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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997
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 1-12675
KILROY REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 95-4598246
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION) NUMBER)
2250 EAST IMPERIAL HIGHWAY, EL SEGUNDO, CALIFORNIA 90254
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
----------------
(213) 772-1193
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR, IF CHANGED SINCE LAST
REPORT)
----------------
Indicate by check mark whether the registrant (1) 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 (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
As of August 13, 1997, 14,475,000 shares of common stock, par value $.01 per
share, were outstanding.
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<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I--FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheet of Kilroy Realty Corporation as of
June 30, 1997 (Unaudited) and Combined Balance Sheet of the
Kilroy Group (predecessor to Kilroy Realty Corporation) as of
December 31, 1996.............................................. 3
Consolidated Statement of Operations of Kilroy Realty
Corporation for the period February 1, 1997 to June 30, 1997
and the Combined Statements of Operations of the Kilroy Group
for the period January 1, 1997 to January 31, 1997 and the six
months ended June 30, 1996 (Unaudited)......................... 4
Consolidated Statement of Operations of Kilroy Realty
Corporation for three months ended June 30, 1997 and the
Combined Statement of Operations of the Kilroy Group for the
three months ended June 30, 1996 (Unaudited)................... 5
Consolidated Statement of Cash Flows of Kilroy Realty
Corporation for the six months ended June 30, 1997 and the
Combined Statement of Cash Flows of the Kilroy Group for the
six months ended June 30, 1996 (Unaudited)..................... 6
Notes to the Kilroy Realty Corporation Consolidated and Kilroy
Group Combined Financial Statements............................ 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.......................................... 13
PART II--OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.............................................. 19
Item 2. CHANGES IN SECURITIES.......................................... 19
Item 3. DEFAULTS UPON SENIOR SECURITIES................................ 19
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............ 19
Item 5. OTHER INFORMATION.............................................. 19
Item 6. EXHIBITS AND REPORTS ON FORM 8-K............................... 19
</TABLE>
2
<PAGE>
PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
KILROY REALTY CORPORATION (THE "COMPANY") AND
KILROY GROUP (PREDECESSOR TO THE COMPANY)
CONSOLIDATED BALANCE SHEET OF THE COMPANY AND
COMBINED BALANCE SHEET OF THE KILROY GROUP
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
KILROY REALTY KILROY GROUP
CORPORATION DECEMBER 31,
JUNE 30, 1997 1996
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
RENTAL PROPERTIES (Notes 1, 2, 3 and 5):
Land.............................................. $ 74,259 $ 12,490
Buildings and improvements........................ 376,372 214,847
--------- ---------
Total rental properties......................... 450,631 227,337
Accumulated depreciation and amortization......... (114,334) (109,668)
--------- ---------
Rental properties, net.......................... 336,297 117,669
CASH AND CASH EQUIVALENTS........................... 34,296
RESTRICTED CASH..................................... 5,724
TENANT RECEIVABLES, NET............................. 3,759 3,042
INVESTMENT IN SUBSIDIARY............................ 216
ESCROW DEPOSITS..................................... 16,935
DEFERRED CHARGES AND OTHER ASSETS, NET (Note 4)..... 13,004 7,628
--------- ---------
TOTAL............................................. $ 410,231 $ 128,339
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Mortgage debt (Note 5)............................ 95,663 $ 223,297
Line of credit (Note 5)........................... 92,000
Accounts payable and accrued expenses............. 5,178 7,614
Accrued distributions (Note 8).................... 6,701
Accrued cost of option buy-out and tenant
improvement (Note 2)............................. 1,390
Rents received in advance and tenant security
deposits......................................... 11,336 9,815
--------- ---------
Total liabilities............................... 210,878 242,116
COMMITMENTS AND CONTINGENCIES (Note 6)..............
MINORITY INTEREST................................... 32,495
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 30,000,000 shares
authorized: none issued and outstanding..........
Common stock, $.01 par value, 150,000,000 shares
authorized: 14,475,000 shares issued and
outstanding ..................................... 145
Additional paid-in capital........................ 169,300
Distributions in excess of earnings/deficit....... (2,587) (113,777)
--------- ---------
Total stockholders' equity (accumulated
deficit)....................................... 166,858 (113,777)
--------- ---------
TOTAL............................................. $ 410,231 $ 128,339
========= =========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
3
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
KILROY KILROY KILROY
REALTY CORPORATION GROUP GROUP
FEBRUARY 1, JANUARY 1, SIX MONTHS
1997 TO 1997 TO ENDED
JUNE 30, JANUARY 31, JUNE 30,
1997 1997 1996
------------------ ----------- ----------
<S> <C> <C> <C>
REVENUES:
Rental income...................... $ 19,460 $2,760 $17,594
Tenant reimbursements.............. 1,810 275 1,790
Interest income.................... 1,975
Development services............... 14 458
Other income....................... 296 4 11
---------- ------ -------
Total revenues................... 23,541 3,053 19,853
---------- ------ -------
EXPENSES:
Property expenses.................. 3,275 579 3,285
Real estate taxes.................. 927 106 633
General and administrative......... 2,175 78 1,064
Ground lease....................... 464 64 390
Development expense................ 46 391
Interest expense................... 4,077 1,895 10,726
Depreciation and amortization...... 4,744 787 4,559
---------- ------ -------
Total expenses................... 15,662 3,555 21,048
---------- ------ -------
INCOME (LOSS) BEFORE EXTRAORDINARY
GAINS, EQUITY IN INCOME OF
UNCONSOLIDATED SUBSIDIARY AND
MINORITY INTEREST................... 7,879 (502) (1,195)
EQUITY IN INCOME OF UNCONSOLIDATED
SUBSIDIARY.......................... 135
MINORITY INTEREST.................... (1,254)
---------- ------ -------
INCOME (LOSS) BEFORE EXTRAORDINARY
GAINS............................... 6,760 (502) (1,195)
EXTRAORDINARY GAINS.................. 3,204 20,095
---------- ------ -------
NET INCOME........................... $ 6,760 $2,702 $18,900
========== ====== =======
Net income per common share.......... $ .47
==========
Weighted average shares outstanding.. 14,475,000
==========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
4
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
KILROY REALTY
CORPORATION KILROY GROUP
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 1997 JUNE 30, 1996
------------- -------------
<S> <C> <C>
REVENUES:
Rental income.................................... $ 12,350 $ 8,809
Tenant reimbursements............................ 1,104 928
Interest income.................................. 1,004
Development services............................. 195
Other income..................................... 111
---------- -------
Total revenues................................. 14,569 9,932
---------- -------
EXPENSES:
Property expenses................................ 2,036 1,752
Real estate taxes................................ 574 333
General and administrative....................... 1,450 536
Ground lease..................................... 279 197
Development expense.............................. 194
Interest expense................................. 2,546 5,499
Depreciation and amortization.................... 3,000 2,278
---------- -------
Total expenses................................. 9,885 10,789
---------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY GAINS, EQUITY IN
INCOME OF UNCONSOLIDATED SUBSIDIARY AND MINORITY
INTEREST.......................................... 4,684 (857)
EQUITY IN INCOME OF UNCONSOLIDATED SUBSIDIARY...... 192
MINORITY INTEREST.................................. (768)
---------- -------
INCOME (LOSS) BEFORE EXTRAORDINARY GAINS........... 4,108 (857)
EXTRAORDINARY GAIN (Note 5)........................ 20,095
---------- -------
