<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report under Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarter Ended September 30, 1999 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 November 10, 1999, was 37,608,439 and the number of outstanding
Participating Cumulative Redeemable Preferred Shares of Beneficial Interest,
Series A, was 3,773,585.
<PAGE>
PRENTISS PROPERIES TRUST
<TABLE>
<CAPTION>
INDEX
-----
<S> <C> <C>
Part I: FINANCIAL INFORMATION Page Number
-----------
Item 1. Financial Statements
Consolidated Balance Sheets of Prentiss Properties Trust at
September 30, 1999 (unaudited) and December 31, 1998 4
Consolidated Statements of Income of Prentiss Properties Trust
for the three month periods and the nine month periods ended
September 30, 1999 and 1998 (unaudited) 5
Consolidated Statements of Cash Flows of Prentiss Properties
Trust for the nine month periods ended September 30, 1999 and
1998 (unaudited) 6
Notes to Consolidated Financial Statements 7-14
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 15-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 27
Part II: OTHER INFORMATION
Item 1. Legal Proceedings 28
Item 2. Changes in Securities 28
Item 3. Defaults Upon Mortgages and Notes Payable 28
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 5. Other Information 28
Item 6. Exhibits and Reports on Form 8-K 28-30
SIGNATURE 31
</TABLE>
2
<PAGE>
FORWARD-LOOKING STATEMENTS
This Form 10-Q and the documents incorporated by reference herein
contains forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). When used
in this Form 10-Q, words such as "anticipate," "believe," "estimate," "expect,"
"intend," "predict," "project," and similar expressions, as they relate to the
Company's management, identify forward-looking statements. Such forward-looking
statements are based on the beliefs of the Company's management as well as
assumptions made by and information currently available to the Company. These
forward-looking statements are subject to certain risks, uncertainties and
assumptions, including, but not limited to, risks, uncertainties and assumptions
related to the following:
<TABLE>
<CAPTION>
<S> <C>
. The geographic concentration of our properties; . Conflicts of interest;
. The Company's real estate acquisition, . Change in our investment, financing and borrowing
redevelopment, development and construction policies without shareholder approval;
activities;
. Operating performance of properties; . The Company's dependence on key personnel;
. The Company's incurrence of debt; . The Company's third-party property management,
leasing, development and construction business and
related services; and
. Limited ability of shareholders to effect a change . Effect of shares available for future sale on price
of control; of common shares.
. The Company's failure to qualify as a Real Estate
Investment Trust ("REIT");
</TABLE>
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect the Company's current views with respect to future events and are
subject to these and other risks, uncertainties and assumptions relating to the
Company's operations, growth strategy and liquidity. All subsequent written and
oral forward-looking statements attributable to us or individuals acting on our
behalf are expressly qualified in their entirety by this paragraph. A detailed
discussion of risks is included in the Company's Form 10-K, filed on March 29,
1999, under the caption "Risk Factors."
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements
3
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
-------------------- --------------------
(Unaudited)
ASSETS
<S> <C> <C>
Real estate..................................................... $1,852,779 $1,810,735
Less: accumulated depreciation............................... (89,333) (61,232)
---------- ----------
1,763,446 1,749,503
Deferred charges and other assets, net.......................... 108,311 74,560
Receivables, net................................................ 24,363 20,484
Cash and cash equivalents....................................... 12,647 5,523
Escrowed cash................................................... 6,621 8,172
Other receivables (affiliates).................................. 4,688 2,245
Investments in joint ventures and unconsolidated subsidiary..... 19,802 10,658
---------- ----------
Total assets................................................... $1,939,878 $1,871,145
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Debt on real estate............................................ $ 854,842 $ 800,263
Accounts payable and other liabilities......................... 57,561 62,410
Distributions payable.......................................... 21,205 17,774
---------- ----------
Total liabilities........................................... 933,608 880,447
---------- ----------
Minority interest in operating partnership...................... 177,460 128,775
---------- ----------
Minority interest in real estate partnerships................... 1,458 1,345
---------- ----------
Commitments and contingencies
Shareholders' equity:
Preferred shares $.01 par value, 20,000,000
shares authorized, 3,773,585 shares issued and
outstanding................................................... 100,000 100,000
Common shares $.01 par value, 100,000,000 shares
authorized, 40,047,719 (includes 2,215,100 in treasury)
and 39,930,288 (includes 998,800 in treasury)
shares issued and outstanding at September 30, 1999
and December 31, 1998, respectively........................ 400 399
Additional paid-in capital..................................... 788,927 787,193
Distributions in excess of accumulated earnings................ (6,149) (3,700)
Common shares in treasury, at cost, 2,215,100
and 998,800 at September 30, 1999 and
December 31, 1998, respectively.............................. (55,826) (23,314)
---------- ----------
Total shareholders' equity................................... 827,352 860,578
---------- ----------
Total liabilities and shareholders' equity................... $1,939,878 $1,871,145
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Rental income................................................. $76,119 $63,531 $220,179 $167,470
Mortgage interest............................................. - 960 2,880
Management and other fees, net................................ 609 580 1,804 1,543
------- ------- -------- --------
Total revenues............................................... 76,728 65,071 221,983 171,893
------- ------- -------- --------
Expenses:
Property operating and maintenance............................ 18,218 15,874 51,037 39,455
Real estate taxes............................................. 8,699 6,828 26,116 18,096
General and administrative and personnel costs, net........... 2,122 1,889 6,532 5,768
Interest expense.............................................. 15,442 11,566 43,530 28,245
Amortization of deferred financing costs...................... 276 200 795 596
Depreciation and amortization................................. 14,216 11,221 39,700 29,380
------- ------- -------- --------
Total expenses............................................... 58,973 47,578 167,710 121,540
------- ------- -------- --------
Equity in income of joint ventures and unconsolidated
subsidiary.................................................... 973 2,222 3,217 5,172
------- ------- -------- --------
Income before gains on sale, minority interests, and
extraordinary items........................................... 18,728 19,715 57,490 55,525
Gains on sale.................................................. 1,354 4,379 1,643 8,203
Minority interests............................................. (2,886) (2,862) (8,281) (5,041)
------- ------- -------- --------
Income before extraordinary items.............................. 17,196 21,232 50,852 58,687
Extraordinary items............................................ - - - (8,908)
------- ------- -------- --------
Net income..................................................... 17,196 21,232 50,852 49,779
Preferred dividends............................................ (1,660) (1,505) (4,830) (4,146)
------- ------- -------- --------
Net income applicable to common shareholders................... $15,536 $19,727 $ 46,022 $ 45,633
======= ======= ======== ========
Net income per common share before extraordinary items basic.. $ 0.41 $ 0.50 $ 1.21 $ 1.41
------- ------- -------- --------
Extraordinary items............................................ - - - (0.21)
------- ------- -------- --------
Net income per common share basic............................. $ 0.41 $ 0.50 $ 1.21 $ 1.18
------- ------- -------- --------
Weighted average number of common shares outstanding basic.... 37,930 39,349 37,973 38,680
======= ======= ======== ========
Net income per common share before
extraordinary items diluted................................ $ 0.41 $ 0.49 $ 1.21 $ 1.38
Extraordinary items............................................ - - - (0.21)
------- ------- -------- --------
Net income per common share diluted........................... $ 0.41 $ 0.49 $ 1.21 $ 1.17
======= ======= ======== ========
Weighted average number of common shares and
common share equivalents outstanding diluted................. 38,063 43,280 38,068 42,425
======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
Sept. 30, 1999 Sept. 30, 1998
----------------------- --------------------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income............................................................. $ 50,852 $ 49,779
Adjustments to reconcile net income to net cash provided by operating
activities:
Minority interests................................................. 8,281 5,041
Extraordinary items................................................ - 8,908
Gains on sale...................................................... (1,643) (8,203)
Provision for doubtful accounts.................................... 1,076 827
Depreciation and amortization...................................... 39,700 29,380
Amortization of deferred financing costs........................... 795 596
Equity in income of joint ventures and unconsolidated subsidiary....... (3,217) (5,172)
Non-cash compensation.............................................. 75 75
Changes in assets and liabilities:
Deferred charges and other assets...................................... (2,593) (2,989)
Receivables............................................................ (4,955) (8,129)
Escrowed cash.......................................................... (2,113) (599)
Other receivables (affiliates)......................................... (2,443) 4,401
Accounts payable and other liabilities................................. (5,216) 8,916
--------- ---------
Net cash provided by operating activities.............................. 78,599 82,831
--------- ---------
Cash Flows from Investing Activities:
Purchase and development of real estate................................ (69,692) (594,263)
Investment in real estate.............................................. (43,370) (35,723)
Investment in joint ventures........................................... (9,918) -
Investment in mortgage note receivable................................. - 230
Proceeds from sale of real estate...................................... 29,291 42,905
Distributions received from joint ventures and unconsolidated subsidiary. 3,800 7,194
--------- ---------
Net cash used in investing activities.................................. (89,889) (579,657)
--------- ---------
Cash Flows from Financing Activities:
Net proceeds from sale of common shares................................ 829 106,841
Net proceeds from sale of preferred shares............................. - 25,000
Net proceeds from sale of preferred units.............................. 50,000 95,000
Purchase of treasury shares............................................ (28,847) (23,314)
Distributions paid to limited partners................................. (2,126) (3,061)
Distributions paid to common shareholders.............................. (47,399) (44,799)
Distributions paid to preferred shareholders........................... (4,679) (2,671)
Distributions paid to preferred unitholders............................ (3,943) (131)
Proceeds from debt on real estate...................................... 355,844 617,441
Repayments of debt on real estate...................................... (301,265) (277,025)
--------- ---------
Net cash provided by financing activities.............................. 18,414 493,281
--------- ---------
Net change in cash and cash equivalents................................ 7,124 (3,545)
Cash and cash equivalents, beginning of period......................... 5,523 7,075
--------- ---------
Cash and cash equivalents, end of period............................... $ 12,647 $ 3,530
========= =========
Supplemental Cash Flow Information:
Cash paid for interest................................................. $ 45,932 $ 29,492
========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
6
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1. The Organization
Prentiss Properties Trust is a Maryland Real Estate Investment Trust
("REIT") that acquires, owns, manages, leases, develops and builds office and
industrial properties throughout the United States. The Company is self-
administered in that it provides its own administrative services, such as
accounting, tax and legal, internally through its own employees. The Company is
self-managed in that it internally provides all the management and maintenance
services that its properties require through its own employees, such as property
managers, leasing professionals and engineers. The Company operates principally
through Prentiss Properties Acquisition Partners, L.P. and its subsidiaries (the
"Operating Partnership") and Prentiss Properties Limited, Inc. (the "Manager")
(collectively referred to herein as the "Company"). As of September 30, 1999,
the Company owned interests in a diversified portfolio of 225 primarily suburban
Class A office and suburban industrial properties containing approximately 20.9
million net rentable square feet. The properties consist of 133 office buildings
(the "Office Properties") containing approximately 14.3 million net rentable
square feet and 92 industrial buildings (the "Industrial Properties" and
together with the Office Properties, the "Properties") containing approximately
6.6 million net rentable square feet. The Properties include 11 Properties
containing 1.3 million square feet that are in various stages of development or
have been recently developed by the Company and are in various stages of lease-
up (the "Development Properties"). The Development Properties, upon completion,
will include 989,000 square feet of office space and 262,000 square feet of
industrial space. As of September 30, 1999, the Office Properties and Industrial
Properties, exclusive of the Development Properties, were approximately 95%
leased to 1,230 tenants and approximately 98% leased to 246 tenants,
respectively. In addition to managing the Properties that the Company owns or
has ownership interests in, the Company manages approximately 25.4 million net
rentable square feet in office, industrial and other properties that are owned
by third parties.
The Share Repurchase Program, Preferred Shares and Unit Registration
On September 9, 1999, the Company filed, with the Securities and Exchange
Commission ("SEC"), a Registration Statement on Form S-3 relating to the
registration of 20,126 common shares of beneficial interest that may be issued
to the holders of 20,126 units of limited partnership interest in Prentiss
Properties Acquisition Partners, L.P., upon redemption of such units.
During 1998, the Company's board of trustees (the "Board of Trustees")
authorized the repurchase of up to 2.0 million common shares in the open market
or negotiated private transactions. In fiscal 1998, the Company repurchased
998,800 common shares at an average price of $23.30 per share. Beginning
September 14, 1999, the Company's repurchase program resumed and, as of November
10, 1999, the Company has purchased an additional 341,600 common shares at an
average purchase price of $21.84 per share. Since the inception of the share
repurchase program, the Company has repurchased 1,340,400 common shares of the
2,000,000 common shares authorized by the Board of Trustees.
On September 17, 1999, the Company privately placed 2,000,000, $25 par
value, Series C Cumulative Redeemable Perpetual Preferred Units (the "Series C
Perpetual Preferred Units") with an institutional investor. The issue resulted
in gross consideration of $50 million. Such proceeds were used to repay
borrowings under the Company's line of credit (as defined in Note 4). The Series
C Perpetual Preferred Units are callable by the Company in five years at par
value and have a coupon rate of 9.45% per annum. The Series C Perpetual
Preferred Units are accounted for at their $50 million redemption value in the
line item "Minority interest in operating partnership" on the Company's balance
sheet.
2. Basis of Presentation
The accompanying financial statements are unaudited; however, the financial
statements of the Company have been prepared in accordance with generally
accepted accounting principles ("GAAP") for interim financial information and
the rules and regulations of the SEC. Accordingly, they do not include all of
the disclosures required by GAAP for complete financial statements. In the
opinion of management, all adjustments (consisting solely of normal recurring
matters) necessary for a fair presentation of the financial statements for these
interim periods have been included. The results for the three and nine month
periods ended September 30, 1999 are not necessarily indicative of the results
to be obtained for the full fiscal year. These financial statements should be
read
7
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
in conjunction with the December 31, 1998 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, 1998.
3. Real Estate
During the three months ended September 30, 1999, the Company completed the
following real estate transactions:
On July 1, 1999, the Company disposed of the Regents Centre office
buildings, located in the Phoenix, Arizona, area, which contained 101,000 square
feet. In connection with the sale, the Company received gross proceeds of
approximately $11.2 million and recorded a gain on sale of $744,000.
On July 2, 1999, the Company disposed of the six industrial buildings
comprising Shadowridge Plaza in San Diego, California for gross proceeds of
approximately $5.0 million, resulting in a gain on sale of $152,000. Shadowridge
Plaza contained 32,000 square feet of industrial space.
On July 20, 1999 the Company acquired two office buildings for a purchase
price of $9.8 million. The two buildings ("Orchard Place I and II") contain
approximately 105,000 square feet and are located in the Denver, Colorado, area.
On August 23, 1999, the Company sold the Simpson Business Park industrial
buildings in the San Diego, California, area, for gross proceeds of
approximately $3.3 million, resulting in a gain on sale of $458,000. Simpson
Business Park contained 56,000 square feet of industrial space.
4. Debt on Real Estate
At September 30, 1999, the Company had debt on real estate of $854.8
million, excluding the Company's proportionate share of debt on its 50% and 20%
equity investments in the joint ventures owning the Broadmoor Austin Properties
(as defined herein) and the Burnett Plaza Property, respectively.
The Company's debt transactions for the three months ended September 30,
1999 are summarized in the table below:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
Debt on real estate at June 30, 1999............................. $883,576
Net payments under the line of credit........................... (28,000)
Net payment on mortgage loans................................... (734)
--------
Debt on real estate at September 30, 1999........................ $854,842
========
</TABLE>
During the period, the Company made net payments against its $300.0 million
line of credit (the "Line of Credit") of $28.0 million resulting in an
outstanding balance of $188.1 million at September 30, 1999. The Company's Line
of Credit bears interest at LIBOR plus 137.5 basis points and matures on January
2, 2001. At September 30, 1999, LIBOR was equal to 5.40%.
Of the Company's debt balance at September 30, 1999, $548.2 million is
fixed rate, non-recourse, long-term mortgages. The remaining $306.6 million is
floating rate debt, of which $50.0 million is hedged through interest rate swaps
until September 2003 and $110.0 million is hedged through interest rate swaps
until September 2004. Future scheduled principal repayments of debt on real
estate are as follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
1999...................................................... $ 864
2000...................................................... 8,751
2001...................................................... 207,722
2002...................................................... 105,539
2003...................................................... 64,397
Thereafter................................................ 467,569
--------
Total $854,842
========
</TABLE>
8
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
5. Distribution
On September 9, 1999, the Company declared a cash distribution for the third
quarter of 1999 in the amount of $.44 per share, payable on October 15, 1999 to
common shareholders of record on September 30, 1999. Additionally, it was
determined that a distribution of $.44 per unit would be made to the partners of
the Operating Partnership, and the holders of the Company's Series A Convertible
Preferred Shares (the "Series A Convertible Preferred Shares"). The total
distributions were paid on October 15, 1999, totaling approximately $19.0
million.
In addition, quarterly distributions were declared on September 30, 1999 to
the holders of the Series B Perpetual Preferred Units (the "Series B Perpetual
Preferred Units") and the Series C Perpetual Preferred Units. The quarterly
distributions equal to an annualized 8.3% of the face amount of the Series B
Perpetual Preferred Units and an annualized, pro-rated 9.45% of the face amount
of the Series C Perpetual Preferred Units totaling, in the aggregate,
approximately $2.2 million were paid on October 1, 1999.
6. Investment in Joint Ventures and Unconsolidated Subsidiary
Included in Investments in Joint Ventures and Unconsolidated Subsidiary are
the Company's investment in Broadmoor Austin Associates ("Broadmoor Austin"),
the Company's investment in the Oaklands 21 and 27 development projects, the
Company's investment in the Burnett Plaza Property and the Company's investment
in the Manager. The Company accounts for its 50%, 60%, 20% and 95% investments
in Broadmoor Austin, Oaklands 21 and 27, Burnett Plaza and the Manager,
respectively, 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 September 30, 1999, the carrying value of the Company's interest in Broadmoor
Austin, Oaklands 21 and 27, Burnett Plaza and the Manager totaled $5.9 million,
$1.2 million, $8.7 million and $4.0 million, respectively.
