<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14516
PRENTISS PROPERTIES TRUST
(Exact name of registrant as specified in its charter)
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<S> <C>
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 Offices) (Zip Code)
</TABLE>
(214) 654-0886
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of each class Name of each exchange on which registered
------------------ -----------------------------------------
<S> <C>
Common Shares of Beneficial Interest, New York Stock Exchange, Inc.
par value $.01 per share
Preferred Share Purchase Rights New York Stock Exchange, Inc.
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of class)
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 reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, as of March 17, 2000, was approximately $682,758,736.
As of March 17, 2000, the number of Common Shares of Beneficial Interest
outstanding was 36,073,247, and the number of outstanding Participating
Cumulative Redeemable Preferred Shares of Beneficial Interest, Series A, was
3,773,585.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates by reference the Company's Definitive Proxy Statement
to be filed with respect to the Annual Meeting of Shareholders to be held on May
10, 2000.
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PRENTISS PROPERTIES TRUST
INDEX
<TABLE>
<CAPTION>
Form 10-K
Report
Item No. Page
- -------- ---------
<S> <C>
Forward-Looking Statements.................................................................... 3
PART I
1. Business................................................................................ 3
2. Properties.............................................................................. 7
3. Legal Proceedings....................................................................... 12
4. Submission of Matters to a Vote of Security Holders..................................... 13
PART II
5. Market for Registrant's Common Equity and Related Shareholder Matters.................. 14
6. Selected Financial and Operating Data.................................................. 16
7. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 19
7A. Quantitative and Qualitative Disclosures About Market Risk............................. 40
8. Financial Statements and Supplementary Data............................................ 41
9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure... 41
PART III
10. Trustees and Executive Officers of the Company......................................... 42
11. Executive Compensation................................................................. 42
12. Security Ownership of Certain Beneficial Owners and Management......................... 42
13. Certain Relationships and Related Transactions......................................... 42
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K....................... 43
</TABLE>
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FORWARD-LOOKING STATEMENTS
This Form 10-K and the documents incorporated by reference herein may
contain 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-K, words such as "anticipate," "believe," "estimate," "expect,"
"intend," "predict," "project," and similar expressions, as they relate to us or
our management, identify forward-looking statements. Such forward-looking
statements are based on the beliefs of our management as well as assumptions
made by and information currently available to us. These forward-looking
statements are subject to certain risks, uncertainties and assumptions,
including risks, uncertainties and assumptions related to the following:
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<S> <C>
. the geographic concentration of our properties; . conflicts of interest;
. our real estate acquisition, redevelopment, . change in our investment, financing and borrowing
development and construction activities; policies without shareholder approval;
. operating performance of properties; . our dependence on key personnel;
. our incurrence of debt; . our 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.
. our failure to qualify as a 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 our current views with respect to future events and are subject to these
and other risks, uncertainties and assumptions, relating to our operations,
results of 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. You should
specifically consider the various factors identified in this Form 10-K and the
documents incorporated by reference herein, which could cause actual results to
differ.
PART I
Item 1. Business
Overview
The Company is a Maryland real estate investment trust ("REIT") that
acquires, owns, manages, leases, develops and builds primarily office 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 December 31, 1999 the
Company owned interests in a diversified portfolio of 199 primarily suburban
Class A office and suburban industrial properties containing approximately 19.8
million net rentable square feet. The properties consist of 133 office buildings
(the "Office Properties") containing approximately 14.9 million net rentable
square feet and 66 industrial buildings (the "Industrial Properties" and
together with the Office Properties, the "Properties") containing approximately
4.9 million net rentable square feet. The Properties include 10 Office
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Properties containing 1.0 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"). As of December 31, 1999, the
Office Properties and Industrial Properties, exclusive of the Development
Properties, were approximately 95% leased to approximately 1,200 tenants and
approximately 97% leased to approximately 150 tenants, respectively. In addition
to managing the Properties that the Company owns or has ownership interest in,
the Company manages approximately 25.3 million net rentable square feet in
office, industrial and other properties that are owned by third parties.
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 Company's Properties are located in 12 core markets and two other
markets which are included in the Company's reportable segments as follows:
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<CAPTION>
Reportable Segment Market
- ------------------ ------
<S> <C>
Mid-Atlantic Metropolitan Washington, D.C.
Midwest Chicago, Suburban Detroit
Northeast Suburban Philadelphia
Southeast Atlanta
Southwest Austin, Dallas/Fort Worth, Denver, Houston
West Arizona, Los Angeles, Sacramento, San Diego, San Francisco Bay Area
</TABLE>
For revenues, profit and loss, and total asset information on each of the
Company's segments, see Note (19) to the Company's Consolidated Financial
Statements.
Business and Growth Strategies
The Company's primary objective is to maximize shareholder value through
increases in distributable cash flow per share and appreciation in the value of
the common shares. The Company intends to achieve this objective through a
combination of external and internal growth, while maintaining a conservative
balance sheet and pursuing a strategy of financial flexibility.
External Growth
Development
The Company intends to capitalize on its development capabilities by
selectively developing (and redeveloping) properties in markets with favorable
current and projected long-term demographic characteristics and supply-demand
imbalances. The Company controls all aspects of the development process,
including site selection, project concept, design and construction, financing,
leasing and property management. The Company intends to continue developing
primarily office properties on a build-to-suit basis, but it will also consider
selective opportunities for speculative development, when appropriate. During
the year ended December 31, 1999, the Company completed construction of seven
Office Properties and one Industrial Property containing 877,000 and 112,000
square feet, respectively, that were leased and phased into operations. In
addition, the Company began development of 439,000 net rentable square feet of
Office Properties during the year. The following tables present the development
completions and development starts during 1999:
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<TABLE>
<CAPTION>
Number of Net Rentable
Development Completions Market Segment Buildings Type Square Feet/(1)/
- ----------------------- ------ ------- --------- ---- ----------------
(in thousands)
<S> <C> <C> <C> <C> <C>
225 N. Fairway Drive Chicago Midwest 1 Industrial 112
2500 Cumberland Parkway Atlanta Southeast 1 Office 143
3130 Fairview Park Drive Metro. Washington, DC Mid-Atlantic 1 Office 183
Bannockburn Centre Chicago Midwest 1 Office 257
Executive Center Del Mar San Diego West 2 Office 113
Millennium Center Dallas/Fort Worth Southwest 1 Office 90
Seven Mile Crossing Building C Suburban Detroit Midwest 1 Office 91
- ---
Total 8 989
= ===
Development Starts
- ------------------
1247 Ward Avenue Suburban Philadelphia Northeast 1 Office 27
Barton Skyway II Austin Southwest 1 Office 195
Del Mar Gateway San Diego West 1 Office 164
Oaklands 21/27/(2)/ Suburban Philadelphia Northeast 2 Office 53
- ---
Total 5 439
= ===
</TABLE>
/(1)/ The area of a Property for which a tenant is required to pay rent, which
includes the actual rentable area plus a portion of the common areas of
the Property allocated to a tenant.
/(2)/ The Company has a 60% joint venture interest in these Properties. The
net rentable square feet presented above represent 100% of the
Properties square footage since the Company has an option to acquire the
remaining 40% joint venture interest.
Acquisitions
In addition to development opportunities, the Company invests opportunistically,
pursuing assets that are:
. managed by the Company or owned by the Company's existing management clients
which become available for sale;
. performing at a level believed to be substantially below potential due to
identifiable management weaknesses or temporary market conditions;
. encumbered by indebtedness that is in default or is not performing;
. held or controlled by short-term owners (such as assets held by insurance
companies and financial institutions under regulatory pressure to sell); or
. properties with below market leases which may be re-leased in the near term
to improve cash flow.
The Company believes it is particularly well-positioned to acquire properties
because of its:
. presence in and knowledge of its 12 core markets and two other markets
across the United States through a diversified base of approximately 2,800
tenants and existing relationships with 61 different management clients;
. access to capital as a public company, including its credit facilities;
. reputation as a buyer with the ability to execute complicated transactions;
. fully-integrated operations which allow rapid response to opportunities;
. UPREIT structure, which may allow sellers to defer tax consequences on sale;
and
. relationships with real estate brokers, institutional owners, and third-
party management clients, which often allow preferential access to
opportunities.
In evaluating potential acquisition opportunities, the Company relies on the
experience of its employees and on its internal research capabilities in
considering a number of factors, including:
. macro-economic issues that impact the market in which the property is
located;
. location and competition in the property's market;
. occupancy of and demand for properties of a similar type in the same market;
. the construction quality and condition of the property;
. the potential for increased cash flow after benefiting from the Company's
renovations, refurbishment and upgrades;
. purchase price relative to replacement costs; and
5
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. the potential to generate revenue growth at or above levels of economic
growth in the property's market. Further, the Company believes its
development expertise enables it to identify the potential for improvement
in an acquisition opportunity, which might not be apparent to a buyer
without similar expertise.
During the year ended December 31, 1999, the Company acquired six
Properties. The following table sets forth the market, Company segment, month
of acquisition, number of buildings, building type, net rentable square feet and
purchase price of the Properties the Company acquired in 1999 ("Acquired
Properties"). See "Item 2. Properties" for additional information relating to
the Company's Properties.
<TABLE>
<CAPTION>
Month of Number of Net Rentable Purchase
Acquired Properties Market Segment Acquisition Buildings Type Square Feet/(1)/ Price
- ------------------- ------ ------- ------------- ---------- ---- ------------- -------------
(in thousands) (in millions)
<S> <C> <C> <C> <C> <C> <C> <C>
123 North Wacker Drive Chicago Midwest November 1999 1 Office 537 $ 87.3
935 First Avenue Suburban Philadelphia Northeast October 1999 1 Office 119 5.0
Burnett Plaza/(2)/ Dallas/Fort Worth Southwest March 1999 1 Office 205 17.6
Fairmont Building Metro. Washington, DC Mid-Atlantic November 1999 1 Office 122 21.2
Orchard Place I & II Denver Southwest July 1999 2 Office 105 9.8
- ----- ------
Total Acquired Properties 6 1,088 $140.9
= ===== ======
</TABLE>
/(1)/ The area of a Property for which a tenant is required to pay rent, which
includes the actual rentable area plus a portion of the common areas of
the Property allocated to a tenant.
/(2)/ The Company acquired a 20% joint venture interest in this Property. The
net rentable square feet and purchase price presented above represents
the Company's proportionate share of the Property.
Internal Growth
The Company seeks to maximize the profitability of the Properties by
renewing leases, maintaining high occupancy rates, increasing rental revenues,
and reducing operating costs.
The Company strives to achieve increases in rental revenues by negotiating
leases that include increases in rent during the lease term, by replacing
expiring leases with new leases at higher rental rates and by improving
occupancy rates. The Company also seeks to renew existing leases, which reduces
the costs of lease rollovers, reduces rental revenue fluctuations and enhances
long-term relationships with national tenants that may have space needs in the
Company's other markets.
The Company strives to achieve reductions in operating costs by performing
many functions (e.g., engineering, tax and legal) in-house instead of hiring
third parties and by employing benchmarking and best practices methodologies.
The Company's benchmarking program compares operating costs and efficiencies of
each Property with other Company Properties and with other office and industrial
properties. Under the program, the Company conducts periodic evaluations of key
performance indicators at each building and compares the results to a variety of
benchmarks (e.g., specific buildings, portfolios, regions and the industry).
The Company's best practices methodology involves continuously analyzing
benchmarking data, investigating Properties that perform better than the norm
and regularly disseminating and sharing information with respect to the best
practices employed at the better performing Properties throughout the Company's
management system. By employing these methodologies, the Company believes that
it can continue to capitalize on opportunities to reduce operating costs and
operate the Properties more efficiently and effectively.
The Company uses centralized cash management, national alliances with
service providers, a sophisticated budgeting system and state-of-the-art
information systems to improve efficiency and increase profits. Training is
provided through Prentiss Properties University, a Company-wide professional
training program which helps to integrate new operations during periods of rapid
expansion, communicate new technology and procedures, and reduce turnover.
Asset managers in each region develop a strategy and market positioning for
each Property. Each Property is evaluated using sophisticated valuation
software to determine the overall effect of property-level decisions such as
6
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lease structures and capital expenditures on asset value. Asset managers also
work with property managers and engineers to determine where improvements, such
as lighting retrofits and energy management system upgrades, will maximize
returns.
Third-Party Management
At December 31, 1999, the Company managed 216 office, industrial and other
properties for 61 third-party management clients. These properties are located
throughout the United States, contain approximately 25.3 million net rentable
square feet and are leased to over 1,400 tenants.
The Company's management business serves a broad base of clients, including
major financial institutions and pension funds, large corporate users, real
estate advisory firms and real estate investment groups. In addition to
property management and leasing, the Company offers its clients a full range of
fee-based services, including tenant construction, leasing, insurance,
accounting, tax, acquisition, disposition, facilities management, and corporate
and asset management services.
Financing Strategy
As of December 31, 1999, the Company had outstanding total indebtedness,
including its pro rata share of joint venture debt and construction loans, of
approximately $983.2 million, or approximately 48.1% of total market
capitalization based on a common share price of $21.375 per common share. As of
March 17, 2000, the Company had the approximate capacity to borrow up to an
additional $2.6 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. 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 year ended December 31, 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 3.02 and 2.65 times, respectively.
Item 2. Properties
At December 31, 1999, the Company owned an interest in 199 Properties
totaling 19.8 million square feet with no individual Property representing 10%
or more of the Company's total assets at December 31, 1999 or gross revenues for
the year ended December 31, 1999. The Properties consist of 133 Office
Properties comprising approximately 14.9 million net rentable square feet and 66
Industrial Properties comprising approximately 4.9 million net rentable square
feet. All of the Properties are wholly-owned by the Company (through its
subsidiaries), except (i) the Broadmoor Austin Properties, which are held
pursuant to a 100% leasehold interest by a joint venture in which the Company
owns an approximate 50% non-controlling interest; (ii) the Burnett Plaza
Property, which is owned by a joint venture in which the Company owns a 20% non-
controlling joint venture interest; (iii) the Oaklands 21/27 Development
Properties, which are owned by a joint venture in which the Company owns a 60%
non-controlling joint venture interest; (iv) One Northwestern Plaza, in which
the Company owns a 100% leasehold interest; (v) the Seven Mile Crossing
Properties, in which the Company owns a 100% leasehold interest; and (vi) the
6600 Rockledge Drive Property, in which the Company also owns a 100% leasehold
interest.
7
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Properties
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<CAPTION>
Year(s)
Building Built/ Number of
Property Name Type Market Renovated Buildings
- ------------- ---- ------ --------- ---------
<S> <C> <C> <C> <C>
2411 Dulles Corner Road Office Metro. Wash., DC 1990 1
2455 Horsepen Road Office Metro. Wash., DC 1989 1
3130 Fairview Park Drive Office Metro. Wash., DC 1999 1
3141 Fairview Park Drive Office Metro. Wash., DC 1988 1
4401 Fair Lakes Court Office Metro. Wash., DC 1988 1
6600 Rockledge Drive Office Metro. Wash., DC 1981 1
7101 Wisconsin Avenue Office Metro. Wash., DC 1975 1
8521 Leesburg Pike Office Metro. Wash., DC 1984 1
Calverton Office Park Office Metro. Wash., DC 1981-1987 3
Fairmont Building Office Metro, Wash., DC 1964/1997 1
Research Office Center Office Metro. Wash., DC 1986-1990 2
Research Office Center III Office Metro. Wash., DC (A) 1
Willow Oaks I & II Office Metro. Wash., DC 1986-1989 2
Metro. Wash., DC Industrial Industrial Metro. Wash., DC 1974-1989 7
---
Total Mid-Atlantic Region 24
---
123 North Wacker Drive Office Chicago 1986 1
1717 Deerfield Road Office Chicago 1985 1
1800 Sherman Avenue Office Chicago 1986 1
701 Warrenville Road Office Chicago 1988 1
Bannockburn Centre Office Chicago 1999 1
Corporetum Office Campus Office Chicago 1984-1987 5
O'Hare Plaza II Office Chicago 1986 1
One O'Hare Centre Office Chicago 1984 1
Chicago Industrial Industrial Chicago 1987-1999 6
One Northwestern Plaza Office Sub. Detroit 1989 1
Seven Mile Crossing Office Sub. Detroit 1988-1999 3
---
Total Midwest Region 22
---
1247 Ward Avenue Office Sub. Philadelphia (A) 1
935 First Avenue Office Sub. Philadelphia 1964 1
Centerpointe Office Sub. Philadelphia 1987 1
Creamery Way Office Sub. Philadelphia 1988-1996 3
Croton Road Corporate Center Office Sub. Philadelphia (A) 1
Lake Center Office Sub. Philadelphia 1986-1989 2
Oaklands 21/27/(B)/ Office Sub. Philadelphia (A) 2
Oaklands Corporate Center Office Sub. Philadelphia 1988-1997 7
Pencader Courtyards Office Sub. Philadelphia 1990 2
Southpoint Office Sub. Philadelphia 1986-1997 4
Valleybrooke Office Sub. Philadelphia 1984-1988 5
Woodland Falls Office Sub. Philadelphia 1986-1989 3
---
Total Northeast Region 32
---
Crescent Centre Office Atlanta 1986 1
Cumberland Office Park Office Atlanta 1972-1999 10
---
Total Southeast Region 11
---
Barton Skyway I Office Austin (A) 1
Barton Skyway II Office Austin (A) 1
Broadmoor Austin/(C)/ Office Austin 1991 7
Spyglass Point Office Austin (A) 1
Bachman East Office Dallas/Fort Worth 1986 1
<CAPTION>
Net Total Base Rent Percent
Rentable for Leased
Square Year Ended As of
Feet/(E)/ 12/31/99 12/31/999
--------- -------- ---------
(in thousands) (in thousands)
<S> <C> <C> <C>
2411 Dulles Corner Road 177 $ 3,753 100
2455 Horsepen Road 104 2,419 95
3130 Fairview Park Drive 183 4,577 100
3141 Fairview Park Drive 192 2,680 94
4401 Fair Lakes Court 59 1,078 95
6600 Rockledge Drive 156 3,611 100
7101 Wisconsin Avenue 237 5,102 96
8521 Leesburg Pike 145 3,008 99
Calverton Office Park 307 5,468 86
Fairmont Building 122 402 98
Research Office Center 286 5,793 100
Research Office Center III 148 100
Willow Oaks I & II 387 8,082 100
Metro. Wash., DC Industrial 875 3,556 93
------ --------
Total Mid-Atlantic Region 3,378 49,529
------ --------
123 North Wacker Drive 537 1,182 100
1717 Deerfield Road 138 2,390 100
1800 Sherman Avenue 136 3,342 100
701 Warrenville Road 67 875 100
Bannockburn Centre 257 1,508 100
Corporetum Office Campus 324 5,326 99
O'Hare Plaza II 234 5,942 94
One O'Hare Centre 380 5,837 94
Chicago Industrial 930 3,147 100
One Northwestern Plaza 242 4,839 94
Seven Mile Crossing 336 5,948 98
------ --------
Total Midwest Region 3,581 40,336
------ --------
1247 Ward Avenue 27 0
935 First Avenue 119 91 100
Centerpointe 42 716 90
Creamery Way 141 1,419 100
Croton Road Corporate Center 97 1,280 98
Lake Center 117 2,184 86
Oaklands 21/27/(B)/ 53 33
Oaklands Corporate Center 348 3,020 84
Pencader Courtyards 53 585 100
Southpoint 250 4,962 100
Valleybrooke 280 5,051 100
Woodland Falls 215 3,867 94
------ --------
Total Northeast Region 1,742 23,175
------ --------
Crescent Centre 243 3,116 78
Cumberland Office Park 673 9,329 95
------ --------
Total Southeast Region 916 12,445
------ --------
Barton Skyway I 195 1,030 99
Barton Skyway II 195 70
Broadmoor Austin/(C)/ 556 100
Spyglass Point 58 371 100
Bachman East 126 1,975 100
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
Bachman West Office Dallas/Fort Worth 1986 1
Burnett Plaza/(D)/ Office Dallas/Fort Worth 1983 1
Cottonwood Office Center Office Dallas/Fort Worth 1986 3
IBM Call Center Office Dallas/Fort Worth 1998 1
Lakeview Center Office Dallas/Fort Worth (A) 1
Millennium Center Office Dallas/Fort Worth 1999 1
Park West C2 Office Dallas/Fort Worth 1989 1
Park West E1 Office Dallas/Fort Worth 1982 1
Park West E2 Office Dallas/Fort Worth 1985 1
Walnut Glen Tower Office Dallas/Fort Worth 1985 1
WestPoint Office Building Office Dallas/Fort Worth 1998 1
Dallas Industrial Industrial Dallas/Fort Worth 1970-1987 8
Carrara Place Office Denver 1982 1
Highland Court Office Denver 1986 1
Orchard Place I & II Office Denver 1980 2
PacifiCare Building Office Denver 1983 1
Panorama Point Office Denver 1983 1
14425 Torrey Chase Office Houston 1982/1989 1
14505 Torrey Chase Office Houston 1982/1993 1
7575 San Felipe Office Houston 1976 1
International Energy Center Office Houston 1982/1990 1
Northchase Place Office Houston 1982/1989 1
One Westchase Center Office Houston 1982 1
Westheimer Central Plaza Office Houston 1982 1
---
Total Southwest Region 45
---
Arizona Industrial Industrial Arizona 1987 7
The Academy Office Los Angeles 1991 3
Los Angeles Industrial Industrial Los Angeles 1973-1992 23
Natomas Corporate Center Office Sacramento 1984-1991 6
Carlsbad Pacific Center Office San Diego 1986-1989 2
Carlsbad Pacifica Office San Diego 1986 1
Del Mar Gateway Office San Diego (A) 1
Executive Center Del Mar Office San Diego 1998 2
Plaza I & II Office San Diego 1988-1989 2
The Campus Office San Diego 1988 1
San Diego Industrial Industrial San Diego 1981-1988 9
The Ordway Office San Francisco Bay Area 1970 1
World Savings Center Office San Francisco Bay Area 1985 1
San Francisco Bay Area Industrial San Francisco Bay Area 1973-1988 6
Industrial ---
Total West Region 65
---
Total Properties 199
===
<CAPTION>
<S> <C> <C> <C>
Bachman West 70 1,097 100
Burnett Plaza/(D)/ 205 71
Cottonwood Office Center 164 2,462 100
IBM Call Center 150 2,172 100
Lakeview Center 101 682 79
Millennium Center 90 380 100
Park West C2 349 8,304 99
Park West E1 183 3,125 100
Park West E2 201 2,398 96
Walnut Glen Tower 464 6,899 91
WestPoint Office Building 150 3,460 100
Dallas Industrial 664 2,376 95
Carrara Place 235 3,841 71
Highland Court 99 1,442 100
Orchard Place I & II 105 698 91
PacifiCare Building 201 3,547 100
Panorama Point 79 1,403 100
14425 Torrey Chase 54 564 89
14505 Torrey Chase 67 695 93
7575 San Felipe 53 627 89
International Energy Center 156 1,456 87
Northchase Place 68 701 93
One Westchase Center 466 7,610 94
Westheimer Central Plaza 181 2,318 91
------ --------
Total Southwest Region 5,685 61,633
------ --------
Arizona Industrial 139 847 96
The Academy 194 3,749 91
Los Angeles Industrial 1,554 7,369 99
Natomas Corporate Center 566 12,369 98
Carlsbad Pacific Center 90 1,724 94
Carlsbad Pacifica 49 879 88
Del Mar Gateway 164 83
Executive Center Del Mar 113 2,826 100
Plaza I & II 89 1,861 98
The Campus 45 738 80
San Diego Industrial 359 3,175 84
The Ordway 531 12,547 97
World Savings Center 271 6,798 99
San Francisco Bay Area 382 2,438 100
Industrial ------ --------
Total West Region 4,546 57,320
------ --------
Total Properties 19,848 244,438
====== ========
</TABLE>
/(A)/ Represents Properties in various stages of development or Properties
that have been recently developed by the Company and are in various
stages of lease-up. See "Item 1. Business - Business and Growth
Strategies" for further disclosure on the Company's Development
Properties.