NET INCOME......................................... $ 4,108 $19,238
========== =======
Net income per common share........................ $ .28
==========
Weighted average shares outstanding................ 14,475,000
==========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
5
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1997 1996
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 9,462 $ 18,900
Adjustment to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation and amortization......................... 5,531 4,559
Provision for bad debts............................... 168 619
Extraordinary gain.................................... (3,204) (20,095)
Minority interest in earnings......................... 1,254
Equity in income of unconsolidated subsidiary......... 135
Changes in assets and liabilities:
Tenant receivables.................................. (885) (113)
Other assets........................................ (4,309) (439)
Accounts payable and accrued expenses............... 598 2,034
Accrued interest payable............................ (3,034) 619
Accrued cost of option buy-out and tenant
improvements....................................... (1,390)
Rents received in advance and tenant security
deposits........................................... 1,521 (251)
--------- --------
Net cash provided by operating activities......... 5,847 5,833
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for rental properties...................... (219,315) (407)
Escrow Deposits......................................... (16,935)
Net investment in and advances to unconsolidated
subsidiary............................................. (351)
--------- --------
Net cash used in investing activities............. (236,601) (407)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of stock..................... 302,780
Proceeds received from debt............................. 96,000 20,898
Borrowings on line of credit............................ 92,000
Principal payments on debt.............................. (219,147) (17,380)
Cash paid for loan costs................................ (3,215) (2,617)
Restricted cash ........................................ (5,724)
Dividends paid.......................................... (3,739)
Deemed and actual contributions from (distributions to)
partners, net.......................................... 6,095 (6,327)
--------- --------
Net cash provided by (used in) financing
activities....................................... 265,050 (5,426)
--------- --------
Net increase in cash and cash equivalents................. 34,296
Cash and cash equivalents, beginning of period ...........
--------- --------
Cash and cash equivalents, end of period ................. $ 34,296 $
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest.................................. $ 8,119 $ 10,107
========= ========
NON-CASH TRANSACTIONS:
Accrual of distributions payable........................ $ 6,701
=========
Issuance of units of the Operating Partnership to
acquire properties..................................... $ 3,979
=========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
6
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997 AND 1996
(UNAUDITED)
1. ORGANIZATION AND FORMATION TRANSACTIONS
Kilroy Realty Corporation (the "Company") was incorporated in Maryland in
September 1996 and is the successor to the operations of the Kilroy Group
("KG"). KG consists of the combination of Kilroy Industries ("KI") and various
entities, the properties of which were under common control of KI and/or its
stockholders, including John B. Kilroy, Sr. and John B. Kilroy, Jr. The
Company's Chairman of the Board of Directors, and President and Chief
Executive Officer are John B. Kilroy, Sr. and John B. Kilroy, Jr.,
respectively. KI has historically provided acquisition, development,
financing, construction and leasing services with respect to the properties
held by KG. KI has also provided development services to third-party owners of
properties for a fee. The accompanying combined financial statements of KG
have been presented on a combined basis because of common ownership and
management and because the entities were the subject of a business combination
in 1997 with the Company.
On January 31, 1997, the Company completed an initial public offering of
12,500,000 shares of, $.01 par value, common stock. The offering price was
$23.00 per share resulting in gross proceeds of $287,500,000. On February 7,
1997, the underwriters exercised their over-allotment option and, accordingly,
the Company issued 1,875,000 additional shares of common stock and received
gross proceeds of $43,125,000. The aggregate proceeds to the Company, net of
underwriters' discount, advisory fee and offering costs were approximately
$302,800,000. The initial public offering, including the exercise of the
overallotment option in connection therewith, is hereinafter referred to as
the "IPO".
The following transactions occurred simultaneously with the completion of
the IPO (collectively, the "Formation Transactions"):
. The Company consummated various purchase agreements to acquire four
properties for approximately $58,000,000 in cash. The four properties had
aggregate operating revenues of approximately $9,100,000 and net
operating income (before depreciation, amortization and interest) of
approximately $6,300,000 during the year ended December 31, 1996.
. The Company became the sole general partner of Kilroy Realty, L.P. (the
"Operating Partnership"). Upon completion of the IPO, the Company
contributed substantially all of the net proceeds of the IPO in exchange
for an approximate 84.5% interest in the Operating Partnership. The
Company also contributed cash in exchange for 100% of the capital stock
of Kilroy Realty Finance, Inc. ("Finance Inc."), which was formed to
serve as the general partner of Kilroy Realty Finance Partnership, L.P.
(the "Finance Partnership"). The Operating Partnership executed various
option and purchase agreements whereby it issued 2,652,374 units in the
Operating Partnership ("Units"), representing an approximate 15.5%
partnership interest, to the continuing investors in exchange for their
interests in the properties. The continuing investors included John B.
Kilroy, Sr. and John B. Kilroy, Jr., certain family members and certain
entities owned by them. The Operating Partnership contributed certain
properties to the Finance Partnership in exchange for a limited
partnership interest therein. All properties acquired by the Company are
held by or through the Operating Partnership or the Finance Partnership.
Unless otherwise indicated, all references to the Company include the
Operating Partnership, the Finance Partnership and Finance Inc.
. The Finance Partnership and the Operating Partnership borrowed
$84,000,000 and $12,000,000, respectively, under two mortgage loans.
. The Operating Partnership used a portion of the IPO proceeds and the
proceeds of the new mortgage borrowings of $96,000,000 to repay
approximately $219,000,000 of indebtedness.
7
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
. The Operating Partnership contributed certain assets valued at
approximately $100,000 to Kilroy Services, Inc. in exchange for a 5%
ownership interest and a 95% economic interest in Kilroy Services, Inc.
The remaining ownership interest is held by John B. Kilroy, Sr. and John
B. Kilroy, Jr.
The Company is engaged in the acquisition, development, ownership and
operation of office and industrial properties located in California,
Washington and Arizona. As of June 30, 1997, the Company owned 30 office
properties encompassing approximately 2.7 million rentable square feet and 38
industrial properties encompassing approximately 2.5 million rentable square
feet.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the consolidated financial
position of the Company, the Operating Partnership and the Finance Partnership
at June 30, 1997 and the results of their operations for the period from
February 1, 1997 to June 30, 1997. Subsequent to the IPO, the operating
results of the service business currently conducted by Kilroy Services, Inc.
are reflected in the accompanying financial statements on the equity method of
accounting. All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
The combined financial statements of the KG reflect a combination of real
estate properties, which were under common control of KI and/or its
stockholders, including John B. Kilroy, Sr. and John B. Kilroy, Jr. and which
were contributed to the Operating Partnership for 2,652,374 Units upon
consummation of the IPO. KG is considered the predecessor entity to the
Company due to common ownership and management; therefore, its combined
financial statements are presented for comparative purposes.