The following is summarized financial information for 100% of Broadmoor
Austin at September 30, 1999 and December 31, 1998 and for the three and
nine months ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Sept. 30, 1999 Dec. 31, 1998
-------------------- -------------------
<S> <C> <C>
Balance sheets: (in thousands)
- ---------------
Real estate and deferred charges, net......... $104,761 $108,013
Total assets.................................. $120,583 $123,255
Mortgage note payable......................... $154,000 $154,000
Venturers' deficit............................ $(34,132) $(32,915)
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- ---------------- ---------------- --------------
(in thousands)
Income statements:
- ------------------
<S> <C> <C> <C> <C>
Rental and other income........................ $4,950 $4,950 $14,845 $ 14,846
Interest expense............................... $2,771 $2,771 $ 8,222 $ 8,840
Depreciation and amortization.................. $1,084 $1,085 $ 3,252 $ 3,251
Extraordinary items............................ $ 12,900
Net income (loss).............................. $ 948 $ 942 $ 2,923 $(10,620)
</TABLE>
The Company acquired a 20% equity interest in the joint venture owning the
Burnett Plaza Property on March 25, 1999. The following is summarized
financial information for 100% of Burnett Plaza at September 30, 1999, for
the three months ended September 30, 1999 and the period from acquisition
through September 30, 1999:
9
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Sept. 30, 1999
--------------------
Balance sheet: (in thousands)
- --------------
<S> <C>
Real estate and deferred charges, net.......... $88,757
Total assets................................... $92,606
Mortgage note payable.......................... $47,000
Venturers' equity.............................. $43,379
</TABLE>
<TABLE>
<CAPTION>
Three Months March 25, 1999
Ended Through
Sept. 30, 1999 Sept. 30, 1999
------------------- -------------------
Income statements: (in thousands)
- ------------------
<S> <C> <C>
Rental and other income........................ $3,384 $6,723
Interest expense............................... $ 881 $1,829
Depreciation and amortization.................. $ 596 $1,103
Extraordinary item............................. - -
Net income (loss).............................. $ 233 $ 507
</TABLE>
The following is summarized financial information for 100% of the Manager at
September 30, 1999 and December 31, 1998 and for the three and nine months
ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
Sept. 30, 1999 Dec. 31, 1998
------------------- ------------------
Balance sheets: (in thousands)
- ---------------
<S> <C> <C>
Total assets................................... $15,366 $15,326
Total liabilities.............................. $11,159 $11,119
Owners' equity................................. $ 4,207 $ 4,207
</TABLE>
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
------------------- ------------------ ------------------ ------------------
Income statements: (in thousands)
- ------------------
<S> <C> <C> <C> <C>
Fee income..................................... $5,498 $7,887 $15,939 $22,736
General and administrative and personnel
costs, net.................................... $4,618 $6,009 $13,772 $18,685
Net income..................................... $ 452 $1,784 $ 1,654 $ 4,070
</TABLE>
The Oaklands 21 and 27 development projects had no operations for the
periods ended September 30, 1999. The projects' assets totaled $2.6 million at
September 30, 1999.
7. Supplemental Disclosure of Non-Cash Activities
During the three months ended September 30, 1999, the Company declared cash
distributions totaling $19.0 million payable to holders of common shares,
Operating Partnership units ("Units") and Series A Convertible Preferred Shares.
The distributions were paid on October 15, 1999. In addition, distributions
totaling $2.2 million were declared in September 1999 payable to holders of the
Company's Series B and Series C Perpetual Preferred Units. Such distributions
were paid on October 1, 1999.
On January 21, 1999, pursuant to provisions of a forward stock contract,
the Company reacquired 1,100,000 common shares from the Union Bank of
Switzerland. $3.7 million of the proceeds used to reacquire the common shares
were previously escrowed funds placed as collateral, in 1998, on the forward
stock contract.
8. Impact of the Year 2000 Issue
The Year 2000 ("Y2K") compliance problem is the result of computer programs
designed to use two-digit rather than four-digit years. Thus, the year 1999 is
represented as 99 and the year 2000 would be represented as 00. This could be
interpreted as either 1900 or 2000. Systems that have Y2K-related issues may
perceive time to have reverted back 100 years. Systems, equipment and software
with exposure to Y2K-related problems exist not only in
10
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
computerized information systems ("Information Systems") but also in building
operating systems such as elevators, alarm systems, energy management systems,
phone systems, and numerous other systems and equipment ("Non-Information
Technology Systems" and collectively, "Systems"). Failure to adequately identify
and correct Y2K-related problems could result in a Systems failure or
malfunction with potential adverse effects including personal injury, property
damage, and disruption of operations. Any or all of these failures could
materially and adversely affect the Company's business, financial condition, or
results of operations.
Due to the exposure and potential liabilities inherent in both the Systems
used internally by the Company and those Systems used by third parties to
conduct business with the Company, in September 1997, the Company created a Y2K
committee (the "Y2K Committee") headed by the Vice President of Information
Systems and co-chaired by the Vice President of National Property Operations.
Due to the national presence of the Company, the Y2K Committee appointed
approximately 85 employees (the "Y2K Coordinators") designated as either Y2K
property coordinators ("Y2K Property Coordinators") or Y2K corporate office
coordinators ("Y2K Corporate Office Coordinators"). The purpose of the Y2K
Committee was to develop a plan to assess and mitigate the Company's exposure to
potential Y2K-related problems (the "Company's Y2K Plan"). In order to
implement the Company's Y2K Plan in a timely and uniform manner, during August
1998 the Y2K Committee held classes to educate the Y2K Coordinators on the steps
to be taken to implement the Company's Y2K Plan. Due to the risks associated
with inadequate assessment and remediation of the Systems, the Company engaged
various independent sources to assist in the review of the Company's Y2K Plan,
including:
. An embedded systems specialist to focus on building Systems
. A Big 5 Accounting firm to focus on financial Systems
. A legal firm specializing in Y2K-related issues(S)
. Computer Sciences Corporation ("CSC") to perform an overall review
Estimate of Financial Impact
The Y2K Committee has assessed and continues to assess the financial impact
of the Company's Y2K remediations. The total costs associated with required
modifications to become Y2K compliant are not expected to be material to the
Company's financial position. The Company currently estimates the total Y2K
readiness costs are between $500,000 and $600,000. The costs incurred to date
are consistent with the various stages of completion of the three categories as
follows:
<TABLE>
<CAPTION>
Category Low High Q4/98 Q1/99 Q2/99 Q3/99 Q4/99
----------- ----------- ----------- ----------- ----------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Non-Information Technology $400,000 $475,000 8% 61% 4% 14% 13%
Information Systems 40,000 50,000 20% 70% 10%
Y2K Committee 60,000 75,000 80% 10% 5% 5%
--------------------------
Total $500,000 $600,000
</TABLE>
These costs are net of the Company's personnel costs that are considered to
be part of normal operating costs. A significant portion of the Non-Information
Technology Systems costs are expected to be capitalized and recovered from
tenants through building operations, while the balance will be expensed in the
period incurred. Much of the Information Systems costs are version upgrades
that will be expensed as incurred. The Y2K Committee costs consist largely of
consulting charges that are expensed as incurred.
The Company's readiness program is an ongoing process, and the estimates of
costs and completion dates for the various categories described above are
subject to material change.
Contingency Plans
The Company has been developing contingency plans to be implemented as part
of its efforts to identify and correct Y2K-related issues. The Company has
substantially completed the contingency plans for assets owned as of September
30, 1999. These contingency plans range from manual overrides to alternative
processes such as building lock-downs in the event of a long-term power failure.
Fortunately, most buildings currently have contingency plans in place for
natural disasters such as earthquakes, floods, ice storms, and the like, which
provide a basis for the Y2K contingency plans. These plans may also include
short-term use of backup equipment and software, increased work
11
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
hours for Company personnel or use of contract personnel, and orderly shut-down
of buildings on December 31, 1999 and January 1, 2000 in order to perform tests
of critical systems.
9. Recently Issued Accounting Standards
In September 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. In September 1999, the FASB issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of the Effective Date of FASB
Statement No. 133" ("FAS No. 137"). FAS No. 133 was originally effective for all
fiscal quarters of fiscal years beginning after September 15, 1999. FAS No. 137
deferred the effective date of FAS No. 133 to all fiscal quarters of all fiscal
years beginning after September 15, 2000. The Company believes that upon
implementation, FAS No. 133 will not have a material impact on the financial
statements of the Company.
10. Segment Information
The Company's primary business is the ownership and operation of office and
industrial Properties throughout the United States. The Company has determined
that its reportable segments are those that are based on the Company's method of
internal reporting, which disaggregates its business by geographic region. The
Company's reportable segments are the Company's six regions which include (1)
Mid-Atlantic; (2) Midwest; (3) Northeast; (4) Southeast; (5) Southwest; and (6)
West.
The tables below present information about net income/(loss) and segment
assets used by the chief operating decision maker of the Company as of and for
the three and nine months ended September 30, 1999:
<TABLE>
<CAPTION>
For the Three Months Ended September 30, 1999
(in thousands)
Corporate
Mid- Total Not Allocable Consolidated
Atlantic Midwest Northeast Southeast Southwest West Segments to Segments Total
-------- -------- --------- --------- --------- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $14,212 $14,789 $7,043 $3,523 $19,734 $17,386 $76,687 $ 41 $76,728
======= ======= ====== ====== ======= ======= ======= ======== =======
Income before
extraordinary item $ 7,309 $ 6,568 $3,752 $1,268 $ 8,599 $10,321 $37,817 $(20,621) $17,196
======= ======= ====== ====== ======= ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
(in thousands)
Corporate
Mid- Total Not Allocable Consolidated
Atlantic Midwest Northeast Southeast Southwest West Segments to Segments Total
-------- -------- --------- --------- --------- -------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 43,225 $ 43,172 $ 20,150 $ 9,963 $ 54,112 $ 51,281 $ 221,903 $ 80 $ 221,983
======== ======== ======== ======= ======== ======== ========== ======== ==========
Income before
extraordinary
Item $ 22,847 $ 20,607 $ 10,768 $ 3,237 $ 23,018 $ 28,162 $ 108,639 $(57,787) $ 50,852
======== ======== ======== ======= ======== ======== ========== ======== ==========
As of September 30, 1999
(in thousands)
Assets $374,851 $367,871 $207,706 $71,614 $454,090 $428,025 $1,904,157 $ 35,721 $1,939,878
======== ======== ======== ======= ======== ======== ========== ======== ==========
</TABLE>
The Company has not disclosed prior years' segment data on a comparative
basis because management found it impracticable to obtain the comparative data
for prior years.
12
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
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.
<TABLE>
<CAPTION>
Reconciliation of Earnings per Share Numerator Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
--------------- --------------- --------------- ---------------
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Net income........................................... $17,196 $21,232 $50,852 $49,779
Preferred dividends.................................. (1,660) (1,505) (4,830) (4,146)
------- ------- ------- -------
Net income available to common shareholders.......... $15,536 $19,727 $46,022 $45,633
======= ======= ======= =======
Reconciliation of Earnings per Share Denominator
Weighted average common shares outstanding........... 37,930 39,349 37,973 38,680
======= ======= ======= =======
Basic Earnings per Share............................. $ 0.41 $ 0.50 $ 1.21 $ 1.18
======= ======= ======= =======
Dilutive Effect of Common Share Equivalents
Dilutive options..................................... 133 157 95 279
Dilutive preferred shares............................ (A) 3,774 (A) 3,466
Weighted average common shares outstanding........... 37,930 39,349 37,973 38,680
------- ------- ------- -------
Weighted average common shares and common share
equivalents....................................... 38,063 43,280 38,068 42,425
======= ======= ======= =======
Diluted Earnings per Share........................... $ 0.41 $ 0.49 $ 1.21 $ 1.17
======= ======= ======= =======
</TABLE>
(A) Preferred shares for the three and nine months ended September 30, 1999 are
excluded from the calculation of Dilutive Earnings per Share as such shares
are anti-dilutive for the respective periods.
12. Subsequent Events
On October 1, 1999, the Company disposed of the two office and seven
industrial buildings in the Kansas City area, (the "Kansas City portfolio"). The
Kansas City portfolio contained 148,000 square feet of office and approximately
1.5 million square feet of industrial space. In connection with the sale, the
Company received gross proceeds of approximately $58.0 million and recorded a
gain on sale of approximately $10.5 million.
On October 1, 1999, the Company closed a collateral substitution whereby
certain of the Kansas City Industrial Properties were released as collateral for
the Company's $180.1 million mortgage loan (the "PPREFI Portfolio Loan"). In
exchange, the Company provided new collateral which includes the Horsepen Road
and Cottonwood Office Center Properties. The Horsepen Road Property consists of
a 104,000 square feet, Class A office building located in the Metropolitan
Washington, D.C., area. Cottonwood Office Center is comprised of three Class A
office buildings, totaling 164,000 square feet, and is located in Suburban
Dallas/Fort Worth.
On October 4, 1999, the Company closed a $72.5 million five-year floating
rate bank term loan priced at LIBOR plus 162.5 basis points. The loan is
collateralized by the following four Properties: Willow Oaks I and II and 8521
Leesburg Pike in Metropolitan Washington, D.C., and Croton Road Corporate Center
in Suburban Philadelphia, Pennsylvania. The proceeds from this loan were used to
pay down the Company's outstanding balance on the Line of Credit.
13
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
On October 5, 1999, the Company closed a $29.5 million, 11-year term loan
with a fixed interest rate of 7.91%. The loan is collateralized by the World
Savings Center Property in Oakland, California. The proceeds from this loan were
used to pay down the Company's outstanding balance on the Line of Credit.
On October 22, 1999, the Company acquired a single industrial building for
gross proceeds of approximately $5.2 million. The property ("935 First Avenue")
contains approximately 118,000 square feet and is located in Suburban
Philadelphia.
On October 29, 1999, the Company disposed of eight industrial buildings in
the San Diego, California, area, (the "Copperwood Center"). Copperwood Center
contained 126,000 square feet of industrial space. In connection with the sale,
the Company received gross proceeds of approximately $6.05 million and recorded
a gain on sale of approximately $784,000.
On November 4, 1999, the Company acquired a single Class A office building
for gross proceeds of approximately $21.6 million. The property (the "Fairmont
Building") contains approximately 122,500 square feet and is located in
Metropolitan Washington, D.C.
14
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Overview
Prentiss Properties Trust is a Maryland Real Estate Investment Trust (the
"REIT") that acquires, owns, manages, leases, develops and builds office and
industrial properties throughout the United States. The REIT operates
principally through Prentiss Properties Acquisition Partners, L.P. and its
subsidiaries (the "Operating Partnership") and Prentiss Properties Limited, Inc.
(the "Manager" and together with the REIT and the Operating Partnership, the
"Company"). The Company is self-administered in that it provides its own
administrative services, such as accounting, tax and legal, internally through
its own employees. The Company is self-managed in that it internally provides
all the management and maintenance services that its properties require through
its own employees such as property managers, leasing professionals and
engineers.
At December 31, 1998, the Company owned 233 properties consisting of 128
office and 105 industrial properties containing in the aggregate 21.0 million
net rentable square feet. During the nine months ended September 30, 1999, the
Company acquired three office Properties totaling approximately 1.1 million
square feet including a 20% equity interest in Burnett Plaza Associates
("Burnett Plaza"), a joint venture owning one Class A office property containing
approximately 1.0 million square feet. Additionally, the Company sold 14
properties, transitioned six properties to operations, and acquired a 60% equity
interest in two land parcels in Suburban Philadelphia, Pennsylvania (the
"Oaklands 21 and 27 Development Projects"). The Company also began development
of various projects containing 244,000 square feet. Inclusive of the Company's
proportionate share of the net rentable square feet of Burnett Plaza and the
development projects, at September 30, 1999, the Company had 225 properties (the
"Properties") containing 21.0 million net rentable square feet. The Company's
Properties include 11 Properties containing 1.3 million square feet that are in
various stages of development or have been recently developed by the Company and
are in various stages of lease-up. As of September 30, 1999, the 11 development
Properties had incurred total costs of approximately $116.7 million and were 86%
leased or committed.
Results of Operations
The results of operations for the three month periods ended September 30,
1999 and 1998 include the respective operations of the Company. During the
period from July 1, 1998 through September 30, 1999, the Company had significant
property transactions including 14 Property acquisitions and 36 property
dispositions. Consequently, the comparison of the periods provides only limited
information regarding the operations of the Company as currently constituted.
Comparison of the Three Months Ended September 30, 1999 to the Three Months
Ended September 30, 1998
General. As a result of the Company's significant property transactions,
with respect to the comparison of the results of operations for the three months
ended September 30, 1999 to the three months ended September 30, 1998, the
following should be considered:
. 183 Properties that consolidated into the Company's results of
operations were owned and fully operational at July 1, 1998 and
remained in the Company's portfolio at September 30, 1999;
. 8 Properties, including the Broadmoor Austin Properties and the
recently acquired Burnett Plaza Property, are accounted for using
the equity method of accounting;
. 14 Properties, which are wholly-owned by the Company, were acquired
subsequent to July 1, 1998 and remained in the Company's portfolio
at September 30, 1999;
. 36 properties were sold subsequent to July 1, 1998;
. 1 Property, the World Savings Center Property, the economics of which
were owned during the comparative periods, was converted to real
estate from a mortgage note receivable in December 1998;
. 8 Properties that were developed by the Company became operational
subsequent to July 1, 1998 and remained in the portfolio at
September 30, 1999; and
. 11 Properties were in various stages of development or in various
stages of lease-up at September 30, 1999.
15
<PAGE>
Rental Revenue. Rental revenues increased by $12.6 million, or 19.8%, to
$76.1 million from $63.5 million primarily as a result of Properties acquired or
development Properties becoming operational subsequent to July 1, 1998, offset
by properties that were sold subsequent to July 1, 1998. Rental income for the
183 Properties that were owned and fully operational at July 1, 1998 and
remained in the Company's portfolio at September 30, 1999 increased by $4.6
million, or 8.3%, from $55.3 million for the three months ended September 30,
1998 to $59.9 million for the three months ended September 30, 1999. The
increase for such 183 Properties was attributable to the Company's six regions
as follows:
. 21 Properties in the Mid-Atlantic Region increased $556,000, or 5.1%;
. 24 Properties in the Midwest Region decreased $44,000, or .44%;
. 20 Properties in the Northeast Region increased $157,000, or 2.9%;
. 10 Properties in the Southeast Region increased $348,000, or 14.0%;
. 28 Properties in the Southwest Region increased $2.1 million, or
15.4%; and
. 80 Properties in the West Region increased $1.4 million, or 10.9%.
Property Operating and Maintenance. Property operating and maintenance
increased by $2.3 million, or 14.7%, to $18.2 million from $15.9 million
primarily as a result of Properties acquired or development Properties becoming
operational subsequent to July 1, 1998, offset by properties that were sold
subsequent to July 1, 1998. Property operating and maintenance for the 183
Properties that were owned and fully operational at July 1, 1998 and remained in
the Company's portfolio at September 30, 1999 increased by $1.3 million, or
8.2%, from $15.3 million for the three months ended September 30, 1998 to $16.6
million for the three months ended September 30, 1999. The increase for such 183
Properties was attributable to the Company's six regions as follows:
. 21 Properties in the Mid-Atlantic Region increased $111,000, or 3.6%;
. 24 Properties in the Midwest Region increased $199,000, or 9.5%;
. 20 Properties in the Northeast Region decreased $103,000, or 7.6%;
. 10 Properties in the Southeast Region increased $219,000, or 21.8%;
. 28 Properties in the Southwest Region increased $445,000, or 10.2%;
and
. 80 Properties in the West Region increased $374,000, or 11.0%.
