8(a)(i),
if an Exchange Notice (as defined herein) has been delivered to the General
Partner, then the General Partner may, at its option, elect to redeem or cause
the Partnership to redeem all or a portion of the outstanding Series B Preferred
Units for cash in an amount equal to the original Capital Contribution per
Series B Preferred Unit and all accrued and unpaid distributions thereon to the
date of redemption. The General Partner may exercise its option to redeem the
Series B Preferred Units for cash pursuant to this SECTION 8(a)(ii) by giving
each holder of record of Series B Preferred Units notice of its election to
redeem for cash, within five (5) Business Days after receipt of the Exchange
Notice, by (i) fax (if the holder of the Series B Preferred Units shall have
provided the Partnership with such holder's fax number) and (ii) registered
mail, postage paid, at the address of each holder as it may appear on the
records of the Partnership stating (i) the redemption date, which shall be no
later than sixty (60) days following the receipt of the Exchange Notice, (ii)
the redemption price, (iii) the place or places where the Series B Preferred
Units are to be surrendered for payment of the redemption price, (iv) that
distributions on the Series B Preferred Units will cease to accrue on such
redemption date; (v) that payment of the redemption price will be made upon
presentation and surrender of the Series B Preferred Units and (vi) the
aggregate number of Series B Preferred Units to be redeemed, and if fewer than
all of the outstanding Series B Preferred Units are to be redeemed, the number
of Series B Preferred Units to be redeemed held by such holder, which number
shall equal such holder's pro-rata share (based on the percentage of the
aggregate number of outstanding Series B Preferred Units the total number of
Series B Preferred Units held by such holder represents) of the aggregate number
of Series B Preferred Units being redeemed.
(iii) In the event an exchange of all or a portion of Series B Preferred
Units pursuant to SECTION 8(a)(i) would violate the provisions on ownership
limitation of the Trust set forth in Article VII of the Declaration, the General
Partner shall give written notice thereof to each holder of record of Series B
Preferred Units, within five (5) Business Days following receipt of the Exchange
Notice, by fax (if the holder of the Series B Preferred Units shall have
provided the Partnership with such holder's fax number) and (ii) registered
mail, postage prepaid, at the
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address of each such holder set forth in the records of the Partnership. In such
event, each holder of Series B Preferred Units shall be entitled to exchange,
pursuant to the provision of SECTION 8(b) a number of Series B Preferred Units
which would comply with the provisions on the ownership limitation of the Trust
set forth in such Article VII of the Declaration and any Series B Preferred
Units not so exchanged (the "EXCESS UNITS") shall be redeemed by the Partnership
for cash in an amount equal to the original Capital Contribution per Excess
Unit, plus any accrued and unpaid distributions thereon, whether or not
declared, to the date of redemption. The written notice of the General Partner
shall state (i) the number of Excess Units held by such holder, (ii) the
redemption price of the Excess Units, (iii) the date on which such Excess Units
shall be redeemed, which date shall be no later than sixty (60) days following
the receipt of the Exchange Notice, (iv) the place or places where such Excess
Units are to be surrendered for payment of the redemption price, (v) that
distributions on the Excess Units will cease to accrue on such redemption date,
and (vi) that payment of the redemption price will be made upon presentation and
surrender of such Excess Units. In the event an exchange would result in Excess
Units, as a condition to such exchange, each holder of such units agrees to
provide representations and covenants reasonably requested by the General
Partner relating to (i) the widely held nature of the interests in such holder,
sufficient to assure the General Partner that the holder's ownership of stock of
the Trust (without regard to the limits described above) will not cause any
individual to own in excess of 9.8% of the stock of the Trust; and (ii) to the
extent such holder can so represent and covenant without obtaining information
from its owners, the holder's ownership of tenants of the Partnership and its
affiliates.
