<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 24, 1997
REGISTRATION NO. 333-15553
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 3
TO
FORM S-11
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
KILROY REALTY CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS GOVERNING INSTRUMENTS)
2250 EAST IMPERIAL HIGHWAY
EL SEGUNDO, CALIFORNIA 90245
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
----------------
JOHN B. KILROY, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
KILROY REALTY CORPORATION
2250 EAST IMPERIAL HIGHWAY
EL SEGUNDO, CALIFORNIA 90245
(NAME AND ADDRESS OF AGENT FOR SERVICE)
----------------
COPIES TO:
EDWARD SONNENSCHEIN, JR., ESQ. LYNN TOBY FISHER, ESQ.
LATHAM & WATKINS KAYE, SCHOLER, FIERMAN, HAYS &
633 WEST FIFTH STREET HANDLER, LLP
LOS ANGELES, CALIFORNIA 90071 425 PARK AVENUE
(213) 485-1234 NEW YORK, NEW YORK 10022
(212) 836-8000
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM S-11 ITEM NO. AND HEADING LOCATION OR HEADING IN PROSPECTUS
------------------------------ ---------------------------------
<C> <S>
1. Forepart of Registration Statement and
Outside Front Cover Page of
Prospectus............................ Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................... Inside Front Cover Page; Outside Back Cover
Page
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges.... Prospectus Summary; Risk Factors;
Distribution
Policy; Business and Properties; Certain
Relationships and Related Transactions
4. Determination of Offering Price........ Underwriting
5. Dilution............................... Dilution
6. Selling Security Holders............... Not applicable
7. Plan of Distribution................... Underwriting
8. Use of Proceeds........................ Use of Proceeds
9. Selected Financial Data................ Selected Financial Data
10. Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ Management's Discussion and Analysis of
Financial Condition and Results of
Operations
11. General Information as to Registrant... Prospectus Summary; Business and
Properties;
Management; Principal Stockholders;
Certain
Provisions of Maryland Law and of the
Company's Articles of Incorporation and
Bylaws
12. Policy with Respect to Certain
Activities............................ Policies With Respect to Certain Activities
13. Investment Policies of Registrant...... Policies With Respect to Certain Activities
14. Description of Real Estate............. Management's Discussion and Analysis of
Financial Condition and Results of
Operations; Business and Properties
15. Operating Data......................... Business and Properties
16. Tax Treatment of Registrant and Its
Security-Holders...................... Federal Income Tax Consequences
17. Market Price of and Dividends on the
Registrant's Common Equity and Related
Stockholder Matters................... Risk Factors; Principal Stockholders;
Distribution Policy; Shares Available for
Future Sale
18. Description of Registrant's
Securities............................ Description of Capital Stock; Certain
Provisions of Maryland Law and of the
Company's Articles of Incorporation and
Bylaws
19. Legal Proceedings...................... Business and Properties--Legal Proceedings
20. Security Ownership of Certain
Beneficial Owners and Management...... Principal Stockholders
21. Directors and Executive Officers....... Management
22. Executive Compensation................. Management
23. Certain Relationships and Related
Transactions.......................... Risk Factors; Business and Properties;
Management; Certain Relationships and
Related Transactions; Principal
Stockholders
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
FORM S-11 ITEM NO. AND HEADING LOCATION OR HEADING IN PROSPECTUS
------------------------------ ---------------------------------
<C> <S>
24. Selection, Management and Custody of
Registrant's Investments.............. Risk Factors; Business and Properties;
Policies With Respect to Certain
Activities
25. Policies with Respect to Certain
Transactions.......................... Risk Factors; Business and Properties;
Policies With Respect to Certain
Activities; Management; Certain
Relationships and Related Transactions;
Principal Stockholders
26. Limitations of Liability............... Management; Certain Provisions of Maryland
Law and of the Company's Articles of
Incorporation and Bylaws
27. Financial Statements and Information... Index to Financial Statements
28. Interests of Named Experts and
Counsel............................... Not Applicable
29. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................... Not Applicable
</TABLE>
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION--DATED JANUARY , 1997
PROSPECTUS
- --------------------------------------------------------------------------------
11,300,000 Shares
KILROY REALTY CORPORATION
Common Stock
[LOGO OF KILROY REALTY CORPORATION]
- --------------------------------------------------------------------------------
Kilroy Realty Corporation (the "Company") has been formed to succeed to the
business of Kilroy Industries and its affiliates consisting principally of a
portfolio of Class A suburban office and industrial buildings in prime
locations, primarily in Southern California, and the affiliated real estate
ownership, acquisition, development, leasing and management businesses which
were established in Southern California in 1947. Upon the consummation of this
offering (the "Offering") and a series of related transactions (the "Formation
Transactions"), the Company will own 14 suburban office buildings (the "Office
Properties"), 11 of which are located in Southern California, and 12 industrial
properties (the "Industrial Properties"), 11 of which are located in Southern
California. The Company will operate as a self-administered and self-managed
real estate investment trust (a "REIT"). The Company intends to make regular
quarterly distributions to its stockholders beginning with a distribution for
the period ending March 31, 1997.
All of the shares of common stock of the Company, par value $.01 per share (the
"Common Stock"), offered hereby are being sold by the Company and will
represent approximately 80.4% of all shares of Common Stock (or interests
exchangeable therefor) outstanding after consummation of the Offering. Upon
consummation of the Offering, the Company's officers and directors (and certain
of their affiliates) will own in the aggregate 19.6% of the Common Stock or
interests exchangeable therefor. See "Principal Stockholders." To assist the
Company in maintaining its qualification as a REIT for federal income tax
purposes, ownership by any person generally is limited to 7.0% of the then
outstanding Common Stock, which limit can be waived by the Board of Directors.
Prior to the Offering, there has been no public market for the Common Stock of
the Company. It is currently anticipated that the initial public offering price
will be between $19.00 and $21.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The shares of Common Stock offered hereby have been approved
for listing on the New York Stock Exchange (the "NYSE") under the symbol "KRC,"
subject to official notice of issuance. See "Glossary" beginning on page 163
for definitions of certain terms used in this Prospectus.
See "Risk Factors" on pages 20 to 35 for a discussion of certain material
factors which should be considered in connection with an investment in the
Common Stock offered hereby, including:
. Conflicts of interest with, and material benefits to, affiliates of the
Company, including certain officers and directors, in connection with the
Formation Transactions, consummation of the Offering and the operation of
the Company's ongoing businesses, including conflicts associated with the
tax consequences of sales and refinancings of the Company's properties.
. Taxation of the Company as a corporation if it fails to qualify as a REIT
for federal income tax purposes and the resulting decreases in cash
available for distribution.
. The inability of the Company to control the operations of the Services
Company, which could result in decisions that do not reflect the Company's
interest.
. The valuation of the Company's properties was not based on third-party
appraisals, and the consideration to be paid by the Company for the
properties may exceed their aggregate fair market value, thereby increasing
the risk that the aggregate market value of the Common Stock may exceed the
Company's total assets.
. A portion of the Company's anticipated cash flow may be generated from
development activities which are partially dependent on the availability of
development opportunities, and are subject to the risks inherent with
development, which in turn may negatively impact the Company's ability to
make distributions.
. Dependence on demand for office, industrial and retail space in the Southern
California market, thereby increasing the risk that the Company will be
materially adversely affected by general economic conditions in a single
market.
. Dependence on certain significant tenants, particularly Hughes Electronic
Corporation's Space & Communications Company, thereby increasing the
potential negative impact to the Company of downturns in the business of, or
its relationship with, such tenants.
. The distribution requirements of REITs may limit the Company's ability to
finance future developments, acquisitions and expansions without additional
debt or equity financing necessary to achieve the Company's business plan,
which in turn may adversely affect the price of the Company's Common Stock.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
ANDEXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THESECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSIONPASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company(2)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share............. $ $ $
- -------------------------------------------------------------------------------
Total(3).............. $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act of
1933. See "Underwriting."
(2) Before deducting expenses of the Offering payable by the Company estimated
at $ .
(3) The Company has granted the several Underwriters a 30-day over-allotment
option to purchase up to 1,695,000 additional shares of Common Stock on the
same terms and conditions as set forth above. If all such additional shares
are purchased by the Underwriters, the total Price to Public will be $ ,
the total Underwriting Discounts and Commissions will be $ and the total
Proceeds to Company will be $ . See "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and acceptance by the Underwriters, to prior sale and
to withdrawal, cancellation or modification of the offer without notice.
Delivery of the shares to the Underwriters is expected to be made at the office
of Prudential Securities Incorporated, One New York Plaza, New York, New York,
on or about , 1997.
PRUDENTIAL SECURITIES INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
J.P. MORGAN & CO.
, 1997 SMITH BARNEY INC.
<PAGE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVERALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
THE ATTORNEY GENERAL OF THE STATE OF NEW YORK HAS NOT PASSED ON OR ENDORSED
THE MERITS OF THIS OFFERING. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 1
The Company............................................................... 1
Risk Factors.............................................................. 3
Formation and Structure of the Company.................................... 5
Formation of Kilroy Services, Inc. ....................................... 9
Growth Strategies......................................................... 10
The Office and Industrial Properties...................................... 13
The Company's Southern California Submarkets.............................. 15
The Financing............................................................. 15
Distribution Policy....................................................... 16
Tax Status of the Company................................................. 17
The Offering.............................................................. 17
Summary Financial Data.................................................... 18
RISK FACTORS.............................................................. 20
Conflicts of Interest..................................................... 20
Adverse Consequences of Failure to Qualify as a REIT...................... 22
Risks of Development Business and Related Activities Being Conducted by
the Services Company..................................................... 23
No Appraisals; Consideration to be Paid for Properties and Other Assets
May Exceed their Fair Market Value....................................... 23
Cash Flow from Development Activities is Uncertain........................ 24
Dependence on Southern California Market.................................. 24
Dependence on Significant Tenants......................................... 24
Distributions to Stockholders Affected by Many Factors.................... 25
Real Estate Investment Considerations..................................... 25
Real Estate Financing Risks............................................... 28
Changes in Investment and Financing Policies Without Stockholder Vote..... 28
Risk of Operations Conducted Through the Operating Partnership............ 29
Influence of Certain Continuing Investors................................. 29
Limits on Ownership and Change in Control................................. 30
Dependence on Key Personnel............................................... 31
Distribution Payout Percentage............................................ 31
Historical Operating Losses of the Office and Industrial Properties....... 31
No Limitation on Debt..................................................... 31
Government Regulations.................................................... 32
Immediate and Substantial Dilution........................................ 33
No Prior Public Market.................................................... 34
Effect of Market Interest Rates on Price of Common Stock.................. 34
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Shares Available for Future Sale.......................................... 34
FORMATION AND STRUCTURE OF THE COMPANY.................................... 36
Formation Transactions.................................................... 36
Reasons for the Reorganization of the Company............................. 38
Comparison of Common Stock and Units...................................... 40
Advantages and Disadvantages of the Formation Transactions to Unaffiliated
Stockholders............................................................. 41
Benefits of the Formation Transactions to the Continuing Investors........ 41
Determination and Valuation of Ownership Interests........................ 43
Allocation of Consideration in the Formation Transactions................. 43
FORMATION OF KILROY SERVICES, INC. ....................................... 44
THE COMPANY............................................................... 45
General................................................................... 45
Growth Strategies......................................................... 47
USE OF PROCEEDS........................................................... 51
DISTRIBUTION POLICY....................................................... 53
CAPITALIZATION............................................................ 58
DILUTION.................................................................. 59
SELECTED FINANCIAL DATA................................................... 60
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 62
Results of Operations..................................................... 62
Development and Management Fees........................................... 64
Adoption of SFAS No. 121.................................................. 64
Liquidity and Capital Resources........................................... 65
Historical Cash Flows..................................................... 66
Funds from Operations..................................................... 67
Inflation................................................................. 67
BUSINESS AND PROPERTIES................................................... 68
General................................................................... 68
Occupancy and Rental Information.......................................... 75
Lease Expirations......................................................... 75
Tenant Information........................................................ 83
Office Properties......................................................... 84
Industrial Properties..................................................... 91
Development, Leasing and Management Activities............................ 91
Acquisition Properties.................................................... 93
The Company's Southern California Submarkets.............................. 94
</TABLE>
i
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Seattle Market............................................................ 105
Excluded Properties....................................................... 105
Insurance................................................................. 107
Uninsured Losses from Seismic Activity.................................... 107
Government Regulations.................................................... 108
Management and Employees.................................................. 110
Legal Proceedings......................................................... 110
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES............................... 111
Investment Policies....................................................... 111
Dispositions.............................................................. 112
Financing................................................................. 112
Working Capital Reserves.................................................. 113
Conflict of Interest Policies............................................. 113
Other Policies............................................................ 115
THE FINANCING............................................................. 116
The Mortgage Loans........................................................ 116
The Credit Facility....................................................... 116
MANAGEMENT................................................................ 118
Directors and Executive Officers.......................................... 118
Committees of the Board of Directors...................................... 120
Compensation of Directors................................................. 120
Executive Compensation.................................................... 121
Employment Agreements..................................................... 121
Stock Incentive Plan...................................................... 122
Section 401(k) Plan....................................................... 127
Indemnification........................................................... 127
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 128
Partnership Agreement..................................................... 128
Assignment of Lease; Various Services Provided by the Services Company to
the Kilroy Group......................................................... 128
Benefits of the Formation Transactions to Certain Executive Officers...... 128
PRINCIPAL STOCKHOLDERS.................................................... 129
DESCRIPTION OF CAPITAL STOCK.............................................. 130
General................................................................... 130
Common Stock.............................................................. 130
Transfer Agent and Registrar.............................................. 131
Preferred Stock........................................................... 131
Restrictions on Ownership and Transfer.................................... 131
CERTAIN PROVISIONS OF MARYLAND LAW AND OF THE COMPANY'S ARTICLES OF
INCORPORATION AND BYLAWS................................................. 134
Board of Directors........................................................ 134
Removal of Directors...................................................... 134
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business Combinations..................................................... 135
Control Share Acquisitions................................................ 135
Amendment to the Articles of Incorporation and Bylaws..................... 136
Meetings of Stockholders.................................................. 136
Advance Notice of Director Nominations and New Business................... 136
Dissolution of the Company................................................ 137
Limitation of Directors' and Officers' Liability.......................... 137
Indemnification Agreements................................................ 138
PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP........................ 139
Management................................................................ 139
Indemnification........................................................... 139
Transferability of Interests.............................................. 139
Issuance of Additional Units.............................................. 140
Capital Contribution...................................................... 140
Awards Under Stock Incentive Plan......................................... 141
Redemption/Exchange Rights................................................ 141
Registration Rights....................................................... 141
Tax Matters............................................................... 141
Operations................................................................ 142
Duties and Conflicts...................................................... 142
Certain Limited Partner Approval Rights................................... 142
Term...................................................................... 142
SHARES AVAILABLE FOR FUTURE SALE.......................................... 143
General................................................................... 143
Redemption/Exchange Rights/Registration Rights............................ 144
Reinvestment and Share Purchase Plan...................................... 145
FEDERAL INCOME TAX CONSEQUENCES........................................... 145
Taxation of the Company................................................... 145
Failure to Qualify........................................................ 150
Taxation of Taxable U.S. Stockholders Generally........................... 151
Backup Withholding........................................................ 152
Taxation of Tax-Exempt Stockholders....................................... 152
Taxation of Non-U.S. Stockholders......................................... 153
Tax Aspects of the Operating Partnership.................................. 155
Services Company.......................................................... 157
OTHER TAX CONSEQUENCES.................................................... 158
ERISA CONSIDERATIONS...................................................... 158
Employee Benefit Plans, Tax-Qualified Retirement Plans and IRAs .......... 158
</TABLE>
ii
<PAGE>
TABLE OF CONTENTS--(CONTINUED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Status of the Company, the Operating Partnership and the Services Company
Under ERISA.............................................................. 159
UNDERWRITING.............................................................. 160
LEGAL MATTERS............................................................. 161
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXPERTS................................................................... 161
ADDITIONAL INFORMATION.................................................... 162
GLOSSARY.................................................................. 163
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
FORWARD LOOKING STATEMENTS
THIS PROSPECTUS CONTAINS CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE
MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE
SECURITIES EXCHANGE ACT OF 1934. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM
THOSE PROJECTED IN THE FORWARD LOOKING STATEMENTS AS A RESULT OF CERTAIN
UNCERTAINTIES SET FORTH BELOW AND ELSEWHERE IN THIS PROSPECTUS.
THE FORWARD LOOKING STATEMENTS INCLUDED IN THIS PROSPECTUS UNDER THE
CAPTIONS "PROSPECTUS SUMMARY," "THE COMPANY," "DISTRIBUTION POLICY,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS," AND "BUSINESS AND PROPERTIES," SUCH AS THOSE CONCERNING, AMONG
OTHER THINGS, FUTURE RESULTS OF OPERATIONS, CASH AVAILABLE FOR DISTRIBUTION,
LEASE RENEWALS, INCREASES IN BASE RENT, FEE DEVELOPMENT ACTIVITIES, SOURCES OF
GROWTH, ECONOMIC CONDITIONS AND TRENDS, PROPERTY ACQUISITIONS AND PLANNED
DEVELOPMENT AND EXPANSION OF OWNED OR LEASED PROPERTY ARE PROJECTIONS AND ARE
NECESSARILY SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES. ACTUAL OUTCOMES ARE
DEPENDENT UPON THE COMPANY'S SUCCESSFUL PERFORMANCE OF INTERNAL PLANS,
ECONOMIC CONDITIONS IN THE SUBMARKETS IN WHICH THE COMPANY'S PROPERTIES ARE
LOCATED SUCH AS OVERSUPPLY OF OFFICE, INDUSTRIAL OR RETAIL SPACE OR A
REDUCTION IN THE DEMAND FOR SUCH SPACE, SUCCESSFUL COMPLETION OF PLANNED
DEVELOPMENT, THE AVAILABILITY OF DEVELOPMENT OPPORTUNITIES, THE AVAILABILITY
OF ACQUISITION AND DEVELOPMENT FINANCING, COMPLIANCE WITH APPLICABLE LAWS AND
REGULATIONS AND THE SUCCESSFUL MANAGEMENT OF OTHER ECONOMIC, LEGAL, FINANCIAL
AND GOVERNMENTAL RISKS AND UNCERTAINTIES.
iii
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial data, including the financial statements and notes
thereto, set forth elsewhere in this Prospectus. Unless otherwise indicated,
all calculations and information contained in this Prospectus assume (i) an
initial public offering price of $20 per share of Common Stock (representing
the midpoint of the range set forth on the cover page of this Prospectus),
(ii) that the Underwriters' over-allotment option will not be exercised and
(iii) the consummation of the Formation Transactions described under the
heading "Formation and Structure of the Company," including consummation of the
financings described under the heading "The Financing" and the acquisition of
certain properties described under the heading "Business and Properties--
Acquisition Properties" and give pro forma effect thereto as if such
transactions had each occurred on January 1, 1995. In addition, unless
otherwise indicated, all calculations and information contained in this
Prospectus, other than the historical and pro forma financial statements and
the respective notes thereto, give pro forma effect to the recent extension of
the tenant lease with Hughes Electronics Corporation's Space & Communications
Company with respect to space leased in the Office Property located at 2250 E.
Imperial Highway, and a portion of the space leased in the Office Property
located at 2240 E. Imperial Highway as if such lease renewal had occurred on
January 1, 1995. Unless the context otherwise requires, (i) the "Company" shall
include Kilroy Realty Corporation ("Kilroy Realty") and its subsidiaries,
including Kilroy Realty, L.P. (the "Operating Partnership") and Kilroy
Services, Inc. (the "Services Company"), and with respect to the period prior
to the Offering, the Kilroy Group (as defined below), and its predecessors,
(ii) the "Kilroy Group" shall mean, collectively, Kilroy Industries, a
California corporation ("KI"), and certain of its affiliated corporations,
partnerships and trusts that prior to the Offering owned the Properties, as
identified in "Note 1. Organization and Basis of Presentation" to the
historical financial statements of the Kilroy Group (collectively, the
"Partnerships") and (iii) the "Continuing Investors" shall mean the persons and
entities which beneficially own interests in the Partnerships or in the
Properties and will receive limited partnership interests ("Units") in the
Operating Partnership in connection with the Formation Transactions. See "--
Formation and Structure of the Company." Additional capitalized terms shall
have the meanings set forth in the Glossary beginning on page 163.
THE COMPANY
The Company has been formed to succeed to the business of the Kilroy Group,
consisting principally of a portfolio of Class A suburban office and industrial
buildings in prime locations, primarily in Southern California, and the Kilroy
Group's real estate ownership, acquisition, development, leasing and management
businesses which were established in Southern California in 1947. Upon the
consummation of the Offering and the Formation Transactions, the Company
(through the Operating Partnership) will own 14 Office Properties encompassing
an aggregate of approximately 2.0 million rentable square feet and 12
Industrial Properties encompassing an aggregate of approximately 1.3 million
rentable square feet. Eleven of the 14 Office Properties and 11 of the 12
Industrial Properties are located in prime Southern California suburban
submarkets (including a complex of three Office Properties located in El
Segundo, adjacent to the Los Angeles International Airport, presently the
nation's second largest air-cargo port, and a complex of five Office Properties
located adjacent to the Long Beach Municipal Airport). The Company also will
own three Office Properties located adjacent to the Seattle-Tacoma
International Airport in the State of Washington and one Industrial Property
located in Phoenix, Arizona. The Office Properties, Industrial Properties and
the related assets owned by the Partnerships contributed to the Company by the
Continuing Investors in connection with the Formation Transactions are
collectively referred to herein as the "Properties." As of September 30, 1996,
the Office Properties were approximately 79.8% leased to 130 tenants and the
Industrial Properties were approximately 93.7% leased to 20 tenants. The
average age of the Office Properties and the Industrial Properties is
approximately 12 years and 24 years, respectively. The Company developed and
leased all but two of the 14 Office Properties and all but five of the 12
Industrial Properties, and, upon consummation of the Offering and acquisition
of the Acquisition Properties, will manage all of the Properties.
The Company was founded in 1947 by John B. Kilroy, Sr., a nationally
prominent member of the real estate community, and is led by John B. Kilroy,
Jr., the Company's Chief Executive Officer and President. The
1
<PAGE>
Company's executive officers have been with the Company for an average of
approximately 13 years. The Company presently has 47 employees, 34 of whom are
located at the Company's headquarters at Kilroy Airport Center at El Segundo,
California. Upon consummation of the Offering, the Company's officers and
directors (and certain of their affiliates) will own in the aggregate 19.6% of
the Company's Common Stock (or interests exchangeable therefor).
The Company's strategy has been to own, develop, acquire, lease and manage
Class A properties in select locations in key suburban submarkets, primarily in
Southern California, that the Company believes have strategic advantages
compared to neighboring submarkets. Existing locations offer tenants: (i) lower
business taxes and operating expenses than in adjoining submarkets; (ii) access
to highly skilled labor markets; (iii) strategic access to major transportation
facilities such as freeways, airports and the expanded Southern California
light-rail system; (iv) proximity to the Los Angeles-Long Beach port complex
which presently ranks as the largest commercial port in the United States; and
(v) for tenants with their names on certain Properties, visibility to freeway
and airplane travelers. As a result, the Properties attract major corporate
tenants and historically have achieved among the highest occupancy, tenant
retention and rental rates, both within their respective submarkets and as
compared to their respective neighboring submarkets. See "Business and
Properties--Office Properties" and "--Industrial Properties."
The Company's major tenants include, among others, Hughes Electronic
Corporation's Space & Communications Company and related companies ("Hughes
Space & Communications"), a tenant since 1984, which is engaged in high-
technology commercial activities including satellite development and related
applications such as DirecTV, as well as Mattel, Inc., Northwest Airlines,
Inc., Olympus America, Inc. and Furon Co., Inc. As of December 31, 1995, the
Company's ten largest office tenants and ten largest industrial tenants (based
upon annual base rents as of December 31, 1995) had leased space from the
Company for an average of 5.3 years. The Company's strong relationships with
its tenants is further evidenced by its average tenant retention rate (based
upon rentable square feet) for the two-year and nine-month period ended
September 30, 1996, which was 71.7% for the Properties located in the Southern
California Area. The Company's extensive experience and long-term presence in
Southern California have enabled it to form key alliances and working
relationships with large corporate tenants, municipalities and landowners that
have led to a variety of development projects and provide a continuing source
of development and acquisition opportunities with institutional sellers. As a
result of its experience and relationships, the Company currently has exclusive
rights to develop approximately 24 acres of developable land (net of the
acreage required for streets) at Kilroy Airport Center Long Beach (the
"Development Properties"). These properties are presently entitled for over
900,000 rentable square feet of office, industrial and retail space. See
"Business and Properties--Development, Leasing and Management Activities."
The Company believes, based on independent economic surveys, that the
Southern California office and industrial real estate market is recovering
after experiencing a downturn over the last several years. Vacancy rates in the
Class A office space market in the greater Southern California area, including
the counties of Los Angeles, Orange, Riverside, San Bernardino and Ventura (the
"Southern California Area"), have decreased from a high in 1991 and 1992 of
nearly 20.0% to a level at the end of 1996 of under 17.0%. Vacancy rates in the
industrial space market in the Southern California Area also are decreasing
from a high of nearly 14.0% in 1992 to 7.6% at the end of 1996. In addition,
the Company has on average achieved increases in rental rates since 1994 in the
Office Properties it has managed. See "--The Company's Southern California
Submarkets" and "Business and Properties--The Company's Southern California
Submarkets." Management believes that the on-going economic recovery in its
submarkets will continue the trend of increasing occupancy rates and should
apply some upward pressure on rents for Class A office buildings. See "--Growth
Strategies."
The Company believes that the foundation for its growth in future years will
be the strengthening Southern California economy, the quality and strategic
location of its Properties, the economic benefits of its submarkets to tenants,
its capital structure, its access to public capital markets, the lack of new
construction of office properties in its submarkets, its access to developable
properties, the knowledge and experience of its senior
2
<PAGE>
management team and its long-term relationships with large Southern California
corporate tenants, municipalities, landowners and institutional sellers. In
addition, the Company believes that it will be one of a limited number of REITs
focusing on office and industrial properties and that it will be the only REIT
with a 50-year operating history concentrating primarily on suburban Southern
California office and industrial properties. In the 12 months following the
consummation of the Offering, the Company expects sources of potential growth
in cash available for distribution per share from the amount set forth under
the caption "Distribution Policy" through: (i) the further leasing of its
available space, currently approximately 400,000 rentable square feet; (ii) the
renewal of leases for approximately 60,000 rentable square feet which expire
during such period; and (iii) the acquisition of strategic properties with
Units and/or with available cash and borrowings under a $100.0 million
revolving credit facility (the "Credit Facility") which the Company expects to
enter into shortly after the Offering and its approximately $20.0 million of
working capital cash reserves upon consummation of the Offering. In the second
12-month period following consummation of the Offering, the Company expects
sources of potential growth in cash flow per share from: (i) contractual
increases in base rent payments from tenants; (ii) continued leasing of
available space; (iii) the acquisition of strategic properties; and (iv) the
contemplated completion of certain planned development activities. In addition,
the Company presently plans to expand one or more of its Industrial Properties
during the next two years, subject to substantial pre-leasing. There can be no
assurance, however, that the Company will achieve any growth in cash available
for distribution per share, that available space will be leased, that leases
scheduled to expire will be renewed or that the Company will successfully
acquire additional properties or complete any of its planned development
activities. See "Risk Factors--Real Estate Investment Considerations --Risks of
Real Estate Acquisition and Development."
The Company will be fully integrated in that it will perform substantially
all leasing, management and tenant improvements on an "in-house" basis and will
be self-administered and self-managed. The Company expects to qualify as a REIT
for federal income tax purposes beginning with its taxable year ending December
31, 1997. See "Federal Income Tax Consequences--Taxation of the Company."
RISK FACTORS
An investment in the shares of Common Stock involves various material risks.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus, in connection
with an investment in the shares of Common Stock offered hereby. Such risks
include, among others:
. conflicts of interest, particularly with the Continuing Investors
(including John B. Kilroy, Sr. and John B. Kilroy, Jr.) in connection
with the (i) Formation Transactions, (ii) operation of the Company's
ongoing businesses, including conflicts associated with the tax
consequences to Continuing Investors of sales or refinancings of any of
the Properties, which, together with certain provisions of the Operating
Partnership agreement, may influence the Company's decision to sell or
refinance, or to prepay debt secured by, certain properties, (iii)
potential election by the Company to exercise its option to purchase any
of the properties owned or controlled by one or more of the Continuing
Investors which the Company has the option to acquire (the "Excluded
Properties") and (iv) enforcement of agreements with affiliates of the
Company, any of which could result in decisions affecting the Company
that do not fully reflect interests of all of the Company's
stockholders;
. limitations on the Company's ability to withdraw as general partner of
the Operating Partnership, transfer or assign its interest in the
Operating Partnership without the consent of at least 60% of the Units
(including Units held by the Company which will represent 80.8% of all
Units outstanding upon consummation of the Offering) and without meeting
certain criteria with respect to the consideration to be received by the
Continuing Investors, or to dissolve the Operating Partnership or sell
the Office Property located at 2260 E. Imperial Highway, El Segundo,
California, at Kilroy Airport Center at El Segundo without the consent
of more than 50% of the Units held by limited partners (excluding Units
held by the Company), which may in each case result in the Company
taking action that is not in the best interest of all stockholders;
3
<PAGE>
. taxation of the Company as a corporation if it fails to qualify as a
REIT for federal income tax purposes, the Company's liability for
certain federal, state and local income taxes in such event and the
resulting decrease in cash available for distribution;
. the inability of the Company to control the operations of the Services
Company, which could result in decisions that do not reflect the
Company's interest because the Company does not control the election of
directors or the selection of officers of the Services Company;
. the valuation of the Properties was not based on third-party appraisals
and there have not been arm's-length negotiations with respect to such
values. The consideration to be paid by the Company for the Properties
may exceed their aggregate fair market value;
. A portion of the Company's anticipated cash flow may be generated from
development activities, which are partially dependent on the
availability of development opportunities, and are subject to the risks
inherent in development as well as general economic conditions and
limitations on such activities imposed by the REIT tests, which in turn
may negatively impact the Company's ability to make distributions;
. geographic concentration of 22 of its 26 Properties in Southern
California, creating a dependence on demand for office, industrial and
retail space in such market and increasing the risk that the Company
will be materially adversely affected by general economic conditions in
a single market;
. the Company's results of operations are dependent on certain key
tenants, particularly Hughes Space & Communications, which accounted for
approximately 25.3% of the Company's total base rental revenues for the
year ending December 31, 1995 (giving pro forma effect to a recent
extension of a lease with Hughes Space & Communications with respect to
two of the Office Properties located at Kilroy Airport Center at El
Segundo), thereby increasing the potential negative impact to the
Company of downturns in the business of, or its relationship with, such
tenants. The base periods of the Hughes Space & Communications' leases
expire beginning in January 1999;
. the distribution requirements for REITs under federal income tax laws
may limit the Company's ability to finance future acquisitions,
developments and expansions without additional debt or equity financing
and may limit cash available for distribution;
. real estate investment considerations such as the effect of economic and
other conditions on real estate values, the general lack of liquidity of
investments in real estate, the ability of tenants to pay rents, the
possibility that leases may not be renewed or will be renewed on terms
less favorable to the Company, the possibility of uninsured losses,
including losses associated with earthquakes, the ability of the
Properties to generate sufficient cash flow to meet operating expenses,
including debt service, and competition in seeking properties for
acquisition and in seeking tenants, which, individually or in the
aggregate, may negatively impact the Company's ability to make
distributions;
. risks associated with debt financing, including the potential inability
to refinance mortgage indebtedness upon maturity and the potential
increase in the level of indebtedness incurred by the Company since its
organizational documents do not limit the amount of indebtedness which
the Company may incur, which may adversely affect the ability of the
Company to repay debt, particularly in the event of a downturn in the
Company's business;
. substantial influence over the affairs of the Company by certain
Continuing Investors who are directors and executive officers of the
Company, and the ability of the Board of Directors to change the
investment policies of the Company (including the Company's ratio of
debt to total market capitalization) without the consent of
stockholders, which may result in a decline in the market value of the
Common Stock;
4
<PAGE>
. potential antitakeover effects of provisions generally limiting the
actual or constructive ownership by any one person or entity of Common
Stock to 7.0% of the outstanding shares, a classified board of directors
and other charter and statutory provisions and provisions in the
Operating Partnership partnership agreement that may have the effect of
inhibiting a change of control of the Company or making it more
difficult to effect a change in management or limiting the opportunity
for stockholders to receive a premium over the market price for the
Common Stock;
. dependence on key personnel;
. the Company's cash available for distribution may be less than the
Company expects and may decrease in future periods from expected levels,
materially adversely affecting the Company's ability to make the
expected annual distributions of $1.55 per share during the 12-month
period following consummation of the Offering (which represents
approximately 93.6% of the estimated cash available for distribution for
such period) or to sustain such distribution rate in the future;
. the Company's historical operating losses for financial reporting
purposes;
. the ability of the Company to incur more debt, thereby increasing its
debt service, which could adversely affect the Company's cash flow;
. the potential liability of the Company for environmental matters and the
costs of compliance with certain governmental regulations, which may
negatively impact the Company's financial condition, results of
operations and cash available for distribution;
. immediate and substantial dilution of $12.84 per share in the net
tangible book value per share of the shares of Common Stock purchased by
new investors in the Offering;
. no prior public market for the shares of Common Stock, including the
risk that an active trading market might not develop, or if developed
might not be maintained, which may negatively impact the price at which
shares of Common Stock may be resold;
. potential adverse effects on the value of the shares of Common Stock of
fluctuations in interest rates or equity markets, which may negatively
impact the price at which shares of Common Stock may be resold and may
limit the Company's ability to raise additional equity to finance future
development; and
. the possible issuance of additional shares of Common Stock, including
2,692,374 shares of Common Stock issuable upon exchange of the Units
outstanding upon consummation of the Offering, which may adversely
affect the market price of the shares of Common Stock or result in
dilution on a per share basis of cash available for distribution.
FORMATION AND STRUCTURE OF THE COMPANY
The Company was formed in September 1996 and the Operating Partnership was
formed in October 1996. The Services Company will be formed prior to
consummation of the Offering. Prior to or simultaneous with the consummation of
the Offering, the Company, the Operating Partnership, the Services Company and
the Continuing Investors will engage in certain transactions (the "Formation
Transactions"), designed to enable the Company to continue and expand the real
estate operations of the Continuing Investors, to facilitate the Offering, to
enable the Company to qualify as a REIT for federal income tax purposes
commencing with its taxable year ending December 31, 1997 and to preserve
certain tax advantages for the existing owners of the Properties. The Formation
Transactions are as follows:
. Pursuant to an omnibus option agreement (the "Omnibus Agreement"), the
Operating Partnership may require the contribution to the Operating
Partnership of all of the Continuing Investors' interests in the
Properties (other than the Acquisition Properties), the assets used to
conduct the leasing, management and development activities (principally
office equipment), the contract rights in connection with
5
<PAGE>
development opportunities at Kilroy Airport Center Long Beach, and the
rights with respect to the purchase of each of the Acquisition
Properties, in exchange for Units representing limited partnership
interests in the Operating Partnership. The book value to the Continuing
Investors of the assets to be contributed to the Operating Partnership
is a negative $113.2 million and the value of the Units representing
limited partnership interests in the Operating Partnership to be
received by the Continuing Investors is $53.8 million, assuming a Unit
value equal to the assumed initial public offering price of $20.00 per
share. The right to acquire the Properties and the other assets
described above in exchange for Units is conditioned upon the
consummation of the Offering. Pursuant to the terms of the Omnibus
Agreement, the Operating Partnership has the right to acquire the
Properties and other assets from the Continuing Investors in exchange
for Units through December 31, 1998, the date the Omnibus Agreement
terminates. Following the consummation of the Offering and the Formation
Transactions, the Units received by the Continuing Investors will
constitute in the aggregate an approximately 19.2% limited partnership
interest in the Operating Partnership.
. John B. Kilroy, Sr. and John B. Kilroy, Jr. will acquire all of the
voting common stock of the Services Company for the aggregate purchase
price of $5,275 in cash (representing 5.0% of its economic value), and
the Operating Partnership will acquire all of the non-voting preferred
stock of the Services Company (representing 95.0% of its economic
value).
. The Company will sell shares of Common Stock in the Offering, issue
restricted shares of Common Stock to Richard E. Moran Jr., Executive
Vice President, Chief Financial Officer and Secretary of the Company
(but not a Continuing Investor) and contribute the net proceeds from the
Offering and the issuance of such restricted stock (approximately $206.6
million in the aggregate) to the Operating Partnership in exchange for
an 80.8% general partner interest in the Operating Partnership.
. The Operating Partnership will borrow approximately $84.0 million in
principal amount of long-term financing and $12.0 million in principal
amount of short-term debt pursuant to the Mortgage Loans.
. The Company, through the Operating Partnership, will apply the aggregate
of the net Offering proceeds and the Mortgage Loans toward the repayment
of existing mortgage indebtedness on certain of the Properties, the
purchase of the Acquisition Properties and the payment of its expenses
from the Offering and the Financing. See "Use of Proceeds."
. Forty-seven of the current 69 employees of KI will become employees of
the Company, the Operating Partnership and/or the Services Company,
including John B. Kilroy, Jr., the President and Chief Executive Officer
of KI, three other officers (Mr. Jeffrey Hawken, Executive Vice
President and Chief Operating Officer, Mr. Richard E. Moran Jr.,
Executive Vice President, Chief Financial Officer and Secretary, and
Mr. Campbell Hugh Greenup, General Counsel) who are not Continuing
Investors and 43 other operating and administrative employees. See
"Management."
. Concurrent with the consummation of the Offering, the Operating
Partnership or the Services Company will enter into management
agreements with respect to each of the Excluded Properties (the
"Management Agreements"). Pursuant to the terms of each of the
Management Agreements, the Operating Partnership or the Services
Company, as applicable, will have exclusive control and authority
(subject to an operating budget to be approved by the owners of each
property) over each of the Excluded Properties for a term of 24 months.
If any of the Excluded Properties are sold during the term of the
Management Agreements, then either party may terminate the respective
Management Agreement upon 30 days' prior written notice. In
consideration of the services to be provided under each of the
Management Agreements, the Company will receive a market rate monthly
property management fee as well as any applicable leasing commissions.
See "Business and Properties--Excluded Properties."
. Concurrent with the consummation of the Offering, the Company also will
enter into option agreements (together, the "Option Agreements") with
partnerships controlled by John B. Kilroy, Sr. and John B. Kilroy, Jr.
granting to the Operating Partnership the exclusive right to acquire (i)
approximately 18
6
<PAGE>
undeveloped acres located at Calabasas Park Centre for cash and (ii) the
Office Property located at North Sepulveda Boulevard, El Segundo for
cash (or for Units after the first anniversary of the Offering at the
election of the seller), and in each case pursuant to the other terms of
the respective Option Agreement. See "Business and Properties--Excluded
Properties--Calabasas Park Centre" and "--North Sepulveda Boulevard, El
Segundo" for a discussion of the purchase price and other material terms
of each Option Agreement.
The Continuing Investors are comprised of (i) seven individuals, John B.
Kilroy, Sr., his five children, John B. Kilroy, Jr., Patrice Bouzaid, Susan
Hahn, Anne McCahon and Dana Pantuso, and Marshall L. McDaniel, a long-time
employee of KI, all of whom are "accredited investors" as defined in
Regulation D ("Regulation D") under the Securities Act, and (ii) corporations,
partnerships and trusts owned, directly or indirectly, solely by such
individuals, all of which are also "accredited investors." See "Note 1.
Organization and Basis of Presentation" to the historical financial statements
of the Kilroy Group. In addition, John B. Kilroy, Sr. is the Company's
Chairman of the Board of Directors and John B. Kilroy, Jr. is President and
Chief Executive Officer and a director of the Company. Consent on behalf of
the Continuing Investors to the Formation Transactions was received on or
before November 3, 1996 pursuant to a private solicitation thereof in
compliance with Regulation D.
REASONS FOR THE REORGANIZATION OF THE COMPANY
The Company believes that the benefits of the Formation Transactions
outweigh the detriments to the Company. The benefits of the Company's REIT
status and structure, as opposed to the status and structure of the
Partnerships, include greater access to capital for refinancing and growth,
allowing stockholders to participate in real estate growth through one
business enterprise, diversification of risk and reward not available in
single asset entities, reduction in indebtedness encumbering the Properties,
greater liquidity than interests in partnerships owning individual properties,
allowing stockholders to benefit potentially from the current public market
valuation of REITs and deferral of tax liabilities to the Continuing Investors
upon contribution of the Properties.
The detriments of the Company's REIT status and structure as opposed to the
status and structure of the Partnerships include the fact that management will
be subject to conflicts of interest in the operation of the Operating
Partnership and the limited partners of the Operating Partnership will have
certain approval rights with respect to certain transactions, including (i)
the right of partners holding in the aggregate at least 60% of all interests
in the Operating Partnership to withhold consent to the withdrawal of the
general partner, or the transfer or assignment of the general partner's
interest in the Operating Partnership (see "Partnership Agreement of the
Operating Partnership--Transferability of Interests") and (ii) if limited
partners own at least 5% of the outstanding Units (including Units owned by
the Company), the right of limited partners holding in the aggregate more than
50% of all Units representing limited partnership interests in the Operating
Partnership to withhold consent to (a) the dissolution of the Operating
Partnership (other than pursuant to a merger or sale of substantially all of
the Company's assets) or (b) prior to the seventh anniversary of the
consummation of the Offering, to sell the Office Property located at 2260 E.
Imperial Highway at Kilroy Airport Center at El Segundo (see "Partnership
Agreement of the Operating Partnership--Certain Limited Partner Approval
Rights"). In addition, the Continuing Investors will have influence over
certain transactions, including with respect to the Company's acquisition,
management and leasing activities, asset sales, dispositions and refinancings
of properties and its distribution policy. Other detriments of the Company's
REIT status include a potential lower overall rate of return for an investor
who exchanges an interest in a single asset for a smaller interest in a group
of assets, lower potential of distributions from asset sales, no assurance
that the public market valuation of the Company will reflect private real
estate values, the aggregate cost to the Company of the Offering (estimated at
approximately $19.4 million, including underwriting discounts and commissions)
and the incremental costs of operating a public company. See also "Risk
Factors."
7
<PAGE>
The following diagram illustrates the structure of the Company, the Operating
Partnership and the Services Company after the consummation of the Offering and
the Formation Transactions:
Kilroy Realty Corporation
(the "Company")(1)
Kilroy Realty, L.P.
(the "Operating Partnership")
80.8% owned by the Company
as general partner
19.2% owned by the Continuing Investors
as limited partners
Kilroy Services, Inc.
(the "Services Company")
100% nonvoting
preferred stock owned by
the Operating Partnership(/2/)
100% voting common stock
owned by John B. Kilroy, Sr.
and John B. Kilroy, Jr.(/3/)
- --------
(1) 11,300,000 shares of Common Stock, representing 99.5% of the outstanding
shares of Common Stock after the Offering, will be owned by public
stockholders and 60,000 restricted shares of Common Stock, representing
0.5% of the outstanding shares of Common Stock, will be owned by Richard E.
Moran Jr., Executive Vice President, Chief Financial Officer and Secretary
of the Company (but not a Continuing Investor). If all Units of the
Operating Partnership were exchanged for Common Stock, the Company would be
owned approximately 80.4% by public stockholders, 0.4% by Mr. Moran and
19.2% by the Continuing Investors. Beginning on the second anniversary of
the consummation of the Offering, each Unit will be redeemable by the
Operating Partnership at the request of the Unitholder for cash (based on
the fair market value of an equivalent number of shares of Common Stock at
the time of such redemption) or, at the Company's option, it may exchange
Units for shares of Common Stock on a one-for-one basis, subject to certain
antidilution adjustments and exceptions; provided, however, that if the
Company does not elect to exchange such Units for shares of Common Stock, a
Unitholder that is a corporation or limited liability company may require
the Company to issue shares of Common Stock in lieu of cash, subject to the
Ownership Limit, or such other limit as provided in the Company's Articles
of Incorporation or as otherwise permitted by the Board of Directors. See
"Partnership Agreement of Operating Partnership--Redemption/Exchange
Rights." Under certain circumstances, 50% of the Units received by John B.
Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries may be redeemed
prior to the second anniversary of the consummation of the Offering in
connection with the obligation of certain of the Continuing Investors to
indemnify the Company in connection with the Formation Transactions. See
"Formation and Structure of the Company--Allocation of Consideration in the
Formation Transactions." Executive officers, directors and other employees
of the Company will have options to acquire approximately 900,000 shares of
Common Stock which could reduce the percentage owned by public stockholders
to approximately 75.6% (assuming exchange of all outstanding Units and the
exercise of all outstanding options).
(2) Represents 95.0% of the economic interest in the Services Company.
(3) Represents 5.0% of the economic interest in the Services Company.
The Company presently anticipates that one of the Mortgage Loans (see "--The
Financing") will be incurred by a limited partnership which is wholly-owned by
the Company and the Operating Partnership and which will be structured to be a
"bankruptcy remote" financing vehicle. The Properties pledged as collateral for
such Mortgage Loan will be transferred to such limited partnership.
8
<PAGE>
BENEFITS TO THE CONTINUING INVESTORS
The principals of KI proposed the Formation Transactions to the Continuing
Investors because they believe that the benefits of the organization of the
Company for the Continuing Investors outweigh the detriments to them. Benefits
to the Continuing Investors include:
. improved liquidity of their interests in the Properties and increased
diversification of their investment;
. repayment of indebtedness in the aggregate net amount of approximately
$229.5 million resulting from the refinancing of existing mortgage
indebtedness, of which approximately $37.2 million is guaranteed by John
B. Kilroy, Sr., including $8.7 million which also is guaranteed by John
B. Kilroy, Jr., and the repayment of approximately $3.4 million of
personal indebtedness of John B. Kilroy, Sr.;
. an employment agreement between the Company and John B. Kilroy, Jr.
providing annual salary, incentive compensation (including Common Stock
options) and other benefits for his services as an officer of the
Company (see "Management--Employment Agreements"), and a grant of
options to purchase Common Stock to John B. Kilroy, Sr. (see
"Management--Stock Incentive Plan"); and
. the deferral of certain tax consequences that would arise from a sale,
or in certain circumstances a contribution, of such interests and assets
to the Company or to a third party.
DETERMINATION AND VALUATION OF OWNERSHIP INTERESTS
The Company's percentage interest in the Operating Partnership was determined
based upon the percentage of estimated cash available for distribution required
to pay estimated cash distributions resulting in an annual distribution rate
equal to 7.75% of the assumed initial public offering price of the Common Stock
of $20.00. The ownership interest in the Operating Partnership allocated to the
Company is equal to this percentage of estimated cash available for
distribution, and the remaining interest in the Operating Partnership will be
allocated to the Continuing Investors receiving Units in the Formation
Transactions. The parameters and assumptions used in deriving the estimated
cash available for distribution are described under the caption "Distribution
Policy."
In connection with the Offering, the Company did not obtain appraisals with
respect to the market value of any of the Properties or other assets that the
Company will own immediately after consummation of the Offering and the
Formation Transactions or an opinion as to the fairness of the allocation of
shares to the purchasers in the Offering. The initial public offering price
will be determined based upon the estimated cash available for distribution and
the factors discussed under the caption "Underwriting," rather than a property
by property valuation based on historical cost or current market value. This
methodology has been used because management believes it is appropriate to
value the Company as an ongoing business rather than with a view to values that
could be obtained from a liquidation of the Company or of individual properties
owned by them. See "Underwriting."
FORMATION OF KILROY SERVICES, INC.
Prior to consummation of the Offering, Kilroy Services, Inc. (the "Services
Company") will be formed under the laws of the State of Maryland to succeed to
the development activities of the Kilroy Group and to perform development
activities for the Company and third parties. John B. Kilroy, Sr. and John B.
Kilroy, Jr. together will own 100% of the voting common stock of the Services
Company, representing 5.0% of its economic value. The Operating Partnership
will own 100% of the nonvoting preferred stock of the Services Company,
representing 95.0% of its economic value. The ownership structure of the
Services Company is necessary to permit the Company to share in the income of
the activities of the Services Company and also maintain its status as a REIT.
Although the Company anticipates receiving substantially all of the economic
benefit of the businesses carried on by the Services Company through the
Company's right to receive dividends through the Operating Partnership's
investment in the Services Company's nonvoting preferred stock, the Company
will not be able to elect the Services Company's officers or directors and,
consequently, may not have the ability to influence the operations of the
Services Company. See "Risk Factors--Risks of Development Business and Related
Activities Being Conducted by the Services Company--Adverse Consequences of
Lack of Control Over the Businesses of the Services Company."
9
<PAGE>
GROWTH STRATEGIES
The Company's objectives are to maximize growth in cash flow per share and to
enhance the value of its portfolio through effective management, operating,
acquisition and development strategies. The Company believes that opportunities
exist to increase cash flow per share: (i) by acquiring office and industrial
properties with attractive returns in strategic suburban submarkets where such
properties complement its existing portfolio; (ii) from contractual increases
in base rent; (iii) as a result of increasing rental and occupancy rates and
decreasing concessions and tenant installation costs as vacancy rates in the
Company's submarkets generally continue to decline; (iv) by developing
properties for the benefit of the Company where such development will result in
a favorable risk-adjusted return on investment; and (v) by expanding Properties
within the Company's existing industrial portfolio. The Company's ability to
achieve its growth strategy will be aided by its working capital cash reserves
of approximately $20.0 million upon consummation of the Offering and the
proposed Credit Facility.
The Company believes that a number of factors will enable it to achieve its
business objectives, including: (i) the opportunity to lease available space at
attractive rental rates because of increasing demand and, with respect to the
Office Properties, the present lack of new construction in the Southern
California submarkets in which most of the Properties are located; (ii) the
presence of distressed sellers and inadvertent owners (through foreclosure or
otherwise) of office and industrial properties in the Company's markets, as
well as the Company's ability to acquire properties with Units (thereby
deferring the seller's taxable gain), all of which create enhanced acquisition
opportunities; (iii) the quality and location of the Properties; and (iv) the
limited availability to competitors of capital for financing development,
acquisitions or capital improvements. Management believes that the Company is
well positioned to exploit existing opportunities because of its extensive
experience in its submarkets and its nearly 50-year presence in the Southern
California market, its seasoned management team and its proven ability to
develop, lease and efficiently manage office and industrial properties. In
addition, the Company believes that public ownership and its capital structure
will provide new opportunities for growth. There can be no assurance, however,
that the Company will be able to lease available space, complete any property
acquisitions, successfully develop any land acquired or improve the operating
results of any developed properties that are acquired. See "Business and
Properties--Development, Leasing and Management Activities."
Operating Strategies. The Company will focus on enhancing growth in cash flow
per share by: (i) maximizing cash flow from existing Properties through active
leasing, contractual base rent increases and effective property management;
(ii) managing operating expenses through the use of in-house management,
leasing, marketing, financing, accounting, legal, construction management and
data processing functions; (iii) maintaining and developing long-term
relationships with a diverse tenant group; (iv) attracting and retaining
motivated employees by providing financial and other incentives to meet the
Company's operating and financial goals; and (v) continuing to emphasize
capital improvements to enhance the Properties' competitive advantages in their
markets.
The Company believes that the strength of its leasing is demonstrated by the
Company's leasing activity since 1993. In the period from January 1, 1993 to
September 30, 1996, the Company leased or renewed leases for an aggregate of
approximately 1.0 million rentable square feet of office space and
approximately 718,000 rentable square feet of industrial space. As of December
31, 1995, the Office Properties located in the Southern California Area were
approximately 89.5% leased as compared to approximately 82.0% for the Southern
California Area, approximately 89.2% for the El Segundo submarket and
approximately 85.4% in the Long Beach submarket. In addition, at December 31,
1995, the Industrial Properties were approximately 91.4% leased as compared to
approximately 82.3% and approximately 87.1% for industrial properties located
in Los Angeles and Orange Counties, respectively. As of September 30, 1996, (i)
the Office Properties contained approximately 2.0 million rentable square feet
and were approximately 79.8% leased, and (ii) the Industrial Properties
contained approximately 1.3 million rentable square feet and were approximately
93.7% leased. In addition, the number of
10
<PAGE>
individual lease transactions since 1992, including the results for the nine-
month period ended September 30, 1996, averaged over 33 per year. See "Business
and Properties--General," "--Properties," "--Occupancy and Rental Information"
and "--The Company's Southern California Submarkets."
Approximately 1.0 million aggregate rentable square feet in the Properties
was leased by the Company from January 1, 1992 through December 31, 1994, a
period which management characterizes as recessionary. Based on the leases the
Company signed in 1996, and the findings in an independent study of the
Southern California real estate market commissioned by the Company, management
believes that the recent trend toward increasing rental rates in Class A office
and industrial buildings in the Company's Southern California submarkets
presents significant opportunities for growth. In addition, approximately 66.5%
of the Company's net rentable square feet is subject to leases expiring in 2000
or beyond, when management expects asking rents for the respective Properties
to be higher than the rents paid pursuant to such leases. In addition, as of
December 31, 1995 approximately 36.7% of the Company's total base rent
(representing approximately 23.7% of the aggregate net rentable square feet of
the Properties) was attributable to leases with Consumer Price Index increases
and approximately 28.1% of the Company's total base rent (representing
approximately 30.5% of the aggregate net rentable square feet of the
Properties) was attributable to leases with other specified contractual
increases. No assurance can be given, however, that new leases will reflect
rental rates greater than or equal to current rental rates or that current or
future economic conditions will support higher rental rates. See "Risk
Factors--Real Estate Investment Considerations."
Acquisition Strategies. The Company will seek to increase its cash flow per
share by acquiring additional quality office and industrial properties,
including properties that may: (i) provide attractive initial yields with
significant potential for growth in cash flow from property operations; (ii)
are strategically located, of high quality and competitive in their respective
submarkets; (iii) are located in the Company's existing submarkets and/or in
other strategic submarkets where the demand for office and industrial space
exceeds available supply; or (iv) have been under-managed or are otherwise
capable of improved performance through intensive management and leasing that
will result in increased occupancy and rental revenues. The Company believes
that the Southern California market is an established and mature real estate
market in which property owners generally have a low tax basis (and,
accordingly, the potential for large taxable gains) in their properties.
Management believes that the Company's extensive experience, capital structure
and ability to acquire properties for Units, and thereby defer a seller's
taxable gain, if any, will enhance the ability of the Company to consummate
transactions quickly and to structure more competitive acquisitions than other
real estate companies in the market which lack its access to capital or the
ability to issue Units. See "Business and Properties--Development, Leasing and
Management Activities."
The Company has entered into an agreement to acquire the two office
properties that comprise Phase I of Kilroy Airport Center Long Beach. Kilroy
Airport Center Long Beach Phase I was developed by the Company in 1987 and has
been leased and managed by the Company since its inception. In addition, the
Company has entered into an agreement to purchase an office property located in
Thousand Oaks, California. The Company also has entered into an agreement to
acquire a three building office and industrial complex located in Anaheim,
California. In addition, KI, on behalf of the Operating Partnership, has
acquired a multi-tenant industrial property located in Garden Grove,
California. The acquisition of these properties (the "Acquisition Properties")
by the Company is expected to occur concurrently with the consummation of the
Offering and, accordingly, the Acquisition Properties are included in the
discussion of the Properties included throughout this Prospectus. There can be
no assurance, however, that the Company will be able to complete any property
acquisitions, including the acquisition of the Acquisition Properties,
successfully develop any land acquired or improve the operating results of any
developed properties that are acquired. See "Business and Properties--
Acquisition Properties."
11
<PAGE>
Development Strategies. The Company's interests in the Development Properties
provide it with significant growth opportunities.
The Company is the master ground lessee of, and has sole development rights
in, Kilroy Airport Center Long Beach, a planned four-phase, approximately 53-
acre property entitled for office, research and development,
light industrial and other commercial projects at which the Company will own,
upon consummation of the Offering, all five existing Office Properties and
manages all ongoing leasing and development activities. The Company developed
Phases I and II in 1987 and 1989/1990, respectively, encompassing an aggregate
of approximately 620,000 rentable square feet of office space. The Company
controls development of the Phase III and IV parcels while receiving rental
revenue in connection with such parcels under current leases expiring in July
2009 and September 1998, respectively, in amounts sufficient to cover a
substantial portion of the predevelopment carrying costs. Phases III and IV
presently are planned to be developed on the projects' approximately 24
undeveloped acres and are entitled for an aggregate of approximately
900,000 rentable square feet. The Company is currently in discussions with
several prospective tenants for office space presently planned to be included
in Kilroy Long Beach Phase III. Development of each of Phases III and IV is
subject to substantial predevelopment leasing activity and, therefore, the
timing for the commencement of development of Phases III and IV is uncertain.
No assurance can be given that the Company will commence such development when
planned, or that, if commenced, such development will be completed. See "Risk
Factors--Real Estate Investment Considerations--Risks of Real Estate
Acquisition and Development" and "Business and Properties--Development, Leasing
and Management Activities--Kilroy Long Beach."
In addition, certain of the Industrial Properties can support additional
development, and the Company presently is planning to develop in the next two
years, subject to substantial pre-leasing, approximately 105,000 rentable
square feet of such additional space.
The Company may engage in the development of other office and/or industrial
properties primarily in Southern California submarkets when market conditions
support a favorable risk-adjusted return on such development. The Company's
activities with third-party owners in Southern California are expected to give
the Company further access to development opportunities. There can be no
assurance, however, that the Company will be able to successfully develop any
of the Development Properties or any other properties. See "Business and
Properties--Development, Leasing and Management Activities."
Financing Policies. The Company's financing policies and objectives are
determined by the Company's Board of Directors. The Company presently intends
to limit the ratio of debt to total market capitalization (total debt of the
Company as a percentage of the market value of issued and outstanding shares of
Common Stock, including interests exchangeable therefor, plus total debt) to
approximately 50%. However, such objectives may be altered without the consent
of the Company's stockholders, and the Company's organizational documents do
not limit the amount of indebtedness that the Company may incur. Upon
completion of the transactions outlined under the caption "Formation and
Structure of the Company," total debt will constitute approximately 25.5% of
the total market capitalization of the Company (assuming an initial public
offering price of $20.00 per share of Common Stock). In addition, upon
consummation of the Offering, the Company will have working capital cash
reserves of approximately $20.0 million. The Company anticipates that upon
consummation of the Offering all but approximately $12.0 million of its
permanent indebtedness will bear interest at fixed rates. The Company intends
to utilize one or more sources of capital for future acquisitions, including
development and capital improvements, which may include undistributed cash
flow, borrowings under the proposed Credit Facility, the Company's
approximately $20.0 million of working capital cash reserves out of the net
proceeds of the Offering, issuance of debt or equity securities and other bank
and/or institutional borrowings. There can be no assurance, however, that the
Company will be able to obtain capital for any such acquisitions, developments
or improvements on terms favorable to the Company. See "--Growth Strategies,"
"The Company--Growth Strategies" and "Business and Properties--Development,
Leasing and Management Activities."
12
<PAGE>
THE OFFICE AND INDUSTRIAL PROPERTIES
The following table sets forth certain information relating to each of the
Properties as of December 31, 1995, unless indicated otherwise. This table
gives pro forma effect to a recent extension of one of the leases with Hughes
Space & Communications with respect to two of the Office Properties located at
Kilroy Airport Center at El Segundo as if such lease renewal had occurred on
January 1, 1995. After completion of the Formation Transactions, the Company
(through the Operating Partnership) will own a 100% interest in all of the
Office and Industrial Properties other than the five Office Properties located
at Kilroy Airport Center Long Beach and the three Office Properties located at
the SeaTac Office Center, each of which are held subject to ground leases
expiring in 2035 and 2062 (assuming the exercise of the Company's options to
extend such lease), respectively.
<TABLE>
<CAPTION>
AVERAGE
PERCENTAGE PERCENTAGE BASE
NET LEASED 1995 OF 1995 RENT
RENTABLE AS OF BASE 1995 TOTAL PER EFFECTIVE
SQUARE 12/31/95 RENT EFFECTIVE BASE SQ. FT. RENT PER
PROPERTY LOCATION YEAR BUILT FEET (%)(1) ($000)(2) RENT($000)(3) RENT (%) ($)(4) SQ. FT. ($)(5)
----------------- ---------- --------- ---------- --------- ------------- ---------- ------- --------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Office Properties:
Kilroy Airport Center at El
Segundo
2250 E. Imperial Highway(8).... 1983 291,187 80.9 4,316 4,042 11.5 18.32 17.16
2260 E. Imperial Highway)(9)... 1983 291,187 100.0 7,160 6,545 19.1 24.59 22.48
2240 E. Imperial Highway
El Segundo, California(10)..... 1983 118,933 100.0 1,130 1,121 3.0 9.50 9.43
Kilroy Airport Center Long Beach
3900 Kilroy Airport Way(11).... 1987 126,840 94.0 2,282 2,092 6.1 19.14 17.55
3880 Kilroy Airport Way(11).... 1987 98,243 100.0 1,296 1,022 3.5 13.19 10.40
3760 Kilroy Airport Way........ 1989 165,278 92.1 3,372 2,807 9.0 22.16 18.45
3780 Kilroy Airport Way........ 1989 219,745 63.6 3,465 3,005 9.2 24.79 21.50
3750 Kilroy Airport Way
Long Beach, California......... 1989 10,457 100.0 75 28 0.2 7.21 2.66
SeaTac Office Center
18000 Pacific Highway.......... 1974 207,092 58.7 1,799 1,510 4.8 14.80 12.42
17930 Pacific Highway.......... 1980 210,899 -- -- -- -- -- --
17900 Pacific Highway
Seattle, Washington........... 1980 113,605 87.7 1,896 1,820 5.0 19.02 18.26
La Palma Business Center
4175 E. La Palma Avenue
Anaheim, California(11)....... 1985 42,790 93.2 493 475 1.3 12.37 11.92
2829 Townsgate Road
Thousand Oaks, California(11).. 1990 81,158 100.0 1,888 1,760 5.0 23.26 21.69
185 S. Douglas Street
El Segundo, California(12)..... 1978 60,000 100.0 1,313 898 3.5 21.89 14.96
--------- ----- ------ ------ ---- ----- -----
Subtotal/Weighted Average 2,037,414 77.0 30,485 27,125 81.2 19.44 17.30
--------- ----- ------ ------ ---- ----- -----
Industrial Properties:
2031 E. Mariposa Avenue
El Segundo, California......... 1954 192,053 100.0 1,556 1,296 4.1 8.10 6.75
3340 E. La Palma Avenue
Anaheim, California............ 1966 153,320 100.0 881 790 2.3 5.74 5.16
2260 E. El Segundo Boulevard
El Segundo, California(13)..... 1979 113,820 100.0 553 510 1.5 4.86 4.48
2265 E. El Segundo Boulevard
El Segundo, California......... 1978 76,570 100.0 554 493 1.5 7.23 6.44
1000 E. Ball Road
Anaheim, California(14)........ 1956 100,000 100.0 639 519 1.7 6.39 5.19
1230 S. Lewis Street
Anaheim, California............ 1982 57,730 100.0 303 284 0.8 5.25 4.92
12681/12691 Pala Drive
Garden Grove, California ...... 1970 84,700 82.6 476 454 1.3 6.81 6.48
<CAPTION>
TENANTS LEASING
PERCENTAGE 10% OR MORE OF
LEASED NET RENTABLE
AS OF SQUARE FEET PER
9/30/96 PROPERTY
(%)(6) AS OF 9/30/96(7)
---------- ----------------
<C> <S>
83.9 Hughes Space &
Communications
(33.0%)
100.0 Hughes Space &
Communications
(100.0%)
100.0 Hughes Space &
Communications
(94.6%)
94.0 McDonnell
Douglas
Corporation
(50.9%), Olympus
America, Inc.
(18.6%)
100.0 Devry, Inc.
(100.0%)
82.6 R.L. Polk & Co.
(9.8%)
92.2 SCAN Health Plan
(20.4%), Zelda
Fay Walls (12.7%)
100.0 Oasis Cafe
(37.1%),
Keywanfar &
Baroukhim
(16.1%),
SR Impressions
(15.0%)
60.0 Principal Mutual
(8.8%),
Lynden (8.8%),
Rayonier (8.0%)
-- --
87.7 Key Bank
(41.9%)(15),
Northwest
Airlines
(24.9%),
City of Sea Tac
(17.2%)
91.6 Peryam & Kroll
(26.7%),
DMV/VPI
Insurance Group
(26.5%),
Midcom
Corporation
(15.5%)
100.0 Worldcom, Inc.
(34.2%), Data
Select Systems,
Inc. (13.0%),
Pepperdine
University
(12.7%),
Anheuser Busch,
Inc. (12.0%)
100.0 Northwest
Airlines, Inc.
(100%)
-----
79.8
-----
Mattel, Inc.
100.0 (100%)
Furon Co., Inc.
59.2 (59.2%)
Ace Medical Co.
100.0 (100%)
100.0 MSAS Cargo
Intl., Inc.
(100%)
100.0 Allen-Bradley
Company (100%)
100.0 Extron
Electronics (100%)
82.6 Rank Video Services America, Inc.
(82.6%)
</TABLE>
(footnotes on next page)
13
<PAGE>
<TABLE>
<CAPTION>
AVERAGE
PERCENTAGE PERCENTAGE BASE PERCENTAGE
NET LEASED 1995 OF 1995 RENT LEASED
RENTABLE AS OF BASE 1995 TOTAL PER EFFECTIVE AS OF
SQUARE 12/31/95 RENT EFFECTIVE BASE SQ. FT. RENT PER 9/30/96
PROPERTY LOCATION YEAR BUILT FEET (%)(1) ($000)(2) RENT($000)(3) RENT (%) ($)(4) SQ. FT. ($)(5) (%)(6)
----------------- ---------- --------- ---------- --------- ------------- ---------- ------- -------------- ----------
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2270 E. El Segundo
Boulevard
El Segundo,
California........... 1975 7,500 100.0 129 129 0.3 17.17 17.17 --
5115 N. 27th Avenue
Phoenix,
Arizona(16).......... 1962 130,877 100.0 640 612 1.7 4.89 4.68 100.0
12752-12822 Monarch
Street
Garden Grove,
CA(11)(17)........... 1970 277,037 76.4 727 715 1.9 3.43 3.38 100.0
4155 E. La Palma
Avenue
Anaheim, CA(11)(17).. 1985 74,618 100.0 325 237 0.9 4.36 3.18 100.0
4125 La Palma Avenue
Anaheim, CA(11)(17).. 1985 69,472 65.6 319 302 0 .8 7.00 6.63 100.0
--------- ----- ------ ------ ----- ----- ----- -----
Subtotal/Weighted
Average 1,337,697 92.2 7,102 6,341 18.8 5.76 5.14 93.7
--------- ----- ------ ------ ----- ----- ----- -----
Office & Industrial--
All Properties 3,375,111 83.0 37,587 33,466 100.0 13.42 11.95 85.3
--------- ----- ------ ------ ----- ----- ----- -----
<CAPTION>
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE FEET PER
PROPERTY
AS OF 9/30/96(7)
--------------------
<S>
--
Festival
Markets, Inc.
(100%)
Cannon Equipment
(60%),
Vanco (16.4%)
Bond
Technologies
(29.6%),
NovaCare
Orthotics
(24.0%),
Specialty
Restaurants
Corp.
(21.7%)
Household
Finance
Corporation
(59%), CSTS
(34%)
</TABLE>
- -------
(1) Based on all leases at the respective Properties in effect as of December
31, 1995.
(2) Total base rent for the year ended December 31, 1995, determined in
accordance with generally accepted accounting principles ("GAAP"). All
leases at the Industrial Properties are written on a triple net basis.
Unless otherwise indicated, all leases at the Office Properties are
written on a full service gross basis, with the landlord obligated to pay
the tenant's proportionate share of taxes, insurance and operating
expenses up to the amount incurred during the tenant's first year of
occupancy ("Base Year") or a negotiated amount approximating the tenant's
pro rata share of real estate taxes, insurance and operating expenses
("Expense Stop"). Each tenant pays its pro rata share of increases in
expenses above the Base Year or Expense Stop.
(3) Aggregate base rent received over their respective terms from all leases
in effect at December 31, 1995 minus all tenant improvements, leasing
commissions and other concessions for all such leases, divided by the
terms in months for such leases, multiplied by 12. Tenant improvements,
leasing commissions and other concessions are estimated using the same
methodology used to calculate effective rent for the Properties as a whole
in the charts set forth under the caption "Business and Properties--
General."
(4) Base rent for the year ended December 31, 1995 divided by net rentable
square feet leased at December 31, 1995.
(5) Effective rent at December 31, 1995 divided by net rentable square feet
leased at December 31, 1995.
(6) Based on all leases at the respective Properties dated on or before
September 30, 1996. Occupancy for all Properties at December 31, 1996 was
approximately 88.2%.
(7) Excludes office space leased by the Company.
(8) For this Property, a lease with Hughes Space & Communications, for
approximately 96,000 rentable square feet, and with SDRC Software Products
Marketing Division, Inc., for approximately 6,800 rentable square feet,
are written on a full service gross basis except that there is no Expense
Stop.
(9) For this Property, the lease with Hughes Space & Communications is written
on a modified full service gross basis under which Hughes Space &
Communications pays for all utilities and other internal maintenance costs
with respect to the leased space and, in addition, pays its pro rata share
of real estate taxes, insurance, and certain other expenses including
common area expenses.
(10) For this Property, leases with Hughes Space & Communications for
approximately 101,000 rentable square feet are written on a full service
gross basis except that there is no Expense Stop.
(11) This Property is an Acquisition Property.
(12) For this Property, the lease is written on a triple net basis.
(13) This Industrial Property was vacant until April 1995. The tenant began
paying rent in mid-October 1995 at an annual rate of $4.86 per rentable
square foot.
(14) The tenant subleased this Industrial Property on May 15, 1996 to RGB
Systems, Inc. (doing business as Extron Electronics), the tenant of the
Property located at 1230 S. Lewis Street, Anaheim, California, which is
adjacent to this Property. The sublease is at an amount less than the
current lease rate, and the tenant is paying the difference between the
current lease rate and the sublease rate. The lease and the sublease
terminate in April 1998. Extron Electronics has executed a lease for this
space from May 1998 through April 2005 at the current lease rate. Extron
Electronics continues to occupy the space located at 1230 S. Lewis Street.
(15) This lease terminates on December 31, 1996.
(16) This Industrial Property was originally designed for multi-tenant use and
currently is leased to a single tenant and utilized as an indoor multi-
vendor retail marketplace.
(17) The leases for this Industrial Property are written on a modified triple
net basis, with the tenants responsible for estimated allocated common
area expenses.
14
<PAGE>
THE COMPANY'S SOUTHERN CALIFORNIA SUBMARKETS
The Company retained Robert Charles Lesser & Co. ("Lesser"), nationally
recognized experts in real estate consulting and urban economics, to study the
Company's Southern California submarkets, and the discussion of such submarkets
below is based upon Lesser's findings. While the Company believes that these
estimates of economic trends are reasonable, there can be no assurance that
these trends will in fact continue.
The Company's Office and Industrial Properties are primarily located in Los
Angeles, Orange and Ventura Counties which, together with Riverside and San
Bernardino Counties, comprise the second largest Consolidated Metropolitan
Statistical Area in the United States. Management believes that the region's
economy, which in 1994 commenced recovery from a four-year economic recession,
and the continuing growth in the region's foreign trade, tourism and
entertainment industries, provide an attractive environment for owning and
operating Class A office and industrial properties since occupancy rates and
asking rents generally are increasing. In addition, since 1992 there has been
virtually no increase in the region's office space, while the region's demand
for quality industrial space and low vacancy rates has spurred modest new
construction of industrial properties.
Vacancy rates in the office space market in the Southern California Area are
trending downward from a high in 1991 and 1992 of nearly 20.0% to a level at
the end of 1996 of under 17.0%. At September 30, 1996, the vacancy rate for the
Southern California Area Office Properties was approximately 6.9%. Vacancy
rates in the industrial space market in the Southern California Area have
decreased from a high of nearly 14% in 1992 to approximately 7.6% at December
31, 1996. At September 30, 1996, the vacancy rate for the Southern California
Area Industrial Properties was approximately 7.0%.
As of December 31, 1995, the Southern California Area had a total population
of approximately 15.6 million people which accounted for approximately 5.9% of
the total U.S. population. Beginning in 1990, annual population growth in the
region has averaged approximately 217,000 persons. Of the total population at
December 31, 1995, approximately 9.2 million and 2.6 million persons lived in
Los Angeles and Orange Counties, respectively, the counties in which all but
five of the Properties are located. Annual estimated growth in population over
the next five years in these counties is expected to be approximately 94,000
and 32,000 persons, respectively. See "Business and Properties--The Company's
Southern California Submarkets."
THE FINANCING
The Company, on behalf of the Operating Partnership, has obtained a written
commitment for mortgage loans of $96.0 million (the "Mortgage Loans"), the
closing of which is a condition to the consummation of the Offering. The
proceeds of the Mortgage Loans will principally be used to repay existing
indebtedness on the Properties. The Mortgage Loans consist of: (i) an $84.0
million mortgage loan secured by certain of the Properties (the "$84.0 Million
Loan") and (ii) a $12.0 million mortgage loan secured by the SeaTac Office
Center (the "SeaTac Loan"). The $84.0 Million Loan requires monthly principal
and interest payments based on a fixed rate of 8.2%, amortizing over a 25-year
period, and matures in 2005. The Company presently anticipates that the $84.0
Million Loan will be incurred by a limited partnership which is wholly-owned by
the Company and the Operating Partnership and structured to be a "bankruptcy
remote" financing vehicle. The Properties to be pledged as collateral for the
$84.0 Million Loan will be transferred to such limited partnership. The SeaTac
Loan requires monthly payment of interest computed at a variable rate and has a
term of six months. Principal and interest under the SeaTac Loan will be full
recourse to the Company. The Company has financed the SeaTac Office Center in
this manner in order to provide flexibility to obtain additional financing
secured by the SeaTac Office Center if the Company leases additional space at
this Property.
The Company is currently negotiating a $100.0 million revolving Credit
Facility (the Credit Facility, together with the Mortgage Loans, the
"Financing") which the Company, on behalf of the Operating
15
<PAGE>
Partnership, expects to enter into shortly after the consummation of the
Offering. The availability of funds under the Credit Facility is expected to be
subject to the value of collateral securing the facility and the Company's
compliance with a number of customary financial and other covenants on an
ongoing basis. The Company expects that, initially, approximately $50.0 million
will be available under the Credit Facility. The Company also will have working
capital cash reserves of approximately $20.0 million and capital expenditure
cash reserves of approximately $2.3 million upon consummation of the Offering.
The Credit Facility and the working capital cash reserves will be used
primarily to finance acquisitions of additional properties. The Credit Facility
will also be available to refinance the SeaTac Loan. Payment of principal and
interest on the Credit Facility is expected to be secured by certain of the
Properties. In addition, borrowings under the Credit Facility are expected to
be recourse obligations to the Company and the Operating Partnership.
If the initial public offering price for the Common Stock is less than the
assumed offering price of $20.00 per share, the Company expects to make up any
shortfall between the aggregate net proceeds of the Offering and the Mortgage
Loans, and the intended uses thereof, by reducing its working capital cash
reserves. See "Use of Proceeds."
DISTRIBUTION POLICY
The Company presently intends to make regular quarterly distributions to
holders of its Common Stock. The first distribution, for the period commencing
upon the consummation of the Offering and ending March 31, 1997, is anticipated
to be approximately $ per share (which is equivalent to a quarterly
distribution of $.3875 per share or an annual distribution of $1.55 per share)
which results in an initial annual distribution rate of 7.75%, based on an
initial public offering price of $20.00 per share. The Company does not expect
to change its estimated distribution rate if any of the Underwriters' over-
allotment option is exercised. The Company currently expects to distribute
approximately 93.6% of estimated cash available for distribution for the 12
months following the consummation of the Offering. Units and shares of Common
Stock will receive equal distributions. The Board of Directors may vary the
percentage of cash available for distribution which is distributed if the
actual results of operations, economic conditions or other factors differ from
the assumptions used in the Company's estimates.