Real Estate Taxes. Real estate taxes increased by $1.9 million, or 27.4%,
to $8.7 million from $6.8 million primarily as a result of Properties acquired
or development Properties becoming operational subsequent to July 1, 1998,
offset by properties that were sold subsequent to July 1, 1998. Real estate
taxes for the 183 Properties that were owned and fully operational at July 1,
1998, and remained in the Company's portfolio at September 30, 1999 increased by
$757,000, or 13.3%, from $5.7 million for the three months ended September 30,
1998, to $6.4 million for the three months ended September 30, 1999. The
increase for such 183 Properties was attributable to the Company's six regions
as follows:
. 21 Properties in the Mid-Atlantic Region increased $46,000, or 5.8%;
. 24 Properties in the Midwest Region increased $182,000, or 15.5%;
. 20 Properties in the Northeast Region increased $65,000, or 15.3%;
. 10 Properties in the Southeast Region increased $57,000, or 30.7%;
. 28 Properties in the Southwest Region increased $435,000, or 21.5%;
and
. 80 Properties in the West Region decreased $28,000, or 2.6%.
General and Administrative and Personnel Costs, Net. General and
administrative and personnel costs increased by $233,000, or 12.3%, to $2.1
million from $1.9 million primarily as a result of Properties acquired or
development Properties becoming operational subsequent to July 1, 1998, offset
by properties that were sold subsequent to July 1, 1998.
Interest Expense. Interest expense increased by $3.9 million, or 33.5%, to
$15.4 million from $11.6 million primarily as a result of the increase of the
debt on real estate from $593.9 million at July 1, 1998 to $854.8 million at
September 30, 1999. The increase in debt on real estate during the period
resulted primarily from the significant property transactions occurring between
July 1, 1998 and September 30, 1999.
16
<PAGE>
Depreciation and Amortization. Depreciation and amortization increased by
$3.0 million, or 26.7%, to $14.2 million from $11.2 million primarily as a
result of Properties acquired or development Properties becoming operational
subsequent to July 1, 1998, offset by properties that were sold subsequent to
July 1, 1998. Depreciation and amortization for the 183 Properties that were
owned and fully operational at July 1, 1998 and remained in the Company's
portfolio at September 30, 1999, increased by $920,000, or 10.0%, from $9.2
million for the three months ended September 30, 1998, to $10.1 million for the
three months ended September 30, 1999. The increase for such 183 Properties was
attributable to the Company's six regions as follows:
. 21 Properties in the Mid-Atlantic Region increased $90,000, or 4.7%;
. 24 Properties in the Midwest Region increased $130,000, or 8.0%;
. 20 Properties in the Northeast Region increased $55,000, or 6.2%;
. 10 Properties in the Southeast Region increased $8,000, or 1.2%;
. 28 Properties in the Southwest Region increased $452,000, or 20.8%;
and
. 80 Properties in the West Region increased $186,000, or 9.4%.
Equity in Income of Joint Ventures and Unconsolidated Subsidiary. Equity
in income of joint ventures and unconsolidated subsidiary decreased from $2.2
million for the three months ended September 30, 1998 to $1.0 million for the
three months ended September 30, 1999. The net decrease was primarily
attributable to a decrease of $1.3 million in the Company's proportionate share
of net income from the Manager, offset by $47,000 which represents the Company's
proportionate share of the operations of Burnett Plaza. The management of
certain third party properties were transferred from the Manager to Prentiss
Properties Trust which decreased management fees for the Manager.
Gains on Sale. Gains on sale decreased by $3.0 million, to $1.4 million,
from $4.4 million. During the three months ended September 30, 1998, the Company
sold two properties containing 197,000 square feet. During the three months
ended September 30, 1999, the Company sold 12 properties comprising 189,000
square feet. It is the Company's strategy to obtain the maximum value from each
of its Properties, which is occasionally achieved through the sale of
properties.
Minority Interests. Minority interests increased by $24,000, or 1.0%. The
increase in minority interests is primarily attributable to an increase in the
minority interests holdings resulting from the issuance of 2,000,000, $25 par
value, Series C Cumulative Redeemable Perpetual Preferred Units (the "Series C
Perpetual Preferred Units") on September 17, 1999, offset by minority interests
effect of lower net income before minority interests for the three month period
ended September 30, 1999 from the three month period ended September 30, 1998.
Comparison of the Nine Months Ended September 30, 1999 to the Nine Months Ended
September 30, 1998
General. As a result of the Company's significant property transactions,
with respect to the comparison of the results of operations for the nine months
ended September 30, 1999 to the nine months ended September 30, 1998, the
following should be considered:
. 120 Properties that consolidated into the Company's results of
operations were owned and fully operational at January 1, 1998 and
remained in the Company's portfolio at September 30, 1999;
. 8 Properties, including the Broadmoor Austin Properties and the
recently acquired Burnett Plaza Property, are accounted for using
the equity method of accounting;
. 76 Properties, which are wholly-owned by the Company, were acquired
subsequent to January 1, 1998 and remained in the Company's
portfolio at September 30, 1999;
. 43 properties were sold subsequent to January 1, 1998;
. 1 Property, the World Savings Center Property, the economics of
which were owned during the comparative periods, was converted to
real estate from a mortgage note receivable in December 1998;
. 9 Properties that were developed by the Company became operational
subsequent to January 1, 1998 and remained in the portfolio at
September 30, 1999; and
. 11 Properties were in various stages of development or in various
stages of lease-up at September 30, 1999.
17
<PAGE>
Rental Revenue. Rental revenues increased by $52.7 million, or 31.5%, to
$220.2 million from $167.5 million primarily as a result of Properties acquired
or development Properties becoming operational subsequent to January 1, 1998,
offset by properties that were sold subsequent to January 1, 1998. Rental income
for the 120 Properties that were owned and fully operational at January 1, 1998
and remained in the Company's portfolio at September 30, 1999 increased by $4.9
million, or 3.9%, from $126.2 million for the nine months ended September 30,
1998 to $131.0 million for the nine months ended September 30, 1999. The
increase for such 120 Properties was attributable to the Company's six regions
as follows:
. 20 Properties in the Mid-Atlantic Region increased $1.5 million, or
5.1%;
. 21 Properties in the Midwest Region decreased $137,000, or .52%;
. 15 Properties in the Northeast Region increased $599,000, or 4.3%;
. 10 Properties in the Southeast Region increased $214,000, or 2.7%;
. 20 Properties in the Southwest Region increased $1.6 million, or
5.5%; and
. 34 Properties in the West Region increased $1.1 million, or 5.4%.
Property Operating and Maintenance. Property operating and maintenance
increased by $11.6 million, or 29.4%, to $51.0 million from $39.4 million
primarily as a result of Properties acquired or development Properties becoming
operational subsequent to January 1, 1998, offset by properties that were sold
subsequent to January 1, 1998. Property operating and maintenance for the 120
Properties that were owned and fully operational at January 1, 1998 and remained
in the Company's portfolio at September 30, 1999 increased by $1.5 million, or
4.5%, from $33.3 million for the nine months ended September 30, 1998 to $34.8
million for the nine months ended September 30, 1999. The increase for such 120
Properties was attributable to the Company's six regions as follows:
. 20 Properties in the Mid-Atlantic Region increased $507,000, or 6.4%;
. 21 Properties in the Midwest Region increased $878,000, or 16.7%;
. 15 Properties in the Northeast Region decreased $20,000, or .59%;
. 10 Properties in the Southeast Region increased $38,000, or 1.1%;
. 20 Properties in the Southwest Region increased $245,000, or 2.9%;
and
. 34 Properties in the West Region decreased $144,000, or 2.9%.
Real Estate Taxes. Real estate taxes increased by $8.0 million, or 44.3%,
to $26.1 million from $18.1 million primarily as a result of Properties acquired
or development Properties becoming operational subsequent to January 1, 1998,
offset by properties that were sold subsequent to January 1, 1998. Real estate
taxes for the 120 Properties that were owned and fully operational at January 1,
1998, and remained in the Company's portfolio at September 30, 1999 increased by
$1.4 million, or 10.3%, from $13.6 million for the nine months ended September
30, 1998, to $15.0 million for the nine months ended September 30, 1999. The
increase for such 120 Properties was attributable to the Company's six regions
as follows:
. 20 Properties in the Mid-Atlantic Region increased $199,000, or 8.9%;
. 21 Properties in the Midwest Region increased $294,000, or 8.1%;
. 15 Properties in the Northeast Region decreased $7,000, or .58%;
. 10 Properties in the Southeast Region increased $44,000, or 7.6%;
. 20 Properties in the Southwest Region increased $1.1 million, or
26.4%; and
. 34 Properties in the West Region decreased $221,000, or 12.4%.
General and Administrative and Personnel Costs, Net. General and
administrative and personnel costs increased by $764,000, or 13.2%, from $5.8
million to $6.5 million primarily due to one-time severance and travel costs and
cash bonuses paid during the second quarter of 1999.
Interest Expense. Interest expense increased by $15.3 million, or 54.1%, to
$43.5 million from $28.2 million primarily as a result of the increase of the
debt on real estate from $420.0 million at January 1, 1998 to $854.8 million at
September 30, 1999. The increase in debt on real estate during the period
resulted primarily from the significant property transactions occurring between
January 1, 1998 and September 30, 1999.
18
<PAGE>
Depreciation and Amortization. Depreciation and amortization increased by
$10.3 million, or 35.1%, to $39.7 million from $29.4 million primarily as a
result of Properties acquired or development Properties becoming operational
subsequent to January 1, 1998, offset by properties that were sold subsequent to
January 1, 1998. Depreciation and amortization for the 120 Properties that were
owned and fully operational at January 1, 1998 and remained in the Company's
portfolio at September 30, 1999 increased by $1.7 million, or 8.1%, from $21.1
million for the nine months ended September 30, 1998 to $22.9 million for the
nine months ended September 30, 1999. The increase for such 120 Properties was
attributable to the Company's six regions as follows:
. 20 Properties in the Mid-Atlantic Region increased $289,000, or 5.7%;
. 21 Properties in the Midwest Region increased $230,000, or 5.5%;
. 15 Properties in the Northeast Region increased $220,000, or 9.8%;
. 10 Properties in the Southeast Region decreased $62,000, or 3.2%;
. 20 Properties in the Southwest Region increased $656,000, or 13.9%;
and
. 34 Properties in the West Region increased $366,000, or 12.1%.
Equity in Income of Joint Ventures and Unconsolidated Subsidiary. Equity
in income of joint ventures and unconsolidated subsidiary decreased from $5.2
million for the nine months ended September 30, 1998 to $3.2 million for the
nine months ended September 30, 1999. The net decrease was attributable to a
decrease of $2.4 million in the Company's proportionate share of net income from
the Manager, offset by an increase of $375,000 of the Company's proportionate
share of the net income, before extraordinary items, of the Broadmoor Austin
Properties. The decrease in the income of the Manager is due to the gain on sale
recorded in connection with the Oceanside Distribution Center property in the
second quarter of 1998. Additionally, certain third-party properties were
transferred from the Manager to Prentiss Properties Trust which decreased
management fees for the Manager. Such fees are the primary reason for the
comparative period increase in consolidated management and other fees.
Gains on Sale. Gains on sale decreased by $6.6 million, to $1.6 million,
from $8.2 million. During the nine months ended September 30, 1998, the Company
sold nine properties containing 533,000 square feet. During the nine months
ended September 30, 1999, the Company sold a 12.6 acre parcel of land and 14
properties, containing 417,000 square feet. It is the Company's strategy to
obtain the maximum value from each of its Properties, which is occasionally
achieved through the sale of a property.
Minority Interests. Minority interests increased by $3.2 million, or
64.3%, from $5.0 million for the nine months ended September 30, 1998, to $8.3
million for the nine months ended September 30, 1999. The increase was primarily
attributable to the increase in minority interests holdings resulting from the
issuance of 1,900,000, $50 par value. Series B Perpetual Preferred Units (the
"Series B Perpetual Preferred Units") in September 1998, and the issuance of
2,000,000, $25 par value, Series C Perpetual Preferred Units in September 1999,
offset by the conversion in February 1998 of 2,432,541 and 113,500 Operating
Partnership units ("Units") into common shares. The increase is also
attributable to the issuance of Units in conjunction with Property acquisitions
subsequent to January 1, 1998.
Extraordinary Items. During the nine months ended September 30, 1998, the
Company had extraordinary items totaling $8.9 million, resulting from two
significant transactions during 1998, including (i) the Company's recognition of
its 50% proportionate share of Broadmoor Austin's $12.9 million, or $6.45
million, of prepayment penalties paid and recognition of unamortized financing
during the period; and (ii) the distribution of 113,500 Operating Partnership
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 holders' proportionate share of each
charge totaling $406,000 and $193,000, respectively.
Liquidity and Capital Resources
Cash and cash equivalents were $12.6 million and $3.5 million at September
30, 1999 and September 30, 1998, respectively. The increase in cash and cash
equivalents is primarily a result of cash flows provided by operating and
financing activities exceeding those used in investing activities. Net cash
provided by operating activities was $78.6 million for the nine months ended
September 30, 1999 compared to $82.8 million for the nine months ended September
30, 1998.
19
<PAGE>
Net cash used in investing activities decreased from $579.7 million for the
nine months ended September 30, 1998 to $89.9 million for the nine months ended
September 30, 1999. This decrease is due primarily to fewer acquisitions of
real estate in 1999 than 1998.
Net cash provided by financing activities of $18.4 million for the nine
months ended September 30, 1999 decreased from $493.3 million for the nine
months ended September 30, 1998. This decrease is primarily attributable to
proceeds from securities offerings, mortgage loans and other indebtedness
incurred to fund the 1998 acquisitions exceeding the proceeds raised from such
sources in 1999, including the net proceeds from the sale of the Series C
Cumulative Redeemable Perpetual Preferred Units (the "Series C Perpetual
Preferred Units").
As of September 30, 1999, the Company had outstanding total indebtedness,
including its pro rata share of joint venture debt and construction loans of
approximately $941.2 million, or approximately 45.98% of total market
capitalization based on a common share price of $22.19 per common share. As of
November 10, 1999, the Company had the approximate capacity to borrow up to an
additional $121.0 million under its debt limitation policy. 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 "Board of
Trustees"). Although it is the Company's general policy to limit combined
indebtedness plus its pro rata share of joint venture debt and construction
loans so that, at the time such debt is incurred, it does not exceed 50% of the
Company's total market capitalization, the Company views ratios such as interest
coverage and fixed charge coverage as more stable and indicative measures of its
ability to meet debt obligations. For the three months ended September 30, 1999,
the Company's interest coverage (earnings before interest, taxes and
depreciation and amortization over interest expense) and fixed charge coverage
(earnings before interest, taxes and depreciation and amortization over interest
expense and perpetual preferred distributions) totaled 2.96 and 2.63 times,
respectively.
The Company has in place a $300 million unsecured line of credit with a
group of 12 banks (the "Line of Credit"). The Line of Credit has an interest
rate on borrowings of LIBOR plus 137.5 basis points. The Line of Credit is
unsecured and matures on January 2, 2001. 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. The Company
made net payments to the Line of Credit during the three months ended September
30, 1999 of $28.0 million and had an outstanding balance of $188.1 million at
September 30, 1999, resulting in an available balance of $111.9 million.
In September 1997, the Company entered into a seven-year interest rate swap
locking in cost of funds of 6.25% (before the spread over LIBOR) on $110
million. In June 1999, the Company entered into a four-year interest rate swap
locking in cost of funds of 6.16% (before the spread over LIBOR) on $50 million
(collectively, the "Interest Rate Swaps"). The Interest Rate Swaps consist of
three separate agreements intended to manage the relative mix of the Company's
debt between fixed and variable rate instruments. The Interest Rate Swaps
modify a portion of the interest characteristics of the Company's variable rate
debt, effectively converting variable rate debt to fixed rate debt. The fixed
rates to be paid, the effective fixed rate and the variable rate to be received
by the Company, are summarized in the following table:
<TABLE>
<CAPTION>
Swap Rate
Swap Rate Paid Effective Fixed Received (Variable)
Notional Amount (Fixed) Rate at Sept. 30, 1999 Swap Maturity
- --------------- ------- ----- ----------------- -------------
<S> <C> <C> <C> <C>
$50 million 6.155% 7.530% 5.40% September 30, 2003
$50 million 6.253% 7.628% 5.40% September 30, 2004
$60 million 6.248% 7.623% 5.40% September 30, 2004
</TABLE>
The differences to be paid or received by the Company under the terms of
the Interest Rate Swaps are accrued as interest rates change and recognized as
an adjustment to interest expense by the Company pursuant to the terms of the
three agreements and will have a corresponding effect on its future cash flows.
Agreements such as these contain a credit risk that the counterparties may be
unable to meet the terms of the agreement. The Company minimizes that risk by
evaluating the creditworthiness of its counterparties, which is limited to major
banks and financial institutions, and does not anticipate non-performance by the
counterparties.
20
<PAGE>
The following table sets forth the Company's debt as of September 30, 1999:
<TABLE>
<CAPTION>
Current
Balance Interest Annual
Description (000s) Amortization Rate Maturity Interest
- ----------- ------ ------------ ---- -------- --------
<S> <C> <C> <C> <C> <C>
Line of Credit $188,100 None 6.94%(10) January 2, 2001 $13,054
Executive Center Del Mar 13,267 None 6.75%(11) December 19, 2001 (14) 896
Burnett Plaza /(1)/ 9,400 None 7.50% February 1, 2002 705
Bank Term Facility 100,000 None 7.63%(12) October 13, 2002 7,630
Bachman West 2,987 25 yr 8.63% December 1, 2003 258
Northeast Portfolio Loan /(2)/ 60,000 None (6) 6.80% December 10, 2003 4,080
One Westchase Center 25,039 25 yr 7.84% February 1, 2004 1,963
Crescent Centre 12,000 None 7.95% March 1, 2004 954
Walnut Glen Tower 35,000 None (7) 6.92% April 1, 2005 2,422
Highland Court 4,962 25 yr 7.27% April 1, 2006 361
Westheimer Central Plaza 5,990 25 yr 8.38% August 1, 2006 502
Oaklands Corporate Center /(3)/ 1,331 20 yr 8.65% August 1, 2006 115
Creamery Way /(3)/ 3,742 20 yr 8.30% September 19, 2006 311
PPREFI Portfolio Loan /(4)/ 180,100 None 7.58% February 26, 2007 13,652
Oaklands Corporate Center /(3)/ 6,322 25 yr 8.55% July 1, 2007 541
Oaklands Corporate Center /(3)/ 2,665 25 yr 8.40% November 1, 2007 224
Natomas Corporate Center 37,794 30 yr 7.02% February 1, 2009 2,653
Corporetum Office Campus 25,859 30 yr 7.02% February 1, 2009 1,815
7101 Wisconsin Avenue 21,415 30 yr 7.25% April 1, 2009 1,553
2500 Cumberland Parkway 14,500 None(8) 7.46% July 15, 2009 1,082
Park West C2 35,427 30 yr 7.36%(13) November 10, 2010 2,349
One O'Hare Centre 41,956 30 yr 7.03%(13) January 10, 2011 2,853
Broadmoor Austin /(5)/ 77,000 None (9) 7.04% April 10, 2011 5,421
3130 Fairview Park Drive 23,422 30 yr 7.00% April 11, 2001 1,640
Southpoint (III) /(3)/ 7,732 20 yr 7.75% April 14, 2014 599
Other Corporate Debt 5,232 None 7.40% Various 387
-------- ----- -------
Total Fiancing/Weighted Average Rate $941,242 7.22% $68,020
======== ===== =======
</TABLE>
(1) The Company, through the Operating Partnership, owns a 20% non-controlling
partnership interest in the entity that owns the Burnett Plaza Property,
which interest is accounted for using the equity method of accounting. The
amount shown reflects the Company's proportionate share of the mortgage
indebtedness collateralized by the Property.