/(B)/ The Company holds a non-controlling, 60% interest in the Oakland 21
and 27 Joint Ventures ("Oaklands 21/27"). Oaklands 21/27 consist of
two Development Properties. The Company accounts for its interest
using the equity method of accounting.
/(C)/ The Company holds a non-controlling, 50% interest in the Broadmoor
Austin Associates Joint Venture ("Broadmoor Austin"). Broadmoor
Austin owns and operates an office complex in Austin, Texas,
consisting of seven Properties. The Company accounts for its
interest using the equity method of accounting.
/(D)/ The Company holds a non-controlling, 20% interest in the Burnett
Plaza Associates Joint Venture in Fort Worth, Texas. The Company
accounts for its interest using the equity method of accounting.
/(E)/ The area of a Property for which a tenant is required to pay rent,
which includes the actual rentable area plus a portion of the common
areas of the Property allocated to a tenant.
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At December 31, 1999, the Company's 199 Properties were subject to existing
mortgage indebtedness totaling $983.2 million which includes the Company's pro
rata share of joint venture debt. See "Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" for a discussion of mortgage debt related to the Properties.
The Company's Properties are leased by numerous tenants pursuant to
operating leases ranging, on average, from three to seven years in length. The
following table sets forth a 10-year schedule of the operating Properties lease
expirations for leases in place as of December 31, 1999.
<TABLE>
<CAPTION>
Office Properties 2000 2001 2002 2003 2004 2005
- ----------------- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Atlanta Square Feet Expiring (000's) 91 75 112 207 180 76
Square Feet as a % of NRA 10% 8% 12% 23% 20% 8%
Annualized Base Rent in Expiring
Year (000's) $1,410 $ 1,227 $2,061 $ 3,820 $ 3,715 $1,578
Annualized Base Rent PSF in
Expiring Year $15.49 $ 16.36 $18.40 $ 18.45 $ 20.64 $20.76
Number of Leases Expiring 27 24 28 17 18 2
Austin, Dallas/Fort Square Feet Expiring (000's) 384 382 424 527 556 402
Worth, Denver, Square Feet as a % of NRA 9% 9% 9% 12% 12% 9%
Houston Annualized Base Rent in Expiring
Year (000's) $5,713 $ 5,825 $6,949 $10,835 $ 9,737 $7,170
Annualized Base Rent PSF in
Expiring Year $14.88 $ 15.25 $16.39 $ 20.56 $ 17.51 $17.84
Number of Leases Expiring 91 75 74 49 44 18
Metro. Washington, Square Feet Expiring (000's) 145 264 231 203 553 162
D.C. Square Feet as a % of NRA 6% 11% 10% 9% 23% 7%
Annualized Base Rent in Expiring
Year (000's) $3,122 $ 4,944 $5,230 $ 4,824 $12,012 $3,945
Annualized Base Rent PSF in
Expiring Year $21.53 $ 18.73 $22.64 $ 23.76 $ 21.72 $24.35
Number of Leases Expiring 28 31 21 20 25 4
Suburban Square Feet Expiring (000's) 324 152 169 158 209 92
Philadelphia Square Feet as a % of NRA 21% 10% 11% 10% 13% 6%
Annualized Base Rent in Expiring
Year (000's) $3,942 $ 2,267 $2,600 $ 2,914 $ 3,799 $2,145
Annualized Base Rent PSF in
Expiring Year $12.17 $ 14.91 $15.38 $ 18.44 $ 18.18 $23.32
Number of Leases Expiring 23 17 16 18 17 15
Chicago, Square Feet Expiring (000's) 238 773 231 558 295 71
Suburban Detroit Square Feet as a % of NRA 9% 29% 9% 21% 11% 3%
Annualized Base Rent in Expiring
Year (000's) $4,294 $15,349 $5,385 $11,769 $ 7,257 $1,506
Annualized Base Rent PSF in
Expiring Year $18.04 $ 19.86 $23.31 $ 21.09 $ 24.60 $21.21
Number of Leases Expiring 49 42 25 35 42 7
Arizona, Los Square Feet Expiring (000's) 208 283 121 254 261 189
Angeles,
Sacramento, San Square Feet as a % of NRA 11% 15% 6% 13% 13% 10%
Diego, San Francisco Annualized Base Rent in Expiring
Bay Area Year (000's) $4,763 $ 6,227 $2,780 $6,294 $ 5,906 $4,272
Annualized Base Rent PSF in
Expiring Year $22.90 $ 22.00 $22.98 $24.78 $ 22.63 $22.60
Number of Leases Expiring 54 50 36 34 36 9
<CAPTION>
Office Properties 2006 2007 2008 2009 Thereafter
- ----------------- ---- ---- ---- ---- ----------
<S> <C> <C> <C> <C> <C>
Atlanta Square Feet Expiring (000's) 24 61 3 0 0
Square Feet as a % of NRA 3% 7% 0% 0% 0%
Annualized Base Rent in Expiring
Year (000's) $ 602 $1,475 $ 30 $0 $ 0
Annualized Base Rent PSF in
Expiring Year $25.08 $24.18 $10.00 $ 0.00 $ 0.00
Number of Leases Expiring 1 2 2 0 0
Austin, Dallas/Fort Square Feet Expiring (000's) 197 229 150 449 489
Worth, Denver, Square Feet as a % of NRA 4% 5% 3% 10% 11%
Houston Annualized Base Rent in Expiring
Year (000's) $3,741 $4,548 $2,232 $10,034 $10,106
Annualized Base Rent PSF in
Expiring Year $19.04 $19.86 $14.88 $ 22.35 $ 20.65
Number of Leases Expiring 6 7 1 8 7
Metro. Washington, Square Feet Expiring (000's) 338 259 1 30 95
D.C. Square Feet as a % of NRA 14% 11% 0% 1% 4%
Annualized Base Rent in Expiring
Year (000's) $8,509 $6,077 $ 13 $ 918 $ 3,134
Annualized Base Rent PSF in
Expiring Year $25.17 $23.46 $13.00 $ 30.60 $ 32.99
Number of Leases Expiring 10 10 1 2 2
Suburban Square Feet Expiring (000's) 41 94 55 19 162
Philadelphia Square Feet as a % of NRA 3% 6% 4% 1% 10%
Annualized Base Rent in Expiring
Year (000's) $ 840 $1,273 $1,377 $ 405 $ 3,694
Annualized Base Rent PSF in
Expiring Year $20.49 $13.54 $25.04 $ 21.32 $ 22.80
Number of Leases Expiring 3 3 3 1 3
Chicago, Square Feet Expiring (000's) 50 31 10 47 288
Suburban Detroit Square Feet as a % of NRA 2% 1% 0% 2% 11%
Annualized Base Rent in Expiring
Year (000's) $1,329 $ 742 $ 311 $ 1,257 $ 6,929
Annualized Base Rent PSF in
Expiring Year $26.58 $23.94 $31.10 $ 26.74 $ 24.06
Number of Leases Expiring 5 2 1 1 5
Arizona, Los Square Feet Expiring (000's) 33 188 20 95 223
Angeles,
Sacramento, San Square Feet as a % of NRA 2% 10% 1% 5% 11%
Diego, San Francisco Annualized Base Rent in Expiring
Bay Area Year (000's) $ 928 $5,098 $ 572 $ 2,287 $ 7,237
Annualized Base Rent PSF in
Expiring Year $28.12 $27.12 $28.60 $ 24.07 $ 32.45
Number of Leases Expiring 4 4 2 1 1
</TABLE>
10
<PAGE>
<TABLE>
<S>
Total Office Square Feet Expiring (000's) 1,390 1,929 1,288 1,907 2,054 992
Properties Square Feet as a % of NRA 10% 14% 9% 14% 15% 7%
Annualized Base Rent in Expiring
Year (000's) $23,244 $35,839 $25,005 $40,456 $42,426 $20,616
Annualized Base Rent PSF in
Expiring Year $ 16.72 $ 18.58 $ 19.41 $ 21.21 $ 20.66 $20.78
Number of Leases Expiring 272 239 200 173 182 55
Industrial Properties
- ---------------------
Dallas/Fort Worth Square Feet Expiring (000's) 42 190 197 161 24 20
Square Feet as a % of NRA 6% 29% 30% 24% 4% 3%
Annualized Base Rent in Expiring
Year (000's) $ 170 $ 573 $ 793 $ 658 $ 96 $ 69
Annualized Base Rent PSF in
Expiring Year $ 4.05 $ 3.02 $ 4.03 $ 4.09 $ 4.00 $ 3.45
Number of Leases Expiring 3 4 4 4 2 1
Metro. Washington, Square Feet Expiring (000's) 457 51 17 181 0 108
D.C. Square Feet as a % of NRA 52% 6% 2% 21% 0% 12%
Annualized Base Rent in Expiring
Year (000's) $ 1,816 $ 223 $ 88 $ 840 $ 0 $ 566
Annualized Base Rent PSF in
Expiring Year $ 3.97 $ 4.37 $ 5.18 $ 4.64 $ 0.00 $ 5.24
Number of Leases Expiring 7 2 2 3 0 1
Chicago Square Feet Expiring (000's) 0 204 75 0 248 136
Square Feet as a % of NRA 0% 22% 8% 0% 27% 15%
Annualized Base Rent in Expiring
Year (000's) $ 0 $ 613 $ 396 $ 0 $ 1,093 $ 749
Annualized Base Rent PSF in
Expiring Year $ 0.00 $ 3.00 $ 5.28 $ 0.00 $ 4.41 $ 5.51
Number of Leases Expiring 0 2 4 0 3 1
Arizona, Los
Angeles, Square Feet Expiring (000's) 865 526 191 335 213 143
Sacramento, San Square Feet as a % of NRA 36% 22% 8% 14% 9% 6%
Diego, San Annualized Base Rent in Expiring
Francisco Bay Area Year (000's) $ 4,659 $ 3,078 $ 1,648 $ 2,174 $ 1,116 $1,194
Annualized Base Rent PSF in
Expiring Year $ 5.39 $ 5.85 $ 8.63 $ 6.49 $ 5.24 $ 8.35
Number of Leases Expiring 35 23 23 12 8 4
Total Industrial Square Feet Expiring (000's) 1,364 971 480 677 485 407
Properties Square Feet as a % of NRA 28% 20% 10% 14% 10% 8%
Annualized Base Rent in Expiring
Year (000's) $ 6,645 $ 4,487 $ 2,925 $ 3,672 $ 2,305 $2,578
Annualized Base Rent PSF in
Expiring Year $ 4.87 $ 4.62 $ 6.09 $ 5.42 $ 4.75 $ 6.33
Number of Leases Expiring 45 31 33 19 13 7
<CAPTION>
<S> <C> <C> <C> <C> <C>
Total Office Square Feet Expiring (000's) 683 862 239 640 1,257
Properties Square Feet as a % of NRA 5% 6% 2% 5% 9%
Annualized Base Rent in Expiring
Year (000's) $15,949 $19,213 $4,535 $14,901 $31,100
Annualized Base Rent PSF in
Expiring Year $ 23.37 $ 22.29 $18.97 $ 23.28 $ 24.73
Number of Leases Expiring 29 28 10 13 18
Industrial Properties
- ---------------------
Dallas/Fort Worth Square Feet Expiring (000's) 0 0 0 0 0
Square Feet as a % of NRA 0% 0% 0% 0% 0%
Annualized Base Rent in Expiring
Year (000's) $ 0 $ 0 $ 0 $ 0 $ 0
Annualized Base Rent PSF in
Expiring Year $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Number of Leases Expiring 0 0 0 0 0
Metro. Washington, Square Feet Expiring (000's) 0 0 0 0 0
D.C. Square Feet as a % of NRA 0% 0% 0% 0% 0%
Annualized Base Rent in Expiring
Year (000's) $ 0 $ 0 $ 0 $ 0 $ 0
Annualized Base Rent PSF in
Expiring Year $ 0.00 $ 0.00 $ 0.00 $ 0.00 $ 0.00
Number of Leases Expiring 0 0 0 0 0
Chicago Square Feet Expiring (000's) 0 0 267 0 0
Square Feet as a % of NRA 0% 0% 29% 0% 0%
Annualized Base Rent in Expiring
Year (000's) $ 0 $ 0 $ 988 $ 0 $ 0
Annualized Base Rent PSF in
Expiring Year $ 0.00 $ 0.00 $ 3.70 $ 0.00 $ 0.00
Number of Leases Expiring 0 0 1 0 0
Arizona, Los
Angeles, Square Feet Expiring (000's) 10 0 48 31 0
Sacramento, San Square Feet as a % of NRA 0% 0% 2% 1% 0%
Diego, San Annualized Base Rent in Expiring
Francisco Bay Area Year (000's) $ 132 $ 0 $ 276 $ 300 $ 0
Annualized Base Rent PSF in
Expiring Year $ 13.20 $ 0.00 $ 5.75 $ 9.68 $ 0.00
Number of Leases Expiring 1 0 1 1 0
Total Industrial Square Feet Expiring (000's) 10 0 315 31 0
Properties Square Feet as a % of NRA 0% 0% 6% 1% 0%
Annualized Base Rent in Expiring
Year (000's) $ 132 $ 0 $1,264 $ 300 $ 0
Annualized Base Rent PSF in
Expiring Year $ 13.20 $ 0.00 $ 4.01 $ 9.68 $ 0.00
Number of Leases Expiring 1 0 2 1 0
</TABLE>
The Company is actively engaged in and has significant experience in the
development, redevelopment and renovation of office and industrial properties.
The Company expects to have the total projected costs of Development Properties
comprise 10-15% of its total market capitalization at any point in time. At
December 31, 1999, the Company had 1.0 million square feet of Properties under
development. In addition to new building construction, the Company is involved
in substantial levels of construction activity in the normal course of owning
and operating buildings. Such activity includes building out interior space for
tenants, expansions of existing buildings, and repairs
11
<PAGE>
necessary to upgrade or maintain the quality of the buildings. The table below
sets forth a schedule of the building type, market, square feet and estimated
cost of each Development Property.
<TABLE>
<CAPTION>
Development Properties Type Market Square Feet/(1)/ Estimated Cost
- ---------------------- ---- ------ ---------------- --------------
(in thousands) (in millions)
<S> <C> <C> <C> <C>
Croton Road Corporate Center Office Sub.Philadelphia 97 $ 16.8
Lakeview Center Office Dallas/Fort Worth 101 9.7
Spyglass Point Office Austin 58 10.0
Barton Skyway I Office Austin 195 28.2
Barton Skyway II Office Austin 195 31.0
Research Office Center III Office Metro. Wash., DC 148 24.1
Oaklands 21/27 /(2)/ Office Sub. Philadelphia 53 6.8
1247 Ward Avenue Office Sub. Philadelphia 27 3.6
Del Mar Gateway Office San Diego 164 33.8
----- ------
Total Development Properties 1,038 $164.0
===== ======
</TABLE>
/(1)/ The area of a Property for which a tenant is required to pay rent, which
includes the actual rentable area plus a portion of the common areas of
the Property allocated to a tenant.
/(2)/ The Company has a 60% joint venture interest in these Properties. The net
rentable square feet presented above represents 100% of the Properties
square footage since the Company has an option to acquire the remaining
40% joint venture interest.
Competition
The Company operates in six regions: Mid-Atlantic, Midwest, Northeast,
Southeast, Southwest and West and competes with many local, regional and
national competitors in the office and industrial sectors. These six regions
comprise 12 core markets and two other markets, nationwide. None of the markets
in which the Company operates are dominated by any one owner or by the Company.
In each market the Company competes 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. Major
competitors in each region include the following companies:
Market Competitors
- ------ -----------
Austin, Dallas/Fort Worth, CarrAmerica Realty Corp., Equity Office
Properties, Mack-Cali Realty Corp., Crescent
Denver, Houston Real Estate Equities, ProLogis, Trammell Crow
Company, Lincoln Property Co.
Metro. Washington, D.C. CarrAmerica Realty Corp., Equity Office
Properties, Brandywine Realty Trust, Boston
Properties
Chicago, Suburban Detroit CarrAmerica Realty Corp., Equity Office
Properties, CenterPoint Properties, ProLogis,
Duke-Weeks Realty Corporation, First
Industrial Realty
Suburban Philadelphia Liberty Property Trust, Equity Office
Properties, Mack-Cali Realty Corp.,
Brandywine Realty Trust
Atlanta Cousins Properties, Equity Office Properties,
CarrAmerica Realty Corp., Duke-Weeks Realty
Corporation
Arizona, Los Angeles, CarrAmerica Realty Corp., Spieker Properties,
Kilroy Realty Corp., Cornerstone
Sacramento, San Diego, Properties, Arden Realty, Shorenstein Co.,
Equity Office Properties, ProLogis, Boston
San Francisco Bay Area Properties
Item 3. Legal Proceedings
Neither the Company nor its affiliates (other than in a representative
capacity) is presently subject to any material litigation. To the Company's
knowledge, no litigation has been threatened against it or its affiliates other
12
<PAGE>
than routine actions and administrative proceedings, substantially all of which
are expected to be covered by liability insurance and which, in the aggregate,
are not expected to have a material adverse effect on the business or financial
condition of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders of the Company
during the fourth quarter of 1999 through the solicitation of proxies or
otherwise.
13
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market Information
The Company's common shares commenced trading on The New York Stock
Exchange (the "NYSE") on October 17, 1996 under the symbol "PP." As of March 17,
2000, the last reported sales price per common share on the NYSE was $21.438 per
common share. The following table sets forth the high and low sales price per
common share reported on the NYSE as traded for the periods indicated.
<TABLE>
<CAPTION>
Period High Low
------ ---- ---
1999
<S> <C> <C>
Fourth Quarter...................................... 22 1/2 18 5/8
Third Quarter....................................... 24 21 1/2
Second Quarter...................................... 24 3/8 18 7/16
First Quarter....................................... 22 3/16 18 1/8
1998
Fourth Quarter...................................... 22 13/16 18 1/2
Third Quarter....................................... 26 19 1/8
Second Quarter...................................... 26 11/16 22 15/16
First Quarter....................................... 28 1/4 25
</TABLE>
The foregoing over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Shareholder Information
At March 17, 2000, the Company had approximately 387 holders of record and
approximately 11,000 beneficial owners of its common shares. As of March 17,
2000, all of the Company's 3,773,585 Series A Preferred Shares, which are
convertible into the Company's common shares subject to certain limitations,
were held by Security Capital Preferred Growth, Incorporated ("SCPG"). In
addition, the units of limited partnership interest in the Operating
Partnership, which are redeemable for common shares subject to certain
limitations, were held by 22 entities or persons.
In order to comply with certain requirements related to qualification of
the Company as a REIT, the Company's organizational documents limit the number
of outstanding common shares that may be owned by any single person or
affiliated group to 8.5% of the outstanding common shares (other than Michael V.
Prentiss, for whom the ownership limitation initially is 15%, and SCPG, for whom
the ownership limitation is 11%).
14
<PAGE>
Distribution Information
The Company has adopted a policy of paying regular quarterly distributions
on its common shares and cash distributions have been paid on the Company's
common shares with respect to the period since its inception. The following
table sets forth information regarding the declaration and payment of
distributions by the Company in 1999 and 1998.
<TABLE>
<CAPTION>
Distribution Distribution Per Share
Record Payment Distribution
Period Which Distribution Relates Date Date Amount
--------------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
1999
Fourth Quarter 12/31/99 1/14/00 $0.44
Third Quarter 9/30/99 10/15/99 $0.44
Second Quarter 6/30/99 7/16/99 $0.44
First Quarter 3/31/99 4/16/99 $0.40
1998
Fourth Quarter 12/31/98 1/15/99 $0.40
Third Quarter 9/30/98 10/16/98 $0.40
Second Quarter 6/30/98 7/17/98 $0.40
First Quarter 3/31/98 4/17/98 $0.40
</TABLE>
The foregoing distributions represent an approximate 10.1% and 18.5% return
of capital in 1999 and 1998, respectively. In order to maintain its
qualification as a REIT, the Company must make annual distributions to its
shareholders of at least 95% of its taxable income, excluding net capital gains.
During the year ended December 31, 1999, the Company declared distributions
totaling $1.72. During the year ended December 31, 1998, the Company declared
distributions totaling $1.60. Under certain circumstances the Company may be
required to make distributions in excess of cash available for distribution in
order to meet such REIT distribution requirements. In such event, the Company
presently would expect to borrow funds, or to sell assets for cash, to the
extent necessary to obtain cash sufficient to make the distributions required to
retain its qualification as a REIT for federal income tax purposes.
The Company has declared a cash distribution for the first quarter of 2000
in the amount of $.44 per share, payable on April 14, 2000 to holders of record
on March 31, 2000. The Company currently anticipates that it will maintain at
least the current distribution rate for the immediate future, unless actual
results of operations, economic conditions or other factors differ from its
current expectations. Future distributions, if any, paid by the Company will be
at the discretion of the board of trustees of the Company and will depend on the
actual cash flow of the Company, its financial condition, capital requirements,
the annual distribution requirements under the REIT provisions of the Internal
Revenue Code and such other factors as the board of trustees of the Company
deems relevant.
Recent Sales of Unregistered Securities
On September 17, 1999, the Company privately placed 2,000,000 series C
cumulative redeemable perpetual preferred units (the "Series C Perpetual
Preferred Units") with Belair Capital Fund LLC for approximately $50.0 million.
The proceeds were used to repay borrowings under the Company's line of credit.
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%. The private placement was exempt
from registration under Section 4(2) of the Securities Act.
15
<PAGE>
Item 6. Selected Financial and Operating Data
The following sets forth selected financial and operating data for the
Company and selected combined historical financial data for the predecessor
company. The following data should be read in conjunction with the historical
Consolidated Financial Statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included elsewhere
in this Form 10-K.
The selected historical consolidated financial data for the Company for the
years ended December 31, 1999, 1998 and 1997 and the period October 22, 1996
through December 31, 1996 and the selected historical combined financial data
for the period January 1, 1996 through October 21, 1996 and the year ended
December 31, 1995 has been derived from the historical Consolidated and Combined
Financial Statements of the Company and the predecessor company, respectively,
and the notes thereto audited by PricewaterhouseCoopers LLP, independent
accountants.