(iv) The redemption of Series B Preferred Units described in SECTION
8(a)(ii) and (iii) shall be subject to the provisions of SECTION 5(c)(ii);
provided, however, that for the purposes hereof the term "Redemption Price" in
Section 5(c)(ii) shall be read to mean the original Capital Contribution per
Series B Preferred Unit being redeemed, plus any accumulated and unpaid
distributions, whether or not declared, to the date of redemption to the extent
not otherwise accounted for therein.
(b) Procedure for Exchange. (i) Any exchange shall be exercised pursuant
to a notice of exchange (the "EXCHANGE NOTICE") delivered to the General Partner
by the holder who is exercising such exchange right, by fax (if the holder of
the Series B Preferred Units shall have provided the Partnership with such
holder's fax number) and (ii) certified mail postage prepaid. The exchange of
Series B Preferred Units, or a specified portion thereof, may be effected after
the fifth (5th) Business Days following receipt by the General Partner of the
Exchange Notice by delivering certificates, if any, representing such Series B
Preferred Units to be exchanged together with, if applicable, written notice of
exchange and a proper assignment of such Series B Preferred Units to the office
of the General Partner maintained for such purpose. Currently, such office is
located at 3890 W. Northwest Highway, Suite 400, Dallas, Texas 75220. Each
exchange will be deemed to have been effected immediately prior to the close of
business on the date on which such Series B Preferred Units to be exchanged
(together with all required documentation) shall have been surrendered and
notice shall have been received by the General Partner as aforesaid and the
Exchange Price shall have been paid. Any Series B Preferred Shares issued
pursuant to this SECTION 8 shall be delivered as shares which are duly
authorized, validly issued, fully paid and nonassessable, free of pledge, lien,
encumbrance or restriction other than those provided in the
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Declaration, the Bylaws of the Trust, the Securities Act and relevant state
securities or blue sky laws.
(ii) In the event of an exchange of Series B Preferred Units for shares of
Series B Preferred Shares, an amount equal to the accrued and unpaid
distributions, whether or not declared, to the date of exchange on any Series B
Preferred Units tendered for exchange shall (i) accrue on the shares of the
Series B Preferred Shares into which such Series B Preferred Units are
exchanged, and (ii) continue to accrue on such Series B Preferred Units, which
shall remain outstanding following such exchange, with the Trust as the holder
of such Series B Preferred Units. Notwithstanding anything to the contrary set
forth herein, in no event shall a holder of a Series B Preferred Unit that was
validly exchanged into Series B Preferred Shares pursuant to this section (other
than the Trust now holding such Series B Preferred Unit), receive a distribution
out of Available Cash of the Partnership, if such holder, after exchange, is
entitled to receive a distribution out of Available Cash with respect to the
share of Series B Preferred Shares for which such Series B Preferred Unit was
exchanged or redeemed.
(iii) Fractional shares of Series B Preferred Shares are not to be issued
upon exchange but, in lieu thereof, the General Partner will pay a cash
adjustment based upon the fair market value of the Series B Preferred Shares on
the day prior to the exchange date as determined in good faith by the Board of
Trustees of the Trust.
(c) Adjustment of Exchange Price. (i) The Exchange Price is subject to
adjustment upon certain events, including, (i) subdivisions, combinations and
reclassification of the Series B Preferred Shares, and (ii) distributions to all
holders of Series B Preferred Shares of evidences of indebtedness of the Trust
or assets (including securities, but excluding dividends and distributions paid
in cash out of equity applicable to Series B Preferred Shares).
(ii) In case the Trust shall be a party to any transaction
(including, without limitation, a merger, consolidation, statutory share
exchange, tender offer for all or substantially all of the Trust's capital stock
or sale of all or substantially all of the Trust's assets), in each case as a
result of which the Series B Preferred Shares will be converted into the right
to receive shares of capital stock, other securities or other property
(including cash or any combination thereof), each Series B Preferred Unit will
thereafter be exchangeable into the kind and amount of shares of capital stock
and other securities and property receivable (including cash or any combination
thereof) upon the consummation of such transaction by a holder of that number of
shares of Series B Preferred Shares or fraction thereof into which one Series B
Preferred Unit was exchangeable immediately prior to such transaction. The Trust
may not become a party to any such transaction unless the terms thereof are
consistent with the foregoing.