(2) The Northeast Portfolio Loan is collateralized by the following 11
Properties: Valleybrooke (five Properties), Lake Center (two Properties),
certain of the Southpoint Properties (two Properties), and certain of the
Woodland Falls Properties (two Properties).
(3) The mortgage loan is collateralized by certain of the Properties in the
respective office Property grouping.
(4) The PPREFI Portfolio Loan is collateralized by the following 38 Properties:
certain of the Los Angeles Industrial Properties (18 Properties), certain
of the Kansas City Industrial Properties (six Properties), certain of the
Chicago Industrial Properties (four Properties), Park West E1 and E2 (two
Properties), One Northwestern Plaza, 3141 Fairview Park Drive, O'Hare Plaza
II, 1717 Deerfield Road, 2411 Dulles Corner Road, 4401 Fair Lakes Court,
the WestPoint Office Building and the PacifiCare Building.
(5) The Company, through the Operating Partnership, owns a 50% non-controlling
partnership interest in the entity that owns the Broadmoor Austin
Properties, which interest is accounted for using the equity method of
accounting. The amount shown reflects the Company's proportionate share of
the mortgage indebtedness collateralized by the Properties.
(6) The loan, which was entered into in December 1997, has no principal
amortization during the first 24 months of the loan term. Principal and
interest are payable for the remaining loan term based on a 25-year
amortization.
(7) The loan, which was entered into in March 1998, has no principal
amortization during the first 24 months of the loan term. Principal and
interest are payable for the remaining loan term based on a 30-year
amortization.
(8) The loan, which was entered into in May 1999, has no principal amortization
during the first 58 months of the loan term. Principal and interest are
payable for the remaining loan term. All repayments are based on a 30-year
amortization.
(9) The loan, which was entered into in March 1998, has no principal
amortization during the first 36 months of the loan term. Principal and
interest are payable for the remaining loan term based on a 16.25-year
amortization.
(10) Represents the weighted average interest rate for $10 million of the $60
million Interest Rate Swap at an effective rate of 7.623% and the $50
million Interest Rate Swap at an effective interest rate of 7.530%.
Interest on the remaining, unhedged balance of $128.1 million is at a
variable rate equal to LIBOR + 1.375%; on September 30, 1999, LIBOR was
equal to 5.40%.
(11) Represents a variable rate equal to LIBOR + 1.35%; on September 30, 1999,
LIBOR was equal to 5.40%.
(12) Represents the weighted average interest rate for the Interest Rate Swap of
$50 million at an effective rate of 7.628% and $50 million of the $60
million Interest Rate Swap at an effective rate of 7.623%.
(13) Includes the effect of the settlement cost of $4.3 million on the $49.25
million treasury lock agreement that was terminated on October 6, 1998. The
settlement cost related to $35.75 million of the treasury lock is being
amortized over the 12-year term of the Park West C2 loan, with the
remaining $13.5 million amortized over the 12-year term of the One O'Hare
Centre loan.
(14) December 19, 2001 represents a maturity date based on the Company's
anticipated execution of its option to extend the term of the loan one year
beyond the original maturity date of December 19, 2000.
21
<PAGE>
The Company's Properties require periodic investments of capital for
tenant-related capital expenditures and for general capital improvements. For
the three months ended September 30, 1999, the Company's recurring non-
incremental revenue-generating capital expenditures totaled $4.8 million. The
Company's recurring non-incremental revenue-generating capital expenditures were
attributable to the Company's six regions as follows: (1) Mid-Atlantic-$475,000;
(2) Midwest-$1,037,000; (3) Northeast-$524,000; (4) Southeast-$428,000; (5)
Southwest-$1,166,000; and (6) West-$1,126,000.
The Company has considered its short-term liquidity needs and the adequacy
of adjusted estimated cash flows and other expected liquidity sources to meet
these needs. The Company believes that its principal short-term liquidity needs
are to fund normal recurring expenses, debt service requirements and the minimum
distribution required to maintain the Company's REIT qualification under the
Internal Revenue Code. The Company anticipates that these needs will be fully
funded from the Company's cash flows provided by operating activities and, when
necessary, to fund shortfalls resulting from the timing of collections of
accounts receivable in the ordinary course of business, from the Line of Credit,
the 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 expects to meet its long-term liquidity requirements for the
funding of activities such as development, property acquisitions, scheduled debt
maturities, major renovations, expansions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness and through
the issuance of additional debt and equity securities. The Company also intends
to use proceeds from the Line of Credit to fund property acquisitions,
development, redevelopment, expansions and capital improvements on an interim
basis.
The Company expects to make distributions to its shareholders primarily
based on its distributions from the Operating Partnership. The Operating
Partnership's income will be derived primarily from lease revenues from the
Properties and, to a limited extent, from fees generated by its office and
industrial real estate management service business.
Funds from Operations
"Funds from Operations" as defined by NAREIT means net income, computed in
accordance with GAAP excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization, and after adjustments for
unconsolidated partnerships and joint ventures. The Company believes that Funds
from Operations is helpful to investors as a measure of the performance of an
equity REIT because, along with cash flow from operating activities, financing
and investing activities, it provides investors with an indication of the
ability of the Company to incur and service debt, to make capital expenditures
and to fund other cash needs. The Company's Funds from Operations is not
comparable to Funds from Operations reported by other REITs that do not define
that term using the current NAREIT definition. The Company believes that in
order to facilitate a clear understanding of its operating results, Funds from
Operations should be examined in conjunction with net income as presented in the
audited Consolidated Financial Statements of the Company. Funds from Operations
does not represent cash generated from operating activities in accordance with
GAAP and should not be considered as an alternative to net income as an
indication of the Company's performance or to cash flows as a measure of
liquidity or ability to make distributions.
22
<PAGE>
<TABLE>
<CAPTION>
(in thousands) Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Funds from Operations
Net income......................................... $17,196 $21,232 $50,852 $49,779
Add:
Real estate depreciation and amortization......... 14,203 11,221 39,663 29,380
Real estate depreciation and amortization of
unconsolidated joint ventures.................... 651 532 1,816 1,664
Minority interests(1)............................. 2,846 2,832 8,168 4,948
Extraordinary items............................... - 8,908
Less:
Gains on sale..................................... (1,354) (4,379) (1,643) (8,203)
Dividend on perpetual preferred units............. (2,155) (1,971) (6,098) (2,102)
------- ------- ------- -------
Funds from Operations.............................. $31,387 $29,467 $92,758 $84,374
======= ======= ======= =======
</TABLE>
(1) Represents the minority interests applicable to the common and
preferred Unit holders of the Operating Partnership.
Funds from Operations increased by $1.9 million and $8.4 million for the
three and nine months ended September 30, 1999 from the three and nine months
ended September 30, 1998, respectively, as a result of the factors discussed in
the analysis of operating results.
Impact of the Year 2000 Issue
The Year 2000 ("Y2K") compliance problem is the result of computer programs
designed to use two-digit rather than four-digit years. Thus, the year 1999 is
represented as 99 and the year 2000 would be represented as 00. This could be
interpreted as either 1900 or 2000. Systems that have Y2K-related issues may
perceive time to have reverted back 100 years. Systems, equipment and software
with exposure to Y2K-related problems exist not only in computerized information
systems ("Information Systems") but also in building operating systems such as
elevators, alarm systems, energy management systems, phone systems, and numerous
other systems and equipment ("Non-Information Technology Systems" and
collectively, "Systems"). Failure to adequately identify and correct Y2K-related
problems could result in a Systems failure or malfunction with potential adverse
effects including personal injury, property damage, and disruption of
operations. Any or all of these failures could materially and adversely affect
the Company's business, financial condition, or results of operations.
Due to the exposure and potential liabilities inherent in both the Systems
used internally by the Company and those Systems used by third parties to
conduct business with the Company, in September 1997, the Company created a Y2K
committee (the "Y2K Committee") headed by the Vice President of Information
Systems and co-chaired by the Vice President of National Property Operations.
Due to the national presence of the Company, the Y2K Committee appointed
approximately 85 employees (the "Y2K Coordinators") designated as either Y2K
property coordinators ("Y2K Property Coordinators") or Y2K corporate office
coordinators ("Y2K Corporate Office Coordinators"). The purpose of the Y2K
Committee was to develop a plan to assess and mitigate the Company's exposure to
potential Y2K-related problems (the "Company's Y2K Plan"). In order to
implement the Company's Y2K Plan in a timely and uniform manner, during August
1998 the Y2K Committee held classes to educate the Y2K Coordinators on the steps
to be taken to implement the Company's Y2K Plan. Due to the risks associated
with inadequate assessment and remediation of the Systems, the Company engaged
various independent sources to assist in the review of the Company's Y2K Plan,
including:
. An embedded systems specialist to focus on building Systems
. A Big 5 Accounting firm to focus on financial Systems
. A legal firm specializing in Y2K-related issues
. Computer Sciences Corporation ("CSC") to perform an overall review
Additional Internal Reviews
During April 1999 the Y2K Committee, in cooperation with the Company's
Property Managers, performed internal reviews on each of the Company's
buildings. This effort was to further assure that remediation and progress to
date is on track by reviewing for full compliance with the Company's Y2K Plan.
During the internal reviews, no significant issues were found.
23
<PAGE>
In October the Y2K Committee conducted a second round of internal reviews
on each of the Company's buildings. Emphasis was placed on:
- Finalizing building readiness
- Updating contingency plans
- Establishing detailed building checklists for managing the
transition
- Perpetuating awareness through the last quarter of 1999
Once again during this second round of internal reviews no significant issues
were found.
General Approach
The Company's general approach is the same whether it is for a building or
an office environment.
The steps involved are:
1) Communication with clients (owners, tenants, and asset managers) regarding
the potential for Y2K problems inherent in the Internal Systems.
2) Communication with vendors regarding the potential for Y2K problems inherent
in their Third-Party Systems.
3) Inventory and prioritization of the Internal Systems.
4) Initial assessment of the inventoried Internal Systems.
5) Contingency plan for the inventoried Internal Systems.
6) Test inventoried Internal Systems.
7) Prioritize resolution of any problems discovered with inventoried Internal
Systems. The resolution will include additional testing of the solutions.
8) Review and revise, if necessary, contingency plans for inventoried Internal
Systems.
9) Review vendor responses regarding their Third-Party Systems and take
necessary action accordingly.
With respect to assets existing at September 30, 1999, the Company has
completed its Y2K inventory and assessment of Internal Systems and has
substantially completed the testing phase of the Y2K effort. The results of
these tests minimize the doubt as to whether or not the inventoried Internal
Systems have any Y2K issues. These findings have enabled the Company to
reasonably determine the remaining financial commitment necessary to remedy the
Y2K problems for existing Internal Systems.
In some cases, Systems that demonstrate Y2K-related problems have
previously been scheduled for replacement or remediation as a normal course of
business irrespective of Y2K-related problems. Alternatively, certain Systems
that may have originally been scheduled for replacement after the January 1,
2000 must have their replacements accelerated due to Y2K-related problems.
Information Systems
The Company has inventoried its Information Systems according to reasonable
man standards relative to exposure. The majority of the Company's software is
off-the-shelf with a minimum amount of proprietary code. The Company's primary
financial software is from CTI Limited, Inc., which runs on an IBM AS/400
server. Assurances from both vendors, accompanied by thorough testing, have
resulted in a minimal amount of remediation necessary on proprietary
modifications made to the software over the years. These modifications have
been completed and will be implemented upon final acceptance testing by the
users.
The Company uses a number of personal computers and networks in the course
of its operations. Employees use off-the-shelf software such as Microsoft Word,
Microsoft Excel and Lotus Notes for productivity purposes. Personal computer
hardware is tested using software distributed by the National Software Testing
Laboratory. The desktop software applications require software updates that were
to be distributed Company-wide in the second quarter of 1999. While preparing
CD's for distribution in June, the Company received word from Microsoft
regarding an upcoming update to the Microsoft Year 2000 Resource CD. As a
result, the Company deferred shipping the updates. The Company received the new
Microsoft Year 2000 Resource CD on August 1, 1999. The Company prepared and
shipped the new CD's August 31, 1999. Server operating systems that
demonstrated Y2K-related problems were upgraded as scheduled by June 30, 1999.
24
<PAGE>
Non-Information Technology Systems
Non-Information Technology Systems at Properties owned as of September 30,
1999 have been substantially assessed with respect to date-sensitive operating
controls in order to quantify the Y2K exposure. Assessments will continue as
the Company acquires additional properties. An evaluation of Y2K exposure has
been incorporated into the Company's normal acquisition due diligence process.
The Company's investment committee formally considers the Y2K status of each
investment during the approval process.
The methodology for assessing and testing building Systems will vary by
equipment and is typically dictated by the building type. In 1998 the Company
used an outside embedded systems specialist firm to benchmark and review its
methodology in representative samples of each building type in the Company's
portfolio (i.e., low-rise/industrial, mid-rise office, and high-rise office).
Although building Systems may be similar from building to building within a
given building type, implementations can vary. Therefore, testing for
compliance is necessary where possible. Testing is substantially complete for
the known building Systems on assets owned as of September 30, 1999. The
Company's staff, outside vendors, or a combination of both have performed these
tests.
Third-Party Systems
In addition to the Company's Y2K Plan with respect to Internal Systems, it
is also taking proactive steps to determine the impact on the Company of Y2K-
related issues with Third-Party Systems.
The Company has been identifying and contacting critical suppliers, service
providers, contractors, and clients to determine the extent to which the
Company's operations could be impacted as a result of third parties' failure to
remedy their own Y2K-related problems. The Company substantially completed this
process for assets owned as of September 30, 1999. To the extent the Y2K
readiness responses of the critical suppliers, service providers, contractors
and clients are unsatisfactory, the Company will evaluate the impact of this
relationship. Should this relationship prove materially detrimental, the
Company will make every effort to change to a critical supplier, service
provider, contractor, or client that demonstrates Y2K readiness. The Company is
not currently aware of any such situations, but the inability to locate an
alternative supplier, service provider, contractor, or client in a timely manner
could materially and adversely affect the Company's business, financial
condition or results of operations.
Estimate of Financial Impact
The Y2K Committee has assessed and continues to assess the financial impact
of the Company's Y2K remediations. The total costs associated with required
modifications to become Y2K compliant are not expected to be material to the
Company's financial position. The Company currently estimates the total Y2K
readiness costs are between $500,000 and $600,000. The costs incurred to date
are consistent with the various stages of completion of the three categories as
follows:
<TABLE>
<CAPTION>
Category Low High Q4/98 Q1/99 Q2/99 Q3/99 Q4/99
--- ---- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Non-Information $400,000 $475,000 8% 61% 4% 14% 13%
Technology
Information Systems 40,000 50,000 20% 70% 10%
Y2K Committee 60,000 75,000 80% 10% 5% 5%
-------------------------------
Total $500,000 $600,000
</TABLE>
These costs are net of the Company's personnel costs that are considered to
be part of normal operating costs. A significant portion of the Non-Information
Technology Systems costs are expected to be capitalized and recovered from
tenants through building operations, while the balance will be expensed in the
period incurred. Much of the Information Systems costs are version upgrades
that will be expensed as incurred. The Y2K Committee costs consist largely of
consulting charges that are expensed as incurred.
The Company's readiness program is an ongoing process, and the estimates of
costs and completion dates for the various categories described above are
subject to material change.
25
<PAGE>
Potential Risks of Inadequate Remediation
Failure to correct a material Y2K problem could result in an interruption
in, or a failure of, certain normal business activities or operations that could
materially and adversely affect the Company's results of operations, liquidity,
and financial position. Much of the uncertainty lies with the ability of
critical suppliers, service providers, contractors, and clients to fully remedy
their Y2K problems. The Company's Y2K Plan should significantly reduce the
Company's level of uncertainty regarding the Y2K problem.
The most reasonable and likely worst case scenario might be the failure of
an energy management system in a building. This could adversely affect the
environmental conditions of the occupied space, thus creating discomfort and
inconvenience to the tenants until the condition could be manually corrected.
Persistence of this problem for a long period of time could result in an
increase in operating costs for the building until the energy management system
is restored to proper operations.
The Company is making substantial effort to eliminate the exposure to any
Y2K issues; however, no one can accurately predict how many Y2K problem-related
failures will occur or the severity, duration, or financial consequences of
these potential failures, especially with regard to Third-Party Systems. As a
result, a significant number of operational inconveniences and inefficiencies
for the Company and its clients may occur that could divert management's time,
attention, financial resources, and human resources from its ordinary business
activities; and a lesser number of serious system failures may occur that could
require significant efforts by the Company and its clients to prevent or
alleviate material business disruption.
Contingency Plans
The Company has been developing contingency plans to be implemented as part
of its efforts to identify and correct Y2K-related issues. The Company has
substantially completed the contingency plans for assets owned as of September
30, 1999. These contingency plans range from manual overrides, as described in
the aforementioned example, to alternative processes such as building lock-downs
in the event of a long-term power failure. Fortunately, most buildings
currently have contingency plans in place for natural disasters such as
earthquakes, floods, ice storms, and the like, which provide a basis for the Y2K
contingency plans. These plans may also include short-term use of backup
equipment and software, increased work hours for Company personnel or use of
contract personnel, and orderly shut-down of buildings on December 31, 1999 and
January 1, 2000 in order to perform tests of critical systems.
Disclaimer
The Company's Y2K readiness program is an ongoing process and the estimates
of costs and completion dates for various components of the Company's Y2K
readiness program described above are subject to change. The Company's Y2K Plan
will also be applied to assets acquired or developed during 1999 and in future
years. Additionally, the Company's discussion of its Y2K readiness program
contains forward-looking statements that are based on assumptions as to future
events. There can be no guarantee as to the outcome of these future events.
