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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
Amendment No. 2
Current Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of Earliest Event Reported): May 21, 1998
PRENTISS PROPERTIES TRUST
(Exact Name of Registrant as Specified in its Charter)
Maryland
(State or Other Jurisdiction of
Incorporation or Organization)
1-14516 75-2661588
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(Commission File Number) (I.R.S. Employer Identification No.)
3890 West Northwest Highway, Suite 400, Dallas, Texas 75220
(Address of Registrant's Principal Executive Office)
(214) 654-0886
(Registrant's Telephone Number, Including Area Code)
N/A
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(Former Name or Former Address, if Changed Since Last Report)
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This Amendment No. 2 to Form 8-K amends and restates the current report on
Form 8-K filed with the SEC on October 9, 1998 and amended by Amendment No. 1
filed with the SEC on December 24, 1998 (the "Form 8-K") of Prentiss Properties
Trust. The Form 8-K is hereby amended and restated by amending and restating in
its entirety the section entitled "Risk Factors" in Item 5 of the Form 8-K.
ITEM 5. OTHER EVENTS
ACQUISITION OF PROPERTIES
On May 21, 1998, the Company completed the acquisition of a single Class
"A" suburban office property (the "Ordway Property"). The Ordway Property
totals 525,951 square feet and is located in Oakland, California. The Ordway
Property was purchased for a purchase price of approximately $76.3 million which
was funded primarily with borrowings under the Company's line of credit.
On August 18, 1998, the Company completed the acquisition of two Class "A"
office properties (the "Willow Oaks Properties"). The properties total 387,469
square feet and are located in the suburban Washington, D.C. area. The Willow
Oaks Properties were purchased for a purchase price of approximately $76.0
million (inclusive of 4.05 acres of undeveloped land) which was funded primarily
with borrowings under the Company's line of credit.
In addition to the Ordway and Willow Oaks Properties, the Company has
acquired, between January 1, 1998 and the filing date of this Form 8-K, 81
Properties containing 4.1 million square feet for a purchase price of
approximately $410.3 million.
The acquisitions of the Ordway Property and Willow Oaks Properties do not
individually constitute acquisitions of a "significant amount of assets" as
defined under Item 2 of Form 8-K or Rule 3-14 of Regulation S-X. Rather, these
acquisitions when combined with other individually insignificant acquisitions as
previously filed in the Company's Current Report on Form 8-K date February 5,
1998, constitute a mathematical majority of individually insignificant 1998
acquisitions, for which audited combined statements of revenues and certain
operating expenses are required under Rule 3-14 of Regulation S-X. Accordingly,
the audited statement of revenues and certain operating expenses of the Ordway
Property and the audited combined statement of revenues and certain operating
expenses of the Willow Oaks Properties are filed herewith.
RISK FACTORS
We are filing in this Form 8-K a description of certain factors that in
some cases may have affected, and in the future could affect, our actual
operating results and could cause such results to differ materially from those
in any forward looking statements. This list is not necessarily exhaustive, and
new risk factors emerge periodically. We can give no assurance that the factors
described below list all material risks at any specific point in time. Many of
the important factors discussed below have been disclosed in our previous
filings with the SEC.
An investment in us involves various risks. You should carefully
consider the following information.
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The bankruptcy or insolvency of our major tenant or the failure of our major
tenant to pay rent could have a potential adverse effect on operating
performance.
For the nine months ended September 30, 1998, rent from our largest tenant,
IBM, accounted for 3.3% of our total revenues. We have leases with IBM in two
properties. We have extended both leases so that 60% of the rentable area for
one of the properties will expire in the year 2009. With respect to the other
property, 70% of the rentable area for the other property will expire in the
year 2011, and the remainder will expire in 2006. The bankruptcy or insolvency
of, or a downturn in the business of, any major tenant such as IBM could result
in a failure or delay in the tenant's rent payments. Such a failure would
adversely affect our business.
The geographic concentration of our properties in markets which are in economic
decline could have a material adverse effect on operating performance.
Properties located in the Dallas, Austin, suburban Chicago and Northern
Virginia areas provided approximately 19%, 6%, 10% and 14% of total revenues for
the year ended December 31, 1997, respectively. Like other real estate markets,
these commercial real estate markets have experienced economic downturns in the
past, and future declines in any of these economies or real estate markets could
adversely affect our cash available for distribution. Our financial performance
and ability to make distributions to our shareholders are, therefore,
particularly sensitive to the economic conditions in these markets. The local
economic climate, which may be adversely impacted by business layoffs or
downsizing, industry slowdowns, changing demographics and other factors, and
local real estate conditions, such as oversupply of or reduced demand for
office, industrial and other competing commercial properties, may affect our
revenues and the value of our properties.
Our acquisition, redevelopment, development and construction activities may give
rise to unexpected costs and can make it difficult to predict revenue potential.
Our acquisition of new properties and lack of operating history gives rise
to difficulties in predicting revenue potential.
We intend to acquire office and industrial properties. These acquisitions
could fail to perform in accordance with our expectations. If we fail to
accurately estimate the occupancy levels, operating costs or costs of
improvements to bring an acquired property up to the standards established for
its intended market position, the operating performance of the property may be
below our expectations. Acquired properties may have characteristics or
deficiencies affecting their valuation or revenue potential that we have not yet
discovered. We cannot assure you that the operating performance of acquired
properties will increase or be maintained under our management.
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During 1997, we acquired a total of 66 properties containing 6.8 million
square feet. Our ability to manage our growth effectively will require us to
integrate successfully our new acquisitions into our existing management
structure. Many of our properties have relatively short or no operating history
under our management. We have had limited control over the operation of these
buildings.
Our redevelopment, development and construction activities may give rise to
unexpected costs.
We redevelop, develop and construct office and industrial buildings. The
risks associated with these activities include:
. abandonment of redevelopment or development opportunities resulting in a
loss of invested capital;
. construction costs of a property exceeding original estimates
potentially resulting in yields on invested capital lower than
expected;
. occupancy rates and rents at a newly renovated or completed property may
not be sufficient to make the property profitable;
. financing may not be available on favorable terms for redevelopment or
development of a property possibly increasing the projected cost of the
project;
. permanent financing may not be available on favorable terms to replace
short-term construction loans and construction and lease-up may not be
completed on schedule, resulting in increased interest expense and
construction costs;
. all necessary zoning, land-use, building, occupancy and other required
governmental permits and authorizations may not be obtained or may not
be obtained on a timely basis resulting in possible delays, decreased
profitability and increased management time and attention; and
. increased management time required for such activities may divert their
attention from other aspects of our business.
Cost increases or revenue decreases can adversely affect property yields and
values.
The yields available from equity investments in real estate depend in large
part on the amount of income generated and expenses incurred. If our properties
do not generate revenues sufficient to meet operating expenses, including debt
service, tenant improvements, leasing commissions and other capital
expenditures, we may have to borrow additional amounts to cover fixed costs, and
our cash flow and ability to make distributions to our shareholders will be
adversely affected.
Factors which may affect our revenues and the value of our properties
include:
. the national, state and local economic climate and real estate
conditions, such as oversupply of or reduced demand for space and
changes in market rental rates;
. the perceptions of prospective tenants of the safety, convenience and
attractiveness of the properties;
. the ability of the owner to provide adequate management, maintenance and
insurance;
. the ability to collect on a timely basis all rent from tenants;
. the expense of periodically renovating, repairing and reletting spaces;
. increasing operating costs, including real estate taxes and utilities,
which may or may not be passed through to tenants; and
. our compliance with the laws, changes in the tax laws, fluctuations in
interest rates and the availability of financing.
Certain significant expenditures associated with our properties, such as
mortgage payments, real estate taxes, insurance and maintenance costs, are
generally not reduced when circumstances cause a reduction in rental
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revenues from our properties.
Tenant defaults and bankruptcy could cause rent collection difficulties.