16
<PAGE>
<TABLE>
<CAPTION>
Company Historical
---------------------------------------------------------------
Year Ended Year Ended Year Ended Oct. 22, 1996
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997 - Dec. 31, 1996
------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Statements of Operations Data:
Rental income..................................... $ 297,147 $ 235,650 $ 127,089 $ 13,485
Fee and other income/(1)/......................... 3,325 5,964 4,639 302
---------- ---------- ---------- ---------
Total revenues................................. 300,472 241,614 131,728 13,787
Operating expenses/(1)/........................... 78,446 65,191 37,221 4,670
Real estate taxes................................. 34,201 25,512 13,742 1,162
Interest expense.................................. 60,472 42,681 21,955 846
Real estate depreciation and
Amortization..................................... 54,482 41,828 21,600 2,696
Other depreciation and amortization............... 53
Equity in income of joint ventures and
Unconsolidated subsidiary/(1)/................... 4,294 7,398 5,208 1,427
---------- ---------- ---------- ---------
Income before gain on sales, minority
Interests, and extraordinary items............... 77,112 73,800 42,418 5,840
Gain on sales..................................... 16,105 14,416 641
Minority interests/(2)/........................... (12,735) (7,796) (5,235) (844)
---------- ---------- ---------- ---------
Income before extraordinary items................. 80,482 80,420 37,824 4,996
Extraordinary items............................... (9,001) (878)
---------- ---------- ---------- ---------
Net income........................................ 80,482 71,419 36,946 4,996
Preferred dividends............................... (6,491) (5,655) (25)
---------- ---------- ---------- ---------
Net income applicable to common
Shareholders..................................... 73,991 65,764 36,921 4,996
========== ========== ========== =========
Net income per common share - basic............... $ 1.95 $ 1.70 $ 1.48 $ .25
========== ========== ========== =========
Net income per common share
Before extraordinary items - basic............... $ 1.95 $ 1.93 $ 1.52 $ .25
========== ========== ========== =========
Weighted average number of common
Shares outstanding............................... 37,875 38,742 24,930 20,002
========== ========== ========== =========
Net income per common share -
Diluted.......................................... $ 1.93 $ 1.68 $ 1.46 $ .25
========== ========== ========== =========
Net income per common share before
Extraordinary items - diluted................... $ 1.93 $ 1.89 $ 1.49 $ .25
========== ========== ========== =========
Weighted average number of common
Shares and common share equivalents
Outstanding..................................... 41,729 42,497 25,307 20,332
========== ========== ========== =========
Balance Sheet Data (end of period):
Real estate, before accumulated
depreciation................................... $1,898,482 $1,810,735 $1,170,992 $ 501,035
Real estate, after accumulated
Depreciation................................... 1,807,021 1,749,503 1,134,849 482,528
Cash and cash equivalents....................... 13,313 5,523 7,075 7,226
Total assets.................................... 1,994,663 1,871,145 1,239,846 531,026
Debt on real estate............................. 896,810 800,263 420,030 128,800
Total liabilities............................... 983,850 880,447 470,607 151,977
Shareholders' equity............................ 831,493 860,578 696,632 325,221
Other Data:
EBITDA/(3)/....................................... $ 201,243 $ 166,454 $ 95,551 $ 11,445
Funds from Operations/(4)/........................ 124,665 113,620 $ 66,047 $ 8,935
Cash flow from operations......................... 119,664 101,986 61,458 9,142
Cash flow from investing.......................... (140,377) (563,851) (660,263) (353,809)
Cash flow from financing.......................... 28,503 460,313 598,654 351,892
Property Data (end of period):
Number of Properties.............................. 199 233 161 95
Total GLA in sq. ft............................... 19,848 20,963 18,082 9,944
Occupancy %....................................... 96% 97% 96% 97%
<CAPTION>
Predecessor Company
Historical
-------------------------------
Jan. 1, 1996 Year Ended
- Oct. 21, 1996 Dec. 31, 1995
--------------- --------------
<S> <C> <C>
Statements of Operations Data:
Rental income..................................... $ 27,086 $ 29,423
Fee and other income/(1)/......................... 17,510 25,741
-------- --------
Total revenues................................. 44,596 55,164
Operating expenses/(1)/........................... 24,845 31,127
Real estate taxes................................. 3,085 3,030
Interest expense.................................. 5,951 3,882
Real estate depreciation and
Amortization..................................... 5,993 7,060
Other depreciation and amortization............... 106
Equity in income of joint ventures and
Unconsolidated subsidiary/(1)/................... 18 11
-------- --------
Income before gain on sales, minority
Interests, and extraordinary items............... 4,740 9,970
Gain on sales..................................... 378
Minority interests/(2)/...........................
-------- --------
Income before extraordinary items................. 5,118 9,970
Extraordinary items...............................
-------- --------
Net income........................................ 5,118 9,970
Preferred dividends...............................
-------- --------
Net income applicable to common
Shareholders..................................... 5,118 9,970
======== ========
Net income per common share - basic...............
Net income per common share
Before extraordinary items - basic...............
Weighted average number of common
Shares outstanding...............................
Net income per common share -
Diluted..........................................
Net income per common share before
Extraordinary items - diluted...................
Weighted average number of common
Shares and common share equivalents
Outstanding.....................................
Balance Sheet Data (end of period):
Real estate, before accumulated
depreciation................................... $153,148
Real estate, after accumulated
Depreciation................................... 141,368
Cash and cash equivalents....................... 1,033
Total assets.................................... 154,635
Debt on real estate............................. 46,442
Total liabilities............................... 50,769
Shareholders' equity............................ 103,866
Other Data:
EBITDA/(3)/....................................... $ 20,458 $ 25,705
Funds from Operations/(4)/........................ $ 11,608 $ 18,114
Cash flow from operations......................... 10,268 $ 16,238
Cash flow from investing.......................... (32,985) $ (4,301)
Cash flow from financing.......................... 23,283 $(20,037)
Property Data (end of period):
Number of Properties.............................. 57 55
Total GLA in sq. ft............................... 6,641 6,323
Occupancy %....................................... 95% 97%
</TABLE>
17
<PAGE>
/(1)/ The Manager's operations are combined with the property operations in the
historical statements of the predecessor company and are accounted for
under the equity method in the Company's historical statements; therefore,
the historical statements of the predecessor company include the Manager's
revenues and expenses on a gross basis in the respective income and
expense line items and the Company's historical statements present the
Manager's net operations in the line item titled "Equity in income of
joint ventures and unconsolidated subsidiary."
Equity in income of joint ventures and unconsolidated subsidiary includes
the Company's approximate 50% interest in the Broadmoor Austin Joint
Venture on a historical basis, and the predecessor company's 25% interest
in the Broadmoor Austin Joint Venture, which is accounted for on the
equity method for all periods presented. For more information on the
operations and accounts of the Broadmoor Austin Joint Venture, refer to
Note (5) in the footnotes to the Consolidated Financial Statements of the
Company.
/(2)/ Represents the interest in the Operating Partnership which is owned by the
minority interest holders.
/(3)/ EBITDA means operating income before mortgage and other interest expense,
income taxes, depreciation and amortization. The Company believes EBITDA
is useful to investors as an indicator of the Company's ability to service
debt and pay cash distributions. EBITDA, as calculated by the Company, is
not comparable to EBITDA reported by other REITs that do not define EBITDA
exactly as the Company defines that term. EBITDA does not represent cash
generated from operating activities in accordance with GAAP, and should
not be considered as an alternative to operating income or net income as
an indicator of performance or as an alternative to cash flows from
operating activities as an indicator of liquidity. The Company's EBITDA
for the respective periods is calculated as follows:
<TABLE>
<CAPTION>
Company
Historical
--------------------------------------------------------------------
(in thousands) Year Ended Year Ended Year Ended Oct. 22, 1996 -
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
EBITDA
Net Income......................................... $ 80,482 $ 71,419 $36,946 $ 4,996
Add:
Interest expense.................................. 60,472 42,681 21,995 846
Real estate depreciation and amortization......... 54,482 41,828 21,600 2,696
Other depreciation and amortization............... 53
EBITDA of unconsolidated subsidiary............... 2,837 6,086 5,434 1,700
EBITDA of unconsolidated joint ventures........... 10,739 9,588 9,419 1,810
Extraordinary items................................ 9,001 878
Minority interests/(1)/............................ 12,577 7,665 5,128 824
Less:
Gain on sales..................................... (16,105) (14,416) (641)
Equity in income of joint ventures and
unconsolidated subsidiary........................ (4,294) (7,398) (5,208) (1,427)
-------- -------- ------- -------
EBITDA............................................. $201,243 $166,454 $95,551 $11,445
======== ======== ======= =======
<CAPTION>
Predecessor Company
Historical
------------------------------
(in thousands) Jan. 1, 1996 - Year Ended
Oct. 21, 1996 Dec. 31, 1995
-------------- -------------
<S> <C> <C>
EBITDA
Net Income......................................... $ 5,118 $ 9,970
Add:
Interest expense.................................. 5,951 3,882
Real estate depreciation and amortization......... 5,993 7,060
Other depreciation and amortization............... 106
EBITDA of unconsolidated subsidiary...............
EBITDA of unconsolidated joint ventures........... 3,792 4,698
Extraordinary items................................
Minority interests/(1)/............................
Less:
Gain on sales..................................... (378)
Equity in income of joint ventures and
unconsolidated subsidiary........................ (18) (11)
------- -------
EBITDA............................................. $20,458 $25,705
======= =======
</TABLE>
/(1)/ Represents the minority interests applicable to common and preferred
unit holders of the Operating Partnership.
(4) "Funds from Operations," as defined by the National Association of Real
Estate Investment Trusts ("NAREIT"), means net income, computed in
accordance with generally accepted accounting principles ("GAAP") excluding
gains (or losses) from debt restructuring and sales of property, plus
depreciation and amortization on real estate assets, and after adjustments
for unconsolidated partnerships, joint ventures and subsidiaries. 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 the combined historical operating results of the
predecessor company and the Company, Funds from Operations should be
examined in conjunction with net income as presented in the audited
Consolidated Financial Statements and notes thereto of the Company included
elsewhere in this Form 10-K. Funds from Operations does not represent cash
generated from operating activities in accordance with GAAP and should not
be considered as an alternative to net income as an indication of the
Company's performance or to cash flows as a measure of liquidity or ability
to make distributions. The Company's and predecessor company's Funds from
Operations for the respective periods is calculated as follows:
18
<PAGE>
<TABLE>
<CAPTION>
Company
Historical
--------------------------------------------------------------------
(in thousands) Year Ended Year Ended Year Ended Oct. 22, 1996 -
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996
------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C>
Funds from Operations
Net Income..................................... $ 80,482 $ 71,419 $36,946 $4,996
Add:
Real estate depreciation and amortization..... 54,482 41,828 21,600 2,696
Real estate depreciation and amortization of
unconsolidated joint ventures................ 2,480 2,196 2,136 419
Minority interests/(1)/....................... 12,577 7,665 5,128 824
Extraordinary items............................ 9,001 878
Less:
Gain on sales................................. (16,105) (14,416) (641)
Dividend on perpetual preferred............... (9,251) (4,073)
-------- -------- ------- ------
Funds from Operations.......................... $124,665 $113,620 $66,047 $8,935
======== ======== ======= ======
<CAPTION>
Predecessor Company
Historical
------------------------------
(in thousands) Jan. 1, 1996 - Year Ended
Oct. 21, 1996 Dec. 31, 1995
-------------- -------------
<S> <C> <C>
Funds from Operations
Net Income..................................... $ 5,118 $ 9,970
Add:
Real estate depreciation and amortization..... 5,993 7,060
Real estate depreciation and amortization of
unconsolidated joint ventures................ 875 1,084
Minority interests/(1)/.......................
Extraordinary items............................
Less:
Gain on sales................................. (378)
Dividend on perpetual preferred...............
Funds from Operations.......................... $11,608 $18,114
======= =======
</TABLE>
(1) Represents the minority interests applicable to the common and preferred
unit holders of the Operating Partnership.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with the "Selected
Financial and Operating Data" and the historical Consolidated Financial
Statements and related notes thereto for the Company. Historical results set
forth in the "Selected Financial and Operating Data," and the Consolidated
Financial Statements of the Company should not be taken as an indication of
future operations of the Company.
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 January 1, 1999, 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 year ended December 31, 1999, the Company
acquired six office properties totaling approximately 1.1 million square feet.
Additionally, the Company sold 45 properties totaling approximately 2.6 million
square feet and transitioned eight development projects to operations. The
Company also began development of five office properties containing, 439,000
square feet. Inclusive of the Company's proportionate share of the net rentable
square feet of the Companys 50% and 20% joint venture interests in the Broadmoor
Austin properties and Burnett Plaza Property, respectively, at December 31,
1999, the Company had 199 properties (the "Properties") containing 19.8 million
net rentable square feet. The Company's Properties include 10 Properties
containing 1.0 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"). As of December 31, 1999, the 10 Development
Properties had incurred total costs of approximately $104.6 million and were 94%
leased or committed.
19
<PAGE>
<TABLE>
<CAPTION>
Number of
Buildings Square Feet
--------- -----------
(in thousands)
<S> <C> <C>
Properties at December 31, 1996............................................. 97 9,829
Activity for the Year Ended December 31, 1997
Property Acquisitions.................................................... 66 6,817
Property Dispositions.................................................... (1) (284)
Development Starts....................................................... 8 1,164
--------- -----------
170 17,526
Activity for the Year Ended December 31, 1998
Property Acquisitions.................................................... 84 5,016
Property Dispositions.................................................... (29) (2,595)
Development Starts....................................................... 8 1,016
--------- -----------
233 20,963
Activity for the Year Ended December 31, 1999
Property Acquisitions.................................................... 6 1,088
Property Dispositions.................................................... (45) (2,642)
Development Starts....................................................... 5 439
--------- -----------
Properties at December 31, 1999............................................. 199 19,848
========= ===========
</TABLE>
Results of Operations
As noted above, the Company has had significant property transactions
during the periods subsequent to December 31, 1996 and consequently, the
comparisons of the years provide only limited information regarding the
operations of the Company as currently constituted.
Comparison of the Year Ended December 31, 1999 to the Year Ended December 31,
1998
General. As a result of the Company's significant property transactions,
with respect to the comparison of the results of operations for the year ended
December 31, 1999 to the year ended December 31, 1998, the following should be
considered:
. 111 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 December 31, 1999;
. 8 Properties, the Broadmoor Austin Properties and the Burnett Plaza
Property (which was acquired in 1999), were accounted for using the
equity method of accounting;
. 58 Properties, which are wholly owned by the Company, were acquired
subsequent to January 1, 1998 and prior to December 31, 1999 that
remained in the Company's portfolio at December 31, 1999;
. 74 Properties were sold during the two-year period ended December 31,
1999;
. 1 Property, World Savings Center, the economics of which were owned
during the comparative periods, was converted to real estate from a
mortgage note receivable in December 1998.
. 11 Properties that were developed by the Company became operational
subsequent to January 1, 1998 and remained in the portfolio at
December 31, 1999; and
. 10 Properties were in various stages of development or in various
stages of lease-up at December 31, 1999.
Rental Revenue. Rental revenues increased by $61.5 million, or 26.1% to
$297.1 million from $235.7 million primarily as a result of Properties acquired
or Development Properties becoming operational subsequent to January 1, 1998,
offset by properties that were sold during the two years ended December 31,
1999. Rental income for the 111
20
<PAGE>
Properties that were owned and fully operational at January 1, 1998 and remained
in the Company's portfolio at December 31, 1999 increased by $4.3 million, or
2.7%, from $161.1 million for the year ended December 31, 1998 to $165.4 million
for the year ended December 31, 1999. The increase was attributable to the
Company's six regions as follows:
. 18 Properties in the Mid-Atlantic Region increased $833,000, or 2.3%;
. 14 Properties in the Midwest Region decreased $104,000, or .3%;
. 15 Properties in the Northeast Region increased $534,000, or 2.9%;
. 10 Properties in the Southeast Region increased $354,000, or 3.3%;
. 20 Properties in the Southwest Region increased $2.2 million, or 5.8%;
and
. 34 Properties in the West Region increased $471,000, or 1.7%.
Property Operating and Maintenance. Property operating and maintenance
increased by $12.4 million, or 21.7%, to $69.6 million from $57.2 million
primarily as a result of Properties acquired or Development Properties becoming
operational subsequent to January 1, 1998, offset by properties that were sold
during the two years ended December 31, 1999. Property operating and maintenance
for the 111 Properties that were owned and fully operational at January 1, 1998
and remained in the Company's portfolio at December 31, 1999 increased by
$586,000, or 1.5%, from $39.4 million for the year ended December 31, 1998 to
$40.0 million for the year ended December 31, 1999. However, for these 111
Properties, these costs were consistent as a percent of rental revenues of
approximately 24% for both years. The increase was attributable to the
Company's six regions as follows:
. 18 Properties in the Mid-Atlantic Region increased $267,000, or 3.1%;
. 14 Properties in the Midwest Region increased $240,000, or 3.8%;
. 15 Properties in the Northeast Region increased $58,000, or 1.4%;
. 10 Properties in the Southeast Region increased $77,000, or 1.8%;
. 20 Properties in the Southwest Region decreased $84,000, or less than
1%; and
. 34 Properties in the West Region increased $28,000, or less than 1%.
Real Estate Taxes. Real estate taxes increased by $8.7 million, or 34.1%,
to $34.2 million from $25.5 million primarily as a result of Properties acquired
or Development Properties becoming operational subsequent to January 1, 1998,
offset by properties that were sold during the two years ended December 31,
1999. Real estate taxes for the 111 Properties that were owned and fully
operational at January 1, 1998 and remained in the Company's portfolio at
December 31, 1999 increased by $1.5 million, or 8.5%, from $17.2 million for
the year ended December 31, 1998, to $18.7 million for the year ended December
31, 1999. The increase was attributable to the Company's six regions as follows:
. 18 Properties in the Mid-Atlantic Region increased $200,000 , or 7.1%;
. 14 Properties in the Midwest Region increased $215,000 , or 4.9%
. 15 Properties in the Northeast Region decreased $24,000, or 1.5%;
. 10 Properties in the Southeast Region increased $99,000, or 13.2%;
. 20 Properties in the Southwest Region increased $1.1 million, or
21.0%; and
. 34 Properties in the West Region decreased $150,000, or 6.6%.
General and Administrative and Personnel Costs. General and administrative
and personnel costs increased by $843,000, or 10.5%, from $8.0 million to $8.8
million primarily due to a general overall increase in employee salaries
accompanied by one-time severance costs incurred during 1999.
Interest Expense. Interest expense increased by $17.6 million, or 42.3%, to
$59.3 million from $41.7 million primarily as a result of the increase of the
debt on real estate from $420.0 million at January 1, 1998 to $800.3 million at
December 31, 1998 and $896.8 million at December 31, 1999. The increase in debt
on real estate during the two years ended December 31, 1999 results primarily
from the significant property acquisitions occurring between January 1, 1998 and
December 31, 1999.
21
<PAGE>
Depreciation and Amortization. Depreciation and amortization increased
by $12.7 million, or 30.4%, to $54.5 million from $41.8 million primarily as a
result of Properties acquired or Development Properties becoming operational
subsequent to January 1, 1998, offset by properties that were sold during the
two years ended December 31, 1999. Depreciation and amortization for the 111
Properties that were owned and fully operational at January 1, 1998 and remained
in the Company's portfolio at December 31, 1999, increased by $2.3 million, or
8.7% from $26.8 million for the year ended December 31, 1998, to $29.1 million
for the year ended December 31, 1999. The increase was attributable to the
Company's six regions as follows:
. 18 Properties in the Mid-Atlantic Region increased $251,000, or 4.0%;
. 14 Properties in the Midwest Region increased $418,000, or 9.4%;
. 15 Properties in the Northeast Region increased $307,000, or 10.2%;
. 10 Properties in the Southeast Region decreased $88,000, or 3.5%;
. 20 Properties in the Southwest Region increased $800,000, or 12.6%;
and
. 34 Properties in the West Region increased $653,000, or 15.9%.
Equity in Income of Joint Ventures and Unconsolidated Subsidiary. Equity in
income of joint ventures and unconsolidated subsidiary decreased by $3.1
million, or 42.0%, from $7.4 million for the year ended December 31, 1998 to
$4.3 million for the year ended December 31, 1999. The decrease was attributable
to a decrease of $3.6 million representing the Company's 95% proportionate share
of the decrease in net income of the Manager, offset by an increase of $361,000
representing the Company's proportionate share of the increase in net income
before extraordinary item from the Broadmoor Austin Properties and an increase
of $159,000 which represents the Company's proportionate share of operations of
Burnett Plaza which was acquired in March 1999.
Gain on Sales. Gain on sales increased by $1.7 million, to $16.1 million,
from $14.4 million as a result of the Company's property sales occurring during
1999. 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 $4.9 million, or 63.4%,
from $7.8 million for the year ended December 31, 1998, to $12.7 million for the
year ended December 31, 1999. The increase was primarily attributable to the
income allocation from the issuance by the Operating Partnership of (i)
1,900,000, $50 par value, Series B Perpetual Preferred Units in June 1998; and
(ii) the issuance of 2,000,000, $25 par value, Series C Perpetual Preferred
Units in September 1999.
Extraordinary Items. During the year ended December 31, 1998, the Company
had extraordinary items totaling $9.0 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 and 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. In addition, the Company incurred a charge of $93,000
(net of the minority interest holders' $4,000 proportionate share) related to
early repayment of debt during 1998.
Comparison of the Year Ended December 31, 1998 to the Year Ended December 31,
1997
General. As a result of the Company's significant property transactions,
with respect to the comparison of the results of operations for the year ended
December 31, 1998 to the year ended December 31, 1997, the following should be
considered:
. 65 Properties that consolidated into the Company's results of
operations were owned and fully operational at January 1, 1997 and
remained in the Company's portfolio at December 31, 1998;
. 7 Properties, the Broadmoor Austin Properties, were accounted for
using the equity method of accounting;
22
<PAGE>
. 145 Properties were acquired subsequent to January 1, 1997 and prior to
December 31, 1998 that remained in the Company's portfolio at
December 31, 1998;
. 30 properties were sold during the two-year period ended December 31,
1998;
. 3 Properties that were developed by the Company became operational
during the year ended December 31, 1998 and remained in the
portfolio at December 31, 1998; and
. 13 Properties were in various stages of development or in various
stages of lease-up at December 31, 1998.
The Company's Northeast Region was established during the year ended
December 31, 1997; therefore, none of the Northeast Region's Properties are
included in the comparison of the 65 Properties that were owned and fully
operational at January 1, 1997 and remained in the Company's portfolio at
December 31, 1998.
Rental Revenue. Rental revenues increased by $108.6 million, or 85.4%, to
$235.7 million from $127.1 million primarily as a result of Properties acquired
or development Properties becoming operational subsequent to January 1, 1997,
offset by properties that were sold during the two years ended December 31,
1998. Rental income for the 65 Properties that were owned and fully operational
at January 1, 1997 and remained in the Company's portfolio at December 31, 1998
increased by $1.2 million, or 1.5%, from $82.5 million for the year ended
December 31, 1997 to $83.7 million for the year ended December 31, 1998. The
increase was attributable to five of the Company's six regions as follows:
. 10 Properties in the Mid-Atlantic Region increased $707,000, or 4.2%;
. 13 Properties in the Midwest Region increased $1.4 million, or 7.7%;
. 9 Properties in the Southeast Region decreased $98,000, or 1.3%;
. 15 Properties in the Southwest Region decreased $644,000, or 1.9%; and
. 18 Properties in the West Region decreased $213,000, or 3.3%.