Recently Issued Accounting Standards
In September 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. In September 1999, the FASB issued Statement
of Financial Accounting Standards No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133" ("FAS No. 137"). FAS No. 133 was originally effective for all
fiscal quarters of fiscal years beginning after September 15, 1999. FAS No. 137
deferred the effective date of FAS No. 133 to all fiscal quarters of all fiscal
years beginning after September 15, 2000. The Company believes that upon
implementation, FAS No. 133 will not have a material impact on the financial
statements of the Company.
26
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company's primary market risk exposure is to changes in interest rates
as a result of its Line of Credit and long-term debt. At September 30, 1999,
the Company had outstanding total indebtedness, including its pro rata share of
joint venture debt and construction loans, of approximately $941.2 million, or
approximately 46% of total market capitalization. The Company's interest rate
risk objective is to limit the impact of interest rate fluctuations on earnings
and cash flows and to lower its overall borrowing costs. To achieve this
objective, the Company manages its exposure to fluctuations in market interest
rates for its borrowings through the use of fixed rate debt instruments to the
extent that reasonably favorable rates are obtainable with such arrangements and
may enter into derivative financial instruments such as interest rate swaps,
caps and treasury locks to mitigate its interest rate risk on a related
financial instrument or to effectively lock the interest rate on a portion of
its variable debt. The Company does not enter into derivative or interest rate
transactions for speculative purposes. Approximately 67.4% of the Company's
outstanding debt was subject to fixed rates with a weighted average interest
rate of 7.26% at September 30, 1999. An additional 5.3% of the Company's
outstanding debt at September 30, 1999 was effectively locked at an interest
rate (before the spread over LIBOR) of 6.16% through an interest rate swap
agreement for a notional amount of $50.0 million. Further, 11.7% of the
Company's debt at September 30, 1999 was effectively locked at a rate (before
the spread over LIBOR) of 6.25% through an interest rate swap agreement for a
notional amount of $110.0 million. The Company regularly reviews interest rate
exposure on its outstanding borrowings in an effort to minimize the risk of
interest rate fluctuations.
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates, including interest
rate swaps and debt obligations. For debt obligations outstanding at September
30, 1999, the table presents principal cash flows and related weighted average
interest rates by expected maturity dates including the Company's pro rata share
of joint venture debt totaling $86.4 million. For interest rate swaps, the
table presents notional amounts and weighted average interest rates by expected
contractual maturity dates. Notional amounts are used to calculate the
contractual payments to be exchanged under the contract. Weighted average
variable rates are based on implied forward rates in the yield curve as of
September 30, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date
(in thousands)
----------------------------------------------------------------------------------
Fair
1999 2000 2001 2002 2003 Thereafter Total Value
---- ---- ---- ---- ---- ---------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Long-Term Debt:
Fixed Rate $ 864 $4,718 $ 7,113 $ 17,711 $67,371 $536,866 $634,643 $634,643
Average Interest 7.30% 7.30% 7.30% 7.30% 7.30% 7.18%
Rate
Variable Rate $4,033 $202,566 $100,000 $306,599 $306,599
Average Interest 6.78% 6.78% 6.78%
Rate
Interest Rate Derivatives
Interest Rate Swaps:
Variable to Fixed $50,000 $110,000 $160,000 $672
Avg. Pay Rate 6.22% 6.22% 6.22% 6.22% 6.16% 6.25%
Avg. Receive Rate 5.40% 5.40% 5.40% 5.40% 5.40% 5.40%
</TABLE>
The table incorporates only those exposures that exist as of September 30,
1999 and does not consider exposures or positions which could arise after that
date. In addition, because firm commitments are not represented in the table
above, the information presented therein has limited predictive value. As a
result, the Company's ultimate realized gain or loss with respect to interest
rate fluctuations will depend on the exposures that arise during the future
period, prevailing interest rates, and the Company's hedging strategies at that
time. There is inherent rollover risk for borrowings as they mature and are
renewed at current market rates. The extent of this risk is not quantifiable or
predictable because of the variability of future interest rates and the
Company's financing requirements.
27
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
On September 17, 1999, the Company privately placed 2,000,000, $25 par
value, Series C Cumulative Redeemable Perpetual Preferred Units (the "Series C
Perpetual Preferred Units") with an institutional investor. The issue resulted
in gross consideration of $50 million. Such proceeds were used to repay
borrowings under the Company's Line of Credit (as earlier defined). The Series C
Perpetual Preferred Units are callable by the Company in five years at par value
and have a coupon rate of 9.45% per annum. 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
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
28
<PAGE>
(a) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 -- Form of Amended and Restated Declaration of Trust of the
Registrant (filed as Exhibit 3.1 to the Company's Registration
Statement on Amendment No. 1 of Form S-11, File No. 333-09863,
and incorporated by reference herein).
3.2 -- Bylaws of the Registrant (filed as Exhibit 3.2 to the
Company's Registration Statement on Amendment No. 1 of Form S-
11, File No. 333-09863, and incorporated by reference herein).
3.3 -- Articles Supplementary, dated December 18, 1997,
Classifying and Designating a Series of Preferred Shares of
Beneficial Interest as Series A Cumulative Convertible
Redeemable Preferred Shares of Beneficial Interest and Fixing
Distribution and Other Preferences and Rights of Such Shares
(filed as Exhibit 3.1 to the Company's Current Report on Form
8-K filed on January 15, 1998, File No. 001-14516).
3.4 -- Articles Supplementary, dated February 17, 1998,
Classifying and Designating a Series of Preferred Shares of
Beneficial Interest as Junior Participating Cumulative
Convertible Redeemable Preferred Shares of Beneficial
Interest, Series B, and Fixing Distribution and Other
Preferences and Rights of Such Shares (filed as an Exhibit to
the Company's Registration Statement on Form 8-A filed on
February 17, 1998, File No. 000-23813).
3.5 -- Articles Supplementary, dated September 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
(filed as an exhibit to the Company's Form 10-Q filed on
August 12, 1998, File No. 001-14516)
3.6* -- Articles Supplementary, dated September 17, 1999,
Classifying and Designating a Series of Preferred Shares of
Beneficial Interest as Series C Cumulative Redeemable
Perpetual Preferred Shares of Beneficial Interest and Fixing
Distribution and other Preferences and Rights of Such Shares.
4.1 -- Form of Common Share Certificate (filed as Exhibit 4.1 to
the Company's Registration Statement on Amendment No. 1 of
Form S-11, File No. 333-09863, and incorporated by reference
herein).
4.2 -- Rights Agreement, dated February 6, 1998, between the
Company and First Chicago Trust Company of New York, as Rights
Agent (filed as an Exhibit 4.1 to the Company's Registration
Statement on Form 8-A filed on February 17, 1998, File No.
000-23813).
4.3 -- Form of Rights Certificate (included as Exhibit A to the
Rights Agreement (Exhibit 4.2)).
4.4 -- Form of Series A Preferred Share Certificate (filed as
Exhibit 4.2 to the Company's Registration Statement on Form S-
3, filed on October 16, 1998, File No. 333-65793)
10.1* -- Eighth Amendment to the Second Amended and Restated
Agreement of Limited Partnership of Prentiss Properties
Acquisition Partners, L.P.
10.2* -- Contribution Agreement, dated as of September 17, 1999, by
and among Belcrest Realty Corporation, Belair Real Estate
Corporation, Prentiss Properties Acquisition Partners, L.P.,
and the Company.
27.1* -- Financial Data Schedule.
-------- ---------------------------
* Filed herewith.
29
<PAGE>
(b) Reports on Form 8-K
Not applicable.
30
<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: November 10, 1999 By: /s/ Thomas P. Simon
----------------------------------------------
Thomas P. Simon
Senior Vice President and Chief Accounting
Officer
(Principal Accounting Officer and Duly
Authorized Officer of the Company)
31
<PAGE>
EXHIBIT 3.6
PRENTISS PROPERTIES TRUST
ARTICLES SUPPLEMENTARY OF BOARD OF TRUSTEES CLASSIFYING AND DESIGNATING A SERIES
OF PREFERRED SHARES OF BENEFICIAL INTEREST AS SERIES C CUMULATIVE REDEEMABLE
PERPETUAL PREFERRED SHARES OF BENEFICIAL INTEREST AND FIXING DISTRIBUTION AND
OTHER PREFERENCES AND RIGHTS OF SUCH SHARES
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 September 9, 1999, has
-----------------
designated and classified 2,000,000 shares of the authorized but unissued and
unclassified preferred shares of beneficial interest, par value $.01 per share,
of the Trust as Series C Cumulative Redeemable Perpetual Preferred Shares of
Beneficial Interest, authorized the issuance of a maximum of 2,000,000 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 C 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 "9.45% Series C Cumulative Redeemable
Perpetual Preferred Shares" (the "Series C Preferred Shares") is hereby
-------------------------
established. The number of shares of Series C Preferred Shares shall be
2,000,000, 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 C Preferred Shares will, with respect to
----
distributions and rights upon voluntary or involuntary liquidation, winding-up
or dissolution of the Trust, 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 expressly
designated as ranking on a parity with
<PAGE>
2
or senior to the Series C Preferred Shares as to distributions and rights upon
voluntary or involuntary liquidation, winding-up or dissolution of the Trust.
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 C Preferred Shares with respect to
distributions and rights upon voluntary or involuntary liquidation, winding-up
or dissolution of the Trust, as the context may require, and includes the Series
A Cumulative Convertible Redeemable Preferred Shares of Beneficial Interest, par
value $.01 per share and the Series B Cumulative Redeemable Perpetual 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 C Preferred Shares.
Section 3. Distributions. (a) Payment of Distributions. Subject to
------------- ------------------------
the rights of holders of Parity Preferred Shares and holders of equity
securities ranking senior to the Series C Preferred Shares issued after the date
hereof in accordance herewith as to payment of distributions, holders of Series
C 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 9.45% of the $25.00 liquidation preference per share of Series C
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 C Preferred Shares (other than the initial
Distribution Period, which shall commence on the original date of issuance for
such Series C 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 C 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 ratio of the actual number of days elapsed in such period to ninety (90)
days. If any date on which distributions are to be made on the Series C
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 C Preferred Shares will be made to the holders of
record of the Series C 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
<PAGE>
3
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 C Preferred Shares shall
also continue to accrue all accrued and unpaid distributions, whether or not
declared, up to the exchange date on any Series C 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 C 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 C 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 C 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 C
----------------------------
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 to the Series C Preferred
Shares as to the payment of distributions or rights upon voluntary or
involuntary liquidation, winding-up or dissolution (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 C Preferred
Shares, any Parity Preferred Shares or any Junior Shares, unless, in each case,
all distributions accumulated on all Series C Preferred Shares and all classes
and series of outstanding Parity Preferred Shares have been paid in full. The
foregoing sentence will not prohibit (i) distributions payable solely in shares
of beneficial interest of the Trust ranking junior to the Series C Preferred
Shares as to the payment of distributions and rights upon voluntary or
involuntary liquidation, winding-up or dissolution, (ii) the conversion of
Junior Shares or Parity Preferred Shares into stock of the Trust ranking junior
to the Series C Preferred Shares as to distributions and rights upon voluntary
or involuntary liquidation, winding-up or dissolution, (iii) purchase by the
Trust of such Series C Preferred Shares, Parity Preferred Shares or Junior
Shares pursuant to Article VII of the Declaration to the extent required to
preserve the
<PAGE>
4
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 C Preferred Shares, all distributions authorized
and declared on the Series C Preferred Shares and all classes or series of
outstanding Parity Preferred Shares shall be authorized and declared so that the
amount of distributions authorized and declared per share of Series C 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 C 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.
(d) No Further Rights. Holders of Series C 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.
(e) No Declaration of Distributions. No distributions on Series C
-------------------------------
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).
------------ ------------
(f) 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 C Preferred Shares with respect to rights upon any voluntary or
involuntary liquidation, dissolution or winding-up of the Trust, the holders of
Series C Preferred Shares shall be entitled to receive out of the assets of the
Trust legally available for distribution or
<PAGE>
5
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 C 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 $25 per share of Series C 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 C Preferred Shares and any Parity Preferred Shares as to
rights upon liquidation, dissolution or winding-up of the Trust, all payments of
liquidating distributions on the Series C Preferred Shares and such Parity
Preferred Shares shall be made so that the payments on the Series C 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 C 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 C 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 C 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 C
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 C Preferred Shares may not be redeemed prior to September 17, 2004.
On or after such date, the Trust shall have the right to redeem the Series C
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
<PAGE>
6
days' written notice, at a redemption price, payable in cash, equal to $25 per
share of Series C 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 C Preferred Shares are to be redeemed, the shares
of Series C 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
------------------------
C 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 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 C Preferred Shares unless all accumulated and unpaid distributions
have been paid on all outstanding Series C 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 C 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 C 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 C 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 C 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 C Preferred Shares to be
redeemed, (iv) the place or places where such shares of Series C Preferred
Shares are to be surrendered for payment of the redemption price, (v) that
distributions on the Series C 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 C Preferred Shares. If fewer than all of the shares of
Series C 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 C
Preferred Shares held by such holder to be redeemed.
(ii) If the Trust gives a notice of redemption in respect of
Series C 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 C Preferred Shares being
redeemed funds sufficient to pay the applicable redemption price, plus any
<PAGE>
7
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 C Preferred Shares upon surrender of the certificate evidencing the
Series C Preferred Shares by such holders at the place designated in the notice
of redemption. If fewer than all Series C Preferred Shares evidenced by any
certificate is being redeemed, a new certificate shall be issued upon surrender
of the certificate evidencing all Series C Preferred Shares, evidencing the
unredeemed Series C Preferred Shares without cost to the holder thereof. On and
after the date of redemption, distributions will cease to accumulate on the
Series C 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 C
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 C Preferred Shares). If any date fixed for
redemption of Series C Preferred Shares 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 or any accumulated or unpaid
distributions in respect of the Series C Preferred Shares is improperly withheld
or refused and not paid by the Trust, distributions on such Series C 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 C 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 C
------------- -------
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 C Preferred Units prior to the
exchange into Series C 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
<PAGE>
8
record of such Series C 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 C 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 C
Preferred Shares, a special meeting of the holders of Series C 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 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 C
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 C 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 C 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 C 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
<PAGE>
9
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 C 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 C Preferred Shares when they have the
voting rights set forth in Section 6(b)) voting together as a single class. The
Preferred Shares Trustees shall each be entitled to one vote per trustee on any
matter .
(c) Certain Voting Rights. So long as any Series C Preferred Shares
---------------------
are outstanding, the Trust shall not, without the affirmative vote of the
holders of at least two-thirds of the Series C 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 senior to the Series C 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 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 C 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 C 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 C Preferred Shares for other
preferred stock having substantially the same terms and same rights as the
Series C 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 C
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 C 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 C Preferred
<PAGE>
10
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 C
--------------------
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 C Preferred Shares.
Section 9. No Preemptive Rights. No holder of the Series C 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 C Preferred Shares may deem and treat the record holder of any Series C
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.
THIRD: The Series C 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.
<PAGE>
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 17th day of September, 1999.
PRENTISS PROPERTIES TRUST
By:/S/ MICHAEL ERNST
_____________________________
Name: MICHAEL A. ERNST
Title: SENIOR VICE PRESIDENT
CHIEF FINANCIAL OFFICER
ATTEST:
/S/ GREGORY IMHOFF
____________________________
Name: GREGORY S. IMHOFF
Title: CORPORATE SECRETARY
<PAGE>
EXHIBIT 10.1
PRENTISS PROPERTIES ACQUISITION PARTNERS, L.P.
Eighth Amendment to the Second Amended and Restated Agreement of
Limited Partnership of Prentiss Properties Acquisition Partners, L.P.
Establishing the Series C 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 C Cumulative Redeemable Perpetual Preferred Units (the
"Series C Preferred Units") with economic interests as set forth in this
------------------------
Amendment.
NOW, THEREFORE, the General Partner hereby adopts the following
amendment to the Agreement.
I. Section 4.02 of the Agreement is amended by adding Section 4.02(f)
as follows, with appropriate conforming changes to the numbering and lettering
thereto:
(f) Series C Cumulative Redeemable Perpetual Preferred Units of
Partnership Interest.
Section 1. Definitions. Capitalized terms used herein and not
-----------
defined herein shall have the meaning given them in the Agreement. For purposes
of the Series C 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 C Preferred Units with respect to distributions and rights upon voluntary
or involuntary liquidation, winding-up or dissolution of the Partnership, and
includes the Series A Cumulative Convertible Redeemable Preferred Units of
Partnership Interest of the Partnership and the Series B Cumulative Redeemable
Perpetual Preferred Units of Partnership Interest of the Partnership.
"PTP" shall mean a "publicly traded partnership" within the meaning of
---
Section 7704 of the Code.
<PAGE>
2
The definitions of "Profit" and "Loss" in the Agreement shall be
------ ----
modified as follows:
Solely for purposes of allocating Profit or Loss in any fiscal
year of the Partnership to the holders of the Series C 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 C Preferred Units. For purposes of
the preceding sentence, Partnership property shall be considered ceiling
limited in respect of a holder of Series C 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 "9.45% Series C
Cumulative Redeemable Perpetual Preferred Units" (the "Series C Preferred
------------------
Units") is hereby established. The number of Series C Preferred Units shall be
- -----
2,000,000, 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 and holders of preferred
units ranking senior to the Series C Preferred Units issued after the date
hereof in accordance herewith as to payment of distributions and rights upon
voluntary or involuntary dissolution, liquidation or winding-up, holders of
Series C 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 9.45% of the original Capital
Contribution per Series C 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 C Preferred Units into
Series C Preferred Shares, or (ii) a redemption of Series C 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 C Preferred Units (other than the initial
Distribution Period, which shall commence on the original date of issuance for
such Series C 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 C 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
<PAGE>
3
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 ratio of the actual number of days elapsed in such
period to ninety (90) days. If any date on which distributions are to be made on
the Series C 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 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 C Preferred Units will be made to the
holders of record of the Series C Preferred Units on October 1, 1999 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 C 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 C 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 C
----------------------------
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 to the
Series C Preferred Units as to the payment of distributions or rights upon
voluntary or involuntary liquidation, dissolution or winding-up (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 C Preferred Units, any Parity Preferred Units or any Junior Units,
unless, in each case, all distributions accumulated on all Series C Preferred
Units and all classes and series of outstanding Parity Preferred Units have been
paid in full. The foregoing sentence will not prohibit (a) distributions
payable solely in classes or series of Partnership Interest ranking junior to
the Series C Preferred Units as to the payment of distributions and rights upon
voluntary or involuntary liquidation, dissolution or winding-up, (b) the
conversion of Junior Units or Parity Preferred Units into Partnership Interests
of the Partnership ranking junior to the Series C Preferred Units as to
distributions and rights upon
<PAGE>
4
voluntary or involuntary liquidation, dissolution or winding-up, (c) the
redemption of Partnership Interests corresponding to any Series C Preferred
Shares, Parity Preferred Shares 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.