A significant portion of our income is derived from rental income on our
properties. As a result, our distributable cash flow and ability to make
expected distributions to our shareholders would be adversely affected if a
significant number of our tenants fail to pay their rent due to bankruptcy,
weakened financial condition or otherwise. At any time, a tenant may seek the
protection of the bankruptcy laws, which could result in delays in rental
payments or in the rejection and termination of such tenant's lease. These
events would cause a reduction in our cash flow and the amounts available for
distributions to our shareholders. We cannot assure you that tenants will not
file for bankruptcy protection in the future or, if any tenants file, that they
will affirm their leases and continue to make rental payments in a timely
manner. In addition, a tenant from time to time may experience a downturn in its
business. Such a downturn may weaken its financial condition, and it may stop
paying rent when due.
Property maintenance costs may escalate beyond our ability to recover such costs
through rents.
Our properties are subject to increases in operating expenses such as
cleaning; electricity; heating, ventilation and air conditioning; elevator
repair and maintenance; insurance and administrative costs; and other general
costs associated with security, landscaping, repairs and maintenance. While our
tenants generally are obligated to pay a portion of these escalating costs,
there can be no assurance that our tenants will agree to pay such costs upon
renewal or that new tenants will agree to pay such costs. If operating expenses
increase, the local rental market may limit the extent to which rents may be
increased to meet increased expenses without decreasing occupancy rates.
Although we implement incentive measures including evaluation and bonus plans
based in-part on cost-savings at each of our properties, our ability to make
distributions to our shareholders could be adversely affected if operating
expenses increase without a corresponding increase in revenues.
Non-renewal of leases and non-reletting of space could adversely affect our
rental revenues.
We are subject to several risks upon expiration of leases for space located
at our properties. The leases may not be renewed, the space may not be relet or
the terms of renewal or reletting, including the costs of required renovations,
may be less favorable than current lease terms. Leases on a total of
approximately 22% of the total net rentable square feet in our properties will
expire in the 12 months ending December 31, 1999. If we are unable to relet
promptly or renew the leases for a particular property or properties, if the
rental rates upon such renewal or reletting are significantly lower than
expected rates or if our budgets for these purposes prove to be inadequate, then
our cash flow and ability to make expected distributions to our shareholders may
be adversely affected.
Some of our competitors in markets in which we have properties may have newer,
better located or better capitalized properties.
Numerous office and industrial properties compete with our properties in
attracting tenants to lease space. In each market we compete on a number of
factors including rental rates, tenant concession allowances, quality and
location of buildings, quality of property management, and other economic and
non-economic factors. Our major competitors in each market include the following
companies:
MARKETS COMPETITORS
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Dallas, Houston, Carr America, Equity Office Properties, Mack-Cali, Crescent
Denver, Austin Real Estate Equities, ProLogis, Trammell Crow Company,
Lincoln Property Co.
Washington D.C., Carr America, Equity Office Properties, Brandywine Realty,
Baltimore, Boston Properties
Northern Virginia
Chicagao, Detroit, Carr America, Equity Office Properties, Centerpoint,
Kansas, Milwaukee ProLogis, Duke Realty, First Industrial, Liberty Property
Trust
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Philadelphia Liberty Property Trust, Mack-Cali Realty, Brandywine Realty
Atlanta Cousins Properties, Equity Office Properties, Carr America,
Weeks Corporation
San Diego, Los Carr America, Speiker Properties, Kilroy Realty, Cornerstone
Angeles, Oakland, Properties, Arden Realty, Shorenstein Co., Equity Office
Sacramento, Phoenix Properties, ProLogis, Boston Properties
This competition could have an adverse effect on our operating performance
because some of these competing properties may be newer, better located or
better capitalized than our properties.
Properties with environmental problems could cause us to incur cleanup cost or
other liabilities.
Under various federal, state, and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under or in the property. These laws often impose liability whether or not
the owner or operator knew of, or was responsible for, the presence of the
hazardous or toxic substances. In addition, the presence of hazardous or toxic
substances, or the failure to remediate a property properly, may adversely
affect the owner's ability to borrow using the real property as collateral.
Persons who arrange for the disposal or treatment of hazardous or toxic
substances may also be liable for the costs of removal or remediation of
hazardous substances at the disposal or treatment facility, whether or not such
facility is or ever was owned or operated by them. Environmental laws and common
law principles impose liability for release of and exposure to hazardous
substances, including asbestos-containing materials, into the air, and third
parties may seek recovery from owners or operators of real property for personal
injury or property damage associated with exposure to released hazardous
substances, including asbestos-containing materials.
As the owner of the properties, we may be liable for these types of costs.
We obtained Phase I environmental site assessments on all of our properties and
will obtain them on all of the properties we acquire in the future, prior to
their acquisition. The purpose of Phase I environmental site assessments is to
identify potential sources of contamination for which we may be responsible and
to assess the status of environmental regulatory compliance. For a number of
our properties, the Phase I environmental site assessments referenced prior
Phase II environmental site assessments obtained on such properties. Phase II
environmental site assessments generally involve more invasive procedures than
Phase I environmental site assessments, such as soil sampling and testing or the
installation and monitoring of groundwater wells.
Certain land in the vicinity of and underlying our Los Angeles industrial
properties was formerly the site of a synthetic rubber manufacturing plant owned
by the United States Government and subsequently owned or operated by numerous
companies, including Shell Oil Company and Dow Chemical Company. During the
operation of the plant, wastes were disposed of in pits and ponds located south
of the properties. On September 25, 1997, we were notified that an undefined
area, which may or may not include our Los Angeles industrial properties,
associated with the operation of the plant would be listed on the National
Priorities List. The National Priorities List is a federal list of abandoned
hazardous waste sites that must be cleaned up by either the government or the
potentially responsible parties. At this time, the EPA has not indicated the
precise boundaries of the National Priorities List site. We and the surrounding
landowners are challenging the listing. All past and present owners of the land
underlying our Los Angeles industrial properties, including the United States
Government, Dow, Shell and the former owner, LAPCO Industrial Parks, from whom
we purchased the Los Angeles industrial properties, are potentially responsible
parties for the investigation and remediation of the Plant Site. Shell has
agreed to:
. indemnify and hold harmless any successor of LAPCO, including us and any
subsequent purchasers, tenants and lenders, from any liability relating
to clean up or remediation costs for the plant site or for any
contamination resulting from the plant site, and
. indemnify and hold harmless LAPCO and any successor of LAPCO, including
us, from any liability arising out of any third party tort claims for
personal injury or property damage.
Except as noted above, the environmental site assessments have not revealed
any environmental condition, liability or compliance concern that we believe
could have a material adverse affect on our business, assets or results of
operations. It is possible that the environmental site assessments relating to
any one of our
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properties do not reveal all environmental conditions, liabilities or compliance
concerns. In addition, there could be material environmental conditions,
liabilities or compliance concerns that arose at a property after the related
environmental site assessments report was completed.
Americans with Disabilities Act compliance could lead to unanticipated costs.
The Americans with Disabilities Act of 1990 requires all public
accommodations and commercial facilities to meet federal requirements related to
access and use by disabled persons. Compliance with the Americans with
Disabilities Act requirements could require removal of access barriers, and non-
compliance could result in imposition of fines by the U.S. government or an
award of damages to private litigants. Although we believe that our properties
are substantially in compliance with these requirements, a determination that we
are not in compliance with the Americans with Disabilities Act could result in
the imposition of fines or an award of damages to private litigants. If we were
required to make unanticipated expenditures to comply with the Americans with
Disabilities Act, our cash flow and the amounts available for distributions to
our shareholders may be adversely affected.
Some of our properties may be subject to uninsured losses such as from
earthquakes.
We carry comprehensive liability, fire, flood, where appropriate, extended
coverage and rental loss insurance with respect to our properties, with policy
specifications and insured limits customarily carried for similar properties.
There are, however, certain types of losses, such as from earthquakes at
properties located in California or from wars, that may be either uninsurable or
the cost of obtaining insurance would be so high that it would be more prudent
to accept the risk of loss. Should an uninsured loss or a loss in excess of
insured limits occur, we could lose both capital invested in a property as well
as the anticipated future revenue from the property but would continue to be
obligated on any mortgagee indebtedness or other obligations related to the
property. Any such loss would adversely affect our business, financial condition
and results of operations.