The accompanying interim financial statements have been prepared by the
Company's management in accordance with generally accepted accounting
principles and in conjunction with the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, the interim financial
statements presented herein, reflect all adjustments of a normal and recurring
nature which are necessary to fairly state the interim financial statements.
The results of operations for the interim period are not necessarily
indicative of the results that may be expected for the eleven months ended
December 31, 1997. These financial statements should be read in conjunction
with KG's audited financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1996.
The Company intends to qualify as a real estate investment trust ("REIT")
under Section 856 through 860 of the Internal Revenue Code of 1986, as amended
(the "Code"). As a REIT, the Company will not generally be subject to
corporate Federal income taxes as long as it satisfies certain requirements of
the Code relating to composition of its income and assets, and requirements
relating to distributions of taxable income to stockholders.
SIGNIFICANT ACCOUNTING POLICIES:
Restricted cash--Restricted cash consists of cash held as collateral to
provide credit enhancement for the mortgage loans payable and cash reserves
for capital expenditures and tenant improvements.
Accrued cost of option buy-out and tenant improvements--In September 1996,
KG amended the terms of certain of their lease agreements. Such amendments
included a $500,000 allowance for tenant improvements. In addition, KG agreed
to pay $3,150,000 in consideration for the cancellation of an option to
purchase a 50% equity interest in Kilroy Airport Center at El Segundo, which
was reflected in the statement of operations as of December 31, 1996. In
November 1996, $2,260,000 of the total liability of $3,650,000, was paid by KI
and its stockholders. In January 1997, $100,000 of the amount was paid by KG
and the remaining balance was paid by the Company with the proceeds of the
IPO.
8
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KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Recent Pronouncements--In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
128 Earnings Per Share. This statement establishes standards for computing and
presenting earnings per share ("EPS") and applies to entities with publicly
held common stock or potential common stock. This statement simplifies the
standards for computing EPS previously found in APB Opinion No. 15, Earnings
per Share, and makes them comparable to international EPS standards. This
statement is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company has not yet
determined the impact of adopting this statement.
In June 1997, the FASB issued SFAS No. 130 Reporting for Comprehensive Income
and No. 131, Disclosures about Segments of an Enterprise and Related
Information. These statements are effective for financial statements issued for
periods beginning after December 15, 1997. The Company has not yet determined
the impact of adopting these statements.
3. PROPERTY ACQUISITIONS
For the quarter ended June 30, 1997, the Company completed a series of
transactions to acquire 16 office buildings, 26 industrial buildings and two
parcels of land for development in California, as follows:
<TABLE>
<CAPTION>
PROPERTY NUMBER OF ACREAGE/ LOCATION OF PURCHASE PRICE
DESCRIPTION BUILDINGS SQUARE FOOTAGE PROPERTY (MILLIONS)
----------- --------- --------------- ------------------ --------------
<S> <C> <C> <C> <C>
Undeveloped land 15 acres Foothill Ranch, CA $ 3.2
Undeveloped land 10 acres Brea, CA 3.3
Office 5 115,000 sq. ft. Anaheim, CA 8.0
Office 1 91,000 sq. ft. Calabasas, CA 11.6
Office 2 80,000 sq. ft. Torrance, CA 5.7
Office 3 95,000 sq. ft. Santa Monica, CA 31.3
Office 4 276,000 sq. ft. Camarillo, CA 24.2
Office 1 67,000 sq. ft. Irvine, CA 8.5
Industrial 1 109,000 sq. ft. Anaheim, CA 5.3
Industrial 1 158,000 sq. ft. Irvine, CA 12.1
Industrial 7 276,000 sq. ft. Brea, CA 16.3
Industrial 1 154,000 sq. ft. Ontario, CA 4.9
Industrial 6 276,000 sq. ft. Garden Grove, CA 14.0
Industrial 10 159,000 sq. ft. Irvine, CA 15.9
------
Total $164.3
======
</TABLE>
These acquisitions were funded with existing working capital and proceeds
from the secured revolving line of credit (see Note 5 to the financial
statements). In addition, 165,102 Units valued at approximately $3,979,000 were
issued in conjunction with a purchase of two properties, consisting of one
office building and ten industrial buildings, located in Irvine, California.
9
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KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets are summarized as follows for the Company
at June 30, 1997 and the Kilroy Group at December 31, 1996, respectively:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
(IN THOUSANDS)
<S> <C> <C>
Deferred assets:
Deferred financing costs............................ $ 3,215 $ 2,968
Deferred leasing costs.............................. 13,896 11,563
------- -------
Total deferred assets............................... 17,111 14,531
Accumulated amortization.............................. (5,880) (7,728)
------- -------
Deferred assets, net.................................. 11,231 6,803
Prepaid expenses and other............................ 1,773 825
------- -------
Total deferred charges and other assets, net.......... $13,004 $ 7,628
======= =======
</TABLE>
5. DEBT
At June 30, 1997, debt consists of an $83,663,000 mortgage loan (the
"Permanent Loan") secured by certain of the properties and a $12,000,000
mortgage loan (the "SeaTac Loan") secured by an office complex in Seattle,
Washington. The Permanent Loan requires monthly principal and interest
payments based on an interest rate of 8.35%, amortizes over a 25-year period
and matures in 2022, but is subject to increases in the effective interest
rate beginning in 2005. The SeaTac Loan requires monthly payments of interest
based on a variable rate of the London interbank offered rate ("LIBOR") plus
3% (8.44% at June 30, 1997). The SeaTac Loan matures in January 1998 with an
option to extend for six months. The interest rate on the SeaTac Loan was
adjusted to LIBOR plus 1.5% in July 1997. As of June 30, 1997 the loans have a
weighted average interest rate of 8.36%. On August 13, 1997, the Company
increased the outstanding principal amount under the SeaTac Loan by
$2.0 million to $14.0 million.