(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 C Preferred Units, all distributions authorized and
declared on the Series C Preferred Units and all classes or series of
outstanding Parity Preferred Units shall be authorized and declared so that the
amount of distributions authorized and declared per Series C 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 C 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 C 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 C 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 and subject to preferred units ranking senior
to the Series C Preferred Units with respect to rights upon any voluntary or
involuntary liquidation, dissolution or winding-up of the
<PAGE>
5
Partnership, the holders of Series C 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 C
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
C 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 involuntary
liquidation, dissolution or winding-up, there are insufficient assets to permit
full payment of liquidating distributions to the holders of Series C 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 C Preferred Units and such Parity Preferred Units shall be made so
that the payments on the Series C 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 C 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 C 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 C 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 C
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
<PAGE>
6
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 C 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 C 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 C 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 C 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 Capital Account balance as of
the date of redemption. If fewer than all of the outstanding Series C Preferred
Units are to be redeemed, the Series C 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 C
------------------------
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 C Preferred Units unless all accumulated and unpaid distributions have
been paid on all Series C 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 C 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 C 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 C
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:
<PAGE>
7
(i) the redemption date, (ii) the Redemption Price, (iii) the aggregate
number of Series C Preferred Units to be redeemed and if fewer than all of the
outstanding Series C Preferred Units are to be redeemed, the number of Series C
Preferred Units to be redeemed held by such holder, (iv) the place or places
where such Series C Preferred Units are to be surrendered for payment of the
Redemption Price, (v) that distributions on the Series C 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 C Preferred Units.
(ii) If the Partnership gives a notice of redemption in respect of
Series C 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 C 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 C Preferred Units upon surrender of the Series C Preferred
Units by such holders at the place designated in the notice of redemption. If
the Series C Preferred Units are evidenced by a certificate and if fewer than
all Series C Preferred Units evidenced by any certificate are being redeemed, a
new certificate shall be issued upon surrender of the certificate evidencing all
Series C Preferred Units, evidencing the unredeemed Series C Preferred Units
without cost to the holder thereof. On and after the date of redemption,
distributions will cease to accumulate on the Series C 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 C 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 C Preferred Units, if any). If any date fixed for redemption of Series C
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 C 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 C
------------- -------
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 C Preferred Units
---------------------
remains outstanding, the Partnership shall not, without the affirmative vote of
the holders of at least two-
<PAGE>
8
thirds of the Series C 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 C 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 C 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 C 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 substitutes
the Series C Preferred Units for other interests in such entity having
substantially the same terms and rights as the Series C 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 C 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 C 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 C
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 C 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 C
--------------- -----------------
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
<PAGE>
9
9.45% Series C Cumulative Redeemable Preferred Shares of the Trust (the "Series
------
C Preferred Shares") at an exchange rate of one share of Series C Preferred
- ------------------
Shares for one Series C Preferred Unit, subject to adjustment as described below
(the "Exchange Price"), provided that the Series C Preferred Units will become
--------------
exchangeable at any time, in whole or in part, at the option of the holders of
Series C Preferred Units for Series C Preferred Shares if (y) at any time full
distributions shall not have been timely made on any Series C Preferred Unit
with respect to six (6) prior quarterly distribution periods, whether or not
consecutive, provided, however, that a distribution in respect of Series C
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 C 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 C 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 C
Preferred Units may be exchanged for Series C Preferred Shares, 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 C
Preferred Units shall deliver to the General Partner either (i) a private ruling
letter addressed to such holder of Series C 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 the effect that an exchange of the Series C
Preferred Units at such earlier time would not cause the Series C 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
C 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 C
Preferred Units may be exchanged in whole but not in part by any holder thereof
which is a real estate investment trust within the meaning of Sections 856
through 859 of the Code for Series C Preferred Shares (but only if the exchange
in whole may be accomplished consistently with the ownership limitations set
forth under Article VII of the Declaration (taking into account exceptions
thereto)) if at any time, (i) the Partnership reasonably determines that the
assets and income of the Partnership for a taxable year after 1999 would not
satisfy the income and assets tests of Section 856 of the Code for such taxable
year if the Partnership were a real estate investment trust within the meaning
of the Code or (ii) any such holder of Series C Preferred Units shall deliver to
the Partnership and the General Partner an opinion of independent counsel
reasonably acceptable to the Trust to the effect that, based on the assets and
income of the Partnership for a taxable year after 1999, the Partnership would
not satisfy the income and assets tests of Section 856 of the Code for such
taxable year if the Partnership were a real estate investment trust within the
meaning of the Code and that such failure would create a meaningful risk that a
holder of the Series C Preferred Units would fail to maintain qualification as a
real estate investment trust.
<PAGE>
10
(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 C
Preferred Units for cash in an amount equal to the original Capital Contribution
per Series C 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 C Preferred Units for cash pursuant to this Section 8(a)(ii) by
giving each holder of record of Series C 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 C 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 C Preferred
Units are to be surrendered for payment of the redemption price, (iv) that
distributions on the Series C 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 C Preferred Units and (vi) the
aggregate number of Series C Preferred Units to be redeemed, and if fewer than
all of the outstanding Series C Preferred Units are to be redeemed, the number
of Series C 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 C Preferred Units the total number of
Series C Preferred Units held by such holder represents) of the aggregate number
of Series C Preferred Units being redeemed.
(iii) In the event an exchange of all or a portion of Series C
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 C Preferred Units, within five (5) Business Days following receipt of
the Exchange Notice, by fax (if the holder of the Series C Preferred Units shall
have provided the Partnership with such holder's fax number) and (ii) registered
mail, postage prepaid, at the address of each such holder set forth in the
records of the Partnership. In such event, each holder of Series C Preferred
Units shall be entitled to exchange, pursuant to the provision of Section 8(b) a
number of Series C 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 C 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
<PAGE>
11
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 C 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 C 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 C Preferred Units shall have provided the Partnership
with such holder's fax number) and certified mail postage prepaid. The exchange
of Series C 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
C Preferred Units to be exchanged together with, if applicable, written notice
of exchange and a proper assignment of such Series C 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 C 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 C 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 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 C Preferred Units for
shares of Series C Preferred Shares, an amount equal to the accrued and unpaid
distributions, whether or not declared, to the date of exchange on any Series C
Preferred Units tendered for exchange shall (a) accrue on the shares of the
Series C Preferred Shares into which such Series C Preferred Units are
exchanged, and (b) continue to accrue on such Series C Preferred Units, which
shall remain outstanding following such exchange, with the Trust as the holder
of such Series C Preferred Units. Notwithstanding anything to the contrary set
forth herein, in no event shall a holder of a Series C Preferred Unit that was
validly exchanged into Series C Preferred Shares pursuant to this section
<PAGE>
12
(other than the Trust now holding such Series C Preferred Unit), receive a
distribution out of funds legally available for the payment of distributions, if
such holder, after exchange, is entitled to receive a distribution out of funds
legally available for the payment of distributions with respect to the share of
Series C Preferred Shares for which such Series C Preferred Unit was exchanged
or redeemed.
(iii) Fractional shares of Series C 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 C 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, (a) subdivisions,
combinations and reclassification of the Series C Preferred Shares, and (b)
distributions to all holders of Series C 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 C
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 shares or sale of all
or substantially all of the Trust's assets), in each case as a result of which
the Series C 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 C 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 C Preferred Shares or fraction thereof into which one Series C
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. In addition, the Trust shall not issue any
Additional Securities without the consent of the holders of the Series C
Preferred Units if such consent would be required to be obtained from holders of
Series C Preferred Shares and such Series C Preferred Shares were outstanding.
Section 9. No Conversion Rights. The holders of the Series C
--------------------
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 C Preferred Units.
Section 11. Record Holders. The General Partner may deem and treat
--------------
the record holder of any Series C 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.
<PAGE>
13
II. Amendment to Section 5.01. 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 each Series A Preferred Unitholder, Series B
Preferred Unitholder and Series C 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) each Series A Preferred
Unitholder until the aggregate amount of Profit allocated to each Series A
Preferred Unitholder under this Section 5.01(a)(1)(D)(i) shall equal the
------------------------
Series A Preferred Distribution Amount, (ii) each Series B Preferred
Unitholder until the aggregate amount of Profit allocated to each Series B
Preferred Unitholder under this Section 5.01(a)(1)(D)(ii) shall equal the
-------------------------
Series B Preferred Distribution Amount and (iii) each Series C Preferred
Unitholder until the aggregate amount of Profit allocated to each Series C
Unitholder under this Section 5.01(a)(1)(D)(iii) shall equal the Series C
--------------------------
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);
---------------------
<PAGE>
14
(B) Second 100% proportionately to (i) each Series A Preferred
Unitholder to the extent of the Undistributed Series A Preferred Unit
Distribution Amount, (ii) each Series B Preferred Unitholder to the extent
of the Undistributed Series B Preferred Unit Distribution Amount and (iii)
each Series C Preferred Unitholder to the extent of the Undistributed
Series C 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 each Series A Preferred Unitholder, Series B
Preferred Unitholder and Series C Preferred Unitholder in proportion to the
Capital Account balances of each until the Capital Account balances of each
Series A Preferred Unitholder, Series B Preferred Unitholder and Series C
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 Unitholders as provided in 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 Unitholders as provided in Section 3 of
Section 4.02(e) of the Agreement, which has been added to the Agreement by
the Second Amendment to the Second Amended and
<PAGE>
15
Restated Agreement of Limited Partnership of the Partnership dated June 25,
1998 (the "Second Amendment").
"Series B Preferred Unitholder" means any Person holding Series B
-----------------------------
Preferred Units.
"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.
"Series C Preferred Unit Distribution Amount" means the amount
-------------------------------------------
distributable to the Series C Unitholders as provided in Section 3 of
Section 4.02(f) of the Agreement, which has been added to the Agreement by
the Eighth Amendment to the Second Amended and Restated Agreement of
Limited Partnership of the Partnership dated September 17, 1999.
"Series C Preferred Unitholder" means any Person holding Series C
-----------------------------
Preferred Units.
"Series C Preferred Units" means the Series C Cumulative Redeemable
------------------------
Perpetual Preferred Units of Partnership Interest issued pursuant to the
Eighth Amendment to the Second Amended and Restated Agreement of Limited
Partnership of the Partnership dated September 17, 1999.
"Undistributed Series A Preferred Unit Distribution Amount" means the
---------------------------------------------------------
excess of (i) the aggregate amount of Profit allocated to the Series A
Unitholders 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
Unitholders 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.
"Undistributed Series C Preferred Unit Distribution Amount" means the
---------------------------------------------------------
excess of (i) the aggregate amount of Profit allocated to the Series C
Unitholders under Section 5.01(a)(1)(D) and (ii) the aggregated amount of
---------------------
distributions made to the Series C Unitholder under Section 3 of Section
4.02(f) which has been added to the Agreement by the Eighth
<PAGE>
16
Amendment to the Second Amended and Restated Agreement of Limited
Partnership of the Partnership dated September 17, 1999.
III. Amendments to Second Amendment. The Second Amendment is hereby
------------------------------
amended as follows:
(1) The last sentence of Section 8(a)(i) of 4.02(e) which was added
to the Agreement by the Second Amendment shall be deleted and the following
shall be inserted in lieu thereof:
Furthermore, the Series B Preferred Units may be exchanged in whole
but not in part by any holder thereof which is a real estate
investment trust within the meaning of Sections 856 through 859 of the
Code for Series B Preferred Shares (but only if the exchange in whole
may be accomplished consistently with the ownership limitations set
forth under Article VII of the Declaration (taking into account
exceptions thereto)) if at any time, (i) the Partnership reasonably
determines that the assets and income of the Partnership for a taxable
year after 1999 would not satisfy the income and assets tests of
Section 856 of the Code for such taxable year if the Partnership were
a real estate investment trust within the meaning of the Code or (ii)
any such holder of Series B Preferred Units shall deliver to the
Partnership and the General Partner an opinion of independent counsel
reasonably acceptable to the Trust to the effect that, based on the
assets and income of the Partnership for a taxable year after 1999,
the Partnership would not satisfy the income and assets tests of
Section 856 of the Code for such taxable year if the Partnership were
a real estate investment trust within the meaning of the Code and that
such failure would create a meaningful risk that a holder of the
Series B Preferred Units would fail to maintain qualification as a
real estate investment trust.
(2) The following shall be inserted at the end of Section 8(c)(ii) of
Section 4.02(e) of the Agreement added to the Agreements by the Second
Amendment:
In addition, the Trust shall not issue any Additional Securities
without the consent of the holders of the Series B Preferred Units if
such consent would be required to be obtained from holders of Series B
Preferred Shares and such Series B Preferred Shares were outstanding.
<PAGE>
17
(d) Exhibit A.
---------
Exhibit A to the Agreement is hereby amended and restated in its
entirety as set forth on Exhibit A attached hereto.
---------
[signature page follows]
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of September 17, 1999.
GENERAL PARTNER:
PRENTISS PROPERTIES I, INC.
By: /S/ MICHAEL A. ERNST
___________________________
Name: MICHAEL A. ERNST
Title: SENIOR VICE PRESIDENT
CHIEF FINANCIAL OFFICER
LIMITED PARTNERS:
BELAIR REAL ESTATE CORPORATION
By: /S/ WILLIAM CROSS
________________________
Name: WILLIAM R. CROSS
Title: VICE PRESIDENT
BELCREST REALTY CORPORATION
By: /S/ WILLIAM CROSS
________________________
Name: WILLIAM R. CROSS
Title: VICE PRESIDENT
<PAGE>
ACKNOWLEDGMENT
The Trust referred to in the foregoing Eighth 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
_______________________
Name: MICHAEL A. ERNST
Title: SENIOR VICE PRESIDENT
Chief Financial Officer
<PAGE>
EXHIBIT A
---------
<TABLE>
Partner Partnership Percentage
Units Interest
<S> <C> <C>
Operating Partnership Units (Common)
- ------------------------------------
General Partner:
PRENTISS PROPERTIES I, INC. 47,152 0.1130%
3890 W. Northwest Hwy. Ste. 400
Dallas, TX 75220
Limited Partners:
PRENTISS PROPERTIES TRUST 39,981,497 95.8397%
3890 W. Northwest Hwy. Ste. 400
Dallas, TX 75220
MICHAEL V. PRENTISS 262,733 0.6298%
3890 W. Northwest Hwy. Ste. 400
Dallas, TX 75220
THOMAS F. AUGUST 88,576 0.2123%
3890 W. Northwest Hwy. Ste. 400
Dallas, TX 75220
DENNIS J. DuBOIS 58,274 0.1397%
3890 W. Northwest Hwy. Ste. 400
Dallas, TX 75220
RICHARD J. BRADSHAW, JR. 6,984 0.0167%
1828 Mt. Paran Rd.
Atlanta, GA 30327
PRENTISS CREDIT SHELTER TRUST 333,387 0.7992%
3890 W. Northwest Hwy. Ste. 400
Dallas, TX 75220
PETER O. HAUSMANN 155,257 0.3722%
1160 W. Swedesford Rd., Ste. 140
Berwyn, PA 19312
BT ALEX BROWN Exchange Fund, L.P. 36,867 0.0884%
1 South Street, 18th Floor
Baltimore, MD 21202
HENRY C. GULBRANDSEN, JR. 133,720 0.3205%
1160 W. Swedesford Rd., Ste. 140
Berwyn, PA 19312
TIMOTHY J. WEBER 133,720 0.3205%
1160 W. Swedesford Rd., Ste. 140
Berwyn, PA 19312
</TABLE>
<PAGE>
<TABLE>
Partner Partnership Percentage
Units Interest
<S> <C> <C>
STEVEN A. STATTNER 30,078 0.0721%
1160 W. Swedesford Rd., Ste. 140
Berwyn, PA 19312
THE F M (BRUCE) BRUSSEAU TRUST 16,735 0.0401%
5050 Avenida Encinas, Ste. 350
Carlsbad, CA 92008
NEWPORT NATIONAL CORPORATION 40,078 0.0961%
5050 Avenida Encinas, Ste. 350
Carlsbad, CA 92008
SCOTT R. BRUSSEAU 15,049 0.0361%
5050 Avenida Encinas, Ste. 350
Carlsbad, CA 92008
JEFFREY A. BRUSSEAU 13,962 0.0335%
5050 Avenida Encinas, Ste. 350
Carlsbad, CA 92008
ELLIOTT INVESTMENT COMPANY, L.P. 9,514 0.0228%
5000 Burch Street, Suite 6200
Newport Beach, CA 93660
D. KENT DAHLKE 632 0.0015%
4695 MacArthur Court, Suite 1100
Newport Beach, CA 92660
JACOB BROUWER & JEANETTE BROUWER TRUST 144,980 0.3475%
1508 West Mission Rd.
Escondido, CA 92029
KENNETH L. HATFIELD 93,860 0.2250%
17627 Kaman Road
Cypress, TX 77429
MICHAEL G. TOMBARI 93,860 0.2250%
5811 Redwood River Drive
Kingwood, TX 77345
JAMES J. GORMAN 10,063 0.0241%
120 Arrandale Blvd.
Exton, PA 19341
CHRISTOPHER J. KNAUER 10,063 0.0241%
120 Arrandale Blvd.
Exton, PA 19341
TOTAL 41,717,041 100.0000%
</TABLE>
2
<PAGE>
<TABLE>
Partner Partnership Percentage
Units Interest
<S> <C> <C>
Series A Cumulative Preferred Shares
- ------------------------------------
Limited Partners:
PRENTISS PROPERTIES TRUST (Security Capital) 3,773,585 100.0000%
3890 W. Northwest Hwy. Ste. 400
Dallas, TX 75220
TOTAL 3,773,585 100.0000%
Series B Cumulative Redeemable Perpetual Preferred Units
- --------------------------------------------------------
Limited Partners:
ARGOSY REALTY CORPORATION 36,464 1.9191%
c/o Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 02109
BELMAR REALTY CORPORATION 36,464 1.9191%
c/o Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 02109
BELPORT REALTY CORPORATION 36,464 1.9191%
c/o Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 02109
BELRIEVE REALTY CORPORATION 36,464 1.9191%
c/o Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 02109
BELAIR REAL ESTATE CORPORATION 539,144 28.3761%
c/o Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 02109
BELCREST REALTY CORPORATION 1,215,000 63.9475%
c/o Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 02109
</TABLE>
3
<PAGE>
<TABLE>
<S> <C> <C>
TOTAL 1,900,000 100.0000%
Series C Cumulative Redeemable Perpetual Preferred Shares
- ---------------------------------------------------------
Limited Partners:
BELCREST REALTY CORPORATION 1,400,000 70.0000%
c/o Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 02109
BELAIR REAL ESTATE CORPORATION 600,000 30.0000%
c/o Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 02109
TOTAL 2,000,000 100.0000%
</TABLE>
[SIGNATURE PAGE FOLLOWS]
3
<PAGE>
Acknowledged:
Prentiss Properties I, Inc
General Partner
By: /s/ Gregory S. Imhoff
----------------------
Gregory S. Imhoff
Secretary
4
<PAGE>
EXHIBIT 10.2
CONTRIBUTION AGREEMENT
By and Among
BELCREST REALTY CORPORATION
and
BELAIR REAL ESTATE CORPORATION
and
PRENTISS PROPERTIES ACQUISITION PARTNERS, L.P.
and
PRENTISS PROPERTIES TRUST
Dated: As of September 17, 1999
<PAGE>
CONTRIBUTION AGREEMENT
----------------------
Contribution Agreement (this "Agreement") made as of September 17,
---------
1999 ("Agreement Date"), by and among BELCREST REALTY CORPORATION, a Delaware
--------------
corporation, and BELAIR REAL ESTATE CORPORATION, a Delaware corporation
(together, the "Contributors"), and PRENTISS PROPERTIES ACQUISITION PARTNERS,
------------
L.P., a Delaware limited partnership ("Operating Partnership"), and PRENTISS
---------------------
PROPERTIES TRUST, a Maryland real estate investment trust ("Company").