Property ownership through partnerships and joint ventures could subject us to
the contrary business objectives of our partners or co-venturers.
Through an affiliate of Prentiss Properties Acquisition Partners, L.P.,
the operating partnership, we own a non-controlling 50% interest in Broadmoor
Austin Joint Venture, which leases the Broadmoor Austin Office Properties in
Austin, Texas. Through this interest, we act as managing venture partner and
have the authority to conduct the business and affairs of Broadmoor Austin Joint
Venture, subject to the approval and veto rights of the other venture partner.
IBM, the tenant leasing 100% of the space at that property, owns the remaining
50% interest in Broadmoor Austin Joint Venture through an affiliated entity.
We may also participate with other entities in property ownership through
joint ventures or partnerships. Partnership or joint venture investments may
involve risks such as the following:
. our partners or co-venturers might become bankrupt,
. our partners or co-venturers might at any time have economic or other
business interests or goals that are inconsistent with our business
interests or goals, and
. our partners or co-venturers may be in a position to take action
contrary to our instructions or make requests contrary to our policies
or objectives, including our policy with respect to maintaining our
qualification as a real estate investment trust.
We will, however, seek to maintain sufficient control of such partnerships
or joint ventures to achieve our business objectives. Our organizational
documents do not limit the amount of available funds that we may invest in
partnerships or joint ventures.
In addition, we may acquire in the future either a limited partnership
interest in a property partnership without partnership management responsibility
or a co-venturer interest or co-general partnership interest in a property
partnership with shared responsibility for managing the affairs of a property
partnership or joint venture. In such cases, we will not be in a position to
exercise sole decision-making authority regarding the property partnership or
joint venture.
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Our properties are illiquid assets.
Our investments in properties are relatively illiquid. This illiquidity
will tend to limit our ability to vary our portfolio promptly in response to
changes in economic or other conditions.
Our incurrence of debt could have a material adverse effect on operating
performance.
If principal payments due at maturity cannot be refinanced, extended or
paid with proceeds of other capital transactions, such as the issuance of new
equity capital, we expect that our cash flow will not be sufficient in all years
to pay distributions at expected levels and to repay all maturing debt.
Furthermore, if prevailing interest rates or other factors at the time of
refinancing result in higher interest rates upon refinancing, the interest
expense relating to such refinanced indebtedness would increase. This increase
would adversely affect our cash flow and the amounts available for distributions
to our shareholders. If a property is mortgaged to collateralize payment of
indebtedness and we are unable to meet mortgage payments, the property could be
foreclosed upon by or otherwise transferred to the mortgagee with a consequent
loss of income and asset value. We have no remaining debt maturities in 1998.
During 1999, we have one loan maturity of $120 million in January which we
expect to repay by refinancing two of the four assets currently held as security
for the existing loan and with fundings from our line of credit.
Our use of variable rate debt and derivative financial instruments may
cause an increase in debt service costs.
We have incurred and may incur in the future indebtedness that bears
interest at variable rates. Variable rate debt creates higher debt service
requirements if market interest rates increase, which would adversely affect our
cash flow and the amounts available for distributions to our shareholders.
We enter into financial futures contracts and option contracts in the
ordinary course of our business to hedge or modify our exposures to interest
rate fluctuations related to our costs of financing. While our use of these
derivatives is intended to allow us to better manage certain risks, it is
possible that, over time, mis-matches may arise with respect to the derivatives
and the cash market instruments they are intended to hedge. Discrepancies can
also arise between the derivative and cash markets. Derivatives also have risks
that are similar in type to the risks of the cash market instrument on which
their values are based. For example, in times of market stress, sharp price
movements or reductions in liquidity in the cash markets may be related to
comparable or even greater price movements and reductions in liquidity in the
derivative markets. Further, the risks associated with derivatives are
potentially greater than those associated with the related cash market
instruments because of the additional complexity and potential for leverage. In
addition, derivatives may create credit risks, as well as legal, operational and
other risks beyond those associated with the underlying cash market instruments
on which their values are based. Credit risk involves the risk that a
counterparty on a derivative transaction will not fulfill its contractual
obligations. There can be no assurance, however, that hedging strategy or
techniques will be effective, that our profitability will not be adversely
affected during any period of changes in interest rates or that the costs of
hedging will not exceed the benefits.
On September 19, 1997, we entered into two interest rate swap agreements
with Nations Bank and Societe Generale covering $60 million and $50 million,
respectively, of our outstanding indebtedness. Our cost of seven-year funds,
before adding the spread, is fixed by these swap agreements at an average of
6.25%.
On August 25, 1998, we entered into two treasury rate lock agreements with
Societe Generale, New York Branch and UBS AG, London Branch each covering a
notional amount of $49.25 million. These agreements were executed in
anticipation of closing mortgage loans over the course of the next six months.
The agreements effectively locked the cost of the underlying 10-year treasury
rate which is the security used as a benchmark to price the mortgages we
anticipate entering into. On October 6, 1998, we terminated one $49.25 million
agreement with Societe Generale, New York Branch, and incurred settlement losses
of $4.3 million due to the substantial downward movement in the underlying
treasury security. These settlement losses are expected to be amortized over the
12 year term of a mortgage loan with a principal balance of $35.75 million and
an interest rate of 6.63%. The remainder will be amortized over $13.5 of a
$42.25 million, 12 year mortgage with an interest rate of 6.80%. The effective
interest rate on the $49.25 million will be 7.40%. On December 29, 1998, we
terminated the $49.25 million treasury lock agreement with UBS AG, London Branch
and incurred settlement losses of approximately $1.8 million. These settlement
losses will be amortized over the life of two ten-year loans with combined
principle of $64.0 million and an effective interest rate of 7.29%.
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If we are unable to replace construction loans with permanent financing, we
may have to sell development property at a loss.
If new developments are financed through construction loans or if
acquisitions are financed with short-term bridge loans in anticipation of later,
permanent financing, there is a risk that upon completion of construction or the
maturity of the bridge loans, permanent financing may not be available or may be
available only on disadvantageous terms. As of December 10, 1998, we have $29.7
million in construction loan commitments of which we have drawn $26.4 million.
In the event that we are unable to obtain permanent financing for a property on
favorable terms, we could be forced to sell such property at a loss or the
property could be foreclosed upon by the lender and result in loss of income and
asset value.
Our shareholders' ability to effect a change of control may be limited.
We have a shareholder rights plan.
In February 1998, we adopted a shareholder rights plan and declared a
dividend of one purchase right for each common share of beneficial interest. The
purchase rights may have the effect of delaying, inhibiting or preventing a
transaction or a change in control of us that might involve a premium price for
the common shares or otherwise be in the best interest of our shareholders. The
purchase rights can cause substantial dilution to a person or group that
acquires 10% or more of our outstanding common shares without the purchase
rights having been redeemed by our board of trustees. However, because the
purchase rights are redeemable by our board of trustees, the purchase rights
should not interfere with any merger or other business combination approved by
our board of trustees.
We have an ownership limitation.
In order to maintain our qualification as a REIT under the Internal Revenue
Code of 1986, no more than 50% in value of our outstanding shares of beneficial
interest may be owned, directly or indirectly, by five or fewer individuals
during the last half of our taxable year, other than our 1996 taxable year. To
ensure that we will not fail to qualify as a REIT, our declaration of trust
authorizes our board of trustees to take such actions as are necessary and
desirable to preserve our qualification as a REIT. In particular, our
declaration of trust has an ownership limitation which provides that no person
may own, directly or indirectly, more than 8.5% of the number of outstanding
common shares, other than Michael V. Prentiss, who currently may own up to 15%
of the number of outstanding common shares, or more than 9.8% of the number of
outstanding preferred shares of beneficial interest of any series.
Our board of trustees, upon receipt of a ruling from the IRS, an opinion of
counsel or other evidence satisfactory to our board of trustees, may exempt a
proposed transferee from the ownership limitation. For example, our board of
trustees has exempted Security Capital Preferred Growth Incorporated from the
ownership limitation on the condition that Security Capital not own more than
11% of the number of outstanding common shares. Our board of trustees may not
grant an exemption from the ownership limitation to any proposed transferee if
such exemption would result in the termination of our status as a REIT.