Property Operating and Maintenance. Property operating and maintenance
increased by $26.6 million, or 86.9%, to $57.2 million from $30.6 million
primarily as a result of Properties acquired or development Properties becoming
operational subsequent to January 1, 1997, offset by properties that were sold
during the two years ended December 31, 1998. Property operating and maintenance
for the 65 Properties that were owned and fully operational at January 1, 1997
and remained in the Company's portfolio at December 31, 1998 decreased by
$545,000, or 2.6%, from $20.9 million for the year ended December 31, 1997 to
$20.3 million for the year ended December 31, 1998. The decrease was
attributable to five of the Company's six regions as follows:
. 10 Properties in the Mid-Atlantic Region decreased $45,000, or 1.2%;
. 13 Properties in the Midwest Region decreased $121,000, or 3.1%;
. 9 Properties in the Southeast Region decreased $272,000, or 8.3%;
. 15 Properties in the Southwest Region decreased $3,000, or less than
1%; and
. 18 Properties in the West Region decreased $104,000, or 18.7%.
Real Estate Taxes. Real estate taxes increased by $11.8 million, or 85.7%,
to $25.5 million from $13.7 million primarily as a result of Properties acquired
or development Properties becoming operational subsequent to January 1, 1997,
offset by properties that were sold during the two years ended December 31,
1998. Real estate taxes for the 65 Properties that were owned and fully
operational at January 1, 1997, and remained in the Company's portfolio at
December 31, 1998 increased by $1.0 million, or 11.2%, from $9.3 million for the
year ended December 31, 1997, to $10.3 million for the year ended December 31,
1998. The increase was attributable to five of the Company's six regions as
follows:
. 10 Properties in the Mid-Atlantic Region increased $135,000, or 10.4%;
. 13 Properties in the Midwest Region increased $90,000, or 3.0%;
. 9 Properties in the Southeast Region increased $118,000, or 36.7%;
. 15 Properties in the Southwest Region increased $733,000, or 18.5%;
and
. 18 Properties in the West Region decreased $39,000, or 5.6%.
23
<PAGE>
Interest Expense. Interest expense increased by $20.6 million, or 97.4%, to
$41.7 million from $21.1 million primarily as a result of the increase of the
debt on real estate from $128.8 million at January 1, 1997 to $420.0 million at
December 31, 1997 and $800.3 million at December 31, 1998. The increase in debt
on real estate during the two years ended December 31, 1998 results primarily
from the significant property acquisitions occurring between January 1, 1997 and
December 31, 1998.
Depreciation and Amortization. Depreciation and amortization increased by
$20.2 million, or 93.6%, to $41.8 million from $21.6 million primarily as a
result of Properties acquired or development Properties becoming operational
subsequent to January 1, 1997, offset by properties that were sold during the
two years ended December 31, 1998. Depreciation and amortization for the 65
Properties that were owned and fully operational at January 1, 1997 and remained
in the Company's portfolio at December 31, 1998, increased by $1.5 million, or
10.9%, from $14.0 million for the year ended December 31, 1997, to $15.5 million
for the year ended December 31, 1998. The increase was attributable to five of
the Company's six regions as follows:
. 10 Properties in the Mid-Atlantic Region increased $320,000, or
10.1%;
. 13 Properties in the Midwest Region increased $200,000, or 6.1%;
. 9 Properties in the Southeast Region increased $36,000, or 2.0%;
. 15 Properties in the Southwest Region increased $923,000, or 20.3%;
and
. 18 Properties in the West Region increased $49,000, or 3.9%.
Equity in Income of Joint Ventures and Unconsolidated Subsidiary. Equity in
income of joint ventures and unconsolidated subsidiary increased by $2.2
million, or 42.1%, from $5.2 million for the year ended December 31, 1997 to
$7.4 million for the year ended December 31, 1998. The increase was attributable
to (i) an increase of $1.2 million, representing the Company's 50% proportionate
share of the increase in net income, before extraordinary item, of the Broadmoor
Austin Properties; and (ii) an increase of $1.0 million, representing the
Company's 95% proportionate share of the increase in net income of the Manager.
Gain on Sales. Gains on sale increased by $13.8 million, to $14.4
million, from $641,000 as a result of the Company's property sales occurring
during 1998. 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 $2.6 million, or
48.9%, from $5.2 million for the year ended December 31, 1997 to $7.8 million
for the year ended December 31, 1998. The increase was primarily attributable to
the issuance by the Operating Partnership of 1,900,000 Series B Perpetual
Preferred Units in June 1998, offset by the conversion in February 1998 of
2,432,541 and 113,500 Operating Partnership units into common shares. The
increase is also attributable to the issuance of units in conjunction with
Property acquisitions between January 1, 1997 and December 31, 1998.
Extraordinary Items. Extraordinary items increased by $8.1 million, to
$9.0 million, from $878,000 as a result of 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 and
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.
In addition, the Company incurred a charge of $93,000 (net of the minority
interest holders' $4,000 proportionate share) related to early repayment of debt
during 1998.
Liquidity and Capital Resources
Cash and cash equivalents were $13.3 million and $5.5 million at December
31, 1999 and December 31, 1998, respectively. The increase in cash and cash
equivalents is primarily a result of cash flows provided by operating and
financing activities exceeding cash flows used in investing activities.
24
<PAGE>
Cash Provided by Operating Activities. Net cash provided by operating
activities was $119.7 million for the year ended December 31, 1999 compared to
$102.0 million for the year ended December 31, 1998. The increase is due
primarily to the net operating income generated in 1999 from Properties acquired
in 1998 exceeding the net operating income generated in 1998 from these
Properties.
Cash Used in Investing Activities. Net cash used in investing activities
decreased from $563.9 million for the year ended December 31, 1998 to $140.4
million for the year ended December 31, 1999. This decrease is due primarily to
the significant property acquisitions in 1998 exceeding those in 1999.
Cash Provided by Financing Activities. Net cash provided by financing
activities of $28.5 million for the year ended December 31, 1999 decreased from
$460.3 million for the year ended December 31, 1998. This decrease is primarily
attributable to proceeds from mortgage loans and other indebtedness incurred to
fund the 1998 acquisitions exceeding the proceeds raised from such sources in
1999 as well as a decrease in capital raised through the issuances of common
shares, preferred shares and preferred units from 1998 to 1999.
As of December 31, 1999, the Company had outstanding total indebtedness,
including its pro rata share of joint venture debt and construction loans of
approximately $983.2 million, or approximately 48.1% of total market
capitalization based on a common share price of $21.375 per common share. The
Company's policy is 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.
As of December 31, 1999, the Company had the approximate capacity to borrow up
to an additional $79.7 million under the debt limitation. The amount of
indebtedness that the Company may incur, and the policies with respect thereto,
are not limited by the Company's declaration of trust and bylaws, and are solely
within the discretion of the Company's board of trustees.
On December 31, 1997, the Company obtained 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 has a term of three years. Additionally, the Company is
required to pay an average daily unused commitment fee of 20 basis points per
annum if the daily unused portion of the Line of Credit is greater than the
related daily balance outstanding. The fee is reduced to 15 basis points per
annum if the daily unused portion is less than the daily balance outstanding.
The Company had net borrowings from the Line of Credit during the period of $7.0
million and an outstanding balance of $129.0 million at December 31, 1999,
resulting in an available balance of $171.0 million.
25
<PAGE>
The following table sets forth the Company's debt balance as of December
31, 1999:
<TABLE>
<CAPTION>
Current Interest
Description Balance Amortization Rate Maturity
- ----------- ------- ------------ ---- --------
(in thousands)
<S> <C> <C> <C> <C>
Line of Credit $129,022 None LIBOR + 1.375% January 2, 2001
Executive Center Del Mar 13,267 None LIBOR + 1.35% December 19, 2001 (12)
Burnett Plaza (1) 9,400 None 7.50% February 1, 2002
Bank Term Facility 100,000 None LIBOR + 1.375% October 13, 2002
Bachman West 2,972 25 yr 8.63% December 1, 2003
Northeast Portfolio Loan (2) 60,000 None (7) 6.80% December 10, 2003
One Westchase Center 24,901 25 yr 7.84% February 1, 2004
Crescent Centre 12,000 None 7.95% March 1, 2004
Bank Term Loan (3) 72,500 None (8) LIBOR + 1.625% September 30, 2004
Walnut Glen Tower 35,000 None (9) 6.92% April 1, 2005
Highland Court 4,930 25 yr 7.27% April 1, 2006
Oaklands Corporate Center (4) 1,319 20 yr 8.65% August 1, 2006
Westheimer Central Plaza 5,966 25 yr 8.38% August 1, 2006
Creamery Way (4) 3,708 20 yr 8.30% September 19, 2006
PPREFI Portfolio Loan (5) 180,100 None 7.58% February 26, 2007
Oaklands Corporate Center (4) 6,292 25 yr 8.55% July 1, 2007
Oaklands Corporate Center (4) 2,652 25 yr 8.40% November 1, 2007
Corporetum Office Campus 25,780 30 yr 7.02% February 1, 2009
Natomas Corporate Center 37,679 30 yr 7.02% February 1, 2009
7101 Wisconsin Avenue 21,345 30 yr 7.25% April 1, 2009
2500 Cumberland Parkway 14,500 None(10) 7.46% July 15, 2009
World Savings Center 29,480 30 yr 7.91% November 1, 2010
Park West C2 35,327 30 yr 6.63% November 10, 2010
One O'Hare Centre 41,842 30 yr 6.80% January 10, 2011
3130 Fairview Park Drive Loan 23,342 30 yr 7.00% April 1, 2011
Broadmoor Austin (6) 77,000 None(11) 7.04% April 10, 2011
Southpoint (III) (4) 7,635 20 yr 7.75% April 14, 2014
Other Corporate Debt 5,251 None 7.40% Various
--------
Total $983,210
========
</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 Bank Term Loan which is collateralized by the following four
Properties: Willow Oaks I & II (two Properties), 8521 Leesburg Pike and
Croton Road Corporate Center.
(4) The mortgage loan is collateralized by certain of the Properties in the
respective office Property grouping.
(5) The PPREFI Portfolio Loan is collateralized by the following 36 Properties:
certain of the Los Angeles Industrial Properties (18 Properties), certain
of the Chicago Industrial Properties (four Properties), the Cottonwood
Office Properties (three Properties), Park West E1 and E2 (two Properties),
One Northwestern Plaza, 3141 Fairview Park Drive, 2455 Horsepen Road,
O'Hare Plaza II, 1717 Deerfield Road, 2411 Dulles Corner Road, 4401 Fair
Lakes Court, the WestPoint Office Building and the PacifiCare Building.
(6) 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.
(7) 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.
(8) The loan, which was entered into in October 1999, 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.
(9) 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.
(10) 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 based on a 30-year amortization.
(11) 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.
(12) 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.
26
<PAGE>
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 in the aggregate, $160.0 million of 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 Received
Swap Rate Paid Effective Fixed (Variable) at
Notional Amount (Fixed) Rate December 31, 1999 Swap Maturity
- --------------- ------ ---- ----------------- -------------
<S> <C> <C> <C> <C>
$50 million 6.155% 7.780% 5.822% June 2, 2003
$50 million 6.253% 7.628% 5.822% September 30, 2004
$60 million 6.248% 7.623% 5.822% 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
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.
On August 25, 1998, the Company 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
the Company anticipated entering into. On October 6, 1998, the Company
terminated one $49.25 million agreement with Societe Generale, New York Branch,
and, as a result of the substantial downward movement in the underlying treasury
security, incurred settlement costs of $4.3 million. These settlement costs are
being amortized over the 12-year term of the $35.75 million Park West C2 loan,
with the remainder being amortized over $13.5 million of the $42.25 million One
O'Hare Centre loan. The effective interest rate on the $49.25 million is 7.40%
per annum.
On December 29, 1998, the Company terminated the $49.25 million treasury
lock agreement with UBS AG, London Branch, and incurred settlement costs of
approximately $1.8 million. These settlement costs are being amortized over the
term of the Corporetum Office Campus and Natomas Corporate Center loans. The
effective interest rate on the $49.25 million is 7.30% per annum.
The Company's Properties require periodic investments of capital for tenant-
related capital expenditures and for general capital improvements. For the year
ended December 31, 1999, the Company's recurring non-incremental revenue-
generating capital expenditures totaled $18.5 million. The Company's recurring
non-incremental revenue-generating capital expenditures were attributable to the
Company's six regions as follows: (1) Mid-Atlantic-$2.1 million; (2) Midwest-
$2.0 million; (3) Northeast-$2.1 million; (4) Southeast-$3.3 million; (5)
Southwest-$3.9 million; and (6) West-$5.1 million.
The Company has considered its short-term liquidity needs and the adequacy
of adjusted estimated cash flows and other expected liquidity sources to meet
these needs. The Company believes that its principal short-term liquidity needs
are to fund normal recurring expenses, debt service requirements and the minimum
distribution required to maintain the Company's REIT qualification under the
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,
leasing, development and construction business and from the Manager. The
27
<PAGE>
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 the National Association of Real
Estate Investment Trusts ("NAREIT"), means net income, computed in accordance
with generally accepted account principles ("GAAP") excluding gains (or losses)
from debt restructuring and sales of property, plus depreciation and
amortization, and after adjustments for unconsolidated partnerships, joint
ventures and subsidiaries. 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.
<TABLE>
<CAPTION>
Company Predecessor Company
Historical Historical
------------------------------------------------------------ -----------------------------
(in thousands) Year Ended Year Ended Year Ended Oct. 22, 1996- Jan. 1, 1996- Year Ended
Dec. 31, 1999 Dec. 31, 1998 Dec. 31, 1997 Dec. 31, 1996 Oct. 21, 1996 Dec. 31, 1995
-------------- ------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Funds from Operations
Net Income............................... $ 80,482 $ 71,419 $36,946 $4,996 $ 5,118 $ 9,970
Add:
Real estate depreciation and
amortization........................... 54,482 41,828 21,600 2,696 5,993 7,060
Real estate depreciation and
amortization of unconsolidated joint
ventures............................... 2,480 2,196 2,136 419 875 1,084
Minority interests(1)................... 12,577 7,665 5,128 824
Extraordinary items...................... 9,001 878
Less:
Gain on sales........................... (16,105) (14,416) (641) (378)
Dividend on perpetual preferred......... (9,251) (4,073)
-------- -------- --------- --------- --------- ----------
Funds from Operations.................... $124,665 $113,620 $66,047 $8,935 $11,608 $18,114
======== ======== ========= ========= ========= ==========
</TABLE>
(1) Represents the minority interests applicable to the common and preferred
unit holders of the Operating Partnership.
Funds from Operations increased by $11.0 million for the year ended
December 31, 1999 from the year ended December 31, 1998 and increased by $47.6
million for the year ended December 31, 1998 from the year ended December 31,
1997 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 problems may
perceive time to have
28
<PAGE>
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 (collectively,
"Systems"). The occurrence of Y2K-related problems could result in a Systems
failure or malfunction with potential adverse effects including personal injury,
property damage, and disruption of operations.
The Company's cost related to Y2K preparation, readiness and remediation,
expended through December 31, 1999 totaled approximately $500,000. Although the
Company has not experienced any Y2K-related problems that have resulted in a
material adverse effect on the Company's business, financial condition, or
results of operations, and does not anticipate any such problems in the future,
it is possible that not all Y2K-related problems have been revealed. Any Y2K-
related problems revealed in the future could have a materially adverse effect
on the Company's business, financial condition, or results of operations.
Recently Issued Accounting Standards
In September 1998, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS 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 SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." SFAS No. 133 was originally effective
for all fiscal quarters of fiscal years beginning after September 15, 1999. SFAS
No. 137 deferred the effective date of SFAS No. 133 to all fiscal quarters of
all fiscal years beginning after June 15, 2000. The impact of SFAS No. 133 will
be dependent upon the extent of derivative instruments held by the Company and
the market for such instruments as of the effective date of SFAS No. 133.
Potential Changes in Law Regarding Ownership of Subsidiaries
At any time, future legislation or administrative or judicial decisions or
actions could affect our tax treatment or qualification as a REIT. The REIT
Modernization Act ("RMA"), signed into law in late 1999 and effective for 2001
and later years, contains several provisions affecting REITs. Currently, a REIT
may not hold more than 10% of the voting stock of another company. Under RMA,
this limitation is expanded to include 10% of the value of another company's
securities, with these exceptions: (1) subsidiary's stock held by the REIT on
July 12, 1999; (2) straight debt; and (3) stock of a taxable REIT subsidiary (as
defined below). Thus, the Manager's stock would be grandfathered.
RMA allows a REIT subsidiary to perform services for REIT tenants without
disqualifying the rents received (as under current law). These subsidiaries,
called taxable REIT subsidiaries ("TRS"), will be subject to taxation and will
be limited in the amount of debt and rental payments between the REIT and the
TRS. Existing subsidiaries, such as the Manager, will be grandfathered in a one-
time tax-free conversion as TRS. They will not be subject to these limitations,
unless engaging in a new line of business or increasing assets. If either of
these events occurs, new restrictions on debt and rental payments will apply to
these entities as well. It is anticipated that any new lines of business will be
conducted in a new TRS, therefore not negatively impacting the Manager.
Under the new law, the fair market value of all TRS securities cannot
exceed 20% of the REIT's fair market value. At this time, the Company does not
believe its investments in all future TRS will exceed 20% of the value of the
Company. The RMA returns the REIT distribution requirement to 90% from 95%,
putting REITs back in line with mutual fund distribution requirements. It is
unclear at this time what impact this change will have on future dividends made
by the Company.
Inflation
Most of the leases on the Properties require tenants to pay increases in
operating expenses, including common area charges and real estate taxes, thereby
reducing the impact on the Company of the adverse effects of
29
<PAGE>
inflation. Leases also vary in term from one month to 18 years, further reducing
the impact on the Company of the adverse effects of inflation.
RISK FACTORS
An investment in us involves various risks. The following describes 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 from time to time. We cannot assure you that the factors
described below are all material risks to us at any specific point in time. You
should carefully consider the following factors in reviewing this Form 10-K
which qualify in their entirety each forward-looking statement.
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 Metropolitan Washington, D.C, Dallas/Fort Worth
and Chicago areas provided approximately 19.5%, 14.0% and 13.8% of total
revenues in 1999, 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,
including properties to be acquired or developed. We cannot assure you that
these local economies will continue to grow at the current pace or at all.
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 give rise to
difficulties in predicting revenue potential.
We intend to, from time to time, acquire office properties. These
acquisitions could fail to perform in accordance with expectations. If we fail
to accurately estimate 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.
During 1999, we acquired a total of six Properties containing 1.1 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;
30
<PAGE>
. 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.
These risks and potential costs may adversely affect our results of operations.
Cost variances, tenant defaults, property maintenance costs, non-renewal of
leases, competition, environmental issues and other factors could cause or
contribute to poor operating performance of our properties.
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 our Properties;
. our ability to provide adequate management, maintenance and insurance;
. our 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 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 fails 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
31
<PAGE>
general costs associated with security, landscaping, and 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 13.9% of the total net rentable square feet in our Properties will
expire in the 12 months ending December 31, 2000. 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:
<TABLE>
<CAPTION>
Markets Competitors
- ------- -----------
<S> <C>
Austin, Dallas/Fort Worth, CarrAmerica Realty Corp., Equity Office Properties, Mack-Cali Realty Corp.,
Denver, Houston Crescent Real Estate Equities, ProLogis, Trammell Crow Company, Lincoln Property
Co.
Metro. Washington, D.C. CarrAmerica Realty Corp., Equity Office Properties, Brandywine Realty Trust,
Boston Properties
Chicago, Suburban Detroit CarrAmerica Realty Corp., Equity Office Properties, CenterPoint Properties,
ProLogis, Duke-Weeks Realty Corporation, First Industrial Realty
Suburban Philadelphia Liberty Property Trust, Equity Office Properties, Mack-Cali Realty Corp.,
Brandywine Realty Trust
Atlanta Cousins Properties, Equity Office Properties, CarrAmerica Realty Corp., Duke-Weeks
Realty Corporation
Arizona, Los Angeles, CarrAmerica Realty Corp., Spieker Properties, Kilroy Realty Corp., Cornerstone
Sacramento, San Diego, San Properties, Arden Realty, Shorenstein Co., Equity Office Properties, ProLogis,
Francisco Bay Area, Boston Properties
</TABLE>
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 clean-up costs 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
32
<PAGE>
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.
The environmental site assessments have not revealed any environmental
condition, liability or compliance concern that we believe could have a material
adverse effect on our business, assets or results of operations. It is possible
that the environmental site assessments relating to any one of our 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.
Effective January 1, 1999, the Company purchased insurance to cover
environmental conditions if and when they occur. The policy also covers third-
party claims, which may arise due to the environmental conditions and covers
business interruption. The Company's limits for loss under the policy is $5.0
million per occurrence with a $10.0 million aggregate policy limit.
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 outside of 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.
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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 non-controlling interests, including (1) a 50%
interest in the Broadmoor Austin Joint Venture; (2) a 20% interest in the
Burnett Plaza Joint Venture; and (3) a 60% interest in both Lot 21 Associates,
L.P. and Project 127 Partners, L.P. (collectively, "Oaklands 21/27"). Through
these interests, we act as managing venture partner and have the authority to
conduct business affairs of each Joint Venture, subject to approval and veto
rights of the other venture partner. In addition, the Operating Partnership has
an approximate 10% ownership interest in Urban Media Communications Corporation,
which provides broadband internet access to tenants of commercial office
buildings.
We may also participate with other entities in property ownership or in
providing property-related services 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 REIT.
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.
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.
Our use of variable rate debt and derivative financial instruments may cause an
increase in debt service.
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.
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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.
In September, 1997 we entered into two interest rate swap agreements with
Bank of America 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%. Further, in June 1999, we entered into an interest rate swap agreement
for a notional amount of $50 million. With respect to the interest rate swap
entered into in June 1999, our cost of four year funds before adding the spread
is fixed at a rate of 6.16%.
If we are unable to replace construction loans with permanent refinancing, we
may have to sell the 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 31, 1999, we have $13.3
million in construction loan commitments all of which have been drawn. We have
the option to extend and we anticipate extending the loan maturity from December
19, 2000 to December 19, 2001. 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, as amended, 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 the 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
35
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outstanding common shares, or more than 9.8% of the number of outstanding
preferred shares of beneficial interest of any series.
The board of trustees, upon receipt of a ruling from the IRS, an opinion of
counsel or other evidence satisfactory to the board of trustees, may exempt a
proposed transferee from the ownership limitation. For example, the 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. The board of trustees may not
grant an exemption from the ownership limitation to any proposed transferee if
such exemption would result in the termination of our status as a REIT.
The 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
the board of trustees standing for election at each annual meeting. The
staggered terms of trustees may reduce the possibility of a tender offer or an
attempt to change control of us, even though a tender offer or change in control
might be in the best interest of our shareholders.
The board of trustees can issue additional shares.
Our declaration of trust authorizes our board of trustees to:
. 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
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.
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<PAGE>
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% non-deductible 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.