-------
WITNESSETH:
WHEREAS, Contributors desire to contribute to Operating Partnership
cash in return for Preference Units in Operating Partnership on the terms and
conditions herein set forth.
NOW, THEREFORE, in consideration of the mutual covenants contained
herein and other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereby agree as follows:
1. Definitions. For purposes of this Agreement, the following terms
-----------
shall have the meanings set forth below:
"Affiliate" means with respect to any Person, any other Person
---------
controlled by, controlling or under common control with such Person. For
purposes hereof, "control" means the power to direct the actions of a Person,
regardless of whether the same shall involve an ownership interest in such
Person.
"Agreement" has the meaning set forth in the initial paragraph hereof.
---------
"Agreement Date" has the meaning set forth in the initial paragraph
--------------
hereof.
"Agreement of Limited Partnership" means the Second Amended and
--------------------------------
Restated Agreement of Limited Partnership of Operating Partnership, dated as of
October 22, 1996, as amended from time to time.
"Amendment" has the meaning set forth in Section 6(b)(ii).
---------
"Articles Supplementary" means the Articles Supplementary of Company
----------------------
relating to the Preferred Shares substantially in the form attached hereto as
Exhibit B.
- ---------
"Belair" means Belair Real Estate Corporation.
------
"Belcrest" means Belcrest Realty Corporation.
--------
<PAGE>
2
"Broker" has the meaning set forth in Paragraph 10.
------
"Bylaws" means the Bylaws of the Company, as amended from time to
------
time.
"Charter" means the Amended and Restated Declaration of Trust of the
-------
Company, as amended and restated from time to time including, as amended by the
Articles Supplementary.
"Closing" has the meaning set forth in Paragraph 6(a).
-------
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Company" has the meaning set forth in the initial paragraph hereof.
-------
"Contribution Amount" means $50,000,000, such amount to be contributed
-------------------
severally by Belair and Belcrest in the amounts of $15,000,000 and $35,000,000,
respectively.
"Contributors" has the meaning set forth in the initial paragraph
------------
hereof.
"Contributors' Closing Documents" has the meaning set forth in
-------------------------------
Paragraph 6(c).
"ERISA" means the Employee Retirement Income Securities Act of 1974,
-----
as amended.
"Exchange Date" means, with respect to any Preference Unit, the date
-------------
on which the exchange of such Preference Units for Preferred Shares shall occur
in accordance with the Agreement of Limited Partnership.
"GAAP" means generally accepted accounting principles consistently
----
applied as in effect as of the date of the financial statements to which such
principles are applied.
"General Partner" means Prentiss Properties I, Inc., a Delaware
---------------
corporation, as general partner of Operating Partnership.
"Governing Documents" means, with respect to (i) a limited
-------------------
partnership, such limited partnership's certificate of limited partnership and
the agreement of limited partnership, and any amendments or modifications of any
of the foregoing; (ii) a corporation, such corporation's articles or certificate
of incorporation, by-laws and any applicable authorizing resolutions, and any
amendments or modifications of any of the foregoing; (iii) a limited liability
company, such limited liability company's articles or certificate of
organization, by-laws and operating agreement or agreement of limited liability
company, and any amendments or
<PAGE>
3
modifications of any of the foregoing; and (iv) a real estate investment trust,
such trust's declaration of trust, by-laws and any amendments or modifications
of any of the foregoing.
"Operating Partnership" has the meaning set forth in the initial
---------------------
paragraph hereof.
"Operating Partnership's Closing Documents" has the meaning set forth
-----------------------------------------
in Paragraph 6(b).
"Partner" has the meaning ascribed to such term in the Agreement of
-------
Limited Partnership.
"Person" means a natural person, partnership (whether general or
------
limited), trust, estate, association, corporation, limited liability company,
unincorporated organization, custodian, nominee or any other individual or
entity in its own or representative capacity.
"Preference Units" means Series C Preferred Units as such term is
----------------
defined in the Amendment.
"Preferred Shares" means shares of Company's 9.45% Series C Cumulative
----------------
Redeemable Perpetual Preferred Shares, par value $.01 per share, with the terms
and provisions set forth in the Articles Supplementary.
"PTP" means a "publicly traded partnership" within the meaning of
---
Section 7704 of the Code.
"Registration Rights Agreement" has the meaning set forth in Section
-----------------------------
6(b)(iii).
"REIT" has the meaning set forth in Section 8(g).
----
"Securities Act" means the Securities Act of 1933, as amended.
--------------
"Subsidiary" means with respect to any Person, any corporation,
----------
partnership, limited liability company, joint venture or other entity of which a
majority of (i) voting power of the voting equity securities or (ii) the
outstanding equity interests, is owned, directly or indirectly, by such Person.
"US$" means United States dollars, lawful money of the United States
---
of America.
2. Contribution of Cash. Subject to the terms and provisions of this
--------------------
Agreement, Belair and Belcrest each hereby agrees to contribute to Operating
Partnership their
<PAGE>
4
portion of the Contribution Amount on the date of the Closing in consideration
for 600,000 and 1,400,000, respectively, Preference Units in Operating
Partnership. Subject to the terms and provisions of this Agreement, Operating
Partnership hereby agrees to accept the Contribution Amount and to issue to
Belair and Belcrest 600,000 and 1,400,000, respectively, Preference Units in
exchange therefor.
3. Conditions to Closing. (a) Conditions to Operating Partnership's
--------------------- -------------------------------------
and Company's Obligations. Operating Partnership's and Company's obligations
- -------------------------
under this Agreement to accept the Contribution Amount, provide Contributors
with Preference Units and otherwise consummate the transactions contemplated
herein are subject to the satisfaction (or waiver in writing by Operating
Partnership and Company) of the following conditions on or before the Closing:
(i) No Injunction. No temporary restraining order or preliminary
-------------
or permanent injunction of any court or administrative agency of competent
jurisdiction prohibiting the consummation of the transactions contemplated
herein shall be in effect.
(ii) Accuracy of Representations and Warranties. The
------------------------------------------
representations and warranties of Contributors contained in this Agreement
shall be true and correct in all material respects on the date of the
Closing with the same effect as though made on the date of the Closing.
(iii) Performance of Agreement. Each Contributor shall have
------------------------
performed, in all material respects, all of its respective covenants,
agreements and obligations required by this Agreement to be performed or
complied with by it prior to or at the Closing, including, without
limitation, delivery of the Contribution Amount.
(iv) Delivery of Closing Documents. Operating Partnership and
-----------------------------
Company shall have received the Contributors' Closing Documents.
In the event that for any reason any of the conditions set forth in
this Paragraph 3(a) or elsewhere in this Agreement are not satisfied or waived
by Operating Partnership and Company at or prior to the Closing, at Operating
Partnership's or Company's option, this Agreement shall be terminated and
Operating Partnership, Company and Contributors shall be released from their
obligations under this Agreement and none of Operating Partnership, Company or
Contributors shall have any further liability hereunder.
(b) Conditions to Contributors' Obligations. Contributors'
---------------------------------------
obligations under this Agreement to deliver the Contribution Amount and
otherwise consummate the transactions contemplated herein are subject to the
satisfaction (or waiver in writing by Contributors) of the following conditions
on or before the Closing:
<PAGE>
5
(i) No Injunction. No temporary restraining order or preliminary
-------------
or permanent injunction of any court or administrative agency of competent
jurisdiction prohibiting the consummation of the transactions contemplated
herein shall be in effect.
(ii) Accuracy of Representations and Warranties. The
------------------------------------------
representations and warranties of Operating Partnership and Company
contained in this Agreement shall be true and correct in all material
respects on the date of the Closing with the same effect as though made on
the date of the Closing.
(iii) Performance of Agreement. Operating Partnership and Company
------------------------
shall have performed, in all material respects, all of their respective
covenants, agreements and obligations required by this Agreement to be
performed or complied with by it prior to or at the Closing.
(iv) Delivery of Closing Documents. Contributors shall have
-----------------------------
received the Operating Partnership's Closing Documents.
In the event that for any reason any of the conditions set forth in
this Paragraph 3(b) or elsewhere in this Agreement are not satisfied or waived
by Contributors at or prior to the Closing, at Contributors' option, this
Agreement shall be terminated and Contributors, Operating Partnership and
Company shall be released from their obligations under this Agreement and none
of Contributors, Operating Partnership or Company shall have any further
liability hereunder.
4. Covenants. (a) On the Exchange Date, Company shall issue
---------
Preferred Shares in Company in a number equal to the number of Preferred Shares
into which the Preference Units are exchangeable pursuant to the terms of the
Agreement of Limited Partnership. Upon consummation of such exchange in
accordance with the terms of the Agreement of Limited Partnership, and issuance
in accordance with the Charter, the Preferred Shares shall be validly issued,
fully paid and non-assessable pursuant to the Articles Supplementary.
(b) Operating Partnership covenants to notify holders of Preference
Units promptly in the event Company or any Subsidiary of Company anticipates or
realizes either that (i) the amount of Operating Partnership's assets
constituting "stock and securities" within the meaning of Section 351(e)(1) of
the Code will equal 10% or more of Operating Partnership's total assets or (ii)
there is a material increase in the amount of Operating Partnership's assets
constituting "stock and securities" if immediately preceding such material
increase the amount of Operating Partnership's assets constituting "stock and
securities" within the meaning of Section 351(e)(1) of the Code equaled 10% or
more of the Operating Partnership's total assets.
(c) Company agrees that, on and after January 1, 2000, it will notify
holders of Preference Units promptly in the event that Company or any Subsidiary
of Company takes the
<PAGE>
6
position that Operating Partnership is, or upon consummation of an identified
event in the then immediate future will be, a PTP.
(d) Through the end of 1999, Operating Partnership, (i) shall take all
actions reasonably available to it under the Agreement of Limited Partnership as
presently in effect to avoid treatment as a PTP, and (ii) shall at all times
satisfy the private placement safe harbor of Treasury Regulation Section 1.7704-
1(h) (taking into account any person treated as a partner under Treasury
Regulation Section 1.7704-1(h)(3) and substituting "80" for 100.
(e) For each taxable year, Company will promptly provide notice to the
holders of the Preference Units in the event Company or any Subsidiary of
Company anticipates or realizes that less than 90% of the gross income of
Operating Partnership for such taxable year will or likely will constitute
"qualifying income" within the meaning of Section 7704(d) of the Code.
(f) Operating Partnership covenants that it shall deliver or cause to
be delivered to holders of Preference Units the following:
(i) as soon as available, but in no event later than ninety (90)
days following the end of each fiscal year of Operating Partnership, a
complete copy of Operating Partnership's audited financial statements
including a balance sheet, income statement and cash flow statement for
such fiscal year prepared and audited by an independent certified public
accountant in accordance with GAAP;
(ii) as soon as possible, but in no event later than forty-five (45)
days following the end of each fiscal quarter of Operating Partnership, a
complete copy of Operating Partnership's unaudited quarterly financial
statements including a balance sheet, income statement and cash flow
statement for such fiscal quarter prepared in accordance with GAAP; and
(iii) on a quarterly basis (as soon as possible, but in no event
later than forty-five (45) days following the end of each fiscal quarter of
Operating Partnership and ninety (90) days following the end of each fiscal
year of Operating Partnership) a statement, together with reasonable
supporting information of, (1) the percentage of the Operating
Partnership's gross income that is derived from sources enumerated in
Section 856(c)(2) and (3), respectively, of the Code and (2) the percentage
of the Operating Partnership's assets (by value) that are within the
relevant categories of Section 856(c)(4) of the Code; provided, however,
that the information requested by this Subparagraph (f)(iii) shall not be
required to be delivered to a holder if that holder of the Preferred Units
no longer qualifies as a, or is not a, REIT under the Code.
<PAGE>
7
(g) Provided that all other conditions to Operating Partnership's and
Company's obligations set forth in this Agreement have been satisfied or
properly waived, Operating Partnership covenants that it shall record
Contributors as the holders of the Preference Units on its books and records and
shall admit Contributors as limited partners to Operating Partnership on the
date of the Closing in accordance with the Agreement of Limited Partnership.
(h) Operating Partnership shall not issue any Preference Units to any
Person other than Contributors and Company shall not issue any Preferred Shares
to any Person other than a holder of Preference Units upon exchange of such
Preference Units.
(i) Operating Partnership covenants and agrees to promptly provide
notice to the Contributors and any Affiliate of Contributors which holds
Preference Units in the event that the Operating Partnership or the Company or
any Affiliate thereof becomes aware of any fact that would cause the Operating
Partnership to fail to satisfy the income and assets requirements of Section 856
of the Code if the Operating Partnership were a real estate investment trust.
(j) Upon request of any Contributor, Operating Partnership and Company
agree to deliver a certificate to each Contributor bringing down the
representations and warranties made by Operating Partnership and Company in
Paragraph 8(d), (e), (f), (g), and (n) and to a date requested by a Contributor
to the extent, after due inquiry, Operating Partnership and Company can make
such representations and warranties as of such date.
The covenants set forth in this Paragraph 4 shall survive the Closing.
5. Transaction Costs. Except as otherwise specifically set forth
-----------------
herein, each of the parties hereto shall bear its own costs and expenses with
respect to the transaction contemplated hereby.
6. Closing. (a) The closing of the transactions contemplated by
-------
this Agreement shall be consummated on September 17, 1999 (the "Closing").
-------
(b) At the Closing, Operating Partnership and Company shall deliver or
cause to be delivered to Contributors the following documents and the following
other items (the documents and other items described in this Paragraph 6(b)
being collectively referred to herein as the "Operating Partnership Closing
-----------------------------
Documents"):
- ---------
(i) This Agreement duly executed and delivered by Operating
Partnership and Company;
(ii) The Eighth Amendment to the Second Amended and Restated
Agreement of Limited Partnership ("Amendment"), substantially in the form
---------
set forth on Exhibit A,
----------
<PAGE>
8
duly executed and delivered by all persons necessary to make such amendment
binding on and enforceable against all Partners in Operating Partnership;
(iii) A copy of Company's Articles Supplementary, substantially in
the form set forth on Exhibit B, certified as filed by the State Department
---------
of Assessments and Taxation of Maryland;
(iv) A Registration Rights Agreement, substantially in the form set
forth on Exhibit C, duly executed and delivered by Company;
---------
(v) A Certificate of the Secretary of Company, substantially in the
form set forth on Exhibit D-1 together with completed exhibits attached
-----------
thereto, executed by the secretary of the Company and dated as of the date
of the Closing;
(vi) A Certificate of the Secretary of the General Partner,
substantially in the form set forth on Exhibit D-2 together with completed
-----------
exhibits attached thereto, executed by the Secretary of the General Partner
and dated as of the date of the Closing.
(vii) An opinion of counsel of Company, Operating Partnership and the
General Partner substantially in the form set forth on Exhibit E;
---------
(viii) Cross-Receipts, substantially in the form set forth on
Exhibits F-1 and F-2;
------------ ---
(ix) Global certificates representing the Preference Units;
(x) A certificate of the Secretary of State of the State of
incorporation or formation of the Company, the Operating Partnership and
the General Partner, dated not more than thirty (30) days prior to the date
of the Closing as to the due incorporation or formation and good standing
of the Company and the General Partner and due formation and existence of
the Operating Partnership, the payment of all franchise and exise taxes by
the Company, the Operating Partnership and the General Partner and listing
all documents of the Company, the Operating Partnership and the General
Partner on file with said authority;
(xi) Written confirmation that the requirements set forth in Section
7 of the Articles Supplementary (Series A Cumulative Convertible Redeemable
Preferred Shares), dated December 18, 1997 have been met; and
(xii) Those closing documents required to be executed by it or as may
be otherwise necessary or appropriate to consummate the transaction
contemplated hereby.
<PAGE>
9
(c) At the Closing, Contributors shall deliver to Operating
Partnership and Company the following documents and the following other items
(the documents and other items described in this Paragraph 6(c) being
collectively referred to herein as the "Contributors' Closing Documents"):
-------------------------------
(i) Counterparts of documents listed in Paragraph 6(b)(i), (ii),
(iv), and (viii) duly executed and delivered by Contributors; and
(ii) Those other closing documents required to be executed by it or
as may be otherwise necessary or appropriate to consummate the transaction
contemplated hereby.
7. Representations and Warranties of Contributors. Contributors make
----------------------------------------------
the following representations and warranties to Operating Partnership and
Company, all of which (except as otherwise designated) are true and correct in
all material respects on the Agreement Date and shall be true and correct in all
material respects as of the date of the Closing:
(a) Contributors are duly organized and validly existing under the
laws of the state of their organization and have been duly authorized by all
necessary and appropriate action to enter into this Agreement and to consummate
the transactions contemplated hereby. This Agreement is a valid and binding
obligation of Contributors, enforceable against Contributors in accordance with
its terms, except insofar as enforceability may be affected by bankruptcy,
insolvency or similar laws affecting creditor's rights generally and the
availability of any particular equitable remedy.
(b) Neither the execution nor the delivery of this Agreement nor the
consummation of the transactions contemplated hereby nor fulfillment of or
compliance with the terms and conditions hereof (a) conflict with or will result
in a breach of any of the terms, conditions or provisions of (i) the Governing
Documents of Contributors or (ii) any agreement, order, judgment, decree,
arbitration award, statute, regulation or instrument to which a Contributor is a
party or by which it or its assets are bound, or (b) constitutes or will
constitute a breach, violation or default under any of the foregoing. No
consent or approval, authorization, order, regulation or qualification of any
governmental entity or any other person is required for the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby by Contributors.