The Company established its initial distribution rate based on estimated cash
flow for the 12 months following the consummation of the Offering and the
Formation Transactions which the Company anticipates to be available for
distribution, taking into account rents under existing leases, estimated
operating expenses, capital improvements, debt service requirements, known
contractual commitments, and estimated amounts for recurring tenant
improvements and leasing commissions. To maintain its qualification as a REIT,
the Company must make annual distributions to stockholders of at least 95% of
its taxable income, determined without regard to the deduction for dividends
paid and by excluding any net capital gains. Under certain circumstances, the
Company may be required to make distributions in excess of cash flow available
for distribution to meet such distribution requirements. See "Distribution
Policy."
The Company's estimate of the initial distribution rate for the Common Stock
was based on the Company's estimate of cash available for distribution, which
is being made solely for the purpose of setting the initial distribution rate
and is not intended to be a projection or forecast of the Company's results of
operations or of its liquidity. The Company believes that its estimate of cash
available for distribution constitutes a reasonable basis for setting the
initial distribution rate. However, no assurance can be given that the
Company's estimate will be accurate. See "Risk Factors--Distribution Payout
Percentage."
16
<PAGE>
TAX STATUS OF THE COMPANY
The Company intends to elect to be taxed as a REIT under Sections 856 through
860 of the Internal Revenue Code of 1986, as amended (the "Code"), commencing
with its taxable year ending December 31, 1997 and believes its organization
and proposed method of operation will enable it to meet the requirements for
qualification as a REIT. To maintain REIT status, an entity must meet a number
of organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its REIT taxable income (determined
without regard to the dividends paid deduction and by excluding net capital
gains) to its stockholders. As a REIT, the Company generally will not be
subject to federal income tax on net income it distributes currently to its
stockholders. If the Company fails to qualify as a REIT in any taxable year, it
will be subject to federal income tax at regular corporate rates and may not be
able to qualify as a REIT for the four subsequent taxable years. See "Risk
Factors--Adverse Consequences of Failure to Qualify as a REIT" and "Federal
Income Tax Considerations." Even if the Company qualifies for taxation as a
REIT, the Company may be subject to certain federal, state and local taxes on
its income and property. In addition, the Services Company will be subject to
federal and state income tax at regular corporate rates on its net income.
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered Hereby.. 11,300,000 shares
Common Stock Outstanding af-
ter the Offering............ 14,052,374 shares(/1/)
Use of Proceeds.............. Together with the net proceeds of the Mortgage
Loans, repayment of approximately $229.5 million
(including accrued interest and loan fees) of
existing mortgage and other indebtedness,
approximately $49.0 million for the purchase of
the Acquisition Properties and the remaining
approximately $27.2 million to be available for
expenses of the Formation Transactions, expenses
of the Financing, expenses of the Offering and
as working capital.
NYSE symbol.................. KRC
</TABLE>
- --------
(1) Includes 2,692,374 Units (calculated on an as-exchanged basis) issued in
connection with the Formation Transactions and 60,000 restricted shares of
Common Stock to be issued to Richard E. Moran Jr., Executive Vice
President, Chief Financial Officer and Secretary of the Company (but not a
Continuing Investor) pursuant to the Stock Incentive Plan, but excludes
1,400,000 additional shares of Common Stock reserved for issuance as
restricted shares of Common Stock, or upon the exercise of options granted,
pursuant to the Stock Incentive Plan (as defined herein). See "Management--
Stock Incentive Plan" and "Shares Eligible for Future Sale."
17
<PAGE>
SUMMARY FINANCIAL DATA
The following table sets forth certain financial data on a pro forma basis
for the Company, and on an historical basis for the Kilroy Group, which consist
of the combined financial statements of the Kilroy Group (the "Combined
Financial Statements") whose financial results will be consolidated in the
historical and pro forma financial statements of the Company. The financial
data should be read in conjunction with the historical and pro forma financial
statements and notes thereto included in this Prospectus. The combined
historical summary financial data as of December 31, 1994, 1995 and September
30, 1996 and for each of the three years in the period ended December 31, 1995
and the nine months ended September 30, 1995 and 1996 have been derived from
the Combined Financial Statements of the Kilroy Group audited by Deloitte &
Touche LLP, independent public accountants, whose report with respect thereto
is included elsewhere in this Prospectus. The selected combined historical
financial and operating information as of December 31, 1993, 1992 and 1991, and
for the years ended December 31, 1992 and 1991, have been derived from the
unaudited Combined Financial Statements of the Kilroy Group and, in the opinion
of management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair statement of the operating information for
the unaudited periods. The pro forma data assume the completion of the
Formation Transactions, including acquisition of the Acquisition Properties and
the consummation of the Offering (based upon the midpoint of the range of the
initial public offering price set forth on the cover page of this Prospectus)
and the Financing, and use of the aggregate net proceeds therefrom as described
under "Use of Proceeds" as of the beginning of the periods presented for the
operating data and as of the balance sheet date for the balance sheet data. The
pro forma financial data does not give effect to the recent extension of the
tenant lease with Hughes Space & Communications with respect to space leased in
the Office Property located at 2250 E. Imperial Highway, El Segundo, California
and a portion of the space leased in the Office Property located at 2240 E.
Imperial Highway, El Segundo, California. The pro forma financial data are not
necessarily indicative of what the actual financial position or results of
operations of the Company would have been as of and for the periods indicated,
nor does it purport to represent the future financial position and results of
operations.
18
<PAGE>
THE COMPANY (PRO FORMA) AND KILROY GROUP (HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------- ------------------------------------------------------------
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA --------------------- PRO FORMA --------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
--------- ------------ -------- --------- --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Rental income.......... $ 30,635 $ 25,156 $ 24,056 $39,141 $ 32,314 $ 31,220 $ 34,239 $ 32,988 $ 29,300
Tenant reimbursements.. 3,326 2,583 2,377 3,886 3,002 1,643 4,916 5,076 5,416
Parking income......... 1,317 1,317 1,193 1,582 1,582 1,357 1,360 1,286 1,358
Development and
management fees....... -- 580 926 -- 1,156 919 751 882 779
Sale of air rights..... -- -- 4,456 4,456 4,456 -- -- -- --
Lease termination
fees.................. -- -- -- 100 100 300 5,190 48 --
Other income........... 364 65 211 705 298 784 188 221 206
-------- ---------- -------- ------- --------- --------- -------- -------- --------
Total revenues......... 35,642 29,701 33,219 49,870 42,908 36,223 46,644 40,501 37,059
-------- ---------- -------- ------- --------- --------- -------- -------- --------
Property expenses...... 6,411 5,042 5,045 8,668 6,834 6,000 6,391 6,384 6,971
Real estate taxes
(refunds)............. 1,457 970 1,088 2,002 1,416 (448) 2,984 3,781 2,377
General and
administrative
expense............... 3,062 1,607 1,554 4,083 2,152 2,467 1,113 1,115 841
Ground lease........... 832 579 542 1,127 789 913 941 854 726
Development expenses... -- 584 564 -- 737 468 581 429 255
Option buy-out cost.... 3,150 3,150 -- -- -- -- -- -- --
Interest expense....... 5,937 16,234 18,660 7,916 24,159 25,376 25,805 26,293 26,174
Depreciation and
amortization.......... 7,668 6,838 7,171 10,580 9,474 9,962 10,905 10,325 9,116
-------- ---------- -------- ------- --------- --------- -------- -------- --------
Total expenses......... 28,517 35,004 34,624 34,376 45,561 44,738 48,720 49,181 46,460
-------- ---------- -------- ------- --------- --------- -------- -------- --------
Income (loss) before
equity in income of
subsidiary, minority
interest and
extraordinary item.... 7,125 (5,303) (1,405) 15,494 (2,653) (8,515) (2,076) (8,680) (9,401)
Equity in income (loss)
of subsidiary......... (58) -- 136 -- -- -- -- --
Minority interest...... (1,357) -- (3,001) -- -- -- -- --
Extinguishment of
debt.................. -- 20,095 15,267 -- 15,267 1,847 -- -- --
-------- ---------- -------- ------- --------- --------- -------- -------- --------
Net income (loss)...... $ 5,710 $ 14,792 $ 13,862 $12,629 $ 12,614 $ (6,668) $ (2,076) $ (8,680) $ (9,401)
======== ========== ======== ======= ========= ========= ======== ======== ========
Pro forma net income
per share(1).......... $ 0.50 $ 1.11
======== =======
<CAPTION>
DECEMBER 31,
--------------------------------------------------
SEPTEMBER 30, 1996 COMBINED HISTORICAL
----------------------- --------------------------------------------------
COMBINED
PRO FORMA HISTORICAL 1995 1994 1993 1992 1991
--------- ------------ --------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate assets,
before accumu-
lated depreciation and
amortization.......... $285,150 $ 227,127 $ 224,983 $ 223,821 $222,056 $221,423 $220,363
Total assets........... 210,603 131,062 132,857 143,251 148,386 161,008 169,147
Mortgages and loans.... 96,000 224,046 233,857 250,059 248,043 250,792 245,645
Total liabilities...... 109,981 244,285 254,683 273,585 263,346 263,156 254,786
Minority interest...... 19,319
Stockholders' equity
(deficit)............. 81,303 (113,223) (121,826) (130,334) (114,960) (102,148) (85,639)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------------- ------------------------------------------
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA ---------------------- PRO FORMA -------------------------------
1996 1996 1995 1995 1995 1994 1993
----------------------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from
Operations(2)......... $18,243 $4,685 $1,310 $22,018 $2,365 $1,447 $3,639
Cash flows from:
Operating activities... -- 5,528 9,270 -- 10,071 6,607 11,457
Investing activities... -- (2,140) (446) -- (1,162) (1,765) 2,028
Financing activities... -- (3,388) (8,824) -- (8,909) (4,842) (13,485)
Office Properties:
Square footage......... 2,037,414 1,688,383 1,688,383 2,037,414 1,688,383 1,688,383 1,688,383
Occupancy.............. 79.8% 76.3% 72.8% 77.0% 72.8% 73.3% 81.0%
Industrial Properties:
Square footage......... 1,337,697 916,570 916,570 1,337,697 916,570 916,570 916,570
Occupancy.............. 93.7% 90.8% 98.4% 92.2% 98.4% 79.7% 77.6%
</TABLE>
- -------
(1) Pro forma net income per share equals pro forma net income divided by the
11,360,000 shares of Common Stock outstanding after the Offering.
(2) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), Funds from Operations represents net income (loss) before
minority interest of unit holders (computed 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 after adjustments for
unconsolidated partnerships and joint ventures. Non-cash adjustments to
Funds from Operations were as follows: in all periods, depreciation and
amortization; in 1996, 1995 and 1994, gains on extinguishment of debt; and
in pro forma 1996 and 1995, non-cash compensation. Further, in 1996 and
1995 non-recurring items (sale of air rights and option buy-out cost) were
excluded. Management considers Funds from Operations an appropriate measure
of performance of an equity REIT because industry analysts have accepted it
as such. 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 by other equity REITs and, accordingly, may not be
comparable to such other REITs. Further, Funds from Operations does not
represent amounts available for management's discretionary use because of
needed capital replacement or expansion, debt service obligations, or other
commitments and uncertainties. See notes (9), (10) and (11) under the
caption "Distribution Policy" and the notes to the historical financial
statements of the Kilroy Group. Funds from Operations should not be
considered as an alternative for net income as a measure of profitability
nor is it comparable to cash flows provided by operating activities
determined in accordance with GAAP.
19
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock involves various material
risks. Prospective investors should carefully consider the following risk
factors, in addition to the other information set forth in this Prospectus, in
connection with an investment in the shares of Common Stock offered hereby.
CONFLICTS OF INTEREST
Certain Limited Partner Approval Rights. While the Company will be the sole
general partner of the Operating Partnership, and generally will have full and
exclusive responsibility and discretion in the management and control of the
Operating Partnership, certain provisions of the Partnership Agreement place
limitations on the Company's ability to act with respect to the Operating
Partnership. The Partnership Agreement provides that if the limited partners
own at least 5% of the outstanding Units (including Units held by the Company
which will represent 80.8% of all Units outstanding upon consummation of the
Offering), the Company shall not, on behalf of the Operating Partnership, take
any of the following actions without the prior consent of the holders of more
than 50% of the Units representing limited partner interests (excluding Units
held by the Company): (i) dissolve the Operating Partnership, other than
incident to a merger or sale of substantially all of the Company's assets; or
(ii) prior to the seventh anniversary of the consummation of the Offering,
sell the Office Property located at 2260 E. Imperial Highway at Kilroy Airport
Center at El Segundo, other than incident to a merger or sale of substantially
all of the Company's assets. Furthermore, the Partnership Agreement provides
that, except in connection with certain transactions, the Company may not
voluntarily withdraw from the Operating Partnership, or transfer or assign its
interest in the Operating Partnership, without the consent of the holders of
at least 60% of the Units (including Units held by the Company) and without
meeting certain other criteria with respect to the consideration to be
received by the limited partners. In addition, the Company has agreed to use
its commercially reasonable efforts to structure certain merger transactions
to avoid causing the limited partners to recognize gain for federal income tax
purposes by virtue of the occurrence of or their participation in such
transactions. The restrictions on the Company's ability to act as described
above may result in the Company being precluded from taking action which the
Board of Directors believes is in the best interest of all stockholders. See
"Partnership Agreement of the Operating Partnership--Transferability of
Interests" and "--Certain Limited Partner Approval Rights."
Tax Consequences Upon Sale or Refinancing. Unlike persons acquiring shares
of Common Stock in the Offering, holders of Units may suffer different and
more adverse tax consequences than the Company upon the sale or refinancing of
the Properties owned by the Operating Partnership, and therefore such holders
may have different objectives regarding the appropriate pricing and timing of
any sale or refinancing of such Properties. While the Company, as the sole
general partner of the Operating Partnership, will have the authority (subject
to certain limited partner approval rights described below) to determine
whether and on what terms to sell or refinance each Property owned solely by
the Operating Partnership, those directors and officers of the Company who
hold Units may seek to influence the Company not to sell or refinance the
Properties, even though such a sale might otherwise be financially
advantageous to the Company, or may seek to influence the Company to refinance
a Property with a higher level of debt. The Partnership Agreement provides
that if the limited partners own at least 5% of the outstanding Units
(including Units held by the Company which will represent 80.8% of all Units
outstanding upon consummation of the Offering), the Company shall not, on
behalf of the Operating Partnership, take any of the following actions without
the prior consent of the holders of more than 50% (excluding Units held by the
Company) of the Units representing limited partner interests: (i) dissolve the
Operating Partnership, other than incident to a merger or sale of
substantially all of the Company's assets; or (ii) prior to the seventh
anniversary of the consummation of the Offering, sell the Office Property at
2260 E. Imperial Highway at Kilroy Airport Center at El Segundo, other than
incident to a merger or sale of substantially all of the Company's assets. The
Operating Partnership will also use commercially reasonable efforts to
cooperate with the limited partners to minimize any taxes payable in
connection with any repayment, refinancing, replacement or restructuring of
indebtedness, or any sale, exchange or any other disposition of assets, of the
Operating Partnership. See "Partnership Agreement of the Operating
Partnership--Transferability of Interests" and "--Certain Limited Partner
Approval Rights."
20
<PAGE>
Failure to Enforce Terms of Certain Agreements. As recipients of Units in
the Formation Transactions, John B. Kilroy, Sr., as Chairman of the Company's
Board of Directors, and John B. Kilroy, Jr., as the Company's President and
Chief Executive Officer and a director of the Company, will have a conflict of
interest with respect to their obligations as directors or officers of the
Company to enforce the terms of the agreements relating to the transfer to the
Operating Partnership of their interests in the Properties and other assets to
be acquired by the Company and relating to the Company's option to purchase
certain additional properties owned by entities controlled by them. See
"Business and Properties--Development, Leasing and Management Activities--
Excluded Properties." The failure to enforce the material terms of those
agreements (which would require the approval of the Independent Directors)
could result in a monetary loss to the Company, which loss could have a
material effect on the Company's financial condition or results of operations.
While certain Continuing Investors will provide indemnities in connection with
such transfers, such indemnities would be impaired to the extent that such
Continuing Investors have other obligations, including obligations for taxes
arising from the Formation Transactions or prior transactions, which they may
not have sufficient assets to satisfy.
Policies with Respect to Conflicts of Interest. The Company has adopted
certain policies designed to eliminate or minimize conflicts of interest.
These policies include (i) provisions in the Company's Articles of
Incorporation and Bylaws which require that at least a majority of the
directors be Independent Directors, (ii) provisions in the Company's Bylaws
which require that a majority of the Independent Directors approve
transactions between the Company and members of the Kilroy Group, including
the enforcement of terms of the transfers of the Properties to the Operating
Partnership and the exercise of the options with respect to the Excluded
Properties, and the sale or refinancing of the Properties and (iii) the
requirement that the members of the Board of Directors that are Continuing
Investors (John B. Kilroy, Jr. and John B. Kilroy, Sr.) enter into
noncompetition agreements with the Company. The provisions contained in the
Company's Articles of Incorporation can be modified only with the approval of
two-thirds of the shares of the Company's capital stock outstanding and
entitled to vote thereon, and the provisions contained in the Company's Bylaws
can be modified only with the approval of a majority of either the Company's
Board of Directors or the shares of the Company's capital stock outstanding
and entitled to vote thereon. However, there can be no assurance that these
policies will not be changed in the future or that they otherwise always will
be successful in eliminating the influence of such conflicts, and, if they are
not successful, decisions could be made that might fail to reflect fully the
interests of all stockholders. See "Policies with Respect to Certain
Activities--Conflict of Interest Policies."
Competitive Real Estate Activities of Management. John B. Kilroy, Sr. and
John B. Kilroy, Jr. will have controlling ownership interests in a complex of
three office properties which are located in the El Segundo submarket in which
four of the Office Properties and four of the Industrial Properties are
located. These properties will be managed by the Operating Partnership and
certain of the Company's officers, directors and employees will spend an
immaterial portion of their time and effort managing these interests and
Calabasas Park Centre, an undeveloped approximately 66-acre site (representing
approximately 45 developable acres net of acreage required for streets and
contractually required open areas). The Kilroy Group is actively marketing for
sale all but 18 acres of Calabasas Park Centre. Certain of the Company's
officers, directors and employees will spend an immaterial amount of time in
connection with any sales of such parcels.
Each of these properties is currently owned by partnerships owned and
controlled by John B. Kilroy, Sr. and John B. Kilroy, Jr. The properties
located on North Sepulveda Boulevard in El Segundo will be managed by the
Operating Partnership pursuant to a management agreement on market terms. With
respect to Calabasas Park Centre, the officers, directors and employees of the
Company will spend an immaterial amount of time in connection with the
entitlement, marketing and sales of such parcels. Calabasas Park Centre will
be managed by the Services Company pursuant to a management agreement on
market terms. The implementation of the arrangements relating to each of these
properties will involve a conflict of interest with John B. Kilroy, Sr. and
John B. Kilroy, Jr. The Kilroy Group holds certain other real estate interests
which are not being contributed to the Company as part of the Formation
Transactions. All of such other real estate interests relate to miscellaneous
properties and property rights that the Company believes are not of a type
appropriate for inclusion in the
21
<PAGE>
Company's portfolio and the properties are not consistent with the Company's
strategy. See "Business and Properties--Excluded Properties."
ADVERSE CONSEQUENCES OF FAILURE TO QUALIFY AS A REIT
Tax Liabilities as a Consequence of Failure to Qualify as a REIT. The
Company intends to operate so as to qualify as a REIT under the Code,
commencing with its taxable year ending December 31, 1997. Although management
believes that it will be organized and will operate in such a manner, no
assurance can be given that the Company will be organized or will be able to
operate in a manner so as to qualify or remain so qualified. Qualification as
a REIT involves the satisfaction of numerous requirements (some on an annual
and others on a quarterly basis) established under highly technical and
complex Code provisions for which there are only limited judicial and
administrative interpretations, and involves the determination of various
factual matters and circumstances not entirely within the Company's control.
For example, in order to qualify as a REIT, at least 95% of the Company's
gross income in any year must be derived from qualifying sources and the
Company must pay distributions to stockholders aggregating annually at least
95% of its REIT taxable income (determined without regard to the dividends
paid deduction and by excluding net capital gains). The complexity of these
provisions and of the applicable Treasury Regulations that have been
promulgated under the Code is greater in the case of a REIT that holds its
assets in partnership form. No assurance can be given that legislation, new
regulations, administrative interpretations or court decisions will not
significantly change the tax laws with respect to qualification as a REIT or
the federal income tax consequences of such qualification. The Company is
relying on the opinion of Latham & Watkins, tax counsel to the Company,
regarding various issues affecting the Company's ability to qualify, and
continue to qualify, as a REIT. See "Federal Income Tax Consequences--Taxation
of the Company" and "Legal Matters." Such legal opinion is based on various
assumptions and factual representations by the Company regarding the Company's
ability to meet the various requirements for qualification as a REIT, and no
assurance can be given that actual operating results will meet these
requirements. Such legal opinion is not binding on the Internal Revenue
Service ("IRS") or any court.
Among the requirements for REIT qualification is that the value of any one
issuer's securities held by a REIT may not exceed 5% of the REIT's total
assets on certain testing dates. See "Federal Income Tax Consequences--
Taxation of the Company--Requirements for Qualification." The Company believes
that its allocable share of the aggregate value of the securities of the
Services Company to be held by the Operating Partnership will be less than 5%
of the value of the Company's total assets, based on the initial allocation of
Units among participants in the Formation Transactions and the Company's
opinion regarding the maximum value that could be assigned to the expected
assets and net operating income of the Services Company after the Offering. In
rendering its opinion as to the qualification of the Company as a REIT, Latham
& Watkins is relying on the conclusions of the Company regarding the value of
the Services Company.
If the Company were to fail to qualify as a REIT in any taxable year, the
Company would be subject to federal income tax (including any applicable
alternative minimum tax) on its taxable income at regular corporate rates and
would not be allowed a deduction in computing its taxable income for amounts
distributed to its stockholders. Moreover, unless entitled to relief under
certain statutory provisions, the Company also would be disqualified from
treatment as a REIT for the four taxable years following the year during which
qualification is lost. This treatment would reduce the net earnings of the
Company available for investment or distribution to stockholders because of
the additional tax liability to the Company for the years involved. In
addition, distributions to stockholders would no longer be required to be
made. See "Federal Income Tax Consequences--Taxation of the Company--
Requirements for Qualification."
Other Tax Liabilities. Even if the Company qualifies for and maintains its
REIT status, it will be subject to certain federal, state and local taxes on
its income and property. For example, if the Company has net income from a
prohibited transaction, such income will be subject to a 100% tax. In
addition, the Company's net income, if any, from the third-party development
conducted through the Services Company will be subject to federal income tax
at regular corporate tax rates. See "Federal Income Tax Consequences--Services
Company."
22
<PAGE>
RISKS OF DEVELOPMENT BUSINESS AND RELATED ACTIVITIES BEING CONDUCTED BY THE
SERVICES COMPANY
Tax Liabilities. The Services Company will be subject to federal and state
income tax on its taxable income at regular corporate rates. Any federal,
state or local income taxes that the Services Company is required to pay will
reduce the cash available for distribution by the Company to its stockholders.
Adverse Consequences of Lack of Control Over the Businesses of the Services
Company. To comply with the REIT asset tests that restrict ownership of shares
of other corporations, upon consummation of the Offering, the Operating
Partnership will own 100% of the nonvoting preferred stock of the Services
Company (representing approximately 95.0% of its economic value) and John B.
Kilroy, Sr. and John B. Kilroy, Jr. will own all the outstanding voting common
stock of the Services Company (representing approximately 5.0% of its economic
value). This ownership structure is necessary to permit the Company to share
in the income of the Services Company and also maintain its status as a REIT.
Although it is anticipated that the Company will receive substantially all of
the economic benefit of the businesses carried on by the Services Company
through the Company's right to receive dividends through the Operating
Partnership, the Company will not be able to elect directors or officers of
the Services Company and, therefore, the Company will not have the ability to
influence the operations of the Services Company or require that the Services
Company's board of directors declare and pay a cash dividend on the nonvoting
preferred stock of the Services Company held by the Operating Partnership. As
a result, the board of directors and management of the Services Company may
implement business policies or decisions that would not have been implemented
by persons controlled by the Company and that are adverse to the interests of
the Company or that lead to adverse financial results, which could adversely
impact the Company's net operating income and cash flow. See "Formation and
Structure of the Company."
Adverse Consequence of REIT Status on the Businesses of the Services
Company. Certain requirements for REIT qualification may in the future limit
the Company's ability to receive increased distributions from the fee
development operations conducted and related services offered by the Services
Company. See "--Adverse Consequences of Failure to Qualify as a REIT."
NO APPRAISALS; CONSIDERATION TO BE PAID FOR PROPERTIES AND OTHER ASSETS MAY
EXCEED THEIR FAIR MARKET VALUE. No independent valuations or appraisals of the
Properties were obtained in connection with the Formation Transactions. The
valuation of the Company has been determined by considering the enterprise
value of the Company as a going concern based primarily upon a capitalization
of estimated and anticipated Funds from Operations (as defined) and cash
available for distribution and the other factors discussed in this Prospectus
under "Distribution Policy" and "Underwriting," rather than an asset-by-asset
valuation based on historical cost or current market value. This methodology
has been used because management believes it is appropriate to value the
Company as an ongoing business rather than with the view to values that could
be obtained from a liquidation of the Company or of individual assets owned by
the Company. Accordingly, there can be no assurance that the consideration
paid by the Company will not exceed the fair market value of the Properties
and other assets acquired by the Company. A valuation of the Company
determined solely by appraisals of the Properties and other assets of the
Company may result in a significantly lower valuation of the Company from that
which is reflected by the initial public offering price per share set forth on
the cover of this Prospectus, which also takes into account the businesses of
the Services Company, the earnings of the Properties and the going concern
value of the Company. See "Underwriting." Since the liquidation value of the
Company is likely to be significantly less than the value of the Company as a
going concern, stockholders may suffer a significant loss in the value of
their shares if the Company were required to sell its assets.
The valuation of the Company's development, leasing and management services
business has been derived, in part, from a capitalization of the revenue
derived from the Company's contracts with third parties for real estate
development, leasing and management services. Upon consummation of the
Offering, the Company expects to provide through the Operating Partnership
leasing and management services, and through the Services Company development
services.
The consideration paid and the allocation of Units of the Operating
Partnership among the participants in connection with the Formation
Transactions were not determined by arm's-length negotiations. Since no
23
<PAGE>
appraisals of the Properties and other assets were obtained, the value of the
Units allocated to participants in the Formation Transactions may exceed the
fair market value of their ownership of such Properties and assets. The terms
of the option agreements relating to the Excluded Properties also were not
determined by arm's-length negotiations, and such terms may be less favorable
to the Company than those that may have been obtained through negotiations
with a third party. In addition, approximately $37.2 million of mortgage
indebtedness guaranteed by John B. Kilroy, Sr., of which $8.7 million is also
guaranteed by John B. Kilroy, Jr., and personal indebtedness of approximately
$3.4 million of John B. Kilroy, Sr., will be repaid in connection with the
Formation Transactions. See "--Conflicts of Interest," "Use of Proceeds" and
"Formation and Structure of the Company."
CASH FLOW FROM DEVELOPMENT ACTIVITIES IS UNCERTAIN. A portion of the
Company's anticipated cash flow may be generated from development activities
which are partially dependent on the availability of development opportunities
and which are subject to the risks inherent with development and general
economic conditions. In addition, development activities will be subject to
limitations imposed by the REIT tests. See "Federal Income Tax Consequences--
Taxation of the Company--Income Tests." There can be no assurance that the
Company will realize such anticipated cash flows. See "Risk Factors--Real
Estate Investment Considerations--Risks of Real Estate Acquisition and
Development." Also, these development activities generally will be conducted
by the Services Company. Accordingly, cash flow from these activities will be
further dependent upon the decision of the Services Company's board of
directors to declare and pay a cash dividend on the nonvoting preferred stock
held by the Operating Partnership. See "--Risks of Development Business and
Related Activities Being Conducted by the Services Company."
DEPENDENCE ON SOUTHERN CALIFORNIA MARKET. Twenty-two of the 26 Properties,
comprising an aggregate of approximately 2.7 million rentable square feet
(representing approximately 80.4% of the aggregate rentable square feet of all
of the Properties), are located in Southern California. Consequently, the
Company's performance will be linked to economic conditions and the demand for
office, industrial and retail space in this region. The Southern California
economy has experienced significant recessionary conditions in the past
several years, primarily as a result of the downsizing of the aerospace and
defense industries; there is still a dependence on these industries in the
Company's El Segundo and Long Beach Airport area submarkets. The recessionary
conditions resulted in a general increase in vacancies and a general decrease
in net absorption and rental rates in the Company's El Segundo and Long Beach
Airport area submarkets. See "Business and Properties--The Company's Southern
California Submarkets." Any decline in the Southern California economy
generally may result in a material decline in the demand for office,
industrial and retail space, have a material adverse effect greater than if
the Company had a more geographically diverse portfolio of properties, and may
materially and adversely affect the ability of the Company to make
distributions to stockholders. See "Business and Properties--The Company's
Southern California Submarkets."
In addition, eight Office Properties, representing approximately 64.9% of
the aggregate office space of all of the Office Properties, are located in two
office parks in El Segundo, California, and Long Beach, California,
respectively.
DEPENDENCE ON SIGNIFICANT TENANTS. The Company's ten largest office tenants
represented approximately 46.3% of annual base rent for the year ended
December 31, 1995 (giving pro forma effect to a recent extension of a lease
with Hughes Space & Communications with respect to two of the Office
Properties located at Kilroy Airport Center at El Segundo), and its ten
largest industrial tenants represented approximately 16.1% of annual base rent
for the same period. Of this amount, its largest tenant, Hughes Space &
Communications, currently leases approximately 495,000 rentable square feet of
office space in Kilroy Airport Center at El Segundo, representing
approximately 25.3% of the Company's total base rent revenues for the year
ended December 31, 1995 (giving pro forma effect to the Hughes Space &
Communications lease extension). The base periods of the Hughes Space &
Communications leases expire beginning in January 1999. The Company's revenues
and cash available for distribution to stockholders would be
disproportionately and materially adversely affected in the event of
bankruptcy or insolvency of, or a downturn in the business of, or the
nonrenewal of leases by, any of its significant tenants, or the renewal of
such leases on terms less favorable to the Company than their current terms.
24
<PAGE>
DISTRIBUTIONS TO STOCKHOLDERS AFFECTED BY MANY FACTORS. Distributions by the
Company to its stockholders will be based principally on cash available for
distribution from the Properties. Increases in base rent under the leases of
the Properties or the payment of rent in connection with future acquisitions
will increase the Company's cash available for distribution to stockholders.
However, in the event of a default or a lease termination by a lessee, there
could be a decrease or cessation of rental payments and thereby a decrease in
cash available for distribution. In addition, the amount available to make
distributions may decrease if properties acquired in the future yield lower
than expected returns.
The distribution requirements for REITs under federal income tax laws may
limit the Company's ability to finance future developments, acquisitions and
expansions without additional debt or equity financing. If the Company incurs
additional indebtedness in the future, it will require additional funds to
service such indebtedness and as a result amounts available to make
distributions may decrease. Distributions by the Company will also be
dependent on a number of other factors, including the Company's financial
condition, any decision to reinvest funds rather than to distribute such
funds, capital expenditures, the annual distribution requirements under the
REIT provisions of the Code and such other factors as the Company deems
relevant. In addition, the Company may issue from time to time additional
Units or shares of Common Stock in connection with the acquisition of
properties or in certain other circumstances. No prediction can be made as to
the number of such Units or shares of Common Stock which may be issued, if
any, and, if issued, the effect on cash available for distribution on a per
share basis to holders of Common Stock. Such issuances, if any, will have a
dilutive effect on cash available for distribution on a per share basis to
holders of Common Stock. See "The Company--Growth Strategies." The possibility
exists that actual results of the Company may differ from the assumptions used
by the Board of Directors in determining the initial distribution rate. In
such event, the trading price of the Common Stock may be adversely affected.
To obtain the favorable tax treatment associated with REITs, the Company
generally will be required to distribute to its stockholders at least 95% of
its taxable income (determined without regard to the dividends paid deduction
and by excluding net capital gains) each year. In addition, the Company will
be subject to tax at regular corporate rates to the extent that it distributes
less than 100% of its taxable income (including net capital gains) each year.
The Company will also be subject to a 4% nondeductible excise tax on the
amount, if any, by which certain distributions paid by it with respect to any
calendar year are less than the sum of 85% of its ordinary income, 95% of its
capital gain net income and 100% of its undistributed income from prior years.
The Company intends to make distributions to its stockholders to comply with
the distribution requirements of the Code and to reduce exposure to federal
income taxes and the nondeductible excise tax. Differences in timing between
the receipt of income and the payment of expenses in arriving at taxable
income and the effect of required debt amortization payments could require the
Company to borrow funds on a short-term basis to meet the distribution
requirements that are necessary to achieve the tax benefits associated with
qualifying as a REIT.
REAL ESTATE INVESTMENT CONSIDERATIONS
General. Real property investments are subject to varying degrees of risk.
The yields available from equity investments in real estate depend on the
amount of income earned and capital appreciation generated by the related
properties as well as the expenses incurred in connection therewith. If the
Properties do not generate income sufficient to meet operating expenses,
including debt service and capital expenditures, the ability to make
distributions to the Company's stockholders could be adversely affected.
Income from, and the value of, the Properties may be adversely affected by the
general economic climate, local conditions such as oversupply of office,
industrial or retail space or a reduction in demand for office, industrial or
retail space in the area, the attractiveness of the Properties to potential
tenants, competition from other office, industrial and retail buildings, and
the ability of the Company to provide adequate maintenance and insurance and
increased operating costs (including insurance premiums, utilities and real
estate taxes). In addition, revenues from properties and real estate values
are also affected by such factors as the cost of compliance with regulations
and the potential for liability under applicable laws, including changes in
tax laws, interest rate levels and the availability of financing.
25
<PAGE>
The Company's income would be adversely affected if a significant number of
tenants were unable to pay rent or if office, industrial or retail space could
not be rented on favorable terms. Certain significant expenditures associated
with an investment in real estate (such as mortgage payments, real estate
taxes and maintenance costs) generally are not reduced when circumstances
cause a reduction in income from the investment.
Illiquidity of Real Estate. Real estate investments are relatively illiquid
and, therefore, the Company has limited ability to vary its portfolio quickly
in response to changes in economic or other conditions. In addition, the
prohibition in the Code and related regulations on a REIT holding property for
sale may affect the Company's ability to sell properties without adversely
affecting distributions to the Company's stockholders.
Competition. The Company plans to expand, primarily through the acquisition
and development of additional office and industrial buildings in Southern
California and other markets where the acquisition and/or development of
property would, in the opinion of management, result in a favorable risk-
adjusted return on investment. There are a number of office and industrial
building developers and real estate companies that compete with the Company in
seeking properties for acquisition, prospective tenants and land for
development. All of the Properties are in developed areas where there are
generally other properties of the same type. Competition from other office,
industrial and retail properties may affect the Company's ability to attract
and retain tenants, rental rates and expenses of operation (particularly in
light of the higher vacancy rates of many competing properties which may
result in lower-priced space being available in such properties). The Company
may be competing with other entities that have greater financial and other
resources than the Company. During the two-year and nine-month period ended
September 30, 1996, the Company's weighted average renewal rate, based on net
rentable square footage, was 71.7% for the Properties located in the Southern
California Area and 50.9% for the Properties overall. The lower overall
retention rate is due primarily to the termination in 1993 of a lease for
211,000 square feet at the SeaTac Office Center.
Lease Expirations. Certain leases expiring during the first several years
following the Offering are at rental rates higher than those attained by the
Company in its recent leasing activity. Such leases, or other leases of the
Company, may not be renewed or, if renewed, may be renewed at rental rates
lower than rental rates in effect immediately prior to expiration. Decreases
in the rental rates for the Company's properties, the failure of tenants to
renew any such leases or the failure of the Company to re-lease any of the
Company's space could materially adversely affect the Company and its ability
to make distributions. During the three calendar years ending December 31,
1999, the Company will have expiring Office Property leases covering
approximately 408,000 net rentable square feet, and Industrial Property leases
covering approximately 92,900 net rentable square feet. For the year ended
December 31, 1995, such leases had a weighted average annual base rent per net
rentable square foot of approximately $18.81 and $5.97, respectively. For the
nine-month period ended September 30, 1996, the Company entered into 31 Office
Property lease transactions for an aggregate of approximately 342,000 net
rentable square feet with a weighted average initial annual base rent per net
rentable square foot of approximately $19.52 (excluding the Thousand Oaks
Office Property where the Company entered into one lease transaction with an
initial annual base rent per net rentable square foot of $24.00). For the 12-
month period ending December 31, 1996, the Company entered into one Industrial
Property lease transaction for approximately 62,500 net rentable square feet
with an initial annual base rent per net rentable square foot of $6.36. See
"Business and Properties--General" and "--Lease Expirations."
Ground Leases. The Company's eight Office Properties located at Kilroy
Airport Center in Long Beach (assuming consummation of the acquisition of
Kilroy Long Beach Phase I concurrent with the consummation of the Offering)
and the SeaTac Office Center are held subject to ground leases. A default by
the Company under the terms of a ground lease could result in the loss of
Properties located on the respective parcel, with the landowner becoming the
owner of such Properties unless the default under the lease is cured or
waived. In addition, upon expiration of the ground leases, including the
options thereon, there is no assurance that the Company will be able to
negotiate new ground leases at all or, if any leases were renewed, that they
will be on terms consistent with or more favorable than existing terms, which
may result in the loss of the Properties or increased rental expense to the
Company. The ground leases for the Kilroy Airport Center Long Beach
26
<PAGE>
will expire in 2035. See "Business and Properties--Office Properties--Kilroy
Long Beach." The ground leases for the SeaTac Office Center (including renewal
options) will expire in 2062. See "Business and Properties--Office
Properties--SeaTac."
Capital Improvements. The Properties vary in age and require capital
improvements regularly. If the cost of improvements, whether required to
attract and retain tenants or to comply with governmental requirements,
substantially exceeds management's expectations, cash available for
distribution could be reduced.
Risks of Real Estate Acquisition and Development. The Company intends to
actively seek to acquire office and industrial properties to the extent that
they can be acquired on advantageous terms and meet the Company's investment
criteria. Acquisitions of office and industrial properties entail risks that
investments will fail to perform in accordance with expectations. Estimates of
the costs of improvements to bring an acquired property up to standards
established for the market position intended for that property may prove
inaccurate. In addition, there are general investment risks associated with
any new real estate investment.
In addition to the Development Properties, the Company will pursue other
development opportunities both for ownership by the Company and on a fee
basis. The real estate development business involves significant risks in
addition to those involved in the ownership and operation of established
office or industrial buildings, including the risks that financing may not be
available on favorable terms for development projects and construction may not
be completed on schedule or within budget, resulting in increased debt service
expense and construction costs and delays in leasing such properties and
generating cash flow. In addition, new development activities, regardless of
whether or not they are ultimately successful, typically require a substantial
portion of management's time and attention. Development activities are also
subject to risks relating to the inability to obtain, or delays in obtaining,
all necessary zoning, land-use, building, occupancy, and other required
governmental permits and authorizations.
The Company anticipates that future acquisitions and developments will be
financed, in whole or in part, through additional equity offerings, lines of
credit and other forms of secured or unsecured financing. If new developments
are financed through construction loans, there is a risk that, upon completion
of construction, permanent financing for newly developed properties may not be
available or may be available only on disadvantageous terms. Equity, rather
than debt, financing of future acquisitions or developments could have a
dilutive effect on the interests of existing stockholders of the Company.
While the Company has focused primarily on the development and ownership of
office and industrial properties, the Company plans in the future to develop
properties, part or all of which will be for retail use. In addition, while
the Company has historically limited its ownership of properties primarily to
the Southern California market, the Company in the future may expand its
business to geographic markets other than Southern California, where the
acquisition and/or development of property would, in the opinion of
management, result in a favorable risk-adjusted return on investment. The
Company will not initially possess the same level of familiarity with new
types of commercial development or new markets, which could adversely affect
its ability to acquire or develop properties in any new localities or to
realize expected performance.
Uninsured Loss. Management believes that the Properties are covered by
adequate comprehensive liability, rental loss and all-risk insurance provided
by reputable companies and with commercially reasonable deductibles, limits
and policy specifications customarily carried for similar properties. Certain
types of losses, however, may be either uninsurable or not economically
insurable, such as losses due to floods, riots or acts of war, or may be
insured subject to certain limitations including large deductibles or
copayments, such as losses due to seismic activity. See discussion of
uninsured losses from seismic activity below. Should an uninsured loss or a
loss in excess of insured limits occur, the Company could lose its investment
in and anticipated profits and cash flow from a property and would continue to
be obligated on any mortgage indebtedness or other obligations related to such
property. Any such loss would adversely affect the Company and its ability to
make distributions.
Uninsured Losses from Seismic Activity. The Properties are located in areas
that are subject to earthquake activity. Although the Company expects to have
earthquake insurance on a substantial portion of its Properties,
27
<PAGE>
such insurance will not be replacement cost and should any Property sustain
damage as a result of an earthquake, or should losses exceed the amount of
such coverage, the Company may incur uninsured losses or losses due to
deductibles or co-payments on insured losses. See "Business and Properties--
Uninsured Losses from Seismic Activity."
Risks Involved in Property Ownership Through Partnerships and Joint
Ventures. Although the Company will own fee simple interests in the Properties
(other than Kilroy Long Beach and the SeaTac Office Center, which are held
subject to long-term ground leases), in the future the Company may also
participate with other entities in property ownership through joint ventures
or partnerships. Partnership or joint venture investments may, under certain
circumstances, involve risks not otherwise present, including the possibility
that the Company's partners or co-venturers might become bankrupt, that such
partners or co-venturers might at any time have economic or other business
interests or goals which are inconsistent with the business interests or goals
of the Company, and that such partners or co-venturers may be in a position to
take action contrary to the instructions or the requests of the Company or
contrary to the Company's policies or objectives, including the Company's
policy with respect to maintaining its qualification as a REIT. The Company
will, however, seek to maintain sufficient control of such partnerships or
joint ventures to permit the Company's business objectives to be achieved.
There is no limitation under the Company's organizational documents as to the
amount of available funds that may be invested in partnerships or joint
ventures.
REAL ESTATE FINANCING RISKS. The Company will be subject to the risks
normally associated with debt financing, including the risk that the Company's
cash flow will be insufficient to meet required payments of principal and
interest, the risk that indebtedness on the Properties will not be refinanced
at maturity or that the terms of such refinancing will not be as favorable as
the terms of such indebtedness. If the Company were unable to refinance its
indebtedness on acceptable terms, or at all, the Company might be forced to
dispose of one or more of the Properties upon disadvantageous terms, which
might result in losses to the Company and might adversely affect the cash
available for distribution. If prevailing interest rates or other factors at
the time of refinancing result in higher interest rates on refinancings, the
Company's interest expense would increase, which would adversely affect the
Company's cash flow and its ability to pay expected distributions to
stockholders. Further, if a Property is mortgaged to secure payment of
indebtedness and the Company is unable to meet mortgage payments, or is in
default under the related mortgage or deed of trust, such Property could be
transferred to the mortgagee, the mortgagee could foreclose upon the Property,
appoint a receiver and receive an assignment of rents and leases or pursue
other remedies, all with a consequent loss of income and asset value to the
Company. Foreclosures could also create taxable income without accompanying
cash proceeds, thereby hindering the Company's ability to meet the REIT
distribution requirements of the Code. See "The Financing."
CHANGES IN INVESTMENT AND FINANCING POLICIES WITHOUT STOCKHOLDER
VOTE. Subject to the Company's fundamental investment policy to maintain its
qualification as a REIT (unless a change is approved by the Company's Board of
Directors and stockholders), the Company's Board of Directors will determine
its investment and financing policies, its growth strategy, and its debt,
capitalization, distribution and operating policies. Although the Board of
Directors has no present intention to revise or amend these strategies and
policies, the Board of Directors may do so at any time without a vote of the
Company's stockholders. See "Policies With Respect to Certain Activities--
Other Policies." Accordingly, stockholders will have no control over changes
in strategies and policies of the Company, and such changes may not serve the
interests of all stockholders and could adversely affect the Company's
financial condition or results of operations, including its ability to
distribute cash to stockholders.
Issuance of Additional Securities. The Company has authority to offer its
Common Stock or other equity or debt securities in exchange for property or
otherwise. Similarly, the Company may cause the Operating Partnership to offer
additional Units or preferred units of the Operating Partnership, including
offers in exchange for property to sellers who seek to defer certain of the
tax consequences relating to a property transfer. Existing stockholders will
have no preemptive right to acquire any such securities, and any such issuance
of equity securities could result in dilution in an existing stockholder's
investment in the Company.
28
<PAGE>
Risks Involved in Acquisitions Through Partnerships or Joint Ventures. The
Company may invest in office and industrial properties through partnerships or
joint ventures instead of purchasing such properties directly or through
wholly-owned subsidiaries. Partnership or joint venture investments may, under
certain circumstances, involve risks not otherwise present in a direct
acquisition of properties. These include the risk that the Company's co-
venturer or partner in an investment might become bankrupt; a co-venturer or
partner might at any time have economic or business interests or goals which
are inconsistent with the business interests or goals of the Company and a co-
venturer or partner might be in a position to take action contrary to the
instructions or the requests of the Company or contrary to the Company's
policies or objectives.
Risks Involved in Investments in Securities Related to Real Estate. The
Company may pursue its investment objectives through the ownership of
securities of entities engaged in the ownership of real estate. Ownership of
such securities may not entitle the Company to control the ownership,
operation and management of the underlying real estate. In addition, the
Company may have no ability to control the distributions with respect to such
securities, which may adversely affect the Company's ability to make required
distributions to stockholders. Furthermore, if the Company desires to control
an issuer of securities, it may be prevented from doing so by the limitations
on percentage ownership and gross income tests which must be satisfied by the
Company in order for the Company to qualify as a REIT. See "Federal Income Tax
Consequences--Taxation of the Company--Requirements for Qualification as a
REIT." The Company intends to operate its business in a manner that will not
require the Company to register under the Investment Company Act of 1940 and
stockholders will therefore not have the protection of that Act.
The Company may also invest in mortgages, and may do so as a strategy for
ultimately acquiring the underlying property. In general, investments in
mortgages include the risk that borrowers may not be able to make debt service
payments or pay principal when due, the risk that the value of the mortgaged
property may be less than the principal amount of the mortgage note securing
such property and the risk that interest rates payable on the mortgages may be
lower than the Company's cost of funds to acquire these mortgages. In any of
these events, Funds from Operations and the Company's ability to make required
distributions to stockholders could be adversely affected.
RISK OF OPERATIONS CONDUCTED THROUGH THE OPERATING PARTNERSHIP. The Company
will own and manage the Properties through its investment in the Operating
Partnership in which it will own an approximately 80.8% economic interest (or
an 82.9% interest if the Underwriters' over-allotment option is exercised in
full). The remaining interests in the Operating Partnership will be owned by
the Continuing Investors. Although the number of limited partnership Units was
designed to result in a distribution per Unit equal to a distribution per
share of Common Stock, such distributions would be equal only if the Company
distributes to stockholders all amounts it receives in distributions from the
Operating Partnership. See "Formation Transactions--Comparison of Common Stock
and Units." In addition, under the terms of the Partnership Agreement, the
limited partners of the Operating Partnership have certain approval rights
with respect to certain transactions that affect all stockholders. See "--
Conflicts of Interest--Certain Limited Partner Approval Rights."
INFLUENCE OF CERTAIN CONTINUING INVESTORS. John B. Kilroy, Sr., the
Company's Chairman of the Board of Directors, and John B. Kilroy, Jr., the
Company's President and Chief Executive Officer and one of its directors, will
own, together with the other Continuing Investors, Units exchangeable for
shares of Common Stock equal to approximately 19.2% of the total outstanding
shares (and, together with options exercisable for shares of Common Stock,
20.7% of the total outstanding shares). In addition, the Messrs. Kilroy will
hold two of the Company's five seats on the Board of Directors. Under the
terms of the Company's charter, no other stockholder presently is permitted to
own in excess of 7.0% of the Common Stock. In addition, although the Messrs.
Kilroy will not be able to take action on behalf of the Company without the
concurrence of other members of the Company's Board of Directors, they will,
for so long as limited partners of the Operating Partnership own at least 5%
of the outstanding Units, be able to block (i) the dissolution of the
Operating Partnership, or (ii) prior to the seventh anniversary of the
consummation of the Offering, the sale of the Office Property located at 2260
E. Imperial Highway at Kilroy Airport Center at El Segundo, in each case other
than incident to a merger or sale of all or substantially all of the Company's
assets, and be able to exert substantial influence over the Company's affairs.
29
<PAGE>
LIMITS ON OWNERSHIP AND CHANGE IN CONTROL. Certain provisions of the
Maryland General Corporation Law (the "MGCL") and the Company's Articles of
Incorporation and Bylaws, and certain provisions of the Operating
Partnership's partnership agreement, could have the effect of delaying,
deferring or preventing a change in control of the Company or the removal of
existing management and, as a result, could prevent the stockholders of the
Company from being paid a premium for their shares of Common Stock over then
prevailing market prices.
Limits on Ownership of Common Stock. In order for the Company to maintain
its qualification as a REIT, not more than 50% in value of the outstanding
shares of its capital stock may be owned, actually or constructively, by five
or fewer individuals (as defined in the Code to include certain entities)
during the last half of a taxable year (other than the first year for which
the election to be treated as a REIT has been made). Furthermore, after the
first taxable year for which a REIT election is made, the Company's shares
must be held by a minimum of 100 persons for at least 335 days of a 12-month
taxable year (or a proportionate part of a short tax year). In addition, if
the Company, or an owner of 10% or more of the Company, actually or
constructively, owns 10% or more of a tenant of the Company (or a tenant of
any partnership in which the Company is a partner), the rent received by the
Company (either directly or through any such partnership) from such tenant
will not be qualifying income for purposes of the REIT gross income tests of
the Code. See "Federal Income Tax Consequences--Taxation of the Company." In
order to protect the Company against the risk of losing REIT status due to a
concentration of ownership among its stockholders, the Articles of
Incorporation of the Company limit actual or constructive ownership of the
outstanding shares of Common Stock by any single stockholder to 7.0% (the
"Ownership Limit") of the then outstanding shares of Common Stock. See
"Description of Capital Stock--Restrictions on Ownership and Transfer." The
Board of Directors will consider waiving the Ownership Limit with respect to a
particular stockholder if it is satisfied, based upon the advice of tax
counsel or otherwise, that ownership by such stockholder in excess of the
Ownership Limit would not jeopardize the Company's status as a REIT and the
Board of Directors otherwise decided such action would be in the best
interests of the Company. The Board of Directors has waived the Ownership
Limit with respect to John B. Kilroy, Sr., John B. Kilroy, Jr., members of
their families and certain affiliated entities and has permitted such
individuals and entities to actually or constructively own, in the aggregate,
up to 21% of the outstanding Common Stock.
Actual or constructive ownership of shares of Common Stock in excess of the
Ownership Limit, or, with the consent of the Board of Directors, such other
limit, will cause the violative transfer or ownership to be void with respect
to the transferee or owner as to that number of shares in excess of the
Ownership Limit, or, with the consent of the Board of Directors, such other
limit, as applicable, and such shares will be automatically transferred to a
trust for the benefit of a qualified charitable organization. Such purported
transferee or owner shall have no right to vote such shares or be entitled to
dividends or other distributions with respect to such shares. See "Description
of Capital Stock--Restrictions on Ownership and Transfer" for additional
information regarding the Ownership Limit.
Staggered Board. Following the consummation of the Offering, the Board of
Directors of the Company will be divided into three classes serving staggered
three-year terms. The terms of the first, second and third classes will expire
in 1998, 1999 and 2000, respectively. Directors for each class will be chosen
for a three-year term upon the expiration of the current class' term,
beginning in 1998. In addition, the Articles of Incorporation authorize the
Board of Directors to issue up to 150,000,000 shares of Common Stock and
30,000,000 shares of preferred stock and to establish the rights and
preferences of any shares of preferred stock issued. No shares of preferred
stock will be issued or outstanding at the consummation of the Offering. See
"Description of Capital Stock--Preferred Stock." Under the Articles of
Incorporation, stockholders do not have cumulative voting rights.
The Ownership Limit, the staggered terms for directors, the issuance of
additional common or preferred stock in the future and the absence of
cumulative voting rights could have the effect of (i) delaying or preventing a
change of control of the Company even if a change of control were in the
stockholders' interest, (ii) deterring tender offers for the Common Stock that
may be beneficial to the stockholders, or (iii) limiting the opportunity for
stockholders to receive a premium for their Common Stock that might otherwise
exist if an investor attempted
30
<PAGE>
to assemble a block of shares of Common Stock in excess of the Ownership Limit
or otherwise to effect a change of control of the Company. See "Management"
and "Description of Capital Stock."
DEPENDENCE ON KEY PERSONNEL. The Company is dependent on the efforts of its
executive officers and directors, particularly John B. Kilroy, Sr., the
Company's Chairman of the Board, and John B. Kilroy, Jr., the Company's
President and Chief Executive Officer, for strategic business direction and
experience in the Southern California real estate market. While the Company
believes that it could find replacements for these key personnel, the loss of
their services could have an adverse effect on the operations of the Company.
The Company has entered into employment agreements with John B. Kilroy, Jr.,
Jeffrey C. Hawken, Richard E. Moran Jr. and Campbell Hugh Greenup. See
"Management--Employment Agreements."
DISTRIBUTION PAYOUT PERCENTAGE. The Company's expected annual distributions
for the 12 months following consummation of the Offering of $1.55 per share
are expected to be approximately 93.6% of estimated cash available for
distribution. If cash available for distribution generated by the Company's
assets for such 12-month period is less than the Company's estimate, or if
such cash available for distribution decreases in future periods from expected
levels, the Company's ability to make the expected distributions would be
adversely affected. Any such failure to make expected distributions could
result in a decrease in the market price of the Common Stock. See
"Distribution Policy."
HISTORICAL OPERATING LOSSES OF THE OFFICE AND INDUSTRIAL
PROPERTIES. Although the Office and Industrial Properties developed by the
Company after their construction and initial lease-up periods have
historically generated positive net cash flow, the effect of depreciation,
amortization and other non-cash charges of the Company has resulted in net
losses for financial reporting purposes in each of the last five fiscal years.
Historical operating results of the Office and Industrial Properties may not
be comparable to future operating results of the Company because, prior to the
completion of the Offering and the Formation Transactions, the Office and
Industrial Properties were encumbered with greater levels of debt (which has
the effect of reducing net income) than that with which the Company intends to
operate. In addition, the historical results of operations do not reflect the
acquisition and development of any of the Acquisition Properties or the
Development Properties. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations." However, there can be no assurance that
the Company will acquire the Acquisition Properties or acquire and
successfully develop any of the Development Properties, and, even if such
Properties are acquired and successfully developed, that they will not
experience losses in the future.
NO LIMITATION ON DEBT. The Board of Directors currently intends to fund
acquisition opportunities and development partially through short-term
borrowings, as well as out of undistributed cash available for distribution
and other available cash. The Board of Directors expects to refinance projects
purchased or developed with short-term debt either with long-term indebtedness
or equity financing depending upon the economic conditions at the time of
refinancing. Upon completion of the Offering and the Formation Transactions,
the debt to total market capitalization ratio of the Company will be
approximately 25.5% (assuming an initial public offering price of $20.00 per
share of Common Stock). The Board of Directors has adopted a policy of
limiting its indebtedness to approximately 50% of its total market
capitalization (i.e., the market value of the issued and outstanding shares of
Common Stock, including interests exchangeable therefor, plus total debt), but
the organizational documents of the Company do not contain any limitation on
the amount or percentage of indebtedness, funded or otherwise, that the
Company may incur. The Board of Directors, without the vote of the Company's
stockholders, could alter or eliminate its current policy on borrowing at any
time at its discretion. If this policy were changed, the Company could become
more highly leveraged, resulting in an increase in debt service that could
adversely affect the Company's cash flow and its ability to make expected
distributions to its stockholders and an increased risk of default on the
Company's obligations. See "Policies With Respect to Certain Activities--
Financing."
The Company has established its debt policy relative to the market
capitalization of the Company rather than to the book value of its assets, a
ratio that is frequently employed. The Company has used total market
capitalization because it believes that the book value of its assets (which to
a large extent is the depreciated value
31
<PAGE>
of real property, the Company's primary tangible asset) does not accurately
reflect its ability to borrow and to meet debt service requirements. The total
market capitalization of the Company, however, is more variable than book
value, and does not necessarily reflect the fair market value of the
underlying assets of the Company at all times. Although the Company will
consider factors other than total market capitalization in making decisions
regarding the incurrence of indebtedness (such as the purchase price of
properties to be acquired with debt financing, the estimated market value of
such properties upon refinancing and the ability of particular properties and
the Company as a whole to generate cash flow to cover expected debt service),
there can be no assurance that the ratio of indebtedness to total market
capitalization (or to any other measure of asset value) will be consistent
with the expected level of distributions to the Company's stockholders.
GOVERNMENT REGULATIONS. Many laws and governmental regulations are
applicable to the Properties and changes in these laws and regulations, or
their interpretation by agencies and the courts, occur frequently.
Costs of Compliance with Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation, effective beginning in 1992, are required to meet certain
federal requirements related to access and use by disabled persons. Compliance
with the ADA might require removal of structural barriers to handicapped
access in certain public areas where such removal is "readily achievable."
Noncompliance with the ADA could result in the imposition of fines or an award
of damages to private litigants. The impact of application of the ADA to the
Company's properties, including the extent and timing of required renovations,
is uncertain. If required changes involve a greater amount of expenditures
than the Company currently anticipates or if the changes must be made on a
more accelerated schedule than the Company currently anticipates, the
Company's ability to make expected distributions to stockholders could be
adversely affected.
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations relating to the protection of the environment, an
owner or operator of real estate may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose liability without regard to whether the
owner was responsible for, or even knew of, the presence of such hazardous or
toxic substances. The costs of investigation, removal or remediation of such
substances may be substantial, and the presence of such substances may
adversely affect the owner's ability to rent or sell the property or to borrow
using such property as collateral and may expose it to liability resulting
from any release of or exposure to such substances. Persons who arrange for
the disposal or treatment of hazardous or toxic substances at another location
may also be liable for the costs of removal or remediation of such substances
at the disposal or treatment facility, whether or not such facility is owned
or operated by such person. Certain environmental laws impose liability for
release of asbestos-containing materials into the air, and third parties may
also seek recovery from owners or operators of real properties for personal
injury associated with asbestos-containing materials and other hazardous or
toxic substances. In connection with the ownership (direct or indirect),
operation, management and development of real properties, the Company may be
considered an owner or operator of such properties or as having arranged for
the disposal or treatment of hazardous or toxic substances and, therefore,
potentially liable for removal or remediation costs, as well as certain other
related costs, including governmental penalties and injuries to persons and
property.
The Company believes that the Properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products. The Company has
not been notified by any governmental authority, and is not otherwise aware,
of any material noncompliance, liability or claim relating to hazardous or
toxic substances or petroleum products in connection with any of its present
properties.
All of the Properties were subject to Phase I or similar environmental
assessments by independent environmental consultants in connection with the
formation of the Company. Phase I assessments are intended to discover
information regarding, and to evaluate the environmental condition of, the
surveyed property and surrounding properties. Phase I assessments generally
include an historical review, a public records review, an investigation of the
surveyed site and surrounding properties, and preparation and issuance of a
written report,
32
<PAGE>
but do not include soil sampling or subsurface investigations. In connection
with the preparation of the Phase I environmental survey with respect to
Kilroy Long Beach Phase I, interviews of certain individuals formerly employed
at the site documented in a historical site assessment survey revealed the
site's possible prior use as a Nike air defense command center or missile
facility. Further investigation performed by the Company's environmental
consultants and by the Company did not reveal any additional information with
respect to such use of the site. The Company's investigation included whether
the site might have been used previously for the storage of missiles
containing nuclear warheads, and did not reveal any facts that would indicate
that the prior use of the site would result in a material risk of
environmental liability. Consequently, the Company does not believe that this
site constitutes a risk of a liability that would have a material adverse
effect on the Company's financial condition or results of operations taken as
a whole. In connection with the preparation of the Phase I environmental
survey with respect to the Industrial Property located at 12752-12822 Monarch
Street, soil sampling revealed trace elements of contamination with cleaning
solvents. However, based on the level of contamination noted in the
environmental survey, management does not believe that such contamination will
have a material adverse effect on the Company's financial condition or results
of operations taken as a whole.
None of the Company's environmental assessments of the other Properties has
revealed any environmental liability that the Company believes would have a
material adverse effect on the Company's financial condition or results of
operations taken as a whole, nor is the Company aware of any such material
environmental liability. Nonetheless, it is possible that the Company's
assessments do not reveal all environmental liabilities or that there are
material environmental liabilities of which the Company is unaware. Moreover,
there can be no assurance that (i) future laws, ordinances or regulations will
not impose any material environmental liability or (ii) the current
environmental condition of the Properties will not be affected by tenants, by
the condition of land or operations in the vicinity of the Properties (such as
the presence of underground storage tanks), or by third parties unrelated to
the Company. If compliance with the various laws and regulations, now existing
or hereafter adopted, exceeds the Company's budgets for such items, the
Company's ability to make expected distributions to stockholders could be
adversely affected.
Other Regulations. The Properties are also subject to various federal, state
and local regulatory requirements such as state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. The Company believes that the Properties are currently in
compliance with all such regulatory requirements. However, there can be no
assurance that these requirements will not be changed or that new requirements
will not be imposed which would require significant unanticipated expenditures
by the Company and could have an adverse effect on the Company's Funds from
Operations and expected distributions.
The City of Los Angeles has enacted certain regulations relating to the
repair of welded steel moment frame buildings located in certain areas damaged
as a result of the Southern California Northridge earthquake on January 17,
1994. Such regulations do not apply to the Properties. There can be no
assurance, however, that similar regulations will not be adopted by
governmental agencies with the ability to regulate the Properties or that
other requirements affecting the Properties will not be imposed which would
require significant unanticipated expenditures by the Company and could have
an adverse effect on the Company's Funds from Operations and cash available
for distribution. The Company believes, based in part on recent engineering
reports, that its Properties are in good condition. See "Business and
Properties--Uninsured Losses from Seismic Activity."
IMMEDIATE AND SUBSTANTIAL DILUTION. As set forth more fully under
"Dilution," as of September 30, 1996, the Properties to be contributed by the
Kilroy Group in exchange for Units in the Operating Partnership had a pro
forma net tangible book value for financial reporting purposes (giving effect
to the Offering) of approximately $81.3 million, or $7.16 per share of Common
Stock. As a result, the pro forma net book value per share of Common Stock of
the Company after the consummation of the Offering and the Formation
Transactions will be less than the assumed initial public offering price of
$20.00 per share. The purchasers of Common Stock offered hereby will
experience immediate and substantial dilution of $12.84 per share of Common
Stock (based on the assumed initial public offering price) in the net tangible
book value of the shares of Common Stock. See "Dilution."
33
<PAGE>
NO PRIOR PUBLIC MARKET. Prior to the Offering, there has been no public
market for the Common Stock, and there can be no assurance that an active
trading market will develop as a result of the Offering or, if a trading
market does develop, that it will be sustained or that the shares of Common
Stock will be resold at or above the initial public offering price. The market
for equity securities can be volatile and the trading price of the Common
Stock could be subject to wide fluctuations in response to operating results,
news announcements, trading volume, general market trends, changes in interest
rates, governmental regulatory action and changes in tax laws. The initial
public offering price of the Common Stock offered hereby will be determined
through negotiations between the Company and the representatives (the
"Representatives") of the Underwriters. Among the factors to be considered in
such negotiations, in addition to prevailing market conditions, will be
distribution rates and Funds from Operations of publicly traded REITs that the
Company and the Representatives believe to be comparable to the Company,
estimates of the business potential and earnings prospects of the Company, and
the current state of the Company's industry and the economy as a whole. The
assumed initial public offering price does not necessarily bear any
relationship to the Company's book value, assets, financial condition or any
other established criteria of value and may not be indicative of the market
price for the Common Stock after the Offering. See "Underwriting."
EFFECT OF MARKET INTEREST RATES ON PRICE OF COMMON STOCK. One of the factors
that will influence the market price of the Common Stock in public markets
will be the annual yield on the price paid for shares from distributions by
the Company. An increase in prevailing market interest rates on fixed income
securities may lead prospective purchasers of the Common Stock to demand a
higher annual yield from future distributions. Such an increase in the
required yield from distributions may adversely affect the market price of the
Common Stock.
SHARES AVAILABLE FOR FUTURE SALE. No prediction can be made as to the
effect, if any, that future sales of shares, or the availability of shares for
future sale, will have on the market price of the Common Stock. Sales of
substantial amounts of shares of Common Stock in the public market (or upon
exchange of Units) or the perception that such sales might occur could
adversely affect the market price of the shares of Common Stock.
Upon the consummation of the Offering and the Formation Transactions, the
Company will have 11,360,000 shares of Common Stock outstanding (including
60,000 restricted shares of Common Stock issued to an officer of the Company
who is not a Continuing Investor and excluding 1,695,000 shares of Common
Stock subject to the Underwriters' over-allotment option), of which all but
the 60,000 restricted shares of Common Stock will be freely tradeable in the
public market by persons other than "affiliates" of the Company without
restriction or registration under the Securities Act. The Common Stock issued
to an officer and all of the shares of Common Stock that are issuable upon the
redemption of Units will be deemed to be "restricted securities" within the
meaning of Rule 144 under the Securities Act and may not be transferred unless
registered under the Securities Act or an exemption from registration is
available, including any exemption from registration provided under Rule 144
of the Securities Act. In general, upon satisfaction of certain conditions,
Rule 144 of the Securities Act permits the sale of certain amounts of
restricted securities two years following the date of acquisition of the
restricted securities from the Company and, after three years, permits
unlimited sales by persons unaffiliated with the Company.
It is expected that the Operating Partnership will issue an aggregate of
2,692,374 Units to executive officers, directors and other Continuing
Investors in connection with the formation of the Company which, after two
years following the receipt of such Units, may be redeemed by the Operating
Partnership at the request of the holders for cash (based on the fair market
value of an equivalent number of shares of Common Stock at the time of such
redemption) or, at the Company's option, exchanged for an equal number of
shares of Common Stock, subject to certain antidilution adjustments and, with
respect to 50% of the Units to be issued to John B. Kilroy, Sr., John B.
Kilroy, Jr. and Kilroy Industries, the obligation of such Continuing Investors
to indemnify the Company in connection with the Formation Transactions. See
"Formation and Structure of the Company--Allocation of Consideration in the
Formation Transactions." However, if the Company does not elect to exchange
such Units for shares, a Continuing Investor that is a corporation or a
limited liability company may require the Company to issue shares of Common
Stock in lieu of cash, subject to the Ownership Limit or, with the consent of
the
34
<PAGE>
Board of Directors, such other limit which does not result in the failure of
the Company to qualify as a REIT. See "Formation and Structure of the Company"
and "Shares Available for Future Sale--Redemption Rights/Exchange
Rights/Registration Rights." It is expected that immediately after the
Offering the Company will grant options to purchase an aggregate of
approximately 900,000 shares of Common Stock at the initial public offering
price to certain directors, executive officers and other employees of the
Company and an additional approximately 500,000 shares of Common Stock will be
reserved for issuance as restricted shares of Common Stock or upon the
exercise of options granted under the Stock Incentive Plan. See "Management--
Stock Incentive Plan." In addition, the Company may issue from time to time
additional shares of Common Stock or Units in connection with the acquisition
of properties, including the possible issuance of Units upon the exercise of
options to acquire the Excluded Properties. See "The Company--Growth
Strategies" and "Business and Properties--Development, Management and Leasing
Activities--Excluded Properties." The Company has agreed to file and generally
keep continuously effective beginning two years after the completion of the
Offering a registration statement covering the issuance of shares upon the
exchange of Units and the resale thereof and has agreed to provide piggyback
registration rights with respect to shares of Common Stock which may be
acquired by the Continuing Investors and certain other persons. See "Shares
Available for Future Sale." The Company also anticipates that it will file a
registration statement with respect to the shares of Common Stock issuable
under the Stock Incentive Plan following the consummation of the Offering.
Such registration statements and registration rights generally will allow
shares of Common Stock covered thereby, including shares of Common Stock
issuable upon exchange of Units or the exercise of options or restricted
shares of Common Stock to be transferred or resold without restriction under
the Securities Act.
In addition to the limits placed on the sale of shares of Common Stock by
operation of Rule 144 and other provisions of the Securities Act, (i) each of
the Continuing Investors has agreed not to, directly or indirectly, offer,
sell, offer to sell, contract to sell, pledge, grant any option to purchase or
otherwise sell or dispose (or announce any offer, sale, offer of sale,
contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any Units or shares of Common Stock or other capital stock of
the Company, or any securities convertible or exercisable or exchangeable for
any Units or shares of Common Stock or other capital stock of the Company for
a period of two years from the date of this Prospectus, and (ii) the Company
has agreed not to offer, sell, offer to sell, contract to sell, pledge, grant
any option to purchase or otherwise sell or dispose (or announce any offer,
sale, offer of sale, contract of sale, pledge, grant of any option to purchase
or other sale or disposition) of any (other than pursuant to the Stock
Incentive Plan) shares of Common Stock or other capital stock of the Company,
or any securities convertible or exercisable or exchangeable for any Units or
shares of Common Stock or other capital stock of the Company, for a period of
180 days from the date of this Prospectus, in each case without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, subject to certain limited exceptions. At the conclusion of the
two-year period referenced in clause (i) above, Common Stock issued upon the
subsequent exchange of Units may be sold in the public market pursuant to the
registration rights described above. Notwithstanding the foregoing, 50% of the
Units received by John B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy
Industries in connection with the Formation Transactions will be pledged to
secure their indemnification obligations pursuant to an agreement with the
Company. See "Formation and Structure of the Company." Future sales of the
shares of Common Stock described above could have an adverse effect on the
market price of the shares of Common Stock and the existence of Units,
options, shares of Common Stock reserved for issuance as restricted shares of
Common Stock or upon exchange of Units and the exercise of options and
registration rights referred to above may adversely affect the terms upon
which the Company may be able to obtain additional capital through the sale of
equity securities. See "Shares Available for Future Sale" and "Underwriting."
Such sales may be increased or accelerated to the extent that the Continuing
Investors have personal obligations, including obligations for taxes, which
may arise as a result of the Formation Transactions or prior transactions.
35
<PAGE>
FORMATION AND STRUCTURE OF THE COMPANY
Kilroy Realty was formed in September 1996 and the Operating Partnership was
formed in October 1996. The Services Company will be formed prior to
consummation of the Offering.
FORMATION TRANSACTIONS
Prior to or simultaneous with the consummation of the Offering, the Company,
the Operating Partnership, the Services Company and the Continuing Investors
will engage in the Formation Transactions designed to enable the Company to
continue and expand the real estate operations of KI, to facilitate the
Offering, to enable the Company to qualify as a REIT for federal income tax
purposes commencing with its taxable year ending December 31, 1997 and to
preserve certain tax advantages for the existing owners of the Properties. The
Formation Transactions are as follows:
. Pursuant to the Omnibus Agreement, the Operating Partnership may require
the contribution to the Operating Partnership of all of the Continuing
Investors' interests in the Properties (other than the Acquisition
Properties), the assets used to conduct the leasing, management and
development activities (principally office equipment), the assignment of
contract rights in connection with development opportunities at Kilroy
Airport Center Long Beach, and the rights with respect to the purchase
of each of the Acquisition Properties, in exchange for Units
representing limited partnership interests in the Operating Partnership.
The book value to the Continuing Investors of the assets to be
contributed to the Operating Partnership is a negative $113.2 million
and the value of the Units representing limited partnership interests in
the Operating Partnership to be received by the Continuing Investors is
$53.8 million, assuming a Unit value equal to the assumed initial public
offering price of $20.00 per share. Pursuant to the terms of the Omnibus
Agreement, the Operating Partnership has the right to acquire the
Properties and the other assets described above from the Continuing
Investors in exchange for Units through December 31, 1998, the date the
Omnibus Agreement terminates. Following the consummation of the Offering
and the Formation Transactions, the Units received by the Continuing
Investors will constitute in the aggregate an approximately 19.2%
limited partnership interest in the Operating Partnership.
. John B. Kilroy, Sr. and John B. Kilroy, Jr. will acquire all of the
voting common stock of the Services Company for the aggregate purchase
price of $5,275 in cash (representing 5.0% of its economic value), and
the Operating Partnership will acquire all of the non-voting preferred
stock of the Services Company (representing 95.0% of its economic
value).
. The Company will sell shares of Common Stock in the Offering, issue
restricted shares of Common Stock to Richard E. Moran Jr., Executive
Vice President, Chief Financial Officer and Secretary of the Company
(but not a Continuing Investor) and contribute the net proceeds from the
Offering and the issuance of such restricted stock (approximately $206.6
million in the aggregate) to the Operating Partnership in exchange for
an 80.8% general partner interest in the Operating Partnership.
. The Company, through the Operating Partnership, will borrow
approximately $84.0 million principal amount of long-term financing and
$12.0 million principal amount of short-term debt pursuant to the
Mortgage Loans.
. The Operating Partnership will apply the aggregate of the net Offering
proceeds and the Mortgage Loans toward the repayment of existing
mortgage indebtedness on certain of the Properties, the purchase of the
Acquisition Properties and payment of its expenses arising in connection
with the Offering and the Financing. See "Use of Proceeds."
. Forty-seven of the current 69 employees of KI will become employees of
the Company, the Operating Partnership and/or the Services Company,
including John B. Kilroy, Jr., the President and Chief Executive Officer
of KI, three other executive officers (Mr. Jeffrey Hawken, Executive
Vice President and Chief Operating Officer, Mr. Richard E. Moran Jr.,
Executive Vice President, Chief Financial
36
<PAGE>
Officer and Secretary, and Mr. Campbell Hugh Greenup, General Counsel)
who are not Continuing Investors and 43 other operating and
administrative employees. See "Management."
. The Operating Partnership or the Services Company will enter into
Management Agreements with respect to each of the Excluded Properties.
Pursuant to the terms of each of the Management Agreements, the
Operating Partnership or the Services Company, as applicable, will have
exclusive control and authority (subject to an operating budget to be
approved by the owners of each property) over each of the Excluded
Properties for a term of 24 months. If any of the Excluded Properties
are sold during the term of the Management Agreements, then either party
may terminate the respective Management Agreement with respect to the
property being sold upon 30 days' prior written notice. In consideration
of the services to be provided under the Management Agreements, the
Company will receive a monthly property management fee as well as any
applicable leasing commissions. See "Business and Properties--Excluded
Properties."
. Concurrent with the consummation of the Offering, the Company will enter
into Option Agreements with partnerships controlled by John B. Kilroy,
Sr. and John B. Kilroy, Jr. granting to the Operating Partnership the
exclusive right to acquire (i) the approximately 18 undeveloped acres
located at Calabasas Park Centre for cash and (ii) the office property
located at North Sepulveda Boulevard, El Segundo for cash (or for Units
after the first anniversary of the Offering at the election of the
seller), and in each case pursuant to the other terms of the respective
Option Agreement. See "Business and Properties--Excluded Properties--
Calabasas Park Centre" and "--North Sepulveda Boulevard, El Segundo" for
a discussion of the purchase price and other material terms of each
Option Agreement.
As a result of the foregoing transactions, the Company will own 11,360,000
Units of the Operating Partnership (including 60,000 Units attributable to the
issuance by the Company of 60,000 restricted shares of Common Stock to Mr.
Moran), which will represent an approximately 80.8% economic interest in the
Operating Partnership, and the Continuing Investors will own 2,692,374 Units,
which will represent the remaining approximately 19.2% economic interest in
the Operating Partnership. If the Underwriters' over-allotment option is
exercised in full and the net proceeds from the additional shares of Common
Stock sold by the Company are contributed to the Operating Partnership, the
Company's percentage ownership interest in the Operating Partnership will
increase to approximately 82.9%. The Company will be the sole general partner
and retain management control over the Operating Partnership.