The ownership limitation may have the effect of delaying, inhibiting or
preventing a transaction or a change in control that might involve a premium
price for the common shares or otherwise be in the best interests of our
shareholders.
We have a staggered board.
Our board of trustees is divided into three classes, with only a portion of
our board of trustees standing for election at each annual meeting. The
staggered terms of trustees may reduce the possibility of a tender offer or an
attempt to change control of us, even though a tender offer or change in control
might be in the best interest of our shareholders.
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The board of trustees can issue additional shares.
Our declaration of trust authorizes our board of trustees to:
. amend the declaration of trust, without shareholder approval, to
increase or decrease the aggregate number of shares of beneficial
interest or the number of shares of beneficial interest of any class
that we have the authority to issue;
. issue additional authorized but unissued preferred or common shares; and
. classify or reclassify any unissued common shares or preferred shares
and to set the preferences, rights and other terms of such classified or
unclassified shares.
These provisions may have the effect of delaying, deferring or preventing a
transaction or a change in control that might involve a premium price for the
common shares or otherwise be in the best interest of our shareholders.
If we ever fail to qualify as a REIT, we would not be able to deduct shareholder
distributions, and we would be taxed at corporate rates.
We have operated and intend to continue to operate as a REIT for federal
income tax purposes. We have not requested, and do not expect to request, a
ruling from the IRS that we qualify as a REIT. Our REIT status will depend on
our continuing ability to meet various requirements concerning, among other
things, the ownership of our outstanding stock, the nature of our assets, the
sources of our income, and the amount of our distributions to our shareholders.
Because we have a limited history of operating as a REIT, we cannot assure you
that we will be able to maintain our status as a REIT.
If we fail to qualify as a REIT for any taxable year, we would not be
allowed a deduction for distributions to our shareholders in computing our
taxable income and would be subject to federal income tax, including any
applicable alternative minimum tax, on our taxable income at regular corporate
rates. Unless entitled to relief under the Internal Revenue Code, we also would
be disqualified from treatment as a REIT for the four taxable years following
the year during which qualification was lost. As a result, cash available for
distribution would be reduced for each of the years involved. Although we intend
to continue to operate as a REIT, it is possible that future economic, market,
legal, tax or other considerations may cause our board of trustees, with the
consent of our shareholders holding at least two-thirds of all the outstanding
common shares, to revoke the REIT election.
We have minimum distribution requirements that could require us to incur
additional debt.
In order to avoid corporate income taxation of the earnings that we
distribute, we are required each year to distribute to our shareholders at least
95% of our net taxable income, excluding any net capital gain. In addition, we
will be subject to a 4% nondeductible excise tax on the amount, if any, by which
distributions paid by us with respect to any calendar year are less than the sum
of the following:
. 85% of our ordinary income for that year,
. 95% of our capital gain net income for that year, and
. 100% of our undistributed taxable income from prior years.
Beginning with the 1998 taxable year, we may elect to retain and pay income
tax on net capital gains. These retained amounts will be treated as having been
distributed for purposes of the 4% excise tax.
We have made and intend to continue to make distributions to our
shareholders to comply with the 95% distribution requirement and to avoid the
nondeductible excise tax. Our income consists primarily of our share of the
income of the operating partnership, and the cash available for distribution to
our shareholders consists of our share of cash distributions from the operating
partnership. Differences in timing between (1) the actual receipt of income and
actual payment of deductible expenses and (2) the related inclusion of income
and deduction of expenses in arriving at taxable income could require us,
through the operating partnership, to borrow funds on a short-term basis to meet
the 95% distribution requirement and to avoid the nondeductible excise tax. The
requirement to distribute a substantial portion of our net taxable income could
cause us to distribute amounts that
10
<PAGE>
otherwise would be spent on future acquisitions, unanticipated capital
expenditures or repayment of debt, which would require us to borrow funds or to
sell assets to fund the costs of such items.
If the operating partnership fails to be classified as a partnership for
federal income tax purposes, we could lose our REIT status.
We have not requested, and do not expect to request, a ruling from the IRS
that the operating partnership and each of its non-corporate subsidiaries have
been and will continue to be classified as partnerships for federal income tax
purposes. If the IRS were to challenge successfully the tax status of the
operating partnership or a non-corporate subsidiary as a partnership for federal
income tax purposes, the operating partnership or such non-corporate subsidiary
would be taxable as a corporation. In such event, we would likely cease to
qualify as a REIT. Furthermore, the imposition of a corporate income tax on the
operating partnership would reduce substantially the amount of cash available
for distribution from the operating partnership.
Changes in tax laws could affect our REIT status.
At any time, future legislation or administrative or judicial decisions or
actions could affect our tax treatment or qualification as a REIT. For example,
on February 2, 1998, President Clinton released his budget proposal for fiscal
year 1999. Several provisions of his proposal potentially could have affected
us if enacted in final form as then proposed. Specifically, one proposal would
prohibit a REIT from owning, directly or indirectly, more than 10% of the voting
power or value of all classes of a C corporation's stock, other than the stock
of a qualified REIT subsidiary, after the effective date of such proposal.
Although this proposal was not enacted, we can give no assurance regarding
whether this proposal will be enacted or whether any future tax legislation or
administrative or judicial decisions will adversely affect our tax treatment or
qualification as a REIT.
Conflicts of interests in our business could result in decisions not in your
best interest.
Prentiss principals could have differing objectives from other shareholders
upon the sale, refinancing or prepayment of indebtedness of properties.
Messrs. Prentiss, August and DuBois, our senior executive officers, and
their affiliates may have unrealized taxable gain associated with their units of
limited partnership interest in the operating partnership. Messrs. Prentiss,
August and DuBois may suffer different and more adverse tax consequences than
our other shareholders upon the sale or refinancing of properties that they
contributed to the operating partnership. Therefore, Messrs. Prentiss, August
and DuBois and our other shareholders may have different objectives regarding
the appropriate pricing and timing of any sale or refinancing of properties.
While we, through Prentiss Properties I, Inc., the general partner of the
operating partnership, have the exclusive authority as to whether and on what
terms to sell or refinance an individual property, Messrs. Prentiss, August and
DuBois may influence us not to sell, or refinance or prepay the indebtedness
associated with properties even though such a transaction might otherwise be to
our financial advantage, or may influence us to refinance properties with a high
level of debt. As of December 10, 1998, we owned 22 properties with an aggregate
purchase price of approximately $224 million which were subject to restrictions
on transfer lasting from two to six years unless the transfer is structured as a
tax-deferred like kind exchange under Section 1031 of the Internal Revenue Code.
Our policies with respect to conflicts of interests may not eliminate the
influence of conflicts.
We have adopted policies intended to minimize conflicts of interest. For
example, our bylaws require that all transactions in which executive officers or
trustees have a conflicting interest with us must be approved by a majority of
our trustees that are not affiliated with any of our affiliates or by the
holders of a majority of the common shares held by disinterested shareholders.
There can be no assurance that our policies will be successful in eliminating
the influence of conflicts. Decisions could be made that might fail to reflect
fully the interests of all our shareholders. Our declaration of trust includes
a provision permitting each individual trustee to engage in the type of business
activities conducted by us without first presenting any investment opportunities
to us, even though such investment opportunities may be within the scope of our
investment policies.
11
<PAGE>
Our board of trustees may change policies and incur debt without shareholder
approval.
Our board of trustees determines our investment, financing, borrowing and
distribution policies, and our policies with respect to all other activities,
including growth, capitalization and operations. Our board of trustees has
adopted a debt limitation policy limiting our total combined indebtedness plus
our pro rata share of joint venture debt to 50% or less of our total market
capitalization, but our organizational documents do not contain any limitation
on the amount of indebtedness we may incur. Although our board of trustees has
no present intention to do so, these policies may be amended or revised at any
time and from time to time at the discretion of our board of trustees without a
vote of our shareholders. A change in these policies could adversely affect our
financial condition, results of operations or the market price of the common
shares.
We are dependent on the services of Michael V. Prentiss and Thomas F. August.