(c) Contributors acknowledge that the Preference Units have not been
and will not be registered or qualified under the Securities Act or any state
securities laws and are offered in reliance upon an exemption from registration
under Regulation D of the Securities Act and similar state law exceptions. The
Preference Units to be received by Contributors hereunder and any Preferred
Shares acquired in exchange therefor shall be held by Contributors for
investment purposes only for their own account, and not with a view to or for
sale in connection with any distribution of the Preference Units or such
Preferred Shares, and Contributors acknowledge that
<PAGE>
10
the Preference Units and Preferred Shares cannot be sold or otherwise disposed
of by the holders thereof unless they are subsequently registered under the
Securities Act or pursuant to an exemption therefrom; and the Preference Units
may not be sold, assigned or otherwise transferred except in compliance with the
Agreement of Limited Partnership. Contributors hereby acknowledge receipt of a
copy of the Agreement of Limited Partnership and represent that they have
reviewed the same and understands the provisions thereof which have a bearing on
the representations made in this Paragraph 7(c).
(d) Contributors have no contract, understanding, agreement or
arrangement with any person or entity to sell, transfer or grant a participation
to such person or entity or any other person or entity, with respect to any or
all of the Preference Units it will receive in accordance with the provisions
hereof or any Preferred Shares to be acquired in exchange therefor.
(e) Each of Contributors is an "accredited investor" within the
meaning of Regulation D under the Securities Act and has knowledge and
experience in financial and business matters such that it is capable of
evaluating the merits and risks of receiving and owning the Preference Units and
each of the Contributors is able to bear the economic risk of such ownership.
(f) No part of the funds to be used by Contributors to purchase the
Preference Units constitutes "plan assets", as defined in Department of Labor
Regulation Section 2510.3-101 (29 C.F.R. 2510.3-101), of any "employee benefit
plan", as defined in Section 3(3) of the Employee Retirement Income Security Act
of 1974, as amended ("ERISA") or individual retirement account or plan which is
subject to Section 4975 of the Code (collectively, a "Benefit Plan") or of any
account or entity whose underlying assets constitute "plan assets" of a Benefit
Plan by reason of the Benefit Plan's investment in the account or entity.
Neither Contributor is an employee benefit plan subject to ERISA or Section 4975
of the Code.
(g) In making this investment, Contributors are relying upon the
advice of their own personal, legal and tax advisors with respect to the tax and
other aspects of an investment in Operating Partnership.
(h) There has been made available to Contributors and their respective
advisors the opportunity to ask questions of, and receive answers from,
Operating Partnership and Company concerning the terms and conditions of the
investment in the Preference Units, and to obtain Company's Registration
Statement filed with the Securities and Exchange Commission on Form S-11, the
Agreement of Limited Partnership, and any additional information, to the extent
that any of them possess such information, or can acquire it without
unreasonable effort or expense, necessary to verify the accuracy of the
information given to it, or to otherwise make an informed investment decision,
and that Contributors have had an opportunity to consult with counsel and other
advisers about the investment in the Preference Units, and that all material
<PAGE>
11
documents, records and books pertaining to such investment have, on request,
been made available to Contributors and their respective advisors.
(i) None of Contributors or any of their advisors, including Merrill
Lynch & Co., is aware of or has engaged in any form of general solicitation or
advertising with respect to sales of the Preference Units, including (i) any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio; and
(ii) any seminar or meeting whose attendees were invited by any general
solicitation or general advertising.
(j) (A)(1) None of the interest holders of Belcrest Capital Fund, LLC
("Belcrest Fund"), the owner of all of the issued and outstanding common stock
of Belcrest, owns more than 9% of the outstanding interests of Belcrest Fund and
(2) no interest holder of Belcrest (other than Belcrest Fund) owns more than 9%
of the outstanding interests in Belcrest and (B)(1) none of the interest holders
of Belair Capital Fund, LLC ("Belair Fund"), the owner of all of the issued and
outstanding common stock of Belair, owns more than 9% of the outstanding
interests of Belair Fund and (2) no interest holder of Belair (other than Belair
Fund) owns more than 9% of the outstanding interests in Belair.
(k) Contributors own no other interests in the Operating Partnership
or the Company, other than the Series B Preferred Units (as such terms defined
in the Agreement of Limited Partnership) and the Series C Preferred Units.
(l) None of Contributors nor any affiliate of Contributors is a tenant
of the Company, Operating Partnership or any affiliate thereof.
(m) Each Contributor has elected or will elect to be treated as a REIT
for federal income tax purposes.
(n) Contributors agree to cooperate with the Company if the Company
requests information from Contributors regarding the number of shares of the
Company or interests in the Operating Partnership owned by Contributors and
their affiliates in the future.
Contributors hereby expressly permit Akin, Gump, Strauss, Hauer &
Feld, L.L.P., as counsel to Company and Operating Partnership, to rely upon the
representations and warranties set forth above as if such representations and
warranties were made by Contributors directly to Akin, Gump, Strauss, Hauer &
Feld, L.L.P.
8. Representations and Warranties of Operating Partnership and
-----------------------------------------------------------
Company. Operating Partnership and Company make the following representations
- -------
and warranties to Contributors all of which (except as otherwise designated) are
true and correct in all
<PAGE>
12
material respects on the Agreement Date and shall be true and correct in all
material respects as of the date of the Closing:
(a) Operating Partnership is duly formed and validly existing under
the laws of the state of its organization and is duly registered and qualified
to do business in each jurisdiction where such registration or qualification is
required and material to the transactions contemplated hereby and has been duly
authorized by all necessary and appropriate action to enter into this Agreement,
to issue, sell and deliver the Preference Units and to consummate the
transactions contemplated herein, and the individuals executing this Agreement
on behalf of Operating Partnership have been duly authorized by all necessary
and appropriate action on behalf of Operating Partnership. This Agreement is a
valid and binding obligation of Operating Partnership, enforceable against
Operating Partnership in accordance with its terms, except insofar as
enforceability may be affected by bankruptcy, insolvency or similar laws
affecting creditor's rights generally and the availability of any particular
equitable remedy.
(b) Company is duly organized and validly existing under the laws of
the state of its organization and is duly registered and qualified to do
business in each jurisdiction where such registration or qualification is
required and material to the transactions contemplated hereby and has been duly
authorized by all necessary and appropriate action to enter into this Agreement,
to issue and deliver, upon exchange of the Preference Units, the Preferred
Shares and to consummate the transactions contemplated herein, and the
individuals executing this Agreement on behalf of Company have been duly
authorized by all necessary and appropriate action on behalf of Company. This
Agreement is a valid and binding obligation of Company, enforceable against
Company in accordance with its terms, except insofar as enforceability may be
affected by bankruptcy, insolvency or similar laws affecting creditors' rights
generally and the availability of any particular equitable remedy.
(c) Neither the execution nor the delivery of this Agreement nor the
consummation of the transactions contemplated hereby nor fulfillment of or
compliance with the terms and conditions hereof (a) conflict with or will result
in a breach of any of the terms, conditions or provisions of (i) the Governing
Documents of Company or Operating Partnership or any of its general partners or
(ii) any agreement, order, judgment, decree, arbitration award, statute,
regulation or instrument to which Company or Operating Partnership is a party or
by which it or its assets are bound, or (b) constitutes or will constitute a
breach, violation or default under any of the foregoing. No consent or
approval, authorization, order, registration or qualification of any
governmental entity or any other person is required for the execution and
delivery of this Agreement and the consummation of the transactions contemplated
hereby by Operating Partnership or Company.
(d) Immediately following the issuance of the Preference Units
pursuant to this Agreement, less than 8% of Operating Partnership's assets will
consist of "stock and securities" within the meaning of Section 351(e)(1) of the
Code and Operating Partnership has no
<PAGE>
13
plan to increase the amount of its assets constituting "stock and securities" to
an amount equal to or greater than 10%.
(e) Operating Partnership has not been and is not presently a PTP and
currently has fewer than 80 partners within the meaning of Treasury Regulation
Section 1.7704-1(h)(3).
(f) Neither Company nor any Subsidiary of Company has any present plan
or intention, and neither Company nor any Subsidiary of Company has any actual
knowledge of any present plan or intention of any partner in Operating
Partnership, to take any action or actions that would or likely would result in
Operating Partnership becoming a PTP in the foreseeable future. Neither Company
nor any Subsidiary of Company has actual knowledge of facts that reasonably
would cause it to expect that Operating Partnership would or likely would become
a PTP in the foreseeable future.
(g) The Company has properly elected to be taxed as a real estate
investment trust ("REIT") in accordance with Sections 856 to 860 of the Code,
----
currently qualifies for taxation as a REIT and has no plan or intention or
knowledge of facts that likely would cause it to fail to qualify for taxation as
a REIT in the foreseeable future.
(h) The Preference Units have been duly authorized and upon
contribution of the Contribution Amount to the Operating Partnership will be
validly issued, fully paid and non-assessable and free and clear of all liens,
claims, charges, security interests, options or other encumbrances.
(i) The Preferred Shares issuable upon exchange of the Preference
Units in accordance with the Agreement of Limited Partnership have been duly and
validly reserved for issuance, and upon issuance in accordance with this
Agreement, the Agreement of Limited Partnership and the Charter, shall be duly
and validly issued, fully paid and non-assessable.
(j) Neither the issuance, sale or delivery of the Preference Units
nor, upon exchange, the issuance and delivery of the Preferred Shares, is
subject to any consent right or preemptive right of any Partner of Operating
Partnership arising under law or the Agreement of Limited Partnership or any
shareholder of Company arising under applicable law or the Charter or Bylaws of
Company, or to any contractual right of first refusal or other right in favor of
any person. There are no agreements or understandings in effect restricting the
voting rights, the distribution rights or any other rights or privileges of the
holders of the Preference Units, or upon exchange, the Preferred Shares.
(k) There is no action, suit, proceeding or investigation pending or,
to Operating Partnership's and Company's knowledge, currently threatened against
Operating Partnership or Company that questions the validity of this Agreement
or the right of Operating
<PAGE>
14
Partnership or Company to enter into this Agreement, to consummate the
transactions contemplated hereby, or that would reasonably be expected to,
either individually or in the aggregate, have a material adverse affect on the
business, operations, properties or condition (financially or otherwise) of
Operating Partnership or Company, or result in any change in the current equity
ownership of Operating Partnership or Company, nor is Company or Operating
Partnership aware that there is any basis for the foregoing.
(l) Neither Operating Partnership nor Company is in default or
violation of (i) any law, rule, regulation, order, judgment or decree applicable
to it or by which any of its properties or assets is bound or affected, or (ii)
any note, bond, mortgage, indenture or obligation to which it is a party or by
which Operating Partnership or Company or any property or asset of Company or
Operating Partnership is bound or affected, except for any such conflicts,
defaults or violations that would not reasonably be expected to, individually or
in the aggregate, have a material adverse effect on the business, operations,
properties or condition (financially or otherwise) of Operating Partnership or
Company.
(m) Operating Partnership and Company hereby consent to any pledge and
release of such pledge of the Preference Units, and to any pledge and release of
such pledge of any Preferred Shares into which such Preference Units are
exchanged, to secure the obligations of Contributor; so long as the pledge and
exercise of remedies thereunder shall be subject in all respects to the
provisions of the Agreement of Limited Partnership.
(n) The income and assets of the Operating Partnership currently are
such as would permit the Operating Partnership to satisfy the income and assets
requirements of Section 856 of the Code if the Operating Partnership were a real
estate investment trust and (ii) the Operating Partnership has no plan,
intention or expectation of having income or assets that would not permit the
Operating Partnership to satisfy the income and assets of requirements of
Section 856 of the Code if the Operating Partnership were a real estate
investment trust.
Operating Partnership and Company hereby expressly permit Shearman &
Sterling, as counsel to Contributors to rely upon the representations and
warranties set forth in Paragraph 8 as if such representations and warranties
were made by Operating Partnership and Company directly to Shearman & Sterling.
9. Survival of Representations and Warranties. The representations
------------------------------------------
and warranties set forth in Paragraphs 7 and 8 shall survive the Closing.
10. Brokers. Each party represents and warrants to the other that it
-------
has dealt with no broker, finder or other person (collectively, "Broker") with
------
respect to this Agreement or the transactions contemplated hereby and that no
Broker is entitled to a commission as a result of this transaction, except for
Donaldson, Lufkin, Jenrette Securities Corporation. Operating
<PAGE>
15
Partnership is responsible for the commission to Donaldson, Lufkin, Jenrette
Securities Corporation pursuant to a separate agreement. Each of (a) Operating
Partnership and Company, severally and not jointly, on the one hand, and (b)
Contributors on the other hand, agree to indemnify and hold harmless the other
party against any loss, liability, damage, expense or claim incurred by reason
of any brokerage commission or finder's fee alleged to be payable because of any
act, omission or statement of the indemnifying party. Such indemnity obligation
shall be deemed to include the payment of reasonable attorney's fees and court
costs incurred in defending any such claim. The provisions of this Paragraph 10
shall survive the Closing.
11. Complete Agreement. This Agreement represents the entire
------------------
agreement between Contributors, Operating Partnership and Company covering
everything agreed upon or understood in this transaction and all other prior
agreements, written or oral, including any prior subscription agreements or
letters, are merged into this Agreement. There are no oral promises,
conditions, representations, understandings, interpretations or terms of any
kind as conditions or inducements to the execution hereof in effect between the
parties. No change or addition shall be made to this Agreement except by a
written agreement executed by Contributors, Operating Partnership and Company.
12. Authorized Signatories. The persons executing this Agreement for
----------------------
and on behalf of Contributors, Operating Partnership and Company each represent
that they have the requisite authority to bind the entities on whose behalf they
are signing.
13. Partial Invalidity. If any term, covenant or condition of this
------------------
Agreement is held to be invalid or unenforceable in any respect, such invalidity
or unenforceability shall not affect any other provision hereof, and this
Agreement shall be construed as if such invalid or unenforceable provision had
never been contained herein.
14. Miscellaneous. (a) Governing Law. This Agreement shall be
------------- -------------
interpreted and enforced according to the internal laws of the State of Texas.
(b) Headings; Sections. All headings and sections of this Agreement
------------------
are inserted for convenience only and do not form part of this Agreement or
limit, expand or otherwise alter the meaning of any provisions hereof.
(c) Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original and all of which
shall constitute one and the same agreement. Facsimile signatures shall be
deemed effective execution of this Agreement and may be relied upon as such by
the other party. In the event facsimile signatures are delivered, originals of
such signatures shall be delivered to the other party within three (3) business
days after execution.
<PAGE>
16
(d) No Benefit For Third Parties. The provisions of this Agreement
----------------------------
are intended to be for the sole benefit of the parties hereto and their
respective successors and permitted assigns, and none of the provisions of this
Agreement are intended to be, nor shall they be construed to be, for the benefit
of any third party.
(e) Rights and Obligations. The rights and obligations of
----------------------
Contributors, Operating Partnership and Company shall inure to the benefit of
and be binding upon the parties hereto and their respective successors and
permitted assigns in accordance with the provisions of Article IX of the
Agreement of Limited Partnership.
(f) Limitation of Liability. The liability of Contributors hereunder
-----------------------
shall be limited to the Contribution Amount.
15. Notices. All notices and other communications required or
-------
permitted to be given hereunder shall be in writing and shall be deemed to have
been duly given if personally delivered, delivered by nationally recognized
overnight courier with proof of delivery thereof, sent by United States
registered or certified mail (postage prepaid, return receipt requested)
addressed as hereinafter provided or via telephonic facsimile transmission with
proof of delivery in the form of a telecopier's transmission confirmation
report. Notice shall be sent and deemed given when (a) if personally delivered
or via nationally recognized overnight courier, then upon receipt by the
receiving party, or (b) if mailed, then three (3) days after being postmarked,
or (c) if sent via telephonic facsimile transmission, then at the time set forth
in the telecopier's transmission confirmation report.
Any party listed below may change its address hereunder by notice to
the other party listed below. Until further notice, notice and other
communications hereunder shall be addressed to the parties listed below as
follows:
If to Contributors: Belcrest Realty Corporation and
Belair Real Estate Corporation
c/o Eaton Vance Management
The Eaton Vance Building
255 State Street
Boston, MA 02109
Attention: Mr. Alan Dynner
Fax: (617) 338-8054
<PAGE>
17
If to Operating Partnership
or Company: Prentiss Properties Trust
3890 West Northwest Highway
Suite 400
Dallas, TX 75220
Attention: Mr. Thomas F. August
Mr. Michael Ernst
Fax: (214) 350-2437
16. Press Releases. Contributors, Operating Partnership and Company
--------------
each agrees that it will not issue any press release, advertisement or other
public communication with respect to this Agreement or transaction contemplated
therein without the prior consent of the other party hereto, except to the
extent such communication is required by applicable law or by the New York Stock
Exchange Rules. With respect to the initial press release in connection with
this Agreement or the transaction contemplated herein, Operating Partnership and
Company shall deliver a copy of such proposed press release to Contributors
prior to the publication thereof and shall grant Contributors an opportunity to
review the same and shall make reasonable revisions to such proposed press
release requested by Contributors.
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the day first written above.
CONTRIBUTORS:
BELCREST REALTY CORPORATION
By: /s/ William R. Cross
----------------------------------------
Name: William R. Cross
Title: Vice President
BELAIR REAL ESTATE CORPORATION
By: /s/ William R. Cross
-----------------------------------------
Name: William R. Cross
Title: Vice President
OPERATING PARTNERSHIP:
PRENTISS PROPERTIES ACQUISITION PARTNERS, L.P.
By: PRENTISS PROPERTIES I, INC., its general
partner
By: /s/ Michael A. Ernst
-----------------------------------
Name: Michael A. Ernst
Title: Senior Vice President
Chief Financial Officer
COMPANY:
PRENTISS PROPERTIES TRUST
By: /s/ Michael A. Ernst
-----------------------------------
Name: Michael A. Ernst
Title: Senior Vice President
Chief Financial Officer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 12,647 3,530
<SECURITIES> 0 0
<RECEIVABLES> 25,439 19,052
<ALLOWANCES> 1,076 827
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,852,779 1,804,884
<DEPRECIATION> 89,333 59,090
<TOTAL-ASSETS> 1,939,878 1,876,897
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
100,000 100,000
<COMMON> 400 399
<OTHER-SE> 726,952 755,647
<TOTAL-LIABILITY-AND-EQUITY> 1,939,878 1,876,897
<SALES> 0 0
<TOTAL-REVENUES> 221,983 171,893
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<INTEREST-EXPENSE> 43,530 28,245
<INCOME-PRETAX> 50,852 58,687
<INCOME-TAX> 0 0
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<EXTRAORDINARY> 0 8,908
<CHANGES> 0 0
<NET-INCOME> 50,852 49,779
<EPS-BASIC> 1.21 1.18
<EPS-DILUTED> 1.21 1.17
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