Holders of Units will have the opportunity after two years following the
receipt of such Units to have their Units redeemed by the Operating
Partnership at the request of the Unitholder for cash (based on the fair
market value of an equivalent number of shares of Common Stock at the time of
such redemption) or, at the Company's option, it may exchange Units for shares
of Common Stock on a one-for-one basis, subject to certain antidilution
adjustments and the obligation of certain of the Continuing Investors to
indemnify the Company in connection with the Formation Transactions, provided,
however, that if the Company does not elect to exchange such Units for shares
of Common Stock, a Unitholder that is a corporation or limited liability
company may require the Company to issue shares of Common Stock in lieu of
cash, subject to the Ownership Limit or such other limit as provided in the
Company's Articles of Incorporation, as applicable. See "Formation and
Structure of the Company--Allocation of Consideration in the Formation
Transactions," Under certain circumstances, 50% of the Units received by John
B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries may be redeemed
prior to the second anniversary of the consummation of the Offering in
connection with the obligation of such Continuing Investors to indemnify the
Company in connection with the Formation Transactions. See "--Allocation of
Consideration in the Formation Transactions."
The Continuing Investors are comprised of (i) seven individuals, John B.
Kilroy, Sr., his five children, John B. Kilroy, Jr., Patrice Bouzaid, Susan
Hahn, Anne McCahon and Dana Pantuso, and Marshall L. McDaniel, a long-time
employee of KI, all of whom are "accredited investors" as defined in
Regulation D, and (ii) corporations, partnerships and trusts owned, directly
or indirectly, solely by such individuals, all of which are also "accredited
investors." See "Note 1. Organization and Basis of Presentation" to the
historical financial statements of the Kilroy Group. In addition, John B.
Kilroy, Sr. is the Company's Chairman of the Board of
37
<PAGE>
Directors and John B. Kilroy, Jr. is President and Chief Executive Officer and
a director of the Company. Consent of the Continuing Investors to the
Formation Transactions was received on or before November 3, 1996 pursuant to
a private solicitation thereof in compliance with Regulation D.
REASONS FOR THE REORGANIZATION OF THE COMPANY
The Company believes that the benefits of the Formation Transactions
outweigh the detriments to the Company. The benefits of the Company's REIT
status and structure, as opposed to the status and structure of the
Partnerships, include the following:
. Access to Capital. The Company's structure will, in the Company's
judgment, provide it with greater access to capital for refinancing and
growth. Sources of capital include the Common Stock sold in the Offering
and possible future issuances of debt or equity through public offerings
or private placements. The financial strength of the Company should
enable it to obtain financing at better rates and on better terms than
would otherwise be available to the Partnerships, some of which are
single asset entities.
. Growth of the Company. The Company's structure will allow stockholders,
including the Continuing Investors through their ownership of Units, an
opportunity to participate in the growth of the real estate market
through an ongoing business enterprise. In addition to the existing
portfolio of Properties, the Company gives stockholders an interest in
all future development by the Company and in the fee-producing service
businesses being contributed by the Company to the Services Company.
. Risk Diversification. The Company's structure provides stockholders a
diversification of risk and reward not available in single asset
entities by providing them with an equity interest in a REIT in which
there has been a pooling together of similar properties and by
consolidating the operating business and future development projects.
. Deleveraging. Upon completion of the Offering and the Formation
Transactions, the Company will have substantially reduced the debt
encumbering the Properties. This reduction, with a consequent reduction
in debt service, will increase the aggregate amount of cash available
for distribution to stockholders. The Formation Transactions also will
permit the Company to refinance its existing indebtedness at more
favorable rates.
. Liquidity. The equity interests in the Partnerships are typically not
marketable. The Company's structure allows stockholders, including the
Continuing Investors, the opportunity to liquidate their capital
investment through the disposition of Common Stock or Units. Beginning
on the second anniversary of the consummation of the Offering, holders
of Units will have the opportunity to have their Units redeemed by the
Operating Partnership for cash equal to the value of an equal number of
shares of Common Stock, or the Company may elect to exchange such Units
for an equivalent number of shares of Common Stock, provided, however,
if the Company does not elect to exchange such units for shares of
Common Stock, a holder of Units that is a corporation or limited
liability company may require the Company to issue Common Stock in lieu
thereof, subject to the Ownership Limit or such other limit as provided
in the Company's Articles of Incorporation, as applicable.
. Public Market Valuation of Real Estate Assets. The Company's structure
may allow investors to benefit potentially from the current public
market valuation of REITs, which management believes is favorable in
light of the current private market valuation of comparable assets.
. Tax Deferral. The Formation Transactions provide to the Continuing
Investors the opportunity to defer the tax consequences that would arise
from a sale or contribution of their interests in the Properties and
other assets to the Company or to a third party.
The detriments of the Company's REIT status and structure as opposed to the
status and structure of the Partnerships include the following (see also "Risk
Factors"):
. Conflicts of Interest. Management of the Company will be subject to a
number of conflicts of interest in the operation of the Operating
Partnership as well as the formation of the Company. Among other
38
<PAGE>
conflicts, there will be no independent valuation or appraisal of the
Properties, and no arm's-length negotiation of the terms of the option
agreements relating to the Excluded Properties, and there can be no
assurance that the value given to the Continuing Investors by the
Company for such assets is equal to their fair market value. Because
John B. Kilroy, Sr. and John B. Kilroy, Jr. will be directors or
officers of the Company, they will have a conflict of interest with
respect to enforcing the agreements transferring their interest in
certain assets to the Company. In addition, because the Continuing
Investors and officers of the Company may suffer different tax
consequences than the Company upon the sale or refinancing of any of the
Properties, their interests regarding the timing and pricing of such
sale or refinancing may conflict with those of the Company. So long as
the Continuing Investors own more than 5% of the outstanding Units, the
Continuing Investors will be able to veto or preclude the sale of the
Office Property located at 2260 E. Imperial Highway at Kilroy Airport
Center at El Segundo at any time prior to the seventh anniversary of the
Offering. In addition, the Company is required to use its commercially
reasonable efforts to structure any merger, consolidation or other
business combination, any sale or other disposition of all or
substantially all of its assets, or any reclassification,
recapitalization or change of its outstanding equity interests, to avoid
causing the limited partners to recognize gain for federal income tax
purposes by virtue of the occurrence of or their participation in such
transaction. The Operating Partnership will also use commercially
reasonable efforts to cooperate with the limited partners to minimize
any taxes payable in connection with any repayment, refinancing,
replacement or restructuring of indebtedness, or any sale, exchange or
any other disposition of assets, of the Operating Partnership. See
"Partnership Agreement of the Operating Partnership--Certain Limited
Partner Approval Rights."
. Consent Rights of Limited Partners. The Company will be the sole general
partner of the Operating Partnership and will own and control 80.8% of
the ownership interests in the Operating Partnership. However, under the
terms of the Partnership Agreement, the Company may not withdraw as
general partner of the Operating Partnership or transfer or assign its
interest in the Operating Partnership without the consent of partners
holding in the aggregate at least 60% of all interests in the Operating
Partnership. See "Partnership Agreement of the Operating Partnership--
Transferability of Interests". In addition, until the seventh
anniversary of the Offering the general partner of the Operating
Partnership will not be able to dissolve the Operating Partnership, or
sell the Office Property located at 2260 E. Imperial Highway at Kilroy
Airport Center at El Segundo, without the consent of limited partners
holding in the aggregate more than 50% of all Units representing limited
partnership interests in the Operating Partnership, provided that the
limited partners own at least 5% of the outstanding Units (including
Units owned by the Company). See "Partnership Agreement of the Operating
Partnership--Certain Limited Partner Approval Rights". As a consequence
of the exercise of these consent and approval rights, the Company may be
precluded from taking action that the Board of Directors believes is in
the best interest of all stockholders. See "Partnership Agreement of the
Operating Partnership--Transferability of Interests" and "--Certain
Limited Partner Approval Rights."
. Influence of Certain Continuing Investors. John B. Kilroy, Sr., the
Company's Chairman of the Board of Directors, and John B. Kilroy, Jr.,
the Company's President and Chief Executive Officer and one of its
directors, will own, together with the other Continuing Investors, Units
exchangeable for shares of the Common Stock equal to approximately 19.2%
of the total outstanding shares. In addition, the Messrs. Kilroy will
hold two of the Company's five seats on the Board of Directors. Under
the terms of the Company's charter, no other stockholder presently is
permitted to own in excess of 7.0% of the Common Stock. Consequently,
although the Messrs. Kilroy will not be able to take action on behalf of
the Company without the concurrence of other members of the Company's
Board of Directors, they will be able to block certain transactions by
the Operating Partnership and exert substantial influence over the
Company's affairs.
. Loss of Individual Asset Growth Opportunity. Any given asset may over
time outperform the Common Stock. Any investor who exchanges an interest
in a single asset for a smaller interest in a
39
<PAGE>
group of assets will receive a lower return on investment if the asset
from which the investor traded outperforms the Common Stock.
. No Anticipated Distributions from Asset Sales. Unlike the Partnerships,
in which the net proceeds from the sale of assets were generally
distributed to the partners, the Company is not expected to have
significant asset sales. Moreover, the Company may decide to reinvest
the proceeds from asset sales rather than distribute them to
stockholders. Although stockholders will have the ability to sell their
shares of Common Stock (subject to certain restrictions discussed
herein), they would not be able to rely upon the mere passage of time to
realize their share of the gains, if any, that might be recognized at
any point in time from a liquidation of all or part of the assets of the
Company.
. Public Market Valuation. Although the public market may value real
estate assets on a basis that is attractive in relation to private
market real estate values, there is no assurance that this condition, if
it exists, will continue. In the 1980s, REIT shares generally traded at
a discount to the underlying private market values of the REIT
properties, rather than at a premium. This condition could return. In
addition, an increase in interest rates could adversely affect the
market value of the shares of Common Stock.
. Costs of the Transaction. The aggregate expenses of the Offering,
including the underwriting discount, are expected to be approximately
$19.4 million, assuming gross proceeds of the Offering of approximately
$226.0 million. In addition, the Operating Partnership will incur costs
of approximately $1.8 million in the aggregate in connection with the
Financing.
. Costs of Operating Public Company. The Company expects to incur expenses
in connection with the requirements of being a public company, including
without limitation, preparation of financial statements and proxies,
printing and filing costs, directors' and officers' insurance, and legal
and accounting fees, estimated to be $1.0 million annually.
COMPARISON OF COMMON STOCK AND UNITS
Conducting the Company's operations through the Operating Partnership allows
the Continuing Investors to defer certain tax consequences by contributing
their interests in Properties to the Operating Partnership and also offers
favorable methods of accessing capital markets. Units in the Operating
Partnership will be held by the Continuing Investors and the Company. Each
Unit was designed to result in a distribution per Unit equal to a distribution
per share of Common Stock (assuming the Company distributes to its
stockholders all amounts it receives as distributions from the Operating
Partnership). Beginning two years following the consummation of the Offering,
each Unit issued in the Formation Transactions is redeemable by the Operating
Partnership at the request of the Unitholder for cash payable by the Operating
Partnership or, at the Company's option, the Company may exchange Units for
Common Stock on a one-for-one basis (subject to certain antidilution
adjustments and certain limitations on exchange to preserve the Company's
status as a REIT), provided, however, that if the Operating Partnership elects
to redeem such Units for cash, a Unitholder that is a corporation or a limited
liability company may require the Company to issue shares of Common Stock in
lieu of cash. There are, however, certain differences between the ownership of
Common Stock and Units, including:
. Voting Rights. Holders of Common Stock may elect the Board of Directors
of the Company, which, as the general partner of the Operating
Partnership, controls the business of the Operating Partnership.
Unitholders may not elect directors of the Company.
. Transferability. The shares of Common Stock sold in the Offering will be
freely transferable under the Securities Act by holders who are not
affiliates of the Company or the Underwriters. The Units and the shares
of Common Stock into which they are exchangeable are subject to transfer
restrictions under applicable securities laws and under the Partnership
Agreement, including the required consent of the general partner to the
admission of any new limited partner, and 50% of the Units of John B.
Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries will be pledged
to secure certain indemnity obligations. See "Shares Available for
Future Sale" for a description of the Registration Rights Agreement
applicable to holders of Units.
40
<PAGE>
. Distributions. Because the relative tax basis of the contributions by
the public investors and the Continuing Investors are expected to be
different, it is possible that the public investors' distribution will
include a return of capital that exceeds that of the Continuing
Investors. See "Federal Income Tax Consequences."
ADVANTAGES AND DISADVANTAGES OF THE FORMATION TRANSACTIONS TO UNAFFILIATED
STOCKHOLDERS
The potential advantages of the Formation Transactions to unaffiliated
stockholders of the Company include their ability to participate in the cash
flow of the Properties through their ownership in the Company and in all
future office and industrial property acquisitions and development by the
Company. The potential disadvantages of such transactions to unaffiliated
stockholders of the Company may be several, including the impact of shares
available for future sale and substantial and immediate dilution in the
tangible book value per share, and the lack of arm's-length negotiations to
determine the terms of the transfers of the Properties to the Company and the
Operating Partnership and the terms of the option agreements relating to the
Excluded Properties. See the discussion of such matters under "Risk Factors."
BENEFITS OF THE FORMATION TRANSACTIONS TO THE CONTINUING INVESTORS
The principals of KI proposed the Formation Transactions to the Continuing
Investors because they believe that the benefits of the organization of the
Company for the Continuing Investors outweigh the detriments to them. Benefits
to the Continuing Investors include:
. improved liquidity of their interests in the Properties and increased
diversification of their investment;
. repayment of indebtedness in the aggregate net amount of approximately
$229.5 million resulting from the refinancing of existing mortgage
indebtedness, of which approximately $37.2 million is guaranteed by John
B. Kilroy, Sr., including $8.7 million which also is guaranteed by John
B. Kilroy, Jr., and the repayment of approximately $3.4 million of
personal indebtedness of John B. Kilroy, Sr.;
. an employment agreement between the Company and John B. Kilroy, Jr.
providing annual salary, incentive compensation (including Common Stock
options) and other benefits for his services as an officer of the
Company (see "Management--Employment Agreements"), and a grant of
options to purchase Common Stock to John B. Kilroy, Sr. (see
"Management--Stock Incentive Plan"); and
. the deferral of certain tax consequences of taxable dispositions of
assets through the creation of the Operating Partnership and the direct
contribution of their interests in the Properties to the Operating
Partnership in exchange for Units.
Set forth below are the (i) names of executive officers of the Company and
certain other persons involved in the Formation Transactions; (ii) net book
value of the interests of such persons in the Properties being transferred;
(iii) value of the Units, (iv) the number of shares of Common Stock, (v) cash,
(vi) the number of stock options, (vii) consideration for the Excluded
Properties and (viii) repayment of debt and/or termination of guarantees that
were outstanding as of December 31, 1996, to be received by the named persons
in the Formation Transactions:
<TABLE>
<CAPTION>
NET BOOK DEBT
VALUE OF REPAYMENT/
PROPERTY ANNUAL NO. OF SHARES NO. OF CONSIDERATION GUARANTEE
INTERESTS SALARY OF COMMON CASH STOCK FOR EXCLUDED TERMINATION
$ $ UNITS $ STOCK $ OPTIONS PROPERTIES $
--------- ------ ------- ------------- ---- ------- ------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John B. Kilroy, Sr. .... $ (76,233) -- $25,262(1) -- -- 15 --(2) $40,636(3)
John B. Kilroy, Jr. .... (33,231) $200 25,262(1) -- -- 250 --(2) 8,700(4)
KI(5)................... -- -- -- -- -- -- -- --
Persons other than
officers/directors(6).. (3,759) -- 3,324 -- -- -- --(2) --
--------- ---- ------- --- --- --- --- -------
$(113,223) $200 $53,848 -- -- 265 --(2) $49,336
========= ==== ======= === === === === =======
</TABLE>
(footnotes on next page)
41
<PAGE>
- --------
(1) Includes the Units to be beneficially owned by KI which are allocated to
John B. Kilroy, Sr. and John B. Kilroy, Jr., the only shareholders of KI,
in accordance with their respective percentage ownership of KI. The value
of the Units received by the Continuing Investors in connection with the
Formation Transactions was determined assuming a Unit value equal to the
assumed per share initial offering price of $20.00.
(2) In the event the Company exercises its option with respect to any of the
Excluded Properties, each of John B. Kilroy, Sr. and John B. Kilroy, Jr.
will receive approximately 49.0% and 51.0%, respectively, of the purchase
price for the sale of the parcels at Calabasas Park Centre and
approximately 65.1% and 18.2%, respectively, of the purchase price for the
sale of the properties located at North Sepulveda Boulevard in El Segundo.
In addition, each of Patrice Bouzaid, Susan Hahn, Anne McCahon and Dana
Pantuso, the daughters of John B. Kilroy, Sr., will receive approximately
4.2% of the purchase price for the sale of the properties located at North
Sepulveda Boulevard in El Segundo. The exercise price for the options for
the Excluded Properties will vary depending on the date of exercise. See
"Business and Properties--Excluded Properties."
(3) Represents $3.4 million of personal indebtedness repaid with proceeds of
indebtedness incurred by the Company within the past 12 months, which
indebtedness will be repaid with proceeds of the Offering, and $37.2
million of personal guarantees of indebtedness of the Kilroy Group secured
by the Properties, which indebtedness will be repaid with proceeds of the
Offering. See "Use of Proceeds."
(4) Represents the termination of personal guarantees of indebtedness of the
Kilroy Group secured by the Properties, which indebtedness will be repaid
with proceeds of the Offering. See "Use of Proceeds."
(5) The amounts attributable to KI are reflected in the amounts attributable
to each of John B. Kilroy, Sr. and John B. Kilroy, Jr., the only
shareholders of KI, who own 81.3% and 18.7% of the common stock of KI,
respectively.
(6) The persons other than officers/directors of the Company are Patrice
Bouzaid, Susan Hahn, Anne McCahon and Dana Pantuso, the daughters of John
B. Kilroy, Sr., and Marshall McDaniel, a long-time employee of KI, all of
whom are Continuing Investors.
The following table contains information concerning the grant of stock
options under the Company's 1997 Stock Incentive Plan expected to be made for
the year ended December 31, 1997 to John B. Kilroy, Sr. and John B. Kilroy,
Jr. The table also lists potential realizable values of such options on the
basis of assumed annual compounded stock appreciation rates of 5% and 10% over
the life of the options.
OPTION GRANTS IN CONNECTION WITH THE FORMATION TRANSACTIONS
<TABLE>
<CAPTION>
NUMBER OF POTENTIAL REALIZABLE
SECURITIES VALUE AT
UNDERLYING EXERCISE ASSUMED ANNUAL
OPTIONS OR BASE RATES OF SHARE
GRANTED PRICE EXPIRATION PRICE APPRECIATION
(#)(1) PER SHARE(2) DATE(3) FOR OPTION TERM(4)
---------- ------------ ------------ ---------------------
(IN THOUSANDS)
5% 10%
---------- ----------
<S> <C> <C> <C> <C> <C>
John B. Kilroy, Sr. .... 15,000 $20.00 January 2007 $ 383 $ 778
John B. Kilroy, Jr. .... 250,000 $20.00 January 2007 $3,144 $7,969
</TABLE>
- --------
(1) The options granted to Messrs. Kilroy will vest in three equal
installments on the first, second and third anniversaries of the date of
the grant.
(2) Assuming an initial public offering price of the Common Stock of $20.00
per share. The option price will be equal to the initial public offering
price of the Common Stock.
(3) The expiration date of the options will be ten years after the date of
grant.
(4) The potential realizable value is reported net of the option price, but
before income taxes associated with exercise. These amounts represent
assumed annual compounded rates of appreciation at 5% and 10% only from
the date of grant to the expiration date of the option.
No third party determination of the value of the Properties was sought or
obtained in connection with the acquisition by the Operating Partnership of
the Properties, and the terms of each of the Option Agreements relating to the
Excluded Properties were not determined through arm's-length negotiations.
There can be no assurance that the aggregate value of the consideration
received by the participants in the Formation Transactions, including the
grant of the options relating to the Excluded Properties, is equivalent to the
fair market value of the properties and assets acquired by the Company and the
Operating Partnership in connection with the Formation Transactions. See "Risk
Factors--No Appraisals; Consideration to be Paid for Properties
42
<PAGE>
and Other Assets May Exceed their Fair Market Value" and "--Conflicts of
Interest--Competitive Real Estate Activities of Management."
DETERMINATION AND VALUATION OF OWNERSHIP INTERESTS
The Company's percentage interest in the Operating Partnership was
determined based upon the percentage of estimated cash available for
distribution required to pay estimated cash distributions to stockholders of
the Company representing an annual distribution rate equal to 7.75% of the
assumed initial public offering price of the Common Stock of $20.00. The
ownership interest in the Operating Partnership allocated to the Company is
equal to this percentage of estimated cash available for distribution and the
remaining interest in the Operating Partnership will be allocated to the
Continuing Investors receiving Units in the Formation Transactions. The
parameters and assumptions used in deriving the estimated cash available for
distribution are described under the caption "Distribution Policy."
Based on the issuance of 11,300,000 shares of Common Stock in the Offering
plus 60,000 restricted shares of Common Stock to Richard E. Moran Jr. (who is
not a Continuing Investor), the Company will hold an approximately 80.8%
ownership interest in the Operating Partnership and the Continuing Investors
will hold an approximately 19.2% ownership interest in the Operating
Partnership. If the Underwriters' over-allotment option is exercised in full,
the Company will hold an approximately 82.9% ownership interest in the
Operating Partnership and the Continuing Investors will hold an approximately
17.1% ownership interest in the Operating Partnership.
In connection with the Offering, the Company did not obtain appraisals with
respect to the market value of any of the Properties or other assets that the
Company will own immediately after consummation of the Offering and the
Formation Transactions or an opinion as to the fairness of the allocation of
shares to the purchasers in the Offering. The initial public offering price
will be determined based upon the estimated cash available for distribution
and the factors discussed under the caption "Underwriting," rather than a
property by property valuation based on historical cost or current market
value. This methodology has been used because management believes it is
appropriate to value the Company as an ongoing business rather than with a
view to values that could be obtained from a liquidation of the Company or of
individual properties owned by them. See "Underwriting."
ALLOCATION OF CONSIDERATION IN THE FORMATION TRANSACTIONS
No independent valuations or appraisals of the Properties were obtained in
connection with the Formation Transactions. The allocation of Units among the
Continuing Investors was based primarily on the relative contributions to net
operating income and other factors relating to the value of the Company as an
on-going enterprise, and generally was not determined through arm's-length
negotiations. There can be no assurance that the fair market value of the
Properties transferred to the Company will equal the sum of the value of the
Units issued to the Continuing Investors.
Certain Continuing Investors (the "Indemnitors") have agreed pursuant to a
supplemental representations, warranties and indemnity agreement, a form of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part, to make certain representations and warranties
concerning the Properties, and have also agreed to indemnify the Company
against breaches of such representations and warranties. These representations
and warranties will survive the closing of the Offering until June 1998 and
the related indemnification obligations generally will be joint and several
among the Indemnitors. Fifty percent of the Units received by John B. Kilroy,
Sr., John B. Kilroy, Jr. and Kilroy Industries in the Formation Transactions
will be pledged to secure their indemnification obligations under the
supplemental representations, warranties and indemnity agreement.
43
<PAGE>
FORMATION OF KILROY SERVICES, INC.
Prior to consummation of the Offering, Kilroy Services, Inc. will be formed
under the laws of the State of Maryland to succeed to the development
activities of the Kilroy Group. John B. Kilroy, Sr. and John B. Kilroy, Jr.
together will own 100% of the voting common stock of the Services Company,
representing 5.0% of its economic value. The Operating Partnership will own
100% of the nonvoting preferred stock of the Services Company, representing
95.0% of its economic value. The ownership structure of the Services Company
is necessary to permit the Company to share in the income of the activities of
the Services Company and also maintain its status as a REIT. Although the
Company anticipates receiving substantially all of the economic benefit of the
businesses carried on by the Services Company through the Company's right to
receive dividends through the Operating Partnership's investment in the
Services Company's nonvoting preferred stock, the Company will not be able to
elect the Services Company's officer or directors and, consequently, may not
have the ability to influence the operations of the Services Company or
require the declaration of dividends. See "Risk Factors--Risks of Development
Business and Related Activities Being Conducted by the Services Company--
Adverse Consequences of Lack of Control Over the Businesses of the Services
Company."
The Services Company initially will have three directors, including Campbell
Hugh Greenup, who also serves as the General Counsel of the Company, and
Jeffrey C. Hawken, who also serves as the Executive Vice President and Chief
Operating Officer of the Company. See "Management." In addition, the Services
Company will have a third and independent director. Campbell Hugh Greenup will
serve as the Services Company's President and Secretary, and David Armanetti
will serve as its Vice President of Development Services and Treasurer. Prior
to the Offering, Mr. Greenup was a Senior Vice President for Development of KI
and Mr. Armanetti was a Vice President for Development of KI.
44
<PAGE>
THE COMPANY
GENERAL
The Company has been formed to succeed to the business of the Kilroy Group
consisting principally of a portfolio of Class A suburban office and
industrial buildings in prime locations primarily in Southern California, and
the Kilroy Group's real estate ownership, acquisition, development, leasing
and management businesses. Upon the consummation of the Offering and the
Formation Transactions, the Company (through the Operating Partnership) will
own 14 Office Properties encompassing an aggregate of approximately 2.0
million rentable square feet and 12 Industrial Properties encompassing an
aggregate of approximately 1.3 million rentable square feet. Eleven of the 14
of the Office Properties and 11 of the 12 Industrial Properties are located in
prime Southern California suburban submarkets (including a complex of three
Office Properties located in El Segundo, adjacent to Los Angeles International
Airport, presently the nation's second largest air-cargo port, and a complex
of five Office Properties located adjacent to the Long Beach Municipal
Airport). The Company also will own three Office Properties located adjacent
to the Seattle-Tacoma International Airport in the State of Washington and one
Industrial Property located in Phoenix, Arizona. As of September 30, 1996, the
Office Properties were approximately 79.8% leased to 130 tenants and the
Industrial Properties were approximately 93.7% leased to 20 tenants. The
average age of the Office Properties and the Industrial Properties is
approximately 12 years and 24 years, respectively. The Company developed and
leased all but two of the 14 Office Properties and all but five of the 12
Industrial Properties, and upon consummation of the Offering and acquisition
of the Acquisition Properties will manage all of the Properties.
The Company was founded in 1947 by John B. Kilroy, Sr., a nationally
prominent member of the real estate community, and is led by John B. Kilroy,
Jr., the Company's President since 1981. The Company's executive officers have
been with the Company for an average of approximately 13 years. The Company
has been involved in the ownership, acquisition, entitlement, development,
leasing and management of commercial properties, the majority of which are
located in Southern California, for nearly 50 years and has been focusing
primarily on office and industrial development for the past 30 years. The
Company presently has 47 employees, 34 of whom are located at the Company's
headquarters at Kilroy Airport Center at El Segundo, California.
The Company's strategy has been to own, develop, acquire, lease and manage
Class A properties in select locations in key suburban submarkets, primarily
in Southern California, that the Company believes have strategic advantages
compared to neighboring submarkets. The Company's extensive experience and
long-term presence in Southern California have enabled it to form key
alliances and working relationships with major corporate tenants,
municipalities and landowners in Southern California that have resulted in a
variety of development projects and provide an on-going source of development
and acquisition opportunities. The Southern California Properties located in
Los Angeles and Orange Counties are situated in locations which the Company
believes are among the best within key submarkets, offering tenants: (i) lower
business taxes and operating expenses than adjoining submarkets; (ii) access
to highly skilled labor markets; (iii) access to major transportation
facilities such as freeways, airports and the expanded Southern California
light-rail system; (iv) proximity to the Los Angeles-Long Beach port complex,
which presently ranks as the largest commercial port in the United States; and
(v) for tenants with their names on certain Properties, visibility to freeway
and airline travelers.
The Company also has focused on the design and construction of its projects.
The Office Properties developed by the Company (Kilroy Airport Center at El
Segundo, Kilroy Airport Center Long Beach and SeaTac Office Center) were
designed and developed to above-standard specifications, with an emphasis on
long-term operating efficiency and tenant comfort. The Industrial Properties
also were designed and developed to provide above-standard quality and meet
the long-term needs of tenants and were designed as multi-use facilities to
satisfy various types of manufacturing, distribution and office uses. As a
result, the Industrial Properties continue to serve the evolving needs of
their tenants, some of which have recently invested substantially in long-term
tenant improvements. As a result of the high quality and strategic location of
the Properties, and the Company's attention to the highest quality management
and service, the Company believes that the Properties attract major corporate
tenants and historically have achieved among the highest occupancy, tenant
retention and rental rates,
45
<PAGE>
both within their respective submarkets and as compared to their respective
neighboring submarkets. See "Business and Properties--Office Properties" and
"--Industrial Properties."
The Company has created value by effectively working with municipalities,
large landowners and other members of the real estate community in Southern
California, and has maintained strong relationships at all levels of
government, as well as with financial institutions and major corporate
tenants. In 1981, the Company initiated the El Segundo Employers' Association,
a traffic and management organization composed of major employers in the El
Segundo area. The organization has worked with local government and has been
instrumental in the furtherance of infrastructure developments in El Segundo
and throughout the surrounding area, including two recent developments that
management believes will have a substantial economic benefit to the El Segundo
submarket. First, in October 1994, Interstate Highway I-105 (the "I-105
Freeway") opened, which crosses Los Angeles from east to west and provides
substantially improved access to El Segundo and Los Angeles International
Airport. A second infrastructure development in the El Segundo submarket is a
major east-west grade-separated light rail commuter line (the "Green Line").
The Green Line runs adjacent to Kilroy Airport Center at El Segundo.
Management believes that the Green Line, which opened in August 1995, will add
significant value to the El Segundo submarket. See "Business and Properties--
The Company's Southern California Submarkets--El Segundo Submarket."
The Company's major tenants include, among others, Hughes Space &
Communications, a tenant since 1984, which is engaged in high-technology
commercial activities including satellite development and related applications
such as DirecTV, as well as CompuServe, Inc., Employer's Health Insurance Co.,
the Federal Aviation Administration, First Nationwide Mortgage Corporation,
Furon Co., Inc., GTE Directories Sales Corporation, Great Western Bank,
HealthNet, Mattel, Inc. (which has its worldwide corporate headquarters in
El Segundo), North American Title Company, Northwest Airlines, Inc., Olympus
America, Inc., The Prudential Insurance Company of America, R.L. Polk &
Company, SCAN HealthPlan, Senn-Delaney Leadership Consulting Group, Inc.,
Transamerica Financial Services, Inc., 20th Century Industries, UniCare
Financial Corporation and Unihealth. As of December 31, 1995, the Company's
ten largest office tenants and ten largest industrial tenants (based upon
annual base rents as of December 31, 1995) had leased office space from the
Company for an average of 5.3 years. The Company's strong relationships with
its tenants is further evidenced by its average tenant retention rate (based
upon rentable square feet) for the two-year and nine-month period ended
September 30, 1996, which was 71.7% for the Properties located in the Southern
California Area and 50.9% for the Properties overall. The lower overall
retention rate results primarily from the 1993 termination of a lease for
211,000 net rentable square feet at the SeaTac Office Center. The Company's
extensive experience and long-term presence in Southern California have
enabled it to form key alliances and working relationships with large
corporate tenants, municipalities and landowners that have led to a variety of
development projects and provide a continuing source of development and
acquisition opportunities with institutional sellers. As a result of its
experience and relationships, the Company currently has exclusive rights to
develop approximately 24 acres of developable land (net of the acreage
required for streets) at Kilroy Airport Center Long Beach. These properties
are presently entitled for over 900,000 rentable square feet of office,
industrial and retail space.
The Company believes that the foundation for its growth in future years will
be the strengthening Southern California economy, the quality and strategic
location of its Properties, the economic benefits of its submarkets to
tenants, its capital structure, its access to public capital markets, the lack
of new construction of office properties in its submarkets, its access to
developable properties, the knowledge and experience of its senior management
team and its long-term relationships with the Southern California real estate
community, large corporate tenants, municipalities, landowners and
institutional sellers. In addition, the Company believes that it will be one
of a limited number of REITs focusing on office and industrial properties and
that it will be the only REIT with a 50-year operating history concentrating
primarily on suburban Southern California office and industrial properties. In
the 12 months following the consummation of the Offering, the Company expects
sources of potential growth in cash available for distribution per share from
the amount set forth under the caption "Distribution Policy," through: (i) the
further leasing of its available space, currently approximately 400,000
rentable square feet; (ii) the renewal of leases for approximately 60,000
rentable square feet which
46
<PAGE>
expire during such period; and (iii) the acquisition of strategic properties
with Units and/or with available cash and borrowings under the proposed Credit
Facility and its approximately $20.0 million of working capital cash reserves,
upon consummation of the Offering. In the second 12-month period following
consummation of the Offering, the Company expects sources of potential growth
in cash flow per share from: (i) contractual increases in base rent payments
from tenants; (ii) continued leasing of available space; (iii) the acquisition
of strategic properties; and (iv) the contemplated completion of certain
planned development activities. In addition, the Company presently plans to
expand one or more of its Industrial Properties during the next two years,
subject to substantial pre-leasing. There can be no assurance, however, that
the Company will achieve any growth in cash available for distribution per
share, that available space will be leased, that leases scheduled to expire
will be renewed, that the Company will successfully complete any of its
planned development activities or that the Company will be able to acquire and
develop any of the Development Properties or other properties that may become
available. See "Risk Factors--Real Estate Investment Considerations--Risks of
Real Estate Acquisition and Development."
The Company will continue its practice of managing or administering
substantially all leasing, management, tenant improvements and construction on
an "in-house" basis and will be self-administered and self-managed. The
Company intends to elect to qualify as a REIT for federal income tax purposes
beginning with its taxable year ending December 31, 1997. See "Federal Income
Tax Consequences--Taxation of the Company."
Kilroy Realty Corporation, a Maryland corporation, has executive offices at
2250 East Imperial Highway, El Segundo, CA 90245 and its telephone number is
(213) 772-1193.
GROWTH STRATEGIES
The Company's objectives are to maximize growth in cash flow per share and
to enhance the value of its portfolio through effective management, operating,
acquisition and development strategies. The Company believes that
opportunities exist to increase cash flow per share: (i) by acquiring office
and industrial properties with attractive returns in strategic suburban
submarkets where such properties complement its existing portfolio; (ii) from
contractual increases in base rent; (iii) as a result of increasing rental and
occupancy rates and decreasing concessions and tenant installation costs as
vacancy rates in the Company's submarkets generally continue to decline; (iv)
by developing properties for the benefit of the Company where such development
will result in a favorable risk-adjusted return on investment; and (v) by
expanding Properties within the Company's existing industrial portfolio. The
Company's ability to achieve its growth strategy will be aided by its working
capital cash reserves of approximately $20.0 million upon consummation of the
Offering and the proposed Credit Facility.
The Company believes that a number of factors will enable it to achieve its
business objectives, including: (i) the opportunity to lease available space
at attractive rental rates because of increasing demand and, with respect to
the Office Properties, the present lack of new construction in the Southern
California submarkets in which most of the Properties are located; (ii) the
presence of distressed sellers and inadvertent owners (through foreclosure or
otherwise) of office and industrial properties in the Company's markets, as
well as the Company's ability to acquire properties with Units (thereby
deferring the seller's taxable gain), all of which create enhanced acquisition
opportunities; (iii) the quality and location of the Properties; (iv) the
Company's access to development opportunities as a result of its significant
relationships with large Southern California corporate tenants, municipalities
and landowners and its nearly 50-year presence in the Southern California
market; and (v) the limited availability to competitors of capital for
financing development, acquisitions or capital improvements. Management
believes that the Company is well positioned to exploit existing opportunities
because of its extensive experience in its submarkets, its seasoned management
team and its proven ability to develop, lease and efficiently manage office
and industrial properties. In addition, the Company believes that public
ownership and its capital structure will provide new opportunities for growth.
There can be no assurance, however, that the Company will be able to lease
available space, complete any property acquisitions, successfully develop any
land acquired or improve the operating results of any developed properties
that are acquired. See "Business and Properties--Development, Leasing and
Management Activities."
47
<PAGE>
Operating Strategies. The Company will focus on enhancing growth in cash
flow per share by: (i) maximizing cash flow from existing Properties through
active leasing, contractual base rent increases and effective property
management; (ii) managing operating expenses through the use of in-house
management, leasing, marketing, financing, accounting, legal, construction
management and data processing functions; (iii) maintaining and developing
long-term relationships with a diverse tenant group; (iv) attracting and
retaining motivated employees by providing financial and other incentives to
meet the Company's operating and financial goals; and (v) continuing to
emphasize capital improvements to enhance the Properties' competitive
advantages in their markets.
The Company believes that the strength of its leasing is demonstrated by the
Company's leasing activity since 1993. In the period from January 1, 1993 to
September 30, 1996, the Company leased or renewed leases for an aggregate of
approximately 1.0 million rentable square feet of office space and
approximately 718,000 rentable square feet of industrial space. As of December
31, 1995, the Office Properties in the Southern California Area were
approximately 89.5% leased as compared to approximately 82.0% for the Southern
California Area, approximately 89.2% for the El Segundo submarket and
approximately 85.4% in the Long Beach submarket. In addition, at December 31,
1995, the Industrial Properties were approximately 91.4% leased as compared to
approximately 82.3% and approximately 87.1% for industrial properties located
in Los Angeles and Orange Counties, respectively. As of September 30, 1996,
(i) the Office Properties contained approximately 2.0 million rentable square
feet and were approximately 79.8% leased, and (ii) the Industrial Properties
contained an aggregate of approximately 1.3 million rentable square feet and
were approximately 93.7% leased. In addition, the number of individual lease
transactions since 1992, including the results for the nine-month period ended
September 30, 1996, averaged over 33 per year. See "Business and Properties--
General," "--Properties," "--Occupancy and Rental Information," and "--The
Company's Southern California Submarkets."
Approximately 1.0 million aggregate rentable square feet in the Properties
was leased by the Company from January 1, 1992 through December 31, 1994, a
period which management characterizes as recessionary. Based on the leases the
Company signed in 1996, and the findings in an independent study of the
Southern California real estate market commissioned by the Company, management
believes that the recent trend toward increasing rental rates in Class A
office and industrial buildings in the Company's Southern California
submarkets presents significant opportunities for growth. In addition,
approximately 66.5% of the Company's net rentable square feet is subject to
leases expiring in 2000 or beyond, when management expects asking rents for
the respective Properties to be higher than the rents paid pursuant to such
leases. In addition, as of December 31, 1996 approximately 36.7% of the
Company's total base rent (representing approximately 23.7% of the aggregate
net rentable square feet of the Properties) was attributable to leases with
Consumer Price Index increases and approximately 28.1% of the Company's total
base rent (representing approximately 30.5% of the aggregate net rentable
square feet of the Properties) is attributable to leases with other specified
contractual increases. No assurance can be given, however, that new leases
will reflect rental rates greater than or equal to current rental rates or
future economic conditions will support higher rental rates. See "Risk
Factors--Real Estate Investment Considerations."
Acquisition Strategies. The Company will seek to increase its cash flow per
share by acquiring additional quality office and industrial properties,
including properties that may: (i) provide attractive initial yields with
significant potential for growth in cash flow from property operations; (ii)
are strategically located, of high quality and competitive in their respective
submarkets; (iii) are located in the Company's existing submarkets and/or in
other strategic submarkets where the demand for office and industrial space
exceeds available supply; or (iv) have been under-managed or are otherwise
capable of improved performance through intensive management and leasing that
will result in increased occupancy and rental revenues. The Company believes
that the Southern California market is an established and mature real estate
market in which property owners generally have a low tax basis (and,
accordingly, the potential for large taxable gains) in their properties.
Management believes that the Company's extensive experience, capital structure
and ability to acquire properties for Units, and thereby defer a seller's
taxable gain, if any, will enhance the ability of the Company to consummate
transactions quickly and to structure more competitive acquisitions than other
real estate companies
48
<PAGE>
in the market which lack its access to capital or the ability to issue Units.
See "Business and Properties-- Development, Leasing and Management
Activities."
The Company has entered into an agreement to acquire the two office
properties that comprise Phase I of Kilroy Airport Center Long Beach. Kilroy
Airport Center Long Beach Phase I was developed by the Company in 1987 and has
been leased and managed by the Company since its inception. In addition, the
Company has entered into an agreement to purchase an office property located
in Thousand Oaks, California. The Company also has entered into an agreement
to acquire a three building office and industrial complex located in Anaheim,
California. Furthermore, KI, on behalf of the Operating Partnership, has
acquired a multi-tenant industrial property located in Garden Grove,
California. The acquisition of the Acquisition Properties by the Company is
expected to occur concurrently with the consummation of the Offering and,
accordingly, the Acquisition Properties are included in the discussion of the
Properties included throughout this Prospectus. There can be no assurance,
however, that the Company will be able to complete any property acquisitions,
including the acquisition of the Acquisition Properties, successfully develop
any land acquired or improve the operating results of any developed properties
that are acquired. See "Business and Properties--Acquisition Properties."
Development Strategies. The Company's interests in the Development
Properties provide it with significant growth opportunities.
The Company is the master ground lessee of, and has sole development rights
in, Kilroy Airport Center Long Beach, a planned four-phase, approximately 53-
acre property entitled for office, research and development, light industrial
and other commercial projects at which the Company will own, upon consummation
of the Offering, all five existing Office Properties and manages all ongoing
leasing and development activities. The Company developed Phases I and II in
1987 and 1989/1990, respectively, encompassing an aggregate of approximately
620,000 rentable square feet of office and light industrial space. The Company
controls development of the Phase III and IV parcels while receiving rental
revenue in connection with such parcels under current leases expiring in July
2009 and September 1998, respectively, in amounts sufficient to cover a
substantial portion of the predevelopment carrying costs. Phases III and IV
presently are planned to be developed on the project's approximately
24 undeveloped acres and are entitled for an aggregate of approximately
900,000 rentable square feet. The Company is currently in discussions with
several prospective tenants for office space presently planned to be included
in Kilroy Long Beach Phase III. Development of each of Phases III and IV is
subject to substantial predevelopment leasing activity and, therefore, the
timing for the commencement of development of Phases III and IV is uncertain.
No assurance can be given that the Company will commence such development when
planned, or that, if commenced, such development will be completed. See "Risk
Factors--Real Estate Investment Considerations--Risks of Real Estate
Acquisition and Development" and "Business and Properties--Development,
Leasing and Management Activities--Kilroy Long Beach."
In addition, certain of the Industrial Properties can support additional
development, and the Company presently is planning to develop in the next two
years, subject to substantial pre-leasing, approximately 105,000 rentable
square feet of such additional space.
The Company may engage in the development of other office and/or industrial
properties primarily in Southern California submarkets when market conditions
support a favorable risk-adjusted return on such development. The Company's
activities with third-party owners in Southern California are expected to give
the Company further access to development opportunities. There can be no
assurance, however, that the Company will be able to successfully develop any
of the Development Properties or any other properties. See "Business and
Properties--Development, Leasing and Management Activities."
Financing Policies. The Company's financing policies and objectives are
determined by the Company's Board of Directors. The Company presently intends
to limit the ratio of debt to total market capitalization (total debt of the
Company as a percentage of the market value of issued and outstanding shares
of Common Stock, including interests exchangeable therefor, plus total debt)
to approximately 50%. However, such objectives may be altered without the
consent of the Company's stockholders, and the Company's organizational
documents do
49
<PAGE>
not limit the amount of indebtedness that the Company may incur. Upon
completion of the transactions outlined under the caption "Formation and
Structure of the Company," total debt will constitute approximately 25.5% of
the total market capitalization of the Company (assuming an initial public
offering price of $20.00 per share of Common Stock). In addition, upon
consummation of the Offering, the Company will have working capital cash
reserves of approximately $20.0 million. The Company anticipates that upon
consummation of the Offering all but approximately $12.0 million of the
permanent indebtedness will bear interest at fixed rates. The Company intends
to utilize one or more sources of capital for future acquisitions, including
development and capital improvements, which may include undistributed cash
flow, borrowings under the proposed Credit Facility, the Company's
approximately $20.0 million of working capital cash reserves out of the net
proceeds of the Offering, issuance of debt or equity securities and other bank
and/or institutional borrowings. There can be no assurance, however, that the
Company will be able to obtain capital for any such acquisitions, developments
or improvements on terms favorable to the Company. See "--Growth Strategies,"
"The Company--Growth Strategies" and "Business and Properties--Development,
Leasing and Management Activities."
50
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Stock in the
Offering (based on the midpoint of the range of the initial public offering
price set forth on the cover page of this Prospectus), after deduction of
underwriting discounts and commissions and estimated offering expenses, are
expected to be approximately $206.6 million (approximately $238.1 million if
the Underwriters' over-allotment option is exercised in full). In addition to
the net proceeds from the Offering, the Operating Partnership expects to
receive net proceeds from the Mortgage Loans, after payment of expenses
related thereto, of approximately $95.5 million. The Company intends to apply
the net proceeds of the Offering and from the Mortgage Loans as follows:
<TABLE>
<CAPTION>
AMOUNT
--------------
(IN THOUSANDS)
<S> <C>
Repayment of existing mortgage debt (net of
discounts/premiums)...................................... $229,452
Purchase price of the Acquisition Properties.............. 48,962
Working capital cash reserves............................. 20,000
Capital expenditure cash reserves......................... 2,336
Financing expenses........................................ 1,350
--------
Total................................................. $302,100
========
</TABLE>
Upon consummation of the Offering, the estimated amount of indebtedness of
the Kilroy Group secured by the Properties which is to be repaid with net
proceeds of the Offering and the Financing will be approximately $229.5
million (including accrued interest and loan fees), of which approximately
$37.2 million has been guaranteed by certain members of the Kilroy Group,
including officers and directors of the Company. An aggregate of approximately
$32.1 million of indebtedness was incurred within the last year, of which $1.5
million was incurred to finance tenant improvements and to pay leasing
commissions related to Kilroy Airport Center Long Beach, $9.1 million was
incurred by KI (on behalf of the Company) to acquire the Industrial Property
located at 12752-12822 Monarch Street, Garden Grove, California (including
expenses at closing) and $21.5 million was used to repay $16.6 million of
existing indebtedness (including $3.4 million of indebtedness of John B.
Kilroy, Sr., the Chairman of the Company's Board of Directors, and accrued
interest and prepayment penalties in connection with such repayments), and to
pay approximately $940,000 in property taxes and approximately $454,000 in
loan costs, legal fees and other expenses in connection with such financing,
with the remainder being contributed to working capital.
The approximately $49.0 million to be used to purchase the Acquisition
Properties referenced above represents the aggregate purchase price paid or to
be paid (including expenses at closing) pursuant to executed agreements for
the acquisition of Kilroy Airport Center Long Beach Phase I, the Westlake
Office Plaza and the Anaheim Office and Industrial Properties. The acquisition
of the Industrial Property located at 12752-12822 Monarch Street, Garden
Grove, California is reflected in the repayment of existing mortgage debt (net
of discounts/premiums) referenced above, as this amount was incurred by KI on
behalf of the Company to acquire the property prior to consummation of the
Offering based on the closing schedule required by the seller. See "Business
and Properties--Acquisition Properties."
In addition, the Company presently intends to use the approximately $2.3
million of capital expenditure cash reserves to pay to Hughes Space &
Communications, in connection with Formation Transactions, the remaining
balance of approximately $1.4 million in connection with the amendment and/or
extension of leases of office space at the Office Properties located at Kilroy
Airport Center, including $500,000 in connection with a tenant improvement
allowance for the properties located at 2240 and 2250 E. Imperial Highway and
the balance in connection with the cancellation of an option to purchase an
equity interest in the Office Properties located at Kilroy Airport Center at
El Segundo. Also from such $2.3 million capital expenditure cash reserves, in
connection with the Financing, the Company will make earthquake-related
improvements to certain of the Properties in an aggregate amount of
approximately $500,000.
51
<PAGE>
The following table presents the balances, as of September 30, 1996, and the
expected balances as of the date the Offering is consummated, of the mortgages
and loans (which are all of the current outstanding mortgages and loans on the
Properties) intended to be repaid out of the net proceeds of the Offering. The
mortgages expected to be repaid upon completion of the Offering had a weighted
average interest rate of approximately 8.74% and a weighted average remaining
term to maturity of approximately 3.14 years as of September 30, 1996.
<TABLE>
<CAPTION>
EXPECTED BALANCE AS OF
BALANCE AS OF THE DATE THE
PROPERTY LOCATION SEPTEMBER 30, 1996 OFFERING IS CONSUMMATED
- ----------------- ------------------ -----------------------
(IN THOUSANDS)
<S> <C> <C>
Kilroy Airport Center at El Segundo }
2240 E. Imperial Highway }
2250 E. Imperial Highway }.......................... $ 94,799 $ 93,999
2260 E. Imperial Highway }
El Segundo, California }
Kilroy Airport Center Long Beach }
3750 Kilroy Airport Way }
3760 Kilroy Airport Way }.......................... 56,168 56,168
3780 Kilroy Airport Way }
Long Beach, California }
SeaTac Properties Ltd. }
17900 Pacific Highway }
17930 Pacific Highway }.......................... 20,162 16,100
18000 Pacific Highway }
Seattle, Washington }
2031 E. Mariposa Avenue
El Segundo, California(1)..................................... 12,000 12,000
3332 E. La Palma Avenue
Anaheim, California........................................... 7,589 7,580
2260 E. El Segundo Boulevard }
El Segundo, California }
2265 E. El Segundo Boulevard }
El Segundo, California }
2270 E. El Segundo Boulevard }
El Segundo, California }
185 S. Douglas Street }
El Segundo, California(2) }.......................... 21,523(3) 21,525(3)
1000 E. Ball Road }
Anaheim, California(1) }
1230 S. Lewis Street }.......................... 5,536 5,506
Anaheim, California(1) }
12681/12691 Pala Drive
Garden Grove, California...................................... 3,267 3,264
5115 N. 27th Avenue
Phoenix, Arizona.............................................. 3,000 3,000
12752-12822 Monarch Street
Garden Grove, California...................................... -- 9,060(4)
-------- --------
$224,046 $228,202
======== ========
</TABLE>
(footnotes on next page)
52
<PAGE>
- --------
(1) This property is also subject to a second mortgage securing the
indebtedness referenced in note (3) below which will be repaid with the
net proceeds of the Offering. This property is also subject to a mortgage
securing the $9.1 million aggregate principal amount of indebtedness
(including related expenses incurred in connection therewith) referenced
in note (4) below which will be repaid with the net proceeds of the
Offering.
(2) This property is also subject to a mortgage securing the $9.1 million
aggregate principal amount of indebtedness (including related expenses
incurred in connection therewith) referenced in note (4) below, which will
be repaid with the net proceeds of the Offering.
(3) This indebtedness is also secured by a second mortgage on the properties
located at 1000 East Ball Road, Anaheim, California, 1230 S. Lewis Street,
Anaheim, California and 2031 E. Mariposa Avenue, El Segundo, California.
(4) Represents the principal amount of indebtedness incurred on December 19,
1996, by KI on behalf of the Company, in connection with the acquisition
of the Industrial Property located at 12752-12822 Monarch Street, Garden
Grove, California, plus accrual of related closing expenses. See "Business
and Properties--Acquisition Properties--12752-12822 Monarch Street, Garden
Grove, California." The indebtedness matures on the earlier of the date on
which the Offering is consummated and June 20, 1997 and, as of December
31, 1996, had an interest rate of approximately 8.41%.
In the event that the Underwriters' over-allotment option is exercised, the
net proceeds thereof will be used by the Company for additional working
capital and will be available for development and for future acquisitions of
additional properties not yet identified. Pending application of such net
proceeds, the Company will invest the net proceeds 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 Governmental National
Mortgage Association, other government and government agency securities,
certificates of deposit and interest-bearing bank deposits.
DISTRIBUTION POLICY
The Company presently intends to make regular quarterly distributions to
holders of its Common Stock. The first distribution, for the period commencing
upon the consummation of the Offering and ending March 31, 1997, is
anticipated to be approximately $ per share (which is equivalent to a
quarterly distribution of $.3875 per share or an annual distribution of $1.55
per share) which results in an initial annual distribution rate of 7.75%,
based on the midpoint of the range of the initial public offering price set
forth on the cover page of this Prospectus. The Company does not expect to
change its estimated distribution rate if any of the Underwriters' over-
allotment option is exercised. The Company currently expects to distribute
approximately 93.6% of estimated cash available for distribution for the 12
months following the consummation of the Offering. Units and shares of Common
Stock will receive equal distributions. The Board of Directors may vary the
percentage of cash available for distribution which is distributed if the
actual results of operations, economic conditions or other factors differ from
the assumptions used in the Company's estimates.
The Company believes that its estimate of cash available for distribution
constitutes a reasonable basis for setting the initial distribution rate and
is made solely for the purpose of setting the initial distribution rate and is
not intended to be a projection or forecast of the Company's results of
operations or of its liquidity. The Company presently intends to maintain the
initial distribution rate for the 12 months following the consummation of the
Offering unless actual results from operations, economic conditions or other
factors differ significantly from the assumptions used in its estimate.
However, no assurance can be given that the Company's estimate will prove
accurate. The actual return that the Company will realize will be affected by
a number of factors, including the revenue received from the Properties, the
distributions and other payments received from the Operating Partnership and
Services Company (which in turn is based in part on revenues received from
development activities), the operating expenses of the Company, the interest
expense incurred on its borrowings, the ability of tenants to meet their
obligations, general leasing activity and unanticipated capital expenditures.
See "Risk Factors--Real Estate Investment Considerations."
53
<PAGE>
The following table illustrates the adjustments made by the Company to its
pro forma Funds from Operations for the twelve months ended September 30, 1996
in order to calculate estimated cash available for distribution:
<TABLE>
<CAPTION>
AMOUNT
------
(IN THOUSANDS,
EXCEPT PER
SHARE AMOUNTS)
<S> <C>
Pro forma net income before minority interests for the year
ended December 31, 1995..................................... $ 15,630
Plus pro forma net income before minority interests for the
nine months ended September 30, 1996........................ 7,067
Less pro forma net income before minority interests for the
nine months ended September 30, 1995........................ (12,428)
--------
Pro forma net income before minority interests for the 12
months ended September 30, 1996(1).......................... 10,269
Add non-cash items:
Pro forma depreciation for the 12 months ended September
30, 1996(2)............................................... 9,205
Pro forma amortization for capitalized leasing commissions
for the 12 months ended September 30, 1996(2)............. 1,041
Nonrecurring item and non-cash compensation(3)............. 3,550
--------
Pro forma Funds from Operations for the 12 months ended
September 30, 1996.......................................... 24,065
Adjustments:
Net increases in contractual rental income(4).............. 305
Net increase from new leases(5)............................ 4,113
Net effect of lease expirations, assuming no renewals(6)... (4,052)
Net effect of straight-line rents(7)....................... 293
Interest income on excess cash from proceeds of
Offering(8)............................................... 1,022
--------
Estimated cash flow from operating activities for the 12
months ending January 31, 1998.............................. 25,746
Estimated capitalized tenant improvements and leasing
commissions(9).............................................. (1,117)
Estimated capital expenditures(10)........................... (310)
Scheduled debt principal payments(11)........................ (1,060)
--------
Estimated cash available for distribution for the 12 months
ending January 31, 1998..................................... $ 23,259
========
Company's share of cash available for distribution(12)..... $ 18,793
Minority interest's share of cash available for
distribution.............................................. $ 4,466
========
Total estimated initial annual distribution.................. $ 21,781
========
Estimated initial annual distribution per share.............. $ 1.55
========
Estimated cash available for distribution payout ratio(13)... 93.6%
========
</TABLE>
- --------
(1) The effect of including the Services Company was a reduction in Funds
from Operations of $50,000 during such period.
(2) Pro forma depreciation of $9,595,000 for the year ended December 31, 1995
plus $6,773,000 for the nine months ended September 30, 1996 less
$7,163,000 for the nine months ended September 30, 1995. Pro forma
amortization of $985,000 for the year ended December 31, 1995 plus
$895,000 for the nine months ended September 30, 1996 less $839,000 for
the nine months ended September 30, 1995. Amortization consists primarily
of amortization of deferred leasing commissions. Non-cash interest
expense of $60,000 for the year ended September 30, 1996 related to
amortization of the costs associated with the Mortgage Loans is not added
back in this table in conformity with NAREIT's definition of Funds from
Operations.
(3) Includes elimination of the cost to buy out an option held by a third
party to acquire a portion of a Property ($3,150,000) and compensation
expense relating to a restricted Common Stock grant ($400,000).
(4) Represents an incremental increase in Funds from Operations attributable
to contractual rental increases for the 12 months ending January 31, 1998
(over actual rental revenue included in pro forma Funds from Operations
for the 12 months ended September 30, 1996). The contractual rental
increases are limited to the actual number of months in which the
increased rental rate will be in effect as to each lease.
(footnotes continued on next page)
54
<PAGE>
(5) Represents the incremental increase in Funds from Operations attributable
to rental revenue from new executed leases commencing after September 30,
1995 for the 12 months ending January 31, 1998.
(6) Represents the elimination of rental revenue reflected in rental revenue
for the 12 months ended September 30, 1996 from: (i) leases which expired
between September 30, 1995 and September 30, 1996 ($1,249,000) and (ii)
leases which will expire between October 1, 1996 and January 31, 1998 for
that portion of the 12 months ending January 31, 1998 that such leases
are no longer in effect ($2,803,000).
This table assumes that leases which expire prior to January 31, 1998 will
not be renewed or re-leased during the period. As a result of this
assumption, the effective average occupancy rate of the Properties for the
12-month period ending January 31, 1998 will equal approximately 87.2%,
versus the actual occupancy rate for the Properties of approximately 88.2%
as of December 31, 1996. The Company's average tenant retention rate for
expiring leases for January 1, 1994 through September 30, 1996 was
approximately 71.7% for the Properties located in the Southern California
Area and 50.9% for the Properties overall.
(7) Represents the effect of adjusting straight-line rental income and
expense included in pro forma net income from an accrual basis under GAAP
to a cash basis.
(8) Represents estimated interest earned at 5% on working capital cash
reserves of $20,444,000.
(9) Reflects projected non-incremental revenue-generating tenant improvement
("TI") and leasing commission ("LC") for the 12-month period ending
January 31, 1998 based on the weighted average TI and LC expenditures for
all renewed and retenanted space incurred during 1993, 1994, 1995 and the
nine months ended September 30, 1996, multiplied by the average annual
net rentable square feet of leased space expiring during the three 12-
month periods following the consummation of the Offering.
<TABLE>
<CAPTION>
WEIGHTED
1993 1994 1995 1996 AVERAGE
----- ------ ----- ----- ----------
<S> <C> <C> <C> <C> <C>
OFFICE PROPERTIES:
Retenanted
TI per net rentable square foot.. $5.21 $20.82 $4.76 $8.62 $ 12.50
LC per net rentable square foot.. $1.85 $ 3.56 $4.23 $3.85 3.41
----------
Total weighted average TI and
LC............................ 15.91
Average annual net rentable
square feet of leased space
expiring during the three 12-
month periods following the
Offering...................... 137,976
----------
Total estimated annual TI and
LC............................ 2,195,198
Rate of retenant(i)............ 30%
----------
Total cost of retenants........ $ 659,000
Renewals
TI per net rentable square foot.. $ -- $ .28 $4.49 $4.01 $ 2.89
LC per net rentable square foot.. $ -- $ .07 $1.61 $1.02 0.80
----------
Total weighted average TI and
LC............................ 3.69
Average annual net rentable
square feet of leases expiring
during the three 12-month
periods following the
Offering...................... 137,976
----------
Total estimated annual TI and
LC............................ 509,131
Rate of renewal(i)............. 70%
----------
Total cost of renewals....... 357,000
----------
Total TI and LC cost of Office
Properties...................... 1,016,000
----------
INDUSTRIAL PROPERTIES:
TI per net rentable square foot.... $ .14 $ 4.49 $2.00 $ -- $ 2.19
LC per net rentable square foot.... $1.49 $ 3.49 $1.84 $ -- 2.16
----------
Total weighted average TI and
LC.............................. 4.35
Average annual net rentable
square feet of leases expiring
during the three 12-month
periods following the Offering.. 23,333
----------
Total estimated annual TI and
LC.............................. 101,000
----------
Total.............................. $1,117,000
==========
</TABLE>
(footnotes continued on next page)
55
<PAGE>
--------
(i) The Company's historical weighted average renewal rate, based on net
rentable square footage, from January 1, 1994 through September 30,
1996 was 71.7% for the Properties located in the Southern California
Area and 50.9% for the Properties overall. The lower overall renewal
rate results primarily from a 1993 termination of a lease for 211,000
square feet at the SeaTac Office Center. Management believes, based on
historical figures and its review of market conditions in the
Company's submarkets in which the Properties are located, that the
assumption of a 70% renewal rate is reasonable.
(10) Estimated annual capital expenditures not reimbursed by tenants. The
average of historical nonreimbursed capital expenditures at the Office
and Industrial Properties during the years ended December 31, 1994 and
1995 was $150,000. All capital expenditures during 1993 were reimbursed
by tenants.
(11) Estimated principal payments on the Mortgage Loans. Excludes the net
effect of the refinancing of the SeaTac Loan.
(12) The Company's share of estimated distributions based on its approximately
80.8% partnership interest in the Operating Partnership.
(13) Calculated as the estimated initial annual distribution divided by the
estimated cash flow available for distribution for the 12 months ending
January 31, 1998. The payout ratio of estimated adjusted pro forma Funds
from Operations (which is substantially equivalent to the Company's
estimated pro forma cash flow from operating activities) for the 12
months ending January 31, 1998 equals 84.6%.
The Company anticipates that its estimated cash available for distribution
will exceed earnings and profits due to non-cash expenses, primarily
depreciation and amortization, to be incurred by the Company. Distributions by
the Company to the extent of its current or accumulated earnings and profits
for federal income tax purposes, other than capital gain dividends, will be
taxable to stockholders as ordinary dividend income. Capital gain
distributions generally will be treated as long-term capital gains.
Distributions in excess of earnings and profits generally will be treated as a
non-taxable return of capital to the extent of each stockholder's basis in his
or her Common Stock to the extent thereof, and thereafter as taxable gain. The
non-taxable distributions will reduce each stockholder's tax basis in the
Common Stock and, therefore, the gain (or loss) recognized on the sale of such
Common Stock or upon liquidation of the Company will be increased (or
decreased) accordingly. Based on the estimated cash flow available for
distribution set forth in the table above, the Company believes that
approximately 10% of distributions for the 12 months following consummation of
the Offering would represent a return of capital. If actual cash available for
distribution or taxable income vary from these amounts, the percentage of
distributions which represent a return of capital may be materially different.
For a discussion of the tax treatment of distributions to holders of Common
Stock, see "Federal Income Tax Consequences--Taxation of U.S. Stockholders"
and "--Taxation of Non-U.S. Stockholders." In order to qualify to be taxed as
a REIT, the Company must make annual distributions to stockholders of at least
95% of its REIT taxable income (determined without regard to the dividends
received deduction and by excluding any net capital gains) which the Company
anticipates will be less than its share of adjusted Funds from Operations.
Under certain circumstances, the Company may be required to make distributions
in excess of cash available for distribution in order to meet such
distribution requirements.
Financing activities such as repayment or refinancing of loans also may
affect the Company's assets and liabilities and the amount of cash available
for distribution for future periods. Management will seek to control the
timing and nature of investing and financing activities in order to maximize
the Company's return on invested capital.
Future distributions by the Company will be subject to the requirements of
the MGCL and the discretion of the Board of Directors of the Company, and will
depend on the actual cash flow of the Company, its financial condition, its
capital requirements, any decision by the Board of Directors to reinvest the
Operating Partnership's Funds from Operations rather than distribute such
funds to the Company, the annual distribution requirements under the REIT
provisions of the Code (see "Federal Income Tax Considerations--Taxation of
the Company--Annual Distribution Requirements") and such other factors as the
Board of Directors deems relevant. There can be no assurance that any
distributions will be made or that the expected level of distributions will be
maintained by the Company. See "Risk Factors--Real Estate Investment
Considerations" and "--Distribution Payout Percentage." If revenues generated
by the Company's properties in future periods decrease materially from current
levels, the Company's ability to make expected distributions would be
materially adversely affected, which could result in a decrease in the market
price of the shares of Common Stock.
56
<PAGE>
The Company may in the future implement a distribution reinvestment program
under which holders of shares of Common Stock may elect automatically to
reinvest distributions in additional shares of Common Stock. The Company may,
from time to time, repurchase shares of Common Stock in the open market for
purposes of fulfilling its obligations under this distribution reinvestment
program, if adopted, or may elect to issue additional shares of Common Stock.
If the Company adopts a distribution reinvestment program, it will solicit
participation in the program after the Offering by means of a separate
prospectus, and a purchase of shares of Common Stock in the Offering does not
entitle any investor to participate in any such program. There can be no
assurance that the Company will adopt such a program, and consequently, the
probable date of adoption or number of shares of Common Stock that would be
available under such program cannot be determined at this time.
Cash available for distribution is based on Funds from Operations (which is
defined by NAREIT as net income (loss) (computed 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 after adjustments for unconsolidated
partnerships and joint ventures. The calculation of adjustments to pro forma
Funds from Operations is being made solely for the purpose of setting the
initial distribution amount and is not intended to be a projection or
prediction of the Company's actual results of operations nor is the
methodology upon which such adjustments are made intended to be a basis for
determining future distributions. Management considers Funds from Operations
an appropriate measure of performance of an equity REIT because industry
analysts have accepted it as such. 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 by other equity REITs and,
accordingly, may not be comparable to such other REITs. Further, Funds from
Operations does not represent amounts available for management's discretionary
use because of needed capital replacement or expansion, debt service
obligations, or other commitments and uncertainties. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Funds from Operations."
The Company intends to provide its stockholders with annual reports
containing audited financial statements with a report thereon by the Company's
independent auditors, together with management's discussion and analysis, as
required under applicable Commission rules and regulations.
57
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (based on
the Combined Financial Statements of the Kilroy Group) as of September 30,
1996 on an historical basis, and on a pro forma basis as adjusted to give
effect to the Formation Transactions, the Offering, the Financing and the
application of the net proceeds therefrom as described under the caption "Use
of Proceeds." The information set forth in the following table should be read
in conjunction with the Combined Financial Statements of the Kilroy Group and
notes thereto, the pro forma financial information of the Company and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources" included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------------
HISTORICAL PRO FORMA
----------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Debt:
Mortgage Loans(1).................................... $ 224,046 $ 96,000
Borrowings under Credit Facility(2).................. -- --
----------- ----------
Total debt............................................. 224,046 96,000
----------- ----------
Minority interest in the Operating Partnership(3)...... -- 19,319
----------- ----------
Stockholders' equity (deficit):
Preferred Stock, $.01 par value, 30,000,000 shares
authorized, none issued or outstanding..............
Common Stock, $.01 par value, 150,000,000 shares
authorized, 11,360,000 shares issued and
outstanding(3)(4)................................... -- 114
Capital in excess of par value....................... -- 81,189
Accumulated deficit.................................. (113,223) --
----------- ----------
Total stockholders' equity (deficit)................... (113,223) 81,303
----------- ----------
Total capitalization................................... $ 110,823 $ 196,622
=========== ==========
</TABLE>
- --------
(1) The Company, on behalf of the Operating Partnership, has obtained written
commitments for the Mortgage Loans, the closing of which is a condition to
the consummation of the Offering. See "The Financing--The Mortgage Loans."
(2) The Company, on behalf of the Operating Partnership, expects to obtain a
written commitment to establish the $100.0 million Credit Facility, which
the Company expects to enter into concurrently with the consummation of
the Offering. See "The Financing--The Credit Facility."
(3) Assumes no exchange of the Units to be issued to the Continuing Investors
in connection with the Formation Transactions. If all of the Units were
exchanged, 14,052,374 shares of Common Stock would be outstanding.
(4) Excludes 1,400,000 shares of the 1,460,000 shares of Common Stock reserved
for issuance pursuant to the Stock Incentive Plan. See "Management--Stock
Incentive Plan." Includes 60,000 restricted shares of Common Stock to be
issued to an officer of the Company who is not a Continuing Investor.
58
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution of the net tangible book value of their Common Stock
from the assumed initial public offering price. At September 30, 1996, the
Company had a negative combined net tangible book value of approximately
$113.2 million, or negative $42.05 per share of Common Stock (assuming the
exchange of Units issued to Continuing Investors in connection with the
Formation Transactions into shares of Common Stock on a one-for-one basis).
After giving effect to the sale of the shares of Common Stock offered hereby
at an assumed initial public offering price of $20.00 per share of Common
Stock, the deduction of underwriting discounts and commissions and estimated
Offering expenses and the receipt by the Company of approximately
$206.6 million in net proceeds from the Offering, the pro forma net tangible
book value at September 30, 1996 would have been $81.3 million, or $7.16 per
share of Common Stock. This amount represents an immediate increase in net
tangible book value of $49.21 per Unit to Continuing Investors and an
immediate dilution in pro forma net tangible book value of $12.84 per share of
Common Stock to new public investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............ $20.00
Pro forma net tangible book value before the
Offering(1)............................................. $(42.05)
Increase in pro forma net tangible book value
attributable to the Offering and Formation
Transactions............................................ 49.21
-------
Pro forma net tangible book value after the Offering(2).... 7.16
------
Dilution in pro forma net tangible book value to new
investors(3).............................................. $12.84
======
</TABLE>
- -------
(1) Net tangible book value per share of Common Stock before the Offering is
determined by dividing net tangible book value (total tangible assets less
total liabilities) of the Company by the number of shares of Common Stock
of the Company representing the exchange in full of the Units to be issued
to the Continuing Investors.
(2) Based on pro forma net tangible book value of approximately $81.3 million
divided by 11,360,000 shares of Common Stock outstanding. There is no
impact on dilution attributable to the exchange of Units to be issued to
the Continuing Investors due to the effect of minority interest.
(3) Dilution is determined by subtracting pro forma net tangible book value
per share of Common Stock after giving effect to the Formation
Transactions and the Offering from the assumed initial public offering
price paid by a new investor for a share of Common Stock.
The following table sets forth, on a pro forma basis giving effect to the
Offering and the Formation Transactions: (i) the number of shares of Common
Stock to be sold by the Company in the Offering and the number of Units issued
to the Continuing Investors in connection with the Formation Transactions;
(ii) the net tangible book value as of September 30, 1996 of the assets
contributed to the Operating Partnership in the Formation Transactions; and
(iii) the net tangible book value of the average contribution per share/Unit
based on total contributions. See "Risk Factors--Immediate and Substantial
Dilution."
<TABLE>
<CAPTION>
SHARES/UNITS BOOK VALUE OR CASH
ISSUED(1)(2) CONTRIBUTIONS AVERAGE PRICE
------------------ ------------------------ PER
NUMBER PERCENT AMOUNT PERCENT SHARE/UNIT
---------- ------- ---------- --------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
New investors(2)........ 11,360,000 80.8% $ 226,000 (3) 242.1 % $ 20.00
Units issued to
Continuing Investors in
connection with the
Formation
Transactions........... 2,692,374 19.2% (132,643)(4) (142.1)% $(49.27)
---------- ----- ---------- --------
Total............... 14,052,374 100.0% $ 93,357 100.0 %
========== ===== ========== ========
</TABLE>
- -------
(1) Reflects the shares of Common Stock offered hereby and the Units to be
issued to the Continuing Investors in exchange for assets contributed in
connection with the Formation Transactions at the initial exchange ratio
of one share of Common Stock for each Unit. There are, however, certain
restrictions on the exchange of Units. See "Partnership Agreement of the
Operating Partnership--Redemption/Exchange Rights."
(2) Includes 60,000 restricted shares of Common Stock that will be purchased
by an officer of the Company, who is not a Continuing Investor, for $.01
per share ($600 in the aggregate) in connection with a grant pursuant to
the Company's Stock Incentive Plan.
(3) This amount is based on the assumed initial public offering price of
$20.00.
(4) Based on the September 30, 1996 pro forma book value of the assets to be
contributed to the Operating Partnership in connection with the Formation
Transactions less $19.42 million attributable to underwriting discounts
and commissions and estimated expenses of the Offering.
59
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth certain financial data on a pro forma basis
for the Company, and on an historical basis for the Kilroy Group, which
consist of the Combined Financial Statements of the Kilroy Group whose
financial results will be consolidated in the historical and pro forma
financial statements of the Company. The financial data should be read in
conjunction with the historical and pro forma financial statements and notes
thereto included in this Prospectus. The combined historical summary financial
data as of December 31, 1994, 1995 and September 30, 1996 and for each of the
three years in the period ended December 31, 1995 and the nine months ended
September 30, 1995 and 1996 have been derived from the Combined Financial
Statements of the Kilroy Group audited by Deloitte & Touche LLP, independent
public accountants, whose report with respect thereto is included elsewhere in
this Prospectus. The selected combined historical financial and operating
information as of December 31, 1993, 1992 and 1991 and for the years ended
December 31, 1992 and 1991 have been derived from the unaudited Combined
Financial Statements of the Kilroy Group and, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the operating information for the unaudited
periods. The pro forma data assume the completion of the Formation
Transactions, including acquisition of the Acquisition Properties and the
consummation of the Offering (based upon the midpoint of the range of the
initial public offering price set forth on the cover page of this Prospectus)
and the Financing and use of the aggregate net proceeds therefrom as described
under "Use of Proceeds" as of the beginning of the periods presented for the
operating data and as of the balance sheet date for the balance sheet data.
The pro forma financial data do not give effect to the recent extension of the
tenant lease with Hughes Space & Communications with respect to space leased
in the Office Property located at 2250 E. Imperial Highway, El Segundo,
California and a portion of the space leased in the Office Property located at
2240 E. Imperial Highway, El Segundo, California. The pro forma financial data
are not necessarily indicative of what the actual financial position or
results of operations of the Company would have been as of and for the periods
indicated, nor does it purport to represent the future financial position and
results of operations.
60
<PAGE>
THE COMPANY (PRO FORMA) AND KILROY GROUP (HISTORICAL)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------------- --------------------------------------------------------------
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA --------------------- PRO FORMA ----------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
--------- ------------ -------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Rental income.......... $ 30,635 $ 25,156 $ 24,056 $39,141 $ 32,314 $ 31,220 $ 34,239 $ 32,988 $ 29,300
Tenant reimbursements.. 3,326 2,583 2,377 3,886 3,002 1,643 4,916 5,076 5,416
Parking income......... 1,317 1,317 1,193 1,582 1,582 1,357 1,360 1,286 1,358
Development and
management fees....... -- 580 926 -- 1,156 919 751 882 779
Sale of air rights..... -- -- 4,456 4,456 4,456 -- -- -- --
Lease termination
fees.................. -- -- -- 100 100 300 5,190 48 --
Other income........... 364 65 211 705 298 784 188 221 206
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Total revenues......... 35,642 29,701 33,219 49,870 42,908 36,223 46,644 40,501 37,059
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Property expenses...... 6,411 5,042 5,045 8,668 6,834 6,000 6,391 6,384 6,971
Real estate taxes
(refunds)............. 1,457 970 1,088 2,002 1,416 (448) 2,984 3,781 2,377
General and
administrative
expense............... 3,062 1,607 1,554 4,083 2,152 2,467 1,113 1,115 841
Ground lease........... 832 579 542 1,127 789 913 941 854 726
Development expenses... -- 584 564 -- 737 468 581 429 255
Option buy-out cost.... 3,150 3,150 -- -- -- -- -- -- --
Interest expense....... 5,937 16,234 18,660 7,916 24,159 25,376 25,805 26,293 26,174
Depreciation and
amortization.......... 7,668 6,838 7,171 10,580 9,474 9,962 10,905 10,325 9,116
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Total expenses......... 28,517 35,004 34,624 34,376 45,561 44,738 48,720 49,181 46,460
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Income (loss) before
equity in income of
subsidiary, minority
interest and
extraordinary item.... 7,125 (5,303) (1,405) 15,494 (2,653) (8,515) (2,076) (8,680) (9,401)
Equity in income (loss)
of subsidiary......... (58) -- 136 -- -- -- -- --
Minority interest...... (1,357) -- (3,001) -- -- -- -- --
Extinguishment of
debt.................. -- 20,095 15,267 -- 15,267 1,847 -- -- --
-------- ---------- -------- ------- --------- --------- --------- --------- --------
Net income (loss)...... $ 5,710 $ 14,792 $ 13,862 $12,629 $ 12,614 $ (6,668) $ (2,076) $ (8,680) $ (9,401)
======== ========== ======== ======= ========= ========= ========= ========= ========
Pro forma net income
per share(1).......... $ 0.50 $ 1.11
======== =======
<CAPTION>
DECEMBER 31,
----------------------------------------------------
SEPTEMBER 30, 1996 COMBINED HISTORICAL
----------------------- ----------------------------------------------------
COMBINED
PRO FORMA HISTORICAL 1995 1994 1993 1992 1991
--------- ------------ --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Real estate assets,
before accumu-
lated depreciation and
amortization.......... $285,150 $ 227,127 $ 224,983 $ 223,821 $ 222,056 $ 221,423 $220,363
Total assets........... 210,603 131,062 132,857 143,251 148,386 161,008 169,147
Mortgages and loans.... 96,000 224,046 233,857 250,059 248,043 250,792 245,645
Total liabilities...... 109,981 244,285 254,683 273,585 263,346 263,156 254,786
Minority interest...... 19,319
Stockholders' equity
(deficit)............. 81,303 (113,223) (121,826) (130,334) (114,960) (102,148) (85,639)
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------------------------- ------------------------------------------
COMBINED HISTORICAL COMBINED HISTORICAL
PRO FORMA ---------------------- PRO FORMA -------------------------------
1996 1996 1995 1995 1995 1994 1993
----------------------- ---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
Funds from
Operations(2)......... $18,243 $4,685 $1,310 $22,018 $2,365 $1,447 $3,639
Cash flows from:
Operating activities... -- 5,528 9,270 -- 10,071 6,607 11,457
Investing activities... -- (2,140) (446) -- (1,162) (1,765) 2,028
Financing activities... -- (3,388) (8,824) -- (8,909) (4,842) (13,485)
Office Properties:
Square footage......... 2,037,414 1,688,383 1,688,383 2,037,414 1,688,383 1,688,383 1,688,383
Occupancy.............. 79.8% 76.3% 72.8% 77.0% 72.8% 73.3% 81.0%
Industrial Properties:
Square footage......... 1,337,697 916,570 916,570 1,337,697 916,570 916,570 916,570
Occupancy.............. 93.7% 90.8% 98.4% 92.2% 98.4% 79.7% 77.6%
</TABLE>
- -------
(1) Pro forma net income per share equals pro forma net income divided by the
11,360,000 shares of Common Stock outstanding after the Offering.