SECTION 9. NO CONVERSION RIGHTS. The holders of the Series B
Preferred Units shall not have any rights to convert such shares into shares of
any other class or series of stock or into any other securities of, or interest
in, the Partnership.
SECTION 10. NO SINKING FUND. No sinking fund shall be established
for the retirement or redemption of Series B Preferred Units.
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SECTION 11. RECORD HOLDERS. The General Partner may deem and treat
the record holder of any Series B Preferred Unit as the true and lawful owner
thereof for all purposes, and the General Partner shall not be affected by any
notice to the contrary.
Section 5.01 is amended by amending and restating in its entirety
Section 5.01(a), as follows:
(a) General.
(1) Profit.
(A) First, 100% to the General Partner and Common Unitholders until
the aggregate amount of Profit allocated under this Section 5.01(a)(1)(A),
shall equal the aggregate amount of Loss allocated to the Partners under
Section 5.01(a)(2)(E);
(B) Second, 100% to the Series A Preferred Unitholder and Series B
Preferred Unitholder in proportion to and to the extent of their respective
excesses of (i) the aggregate amount of Loss allocated to each under
Section 5.01(a)(2)(D) over (ii) the aggregate amount of Profit allocated to
each under this Section 5.01(a)(1)(B);
(C) Third, 100% to the General Partner and the Common Unitholders in
proportion to and to the extent of their respective excesses of (i) the
aggregate amount of Loss allocated to each under Section 5.01(a)(2)(C) over
(ii) the aggregate amount of Profit allocated to each under this Section
5.01(a)(1)(C);
(D) Fourth, 100% proportionately to (i) the Series A Preferred
Unitholder until the aggregate amount of Profit allocated to the Series A
Preferred Unitholder under this Section 5.01(a)(1)(D)(i) shall equal the
Series A Preferred Distribution Amount and (ii) the Series B Preferred
Unitholder until the aggregate amount of Profit allocated to the Series B
Preferred Unitholder under this Section 5.01(a)(1)(D)(ii) shall equal the
Series B Preferred Distribution Amount; and
(E) Fifth, 100% to the General Partner and the Common Unitholders in
accordance with the Percentage Interest of each.
(2) Loss.
(A) First, 100% to the General Partner and the Common Unitholders to
the extent of and in proportion to (i) the aggregate amount of Profit
allocated to each under Section 5.01(a)(1)(E) over (ii) the aggregate
amount of Loss allocated to each under this Section 5.01(a)(2)(A);
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(B) Second 100% proportionately to (i) the Series A Preferred
Unitholder to the extent of the Undistributed Series A Preferred Unit
Distribution Amount and (ii) the Series B Preferred Unitholder to the
extent of the Undistributed Series B Preferred Unit Distribution Amount;
(C) Third, 100% to the General Partner and the Common Unitholders in
proportion to the Percentage Interest of each until the Capital Account
balances of both the General Partner and each Common Unitholder shall equal
zero;
(D) Fourth, 100% to the Series A Preferred Unitholder and Series B
Preferred Unitholder in proportion to the Capital Account balances of each
until the Capital Account balances of both the Series A Preferred
Unitholder and Series B Preferred Unitholder shall equal zero; and
(E) Fifth, 100% to the General Partner and Common Unitholders in
accordance with their Percentage Interests.
(3) Definitions. For purposes of this Section 5.01(a), the following terms
shall have the meanings indicated:
"COMMON UNITHOLDER(S)" means all Persons holding a Limited Partnership
Interest in the Partnership other than the Series A Preferred Unitholder
and the Series B Preferred Unitholder.
"SERIES A PREFERRED UNIT DISTRIBUTION AMOUNT" means the amount
distributable to the Series A Preferred Unitholder as provided in Section 3
of Section 4.02(d) of the First Amendment to the Second Amended and
Restated Agreement of Limited Partnership of the Partnership dated December
29, 1997.