Scheduled principal payments for the above mortgage loans at June 30, 1997
(which excludes the $2.0 million increase in the SeaTac Loan) are as follows:
<TABLE>
<S> <C>
Period Ending December 31,
1997.......................................................... $ 523
1998.......................................................... 13,115
1999.......................................................... 1,212
2000.......................................................... 1,317
2001.......................................................... 1,431
Thereafter.................................................. 78,065
-------
Total..................................................... $95,663
=======
</TABLE>
In May 1997, the Company obtained a $150,000,000 secured revolving credit
facility (the "Credit Facility"). The Credit Facility matures on May 30, 1999,
with an option to extend for one year and is to be used to finance property
acquisitions and development and for general corporate purposes. The Credit
Facility bears interest at either (a) 1.5% plus LIBOR or (b) 0.25% plus a
prime rate. As of June 30, 1997, the weighted average interest rate of
outstanding borrowings under the Credit Facility was 8.14%. Outstanding
borrowings under the Credit Facility were $92.0 million as of June 30, 1997
and $95.0 as of July 31, 1997. On July 22, 1997, the Company received a
commitment to increase the Credit Facility to $200,000,000. Availability under
the Credit Facility is subject to, among other things, the value of the
underlying collateral securing it.
10
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The carrying value of the fixed rate Permanent Loan at June 30, 1997
approximates its fair value based on terms currently offered to the Company.
The carrying values of the variable rate SeaTac Loan and the Credit Facility
also approximate fair value at June 30, 1997.
In January 1997, KG recorded an extraordinary gain of $3,204,000 consisting
of approximately $1,283,000 of unamortized deferred financing fees written off
and a net gain on partial forgiveness of a mortgage obligation of $4,487,000.
6. COMMITMENTS AND CONTINGENCIES
Operating Leases--The Company has noncancelable ground lease obligations on
Kilroy Airport Center Long Beach with an initial lease period expiring on July
31, 2035, classified as an operating lease. Further, the Company has
noncancelable ground lease obligations on the SeaTac Office Center expiring on
December 31, 2032 with an option to extend the leases for an additional 30
years and on one of the properties purchased in connection with the IPO which
expires in 2035. Except with respect to one of the ground leases at the SeaTac
Office Center, rentals are subject to adjustments every five years based on
changes in the Consumer Price Index.
The minimum commitments under these leases as of June 30, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
Period Ending December 31,
1997.......................................................... $ 540
1998.......................................................... 1,099
1999.......................................................... 1,261
2000.......................................................... 1,394
2001.......................................................... 1,394
Thereafter.................................................. 46,004
-------
Total..................................................... $51,692
=======
</TABLE>
7. STOCK OPTIONS
The Company has established a stock option and incentive plan for the
purpose of attracting and retaining qualified executives and to reward them
for superior performance in achieving the Company's business goals and
enhancing stockholder value. As of July 31, 1997, 1,155,000 of the Company's
authorized options to purchase shares have been granted to directors, officers
and employees and an additional 245,000 have been reserved for issuance under
such plan. The term of each option is ten years from the date of grant. Each
option vests 33 1/3% per year over three years beginning on the first
anniversary date of the grant and is exercisable at a price per share equal to
the fair market value on the date of grant.
8. SUBSEQUENT EVENTS
Subsequent to June 30, 1997, the Company acquired the following properties
with proceeds from the Credit Facility and working capital:
<TABLE>
<CAPTION>
PROPERTY NUMBER OF
DESCRIPTION BUILDINGS ACREAGE/SQUARE FOOTAGE LOCATION OF PROPERTY PURCHASE PRICE (MILLIONS)
----------- --------- ---------------------- -------------------- -------------------------
<S> <C> <C> <C> <C>
Office 2 125,000 sq. ft. Santa Ana, CA $15.6
Office 1 27,000 sq. ft. Irvine, CA 3.0
Industrial 1 245,000 sq. ft. Irvine, CA 14.3
Industrial 1 64,000 sq. ft. Garden Grove, CA 3.0
Industrial 1 83,000 sq. ft. Garden Grove, CA 4.5
</TABLE>
11
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(CONTINUED)
On July 10, 1997, distributions of $6,701,000 were paid to stockholders and
unitholders of record on May 22, 1997.
On July 28, 1997, the Company filed a registration statement on Form S-11
with the Securities and Exchange Commission for an offering of 10,000,000
shares of common stock. The offering is expected to be completed by the end of
August 1997.
The Company presently is negotiating for the purchase of, and the right to
acquire, additional properties for an aggregate acquisition cost (including
closing costs and anticipated improvements) currently estimated to exceed $425
million over the next several years.
9. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma information for the six months ended
June 30, 1997 and 1996 are presented as if the Formation Transactions and
Acquisitions, as described in Note 1 and Note 3, respectively, to the
financial statements had occurred on January 1, 1996. Such pro forma
information is based upon the historical consolidated financial statements of
the Company and the Kilroy Group and should be read in conjunction with the
consolidated and combined financial statements and the notes thereto.
This unaudited pro forma condensed consolidated information does not purport
to represent what the actual results of operations of the Company would have
been assuming such Formation Transactions and Acquisitions had been completed
as set forth above, nor do they purport to predict the results of operations
for future periods.
PRO FORMA INCOME STATEMENT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
---------------------
1997 1996
---------- ----------
<S> <C> <C>
Total revenues........................................... $ 33,170 $ 32,676
========== ==========
Net income before extraordinary items.................... $ 6,473 $ 6,701
========== ==========
Net income............................................... $ 9,677 $ 6,701
========== ==========
Net income per common share.............................. $ .67 $ .46
========== ==========
Weighted average shares outstanding...................... 14,475,000 14,475,000
========== ==========
</TABLE>
12
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to the consolidated financial statements of
Kilroy Realty Corporation (the "Company") and the combined financial
statements of the Company's predecessor, the Kilroy Group, and should be read
in conjunction with the financial statements and related notes thereto
included in the Form 10-K of the Company for the year ended December 31, 1996.
OVERVIEW AND BACKGROUND
The Company owns, operates and develops commercial and industrial real
estate, primarily in Southern California. The Company was formed in January
1997 as a self-administered real estate investment trust (a "REIT") and
succeeded to the Kilroy Group's real estate business. The Kilroy Group, the
Company's predecessor, had been engaged in the acquisition, management,
financing, construction and leasing of commercial and industrial properties.
The combined financial statements of the Kilroy Group comprise the operations,
assets and liabilities of the properties contributed to the Company in
connection with the formation transactions following the initial public
offering on January 31, 1997 (the "IPO") (see Note 1 to the Consolidated
Financial Statements for a discussion of the organization and formation of the
Company). As of June 30, 1997, the Company owned 30 office buildings and 38
industrial buildings that encompassed approximately 2.7 million and 2.5
million rentable square feet, respectively, and were 96.0% leased. The Company
owns all of the properties through the Operating Partnership and the Finance
Partnership.
As a result of the formation transactions in the first quarter and
acquisitions during the second quarter, the Company's total assets increased
to $410,231,000, including real estate assets of $336,297,000, net of
accumulated depreciation at June 30, 1997. The market capitalization of the
Company based on the market value of the 14,475,000 issued and outstanding
shares of the Company's common stock, 2,817,476 Operating Partnership units
and the $187,663,000 of debt outstanding at June 30, 1997 was $624,295,000.