(2) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), Funds from Operations represents net income (loss) before
minority interest of unit holders (computed 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 after adjustments for
unconsolidated partnerships and joint ventures. Non- cash adjustments to
Funds from Operations were as follows: in all periods, depreciation and
amortization; in 1996, 1995 and 1994, gains on extinguishment of debt; and
in pro forma 1996 and 1995, non-cash compensation. Further, in 1996 and
1995 non-recurring items (sale of air rights and option buy-out cost) were
excluded. Management considers Funds from Operations an appropriate
measure of performance of an equity REIT because industry analysts have
accepted it as such. 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 by other equity REITs and,
accordingly, may not be comparable to such other REITs. Further, Funds
from Operations does not represent amounts available for management's
discretionary use because of needed capital replacement or expansion, debt
service obligations, or other commitments and uncertainties. See notes
(9), (10) and (11) under the caption "Distribution Policy" and the notes
to the historical financial statements of the Kilroy Group. Funds from
Operations should not be considered as an alternative for net income as a
measure of profitability nor is it comparable to cash flows provided by
operating activities determined in accordance with GAAP.
61
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Combined Financial Statements for the Kilroy Group and
notes thereto appearing elsewhere in this Prospectus. The Combined Financial
Statements of the Kilroy Group are comprised of the operations, assets and
liabilities of the Properties other than the Acquisition Properties. As part
of the Formation Transactions, the Properties will be contributed to the
Operating Partnership, of which the Company will be the sole general partner
and the beneficial owner of an approximately 80.8% interest. As a result, for
accounting purposes, the financial information of the Operating Partnership
and the Company will be consolidated.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1996 Compared to Nine Months Ended September
30, 1995
Total revenues decreased $3.5 million, or 10.6%, for the nine months ended
September 30, 1996 compared to the same period for 1995. Revenues from base
rents increased $1.1 million, or 4.6%, to $25.2 million in the 1996 period
compared to $24.1 million in the 1995 period. Rents from Office Properties
increased $0.8 million during the nine months ended September 30, 1996 from
the comparable period in 1995. Such increase was due to office space under
lease increasing from 1,229,000 square feet at September 30, 1995 to 1,288,000
square feet at September 30, 1996. The majority of this increase relates to
leasing at Kilroy Airport Center Long Beach. There was no significant change
in rent per square foot during the 1996 period compared to the 1995 period.
Rents from Industrial Properties increased a net $0.3 million during the nine
months ended September 30, 1996 compared to the same period in 1995. The net
increase was due to a lease with a Consumer Price Index ("CPI") increase and
the effect of the 2260 E. El Segundo Boulevard Building being leased for the
entire nine months ended September 30, 1996. Tenant reimbursements and parking
revenues increased to $2.6 million and $1.3 million, respectively, in the 1996
period compared to $2.4 million and $1.2 million for the same period in 1995.
The overall $0.3 million increase is primarily due to increased billable
operating expenses resulting from new leases and parking income. Revenues for
1995 include a gain on the sale of air rights of $4.5 million at Kilroy
Airport Center at El Segundo. See Note 2 to the Combined Financial Statements.
Expenses in the nine months ended September 30, 1996 increased by $0.4
million, or 1.1%, to $35.0 million compared to $34.6 million in the 1995
period. During the nine months ended September 30, 1996, the Company accrued
the costs of an option buy-out of $3.15 million for the cancellation of an
option to purchase a 50% equity interest in Kilroy Airport Center at El
Segundo. Interest expense decreased $2.5 million, or 13.4%, to $16.2 million
in 1996 from $18.7 million in 1995, primarily as a result of the forgiveness
and restructuring of certain debt in 1995 and 1996 (see Note 4 to the Combined
Financial Statements).
Net income was $14.8 million for the nine months ended September 30, 1996
compared to $13.9 million for the same period in 1995. The increase of $0.9
million is due primarily to a decrease in interest expense of $2.5 million, an
increase in extraordinary gains of $4.8 million less the nonrecurring option
buy-out cost of $3.15 million for the 1996 period and the sale of air rights
of $4.5 million in 1995.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
Total revenues increased $6.7 million, or 18.5%, for the year ended December
31, 1995 compared to the year ended December 31, 1994. Revenues from base
rents increased $1.1 million, or 3.5%, to $32.3 million in 1995 from $31.2
million in 1994. In 1995, rents from Industrial Properties increased $0.8
million from the year ended December 31, 1994, primarily due to the effect of
12-months' rental for the Property located at 2265 E. El Segundo Boulevard
compared to four-months' rental in 1994. Office square footage and average
rent per net rentable square foot remained relatively unchanged for the year
ended December 31, 1995 compared to the year ended December 31, 1994.
Industrial square footage under lease increased to 902,000 at December 31,
1995 as compared to 730,000 a year earlier. The 2260 E. El Segundo Boulevard
building was leased in April 1995 after being vacant during 1994. The Company
also leased the 1230 S. Lewis St. property in February 1995
62
<PAGE>
at a rate of $6.11 per net rentable square foot, down from the rate of $6.43
in effect for the prior year. Tenant reimbursements increased to $3.0 million
in 1995 from $1.6 million in 1994 due principally to the 1994 $1.5 million
refund to tenants for property tax refunds. Parking revenues increased to
$1.6 million in 1995 from $1.4 million in 1994 due to recognition of 12-
months' parking income for Kilroy Airport Center Long Beach in 1995 compared
to two months in 1994, together with increased tenant parking revenues at
Kilroy Airport Center at El Segundo. Revenues for 1995 include a gain on the
sale of air rights of $4.5 million referred to above. Other income decreased
$0.5 million to $0.3 million during 1995 compared to 1994, primarily as a
result of nonrecurring interest income of $0.4 million on the property tax
refunds referred to below.
Expenses in 1995 increased $0.8 million, or 1.8%, to $45.6 million. Property
operating expenses increased $0.8 million, or 13.9%, primarily due to
increased utility costs, increases in employee wages and benefits and a $0.3
million management fee paid to KI to cover costs of the loan renegotiation at
Kilroy Airport Center at El Segundo. Real estate taxes increased $1.9 million,
to $1.4 million in 1995 from a credit balance of $0.4 million in 1994,
primarily due to the $2.4 million property tax refund recorded by the Company
in 1994 and the effect of a reduction in aggregate assessed property values in
1995. General and administrative expenses decreased $0.3 million, or 12.0%, to
$2.2 million in 1995 from $2.5 million in the 1994 period, primarily due to a
$0.3 million penalty for late payment of property taxes in 1994. Interest
expense decreased $1.2 million to $24.2 million in 1995 from $25.4 million in
1994 due to the September 1995 extension of the mortgage on Kilroy Airport
Center at El Segundo at a lower interest rate and the forgiveness of certain
debt, offset in part by the effect of higher interest rates on the variable
rate mortgage secured by Kilroy Airport Center Long Beach. See Note 4 to the
Combined Financial Statements. Ground lease expense decreased $0.1 million to
$0.8 million in 1995, reflecting the effect of 12 months' reduction of ground
rent for Phase III of Kilroy Airport Center Long Beach compared to six months
in 1994. The $0.5 million decrease in depreciation and amortization to
$9.5 million in 1995 results from certain assets becoming fully amortized.
Net income increased $19.3 million to $12.6 million in 1995 compared to a
net loss of $6.7 million in 1994, primarily due to the sale of air rights
discussed above and a $13.4 million increase in gains on extinguishment of
debt to $15.3 million in 1995 compared to $1.8 million in 1994.
Year Ended December 31, 1994 Compared to Year Ended December 31, 1993
Total revenues decreased $10.4 million, or 22.3%, for the year ended
December 31, 1994 compared to the year ended December 31, 1993. The primary
reason for the decrease in revenue was the receipt of lease termination fees
in 1993 of $5.2 million, of which $5.0 million related to a lease termination
at the SeaTac Office Center and $0.2 million to the Kilroy Airport Center Long
Beach. Revenues from base rents decreased $3.0 million, or 8.8%, to $31.2
million for the year ended December 31, 1994 compared to $34.2 million for the
year ended December 31, 1993, due to the lease termination at the SeaTac
Office Center referred to above (with $2.0 million in rental revenue in 1993),
a lease renegotiation resulting in a lower rent rate effective June 1, 1994
for a lease on office space in the parking structure at Kilroy Airport Center
at El Segundo, partially offset by continuing leasing activity at Kilroy
Airport Center Long Beach. Office square footage under lease decreased to
1,239,000 at December 31, 1994 from 1,360,000 at December 31, 1993. The
decrease is due primarily to the termination of the lease at the SeaTac Office
Center (211,000 square feet) offset by 30,000 square feet of new leases
elsewhere in the project and a 55,000 increase in square footage leased at
Kilroy Airport Center Long Beach. Average office rent per square foot declined
$2.33 per square foot in 1994 from 1993 due to the lease renegotiation
referred to above and a softness in the Southern California rental market in
1994. Industrial rents decreased $0.2 million in 1994 primarily due to an
extension of a lease at a reduced rate.
Tenant reimbursements decreased to $1.6 million in 1994 from $4.9 million in
1993, due to a $1.5 million refund to tenants in 1994 for property tax refunds
(for the tax years 1990 through 1994) and an approximate $1.5 million decrease
due to the termination of the SeaTac Office Center lease referred to above.
Tenant reimbursements consist of additional rental revenue from tenants
covering operating expenses, such as utilities and property taxes, and are
recorded as revenue in accordance with the lease terms. Other income increased
$0.6 million, to $0.8 million in 1994 from $0.2 million in 1993, primarily as
a result of interest income of $0.4 million on the property tax refunds
referred to above.
63
<PAGE>
Expenses in 1994 decreased $4.0 million, or 8.2%, to $44.7 million compared
to $48.7 million in 1993. Property expenses decreased $0.4 million, or 6.1%,
due to the vacancy at SeaTac Office Center referred to above and the related
reduction in expenses. Real estate taxes decreased $3.4 million to a credit
balance of $0.4 million in 1994 from taxes of $3.0 million in 1993, primarily
due to property tax refunds of $2.4 million (for the tax years 1990 through
1994) recorded by the Company in 1994 together with an approximate $1.0
million decrease resulting from a reduction in aggregate assessed value of the
Properties during the year ended December 31, 1994. General and administrative
expenses increased $1.4 million, to $2.5 million in 1994 from $1.1 million in
1993, principally due to a $0.6 million increase in the allowance for
uncollectible rent attributable to a single tenant, a $0.3 million penalty in
1994 for late payment of property taxes and $0.2 million of expenses relating
to a financing arrangement which was not consummated. Interest expense
decreased $0.4 million, to $25.4 million in 1994 due to a decrease in the
interest rate on the variable rate mortgage secured by Kilroy Airport Center
Long Beach. Depreciation and amortization decreased $0.9 million to $10.0
million in 1994 as a result of certain assets becoming fully amortized.
The net loss increased $4.6 million to $6.7 million in 1994 compared to a
net loss of $2.1 million in 1993, due to lease termination fees of $5.2
million received in 1993 and the net effect of the items discussed above.
DEVELOPMENT AND MANAGEMENT FEES
The Kilroy Group's third-party development activities are summarized below:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
-------------- ----------------
1996 1995 1995 1994 1993
------ ------ ------ ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Revenues..................................... $580 $926 $1,156 $919 $751
Expenses..................................... 584 564 737 468 581
------ ------ ------ ---- ----
Excess of revenues over expenses............. $ (4) $362 $ 419 $451 $170
====== ====== ====== ==== ====
</TABLE>
Subsequent to the Formation Transactions, the Company's and the Kilroy
Group's development activities will be conducted through Kilroy Services,
Inc., See "Formation and Structure of the Company--Formation Transactions" and
"Formation of Kilroy Services, Inc."
The increases in revenues in 1994, as compared with 1993, and in 1995, as
compared with 1994, was a result of the commencement of development services
for the Riverside Judicial Center (commencing in 1994) and the Northrop
Grumman Corporation's property located in Pico Rivera, California (the
agreement for which commenced in 1995 and expires in February 1997). The $0.3
million decrease in revenues during the nine months ended September 30, 1996
compared with the same period in 1995 was primarily the result of a decrease
in development services at the Calabasas Park Centre which was acquired by the
stockholders of KI in 1996. Revenues from Calabasas Park Centre were $0.1
million, $0.4 million, $0.5 million, $0.7 million and $0.7 million for the
nine months ended September 30, 1996 and 1995 and the years ended December 31,
1995, 1994 and 1993, respectively. The remainder of the decrease was due to
the substantial completion of development services for the Riverside Judicial
Center. A portion of the related expenses of development and management
services are fixed in nature and have not fluctuated significantly, while the
majority of the related expenses are variable in nature and fluctuate with the
level of development and management activities. With the acquisition of
Calabasas Park Centre by the Kilroy Group in 1996, and completion of the fee
activities pursuant to the agreement with Northrop Grumman in February 1997,
the Company does not expect significant fee activity from these sources.
ADOPTION OF SFAS NO. 121
During 1995, the Company adopted 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." No impairments have been determined and,
therefore, no real estate carrying amounts have been adjusted.
64
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
Upon the consummation of the Offering and the Formation Transactions and the
use of proceeds therefrom, the Company will have (i) acquired the Acquisition
Properties, (ii) reduced its total indebtedness by approximately $128.0
million and (iii) established working capital cash reserves of approximately
$20.0 million and capital expenditure cash reserves of approximately $2.3
million. The Company is currently negotiating a $100.0 million Credit
Facility, which the Company expects to enter into shortly after consummation
of the Offering. The Credit Facility is expected to be used primarily to
finance acquisitions of additional properties. The availability of funds under
the Credit Facility is expected to be subject to, among other things, the
value of the underlying collateral securing it. The Company expects that,
initially, it will have approximately $50.0 million in availability under the
Credit Facility. In connection with certain leases signed after September 30,
1996, the Company is obligated to fund approximately $2.0 million in tenant
improvements and leasing commissions. This obligation will be assumed by the
principals of KI. The Company presently expects to finance development
activities from working capital and from funds from operations. See "The
Financing--The Credit Facility." In addition, if the Offering is consummated
on or before June 30, 1997, the Company will pay to Richard E. Moran Jr., the
Company's Executive Vice President, Chief Financial Officer and Secretary, a
bonus of $200,000, pursuant to the terms of his employment agreement. This
obligation also will be assumed by the principals of KI. See "Management--
Executive Compensation."
The Company anticipates that distributions will be paid from cash available
for distribution, which is expected to exceed cash historically available for
distribution as a result of the reduction in debt service anticipated to
result from the repayment of indebtedness. The Company presently intends to
make distributions quarterly, subject to the discretion of the Board of
Directors. Amounts accumulated for distribution will be invested by the
Company 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 the Offering and the Formation Transactions will
improve its financial performance through changes to its capital structure,
principally the substantial reduction in its overall debt and its debt to
equity ratio. Through the Formation Transactions, the Company will repay all
of its existing mortgage debt of $224.0 million secured by the Properties
(other than the Acquisition Properties) and will have debt outstanding of
$96.0 million comprised of the $84.0 Million Loan and the $12.0 million SeaTac
Loan. The $84.0 Million Loan will bear interest at 8.2%, amortize over 25
years and mature in 2005. The SeaTac Loan will bear interest at a variable
rate and mature in July 1997. Thus, total secured debt after the Formation
Transactions (assuming no advances under the Credit Facility) will be reduced
by approximately $128.0 million. This will result in a significant reduction
in annual mortgage interest expense as a percentage of total revenue (15.9% on
a pro forma basis as compared to 56.3% for the historical year ended December
31, 1995). Cash from operations required to fund interest expense will
decrease substantially, although this reduction will be offset by the use of
cash from operations to meet annual REIT distribution requirements. The market
capitalization of the Company, based on the assumed initial public offering
price of $20.00 per share and the debt outstanding at the completion of the
Offering, is expected to be approximately $377.0 million with total debt of
approximately $96.0 million. As a result, the Company's debt to total market
capitalization ratio will be approximately 25.5%.
The Company was adversely impacted in 1993 and 1994 by the decline in market
rental rates, higher vacancies and its higher leverage which prevented it from
meeting certain of its financial obligations. Bank notes relating to
properties other than the SeaTac Office Center aggregating $9.7 million and
$23.7 million were in default as of December 31, 1995 and 1994, respectively.
Past due interest relating to the notes was $2.9 million and $5.7 million as
of December 31, 1995 and 1994, respectively. In addition, property taxes of
$0.2 million, $0.5 million and $0.6 million were past due as of September 30,
1996, and December 31, 1995 and 1994, respectively. In June 1996, the Company
repaid the principal of the bank notes relating to such properties, and the
applicable accrued interest, and all but $40,000 of the property taxes, with
the proceeds of a financing secured by certain of the Industrial Properties.
With respect to the SeaTac Office Center, a high vacancy rate in 1993 resulted
in insufficient cash flow to service the underlying debt on this property. The
high vacancy rate has
65
<PAGE>
continued and a note payable to an insurance company having a principal
balance of $20.2 million and accrued interest of $1.9 million, as of September
30, 1996, has been in default since October 1995. In October 1996, the Company
successfully negotiated a discounted payoff with the lender and the ground
lessor which provides for a payoff or purchase of the lender's note at a
discount on or before February 10, 1997. The Company believes it will be able
to meet this commitment irrespective of the consummation of the Offering based
upon discussions with other sources of financing. Bank notes relating to the
SeaTac Office Center aggregating $6.8 million were in default as of December
31, 1995 and 1994. Past due interest relating to these notes was $2.1 million
and $1.4 million as of December 31, 1995 and 1994, respectively. In June 1996,
the Company repaid the principal of the bank notes and the applicable accrued
interest relating to the SeaTac Office Center with the proceeds of a financing
secured by certain of the Industrial Properties.
The Company expects to meet its short-term liquidity requirements generally
through its initial working capital, net cash provided by operations and
additional debt or equity financings. The Company estimates that for the 12
months ending September 30, 1997 it will incur approximately $1.1 million of
expenses attributable to non-incremental revenue generating tenant
improvements and leasing commissions and $310,000 of capital expenditures not
reimbursed by tenants. The Company expects that it will incur tenant
improvement and leasing commission costs in connection with the leasing-up of
available space at the SeaTac Office Center. Based upon current market
conditions, the Company expects such tenant improvement and leasing commission
costs to equal approximately $ per net rentable square foot. As of
December 31, 1996, approximately 330,000 net rentable square feet were
available for lease at the SeaTac Office Center. In addition, the Company will
set aside approximately $2.3 million of the net proceeds of the Offering for
certain nonrecurring capital expenditures. See "Distribution Policy." From
such $2.3 million capital expenditure cash reserves, the Company will pay to
Hughes Space & Communications, in connection with Formation Transactions, the
remaining balance of approximately $1.4 million in connection with the
amendment and/or extension of leases of office space at the Office Properties
located at Kilroy Airport Center, including $500,000 in connection with a
tenant improvement allowance for the properties located at 2240 and 2250 E.
Imperial Highway and the balance in connection with the cancellation of an
option to purchase an equity interest in the Office Properties located at
Kilroy Airport Center at El Segundo. In November 1996, $2.26 million of the
option buy-out liability was paid by KI and its stockholders. Also from such
$2.3 million capital expenditure cash reserves, in connection with the
Financing, the Company will make earthquake-related improvements to certain of
the Properties in an aggregate amount of approximately $500,000. The Company
presently has no financial commitments in its capacity as a developer of real
estate projects and believes that it will have sufficient capital resources to
satisfy its obligations during the 12-month period following completion of the
Offering, and that its net cash provided by operations will be adequate to
meet both operating requirements and expected distributions by the Company in
accordance with REIT requirements.
The Company expects to meet certain of its long-term liquidity requirements,
including the repayment of long-term debt of $84.0 million (less scheduled
principal repayments) in 2005, the repayment of debt of $12.0 million in July
1997 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.
The Phase I environmental assessments of the Properties have not revealed
any environmental liability that the Company believes would have a material
adverse effect on the Company's financial condition or results of operations
taken as a whole, nor is the Company aware of any such material environmental
liability. See "Risk Factors--Government Regulations--Environmental Matters"
and "Business and Properties--Government Regulations--Environmental Matters."
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 financings. The Kilroy Group incurred net losses before extraordinary
items in each of the last five years and for the nine-month period ended
September 30, 1996.
66
<PAGE>
However, after adding back depreciation and amortization, the Properties have
generated positive net operating cash flows for the last four years.
The Company's net cash provided by operating activities decreased to $6.6
million for the year ended December 31, 1994 from $11.5 million for the same
period in 1993 primarily as a result of lease termination fees of $5.2
received in 1993. The Company's net cash from operating activities increased
$3.5 million from the year ended December 31, 1994 compared to the same period
in 1995, or from $6.6 million in 1994 to $10.1 million in 1995. The increase
was primarily due to the sale of air rights in 1995 of $4.5 million. The
Company's net cash from operating activities decreased $3.8 million to $5.5
million during the nine months ended September 30, 1996 compared with $9.3
million in the comparable 1995 period. The decrease was a result of the sale
of air rights of $4.5 million in 1995, the option buy-out cost of $3.15
million in 1996, offset by an increase in total rent of $1.3 million in 1996
and a decrease in interest expense of $2.5 million in 1996.
Net cash received from investing activities of $2.0 million for the year
ended December 31, 1993 decreased to net cash used in investing activities of
$1.8 million for the same period in 1994 due to the receipt in the 1993 period
of a $2.7 million reimbursement of tenant improvements. Net cash used in
investing activities decreased $0.6 million to $1.2 million for the year ended
December 31, 1995 from $1.8 million for 1994 due to a decrease in the number
of new lease transactions and the resulting decrease in the level of tenant
improvements. Net cash used in investing activities increased $1.7 million to
$2.1 million in the nine months ended September 30, 1996 from $0.4 million in
the 1995 period primarily due to an increase in the number of new lease
transactions and the resulting increase in the level of tenant improvements.
The Company's cash flows used in financing activities decreased $8.7 million
to $4.8 million from $13.5 million for the year ended December 31, 1993 as a
result of net borrowings of $3.9 million during the year ended December 31,
1994 compared to a net repayment of $2.7 million of debt in the 1993 period,
together with an decrease in deemed distributions to partners to $8.7 million
during the year ended December 31, 1994 compared to $10.7 million in the 1993
period. Cash flows used in financing activities increased $4.1 million to $8.9
million for the year ended December 31, 1995 compared to net cash used in
financing activities of $4.8 million for the same period in 1994 as result of
net repayments of debt in the 1995 period compared to net borrowings in the
1994 period and a $4.6 million decrease in deemed distributions to partners.
Cash flows used in financing activities was $3.4 million for the nine months
ended September 30, 1996 consisting of net proceeds from issuance of debt of
$2.8 million, less $6.2 million in distributions to partners.
FUNDS FROM OPERATIONS
Industry analysts generally consider Funds from Operations, as defined by
NAREIT, an alternative measure of performance of an equity REIT. Funds from
Operations is defined by NAREIT to mean net income (loss) determined in
accordance with GAAP, excluding gains (or losses) from debt restructuring and
sales of property, plus depreciation and amortization (other than 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
audited Combined Financial Statements and selected financial data included
elsewhere in this Prospectus. 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 by other equity REITs and,
accordingly, may not be comparable to 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.
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.
67
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Upon the consummation of the Offering and the Formation Transactions, the
Company (through the Operating Partnership) will own 14 Office Properties
encompassing an aggregate of approximately 2.0 million rentable square feet
and 12 Industrial Properties encompassing an aggregate of approximately
1.3 million rentable square feet. Eleven of the 14 of the Office Properties as
well as 11 of the 12 Industrial Properties are located in prime Southern
California suburban submarkets (including a complex of three Office Properties
located adjacent to the Los Angeles International Airport, presently the
nation's second largest air cargo port, and a complex of five Office
Properties located adjacent to the Long Beach Municipal Airport). The Company
also will own three Office Properties located adjacent to the Seattle-Tacoma
International Airport in the State of Washington, and one Industrial Property
located in Phoenix, Arizona. As of September 30, 1996, the Office Properties
were approximately 79.8% leased to 130 tenants and the Industrial Properties
were approximately 93.7% leased to 20 tenants. The Company has developed,
managed and leased all but two of the 14 Office Properties and all but five of
the 12 Industrial Properties. The Company believes that all of its Properties
are well-maintained and, based on recent engineering reports, do not require
significant capital improvements.
In addition to the Office and Industrial Properties, the Company has
development rights with respect to approximately 24 acres of developable land
(net of acreage required for streets), located in Southern California. See "--
Development, Leasing and Management Activities." Upon consummation of the
Offering, the Company also will have the option to purchase three office
properties and 18 acres of undeveloped land currently beneficially owned and
controlled by John B. Kilroy, Sr. and John B. Kilroy, Jr. which will not be
contributed to the Operating Partnership immediately upon consummation of the
Offering. The Company will have the right to acquire the option properties
under the terms and conditions described below. All of these properties will
be managed by the Company. See "--Excluded Properties."
In general, the Office Properties are leased to tenants on a full service
basis, with the landlord obligated to pay the tenant's proportionate share of
taxes, insurance and operating expenses up to the amount incurred during the
tenant's first year of occupancy ("Base Year") or a negotiated amount
approximating the tenant's pro rata share of real estate taxes, insurance and
operating expenses ("Expense Stop"). The tenant pays its pro rata share of
increases in expenses above the Base Year or Expense Stop. All leases for the
Industrial Properties are written on a triple net basis, with tenants paying
their proportionate share of real estate taxes, operating costs and utility
costs.
68
<PAGE>
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Office Properties managed
by the Company (i.e., all of the Office Properties other than the Thousand
Oaks Office Property and the La Palma Business Center Office Property which
are being acquired concurrently upon consummation of the Offering) since
January 1, 1992 (based upon an average of all lease transactions during the
respective periods):
OFFICE PROPERTIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE-MONTH
---------------------------------- PERIOD ENDED
1992 1993 1994 1995 SEPTEMBER 30, 1996
------- ------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C>
Number of lease
transactions during
period(1).............. 27 19 36 27 31
Rentable square feet
during period(1)....... 221,946 127,126 354,018 105,544 341,940
Base rent ($)(1)(2)..... 21.41 19.32 18.89 19.31 19.52
Tenant improvements
($)(3)................. 9.04 6.82 15.01 7.30 8.99
Leasing commissions
($)(4)................. 1.37 2.18 2.66 3.03 2.87
Other concessions
($)(5)................. -- -- -- -- --
Effective rent ($)(6)... 18.65 17.72 16.97 17.30 17.73
Expense Stop ($)(7)..... 6.05 6.15 6.77 6.77 6.70
Effective equivalent
triple net rent
($)(8)................. 12.43 11.57 10.20 10.53 11.03
Occupancy rate at end of
period (%)............. 74.8% 76.1% 75.8% 75.6% 78.7%
- --------
(1) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(2) Equals aggregate base rent received over their respective terms from all
lease transactions during the period, divided by the terms in months for
such leases, multiplied by 12, divided by the total net rentable square
feet leased under all lease transactions during the period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the terms in months from such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
(7) Equals the amount of real estate taxes, operating costs and utility costs
which the landlord is obligated to pay on an annual basis. The tenant is
required to pay any increases above such amount.
(8) Equals effective rent minus Expense Stop.
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Thousand Oaks Office
Property since January 1, 1992 (based upon an average of all lease
transactions during the respective periods):
<CAPTION>
YEAR ENDED DECEMBER 31, NINE-MONTH
---------------------------------- PERIOD ENDED
1992 1993 1994 1995 SEPTEMBER 30, 1996
------- ------- ------- ------- ------------------
<S> <C> <C> <C> <C> <C>
Number of lease
transactions during
period(1).............. -- 1 1 9 1
Rentable square feet
during period(1)....... -- 1,437 2,745 76,266 2,745
Base rent ($)(1)(2)..... -- 25.01 23.40 23.09 24.00
Tenant improvements
($)(3)................. -- 16.25 -- 5.04 --
Leasing commissions
($)(4)................. -- -- -- 4.90 --
Other concessions
($)(5)................. -- -- -- -- --
Effective rent ($)(6)... -- 22.73 23.40 21.42 24.00
Expense Stop ($)(7)..... -- 6.45 6.16 6.49 6.16
Effective equivalent
triple net rent
($)(8)................. -- 16.28 17.24 14.93 17.84
Occupancy rate at end of
period (%)(9).......... NA NA NA 100.0% 100.0%
</TABLE>
(footnotes on next page)
69
<PAGE>
- --------
(1) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(2) Equals aggregate base rent received over their respective terms from all
lease transactions during the period, divided by the terms in months for
such leases, multiplied by 12, divided by the total net rentable square
feet leased under all lease transactions during the period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the terms in months from such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
(7) Equals the amount of real estate taxes, operating costs and utility costs
which the landlord is obligated to pay on an annual basis. The tenant is
required to pay any increases above such amount. Expense Stop for 1996 is
estimated.
(8) Equals effective rent minus Expense Stop.
(9) Occupancy data is not available for the years ended December 31, 1992,
1993 and 1994.
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at 4175 E. La Palma Avenue,
Building A, La Palma Business Center since January 1, 1992 (based upon an
average of all lease transactions during the respective periods):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE-MONTH
---------------------------- PERIOD ENDED
1992 1993 1994 1995 SEPTEMBER 30, 1996(1)
------ ------ ------ ------ ---------------------
<S> <C> <C> <C> <C> <C>
Number of lease
transactions during
period(2)................ NA -- 1 1 0
Rentable square feet
during period(2)......... NA -- 3,348 2,038 --
Base rent ($)(2)(3)....... NA -- 19.36 16.48 --
Tenant improvements
($)(4)................... NA -- -- 9.69 --
Leasing commissions
($)(5)................... NA -- -- 2.06 --
Other concessions ($)(6).. NA -- -- -- --
Effective rent ($)(7)..... NA -- 19.36 14.17 --
Expense Stop ($)(8)....... NA -- 5.45 5.45 --
Effective equivalent tri-
ple net rent ($)(9)...... NA -- 13.91 8.72 --
Occupancy rate at end of
period (%)(2)(10)........ NA NA 92.6% 93.2% 91.6%
</TABLE>
- --------
(1) No leasing activity occurred during the nine-month period ended
September 30, 1996.
(2) Includes only office tenants with lease terms of 12 months or longer.
Excludes leases for amenity, parking, retail and month-to-month office
tenants.
(3) Equals aggregate base rent received over their respective terms from all
lease transactions during the period, divided by the terms in months for
such leases, multiplied by 12, divided by the total net rentable square
feet leased under all lease transactions during the period.
(4) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(5) Equals the aggregate of leasing commissions payable to employees and
third parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(6) Includes moving expenses, furniture allowances and other concessions.
(7) Equals aggregate base rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the terms in months from such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
(8) Equals the amount of real estate taxes, operating costs and utility costs
which the landlord is obligated to pay on an annual basis. The tenant is
required to pay any increases above such amount.
(9) Equals effective rent minus Expense Stop.
(10) Occupancy data is not available for the years ended December 31, 1992 and
1993.
70
<PAGE>
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the Industrial Properties
(other than the Industrial Properties at the La Palma Business Center which
are being acquired upon consummation of the Offering and the Industrial
Property located at 12752-12822 Monarch Street, Garden Grove, California,
which was acquired by KI on behalf of the Company prior to consummation of the
Offering) since January 1, 1992 (based upon an average of all lease
transactions during the respective periods):
INDUSTRIAL PROPERTIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE-MONTH
---------------------------------- PERIOD ENDED
1992 1993 1994 1995 SEPTEMBER 30, 1996(1)
------- ------- ------- ------- ---------------------
<S> <C> <C> <C> <C> <C>
Number of lease
transactions during
period................. 1 1 1 2 0
Net rentable square feet
leased during period... 100,000 70,000 76,570 171,550 --
Base rent ($)(2)........ 6.39 6.81 7.23 4.99 --
Tenant improvements
($)(3)................. 5.87 0.14 4.49 2.00 --
Leasing commissions
($)(4)................. 1.37 1.49 3.49 1.84 --
Other concessions
($)(5)................. -- -- -- -- --
Effective rent ($)(6)... 5.19 6.48 6.44 4.63 --
Expense stop ($)(7)..... -- -- -- -- --
Effective equivalent
triple net rent
($)(8)................. 5.19 6.48 6.44 4.63
Occupancy rate at end of
period (%)............. 86.0% 77.6% 79.7% 98.4% 90.8%
</TABLE>
- --------
(1) No leasing activity occurred during the nine-month period ended September
30, 1996.
(2) Equals aggregate base rent received over their respective terms from all
lease transactions during the period, divided by the terms in months for
such leases, multiplied by 12, divided by the total rentable square feet
leased under all lease transactions during the period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the terms in months from such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
(7) Leases for all Industrial Properties are written on a triple net basis,
providing for each tenant to be responsible, in addition to base rent, for
its proportionate share of real estate taxes, operating costs, utility
costs and other expenses without regard to a base year.
(8) Equals effective rent minus Expense Stop.
71
<PAGE>
The following table sets forth certain information (on a per net rentable
square foot basis) regarding leasing activity at the La Palma Business Center
and Monarch Street Industrial Properties since January 1, 1992 (based upon an
average of all lease transactions during the respective periods):
INDUSTRIAL PROPERTIES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE-MONTH
------------------------------ PERIOD ENDED
1992 1993 1994 1995 SEPTEMBER 30, 1996
----- ------ ------ ------- ------------------
<S> <C> <C> <C> <C> <C>
Number of lease
transactions during
period(1)................. NA 2 -- 4 5
Rentable square feet during
period(2)................. NA 63,094 -- 229,952 107,381
Base rent ($)(2)........... NA 7.37 -- 3.66 4.72
Tenant improvements
($)(3).................... NA 2.65 -- 0.61 0.75
Leasing commissions
($)(4).................... NA 3.61 -- 0.55 1.25
Other concessions ($)(5)... NA -- -- -- --
Effective rent ($)(6)...... NA 7.37 -- 3.48 4.34
Expense stop ($)(7)........ NA -- -- -- --
Effective equivalent triple
net rent ($)(8)........... NA 7.37 -- 3.48 4.34
Occupancy rate at end of
period (%)(9)............. NA NA 85.9% 78.7% 100.0%
</TABLE>
- --------
(1) Includes only industrial tenants with lease terms of 12 months or longer.
(2) Equals aggregate base rent received over their respective terms from all
lease transactions during the period, divided by the terms in months for
such leases, multiplied by 12, divided by the total rentable square feet
leased under all lease transactions during the period.
(3) Equals work letter costs net of estimated profit and overhead. Actual
tenant improvements may differ from estimated work letter costs.
(4) Equals the aggregate of leasing commissions payable to employees and third
parties based on standard commission rates and excludes negotiated
commission discounts obtained from time to time.
(5) Includes moving expenses, furniture allowances and other concessions.
(6) Equals aggregate base rent received over their respective terms from all
lease transactions during the period minus all tenant improvements,
leasing commissions and other concessions from all lease transactions
during the period, divided by the terms in months from such leases,
multiplied by 12, divided by the total net rentable square feet leased
under all lease transactions during the period.
(7) Leases for all Industrial Properties are written on a triple net basis,
providing for each tenant to be responsible, in addition to base rent, for
its proportionate share of real estate taxes, operating costs, utility
costs and other expenses without regard to a base year.
(8) Equals effective rent minus Expense Stop.
(9) Occupancy data is not available for the years ending December 31, 1992 and
1993.
72
<PAGE>
THE OFFICE AND INDUSTRIAL PROPERTIES
The following table sets forth certain information relating to each of the
Properties as of December 31, 1995, unless indicated otherwise. This table
gives pro forma effect to a recent extension of one of the leases with Hughes
Space & Communications with respect to two of the Office Properties located at
Kilroy Airport Center at El Segundo as if such lease renewal had occurred on
January 1, 1995. After completion of the Formation Transactions, the Company
(through the Operating Partnership) will own a 100% interest in all of the
Office and Industrial Properties other than the five Office Properties located
at Kilroy Airport Center Long Beach and the three Office Properties located at
the SeaTac Office Center, each of which are held subject to ground leases
expiring in 2035 and 2064 (assuming the exercise of the Company's options to
extend such lease), respectively.
<TABLE>
<CAPTION>
AVERAGE
PERCENTAGE PERCENTAGE BASE
NET LEASED 1995 OF 1995 RENT
RENTABLE AS OF BASE 1995 TOTAL PER EFFECTIVE
SQUARE 12/31/95 RENT EFFECTIVE BASE SQ. FT. RENT PER
PROPERTY LOCATION YEAR BUILT FEET (%)(1) ($000)(2) RENT($000)(3) RENT (%) ($)(4) SQ. FT. ($)(5)
----------------- ---------- --------- ---------- --------- ------------- ---------- ------- --------------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
Office Properties:
Kilroy Airport Center at El
Segundo
2250 E. Imperial Highway(8).... 1983 291,187 80.9 4,316 4,042 11.5 18.32 17.16
2260 E. Imperial Highway)(9)... 1983 291,187 100.0 7,160 6,545 19.1 24.59 22.48
2240 E. Imperial Highway
El Segundo, California(10)..... 1983 118,933 100.0 1,130 1,121 3.0 9.50 9.43
Kilroy Airport Center Long Beach
3900 Kilroy Airport Way(11).... 1987 126,840 94.0 2,282 2,092 6.1 19.14 17.55
3880 Kilroy Airport Way(11).... 1987 98,243 100.0 1,296 1,022 3.5 13.19 10.40
3760 Kilroy Airport Way........ 1989 165,278 92.1 3,372 2,807 9.0 22.16 18.45
3780 Kilroy Airport Way........ 1989 219,745 63.6 3,465 3,005 9.2 24.79 21.50
3750 Kilroy Airport Way
Long Beach, California......... 1989 10,457 100.0 75 28 0.2 7.21 2.66
SeaTac Office Center
18000 Pacific Highway.......... 1974 207,092 58.7 1,799 1,510 4.8 14.80 12.42
17930 Pacific Highway.......... 1980 210,899 -- -- -- -- -- --
17900 Pacific Highway
Seattle, Washington........... 1980 113,605 87.7 1,896 1,820 5.0 19.02 18.26
La Palma Business Center
4175 E. La Palma Avenue
Anaheim, California(11)....... 1985 42,790 93.2 493 475 1.3 12.37 11.92
2829 Townsgate Road
Thousand Oaks, California(11).. 1990 81,158 100.0 1,888 1,760 5.0 23.26 21.69
185 S. Douglas Street
El Segundo, California(12)..... 1978 60,000 100.0 1,313 898 3.5 21.89 14.96
--------- ----- ------ ------ ---- ----- -----
Subtotal/Weighted Average 2,037,414 77.0 30,485 27,125 81.2 19.44 17.30
--------- ----- ------ ------ ---- ----- -----
Industrial Properties:
2031 E. Mariposa Avenue
El Segundo, California......... 1954 192,053 100.0 1,556 1,296 4.1 8.10 6.75
3340 E. La Palma Avenue
Anaheim, California............ 1966 153,320 100.0 881 790 2.3 5.74 5.16
2260 E. El Segundo Boulevard
El Segundo, California(13)..... 1979 113,820 100.0 553 510 1.5 4.86 4.48
2265 E. El Segundo Boulevard
El Segundo, California......... 1978 76,570 100.0 554 493 1.5 7.23 6.44
1000 E. Ball Road
Anaheim, California(14)........ 1956 100,000 100.0 639 519 1.7 6.39 5.19
1230 S. Lewis Street
Anaheim, California............ 1982 57,730 100.0 303 284 0.8 5.25 4.92
12681/12691 Pala Drive
Garden Grove, California ...... 1970 84,700 82.6 476 454 1.3 6.81 6.48
<CAPTION>
TENANTS LEASING
PERCENTAGE 10% OR MORE OF
LEASED NET RENTABLE
AS OF SQUARE FEET PER
9/30/96 PROPERTY
(%)(6) AS OF 9/30/96(7)
---------- -----------------
<C> <S>
83.9 Hughes Space &
Communications
(33.0%)
100.0 Hughes Space &
Communications
(100.0%)
100.0 Hughes Space &
Communications
(94.6%)
94.0 McDonnell
Douglas
Corporation
(50.9%), Olympus
America, Inc.
(18.6%)
100.0 Devry, Inc.
(100.0%)
82.6 R.L. Polk & Co.
(9.8%)
92.2 SCAN Health Plan
(20.4%), Zelda
Fay Walls (12.7%)
100.0 Oasis Cafe
(37.1%),
Keywanfar &
Baroukhim
(16.1%),
SR Impressions
(15.0%)
60.0 Principal Mutual
(8.8%),
Lynden (8.8%),
Rayonier (8.0%)
-- --
87.7 Key Bank
(41.9%)(15),
Northwest
Airlines
(24.9%),
City of Sea Tac
(17.2%)
91.6 Peryam & Kroll
(26.7%),
DMV/VPI
Insurance Group
(26.5%),
Midcom
Corporation
(15.5%)
100.0 Worldcom, Inc.
(34.2%), Data
Select Systems,
Inc. (13.0%),
Pepperdine
University
(12.7%),
Anheuser Busch,
Inc. (12.0%)
100.0 Northwest
Airlines, Inc.
(100%)
------
79.8
------
Mattel, Inc.
100.0 (100%)
Furon Co., Inc.
59.2 (59.2%)
Ace Medical Co.
100.0 (100%)
100.0 MSAS Cargo
Intl., Inc.
(100%)
100.0 Allen-Bradley
Company (100%)
100.0 Extron
Electronics (100%)
82.6 Rank Video Services America, Inc.
(82.6%)
</TABLE>
(footnotes on next page)
73
<PAGE>
<TABLE>
<CAPTION>
AVERAGE
PERCENTAGE PERCENTAGE BASE PERCENTAGE
NET LEASED 1995 OF 1995 RENT LEASED
RENTABLE AS OF BASE 1995 TOTAL PER EFFECTIVE AS OF
SQUARE 12/31/95 RENT EFFECTIVE BASE SQ. FT. RENT PER 9/30/96
PROPERTY LOCATION YEAR BUILT FEET (%)(1) ($000)(2) RENT($000)(3) RENT (%) ($)(4) SQ. FT. ($)(5) (%)(6)
----------------- ---------- --------- ---------- --------- ------------- ---------- ------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2270 E. El
Segundo
Boulevard
El Segundo,
California..... 1975 7,500 100.0 129 129 0.3 17.17 17.17 --
5115 N. 27th
Avenue
Phoenix,
Arizona(16).... 1962 130,877 100.0 640 612 1.7 4.89 4.68 100.0
12752-12822
Monarch Street
Garden Grove,
CA(17)......... 1970 277,037 76.4 727 715 1.9 3.43 3.38 100.0
4155 E. La Palma
Avenue
Anaheim,
CA(11)(17)..... 1985 74,618 100.0 325 237 0.9 4.36 3.18 100.0
4125 La Palma
Avenue
Anaheim,
CA(11)(17)..... 1985 69,472 65.6 319 302 0 .8 7.00 6.63 100.0
--------- ----- ------ ------ ----- ----- ----- -----
Subtotal/Weighted
Average 1,337,697 92.2 7,102 6,341 18.8 5.76 5.14 93.7
--------- ----- ------ ------ ----- ----- ----- -----
Office &
Industrial--All
Properties 3,375,111 83.0 37,587 33,466 100.0 13.42 11.95 85.3
--------- ----- ------ ------ ----- ----- ----- -----
<CAPTION>
TENANTS LEASING
10% OR MORE OF
NET RENTABLE
SQUARE FEET PER PROPERTY
PROPERTY LOCATION AS OF 9/30/96(7)
----------------- ------------------------
<S> <C>
2270 E. El
Segundo
Boulevard
El Segundo,
California..... --
5115 N. 27th
Avenue
Phoenix,
Arizona(16).... Festival Markets, Inc. (100%)
12752-12822
Monarch Street Cannon Equipment (60%),
Garden Grove, Vanco (16.4%)
CA(17).........
4155 E. La Palma
Avenue Bond Technologies (29.6%),
Anaheim, NovaCare Orthotics (24.0%),
CA(11)(17)..... Specialty Restaurants Corp.
(21.7%)
4125 La Palma
Avenue
Anaheim, Household Finance
CA(11)(17)..... Corporation (59%), CSTS (34%)
Subtotal/Weighted
Average
Office &
Industrial--All
Properties
</TABLE>
- -------
(1) Based on all leases at the respective Properties in effect as of December
31, 1995.
(2) Total base rent for the year ended December 31, 1995, determined in
accordance with generally accepted accounting principles ("GAAP"). All
leases at the Industrial Properties are written on a triple net basis.
Unless otherwise indicated, all leases at the Office Properties are
written on a full service gross basis, with the landlord obligated to pay
the tenant's proportionate share of taxes, insurance and operating
expenses up to the amount incurred during the tenant's first year of
occupancy ("Base Year") or a negotiated amount approximating the tenant's
pro rata share of real estate taxes, insurance and operating expenses
("Expense Stop"). Each tenant pays its pro rata share of increases in
expenses above the Base Year or Expense Stop.
(3) Aggregate base rent received over their respective terms from all leases
in effect at December 31, 1995 minus all tenant improvements, leasing
commissions and other concessions for all such leases, divided by the
terms in months for such leases, multiplied by 12. Tenant improvements,
leasing commissions and other concessions are estimated using the same
methodology used to calculate effective rent for the Properties as a
whole in the charts set forth under the caption "Business and
Properties--General."
(4) Base rent for the year ended December 31, 1995 divided by net rentable
square feet leased at December 31, 1995.
(5) Effective rent at December 31, 1995 divided by net rentable square feet
leased at December 31, 1995.
(6) Based on all leases at the respective Properties dated on or before
September 30, 1996. Occupancy for all Properties at December 31, 1996 was
approximately 88.2%.
(7) Excludes office space leased by the Company.
(8) For this Property, a lease with Hughes Space & Communications, for
approximately 96,000 rentable square feet, and with SDRC Software
Products Marketing Division, Inc., for approximately 6,800 rentable
square feet, are written on a full service gross basis except that there
is no Expense Stop.
(9) For this Property, the lease with Hughes Space & Communications is
written on a modified full service gross basis under which Hughes Space &
Communications pays for all utilities and other internal maintenance
costs with respect to the leased space and, in addition, pays its pro
rata share of real estate taxes, insurance, and certain other expenses
including common area expenses.
(10) For this Property, leases with Hughes Space & Communications for
approximately 101,000 rentable square feet are written on a full service
gross basis except that there is no Expense Stop.
(11) This Property is an Acquisition Property.
(12) For this Property, the lease is written on a triple net basis.
(13) This Industrial Property was vacant until April 1995. The tenant began
paying rent in mid-October 1995 at an annual rate of $4.86 per rentable
square foot.
(14) The tenant subleased this Industrial Property on May 15, 1996 to RGB
Systems, Inc. (doing business as Extron Electronics), the tenant of the
Property located at 1230 S. Lewis Street, Anaheim, California, which is
adjacent to this Property. The sublease is at an amount less than the
current lease rate, and the tenant is paying the difference between the
current lease rate and the sublease rate. The lease and the sublease
terminate in April 1998. Extron Electronics has executed a lease for this
space from May 1998 through April 2005 at the current lease rate. Extron
Electronics continues to occupy the space located at 1230 S. Lewis
Street.
(15) This lease terminates on December 31, 1996.
(16) This Industrial Property was originally designed for multi-tenant use and
currently is leased to a single tenant and utilized as an indoor multi-
vendor retail marketplace.
(17) The leases for this Industrial Property are written on a modified triple
net basis, with the tenants responsible for estimated allocated common
area expenses.
74
<PAGE>
OCCUPANCY AND RENTAL INFORMATION
The following table sets forth the average percentage leased and average
annual base rent per leased square foot for the Properties for the past three
years:
<TABLE>
<CAPTION>
AVERAGE
ANNUAL
BASE RENT
AVERAGE PER RENTABLE
PERCENTAGE SQUARE
YEAR LEASED (%)(1) FOOT($)(2)
---- ------------- ------------
<S> <C> <C>
OFFICE:
1995............................................ 77.0 19.42
1994............................................ 70.9(3) 20.35(3)
1993............................................ 76.1(3) 21.87(3)
INDUSTRIAL:
1995............................................ 81.5 6.52
1994............................................ 78.7(3) 6.71(3)
1993............................................ 81.8(3) 6.73(3)
</TABLE>
- --------
(1) Average of beginning and end-of-year aggregate percentage leased.
(2) Total base rent for the year, determined in accordance with GAAP, divided
by the average of the beginning and end-of-year aggregate rentable square
feet leased.
(3) Excludes data from the Thousands Oaks Office Property and the La Palma
Business Center which are being acquired in connection with the Offering
and the Industrial Property located at 12752-12822 Monarch Street, Garden
Grove, California which was acquired by KI on behalf of the Company prior
to consummation of the Offering.
LEASE EXPIRATIONS
The following table sets out a schedule of the lease expirations for the
Office Properties for each of the ten years beginning with 1996, assuming that
none of the tenants exercises renewal options or termination rights:
<TABLE>
<CAPTION>
NET PERCENTAGE OF ANNUAL AVERAGE ANNUAL
RENTABLE TOTAL LEASED BASE RENT PER NET
AREA SUBJECT SQUARE FEET RENT UNDER RENTABLE SQUARE FOOT
NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRING LEASES EXPIRING LEASES EXPIRING
EXPIRATION LEASES(1) (SQ. FT.) LEASES(%)(2) ($000)(3) LEASES($)(4)
------------- --------- ------------ -------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
10/01/96-12/31/1996..... 7 83,080 5.26 $ 1,340 $16.13
1997..... 16 61,854 3.92 1,226 19.82
1998..... 20 85,138 5.39 1,942 22.80
1999..... 29 261,082 16.53 4,507 17.26
2000..... 24 149,969 9.50 3,300 22.00
2001(4).. 20 289,383 18.32 5,105 17.64
2002..... 2 83,047 5.26 1,606 19.34
2003..... 3 17,574 1.11 346 19.72
2004..... 4 311,491 19.72 7,731 24.82
2005 and
beyond................. 10 236,731 14.99 4,174 17.63
--- --------- ------ ------- ------
Totals................ 135 1,579,349 100.00 $31,278 $19.80
=== ========= ====== ======= ======
</TABLE>
- --------
(1) Includes office tenants only. Excludes leases for amenity, retail, parking
and month-to-month office tenants. Some tenants have multiple leases.
(2) Excludes all space vacant as of December 31, 1995 unless a lease for a
replacement tenant has been dated on or before September 30, 1996.
(3) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before September 30, 1996. Certain leases became effective
subsequent to September 30, 1996.
(4) Includes Hughes Space & Communications leases of 96,133 and 11,556 net
rentable square feet at Kilroy Airport Center at El Segundo. These leases
expire in October 2001 and are at a triple net base rental rate of $14.04
per square foot.
75
<PAGE>
The following table sets out a schedule of the lease expirations for the
Industrial Properties for each of the ten years beginning with 1996, assuming
that none of the tenants exercises renewal options or termination rights:
<TABLE>
<CAPTION>
NET PERCENTAGE OF ANNUAL AVERAGE ANNUAL
RENTABLE TOTAL LEASED BASE RENT PER NET
AREA SUBJECT SQUARE FEET RENT UNDER RENTABLE SQUARE FOOT
NUMBER OF TO EXPIRING REPRESENTED BY EXPIRING REPRESENTED BY
YEAR OF LEASE EXPIRING LEASES EXPIRING LEASES EXPIRING
EXPIRATION LEASES (SQ. FT.) LEASES(%)(1) ($000)(2) LEASES($)
------------- --------- ------------ -------------- ---------- --------------------
<S> <C> <C> <C> <C> <C>
10/01/96-12/31/1996..... 0 -- -- -- --
1997.................... 0 -- -- -- --
1998.................... 1 70,000 5.61 476 6.81
1999.................... 1 22,888 1.83 78 3.41
2000.................... 3 210,464 16.86 1,594 7.58
2001.................... 4 189,667 15.19 918 4.84
2002.................... 0 -- -- -- --
2003.................... 4 252,966 20.26 1,204 4.76
2004.................... 1 76,570 6.13 554 7.23
2005 and beyond......... 6 425,787 34.12 2,317 5.44
--- --------- ------ ------ -----
Totals.............. 20 1,248,342 100.00 $7,141 $5.72
=== ========= ====== ====== =====
</TABLE>
- --------
(1) Excludes all space vacant as of December 31, 1995 unless a lease for a
replacement tenant has been dated on or before September 30, 1996.
(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before September 30, 1996.
76
<PAGE>
The following table sets forth detailed lease expiration information for
each of the Properties for leases in place as of September 30, 1996, assuming
that none of the tenants exercise renewal options or terminations rights, if
any, at or prior to the scheduled expirations:
OFFICE PROPERTIES
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2250 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 1,317 4,385 23,033 29,148 18,201 112,715 18,517
Percentage of
Total Leased Sq.
Ft.............. 0.58% 1.92% 10.07% 12.74% 7.96% 49.28% 8.10%
Annualized Base
Rent of Expiring
Leases.......... $ 24,496 $ 83,025 $ 464,705 $ 695,821 $ 302,853 $1,653,035 $ 456,220
Percentage of
Total Annualized
Base Rent....... 0.59% 1.99% 11.16% 16.70% 7.27% 39.68% 10.95%
Number of Leases
Expiring........ 1 3 6 4 2 3 1
2260 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases..........
Percentage of
Total Leased Sq.
Ft..............
Annualized Base
Rent of Expiring
Leases..........
Percentage of
Total Annualized
Base Rent.......
Number of Leases
Expiring........
2240 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 100,978 15,898
Percentage of
Total Leased Sq.
Ft.............. 86.40% 13.60%
Annualized Base
Rent of Expiring
Leases.......... $1,085,716 $ 196,670
Percentage of
Total Annualized
Base Rent....... 84.66% 15.34%
Number of Leases
Expiring........ 1 2
3900 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 26,356 12,406 6,811 64,530
Percentage of
Total Leased Sq.
Ft.............. 22.10% 10.41% 5.71% 54.12%
Annualized Base
Rent of Expiring
Leases.......... $ 516,551 $ 221,992 $ 124,105 $1,149,922
Percentage of
Total Annualized
Base Rent....... 22.63% 9.73% 5.44% 50.39%
Number of Leases
Expiring........ 2 2 1 1
3880 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases..........
Percentage of
Total Leased Sq.
Ft..............
Annualized Base
Rent of Expiring
Leases..........
Percentage of
Total Annualized
Base Rent.......
Number of Leases
Expiring........
<CAPTION>
----------------------------------------------------------
2004 2005 2006 2009 TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
2250 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 21,418 228,734
Percentage of
Total Leased Sq.
Ft.............. 9.35% 100%
Annualized Base
Rent of Expiring
Leases.......... $ 485,244 $ 4,165,399
Percentage of
Total Annualized
Base Rent....... 11.66% 100%
Number of Leases
Expiring........ 2 22
2260 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 286,151 286,151
Percentage of
Total Leased Sq.
Ft.............. 100.00% 100%
Annualized Base
Rent of Expiring
Leases.......... $7,160,207 $ 7,160,207
Percentage of
Total Annualized
Base Rent....... 100.00% 100%
Number of Leases
Expiring........ 1 1
2240 E. Imperial
Highway
El Segundo, CA
Square Footage
of Expiring
Leases.......... 116,876
Percentage of
Total Leased Sq.
Ft.............. 100%
Annualized Base
Rent of Expiring
Leases.......... $ 1,282,386
Percentage of
Total Annualized
Base Rent....... 100%
Number of Leases
Expiring........ 3
3900 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 9,128 119,231
Percentage of
Total Leased Sq.
Ft.............. 7.66% 100%
Annualized Base
Rent of Expiring
Leases.......... $ 269,532 $ 2,282,102
Percentage of
Total Annualized
Base Rent....... 11.81% 100%
Number of Leases
Expiring........ 1 7
3880 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 98,243 98,243
Percentage of
Total Leased Sq.
Ft.............. 100.00% 100%
Annualized Base
Rent of Expiring
Leases.......... $1,296,270 $ 1,296,270
Percentage of
Total Annualized
Base Rent....... 100.00% 100%
Number of Leases
Expiring........ 1 1
</TABLE>
- ----
(1) Represents lease expirations data from October 1, 1996 to December 31,
1996.
77
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
3760 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases......... 12,545 8,698 23,598 46,675 19,385 27,470 4,892
Percentage of
Total Leased
Sq. Ft......... 8.76% 6.07% 16.47% 32.58% 13.53% 19.17% 3.41%
Annualized Base
Rent of Expiring
Leases.......... $ 334,440 $ 194,155 $ 529,690 $ 947,293 $ 412,749 $ 560,406 $ 100,330
Percentage of
Total Annualized
Base Rent....... 10.86% 6.31% 17.20% 30.77% 13.41% 18.20% 3.26%
Number of Leases
Expiring........ 2 1 4 9 3 3 1
3780 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 22,469 2,088 4,339 74,093 28,251 9,439
Percentage of
Total Leased Sq.
Ft.............. 11.47% 1.07% 2.22% 37.82% 14.42% 4.82%
Annualized Base
Rent of Expiring
Leases.......... $ 532,872 $ 47,606 $ 89,709 $1,816,896 $ 638,222 $ 209,299
Percentage of
Total Annualized
Base Rent....... 11.85% 1.06% 1.99% 40.40% 14.19% 4.65%
Number of Leases
Expiring........ 4 1 2 7 5 1
3750 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 1,570 1,685
Percentage of
Total Leased Sq.
Ft.............. 22.01% 23.62%
Annualized Base
Rent of Expiring
Leases.......... $ 37,155 $ 11,400
Percentage of
Total Annualized
Base Rent....... 49.28% 15.12%
Number of Leases
Expiring........ 1 1
18000 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases.......... 21,669 14,633 5,171 8,941 8,678 20,974 3,243
Percentage of
Total Leased Sq.
Ft. ............ 19.99% 13.50% 4.77% 8.25% 8.01% 19.35% 2.99%
Annualized Base
Rent of Expiring
Leases.......... $ 313,357 $ 209,460 $ 81,505 $ 119,698 $ 132,601 $ 383,924 $ 36,845
Percentage of
Total Annualized
Base Rent....... 18.33% 12.25% 4.77% 7.00% 7.76% 22.46% 2.16%
Number of Leases
Expiring........ 3 3 4 6 4 2 1
17930 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases..........
Percentage of
Total Leased Sq.
Ft. ............
Annualized Base
Rent of Expiring
Leases..........
Percentage of
Total Annualized
Base Rent.......
Number of Leases
Expiring........
<CAPTION>
----------------------------------------------------------
2004 2005 2006 2009 TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
3760 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases......... 143,263
Percentage of
Total Leased
Sq. Ft......... 100%
Annualized Base
Rent of Expiring
Leases.......... $ 3,079,063
Percentage of
Total Annualized
Base Rent....... 100%
Number of Leases
Expiring........ 23
3780 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 3,922 51,290 195,891
Percentage of
Total Leased Sq.
Ft.............. 2.00% 26.18% 100%
Annualized Base
Rent of Expiring
Leases.......... $ 85,656 $1,077,090 $ 4,497,350
Percentage of
Total Annualized
Base Rent....... 1.90% 23.95% 100%
Number of Leases
Expiring........ 1 2 23
3750 Kilroy
Airport Way
Long Beach, CA
Square Footage
of Expiring
Leases.......... 3,878 7,133
Percentage of
Total Leased Sq.
Ft.............. 54.37% 100%
Annualized Base
Rent of Expiring
Leases.......... $ 26,839 $ 75,394
Percentage of
Total Annualized
Base Rent....... 35.60% 100%
Number of Leases
Expiring........ 1 3
18000 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases.......... 25,087 108,396
Percentage of
Total Leased Sq.
Ft. ............ 23.14% 100%
Annualized Base
Rent of Expiring
Leases.......... $ 432,104 $ 1,709,494
Percentage of
Total Annualized
Base Rent....... 25.28% 100%
Number of Leases
Expiring........ 2 25
17930 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases.......... --
Percentage of
Total Leased Sq.
Ft. ............ --
Annualized Base
Rent of Expiring
Leases.......... --
Percentage of
Total Annualized
Base Rent....... --
Number of Leases
Expiring........ --
</TABLE>
- ------
(1) Represents lease expirations data from October 1, 1996 to December 31,
1996.
78
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
17900 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases......... 47,549 23,772
Percentage of
Total Leased
Sq. Ft. ....... 47.73% 23.86%
Annualized Base
Rent of
Expiring
Leases......... $ 667,587 $ 512,695
Percentage of
Total
Annualized Base
Rent........... 37.03% 28.44%
Number of Leases
Expiring....... 1 3
4175 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 8,924 1,300 2,038 22,390
Percentage of
Total Leased
Sq. Ft. ....... 25.75% 3.75 5.88% 64.61%
Annualized Base
Rent of
Expiring
Leases......... $ 141,093 $ 48,113 $ 19,595 $ 348,230
Percentage of
Total
Annualized Base
Rent........... 25.33% 8.64 3.52% 62.52%
Number of Leases
Expiring....... 4 1 1 3
2829 Townsgate
Road
Thousand Oaks, CA
Square Footage
of Expiring
Leases......... 2,745 3,592 34,823 19,193
Percentage of
Total Leased
Sq. Ft. ....... 3.38% 4.43% 42.91% 23.65%
Annualized Base
Rent of
Expiring
Leases......... $ 65,064 $ 84,384 $ 834,132 $ 454,075
Percentage of
Total
Annualized Base
Rent........... 3.45% 4.47% 44.18% 24.05%
Number of Leases
Expiring....... 1 1 2 5
185 S. Douglas
Street
El Segundo, CA
Square Footage
of Expiring
Leases......... 60,000
Percentage of
Total Leased
Sq. Ft. ....... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $1,313,418
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
OFFICE SUBTOTALS
Square Footage
of Expiring
Leases......... 83,080 61,854 85,138 261,082 149,969 289,383 83,047 17,574
Percentage of
Aggregate
Leased
Sq. Ft. ....... 5.26% 3.92% 5.39% 16.53% 9.50% 18.32% 5.26% 1.11%
Annualized Base
Rent of
Expiring
Leases......... $1,339,880 $1,225,669 $1,772,554 $4,507,056 $3,300,029 $5,105,305 $1,606,142 $ 346,474
Percentage of
Aggregate
Annualized Base
Rent........... 4.31% 3.94% 5.70% 14.49% 10.61% 16.41% 5.16% 1.11%
Number of Leases
Expiring....... 7 16 19 29 24 20 2 3
<CAPTION>
-----------------------------------------------------------
2004 2005 2006 2009 TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
17900 Pacific
Highway
Seattle, WA
Square Footage
of Expiring
Leases......... 28,300 99,621
Percentage of
Total Leased
Sq. Ft. ....... 28.41% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 622,317 $ 1,802,599
Percentage of
Total
Annualized Base
Rent........... 34.52% 100%
Number of Leases
Expiring....... 1 5
4175 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 34,652
Percentage of
Total Leased
Sq. Ft. ....... 100%
Annualized Base
Rent of
Expiring
Leases......... $ 557,031
Percentage of
Total
Annualized Base
Rent........... 100%
Number of Leases
Expiring....... 9
2829 Townsgate
Road
Thousand Oaks, CA
Square Footage
of Expiring
Leases......... 20,805 81,158
Percentage of
Total Leased
Sq. Ft. ....... 25.64% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 450,288 $ 1,887,943
Percentage of
Total
Annualized Base
Rent........... 23.85% 100%
Number of Leases
Expiring....... 2 11
185 S. Douglas
Street
El Segundo, CA
Square Footage
of Expiring
Leases......... 60,000
Percentage of
Total Leased
Sq. Ft. ....... 100%
Annualized Base
Rent of
Expiring
Leases......... $ 1,313,418
Percentage of
Total
Annualized Base
Rent........... 100%
Number of Leases
Expiring....... 1
OFFICE SUBTOTALS
Square Footage
of Expiring
Leases......... 311,491 52,983 85,505 98,243 1,579,349
Percentage of
Aggregate
Leased
Sq. Ft. ....... 19.72% 3.35% 5.41% 6.22% 100%
Annualized Base
Rent of
Expiring
Leases......... $7,731,107 $1,099,444 $1,778,726 $1,296,270 $31,108,655
Percentage of
Aggregate
Annualized Base
Rent........... 24.85% 3.53% 5.72% 4.17% 100%
Number of Leases
Expiring....... 4 4 5 1 134
</TABLE>
- ------
(1) Represents lease expirations data from October 1, 1996 to December 31,
1996.
79
<PAGE>
INDUSTRIAL PROPERTIES
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
2031 E. Mariposa
Avenue
El Segundo, CA
Square Footage
of Expiring
Leases......... 192,053
Percentage of
Total Leased
Sq. Ft. ....... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $1,556,321
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
3332 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft. .......
Annualized Base
Rent of
Expiring
Leases.........
Percentage of
Total
Annualized Base
Rent...........
Number of Leases
Expiring.......
2260 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft. .......
Annualized Base
Rent of
Expiring
Leases.........
Percentage of
Total
Annualized Base
Rent...........
Number of Leases
Expiring.......
2265 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft. .......
Annualized Base
Rent of
Expiring
Leases.........
Percentage of
Total
Annualized Base
Rent...........
Number of Leases
Expiring.......
1000 E. Ball Road
Anaheim, CA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft. .......
Annualized Base
Rent of
Expiring
Leases.........
Percentage of
Total
Annualized Base
Rent...........
Number of Leases
Expiring.......
<CAPTION>
----------------------------------------------------------
2004 2005 2006 2009 TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
2031 E. Mariposa
Avenue
El Segundo, CA
Square Footage
of Expiring
Leases......... 192,053
Percentage of
Total Leased
Sq. Ft. ....... 100%
Annualized Base
Rent of
Expiring
Leases......... $ 1,556,321
Percentage of
Total
Annualized Base
Rent........... 100%
Number of Leases
Expiring....... 1
3332 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 90,746 90,746
Percentage of
Total Leased
Sq. Ft. ....... 100.00% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 543,180 $ 543,180
Percentage of
Total
Annualized Base
Rent........... 100.00% 100%
Number of Leases
Expiring....... 1 1
2260 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases......... 113,820 113,820
Percentage of
Total Leased
Sq. Ft. ....... 100.00% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 553,300 $ 553,300
Percentage of
Total
Annualized Base
Rent........... 100.00% 100%
Number of Leases
Expiring....... 1 1
2265 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases......... 76,570 76,570
Percentage of
Total Leased
Sq. Ft. ....... 100.00% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 553,934 $ 553,934
Percentage of
Total
Annualized Base
Rent........... 100.00% 100%
Number of Leases
Expiring....... 1 1
1000 E. Ball Road
Anaheim, CA
Square Footage
of Expiring
Leases......... 100,000 100,000
Percentage of
Total Leased
Sq. Ft. ....... 100.00% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 639,432 $ 639,432
Percentage of
Total
Annualized Base
Rent........... 100.00% 100%
Number of Leases
Expiring....... 1 1
</TABLE>
- ------
(1) Represents lease expirations data from October 1, 1996 to December 31,
1996.
80
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
------------------------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1230 S. Lewis
Street
Anaheim, CA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft. .......
Annualized Base
Rent of
Expiring
Leases.........
Percentage of
Total
Annualized Base
Rent...........
Number of Leases
Expiring.......
12681/12691 Pala
Drive
Garden Grove, CA
Square Footage
of Expiring
Leases......... 70,000
Percentage of
Total Leased
Sq. Ft. ....... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $ 476,358
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
2270 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases.........
Percentage of
Total Leased
Sq. Ft. .......
Annualized Base
Rent of
Expiring
Leases.........
Percentage of
Total
Annualized Base
Rent...........
Number of Leases
Expiring.......
5115 N. 27th
Avenue
Phoenix, AZ
Square Footage
of Expiring
Leases......... 130,877
Percentage of
Total Leased
Sq. Ft. ....... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $ 640,348
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 1
12752-12822
Monarch Street
Garden Grove, CA
Square Footage
of Expiring
Leases......... 22,888 42,608 165,981
Percentage of
Total Leased
Sq. Ft......... 8.26% 15.38% 59.91%
Annualized Base
Rent of
Expiring
Leases......... $ 78,060 $ 136,171 $ 592,548
Percentage of
Total
Annualized Base
Rent........... 8.28% 14.45% 62.89%
Number of Leases
Expiring....... 1 2 1
<CAPTION>
---------------------------------------------------------
2004 2005 2006 2009 TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
1230 S. Lewis
Street
Anaheim, CA
Square Footage
of Expiring
Leases......... 57,730 57,730
Percentage of
Total Leased
Sq. Ft. ....... 100.00% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 302,930 $ 302,930
Percentage of
Total
Annualized Base
Rent........... 100.00% 100%
Number of Leases
Expiring....... 1 1
12681/12691 Pala
Drive
Garden Grove, CA
Square Footage
of Expiring
Leases......... 70,000
Percentage of
Total Leased
Sq. Ft. ....... 100%
Annualized Base
Rent of
Expiring
Leases......... $ 476,358
Percentage of
Total
Annualized Base
Rent........... 100%
Number of Leases
Expiring....... 1
2270 E. El
Segundo
Boulevard
El Segundo, CA
Square Footage
of Expiring
Leases......... --
Percentage of
Total Leased
Sq. Ft. ....... --
Annualized Base
Rent of
Expiring
Leases......... --
Percentage of
Total
Annualized Base
Rent........... --
Number of Leases
Expiring....... --
5115 N. 27th
Avenue
Phoenix, AZ
Square Footage
of Expiring
Leases......... 130,877
Percentage of
Total Leased
Sq. Ft. ....... 100%
Annualized Base
Rent of
Expiring
Leases......... $ 640,348
Percentage of
Total
Annualized Base
Rent........... 100%
Number of Leases
Expiring....... 1
12752-12822
Monarch Street
Garden Grove, CA
Square Footage
of Expiring
Leases......... 45,560 277,037
Percentage of
Total Leased
Sq. Ft......... 16.45% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 135,432 $ 942,211
Percentage of
Total
Annualized Base
Rent........... 14.37% 100%
Number of Leases
Expiring....... 1 5
</TABLE>
- ------
(1) Represents lease expirations data from October 1, 1996 to December 31,
1996.
81
<PAGE>
<TABLE>
<CAPTION>
YEAR OF LEASE EXPIRATION
----------------------------------------------------------------------------------------------
1996(1) 1997 1998 1999 2000 2001 2002 2003
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
4155 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 18,411 16,182 22,094
Percentage of
Total Leased
Sq. Ft......... 24.67% 21.69% 29.61%
Annualized Base
Rent of
Expiring
Leases......... $ 37,970 $ 141,574 $ 145,820
Percentage of
Total
Annualized Base
Rent........... 8.12% 30.29% 31.20%
Number of Leases
Expiring....... 2 1 1
4125 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 64,891
Percentage of
Total Leased
Sq. Ft......... 100.00%
Annualized Base
Rent of
Expiring
Leases......... $ 465,407
Percentage of
Total
Annualized Base
Rent........... 100.00%
Number of Leases
Expiring....... 2
INDUSTRIAL
SUBTOTALS
Square Footage
of Expiring
Leases......... 70,000 22,888 210,464 189,667 252,966
Percentage of
Aggregate
Leased
Sq. Ft. ....... 5.61% 1.83% 16.86% 15.19% 20.26%
Annualized Base
Rent of
Expiring
Leases......... $ 476,358 $ 78,060 $1,594,291 $ 918,093 $1,203,775
Percentage of
Aggregate
Annualized Base
Rent........... 6.67% 1.09% 22.33% 12.86% 16.86%
Number of Leases
Expiring....... 1 1 3 4 4
PORTFOLIO TOTALS
Square Footage
of Expiring
Leases......... 83,080 61,854 155,138 283,970 360,433 479,050 83,047 270,540
Percentage of
Aggregate
Leased
Sq. Ft. ....... 2.94% 2.19% 5.49% 10.04% 12.75% 16.94% 2.94% 9.57%
Annualized Base
Rent of
Expiring
Leases......... $1,339,880 $1,225,669 $2,248,912 $4,585,116 $4,894,320 $6,023,398 $1,606,142 $1,550,249
Percentage of
Aggregate
Annualized Base
Rent........... 3.50% 3.20% 5.88% 11.99% 12.80% 15.75% 4.20% 4.05%
Number of Leases
Expiring....... 7 16 20 30 27 24 2 7
<CAPTION>
-----------------------------------------------------------
2004 2005 2006 2009 TOTAL
---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
4155 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 17,931 74,618
Percentage of
Total Leased
Sq. Ft......... 24.03% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 142,080 $ 467,444
Percentage of
Total
Annualized Base
Rent........... 30.40% 100%
Number of Leases
Expiring....... 1 5
4125 E. La Palma
Avenue
Anaheim, CA
Square Footage
of Expiring
Leases......... 64,891
Percentage of
Total Leased
Sq. Ft......... 100%
Annualized Base
Rent of
Expiring
Leases......... $ 465,407
Percentage of
Total
Annualized Base
Rent........... 100%
Number of Leases
Expiring....... 2
INDUSTRIAL
SUBTOTALS
Square Footage
of Expiring
Leases......... 76,570 248,476 177,311 1,248,342
Percentage of
Aggregate
Leased
Sq. Ft. ....... 6.13% 19.90% 14.22% 100%
Annualized Base
Rent of
Expiring
Leases......... $ 553,934 $1,485,542 $ 830,812 $ 7,140,865
Percentage of
Aggregate
Annualized Base
Rent........... 7.76% 20.80% 11.63% 100%
Number of Leases
Expiring....... 1 3 3 20
PORTFOLIO TOTALS
Square Footage
of Expiring
Leases......... 388,061 301,459 262,816 98,243 2,827,691
Percentage of
Aggregate
Leased
Sq. Ft. ....... 13.72% 10.66% 9.29% 3.47% 100%
Annualized Base
Rent of
Expiring
Leases......... $8,285,041 $2,584,986 $2,609,538 $1,296,270 $38,249,521
Percentage of
Aggregate
Annualized Base
Rent........... 21.66% 6.76% 6.82% 3.39% 100%
Number of Leases
Expiring....... 5 7 8 1 154
</TABLE>
- ------
(1) Represents lease expirations data from October 1, 1996 to December 31,
1996.