Annually, 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 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. The REIT
Modernization Act ("RMA"), signed into law in late 1999 and effective for 2001
and later years, contains several provisions affecting REITs. Currently, a REIT
may not hold more than 10% of the voting stock of another company. Under RMA,
this limitation is expanded to include 10% of the value of another company's
securities, with these exceptions: (1) subsidiary's stock held by the REIT on
July 12, 1999; (2) straight debt; and (3) stock of a taxable REIT subsidiary (as
defined below). Thus, the Manager's stock would be grandfathered.
RMA allows a REIT subsidiary to perform services for REIT tenants without
disqualifying the rents received (as under current law). These subsidiaries,
called taxable REIT subsidiaries ("TRS"), will be subject to taxation, and will
be limited in the amount of debt and rental payments between the REIT and the
TRS. Existing subsidiaries, such as the Manager, will be grandfathered in a one-
time tax-free conversion as TRS. They will not be subject to these limitations,
unless engaging in a new line of business or increasing assets. If either of
these events occurs, new restrictions on debt and rental payments will apply to
these entities as well. It is anticipated that any new lines of business will be
conducted in a new TRS, therefore not negatively impacting the Manager.
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Under the new law, the fair market value of all TRS securities cannot
exceed 20% of the REIT's fair market value. At this time, the Company does not
believe its investments in all future TRS will exceed 20% of the value of the
Company. The RMA returns the REIT distribution requirement to 90% from 95%,
putting REITs back in line with mutual fund distribution requirements. It is
unclear at this time what impact this change will have on future dividends made
by the Company.
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 were
contributed to the Operating Partnership by Messrs. Prentiss, August and DuBois.
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.
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.
In 1999, the Company adopted a code of business conduct governing the conduct of
all employees which further reduces the potential for conflicts of interest.
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.
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 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 the 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 chairman and 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 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 the Company 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
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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 Manager, we engage in the business of
management, leasing, development and construction of properties owned by third
parties. Risks associated with these activities include the following:
. 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, leasing or development fee
income.
The capital stock of the Manager is divided into two classes: voting common
stock, all of which is owned by Mr. Prentiss; and non-voting common stock, all
of which we hold through the Operating Partnership. The voting common stock
represents 5% of the ownership interests in the Manager and the non-voting
common stock represents 95% of the ownership interests in the Manager. Mr.
Prentiss, as the holder of all of the Manager's voting common stock, has the
ability to elect the directors of the Manager. We are not able to elect
directors and, therefore, are not able to influence the day-to-day management
decisions of the Manager. As a result, the board of directors and management of
the Manager may implement business policies or decisions that we would not have
implemented and that are adverse to our interests and which could adversely
impact our net operating income and cash flow.
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:
. 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 31, 1999, we have authorized 100,000,000 common shares, of
which 62,513,257 common shares are unissued or held in treasury. In addition, we
have granted options to purchase 2,936,937 common shares to executives officers,
employees and trustees, of which options to purchase 2,365,691 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, 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 (the "Series A Preferred Shares") to
Security Capital Preferred Growth Incorporated in a private placement. The
Series A Preferred Shares are convertible into our common shares beginning on
January 1, 1999.
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Security Capital may sell such common shares upon the effectiveness of a
registration statement that we filed. We can make no prediction concerning the
effect that such issuance or future sales of any such common shares will have on
market prices.
Item 7A. 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 December 31, 1999, the
Company had outstanding total indebtedness, including its pro rata share of
joint venture debt and construction loans, of approximately $983.2 million, or
approximately 48.1% 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 7.28% at December 31, 1999. An additional 5.1% of the Company's
outstanding debt at December 31, 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, 11.2% of the Company's debt at
December 31, 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 December
31, 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
December 31, 1999.
<TABLE>
<CAPTION>
Expected Maturity Date
(in thousands)
---------------------------------------------------------------------------------------
Fair
2000 2001 2002 2003 2004 Thereafter Total Value
-------- -------- -------- ------- -------- ---------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Long-Term Debt:
Fixed Rate $4,728 $ 7,187 $ 17,888 $67,814 $ 43,073 $522,480 $663,170 $663,170
Average Interest
Rate 7.29% 7.29% 7.29% 7.29% 7.30% 7.20%
Variable Rate $4,033 $143,628 $100,592 $ 640 $ 71,147 $320,040 $320,040
Average Interest
Rate 7.25% 7.29% 7.31% 7.45% 7.45%
Interest Rate Derivatives
Interest Rate Swaps:
Variable to Fixed $50,000 $110,000 $160,000 $ 3,046
Avg. Pay Rate 6.22% 6.22% 6.22% 6.23% 6.25%
Avg. Receive Rate 5.82% 5.82% 5.82% 5.82% 5.82%
</TABLE>
The table incorporates only those exposures that exist as of December 31, 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
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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.
Item 8. Financial Statements and Supplementary Data
Financial Statements and the Financial Statement Schedule appear at page F-
1 to page F-27 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
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PART III
Item 10. Trustees and Executive Officers of the Company
The information regarding the Trustees and Executive Officers of the
Company is incorporated herein by reference to the captions "Proposal One--
Election of Trustees," "Trustees and Executive Officers of the Company" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's
definitive proxy statement to be filed with respect to its Annual Meeting of
Shareholders.
Item 11. Executive Compensation
The information regarding Executive Compensation is incorporated herein by
reference to the captions "Executive Compensation" in the Company's definitive
proxy statement to be filed with respect to its Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information regarding Security Ownership of Certain Beneficial Owners and
Management is incorporated herein by reference to the caption "Security
Ownership of Certain Beneficial Owners and Management" in the Company's
definitive proxy statement to be filed with respect to its Annual Meeting of
Shareholders.
Item 13. Certain Relationships and Related Transactions
The information regarding Certain Relationships and Related Transactions is
incorporated herein by reference to the caption "Certain Relationships and
Related Transactions" in the Company's definitive proxy statement to be filed
with respect to its Annual Meeting of Shareholders.
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PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Financial Statements, Financial Statement Schedule and Exhibits
(1) Financial Statements
Report of Independent Accountants
Consolidated Balance Sheets of Prentiss Properties Trust (the
"Company") as of December 31, 1999 and December 31, 1998
Consolidated Statements of Income of the Company for the Years Ended
December 31, 1999, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity of the
Company for the Years Ended December 31, 1999, 1998 and 1997
Consolidated Statements of Cash Flows of the Company for the Years
Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
(2) Financial Statement Schedule
Report of Independent Accountants
Schedule III: Real Estate and Accumulated Depreciation
(3) 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 January 15, 1998, SEC 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, SEC FileNo.000-23813).
3.5 -- Articles Supplementary, dated June 25, 1998, Classifying
and Designating a Series of Preferred Shares of Beneficial
Interest as Series B Cumulative Redeemable Perpetual Preferred
Shares of Beneficial Interest and Fixing Distribution and
Other Preferences and
43
<PAGE>
Rights of Such Shares (filed as an exhibit to the Company's Form
10-Q filed on August 12, 1998).
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 (filed as Exhibit 3.6 to
the Company's Report on Form 10-Q, filed November 11, 1999).
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,
file no. 333-65793, filed on October 16, 1998)
10.1 -- Second Amended and Restated Agreement of Limited Partnership
(included as exhibit 10.2 in the Company's Annual Report on Form
10-K, filed March 25, 1997).
10.2 -- First Amendment to Second Amended and Restated Agreement of
Limited Partnership of Prentiss Properties Acquisition Partners,
L.P. (filed as Exhibit 4.1 to the Company's Current Report on
Form 8-K, filed January 15, 1998).
10.3 -- Second Amendment to Second Amended and Restated Agreement of
Limited Partnership of Prentiss Properties Acquisition Partners,
L.P. (filed as an exhibit to the Company's Form 10-Q filed on
August 12, 1998).
10.4 -- Credit Agreement, dated October 6, 1997, among Prentiss
Properties Acquisition Partners, L.P., as Borrower, NationsBank
of Texas, N.A., as Administrative Agent and Lender, Bank
One,Texas, N.A., as Documentation Agent and Lender, Crestar
Bank,as Lender, Comerica Bank, as Lender, and First National Bank
of Chicago, as Lender (filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K filed November 3, 1997).
10.5 -- Credit Agreement, dated December 30, 1997, among Prentiss
Properties Acquisition Partners, L.P., as Borrower, each of the
lenders that are a signatory therein, Bank One, Texas, N.A., as
Administrative Agent, and NationsBank of Texas, N.A., as
Syndication Agent (filed as Exhibit 10.4 to the Company's Current
Report on Form 8-K filed February 10, 1998).
10.6 -- Form of Employment Agreement for Michael V. Prentiss (filed as
Exhibit 10.3 to the Company's Registration Statement on Amendment
No. 1 of Form S-11, File No. 333-09863, and incorporated by
reference herein).
10.7 -- Form of Employment Agreement for Thomas F. August (filed as
Exhibit 10.4 to the Company's Registration Statement on Amendment
No. 1 of Form S-11, File No. 333-09863, and incorporated by
reference herein).
10.8 -- Form of Agreement Not to Compete for Dennis J. DuBois (filed
as Exhibit 10.6 to the Company's Registration Statement on
Amendment No. 1 of Form S-11, File No. 333-09863, and
incorporated by reference herein).
10.9 -- Purchase Agreement entered into by and between Jacob Brouwer
and Jeanette Brouwer (as "Sellers") and Prentiss Properties
Acquisition Partners, L.P. (as "Buyer") in respect to the
purchase and sale of the properties referred to therein as
"Carlsbad Pacifica" (filed as Exhibit 10.1 to the Company's
Current Report on Form 8-K filed February 10, 1998).
10.10 -- Purchase Agreement entered into by and between JJB Land
Company, LLC (as "Seller") and Prentiss Properties Acquisition
Partners, L.P. (as "Buyer") in respect to the purchase and sale
of the properties referred to therein as "The Plaza" (filed as
Exhibit 10.2 to the Company's Current Report on Form 8-K filed
February 10, 1998).
10.11 -- Contribution/Purchase Agreement entered into by and between
the Sellers (therein identified) and Prentiss Properties
Acquisition Partners, L.P. (as "Buyer") in respect to the
purchase and sale of the properties referred to therein as the
"Shiley Interests" and "NNC Interests" (filed as Exhibit 10.3 to
the Company's Current Report on Form 8-K filed February 10,
1998).
44
<PAGE>
10.12 -- 1996 Share Incentive Plan (filed as Exhibit 10.25 to the
Company's Registration Statement on Amendment No. 1 of Form S-11,
File No. 333-09863, and incorporated by reference herein).
10.13* --Third Amendment to the Second Amended and Restated Agreement of
Limited Partnership of Prentiss Properties Acquisition Partners,
L.P.
10.14* --Fourth Amendment to the Second Amended and Restated Agreement
of Limited Partnership of Prentiss Properties Acquisition
Partners, L.P.
10.15* --Fifth Amendment to the Second Amended and Restated Agreement of
Limited Partnership of Prentiss Properties Acquisition Partners,
L.P.
10.16* --Seventh Amendment to the Second Amended and Restated Agreement
of Limited Partnership of Prentiss Properties Acquisition
Partners, L.P.
10.17 --Eighth Amendment to the Second Amended and Restated Agreement
of Limited Partnership of Prentiss Properties Acquisition
Partners, L.P. (filed as Exhibit 10.1 to the Company's Report on
Form 10-Q, filed November 11, 1999).
10.18 --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 (filed as Exhibit 10.2 to the Company's Report on
Form 10-Q, filed November 11, 1999).
23.1* --Consent of PricewaterhouseCoopers LLP.
27.1* --Financial Data Schedule
----- -------------------------
* Filed herewith.
(b) Reports on Form 8-K
The Company has not filed any Reports on Form 8-K for or during the period
October 1, 1999 through December 31, 1999.
45
<PAGE>
PRENTISS PROPERTIES TRUST
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
FINANCIAL STATEMENTS PAGE
- -------------------- ----
<S> <C>
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheets of Prentiss Properties Trust (the
"Company") as of December 31, 1999 and December 31, 1998............... F-3
Consolidated Statements of Income of the Company for the Years Ended
December 31, 1999, 1998 and 1997....................................... F-4
Consolidated Statements of Changes in Shareholders' Equity of the
Company for the Years Ended December 31, 1999, 1998 and 1997........... F-5
Consolidated Statements of Cash Flows of the Company for the Years
Ended December 31, 1999, 1998 and 1997................................. F-6
Notes to Consolidated Financial Statements............................. F-7
FINANCIAL STATEMENT SCHEDULE
- ----------------------------
Report of Independent Accountants...................................... F-24
Schedule III: Real Estate and Accumulated Depreciation................ F-25
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees and Shareholders
of Prentiss Properties Trust
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of shareholders' equity and of cash flows
present fairly, in all material respects, the financial position of Prentiss
Properties Trust (the "Company") at December 31, 1999 and 1998, and the
consolidated results of operations and cash flows for each of the three years in
the period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 9, 2000
F-2
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998
---------------- --------------
<S> <C> <C>
ASSETS
Real estate:
Land.......................................................... $ 298,555 $ 285,385
Buildings and improvements.................................... 1,481,831 1,363,347
Construction in progress...................................... 87,860 137,785
Land held for development..................................... 30,236 24,218
---------- ----------
1,898,482 1,810,735
Less: accumulated depreciation................................ (91,461) (61,232)
---------- ----------
Total real estate assets 1,807,021 1,749,503
Deferred charges and other assets, net......................... 115,250 74,560
Receivables, net............................................... 28,277 20,484
Cash and cash equivalents...................................... 13,313 5,523
Escrowed cash.................................................. 6,481 8,172
Other receivables (affiliates)................................. 3,617 2,245
Investments in joint ventures and unconsolidated subsidiary.... 20,704 10,658
---------- ----------
Total assets.................................................. $1,994,663 $1,871,145
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt on real estate............................................ $ 896,810 $ 800,263
Accounts payable and other liabilities......................... 68,144 62,410
Distributions payable.......................................... 18,896 17,774
---------- ----------
Total liabilities............................................ 983,850 880,447
---------- ----------
177,817 128,775
Minority interest in operating partnership..................... ---------- ----------
1,503 1,345
Minority interest in real estate partnerships.................. ---------- ----------
Commitments and contingencies
Preferred shares $.01 par value, 20,000,000 shares
authorized, 3,773,585 shares issued and outstanding
at December 31, 1999 and 1998............................... 100,000 100,000
Common shares $.01 par value, 100,000,000 shares
authorized, 40,078,643 and 39,930,288 (includes
2,591,900 and 998,800 in treasury) shares issued and
outstanding at December 31, 1999 and 1998,
respectively...............................................
Additional paid-in capital..................................... 401 399
Retained earnings (distributions in excess of earnings)........ 789,554 787,193
Common shares in treasury, at cost, 2,591,900 and 998,800 5,329 (3,700)
shares at December 31, 1999 and 1998, respectively............ (63,791) (23,314)
---------- ----------
Total shareholders' equity................................... 831,493 860,578
---------- ----------
Total liabilities and shareholders' equity................... $1,994,663 $1,871,145
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenues:
Rental income................................. $297,147 $235,650 $127,089
Mortgage interest............................. 3,835 1,780
Management and other fees, net.............. 3,325 2,129 2,859
-------- -------- --------
Total revenues 300,472 241,614 131,728
-------- -------- --------
Expenses:
Property operating and maintenance............ 69,603 57,191 30,602
Real estate taxes............................. 34,201 25,512 13,742
General and administrative and personnel cost. 8,843 8,000 6,619
Interest expense.............................. 59,346 41,718 21,131
Amortization of deferred financing costs...... 1,126 963 824
Depreciation and amortization................. 54,535 41,828 21,600
-------- -------- --------
Total expenses........................... 227,654 175,212 94,518
-------- -------- --------
Equity in income of joint ventures and
unconsolidated subsidiary........................ 4,294 7,398 5,208
-------- -------- --------
Income before gain on sales, minority interests
and extraordinary items.......................... 77,112 73,800 42,418
Gain on sales..................................... 16,105 14,416 641
Minority interests................................ (12,735) (7,796) (5,235)
-------- -------- --------
Income before extraordinary items................. 80,482 80,420 37,824
Extraordinary items............................... (9,001) (878)
-------- -------- --------
Net income........................................ 80,482 71,419 36,946
Preferred dividends............................... (6,491) (5,655) (25)
-------- -------- --------
Net income applicable to common shareholders...... $ 73,991 $ 65,764 $ 36,921
======== ======== ========
Net income per common share before extraordinary
items - basic................................. $ 1.95 $ 1.93 $ 1.52
Extraordinary items............................... (0.23) (.04)
-------- -------- --------
Net income per common share - basic............... $ 1.95 $ 1.70 $ 1.48
======== ======== ========
Weighted average number of common shares
outstanding - basic........................... 37,875 38,742 24,930
======== ======== ========
Net income per common share before extraordinary
items - diluted.................................. $ 1.93 $ 1.89 $ 1.49
Extraordinary items............................... (0.21) (.03)
-------- -------- --------
Net income per common share - diluted............. $ 1.93 $ 1.68 $ 1.46
======== ======== ========
Weighted average number of common shares
and common share equivalents
outstanding - diluted........................ 41,729 42,497 25,307
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Additional Retained earnings Common
Preferred Common paid-in (distributions in shares in
Total shares shares capital excess of earnings) treasury
--------- --------- ------ ------- ------------------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996.......... $325,221 $ 203 $326,309 $ (1,291)
Net proceeds from issuance of
common shares (12,911,586
common shares)................. 301,906 129 301,777
Net proceeds from issuance of
preferred shares (2,830,189
preferred shares)............... 75,000 $ 75,000
Distributions declared
($1.60 per common share)....... (42,416) (42,416)
Preferred distributions declared
($1.60 per preferred share for
the prorated period outstanding).. (25) (25)
Net income........................ 36,946 36,946
-------- --------- ------ -------- -------- --------
Balance at December 31, 1997.......... 696,632 75,000 332 628,086 (6,786)
Net proceeds from issuance of
common shares (6,738,805
common shares)................ 159,174 67 159,107
Net proceeds from issuance of
preferred shares (943,396
preferred shares)............. 25,000 25,000
Proceeds used to purchase treasury $(23,314)
shares (998,800 treasury (23,314)
shares).....................
Distributions declared
($1.60 per common share)..... (62,678) (62,678)
Preferred distributions declared
($1.60 per preferred share for the
prorated period outstanding)... (5,655) (5,655)
Net income......................... 71,419 71,419
-------- --------- ------ -------- -------- --------
Balance at December 31, 1998.......... 860,578 100,000 399 787,193 (3,700) (23,314)
Net proceeds from issuance of
common shares (148,355
common shares)................ 2,363 2 2,361
Proceeds used to purchase treasury
shares (1,593,100 treasury (40,477) (40,477)
shares).....................
Distributions declared
($1.72 per common share)..... (64,962) (64,962)
Preferred distributions declared
($1.72 per preferred share).... (6,491) (6,491)
Net income......................... 80,482 80,482
-------- --------- ------ -------- -------- --------
Balance at December 31, 1999.......... $831,493 $100,000 $ 401 $789,554 $ 5,329 $(63,791)
======== ========= ====== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
PRENTISS PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income........................................................... $ 80,482 $ 71,419 $ 36,946
Adjustments to reconcile net income to net cash provided by
operating activities:
Minority interests.................................................. 12,735 7,796 5,235
Extraordinary items................................................. 9,001 878
Gain on sales....................................................... (16,105) (14,416) (641)
Provision for doubtful accounts..................................... 1,225 1,160 59
Depreciation and amortization....................................... 54,535 41,828 21,600
Amortization of deferred financing costs............................ 1,126 963 824
Equity in income of joint ventures and unconsolidated subsidiary.... (4,294) (7,398) (5,208)
Non-cash compensation............................................... 100 99 50
Changes in assets and liabilities:
Deferred charges and other assets................................... (2,316) (8,362) (5,277)
Receivables......................................................... (9,846) (13,320) (5,499)
Escrowed cash....................................................... (1,973) (2,951) (2,376)
Other receivables (affiliates)..................................... (1,372) (317) (582)
Accounts payable and other liabilities............................. 5,367 16,484 15,449
--------- --------- ---------
Net cash provided by operating activities............................ 119,664 101,986 61,458
--------- --------- ---------
Cash Flows from Investing Activities:
Purchase and development of real estate.............................. (204,346) (632,998) (587,495)
Investment in real estate............................................ (56,754) (53,092) (63,809)
Investment in mortgage note receivable............................... (36,331)
Investment in joint ventures and unconsolidated subsidiary........... (11,032) (667)
Proceeds from sales of real estate................................... 126,729 112,565 21,593
Increase in deposits on real estate.................................. (824)
Distributions received from joint ventures and unconsolidated
subsidiary.......................................................... 5,026 9,674 7,270
--------- --------- ---------
Net cash used in investing activities............................... (140,377) (563,851) (660,263)
--------- --------- ---------
Cash Flows from Financing Activities:
Net proceeds from sale of common shares.............................. 1,273 106,940 306,785
Net proceeds from sale of preferred shares........................... 25,000 75,000
Net proceeds from sale of preferred units............................ 50,000 95,000
Purchase of treasury shares.......................................... (36,813) (23,314)
Distributions paid to limited partners............................... (2,869) (3,748) (4,977)
Distributions paid to common shareholders............................ (64,045) (60,369) (35,427)
Distributions paid to preferred shareholders......................... (6,339) (4,180)
Distributions paid to preferred unit holders......................... (9,251) (4,074)
Distributions paid for minority interest in consolidated
subsidiaries........................................................ (17)
Proceeds from debt on real estate.................................... 536,113 850,491 745,286
Repayments of debt on real estate.................................... (439,566) (521,433) (487,996)
--------- --------- ---------
Net cash provided by financing activities 28,503 460,313 598,654
--------- --------- ---------
Net change in cash and cash equivalents.............................. 7,790 (1,552) (151)
Cash and cash equivalents, beginning of year......................... 5,523 7,075 7,226
--------- --------- ---------
Cash and cash equivalents, end of year............................... $ 13,313 $ 5,523 $ 7,075
========= ========= =========
Supplemental Cash Flow Information:
Cash paid for interest............................................... $ 63,825 $ 45,894 $ 17,815
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(1) The Organization and Significant Transactions
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 (as defined
below) 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 December 31, 1999, the Company owned interests in a
diversified portfolio of 199 primarily suburban Class A office and suburban
industrial properties containing approximately 19.8 million net rentable square
feet. The properties consist of 133 office buildings (the "Office Properties")
containing approximately 14.9 million net rentable square feet and 66 industrial
buildings (the "Industrial Properties" and together with the Office Properties,
the "Properties") containing approximately 4.9 million net rentable square feet.
The Properties include 10 Properties containing 1.0 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"). As of
December 31, 1999, the Office Properties and Industrial Properties, exclusive of
the Development Properties, were approximately 95% leased to approximately 1,200
tenants and approximately 97% leased to approximately 150 tenants, respectively.
In addition to managing the Properties that the Company owns or has ownership
interest in, the Company manages approximately 25.3 million net rentable square
feet in office, industrial and other properties that are owned by third parties.
Real Estate Transactions
During the year ended December 31, 1999, the Company disposed of 45
properties containing 2.5 million square feet and two land parcels containing
27.06 acres for an aggregate sales price of $131.6 million, resulting in a gain
on sale of $16.1 million.