We are dependent on the efforts of our executive officers, particularly
Messrs. Prentiss and August. The loss of their services could have an adverse
effect on our operations. Each of Messrs. Prentiss and August have entered into
an employment agreement. Messrs. Prentiss and August have agreed in their
employment agreements that for a period of two (2) years after they are no
longer employed by the Company they will not enter into employment with any
company which is in a business that is competitive to the business of the
Company. If this provision, or if similar provisions in other employment
agreements with our other employees, are determined to not be binding on Messrs.
Prentiss or August, or any other employee, those persons would be able to enter
into employment with companies which compete with us immediately after those
persons ceased to be employed by us. Certain assets of affiliates of the
predecessor entities were not contributed to us in the transactions in which we
were formed, and our executive officers, including Messrs. Prentiss and August,
may devote some of their management time to those excluded assets.
Our third-party property management, leasing, development and construction
business and related services involve relationships which may be subject to
early termination or a lack of control.
Through the operating partnership and Prentiss Properties Limited, Inc., we
engage in the business of management, leasing, development and construction of
properties owned by third parties. Risks associated with these activities
include the following:
. Related contracts, which are typically cancelable upon 30-days notice or
upon specific events, including sale of the property, may be terminated
by the property owner or may be lost in connection with a sale of such
property;
. Contracts may not be renewed upon expiration or may not be renewed on
terms consistent with current terms; and
. Rental revenues upon which management, leasing and development fees are
based may decline as a result of general real estate market conditions
or specific market factors affecting properties that we manage, lease or
develop, resulting in decreased management or leasing fee income.
The capital stock of Prentiss Properties Limited, Inc. is divided into two
classes: voting common stock, all of which is owned by Mr. Prentiss; and
nonvoting common stock, all of which we hold through the operating partnership.
The voting common stock represents 5% of the ownership interests in Prentiss
Properties Limited, Inc. and the nonvoting common stock represents 95% of the
ownership interests in Prentiss Properties Limited, Inc. Mr. Prentiss, as the
holder of all of Prentiss Properties Limited, Inc.'s voting common stock, has
the ability to elect the directors of Prentiss Properties Limited, Inc. We are
not able to elect directors and, therefore, are not able to influence the
day-to-day management decisions of Prentiss Properties Limited, Inc. As a
result, the board of directors and management of Prentiss Properties Limited,
Inc. may implement business policies or decisions that we would not have
implemented and that are adverse to our interests and which could adversely
impact our net operating income and cash flow.
We have shares available for future sale that could adversely affect the price
of our common shares.
Under our declaration of trust, we have the authority to do the following:
12
<PAGE>
. Amend our declaration of trust, without shareholder approval, to
increase or decrease the aggregate number of shares of beneficial
interest or the number of shares of beneficial interest of any class,
including common shares, that we have the authority to issue and
. Issue additional authorized but unissued common shares or preferred
shares.
As of December 16, 1998, we have authorized 100,000,000 common shares, of
which 61,073,512 common shares are unissued or held in treasury. In addition, we
have granted options to purchase 2,735,937 common shares to executives officers,
employees and trustees, of which options to purchase 2,591,525 common shares
remain outstanding. Sales or issuances of a substantial number of common shares,
or the perception that such sales could occur could adversely affect prevailing
market prices of the common shares and dilute the percentage ownership held by
our shareholders.
Limited partners of the operating partnership have the right to receive
either cash or one common share, subject to adjustments, in exchange for each
limited partnership unit they now hold if and to the extent they tender such
units for redemption and we or the general partner elect to redeem such units
for common shares. We are party to registration rights agreements under which
we are required to register the issuance of common shares which we may issue
upon the redemption by the holders of units of limited partnership interest in
the operating partnership. We can make no prediction concerning the effect that
such issuance or future sales of any such common shares will have on market
prices.
In December 1997 and March 1998, we issued an aggregate of 3,773,585 Series
A Cumulative Convertible Preferred Shares to Security Capital in a private
placement. The Series A Preferred Shares are convertible into our common shares
beginning on January 1, 1999. Security Capital may sell such common shares
pursuant to a registration statement that we will file. We can make no
prediction concerning the effect that such issuance or future sales of any such
common shares will have on market prices.
Our shareholders may face potential dilution of capital stock or decrease of
liquidity in connection with settlement of the UBS forward agreement.
The operating partnership and we have entered into a Purchase Agreement,
dated February 2, 1998, with UBS Limited and Union Bank of Switzerland, London
Branch, acting through its agent UBS Securities LLC (all as succeeded by UBS AG,
London Branch, acting through its agent Warburg Dillon Read LLC, "UBS-LB")
involving the sale of 1,100,000 common shares. The operating partnership and us
have also entered into a related forward stock contract, dated February 2, 1998,
with UBS-LB, which provides for certain purchase price adjustments. The maturity
date of the UBS forward agreement is February 2, 1999, subject to acceleration
as described more fully below.
The UBS forward agreement generally provides that if the market price of a
common share on the maturity date is less than a certain amount, which we refer
to as the "forward price," we must pay UBS-LB the difference multiplied by
1,100,000. Similarly, if the market price of a common share is above the
forward price, UBS-LB must pay us the difference in common shares. If we choose
not to, or if we cannot, settle in freely tradable common shares, we must
repurchase the 1,100,000 shares at the forward price in cash. Over the life of
the UBS forward agreement, the forward price will be adjusted by LIBOR plus 135
basis points, minus any dividends received on the common shares.
To secure our obligations under the UBS forward agreement, the UBS forward
agreement provides for quarterly payments of collateral equal to 1,100,000 times
105% of the amount by which the market price of a common share is below the
forward price. The collateral may be in the form of cash, letters of credit or
freely tradable common shares. As of the last recalculation date of the forward
price, which was October 30, 1998, the forward price was $27.227 per share.
Based on the then current share price of $20.625, this resulted in a collateral
requirement of approximately $7.3 million. The forward price is calculated using
the original issue price of $27.00 per share and adjusting it to provide a
return equal to LIBOR plus 135 basis points, less any dividends paid during the
same period. We have secured this requirement entirely with letters of credit
totaling approximately $3.6 million and one cash payment of $3.7 million. Our
cash payment of approximately $3.7 million on November 6, 1998 is included as
restricted cash in our financial statements at December 31, 1998. On January 21,
1999, we reacquired all of the 1.1 million common shares from UBS for
approximately $30.0 million inclusive of the November 6, 1998 $3.7 million cash
payment. We funded the acquisition of the common shares with borrowings under
our line of credit.
Although the maturity date of the UBS forward agreement is February 2,
1999; if the closing price of the common shares falls below $16.40 for a period
of three consecutive trading days, or if the market value of our common shares,
excluding operating partnership
13
<PAGE>
units, declines to or below $600 million, UBS-LB has the right to force a
complete settlement under the UBS forward agreement, if the closing price of the
common shares falls below $18.50 for a period of three consecutive trading
days, UBS-LB has the right to force a settlement with respect to 67% of the
transaction. UBS-LB also has the right to force a complete settlement under the
UBS forward agreement if we:
. are in default with respect to certain financial covenants under the UBS
Forward Agreement,
. are in default under our credit facility with a syndicate of lenders or
any other unsecured lending agreement, or
. fail to post sufficient cash collateral.
Settlement in cash would involve the repurchase of 1,100,000 shares at a
price per share equal to the forward price. If we settled the UBS Forward
Agreement in cash, we would expect to use borrowings under our existing $300
million corporate revolver or various secured borrowings which we are currently
negotiating.
Quarterly payments of collateral and the ultimate settlement of the UBS
forward agreement could adversely affect our liquidity or dilute our common
shares. If the market price, is lower than the forward price, settlement in
common shares would dilute our capital stock. The table below shows the change
in the value of a common share as a result of settling the UBS forward agreement
at various market prices:
INCREASE/(DILUTION) IN VALUE
MARKET PRICE OF COMMON SHARES (1)
------------ ----------------------------
$30 0.26%
$25 (0.25%)
$20 (1.02%)
$15 (2.30%)
$10 (4.87%)
- ---------------
(1) Assumes a Forward Price of $27.227.