82
<PAGE>
TENANT INFORMATION
The Company's tenants include significant corporate and other commercial
enterprises representing a range of industries including, among others,
satellite communications, manufacturing, entertainment, banking, insurance,
telecommunications, health care, computer software, finance, engineering,
technology, legal and accounting. The following table sets forth information
as to the Company's largest tenants based upon annualized rental revenues for
the year ended December 31, 1995:
<TABLE>
<CAPTION>
PERCENTAGE OF
TENANT COMPANY'S
ANNUAL TOTAL LEASE
BASE RENTAL BASE RENTAL INITIAL LEASE EXPIRATION
REVENUE($)(2) REVENUES(%) DATE(3) DATE
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Office Tenants(1):
Hughes Aircraft
Corporation's Space &
Communications
Company(4)........... $ 9,757,877(5) 25.32 August 1984 January 1999
Northwest Airlines:
El Segundo.......... 1,313,418 3.41 August 1978 February 2001
Seattle............. 622,317 1.62 May 1980 April 2005
Devry, Inc............ 1,296,270 3.36 November 1994 October 2009
McDonnell Douglas
Corporation.......... 1,149,922 2.98 February 1992 January 2002
SCAN(6)............... 941,325 2.44 February 1996 May 2006
Zelda Fay Walls(7).... 823,896 2.14 August 1989 August 2000
Worldcom, Inc......... 674,592 1.75 January 1995 December 1999
The Walls Group....... 456,220 1.18 October 1991 September 2002
Olympus America,
Inc.................. 443,375 1.15 September 1993 December 1998
SITA.................. 378,359 0.98 June 1984 May 1999
----------- -----
Total............... $17,857,571 46.33
=========== =====
<CAPTION>
PERCENTAGE OF
TENANT COMPANY'S
ANNUAL TOTAL LEASE
BASE RENTAL BASE RENTAL INITIAL LEASE EXPIRATION
REVENUE($)(2) REVENUES(%) DATE(3) DATE
------------- ------------- -------------- --------------
<S> <C> <C> <C> <C>
Industrial Tenants(1):
Mattel, Inc........... $ 1,556,321 4.04 May 1990 October 2000
Festival Markets...... 640,348 1.66 May 1991 May 2001
Allen-
Bradley/Rockwell..... 639,432 1.66 May 1992 April 1998
Cannon Equipment...... 592,548 1.54 August 1995 July 2003
MSAS Cargo
International Inc.... 553,934 1.44 September 1994 August 2004
Ace Medical........... 553,300 1.44 April 1995 April 2006
Furon, Inc. .......... 543,180 1.41 February 1990 July 2005
Rank Video Services... 476,358 1.24 October 1984 May 1998
Household Finance
Corporation.......... 319,199 0.83 June 1993 November 2003
Extron................ 302,930 0.79 February 1995 January 2005
----------- -----
Total............... $ 6,177,550 16.05
=========== =====
</TABLE>
- --------
(1) Table excludes the lease with LACTC (total annual base rent of $449,935)
which expired on April 30, 1996, the lease with Cerplex Group, Inc./Incert
(total annual base rent of $337,530) which expired on June 30, 1996 and
the lease with Key Bank of Washington (total annual base rent of $667,587)
which expired on December 31, 1996.
(2) Determined in accordance with GAAP.
(3) Represents date of first relationship between tenant and the Kilroy Group.
(4) Includes Hughes Space & Communication's leases at Kilroy Airport Center at
El Segundo of (i) 96,133 and 11,556 net rentable square feet which expire
in October 2001, (ii) 286,151 net rentable square feet which expires in
July 2004 and (iii) 100,978 net rentable square feet which expires in
January 1999.
(footnotes continued on next page)
83
<PAGE>
(5) Tenant annual base rental revenue for Hughes Space & Communications gives
pro forma effect to the recent extension of the tenant lease with respect
to 96,133 rentable square feet of office space located at 2250 E. Imperial
Highway (along with 11,556 rentable square feet located at 2240 E.
Imperial Highway) as if such lease renewal had occurred on January 1,
1995. See "Business and Properties--Kilroy LAX."
(6) Tenant executed leases during 1995 representing approximately 44,825
square feet effective on February 15, 1996. Base rental revenue figure
included on a contract basis.
(7) The term of this lease has been extended to 2007 and, effective February
1, 1997, annual base rent under this lease will be $672,000.
OFFICE PROPERTIES
All but two of the Office Properties are Class A office buildings. Each of
the Kilroy LAX, Kilroy Long Beach and SeaTac (each as defined) Office
Properties was designed and developed to above-standard specifications to
accommodate the long-term needs of tenants and include features such as extra-
floor loading capacity and extra-high ceilings. Each of the Kilroy LAX, Kilroy
Long Beach and SeaTac Office Properties also was designed with an emphasis on
long-term operating efficiency and tenant comfort and includes above-standard
climate controls, on-site management and security, covered parking, heliports
and retail services, all in professionally landscaped environments. In
addition, each of the Kilroy LAX and Kilroy Long Beach Office Properties
offers tenants redundant telecommunications capability and utility leads. The
Office Properties range in size from two to 12 stories and are easily
accessible from major highways and all but two (Westlake Plaza and the Office
Property located at the La Palma Business Center) are easily accessible from
major airports. Management believes that as a result of these factors the
Office Properties in the Southern California Area achieve among the highest
rent, occupancy and tenant retention rates when compared to other properties
within their respective submarkets and in neighboring submarkets. Management
believes that the location, quality of construction and amenities at the
complexes as well as the Company's reputation for providing a high level of
tenant service have enabled the Company to attract and retain a national
tenant base.
Kilroy LAX. The Company developed, owns, leases and manages three Office
Properties at Kilroy Airport Center at El Segundo ("Kilroy LAX"), a Class A
high-rise, multi-tenant corporate office complex situated in what the Company
considers to be the premier location in El Segundo immediately adjacent to Los
Angeles International Airport ("LAX"), the new light rail system servicing Los
Angeles County and the new I-105 Freeway with a freeway off-ramp and freeway
on-ramp providing immediate access to and from the project's parking
facilities. Kilroy LAX was built in 1983 to high quality specifications to
address the anticipated demands of the submarket's aerospace and high
technology tenants. The Company believes Kilroy LAX has the premier location
in the El Segundo office submarket for a number of reasons, including:
(i) unobstructed views of LAX, West Los Angeles and Downtown Los Angeles; (ii)
excellent access to LAX, the new I-105 Freeway and the new light rail system;
(iii) close proximity to corporate office users including Hughes Space &
Communications and its satellite manufacturing facility, and other related
enterprises such as DirectTV; and (iv) for tenants with their names on the
Property, visibility to freeway and airline travelers.
The complex is comprised of two 12-story towers and a 13-level parking
structure with two floors of office space on top, encompassing an aggregate of
approximately 701,000 rentable square feet, of which 93.3% was leased as of
September 30, 1996. Kilroy LAX features fiber optic/telecommunications dual
redundancy (one of the few properties in Southern California so equipped) and
multiple lead-lines for both water and power, thereby mitigating the risk of
temporary loss of such services to the facility. The Property was designed and
constructed with above-standard floor loadings and floor-to-ceiling heights to
accommodate the weight and raised floors requirements of computer and other
equipment. The facility is climate controlled in smaller areas which, while
increasing tenant comfort, allows for separate thermostat controls for areas
housing temperature sensitive equipment and reduces costs for after-hour
operations. The facility was designed toward tenant efficiency and convenience
and features an above-standard ratio of elevators to rentable square feet and
provides 24-hour on-site security and management, private dual heliports,
shuttle service to LAX and on-site retail, banking and dining facilities. In
addition, the two 12-story towers are joined by an atrium and are
professionally landscaped creating a pleasant environment. In addition, the
facility has been recognized by the local utility for its energy efficient
heating, ventilating and air conditioning systems which reduce operating costs
for both the Company and its
84
<PAGE>
tenants. Management believes because of these and other high quality features,
Kilroy LAX continues to attract long-term major corporate tenants at rates
above those offered by other facilities in the El Segundo and neighboring
submarkets. The occupancy rates for Kilroy LAX as of the years ended December
31, 1993 through 1995, and the nine-month period ended September 30, 1996,
were 90.8%, 91.6%, 92.1% and 93.3%, respectively.
Major tenants of the facility include Hughes Space & Communications (the
Company's largest tenant), the Federal Aviation Administration and Realtime
Associates. Hughes Space & Communications has been a tenant at Kilroy LAX
since its opening and, over the past five years, has consolidated operations
into its owned facilities in El Segundo (which includes its satellite
manufacturing facility) and into leased facilities at Kilroy LAX which also
serves as its headquarters. In addition, Hughes Space & Communications has
invested substantial amounts in tenant improvements, including approximately
$3.3 million during the year ended December 31, 1994 and $23.5 million since
1984, and repeatedly has renewed leases at the facilities, including one lease
for approximately 101,000 rentable square feet which has been renewed twice.
Hughes Space and Communications is a major employer and owner of technical
facilities in El Segundo, including facilities for the development of
satellite technology and its applications, such as DirecTV.
Because the book value of the Office Property located at 2240 E. Imperial
Highway will be in excess of 10% of the Company's total assets, additional
information regarding this Property is presented below. The information
presented below gives pro forma effect to the recent extension of the tenant
lease with Hughes Space & Communications with respect to this Office Property
as if such lease renewal had occurred on January 1, 1995.
The Office Property located at 2240 E. Imperial Highway had an occupancy
rate of 100.0% for each of the years ended December 31, 1991 through 1995. As
of September 30, 1996, Hughes Space & Communications occupied approximately
94.6% of the Property's net rentable square feet under two leases. Under the
principal lease for this space, Hughes Space & Communications commenced
occupancy of 100,978 square feet on August 11, 1986 and renewed the lease on
February 1, 1989 and again on June 1, 1994. In connection with the latter
renewal, Hughes made a one time payment of $4,000,000 to the Company in
consideration of a lease amendment to relieve Hughes Space & Communications of
the obligation to remove certain tenant improvements upon termination of the
lease. The current lease term under this lease expires on January 31, 1999,
subject to a five-year option to renew at fair market value, but not less than
$15.84 per annum per net rentable square foot, on a triple net basis. Hughes
Space & Communications also leases 11,556 rentable square feet (along with the
96,133 rentable square feet located at 2250 E. Imperial Highway) under a
second lease which expires October 31, 2001, at an annualized triple net base
rental rate of $14.04 and, for the first year of the lease term, the tenant's
allocable share of operating costs shall not exceed $7.32 per rentable square
foot. The lease also is subject to a five-year option to renew at fair market
value, adjusted bi-annually for CPI adjusted increases in base rent. The total
annual rental income per net rentable square foot for the years ended
December 31, 1991 through December 31, 1995 was $23.17, $24.42, $25.22, $17.15
and $11.83, respectively.
85
<PAGE>
The following table sets forth for such Property for each of the ten years
following the date of Offering (i) the number of tenants whose leases will
expire, (ii) the total net rentable square feet covered by such leases,
(iii) the percentage of total leased net rentable square feet represented by
such leases, (iv) the annual base rent represented by such leases and (v) the
average annual rent per net rentable square foot represented by such leases.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE RENT PER
NET RENTABLE SQUARE FEET NET RENTABLE
YEAR OF NUMBER OF SQUARE FOOTAGE REPRESENTED SQUARE FOOT
LEASE LEASES SUBJECT TO BY EXPIRING ANNUAL BASE RENT UNDER REPRESENTED BY
EXPIRATION EXPIRING EXPIRING LEASES LEASES(%) EXPIRING LEASES ($)(1) EXPIRING LEASES($)
---------- --------- --------------- ------------- ---------------------- ------------------
<S> <C> <C> <C> <C> <C>
10/31/96-12/31/96....... 0 -- -- -- --
1997.................... 0 -- -- -- --
1998.................... 0 -- -- -- --
1999.................... 1(2) 100,978 86.4 $1,085,716 $10.75
2000.................... 0 --
2001.................... 2(3) 15,898 13.6 196,670 12.37
2002.................... 0 -- -- -- --
2003.................... 0 -- -- -- --
2004.................... 0 -- -- -- --
2005.................... 0 -- -- -- --
--- ------- ----- ----------
Totals.............. 3 116,876(4) 100.0 $1,282,386 $10.97
=== ======= ===== ==========
</TABLE>
- --------
(1) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before September 30, 1996.
(2) The terms of this lease are described in the text preceding this table.
(3) The terms of a lease representing 11,556 rentable square feet are
described in the text preceding this table.
(4) The aggregate square footage reflected in each of the respective leases
differs from the actual aggregate square footage for this Property of
118,933 as shown on the table under the caption "The Office and Industrial
Properties." Subsequent to the execution of the leases, the Property was
remeasured at a larger aggregate number of square feet than is reflected
in the executed leases.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1995 was approximately $4.1 million (net of accumulated
depreciation and reductions in depreciable basis). The Property is depreciated
using the modified accelerated cost recovery system straight-line method,
based on an estimated useful life ranging from 31 1/2 years to 39 years,
depending upon the date of certain capitalized improvements to the Property.
For the year ended December 31, 1995, the estimated average depreciation rate
for this Property under the modified accelerated cost recovery system was
4.3%. For the 12-month period ending September 30, 1996, the Company was
assessed property taxes on this Property at an effective annual rate of
approximately 1.0%. Property taxes on this Property for the 12-month period
ending September 30, 1996 totaled approximately $130,000. Management does not
believe that any capital improvements made during the 12-month period
immediately following the Offering should result in an increase in annual
property taxes.
Because the gross revenues for the Office Property located at 2250 E.
Imperial Highway for the year ended December 31, 1995 were in excess of 10% of
the aggregate gross revenues for all of the Properties, additional information
regarding this Property is presented below. The information presented below
gives pro forma effect to the recent extension of the tenant lease with Hughes
Space & Communications with respect to this Office Property as if such lease
renewal had occurred on January 1, 1995.
The Office Property located at 2250 E. Imperial Highway had an occupancy
rate of 84.0%, 82.5%, 77.8%, 79.8% and 80.9% as of the years ended December
31, 1991 through 1995, respectively. As of September 30, 1996, Hughes Space &
Communications occupied 33% of the Property's net rentable square feet. The
Property's other tenants include companies engaged in the communications,
technology, transportation and healthcare industries. Hughes Space &
Communications commenced occupancy of 96,133 rentable square feet on
86
<PAGE>
November 1, 1986 and has entered into an agreement to renew this space (along
with the 11,556 square feet located at 2240 E. Imperial Highway) through
October 31, 2001, at a triple net annual base rental rate of $14.04 per square
foot and, for the first year of the lease term, the tenant's allocable share
of operating costs shall not exceed $7.32 per rentable square foot. The lease
also is subject to a five-year option to renew at fair market value, adjusted
bi-annually for CPI increases in base rent. The total annual rental income per
net rentable square foot for the years ended December 31, 1991 through
December 31, 1995 was $17.82, $18.73, $19.62, $18.89 and $18.86, respectively.
The following table sets forth for such Property for each of the ten years
following the date of the Offering (i) the number of tenants whose leases will
expire, (ii) the total net rentable square feet covered by such leases, (iii)
the percentage of total leased net rentable square feet represented by such
leases, (iv) the annual base rent represented by such leases and (v) the
average annual rent per net rentable square foot represented by such leases.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE RENT PER
NET RENTABLE SQUARE FEET NET RENTABLE
NUMBER OF SQUARE FOOTAGE REPRESENTED ANNUAL BASE SQUARE FOOT
LEASES SUBJECT TO BY EXPIRING RENT UNDER REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES(%)(1) EXPIRING LEASES($)(2) EXPIRING LEASES($)
- ------------------------ --------- --------------- ------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
10/1/96-12/31/96........ 1 1,317 0.6 $ 24,496 $18.60
1997.................... 3 4,385 1.9 83,025 18.93
1998.................... 6 23,033 10.1 464,705 20.18
1999.................... 4 29,148 12.7 695,821 23.87
2000.................... 2 18,201 8.0 302,853 16.64
2001.................... 3 112,715 49.3 1,653,035 14.67
2002.................... 1 18,517 8.1 456,220 24.64
2003.................... 0 -- -- -- --
2004.................... 2 21,418 9.3 485,244 22.66
2005.................... 0 -- -- -- --
--- ------- ----- ----------
Totals.............. 22 228,734 100.0 $4,165,399 $18.21
=== ======= ===== ==========
</TABLE>
- --------
(1) Excludes all space vacant as of December 31, 1995 unless a lease for a
replacement tenant has been dated on or before September 30, 1996.
(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before September 30, 1996. Certain leases became effective
subsequent to September 30, 1996.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1995 was approximately $2.0 million (net of accumulated
depreciation and reductions in depreciable basis), and was fully depreciated
for federal tax purposes. For the 12-month period ending September 30, 1996,
the Company was assessed property taxes on this Property at an effective
annual rate of approximately 1.0%. Property taxes on this Property for the 12-
month period ending September 30, 1996 totaled approximately $240,000.
Management does not believe that any capital improvements made during the 12-
month period immediately following the Offering should result in an increase
in annual property taxes.
Because the 1995 gross revenues for the Office Property located at 2260 E.
Imperial Highway were in excess of 10% of the aggregate gross revenues for all
of the Properties, additional information regarding this Property is presented
below.
The Office Property located at 2260 E. Imperial Highway had an occupancy
rate of 100.0% for the years ended December 31, 1991 through 1995. As of
September 30, 1996, Hughes Space & Communications occupied 100.0% of the
Property's net rentable square feet. Hughes Space & Communications commenced
occupancy of the entire building on August 1, 1984. This lease runs through
July 31, 2004 with CPI adjusted increases in base rent every two years. The
next CPI adjustment is scheduled to occur on August 1, 1998 and provides for
an increase in base rent to the extent that such CPI adjustment exceeds a
minimum floor of 1.86% compounded
87
<PAGE>
annually. The remaining CPI adjustments scheduled for August 1, 2000 and
August 1, 2002, respectively, provide for similar increases to the extent that
the CPI adjustment exceeds a minimum floor of 3% compounded annually. The
total annual rental income per net rentable square foot was $25.35, $26.16,
$26.66, $24.59 and $24.59 for the years ended December 31, 1991 through
December 31, 1995, respectively. The following table sets forth for such
Property for each of the ten years following the date of Offering (i) the
number of tenants whose leases will expire, (ii) the total net rentable square
feet covered by such leases, (iii) the percentage of total leased net rentable
square feet represented by such leases, (iv) the annual base rent represented
by such leases and (v) the average annual rent per net rentable square foot
represented by such leases.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE RENT PER
NET RENTABLE SQUARE FEET NET RENTABLE
NUMBER OF SQUARE FOOTAGE REPRESENTED ANNUAL BASE SQUARE FOOT
LEASES SUBJECT TO BY EXPIRING RENT UNDER REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES(%) EXPIRING LEASES($)(1) EXPIRING LEASES($)
- ------------------------ --------- --------------- ------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
10/01/96-12/31/96....... 0 -- -- $ -- $ --
1997.................... 0 -- -- -- --
1998.................... 0 -- -- -- --
1999.................... 0 -- -- -- --
2000.................... 0 -- -- -- --
2001.................... 0 -- -- -- --
2002.................... 0 -- -- -- --
2003.................... 0 -- -- -- --
2004.................... 1(2) 286,151 100.0 $7,160,207 $25.02
2005.................... 0 -- -- -- --
--- ------- ----- ----------
Totals.............. 1 286,151(3) 100.0 $7,160,207 $25.02
=== ======= ===== ==========
</TABLE>
- --------
(1) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before September 30, 1996.
(2) The terms of this lease are described in the text preceding this table.
(3) The square footage reflected in the lease differs from the actual square
footage for this Property of 291,187 as shown on the table under the
caption "The Office and Industrial Properties." Subsequent to the
execution of the lease, the Property was remeasured at a larger aggregate
number of square feet than is reflected in the executed lease.
The Company's tax basis in the Property for federal income tax purposes as
of December 31, 1995 was approximately $2.0 million (net of accumulated
depreciation and reductions in depreciable basis), and was fully depreciated
for federal tax purposes. For the 12-month period ending September 30, 1996,
the Company was assessed property taxes on this Property at an effective
annual rate of approximately 1.0%. Property taxes on this Property for the 12-
month period ending September 30, 1996 totaled approximately $275,000.
Management does not believe that any capital improvements made during the 12-
month period immediately following the Offering should result in an increase
in annual property taxes.
Kilroy Long Beach. The Company developed, owns, leases and manages the three
Office Properties which comprise Phase II of Kilroy Airport Center Long Beach
("Kilroy Long Beach Phase II"), part of a planned four-phase, 53-acre Class A
corporate office headquarters, business park and retail and entertainment
center strategically located adjacent to the San Diego freeway (Interstate
405, the major coastal north-south highway in Southern California between Los
Angeles and Orange Counties) (the "I-405 Freeway") and immediately adjacent to
the Long Beach Airport. The Company has sole development rights for the
remaining 24 developable acres. Upon consummation of the Offering, the Company
also will own the two office buildings comprising Kilroy Long Beach Phase I
("Kilroy Long Beach Phase I") which were developed by the Company and which
have been leased and managed by the Company since their inception. See "--
Acquisition Properties--Kilroy Long Beach Phase I." Kilroy Long Beach Phase II
includes an eight-story and a six-story office building, and a multi-level
parking structure with retail facilities on the ground floor, encompassing an
aggregate of approximately 395,000 net rentable square feet, of which 88.4%
was leased as of September 30, 1996. The
88
<PAGE>
facility is the only GTE SmartPark in Los Angeles County and offers tenants an
array of advanced telecommunications functions through a pre-laid fiber optic
network, emergency backup loop and ISDN interfaces. The facility also includes
state-of-the-art mechanical and electrical systems designed to accommodate the
highest tenant demands including above-standard floor-to-ceiling heights and
floor loading and four high-speed passenger elevators. Each of the office
structures offers efficient 28,000 square foot floors. Other amenities include
a spacious lobby with an atrium, and a central courtyard with a fountain and
pedestrian arcade. The facility also features 24-hour on-site security and
management, a fitness center, group conference facilities, helipad facilities,
and various retail and business services including banking facilities, dining
facilities and printer services. The occupancy rates for Kilroy Long Beach
Phase II as of the years ended December 31, 1993 through 1995, and the nine
month period ended September 30, 1996, were 64.8%, 78.7%, 76.5% and 88.3%,
respectively. Major tenants include AIG Claim Services, Inc., Assistance in
Marketing, Inc., CompuServe, Inc., Employer's Health Insurance, Co., GTE
Directories Sales Corporation, Great Northern Insured Annuities Corp., Great
Western Bank, HealthNet, Mutual of America Life Insurance Company, North
American Title Company, The Prudential Insurance Company of America, R.L. Polk
& Company, SCAN Health Plan, Senn-Delaney Leadership Consulting Group, Inc.,
20th Century Industries, UniCare Financial Corporation, Unihealth and Zelda
Fay Walls.
Kilroy Airport Center Long Beach was developed in response to a desire by
the City of Long Beach to promote development in the airport area. Phase I of
the project, two office buildings encompassing approximately 225,000 rentable
square feet, was developed by the Company in 1987 and was sold in 1993. The
Company has entered into an agreement to reacquire the Phase I Office
Properties. As of September 30, 1996 the Phase I Office Properties were 96.6%
leased to eight tenants with total annual rental income per leased net
rentable square foot of $15.67 (calculated on the basis of base rent of signed
leases at September 30, 1996, adjusted for contractual increases in base rent
in effect during the 12-month period ending September 30, 1996). Major tenants
include McDonnell Douglas Corporation, Olympus America, Inc. and Devry, Inc.
See "--Acquisition Properties--Kilroy Long Beach Phase I." The Company has
overseen and continues to oversee all leasing and management of Phase I.
Kilroy Long Beach Phase II was developed by the Company in 1989/1990 and
encompasses an aggregate of approximately 395,000 net rentable square feet.
Phases III and IV are planned for future development. See "--Development,
Leasing and Management Activities--Kilroy Airport Center Long Beach."
Kilroy Airport Center Long Beach is subject to three long-term ground leases
under which the Company is ground lessee (assuming the assignment to the
Company of the approximately 14-acre parcel in connection with the acquisition
of Kilroy Long Beach Phase I). The City of Long Beach is the ground lessor
with respect to Kilroy Long Beach Phases I through III and the Board of Water
Commissioners of the City of Long Beach, acting on behalf of the City of Long
Beach, is the ground lessor with respect to Kilroy Long Beach Phase IV. The
basic term under each of the ground leases expires on July 17, 2035. Primary
rent under the leases for Kilroy Long Beach Phases I, II, III and IV is
currently approximately $338,000 per year, $295,000 per year, $75,000 per year
and $76,764 per year, respectively, with such amounts adjusted periodically to
take account of changes in the fair market rental value of the land underlying
each lease.
Because the book value of the Office Property located at 3780 Kilroy Airport
Way will be in excess of 10% of the Company's total assets, additional
information regarding this Property is presented below.
The Office Property located at 3780 Kilroy Airport Way had an occupancy rate
of 70.2%, 70.5%, 69.1%, 78.6% and 63.6% as of the years ended December 31,
1991 through 1995, respectively. As of September 30, 1996, SCAN Health Plan, a
group health insurer, and Zelda Fay Walls, an operator of executive office
suites, occupied approximately 20.4% and 12.7%, respectively, of the
Property's net rentable square feet. The Property's other tenants include
companies engaged in the insurance, healthcare, finance, high technology, law
and accounting industries. Base rent under the SCAN Health Plan lease is
$941,325 per year. The lease expires on August 31, 2000, subject to two
successive five-year options to renew. Base rent under the Zelda Fay Walls
lease
89
<PAGE>
is currently $823,896 per year although the tenant has been paying only
approximately $640,200 since August 1993 and the balance is expensed quarterly
by the Company as an increase to its bad debt reserve. Effective February 1,
1997, annual base rent under the lease will be $672,000, and the term of the
lease has been extended to 2007, subject to a five-year option to renew. The
total annual rental income per net rentable square foot for the years ended
December 31, 1991 through 1995 was $13.02, $17.53, $19.76, $20.54 and $18.55,
respectively. The following table sets forth for such Property for each of the
ten years following the date of Offering (i) the number of tenants whose
leases will expire, (ii) the total net rentable square feet covered by such
leases, (iii) the percentage of total leased net rentable square feet
represented by such leases, (iv) the annual base rent represented by such
leases and (v) the average annual rent per net rentable square foot
represented by such leases.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL LEASED AVERAGE ANNUAL
NET RENTABLE RENT PER
NET RENTABLE SQUARE FEET NET RENTABLE
NUMBER OF SQUARE FOOTAGE REPRESENTED ANNUAL BASE SQUARE FOOT
LEASES SUBJECT TO BY EXPIRING RENT UNDER REPRESENTED BY
YEAR OF LEASE EXPIRATION EXPIRING EXPIRING LEASES LEASES(%)(1) EXPIRING LEASES($)(2) EXPIRING LEASES($)
- ------------------------ --------- --------------- ------------- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
10/1/96-12/31/96........ -- -- -- $ -- $ --
1997.................... 4 22,469 11.5 532,872 23.72
1998.................... 1 2,088 1.1 47,606 22.80
1999.................... 2 4,339 2.2 89,709 20,68
2000.................... 7 74,093 37.8 1,816,896 24.52
2001.................... 5 28,251 14.4 638,222 22.59
2002.................... -- -- -- -- --
2003.................... 1 9,439 4.8 209,299 22.17
2004.................... 1 3,922 2.0 85,656 21.84
2005 and beyond......... 2 51,290 26.2 1,077,090 21.00
--- ------- ------ ----------
Totals.............. 23 195,891 100.00 $4,497,350 $22.96
=== ======= ====== ==========
</TABLE>
- --------
(1) Excludes all space vacant as of December 31, 1995 unless a lease for a
replacement tenant has been dated on or before September 30, 1996.
(2) Determined based upon aggregate base rent to be received over the term
divided by the term in months multiplied by 12, including all leases dated
on or before September 30, 1996. Certain leases became effective
subsequent to September 30, 1996.
The Company's tax basis in the Property for federal income tax purposes was
$11.4 million (net of accumulated depreciation) as of December 31, 1995. The
Property is depreciated using the modified accelerated cost recovery system
straight-line method, based on an estimated useful life ranging from 31 1/2
years to 39 years, depending upon the date of certain capitalized improvements
to the Property. For the year ended December 31, 1995, the estimated average
depreciation rate for this Property under the modified accelerated cost
recovery system was 3.4%. For the 12-month period ending September 30, 1996,
the Company was assessed property taxes on this Property at an effective
annual rate of approximately 1.2%. Property taxes on this Property for the
12-month period year ending September 30, 1996 totaled $175,000. Management
does not believe that any capital improvements made during the 12-month period
immediately following the Offering should result in an increase in annual
property taxes.
SeaTac Office Center at Seattle-Tacoma International Airport. The Kilroy
Group developed and operates the SeaTac Office Center ("SeaTac"), south of
Seattle in SeaTac, Washington, a Class A office development in the Southend
submarket of the Puget Sound region. SeaTac is comprised of two 12-story
towers (constructed in 1977 and 1980, respectively) and a 4-level office and
garage structure with two floors of office space on top (constructed in 1980),
all with views of the Olympic and Coastal mountain ranges. The site is located
directly across from the Seattle-Tacoma International Airport. The facility
currently contains an aggregate of approximately 530,000 square feet of office
space. Current zoning permits up to an additional 500,000 square feet of
development. The facility features 24-hour on-site security and management,
parking for over 1,900 vehicles, computer training and consultation, travel
agencies and a 24-hour restaurant. As of September 30, 1996, SeaTac had
approximately 308,000 rentable square feet of available office space. Major
tenants include First
90
<PAGE>
Nationwide Mortgage Corporation, Lynden, Inc., National Chemsearch, Northwest
Airlines, Inc., Rayonier, Inc., Seattle-First National Bank and Transamerica
Financial Services, Inc.
SeaTac is situated on an approximately 17-acre site subject to two long-term
ground leases and an airspace lease. The initial term of the ground leases
runs through December 31, 2032, and may be extended for an additional period
of thirty years. Payments under the ground leases are subject to adjustment
for increases in the CPI every five years. Payments under the airspace lease
are made monthly. Aggregate payments under the two ground leases and the
airspace lease for the year ended December 31, 1995 totaled approximately
$317,500. As of September 30, 1996, the SeaTac Properties were encumbered by a
first mortgage loan having an outstanding principal balance of $20,162,000.
The loan bears interest at a rate of 9.75% per year and is scheduled to mature
on May 15, 2001. See "Note 4. Debt" to the Combined Financial Statements of
the Kilroy Group.
INDUSTRIAL PROPERTIES
Like the Office Properties, the Industrial Properties developed by the
Company (the Industrial Properties other than the Acquisition Properties) were
designed and developed to provide above-standard quality and meet the long-
term needs of tenants. The Company was among the first Southern California
developers to air-condition its Industrial Properties, increasing each
facility's multidimensional use while providing environments for increased
tenant operating efficiency and comfort. While most of the buildings are
occupied by a single tenant, the Industrial Properties developed by the
Company were designed for multi-tenant operations and can be reconfigured for
such use. The Industrial Properties, all but one of which are located in
Southern California, are primarily comprised of single-story, tilt-up concrete
buildings ranging in size from approximately 57,000 to 277,000 square feet.
The Industrial Properties feature high-tech assembly areas and supporting
office space for management and administrative functions.
The Industrial Property leases are written on a triple net basis with
initial terms of three to eleven years and options to renew for up to an
additional five years at the then current fair market value. The leases
generally provide for rent increases based on the applicable regional CPI or
contain specific contractual increases. The leases do not contain purchase
options.
Certain of the Industrial Properties can support additional development and
the Company presently is planning to develop in the next two years, subject to
substantial pre-leasing, approximately 105,000 square feet of additional
leasable area. The Company anticipates that any such development would be
funded with amounts available under the Credit Facility. There can be no
assurance, however, that the Company will be able to successfully develop any
of the Industrial Properties, or obtain financing for any such development on
terms favorable to the Company. See "Risk Factors--Real Estate Financing
Risks" and "--No Limitation on Debt."
DEVELOPMENT, LEASING AND MANAGEMENT ACTIVITIES
Since 1947, the Company and its affiliates have developed millions of square
feet of office and industrial space, including high technology facilities,
primarily located in Southern California, for its own portfolio and for third
parties. Development activities include site selection, land entitlement,
project design and construction, build-to-suit activities and tenant
renovations. The Company has successfully developed numerous sophisticated
development projects for some of the nation's most prominent corporations both
in Southern California and around the country. The Company's extensive
experience has enabled it to form key alliances with major corporate tenants,
municipalities and landowners in Southern California. The Company's
relationships with tenants and users has enabled it to receive fees in
connection with its role as developer of various projects, or, in the case of
Kilroy Long Beach, to develop the land for its own account where such
development will result in a favorable risk-adjusted return on investment. In
connection with the Formation Transactions, the Company will succeed to the
Kilroy Group's rights in and to the Development Properties.
The Company or the Operating Partnership will be the manager of the
Properties and may provide building management services for independent
building owners for terms that vary in length but which generally provide
91
<PAGE>
for management fees of 4% to 5% of collected revenue and may also provide for
reimbursement of expenses. The Services Company will provide development
services for the Company and the Operating Partnership, as well as for third
parties, at market rates.
The following is a description of the Development Properties as presently
contemplated.
Kilroy Airport Center Long Beach. In conjunction with the Company's role as
master ground lessee of Kilroy Long Beach, the Company manages all ongoing
leasing and development activities for the four-phase, approximately 53-acre
office and retail development project, including sole development rights to
the approximately 24 remaining developable acres. To date the Company has
developed Phases I and II. See "--Office Properties--Kilroy Airport Center
Long Beach" and "Acquisition Properties." Current development activities are
focused on Phase III of the project ("Kilroy Long Beach Phase III") which will
be developed and owned by the Company. Kilroy Long Beach Phase III presently
is contemplated to initially include a seven-story office building with
approximately 186,000 rentable square feet and a five-story office building
with approximately 132,000 rentable square feet. In addition, Kilroy Long
Beach Phase III may be developed, subject to site plan approval by the City of
Long Beach, to include an additional office building with up to 150,000
rentable square feet of space. The Company is currently in discussions with
several prospective tenants for office space presently planned to be included
in Kilroy Long Beach Phase III. Development of Kilroy Long Beach Phase III is
subject to substantial predevelopment leasing activity and, therefore, the
timing for the commencement of development is uncertain.
Kilroy Long Beach also is planned to include Phase IV ("Kilroy Long Beach
Phase IV"), which will be developed and owned by the Company. Kilroy Long
Beach Phase IV presently is contemplated to include an aggregate of up to
550,000 rentable square feet of office and retail space including high quality
retail and specialty shops, sit-down and convenience restaurants and, subject
to site-plan approval by the City of Long Beach, a multitheater and virtual
reality entertainment center. Development of Kilroy Long Beach Phase IV is
subject to substantial predevelopment leasing activity and, therefore, the
timing for the commencement of development is uncertain.
To date the Company has invested approximately $8.8 million in
infrastructure improvements which are in place for Kilroy Long Beach Phases
III and IV and has available an additional approximately $2.6 million of
revenue bond proceeds held by the City of Long Beach which the Company
believes is sufficient to provide for further traffic mitigation improvements,
if any, which may be required by the City in connection with the future
development. Because of the over 900,000 aggregate rentable square feet
entitled at Kilroy Long Beach Phases III and IV, and the significant
infrastructure improvements already in place, the Company believes that Kilroy
Long Beach offers substantial opportunity for tenant expansion from a location
servicing both Los Angeles and Orange Counties. See "--Office Properties--
Kilroy Long Beach."
Kilroy Long Beach Phase III and Phase IV will be developed by the Company or
the Services Company for the benefit of the Company. Prior to the Formation
Transactions, the Kilroy Group and its affiliates acquired construction
materials at a cost of approximately $6.5 million in connection with the
development of Kilroy Long Beach Phase III. These construction materials will
not be contributed to the Company and the Company will have no obligation to
purchase the materials from the Kilroy Group or to in any way use the
materials in the development and completion of the project. Any decision on
the part of the Company to purchase the materials from the Kilroy Group in the
future will be determined by a majority of the Independent Directors.
Kilroy Airport Center Long Beach is subject to three long-term ground leases
under which the Company is ground lessee. The City of Long Beach is the ground
lessor with respect to Kilroy Long Beach Phase III and the Board of Water
Commissioners of the City of Long Beach, acting on behalf of the City of Long
Beach, is the ground lessor with respect to Kilroy Long Beach Phase IV. The
basic term under each of the ground leases expires on July 17, 2035. Primary
rent under the leases for Kilroy Long Beach Phases III and IV is currently
approximately $75,000 per year and $76,764 per year, respectively, with such
amounts adjusted periodically to take account of changes in the fair market
rental value of the land underlying each lease.
92
<PAGE>
Riverside Judicial Center. In a unique "public-private partnership" with the
City of Riverside Redevelopment Agency and the County of Riverside, the
Company has substantially completed for a fee a comprehensive master planning,
design, entitlement and development effort for the initial phase of a multi-
jurisdictional judicial center complex (the "Riverside Judicial Center") in
downtown Riverside that is expected to serve the entire greater Riverside and
San Bernardino area. Riverside is located approximately 56 miles east of Los
Angeles. The project currently includes a United States Bankruptcy Court and
administrative complexes. In addition, future development at the site may also
include a United States District Court. Construction of the Riverside Judicial
Center began in February 1996. Upon consummation of the Formation
Transactions, the Services Company will be assigned the Development Management
Agreement in connection with the project.
Northrop Grumman. The Company has been retained on a fee basis by Northrop
Grumman Corporation ("Northrop Grumman") to undertake a comprehensive, multi-
phased effort to analyze, entitle and manage the future reuse, planning,
entitlement, marketing and disposition of the approximately 200-acre property
located in the City of Pico Rivera, located approximately 13 miles east of Los
Angeles, which currently serves as Northrop Grumman's headquarters for
activities related to the U.S Air Force's B-2 "Stealth" Bomber Program. Early
stages of the project are underway, including the execution of a Memorandum of
Understanding with the City of Pico Rivera and a community outreach program
and submission of a conceptual reuse plan to the City of Pico Rivera. The
agreement runs through February 15, 1997.
ACQUISITION PROPERTIES
The Company has entered into agreements to acquire from non-affiliated third
parties four office properties and two industrial properties upon consummation
of the Offering, and will acquire one Industrial Property which was purchased
from a non-affiliated third party by KI on behalf of the Company prior to
consummation of the Offering and will be assigned to the Company upon
consummation of the Offering (collectively, the "Acquisition Properties"). In
the event one or more of the Acquisition Properties are purchased, the Company
expects to finance the acquisition cost (approximately $49.0 million in the
aggregate) with long-term borrowings under the $84.0 Million Loan, new
mortgage financing and/or the proceeds of the Offering. Acquisition of each of
these properties is subject to the satisfactory completion of certain closing
conditions. Although each of the acquisitions is expected to be completed
prior to or concurrent with consummation of the Offering there is no assurance
that any of the Acquisition Properties will be acquired. In addition,
concurrent with the Offering the Company will assume and repay out of the
Offering proceeds the indebtedness incurred by KI (on behalf of the Company)
to acquire the Industrial Property located at 12752-12822 Monarch Street,
Garden Grove, California (including expenses at closing). Unless otherwise
indicated, all calculations and information contained in this Prospectus give
pro forma effect to the acquisition of the Acquisition Properties.
Kilroy Long Beach Phase I. Two of the Acquisition Properties comprise Kilroy
Long Beach Phase I, a Class A office complex which includes a two-story office
building and a combination two/three-story office building encompassing an
aggregate of 225,000 rentable square feet. The Company has entered into an
agreement for the purchase of these Office Properties for an aggregate
purchase price of $23.5 million. Kilroy Long Beach Phase I was developed by
the Company in 1987 and sold by the Company to the current owner, a non-
affiliated third party, in 1993. The Company has overseen all leasing and
management activity at the property since its development. As of December 31,
1995, the properties were 96.6% leased to eight tenants at an average annual
base rent per net rentable square foot of $15.90. See "--Office Properties--
Kilroy Long Beach."
Thousand Oaks Office Property. Another Acquisition Property is a stand-alone
three-story Class A office property located in Thousand Oaks, California,
which encompasses approximately 81,100 rentable square feet and, as of
December 31, 1995, was 100.0% leased to eleven tenants at an average annual
base rent per net rentable square foot of $23.26. The Company has entered into
an agreement with a non-affiliated third party for the purchase of this Office
Property for a purchase price of $13.2 million.
93
<PAGE>
Anaheim Office and Industrial Properties. The Company also has entered into
an agreement to purchase one office and two industrial properties located at
4123-4175 East La Palma Avenue, Anaheim, California. The Office Property
consists of approximately 42,800 rentable square feet. At September 30, 1996,
the Office Property was 93.2% leased to 12 tenants at an average annual base
rent per net rentable square foot of $11.72. The Industrial Properties
comprise an aggregate of approximately 144,000 rentable square feet. At
September 30, 1996, each of the Industrial Properties was 100% leased with an
aggregate annual base rent per net rentable square foot of $3.74. Pursuant to
the terms of the purchase agreement, the Company will acquire all of these
properties for an aggregate purchase price of $12.2 million in cash.
12752-12822 Monarch Street, Garden Grove, California. On behalf of the
Company, in December 1996 KI purchased an industrial building located at
12752-12822 Monarch Street, Garden Grove, California. The building contains an
aggregate of approximately 277,000 rentable square feet. As of September 30,
1996, the property was 100% leased to five tenants at an average annual base
rent per net rentable square foot of $3.41. Pursuant to the terms of the
purchase agreement, the Property was acquired on behalf of the Company for a
purchase price of $9.1 million in cash and will be transferred to the Company
concurrent with the Offering. The Company will assume and repay out of the net
proceeds of the Offering the debt and expenses incurred by KI in connection
with the acquisition. The purchase was completed on behalf of the Company in
December 1996 because of the closing schedule required by the seller.
THE COMPANY'S SOUTHERN CALIFORNIA SUBMARKETS*
The Company believes that Los Angeles, Orange and Ventura Counties have been
and will continue to be excellent markets in which to own and operate Class A
office, industrial and retail property over the long term. The Company
believes that these counties are attractive for a number of reasons:
. These counties, together with Riverside and San Bernardino Counties,
comprise the second largest Consolidated Metropolitan Statistical Area
in the United States (the "Southern California Area") and rank as the
world's 12th largest economy;
. The continuing expansion of the service-producing sector of the economy;
. Employment sectors using Class A office and industrial properties
continue to expand with the Southern California Area's continuing growth
in foreign trade and diversification of industries;
. Since 1992 there has been virtually no increase in the Southern
California Area's inventory of office space; and
. The Southern California Area's demand for quality industrial space has
spurred new construction of industrial properties.
- --------
* The Company retained Robert Charles Lesser & Co. ("Lesser"), nationally
recognized experts in real estate consulting and urban economics, to study
the Company's Southern California submarkets, and the discussion of such
submarkets below and under the caption "Prospectus Summary--The Company's
Southern California Submarkets" is based upon Lesser's findings. While the
Company believes that these estimates of economic trends are reasonable,
there can be no assurance that these trends will in fact continue.
94
<PAGE>
As of December 31, 1995, the Southern California Area had a total population
of approximately 15.6 million people which accounted for approximately 5.9% of
the total U.S. population. Annual population growth in the Southern California
Area since 1990 has averaged approximately 217,000 persons. Of the
approximately 15.6 million people in the Southern California Area,
approximately 9.2 million persons lived in Los Angeles
County and approximately 2.6 million persons lived in Orange County. Annual
estimated growth in population in these counties over the next five years is
expected to be approximately 94,000 and 32,000 persons, respectively. The
following table presents the total population as a proportion of the United
States population for the Southern California Area and California for 1980,
1990 and 1995 and the estimated population for 2000 and 2010.
TOTAL POPULATION AS A PROPORTION OF THE UNITED STATES
SOUTHERN CALIFORNIA AREA AND CALIFORNIA
1980-2010
<TABLE>
<CAPTION>
1980 1990 1995 2000 2010
<S> <C> <C> <C> <C> <C>
California 10.50% 12.00% 12.30% 12.70% 13.50%
Southern California Area 3.65% 5.80% 5.90% 6.10% 6.30%
</TABLE>
Increasing Employment. The Southern California Area economy experienced
significant recessionary conditions during the 1990-1993 period. While the
Southern California Area lagged behind the rest of the country in entering the
recession, it also lagged in the economic recovery, in part due to the
cutbacks in the aerospace and defense industries. Employment growth recovered
in 1995. The passage of the North American Free Trade Agreement (NAFTA) in the
first quarter of 1995 and the General Agreement on Tariffs and Trade (GATT) in
the fourth quarter of 1994 provide optimism for new jobs and economic growth
for California. In 1995, the Southern California Area experienced a net
increase in employment with the addition of approximately 113,000 jobs,
representing an approximately 1.9% increase over the prior year. Of the total,
approximately 61,000 jobs (approximately 53.9% of the total) were created in
Los Angeles County. Employment in the Southern California Area is expected to
increase during 1996 through 1998, with an expected average increase of
approximately 125,000 to 135,000 jobs annually, representing an annual growth
rate of approximately 2.1%
95
<PAGE>
to 2.2%, nearly twice the expected national growth rate of 1.2%. The following
table shows the annual non-agricultural change in jobs for the Southern
California Area for the period from 1980 through 1995, and the expected change
in jobs for the period from 1996 through 1998.
ANNUAL NON-AGRICULTURAL EMPLOYMENT CHANGE
SOUTHERN CALIFORNIA AREA
1980-1998
ANNUAL CHANGE IN JOBS
Southern California Area
1980 -0-
1981 67,900
1982 (127,300)
1983 42,100
1984 222,700
1985 190,800
1986 188,500
1987 194,700
1988 189,300
1989 155,700
1990 90,600
1991 (173,000)
1992 (189,000)
1993 (102,500)
1994 29,200
1995 112,800
1996 124,448
1997 127,062
1998 135,907
Unemployment rate in the Southern California Area is moving downward from
its 1993 peak. For the U.S., the 1995 unemployment rate was approximately 6.2%
versus approximately 7.7% in California. By comparison, the 1993 unemployment
rates for the U.S. and California were approximately 6.9% and 9.2%,
respectively. While the unemployment rate in the Southern California Area has
been declining in the last couple of years, it probably will remain higher
than the unemployment rate for the nation as a whole. Within the Southern
California Area, the 1995 unemployment rates vary from a low of approximately
5.4% in Orange County to a high of approximately 8.7% in Riverside and San
Bernardino Counties. Los Angeles County's unemployment rate stood at
approximately 7.7%--the same as California's.
Diversification of Industries. Los Angeles and Orange Counties are widely
regarded as major centers for corporate and international business and the
growth of international trade through the Los Angeles-Long Beach port complex,
which presently ranks as the largest commercial port in the United States, is
driving the growth of business in the surrounding area. While the southern
coastal Los Angeles County market, including the El Segundo and Long Beach
submarkets, has historically been, and continues to be, associated with the
aerospace and defense industries, the downsizing of those industries has
resulted in the region becoming more diversified, with major corporations in
emerging industries such as telecommunications and healthcare. The Company
believes this diversity, which is reflected in the Company's tenant base, has
strengthened these submarkets in which the Properties are located.
Foreign Trade. The growth in the region's employment is attributable in part
to the increase in the volume of trade in the region's ports and airports,
which at the end of 1995 accounted for over 12.0% of the total trading volume
in the United States and which has grown at an average annual rate of
approximately 11.4% during the ten-year period ended in 1994 compared to an
approximately 8.0% growth rate nationally during the same period. In addition,
during 1995 the trading volume among the region's ports and airports increased
another approximately 16.0%, further securing the region's position as the
nation's leader in international trade activity.
96
<PAGE>
The following table shows the growth in the Los Angeles Customs District's
share of U.S. Trade for the period from 1972 through 1995.
LOS ANGELES CUSTOMS DISTRICT SHARE OF U.S. TRADE
1972-1995
1972 6%
1973 6%
1974 7%
1975 6%
1976 7%
1977 7%
1978 7%
1979 7%
1980 8%
1981 8%
1982 8%
1983 9%
1984 9%
1985 11%
1986 12%
1987 12%
1988 12%
1989 12%
1990 12%
1991 12%
1992 12%
1993 12%
1994 13%
1995 12%
Growing Service Economy. Over the last 15 years the composition of
employment in the Southern California Area has shifted, generally mirroring
national patterns. The goods-producing sector (mining, construction and
manufacturing) has declined from an approximately 28.7% share in 1980 to
approximately 20.1% in 1995. Within this sector, manufacturing accounted for
the entire decline. Correspondingly, the services-producing sector
(transportation, communications and utilities; wholesale and retail trade;
finance, insurance and real estate services; and government) has expanded from
approximately 71.3% of total employment in 1980 to approximately 79.9% in
1995. The following table presents the total employment growth from 1980 to
1995 for various employment sectors in the Southern California Area.
TOTAL NON-AGRICULTURAL EMPLOYMENT GROWTH BY INDUSTRY
SOUTHERN CALIFORNIA AREA
1980-1995
Mining -10.2
Construction 16.9
Manufacturing -260
Transportation and Public Utilities 38.2
Wholesale and Retail Trade 238.5
F.I.R.E. 32.9
Services 697.6
Government 138.5
Goods Producing Employment -253.3
Service Producing Employment 1145.7
97
<PAGE>
In particular, the entertainment industry now accounts for over 200,000 jobs
in the region. The following table shows the growth of tourism and
entertainment-related jobs for the period from 1972 through 1995.
GROWTH OF TOURISM AND ENTERTAINMENT-RELATED JOBS
SOUTHERN CALIFORNIA AREA
1972-1995
<TABLE>
<CAPTION>
YEAR Thousands of Jobs % Change
<S> <C> <C>
1972 110 ---
1973 120 9.1%
1974 120 0.0%
1975 123 2.5%
1976 130 5.7%
1977 140 7.7%
1978 145 3.6%
1979 150 3.4%
1980 148 -1.3%
1981 165 11.5%
1982 167 1.2%
1983 175 4.8%
1984 180 2.9%
1985 190 5.6%
1986 200 5.3%
1987 218 9.0%
1988 225 3.2%
1989 242 7.6%
1990 254 5.0%
1991 262 3.1%
1992 245 -6.5%
1993 251 2.4%
1994 263 4.8%
1995 297 12.9%
</TABLE>
In addition, recent developments in the Southern California Area aerospace
industry, such as additional orders for the McDonnell Douglas C-17 military
cargo jets and the announcements of new orders for McDonnell Douglas airliners
by commercial carriers and the hiring of up to 700 employees by TRW
Corporation, should help to stabilize related employment. The following table
shows the number of jobs in the aerospace/high technology industries in the
Southern California Area for the period from 1988 through 1995.
AEROSPACE/HIGH TECHNOLOGY EMPLOYMENT TRENDS
SOUTHERN CALIFORNIA AREA
1988-1995
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aerospace/High Technology 274.2 265.6 253.3 228.6 199 168.7 146.7 135
</TABLE>
98
<PAGE>
Office Submarkets. Total office space in the Southern California Area
amounts to approximately 229.2 million square feet. The Southern California
Area is the second largest office market in the country after the New York
City Metro Area (with over approximately 800 million square feet). Los Angeles
County comprises two-thirds of the metro office inventory, roughly 156.1
million square feet; Orange County accounts for approximately 54.2 million
square feet.
Vacancy rates in the office space market in the Southern California Area are
trending downward from a high in 1991 and 1992 of approximately 19.7% to a
level at the end of 1996 of approximately 16.7%. At September 30, 1996, the
vacancy rate for the Southern California Office Properties was approximately
6.9%. The following table shows the U.S. and Southern California Area office
vacancy rates for the period from 1988 through 1996.
OFFICE MARKET VACANCY TRENDS
SOUTHERN CALIFORNIA AREA VERSUS U.S.
1988-1996
VACANCY RATE
SOUTHERN
CALIFORNIA
U.S. AREA
------- ----------
1988 18.2% 0.0%
1989 18.6% 17.2%
1990 19.5% 0.0%
1991 19.4% 19.8%
1992 18.7% 19.7%
1993 17.0% 19.2%
1994 15.5% 18.3%
1995 14.1% 17.8%
1996 12.8% 16.7%
Net absorption in the Southern California Area in 1996 amounted to
approximately 3.1 million square feet, up from last year's total of 2.2
million and 1994's total of 2.7 million and nearly double 1993's total of
approximately 1.7 million square feet. By comparison, absorption in the
Southern California Area ranged from approximately 11.1 million to 11.7
million square feet during the mid- to late 1980s. Annual increases in
employment during the 1980s fluctuated between approximately 160,000 and
200,000 jobs per year, as opposed
99
<PAGE>
to job losses during 1991 to 1994. The following table shows the annual
absorption of office space in the Southern California Area for each of the
years from 1986 through 1996.
ANNUAL NET ABSORPTION OF OFFICE SPACE
SOUTHERN CALIFORNIA AREA
1986-1996
1986 11,116
1987 11,684
1988 11,687
1989 11,260
1990 7,635
1991 5,005
1992 3,301
1993 1,689
1994 2,657
1995 2,153
1996 3,140
No Additional Supply of Office Space. During the last five years new
construction of office space in the Southern California Area has decreased
substantially. The following table shows the additions in square footage to
the Southern California office market for each of the last eight years.
ADDITIONS TO THE SOUTHERN CALIFORNIA AREA'S OFFICE MARKET*
<TABLE>
<CAPTION>
Year Square Feet
<S> <C>
1989 21,097
1990 11,033
1991 9,384
1992 3,188
1993 720
1994 0
1995 0
1996 0
</TABLE>
- --------
* Square feet shown in thousands. The above table represents additions to the
Southern California Area's office market net of office space removed from
service. In 1994 and 1995, the total square footage in the market decreased
by approximately 2.0 million square feet and approximately 1.3 million
square feet, respectively.
100
<PAGE>
The addition in the near-term of any new speculative office space to the
market remains unlikely as effective rents for multi-tenant properties are
currently well below the level needed to make new construction economically
feasible.
El Segundo Office Submarket. In the El Segundo submarket the Company owns
and operates three Office Properties at Kilroy LAX, and one stand alone two-
story office building. The aggregate rentable square feet of the Office
Properties in the El Segundo submarket represent approximately 22% of the
approximately 3.4 million rentable square feet of all Class A office
properties located in this submarket as of December 31, 1996.
The El Segundo submarket is an approximately 5.4 square mile area in the
southwestern coastal section of Los Angeles County. The El Segundo submarket
has the advantages of proximity to LAX without the disadvantages of being
located within the City of Los Angeles, as is the case with the submarket
located on the northeast side of LAX (the "LAX/Century Boulevard submarket").
The El Segundo submarket has a highly qualified computer and technology-based
work force. El Segundo's tax structure is as much as $6.00 per square foot per
annum lower than neighboring Los Angeles, principally attributable to lower
gross receipts and utility taxes. As a result, the El Segundo submarket has
historically enjoyed higher rental occupancy and tenant retention rates than
neighboring submarkets, such as LAX/Century Boulevard, Torrance and Carson.
The El Segundo submarket tenant base has broadened from its historic
concentration of aerospace industry tenants. A number of major corporations
have a significant presence in the El Segundo submarket, including Xerox
Corporation, Mattel, Inc., Chevron USA, Inc., AT&T, TRW Corporation and Hughes
Space & Communications.
Management believes that because of the high quality and strategic location
of the four Office Properties located in the El Segundo submarket, the El
Segundo Office Properties have had higher occupancy and tenant retention than
other properties within this submarket and have achieved higher rental rates.
The vacancy rate of Class A office buildings in the El Segundo submarket was
approximately 19.8% as of September 30, 1996 as compared to approximately 7%
for the Company's El Segundo Office Properties as a whole as of September 30,
1996. The average asking annual rental rate in the El Segundo submarket as of
September 30, 1996 was approximately $22.00 per square foot for Class A office
buildings compared to an average asking annual rental rate of $24.00 per
square foot for the Company's El Segundo Office Properties as of September 30,
1996. No new office buildings are under construction and, to the Company's
knowledge, no new construction is presently
101
<PAGE>
projected in the near future in the El Segundo submarket. The following tables
show the comparative vacancy rates of Class A office space in the El Segundo
submarket and Kilroy LAX, and the comparative mean asking rents of Class A
office space in the El Segundo submarket and Kilroy LAX, respectively.
HISTORICAL CLASS A OFFICE VACANCY
KILROY PROPERTIES VERSUS EL SEGUNDO CLASS A
1990-1996 (1996 FIGURES AS OF SEPTEMBER 30)
<TABLE>
<CAPTION>
Year Kilroy Properties El Segundo Class A
<S> <C> <C>
1990 8.0% 8.3%
1991 6.9% 4.4%
1992 6.8% 8.5%
1993 5.5% 5.5%
1994 4.3% 19.5%
1995 4.3% 10.8%
1996 7.2% 19.8%
</TABLE>
HISTORICAL CLASS A OFFICE RENTS
KILROY PROPERTIES VERSUS EL SEGUNDO CLASS A
1990-1996 (1996 FIGURES AS OF SEPTEMBER 30)
<TABLE>
<CAPTION>
Kilroy Properties El Segundo Class A
Mean Asking Rents Mean Asking Rents
<S> <C> <C>
1990 $23.30 $22.30
1991 $23.85 $22.65
1992 $23.91 $22.55
1993 $23.70 $21.30
1994 $23.40 $21.80
1995 $23.40 $21.10
1996 $23.40 $22.00
</TABLE>
102
<PAGE>
Through September 30, 1996, net absorption of Class A office space in the El
Segundo submarket was a negative 357,000 square feet, principally the result
of the 500,000 net rentable square feet of office space owned by an
unaffiliated third-party located at 200 North Sepulveda Boulevard and vacated
by Hughes Electronics early in 1996. During the same period, Hughes Space &
Communications extended leases for office space located at Kilroy LAX covering
over 107,000 net rentable square feet. Local brokers indicate that the office
space located at 200 North Sepulveda Boulevard is among the lower quality
Class A buildings in the El Segundo submarket and is not conducive to most
tenants seeking a better quality Class A product as offered at Kilroy LAX.
During the year ended 1996, rents at Kilroy LAX remained relatively unaffected
by the addition of the lower quality space to the vacant inventory.
Management believes that the submarket's expanding economy, the availability
of large blocks of office space and lower rental rates than those offered in
the nearby West Los Angeles office submarket should apply some short-term
upward pressure on rents for quality Class A office space by as much as 5.0%
within the next year. Rental rates at lower quality (non-Class A) buildings
are expected to be flat until vacancies drop to a level of at least 15%.
Long Beach Airport Area Office Submarket. Upon consummation of the Offering
and the Formation Transactions, the Company will own five Office Properties at
Kilroy Long Beach Phases I and II which represent approximately 42% of the
total rentable square feet of all Class A office properties located in the
Long Beach Airport area submarket.
The Long Beach Airport area submarket is strategically located near the
border of Los Angeles and Orange Counties, adjacent to the I-405 Freeway and
is in close proximity to several other freeways which serve the area. The
submarket is also near the Long Beach Airport which, through AmericaWest
Airlines, provides commercial airline access to all regions of the country.
The Long Beach Airport area submarket provides tenants with the ability to
draw a workforce from and to provide services to clients in both Los Angeles
and Orange Counties, making it an ideal location for companies operating in
both counties to consolidate their operations to a convenient single location.
In addition, portions of the submarket, including the Properties located at
Kilroy Airport Center Long Beach, are located within a favorable tax zone
which permits qualifying tenants to receive a variety of tax credits and
deductions not available in neighboring submarkets. The submarket also offers
tenants a secure environment within a first class office park with the
potential for substantial expansion, whereas the Long Beach central business
district submarket is hampered by traffic congestion and limited opportunities
for tenant expansion.
As of September 30, 1996, the vacancy rate of Class A office buildings in
the Long Beach Airport area submarket was approximately 16.6% as compared to
approximately 8.6% for the Company's Long Beach Office Properties. For the
year ended December 31, 1996, the submarket experienced net absorption of
approximately 20,000 rentable square feet of office space, as compared to
approximately 458,000 rentable square feet for the year ended December 31,
1995, of which 275,000 rentable square feet was attributable to two leases
entered into by McDonnell Douglas at the Long Beach Airport Business Park. As
of December 31, 1996 and 1995, the mean asking annual rental rate in the Long
Beach Airport area submarket was approximately $22.00 and $24.40,
respectively, per rentable square foot for Class A office buildings compared
to the mean asking annual rental rate at Kilroy Long Beach of $24.00 and
$24.30, respectively, per rentable square foot.
The decrease in the submarket's vacancy rate, the indications of improvement
in the submarket's aerospace industry and the present difficulty in locating
large blocks of contiguous space should apply some short-term upward pressure
on rents for Class A office space within the next two years. Available space
for technology companies is particularly difficult to find and buildings which
offer current telephone communication capabilities and electrical support are
more likely to benefit earlier.
Thousand Oaks Submarket. Upon consummation of the Offering and the Formation
Transactions, the Company will own a stand-alone three-story office building
located in Thousand Oaks, California. The City of Thousand Oaks has
approximately 112,600 residents, and is located 40 miles northwest of Los
Angeles in
103
<PAGE>
Ventura County, which is located along the coast immediately north of Los
Angeles County. As of December 31, 1995, Ventura County had a population of
approximately 720,000 persons. The County is home to companies in various
industries including high technology, pharmaceuticals and finance. As of
December 31, 1996, the vacancy rate of office space in the Ventura County
office submarket was approximately 13.6%. During the years ended December 31,
1996 and 1995, there was net absorption in the Ventura County office submarket
of approximately 79,000 and 157,000 rentable square feet of office space,
respectively. The average annual effective gross rent for office space in the
Ventura County office submarket as of December 31, 1996 was $17.76 per square
foot, an increase of 17.5% over 1995.
Industrial Submarkets.
As of December 31, 1996, available industrial space in the Southern
California Area totaled approximately 1.2 billion square feet. Vacancy rates
in the industrial space market in the Southern California Area have declined
from a high of approximately 13.8% in 1992 to approximately 7.6% at December
31, 1996. At September 30, 1996, the vacancy rate for the Industrial
Properties was approximately 6.3%. The following table shows the U.S. and
Southern California Area industrial vacancy rates for the period from 1991
through 1996.
INDUSTRIAL MARKET VACANCY TRENDS
U.S. AND THE SOUTHERN CALIFORNIA AREA
1991-1996
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C>
U.S. 7.9% 8.7% 8.3% 7.4% 6.9% 7.7%
Southern California Area 13.0% 13.8% 13.5% 12.6% 9.2% 7.6%
</TABLE>
Much of the existing space on the market in the Southern California Area is
considered to be functionally obsolete due to its age, services, and/or
configuration. As a result, the Southern California Area inventory for
industrial space is beginning to experience a modest growth in new
construction primarily of build-to-suit. In addition, speculative construction
also grew modestly in 1996 with approximately 7.0 million square feet of new
construction representing approximately 0.6% of the region's inventory.
However, this amount still is relatively modest when compared to 1989 levels
when new construction for the year reached approximately 34.0 million square
feet, and the existing building inventory was approximately 1.0 billion square
feet.
104
<PAGE>
El Segundo Industrial Submarket. The Company owns four Industrial Properties
located in the City of El Segundo, which contain an aggregate of approximately
390,000 rentable square feet. The El Segundo industrial submarket is part of
the South Bay industrial market which includes the cities of Torrance, Carson
and Long Beach. At September 30, 1996, the Company's El Segundo Industrial
Properties were 98.1% leased to three tenants. At December 31, 1996, the South
Bay industrial market contained approximately 185 million rentable square feet
of industrial space, with a vacancy rate of approximately 8.0%.
Orange County Industrial Submarket. Upon consummation of the Offering, the
Company will own seven Industrial Properties in Orange County, five of which
are in the City of Anaheim and two of which are in the City of Garden Grove.
The seven Industrial Properties located in Orange County contain an aggregate
of approximately 816,877 rentable square feet. At September 30, 1996, the
Company's Orange County Industrial Properties were 90.5% leased to 14 tenants.
At December 31, 1996, the Orange County industrial submarket contained
approximately 207 million rentable square feet, with a vacancy rate of
approximately 8.8%. The low current vacancy rate in the Southern California
industrial submarket as a whole is likely to put upward pressure on rents for
Southern California Class A buildings during 1996, with increases by as much
as 9% by the end of 1997.
SEATTLE MARKET
As of 1995, the population of the Seattle metropolitan statistical area
("Seattle MSA") was 2.2 million making it the 21st largest in the country. The
median per capita personal income in 1995 for the Seattle MSA was $28,329,
which is 22% above the national level.
The Seattle MSA has the 15th largest employment level in the nation. Since
1985, employment has grown at an average annual rate of 3.2%. Industries
concentrated in Seattle include aircraft manufacturing, aircraft parts,
computer and data processing and healthcare. The largest employers in the
greater Seattle area are Boeing Co., The University of Washington, Safeway
Inc., Microsoft Corp. and Group Health Cooperative of Puget Sound.
As of December 31, 1992, the vacancy rate for office space in the Seattle
MSA was 13.2%. Since then, this rate has steadily declined to a level of 12%
as of December 31, 1994 and 9.1% as of June 30, 1996. The Seattle MSA's
aggregate office space of 51.3 million square feet made it the 14th largest in
the nation and, as of June 30, 1996, it contained 35.2 million square feet of
Class A office space with a vacancy rate of 8.7%. Over the last three years
only 581,000 square feet of office space has been added to the Seattle MSA.
EXCLUDED PROPERTIES
The Company will hold options to acquire (i) parcels comprising an aggregate
of approximately 18 acres located at Calabasas Park Centre, in Calabasas,
California and (ii) a three-building office complex located on North Sepulveda
Boulevard in El Segundo, California at the respective purchase price for each
of the properties as discussed below. The office complex was developed and has
been leased and managed by the Kilroy Group and each option property is
currently owned by a partnership beneficially owned and controlled by John B.
Kilroy, Sr. and John B. Kilroy, Jr. The option for Calabasas Park Centre is
exercisable on or before the first anniversary of the Offering. The option for
the office complex located on North Sepulveda Boulevard in El Segundo is
exercisable on or before the seventh anniversary of the consummation of the
Offering. The purchase price for each of the properties will be payable in
cash, provided, however, that if the option for the office complex in El
Segundo is exercised after the first anniversary of the consummation of the
Offering, the purchase price will be payable in cash or Units at the election
of the seller. The Company intends to account for acquisitions of Excluded
Properties, if any, using the purchase accounting method.
In the event that the owner of a property receives an offer from a third
party for the master lease or purchase of such property, such owner may give
notice to the Company, which notice shall include the proposed purchase price,
leasing terms and/or other economic terms of the proposed transfer or lease of
such property. The Company shall then have 60 days to give notice of its
election to acquire or lease such property at the lower of
105
<PAGE>
the applicable option price or the proposed purchase price or lease terms. In
the event that the Company does not give such notice, the option to acquire
such property shall be suspended and the owner may proceed with the sale or
lease of such parcel pursuant to the terms of such offer, provided that the
economic terms may be up to 5% below that described in such notice; provided,
however, that with respect to any sale of the approximately 18 acres located
at Calabasas Park Centre discussed below, the Company shall have the right to
acquire at the option price the owners' rights and related monetary
obligations under the respective sales agreement. In the event the owners of
such property (i) have not entered into a letter of intent for the sale or
lease of such property within 180 days following the notice to the Company
referenced above, or (ii) have not completed the sale of the respective
property within 270 days following such notice, then the Company's option with
respect to such property shall be reinstated, up to the expiration date of the
option. The Company's options shall be subject to any arrangements entered
into by the Kilroy Group in connection with any financing, recapitalization or
leasing of the properties including, without limitation, any rights of the
lender(s) with respect to such properties with respect to a transfer pursuant
to the applicable option. In addition, the office complex will be managed by
the Operating Partnership pursuant to a management agreement on market terms.
Calabasas Park Centre. Kilroy Calabasas Associates, a limited partnership,
beneficially owned 49.0% by John B. Kilroy, Sr. and 51.0% by John B. Kilroy,
Jr., and controlled by both of them, owns Calabasas Park Centre, an
approximately 66-acre site (representing approximately 45 developable acres
net of acreage required for streets and contractually required open areas) in
the City of Calabasas located immediately west of the San Fernando Valley,
which is presently entitled for over one million rentable square feet of
office, retail and hotel development, and for which future entitlements are
expected to include residential development. The property has substantially
all significant infrastructure improvements in place. Kilroy Calabasas
Associates is actively marketing for sale various parcels totaling
approximately 27 acres for neighborhood retail, hotel and residential
development, of which approximately 1.7 acres is proposed to be dedicated to
the City of Calabasas for civic use. Because these 27 acres are not planned
for development for office or industrial use, management believes that such
parcels are not appropriate for inclusion in the Company's portfolio. Kilroy
Calabasas Associates has received offers with respect to certain parcels and
is pursuing such offers in the ordinary course of business, although there is
no assurance that any such transactions will be completed in the near term.
John B. Kilroy, Sr. and John B. Kilroy, Jr. each expect to spend an immaterial
amount of time in connection with any entitlement, marketing and sales of
parcels of Calabasas Park Centre. The remaining approximately 18 acres for
which the Company has been granted an option is entitled for over 500,000
rentable square feet for office, hotel and limited retail use. Because of the
uncertainty that such 18 acres will be used primarily as office space, this
property is not appropriate for inclusion in the Company's portfolio at this
time. In addition, both John B. Kilroy, Sr. and John B. Kilroy, Jr. have
agreed not to sell any of the parcels at Calabasas Park Centre to a real
estate investment trust with an existing portfolio of office or industrial
properties unless first offered to the Company on the same economic terms. See
"Policies with Respect to Certain Activities--Conflicts of Interest Policies--
Noncompetition Agreements."
Pursuant to the terms of the applicable option agreement, the purchase price
for the parcels located at Calabasas Park Centre will be equal to the total
accumulated costs, as of the date such option is exercised, in connection with
acquisition of rights with respect to, and the entitlement and development of
such property, including, without limitation, property taxes, predevelopment
and entitlement costs and fees, and related bond financing costs.
North Sepulveda Boulevard, El Segundo. The Kilroy Group developed and
operates a three-building office complex located on an over 3.5-acre parcel in
El Segundo, California, adjacent to LAX. The complex is comprised of an 11-
story office building (constructed in 1972), an eight-story office building
(constructed in 1962) and a seven-level parking structure with retail space on
the ground floor (constructed in 1972), encompassing an aggregate of
approximately 360,000 rentable square feet of office space and approximately
5,600 rentable square feet of retail space. The properties have convenient
access to LAX and the I-105 Freeway. As of September 30, 1996, the office
space was 100% leased to Hughes Space & Communications (of which approximately
60% is occupied) at an average annual triple net base rent per net rentable
square foot of $17.91,
106
<PAGE>
subject to a lease scheduled to expire on February 28, 1998. Management
believes that in light of the near-term expiration of the current lease and
the uncertainty of whether the current rental rate will approximate market
rental rates at the time of expiration, this office complex is not appropriate
for inclusion in the Company's portfolio at this time. The property is owned
by Kilroy Airport Imperial Co., a limited partnership, beneficially owned by
John B. Kilroy, Sr. and by John B. Kilroy, Jr. (who have an approximately
65.1% interest and an 18.2% interest, respectively), and controlled by both of
them. In addition, each of Patrice Bouzaid, Susan Hahn, Anne McCahon and Dana
Pantuso, the daughters of John B. Kilroy, Sr., have an approximately 4.2%
interest in the limited partnership. Each of Messrs. Kilroy expects to spend
an immaterial amount of time in connection with the management of the
property.
As of September 30, 1996, the office complex was encumbered by a first
mortgage loan having an outstanding principal balance of approximately $61.4
million. The loan bears interest at a rate of 9.63% per year and is scheduled
to mature on February 1, 2005. This property is also encumbered by a second
mortgage loan having an outstanding principal balance as of September 30, 1996
of $3.4 million. This loan bears interest at a rate of 9.75% per year and is
scheduled to mature on February 28, 1998.
Pursuant to the terms of the applicable Option Agreement, the purchase price
for the North Sepulveda Boulevard properties is equal to the sum of (i) the
then outstanding mortgage indebtedness secured by the respective properties,
plus (ii) $1, plus (iii) the aggregate amount of capital contributed by the
beneficial owners of the property, net of actual cash distributions
distributed in respect of such beneficial owners, during the period beginning
on the date of the consummation of the Offering and ending on the date of
exercise of the option, plus (iv) an annualized return of 8.0% on the amount
in excess of $5.0 million, if any, as determined pursuant to clause (iii)
preceding. The Company's option to purchase the North Sepulveda Boulevard
properties is subject to a right of first offer held by Hughes Space &
Communications.
Other Excluded Properties. In addition to the properties described above,
the Company will not acquire the following properties, each of which is owned
and controlled by John B. Kilroy, Sr. and John B. Kilroy, Jr.: (i) an
approximately three-acre undeveloped parcel located in Tampa, Florida, which
management believes is not appropriate for inclusion in the Company's
portfolio because of the long-term uncertainty of demand for office and
industrial property in the local market; and (ii) an approximately one-half-
acre parcel located in Santa Ana, California which management believes is not
appropriate for inclusion in the Company's portfolio because the parcel is
subject to an easement for railroad use, making the property undesirable for
development for office or industrial use. Each of John B. Kilroy, Sr. and John
B. Kilroy, Jr. will spend an immaterial amount of time managing these
properties.
INSURANCE
Management believes that the Properties are covered by adequate
comprehensive liability, rental loss, and all-risk insurance, provided by
reputable companies, with commercially reasonable deductibles, limits and
policy specifications customarily carried for similar properties. There are,
however, certain types of losses which may be either uninsurable or not
economically insurable, such as losses due to floods, riots or acts of war.
Should an uninsured loss occur, the Company could lose both its invested
capital in and anticipated profits from the property.
UNINSURED LOSSES FROM SEISMIC ACTIVITY
The Properties are located in areas that are subject to seismic activity.
Although the Company expects to have earthquake insurance on certain of the
Properties, should any Property sustain damage as a result of an earthquake,
or should losses exceed the amount of such coverage, the Company may incur
uninsured losses or losses due to deductibles or co-payments on insured
losses.
All of the Properties were reviewed by an independent engineering
consultant. Each of the Office Properties located at Kilroy LAX, Kilroy Long
Beach and the SeaTac Office Center was reviewed as part of the respective
107
<PAGE>
office complex ("Office Complex") in which each is located and the following
data summarizes the findings with respect to each Office Complex taken as a
whole. The review of each of the Properties and Office Complexes included a
review of the probable loss associated with certain seismic activity for the
"as-is" building shell construction. The estimated property damage loss
associated with building shell construction and related business interruption
for the Office Complexes and each of the other Properties was estimated based
upon site-specific seismic ground motion intensities expected to occur at
least once during 50-year and 200-year time periods. For 50-year seismic
ground motion intensity, these property damage loss evaluations indicate that
none of the Office Complexes would be expected to incur property damage losses
in excess of approximately 10% of their respective estimated replacement cost
value ("RCV") and only two of the Industrial Properties would be expected to
incur property damage losses in excess of approximately 10% of the RCV. The
two Industrial Properties, located at 12691 Pala Drive, Garden Grove,
California and 1230 South Lewis Street, Anaheim, California, are expected to
incur 50-year property damage losses of approximately 13% and approximately
14%, respectively, of their RCVs. For seismic ground motion intensities
expected to occur at least once in a 200-year period, these property damage
loss evaluations indicate that only one of the Office Properties (including
the Office Complexes) would be expected to incur property damage losses in
excess of approximately 21% of its RCV. Specifically, the Office Property
located at 185 South Douglas Street, El Segundo, California is expected to
incur a 200-year property damage loss of approximately 40% of its estimated
RCV. With respect to the Industrial Properties, only four would be expected to
incur 200-year property damage losses in excess of 25% of their respective
RCVs. Specifically, Industrial Properties located at 12691 Pala Drive, Garden
Grove, California; 1230 South Lewis Street, Anaheim, California; 2260 E. El
Segundo Boulevard, El Segundo, California; and 2270 E. El Segundo Boulevard,
El Segundo, California, each would be expected to experience property damage
losses of approximately 40% of its respective estimated RCV during a 200-year
seismic disturbance.