During the year ended December 31, 1999, the Company acquired six
Properties containing 1.1 million square feet in five markets for an aggregate
purchase price of $140.9 million. The following table presents the Properties
acquired during the period:
<TABLE>
<CAPTION>
Property Description Square Footage Location Month of Acquisition Purchase Price
- -------------------- -------------- -------- -------------------- --------------
(000's)
<S> <C> <C> <C> <C>
Burnett Plaza /(1)/ 205 Fort Worth, TX March 1999 $ 17.6 million
Orchard Place I & II 105 Denver, CO July 1999 9.8 million
935 First Avenue /(2)/ 119 Suburban Philadelphia October 1999 5.0 million
Fairmont Building 122 Metro. Washington, DC November 1999 21.2 million
123 North Wacker Drive 537 Chicago, IL November 1999 87.3 million
------
$140.9 million
======
</TABLE>
/(1)/ The Company acquired a 20% equity interest in Burnett Plaza..
/(2)/ The Company intends to redevelop this single tenant building subsequent
to the lease expiration in August 2000.
In addition to the Properties acquired during 1999, the Company acquired
four parcels of land totaling 28.5 acres for an aggregate purchase price of
$16.6 million.
(2) Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company, the Operating Partnership and other subsidiaries. All significant
intercompany balances and transactions have been eliminated. Certain prior year
amounts have been reclassified to conform to current year presentation.
F-7
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Real Estate
Real estate and leasehold improvements are stated at the lower of
depreciated cost or net realizable value. In accordance with Statement of
Financial Accounting Standards ("SFAS") No. 121, ''Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,'' the
Operating Partnership will record impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the estimated undiscounted cash flows, without interest charges, to
be generated by those assets are less than the carrying amounts of those assets.
The Company periodically reviews its Properties to determine if its carrying
costs will be recovered from future operating cash flows. In cases where the
Company does not expect to recover its carrying costs, the Company recognizes an
impairment loss. No such impairment losses have been recognized to date.
Depreciation on buildings and improvements is provided under the straight-
line method over an estimated useful life of 30 to 40 years for office buildings
and 25 to 30 years for industrial buildings. Interest expense and other directly
related expenses incurred during construction periods are capitalized and
depreciated commencing with the date placed in service, on the same basis as the
related assets. For the year ended December 31, 1999 and December 31, 1998,
capitalized interest costs totaled $5.2 million and $5.8 million, respectively.
Maintenance and repairs are charged to operations as incurred; major
renewals and betterments are capitalized. When assets are sold or retired,
their costs and related accumulated depreciation are removed from the accounts
with the resulting gains or losses reflected in net income.
Deferred Charges
Deferred financing costs are recorded at cost and are amortized using the
effective interest method over the life of the related debt. Leasing commissions
and leasehold improvements are deferred and amortized on a straight-line basis
over the terms of the related leases. Other deferred charges are amortized over
terms applicable to the expenditure.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and investments with
maturities of three months or less when purchased.
Escrowed Cash
Escrowed cash includes real estate tax, insurance and capital reserve
deposits required pursuant to certain of the Company's mortgage loan agreements.
Investment in Joint Ventures and Unconsolidated Subsidiary
Included in investments in joint ventures and unconsolidated subsidiary are
the Company's 50% interest in the joint venture owning the Broadmoor Austin
Properties, the Company's 60% interest in the joint venture owning the Oaklands
21/27 development projects, the Company's 20% interest in the joint venture
owning the Burnett Plaza Property and the Company's 95% interest in the Manager.
The Company accounts for its investments in these entities using the equity
method of accounting, and thus reports its share of income and losses based on
its ownership interest in the respective entities. The difference between the
carrying value of the Company's interest in the Broadmoor Austin Properties and
the book value of the underlying equity is being amortized over 40 years.
Also included in investment in joint ventures and unconsolidated subsidiary
is the Company's approximate 10% interest in the newly formed Urban Media
Communications Corporation which provides broadband internet access to tenants
of commercial office buildings. The Company accounts for this investment using
the cost method of accounting.
F-8
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"). If the
Company qualifies for taxation as a REIT, the Company generally will not be
subject to federal corporate income tax on its taxable income that is
distributed to its shareholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income. The Manager
consists of a legal entity subject to federal income tax on its taxable income
at regular corporate rates.
Leases
The Company, as lessor, has retained substantially all of the risks and
benefits of ownership and accounts for its leases as operating leases.
Revenue Recognition
In accordance with SFAS No. 13 income on leases which include scheduled
rental rate increases over the lease term is recognized on a straight-line
basis.
Management fees, leasing and other fee income items received are recognized
as earned. Leasing fees are generally recognized upon tenant occupancy of the
leased premises unless such fees are irrevocably due and payable upon lease
execution, in which case recognition occurs on the lease execution date.
Distributions
The Company pays regular quarterly distributions on the Company's common
shares ("Common Shares") outstanding which are dependent on receipt of
distributions from the Operating Partnership. The Company pays a quarterly
dividend to holders of the Company's Series A Convertible Preferred Shares (the
"Series A Convertible Preferred Shares") which is equal to the dividends paid
for Common Shares.
Earnings and profits, which will determine the taxability of distributions
to shareholders, will differ from income reported for financial reporting
purposes due to the differences for federal tax purposes, primarily in the
estimated useful lives used to compute depreciation. Distributions declared in
1999, 1998 and 1997 represent an approximate 10.1%, 18.5% and 10.6% return of
capital for federal income tax purposes, respectively.
Minority Interest
Minority interest in the Operating Partnership represents the limited
partners' proportionate share of the equity in the Operating Partnership. The
Operating Partnership pays a regular quarterly distribution to the holders of
common and preferred units. Income is allocated to minority interest based on
the weighted average percentage ownership during the year.
Minority interest in real estate partnerships represents the limited
partners' proportionate share of the equity in real estate partnerships, of
which the Operating Partnership has a majority ownership interest and the
accounts of which are consolidated into the Operating Partnership.
Concentration of Credit Risk
The Company places cash deposits at major banks. Management believes that
through its cash investment policy, the credit risk related to these deposits is
minimal.
F-9
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
SFAS No. 107, "Disclosures About Fair Value of Financial Instruments,"
effective for years ending after December 15, 1992, requires disclosures about
the fair value of financial instruments whether or not such instruments are
recognizable in the balance sheet. The Company's financial instruments include
short-term investments, tenant accounts receivable, accounts payable, other
accrued expenses, mortgage loans payable and interest rate swap agreements. The
fair values of these financial instruments other than the interest rate swap
agreements are not materially different from their carrying or contract values
The fair value of the interest rate swaps is estimated based on quotes from the
market makers of these instruments and represents the estimated amounts the
Company would expect to receive or pay to terminate the agreements. Credit and
market risk exposures are limited to the net interest differentials. The
estimated unrealized net gain on these instruments was approximately $3.0 at
December 31, 1999.
(3) Deferred Charges and Other Assets, Net
Deferred charges and other assets consisted of the following at December
31, 1999 and 1998:
<TABLE>
<CAPTION>
(in thousands)
1999 1998
---- ----
<S> <C> <C>
Deferred leasing and tenant charges.................... $118,629 $ 69,392
Deferred financing costs............................... 13,269 12,071
Prepaid and other assets............................... 8,259 5,100
-------- --------
Total............................................... 140,157 86,563
Less: accumulated amortization........................ (24,907) (12,003)
-------- --------
$115,250 $ 74,560
======== ========
</TABLE>
(4) Receivables, Net
Receivables consisted of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(in thousands)
1999 1998
---- ----
<S> <C> <C>
Rents and services..................................... $ 9,144 $10,677
Accruable rental income................................ 15,686 10,943
Other.................................................. 6,337 529
------- -------
Total................................................ 31,167 22,149
Less: allowance for doubtful accounts.................. (2,890) (1,665)
------- -------
$28,277 $20,484
======= =======
</TABLE>
Accruable rental income represents rental income recognized on a straight-
line basis in excess of rental revenue accrued in accordance with individual
lease agreements.
Effective June 30, 1999, the Company loaned $4.2 million to various key
employees as part of the Company's long-term incentive plan to retain such
employees. The funds were used to purchase Common Shares of the Company in the
open market. The loans are full recourse notes which accrue interest quarterly
at a fixed rate of
F-10
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
7% and have a term of five years. Interest payments are due quarterly. The loan
balances are to be forgiven, contingent upon each key employees' continued
service to the Company, in the following manner: one-third of the principal
balance will be forgiven at the end of the third year of the loan term, one-
third will be forgiven at the end of the fourth year of the loan term, and the
remaining principal balance will be forgiven at the end of the fifth year of the
loan term. The effect of the loans is reflected in the Company's other
receivable balance as of December 31, 1999.
(5) Investment in Joint Ventures and Unconsolidated Subsidiary
The following information summarizes the financial position at December 31,
1999 and 1998 and the results of operations for the years ended December 31,
1999, 1998, and 1997 of the unconsolidated joint ventures and subsidiary of the
Company which are accounted for using the equity method of accounting during the
periods presented:
<TABLE>
<CAPTION>
(in thousands)
Company's
Summary of Financial Position: Total Assets Total Debt Total Equity Investment
------------ ---------- ------------ ----------
1999 1998 1999 1998 1999 1998 1999 1998
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Broadmoor Austin Properties $121,813 $123,255 $154,000 $154,000 ($34,544) ($32,915) $ 5,638 $ 6,707
Oaklands 21/27/(1)/ 4,597 1,943 2,057 1,216
Burnett Plaza Property 94,066 47,000 44,327 8,899
Manager 15,827 15,326 4,190 4,207 3,951 3,951
-------- -------- -------- -------- ------- -------- ------- -------
$236,303 $138,581 $202,943 $154,000 $16,030 ($28,708) $19,704 $10,658
======== ======== ======== ======== ======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
(in thousands)
Company's
Summary of Operations: Total Revenues Net Income Share of Net Income
-------------- ---------- -------------------
1999 1998 1997 1999 1998 1997 1999 1998 1997
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Broadmoor Austin Properties/(1)/ $19,845 $19,795 $19,534 $ 3,921 ($9,696) $ 884 $ 1,961 $ 1,601 $ 442
Oaklands 21/27/(2)/
Burnett Plaza Property 10,763 793 159
Manager 22,583 28,566 26,682 2,174 5,864 4,788 2,174 5,797 4,766
------- ------- ------- -------- ------- -------- ------- ------- ------
$53,191 $48,361 $46,216 $ 6,888 ($3,832) $ 5,672 $ 4,294 $ 7,398 $5,208
======= ======= ======= ======== ======= ======== ======= ======= ======
</TABLE>
(1) The Company's share of net income from the Broadmoor Austin Properties
represents the Company's share of income before extraordinary items which
totaled $6.45 million in 1998. The extraordinary items were reflected as
extraordinary items, net of the minority interest share, on the Company's
consolidated statement of income for the year ended December 31, 1998.
(2) The Oaklands 21/27 development projects had no operations for the two-year
period ended December 31, 1999.
In addition to the above, in November 1999, the Company invested $1.0
million in Urban Media Communications Corporation which provides broadband
Internet access to tenants of commerical office buildings. The Company's $1.0
million investment, which represents less than a 10% interest in Urban Media
Communications Corporation, is accounted for using the cost method of
accounting.
F-11
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(6) Debt on Real Estate
The following table sets forth the Company's debt balances as of December
31, 1999 and 1998:
<TABLE>
<CAPTION>
(000s) Interest
------
Description 1999 1998 Amortization Rate Maturity
- ----------- ---- ---- ------------ ---- --------
<S> <C> <C> <C> <C> <C>
Bridge Loan/(1)/ $120,000 None LIBOR + 1.25% January 4, 1999
Line of Credit $129,022 122,000 None LIBOR + 1.375% January 2, 2001
Executive Center Del Mar 13,267 13,225 None LIBOR + 1.35% December 19, 2001/(13)/
Bank Term Facility 100,000 100,000 None LIBOR + 1.375% October 13, 2002
Bachman West 2,972 3,020 25 yr 8.63% December 1, 2003
Northeast Portfolio Loan 60,000 60,000 None/(9)/ 6.80% December 10, 2003
One Westchase Center 24,901 25,339 25 yr 7.84% February 1, 2004
Crescent Centre 12,000 12,000 None 7.95% March 1, 2004
Bank Term Loan/(2)/ 72,500 None/(10)/ LIBOR + 1.625% September 30, 2004
Walnut Glen Tower 35,000 35,000 None/(11)/ 6.92% April 1, 2005
Highland Court 4,930 5,031 25 yr 7.27% April 1, 2006
Oaklands Corporate Center 1,319 1,356 20 yr 8.65% August 1, 2006
Westheimer Central Plaza 5,966 6,060 25 yr 8.38% August 1, 2006
Creamery Way 3,708 3,814 20 yr 8.30% September 19, 2006
PPREFI Portfolio Loan/(3)/ 180,100 180,100 None 7.58% February 26, 2007
Oaklands Corporate Center 6,292 6,388 25 yr 8.55% July 1, 2007
Oaklands Corporate Center 2,652 2,692 25 yr 8.40% November 1, 2007
Corporetum Office Campus/(4)/ 25,780 30 yr 7.02% February 1, 2009
Natomas Corporate Center/(5)/ 37,679 30 yr 7.02% February 1, 2009
7101 Wisconsin Avenue/(6)/ 21,345 30 yr 7.25% April 1, 2009
2500 Cumberland Parkway 14,500 13,151 None/(12)/ 7.46% July 15, 2009
World Savings Center/(7)/ 29,480 30 yr 7.91% November 1, 2010
Park West C2 35,327 35,718 30 yr 6.63% November 10, 2010
One O'Hare Centre 41,842 42,250 30 yr 6.80% January 10, 2011
3130 Fairview Park Drive Loan/(8)/ 23,342 30 yr 7.00% April 1, 2011
Southpoint (III) 7,635 7,941 20 yr 7.75% April 14, 2014
Other Corporate Debt 5,251 5,178 None 7.40% Various
-------- --------
Total debt on real estate $896,810 $800,263
======== ========
</TABLE>
(1) The Bridge Loan was repaid on January 4, 1999 with proceeds from the
Company's Line of Credit.
(2) On October 4, 1999, the Company closed the Bank Term Loan, which is
collateralized by the following four Properties: Willow Oaks I & II (two
Properties), 8521 Leesburg Pike and Croton Road Corporate Center.
(3) During 1999, six of the Kansas City industrial properties, which
collateralized the PREFI Portfolio Loan, were sold. As a result, four
Properties were added as collateral substitution, bringing the total to 36
Properties. The four substituted Properties include the Cottonwood Office
Properties (three Properties) and the 2455 Horsepen Road Property.
(4) On January 6, 1999, the Company closed the Corporetum Office Campus loan,
which is collateralized by the Corporetum Office Campus Properties (five
Properties).
(5) On January 6, 1999, the Company closed the Natomas Corporate Center loan,
which is collateralized by the Natomas Corporate Center Properties (six
Properties).
(6) On March 9, 1999, the Company closed the 7101 Wisconsin Avenue loan, which
is collateralized by the 7101 Wisconsin Avenue Property.
(7) On October 5, 1999, the Company closed the Word Savings Center loan, which
is collateralized by the World Savings Center Property.
(8) On April 16, 1999, the Company closed the 3130 Farview Park Drive loan,
which is collateralized by the 3130 Fairview Park Drive Property.
(9) 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.
(10) The loan, which was entered into in October 1999, 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.
(11) 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.
(12) The construction loan in place at December 31, 1998 was repaid in May 1999
with proceeds from the permanent loan. 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
based on a 30-year amortization.
F-12
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(13) 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.
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 in the aggregate, $160.0 million of 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 Received
Swap Rate Paid Effective Fixed (Variable) at
Notional Amount (Fixed) Rate December 31, 1999 Swap Maturity
- --------------- ------- ---- ----------------- -------------
<S> <C> <C> <C> <C>
$50 million 6.155% 7.780% 5.822% June 2, 2003
$50 million 6.253% 7.628% 5.822% September 30, 2004
$60 million 6.248% 7.623% 5.822% 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
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.
The fair value of the Interest Rate Swaps is estimated based on quotes
from the market makers of these instruments and represents the estimated amounts
the Company would expect to receive or pay to terminate the agreements. Credit
and market risk exposures are limited to the net interest differentials. The
estimated unrealized net gain on these instruments was approximately $3.0 at
December 31, 1999.
On August 25, 1998, the Company 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
the Company anticipated entering into. On October 6, 1998, the Company
terminated one $49.25 million agreement with Societe Generale, New York Branch,
and as a result of the substantial downward movement in the underlying treasury
security, incurred settlement costs of $4.3 million. These settlement costs are
being amortized over the 12-year term of the $35.75 million Park West C2 loan
with the remainder being amortized over $13.5 million of the $42.25 million One
O'Hare Centre loan. The effective interest rate on the $49.25 million is 7.40%
per annum.
On December 29, 1998, the Company terminated the $49.25 million treasury
lock agreement with UBS AG, London Branch, and incurred settlement costs of
approximately $1.8 million. These settlement costs are being amortized over the
term of the Corporetum Office Campus and Natomas Corporate Center loans. The
effective interest rate on the $49.25 million is 7.30% per annum.
Future scheduled principal repayments of debt on real estate are as
follows:
<TABLE>
<CAPTION>
(in thousands)
<S> <C>
2000.................................... $ 8,761
2001.................................... 148,911
2002.................................... 106,428
2003.................................... 65,606
</TABLE>
F-13
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
2004.................................... 110,900
Thereafter.............................. 456,204
--------
$896,810
========
</TABLE>
Under its loan agreements, the Company is required to satisfy various
affirmative and negative covenants, including limitations on total indebtedness,
total collateralized indebtedness and cash distributions, as well as obligations
to maintain a certain minimum tangible net worth and certain minimum interest
coverage ratios. The Company was in compliance with these covenants at December
31, 1999.
(7) Accounts Payable and Other Liabilities
Accounts payable and other liabilities consisted of the following at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(in thousands)
1999 1998
------- -------
<S> <C> <C>
Accounts payable and other liabilities..... $26,010 $33,027
Accrued real estate taxes.................. 24,824 17,163
Advance rent and deposits.................. 17,310 12,220
------- -------
$68,144 $62,410
======= =======
</TABLE>
(8) Distributions
In December 1999, the Company declared a cash distribution for the fourth
quarter of 1999 in the amount of $.44 per share, payable on January 14, 2000, to
common shareholders of record on December 31, 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 distributions, totaling $18.9 million, were paid on
January 14, 2000.
In addition, a quarterly distribution totaling $3.2 million in the
aggregate was declared and paid on December 31, 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 "Series C Perpetual Preferred
Units"). The quarterly distribution equates to an annualized 8.3% of the face
amount of the Series B Perpetual Preferred Units and an annualized 9.45% of the
face amount of the Series C Perpetual Preferred Units.
(9) Leasing Activities
The future minimum lease payments to be received by the Company as of
December 31, 1999, under non-cancelable operating leases, which expire on
various dates through 2017, are as follows:
<TABLE>
<CAPTION>
(in thousands)
Years ending December 31:
<S> <C>
2000................................. $ 258,007
2001................................. 230,921
2002................................. 199,177
2003................................. 170,015
2004................................. 130,984
Thereafter........................... 333,010
----------
$1,322,114
==========
</TABLE>
The geographic concentration of the future minimum lease payments to be
received is detailed as follows:
F-14
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(in thousands)
Markets
-------
<S> <C>
Metro. Washington, D.C............... $ 274,107
Dallas/Fort Worth.................... 221,159
Chicago.............................. 186,339
Suburban Philadelphia................ 143,049
San Diego............................ 85,657
San Francisco Bay Area............... 79,445
Atlanta.............................. 58,621
Austin............................... 50,071
Sacramento........................... 49,722
Suburban Detroit..................... 49,115
Denver............................... 46,742
Houston.............................. 46,236
Los Angeles.......................... 30,586
Other markets........................ 1,265
----------
$1,322,114
==========
</TABLE>
For the years ended December 31, 1999 and December 31, 1998, no
individual tenant accounted for more than 10% of the Company's total rental
income.
(10) Supplemental Disclosure of Non-Cash Financing Activities
During December 1999 and 1998, the Company declared cash distributions
totaling $18.9 million and $17.8 million that were paid January 2000 and 1999,
respectively.
On January 21, 1999, pursuant to provisions of a forward stock contract,
the Company reacquired 1,100,000 Common Shares from Union Bank of Switzerland
("UBS"). $3.7 million of the proceeds used to reacquire the Common Shares was
previously placed as collateral, in 1998, on the forward stock contract.
In relation to the sale of properties during the year ended December 31,
1999, the Company removed from real estate and deferred charges $9.0 million and
$1.1 million of fully depreciated assets, respectively, as well as receivables
totaling $828,000. The Company removed an additional $2.2 million of deferred
charges related to fully depreciated leasing and financing costs.
(11) Related Party Transactions
The Company owns a 95% economic interest in the Manager which is not
consolidated in these financial statements. The Manager incurs certain
personnel and other overhead-related expenses on behalf of the Company which are
subsequently reimbursed to the Manager. Such expenses totaled $3.5 million and
$2.9 million for the years ended December 31, 1999 and December 31, 1998,
respectively. In addition, the Company funds short-term capital needs of the
Manager which are subsequently reimbursed to the Company. The net unreimbursed
cost has been included in other receivables (affiliates) on the balance sheets
of the Company and consisted of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(in thousands)
1999 1998
------ ------
<S> <C> <C>
Short-term borrowings due from affiliates.................... $2,963 $1,770
Payroll and staff benefits due from affiliates............... 654 475
------ ------
$3,617 $2,245
====== ======
</TABLE>
(12) Employee Benefit Plan
F-15
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
The Company has a 401(k) Savings Plan (the ''Plan'') for its employees.
Under the Plan, as amended, employees, age 21 and older, are eligible to
participate in the Plan after they have completed one year and 1,000 hours of
service. Participants are immediately vested in their contributions, the
Company's matching contributions and earnings thereon.
The Company matches 25% of an employees contribution, not to exceed 25% of
6% of each employee's wages. The cost to the Company totaled approximately
$331,000 and $288,000 for the years ended December 31, 1999 and 1998,
respectively.
The Company has registered 500,000 Common Shares in connection with its
share purchase plan ("Share Purchase Plan"). The Share Purchase Plan enables
eligible employees to purchase shares, subject to certain restrictions, of the
Company at a 15% discount to fair market value. A total of 71,190 and 26,463
Common Shares were issued, in accordance with the Share Purchase Plan, during
the years ended December 31, 1999 and 1998, respectively.
(13) Share Incentive Plans
The Company sponsors the Prentiss Properties Trust Trustees' Share
Incentive Plan (the "Trustees' Automatic Grant Plan") and the Prentiss
Properties Trust 1996 Share Incentive Plan (the "Employees' Plan")
(collectively, the "Plans"), which are stock-based incentive compensation plans
as described below. The Company applies APB Opinion 25 and related
Interpretations in accounting for the Plans. In 1995, the FASB issued SFAS No.
123 "Accounting for Stock-Based Compensation" which, if fully adopted by the
Company, would change the methods the Company applies in recognizing the cost of
its Plans. Adoption of the cost recognition provisions of SFAS No. 123 is
optional and the Company has decided not to elect these provisions of SFAS No.