Year 2000 non-compliance may cause operational problems.
The Y2K compliance problem is the result of computer programs designed to
use two digit rather than four digit years. Thus, the year 1998 is represented
as 98 and the year 2000 would be represented as 00. This could be interpreted as
either 1900 or 2000. To systems that have Y2K related issues, the time may seem
to have reverted back 100 years. Systems, equipment and software with exposure
to Y2K related problems exist not only in computerized information systems but
also in building operating systems such as elevators, alarm systems, energy
management systems, phone systems, and numerous other systems and equipment.
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 our business, financial
condition, or results of operations.
Due to the exposure and potential liabilities inherent in both the
computerized information systems and non-information systems with imbedded
technology that we use internally, in September 1997, we created a Y2K committee
headed by the Vice President of Information Systems and co-chaired by the Vice
President of National Property Operations. We have also engaged various
independent sources to assist in the review of our Y2K plan.
14
<PAGE>
The total costs associated with required modifications to become Y2K
compliant are not expected to be material to our financial position. We
currently estimate the total Y2K readiness costs will be between $500,000 and
$600,000. These costs are net of our personnel costs that are considered to be
part of normal operating costs. Our 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.
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 our 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. Our Y2K plan should significantly reduce our 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.
We are 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
facing us and our clients may divert our management's time, attention,
financial, and human resources from its ordinary business activities. In
addition, system failures may require significant efforts by us and our clients
to prevent or alleviate material business disruption.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS FOR PROPERTIES ACQUIRED
Statement of revenues and certain operating expenses of the Ordway for the
year ended December 31, 1997 is presented as prescribed by Rule 3-14 of
Regulation S-X.
Combined statement of revenues and certain operating expenses of the Willow
Oaks Properties for the year ended December 31, 1997 are presented as prescribed
by Rule 3-14 of Regulation S-X.
(B) Pro Forma Financial Information
Prentiss Properties Trust Pro Forma Balance Sheet as of June 30, 1998 and
Pro Forma Statement of Income for the year ended December 31, 1997 and six month
period ended June 30, 1998.
(C) Exhibits
23.1 Consent of PricewaterhouseCoopers LLP.
16
<PAGE>
INDEX TO FINANCIAL STATEMENTS
The following represents certain of the properties acquired by the
Company during 1998: PAGE
NUMBER
INDIVIDUALLY INSIGNIFICANT ACQUISITIONS:
The Ordway Property
Report of Independent Accountants.................................. 14
Statement of Revenues and Certain Operating Expenses for the Year
Ended December 31, 1997............................................ 15
Notes to Statement of Revenues and Certain Operating Expenses...... 16
The Willow Oaks Properties
Report of Independent Accountants.................................. 17
Combined Statement of Revenues and Certain Operating Expenses for
the Year Ended December 31, 1997................................... 18
Notes to Combined Statement of Revenues and Certain Operating
Expenses........................................................... 19
PRO FORMA FINANCIAL STATEMENTS:
Prentiss Properties Trust Pro Forma Consolidated Balance Sheet as
of June 30, 1998................................................... 21
Prentiss Properties Trust Pro Forma Consolidated Statement of
Income for the Year Ended December 31, 1997........................ 22
Prentiss Properties Trust Pro Forma Consolidated Statement of
Income for the Six Months Ended June 30, 1998...................... 24
17
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Prentiss Properties Trust
We have audited the accompanying statement of revenues and certain
operating expenses of the Ordway Property for the year ended December 31, 1997.
The statement of revenues and certain operating expenses is the responsibility
of the Ordway Property's owners. Our responsibility is to express an opinion on
the statement of revenues and certain operating expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenues and certain
operating expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statement of revenues and certain operating expenses. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the statement of
revenues and certain operating expenses. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenues and certain operating expenses was
prepared for the purpose of complying with rules and regulations of the
Securities and Exchange Commission, as described in Note 1, and is not intended
to be a complete presentation of the Ordway Property's revenues and expenses and
may not be comparable to results from proposed future operations of the Ordway
Property.
In our opinion, the statement of revenues and certain operating expenses
referred to above presents fairly, in all material respects, the revenues and
certain operating expenses described in Note 1 for the year ended December 31,
1997, in conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Dallas, Texas
August 12, 1998
18
<PAGE>
ORDWAY PROPERTY
STATEMENT OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S><C> <C>
Revenues:
Rental income........................................................ $11,564
Other income......................................................... 131
-------
11,695
-------
Certain operating expenses:
Real estate taxes.................................................... 803
Repairs and maintenance.............................................. 2,171
Property management.................................................. 502
Utilities............................................................ 1,061
Insurance............................................................ 324
-------
4,861
-------
Revenues in excess of certain operating expenses $ 6,834
=======
</TABLE>
The accompanying notes are an integral part of this financial statement.
19
<PAGE>
ORDWAY PROPERTY
NOTES TO STATEMENT OF REVENUES
AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The statement of revenues and certain operating expenses for the year ended
December 31, 1997 relate to the operations of the Ordway Property (the
"Property"), which was acquired on May 21, 1998 from an unaffiliated third-party
for an aggregate purchase price of $76.3 million. The Ordway Property consists
of one Class "A" suburban office property totaling approximately 525,951 net
rentable square feet in Oakland, California.
The accompanying statement excludes certain expenses such as interest,
depreciation and amortization and other costs not directly related to the future
operations of the Property that may not be comparable to the expenses expected
to be incurred in the proposed future operations of the Property. Management is
not aware of any material factors relating to the Property which would cause the
reported financial information not to be necessarily indicative of future
operating results.
The statement of revenues and certain operating expenses have been prepared
on the accrual basis of accounting.
REVENUE AND EXPENSE RECOGNITION
Rental income is recorded when due from tenants. The effects of scheduled
rent increases and rental concessions, if any, are recognized on a straight-line
basis over the term of the tenant's lease.
FUTURE RENTAL REVENUES
The Property was leased to tenants under net operating leases. Minimum
lease payments receivable, excluding tenant reimbursement of expenses, under
noncancellable operating leases in effect as of December 31, 1997, are
approximately as follows:
<TABLE>
<S> <C>
1998........................................................................................ $11,377
1999........................................................................................ 10,688
2000........................................................................................ 9,397
2001........................................................................................ 4,590
2002........................................................................................ 2,994
Thereafter.................................................................................. 4,026
-------------
$43,072
=============
</TABLE>
Office space in the Ordway Property is generally leased to tenants under
lease terms which provide for tenants to pay for increases in operating expenses
in excess of specified amounts.
USE OF ESTIMATES
The preparation of the statement of revenues and certain operating expenses
requires management to make estimates and assumptions that affect the reported
amounts of revenues and certain operating expenses during the reporting period.
Actual results could differ from those estimates.
20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders of
Prentiss Properties Trust
We have audited the accompanying combined statement of revenues and certain
operating expenses of the Willow Oaks Properties (the "Willow Oaks Properties")
for the year ended December 31, 1997. The combined statement of revenues and
certain operating expenses is the responsibility of the Willow Oaks Properties'
owners. Our responsibility is to express an opinion on the combined statement of
revenues and certain operating expenses based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined statement of revenues and
certain operating expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the combined statement of revenues and certain operating expenses. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall presentation of the combined
statement of revenues and certain operating expenses. We believe that our audit
provides a reasonable basis for our opinion.
The accompanying combined statement of revenues and certain operating
expenses was prepared for the purpose of complying with rules and regulations of
the Securities and Exchange Commission, as described in Note 1, and is not
intended to be a complete presentation of the Willow Oaks Properties' revenues
and expenses and may not be comparable to results from proposed future
operations of the Willow Oaks Properties.