The Company has insurance for loss in the event of damage to the Properties
from earthquake activity, which consists of primary loss insurance of $1.0
million and $10.0 million supplemental coverage, for losses in excess of
$11.0 million. Both the primary loss and supplemental coverage are subject to
deductibles equal to 25% of the insurable values for each location per
occurrence and, for the primary coverage, a minimum deductible of $250,000 (to
the extent that such amount is greater than 25% of the insurable values at
such location) for each location per occurrence. The Company's earthquake
insurance might not be sufficient to cover the cost of damage sustained in any
seismic event and is not replacement cost.
GOVERNMENT REGULATIONS
Many laws and governmental regulations are applicable to the Properties and
changes in these laws and regulations, or their interpretation by agencies and
the courts, occur frequently.
Costs of Compliance with Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all places of public
accommodation, effective beginning in 1992, are required to meet certain
federal requirements related to access and use by disabled persons. Compliance
with the ADA might require removal of structural barriers to handicapped
access in certain public areas where such removal is "readily achievable."
Noncompliance with the ADA could result in the imposition of fines or an award
of damages to private litigants. The impact of application of the ADA to the
Company's properties, including the extent and timing of required renovations,
is uncertain. If required changes involve a greater amount of expenditures
than the Company currently anticipates or if the changes must be made on a
more accelerated schedule than the Company currently anticipates, the
Company's ability to make expected distributions to stockholders could be
adversely affected.
Environmental Matters. Under various federal, state and local laws,
ordinances and regulations relating to the protection of the environment, an
owner or operator of real estate may be held liable for the costs of removal
or remediation of certain hazardous or toxic substances located on or in the
property. These laws often impose liability without regard to whether the
owner was responsible for, or even knew of, the presence of such hazardous or
toxic substances. The costs of investigation, removal or remediation of such
substances may be substantial and, the presence of such substances may
adversely affect the owner's ability to rent or sell the
108
<PAGE>
property or to borrow using such property as collateral. In addition, the
presence of such substances may expose it to liability resulting from any
release or exposure of such substances. Persons who arrange for the disposal
or treatment of hazardous or toxic substances at another location may also be
liable for the costs of removal or remediation of such substances at the
disposal or treatment facility, whether or not such facility is owned or
operated by such person. Certain environmental laws impose liability for
release of asbestos-containing materials into the air, and third parties may
also seek recovery from owners or operators of real properties for personal
injury associated with asbestos-containing materials and other hazardous or
toxic substances. In connection with the ownership (direct or indirect),
operation, management and development of real properties, the Company may be
considered an owner or operator of such properties or as having arranged for
the disposal or treatment of hazardous or toxic substances and, therefore,
potentially liable for removal or remediation costs, as well as certain other
related costs, including governmental penalties and injuries to persons and
property.
The Company believes that the Properties are in compliance in all material
respects with all federal, state and local laws, ordinances and regulations
regarding hazardous or toxic substances or petroleum products. The Company has
not been notified by any governmental authority, and is not otherwise aware,
of any material noncompliance, liability or claim relating to hazardous or
toxic substances or petroleum products in connection with any of its present
properties.
All of the Properties were subject to Phase I or similar environmental
assessments by independent environmental consultants in connection with the
formation of the Company. Phase I assessments are intended to discover
information regarding, and to evaluate the environmental condition of, the
surveyed property and surrounding properties. Phase I assessments generally
include an historical review, a public records review, an investigation of the
surveyed site and surrounding properties, and preparation and issuance of a
written report, but do not include soil sampling or subsurface investigations.
In connection with the preparation of the Phase I environmental survey with
respect to Kilroy Long Beach Phase I, interviews of certain individuals
formerly employed at the site documented in a historical site assessment
survey revealed the site's possible prior use as a Nike missile storage
facility. Further investigation performed by the Company's environmental
consultants and by the Company did not reveal any additional information with
respect to such use of the site. The Company's investigation included whether
the site might have been used previously for the storage of missiles
containing nuclear warheads, and did not reveal any facts that would indicate
that the prior use of the site would result in a material risk of
environmental liability. Consequently, the Company does not believe that this
site constitutes a risk of a liability that would have a material adverse
effect on the Company's financial condition or results of operations taken as
a whole. In connection with the preparation of the Phase I environmental
survey with respect to the Industrial Property located at 12752-12822 Monarch
Street, soil sampling revealed trace elements of contamination with cleaning
solvents. However, based on the level of contamination noted in the
environmental survey, management does not believe that such contamination will
have a material adverse effect on the Company's financial condition or results
of operations, taken as a whole. None of the Company's environmental
assessments of the other Properties has revealed any environmental liability
that the Company believes would have a material adverse effect on the
Company's financial condition or results of operations taken as a whole, nor
is the Company aware of any such material environmental liability.
Nonetheless, it is possible that the Company's assessments do not reveal all
environmental liabilities or that there are material environmental liabilities
of which the Company is unaware. Moreover, there can be no assurance that (i)
future laws, ordinances or regulations will not impose any material
environmental liability or (ii) the current environmental condition of the
Properties will not be affected by tenants, by the condition of land or
operations in the vicinity of the Properties (such as the presence of
underground storage tanks), or by third parties unrelated to the Company. If
compliance with the various laws and regulations, now existing or hereafter
adopted, exceeds the Company's budgets for such items, the Company's ability
to make expected distributions to stockholders could be adversely affected.
Other Regulations. The Properties are also subject to various federal, state
and local regulatory requirements such as state and local fire and life safety
requirements. Failure to comply with these requirements could result in the
imposition of fines by governmental authorities or awards of damages to
private litigants. The
109
<PAGE>
Company believes that the Properties are currently in material compliance with
all such regulatory requirements. However, the requirements will not be
changed or that new requirements will not be imposed which would require
significant unanticipated expenditures by the Company and could have an
adverse effect on the Company's Funds from Operations and expected
distributions.
The City of Los Angeles has enacted certain regulations relating to the
repair of welded steel moment frame buildings located in certain areas damaged
as a result of the Northridge Earthquake. As currently enacted, such
regulations do not apply to the Properties. There can be no assurance,
however, that similar regulations will not be adopted by other cities in which
the Properties are located or that new requirements will not be imposed which
would require significant unanticipated expenditures by the Company and could
have a material adverse effect on the Company's Funds from Operations and cash
available for distribution.
Except as described in this Prospectus, there are no other laws or
regulations which have a material effect on the Company's operations, other
than typical state and local laws affecting the development and operation of
real property, such as zoning laws. See "Risk Factors--Government
Regulations," "Certain Provisions of Maryland Law and of the Company's
Articles of Incorporation and Bylaws," "Partnership Agreement of Operating
Partnership," "Federal Income Tax Consequences" and "ERISA Considerations."
MANAGEMENT AND EMPLOYEES
The Operating Partnership has been structured as the entity through which
the Company will conduct substantially all of its operations. The Services
Company has been structured as an entity through which the Company will
conduct substantially all of its development activities and related
operations. The Company generally has full, exclusive and complete
responsibility and discretion in the management and control of the Operating
Partnership, but not of the Services Company.
The Company (primarily through the Operating Partnership and the Services
Company) initially will employ approximately 47 persons. The Company, the
Operating Partnership and the Services Company will employ substantially all
of the professional employees of KI that are currently engaged in asset
management and administration. The Operating Partnership will employ
approximately 18 on-site building employees who currently provide services for
the Properties. The Company, the Operating Partnership and the Services
Company believe that relations with their employees are good.
LEGAL PROCEEDINGS
Neither the Company nor any of the Properties is subject to any material
litigation nor, to the Company's knowledge, is any material litigation
threatened against any of them, other than routine litigation arising in the
ordinary course of business, which is expected to be covered by liability
insurance. In May 1994, KI permitted an uncontested foreclosure by the Bank of
America on a five-story office building located in El Segundo, California as
part of an overall renegotiation of KI's loans and lines of credit. In July
1993, KI sold Kilroy Long Beach Phase I to the mortgagee thereof, at a
purchase price slightly in excess of the outstanding balance of such mortgage.
KI continued to lease and manage such facility after such sale. In December
1994, the owner of Hidden River Corporate Park located in Tampa, Florida
permitted the uncontested foreclosure of the deeds of trust and certain other
property pledged as collateral to secure certain development loans related to
such property. KI developed the property, an approximately 210-acre office
park, and at the time of the foreclosure John B. Kilroy, Sr. and John B.
Kilroy, Jr. were limited partners in the company which owned the property.
110
<PAGE>
POLICIES WITH RESPECT TO CERTAIN ACTIVITIES
The Company's policies with respect to the following activities have been
determined by the Board of Directors of the Company and may be amended or
revised from time to time at the discretion of the Board of Directors, without
a vote of the stockholders of the Company, if they determine in the future
that such a change is in the best interests of the Company and its
stockholders.
INVESTMENT POLICIES
Investment in Real Estate or Interests in Real Estate. The Company will
conduct all its investment activities through the purchase of interests in the
Operating Partnership until all Units have been redeemed or exchanged for
shares of Common Stock and the Operating Partnership ceases to exist. During
such period, the proceeds of all equity capital raised by the Company will be
contributed to the Operating Partnership in exchange for Units in the
Operating Partnership. The investment objectives of the Company are to achieve
stable cash flow available for distributions and, over time, to increase cash
flow and portfolio value by actively managing the Properties, developing
properties, acquiring additional properties that, either as acquired or after
value-added activities by the Company (such as improved management and leasing
services and renovations), will produce additional cash flows and by extending
its management, development and leasing business with third-parties. The
Company's policy is to develop and acquire properties primarily for generation
of current income and appreciation of long-term value.
The Company expects to pursue its investment objectives primarily through
the ownership of quality office, industrial and retail properties. The
Properties will initially consist of 14 Office Properties and 12 Industrial
Properties. The Company currently contemplates developing and acquiring
additional office buildings and industrial buildings primarily in Southern
California, although future investments could be made outside of such area or
in different property categories if the Board of Directors determines that
such acquisitions and developments would be desirable. The Company will not
have any limit on the amount or percentage of its assets invested in any
single property or group of related properties. The Board of Directors may
establish limitations as it deems appropriate from time to time. No
limitations have been set on the number of properties in which the Company
will seek to invest or on the concentration of investments in any one
geographic region.
The Company may develop, purchase or lease income-producing properties for
long-term investment and expand, improve or sell its properties, in whole or
in part, when circumstances warrant. The Company may also participate with
other entities in property ownership through joint ventures or other types of
co-ownership. Equity investments by the Company may be subject to existing or
future mortgage financing and other indebtedness which will have priority over
the equity interests of the Company.
As the sole general partner of the Operating Partnership, the Company will
also determine the investment policies of the Operating Partnership. Under the
Partnership Agreement, all future investments must be made through the
Operating Partnership. See "Partnership Agreement of the Operating
Partnership--Management."
Investments in Real Estate Mortgages. While the Company will emphasize
equity real estate investments, the Company may, in its discretion, invest in
mortgages and other real estate interests consistent with the Company's
qualification as a REIT. The Company has not previously invested in mortgages
and does not presently intend to invest in mortgages or deeds of trust, but
may invest in participating or convertible mortgages if the Company concludes
that it may benefit from the cash flow or any appreciation in the value of the
subject property. Such mortgages are similar to equity participations.
Investments in real estate mortgages run the risk that one or more borrowers
may default under such mortgages and that the collateral securing such
mortgages may not be sufficient to enable the Company to recoup its full
investment.
Securities of or Interests in Persons Primarily Engaged in Real Estate
Activities and Other Issuers. Subject to the percentage of ownership
limitations and gross income tests necessary for the Company to qualify and
maintain its status as a REIT, the Company may invest in securities of other
entities engaged in real estate
111
<PAGE>
activities or securities of other issuers. See "Federal Income Tax
Considerations--Taxation of the Company." Except for its investment in the
Services Company, the Company does not currently intend to invest in the
securities of other issuers except in connection with acquisitions of indirect
interests in properties (normally general or limited partnership interests in
special purpose partnerships owning properties) and in connection with the
acquisition of substantially all of the economic interest in a real estate-
related operating business where such investments would be consistent with the
Company's investment policies. Investment in these securities is also subject
to the Company's policy not to be treated as an investment company under the
Investment Company Act of 1940. The risks of investing in real estate-related
operating businesses include the risk that contracts with third parties may be
terminated by such third parties, not renewed upon expiration or renewed on
less favorable terms, and the risk that fee income will decrease as a result
of a decline in general real estate market conditions.
DISPOSITIONS
The Company has no current intention to cause the disposition of any of the
Properties, although it reserves the right to do so if the Board of Directors
determines that such action would be in the best interests of the Company. The
disposition of the Office Property located at 2260 E. Imperial Highway at
Kilroy LAX in El Segundo is subject to the approval of limited partners of the
Operating Partnership. See "Partnership Agreement of the Operating
Partnership--Certain Limited Partner Approval Rights."
FINANCING
The Company has established its debt policy relative to the market
capitalization of the Company rather than to the book value of its assets, a
ratio that is frequently employed. Upon completion of the Offering and the
Formation Transactions, the debt to total market capitalization ratio (i.e.,
the total consolidated debt of the Company as a percentage of the market value
of the issued and outstanding shares of Common Stock and Units plus total
consolidated debt) of the Company will be approximately 25.5% (assuming an
initial public offering price of $20.00 per share of Common Stock). This ratio
will fluctuate with changes in the price of the Common Stock (and the issuance
of additional shares of Common Stock) and differs from the debt-to-book
capitalization ratio, which is based upon book value. As the debt-to-book
capitalization ratio may not reflect the current income potential of a
company's assets and operations, the Company believes that debt-to-total
market capitalization ratio provides a more appropriate indication of leverage
for a company whose assets are primarily income-producing real estate. The
total market capitalization of the Company, however, is more variable than
book value, and does not necessarily reflect the fair market value of the
underlying assets of the Company at all times. Although the Company will
consider factors other than total market capitalization in making decisions
regarding the incurrence of indebtedness (such as the purchase price of
properties to be acquired with debt financing, the estimated market value of
such properties upon refinancing and the ability of particular properties and
the Company as a whole to generate cash flow to cover expected debt service),
there can be no assurance that the ratio of indebtedness to total market
capitalization (or to any other measure of asset value) will be consistent
with the expected level of distributions to the Company's stockholders.
The Board of Directors has adopted a policy of limiting the Company's
indebtedness to approximately 50% of its total market capitalization, but the
organizational documents of the Company do not contain any limitation on the
amount or percentage of indebtedness, funded or otherwise, that the Company
may incur. In addition, the Company may from time to time modify its debt
policy in light of then current economic conditions, relative costs of debt
and equity capital, market values of its properties, general conditions in the
market for debt and equity securities, fluctuations in the market price of its
Common Stock, growth and acquisition opportunities, the Company's continued
REIT qualification requirements and other presently unknown factors which may
arise in the future which, in the judgment of the Board of Directors, require
a revision in such policy. Accordingly, the Company may increase or decrease
its debt to market capitalization ratio beyond the limits described above.
To the extent that the Board of Directors decides to obtain additional
capital, the Company may raise such capital through additional equity
offerings (including offerings of senior or convertible securities and
preferred stock), sales of investments, bank and other institutional
borrowings, the issuance of debt securities (which may
112
<PAGE>
be convertible into or exchangeable for shares of Common Stock or be
accompanied by warrants to purchase shares of Common Stock) or retention of
cash flow (subject to provisions in the Code concerning taxability of
undistributed REIT income), or a combination of these methods. In the event
that the Board of Directors determines to raise additional equity capital, the
Board has the authority, without stockholder approval, to issue additional
shares of Common Stock or other capital stock (including securities senior to
the Common Stock) of the Company in any manner, and on such terms and for such
consideration, it deems appropriate, including in exchange for property.
Existing stockholders would have no preemptive right to purchase shares issued
in any offering, and any such offering might cause a dilution of a
stockholder's investment in the Company. As long as the Operating Partnership
is in existence, the net proceeds of the sale of Common Stock by the Company
will be contributed to the Operating Partnership as a contribution to capital
in exchange for a number of Units in the Operating Partnership equal to the
number of shares of Common Stock sold by the Company. The Company presently
anticipates that any additional borrowings would be made by the Operating
Partnership, although the Company might incur indebtedness, the proceeds of
which would be re-loaned to the Operating Partnership on the same terms and
conditions as are applicable to the Company's borrowing of such funds. See
"Partnership Agreement of the Operating Partnership--Capital Contribution."
Borrowings may be unsecured or may be secured by any or all of the assets of
the Company, the Operating Partnership or any existing or new property-owning
partnership and may have full or limited recourse to all or any portion of the
assets of the Company, the Operating Partnership or any existing or new
property-owning partnership. Indebtedness incurred by the Company may be in
the form of bank borrowings, purchase money obligations to the sellers of the
properties, publicly or privately placed debt instruments or financing from
institutional investors or other lenders. There are no limits on the number or
amount of mortgages or interests which may be placed on any one property. In
addition, such indebtedness may be recourse to all or any part of the property
of the Company or may be limited to the particular property for which the
indebtedness relates. The proceeds from any borrowings by the Company may be
used for working capital, to refinance existing indebtedness, to finance the
acquisition, expansion or development of properties and for the payment of
distributions.
The Board of Directors also has the authority to cause the Operating
Partnership to issue additional Units in any manner (and on such terms and for
such consideration) as it deems appropriate, including in exchange for
property. See "Partnership Agreement of the Operating Partnership--Issuance of
Additional Units."
In the future, the Company may seek to extend, expand, reduce or renew the
Mortgage Loans, the proposed Credit Facility, or obtain new credit facilities
or lines of credit, subject to its general policy of debt capitalization.
Future mortgage loans, credit facilities and lines of credit may be used for
the purpose of making acquisitions or capital improvements, providing working
capital or meeting the taxable income distribution requirements for REITs
under the Code if the Company has taxable income without receipt of cash
sufficient to enable the Company to meet such distribution requirements.
WORKING CAPITAL RESERVES
The Company will maintain working capital reserves (and when not sufficient,
access to borrowings) in amounts that the Board of Directors determines from
time to time to be adequate to meet normal contingencies in connection with
the operation of the Company's business and investments.
CONFLICT OF INTEREST POLICIES
Directors and officers of the Company may be subject to certain conflicts of
interests in fulfilling their responsibilities to the Company. The Company has
adopted certain policies designed to minimize potential conflicts of interest.
Terms of Transfers. The terms of the transfers of the Properties to the
Operating Partnership by the Continuing Investors, and the terms of each of
the option agreements relating to the Excluded Properties, were not determined
through arm's-length negotiation. Partners and affiliates of the Kilroy Group
who are directors
113
<PAGE>
and officers of the Company had a substantial economic interest in the
entities transferring the Properties and granting the options. Consequently,
such directors and officers may be subject to a conflict of interest with
respect to their obligations as management of the Company to enforce the terms
of the agreements relating to such transfers, including the indemnification
provisions thereof. However, the Independent Directors must approve any
transactions between the Company and members of the Kilroy Group including the
enforcement of the terms of the transfers. See "Risk Factors--Conflicts of
Interests" and "Management."
Sale or Refinancing of Properties. The sale of certain of the Properties may
cause adverse tax consequences to members of the Kilroy Group, as compared to
the effects on the Company. In addition, a significant reduction in debt
encumbering such Properties could cause adverse tax consequences to the
members of the Kilroy Group, as compared to the effects on the holders of
Units or shares of Common Stock. As a result, certain officers and directors
who are members of the Kilroy Group might not favor such a sale of the
Properties or a significant reduction in debt even though such sale or debt
reduction could be beneficial to the Company. The decision as to whether to
proceed with any such sale or debt reduction would be made by the Board of
Directors, subject to the obligation of the Operating Partnership to use its
commercially reasonable efforts to cooperate with the limited partners to
minimize any taxes payable in connection with any repayment, refinancing,
replacement or restructuring of indebtedness, or any sale, exchange or any
other disposition of assets, of the Operating Partnership. In addition, the
Partnership Agreement provides that if the limited partners own at least 5% of
the outstanding Units (including Units held by the Company), the Company shall
not, on behalf of the Operating Partnership, prior to the seventh anniversary
of the consummation of the Offering, sell the Office Property located at 2260
E. Imperial Highway, at Kilroy LAX, other than incident to a merger or sale of
substantially all of the Company's assets. See "Partnership Agreement of the
Operating Partnership--Transferability of Interests" and "--Certain Limited
Partner Approval Rights."
Noncompetition Agreements. John B. Kilroy, Sr. has agreed, during the term
of his service as a member of the Company's Board of Directors, not to conduct
property development, acquisition or management activities with respect to
office and industrial property in greater Southern California or in any other
market in which the Company owns, develops or manages property. John B.
Kilroy, Sr. will not be restricted, however, from continuing to own, manage
and lease certain other existing real estate investments owned by him
including, without limitation, certain properties described under "Business
and Properties--Excluded Properties."
John B. Kilroy, Jr. has agreed, during the term of his employment agreement
and for one year thereafter (unless terminated by the Company without cause),
and for so long as he is a member of the Company's Board of Directors, not to
conduct property development, acquisition, sale or management activities in
any market. Notwithstanding the foregoing, John B. Kilroy, Jr. will not be
restricted from continuing to own, manage, lease, transfer and exchange
certain existing real estate investments owned by him described under the
caption "Business and Properties--Excluded Properties" or owning interests in
real property not competitive with the Company.
In addition, with respect to the property located at Calabasas Park Centre,
each of Mr. John B. Kilroy, Sr. and Mr. John B. Kilroy, Jr. has agreed to be
limited solely to activities related to the marketing, entitlement and sale of
such properties. Such properties are being actively marketed for sale and are
expected to be sold in the ordinary course of business. Mr. John B. Kilroy,
Sr. and Mr. John B. Kilroy, Jr. each will spend an immaterial amount of time
in connection with the sale of such properties. In addition, each has agreed
not to sell such properties located at Calabasas Park Centre to a real estate
investment trust with an existing portfolio of office or industrial properties
unless first offered to the Company on the same economic terms.
License Agreement. The Continuing Investors who are members of the Kilroy
family will enter into a license agreement (the "License Agreement") pursuant
to which such Continuing Investors will grant to the Company the nonexclusive
right to use the Kilroy name in connection with the acquisition, development,
leasing and management of commercial properties. Pursuant to the terms of the
License Agreement, each of the Continuing Investors will retain the right to
use the Kilroy name for commercial endeavors, including in connection with
real estate transactions. Such activities will be subject to the limitations
set forth in the agreements described under the caption "--Noncompetition
Agreements."
114
<PAGE>
Policies Applicable to All Directors. Under the Company's Articles of
Incorporation and Maryland law, a contract or transaction between the Company
and any of its directors or between the Company and any other corporation,
firm or other entity in which any of its directors is a director, officer,
stockholder, member or partner or has a material financial interest is not
void or voidable solely because of such interest if (i) the contract or
transaction is approved, after disclosure of the interest, by the affirmative
vote of a majority of the disinterested directors, or by the affirmative vote
of a majority of the votes cast by disinterested stockholders, or (ii) the
contract or transaction is established to have been fair and reasonable to the
Company.
The Company's Articles of Incorporation and Bylaws provide that a majority
of the Company's Board of Directors must be Independent Directors. See
"Certain Provisions of Maryland Law and of the Company's Articles of
Incorporation and Bylaws--Board of Directors."
OTHER POLICIES
The Company intends to operate in a manner that will not subject it to
regulation under the Investment Company Act of 1940. The Company does not
intend (i) to invest in the securities of other issuers (other than the
Operating Partnership and the Services Company) for the purpose of exercising
control over such issuer, (ii) to underwrite securities of other issuers or
(iii) to trade actively in loans or other investments.
The Company has authority to offer shares of Common Stock or other
securities and to repurchase or otherwise reacquire shares of Common Stock or
any other securities in the open market or otherwise and may engage in such
activities in the future. The Company may, under certain circumstances,
purchase shares of Common Stock in the open market, if such purchases are
approved by the Board of Directors. The Board of Directors has no present
intention of causing the Company to repurchase any of the shares of Common
Stock, and any such action would be taken only in conformity with applicable
federal and state laws and the requirements for qualifying as a REIT under the
Code and the Treasury Regulations. Although it may do so in the future, except
in connection with the Formation Transactions, the Company has not issued
Common Stock or any other securities in exchange for property, nor has it
reacquired any of its Common Stock or any other securities. The Company
expects to issue shares of Common Stock to holders of Units upon exercise of
their exchange rights in the Partnership Agreement of the Operating
Partnership. The Company has not made loans to other entities or persons,
including its officers and directors. The Company may in the future make loans
to joint ventures in which it participates in order to meet working capital
needs. The Company has not engaged in trading, underwriting or agency
distribution or sale of securities of other issuers other than the Operating
Partnership, nor has the Company invested in the securities of other issuers
other than the Operating Partnership and the Services Company for the purposes
of exercising control, and does not intend to do so.
At all times, the Company intends to make investments in such a manner as to
be consistent with the requirements of the Code for the Company to qualify as
a REIT unless, because of changing circumstances or changes in the Code (or in
Treasury Regulations), the Board of Directors of the Company determines that
it is no longer in the best interests of the Company to qualify as a REIT and
such determination is approved by the affirmative vote of holders owning at
least two-thirds of the shares of the Company's capital stock outstanding and
entitled to vote thereon.
115
<PAGE>
THE FINANCING
THE MORTGAGE LOANS
The Company, on behalf of the Operating Partnership, has obtained written
commitments for mortgage loans totaling $96.0 million (the "Mortgage Loans"),
the closing of which is a condition to the consummation of the Offering. The
proceeds of the Mortgage Loans principally will be used to repay existing
indebtedness on the Properties. The Mortgage Loans consist of the $84.0
Million Loan and the $12.0 million SeaTac Loan.
The $84.0 Million Loan will require monthly principal and interest payments
based on a fixed rate equal to the sum of the interest rate for U.S. Treasury
Securities maturing 8 years from the date of the closing of the Credit
Facility plus 1.75%, and will amortize over a 25-year period, maturing in
2005. The $84.0 Million Loan will be secured by cross-collateralized and
cross-defaulted mortgages on certain of the Properties. The $84.0 Million Loan
may not be repaid during the first four years of the loan term. Thereafter the
loan may be repaid in whole or in part, subject to a prepayment premium. The
$84.0 Million Loan will require reserves for current taxes and insurance,
capital expenditures and tenant improvements and leasing commissions. Upon
consummation of the Offering, an improvements and repairs reserve of
approximately $ will be established, representing 125% of the estimated
costs of improvements requested by the lenders, which reserve will be released
upon completion of the improvements; a replacement reserve of $ will be
established, which thereafter will be funded monthly at an annual rate of $.15
per square foot of the collateral ($.20 per square foot for one approximately
81,200 square foot Office Property); and a reserve of $ will be established
to make certain earthquake-related structural modifications. A tenant
improvement and leasing commission reserve will commence in January 1998; the
Company presently anticipates that the average balance of this reserve will be
approximately $1.0 million in each of the first four years of the reserve. In
addition, the $84.0 Million Loan will include customary representations and
warranties and will require the borrower to comply with the following
affirmative and negative covenants: limitations on the incurrence of
additional indebtedness; limitations on advances to and investments in others
(including the guaranty of any obligations of another person); limitations on
the transfer or sale of assets including the collateral; limitations on merger
and acquisition transactions; maintenance of minimum levels of insurance;
maintenance of collateral; and other customary covenants. The Company
anticipates that the $84.0 Million Loan will be incurred by a limited
partnership which is wholly-owned by the Company and the Operating Partnership
and which will be structured to be a "bankruptcy remote" financing vehicle.
The Properties to be used as collateral for the $84.0 Million Loan will be
transferred to that limited partnership. Subject to certain limited
exceptions, the $84.0 Million Loan will be non-recourse to the Company.
The SeaTac Loan will bear interest at a variable rate equal to the 30-day
London interbank overnight rate ("LIBOR") plus 3.0%, and matures in July 1997.
The SeaTac Loan will require monthly payments of interest. The SeaTac Loan
will be secured by the ground leasehold interest in the SeaTac Office Center.
Principal and interest under the SeaTac Loan will be full recourse to the
Company. SeaTac's occupancy rate was approximately 42.1% at September 30,
1996. The Company excluded the SeaTac Office Center from the collateral pool
for the $84.0 Million Loan to provide flexibility to incur additional debt
secured by the SeaTac Office Center if the Company leases additional space at
this Property.
THE CREDIT FACILITY
The Company, on behalf of the Operating Partnership is currently negotiating
a two-year, $100.0 million revolving credit facility (the "Credit Facility")
which the Company and the Operating Partnership expect to enter into shortly
after the Offering. There can be no assurance that the Company and the
Operating Partnership will enter into the Credit Facility. The Credit Facility
is expected to be used primarily to finance acquisitions of additional
properties. Payment of principal and interest is expected to be secured by
certain Properties other than Properties securing the Mortgage Loans. In
addition, borrowings under the Credit Facility are expected to be recourse
obligations to the Operating Partnership and the Company.
116
<PAGE>
Availability under the Credit Facility would be subject to the value of the
underlying collateral securing it. The Company expects that, initially,
approximately $50.0 million of the total amount of the Credit Facility would
be available to the Operating Partnership. The Operating Partnership's ability
to borrow under the Credit Facility is expected to be subject to its
compliance with the following covenants on an ongoing basis: a ratio of Net
Operating Cash Flow (as defined in the Credit Facility) to Debt Service (as
defined in the Credit Facility) of 1.75-to-1; a loan to collateral value ratio
of not more than 60.0%; a ratio of debt to Tangible Fair Market Value (as
defined in the Credit Facility) of real property assets owned by the Operating
Partnership of not more than 50%; a ratio of earnings before income taxes,
depreciation and amortization to Debt Service of at least 2-to-1; limitations
on distributions to 95% of funds from operations; Consolidated Tangible Net
Worth (as defined in the Credit Facility) of the Operating Partnership of not
less than 90.0% of the Operating Partnership's Consolidated Tangible Net Worth
as of the closing date for the Credit Facility; maintenance of the Company's
status as a REIT for federal income tax purposes and compliance with all
applicable regulations in connection with such status; maintenance of
collateral; a limit on total development projects to 20% of total assets;
limitations on the incurrence of additional indebtedness; and other customary
covenants. The Credit Facility is expected to require monthly interest only
(LIBOR based) payments on the total borrowings outstanding under the Credit
Facility. The Company and the Operating Partnership anticipate that the Credit
Facility will be either extended, renewed or refinanced through the issuance
of debt or equity securities at its maturity. The Company and the Operating
Partnership will be responsible for payment of the lender's fees and expenses
associated with providing the Credit Facility.
If the initial public offering price for the Common Stock is less than the
assumed offering price of $20.00 per share, the Company expects to make up any
shortfall between the aggregate net proceeds of the Offering and the Mortgage
Loans, and the intended uses thereof, by reducing its working capital cash
reserves. See "Use of Proceeds."
117
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Upon consummation of the Offering, the Board of Directors will consist of
five members, including a majority of directors who are Independent Directors.
Directors of the Company will be divided into three classes serving staggered
three-year terms (except initial terms expiring in 1998 and 1999) with
directors serving until the election and qualification of their successors.
The first annual meeting of stockholders of the Company after the Offering
will be held in 1998. Each of the proposed directors named below has been
nominated for election upon the consummation of the Offering and has consented
to serve. See "Certain Provisions of Maryland Law and of the Company's
Articles of Incorporation and Bylaws--Board of Directors." Subject to rights
pursuant to any employment agreements, officers of the Company serve at the
pleasure of the Board of Directors.
The following table sets forth certain information with respect to the
directors, proposed directors and executive officers of the Company
immediately following the completion of the Formation Transactions and
consummation of the Offering:
<TABLE>
<CAPTION>
TERM
NAME AGE POSITION EXPIRES
---- --- -------- -------
<C> <C> <S> <C>
John B. Kilroy, Sr....... 74 Chairman of the Board of Directors 1999
John B. Kilroy, Jr....... 48 President, Chief Executive Officer and 2000
Director
Jeffrey C. Hawken........ 37 Executive Vice President and Chief
Operating Officer
Campbell Hugh Greenup.... 43 General Counsel
Richard E. Moran Jr...... 45 Executive Vice President, Chief
Financial Officer and Secretary
A. Christian Krogh....... 48 Vice President, Asset Management
William P. Dickey........ 53 Director Nominee 1998
Matthew J. Hart.......... 44 Director Nominee 1999
Dale F. Kinsella......... 48 Director Nominee 2000
</TABLE>
The following is a biographical summary of the experience of the directors,
proposed directors and executive officers of the Company:
JOHN B. KILROY, SR., age 74, founded, in 1947, the businesses which were
incorporated in 1952 as the entity today known as Kilroy Industries. Mr.
Kilroy has served as Kilroy Industries' President from its incorporation
until 1981, and as its Chairman of its Board of Directors since 1954. Mr.
Kilroy is a nationally recognized member of the real estate community,
providing the Company with strategic leadership and a broadly-based network
of relationships. Mr. Kilroy is a trustee of the Independent Colleges of
Southern California, serves on the Board of Directors of Pepperdine
University, and is a past trustee of Harvey Mudd College.
JOHN B. KILROY, JR., age 48, has been responsible for the overall
management of all facets of KI and its various affiliates since 1981. Mr.
Kilroy has been involved in all aspects of commercial and industrial real
estate acquisition, sales, development, construction, leasing, financing,
and entitlement since 1967 and has worked for KI for over twenty-five
years. Mr. Kilroy became President of KI in 1981 and was elected Chief
Executive Officer in 1991. Prior to that time he held positions as
Executive Vice President and Vice President--Leasing & Marketing. He is a
member of the National Realty Committee and the Urban Land Institute, and
is a trustee of the El Segundo Employers Association, and a past trustee of
Viewpoint School, the Jefferson Center For Character Education and the
National Fitness Foundation.
JEFFREY C. HAWKEN, age 37, has been responsible for the management and
operations of KI's real estate portfolio. Mr. Hawken's activities have
included leasing, asset and facility management, with an emphasis on
quality of service, operational cost reduction and code compliance. He has
also served on KI's acquisitions and executive committees. Mr. Hawken
joined KI in 1980, as a Senior Financial Analyst, and has been involved in
property and asset management with the Company since May 1983. Since that
time,
118
<PAGE>
he attained the designation of Real Property Administrator (RPA) through
the Building Owner's and Manager's Association (BOMA).
CAMPBELL HUGH GREENUP, age 43, has over 14 years of experience in the
real estate industry.Mr. Greenup joined KI in 1986 as Assistant General
Counsel and had responsibility for a significant portion of the Company's
legal affairs, including transaction negotiation and documentation. In
addition, he has been responsible for all the Company's development
activities, including land acquisition and entitlement, project
development, leasing and disposition. In this role, he was also President
of Kilroy Technologies Company, LLC, the Kilroy services entity, and
directed all of the Company's fee development activities. Mr. Greenup is a
member of the American Bar Association, the Urban Land Institute-IOPC Gold
Committee, the National Association of Corporate Real Estate Executives and
the Los Angeles County Beach Advisory Commission.
RICHARD E. MORAN JR., age 45, was Executive Vice President, Chief
Financial Officer and Secretary of the Irvine Apartment Communities, Inc.
from 1993 to 1996. Mr. Moran was affiliated with The Irvine Company from
1977 to 1993. He served as Treasurer of The Irvine Company from 1983 to
1993, was named Vice President in 1984, Senior Vice President in 1990, and
Executive Vice President Corporate Finance in 1992. Previously, he was a
certified public accountant with Coopers & Lybrand. He is a member of the
Urban Land Institute. Mr. Moran received his Master of Business
Administration degree from the Harvard University Graduate School of
Business Administration and his undergraduate degree from Boston College.
A. CHRISTIAN KROGH, age 48, has over 20 years of experience in the real
estate industry. Mr. Krogh joined KI in 1990 as Treasurer and was
responsible for all cash flow forecasting, preparing variance reports,
monitoring short-term cash needs and investments, interfacing with lenders,
performing credit analysis for prospective tenants, interfacing with asset
management on the day-to-day activities of the Company, as well as other
traditional treasurer's functions. Mr. Krogh also was responsible for
overseeing KI's personnel functions, obtaining and monitoring property
insurance and coordinating employee benefit programs. In the 15 years prior
to joining KI Mr. Krogh held similar positions with two other real estate
companies.
WILLIAM P. DICKEY, age 53, has agreed to serve as a member of the Board
of Directors of the Company commencing upon the consummation of the
Offering. Mr. Dickey has been the president of The Dermot Company, Inc., a
real estate investment and management company since 1990. From 1986 to
1990,Mr. Dickey was a managing director of real estate for CS First Boston
Corporation. Prior to 1986, Mr. Dickey was a partner at the New York law
firm of Cravath, Swaine & Moore, where he started as an associate beginning
in 1974. Mr. Dickey is a member of the board of directors of Horizon Group,
Inc., a REIT which invests primarily in factory outlet centers, Price
Enterprises, Inc., a REIT which invests primarily in shopping centers, and
Mezzanine Capital Property Investors, Inc., a REIT which invests primarily
in the East Coast office/mixed use space, and is a member of the board of
trustees of Retail Property Trust, a REIT which invests primarily in
regional malls. Mr. Dickey received his undergraduate degree from the
United States Air Force Academy, his Masters Degree from Georgetown
University and his Juris Doctor Degree from Columbia Law School.
MATTHEW J. HART, age 44, has agreed to serve as a member of the Board of
Directors of the Company commencing upon the consummation of the Offering.
Mr. Hart joined Hilton Hotels Corporation in 1996 and is its Executive Vice
President and Chief Financial Officer. Mr. Hart is primarily responsible
for Hilton's corporate finance and development activities. Prior to joining
Hilton, Mr. Hart was Senior Vice President and Treasurer of The Walt Disney
Company from 1995 to 1996. From 1981 to 1995, Mr. Hart was employed by Host
Marriott Corporation (formerly known as Marriott Corporation), most
recently as its Executive Vice President and Chief Financial Officer. He
was responsible for the company's corporate and project financing
activities, as well as the corporate control and the corporate tax
functions. Before joining Marriott Corporation, Mr. Hart had been a lending
officer with Bankers Trust Company in New York. Mr. Hart is a member of the
board of directors of First Washington Realty Trust, Inc., a REIT which
invests
119
<PAGE>
primarily in retail properties. Mr. Hart received his undergraduate degree
from Vanderbilt University and a Masters of Business Administration from
Columbia University.
DALE F. KINSELLA, age 48, has agreed to serve as a member of the Board of
Directors of the Company commencing upon the consummation of the Offering.
For the past eight years, Mr. Kinsella has been a partner with the Los
Angeles law firm of Kinsella, Boesch, Fujikawa & Towle. Mr. Kinsella
received his undergraduate degree from the University of Santa Barbara and
his Juris Doctor Degree from the University of California at Los Angeles.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee. Promptly following the consummation of the Offering, the
Board of Directors will establish an audit committee (the "Audit Committee").
The Audit Committee will be established to make recommendations concerning the
engagement of independent public accountants, review with the independent
public accountants the scope and results of the audit engagement, approve
professional services provided by the independent public accountants, review
the independence of the independent public accountants, consider the range of
audit and non-audit fees and review the adequacy of the Company's internal
accounting controls. The Audit Committee will initially consist of two or more
Independent Directors.
Independent Committee. Promptly following the consummation of the Offering,
the Board of Directors will establish an independent committee (the
"Independent Committee") consisting solely of Independent Directors. The
Independent Committee will be established to approve transactions between the
Company and John B. Kilroy, Sr. or John B. Kilroy, Jr. and their respective
affiliates.
Executive Committee. Promptly following the consummation of the Offering,
the Board of Directors will establish an executive committee (the "Executive
Committee"). Subject to the Company's conflict of interest policies, the
Executive Committee will be granted the authority to acquire and dispose of
real property and the power to authorize, on behalf of the full Board of
Directors, the execution of certain contracts and agreements, including those
related to the borrowing of money by the Company (and, consistent with the
Partnership Agreement of the Operating Partnership, to cause the Operating
Partnership to take such actions.) The Executive Committee will include John
B. Kilroy, Sr., John B. Kilroy, Jr. and at least one Independent Director.
Executive Compensation Committee. Promptly following the consummation of the
Offering, the Board of Directors will establish an executive compensation
committee (the "Executive Compensation Committee") to establish remuneration
levels for executive officers of the Company and implementation of the
Company's Stock Incentive Plan (as defined) and any other incentive programs.
The Executive Compensation Committee will initially consist of two or more
Independent Directors.
The membership of the committees of the Board of Directors will be
established after the completion of the Formation Transactions and the
Offering. The Board of Directors may from time to time establish certain other
committees to facilitate the management of the Company.
COMPENSATION OF DIRECTORS
The Company intends to pay its Independent Directors annual compensation of
$12,000 for their services. In addition, Independent Directors will receive
$1,000 for each committee meeting chaired by such director. Independent
Directors also will be reimbursed for reasonable expenses incurred to attend
director and committee meetings. Officers of the Company who are directors
will not be paid any director's fees. Each Independent Director will receive,
upon initial election to the Board of Directors, an option to purchase 10,000
shares of Common Stock which will vest pro rata in annual installments over a
three-year period. Each Independent Director also will receive an option to
purchase 1,000 shares of Common Stock on each anniversary of his election to
the Board of Directors, which options also will vest pro rata in annual
installments over a three-year period. All stock options will be issued
pursuant to the Stock Incentive Plan at an exercise price equal to or greater
than the fair market value of the Common Stock at the date of grant.
120
<PAGE>
EXECUTIVE COMPENSATION
Since the Company has no operating history, meaningful individual
compensation information for executive officers is not available for prior
periods. The compensation table below sets forth the annual base salary rates
and other compensation expected to be paid in 1997 to the Chief Executive
Officer and the Company's other executive officers who are expected to have a
total annual salary and bonus in excess of $100,000. The Company has entered
into employment agreements with certain of its executive officers as described
below. See "--Employment Agreements."
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
-----------------------------
ANNUAL COMPENSATION RESTRICTED SECURITIES
NAME AND PRINCIPAL ------------------- STOCK UNDERLYING
POSITION YEAR(1) SALARY BONUS AWARD(S) OPTIONS/SARS(2)
------------------ ------- ---------- --------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
John B. Kilroy, Jr. .... 1997 $200,000 $ (3) -- 250,000
Director, President and
Chief Executive Officer
Jeffrey C. Hawken....... 1997 175,000 (3) -- 150,000
Executive Vice
President and
Chief Operating Officer
Richard E. Moran Jr. ... 1997 200,000 (3) $1,199,400(4) 150,000
Executive Vice
President,
Chief Financial Officer
and Secretary
Campbell Hugh Greenup... 1997 165,000 (3) -- 100,000
General Counsel
</TABLE>
- --------
(1) Amounts given are annualized projections for the year ending December 31,
1997.
(2) Options to purchase an aggregate of 900,000 shares of Common Stock will be
granted to directors, executive officers and other employees of the
Company upon consummation of the Offering. Such options will vest pro rata
in annual installments over a three-year-period. An additional 500,000
shares of Common Stock will be reserved for issuance under the Stock
Incentive Plan. See "--Stock Incentive Plan."
(3) Under the terms of each executive officer's respective employment
agreement, each executive officer is entitled to receive an annual bonus
in an amount up to 100% of such executive's base salary. The amount of any
such bonus will be determined by the Executive Compensation Committee of
the Board of Directors. In addition, Mr. Moran will receive a bonus of
$200,000 if the Offering is consummated on or before June 30, 1997. Mr.
Moran's bonus payable upon consummation of the Offering is an obligation
of the principals of KI. See "--Employment Agreements."
(4) Pursuant to Mr. Moran's employment agreement, concurrent with the
consummation of the Offering he will receive 60,000 restricted shares of
Common Stock under the Stock Incentive Plan with an aggregate value of
$1.2 million (assuming a per share value equal to the assumed initial
public offering price of $20.00 per share) against the payment of $600
therefor. The restricted stock will vest in equal annual installments pro
rata over a three-year period, subject to certain acceleration provisions.
See "Management--Employment Agreements." Mr. Moran will be entitled to
receive distributions in respect of such restricted stock.
EMPLOYMENT AGREEMENTS
Each of John B. Kilroy, Jr., Jeffrey C. Hawken, Richard E. Moran Jr. and
Campbell Hugh Greenup will enter into an employment agreement with the Company
which will be effective as of the consummation of the Offering. The employment
agreements will have an initial term of three years and will be subject to
automatic one-year extensions following the expiration of the initial term.
The employment agreements provide for annual base compensation in the amounts
set forth in the Executive Compensation table with the amount of any bonus to
be determined by the Executive Compensation Committee, up to 100% of the
applicable annual base compensation. Under the terms of his employment
agreement, Mr. Moran will receive a bonus of $200,000 if the Offering is
consummated on or before June 30, 1997. Mr. Moran's bonus payable upon
consummation of the Offering is an obligation of the principals of KI.
121
<PAGE>
The employment agreements entitle the executives to participate in the
Company's Stock Incentive Plan (each executive will initially be allocated the
number of stock options and/or restricted stock set forth in the Executive
Compensation table) and to receive certain other insurance benefits. The
employment agreements also provide that in the event of death, the executive's
estate will receive monthly payments of the executive's annual salary, plus
one-twelfth of any bonus to be received, for a period equal to the lesser of
the term remaining under the employment agreement or one year. In addition, in
the event of a termination by the Company without "cause," a termination of
employment resulting from "disability," a termination by the executive for
"good reason," or, in the case of Mr. Kilroy and Mr. Moran, a termination
pursuant to a "change of control" of the Company (as such terms are defined in
the respective employment agreements), the terminated executive will be
entitled to (i) severance (the "Severance Amount") and (ii) continued receipt
of certain benefits including medical insurance, life and disability insurance
and the receipt of other customary benefits established by the Company for its
executive employees for two years following the date of termination
(collectively, the "Severance Benefits"). The Severance Amount is equal to the
sum of two times the executive's average annual base compensation and two
times the highest annual bonus received during the preceding 36-month period.
"Disability" means a physical or mental disability or infirmity which, in the
opinion of a physician selected by the Board of Directors, renders the
executive unable to perform his duties for six consecutive months or for
shorter periods aggregating 180 business days in any twelve-month period (but
only to the extent that such definition does not violate the Americans with
Disabilities Act). "Cause," as defined under the terms of the respective
employment agreements, means (a) the executive's conviction for commission of
a felony or a crime involving moral turpitude, (b) the executive's willful
commission of any act of theft, embezzlement or misappropriation against the
Company; or (c) the executive's willful and continued failure to substantially
perform the executive's duties (other than such failure resulting from the
executive's incapacity due to physical or mental illness), which is not
remedied within a reasonable time. "Good reason" means (a) the Company's
material breach of any of its obligations under the employment agreement
(subject to certain notice and cure provisions) or (b) any removal of the
executive from one or more of the appointed offices or any material alteration
or diminution in the executive's authority, duties or responsibilities,
without "cause" and without the executive's prior written consent. "Change of
Control" means (a) the event by which the individuals constituting the board
of directors as of the date of the Company's initial public offering of Common
Stock cease for any reason to constitute at least a majority of the Company's
board of directors; provided, however, that if the election, or nomination for
election by the Company's stockholders of any new director was approved by a
vote of at least a majority of the members of the original board of directors,
such new director shall be considered a member of the original board of
directors, (b) an acquisition of any voting securities of the Company by any
"person" (as the term "person" is used for purposes of Section 13(d) or
Section 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")) immediately after which such person has "beneficial
ownership" (within the meaning of Rule 13d-3 promulgated under the Exchange
Act) of 20% or more of the combined voting power of the Company's then
outstanding voting securities unless such acquisition was approved by a vote
of at least one more than a majority of the original board of directors; or
(c) approval by the stockholders of the Company of (i) a merger,
consolidation, share exchange or reorganization involving the Company, unless
the stockholders of the Company, immediately before such merger,
consolidation, share exchange or reorganization, own, directly or indirectly
immediately following such merger, consolidation, share exchange or
reorganization, at least 80% of the combined voting power of the outstanding
voting securities of the corporation that is the successor in such merger,
consolidation, share exchange or reorganization in substantially the same
proportion as their ownership of the voting securities immediately before such
merger, consolidation, share exchange or reorganization; (ii) a complete
liquidation or dissolution of the Company; or (iii) an agreement for the sale
or other disposition of all or substantially all of the assets of the Company.
STOCK INCENTIVE PLAN
The Company has established the Stock Incentive Plan to enable executive
officers, key employees and directors of the Company, the Operating
Partnership and the Services Company to participate in the ownership of the
Company. The Stock Incentive Plan is designed to attract and retain executive
officers, other key employees and directors of the Company, the Operating
Partnership and the Services Company and to provide incentives to such persons
to maximize the Company's cash flow available for distribution. The Stock
Incentive
122
<PAGE>
Plan provides for the award to such executive officers and employees of the
Company, the Operating Partnership and the Services Company (subject to the
Ownership Limit, or such other limit as provided in the Company's Articles of
Incorporation or as otherwise permitted by the Board of Directors) of a broad
variety of stock-based compensation alternatives such as nonqualified stock
options, incentive stock options, restricted stock and stock appreciation
rights, and provides for the grant to Independent Directors and directors of
the Services Company (subject to the Ownership Limit, or such other limit as
provided in the Company's Articles of Incorporation or as otherwise permitted
by the Board of Directors) of nonqualified stock options.
Stock Options. Promptly after the closing of the Offering, the Company
expects to issue to certain officers, directors and key employees of the
Company, the Operating Partnership and the Services Company options to
purchase, subject to the Ownership Limit, or such other limit as provided in
the Company's Articles of Incorporation or as otherwise permitted by the Board
of Directors, 900,000 shares of Common Stock pursuant to the Stock Incentive
Plan. The term of each of such option will be ten years from the date of
grant. Each such option will vest 33 1/3% per year over three years and is
exercisable at a price per share equal to the initial public offering price
per share of Common Stock in the Offering. The following table below sets
forth the expected allocation of the options to such persons.
<TABLE>
<CAPTION>
NAME OPTIONS
---- -------
<S> <C>
John B. Kilroy, Sr................................................. 15,000
John B. Kilroy, Jr................................................. 250,000
Jeffrey C. Hawken.................................................. 150,000
Richard E. Moran Jr. .............................................. 150,000
Campbell Hugh Greenup.............................................. 100,000
Independent Directors (as a group)................................. 30,000
Other employees (as a group)....................................... 205,000
</TABLE>
An additional 500,000 shares of Common Stock will be reserved for issuance
under the Stock Incentive Plan. There is no limit on the number of awards that
may be granted to any one individual so long as the (i) aggregate fair market
value (determined at the time of grant) of shares with respect to which an
incentive stock option is first exercisable by an optionee during any calendar
year cannot exceed $100,000, (ii) the grant does not violate the Ownership
Limit or cause the Company to fail to qualify as a REIT for federal income tax
purposes and (iii) the maximum number of shares of Common Stock for which
stock options and stock appreciation rights may be issued during any fiscal
year to any participant in the Stock Incentive Plan shall not exceed 300,000.
See "Description of Capital Stock--Restrictions on Ownership and Transfer."
Restricted Stock. Restricted stock may be sold to participants at various
prices (but not below par value) and made subject to such restrictions as may
be determined by the Executive Compensation Committee. Restricted stock,
typically, may be repurchased by the Company at the original purchase price if
the conditions or restrictions are not met. In general, restricted stock may
not be sold, or otherwise transferred or hypothecated, until restrictions are
removed or expire. Purchasers of restricted stock will have voting rights and
will receive distributions prior to the time when the restrictions lapse. The
Company will issue 60,000 restricted shares of Common Stock reserved for
issuance under the Stock Incentive Plan, to Richard E. Moran Jr. upon
consummation of the Offering.
Administration of the Stock Incentive Plan. The Stock Incentive Plan is
administered by the Board of Directors and/or the Executive Compensation
Committee. No person is eligible to serve on the Executive Compensation
Committee unless such person is then an Independent Director. The Committee
has complete discretion to determine (subject to (a) the Ownership Limit
contained in the Articles of Incorporation of the Company and (b) a limit
against granting options or stock appreciation rights for more than 300,000
shares to any person in any fiscal year) which eligible individuals are to
receive option or other stock grants, the number of shares subject to each
such grant, the status of any granted option as either an incentive option or
a non-qualified stock option under the federal tax laws, the exercise schedule
to be in effect for the grant, the maximum term for which any granted option
is to remain outstanding and subject to the specific terms of the Stock
Incentive Plan, any other terms of the grant.
123
<PAGE>
Eligibility. All employees of the Company may, at the discretion of the
Executive Compensation Committee, be granted incentive and non-qualified stock
options to purchase shares of Common Stock at any exercise price not less than
100% of the fair market value of such shares on the grant date. Directors of
the Company, employees of the Operating Partnership, employees and directors
of the Services Company, consultants and other persons who are not regular
salaried employees of the Company are not eligible to receive incentive stock
options, but are eligible to receive non-qualified stock options. In addition,
all employees and consultants of the Company, the Operating Partnership and
the Services Company are eligible for awards of restricted stock and grants of
stock appreciation rights.
Number of Shares Subject to Stock Incentive Plan. The Company has reserved
up to 1,460,000 shares of Common Stock for issuance pursuant to the Stock
Incentive Plan, 60,000 of which will be issued, and options covering 900,000
of which will be granted, under the Stock Incentive Plan upon the consummation
of the Offering.
Purchase Price of Shares Subject to Options. The price of the shares of
Common Stock subject to each option shall be set by the Executive Compensation
Committee; provided, however, that the price per share of an option shall be
not less than 100% of the fair market value of such shares on the date such
option is granted; provided, further, that, in the case of an incentive stock
option, the price per share shall not be less than 110% of the fair market
value of such shares on the date such option is granted in the case of an
individual then owning (within the meaning of Section 424(d) of the Code) more
than ten percent of the total combined voting power of all classes of stock of
the Company, any subsidiary or any parent corporation ("greater than 10%
stockholders").
Non-Assignability. Options may be transferred only by will or by the laws of
descent and distribution. During a participant's lifetime, options are
exercisable only by the participant.
Terms and Exercisability of Options. Unless otherwise determined by the
Board of Directors or the Executive Compensation Committee, all options
granted under the Stock Incentive Plan are subject to the following
conditions: (i) options will be exercisable in installments, on a cumulative
basis, at the rate of thirty-three and one-third percent (33 1/3%) each year
beginning on the first anniversary of the date of the grant of the option,
until the options expire or are terminated, and (ii) following an optionee's
termination of employment, the optionee shall have the right to exercise any
outstanding vested options for a specified period.
Options are not assignable or transferable by the optionee except by will or
the laws of inheritance following the optionee's death. The optionee has no
stockholder rights with respect to the shares subject to his or her
outstanding options until such options are exercised and the purchase price is
paid for the shares.
To the extent that the aggregate fair market value of stock with respect to
which "incentive stock options" (within the meaning of Section 422 of the
Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an optionee during any calendar year (under the Stock
Incentive Plan and all other incentive stock option plans of the Company, any
subsidiary and any parent corporation) exceeds $100,000, such options shall be
taxed as non-qualified stock options. The rule set forth in the preceding
sentence shall be applied by taking options into account in the order in which
they were granted. For this purpose, the fair market value of stock shall be
determined as of the time that the option with respect to such stock is
granted.
Options are exercisable in whole or in part by written notice to the
Company, specifying the number of shares being purchased and accompanied by
payment of the purchase price for such shares. The option price may be paid:
(i) in cash or by certified or cashier's check payable to the order of the
Company, (ii) by delivery of shares of Common Stock of the Company already
owned by, and in the possession of, the optionee or (iii) if authorized by the
Board of Directors or the Executive Compensation Committee or if specified in
the option agreement for the option being exercised, by a recourse promissory
note made by the optionee in favor of the Company or through installment
payments to the Company.
On the date the option price is to be paid, the optionee (or his or her
successor) must make full payment to the Company of all amounts that must be
withheld by the Company for federal, state or local tax purposes.
124
<PAGE>
Termination of Employment; Death or Permanent Disability. If a holder of an
option ceases to be employed by the Company for any reason other than the
optionee's death or permanent disability, such optionee's stock option shall
expire three months after the date of such cessation of employment unless by
its terms it expires sooner; provided, however, that during such period after
cessation of employment, such stock option may be exercised only to the extent
it was exercisable according to such option's terms on the date of cessation
of employment. If an optionee dies or becomes permanently disabled while the
optionee is employed by the Company, such optionee's option shall expire
twelve months after the date of such optionee's death or permanent disability
unless by its terms it expires sooner. During such period after death, such
stock option may, to the extent it remains unexercised upon the date of such
death, be exercised by the person or persons to whom the optionee's rights
under such stock option are transferred under the laws of descent and
distribution.
Acceleration of Exercisability. In the event that the Company is acquired by
merger, consolidation or asset sale, each outstanding option which is not to
be assumed by the successor corporation or replaced with a comparable option
to purchase shares of the capital stock of the successor corporation will, at
the election of the Board of Directors (or if so provided in an option or
other agreement with an optionee), automatically accelerate in full.
Adjustments. In the event any change is made to the Common Stock issuable
under the Stock Incentive Plan by reason of any recapitalization, stock
dividend, stock split, combination of shares, exchange of shares or other
change in corporate structure effected without the Company's receipt of
consideration, appropriate adjustment will be made to (i) the maximum number
and class of shares issuable under the Stock Incentive Plan and (ii) the
number and/or class of shares and price per share in effect under each
outstanding option.
Amendments to the Stock Incentive Plan. The Board of Directors may at any
time suspend or terminate the Stock Incentive Plan. The Board of Directors or
Executive Compensation Committee may also at any time amend or revise the
terms of the Stock Incentive Plan, provided that no such amendment or revision
shall, unless appropriate stockholder approval of such amendment or revision
is obtained, (i) increase the maximum number of shares which may be acquired
pursuant to options granted under the Stock Incentive Plan (except for
adjustments as described in the foregoing paragraph) or (ii) change the
minimum purchase price required under the Stock Incentive Plan.
Termination. The Stock Incentive Plan will terminate ten years from the date
the Offering is consummated, unless sooner terminated by the Board of
Directors.
Registration Statement on Form S-8. After the consummation of the Offering,
the Company expects to cause to be filed with the Securities and Exchange
Commission a Registration Statement on Form S-8 covering the restricted shares
of Common Stock and the shares of Common Stock underlying options granted
under the Stock Incentive Plan.
FEDERAL INCOME TAX CONSEQUENCES TO PARTICIPANTS IN THE STOCK INCENTIVE PLAN
The following summary of the material federal income tax consequences to
participants in the Stock Incentive Plan is based on current law, is for
general information only and is not tax advice. The summary does not purport
to discuss all aspects of federal income taxation that may be relevant to a
particular participant in light of such participant's personal investment
circumstances.
A participant may be subject to state or local taxation in various state or
local jurisdictions in which he or she works or resides. State and local tax
treatment of the participants are not discussed in this summary, and such
state and local tax treatment may not conform to the federal income tax
consequences discussed in this summary.
Non-Qualified Stock Options. A participant who is granted non-qualified
stock options does not realize income as a result of the grant of such
options. However, the participant normally realizes compensation income at the
time the options are exercised, in the amount by which the fair market value
of the Common Stock on the date the options are exercised exceeds the option
exercise price paid. This compensation income is taxable at
125
<PAGE>
ordinary income rates, and the Company is required to withhold taxes on the
amount treated as ordinary income to the participant.
The participant's tax basis for Common Stock acquired upon the exercise of a
non-qualified stock option is the price paid to exercise the option plus the
amount of ordinary income realized by the participant as a result of the
exercise of the option. Any appreciation in the value of such Common Stock may
qualify for capital gains treatment, provided that applicable holding period
requirements are satisfied.
The tax consequences resulting from a participant's exercise of non-
qualified options by surrendering Common Stock already owned by the
participant are not completely certain. In published rulings, the Internal
Revenue Service (the "IRS") has taken the position that, to the extent that
the number of shares acquired is equivalent to the number of shares
surrendered, the participant recognizes no gain and the participant's basis in
the shares acquired upon such exercise is equal to the participant's basis in
the surrendered shares, that any additional shares acquired upon such exercise
is compensation to the participant taxable under the rules described above,
and that the participant's basis in any such additional shares will be their
fair market value.
Incentive Stock Options. A participant who is granted incentive stock
options is not treated as having received taxable income upon either the grant
or the exercise of the options. Instead, such participant is taxed at the time
of the sale or other taxable disposition of the Common Stock acquired pursuant
to the exercise of the option. Generally, such participants pay taxes at long-
term capital gains rates on the difference between the amount realized on the
sale or other disposition of the shares and the option exercise price. To
qualify for such capital gains treatment, the participant (i) must not sell or
dispose of the shares earlier than two years from the date of grant of the
incentive stock option or one year from the date of transfer of the shares to
the participant upon exercise, and (ii) must be an employee of the Company at
all times during the period beginning with the date of the grant of the option
and ending three months before the date of exercise. If the shares of stock
are sold or otherwise disposed of before the end of the one-year period or the
two-year period, a portion of the gain, if any, may be treated as compensation
taxable as ordinary income rather than as capital gain.
The tax consequences resulting from a participant's exercise of incentive
stock options by surrendering shares of Common Stock already owned by the
participant are not completely certain. In published rulings and proposed
regulations, the IRS has taken the position that generally the participant
recognizes no income upon such stock-for-stock exercise, that to the extent
that the number of shares acquired is equivalent to the number of shares
surrendered, the participant's basis in the shares acquired upon such exercise
is equal to the participant's basis in the surrendered shares increased by any
compensation income recognized by the participant, that the participant's
basis in any additional shares acquired by such exercise is zero, and that any
sale or other disposition of the acquired shares within the one-year period or
the two-year period described above is viewed as a disposition of the shares
with the lowest basis first.
Alternative minimum tax must be paid when it exceeds a taxpayer's regular
federal income tax. Alternative minimum tax is calculated based on alternative
minimum taxable income, which is taxable income for federal income tax
purposes, modified by certain adjustments and increased by tax preference
items. For purposes of the foregoing, the difference between the exercise
price and the fair market value of shares of Common Stock acquired pursuant to
the exercise of an incentive stock option is classified as alternative minimum
taxable income for the year of exercise. For alternative minimum tax purposes
(but not for regular income tax purposes), the participant's basis in the
acquired shares is the fair market value of the shares at the time the
incentive stock option is exercised. A disqualifying disposition of the
acquired shares during the same year in which the incentive stock option was
exercised will cancel the alternative minimum taxable income generated upon
exercise of the incentive stock option. Should there be a disqualifying
disposition in a year other than the year of exercise, the income on the
disqualifying disposition will not be considered income for alternative
minimum tax purposes.
126
<PAGE>
FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY
The following summary of the material federal income tax consequences to the
Company is based on current law, is for general information only and is not
tax advice.
Section 162(m) Limitation. Subject to a limited number of exceptions,
Section 162(m) of the Code denies a deduction to a publicly held corporation
for payments of remuneration to certain employees to the extent the employee's
remuneration for the taxable year exceeds $1,000,000. For this purpose,
remuneration attributable to stock options is included within the $1,000,000
limitation. However, to the extent that the remuneration is payable solely on
account of the attainment of one or more performance goals and certain other
procedural requirements are met, then such remuneration is not subject to the
$1,000,000 limitation.
The Company has attempted to structure the Stock Incentive Plan in such a
manner that the remuneration attributable to the stock options will not be
subject to the $1,000,000 limitation. The Company has not, however, requested
a ruling from the IRS or an opinion of counsel regarding this issue.
Non-Qualified Stock Options. Subject to the limitations set forth in Code
Section 162(m) and discussed above, the Company is entitled to deduct from its
taxable income the amount that the participant is required to include in
ordinary income at the time of such inclusion.
Incentive Stock Options. The Company is not entitled to any deduction on
account of the grant of the incentive stock options or the participant's
exercise of the option to acquire Common Stock. However, in the event of a
subsequent disqualifying disposition of such shares under circumstances
resulting in taxable compensation to the participant, subject to the
limitations set forth in Code Section 162(m) and discussed above, the Company
is entitled to a tax deduction equal to the amount treated as taxable
compensation to the participant.
SECTION 401(K) PLAN
Effective upon the consummation of the Offering, the Company intends to
establish the Company's Section 401(k) Savings/Retirement Plan (the "Section
401(k) Plan") to cover eligible employees of the Company and any designated
affiliate.
The Section 401(k) Plan will permit eligible employees of the Company to
defer up to 15% of their annual compensation, subject to certain limitations
imposed by the Code. The employees' elective deferrals are immediately vested
and non-forfeitable upon contribution to the Section 401(k) Plan. The Company
currently does not intend to make matching contributions to the Section 401(k)
Plan; however, it reserves the right to make matching contributions or
discretionary profit sharing contributions in the future.
INDEMNIFICATION
For a description of the limitation of liability and indemnification rights
of the Company's officers and directors, see "Certain Provisions of Maryland
Law and of the Company's Articles of Incorporation and Bylaws--Limitation of
Directors' and Officers' Liability" and "--Indemnification Agreements."
127
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain directors and executive officers of the Company (or members of their
immediate families) and persons who will hold more than 5% of the outstanding
shares of Common Stock (or interests exchangeable therefor) have direct or
indirect interests in transactions which have been or will be consummated by
the Company, the Operating Partnership or the Services Company, including the
transfer of certain Properties to the Operating Partnership by the Continuing
Investors, the grant of options with respect to the Excluded Properties and,
if exercised, the purchase by the Company of one or more of the Excluded
Properties from the respective Continuing Investors, the repayment of certain
indebtedness encumbering the Properties and the performance of management and
leasing activities by the Operating Partnership and certain development and
other activities by the Services Company at the Excluded Properties. See
"Formation Transactions." In addition, John B. Kilroy, Sr. has contributed
$1,000 to the Company in exchange for an aggregate of 50 shares of Common
Stock, and upon consummation of the Offering, John B. Kilroy, Jr. and John B.
Kilroy, Sr. each will have contributed cash to the Services Company, which,
upon consummation of the Offering and the Formation Transactions, will
represent a 5.0% economic interest in the Services Company.
PARTNERSHIP AGREEMENT
Concurrently with the completion of the Offering, the Company will enter
into the Partnership Agreement of the Operating Partnership with the various
limited partners of the Operating Partnership. See "Partnership Agreement of
Operating Partnership." John B. Kilroy, Sr. and John B. Kilroy, Jr., who are
limited partners of the Operating Partnership, are directors and/or officers
of the Company.
ASSIGNMENT OF LEASE; VARIOUS SERVICES PROVIDED BY THE SERVICES COMPANY TO THE
KILROY GROUP
Concurrently with the completion of the Offering, KI will assign to the
Operating Partnership all of its interest as a tenant in a lease with a
partnership affiliated with the Continuing Investors covering the space
currently serving as the headquarters of KI at Kilroy LAX in El Segundo,
California. The Company, the Operating Partnership and the Services Company
will occupy such space, with the Company and the Services Company subleasing
some of such space from the Operating Partnership and paying rent to the
Operating Partnership therefor, at rates which the Company believes are equal
to the fair rental value of the space.
Pursuant to management agreements, the Operating Partnership will provide
management and leasing services, and the Services Company will provide
development services, with respect to the Excluded Properties, each of which
is beneficially owned and controlled by John B. Kilroy, Sr. and John B.
Kilroy, Jr., for fees equivalent to the fair market value of such services.
See "Business and Properties--Development, Management and Leasing--Excluded
Properties."
BENEFITS OF THE FORMATION TRANSACTIONS TO CERTAIN EXECUTIVE OFFICERS
In connection with the Formation Transactions, John B. Kilroy, Sr., Chairman
of the Company's Board of Directors, will receive Units, the repayment of a
personal loan and the termination of guarantees of loans secured by certain of
the Properties. Also in connection with the Formation Transactions, John B.
Kilroy, Jr. will receive Units, as well as the termination of guarantees of
loans secured by certain of the Properties and certain benefits under his
employment agreement with the Company. See "Use of Proceeds". In addition,
each of John B. Kilroy, Sr. and John B. Kilroy, Jr. own and control Kilroy
Calabasas Associates, a California limited partnership, and Kilroy Airport
Imperial Co., a California limited partnership, which, upon the exercise of
certain options by the Company, may transfer certain of the Excluded
Properties to the Operating Partnership in exchange for cash or Units. In the
event that the Independent Directors determine to cause the Company to
exercise its options to purchase these properties, John B. Kilroy, Sr. and
John B. Kilroy, Jr. will receive the consideration paid therefor. See
"Business and Properties--Development, Management and Leasing--Excluded
Properties."
128
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of shares of Common
Stock immediately following the consummation of the Offering and the Formation
Transactions for (i) each person who is expected to be the beneficial owner of
5% or more of the outstanding Common Stock immediately following the
consummation of the Offering, (ii) directors, proposed directors and the
executive officers of the Company, and (iii) directors, proposed directors and
executive officers of the Company as a group. Except for the restricted Common
Stock owned by Mr. Moran and the 50 shares of Common Stock owned by John B.
Kilroy, Sr. (which will be repurchased upon consummation of the Offering),
none of the persons or entities listed below currently owns any shares of
Common Stock, but rather owns Units exchangeable for shares of Common Stock.
See "Partnership Agreement of the Operating Partnership--Redemption/Exchange
Rights." This table assumes that (i) the Formation Transactions and the
Offering are completed and (ii) the Underwriters' over-allotment option will
not be exercised. Each person named in the table has sole voting and
investment power with respect to all of the shares of Common Stock shown as
beneficially owned by such person, except as otherwise set forth in the notes
to the table. This table reflects the ownership interests each of the
following persons would have if each person exchanged all of his Units for
shares of Common Stock at an initial exchange ratio of one Unit for each share
of Common Stock (without regard to the Ownership Limit and the prohibition on
redemption or exchange of Units until two years after the date of the
Offering). See "Partnership Agreement of the Operating Partnership--
Redemption/Exchange Rights." Unless otherwise indicated, the address of each
named person is c/o Kilroy Realty Corporation, 2250 East Imperial Highway,
Suite 1200, El Segundo, California 90245.
<TABLE>
<CAPTION>
PERCENTAGE OF
NUMBER OF SHARES OUTSTANDING SHARES
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED(1) OF COMMON STOCK(1)(2)
------------------------ --------------------- ---------------------
<S> <C> <C>
John B. Kilroy, Sr ............ 1,263,087(3) 8.99%
John B. Kilroy, Jr. ........... 1,263,087(3) 8.99%
Jeffrey C. Hawken.............. -- --
Richard E. Moran Jr. .......... 60,000(4) 0.43%
Campbell Hugh Greenup.......... -- --
William P. Dickey.............. -- --
Matthew J. Hart................ -- --
Dale F. Kinsella............... -- --
All directors and executive
officers as a group
(8 persons)................... 2,586,174 18.40%
</TABLE>
- --------
(1) Includes the Units to be beneficially owned by KI which are allocated to
John B. Kilroy, Sr. and John B. Kilroy, Jr., the only shareholders of KI,
in accordance with their respective percentage ownership of KI. Excludes
options to purchase 695,000 shares of Common Stock granted to executive
officers and directors at the consummation of the Offering.
(2) Assuming exchange of the 2,692,374 Units outstanding upon consummation of
the Offering.
(3) These Units have been pledged to secure certain indemnification
obligations to the Company arising in connection with the Formation
Transactions. See "Certain Relationships and Related Transactions."
(4) Represents 60,000 restricted shares of Common Stock granted under the
Stock Incentive Plan to Richard E. Moran Jr. pursuant to the terms of his
employment agreement, which shares will vest in three equal annual
installments over a three-year period. See "Management--Employment
Agreements."
129
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of the terms of the Company's capital stock does not
purport to be complete and is subject to and qualified in its entirety by
reference to the Company's Articles of Incorporation and Bylaws, copies of
which are filed as exhibits to the Registration Statement of which this
Prospectus is a part. See "Additional Information."
GENERAL
Under the Articles of Incorporation, the authorized capital stock of the
Company consists of 150,000,000 shares of Common Stock, par value $.01 per
share, and 30,000,000 shares of preferred stock, par value $.01 per share
("Preferred Stock"). Upon completion of the Offering and Formation
Transactions, there will be 11,360,000 shares of Common Stock issued and
outstanding (including 60,000 restricted shares of Common Stock granted to an
officer of the Company who is not a Continuing Investor and excluding the
1,675,000 shares which are subject to the Underwriters' over-allotment option
and shares that may be issued upon the exchange of outstanding Units), and no
shares of Preferred Stock will be issued and outstanding.
COMMON STOCK
Each outstanding share of Common Stock will entitle the holder to one vote
on all matters presented to stockholders for a vote, including the election of
directors, and, except as otherwise required by law and except as provided in
any resolution adopted by the Board of Directors with respect to any other
class or series of stock establishing the designation, powers, preferences and
relative, participating, optional or other special rights and powers of such
series, the holders of such shares will possess the exclusive voting power,
subject to the provisions of the Company's Articles of Incorporation regarding
the ownership of shares of Common Stock in excess of the Ownership Limit, or
such other limit as provided in the Company's Articles of Incorporation or as
otherwise permitted by the Board of Directors described below. Holders of
shares of Common Stock will have no conversion, exchange, sinking fund,
redemption or appraisal rights and have no preemptive rights to subscribe for
any securities of the Company or cumulative voting rights in the election of
directors. All shares of Common Stock to be issued and outstanding following
the consummation of the Offering will be duly authorized, fully paid and
nonassessable. Subject to the preferential rights of any other shares or
series of stock and to the provisions of the Articles of Incorporation
regarding ownership of shares of Common Stock in excess of the Ownership
Limit, or such other limit as provided in the Company's Articles of
Incorporation or as otherwise permitted by the Board of Directors described
below, distributions may be paid to the holders of shares of Common Stock if
and when authorized and declared by the Board of Directors of the Company out
of funds legally available therefor. The Company intends to make quarterly
distributions, beginning with distributions for the portion of the quarter
from the consummation of the Offering through March 31, 1997. See
"Distribution Policy."
Under Maryland law, stockholders are generally not liable for the Company's
debts or obligations. If the Company is liquidated, subject to the right of
any holders of Preferred Stock to receive preferential distributions, each
outstanding share of Common Stock will be entitled to participate pro rata in
the assets remaining after payment of, or adequate provision for, all known
debts and liabilities of the Company, including debts and liabilities arising
out of its status as general partner of the Operating Partnership.
Subject to the provisions of the Articles of Incorporation regarding the
ownership of shares of Common Stock in excess of the Ownership Limit, or such
other limit as provided in the Company's Articles of Incorporation or as
otherwise permitted by the Board of Directors described below, all shares of
Common Stock will have equal distribution, liquidation and voting rights, and
will have no preference or exchange rights. See "--Restrictions on Ownership
and Transfer."
Under the MGCL, a Maryland corporation generally cannot dissolve, amend its
charter, merge, sell all or substantially all of its assets, engage in a share
exchange or engage in similar transactions outside the ordinary course of
business unless approved by the affirmative vote of stockholders holding at
least two-thirds of the
130
<PAGE>
shares entitled to vote on the matter unless a lesser percentage (but not less
than a majority of all of the votes entitled to be cast on the matter) is set
forth in the corporation's charter. Under the MGCL, the term "substantially
all of the Company's assets" is not defined and is, therefore, subject to
Maryland common law and to judicial interpretation and review in the context
of the unique facts and circumstances of any particular transaction. The
Articles of Incorporation of the Company do not provide for a lesser
percentage in any such situation.
The Articles of Incorporation authorize the Board of Directors to reclassify
any unissued shares of Common Stock into other classes or series of classes of
stock and to establish the number of shares in each class or series and to set
the preferences, conversion and other rights, voting powers, restrictions,
limitations and restrictions on ownership, limitations as to dividends or
other distributions, qualifications and terms or conditions of redemption for
each such class or series.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock will be ChaseMellon
Shareholder Services.
PREFERRED STOCK
Preferred Stock may be issued from time to time, in one or more series, as
authorized by the Board of Directors. No Preferred Stock is currently issued
or outstanding. Prior to the issuance of shares of each series, the Board of
Directors is required by the MGCL and the Company's Articles of Incorporation
to fix for each series the terms, preferences, conversion or other rights,
voting powers, restrictions, limitations as to distributions, qualifications
and terms or conditions of redemption, as permitted by Maryland law. Because
the Board of Directors has the power to establish the preferences, powers and
rights of each series of Preferred Stock, it may afford the holders of any
series of Preferred Stock preferences, powers and rights, voting or otherwise,
senior to the rights of holders of shares of Common Stock. The issuance of
Preferred Stock could have the effect of delaying or preventing a change of
control of the Company that might involve a premium price for holders of
Common Stock or otherwise be in their best interest. The Board of Directors
has no present plans to issue any Preferred Stock.