123. However, pro forma disclosures as if the Company adopted the cost
recognition provisions of SFAS No. 123 in 1995 are required by SFAS No. 123 and
are presented herein.
Under the Plans, the Company is authorized to issue shares of common stock
or cash pursuant to "Awards" granted in the form of non-qualified stock options
not intended to qualify under Section 422 of the Internal Revenue Code of 1986,
as amended, restricted or non-restricted shares, stock appreciation rights
("SARs"), and performance shares. Awards may be granted to selected employees
and trustees of the Company or an affiliate. In 1999, 1998, and 1997 the Company
granted nonqualified stock options under the Plans.
The Trustees' Automatic Grant Plan
On the first day of each fiscal quarter, the Company shall issue to each
trustee on that date Common Shares having an aggregate value of $5,000, based on
the per share value of the Common Shares on the date of grant. Common Shares are
100% vested at grant and, therefore, expensed upon issuance. A total of 4,620
and 3,970 Common Shares were granted pursuant to the plan for the years ended
December 31, 1999 and 1998, respectively.
The Employees' Plan
Under the Employees' Plan, the Company is authorized to issue, at the
discretion of the Plan Administrator, Awards with respect to a maximum of
4,500,000 Common Shares. Awards may be granted to employees of the Company. No
participant may be granted, in any calendar year, Awards in the form of stock
options or SARs with respect to more than 390,000 Common Shares or restricted
share Awards for more than 50,000 Common Shares. The Plan Administrator has
broad discretion in determining the vesting terms and other terms applicable to
Awards granted under the Plan.
The exercise price of each option granted during 1999 was equal to the per
share fair market value of the Common Share on the date of grant. These options
vest 33-1/3% per year on each anniversary of the date of grant, commencing with
the first anniversary of the date of grant.
F-16
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
A summary of the status of the Company's stock options as of December 31,
1999, December 31, 1998 and December 31, 1997 and the changes during the year
ended on those dates is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------------- ------------------------------ ------------------------------
Weighted Weighted Weighted
# Shares of Average # Shares of Average # Shares of Average
Underlying Exercise Underlying Exercise Underlying Exercise
Options Prices Options Prices Options Prices
------- ------ ------- ------- ------- ------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the
year.............................. 2,358,359 $22.47 2,194,415 $20.76 1,651,938 $20.82
Granted........................... 101,000 $22.01 547,500 $26.30 636,499 $25.08
Exercised......................... 25,500 $20.02 48,168 $21.30 9,500 $20.63
Forfeited......................... 68,168 $22.75 335,388 $26.66 84,522 $20.86
Expired........................... ---------- ---------- ----------
Outstanding at end of year........ 2,365,691 $22.48 2,358,359 $22.47 2,194,415 $22.06
========== ========== ==========
Exercisable at end of year........ 1,639,722 $22.23 1,205,656 $21.53 525,317 $20.76
========== ========== ==========
Weighted-average fair value....... $ 1.44 $ 1.29 $ 1.42
====== ====== ======
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted-
average assumptions:
1999 1998 1997
------ ------ ------
Expected term 5 5 5
Expected dividend yield 7.86% 8.00% 8.00%
Expected volatility 18.56% 16.30% 13.11%
Risk-free interest rate 6.50% 5.46% 6.28%
The following table summarizes information about employee stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- --------------------
Weighted
Range of Exercise Number Weighted Average Number Weighted
Prices Outstanding Average Remaining Exercisable Average
------
at 12/31/99 Exercise Price Contr. Life at 12/31/99 Exercise Price
----------- -------------- ----------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$20.00 to $25.00 1,913,692 $ 21.42 7.12 1,395,059 $ 21.42
$25.01 to $30.00 451,999 $ 26.98 7.91 244,663 $ 26.94
---------------- --------- --------- ---- --------- ---------
$20.00 to $30.00 2,365,691 $ 22.48 7.27 1,639,722 $ 22.24
================ ========= ========= ==== ========= =========
</TABLE>
Had the compensation cost for the Company's stock-based compensation plans
been determined consistent with SFAS No. 123, the Company's net income and net
income per Common Share for 1999 would approximate the pro forma amounts below:
<TABLE>
<CAPTION>
(amounts in thousands, except per share data)
As Reported Pro Forma As Reported Pro Forma As Reported Pro Forma
12/31/99 12/31/99 12/31/98 12/31/98 12/31/97 12/31/97
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
SFAS No. 123 charge............................. $ 944 $ 1,321 $ 894
Net income applicable to common shareholders.... $73,991 $ 73,047 $ 65,764 $ 64,443 $36,921 $ 36,027
Net income per common share-basic............... $ 1.95 $ 1.93 $ 1.70 $ 1.66 $ 1.48 $ 1.45
Net income per common share-diluted............. $ 1.93 $ 1.91 $ 1.68 $ 1.65 $ 1.46 $ 1.42
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
F-17
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(14) Capital Shares
The Company's board of trustees (the "Board of Trustees") is authorized to
provide for the issuance of 100,000,000 Common Shares and 20,000,000 preferred
shares in one or more series, to establish the number of shares in each series
and to fix the designation, powers, preferences and rights of each such series
and the qualifications, limitations or restrictions thereof. As of December 31,
1999, 37,486,743 and 3,773,585 Common Shares and Series A Convertible Preferred
Shares were issued and outstanding, respectively. The Series A Convertible
Preferred Shares are convertible at the shareholder's option on a one-for-one
basis into Common Shares of the Company, subject to certain adjustments, and may
not be redeemed by the Company before December 29, 2004.
In addition to the common units held by the Company, at December 31, 1999,
the Operating Partnership had (i) 1,681,767 common units outstanding, all of
which are redeemable at the option of the holder for a like number of Common
Shares, or at the option of the Company, the cash equivalent thereof; (ii)
1,900,000, $50 par value, Series B Perpetual Preferred Units, which are callable
by the Company in five years at par value and have a coupon rate of 8.3% per
annum; and (iii) 2,000,000, $25 par value, Series C Perpetual Preferred Units,
which are callable by the Company in five years at par value and have a coupon
rate of 9.45% per annum.
On February 2, 1998, the Company closed a direct placement of 1,100,000
Common Shares to an affiliate of UBS for a gross consideration of $29.7 million,
or $27.00 per share. The sales to UBS and its affiliates were exempt from
registration under Section 4(2) of the Securities Act. In a related transaction,
the Company entered into a forward stock contract with UBS which provided that
during the first year after the closing of the direct placement, the Company
would have the right to consummate a share settlement with UBS based on the then
market price for the Common Shares. On January 21, 1999, the Company reacquired
all of the 1,100,000 Common Shares for approximately $30.0 million. The
acquisition of the Common Shares was funded with $3.7 million of previously
escrowed cash and proceeds from borrowings under the Company's line of credit.
During 1998, the Company's Board of Trustees authorized the repurchase of
up to 2.0 million Common Shares in the open market or negotiated private
transactions (the "Share Repurchase Program"). In fiscal 1998, the Company
repurchased 998,800 Common Shares at an average price of $23.34 per share.
Beginning September 14, 1999, the Company resumed the Share Repurchase Program
and as of December 31, 1999 the Company had purchased an additional 493,100
Common Shares at an average purchase price of $21.41 per share. Through December
31, 1999, pursuant to the Share Repurchase Program, the Company has purchased
1,491,900 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 Perpetual Preferred Units with an institutional investor. The
issue resulted in gross consideration of $50 million which was used to repay
borrowings under the line of credit.
The Series B and C Perpetual Preferred Units are accounted for at their
redemption value in the line item "Minority interest in operating partnership"
on the Company's balance sheet.
(15) Earnings per Share
The Company calculates earnings per share in accordance with SFAS No. 128,
"Earnings per Share." SFAS No. 128 requires a dual presentation of basic and
diluted Earnings per Share on the face of the income statement. Additionally,
SFAS No. 128 requires a reconciliation of the numerator and denominator used in
computing basic and diluted Earnings per Share.
<TABLE>
<CAPTION>
(in thousands, except per share data)
Year Ended Year Ended
Reconciliation of the Earnings per Share numerator Dec. 31, 1999 Dec. 31, 1998
------------- -------------
<S> <C> <C>
Net income $ 80,482 $ 71,419
Preferred dividends (6,491) (5,655)
--------- ---------
Net income available to common shareholders $ 73,991 $ 65,764
========= =========
</TABLE>
F-18
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C>
Reconciliation of the Earnings per Share denominator
Weighted average common shares outstanding 37,875 38,742
======= =======
Basic earnings per share $ 1.95 $ 1.70
======= =======
Dilutive effect of common share equivalents
Preferred shares 3,774 3,544
Options 80 211
------- -------
Total common share equivalents 3,854 3,755
Weighted average common shares outstanding 37,875 38,742
------- -------
Weighted average common shares and common share equivalents 41,729 42,497
======= =======
Diluted earnings per share $ 1.93 $ 1.68
======= =======
</TABLE>
(16) Commitments and Contingencies
Legal Matters
The Company is subject to various legal proceedings and claims that arise
in the ordinary course of business. These matters are generally covered by
insurance. Management believes that the final outcome of such matters will not
have a material adverse effect on the financial position, results of operations
or liquidity of the Company.
Environmental Matters
The Company obtains Phase I environmental site assessments ("ESAs") for all
acquired properties prior to acquisition.
The ESAs have not revealed any environmental condition, liability or
compliance concern that the Company believes may have a material adverse affect
on the Company's business, assets or results of operations, nor is the Company
aware of any such condition, liability or concern. It is possible that the ESAs
relating to any one of the Properties or the properties to be acquired in the
future do not reveal all environmental conditions, liabilities or compliance
concerns or that there are material environmental conditions, liabilities or
compliance concerns that arose at such property after the related ESA report was
completed, of which the Company is otherwise unaware.
Development Activity
The Company is party to several construction contracts as part of its
development activities. The following Properties are currently under
development:
<TABLE>
<CAPTION>
Square Estimated Shell
Property Type Market Footage Estimated Costs (2) Completion Date
-------- ----- ------ ------- ------------------- ----------------
(000s) (in millions)
<S> <C> <C> <C> <C> <C>
Research Office Center III Office Metro. Wash., D.C. 148 $ 24.1 October 1999(1)
Croton Road Corporate Center Office Suburban Philadelphia 97 16.8 February1999(1)
Barton Skyway I Office Austin 195 28.2 June 1999(1)
Barton Skyway II Office Austin 195 31.0 November 2000
Spyglass Point Office Austin 58 10.0 June 1999(1)
Lakeview Center Office Dallas/Fort Worth 101 9.7 May 1999(1)
1247 Ward Avenue Office Suburban Philadelphia 27 3.6 January 2000
Del Mar Gateway Office San Diego 164 33.8 September 2000
--- ------
Total Development in Process 985 $157.2
=== ======
</TABLE>
F-19
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(1) Although development was completed prior to year-end, these buildings were
in the "lease-up" stage at December 31, 1999. Thus, the projects are
categorized as under development at December 31, 1999.
(2) As of December 31, 1999, the Company has incurred $100.1 million of the
total estimated cost of these development projects.
In addition to the development projects included above, the Company has a
60% interest in the Oaklands 21/27 development projects. The total estimated
cost of the Oaklands 21/27 development projects is $6.8 million, of which $4.5
million has been incurred to date.
(17) Recently Issued Accounting Standards
In September 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS 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 SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133." SFAS No.
133 was originally effective for all fiscal quarters of fiscal years beginning
after September 15, 1999. SFAS No. 137 deferred the effective date of SFAS No.
133 to all fiscal quarters of all fiscal years beginning after June 15, 2000.
The impact of SFAS No. 133 will be dependent upon the extent of derivative
instruments held by the Company and the market for such instruments as of the
effective date of SFAS No. 133.
(18) 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 problems 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 but also in building operating systems such as elevators, alarm systems,
energy management systems, phone systems, and numerous other systems and
equipment (collectively, "Systems"). The occurrence of Y2K-related problems
could result in a Systems failure or malfunction with potential adverse effects,
including personal injury, property damage, and disruption of operations.
The Company's cost related to Y2K preparation, readiness and remediation,
expended through December 31, 1999, totaled approximately $500,000 which was
within the Company's estimate. Although the Company has not experienced any Y2K-
related problems that have resulted in a material adverse effect on the
Company's business, financial condition, or results of operations, and does not
anticipate any such problems in the future, it is possible that not all Y2K-
related problems have been revealed. Any Y2K-related problems revealed in the
future could have a materially adverse effect on the Company's business,
financial condition, or results of operations.
(19) 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 table below presents information about net income and segment assets
used by the chief operating decision maker of the Company as of and for the
years ended December 31, 1999 and 1998, respectively:
F-20
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
For the Year Ended and As of December 31, 1999
<TABLE>
<CAPTION>
(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:
Rental income $ 57,962 $ 58,976 $ 26,968 $ 13,562 $ 72,687 $ 66,992 $ 297,147 $ 297,147
Management and
other
fees, net 12 18 294 18 2,048 171 2,561 $ 764 3,325
-------- -------- --------- -------- -------- -------- ---------- ---------- ----------
Total revenues 57,974 58,994 27,262 13,580 74,735 67,163 299,708 764 300,472
-------- -------- --------- -------- -------- -------- ---------- ---------- ----------
Expenses:
Property
operating and
maintenance 13,028 12,210 5,327 4,846 19,071 15,121 69,603 69,603
Real estate 4,297 10,277 2,037 981 11,100 5,509 34,201 34,201
taxes
General &
administrative
and personnel
costs 282 446 384 146 409 683 2,350 6,493 8,843
Interest expense 59,346 59,346
Amortization of
deferred
financing costs 1,126 1,126
Depreciation and
amortization 10,575 10,020 4,969 3,396 14,028 11,494 54,482 53 54,535
-------- -------- --------- -------- -------- -------- ---------- ---------- ----------
Total expenses 28,182 32,953 12,717 9,369 44,608 32,807 160,636 67,018 227,654
-------- -------- --------- -------- -------- -------- ---------- ---------- ----------
Equity in income
of joint
ventures and
unconsolidated
subsidiary 1,252 2,411 (169) 379 2,600 531 7,004 (2,710) 4,294
-------- -------- --------- -------- -------- -------- ---------- ---------- ----------
Income before
gain on sales,
minority
interests, and
extraordinary items 31,044 28,452 14,376 4,590 32,727 34,887 146,076 (68,964) 77,112
Gain on sales 2,732 10,587 23 2,763 16,105 16,105
Minority interest (12,735) (12,735)
-------- -------- --------- -------- -------- -------- ---------- ---------- ----------
income before
extraordinary
items $ 33,776 $ 39,039 $ 14,376 $ 4,590 $ 32,750 $ 37,650 $ 162,181 $ (81,699) $ 80,482
======== ======== ========= ======== ======== ======== ========== ========== ==========
Total assets $374,573 $412,712 $ 214,959 $ 73,533 $463,446 $420,600 $1,959,823 $ 34,840 $1,994,663
======== ======== ========= ======== ======== ======== ========== ========== ==========
</TABLE>
For the Year Ended and As of December 31, 1998
<TABLE>
<CAPTION>
(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:
Rental income $ 44,424 $ 50,653 $ 22,122 $ 11,067 $ 53,069 $ 54,315 $ 235,650 $ 235,650
Mortgage 3,835 3,835 3,835
interest
Management and
other fees, net 21 8 361 9 701 478 1,578 $ 551 2,129
-------- -------- --------- -------- -------- -------- ---------- ---------- ----------
Total revenues 44,445 50,661 22,483 11,076 53,770 58,628 241,063 551 241,614
-------- -------- --------- -------- -------- -------- ---------- ---------- ----------
Expenses:
Property
operating and
maintenance 10,876 9,900 4,623 4,350 15,258 12,184 57,191 57,191
Real estate taxes 3,292 7,767 1,821 755 7,268 4,609 25,512 25,512
General &
administrative
and personnel
costs 290 332 608 256 539 729 2,754 5,246 8,000
Interest expense 41,718 41,718
</TABLE>
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Amortization of
deferred
financing costs 963 963
Depreciation and
amortization 7,733 9,300 3,674 2,713 9,762 8,646 41,828 41,828
-------- -------- -------- ------- -------- -------- ---------- -------- ----------
Total expenses 22,191 27,299 10,726 8,074 32,827 26,168 127,285 47,927 175,212
-------- -------- -------- ------- -------- -------- ---------- -------- ----------
Equity in income
of joint
ventures and
unconsolidated
subsidiary 892 795 337 1,636 4,661 1,764 10,085 (2,687) 7,398
-------- -------- -------- ------- -------- -------- ---------- -------- ----------
Income before
gain on sales,
minority
interests, and
extraordinary
items 23,146 24,157 12,094 4,638 25,604 34,224 123,863 (50,063) 73,800
Gain on sales 6,162 (11) 3,613 4,652 14,416 14,416
Minority interest (7,796) (7,796)
-------- -------- -------- -------- -------- -------- ---------- --------- ----------
Income before
extraordinary
======== ======== ======== ========= ========= ======== ========== ======== ==========
items $ 23,146 $ 30,319 $ 12,094 $ 4,627 $ 29,217 $ 38,876 $ 138,279 $(57,859) $ 80,420
======== ======== ========= ========= ========= ======== ========== ======== ==========
Total assets $366,002 $353,817 $199,722 $70,460 $413,463 $441,654 $1,845,118 $ 26,027 $1,871,145
======== ======== ======== ========= ======== ======== ========== ======== ==========
</TABLE>
(20) Selected Quarterly Financial Data (Unaudited)
The following scheduled is a summary of the quarterly results of
operations for the year ended December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
(amounts in thousands, except per share data)
First Second Third Fourth
-- Quarter Quarter Quarter Quarter Total
----------- ---------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1999
Revenue.................................... $71,362 $73,893 $76,728 $78,489 $300,472
Income from operations .................... 19,880 18,882 18,728 19,622 77,112
Net income................................. 17,255 16,401 17,196 29,630 80,482
Net income per common share-basic.......... $ 0.41 $ 0.39 $ 0.41 $ 0.74 $ 1.95
Net income per common share-diluted........ $ 0.41 $ 0.39 $ 0.41 $ 0.72 $ 1.93
Year ended December 31, 1998
Revenue.................................... $51,373 $55,449 $65,071 $69,721 $241,614
Income from operations..................... 17,119 18,691 19,715 18,275 73,800
Net income................................. 9,496 19,051 21,232 21,640 71,419
Net income per common share-basic.......... $ 0.23 $ 0.44 $ 0.50 $ 0.52 $ 1.70
Net income per common share-diluted........ $ 0.23 $ 0.43 $ 0.49 $ 0.51 $ 1.68
Year ended December 31, 1997
Revenue.................................... $22,654 $29,778 $35,580 $43,716 $131,728
Income from operations..................... 8,379 10,171 11,414 12,454 42,418
Net income................................. 7,080 9,147 10,116 10,603 36,946
Net income per common share-basic.......... $ 0.35 $ 0.38 $ 0.38 $ 0.37 $ 1.48
Net income per common share-diluted........ $ 0.35 $ 0.37 $ 0.38 $ 0.36 $ 1.46
</TABLE>
(21) Subsequent Events
On January 4, 2000, the Company's Board of Trustees authorized a
1.5 million share increase in the current Share Repurchase Program bringing the
total authorization to 3.5 million shares. Following such authorization, the
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Company repurchased 1.5 million shares from an institutional owner at $19.00 per
share which was funded with borrowings under the Company's line of credit.
Pursuant to the Share Repurchase Program, the Company has purchased 2,991,900
Common Shares at an average price of $ 20.85 per share.