The Company's total debt-to-market capitalization ratio at June 30, 1997 was
30.1%.
Income is derived primarily from rental revenue (including tenant
reimbursements). As a result of the Company's acquisitions in the current
fiscal year, the financial data shows significant increases in total revenues
and expenses from quarter to quarter. For the foregoing reasons, management
does not believe the year to year and quarter to quarter financial data are
comparable.
The Company anticipates that the more significant part of its revenue growth
in the next one to two years will come from additional acquisitions rather
than from occupancy and market rent increases in its current portfolio.
However, the Company presently expects that if the Southern California office
and industrial rental market continues to improve, rental rate increases will
become a more substantial part of its revenue growth.
RESULTS OF OPERATIONS
The Company's management believes that in order to provide meaningful
historical analysis of the financial statements, certain adjustments must be
made to the historical Kilroy Group financial statements to make accounting
periods comparable. Accordingly the results of operations for the period
January 1, 1997 to January 31, 1997 have been adjusted to reflect interest
income, general and administrative expenses, interest expense and
extraordinary gains as if the IPO had been consummated on January 1, 1997. The
following sections discuss the results of operations as adjusted.
13
<PAGE>
Adjusted Six Months Ended June 30, 1997 compared to Six Months Ended June 30,
1996
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
(IN THOUSANDS)
---------------------
1997 1996
------------- -------
(AS ADJUSTED)
<S> <C> <C>
REVENUES:
Rental income...................................... $22,220 $17,594
Tenant reimbursements.............................. 2,085 1,790
Interest income.................................... 2,461
Development services............................... 14 458
Other income....................................... 300 11
------- -------
Total revenues................................... 27,080 19,853
------- -------
EXPENSES:
Property expenses.................................. 3,854 3,285
Real estate taxes.................................. 1,033 633
General and administrative......................... 2,538 1,064
Ground leases...................................... 528 390
Development expense................................ 46 391
Interest expense................................... 4,843 10,726
Depreciation and amortization...................... 5,531 4,559
------- -------
Total expenses................................... 18,373 21,048
------- -------
ADJUSTED INCOME (LOSS) BEFORE MINORITY INTEREST...... $ 8,707 $(1,195)
======= =======
</TABLE>
Total revenues increased $7.2 million, or 36.4%, for the six months ended
June 30, 1997 compared to the same period in 1996. Rental income increased
$4.6 million, or 26.3%, to $22.2 million for the six months ended June 30,
1997 compared to $17.6 million in the same period in 1996. Rental income from
office properties increased $3.4 million during the six months ended June 30,
1997 from the comparable period in 1996. This improvement was attributable to
an increase in office space under lease from 1,298,000 rentable square feet at
June 30, 1996 to 2,414,000 rentable square feet at June 30, 1997, an increase
of 1,116,000 rentable square feet. Approximately 343,000 rentable square feet
reflects four office buildings acquired in connection with the IPO and 711,000
rentable square feet reflects sixteen office buildings purchased during the
three months ended June 30, 1997. The remaining increase is primarily the
result of leasing at Kilroy Airport Center at El Segundo and Kilroy Airport
Center, Long Beach. The increase in rentable square footage under lease was
offset by a decrease in average rent per rentable square foot at Kilroy
Airport Center at El Segundo, from $21.51 per square foot for the six months
ended June 30, 1996 to $19.97 for the same period in 1997 as a result of the
re-negotiation and extension of a lease with Hughes Space and Communications
in November 1996. Rental income from industrial properties increased
$1.2 million during the six months ended June 30, 1997 compared to the same
period in 1996. The increase was due to the purchase of three industrial
buildings in connection with the IPO with approximately 380,000 rentable
square feet under lease at June 30, 1997, and the purchase of 26 industrial
buildings during the three months ended June 30, 1997 with approximately
1,101,000 rentable square feet under lease. Tenant reimbursements increased to
$2.1 million for the six months ended June 30, 1997 from $1.8 million for the
same period in 1996. The $0.3 million increase was primarily attributable to
tenant reimbursements in connection with the office and industrial buildings
purchased in connection with and subsequent to the IPO. Interest income
increased $2.5 million as a result of interest earned on the $116.2 million of
net IPO proceeds remaining after the purchase of properties and the repayment
of debt in connection with the IPO. Other income for the six months ended
June 30, 1997 includes a $0.1 million gain on the sale of furniture and
equipment and $0.1 million in revenues which were previously written-off as
uncollectible.
14
<PAGE>
Expenses for the six months ended June 30, 1997 decreased by $2.6 million,
or 12.7%, to $18.4 million compared to $21.0 million for the six months ended
June 30, 1996. Property expenses and real estate taxes increased $0.6 million
and $0.4 million, respectively, during the six months ended June 30, 1997 over
the same period in 1996 primarily due to the properties purchased in
connection with the IPO. Ground lease expense increased $0.1 million during
the six months ended June 30, 1997 over the same period in 1996 as a result of
one additional ground lease with respect to one of the properties purchased in
connection with the IPO. Interest expense decreased $5.9 million, or 54.8%, to
$4.8 million for the six months ended June 30, 1997 from $10.7 million for the
six months ended June 30, 1996, primarily as a result of the net repayment of
$127.4 million in debt in connection with the IPO.
Net income was $8.7 million for the six months ended June 30, 1997 compared
to a $1.2 million loss for the same period in 1996. The net change of $9.9
million is due primarily to an increase in rental income of $4.6 million, an
increase in interest income of $2.5 million and a decrease in interest expense
of $5.9 million which were partially offset by an increase of $1.5 million in
general and administrative expense and an increase of $1.0 million in
depreciation and amortization.
LIQUIDITY AND CAPITAL RESOURCES
On May 21, 1997, the Company entered into a $150.0 million secured revolving
credit facility (the "Credit Facility") underwritten by Morgan Guaranty Trust
Company of New York ("MGT"), which matures in May 1999, subject to a one-year
option to extend the term. The Credit Facility bears interest at a variable
rate equal to either (a) 1.5% plus the London interbank offered rate ("LIBOR")
applicable to the selected period or (b) 0.25% plus a rate equal to the higher
of (i) MGT's prime rate then in effect or (ii) the federal funds rate plus
0.50%. The Credit Facility is secured by certain properties of the Company and
the availability of funds is subject to, among other things, the value of
those properties. The Company recently received a commitment to increase the
amount available under the Credit Facility to $200.0 million. Borrowings
outstanding under the Credit Facility were $92.0 million as of June 30, 1997,
and $95.0 million as of July 31, 1997.