"SERIES A PREFERRED UNITHOLDER" means any Person holding Series A
Preferred Units.
"SERIES A PREFERRED UNITS" means the Series A Cumulative Convertible
Redeemable Preferred Units of Partnership Interest issued pursuant to the
First Amendment to the Second Amended and Restated Agreement of Limited
Partnership of the Partnership dated December 29, 1997.
"SERIES B PREFERRED UNIT DISTRIBUTION AMOUNT" means the amount
distributable to the Series B Unitholder as provided in Section 3 of
Section 4.02(e) of the Second Amendment to the Second Amended and Restated
Agreement of Limited Partnership of the Partnership dated June 25, 1998.
"SERIES B PREFERRED UNITHOLDER" means any Person holding Series B
Preferred Units.
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"SERIES B PREFERRED UNITS" means the Series B Cumulative Redeemable
Perpetual Preferred Units of Partnership Interest issued pursuant to the
Second Amendment to the Second Amended and Restated Agreement of Limited
Partnership of the Partnership dated June 25, 1998.
"UNDISTRIBUTED SERIES A PREFERRED UNIT DISTRIBUTION AMOUNT" means the
excess of (i) the aggregate amount of Profit allocated to the Series A
Unitholder under Section 5.01(a)(1)(D) and (ii) the aggregated amount of
distributions made to the Series A Unitholder under Section 3 of Section
4.02(d) of the First Amendment to the Second Amended and Restated Agreement
of Limited Partnership of the Partnership dated December 29, 1997.
"UNDISTRIBUTED SERIES B PREFERRED UNIT DISTRIBUTION AMOUNT" means the
excess of (i) the aggregate amount of Profit allocated to the Series B
Unitholder under Section 5.01(a)(1)(D) and (ii) the aggregated amount of
distributions made to the Series B Unitholder under Section 3 of Section
4.02(e) of the Second Amendment to the Second Amended and Restated
Agreement of Limited Partnership of the Partnership dated June 25, 1998.
Exhibit A to the Agreement is hereby amended and restated in its
entirety as set forth on Exhibit A attached hereto.
[signature page follows]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of June 25, 1998.
GENERAL PARTNER:
PRENTISS PROPERTIES I, INC.
By: /s/ MICHAEL A. ERNST
----------------------------
Michael A. Ernst
Senior Vice President
LIMITED PARTNER:
BELAIR CAPITAL FUND LLC
By: Eaton Vance Management, its Manager
By: /s/ THOMAS OTIS
----------------------------
Thomas Otis
Vice President
15
<PAGE>
ACKNOWLEDGMENT
The Trust referred to in the foregoing Second Amendment to the Second Amended
and Restated Agreement of Limited Partnership of Prentiss Properties Acquisition
Partners, L.P. hereby acknowledges receipt of a copy thereof and agrees to be
bound thereby and to comply with the terms thereof insofar as such terms are
applicable to the Trust.
PRENTISS PROPERTIES TRUST
By: /s/ MICHAEL A. ERNST
-----------------------------
Michael A. Ernst
Senior Vice President
16
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<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 11,347 6,447
<SECURITIES> 0 0
<RECEIVABLES> 18,206 5,807
<ALLOWANCES> 932 451
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,592,625 776,830
<DEPRECIATION> 50,345 25,754
<TOTAL-ASSETS> 1,668,789 806,649
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
100,000 0
<COMMON> 399 263
<OTHER-SE> 774,158 453,998
<TOTAL-LIABILITY-AND-EQUITY> 1,668,789 806,649
<SALES> 0 0
<TOTAL-REVENUES> 106,822 52,432
<CGS> 0 0
<TOTAL-COSTS> 73,962 36,664
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 17,075 7,400
<INCOME-PRETAX> 37,455 16,338
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 8,908 111
<CHANGES> 0 0
<NET-INCOME> 28,547 16,227
<EPS-PRIMARY> .68 .73
<EPS-DILUTED> .68 .72
</TABLE>