In our opinion, the combined statement of revenues and certain operating
expenses referred to above presents fairly, in all material respects, the
revenues and certain operating expenses described in Note 1 for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
PricewaterhouseCoopers LLP
Dallas, Texas
September 30, 1998
21
<PAGE>
THE WILLOW OAKS PROPERTIES
COMBINED STATEMENT OF REVENUES AND CERTAIN OPERATING EXPENSES
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<S><C> <C>
Revenues:
Rental income........................................................... $8,914
Other income............................................................ 297
------
9,211
------
Certain operating expenses:
Real estate taxes....................................................... 208
Repairs and maintenance................................................. 498
Property management..................................................... 369
Utilities............................................................... 398
Insurance............................................................... 74
------
1,547
------
Revenues in excess of certain operating expenses $7,664
======
</TABLE>
The accompanying notes are an integral part of this financial statement.
22
<PAGE>
THE WILLOW OAKS PROPERTIES
NOTES TO COMBINED STATEMENT OF REVENUES
AND CERTAIN OPERATING EXPENSES
(DOLLARS IN THOUSANDS)
1. BASIS OF PRESENTATION
The combined statement of revenues and certain operating expenses for the
year ended December 31, 1997 relate to the operations of the Willow Oaks
Properties (the "Willow Oaks Properties" or the "Properties"), which were
acquired on August 18, 1998, by the Company from an unaffiliated third-party for
an aggregate purchase price of $76.0 million. The Willow Oaks Properties consist
of two Class "A" suburban office buildings totaling approximately 387,469 net
rentable square feet and 4.05 acres of undeveloped land located in the suburban
markets of Northern Virginia near Washington, D.C.
The accompanying statement excludes certain expenses such as interest,
depreciation and amortization and other costs not directly related to the future
operations of the properties that may not be comparable to the expenses expected
to be incurred in the proposed future operations of these properties. Management
is not aware of any material factors relating to the properties which would
cause the reported financial information not to be necessarily indicative of
future operating results.
The combined statement of revenues and certain operating expenses have been
prepared on the accrual basis of accounting.
REVENUE AND EXPENSE RECOGNITION
Rental income is recorded when due from tenants. The effects of scheduled
rent increases and rental concessions, if any, are recognized on a straight-line
basis over the term of the tenant's lease.
During the year ended December 31, 1997, three separate tenants represented
46%, 19% and 15% of the total base rental income of one of the Willow Oaks
Properties, and one major tenant owned an interest in and leased 100% of the
other.
FUTURE RENTAL REVENUES
The properties are leased to tenants under net operating leases. Minimum
lease payments receivable, excluding tenant reimbursement of expenses, under
noncancellable operating leases in effect as of December 31, 1997, are
approximately as follows:
<TABLE>
<S> <C>
1998.............................................................. $ 9,238
1999.............................................................. 7,767
2000.............................................................. 5,725
2001.............................................................. 5,795
2002.............................................................. 5,998
Thereafter........................................................ 12,498
--------------
$47,021
==============
</TABLE>
Office space in the Willow Oaks Properties is generally leased to tenants
under lease terms that provide for tenants to pay for increases in operating
expenses in excess of specified amounts.
USE OF ESTIMATES
The preparation of the combined statement of revenues and certain operating
expenses requires management to make estimates and assumptions that affect the
reported amounts, revenues and certain operating expenses during the reporting
period. Actual results could differ from those estimates.
23
<PAGE>
2. RELATED PARTY TRANSACTIONS (amounts in whole dollars)
Under terms of various management agreements, the Willow Oaks Properties
paid $153,160 in management fees during the year ended December 31, 1997 to
affiliates of the entities owning the Properties.
The Properties purchased insurance from affiliates of the entities owning
the Properties. Total insurance expense for the year ended December 31, 1997 was
approximately $74,000.
The Willow Oaks Properties received base rents in the amount of $5,821,910
during the year ended December 31, 1997 from entities affiliated with the
entities owning the Properties.
24
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA CONSOLIDATED BALANCE SHEET
JUNE 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following unaudited pro forma consolidated balance sheet is presented
as if the following transactions had been consummated on June 30, 1998: (i) the
acquisition of the Willow Oaks Properties and (ii) the acquisition of other
insignificant properties acquired subsequent to June 30, 1998, (collectively,
the "Other Acquisitions"). This pro forma consolidated balance sheet should be
read in conjunction with the pro forma consolidated statements of income of the
Company for the year ended December 31, 1997 and six month period ended June 30,
1998 included elsewhere in this Form 8-K.
The pro forma consolidated balance sheet is not necessarily indicative of
what the actual financial position would have been had the Company completed the
transactions described above, nor does it purport to represent the future
financial position of the Company.
<TABLE>
<CAPTION>
PRO FORMA
(UNAUDITED) ADJUSTMENTS PRENTISS
PRENTISS --------------------- PROPERTIES
PROPERTIES WILLOW OAKS TRUST
TRUST/(1)/ PROPERTIES AND OTHER PRO FORMA
JUNE 30, 1998 ACQUISITIONS/(2)/ JUNE 30, 1998
-------------- ---------------------- -------------
<S> <C> <C> <C>
Assets:
Real estate, net........................................... $1,542,280 $201,179 $1,819,958
Mortgage note receivable................................... 36,246 36,246
Deferred charges and other assets, net..................... 40,562 40,562
Receivables, net........................................... 17,274 17,274
Cash and cash equivalents.................................. 11,347 11,347
Escrowed cash and deposits on
real estate................................................ 9,612 9,612
Investments in joint venture and unconsolidated
subsidiaries............................................... 11,468 11,468
------------ ---------------------- ------------
Total Assets........................................... $1,668,789 $201,179 $1,869,968
============ ====================== ============
Liabilities:
Debt on real estate........................................ $ 593,913 $200,700 $ 794,613
Accounts payable and other liabilities..................... 47,648 47,648
Other liabilities (affiliates)............................. 5,043 5,043
Distributions payable...................................... 18,225 18,225
------------ ---------------------- ------------
Total Liabilities...................................... 664,829 200,700 865,529
------------ ---------------------- ------------
Minority interest in operating partnership.................... 128,126 479 128,605
------------ ---------------------- ------------
Minority interest in real estate partnership.................. 1,277 1,277
------------ ---------------------- ------------
Shareholders' Equity:
Preferred shares........................................... 100,000 100,000
Common shares.............................................. 399 399
Additional paid-in capital................................. 786,563 786,563
Distributions in excess of accumulated
Earnings................................................... (12,405) (12,405)
------------ ---------------------- ------------
Total Shareholders' Equity............................. 874,557 874,557
------------ ---------------------- ------------
Total Liabilities and Shareholders'
Equity.............................................. $1,668,789 $201,179 $1,869,968
============ ====================== ============
</TABLE>
(1) The acquisition of the Ordway Property was completed on 5/21/98; therefore,
the balance sheet at 6/30/98 included the effect of the acquisition.
(2) The financial information on the Willow Oaks Properties and Other
Acquisitions is presented as if the transaction occurred on June 30, 1998.
The Other Acquisitions include 10 Properties containing 931,000 square feet
and a purchase price totaling approximately $125.2 million.
25
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following unaudited pro forma consolidated statement of income is
presented as if (i) the acquisition of all of the properties acquired in 1997
(the "1997 Acquired Properties"), the acquisition of all of the properties
acquired in 1998 ("the 1998 Acquired Properties") between January 1, 1998 and
the filing date of this form 8-K, and (ii) all of the Company's offerings of
common and preferred shares and operating partnership units during 1997 and 1998
had occurred on January 1, 1997.
This pro forma consolidated statement of income should be read in
conjunction with the pro forma consolidated balance sheet at June 30, 1998
and the pro forma consolidated statement of income of the Company for the six
month period ended June 30, 1998 included elsewhere in this Form 8-K.
The pro forma consolidated statement of income is not necessarily
indicative of what actual results would have been had the previously described
transactions actually occurred as of January 1, 1997 nor does it purport to
represent the operations of the Company for future periods.