RESTRICTIONS ON OWNERSHIP AND TRANSFER
Ownership Limits. For the Company to qualify as a REIT under the Code, no
more than 50% in value of its outstanding shares of stock may be owned,
actually or constructively, by five or fewer individuals (as defined in the
Code to include certain entities) during the last half of a taxable year
(other than the first year for which an election to be treated as a REIT has
been made). In addition, if the Company, or an owner of 10% or more of the
Company, actually or constructively owns 10% or more of a tenant of the
Company (or a tenant of any partnership in which the Company is a partner),
the rent received by the Company (either directly or through any such
partnership) from such tenant will not be qualifying income for purposes of
the REIT gross income tests of the Code. A REIT's stock must also be
beneficially owned by 100 or more persons during at least 335 days of a
taxable year of twelve months or during a proportionate part of a shorter
taxable year (other than the first year for which an election to be treated as
a REIT has been made).
Because the Company expects to qualify as a REIT, the Articles of
Incorporation contain restrictions on the ownership and transfer of Common
Stock which are intended to assist the Company in complying with these
requirements. The Ownership Limit set forth in the Company's Articles of
Incorporation provides that, subject to certain specified exceptions, no
person or entity may own, or be deemed to own by virtue of the applicable
constructive ownership provisions of the Code, more than 7.0% (by number or
value, whichever is more restrictive) of the outstanding shares of Common
Stock. The constructive ownership rules are complex, and may cause shares of
Common Stock owned actually or constructively by a group of related
individuals and/or entities to be constructively owned by one individual or
entity. As a result, the acquisition of less than 7.0% of the shares of Common
Stock (or the acquisition of an interest in an entity that owns, actually or
constructively, Common
131
<PAGE>
Stock) by an individual or entity, could, nevertheless cause that individual
or entity, or another individual or entity, to own constructively in excess of
7.0% of the outstanding Common Stock and thus violate the Ownership Limit, or
such other limit as provided in the Company's Articles of Incorporation or as
otherwise permitted by the Board of Directors. The Board of Directors may, but
in no event will be required to, waive the Ownership Limit with respect to a
particular stockholder if it determines that such ownership will not
jeopardize the Company's status as a REIT and the Board of Directors otherwise
decides such action would be in the best interest of the Company. As a
condition of such waiver, the Board of Directors may require an opinion of
counsel satisfactory to it and/or undertakings or representations from the
applicant with respect to preserving the REIT status of the Company. The Board
of Directors has obtained such undertakings and representations from John B.
Kilroy, Sr. and John B. Kilroy, Jr. and has waived the Ownership Limit with
respect to the actual and constructive ownership (and to any constructive
ownership securities therefrom) of Common Stock by John B. Kilroy, Sr. and
John B. Kilroy, Jr. Consequently, John B. Kilroy, Sr., John B. Kilroy, Jr.,
members of their families and entities (including the Operating Partnership)
which are deemed to own the Kilroys' Common Stock under the constructive
ownership rules of the Code will be permitted to own, in the aggregate,
actually or constructively, up to 21% (by number of shares or value, whichever
is more restrictive) of the outstanding Common Stock. See "Description of
Capital Stock--Restrictions on Ownership and Transfer--Ownership Limits."
The Company's Articles of Incorporation further prohibits (i) any person
from actually or constructively owning shares of stock of the Company that
would result in the Company being "closely held" under Section 856(h) of the
Code or otherwise cause the Company to fail to qualify as a REIT, and (ii) any
person from transferring shares of stock of the Company if such transfer would
result in shares of stock of the Company being owned by fewer than 100
persons. Any person who acquires or attempts or intends to acquire actual or
constructive ownership of shares of stock of the Company that will or may
violate any of the foregoing restrictions on transferability and ownership is
required to give notice immediately to the Company and provide the Company
with such other information as the Company may request in order to determine
the effect of such transfer on the Company's status as a REIT. The foregoing
restrictions on transferability and ownership will not apply if the Board of
Directors determines that it is no longer in the best interest of the Company
to attempt to qualify, or to continue to qualify, as a REIT. Except as
otherwise described above, any change in the Ownership Limit would require an
amendment to the Articles of Incorporation. Amendments to the Articles of
Incorporation require the affirmative vote of holders owning at least two-
thirds of the shares of the Company's capital stock outstanding and entitled
to vote thereon.
Pursuant to the Articles of Incorporation, if any purported transfer of
Common Stock of the Company or any other event would otherwise result in any
person violating the Ownership Limit or such other limit as provided in the
Company's Articles of Incorporation or as otherwise permitted by the Board of
Directors, then any such purported transfer will be void and of no force or
effect with respect to the purported transferee (the "Prohibited Transferee")
as to that number of shares in excess of the Ownership Limit or such other
limit, and the Prohibited Transferee shall acquire no right or interest (or,
in the case of any event other than a purported transfer, the person or entity
holding record title to any such excess shares (the "Prohibited Owner") shall
cease to own any right or interest) in such excess shares. Any such excess
shares described above will be transferred automatically, by operation of law,
to a trust, the beneficiary of which will be a qualified charitable
organization selected by the Company (the "Beneficiary"). Such automatic
transfer shall be deemed to be effective as of the close of business on the
business day prior to the date of such violative transfer. Within 20 days of
receiving notice from the Company of the transfer of shares to the trust, the
trustee of the trust (who shall be designated by the Company and be
unaffiliated with the Company and any Prohibited Transferee or Prohibited
Owner) will be required to sell such excess shares to a person or entity who
could own such shares without violating the Ownership Limit, or such other
limit as provided in the Company's Articles of Incorporation or as otherwise
permitted by the Board of Directors, and distribute to the Prohibited
Transferee or Prohibited Owner an amount equal to the lesser of the price paid
by the Prohibited Transferee or Prohibited Owner for such excess shares or the
sales proceeds received by the trust for such excess shares. In the case of
any excess shares resulting from any event other than a transfer, or from a
transfer for no consideration (such as a gift), the trustee will be required
132
<PAGE>
to sell such excess shares to a qualified person or entity and distribute to
the Prohibited Owner an amount equal to the lesser of the Market Price (as
defined in the Company's Articles of Incorporation) of such excess shares as
of the date of such event or the sales proceeds received by the trust for such
excess shares. In either case, any proceeds in excess of the amount
distributable to the Prohibited Transferee or Prohibited Owner, as applicable,
will be distributed to the Beneficiary. Prior to a sale of any such excess
shares by the trust, the trustee will be entitled to receive, in trust for the
Beneficiary, all dividends and other distributions paid by the Company with
respect to such excess shares, and also will be entitled to exercise all
voting rights with respect to such excess shares. Subject to Maryland law,
effective as of the date that such shares have been transferred to the trust,
the trustee shall have the authority (at the trustee's sole discretion) (i) to
rescind as void any vote cast by a Prohibited Transferee or Prohibited Owner,
as applicable, prior to the discovery by the Company that such shares have
been transferred to the trust and (ii) to recast such vote in accordance with
the desires of the trustee acting for the benefit of the Beneficiary. However,
if the Company has already taken irreversible corporate action, then the
trustee shall not have the authority to rescind and recast such vote. Any
dividend or other distribution paid to the Prohibited Transferee or Prohibited
Owner (prior to the discovery by the Company that such shares had been
automatically transferred to a trust as described above) will be required to
be repaid to the trustee upon demand for distribution to the Beneficiary. In
the event that the transfer to the trust as described above is not
automatically effective (for any reason) to prevent violation of the Ownership
Limit or such other limit as provided in the Company's Articles of
Incorporation or as otherwise permitted by the Board of Directors, then the
Articles of Incorporation provide that the transfer of the excess shares will
be void.
In addition, shares of stock of the Company held in the trust shall be
deemed to have been offered for sale to the Company, or its designee, at a
price per share equal to the lesser of (i) the price per share in the
transaction that resulted in such transfer to the trust (or, in the case of a
devise or gift, the Market Price at the time of such devise or gift) and (ii)
the Market Price on the date the Company, or its designee, accepts such offer.
The Company shall have the right to accept such offer until the trustee has
sold the shares of stock held in the trust. Upon such a sale to the Company,
the interest of the Beneficiary in the shares sold shall terminate and the
trustee shall distribute the net proceeds of the sale to the Prohibited
Transferee or Prohibited Owner.
If any purported transfer of shares of Common Stock would cause the Company
to be beneficially owned by fewer than 100 persons, such transfer will be null
and void in its entirety and the intended transferee will acquire no rights to
the stock.
All certificates representing shares of Common Stock will bear a legend
referring to the restrictions described above. The foregoing ownership
limitations could delay, defer or prevent a transaction or a change in control
of the Company that might involve a premium price for the Common Stock or
otherwise be in the best interest of stockholders.
Under the Articles of Incorporation, every owner of a specified percentage
(or more) of the outstanding shares of Common Stock must file a completed
questionnaire with the Company containing information regarding their
ownership of such shares, as set forth in the Treasury Regulations. Under
current Treasury Regulations, the percentage will be set between 0.5% and
5.0%, depending upon the number of record holders of the Company's shares. In
addition, each stockholder shall upon demand be required to disclose to the
Company in writing such information as the Company may request in order to
determine the effect, if any, of such stockholder's actual and constructive
ownership of Common Stock on the Company's status as a REIT and to ensure
compliance with the Ownership Limit, or such other limit as provided in the
Company's Articles of Incorporation or as otherwise permitted by the Board of
Directors.
133
<PAGE>
CERTAIN PROVISIONS OF MARYLAND LAW AND OF
THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
The following paragraphs summarize certain provisions of the MGCL and the
Company's Articles of Incorporation and Bylaws. The summary does not purport to
be complete and is subject to and qualified in its entirety by reference to the
MGCL and the Company's Articles of Incorporation and Bylaws, copies of which
are exhibits to the Registration Statement of which this Prospectus is a part.
BOARD OF DIRECTORS
The Company's Articles of Incorporation provide that the number of directors
of the Company shall be established by the Bylaws but shall not be less than
the minimum number required by the MGCL, which in the case of the Company is
three. The Bylaws currently provide that the Board of Directors will consist of
not fewer than five nor more than 13 members. Any vacancy (except for a vacancy
caused by removal) will be filled, at any regular meeting or at any special
meeting called for that purpose, by a majority of the remaining directors or,
in the case of a vacancy resulting from an increase in the number of directors,
by a majority of the entire Board of Directors. A vacancy resulting from
removal will be filled by the stockholders at the next annual meeting of
stockholders or at a special meeting of the stockholders called for that
purpose. The Articles of Incorporation and Bylaws provide that a majority of
the Board must be "Independent Directors." An "Independent Director" is a
director who is not an employee, officer or affiliate of the Company or a
subsidiary or division thereof, or a relative of a principal executive officer,
or who is not an individual member of an organization acting as advisor,
consultant or legal counsel, receiving compensation on a continuing basis from
the Company in addition to director's fees.
Pursuant to the Articles of Incorporation, the directors are divided into
three classes as nearly equal in size as practicable. One class will hold
office initially for a term expiring at the annual meeting of stockholders to
be held in 1998, another class will hold office initially for a term expiring
at the annual meeting of stockholders to be held in 1999 and another class will
hold office initially for a term expiring at the annual meeting of stockholders
to be held in 2000. As the term of each class expires, directors in that class
will be elected for a term of three years and until their successors are duly
elected and qualified and the directors in the other two classes will continue
in office. The Company believes that classification of the Board of Directors
will help to assure the continuity and stability of the Company's business
strategies and policies as determined by the Board of Directors.
The classified director provision could have the effect of making the removal
of incumbent directors more time consuming and difficult, which could
discourage a third party from making a tender offer or otherwise attempting to
obtain control of the Company, even though such an attempt might be beneficial
to the Company and its stockholders. At least two annual meetings of
stockholders, instead of one, will generally be required to effect a change in
a majority of the Board of Directors. Thus, the classified board provision
could increase the likelihood that incumbent directors will retain their
positions. Holders of shares of Common Stock will have no right to cumulative
voting for the election of directors. Consequently, at each annual meeting of
stockholders, the holders of a majority of the shares of Common Stock will be
able to elect all of the successors of the class of directors whose term
expires at that meeting.
REMOVAL OF DIRECTORS
While the Company's Articles of Incorporation and the MGCL empower the
stockholders to fill vacancies in the Board of Directors that are caused by the
removal of a director, the Company's Articles of Incorporation preclude
stockholders from removing incumbent directors except upon a substantial
affirmative vote. Specifically, the Company's Articles of Incorporation provide
that a director may be removed only for cause and only by the affirmative vote
of at least two-thirds of the votes entitled to be cast in the election of
directors. Under the MGCL, the term "cause" is not defined and is, therefore,
subject to Maryland common law and to judicial interpretation and review in the
context of the unique facts and circumstances of any particular situation.
134
<PAGE>
This provision, when coupled with the provision in the Bylaws authorizing the
Board of Directors to fill vacant directorships, precludes stockholders from
removing incumbent directors except upon a substantial affirmative vote and
filling the vacancies created by such removal with their own nominees.
BUSINESS COMBINATIONS
Under the MGCL, certain "business combinations" (including a merger,
consolidation, share exchange, or, in certain circumstances, an asset transfer
or issuance or reclassification of equity securities) between the Company and
any person who beneficially owns, directly or indirectly, 10% or more of the
voting power of the Company's shares, or an affiliate of the Company who, at
any time within the two-year period prior to the date in question, was the
beneficial owner of 10% or more of the voting power of the Company's then
outstanding shares (an "Interested Stockholder") or an affiliate thereof are
prohibited for five years after the most recent date on which the Interested
Stockholder became an Interested Stockholder. Thereafter, any such business
combination must be recommended by the Board of Directors and approved by the
affirmative vote of at least (i) 80% of the votes entitled to be cast by
holders of outstanding shares of the Company's voting stock and (ii) two-thirds
of the votes entitled to be cast by holders of outstanding shares of the
Company's voting stock other than shares held by the Interested Stockholder
with whom the business combination is to be effected, unless, among other
things, the Company's stockholders receive a minimum price (as defined in the
MGCL) for their shares of stock and the consideration is received in cash or in
the same form as previously paid by the Interested Stockholder for its shares.
These provisions of the MGCL do not apply, however, to business combinations
that are approved or exempted by the Board of Directors prior to the time that
the Interested Stockholder becomes an Interested Stockholder. The Company's
Board of Directors has resolved to opt out of the business combinations
provisions of the MGCL, and such resolutions also require that any decision to
opt back in be subject to the approval of holders of a majority of the shares
of Common Stock. As a result of the Company's decision to opt out of the
business combinations provisions of the MGCL, an Interested Stockholder would
be able to effect a "business combination" without complying with the
requirements set forth above. The decision to opt out of the provisions may
have the effect of making it easier for stockholders who become Interested
Stockholders to consummate a business combination involving the Company.
However, no assurance can be given that any such business combination would be
consummated or, if consummated, would result in a purchase of shares of Common
Stock from any stockholder at a premium.
CONTROL SHARE ACQUISITIONS
The MGCL provides that "control shares" of the Company acquired in a "control
share acquisition" have no voting rights except to the extent approved by a
vote of two-thirds of the votes entitled to be cast on the matter, excluding
shares owned by the acquiror or by officers or directors who are employees of
the Company. "Control shares" are voting shares of stock which, if aggregated
with all other such shares of stock previously acquired by the acquiror, or in
respect of which the acquiror is able to exercise or direct the exercise of
voting power (except solely by revocable proxy), would entitle the acquiror to
exercise voting power in electing directors within one of the following ranges
of voting power: (i) one-fifth or more but less than one-third; (ii) one-third
or more but less than a majority; or (iii) a majority of all voting power.
"Control shares" do not include shares of stock the acquiring person is then
entitled to vote as a result of having previously obtained stockholder
approval. A "control share acquisition" means the acquisition of control
shares, subject to certain exceptions.
A person who has made or proposes to make a control share acquisition, upon
satisfaction of certain conditions (including an undertaking to pay expenses),
may compel the Board of Directors to call a special meeting of stockholders to
be held within 50 days of demand to consider voting rights for the shares. If
no request for a meeting is made, the Company may itself present the question
at any stockholders' meeting.
If voting rights are not approved at the stockholders' meeting or if the
acquiring person does not deliver an acquiring person statement as required by
the MGCL, then, subject to certain conditions and limitations, the Company may
redeem any or all of the control shares (except those for which voting rights
have previously
135
<PAGE>
been approved) for fair value determined, without regard to the absence of
voting rights for the control shares, as of the date of the last control share
acquisition by the acquiror or of any meeting of stockholders at which the
voting rights of such shares are considered and not approved. If voting rights
for control shares are approved at a stockholders' meeting and the acquiror
becomes entitled to vote a majority of the shares of stock entitled to vote,
all other stockholders may exercise appraisal rights. The fair value of the
shares of stock as determined for purposes of such appraisal rights may not be
less than the highest price per share paid by the acquiror in the control
share acquisition, and certain limitations and restrictions otherwise
applicable to the exercise of dissenters' rights do not apply in the context
of a control share acquisition.
The control share acquisition statute does not apply to shares acquired in a
merger, consolidation or share exchange if the Company is a party to the
transaction, or to acquisitions approved or exempted by the Company's Articles
of Incorporation or Bylaws. The Bylaws of the Company contain a provision
exempting from the control share acquisition statute any and all acquisitions
by any person of the Company's shares of stock. Although there can be no
assurance that such provision will not be amended or eliminated at any time in
the future, the Company's Board of Directors has resolved that the provision
may not be amended or eliminated without the approval of the holders of at
least a majority of the shares of Common Stock. As a result of the Company's
decision to opt out of the "control share acquisition" provisions of the MGCL,
stockholders who acquire a substantial block of Common Stock are not precluded
from exercising full voting rights with respect to their shares on all matters
without first obtaining the approval of other stockholders entitled to vote.
This may have the effect of making it easier for any such control share
stockholder to effect a business combination with the Company. However, no
assurance can be given that any such business combination would be consummated
or, if consummated, would result in a purchase of shares of Common Stock from
any stockholder at a premium.
AMENDMENT TO THE ARTICLES OF INCORPORATION AND BYLAWS
The Company's Articles of Incorporation may not be amended without the
affirmative vote of at least two-thirds of the shares of capital stock
outstanding and entitled to vote thereon voting together as a single class.
Other than provisions of the Bylaws (i) opting out of the control share
acquisition statute, (ii) requiring approval by the Independent Directors for
selection of operators of the Properties or of transactions involving John B.
Kilroy, Sr. and John B. Kilroy, Jr. and their affiliates and (iii) those
governing amendment of the Bylaws, each of which may be amended only with the
approval of a majority of the shares of capital stock entitled to vote, the
Company's Bylaws may be amended by the vote of a majority of the Board of
Directors or the shares of the Company's capital stock entitled to vote
thereon.
MEETINGS OF STOCKHOLDERS
The Company's Bylaws provide for annual meetings of stockholders, commencing
with the year 1998, to elect the Board of Directors and transact such other
business as may properly be brought before the meeting. Special meetings of
stockholders may be called by the President, the Board of Directors or the
Chairman of the Board and shall be called at the request in writing of the
holders of 50% or more of the outstanding stock of the Company entitled to
vote.
The MGCL provides that any action required or permitted to be taken at a
meeting of stockholders may be taken without a meeting by unanimous written
consent, if such consent sets forth such action and is signed by each
stockholder entitled to vote on the matter and a written waiver of any right
to dissent is signed by each stockholder entitled to notice of the meeting but
not entitled to vote at it.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND NEW BUSINESS
The Company's Bylaws provide that (i) with respect to an annual meeting of
stockholders, nominations of persons for election to the Board of Directors
and the proposal of business to be considered by stockholders may be made only
(a) pursuant to the Company's notice of the meeting, (b) by or at the
direction of the Board of Directors or (c) by a stockholder who is entitled to
vote at the meeting and has complied with the advance notice
136
<PAGE>
procedures set forth in the Bylaws, and (ii) with respect to special meetings
of stockholders, only the business specified in the Company's notice of meeting
may be brought before the meeting of stockholders.
The provisions in the Company's Articles of Incorporation on classification
of the Board of Directors and amendments to the Articles of Incorporation and
the advance notice provisions of the Bylaws could have the effect of
discouraging a takeover or other transaction in which holders of some, or a
majority, of the shares of Common Stock might receive a premium for their
shares of Common Stock over the then prevailing market price or which such
holders might believe to be otherwise in their best interests.
DISSOLUTION OF THE COMPANY
Under the MGCL, the Company may be dissolved by (i) the affirmative vote of a
majority of the entire Board of Directors declaring such dissolution to be
advisable and directing that the proposed dissolution be submitted for
consideration at any annual or special meeting of stockholders, and (ii) upon
proper notice, stockholder approval by the affirmative vote of the holders of
two-thirds of the total number of shares of capital stock outstanding and
entitled to vote thereon voting as a single class.
LIMITATION OF DIRECTORS' AND OFFICERS' LIABILITY
The Company's officers and directors are and will be indemnified under
Maryland law, the Company's Articles of Incorporation of the Company and the
Partnership Agreement of the Operating Partnership against certain liabilities.
The Articles of Incorporation and Bylaws require the Company to indemnify its
directors and officers to the fullest extent permitted from time to time by the
laws of Maryland.
The MGCL permits a corporation to indemnify its directors and officers and
certain other parties against judgments, penalties, fines, settlements, and
reasonable expenses actually incurred by them in connection with any proceeding
to which they may be made a party by reason of their service in those or other
capacities unless it is established that (i) the act or omission of the
director or officer was material to the matter giving rise to the proceeding
and was committed in bad faith or was the result of active and deliberate
dishonesty, (ii) the director or officer actually received an improper personal
benefit in money, property or services, or (iii) in the case of any criminal
proceeding, the director or officer had reasonable cause to believe that the
act or omission was unlawful. Indemnification may be made against judgments,
penalties, fines, settlements and reasonable expenses actually incurred by the
director or officer in connection with the proceeding; provided, however, that
if the proceeding is one by or in the right of the corporation, indemnification
may not be made with respect to any proceeding in which the director or officer
has been adjudged to be liable to the corporation. In addition, a director or
officer may not be indemnified with respect to any proceeding charging improper
personal benefit to the director or officer in which the director or officer
was adjudged to be liable on the basis that personal benefit was received. The
termination of any proceeding by conviction, or upon a plea of nolo contendere
or its equivalent, or an entry of any order of probation prior to judgment,
creates a rebuttable presumption that the director or officer did not meet the
requisite standard of conduct required for indemnification to be permitted.
The MGCL permits the articles of incorporation of a Maryland corporation to
include a provision limiting the liability of its directors and officers to the
corporation and its stockholders for money damages, subject to specified
restrictions, and the Articles of Incorporation of the Company contain this
provision. The law does not, however, permit the liability of directors and
officers to the corporation or its stockholders to be limited to the extent
that (i) it is proved that the person actually received an improper personal
benefit in money, property or services, (ii) a judgment or other final
adjudication is entered in a proceeding based on a finding that the person's
action, or failure to act, was committed in bad faith or was the result of
active and deliberate dishonesty and was material to the cause of action
adjudicated in the proceeding or (iii) in the case of any criminal proceeding,
the director had reasonable cause to believe that the act or failure to act was
unlawful. This provision does not limit the ability of the Company or its
stockholders to obtain other relief, such as an injunction or rescission.
137
<PAGE>
The Partnership Agreement also provides for indemnification of the Company,
as general partner, and its officers and directors to the same extent
indemnification is provided to officers and directors of the Company in its
Articles of Incorporation, and limits the liability of the Company and its
officers and directors to the Operating Partnership and the partners of the
Operating Partnership to the same extent liability of officers and directors of
the Company to the Company and its stockholders is limited under the Company's
Articles of Incorporation. See "Partnership Agreement of the Operating
Partnership--Indemnification."
Insofar as indemnification for liability arising under the Securities Act may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Commission such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
INDEMNIFICATION AGREEMENTS
The Company will enter into indemnification agreements with each of its
executive officers and directors. The indemnification agreements will require,
among other matters, that the Company indemnify its executive officers and
directors to the fullest extent permitted by law and advance to the executive
officers and directors all related expenses, subject to reimbursement if it is
subsequently determined that indemnification is not permitted. Under the
agreements, the Company must also indemnify and advance all expenses incurred
by executive officers and directors seeking to enforce their rights under the
indemnification agreements and may cover executive officers and directors under
the Company's directors' and officers' liability insurance. Although the form
of indemnification agreement offers substantially the same scope of coverage
afforded by law, it provides greater assurance to directors and executive
officers that indemnification will be available, because, as a contract, it
cannot be modified unilaterally in the future by the Board of Directors or the
stockholders to eliminate the rights it provides.
138
<PAGE>
PARTNERSHIP AGREEMENT OF THE OPERATING PARTNERSHIP
The following summary of the Amended and Restated Agreement of Limited
Partnership of the Operating Partnership (the "Partnership Agreement") and the
descriptions of certain provisions set forth elsewhere in this Prospectus, are
qualified in their entirety by reference to the Partnership Agreement, which is
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. See "Additional Information."
MANAGEMENT
The Operating Partnership is organized as a Delaware limited partnership
pursuant to the terms of the Partnership Agreement. The Company will be the
sole general partner of, and will initially hold approximately 80.8% of the
economic interests in, the Operating Partnership. The Company will conduct
substantially all of its business through the Operating Partnership, except for
development and certain other services (which will be conducted through the
Services Company) in order to preserve the Company's REIT status. The Operating
Partnership will own a 95.0% economic interest in the Services Company.
Generally, pursuant to the Partnership Agreement, the Company, as the sole
general partner of the Operating Partnership, will have full, exclusive and
complete responsibility and discretion in the management and control of the
Operating Partnership, including the ability to cause the Operating Partnership
to enter into certain major transactions including acquisitions, dispositions
and refinancings and to cause changes in the Operating Partnership's line of
business and distribution policies.
The Continuing Investors, as limited partners of the Operating Partnership,
will have no authority to transact business for, or participate in the
management activities or decisions of, the Operating Partnership, except as
provided in the Partnership Agreement and as required by applicable law.
INDEMNIFICATION
To the extent permitted by law, the Partnership Agreement provides for
indemnification of the Company, as general partner, its officers and directors
and such other persons as the Company may designate to the same extent
indemnification is provided to officers and directors of the Company in its
Articles of Incorporation, and limits the liability of the Company and its
officers and directors to the Operating Partnership to the same extent
liability of officers and directors of the Company is limited under the
Articles of Incorporation.
TRANSFERABILITY OF INTERESTS
Except for a transaction described in the following two paragraphs, the
Partnership Agreement provides that the Company may not voluntarily withdraw
from the Operating Partnership, or transfer or assign its interest in the
Operating Partnership, without the consent of the holders of at least 60% of
the partner interests (including the interests of the Company, which will
represent approximately 80.8% of the total partner interests upon consummation
of the Offering). Pursuant to the Partnership Agreement, the limited partners
have agreed not to transfer, assign, sell, encumber or otherwise dispose of,
without the consent of the Company, their interest in the Operating
Partnership, other than to family members or accredited investors who agree to
assume the obligations of the transferor under the Partnership Agreement
subject to a right of first refusal for the benefit of the Company. The
Continuing Investors are subject to additional restrictions on their ability to
transfer shares of Common Stock. See "Underwriting."
The Company may not engage in any merger, consolidation or other combination
with or into another person, sale of all or substantially all of its assets or
any reclassification, recapitalization or change of its outstanding equity
interests (each a "Termination Transaction") unless the Termination Transaction
has been approved by holders of at least 60% of the Units (including Units held
by the Company, which will represent approximately 80.8% of all Units
outstanding upon consummation of the Offering) and in connection with which all
limited partners either will receive, or will have the right to elect to
receive, for each Unit an amount of cash, securities or other property equal to
the product of the number of shares of Common Stock into which each Unit
139
<PAGE>
is then exchangeable and the greatest amount of cash, securities or other
property paid to the holder of one share of Common Stock in consideration of
one share of Common Stock pursuant to the Termination Transaction. If, in
connection with the Termination Transaction, a purchase, tender or exchange
offer shall have been made to and accepted by the holders of the outstanding
shares of Common Stock, each holder of Units will receive, or will have the
right to elect to receive, the greatest amount of cash, securities or other
property which such holder would have received had it exercised its right to
redemption and received shares of Common Stock in exchange for its Units
immediately prior to the expiration of such purchase, tender or exchange offer
and had thereupon accepted such purchase, tender or exchange offer.
The Company may also merge or otherwise combine its assets with another
entity if the following conditions are met: (i) substantially all of the assets
directly or indirectly owned by the surviving entity are held directly or
indirectly by the Operating Partnership or another limited partnership or
limited liability company which is the survivor of a merger, consolidation or
combination of assets with the Operating Partnership (in each case, the
"Surviving Partnership"); (ii) the limited partners own a percentage interest
of the Surviving Partnership based on the relative fair market value of the net
assets of the Operating Partnership and the other net assets of the Surviving
Partnership immediately prior to the consummation of such transaction; (iii)
the rights, preferences and privileges of the limited partners in the Surviving
Partnership are at least as favorable as those in effect immediately prior to
the consummation of such transaction and as those applicable to any other
limited partners or non-managing members of the Surviving Partnership; and (iv)
such rights of the limited partners include the right to exchange their
interests in the Surviving Partnership for at least one of the following: (a)
the consideration available to such persons pursuant to the preceding
paragraph, or (b) if the ultimate controlling person of the Surviving
Partnership has publicly traded common equity securities, such common equity
securities, with an exchange ratio based on the relative fair market value of
such securities and the Common Stock. For purposes of this paragraph, the
determination of relative fair market values and rights, preferences and
privileges of the limited partners shall be reasonably determined by the
Company's Board of Directors as of the time of the Termination Transaction and,
to the extent applicable, the values shall be no less favorable to the limited
partners than the relative values reflected in the terms of the Termination
Transaction.
In respect of any transaction described in the preceding two paragraphs, the
Company is required to use its commercially reasonable efforts to structure
such transaction to avoid causing the limited partners to recognize gain for
federal income tax purposes by virtue of the occurrence of or their
participation in such transaction. The Operating Partnership will also use
commercially reasonable efforts to cooperate with the limited partners to
minimize any taxes payable in connection with any repayment, refinancing,
replacement or restructuring of indebtedness, or any sale, exchange or any
other disposition of assets, of the Operating Partnership.
ISSUANCE OF ADDITIONAL UNITS
As sole general partner of the Operating Partnership, the Company has the
ability to cause the Operating Partnership to issue additional Units
representing general and limited partnership interests in the Operating
Partnership, including preferred Units of limited partnership interests.
CAPITAL CONTRIBUTION
The Partnership Agreement provides that if the Operating Partnership requires
additional funds at any time or from time to time in excess of funds available
to the Operating Partnership from borrowings or capital contributions, the
Company may borrow such funds from a financial institution or other lender or
through public or private debt offerings and lend such funds to the Operating
Partnership on the same terms and conditions as are applicable to the Company's
borrowing of such funds. As an alternative to borrowing funds required by the
Operating Partnership, the Company may contribute the amount of such required
funds as an additional capital contribution to the Operating Partnership. If
the Company so contributes additional capital to the Operating Partnership, the
Company's partnership interest in the Operating Partnership will be increased
on a proportionate basis. Conversely, the partnership interests of the limited
partners will be decreased on a proportionate basis in
140
<PAGE>
the event of additional capital contributions by the Company. See "Policies
With Respect to Certain Activities--Financing."
AWARDS UNDER STOCK INCENTIVE PLAN
If options granted in connection with the Stock Incentive Plan are exercised
at any time or from time to time, or restricted shares of Common Stock are
issued under the Stock Incentive Plan, the Partnership Agreement requires the
Company to contribute to the Operating Partnership as an additional
contribution the exercise price received by the Company in connection with the
issuance of shares of Common Stock to such exercising participant or the
proceeds received by the Company upon issuance of the shares. Upon such
contribution the Company will be issued a number of Units in the Operating
Partnership equal to the number of shares of Common Stock so issued.
REDEMPTION/EXCHANGE RIGHTS
Limited partners will have rights to require the Operating Partnership to
redeem part or all of their Units for cash (based upon the fair market value of
an equivalent number of shares of Common Stock at the time of such redemption)
or the Company may elect to exchange such Units for shares of Common Stock (on
a one-for-one basis, subject to adjustment in the event of stock splits, stock
dividends, issuance of certain rights, certain extraordinary distributions and
similar events), provided, however, that if the Company does not elect to
exchange such Units for shares of Common Stock, a holder of Units that is a
corporation or a limited liability company may require the Company to issue
Common Stock in lieu thereof, subject to the Ownership Limit or such other
limit as provided in the Company's Articles of Incorporation or as otherwise
permitted by the Board of Directors, as applicable. The Company presently
anticipates that it will elect to issue Common Stock in exchange for Units in
connection with each such redemption request, rather than having the Operating
Partnership pay cash. With each such redemption or exchange, the Company's
percentage ownership interest in the Operating Partnership will increase. This
redemption/exchange right may be exercised by limited partners from time to
time, in whole or in part, subject to the limitations that such right may not
be exercised (i) prior to the expiration of two years following the
consummation of the Offering or (ii) at any time to the extent such exercise
would result in any person actually or constructively owning Common Stock in
excess of the Ownership Limit or such other amount as provided in the Company's
Articles of Incorporation or as otherwise permitted by the Board of Directors,
as applicable, assuming Common Stock was issued in such exchange. See
"Description of Capital Stock--Restrictions on Ownership and Transfer." In
addition, under certain circumstances 50% of the Units received by John B.
Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries may be redeemed prior to
the second anniversary of the consummation of the Offering in connection with
the obligation of such Continuing Investors to indemnify the Company in
connection with the Formation Transactions. See "Formation and Structure of the
Company--Allocation of Consideration in the Formation Transactions."
REGISTRATION RIGHTS
For a description of certain registration rights held by the Continuing
Investors, see "Shares Available for Future Sale--Redemption/Exchange
Rights/Registration Rights."
TAX MATTERS
Pursuant to the Partnership Agreement, the Company will be the tax matters
partner of the Operating Partnership and, as such, will have authority to make
tax elections under the Code on behalf of the Operating Partnership.
The net income or net loss of the Operating Partnership will generally be
allocated to the Company and the limited partners in accordance with their
respective percentage interests in the Operating Partnership, subject to
compliance with the provisions of Sections 704(b) and 704(c) of the Code and
the Treasury Regulations promulgated thereunder. See "Federal Income Tax
Consequences--Tax Aspects of the Operating Partnership."
141
<PAGE>
OPERATIONS
The Partnership Agreement requires that the Operating Partnership be operated
in a manner that will enable the Company to satisfy the requirements for being
classified as a REIT and to avoid any federal income tax liability. The
Partnership Agreement provides that the net operating cash revenues of the
Operating Partnership, as well as net sales and refinancing proceeds, will be
distributed from time to time as determined by the Company (but not less
frequently than quarterly) pro rata in accordance with the partners' respective
percentage interests. Pursuant to the Partnership Agreement, the Operating
Partnership will assume and pay when due, or reimburse the Company for payment
of, all expenses it incurs relating to the ownership and operation of, or for
the benefit of, the Operating Partnership and all costs and expenses relating
to the operations of the Company.
DUTIES AND CONFLICTS
Except as otherwise set forth in "Policies with Respect to Certain
Activities--Conflicts of Interest Policies" and "Management--Employment
Agreements," any limited partner of the Operating Partnership may engage in
other business activities outside the Operating Partnership, including business
activities that directly compete with the Operating Partnership.
CERTAIN LIMITED PARTNER APPROVAL RIGHTS
The Partnership Agreement provides that if the limited partners own at least
5% of the outstanding Units (including Units held by the Company), the Company
shall not, on behalf of the Operating Partnership, take any of the following
actions without the prior consent of the holders of more than 50% (excluding
Units held by the Company) of the Units representing limited partner interests:
(i) dissolve the Operating Partnership, other than incident to a merger or sale
of substantially all of the Company's assets; or (ii) prior to the seventh
anniversary of the consummation of the Offering, sell the Office Property
located at 2260 E. Imperial Highway, at Kilroy LAX, other than incident to a
merger or sale of substantially all of the Company's assets.
TERM
The Operating Partnership will continue in full force and effect for 99 years
or until sooner dissolved pursuant to the terms of the Partnership Agreement.
142
<PAGE>
SHARES AVAILABLE FOR FUTURE SALE
GENERAL
Upon the consummation of the Offering and the Formation Transactions, the
Company will have outstanding 11,360,000 shares of Common Stock (including
60,000 restricted shares of Common Stock issued to an officer of the Company
who is not a Continuing Investor and excluding the 1,695,000 shares which are
subject to the Underwriters' over-allotment option), of which the 11,300,000
issued in the Offering (or 12,995,000 if the Underwriters' overallotment option
is exercised in full) will be freely tradeable in the public market by persons
other than "affiliates" of the Company without restriction or registration
under the Securities Act.
Each of the Continuing Investors has agreed not to, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale
or disposition) of any Units or shares of Common Stock or other capital stock
of the Company, or any securities convertible or exercisable or exchangeable
for any Units or shares of Common Stock or other capital stock for a period of
two years from the date of this Prospectus, and the Company has agreed not to
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale
or disposition) of any (other than pursuant to the Stock Incentive Plan) shares
of Common Stock or other capital stock of the Company, or any securities
convertible or exercisable or exchangeable for any Units or shares of Common
Stock or other capital stock of the Company, for a period of 180 days from the
date of this Prospectus, in each case without the prior written consent of
Prudential Securities Incorporated, on behalf of the Underwriters, subject to
certain limited exceptions. Notwithstanding the foregoing, 50% of the Units
received by John B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries in
connection with the Formation Transactions will be pledged to secure their
indemnification obligations pursuant to an agreement with the Company. See
"Formation and Structure of the Company."
The shares of Common Stock owned by "affiliates" of the Company, the 60,000
restricted shares of Common Stock issued to an officer of the Company who is
not a Continuing Investor and the shares of Common Stock issuable upon exchange
of Units (other than those issued pursuant to registration rights, as described
below), will be subject to Rule 144 promulgated under the Securities Act ("Rule
144") and may not be sold in the absence of registration under the Securities
Act unless an exemption from registration is available, including exemptions
contained in Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated with them in accordance with Rule 144) who has
beneficially owned "restricted shares" (defined generally as shares acquired
from the issuer or an affiliate in a non-public transaction) for at least two
years, as well as any person who purchased unrestricted shares on the open
market who may be deemed an affiliate of the Company, would be entitled to
sell, subject to certain manner of sale, public information and notice
requirements, within any three-month period, a number of shares of Common Stock
that does not exceed the greater of 1% of the then-outstanding number of shares
of Common Stock or 1% of the average weekly trading volume of those shares
during the four calendar weeks preceding each such sale. After restricted
shares are held for three years, a person who is not then deemed an affiliate
of the Company is entitled to sell such shares under Rule 144 without regard to
these volume limitations. Sales of shares of Common Stock by affiliates of the
Company will continue to be subject to the volume limitations, unless resold
under an effective registration statement under the Securities Act. The
Commission has stated that it will re-issue a notice of proposed rulemaking
which, if adopted in the form expected to be proposed, would shorten the
applicable holding period under Rule 144(d) and Rule 144(k) to one and two
years, respectively (from the current two- and three-year periods described
above). The Company cannot predict whether such amendments will be proposed or
adopted or the effect thereof on the trading market for its Common Stock.
The Company has established the Stock Incentive Plan for the purpose of
attracting and retaining executive officers, directors and other key employees.
See "Management--Stock Incentive Plan." Upon the consummation
143
<PAGE>
of the Offering, the Company will issue in the aggregate options to purchase
900,000 shares of Common Stock to executive officers, directors and certain key
employees and has reserved 500,000 additional shares of Common Stock for future
issuance under the Stock Incentive Plan.
Prior to the date of this Prospectus, there has been no public market for the
shares of Common Stock. The shares of Common Stock have been approved for
listing on the NYSE, subject to official notice of issuance. No prediction can
be made as to the effect, if any, that future sales of shares of Common Stock
(including sales pursuant to Rule 144) or the availability of shares of Common
Stock for future sale will have on the market price prevailing from time to
time. Sales of substantial amounts of shares of Common Stock (including shares
of Common Stock issued upon the exercise of options or the exchange of Units),
or the perception that such sales could occur, could adversely affect
prevailing market prices of the shares of Common Stock and impair the Company's
ability to obtain additional capital through the sale of equity securities. See
"Risk Factors--Shares Available for Future Sale." For a description of certain
restrictions on transfers of Common Stock held by certain stockholders of the
Company, see "Underwriting" and "Description of Capital Stock--Restrictions on
Ownership and Transfer."
REDEMPTION/EXCHANGE RIGHTS/REGISTRATION RIGHTS
Each limited partner of the Operating Partnership will have the right to
require the Operating Partnership to redeem part or all of their Units for cash
(based on the fair market value of an equivalent number of shares of Common
Stock at the time of such redemption) or, at the election of the Company, to
exchange such Units for shares of Common Stock, at any time beginning two years
after the completion of the Offering subject to the obligation of John B.
Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries, with respect to 50% of
their Units, to indemnify the Company in connection with the Formation
Transactions. See "Formation and Structure of the Company--Allocation of
Consideration in the Formation Transactions." If the Company does not elect to
exchange such Units for shares of Common Stock, a Unitholder that is a
corporation or a limited liability company may require the Company to issue
shares of Common Stock in lieu of cash, subject to the Ownership Limit or such
other amount as provided in the Company's Articles of Incorporation, as
applicable. Upon completion of the Formation Transactions, an aggregate of
approximately 2,692,374 Units will be held by limited partners of the Operating
Partnership. If the Company elects to exchange Units for Common Stock, each
Unit will be exchangeable for one share of Common Stock, subject to adjustment
in the event of stock splits, distribution of rights, extraordinary dividends
and similar events.
In order to protect the Company's status as a REIT, a holder of Units is
prohibited from exchanging such Units for shares of Common Stock, to the extent
that as a result of such exchange any person would own or would be deemed to
own, actually or constructively, more than 7.0% of the Common Stock, except to
the extent such holder has been granted an exception to the Ownership Limit.
See "Description of Capital Stock--Restrictions on Ownership and Transfer."
The Company has granted the Continuing Investors receiving Units in
connection with the Formation Transactions certain registration rights
(collectively, the "Registration Rights") with respect to the shares of Common
Stock acquired upon exchange of Units or otherwise (the "Registrable Shares").
The Company has agreed to file and generally keep continuously effective
beginning two years after the completion of the Offering a registration
statement covering the issuance of shares of Common Stock upon exchange of
Units and the resale thereof. In addition, the Company has granted the
Continuing Investors piggyback registration rights with respect to shares of
Common Stock acquired by them by any means. The Company also has agreed to
provide the Registration Rights to any other person who may become an owner of
Units, provided such person provides the Company with satisfactory
undertakings. The Company will bear expenses incident to its registration
obligations upon exercise of the Registration Rights, including the payment of
federal securities law and state Blue Sky registration fees, except that it
will not bear any underwriting discounts or commissions or transfer taxes
relating to registration of Registrable Shares.
144
<PAGE>
REINVESTMENT AND SHARE PURCHASE PLAN
The Company is considering the adoption of a Distribution Reinvestment and
Share Purchase Plan that would allow stockholders to automatically reinvest
cash distributions on their outstanding shares of Common Stock and/or Units to
purchase additional shares of Common Stock at a discounted price and without
the payment of any brokerage commission or service charge. Stockholders would
also have the option of investing limited additional amounts by making cash
payments. No decision has been made yet by the Company whether or not to adopt
such a plan and there can be no assurance that such a plan will ever be adopted
by the Company.
FEDERAL INCOME TAX CONSEQUENCES
The following summary of material federal income tax considerations regarding
the Company and the Offering is based on current law, is for general
information only and is not tax advice. The information set forth below, to the
extent that it constitutes matters of law, summaries of legal matters or legal
conclusions, is the opinion of Latham & Watkins, tax counsel to the Company, as
to the material federal income tax considerations relevant to purchasers of the
Common Stock. This discussion does not purport to deal with all aspects of
taxation that may be relevant to particular stockholders in light of their
personal investment or tax circumstances, or to certain types of stockholders
subject to special treatment under the federal income tax laws, including,
without limitation, certain financial institutions, life insurance companies,
dealers in securities or currencies, stockholders holding Common Stock as part
of a conversion transaction, as part of a hedge or hedging transaction, or as a
position in a straddle for tax purposes, tax-exempt organizations (except to
the extent discussed under the heading "--Taxation of Tax-Exempt Stockholders")
or foreign corporations, foreign partnerships and persons who are not citizens
or residents of the United States (except to the extent discussed under the
heading "Taxation of Non-U.S. Stockholders"). In addition, the summary below
does not consider the effect of any foreign, state, local or other tax laws
that may be applicable to prospective stockholders.
EACH PROSPECTIVE PURCHASER IS ADVISED TO CONSULT HIS OR HER OWN TAX ADVISOR
REGARDING THE SPECIFIC TAX CONSEQUENCES TO HIM OR HER OF THE PURCHASE,
OWNERSHIP AND SALE OF THE COMMON STOCK, INCLUDING THE FEDERAL, STATE, LOCAL,
FOREIGN AND OTHER TAX CONSEQUENCES OF SUCH PURCHASE, OWNERSHIP AND SALE AND OF
POTENTIAL CHANGES IN APPLICABLE TAX LAWS.
TAXATION OF THE COMPANY
General. The Company plans to make an election to be taxed as a REIT under
Sections 856 through 860 of the Code commencing with its taxable year ending
December 31, 1997. The Company believes that, commencing with its taxable year
ending December 31, 1997, it will be organized and will operate in such a
manner as to qualify for taxation as a REIT under the Code commencing with such
taxable year, and the Company intends to continue to operate in such a manner,
but no assurance can be given that it will operate or continue to operate in
such a manner so as to qualify or remain qualified.
These sections of the Code and the corresponding Treasury Regulations are
highly technical and complex. The following sets forth the material aspects of
the sections that govern the federal income tax treatment of a REIT and its
stockholders. This summary is qualified in its entirety by the applicable Code
provisions, rules and regulations promulgated thereunder, and administrative
and judicial interpretations thereof.
Latham & Watkins has acted as tax counsel to the Company in connection with
the Offering and the Company's election to be taxed as a REIT. In the opinion
of Latham & Watkins, commencing with the Company's taxable year ending December
31, 1997, the Company will be organized in conformity with the requirements for
qualification as a REIT, and its proposed method of operation will enable it to
meet the requirements for qualification and taxation as a REIT under the Code.
It must be emphasized that this opinion is based on various factual assumptions
relating to the organization and operation of the Company, the Operating
Partnership and the Services Company, and is conditioned upon certain
representations made by the Company as
145
<PAGE>
to factual matters. In addition, this opinion is based upon the factual
representations of the Company concerning its business and properties as set
forth in this Prospectus and assumes that the actions described in this
Prospectus are completed in a timely fashion. Moreover, such qualification and
taxation as a REIT depends upon the Company's ability to meet (through actual
annual operating results, distribution levels and diversity of stock ownership)
the various qualification tests imposed under the Code discussed below, the
results of which will not be reviewed by Latham & Watkins. Accordingly, no
assurance can be given that the actual results of the Company's operation for
any particular taxable year will satisfy such requirements. Further, the
anticipated income tax treatment described in this Prospectus may be changed,
perhaps retroactively, by legislative, administrative or judicial action at any
time. See "--Failure to Qualify."
If the Company qualifies for taxation as a REIT, it generally will not be
subject to federal corporate income taxes on its net income that is currently
distributed to stockholders. This treatment substantially eliminates the
"double taxation" (at the corporate and stockholder levels) that generally
results from investment in a regular corporation. However, the Company will be
subject to federal income tax as follows. First, the Company will be taxed at
regular corporate rates on any undistributed "REIT taxable income," including
undistributed net capital gains. Second, under certain circumstances, the
Company may be subject to the "alternative minimum tax" on its items of tax
preference. Third, if the Company has (i) net income from the sale or other
disposition of "foreclosure property" (defined generally as property acquired
by the Company through foreclosure or otherwise after a default on a loan
secured by the property or a lease of the property) which is held primarily for
sale to customers in the ordinary course of business or (ii) other
nonqualifying income from foreclosure property, it will be subject to tax at
the highest corporate rate on such income. Fourth, if the Company has net
income from prohibited transactions (which are, in general, certain sales or
other dispositions of property held primarily for sale to customers in the
ordinary course of business other than foreclosure property), such income will
be subject to a 100% tax. Fifth, if the Company should fail to satisfy the 75%
gross income test or the 95% gross income test (as discussed below), but has
nonetheless maintained its qualification as a REIT because certain other
requirements have been met, it will be subject to a 100% tax on an amount equal
to (a) the gross income attributable to the greater of the amount by which the
Company fails the 75% or 95% test multiplied by (b) a fraction intended to
reflect the Company's profitability. Sixth, if the Company should fail to
distribute during each calendar year at least the sum of (i) 85% of its REIT
ordinary income for such year, (ii) 95% of its REIT capital gain net income for
such year, and (iii) any undistributed taxable income from prior periods, the
Company would be subject to a 4% excise tax on the excess of such required
distribution over the amounts actually distributed. Seventh, with respect to
any asset (a "Built-In Gain Asset") acquired by the Company from a corporation
which is or has been a C corporation (i.e., generally a corporation subject to
full corporate-level tax) in a transaction in which the basis of the Built-In
Gain Asset in the hands of the Company is determined by reference to the basis
of the asset in the hands of the C corporation, if the Company recognizes gain
on the disposition of such asset during the ten-year period (the "Recognition
Period") beginning on the date on which such asset was acquired by the Company,
then, to the extent of the Built-In Gain (i.e., the excess of (a) the fair
market value of such asset over (b) the Company's adjusted basis in such asset,
determined as of the beginning of the Recognition Period), such gain will be
subject to tax at the highest regular corporate rate pursuant to Treasury
Regulations that have not yet been promulgated. The results described above
with respect to the recognition of Built-In Gain assume that the Company will
make an election pursuant to IRS Notice 88-19.
Requirements for Qualification. The Code defines a REIT as a corporation,
trust or association; (i) which is managed by one or more trustees or
directors; (ii) the beneficial ownership of which is evidenced by transferable
shares, or by transferable certificates of beneficial interest; (iii) which
would be taxable as a domestic corporation, but for Sections 856 through 859 of
the Code; (iv) which is neither a financial institution nor an insurance
company subject to certain provisions of the Code; (v) the beneficial ownership
of which is held by 100 or more persons; (vi) during the last half of each
taxable year not more than 50% in value of the outstanding stock of which is
owned, actually or constructively, by five or fewer individuals (as defined in
the Code to include certain entities); and (vii) which meets certain other
tests, described below, regarding the nature of its income and assets. The Code
provides that conditions (i) to (iv), inclusive, must be met during the entire
taxable year and that condition (v) must be met during at least 335 days of a
taxable year of twelve months, or during a
146
<PAGE>
proportionate part of a taxable year of less than twelve months. Conditions (v)
and (vi) will not apply until after the first taxable year for which an
election is made to be taxed as a REIT. For purposes of conditions (v) and
(vi), pension funds and certain other tax-exempt entities are treated as
individuals, subject to a "look-through" exception in the case of condition
(vi).
The Company believes that upon consummation of the Offering it will have
issued sufficient shares of Common Stock with sufficient diversity of ownership
pursuant to the Offering to allow it to satisfy conditions (v) and (vi). In
addition, the Company's Articles of Incorporation provides for restrictions
regarding the transfer and ownership of shares, which restrictions are intended
to assist the Company in continuing to satisfy the share ownership requirements
described in (v) and (vi) above. Such ownership and transfer restrictions are
described in "Description of Capital Stock--Restrictions on Ownership and
Transfer." These restrictions, however, may not ensure that the Company will,
in all cases, be able to satisfy the share ownership requirements described
above. If the Company fails to satisfy such share ownership requirements, the
Company's status as a REIT will terminate. See "--Failure to Qualify." In
addition, a corporation may not elect to become a REIT unless its taxable year
is the calendar year. The Company will have a calendar taxable year.
Ownership of a Partnership Interest. In the case of a REIT which is a partner
in a partnership, Treasury Regulations provide that the REIT will be deemed to
own its proportionate share of the assets of the partnership and will be deemed
to be entitled to the income of the partnership attributable to such share. In
addition, the character of the assets and gross income of the partnership shall
retain the same character in the hands of the REIT for purposes of Section 856
of the Code, including satisfying the gross income tests and the asset tests.
Thus, the Company's proportionate share of the assets and items of income of
the Operating Partnership (including the Operating Partnership's share of such
items of any subsidiary partnerships) will be treated as assets and items of
income of the Company for purposes of applying the requirements described
herein. A summary of the rules governing the federal income taxation of
partnerships and their partners is provided below in "--Tax Aspects of the
Operating Partnership." The Company has direct control of the Operating
Partnership and intends to operate it consistent with the requirements for
qualification as a REIT.
Income Tests. In order to maintain its qualification as a REIT, the Company
annually must satisfy three gross income requirements. First, at least 75% of
the Company's gross income (excluding gross income from prohibited
transactions) for each taxable year must be derived directly or indirectly from
investments relating to real property or mortgages on real property (including
"rents from real property" and, in certain circumstances, interest) or from
certain types of temporary investments. Second, at least 95% of the Company's
gross income (excluding gross income from prohibited transactions) for each
taxable year must be derived from such real property investments, dividends,
interest and gain from the sale or disposition of stock or securities (or from
any combination of the foregoing). Third, subject to certain exceptions in the
year in which the Company is liquidated, short-term gain from the sale or other
disposition of stock or securities, gain from prohibited transactions and gain
on the sale or other disposition of real property held for less than four years
(apart from involuntary conversions and sales of foreclosure property) must
represent less than 30% of the Company's gross income (including gross income
from prohibited transactions) for each taxable year. For purposes of applying
the 30% gross income test, the holding period of Properties acquired by the
Operating Partnership in the Formation Transactions will be deemed to have
commenced on the date of acquisition.
Rents received by the Company will qualify as "rents from real property" in
satisfying the gross income requirements for a REIT described above only if
several conditions are met. First, the amount of rent must not be based in
whole or in part on the income or profits of any person. However, an amount
received or accrued generally will not be excluded from the term "rents from
real property" solely by reason of being based on a fixed percentage or
percentages of receipts or sales. Second, the Code provides that rents received
from a tenant will not qualify as "rents from real property" in satisfying the
gross income tests if the REIT, or an actual or constructive owner of 10% or
more of the REIT, actually or constructively owns 10% or more of such tenant (a
"Related Party Tenant"). Third, if rent attributable to personal property,
leased in connection with a lease of real property, is greater than 15% of the
total rent received under the lease, then the portion of rent attributable to
such personal property will not qualify as "rents from real property." Finally,
for rents received to qualify as
147
<PAGE>
"rents from real property," the REIT generally must not operate or manage the
property or furnish or render services to the tenants of such property, other
than through an independent contractor from whom the REIT derives no revenue.
The REIT may, however, directly perform certain services that are "usually or
customarily rendered" in connection with the rental of space for occupancy only
and are not otherwise considered "rendered to the occupant" of the property.
The Company does not and will not; (i) charge rent for any property that is
based in whole or in part on the income or profits of any person (except by
reason of being based on a percentage of receipts or sales, as described
above); (ii) rent any property to a Related Party Tenant (unless the Company
determines in its discretion that the rent received from such Related Party
Tenant is not material and will not jeopardize the Company's status as a REIT);
(iii) derive rental income attributable to personal property (other than
personal property leased in connection with the lease of real property, the
amount of which is less than 15% of the total rent received under the lease);
or (iv) perform services considered to be rendered to the occupant of the
property, other than through an independent contractor from whom the Company
derives no revenue.
The Services Company will receive fees in exchange for the performance of
certain development activities. Such fees will not accrue to the Company, but
the Company will derive its allocable share of dividends from the Services
Company through its interest in the Operating Partnership, which qualify under
the 95% gross income test, but not the 75% gross income test. The Company
believes that the aggregate amount of any nonqualifying income in any taxable
year will not exceed the limit on nonqualifying income under the gross income
tests.
The Operating Partnership will receive fees in exchange for the performance
of certain management activities for third parties with respect to properties
in which the Operating Partnership does not own an interest, including certain
of the Excluded Properties. Such fees will result in nonqualifying income to
the Company under the 95% and 75% gross income tests. The Company believes that
the aggregate amount of nonqualifying income, including such fees, in any
taxable year will not exceed the limit on nonqualifying income under the gross
income tests.
The term "interest" generally does not include any amount received or accrued
(directly or indirectly) if the determination of such amount depends in whole
or in part on the income or profits of any person. However, an amount received
or accrued generally will not be excluded from the term "interest" solely by
reason of being based on a fixed percentage or percentages of receipts or
sales.
If the Company fails to satisfy one or both of the 75% or 95% gross income
tests for any taxable year, it may nevertheless qualify as a REIT for such year
if it is entitled to relief under certain provisions of the Code. These relief
provisions will be generally available if the Company's failure to meet such
tests was due to reasonable cause and not due to willful neglect, the Company
attaches a schedule of the sources of its income to its federal income tax
return, and any incorrect information on the schedule was not due to fraud with
intent to evade tax. It is not possible, however, to state whether in all
circumstances the Company would be entitled to the benefit of these relief
provisions. For example, if the Company fails to satisfy the gross income tests
because nonqualifying income that the Company intentionally incurs exceeds the
limits on such income, the IRS could conclude that the Company's failure to
satisfy the tests was not due to reasonable cause. If these relief provisions
are inapplicable to a particular set of circumstances involving the Company,
the Company would not qualify as a REIT. As discussed above in "Federal Income
Tax Considerations--Taxation of the Company--General," even if these relief
provisions apply, a 100% tax would be imposed on an amount equal to (a) the
gross income attributable to the greater of the amount by which the Company
failed the 75% or 95% test multiplied by (b) a fraction intended to reflect the
Company's profitability. No similar mitigation provision provides relief if the
Company fails the 30% gross income test. In such case, the Company would cease
to qualify as a REIT.
Any gain realized by the Company on the sale of any property held as
inventory or other property held primarily for sale to customers in the
ordinary course of business (including the Company's share of any such gain
realized by the Operating Partnership) will be treated as income from a
prohibited transaction that is subject to a 100% penalty tax. Such prohibited
transaction income may also have an adverse effect upon the Company's ability
to satisfy the income tests for qualification as a REIT. Under existing law,
whether property is held as inventory or primarily for sale to customers in the
ordinary course of a trade or business is a question of fact that
148
<PAGE>
depends on all the facts and circumstances with respect to the particular
transaction. The Operating Partnership intends to hold the Properties for
investment with a view to long-term appreciation, to engage in the business of
acquiring, developing, owning, and operating the Properties (and other
properties) and to make such occasional sales of the Properties as are
consistent with the Operating Partnership's investment objectives. There can be
no assurance, however, that the IRS might not contend that one or more of such
sales is subject to the 100% penalty tax.
Asset Tests. The Company, at the close of each quarter of its taxable year,
must also satisfy three tests relating to the nature of its assets. First, at
least 75% of the value of the Company's total assets (including its allocable
share of the assets held by the Operating Partnership) must be represented by
real estate assets including (i) its allocable share of real estate assets held
by partnerships in which the Company owns a direct or indirect interest (such
as the Operating Partnership) and (ii) stock or debt instruments held for not
more than one year purchased with the proceeds of a stock offering or long-term
(at least five years) public debt offering of the Company, cash, cash items and
government securities. Second, not more than 25% of the Company's total assets
(including its allocable share of the assets held by the Operating Partnership)
may be represented by securities other than those in the 75% asset class.
Third, of the investments included in the 25% asset class, the value of any one
issuer's securities owned by the Company may not exceed 5% of the value of the
Company's total assets and the Company may not own more than 10% of any one
issuer's outstanding voting securities.
As described above, the Operating Partnership owns 100% of the non-voting
preferred stock of the Services Company, and by virtue of its ownership of
interests in the Operating Partnership, the Company will be considered to own
its pro rata share of such stock. See "Structure and Formation of the Company."
The Operating Partnership does not and will not own any of the voting
securities of the Services Company, and therefore the Company will not be
considered to own more than 10% of the voting securities of the Services
Company. In addition, the Company believes (and has represented to tax counsel
to the Company for purposes of its opinion, as described above) that the value
of its pro rata share of the securities of the Services Company to be held by
the Operating Partnership will not exceed, at the closing of the Offering, 5%
of the total value of the Company's assets, and will not exceed such amount in
the future. Latham & Watkins, in rendering its opinion as to the qualification
of the Company as a REIT, is relying on the representation of the Company to
such effect. No independent appraisals have been obtained to support this
conclusion. There can be no assurance that the IRS will not contend that the
value of the securities of the Services Company held by the Company (through
the Operating Partnership) exceeds the 5% value limitation.
The 5% value test must be satisfied not only on the date that the Company
(directly or through the Operating Partnership) acquires securities in the
Services Company, but also each time the Company increases its ownership of
securities of the Services Company (including as a result of increasing its
interest in the Operating Partnership as a result of Company capital
contributions to the Operating Partnership or as limited partners exercise
their redemption/exchange rights). Although the Company plans to take steps to
ensure that it satisfies the 5% value test for any quarter with respect to
which retesting is to occur, there can be no assurance that such steps will
always be successful, or will not require a reduction in the Operating
Partnership's overall interest in the Services Company.
After initially meeting the asset tests at the close of any quarter, the
Company will not lose its status as a REIT for failure to satisfy the asset
tests at the end of a later quarter solely by reason of changes in asset
values. If the failure to satisfy the asset tests results from an acquisition
of securities or other property during a quarter (including as a result of the
Company increasing its interest in the Operating Partnership), the failure can
be cured by the disposition of sufficient nonqualifying assets within 30 days
after the close of that quarter. The Company intends to maintain adequate
records of the value of its assets to ensure compliance with the asset tests
and to take such other actions within 30 days after the close of any quarter as
may be required to cure any noncompliance. If the Company fails to cure
noncompliance with the asset tests within such time period, the Company would
cease to qualify as a REIT.
149
<PAGE>
Annual Distribution Requirements. The Company, in order to qualify as a REIT,
is required to distribute dividends (other than capital gain dividends) to its
stockholders in an amount at least equal to (i) the sum of (a) 95% of the
Company's "REIT taxable income" (computed without regard to the dividends paid
deduction and by excluding the Company's net capital gain) and (b) 95% of the
excess of the net income, if any, from foreclosure property over the tax
imposed on such income, minus (ii) the excess of the sum of certain items of
noncash income (i.e., income attributable to leveled stepped rents, original
issue discount or purchase money debt, or a like-kind exchange that is later
determined to be taxable) over 5% of "REIT Taxable Income" as described in
clause (i)(a) above. In addition, if the Company disposes of any Built-In Gain
Asset during its Recognition Period, the Company will be required, pursuant to
Treasury Regulations which have not yet been promulgated, to distribute at
least 95% of the Built-in Gain (after tax), if any, recognized on the
disposition of such asset. Such distributions must be paid in the taxable year
to which they relate, or in the following taxable year if declared before the
Company timely files its tax return for such year and if paid on or before the
first regular dividend payment after such declaration. Such distributions are
taxable to holders of Common Stock (other than tax-exempt entities, as
discussed below) in the year in which paid, even though such distributions
relate to the prior year for purposes of the Company's 95% distribution
requirement. The amount distributed must not be preferential--i.e., each holder
of shares of Common Stock must receive the same distribution per share. A REIT
may have more than one class of capital stock, as long as distributions within
each class are pro rata and non-preferential. To the extent that the Company
does not distribute all of its net capital gain or distributes at least 95%,
but less than 100%, of its "REIT taxable income," as adjusted, it will be
subject to tax thereon at regular ordinary and capital gain corporate tax
rates. The Company intends to make timely distributions sufficient to satisfy
these annual distribution requirements. In this regard, the Partnership
Agreement authorizes the Company, as general partner, to take such steps as may
be necessary to cause the Operating Partnership to distribute to its partners
an amount sufficient to permit the Company to meet these distribution
requirements.
It is expected that the Company's REIT taxable income will be less than its
cash flow due to the allowance of depreciation and other non-cash charges in
computing REIT taxable income. Accordingly, the Company anticipates that it
will generally have sufficient cash or liquid assets to enable it to satisfy
the distribution requirements described above. It is possible, however, that
the Company, from time to time, may not have sufficient cash or other liquid
assets to meet these distribution requirements due to timing differences
between (i) the actual receipt of income and actual payment of deductible
expenses and (ii) the inclusion of such income and deduction of such expenses
in arriving at taxable income of the Company. In the event that such timing
differences occur, in order to meet the distribution requirements, the Company
may find it necessary to arrange for short-term, or possibly long-term,
borrowings, to pay dividends in the form of taxable stock dividends.
If the Company fails to meet the 95% distribution test due to certain
adjustments (e.g., an increase in the Company's income or a decrease in its
deduction for dividends paid) by reason of a judicial decision or by agreement
with the IRS, the Company may pay a "deficiency dividend" to holders of shares
of Common Stock in the taxable year of the adjustment, which dividend would
relate back to the year being adjusted. In such case, the Company would also be
required to pay interest to the IRS and would be subject to any applicable
penalty provisions.
Furthermore, if the Company should fail to distribute during each calendar
year at least the sum of (i) 85% of its REIT ordinary income for such year,
(ii) 95% of its REIT capital gain income for such year, and (iii) any
undistributed taxable income from prior periods, the Company would be subject
to a 4% excise tax on the excess of such required distribution over the amounts
actually distributed.
FAILURE TO QUALIFY
If the Company fails to qualify for taxation as a REIT in any taxable year,
and the relief provisions do not apply, the Company will be subject to tax
(including any applicable alternative minimum tax) on its taxable income at
regular corporate rates. Distributions to stockholders in any year in which the
Company fails to qualify will not be deductible by the Company nor will they be
required to be made. As a result, the Company's failure
150
<PAGE>
to qualify as a REIT would reduce the cash available for distribution by the
Company to its stockholders. In addition, if the Company fails to qualify as a
REIT, all distributions to stockholders will be taxable as ordinary income, to
the extent of the Company's current and accumulated earnings and profits, and,
subject to certain limitations of the Code, corporate distributees may be
eligible for the dividends received deduction. Unless entitled to relief under
specific statutory provisions, the Company will also be disqualified from
taxation as a REIT for the four taxable years following the year during which
qualification was lost. It is not possible to state whether in all
circumstances the Company would be entitled to such statutory relief.
TAXATION OF TAXABLE U.S. STOCKHOLDERS GENERALLY
As used herein, the term "U.S. Stockholder" means a holder of shares of
Common Stock who (for United States federal income tax purposes) (i) is a
citizen or resident of the United States, (ii) is a corporation, partnership,
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, or (iii) is an estate or trust the
income of which is subject to United States federal income taxation regardless
of its source.
As long as the Company qualifies as a REIT, distributions made by the
Company out of its current or accumulated earnings and profits (and not
designated as capital gain dividends) will constitute dividends taxable to its
taxable U.S. Stockholders as ordinary income. Such distributions will not be
eligible for the dividends received deduction otherwise available with respect
to dividends received by U.S. Stockholders that are corporations.
Distributions made by the Company that are properly designated by the Company
as capital gain dividends will be taxable to taxable U.S. Stockholders as
long-term capital gains (to the extent that they do not exceed the Company's
actual net capital gain for the taxable year) without regard to the period for
which a U.S. Stockholder has held his shares of Common Stock. U.S.
Stockholders that are corporations may, however, be required to treat up to
20% of certain capital gain dividends as ordinary income. To the extent that
the Company makes distributions (not designated as capital gain dividends) in
excess of its current and accumulated earnings and profits, such distributions
will be treated first as a tax-free return of capital to each U.S.
Stockholder, reducing the adjusted basis which such U.S. Stockholder has in
his shares of Common Stock for tax purposes by the amount of such distribution
(but not below zero), with distributions in excess of a U.S. Stockholder's
adjusted basis in his shares taxable as long-term capital gains (or short-term
capital gain if the shares have been held for one year or less), provided that
the shares have been held as a capital asset. Dividends declared by the
Company in October, November, or December of any year and payable to a
stockholder of record on a specified date in any such month shall be treated
as both paid by the Company and received by the stockholder on December 31 of
such year, provided that the dividend is actually paid by the Company on or
before January 31 of the following calendar year. Stockholders may not include
in their own income tax returns any net operating losses or capital losses of
the Company.
Distributions made by the Company and gain arising from the sale or exchange
by a U.S. Stockholder of shares of Common Stock will not be treated as passive
activity income, and, as a result, U.S. Stockholders generally will not be
able to apply any "passive losses" against such income or gain. Distributions
made by the Company (to the extent they do not constitute a return of capital)
generally will be treated as investment income for purposes of computing the
investment income limitation. Gain arising from the sale or other disposition
of Common Stock, however, will not be treated as investment income unless the
U.S. Stockholder elects to reduce the amount of such U.S. Stockholder's total
net capital gain eligible for the 28% maximum capital gains rate by the amount
of such gain with respect to such Common Stock.
Upon any sale or other disposition of Common Stock, a U.S. Stockholder will
recognize gain or loss for federal income tax purposes in an amount equal to
the difference between (i) the amount of cash and the fair market value of any
property received on such sale or other disposition and (ii) the holder's
adjusted basis in such shares of Common Stock for tax purposes. Such gain or
loss will be capital gain or loss if the shares have been held by the U.S.
Stockholder as a capital asset, and will be long-term gain or loss if such
shares have been held for more than one year. In general, any loss recognized
by a U.S. Stockholder upon the sale or other disposition of shares of Common
Stock that have been held for six months or less (after applying certain
holding
151
<PAGE>
period rules) will be treated as a long-term capital loss, to the extent of
capital gain dividends received by such U.S. Stockholder from the Company which
were required to be treated as long-term capital gains.
BACKUP WITHHOLDING
The Company will report to its U.S. Stockholders and the IRS the amount of
dividends paid during each calendar year, and the amount of tax withheld, if
any. Under the backup withholding rules, a stockholder may be subject to backup
withholding at the rate of 31% with respect to dividends paid unless such
holder (a) is a corporation or comes within certain other exempt categories
and, when required, demonstrates this fact, or (b) provides a taxpayer
identification number, certifies as to no loss of exemption from backup
withholding, and otherwise complies with applicable requirements of the backup
withholding rules. A U.S. Stockholder that does not provide the Company with
his correct taxpayer identification number may also be subject to penalties
imposed by the IRS. Any amount paid as backup withholding will be creditable
against the stockholder's income tax liability. In addition, the Company may be
required to withhold a portion of capital gain distributions to any
stockholders who fail to certify their non-foreign status to the Company. See
"--Taxation of Non-U.S. Stockholders."
TAXATION OF TAX-EXEMPT STOCKHOLDERS
The IRS has ruled that amounts distributed as dividends by a qualified REIT
do not constitute unrelated business taxable income ("UBTI") when received by a
tax-exempt entity. Based on that ruling, provided that a tax-exempt shareholder
(except certain tax-exempt shareholders described below) has not held its
shares of Common Stock as "debt financed property" within the meaning of the
Code and such shares are not otherwise used in a trade or business, the
dividend income from the Company will not be UBTI to a tax-exempt shareholder.
Similarly, income from the sale of Common Stock will not constitute UBTI unless
such tax-exempt shareholder has held such shares as "debt financed property"
within the meaning of the Code or has used the shares in a trade or business.
For tax-exempt shareholders which are social clubs, voluntary employee
benefit associations, supplemental unemployment benefit trusts, and qualified
group legal services plans exempt from federal income taxation under Code
Sections 501(c)(7), (c)(9), (c)(17) and (c)(20), respectively, income from an
investment in the Company will constitute UBTI unless the organization is able
to properly deduct amounts set aside or placed in reserve for certain purposes
so as to offset the income generated by its investment in the Company. Such
prospective investors should consult their own tax advisors concerning these
"set aside" and reserve requirements.
Notwithstanding the above, however, a portion of the dividends paid by a
"pension held REIT" shall be treated as UBTI as to any trust which (i) is
described in Section 401(a) of the Code, (ii) is tax-exempt under Section
501(a) of the Code, and (iii) holds more than 10% (by value) of the interests
in the REIT. Tax-exempt pension funds that are described in Section 401(a) of
the Code are referred to below as "qualified trusts."
A REIT is a "pension held REIT" if (i) it would not have qualified as a REIT
but for the fact that Section 856(h)(3) of the Code provides that stock owned
by qualified trusts shall be treated, for purposes of the "not closely held"
requirement, as owned by the beneficiaries of the trust (rather than by the
trust itself), and (ii) either (a) at least one such qualified trust holds more
than 25% (by value) of the interests in the REIT, or (b) one or more such
qualified trusts, each of which owns more than 10% (by value) of the interests
in the REIT, hold in the aggregate more than 50% (by value) of the interests in
the REIT. The percentage of any REIT dividend treated as UBTI is equal to the
ratio of (i) the UBTI earned by the REIT (treating the REIT as if it were a
qualified trust and therefore subject to tax on UBTI) to (ii) the total gross
income of the REIT. A de minimis exception applies where the percentage is less
than 5% for any year. The provisions requiring qualified trusts to treat a
portion of REIT distributions as UBTI will not apply if the REIT is able to
satisfy the "not closely held" requirement without relying upon the "look-
through" exception with respect to qualified trusts. As a result of certain
limitations on transfer and ownership of Common Stock contained in the Articles
of Incorporation, the Company does not expect to be classified as a "pension
held REIT."
152
<PAGE>
TAXATION OF NON-U.S. STOCKHOLDERS
The rules governing United States federal income taxation of the ownership
and disposition of stock by persons that are, for purposes of such taxation,
nonresident alien individuals, foreign corporations, foreign partnerships or
foreign estates or trusts (collectively, "Non-U.S. Stockholders") are complex,
and no attempt is made herein to provide more than a brief summary of such
rules. Accordingly, the discussion does not address all aspects of United
States federal income tax and does not address state, local or foreign tax
consequences that may be relevant to a Non-U.S. Stockholder in light of its
particular circumstances, including, for example, if the investment in the
Company is connected to the conduct by a Non-U.S. Stockholder of a U.S. trade
or business. In addition, this discussion is based on current law, which is
subject to change, and assumes that the Company qualifies for taxation as a
REIT. Prospective Non-U.S. Stockholders should consult with their own tax
advisers to determine the impact of federal, state, local and foreign income
tax laws with regard to an investment in Common Stock, including any reporting
requirements.
Distributions. Distributions by the Company to a Non-U.S. Stockholder that
are neither attributable to gain from sales or exchanges by the Company of
United States real property interests nor designated by the Company as capital
gains dividends will be treated as dividends of ordinary income to the extent
that they are made out of current or accumulated earnings and profits of the
Company. Such distributions ordinarily will be subject to withholding of United
States federal income tax on a gross basis (that is, without allowance of
deductions) at a 30% rate or such lower rate as may be specified by an
applicable income tax treaty, unless the dividends are treated as effectively
connected with the conduct by the Non-U.S. Stockholder of a United States trade
or business. Dividends that are effectively connected with such a trade or
business will be subject to tax on a net basis (that is, after allowance of
deductions) at graduated rates, in the same manner as domestic stockholders are
taxed with respect to such dividends and are generally not subject to
withholding. Any such dividends received by a Non-U.S. Stockholder that is a
corporation may also be subject to an additional branch profits tax at a 30%
rate or such lower rate as may be specified by an applicable income tax treaty.
Pursuant to current Treasury Regulations, dividends paid to an address in a
country outside the United States are generally presumed to be paid to a
resident of such country for purposes of determining the applicability of
withholding discussed above and the applicability of a tax treaty rate. Under
proposed Treasury Regulations, not currently in effect, however, a Non-U.S.
Stockholder who wished to claim the benefit of an applicable treaty rate would
be required to satisfy certain certification and other requirements. Under
certain treaties, lower withholding rates generally applicable to dividends do
not apply to dividends from a REIT, such as the Company. Certain certification
and disclosure requirements must be satisfied to be exempt from withholding
under the effectively connected income exemption discussed above.