F-23
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
To the Board of Trustees and Shareholders
of Prentiss Properties Trust
Our audits of the consolidated financial statements referred to in our report
dated February 9, 2000 appearing on page F-2 of the Annual Report on Form 10-K
of Prentiss Properties Trust also included an audit of the financial statement
schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this
financial statement schedule presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
February 9, 2000
F-24
<PAGE>
Schedule III
PRENTISS PROPERTIES TRUST
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1999
(dollars in thousands)
<TABLE>
<CAPTION>
Costs Gross amount
Initial cost capitalized carried at close of period
----------------------- -------------------------------
Buildings and subsequent Land and Building and
Property Name Market Encumbrances Land Improvements to acquisition Improvements Improvements
------------- ------ ------------ ---- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Properties
Arizona Industrial Arizona $ 1,043 $ 4,174 $ 5 $ 1,043 $ 4,179
Crescent Centre Atlanta $ 12,000 3,711 21,039 51 3,711 21,090
Cumberland Office Park Atlanta 14,500 10,986 28,908 4,263 10,986 33,171
Chicago Industrial Chicago 11,630 5,251 25,582 5,251 25,582
123 North Wacker Drive Chicago 13,738 77,902 13,738 77,902
1717 Deerfield Road Chicago 14,200 3,237 18,551 3,237 18,551
1800 Sherman Avenue Chicago 2,253 13,275 2,253 13,275
701 Warrenville Road Chicago 1,564 8,863 7 1,564 8,869
Bannockburn Centre Chicago 7,928 23,602 7,928 23,602
Corporetum Office Campus Chicago 25,780 7,645 43,318 114 7,645 43,432
O'Hare Plaza II Chicago 11,400 3,861 22,131 90 3,861 22,221
One O'Hare Centre Chicago 41,842 10,202 57,792 188 10,202 57,980
Bachman East Dallas/Fort Worth 1,305 8,773 25 1,305 8,798
Bachman West Dallas/Fort Worth 2,972 831 4,703 36 831 4,739
Cottonwood Office Center Dallas/Fort Worth 8,348 1,735 9,865 1,735 9,865
Dallas Industrial Dallas/Fort Worth 2,787 13,999 2,737 2,942 16,581
IBM Call Center Dallas/Fort Worth 1,418 6,063 1,418 6,063
Millennium Center Dallas/Fort Worth 989 6,363 989 6,363
Park West C2 Dallas/Fort Worth 35,327 8,360 29,640 6,238 9,696 34,542
Park West E1 Dallas/Fort Worth 12,100 2,857 16,499 2,857 16,499
Park West E2 Dallas/Fort Worth 7,900 2,079 11,863 2,079 11,863
Walnut Glen Tower Dallas/Fort Worth 35,000 4,300 32,669 3,496 5,612 34,853
WestPoint Office Building Dallas/Fort Worth 12,610 2,853 12,165 2,853 12,165
Carrara Place Denver 4,702 26,646 36 4,702 26,682
Highland Court Denver 4,930 1,594 9,039 56 1,594 9,095
Orchard Place I & II Denver 1,531 8,653 19 1,531 8,672
PacifiCare Building Denver 12,060 3,045 17,457 326 3,045 17,783
Panorama Point Denver 1,245 7,065 49 1,245 7,114
14425 Torrey Chase Houston 389 2,208 25 389 2,233
14505 Torrey Chase Houston 957 5,423 65 957 5,488
7575 San Felipe Houston 545 3,090 57 545 3,148
International Energy Center Houston 854 4,871 142 854 5,013
Northchase Place Houston 416 2,360 55 416 2,415
One Westchase Center Houston 24,901 7,876 44,632 150 7,876 44,782
Westheimer Central Plaza Houston 5,966 2,266 12,845 112 2,266 12,957
Los Angeles Industrial Los Angeles 31,300 11,256 43,662 963 11,256 44,625
The Academy Los Angeles 4,654 18,617 31 4,654 18,648
2411 Dulles Corner Road Metro. Wash., DC 16,700 3,973 22,768 56 3,973 22,824
2455 Horsepen Road Metro. Wash., DC 8,052 2,099 12,028 93 2,099 12,121
3130 Fairview Park Drive Metro. Wash., DC 23,342 3,151 21,345 3,151 21,345
3141 Fairview Park Drive Metro. Wash., DC 12,800 4,000 15,980 389 4,007 16,362
4401 Fair Lakes Court Metro. Wash., DC 3,200 936 5,249 173 936 5,422
6600 Rockledge Drive Metro. Wash., DC 22,428 22,428
7101 Wisconsin Avenue Metro. Wash., DC 21,345 5,187 29,391 712 5,187 30,103
<CAPTION>
Depreciable
Accumulated Date of Date lives
Property Name Total depreciation construction acquired (years)
------------- ----- ------------ ------------ -------- -------
<S> <C> <C> <C> <C> <C>
Operating Properties
Arizona Industrial $ 5,222 $ 265 1987 2/4/98 (1)
Crescent Centre 24,801 1,452 1986 4/8/97 (1)
Cumberland Office Park 44,157 5,058 1972-1999 1/16/91 (1)
Chicago Industrial 30,833 1,993 1986-1987,1998 Various (1)
123 North Wacker Drive 91,640 225 1986 11/18/99 (1)
1717 Deerfield Road 21,788 1,418 1985 12/11/96 (1)
1800 Sherman Avenue 15,528 471 1986 8/5/98 (1)
701 Warrenville Road 10,433 315 1988 8/10/98 (1)
Bannockburn Centre 31,530 262 1998-1999 (1)
Corporetum Office Campus 51,077 2,885 1984-1987 5/6/97 (1)
O'Hare Plaza II 26,082 1,695 1986 12/13/96 (1)
One O'Hare Centre 68,182 1,931 1986 8/27/98 (1)
Bachman East 10,103 726 1986 8/20/96 (1)
Bachman West 5,570 307 1986 6/4/97 (1)
Cottonwood Office Center 11,600 766 1986 10/24/96 (1)
Dallas Industrial 19,523 2,752 1970-1988 Various (1)
IBM Call Center 7,481 198 1998 (1)
Millennium Center 7,352 66 1998-1999 (1)
Park West C2 44,238 3,566 1989 9/5/95 (1)
Park West E1 19,356 1,316 1982 10/23/96 (1)
Park West E2 13,942 946 1985 10/23/96 (1)
Walnut Glen Tower 40,465 6,805 1985 1/1/94 (1)
WestPoint Office Building 15,018 403 1998 (1)
Carrara Place 31,384 1,279 1982 1/30/98 (1)
Highland Court 10,689 464 1986 12/12/97 (1)
Orchard Place I & II 10,203 98 1980 7/20/99 (1)
PacifiCare Building 20,828 1,338 1983 12/20/96 (1)
Panorama Point 8,359 356 1983 12/30/97 (1)
14425 Torrey Chase 2,622 88 1982 6/12/98 (1)
14505 Torrey Chase 6,445 215 1982 6/12/98 (1)
7575 San Felipe 3,693 122 1976 6/12/98 (1)
International Energy Center 5,867 202 1982 6/12/98 (1)
Northchase Place 2,831 96 1982 6/12/98 (1)
One Westchase Center 52,658 1,765 1982 6/12/98 (1)
Westheimer Central Plaza 15,223 512 1982 6/12/98 (1)
Los Angeles Industrial 55,881 4,639 1985-1988 Various (1)
The Academy 23,302 1,128 1991 7/31/97 (1)
2411 Dulles Corner Road 26,797 1,694 1990 12/31/96 (1)
2455 Horsepen Road 14,220 920 1989 12/31/96 (1)
3130 Fairview Park Drive 24,496 438 1997-1999 (1)
3141 Fairview Park Drive 20,369 1,638 1988 2/22/96 (1)
4401 Fair Lakes Court 6,358 421 1988 1/14/97 (1)
6600 Rockledge Drive 22,428 762 1981 6/30/98 (1)
7101 Wisconsin Avenue 35,290 1,591 1991 12/30/97 (1)
</TABLE>
F-25
<PAGE>
<TABLE>
<CAPTION>
Costs Gross amount
Initial cost capitalized carried at close of period
----------------------- -------------------------------
Buildings and subsequent Land and Building and
Property Name Market Encumbrances Land Improvements to acquisition Improvements Improvements
------------- ------ ------------ ---- ------------ -------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
8521 Leesburg Pike Metro. Wash., DC 15,475 2,130 5,955 4,685 2,259 10,511
Calverton Office Park Metro. Wash., DC 2,894 26,048 737 2,894 26,785
Fairmont Building Metro. Wash., DC 3,750 17,656 3,750 17,656
Metro. Wash., D.C.
Industrial Metro. Wash., DC 5,011 23,768 2,168 5,074 25,873
Research Office Center Metro. Wash., DC 5,763 32,658 114 5,763 32,772
Willow Oaks I & II Metro. Wash., DC 43,460 10,857 61,526 28 10,857 61,554
Natomas Corporate Center Sacramento 37,679 11,237 63,593 368 11,237 63,961
Carlsbad Pacific Center San Diego 4,218 9,843 189 4,218 10,032
Carlsbad Pacifica San Diego 1,535 6,141 112 1,535 6,253
Executive Center Del Mar San Diego 13,267 3,953 12,063 101 3,953 12,164
Plaza I & II San Diego 2,817 11,268 159 2,817 11,427
San Diego Industrial San Diego 6,294 25,178 291 6,294 25,469
The Campus San Diego 1,197 4,789 125 1,197 4,914
San Francisco Bay Area
Industrial San Francisco Bay Area 8,036 18,760 142 8,036 18,902
The Ordway San Francisco Bay Area 23,316 54,402 390 23,316 54,792
World Savings Center San Francisco Bay Area 29,480 7,714 30,856 7,714 30,856
935 First Avenue Sub. Philadelphia 5,105 115 5,105 115
Centerpointe Sub. Philadelphia 848 4,805 7 848 4,812
Creamery Way Sub. Philadelphia 3,708 2,122 12,030 35 2,122 12,065
Lake Center Sub. Philadelphia 10,150 2,226 12,617 20 2,226 12,637
Oaklands Corporate Center Sub. Philadelphia 10,263 5,309 30,095 175 5,309 30,270
Pencader Courtyards Sub. Philadelphia 796 4,523 796 4,523
Southpoint Sub. Philadelphia 19,685 6,681 37,882 91 6,681 37,973
Valleybrooke Sub. Philadelphia 27,600 5,985 33,928 47 5,985 33,975
Woodland Falls Sub. Philadelphia 10,200 4,015 22,752 162 4,015 22,914
One Northwestern Plaza Sub. Detroit 17,800 27,448 2 27,450
Seven Mile Crossing Sub. Detroit 135 29,715 16 135 29,731
--------- -------- ----------- -------- --------- -----------
Total Operating
Properties 648,972 295,554 1,453,910 30,922 298,555 1,481,831
Construction in Progress
Barton Skyway I Austin 3,459 21,248 3,459 21,248
Barton Skyway II Austin 3,317 4,475 3,317 4,475
Spyglass Point Austin 1,612 6,443 1,612 6,443
Lakeview Center Dallas/Fort Worth 756 4,923 756 4,923
Research Office
Center III Metro. Wash., DC 3,407 13,695 3,407 13,695
Del Mar Gateway San Diego 5,250 3,987 5,250 3,987
1247 Ward Avenue Sub. Philadelphia 654 1,797 654 1,797
Croton Road Corporate
Center Sub. Philadelphia 13,565 2,859 9,978 2,859 9,978
--------- -------- ----------- -------- --------- -----------
Total Construction in Progress 13,565 21,314 66,546 21,314 66,546
Land Held for Future
Development 26,249 3,987 26,249 3,987
--------- -------- ----------- -------- --------- -----------
Total Real Estate $ 662,537 $343,117 $ 1,524,443 $ 30,922 $ 346,118 $ 1,552,364
======== ======== =========== ======== ========= ===========
<CAPTION>
Depreciable
Accumulated Date of Date lives
Property Name Total depreciation construction acquired (years)
------------- ----- ------------ ------------ -------- -------
<S> <C> <C> <C> <C> <C>
8521 Leesburg Pike 12,770 1,567 1984 8/17/94 (1)
Calverton Office Park 29,679 1,586 1987 8/27/97 (1)
Fairmont Building 21,406 70 1964, 1997 11/4/99 (1)
Metro. Wash., D.C. Industrial 30,947 4,437 1974-1990 Various (1)
Research Office Center 38,535 1,901 1984, 1999 9/9/97 (1)
Willow Oaks I & II 72,411 2,128 1986-1989 8/18/98 (1)
Natomas Corporate Center 75,198 4,395 1987 4/2/97 (1)
Carlsbad Pacific Center 14,250 533 1986 11/13/97 (1)
Carlsbad Pacifica 7,788 297 1972-1990 2/4/98 (1)
Executive Center Del Mar 16,117 403 1997-1998 (1)
Plaza I & II 14,244 543 1972-1990 2/4/98 (1)
San Diego Industrial 31,763 1,614 1972-1990 Various (1)
The Campus 6,111 233 1972-1990 2/4/98 (1)
San Francisco Bay Area Industrial 26,938 1,232 1973-1992 1/13/98 (1)
The Ordway 78,108 2,200 1970 5/21/98 (1)
World Savings Center 38,570 771 1985 7/29/97 (1)
935 First Avenue 5,220 23 1964 10/22/99 (1)
Centerpointe 5,660 263 1987 10/22/97 (1)
Creamery Way 14,187 595 1987 1/9/98 (1)
Lake Center 14,863 691 1986, 1989 10/22/97 (1)
Oaklands Corporate Center 35,579 1,016 1988-1997 8/26/98 (1)
Pencader Courtyards 5,319 191 1990 4/24/98 (1)
Southpoint 44,654 2,075 1986-1997 10/22/97 (1)
Valleybrooke 39,960 1,857 1984-1997 10/22/97 (1)
Woodland Falls 26,929 1,247 1985-1989 10/22/97 (1)
One Northwestern Plaza 27,450 1,963 1989 10/23/96 (1)
Seven Mile Crossing 29,866 1,584 1988-1990 6/4/97 (1)
--------- -----------
Total Operating Properties 1,780,386 91,002
Construction in Progress
Barton Skyway I 24,707 217 1998-1999 (1)
Barton Skyway II 7,792 1999 (1)
Spyglass Point 8,055 69 1998-1999 (1)
Lakeview Center 5,679 51 1998-1999 (1)
Research Office Center III 17,102 1999 (1)
Del Mar Gateway 9,237 1999 (1)
1247 Ward Avenue 2,451 1999 (1)
Croton Road Corporate Center 12,837 122 1998-1999 (1)
--------- -----------
Total Construction in Progress 87,860 459
Land Held for Future Development 30,236
--------- -----------
Total Real Estate $ 1,898,4 $ 91,461
========= ===========
</TABLE>
- ----------
(1) Buildings & improvements - 25 to 40 years
(2) The aggregate cost for federal income tax purposes was approximately
$2,001,358.
F - 26
<PAGE>
PRENTISS PROPERTIES TRUST
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
Real Estate and Accumulated Depreciation
(dollars in thousands)
A summary of activity for real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Real estate:
Balance at beginning of year......................... $1,810,735 $1,170,992 $ 501,035
Additions to and improvement of real estate......... 204,346 735,447 685,690
Cost of real estate sold............................ (116,599) (95,704) (15,733)
---------- ---------- ----------
Balance at end of year............................ $1,898,482 $1,810,735 $1,170,992
========== ========== ==========
Accumulated depreciation:
Balance at beginning of year......................... $ 61,232 $ 36,143 $ 18,507
Depreciation expense................................ 39,197 32,864 17,636
Accumulated depreciation of real estate sold........ (8,968) (7,775)
---------- ---------- ----------
Balance at end of year............................ $ 91,461 $ 61,232 $ 36,143
========== ========== ==========
</TABLE>
F-27
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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
By /s/ Thomas P. Simon
---------------------------------------
Thomas P. Simon
Senior Vice President and Chief Accounting
Officer
Date: March 17, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, the s
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date Signature
---- ---------
March 17, 2000 /s/ Michael V. Prentiss
-------------------------------------------
Michael V. Prentiss
Chairman of the Board and Trustee
March 17, 2000 /s/ Thomas F. August
-------------------------------------------
Thomas F. August
President and Chief Executive Officer
Trustee
March 17, 2000 /s/ Michael A. Ernst
-------------------------------------------
Michael A. Ernst
Senior Vice President and Chief Financial Officer
March 17, 2000 /s/ Thomas P. Simon
-------------------------------------------
Thomas P. Simon
Senior Vice President and Chief Accounting Officer
March 17, 2000 /s/ Thomas J. Hynes, Jr.
-------------------------------------------
Thomas J. Hynes, Jr.
Trustee
March 17, 2000 /s/ Barry J.C. Parker
-------------------------------------------
Barry J.C. Parker
Trustee
March 17, 2000 /s/ Leonard M. Riggs, Jr.
-------------------------------------------
Dr. Leonard M. Riggs, Jr.
Trustee
March 17, 2000 /s/ Ronald G. Steinhart
-------------------------------------------
Ronald G. Steinhart
Trustee
March 17, 2000 /s/ Lawrence A. Wilson
-------------------------------------------
Lawrence A. Wilson
Trustee
<PAGE>
EXHIBIT 10.13
PRENTISS PROPERTIES ACQUISITION PARTNERS, L.P.
Third Amendment to the Second Amended and Restated Agreement of Limited
Partnership of Prentiss Properties Acquisition Partners, L.P.
RECITALS
A. Belair Real Estate Corporation ("Assignor") desires to assign and
--------
Belcrest Realty Corporation ("Assignee") desires to acquire 270,000 Series B
--------
Cumulative Redeemable Perpetual Preferred Units (the "Series B Preferred Units")
------------------------
of Prentiss Properties Acquisition Partners, L.P. (the "Partnership").
-----------
B. Pursuant to Article XI of the Second Amended and Restated
Agreement of Limited Partnership, as amended (as so amended, the "Agreement"),
---------
of the Partnership, Prentiss Properties I, Inc. as the sole general partner of
the Partnership (the "General Partner"), desires to amend the Agreement to admit
---------------
Assignee as a Substitute Limited Partner with respect to the Assigned Units.
NOW, THEREFORE, the General Partner hereby adopts the following
amendment to the Agreement.
1. Exhibit A to the Agreement is hereby amended and restated in its
entirety as set forth on Exhibit A attached hereto.
---------
2. Assignee accepts and agrees to be bound by the terms and
provisions of the Agreement.
[Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, the General Partner and Assignee have executed
this Third Amendment as of February 25, 1999.
GENERAL PARTNER
PRENTISS PROPERTIES I, INC.
By: /s/ Thomas F. August
---------------------------------
Name: Thomas F. August
Title: President
ASSIGNEE AND SUBSTITUTE LIMITED PARTNER:
BELCREST REALTY CORPORATION
By: /s/ Thomas E. Faust
---------------------------------
Name: Thomas E. Faust
Title: Executive Vice President
<PAGE>
EXHIBIT 10.14
PRENTISS PROPERTIES ACQUISITION PARTNERS, L.P.
Fourth Amendment to the Second Amended and Restated Agreement of Limited
Partnership of Prentiss Properties Acquisition Partners, L.P.
RECITALS
A. Belair Real Estate Corporation ("Assignor") desires to assign and
--------
Belcrest Realty Corporation ("Assignee") desires to acquire 190,000 Series B
--------
Cumulative Redeemable Perpetual Preferred Units (the "Series B Preferred Units")
------------------------
of Prentiss Properties Acquisition Partners, L.P. (the "Partnership").
-----------
B. Pursuant to Article XI of the Second Amended and Restated
Agreement of Limited Partnership, as amended (as so amended, the "Agreement"),
---------
of the Partnership, Prentiss Properties I, Inc. as the sole general partner of
the Partnership (the "General Partner"), desires to amend the Agreement to admit
---------------
Assignee as a Substitute Limited Partner with respect to the Assigned Units.
NOW, THEREFORE, the General Partner hereby adopts the following
amendment to the Agreement.
1. Exhibit A to the Agreement is hereby amended and restated in its
entirety as set forth on Exhibit A attached hereto.
---------
2. Assignee accepts and agrees to be bound by the terms and
provisions of the Agreement.
[Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, the General Partner and Assignee have executed
this Fourth Amendment as of April 29, 1999.
GENERAL PARTNER
PRENTISS PROPERTIES I, INC.
By: /s/ Michael A. Ernst
-------------------------------------------
Name: Michael A. Ernst
Title: Chief Financial Officer
ASSIGNEE AND SUBSTITUTE LIMITED PARTNER:
BELCREST REALTY CORPORATION
By: /s/ Thomas E. Faust
-------------------------------------------
Name: Thomas E. Faust
Title: Executive Vice President
<PAGE>
EXHIBIT 10.15
PRENTISS PROPERTIES ACQUISITION PARTNERS, L.P.
Fifth Amendment to the Second Amended and Restated Agreement of Limited
Partnership of Prentiss Properties Acquisition Partners, L.P.
RECITALS
A. Belair Real Estate Corporation ("Assignor") desires to assign and
--------
Argosy Realty Corporation ("Argosy") desires to acquire 36,464 Series B
------
Cumulative Redeemable Perpetual Preferred Units (the "Argosy Units") of Prentiss
------------
Properties Acquisition Partners, L.P. (the "Partnership").
-----------
B. Assignor desires to assign and Belmar Realty Corporation
("Belmar") desires to acquire 36,464 Series B Cumulative Redeemable Perpetual
------
Preferred Units of the Partnership (the "Belmar Units").
------------
C. Assignor desires to assign and Belport Realty Corporation
("Belport") desires to acquire 36,464 Series B Cumulative Redeemable Perpetual
- ---------
Preferred Units of the Partnership (the "Belport Units").
-------------
D. Assignor desires to assign and Belrieve Realty Corporation
("Belrieve"; each of Argosy, Belmar, Belport and Belrieve being an "Assignee")
- ---------- --------
desires to acquire 36,464 Series B Cumulative Redeemable Perpetual Preferred
Units of the Partnership (the "Belrieve Units"; each of the Argosy Units, Belmar
--------------
Units, Belport Units and Belrieve Units being "Assigned Units").
--------------
Pursuant to Article XI of the Second Amended and Restated Agreement of
Limited Partnership, as amended (as so amended, the "Agreement"), of the
---------
Partnership, Prentiss Properties I, Inc. as the sole general partner of the
Partnership (the "General Partner"), desires to amend the Agreement to admit
---------------
each Assignee as a Substitute Limited Partner with respect to its Assigned
Units.
NOW, THEREFORE, the General Partner hereby adopts the following
amendment to the Agreement.
1. Exhibit A to the Agreement is hereby amended and restated in its
entirety as set forth on Exhibit A attached hereto.
---------
2. Each Assignee accepts and agrees to be bound by the terms and
provisions of the Agreement.
[Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, the General Partner and the Assignees have
executed this Fifth Amendment as of July 9, 1999.
GENERAL PARTNER
PRENTISS PROPERTIES I, INC.
By: /s/ Michael A. Ernst
----------------------------------------
Name: Michael A. Ernst
Title: Chief Financial Officer
ASSIGNEES AND SUBSTITUTE LIMITED PARTNERS:
ARGOSY REALTY CORPORATION
By: /s/ Thomas E. Faust
----------------------------------------
Name: Thomas E. Faust
Title: Executive Vice President
BELMAR REALTY CORPORATION
By: /s/ Thomas E. Faust
----------------------------------------
Name: Thomas E. Faust
Title: Executive Vice President
BELPORT REALTY CORPORATION
By: /s/ Thomas E. Faust
----------------------------------------
Name: Thomas E. Faust
Title: Executive Vice President
BELRIEVE REALTY CORPORATION
By: /s/ Thomas E. Faust
----------------------------------------
Name: Thomas E. Faust
Title: Executive Vice President
<PAGE>
EXHIBIT 10.16
PRENTISS PROPERTIES ACQUISITION PARTNERS, L.P.
Seventh Amendment to the Second Amended and Restated Agreement of Limited
Partnership of Prentiss Properties Acquisition Partners, L.P.
RECITALS
A. Belair Real Estate Corporation ("Assignor") desires to assign and
--------
Belcrest Realty Corporation ("Assignee") desires to acquire 115,000 Series B
--------
Cumulative Redeemable Perpetual Preferred Units (the "Assigned Units") of
--------------
Prentiss Properties Acquisition Partners, L.P. (the "Partnership").
-----------
Pursuant to Article XI of the Second Amended and Restated Agreement of
Limited Partnership, as amended (as so amended, the "Agreement"), of the
---------
Partnership, Prentiss Properties I, Inc. as the sole general partner of the
Partnership (the "General Partner"), desires to amend the Agreement to admit
---------------
Assignee as a Substitute Limited Partner with respect to the Assigned Units.
NOW, THEREFORE, the General Partner hereby adopts the following
amendment to the Agreement:
1. Exhibit A to the Agreement is hereby amended and restated in its
entirety as set forth on Exhibit A attached hereto.
---------
2. Assignee accepts and agrees to be bound by the terms and
provisions of the Agreement.
[Signature Page Follows]
<PAGE>
IN WITNESS WHEREOF, the General Partner and the Assignee have executed
this Seventh Amendment as of August 31, 1999.
GENERAL PARTNER
PRENTISS PROPERTIES I, INC.
By: /s/ Michael A. Ernst
-------------------------------------
Name: Michael A. Ernst
Title: Chief Financial Officer
ASSIGNEE AND SUBSTITUTE LIMITED PARTNER:
BELCREST REALTY CORPORATION
By: /s/ Thomas E. Faust
-------------------------------------
Name: Thomas E. Faust
Title: Executive Vice President
<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, 333-60785, 333-65735, 333-65793, 333-72681, 333-80735 and 333-86797)
and Form S-8 (File Nos. 333-20329 and 333-79623) of our reports dated (i)
February 9, 2000 on our audits of the consolidated financial statements of
Prentiss Properties Trust and (ii) February 9, 2000 on our audit of the
financial statement schedule of Prentiss Properties Trust, which reports are
included in this Annual Report on Form 10-K. We also consent to the reference to
our firm under the caption "Selected Financial and Operating Data."
/s/ PricewaterhouseCoopers LLP
Dallas, Texas
March 17, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 13,313
<SECURITIES> 0
<RECEIVABLES> 31,167
<ALLOWANCES> 2,890
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 1,898,482
<DEPRECIATION> 91,461
<TOTAL-ASSETS> 1,994,663
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
100,000
<COMMON> 401
<OTHER-SE> 731,092
<TOTAL-LIABILITY-AND-EQUITY> 1,994,663
<SALES> 0
<TOTAL-REVENUES> 300,472
<CGS> 0
<TOTAL-COSTS> 227,654
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,472
<INCOME-PRETAX> 80,482
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,482
<EPS-BASIC> 1.95
<EPS-DILUTED> 1.93
</TABLE>