In addition, the Operating Partnership has debt outstanding from MGT as of
June 30, 1997 of $95.6 million, comprised of an $83.6 million mortgage loan
and a $12.0 million mortgage loan. The $83.6 million mortgage loan requires
monthly principal and interest payments based on an interest rate of 8.35%,
amortizes over 25 years and matures on February 1, 2022. In February 2005, the
interest rate resets to the greater of 13.35% or the sum of the interest rate
for U.S. Treasury Securities maturing 15 years from the reset date plus 5.0%.
The $12.0 million mortgage loan requires monthly payments of interest computed
at a variable rate of interest equal to LIBOR plus 3.0% and matures on January
31, 1998. On August 13, 1997, the Company increased the outstanding principal
amount under the $12.0 million mortgage loan by $2.0 million to $14.0 million.
Since the IPO, the Company purchased 42 office and industrial buildings for
an aggregate acquisition cost of $157.7 million. The purchase price for such
properties was funded out of net proceeds from the IPO, from borrowings under
the Credit Facility, working capital and, in part for two properties
consisting of one office building and ten industrial buildings, the issuance
of Operating Partnership units.
On July 28, 1997, the Company filed a registration statement on Form S-11
with the Securities and Exchange Commission for an offering of 10,000,000
shares of common stock (the "Offering"), that is expected to be completed by
August 31, 1997. Upon the consummation of the Offering and the use of the
proceeds therefrom, the Company will have (i) repaid its outstanding
indebtedness under the Credit Facility of $95.0 million and (ii) estimated
cash available for acquisitions, development and working capital of
approximately $95.2 million.
Subsequent to June 30, 1997, the Company purchased six office and industrial
buildings for an aggregate acquisition cost of $40.4 million. The acquisitions
were funded with borrowings under the Credit Facility and working capital. As
of June 30, 1997, the Company has entered into agreements to acquire 11
industrial properties for an aggregate acquisition cost of $57.5 million. In
addition, the Company is currently in active negotiations to purchase eight
industrial buildings for an aggregate acquisition cost of $68.0 million,
including the assumption of $14.0 million of mortgage indebtedness. The
Company anticipates that such acquisitions, if consummated, would be funded
with net proceeds from the Offering, funds available under the Credit Facility
and working capital.
15
<PAGE>
The Company owns approximately 60 acres of developable property and plans to
develop an aggregate of 1.6 million rentable square feet of office or
industrial space, subject to required entitlements and other governmental
approvals. Of this amount, the Company intends to commence development of
approximately 500,000 rentable square feet of industrial space in 1997 at a
total budgeted cost of $25.0 million. The Company expects to finance such
development with net proceeds from the Offering, borrowings under the Credit
Facility and working capital. The Company presently has no financial
commitments in its capacity as a developer of real estate projects.
In June 1997, the company leased approximately 211,000 rentable square feet
of office space at the SeaTac Office Center. In connection with the lease, the
Company agreed to make $3.25 million of tenant improvements which the company
expects to fund from working capital or borrowings under the Credit Facility.
The company anticipates that such tenant improvements will be completed by
December 31, 1997. The company also expects to spend approximately $2.0
million in connection with non-recurring capital improvements at the SeaTac
Office Center and $500,000 of earthquake-related improvements to certain other
properties in the next six months.
The Company also expects to incur $500,000 of earthquake-related
improvements to certain of the properties in the next six months. A reserve
for this amount has been established pursuant to the $83.6 million mortgage
loan with MGT.
On July 30, 1997, the Company signed a non-binding letter of intent (the
"Allen LOI") with The Allen Group ("Allen") to acquire the principal assets of
Allen which include approximately 1.7 million rentable square feet of
completed and under construction office and industrial properties, and
developable land, located primarily in Northern San Diego County. If
consummated, the Company would purchase the assets in phases over the next
several years for a total investment currently estimated to exceed $300
million. The acquisition is subject to the completion of due diligence and the
negotiation of final documentation. If the Company enters into the
transactions contemplated by the Allen LOI, it will have substantial financial
commitments with respect thereto. No assurance can be given that the
transactions contemplated by the Allen LOI will be consummated or, if
consummated, successfully managed and/or developed by the Company.
The Company makes quarterly distributions to stockholders from cash
available for distribution and, if necessary to satisfy distribution
requirements to maintain its status as a REIT, the Company may use borrowings
under its Credit Facility. All such distributions are at the discretion of the
Board of Directors. Amounts accumulated for distribution will be invested
primarily in interest-bearing accounts and short-term interest-bearing
securities, which are consistent with the Company's intention to qualify for
taxation as a REIT. Such investments may include, for example, obligations of
the Government National Mortgage Association, other governmental agency
securities, certificates of deposit and interest-bearing bank deposits.
The Company believes that it will have sufficient capital resources to
satisfy its obligations during its first year of operations that commenced on
January 31, 1997. The Company expects to meet certain of its long-term
liquidity requirements, including the repayment of long-term debt of $83.6
million (less scheduled principal repayments) in 2005, the repayment of debt
of $12.0 million in January 1998 and possible property acquisitions and
development, through long-term secured and unsecured borrowings, including the
Credit Facility, and the issuance of debt securities or additional equity
securities of the Company or, possibly in connection with acquisitions of land
or improved properties, the issuance of units of the Operating Partnership.
HISTORICAL CASH FLOWS
Historically, the Kilroy Group's principal sources of funding for operations
and capital expenditures were cash flow from operating activities and secured
debt financing.
The Company's net cash from operating activities was $5.8 million for the
six months ended June 30, 1997 and 1996. There was an increase in income
before non-cash extraordinary gains of $7.5 million from a loss of
$1.2 million in the six months ended June 30, 1996 to $6.3 million in the six
months ended June 30, 1997. This
16
<PAGE>
increase was used for other assets of $4.3 million, accrued interest of $3.0
million and the accrued cost of option buy out and tenant improvements of $1.4
million.
Net cash used in investing activities increased $236.2 million to $236.6
million for the six months ended June 30, 1997 from $0.4 million in the six
months ended June 30, 1996. The increase was due to the purchase of 25 acres
of land, 20 office buildings and 29 industrial buildings for an aggregate
purchase price of $218.7 million (net of $4.0 million paid in units of the
Operating Partnership) and additional tenant improvements and capital
expenditures of $0.6 million.
Cash flows provided by financing activities totaled $265.1 million for the
six months ended June 30, 1997 compared to net cash used in financing
activities of $5.4 million during the first six months of 1996. The increase
in the six months ended June 30, 1997 is primarily attributable to net
proceeds from the IPO of $302.8 million, a net repayment of debt of $123.1
million and borrowings on the line of credit of $92.0 million compared to net
proceeds from debt of $3.5 million during the same period in 1996. In
addition, there were dividends of $3.7 million and loan costs of $3.2 million
and an increase in restricted cash of $5.7 million during the six months ended
June 30, 1997 compared to loan costs of $2.6 million in the same period in
1996. During the six months ended June 30, 1997 there was a contribution from
partners of $6.1 million, compared to a net distribution of $6.3 million
during the same period in 1996.