<TABLE>
<CAPTION>
(UNAUDITED) PRENTISS
PRENTISS PRO FORMA ADJUSTMENTS PROPERTIES
PROPERTIES -------------------------------------------------- TRUST PRO
TRUST 1997 1998 FORMA
YEAR ENDED ACQUIRED ACQUIRED OTHER YEAR ENDED
DEC. 31, 1997 PROPERTIES/(1)/ PROPERTIES/(2)/ ADJUSTMENTS/(3)/ DEC. 31, 1997
------------- -------------- -------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Rental income.............................. $ 127,089 $ 48,341 $ 73,692 $ 249,122
Mortgage interest.......................... 1,780 1,969 3,749
Management fees............................ 925 925
Development, leasing, sale and
other fees............................... 1,934 1,488 428 3,850
--------- --------- --------- --------- ---------
Total revenues........................... 131,728 51,798 74,120 257,646
--------- --------- --------- --------- ---------
Expenses:
Property operating and
maintenance.............................. 30,602 15,060 19,207 (3,451) 61,418
Real estate taxes.......................... 13,742 4,471 7,997 26,210
General and administrative................. 3,141 3,141
Personnel costs, net....................... 3,478 3,478
Interest expense........................... 21,131 31,069 52,200
Amortization of deferred financing
costs.................................... 824 824
Depreciation and amortization.............. 21,600 24,344 45,944
--------- --------- --------- --------- ---------
Total expenses........................... 94,518 19,531 27,204 51,962 193,215
--------- --------- --------- --------- ---------
Equity in income of joint venture
and unconsolidated subsidiaries............ 5,208 5,208
--------- --------- --------- --------- ---------
Income before gain on sale and
minority interest.......................... 42,418 32,267 46,916 (51,962) 69,639
Gain on sale.................................. 641 (641)
Minority interest............................. (5,235) (5,039) (10,274)
--------- --------- --------- --------- ---------
Income before extraordinary item.............. 37,824 32,267 46,916 (57,642) 59,365
Extraordinary item............................ (878) 878
--------- --------- --------- --------- ---------
Net income.................................... $ 36,946 $ 32,267 $ 46,916 $ (56,764) $ 59,365
Preferred dividends........................... (25) (6,013) (6,038)
--------- --------- --------- --------- ---------
Net income attributable to common
shareholders............................... $ 36,921 $ 32,267 $ 46,916 $ (62,777) $ 53,327
========= ========= ========= ========= =========
Net income per common share-before
extraordinary item......................... $ 1.52 $ 1.34
Extraordinary item............................ (0.04)
--------- ---------
Net income per common share-basic............. $ 1.48 $ 1.34
========= =========
Weighted average number of
shares outstanding......................... 24,930 39,905
========= =========
Net income per common share-before
extraordinary item......................... $ 1.49 $ 1.32
Extraordinary item............................ (0.03)
--------- ---------
Net income per common share-diluted........... $ 1.46 $ 1.32
========= =========
Weighted average common shares
outstanding................................ 25,307 40,282
========= =========
</TABLE>
26
<PAGE>
(1) During 1997, the Company acquired 66 properties containing approximately
6.8 million square feet for an approximate purchase price of $650 million.
The financial information of the 1997 Acquired Properties reflects the
historical revenues and certain operating expenses of the properties for
the portion of the period prior to acquisition.
(2) During 1998, the Company has acquired 84 Properties containing
approximately 5.0 million square feet for an approximate purchase price of
$562.6 million. The financial information of the 1998 Acquired Properties
reflects the historical revenues and certain operating expenses of the
properties for the period presented.
(3) The Other Adjustments reflect the adjustments that Management considers
necessary to present the revenues and expenses of the Company related to
the ownership and operations of the 1997 Acquired Properties and the 1998
Acquired Properties as if the acquisitions had occurred on January 1, 1997.
27
<PAGE>
PRENTISS PROPERTIES TRUST
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following unaudited pro forma consolidated statement of income is
presented as if (i) all of the acquisitions of properties during 1998 through
the filing date of this Form 8-K, (collectively, the "1998 Acquired Properties")
and (ii) all of the Company's offerings of common and preferred shares and
operating partnership units during 1998 had occurred on January 1, 1997.
This pro forma consolidated statement of income should be read in
conjunction with the pro forma consolidated balance sheet at June 30, 1998 and
the pro forma consolidated statement of income of the Company year ended
December 31, 1997 included elsewhere in this Form 8-K.
The pro forma consolidated statement of income is not necessarily
indicative of what actual results would have been had the previously described
transactions actually occurred as of January 1, 1997 nor does it purport to
represent the operations of the Company for future periods.
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
-----------------------------------
(UNAUDITED) PRENTISS
PRENTISS PROPERTIES TRUST
PROPERTIES TRUST PRO FORMA
SIX MONTHS ENDED 1998 ACQUIRED OTHER SIX MONTHS ENDED
JUNE 30, 1998 PROPERTIES/(1)/ ADJUSTMENTS/(2)/ JUNE 30, 1998
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Rental income ..................... $ 103,939 $ 28,567 $ 132,506
Mortgage interest ................. 1,920 1,920
Management fees ................... 490 490
Development, leasing, sale and
other fees........................ 473 214 687
---------------- ---------------- ---------------- ----------------
Total revenues .................. 106,822 28,781 135,603
---------------- ---------------- ---------------- ----------------
Expenses:
Property operating and maintenance 23,581 6,770 30,351
Real estate taxes ................. 11,268 3,669 14,937
General and administrative ........ 2,131 2,131
Personnel costs, net .............. 1,748 1,748
Interest expense .................. 16,679 9,421 26,100
Amortization of deferred financing
costs ........................... 396 396
Depreciation and amortization ..... 18,159 4,813 22,972
---------------- ---------------- ---------------- ----------------
Total expenses .................. 73,962 10,439 14,234 98,635
Equity in joint venture and
unconsolidated subsidiaries........ 2,950 2,950
---------------- ---------------- ---------------- ----------------
Income before gain on sale and
minority interest ................. 35,810 18,342 (14,234) 39,318
Gain on sale ......................... 3,824 (3,824)
Minority interest .................... (2,179) (3,178) (5,357)
---------------- ---------------- ---------------- ----------------
Income before extraordinary item ..... 37,455 18,342 (21,236) 34,561
Extraordinary item ................... (8,908) 8,908
---------------- ---------------- ---------------- ----------------
Net income ........................... $ 28,547 $ 18,342 $ (12,328) $ 34,561
Preferred dividends .................. (2,641) (378) (3,019)
---------------- ---------------- ---------------- ----------------
Net income attributable to common
shareholders ...................... $ 25,906 $ 18,342 $ (12,706) $ 31,542
================ ================ ================ ================
Net income per common share before
extraordinary item - basic ........ $ 0.91 $ 0.79
Extraordinary item.................... (0.23)
---------------- ----------------
Net income per common share - basic .. $ 0.68 $ 0.79
================ ================
Weighted average number of shares
outstanding........................ 38,340 39,905
================ ================
Net income per common share before
extraordinary item - diluted ...... $ 0.83 $ 0.78
Extraordinary item ................... (0.21)
---------------- ----------------
Net income per common share -
diluted ........................... $ 0.62 $ 0.78
================ ================
Weighted average number of
shares outstanding ................ 41,992 40,247
================ ================
</TABLE>
28
<PAGE>
(1) The financial information of the 1998 Acquired Properties reflects the
historical revenues and certain operating expenses of the properties for
the portion of the six month period ended June 30, 1998 prior to
acquisition.
(2) The Other Adjustments reflect the adjustments that Management considers
necessary to present the revenues and expenses of the Company related to
the ownership and operations of the 1998 Acquired Properties as if the
acquisitions had occurred on January 1, 1997.
29
<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: January 25, 1999 By: /s/ THOMAS P. SIMON
---------------------------------------------
Thomas P. Simon
(Vice President and Chief Accounting Officer)
30
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. Description
- ----------- -----------
23.1 Consent of PricewaterhouseCoopers LLP.
31
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration
statements of Prentiss Properties Trust on Form S-3 (File Nos. 333-38079,
333-49295, 333-49433, and 333-60785) and Form S-8 (File No. 333-20329) of our
reports dated (i) September 30, 1998 on our audit of the combined statement of
revenues and certain operating expenses of the Willow Oaks Properties and (ii)
August 12, 1998 on our audit of the statement of revenues and certain operating
expenses of the Ordway Property, all of which reports are included in this
Current Report on Form 8-K/A.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
January 25, 1999