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds from Operations, as defined by
NAREIT, an alternative measure of performance for an equity REIT. Funds from
Operations is defined by NAREIT to mean net income (loss) before minority
interest of unitholders (determined in accordance with GAAP), excluding gains
(or losses) from debt restructuring and sales of property, plus real estate-
related depreciation and amortization (excluding amortization of deferred
financing costs and depreciation of non-real estate assets), and after
adjustment for unconsolidated partnerships and joint ventures. The Company
believes that in order to facilitate a clear understanding of the combined
historical operating results of the Company, Funds from Operations should be
examined in conjunction with net income (loss) as presented in the financial
statements included elsewhere in this report. The Company computes Funds from
Operations in accordance with standards established by the Board of Governors
of NAREIT in its March 1995 White Paper, which may differ from the methodology
for calculating Funds from Operations utilized other equity REITs and,
accordingly, may not be comparable to that published by such other REITs.
Funds from Operations should not be considered as an alternative to net income
(loss), as an indication of the Company's performance or to cash flows as a
measure of liquidity or the ability to pay dividends or make distributions.
17
<PAGE>
The following table presents the Company's Funds from Operations for the
period from February 1, 1997 to June 30, 1997 and the three months ended June
30, 1997:
<TABLE>
<CAPTION>
FEBRUARY 1, THREE MONTHS
1997 TO ENDED
JUNE 30, 1997 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Net income.................................. $ 6,760 $4,108
Add
Minority interest of unitholders ....... 1,254 768
Depreciation and amortization........... 4,744 3,000
Other................................... 197 120
------- ------
Funds from Operations....................... $12,955 $7,996
======= ======
The following table presents the Company's Funds Available for Distribution
for the period from February 1, 1997 to June 30, 1997 and the three months
ended June 30, 1997:
<CAPTION>
FEBRUARY 1, THREE MONTHS
1997 TO ENDED
JUNE 30, 1997 JUNE 30, 1997
------------- -------------
<S> <C> <C>
Funds from Operations....................... $12,955 $7,996
Adjustments
Amortization of deferred financing
costs.................................. 404 243
Non-revenue generating tenant
improvements and leasing commissions... (276) (64)
Building Improvements..................... (256) (256)
Net effect of straight-line rents......... (75) (80)
------- ------
Funds Available for Distribution............ $12,752 $7,839
======= ======
</TABLE>
INFLATION
The Company's leases with the majority of its tenants require the tenants to
pay most operating expenses, including real estate taxes and insurance, and
increases in common area maintenance expenses, which reduce the Company's
exposure to increases in costs and operating expenses resulting from
inflation.
18
<PAGE>
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
During the three months ended June 30, 1997, no legal proceedings were
initiated against or on behalf of the Company, the adverse determination of
which would have a material adverse effect upon the financial condition and
results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
During the three months ended June 30, 1997, the Operating Partnership
issued 165,102 partnership units (the "Units") with an aggregate value of
approximately $3,979,000 to four accredited investors in exchange for the
contribution of property. The Units were issued in reliance on an exemption
registration requirement pursuant to regulation D under the Securities Act of
1933 as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES--NONE
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS--NONE
ITEM 5. OTHER INFORMATION--NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ---------------------------------------------------------------------
<C> <S>
3.1 Articles of Amendment and Restatement of the Registrant.(1)
3.2 Amended and Restated Bylaws of the Registrant.(1)
3.3 Form of Certificate for Common Stock of the Registrant.(1)
10.1 Amended and Restated Agreement of Limited Partnership of Kilroy
Realty, L.P.(1)
10.2 Form of Registration Rights Agreement among the Registrant and the
persons named therein.(1)
10.3 Omnibus Agreement, dated as of October 30, 1996, by and among Kilroy
Realty, L.P. and the parties named therein.(1)
10.4 Supplemental Representations, Warranties and Indemnity Agreement by
and among Kilroy Realty, L.P. and the parties named therein.(1)
10.5 Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy,
Sr., John B. Kilroy, Jr. and Kilroy Industries.(1)
10.6 1997 Stock Option and Incentive Plan of the Registrant and Kilroy
Realty, L.P.(1)
10.7 Form of Indemnity Agreement of the Registrant and Kilroy Realty, L.P.
with certain officers and directors.(1)
10.8 Lease Agreement, dated January 24, 1989, by and between Kilroy Long
Beach Associates and the City of Long Beach for Kilroy Long Beach
Phase I.(1)
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
<C> <S>
10.9 First Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase I.(1)
10.10 Lease Agreement, dated July 17, 1985, by and between Kilroy Long Beach
Associates and the City of Long Beach for Kilroy Long Beach Phase
III.(1)
10.11 Lease Agreement, dated April 21, 1988, by and between Kilroy Long
Beach Associates and the Board of Water Commissioners of the City of
Long Beach, acting for and on behalf of the City of Long Beach, for
Long Beach Phase IV.(1)
10.12 Lease Agreement, dated December 30, 1988, by and between Kilroy Long
Beach Associates and the City of Long Beach for Kilroy Long Beach
Phase II.(1)
10.13 First Amendment to Lease, dated January 24, 1989, by and between
Kilroy Long Beach Associates and the City of Long Beach for Kilroy
Long Beach Phase III.(1)
10.14 Second Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III.(1)
10.15 First Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase II.(1)
10.16 Third Amendment to Lease Agreement, dated October 10, 1994, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III.(1)
10.17 Development Agreement by and between Kilroy Long Beach Associates and
the City of Long Beach.(1)
10.18 Amendment No. 1 to Development Agreement by and between Kilroy Long
Beach Associates and the City of Long Beach.(1)
10.19 Ground Lease by and between Frederick Boysen and Ted Boysen and Kilroy
Industries, dated May 15, 1969, for SeaTac Office Center.(1)
10.20 Amendment No. 1 to Ground Lease and Grant of Easement, dated April 27,
1973, among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties.(1)
10.21 Amendment No. 2 to Ground Lease and Grant of Easement, dated May 17,
1977, among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties.(1)
10.22 Airspace Lease, dated July 10, 1980, by and among the Washington State
Department of Transportation, as lessor, and Sea Tac Properties, Ltd.
and Kilroy Industries, as lessee.(1)
10.23 Lease, dated April 1, 1980, by and among Bow Lake, Inc., as lessor,
and Kilroy Industries and SeaTac Properties, Ltd., as lessees for
Sea/Tac Office Center.(1)
10.24 Amendment No. 1 to Ground Lease, dated September 17, 1990, between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee.(1)
10.25 Amendment No. 2 to Ground Lease, dated March 21, 1991, between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee.(1)
10.26 Property Management Agreement between Kilroy Realty Finance
Partnership, L.P. and Kilroy Realty, L.P.(1)
10.27 Form of Environmental Indemnity Agreement.(1)
10.28 Option Agreement by and between Kilroy Realty, L.P. and Kilroy Airport
Imperial Co.(1)
10.29 Option Agreement by and between Kilroy Realty, L.P. and Kilroy
Calabasas Associates.(1)
10.30 Employment Agreement between the Registrant and John B. Kilroy, Jr.(1)
10.31 Employment Agreement between the Registrant and Richard E. Moran
Jr.(1)
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
<C> <S>
10.32 Employment Agreement between the Registrant and Jeffrey C. Hawken.(1)
10.33 Employment Agreement between the Registrant and C. Hugh Greenup.(1)
10.34 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Sr.(1)
10.35 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Jr.(1)
10.36 License Agreement by and among the Registrant and the other persons
named therein.(1)
10.37 Form of Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Leases, Rents
and Security Deposits.(1)
10.38 Form of Mortgage Note.(1)
10.39 Form of Indemnity Agreement.(1)
10.40 Form of Assignment of Leases, Rents and Security Deposits.(1)
10.41 Form of Credit Agreement.(1)
10.42 Form of Variable Interest Rate Indenture of Mortgage, Deed of Trust,
Security Agreement, Financing Statement, Fixture Filing and Assignment
of Leases and Rents.(1)
10.43 Form of Environmental Indemnity Agreement.(1)
10.44 Form of Assignment, Rents and Security Deposits.(1)
10.45 Revolving Credit Agreement, dated as of May 21, 1997, among Kilroy
Realty, L.P., Morgan Guaranty Trust Company of New York and the Banks
listed herein.(5)
10.46 Form of Mortgage, Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Leases and Rents.(1)
10.47 Assignment of Leases, Rents and Security Deposits.(1)
10.48 Purchase and Sale Agreement and Joint Escrow Instructions, dated April
30, 1997, by and between Mission Land Company, Mission-Vacaville, L.P.
and Kilroy Realty, L.P.(2)
10.49 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
April 30, 1997, by and between Camarillo Partners and Kilroy Realty,
L.P.(2)
10.50 Purchase and Sale Agreement and Escrow Instructions, dated May 5,
1997, by and between Kilroy Realty, L.P. and Pullman Carnegie
Associates.(4)
10.51 Amendment to Purchase and Sale Agreement and Escrow Instructions,
dated June 27, 1997, by and between Pullman Carnegie Associates and
Kilroy Realty, L.P.(4)
10.52 Purchase and Sale Agreement, Contribution Agreement and Joint Escrow
Instructions, dated May 12, 1997, by and between Shidler West
Acquisition Company, LLC and Kilroy Realty, L.P.(3)
10.53 First Amendment to Purchase and Sale Agreement, Contribution Agreement
and Joint Escrow Instructions, dated June 6, 1997, between Kilroy
Realty, L.P. and Shidler West Acquisition Company, L.L.C.(3)
10.54 Second Amendment to Purchase and Sale Agreement, Contribution
Agreement and Joint Escrow Instructions, dated June 12, 1997, by and
between Shidler West Acquisition Company, LLC and Kilroy Realty,
L.P.(3)
10.55 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
June 12, 1997, by and between Mazda Motor of America, Inc. and Kilroy
Realty, L.P.(4)
10.56 Amendment to Agreement of Purchase and Sale and Joint Escrow
Instructions, dated June 30, 1997, by and between Mazda Motor of
America, Inc. and Kilroy Realty, L.P.(4)
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- ----------------------------------------------------------------------
<C> <S>
10.57 Agreement for Purchase and Sale of 2100 Colorado Avenue, Santa Monica,
California, dated June 16, 1997, by and between Santa Monica Number
Seven Associates L.P. and Kilroy Realty L.P.(4)
10.58 First Amendment to Credit Agreement dated July 1, 1997.(5)
10.59 Second Amendment to Credit Agreement and First Amendment to Variable
Interest Rate Indenture of Mortgage, Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and Assignment of
Leases and Rent dated August 13, 1997.(5)
*27.1 Financial Data Schedule.
</TABLE>
- --------
*Filed herewith.
(1) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) as declared effective on January 28, 1997 and incorporated
herein by reference.
(2) Previously filed as Exhibit 10.11 and 10.12, respectively, to the Current
Report on Form 8-K (No. 1-12675) as filed on June 5, 1997 and incorporated
herein by reference.
(3) Previously filed as Exhibit 10.57, 10.58 and 10.59, respectively, to the
Current Report on Form 8-K (No. 1-12675) as filed on July 3, 1997 and
incorporated herein by reference.
(4) Previously filed as Exhibit 10.54, 10.59, 10.60, 10.61 and 10.62,
respectively, to the Current Report on Form 8-K (No. 1-12675) as filed on
July 15, 1997 and incorporated herein by reference.
(5) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-32261) as filed on July 28, 1997, as amended, and incorporated by
reference.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K dated May 22, 1997 in
connection with the acquisition of 21 office and industrial buildings.
The Company filed a Current Report on Form 8-K dated June 18, 1997 in
connection with the acquisition of one office building, ten industrial
buildings and 10 acres of undeveloped land.
The Company filed a Current Report on Form 8-K dated July 14, 1997 in
connection with the acquisition of six office and one industrial buildings.
22
<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 on August 14,
1997.
Kilroy Realty Corporation
/s/ John B. Kilroy, Jr.
By: _________________________________
JOHN B. KILROY, JR.
PRESIDENT AND CHIEF EXECUTIVE
OFFICER
/s/ Richard E. Moran Jr.
By: _________________________________
RICHARD E. MORAN JR.
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
/s/ Ann Marie Whitney
By: _________________________________
ANN MARIE WHITNEY
VICE PRESIDENT AND CONTROLLER
23
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-Q
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 34,296 0
<SECURITIES> 0 0
<RECEIVABLES> 3,985 4,670
<ALLOWANCES> (226) (1,628)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 450,631 227,337
<DEPRECIATION> (114,334) (109,668)
<TOTAL-ASSETS> 410,231 128,339
<CURRENT-LIABILITIES> 0 0
<BONDS> 0 0
0 0
0 0
<COMMON> 145 0
<OTHER-SE> 166,713 128,339
<TOTAL-LIABILITY-AND-EQUITY> 410,231 128,339
<SALES> 0 0
<TOTAL-REVENUES> 26,594 19,853
<CGS> 0 0
<TOTAL-COSTS> 13,245 10,322
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 5,972 10,726
<INCOME-PRETAX> 7,377 (1,195)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 7,377 (1,195)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 3,204 20,095
<CHANGES> 0 0
<NET-INCOME> 9,462<F1> 18,900
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
<FN>
<F1>NET INCOME IS AFTER EQUITY IN INCOME OF UNCONSOLIDATED SUBSIDIARY $135 AND
MINORITY INTEREST ($1,254).
</FN>
</TABLE>