Distributions in excess of current or accumulated earnings and profits of the
Company will not be taxable to a Non-U.S. Stockholder to the extent that they
do not exceed the adjusted basis of the stockholders's Common Stock, but rather
will reduce the adjusted basis of such stock. For FIRPTA withholding purposes
(discussed below), such distributions (i.e., distributions that are not made
out of earnings and profits) will be treated as consideration for the sale or
exchange of shares of Common Stock. To the extent that such distributions
exceed the adjusted basis of a Non-U.S. Stockholder's Common Stock, they will
give rise to gain from the sale or exchange of his stock, the tax treatment of
which is described below. If it cannot be determined at the time a distribution
is made whether or not such distribution will be in excess of current or
accumulated earnings and profits, the distribution will generally be treated as
a dividend for withholding purposes. However, amounts thus withheld are
generally refundable if it is subsequently determined that such distribution
was, in fact, in excess of current or accumulated earnings and profits of the
Company.
Distributions to a Non-U.S. Stockholder that are designated by the Company at
the time of distribution as capital gains dividends (other than those arising
from the disposition of a United States real property interest) generally will
not be subject to United States federal income taxation, unless (i) investment
in the Common Stock is effectively connected with the Non-U.S. Stockholder's
United States trade or business, in which case the Non-U.S. Stockholder will be
subject to the same treatment as domestic stockholders with respect to such
gain (except
153
<PAGE>
that a stockholder that is a foreign corporation may also be subject to the 30%
branch profits tax, as discussed above), or (ii) the Non-U.S. Stockholder is a
nonresident alien individual who is present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States, in
which case the nonresident alien individual will be subject to a 30% tax on the
individual's capital gains.
Distributions to a Non-U.S. Stockholder that are attributable to gain from
sales or exchanges by the Company of United States real property interests will
cause the Non-U.S. Stockholder to be treated as recognizing such gain as income
effectively connected with a United States trade or business. Non-U.S.
Stockholders would thus generally be entitled to offset its gross income by
allowable deductions and would pay tax on the resulting taxable income at the
same rates applicable to domestic stockholders (subject to a special
alternative minimum tax in the case of nonresident alien individuals). Also,
such gain may be subject to a 30% branch profits tax in the hands of a Non-U.S.
Stockholder that is a corporation and is not entitled to treaty relief or
exemption, as discussed above. The Company is required to withhold 35% of any
such distribution. That amount is creditable against the Non-U.S. Stockholder's
United States federal income tax liability. To the extent that such withholding
exceeds the actual tax owed by the Non-U.S. Stockholder, the Non-U.S.
Stockholder may claim a refund from the IRS.
The Company or any nominee (e.g., a broker holding shares in street name) may
rely on a certificate of non-foreign status on Form W-8 or Form W-9 to
determine whether withholding is required on gains realized from the
disposition of United States real property interests. A domestic person who
holds shares of Common Stock on behalf of a Non-U.S. Stockholder will bear the
burden of withholding, provided that the Company has properly designated the
appropriate portion of a distribution as a capital gain dividend.
Sale of Common Stock. Gain recognized by a Non-U.S. Stockholder upon the sale
or exchange of shares of Common Stock generally will not be subject to United
States taxation unless such shares constitute a "United States real property
interest" within the meaning of the Foreign Investment in Real Property Tax Act
of 1980 ("FIRPTA"). The Common Stock will not constitute a "United States real
property interest" so long as the Company is a "domestically controlled REIT."
A "domestically controlled REIT" is a REIT in which at all times during a
specified testing period less than 50% in value of its stock is held directly
or indirectly by Non- U.S. Stockholders. The Company believes that at the
closing of the Offering it will be a "domestically controlled REIT," and
therefore that the sale of shares of Common Stock will not be subject to
taxation under FIRPTA. However, because the shares of Common Stock will be
publicly traded, no assurance can be given that the Company will continue to be
a "domestically-controlled REIT." Notwithstanding the foregoing, gain from the
sale or exchange of shares of Common Stock not otherwise subject to FIRPTA will
be taxable to a Non-U.S. Stockholder if the Non-U.S. Stockholder is a
nonresident alien individual who is present in the United States for 183 days
or more during the taxable year and has a "tax home" in the United States. In
such case, the nonresident alien individual will be subject to a 30% United
States withholding tax on the amount of such individual's gain.
If the Company does not qualify as or ceases to be a "domestically-controlled
REIT," gain arising from the sale or exchange by a Non-U.S. Stockholder of
shares of Common Stock would be subject to United States taxation under FIRPTA
as a sale of a "United States real property interest" unless the shares are
"regularly traded" (as defined by applicable Treasury Regulations) on an
established securities market (e.g., the New York Stock Exchange) and the
selling Non-U.S. Stockholder held no more than 5% (after applying certain
constructive ownership rules) of the shares of Common Stock during the shorter
of (i) the period during which the taxpayer held such shares, or (ii) the 5-
year period ending on the date of the disposition of such shares. If gain on
the sale or exchange of shares of Common Stock were subject to taxation under
FIRPTA, the Non-U.S. Stockholder would be subject to regular United States
income tax with respect to such gain in the same manner as a U.S. Stockholder
(subject to any applicable alternative minimum tax, a special alternative
minimum tax in the case of nonresident alien individuals and the possible
application of the 30% branch profits tax in the case of foreign corporations),
and the purchaser of the stock would be required to withhold and remit to the
IRS 10% of the purchase price.
154
<PAGE>
Backup Withholding Tax and Information Reporting. Backup withholding tax
(which generally is a withholding tax imposed at the rate of 31% on certain
payments to persons that fail to furnish certain information under the United
States information reporting requirements) and information reporting will
generally not apply to distributions paid to Non-U.S. Stockholders outside the
United States that are treated as (i) dividends subject to the 30% (or lower
treaty rate) withholding tax discussed above, (ii) capital gains dividends or
(iii) distributions attributable to gain from the sale or exchange by the
Company of United States real property interests. As a general matter, backup
withholding and information reporting will not apply to a payment of the
proceeds of a sale of Common Stock by or through a foreign office of a foreign
broker. Information reporting (but not backup withholding) will apply, however,
to a payment of the proceeds of a sale of Common Stock by a foreign office of a
broker that (a) is a United States person, (b) derives 50% or more of its gross
income for certain periods from the conduct of a trade or business in the
United States or (c) is a "controlled foreign corporation" (generally, a
foreign corporation controlled by United States stockholders) for United States
tax purposes, unless the broker has documentary evidence in its records that
the holder is a Non-U.S. Stockholder and certain other conditions are met, or
the stockholder otherwise establishes an exemption. Payment to or through a
United States office of a broker of the proceeds of a sale of Common Stock is
subject to both backup withholding and information reporting unless the
stockholder certifies under penalty of perjury that the stockholder is a Non-
U.S. Stockholder, or otherwise establishes an exemption. A Non-U.S. Stockholder
may obtain a refund of any amounts withheld under the backup withholding rules
by filing the appropriate claim for refund with the IRS.
New Proposed Regulations. The United States Treasury has recently issued
proposed Treasury Regulations regarding the withholding and information
reporting rules discussed above. In general, the proposed Treasury Regulations
do not alter the substantive withholding and information reporting requirements
but unify current certification procedures and forms and clarify and modify
reliance standards. If finalized in their current form, the proposed Treasury
Regulations would generally be effective for payments made after December 31,
1997, subject to certain transition rules.
TAX ASPECTS OF THE OPERATING PARTNERSHIP
General. Substantially all of the Company's investments will be held
indirectly through the Operating Partnership. In general, partnerships are
"pass-through" entities which are not subject to federal income tax. Rather,
partners are allocated their proportionate shares of the items of income, gain,
loss, deduction and credit of a partnership, and are potentially subject to tax
thereon, without regard to whether the partners receive a distribution from the
partnership. The Company will include in its income its proportionate share of
the foregoing partnership items for purposes of the various REIT income tests
and in the computation of its REIT taxable income. Moreover, for purposes of
the REIT asset tests, the Company will include its proportionate share of
assets held by the Operating Partnership. See "--Taxation of the Company."
Entity Classification. The Company's interest in the Operating Partnership
involves special tax considerations, including the possibility of a challenge
by the IRS of the status of the Operating Partnership as a partnership (as
opposed to an association taxable as a corporation) for federal income tax
purposes. If the Operating Partnership was treated as an association, it would
be taxable as a corporation and therefore be subject to an entity-level tax on
its income. In such a situation, the character of the Company's assets and
items of gross income would change and preclude the Company from satisfying the
asset tests and possibly the income tests (see "--Taxation of the Company--
Asset Tests" and "--Income Tests"), and in turn would prevent the Company from
qualifying as a REIT. See "Federal Income Tax Consequences--Taxation of the
Company--Failure to Qualify" above for a discussion of the effect of the
Company's failure to meet such tests for a taxable year. In addition, a change
in the Operating Partnership's status for tax purposes might be treated as a
taxable event in which case the Company might incur a tax liability without any
related cash distributions.
The IRS recently finalized and published certain Treasury Regulations (the
"Final Regulations") which provide that a domestic business entity not
otherwise classified as a corporation and which has at least two members (an
"Eligible Entity") may elect to be taxed as a partnership for federal income
tax purposes. The Final Regulations apply for tax periods beginning on or after
January 1, 1997 (the "Effective Date"). Unless it
155
<PAGE>
elects otherwise, an Eligible Entity in existence prior to the Effective Date
will have the same classification for federal income tax purposes that it
claimed under the entity classification Treasury Regulations in effect prior to
the Effective Date. In addition, an Eligible Entity which did not exist, or did
not claim a classification, prior to the Effective Date, will be classified as
a partnership for federal income tax purposes unless it elects otherwise. The
Company has not requested, and does not intend to request, a ruling from the
IRS that the Operating Partnership will be treated as a partnership for federal
income tax purposes. However, in connection with the closing of the Formation
Transactions, Latham & Watkins will deliver an opinion to the Company stating
that based on the provisions of the Partnership Agreement, certain factual
assumptions and representations described in the opinion and the Final
Regulations, the Operating Partnership will be treated as a partnership for
federal income tax purposes (and not as an association or a publicly traded
partnership taxable as a corporation). Unlike a private letter ruling, an
opinion of counsel is not binding on the IRS, and no assurance can be given
that the IRS will not challenge the status of the Operating Partnership as a
partnership for federal income tax purposes. If such challenge were sustained
by a court, the Operating Partnership could be treated as a corporation for
federal income tax purposes.
Partnership Allocations. Although a partnership agreement will generally
determine the allocation of income and loss among partners, such allocations
will be disregarded for tax purposes if they do not comply with the provisions
of Section 704(b) of the Code and the Treasury Regulations promulgated
thereunder. Generally, Section 704(b) and the Treasury Regulations promulgated
thereunder require that partnership allocations respect the economic
arrangement of the partners.
If an allocation is not recognized for federal income tax purposes, the item
subject to the allocation will be reallocated in accordance with the partners'
interests in the partnership, which will be determined by taking into account
all of the facts and circumstances relating to the economic arrangement of the
partners with respect to such item. The Operating Partnership's allocations of
taxable income and loss are intended to comply with the requirements of Section
704(b) of the Code and the Treasury Regulations promulgated thereunder.
The Partnership Agreement provides that net income or net loss of the
Operating Partnership will generally be allocated to the Company and the
limited partners in accordance with their respective percentage interests in
the Operating Partnership. Notwithstanding the foregoing, such agreement
provides that certain interest deductions and income from the discharge of
certain indebtedness of the Operating Partnership, attributable to loans
transferred to the Operating Partnership by certain Continuing Investors, will
be allocated disproportionately to such Continuing Investors. In addition,
allocations of net income or net loss will be subject to compliance with the
provisions of Sections 704(b) and 704(c) of the Code and the Treasury
Regulations promulgated thereunder.
Tax Allocations with Respect to the Properties. Pursuant to Section 704(c) of
the Code, income, gain, loss and deduction attributable to appreciated or
depreciated property (such as the Properties) that is contributed to a
partnership in exchange for an interest in the partnership, must be allocated
in a manner such that the contributing partner is charged with, or benefits
from, respectively, the unrealized gain or unrealized loss associated with the
property at the time of the contribution. The amount of such unrealized gain or
unrealized loss is generally equal to the difference between the fair market
value of contributed property at the time of contribution and the adjusted tax
basis of such property at such time (a "Book-Tax Difference"). Such allocations
are solely for federal income tax purposes and do not affect the book capital
accounts or other economic or legal arrangements among the partners. The
Operating Partnership was formed by way of contributions of appreciated
property (including the Properties). Consequently, the Partnership Agreement
requires that such allocations be made in a manner consistent with Section
704(c) of the Code.
In general, the principals of KI and other Continuing Investors who are
limited partners of the Operating Partnership will be allocated depreciation
deductions for tax purposes which are lower than such deductions would be if
determined on a pro rata basis. In addition, in the event of the disposition of
any of the contributed assets which have a Book-Tax Difference, all income
attributable to such Book-Tax Difference will generally be allocated to such
limited partners, and the Company will generally be allocated only its share of
capital gains
156
<PAGE>
attributable to appreciation, if any, occurring after the closing of the
Formation Transactions. This will tend to eliminate the Book-Tax Difference
over the life of the Operating Partnership. However, the special allocation
rules of Section 704(c) do not always entirely eliminate the Book-Tax
Difference on an annual basis or with respect to a specific taxable transaction
such as a sale. Thus, the carryover basis of the contributed assets in the
hands the Operating Partnership may cause the Company to be allocated lower
depreciation and other deductions, and possibly an amount of taxable income in
the event of a sale of such contributed assets in excess of the economic or
book income allocated to it as a result of such sale. This may cause the
Company to recognize taxable income in excess of cash proceeds, which might
adversely affect the Company's ability to comply with the REIT distribution
requirements. See "--Taxation of the Company--Annual Distribution
Requirements."
Treasury Regulations under Section 704(c) of the Code provide partnerships
with a choice of several methods of accounting for Book-Tax Differences,
including retention of the "traditional method" or the election of certain
methods which would permit any distortions caused by a Book-Tax Difference to
be entirely rectified on an annual basis or with respect to a specific taxable
transaction such as a sale. The Operating Partnership and the Company have not
yet decided which will be used to account for Book-Tax Differences with respect
to the Properties initially contributed to the Operating Partnership.
With respect to any property purchased by the Operating Partnership
subsequent to the admission of the Company to the Operating Partnership, such
property will initially have a tax basis equal to its fair market value, and
Section 704(c) of the Code will not apply.
Basis in Operating Partnership Interest. The Company's adjusted tax basis in
its interest in the Operating Partnership generally (i) will be equal to the
amount of cash and the basis of any other property contributed to the Operating
Partnership by the Company, (ii) will be increased by (a) its allocable share
of the Operating Partnership's income and (b) its allocable share of
indebtedness of the Operating Partnership and (iii) will be reduced, but not
below zero, by the Company's allocable share of (a) losses suffered by the
Operating Partnership, (b) the amount of cash distributed to the Company and
(c) by constructive distributions resulting from a reduction in the Company's
share of indebtedness of the Operating Partnership.
If the allocation of the Company's distributive share of the Operating
Partnership's loss exceeds the adjusted tax basis of the Company's partnership
interest in the Operating Partnership, the recognition of such excess loss will
be deferred until such time and to the extent that the Company has adjusted tax
basis in its interest in the Operating Partnership. To the extent that the
Operating Partnership's distributions, or any decrease in the Company's share
of the indebtedness of the Operating Partnership (such decreases being
considered a constructive cash distribution to the partners), exceeds the
Company's adjusted tax basis, such excess distributions (including such
constructive distributions) will constitute taxable income to the Company. Such
taxable income will normally be characterized as a capital gain, and if the
Company's interest in the Operating Partnership has been held for longer than
the long-term capital gain holding period (currently one year), such
distributions and constructive distributions will constitute long-term capital
gain.
SERVICES COMPANY
A portion of the cash to be used by the Operating Partnership to fund
distributions to partners, and in turn to fund distributions by the Company to
its stockholders, is expected to come from the Services Company, through
dividends on nonvoting preferred stock to be held by the Operating Partnership.
The Services Company will not qualify as a REIT and will pay federal, state and
local income taxes on its taxable income at normal corporate rates. The
federal, state and local income taxes that the Services Company is required to
pay will reduce the cash available for distribution by the Company to its
stockholders.
As described above, the value of the Company's indirect interest in the
securities of the Services Company held by the Operating Partnership cannot
exceed 5% of the value of the Company's total assets at the end of any calendar
quarter in which the Company acquires such securities or increases its interest
in such securities (including as a result of the Company increasing its
interest in the Operating Partnership). See "--Taxation of
157
<PAGE>
the Company--Asset Tests." This limitation may restrict the ability of the
Services Company to increase the size of its business unless the value of the
assets of the Company or the Operating Partnership is increasing at a
commensurate rate.
OTHER TAX CONSEQUENCES
The Company and its stockholders may be subject to state or local taxation in
various state or local jurisdictions, including those in which it or they
transact business or reside. The state and local tax treatment of the Company
and its stockholders may not conform to the federal income tax consequences
discussed above. Consequently, prospective stockholders should consult their
own tax advisors regarding the effect of state and local tax laws on an
investment in the Company.
ERISA CONSIDERATIONS
The following is a summary of material considerations arising under ERISA and
the prohibited transaction provisions of Section 4975 of the Code that may be
relevant to a prospective purchaser (including, with respect to the discussion
contained in "--Status of the Company, the Operating Partnership and the
Partnerships under ERISA," to a prospective purchaser that is not an employee
benefit plan, another tax-qualified retirement plan or an individual retirement
account ("IRA")). This discussion does not propose to deal with all aspects of
ERISA or Section 4975 of the Code or, to the extent not preempted, state law
that may be relevant to particular employee benefit plan shareholders
(including plans subject to Title I of ERISA, other employee benefit plans and
IRAs subject to the prohibited transaction provisions of Section 4975 of the
Code, and governmental plans and church plans that are exempt from ERISA and
Section 4975 of the Code but that may be subject to state law requirements) in
light of their particular circumstances.
A FIDUCIARY MAKING THE DECISION TO INVEST IN SHARES OF COMMON STOCK ON BEHALF
OF A PROSPECTIVE PURCHASER WHICH IS AN ERISA PLAN, A TAX-QUALIFIED RETIREMENT
PLAN, AN IRA OR OTHER EMPLOYEE BENEFIT PLAN IS ADVISED TO CONSULT ITS OWN LEGAL
ADVISOR REGARDING THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975
OF THE CODE, AND (TO THE EXTENT NOT PRE-EMPTED) STATE LAW WITH RESPECT TO THE
PURCHASE, OWNERSHIP OR SALE OF SHARES OF COMMON STOCK BY SUCH PLAN OR IRA.
Plans should also consider the entire discussion under the heading "Federal
Income Tax Considerations," as material contained therein is relevant to any
decision by an employee benefit plan, tax-qualified retirement plan or IRA to
purchase the Common Stock.
EMPLOYEE BENEFIT PLANS, TAX-QUALIFIED RETIREMENT PLANS AND IRAS
Each fiduciary of an employee benefit plan subject to Title I of ERISA (an
"ERISA Plan") should carefully consider whether an investment in shares of
Common Stock is consistent with its fiduciary responsibilities under ERISA. In
particular, the fiduciary requirements of Part 4 of Title I of ERISA require
(i) an ERISA Plan's investments to be prudent and in the best interests of the
ERISA Plan, its participants and beneficiaries, (ii) an ERISA Plan's
investments to be diversified in order to reduce the risk of large losses,
unless it is clearly prudent not to do so, (iii) an ERISA Plan's investments to
be authorized under ERISA and the terms of the governing documents of the ERISA
Plan and (iv) that the fiduciary not cause the ERISA Plan to enter into
transactions prohibited under Section 406 of ERISA. In determining whether an
investment in shares of Common Stock is prudent for purposes of ERISA, the
appropriate fiduciary of an ERISA Plan should consider all of the facts and
circumstances, including whether the investment is reasonably designed, as a
part of the ERISA Plan's portfolio for which the fiduciary has investment
responsibility, to meet the objectives of the ERISA Plan, taking into
consideration the risk of loss and opportunity for gain (or other return) from
the investment, the diversification, cash flow and funding requirements of the
ERISA Plan, and the liquidity and current return of the ERISA Plan's
158
<PAGE>
portfolio. A fiduciary should also take into account the nature of the
Company's business, the length of the Company's operating history and other
matters described under "Risk Factors."
The fiduciary of an IRA or of an employee benefit plan not subject to Title I
of ERISA because it is a governmental or church plan or because it does not
cover common law employees (a "Non-ERISA Plan") should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents, not prohibited under Section 4975 of the Code
and permitted under applicable state law.
STATUS OF THE COMPANY, THE OPERATING PARTNERSHIP AND THE SERVICES COMPANY UNDER
ERISA
A prohibited transaction may occur if the assets of the Company are deemed to
be assets of the investing Plans and disqualified persons deal with such
assets. In certain circumstances where a Plan holds an interest in an entity,
the assets of the entity are deemed to be Plan assets (the "look-through
rule"). Under such circumstances, any person that exercises authority or
control with respect to the management or disposition of such assets is a Plan
fiduciary. Plan assets are not defined in ERISA or the Code, but the United
States Department of Labor has issued regulations, effective March 13, 1987
(the "Regulations"), that outline the circumstances under which a Plan's
interest in an entity will be subject to the look-through rule.
The Regulations apply only to the purchase by a Plan of an "equity interest"
in an entity, such as common stock of a REIT. However, the Regulations provide
an exception to the look-through rule for equity interests that are "publicly-
offered securities."
Under the Regulations, a "publicly-offered security" is a security that is
(i) freely transferable, (ii) part of a class of securities that is widely-held
and (iii) either (a) part of a class of securities that is registered under
section 12(b) or 12(g) of the Exchange Act or (b) sold to a Plan as part of an
offering of securities to the public pursuant to an effective registration
statement under the Securities Act and the class of securities of which such
security is a part is registered under the Exchange Act within 120 days (or
such longer period allowed by the Securities and Exchange Commission) after the
end of the fiscal year of the issuer during which the offering of such
securities to the public occurred. Whether a security is considered "freely
transferable" depends on the facts and circumstances of each case. Generally,
if the security is part of an offering in which the minimum investment is
$10,000 or less, any restriction on or prohibition against any transfer or
assignment of such security for the purposes of preventing a termination or
reclassification of the entity for federal or state tax purposes will not of
itself prevent the security from being considered freely transferable. A class
of securities is considered "widely-held" if it is a class of securities that
is owned by 100 or more investors independent of the issuer and of one another.
The Company anticipates that the Common Stock will meet the criteria of the
publicly-offered securities exception to the look-through rule. First, the
Company anticipates that the Common Stock will be considered to be freely
transferable, as the minimum investment will be less than $10,000 and the only
restrictions upon its transfer are those required under federal tax laws to
maintain the Company's status as a REIT. Second, the Company believes that the
Common Stock will be held by 100 or more investors and that at least 100 or
more of these investors will be independent of the Company and of one another.
Third, the Common Stock will be part of an offering of securities to the public
pursuant to an effective registration statement under the Securities Act and
will be registered under the Exchange Act within 120 days after the end of the
fiscal year of the Company during which the offering of such securities to the
public occurs. Accordingly, the Company believes that if a Plan purchases the
Common Stock, the Company's assets should not be deemed to be Plan assets and,
therefore, that any person who exercises authority or control with respect to
the Company's assets should not be a Plan fiduciary.
159
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated ("Prudential Securities"), Donaldson, Lufkin & Jenrette
Securities Corporation, J.P. Morgan Securities Inc. and Smith Barney Inc. are
acting as representatives ("Representatives"), have severally agreed, subject
to the terms and conditions contained in the Underwriting Agreement, to
purchase from the Company the number of shares of Common Stock set forth below
opposite their respective names:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ----------
<S> <C>
Prudential Securities Incorporated................................
Donaldson, Lufkin & Jenrette Securities Corporation...............
J.P. Morgan Securities Inc........................................
Smith Barney Inc..................................................
----------
Total......................................................... 11,300,000
==========
</TABLE>
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are
purchased.
The Underwriters, through their Representatives, have advised the Company
that they propose to offer the shares of Common Stock to the public initially
at the public offering price set forth on the cover page of this Prospectus;
that the Underwriters may allow to selected dealers a concession of $ per
share, and that such dealers may re-allow a concession of $ per share to
certain other dealers. After the initial public offering, the offering price
and the concessions may be changed by the Representatives.
The Company has granted the Underwriters an option, exercisable for 30 days
from the date of this Prospectus, to purchase up to 1,695,000 additional shares
of Common Stock at the initial public offering price, less the underwriting
discounts and commissions, as set forth on the cover page of this Prospectus.
The Underwriters may exercise such option solely for the purpose of covering
over-allotments incurred in the sale of shares of Common Stock offered hereby.
To the extent such option to purchase is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares of Common Stock as the number set
forth next to such Underwriter's name in the preceding table bears to
11,300,000.
The Company has agreed to indemnify the several Underwriters against or to
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act. The Company has been advised that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. Nevertheless, the
Underwriters may seek to enforce such indemnification and rights to
contribution which are expressly provided under the Act.
The Representatives of the Underwriters have informed the Company that the
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
Each of the Continuing Investors has agreed not to, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, pledge, grant of any option to purchase or other sale or disposition) of
any Units or shares of Common Stock or other capital stock of the Company, or
any securities convertible or exercisable or exchangeable for any Units or
shares of Common Stock or other capital stock for a period of two years from
the date of this Prospectus, and the Company has agreed not to offer, sell,
offer to sell, contract to sell, grant any option to purchase or otherwise sell
or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of any
(other than pursuant to the Stock Incentive Plan) shares of Common Stock or
other capital stock of the Company, or any securities convertible or
exercisable or exchangeable for any Units or shares of Common Stock or other
capital stock of the Company, for a period of 180 days from the date of this
Prospectus, in each case without the prior written consent of Prudential
160
<PAGE>
Securities, on behalf of the Underwriters, subject to certain limited
exceptions. Notwithstanding the foregoing, 50% of the Units received by John B.
Kilroy, Sr., John B. Kilroy, Jr. and Kilroy Industries in connection with the
Formation Transactions will be pledged to secure their indemnification
obligations pursuant to an agreement with the Company. See "Formation and
Structure of the Company."
The shares of Common Stock have been approved for listing on the NYSE,
subject to official notice of issuance. In order to meet one of the
requirements for listing the shares of Common Stock on the NYSE, the
Underwriters have undertaken to sell (i) lots of 100 or more shares to a
minimum of 2,000 beneficial holders, (ii) a minimum of 1.1 million shares and
(iii) shares with a minimum aggregate market value of $40.0 million.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined through negotiations
between the Company and the Representatives. Among the factors to be considered
in such determination were prevailing market conditions, dividend yields and
financial characteristics of publicly traded REITs that the Company and the
Representatives believe to be comparable to the Company, the present state of
the Company's financial and business operations, the Company's management,
estimates of the business and earnings potential of the Company and the
prospects for the industry in which the Company operates.
An affiliate of J.P. Morgan & Co. is expected to provide the Mortgage Loans
and the proposed Credit Facility. In such event, the Company will pay (i) a
debt placement fee to an affiliate of J.P. Morgan & Co. for (a) the
$84.0 Million Loan equal to 0.5% of the principal amount thereof and (b) the
SeaTac Loan equal to 1.5% of the principal amount thereof, and (ii) an
origination fee to an affiliate of J.P. Morgan & Co. for the proposed Credit
Facility equal to 1.0% of the maximum amount available thereunder. It is
expected that an affiliate of Prudential Securities will participate in the
Credit Facility.
Upon consummation of the Offering, Prudential Securities will receive
approximately $31.0 million of the net proceeds from the Offering as repayment
of indebtedness, fees and related interest expected to be accrued and unpaid as
of such date. See "Use of Proceeds."
The Prudential Insurance Company of America, an affiliate of Prudential
Securities, is a tenant in one of the Office Properties located in Kilroy Long
Beach, leasing approximately 2,189 square feet of space.
The Company will pay to the Representatives advisory fees equal, in the
aggregate, to 0.75% of the gross proceeds received by the Company in the
Offering, for investment banking services relating to, among other things, the
structuring of the Formation Transactions and the Offering.
LEGAL MATTERS
Certain legal matters in connection with the Offering will be passed upon for
the Company by Latham & Watkins, Los Angeles, California. Legal matters
relating to Maryland law, including the validity of the issuance of the shares
of Common Stock offered hereby, will be passed upon for the Company by Ballard
Spahr Andrews & Ingersoll, Baltimore, Maryland. Certain legal matters will be
passed upon for the Underwriters by Kaye, Scholer, Fierman, Hays & Handler,
LLP, New York, New York. In addition, the description of federal income tax
consequences contained in this Prospectus under "Federal Income Tax
Consequences" is, to the extent that it constitutes matters of law, summaries
of legal matters or legal conclusions, the opinion of Latham & Watkins, special
tax counsel to the Company as to the material federal income tax consequences
of the Offering.
EXPERTS
The financial statements of Kilroy Realty Corporation as of September 30,
1996, the Kilroy Group as of September 30, 1996, December 31, 1995 and 1994 and
for each of the three years in the period ended December 31, 1995 and the nine
months ended September 30, 1995 and 1996 and the Acquisition Properties for
161
<PAGE>
the year ended December 31, 1995 and the nine months ended September 30, 1996
included in this Prospectus and the related financial statement schedule
included elsewhere in the Registration Statement have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their reports appearing herein
and elsewhere in the registration statement, and are included in reliance on
the reports of such firm, given upon their authority as experts in auditing and
accounting.
In addition, certain statistical information provided under the captions
"Prospectus Summary--The Company's Southern California Submarkets" and
"Business and Properties--The Company's Southern California Submarkets" has
been prepared by Robert Charles Lesser & Co., and is included herein in
reliance upon the authority of such firm as expert in, among other things, real
estate consulting and urban economics.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), 450 Fifth Street N.W., Washington, D.C. 20599, a Registration
Statement (of which this Prospectus is a part) on Form S-11 under the
Securities Act and the rules and regulations promulgated thereunder with
respect to the securities offered hereby. This Prospectus does not contain all
the information set forth in the Registration Statement and the exhibits and
financial statements thereto, certain portions of which have been omitted as
permitted by the rules and regulations of the Commission. Statements contained
in this Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference and the exhibits and schedules hereto. For further information
regarding the Company and the Common Stock offered hereby, reference is hereby
made to the Registration Statement and such exhibits and schedules, copies of
which may be examined without charge at, or copies obtained upon payment of
prescribed fees from, the Public Reference Section of the Commission at Room
1204, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the following regional offices of the Commission: 7 World Trade Center, 13th
Floor, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511, or by way of the Commission's
Internet address, http://www.sec.gov.
Following the consummation of the Offering, the Company will be required to
file reports and other information with the Commission pursuant to the Exchange
Act. In addition to applicable legal or New York Stock Exchange requirements,
if any, the Company intends to furnish its stockholders with annual reports
containing consolidated audited financial statements with a report thereon by
the Company's independent certified public accountants and with quarterly
reports containing unaudited condensed consolidated financial statements for
each of the first three quarters of each fiscal year.
162
<PAGE>
GLOSSARY
"Acquisition Properties" means the two office buildings and related assets
that comprise Kilroy Long Beach Phase I, the Thousand Oaks Office Property and
the Office and Industrial Properties located at 4123-4175 East La Palma,
Anaheim, California that are expected to be acquired by the Company
concurrently with the completion of the Offering, including, with respect to
Kilroy Long Beach Phase I, the ground lease with respect thereto, and the
Industrial Property located at 15752-12822 Monarch Street, Garden Grove,
California which was purchased by KI on behalf of the Company prior to
consummation of the Offering and will be assigned to the Company upon
consummation of the Offering.
"ADA" means the Americans with Disabilities Act, enacted on July 26, 1990.
"Audit Committee" means the audit committee of the Board of Directors.
"base rent" means gross rent excluding payments by tenants on account of real
estate taxes, operating expenses and utility expenses.
"Class A office buildings" means office buildings that have excellent
location and access, attract major corporate tenants, have high quality
finishes, are well maintained, professionally managed and are either new
buildings or buildings that are competitive with new buildings.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means common stock, par value $.01 per share, of the Company.
"Company" means Kilroy Realty Corporation and its consolidated subsidiaries
and the Services Company.
"Continuing Investors" shall mean the persons and entities receiving Units in
connection with the Formation Transactions. See "Note 1. Organization and Basis
of Presentation" to the Combined Financial Statements of the Kilroy Group.
"Credit Facility" means the $100.0 million revolving credit facility that the
Company expects to enter into shortly after consummation of the Offering.
"$84.0 Million Loan" means the $84.0 million mortgage loan secured by certain
of the Properties.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Executive Committee" means the executive committee of the Board of
Directors.
"Formation Transactions" means those transactions relating to the
organization of the Company and its subsidiaries, including the transfer of the
Properties and other assets to the Company, as described under "Formation and
Structure of the Company--Formation Transactions."
"Funds from Operations" means, in accordance with the resolution adopted by
the Board of Governors of NAREIT in its March 1995 White Paper, net income
(loss) computed 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 after
adjustments for unconsolidated partnerships and joint ventures.
"Independent Director" means a director of the Company who is not an
employee, officer or affiliate of the Company or a subsidiary or division
thereof, or a relative of a principal executive officer, and who is not an
163
<PAGE>
individual member of an organization acting as advisor, consultant or legal
counsel, receiving compensation on a continuing basis from the Company in
addition to director's fees.
"Industrial Properties" means the 12 industrial properties in which the
Company will have an ownership interest upon completion of the Offering,
including the Industrial Property located at 15752-12822 Monarch Street, Garden
Grove, California which was purchased by KI on behalf of the Company prior to
consummation of the Offering and will be assigned to the Company upon
consummation of the Offering.
"IRAs" means individual retirement accounts.
"IRS" means the Internal Revenue Service.
"KI" means Kilroy Industries, a California corporation, that operated the
Company's business prior to the consummation of the Offering and the Formation
Transactions.
"Kilroy Group" means KI and the partnerships and trusts affiliated with KI
that prior to the Offering owned the Properties (other than the Acquisition
Properties) and other assets being transferred to the Company in the Formation
Transactions. See "Note 1. Organization and Basis of Presentation" of the
historical financial statements of the Kilroy Group.
"Kilroy Realty Corporation" means Kilroy Realty Corporation, a Maryland
corporation with its principal office at 2250 East Imperial Highway, Suite
1200, El Segundo, California 90245.
"LAX" means Los Angeles International Airport.
"look-through rule" means the ERISA rule providing that in certain
circumstances where a Plan holds an interest in an entity, the assets of the
entity are deemed to be the Plan's assets.
"MGCL" means the Maryland General Corporation Law.
"Mortgage Loans" means the $96.0 million mortgage loans, the closing of which
is a condition to the completion of the Offering, to be obtained by the Company
concurrently with the consummation of the Offering.
"NAREIT" means the National Association of Real Estate Investment Trusts.
"net absorption" means, with respect to a specified market area, the net
increase in occupied rentable space.
"NYSE" means the New York Stock Exchange, Inc.
"Offering" means the initial public offering of shares of Common Stock of
Kilroy Realty Corporation pursuant to and as described in this Prospectus.
"Office Properties" means the 14 office properties in which the Company will
have an ownership interest upon completion of the Offering, including
consummation of the Formation Transactions and acquisition of the Acquisition
Properties.
"Omnibus Agreement" means the agreement by and among each of the Continuing
Investors and the Company pursuant to which the Continuing Investors will
contribute their interests in the Properties (other than the Acquisition
Properties), and certain other assets, in exchange for Units representing
limited partnership interests in the Operating Partnership.
"Operating Partnership" means Kilroy Realty, L.P., a Delaware limited
partnership with its office at 2250 East Imperial Highway, Suite 1200, El
Segundo, California 90245, organized in the Formation Transactions and through
which all of the Company's interests in the Properties will be held and real
estate activities will be conducted.
164
<PAGE>
"Ownership Limit" means the restriction contained in the Company's Articles
of Incorporation providing that, subject to certain exceptions, no holder may
own, or be deemed to own by virtue of the constructive ownership provisions of
the Code, more than 7.0% (by number or value, whichever is more restrictive) of
the outstanding shares of Common Stock.
"Partnership Agreement" means the Amended and Restated Agreement of Limited
Partnership of the Operating Partnership, as amended from time to time.
"Partnerships" means those corporations, general and limited partnerships and
trusts affiliated with Kilroy Industries whose Properties are being acquired by
the Operating Partnership.
"Plans" means employee benefit plans and IRAs.
"Preferred Stock" means shares of preferred stock, par value $.01 per share,
of the Company.
"Properties" means the real property and related assets owned by the
Partnerships and contributed to the Company by the Continuing Investors in
connection with the Formation Transactions, including, but not limited to, real
property and the Acquisition Properties.
"Prospectus" means this prospectus relating to the sale of up to 11,300,000
shares of Common Stock of the Company in the Offering, plus the 1,695,500
shares subject to the Underwriters' over-allotment option.
"Regulations" means regulations issued by the United States Department of
Labor defining "plan assets."
"REIT" means a real estate investment trust as defined in Section 856 of the
Code which meets the requirements for qualification as a REIT described in
Sections 856 through 860 of the Code.
"Related Party Tenant" means a tenant of a REIT in which the REIT, or an
owner of 10% or more of the REIT, actually or constructively owns a 10% or
greater ownership interest.
"rentable square feet" means a building's usable area plus common areas and
penetrations, expressed collectively in square feet which are allocated pro
rata to tenants.
"Representatives" means Prudential Securities Incorporated, Donaldson, Lufkin
& Jenrette Securities Corporation, J.P. Morgan Securities Inc. and Smith Barney
Inc., as representatives of the Underwriters.
"Rule 144" means Rule 144 promulgated under the Securities Act.
"SeaTac Loan" means the $12.0 million mortgage loan secured by the SeaTac
Office Center.
"Securities Act" means the Securities Act of 1933, as amended.
"Services Company" means Kilroy Services, Inc., a Maryland corporation with
its principal office at 2250 East Imperial Highway, El Segundo, CA 90245, which
will perform the Company's development activities and third party development
services, and the economic value of which will be owned 95.0% by the Operating
Partnership and 5.0% collectively by John B. Kilroy, Sr. and John B. Kilroy,
Jr.
"Southern California Area" means the counties of Los Angeles, Orange,
Riverside, San Bernardino and Ventura.
"Stock Incentive Plan" means the Company's stock incentive plan, as further
described in this Prospectus under the caption entitled "Management--Stock
Incentive Plan."
"Thousand Oaks Office Property" means the office building and related realty
located at 2829 Townsgate Road, Thousand Oaks, California.
165
<PAGE>
"Treasury Regulations" means regulations of the U.S. Department of Treasury
under the Code.
"triple net basis lease" means a lease pursuant to which a tenant is
responsible for the base rent in addition to the costs and expenses in
connection with and related to property taxes, insurance and repairs and
maintenance applicable to the leased space.
"Underwriters" means each of the Underwriters named in the section of this
Prospectus entitled "Underwriting."
"Underwriting Agreement" means the Underwriting Agreement between the Company
and the Representatives relating to the purchase of the Common Stock offered
hereby.
"Units" means limited and general partnership interests representing an
ownership interest in the Operating Partnership.
166
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Kilroy Realty Corporation
Pro Forma (Unaudited):
Pro Forma Condensed Consolidated Balance Sheet as of September 30,
1996................................................................... F-2
Notes to Pro Forma Condensed Consolidated Balance Sheet................. F-3
Pro Forma Condensed Consolidated Statements of Operations for the nine
months ended September 30, 1996 and the year ended December 31, 1995... F-5
Notes to Pro Forma Condensed Consolidated Statements of Operations...... F-7
Historical:
Independent Auditors' Report............................................ F-8
Balance Sheet as of September 30, 1996.................................. F-9
Notes to Balance Sheet.................................................. F-10
Kilroy Group (Predecessor Affiliates)
Independent Auditors' Report............................................ F-12
Combined Balance Sheets as of September 30, 1996, and December 31, 1995
and 1994............................................................... F-13
Combined Statements of Operations for the nine months ended September
30, 1996 and 1995 and the three years ended December 31, 1995, 1994 and
1993................................................................... F-14
Combined Statements of Accumulated Deficit for the three years ended
December 31, 1995, 1994 and 1993 and nine months ended September 30,
1996................................................................... F-15
Combined Statements of Cash Flows for the nine months ended September
30, 1996 and 1995 and the three years ended December 31, 1995, 1994 and
1993................................................................... F-16
Notes to Combined Financial Statements.................................. F-17
Acquisition Properties
Independent Auditors' Report............................................ F-27
Combined Historical Summaries of Certain Revenues and Certain Expenses
for the nine months ended September 30, 1996 and for the year ended
December 31, 1995...................................................... F-28
Notes to Combined Historical Summaries of Certain Revenues and Certain
Expenses............................................................... F-29
</TABLE>
F-1
<PAGE>
KILROY REALTY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1996
(UNAUDITED)
(DOLLARS IN THOUSANDS)
This unaudited pro forma condensed consolidated balance sheet is presented
as if (i) the transfer of the Properties and business and operations of the
Kilroy Group pursuant to the Formation Transactions and (ii) the Offering, the
Mortgage Loans and use of proceeds to repay indebtedness and purchase the
Acquisition Properties had each occurred on September 30, 1996. Such pro forma
information is based upon the historical balance sheet of the Kilroy Group at
September 30, 1996. The acquisition of the Properties (other than the
Acquisition Properties) and business and operations of the Kilroy Group will
be recorded by the Company at the historical cost reflected in the Kilroy
Group financial statements. The historical cost basis, similar to a pooling of
interests, will be used because these Properties have been under the common
control of John B. Kilroy, Sr. and John B. Kilroy, Jr. The purchase of the
Acquisition Properties will be accounted for as a purchase transaction. Future
acquisitions, including the possible purchase of Excluded Properties, will be
accounted as purchase transactions. This pro forma condensed balance sheet
should be read in conjunction with the pro forma condensed statement of
operations of the Company and the historical combined financial statements and
notes thereto of the Kilroy Group and the historical combined summaries of
certain revenues and certain expenses of the Acquisition Properties included
elsewhere in this Prospectus. See "The Company" and "Use of Proceeds."
The unaudited pro forma condensed balance sheet is not necessarily
indicative of what the actual financial position of the Company would have
been assuming the Company had been formed and the consummation of the
Formation Transactions, the Offering and the Mortgage Loans and the use of
proceeds thereof, and the acquisition of the Acquisition Properties at
September 30, 1996, nor does it purport to represent the future financial
position of the Company.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
-------------------------------------------------------
KILROY REALTY
KILROY REALTY KILROY CORPORATION
CORPORATION GROUP ACQUISITION PRO FORMA PRO FORMA
HISTORICAL HISTORICAL PROPERTIES ADJUSTMENTS CONSOLIDATED
------------- ---------- ----------- ----------- -------------
(A) (B)
ASSETS
<S> <C> <C> <C> <C> <C>
Rental properties, net
of accumulated
depreciation and
amortization........... $ -- $ 119,405 $ 58,022 (C) $ -- $177,427
Cash and cash
equivalents............ 1 (58,022)(C) 79,516 (D) 21,495
Tenant receivables,
net.................... 3,363 3,363
Deferred charges and
other assets, net of
accumulated
amortization........... 8,294 24 (E) 8,318
--------- --------- -------- --------- --------
Total................ $ 1 $ 131,062 -- $ 79,540 $210,603
========= ========= ======== ========= ========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS'
EQUITY (DEFICIT)
<S> <C> <C> <C> <C> <C>
Liabilities:
Debt................... $ -- $ 224,046 $(128,046)(F) $ 96,000
Accounts payable and
accrued expenses...... 2,600 2,600
Accrued construction
costs................. 460 (460)(G)
Accrued property
taxes................. 1,007 1,007
Accrued interest
payable............... 3,538 (3,538)(H)
Accrued cost of option
buy-out and tenant
improvements.......... 3,650 (2,260)(I) 1,390
Rent received in
advance and tenant
security deposits..... 8,984 8,984
--------- --------- -------- --------- --------
Total liabilities.... 244,285 (134,304) 109,981
--------- --------- -------- --------- --------
Minority interest....... 19,319 (J) 19,319
--------- --------- -------- --------- --------
Stockholders' equity
(deficit):
Common stock........... 1 113 (K) 114
Additional paid-in
capital............... 213,731 (K) 81,189
(19,319)(J)
(113,223)(L)
Accumulated deficit.... (113,223) 113,223 (L)
--------- --------- -------- --------- --------
Total stockholders'
equity (deficit).... 1 (113,223) 194,525 81,303
--------- --------- -------- --------- --------
Total................ $ 1 $ 131,062 $ 79,540 $210,603
========= ========= ======== ========= ========
</TABLE>
F-2
<PAGE>
KILROY REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA ADJUSTMENTS
These pro forma adjustments are to reflect the Offering, the Formation
Transactions, including the transfer of the Properties (other than the
Acquisition Properties), the purchase of the Acquisition Properties and the
Mortgage Loans and the use of proceeds thereof.
(A) Reflects Kilroy Realty Corporation audited balance sheet as of September
30, 1996.
(B) Reflects Kilroy Group audited historical combined balance sheet as of
September 30, 1996.
(C) Reflects the cost of the Acquisition Properties.
The Acquisition Properties, all of which will be acquired from unaffiliated
third parties, are as follows:
<TABLE>
<CAPTION>
PROPERTY CASH PURCHASE PRICE SELLER
-------- ------------------- ------
<S> <C> <C>
Westlake Plaza Centre.... $13,235 Westlake Plaza Partners
Long Beach Phase I....... 23,488 The Northwestern Mutual Life
Insurance Company
La Palma Business
Center.................. 12,208 Horowitz Brothers 1975 Trust
Monarch Building......... 9,091 ARGO REO Limited Partnership
-------
Total................ $58,022
=======
</TABLE>
The acquisition of the Acquisition Properties will be accounted for as
purchase transactions. The operations of the Sellers were not acquired and
land and buildings were the only assets purchased. The cost of the
properties will be allocated as follows:
<TABLE>
<S> <C>
Land............................................................. $19,297
Buildings and improvements....................................... 38,725
-------
$58,022
=======
</TABLE>
(D) The adjustment to pro forma cash and cash equivalents was determined as
follows:
<TABLE>
<S> <C>
. Net proceeds from the Offering after underwriting discount and
estimated issuance costs of $19,420............................ $ 206,580
. Net proceeds from the $84.0 Million Loan bearing interest at
8.2% and the $12.0 million SeaTac Loan bearing interest at 30-
day LIBOR plus 300 basis points after estimated issuance cost
of $480........................................................ 95,520
---------
. Net proceeds................................................... 302,100
. Repayment of mortgage debts net of forgiveness of $4,062 and
including $338 of additional loan fees ........................ (220,322)
. Purchase of Acquisition Properties............................. (58,022)
. Payment of accrued interest.................................... (912)
. Payment of debt issuance costs................................. (1,350)
---------
Net increase in cash and cash equivalents........................ $ 21,494
=========
(E)Reflects the net increase as follows:
. Issuance costs of the Mortgage Loans and the $100 million
Credit Facility................................................. $ 1,830
. Write-off of loan costs relating to repayment of mortgage
debt............................................................ (1,806)
---------
Net increase in deferred charge.................................. $ 24
=========
</TABLE>
F-3
<PAGE>
KILROY REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET (UNAUDITED)--(CONTINUED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(F) Reflects the net decrease as follows:
<TABLE>
<S> <C>
. Issuance of $84.0 Million Loan payable monthly until maturity
in 2005....................................................... $ 84,000
. Issuance of $12.0 million SeaTac Loan......................... 12,000
. Repayment of mortgage debt from net proceeds of the Offering
and the Mortgage Loans........................................ (224,046)
---------
Net decrease in mortgage debt................................... $(128,046)
=========
</TABLE>
(G) Amount represents a liability for construction costs which will not be
assumed by Kilroy Realty Corporation.
(H) Amount represents accrued interest which will not be assumed by Kilroy
Realty Corporation ($732) and accrued interest forgiven ($1,894) and paid
($912) in connection with the repayment of mortgage debt.
(I) Amount represents the portion of accrued cost of option buy-out which will
not be assumed by Kilroy Realty Corporation.
(J) Reflects the estimated minority interest of the Continuing Investors in
the Operating Partnership computed as follows:
<TABLE>
<S> <C>
Pro forma total assets.......................................... $ 210,602
Pro forma total liabilities..................................... (109,981)
---------
Pro forma net book value of Operating Partnership............... $ 100,621
=========
Minority interest of Continuing Investors at 19.2%.............. $ 19,319
=========
</TABLE>
(K) Reflects the issuance of 11,300,000 shares of Common Stock, par value $.01
per share, at an assumed initial Offering price of $20.00 per share. The
following table sets forth the adjustments to additional paid-in capital:
<TABLE>
<S> <C>
. Net proceeds from the Offering of Common Stock after
underwriting discounts and commissions and estimated issuance
costs of $19,420................................................ $206,580
Less: par value of Common Stock of 11,300,000 shares at $.01 per
share........................................................... (113)
. Accrued interest which will not be assumed by Kilroy Realty
Corporation..................................................... 732
. Write-off of loan costs relating to repayment of mortgage debt.. (1,806)
. Portion of liability for option buy-out cost which will not be
assumed by Kilroy Realty Corporation............................ 2,260
. Net gain on repayment of mortgage debt and accrued interest..... 5,618
. Liability for construction costs which will not be assumed by
Kilroy Realty Corporation....................................... 460
--------
Net adjustment to additional paid-in capital...................... $213,731
========
</TABLE>
(L) Reflects the reclassification of the accumulated deficit.
F-4
<PAGE>
KILROY REALTY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The unaudited pro forma condensed consolidated statements of operations are
presented as if (i) the transfer of the Properties (other than the Acquisition
Properties) and business and operations of the Kilroy Group pursuant to the
Formation Transactions and (ii) the Offering and the Mortgage Loans, and the
use of proceeds thereof to repay indebtedness and purchase the Acquisition
Properties, each had occurred on January 1, 1995. Such pro forma information
is based upon the historical results of operations of the Kilroy Group for the
nine months ended September 30, 1996, and the year ended December 31, 1995.
This pro forma condensed consolidated statement of operations should be read
in conjunction with the pro forma condensed consolidated balance sheet of the
Company and the historical combined financial statements and notes thereto of
the Kilroy Group and the historical combined summaries of certain revenues and
certain expenses of the Acquisition Properties and notes thereto included
elsewhere in this Prospectus. Reference is also made to "The Company" and "Use
of Proceeds."
The unaudited pro forma condensed consolidated statement of operations is
not necessarily indicative of what the actual results of operations of the
Company would have been assuming the Company had been formed and the
consummation of the Formation Transactions, the Offering and the Mortgage
Loans and the use of proceeds thereof, and the acquisition of the Acquisition
Properties at January 1, 1995, nor does it purport to represent the results of
operations of future periods of the Company.
F-5
<PAGE>
KILROY REALTY CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996
----------------------------------------------------------------
KILROY COMPANY PRO
GROUP ACQUISITION PRO FORMA PRO FORMA FORMA
HISTORICAL PROPERTIES SUBSIDIARY ADJUSTMENTS CONSOLIDATED
---------- ----------- ---------- ----------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental income.... $25,156 $5,875 $ (396)(A) $ 30,635
Tenant
reimbursements... 2,583 743 3,326
Parking.......... 1,317 1,317
Development and
management
fees............ 580 $(580)(B)
Lease termination
fees.............
Sale of air
rights...........
Other income..... 65 299 364
------- ------ ----- -------- ----------
Total revenues.. 29,701 6,917 (580) (396) 35,642
------- ------ ----- -------- ----------
EXPENSES:
Property
expenses......... 5,042 1,315 54 (C) 6,411
Real estate
taxes............ 970 417 70 (D) 1,457
General and
administrative.. 1,607 200 1,255 (E) 3,062
Ground lease..... 579 253 832
Option buy-out
cost............ 3,150 3,150
Development and
management
expenses........ 584 (584)(B)
Interest
expense.......... 16,234 (10,297)(F) 5,937
Depreciation and
amortization.... 6,838 830(G) 7,668
------- ------ ----- -------- ----------
Total expenses.. 35,004 3,015 (584) (8,918) 28,517
------- ------ ----- -------- ----------
Income (loss)
from operations
before equity in
income
of subsidiaries
and minority
interest........ (5,303) 3,902 4 8,522 7,125
Equity in income
of subsidiary... (58)(B) (58)
Minority
interest......... (1,357)(H) (1,357)
------- ------ ----- -------- ----------
Net income
(loss) $(5,303) $3,902 $ 4 $ 7,107 $ 5,710
======= ====== ===== ======== ==========
Average number of
shares
outstanding...... 11,360,000
==========
Net income per
common share(I).. $ 0.50
==========
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------------------------------------------
KILROY COMPANY PRO
GROUP ACQUISITION PRO FORMA PRO FORMA FORMA
HISTORICAL PROPERTIES SUBSIDIARY ADJUSTMENTS CONSOLIDATED
---------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Rental income.... $32,314 $7,355 $ (528)(A) $ 39,141
Tenant
reimbursements... 3,002 884 3,886
Parking.......... 1,582 1,582
Development and
management
fees............ 1,156 $(1,156)(B)
Lease termination
fees............. 100 100
Sale of air
rights........... 4,456 4,456
Other income..... 298 407 705
------- ------ ------- -------- ----------
Total revenues.. 42,908 8,646 (1,156) (528) 49,870
------- ------ ------- -------- ----------
EXPENSES:
Property
expenses......... 6,834 1,882 (48)(C) 8,668
Real estate
taxes............ 1,416 495 91 (D) 2,002
General and
administrative.. 2,152 303 1,628 (E) 4,083
Ground lease..... 789 338 1,127
Option buy-out
cost............
Development and
management
expenses........ 737 (737)(B)
Interest
expense.......... 24,159 (16,243)(F) 7,916
Depreciation and
amortization.... 9,474 1,106(G) 10,580
------- ------ ------- -------- ----------
Total expenses.. 45,561 4,124 (737) (14,572) 34,376
------- ------ ------- -------- ----------
Income (loss)
from operations
before equity in
income
of subsidiaries
and minority
interest........ (2,653) 4,522 (419) 14,044 15,494
Equity in income
of subsidiary... 136 (B) 136
Minority
interest......... (3,001)(H) (3,001)
------- ------ ------- -------- ----------
Net income
(loss) $(2,653) $4,522 $ (419) $ 11,179 $ 12,629
======= ====== ======= ======== ==========
Average number of
shares
outstanding...... 11,360,000
==========
Net income per
common share(I).. $ 1.11
==========
</TABLE>
F-6
<PAGE>
KILROY REALTY CORPORATION
NOTES TO PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED) (DOLLARS IN THOUSANDS)
(A) Represents the elimination of rental income received from Kilroy
Industries.
(B) Represents the elimination of the Services Company's gross revenues and
expenses and the recording of the equity in income of the Services Company
net of income taxes.
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
1996 1995
------------------- ------------
<S> <C> <C>
Development and management fees........... $ 580 $1,156
Development and management expenses....... (584) (737)
Elimination of nonrecurring Services
Company expenses......................... 80
----- ------
76 419
Elimination of management fees earned on
one of the Acquisition Properties........ (137) (181)
----- ------
(61) 238
Income tax expense........................ (95)
----- ------
Estimated service company net income
(loss)................................... (61) 143
----- ------
At 95% economic interest.................. $ (58) $ 136
===== ======
</TABLE>
(C) Represents the elimination of management fees charged to the Kilroy Group
by Kilroy Industries and the reclassification of expenses which previously
had not been allocated to individual properties.
(D) Represents incremental property taxes on the Acquisition Properties due to
change of ownership.
(E) Represents the estimated incremental increases in other general and
administrative expenses, including, without limitation, the incremental
general and administrative expenses to be incurred as a public company,
increases in other G&A expenses, less the effect of the reclassification
of property expenses which previously had not been allocated to individual
properties.
(F) Reflects reduction of interest expenses associated with the mortgage debts
assumed to be repaid using net proceeds from the Offering:
<TABLE>
<CAPTION>
NINE MONTHS YEAR ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
1996 1995
------------------- ------------
<S> <C> <C>
. Interest expense on the Mortgage Loans
(fixed interest rate of 8.2% on $84,000
with 25-year amortization; variable
interest rate of LIBOR plus 3.0% on
$12,000)................................ $ 5,892 $ 7,856
. Amortization of the issuance costs on
the Mortgage Loans...................... 45 60
. Interest expense on debt assumed to be
retired................................. (16,234) (24,159)
-------- --------
Net interest expense reduction.......... $(10,297) $(16,243)
======== ========
</TABLE>
(G) Represents depreciation expense calculated based on the cost of the
Acquisition Properties' buildings depreciated on the straight-line method
over a 35 year life.
(H) Represents the income allocated to the 19.2% minority interest (Units) in
the Operating Partnership owned by Continuing Investors.
(I) Pro forma net income per share of Common Stock is based upon 11,300,000
shares of Common Stock assumed to be outstanding in connection with the
Offering and 60,000 restricted shares of Common Stock granted to an
officer of the Company.
F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Kilroy Realty Corporation:
We have audited the accompanying balance sheet of Kilroy Realty Corporation
(the "Company") as of September 30, 1996. This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company at September 30, 1996 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
October 25, 1996
F-8
<PAGE>
KILROY REALTY CORPORATION
BALANCE SHEET
SEPTEMBER 30, 1996
<TABLE>
<S> <C>
ASSETS
Cash............................................................... $1,000
======
STOCKHOLDER'S EQUITY
Common Stock, $.01 par value, 10,000,000 shares authorized;
50 shares issued and outstanding.................................. $1,000
======
</TABLE>
See notes to balance sheet.
F-9
<PAGE>
KILROY REALTY CORPORATION
NOTES TO BALANCE SHEET
SEPTEMBER 30, 1996
1. FORMATION OF THE COMPANY
Kilroy Realty Corporation (the "Company") was incorporated in Maryland on
September 13, 1996. The Company will file a Registration Statement on Form S-
11 with the Securities and Exchange Commission with respect to a proposed
public offering (the "Offering") of 11,300,000 shares of Common Stock. The
Company has been formed to succeed to the business of the Kilroy Group
consisting of a portfolio of 19 office and industrial properties (the "Kilroy
Properties") and the real estate ownership, acquisition, development, leasing
and management businesses historically conducted by Kilroy Industries and
related partnerships. The Company's assets will be owned and controlled by,
and all of its operations will be conducted through, Kilroy Realty, L.P. (the
"Operating Partnership") and other subsidiaries. The Company will control, as
the sole general partner, and will initially own an approximately 80.8%
interest in, the Operating Partnership. The Operating Partnership will conduct
certain development services through Kilroy Services, Inc. ("Services
Company"). John B. Kilroy, Sr. and John B. Kilroy, Jr. together will own 100%
of the voting common stock representing a 5% economic interest in the Services
Company. The Operating Partnership will own 100% of the nonvoting preferred
stock representing 95% of the economic interest in the Services Company. The
nonvoting preferred stock will not have any voting rights except as provided
by law, will not be convertible or exchangeable into other securities of the
Company, will have no redemption rights or any appraisal rights except as
provided by law and the holders thereof will have no preemptive rights to
subscribe for any securities of the Company. Holders of the nonvoting
preferred stock will participate in all distributions from the Services
Company and receive 95% of all distributions, if and when such distributions
are authorized and declared by the Services Company's board of directors out
of funds legally available therefor. Upon dissolution, holders of nonvoting
preferred stock will be entitled to receive preferential liquidating
distributions in an amount equal to 95% of the value of the Services Company's
assets. The Operating Partnership's investment in the Services Company will be
accounted for under the equity method. As of October 25, 1996, the Services
Company had not yet been formed.
Prior to and simultaneous with the consummation of the Offering, the
Company, the Operating Partnership and the Continuing Investors intend to
engage in certain formation transactions (the "Formation Transactions")
summarized as follows:
(i) The Continuing Investors will contribute all of their interests in
the Kilroy Properties to the Operating Partnership in exchange for units
representing limited partnership interests in the Operating Partnership
("Units"). The transfer of the Kilroy Properties, which are under the
common control of John B. Kilroy, Sr. and John B. Kilroy, Jr., to the
Operating Partnership will be accounted for at the historical cost of the
Continuing Investors' interests therein similar to a pooling of interests;
(ii) The Company will sell shares of Common Stock in the Offering and
will contribute the net proceeds from the Offering (estimated to be
approximately $206.6 million after deduction of estimated offering
expenses) to the Operating Partnership in exchange for Units in the
Operating Partnership. The Operating Partnership will use substantially all
of such net proceeds, together with the net proceeds of borrowings under
the Mortgage Loans, discussed below, for the repayment of certain existing
mortgage and loan indebtedness on the Kilroy Properties, the acquisition of
certain properties (the "Acquisition Properties") and additions to working
capital cash reserves;
(iii) The Operating Partnership will enter into an $84.0 million secured
mortgage financing and a $12.0 million secured mortgage financing (the
"Mortgage Loans"), which will be nonrecourse obligations of the Operating
Partnership; and
(iv) The Company will amend its charter and authorize 150,000,000 shares
of Common Stock, $.01 par value per share, and 30,000,000 shares of
Preferred Stock, par value $.01 per share.
F-10
<PAGE>
KILROY REALTY CORPORATION
NOTES TO BALANCE SHEET--(CONTINUED)
SEPTEMBER 30, 1996
2. INCOME TAXES
It is the intent of the Company to qualify as a real estate investment trust
("REIT") under the Internal Revenue Code of 1986, as amended. As a REIT, the
Company generally will not be subject to federal income tax to the extent that
it distributes at least 95% of its REIT taxable income to its stockholders.
REITs are subject to a number of organizational and operational requirements.
If the Company fails to qualify as a REIT in any taxable year, the Company
will be subject to federal income tax (including any applicable alternative
minimum tax) on its taxable income at regular corporate tax rates.
3. OFFERING COSTS
In connection with the Offering, affiliates have or will incur legal,
accounting and related costs which will be reimbursed by the Company upon the
consummation of the Offering. These costs will be deducted from the gross
proceeds of the Offering.
4. STOCK INCENTIVE PLAN AND RESTRICTED STOCK GRANT
Prior to the consummation of the Offering, the Company intends to adopt and
have its shareholders approve a stock incentive plan (the "Stock Incentive
Plan"), for the purpose of attracting and retaining executive officers,
directors and employees. A maximum of 1,460,000 shares of Common Stock
(subject to adjustment) will be reserved by the Company for issuance under the
Stock Incentive Plan, including 60,000 restricted shares of Common Stock which
will be issued to an officer of the Company upon consummation of the Offering
and which will vest in equal annual installments over a three-year period.
******
F-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of Kilroy Group:
We have audited the accompanying combined balance sheets of Kilroy Group
(described in Note 1) as of September 30, 1996 and December 31, 1995 and 1994,
and the related combined statements of operations, accumulated deficit, and
cash flows for the nine months ended September 30, 1996 and each of the three
years in the period ended December 31, 1995 and the combined statements of
operations and cash flows for the nine months ended September 30, 1995. These
financial statements are the responsibility of the management of Kilroy Group.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Kilroy Group as of September 30, 1996 and
December 31, 1995 and 1994, and the results of its operations and its cash
flows for the nine months ended September 30, 1996 and 1995 and for each of
the three years in the period ended December 31, 1995 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Los Angeles, California
December 20, 1996
F-12
<PAGE>
KILROY GROUP
COMBINED BALANCE SHEETS
SEPTEMBER 30, 1996 AND DECEMBER 31, 1995 AND 1994
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, --------------------
1996 1995 1994
------------- --------- ---------
<S> <C> <C> <C>
ASSETS
RENTAL PROPERTIES (Notes 1, 2, 4, 5, 6 and
9):
Land..................................... $ 12,490 $ 12,490 $ 12,490
Buildings and improvements............... 214,637 212,493 211,331
--------- --------- ---------
Total rental properties................ 227,127 224,983 223,821
Accumulated depreciation and
amortization............................ (107,722) (101,774) (93,475)
--------- --------- ---------
Rental properties, net................. 119,405 123,209 130,346
TENANT RECEIVABLES, NET (Note 2)........... 3,363 3,973 3,961
DEFERRED CHARGES AND OTHER ASSETS, NET
(Notes 2, 3 and 7)........................ 8,294 5,675 8,944
--------- --------- ---------
TOTAL...................................... $ 131,062 $ 132,857 $ 143,251
========= ========= =========
LIABILITIES AND ACCUMULATED DEFICIT
LIABILITIES:
Debt (Notes 4, 8 and 9).................. $ 224,046 $ 233,857 $ 250,059
Accounts payable and accrued expenses.... 2,600 2,590 3,482
Accrued construction costs (Note 2)...... 460 874 --
Accrued property taxes (Note 2).......... 1,007 1,399 1,563
Property tax refund payable to tenants
(Note 3)................................ -- -- 1,500
Accrued interest payable (Note 4)........ 3,538 7,251 8,057
Accrued cost of option buy-out and tenant
improvements (Note 5)................... 3,650 -- --
Rents received in advance and tenant
security deposits (Note 2).............. 8,984 8,712 8,924
--------- --------- ---------
Total liabilities...................... 244,285 254,683 273,585
COMMITMENTS AND CONTINGENCIES (Note 6).....
ACCUMULATED DEFICIT (Note 1)............... (113,223) (121,826) (130,334)
--------- --------- ---------
TOTAL...................................... $ 131,062 $ 132,857 $ 143,251
========= ========= =========
</TABLE>
See notes to combined financial statements.
F-13
<PAGE>
KILROY GROUP
COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER
30, DECEMBER 31,
----------------- -------------------------
1996 1995 1995 1994 1993
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
REVENUES (Notes 2 and 5):
Rental income (Note 7).......... $25,156 $ 24,056 $32,314 $31,220 $34,239
Tenant reimbursements (Note 3).. 2,583 2,377 3,002 1,643 4,916
Parking......................... 1,317 1,193 1,582 1,357 1,360
Development and management
fees........................... 580 926 1,156 919 751
Sale of air rights (Note 2)..... -- 4,456 4,456 -- --
Lease termination fees.......... -- -- 100 300 5,190
Other income (Note 3)........... 65 211 298 784 188
------- -------- ------- ------- -------
Total revenues................ 29,701 33,219 42,908 36,223 46,644
------- -------- ------- ------- -------
EXPENSES:
Property expenses (Notes 2 and
7)............................. 5,042 5,045 6,834 6,000 6,391
Real estate taxes (Note 3)...... 970 1,088 1,416 (448) 2,984
General and administrative...... 1,607 1,554 2,152 2,467 1,113
Ground leases (Note 6).......... 579 542 789 913 941
Development and management
expenses....................... 584 564 737 468 581
Option buy-out cost (Note 5).... 3,150 -- -- -- --
Interest expense................ 16,234 18,660 24,159 25,376 25,805
Depreciation and amortization... 6,838 7,171 9,474 9,962 10,905
------- -------- ------- ------- -------
Total expenses................ 35,004 34,624 45,561 44,738 48,720
------- -------- ------- ------- -------
LOSS BEFORE EXTRAORDINARY GAINS.. (5,303) (1,405) (2,653) (8,515) (2,076)
EXTRAORDINARY GAINS
(Note 4)........................ 20,095 15,267 15,267 1,847 --
------- -------- ------- ------- -------
NET INCOME (LOSS)................ $14,792 $ 13,862 $12,614 $(6,668) $(2,076)
======= ======== ======= ======= =======
</TABLE>
See notes to combined financial statements.
F-14
<PAGE>
KILROY GROUP
COMBINED STATEMENTS OF ACCUMULATED DEFICIT
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 AND
NINE MONTHS ENDED SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, JANUARY 1, 1993............................................ $(102,148)
Deemed and actual distributions to partners, net of
contributions.................................................... (10,736)
Net loss.......................................................... (2,076)
---------
BALANCE, DECEMBER 31, 1993.......................................... (114,960)
Deemed and actual distributions to partners, net of
contributions.................................................... (8,706)
Net loss.......................................................... (6,668)
---------
BALANCE, DECEMBER 31, 1994.......................................... (130,334)
Deemed and actual distributions to partners, net of
contributions.................................................... (4,106)
Net income........................................................ 12,614
---------
BALANCE, DECEMBER 31, 1995.......................................... (121,826)
Deemed and actual distributions to partners, net of
contributions.................................................... (6,189)
Net income........................................................ 14,792
---------
BALANCE, SEPTEMBER 30, 1996......................................... $(113,223)
=========
</TABLE>
See notes to combined financial statements.
F-15
<PAGE>
KILROY GROUP
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30, DECEMBER 31,
-------------------- ---------------------------
1996 1995 1995 1994 1993
--------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss).......... $ 14,792 $ 13,862 $ 12,614 $(6,668) $(2,076)
Adjustment to reconcile net
income (loss) to net cash
provided by (used in)
operating activities:
Depreciation and
amortization............. 6,838 7,171 9,474 9,962 10,905
Net (increase) decrease:
Provision for bad debts.. 920 839 1,000 909 350
Extraordinary gains...... (20,095) (15,267) (15,267) (1,847) --
Changes in assets and
liabilities:
Tenant receivables....... (310) (571) (1,012) (760) (695)
Deferred charges and
other assets, net ...... (1,688) 2,331 2,095 (3,212) 34
Accounts payable and
accrued expenses........ 10 1,519 (892) 2,274 (698)
Accrued construction
costs................... (414) -- 874 -- --
Accrued property taxes... (392) (671) (164) (2,411) 1,676
Property tax refund
payable to tenants...... -- (1,500) (1,500) 1,500 --
Accrued interest
payable................. 1,945 2,274 3,061 1,846 1,368
Accrued cost of option
buy-out and tenant
improvements............ 3,650 -- -- -- --
Rents received in advance
and tenant security
deposits................ 272 (717) (212) 5,014 593
--------- --------- --------- ------- -------
Net cash provided by
operating activities... 5,528 9,270 10,071 6,607 11,457
--------- --------- --------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Expenditures for rental
properties................ (2,140) (446) (1,162) (1,765) (633)
Reimbursement of tenant
improvements.............. -- -- -- -- 2,661
--------- --------- --------- ------- -------
Net cash (used in)
provided by investing
activities............. (2,140) (446) (1,162) (1,765) 2,028
--------- --------- --------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net proceeds received from
debt...................... 21,057 489 625 11,127 7,191
Principal payments on
debt...................... (18,256) (2,207) (5,428) (7,263) (9,940)
Deemed and actual
distributions to
partners.................. (6,189) (7,106) (4,106) (8,706) (10,736)
--------- --------- --------- ------- -------
Net cash (used in)
provided by financing
activities............. $ (3,388) $ (8,824) $ (8,909) (4,842) (13,485)
========= ========= ========= ======= =======
SUPPLEMENTAL CASH FLOW
INFORMATION:
Cash paid during the period
for interest.............. $ (14,289) $ (16,386) $ (21,098) (23,530) (24,437)
========= ========= ========= ======= =======
</TABLE>
See notes to combined financial statements.
F-16
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995 AND
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. ORGANIZATION AND BASIS OF PRESENTATION
Organization--Kilroy Group (not a legal entity) consists of the combination
of Kilroy Industries ("KI") and general and limited partnerships, a limited
liability company and trusts, the properties of which are under common control
of KI and/or its stockholders, John B. Kilroy, Sr. and John B. Kilroy, Jr. The
entities referred to collectively as Kilroy Group ("KG") are engaged in the
acquisition, development, ownership and operation of 19 office and industrial
properties (the "Kilroy Properties") located in California, Washington and
Arizona. KI has historically provided acquisition, financing, construction and
leasing services with respect to the Kilroy Properties. KI has also provided
development services to third-party owners of properties for a fee.
The names of the corporation, partnerships and trusts which directly own the
Kilroy Properties are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OWNERSHIP
OF PROPERTY BY KI,
JOHN B. KILROY, SR.,
AND/OR
ENTITY NAME JOHN B. KILROY, JR. PROPERTY LOCATION
----------- -------------------- -------- --------
<S> <C> <C> <C>
OFFICE:
Kilroy Airport
Associates 100% Kilroy Airport Center at El Segundo:
2240 E. Imperial Highway El Segundo, California
2250 E. Imperial Highway El Segundo, California
2260 E. Imperial Highway El Segundo, California
Kilroy Long Beach
Partner II 99%(1) Kilroy Airport Center Long Beach:
3750 Kilroy Airport Way Long Beach, California
3760 Kilroy Airport Way Long Beach, California
3780 Kilroy Airport Way Long Beach, California
Kilroy Freehold
Industrial
Development
Organization
("K-FIDO") 83%(2) 185/181 S. Douglas Street El Segundo, California
SeaTac Properties Ltd. 99%(1) SeaTac Office Center:
17900 Pacific Highway Seattle, Washington
17930 Pacific Highway Seattle, Washington
18000 Pacific Highway Seattle, Washington
INDUSTRIAL:
Kilroy Industries 100% 2031 E. Mariposa Avenue El Segundo, California
Kilroy Building 73
Partnership 100% 3332 E. La Palma Avenue Anaheim, California
K-FIDO 83%(2) 2260 E. El Segundo Boulevard El Segundo, California
K-FIDO 83%(2) 2265 E. El Segundo Boulevard El Segundo, California
K-FIDO 83%(2) 2270 E. El Segundo Boulevard El Segundo, California
A-102 Trust 20%(2) 5115 N. 27th Avenue Phoenix, Arizona
KI 1979 Trust 85%(2) 1000 E. Ball Road Anaheim, California
KI 1979 Trust 85%(2) 1230 S. Lewis Street Anaheim, California
Kilroy Garden Grove
Associates 100% 12681/12691 Pala Drive Garden Grove, California
</TABLE>
- --------
(1) The balance of the ownership interests are held by Marshall L. McDaniel
(representing an aggregate interest of approximately 1%).
(2) The balance of the ownership interests are held by the four adult
daughters of John B. Kilroy, Sr.
F-17
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The development services of KG relating to non-owned properties have been
conducted by KI and Kilroy Technologies Company, LLC, both wholly-owned by
John B. Kilroy, Sr. and John B. Kilroy, Jr.
Certain of the named entities are owned by other entities. The Kilroy
Properties are ultimately owned beneficially in the proportions identified
above.
Basis of Presentation--The accompanying combined financial statements of KG
have been presented on a combined basis because of the common ownership and
management and because the entities are expected to be the subject of a
business combination with Kilroy Realty Corporation (the "Company"), a
recently formed Maryland corporation which is expected to qualify as a real
estate investment trust under the Internal Revenue Code of 1986, as amended.
Concurrently with the business combination, the Company intends to raise
capital through an initial public offering of Common Stock, mortgage loans and
a credit facility to be secured by mortgage liens on the properties. The
business combination has been structured to allow the beneficial owners of the
Kilroy Properties (including members of KG) to receive limited partnership
interests in Kilroy Realty, L.P. (the "Operating Partnership") aggregating a
19.2% interest. The Company will be the managing general partner of the
Operating Partnership, which will hold the operating assets and will manage
the Kilroy Properties. Certain other properties and operations affiliated with
KI have been excluded as they are not compatible with the investment purposes
of the Company. Deemed and actual cash distributions to partners, net of
contributions, included in the combined statements of accumulated deficit
generally represent distributions of the cash flows generated by KG, and
advances to partners and KI, as well as related-party transactions (see
Note 7).
2. SIGNIFICANT ACCOUNTING POLICIES
Rental Properties--Rental properties are stated at historical cost less
accumulated depreciation, which, in the opinion of KG's management, is not in
excess of net realizable value. Net realizable value does not purport to
represent fair market value. Costs incurred for the acquisition, renovation
and betterment of the properties are capitalized. Maintenance and repairs are
charged to expense as incurred.
During 1995, the Company adopted 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." Under this standard, if impairment
conditions exist, the Company makes an assessment of the recoverability of the
carrying amounts of individual properties by estimating the future
undiscounted cash flows, excluding interest charges, on a property by property
basis. If the carrying amount exceeds the aggregate future cash flows, the
Company would recognize an impairment loss to the extent the carrying amount
exceeds the fair value of the property. Any long-lived assets to be disposed
of are to be valued at estimated fair value less costs to sell. Based on such
periodic assessments, no impairments have been determined and, therefore, no
real estate carrying amounts have been adjusted.
Depreciation and Amortization--The cost of buildings and improvements are
depreciated on the straight-line method over estimated useful lives, as
follows:
Buildings--25 to 40 years
Tenant improvements--shorter of lease term or useful lives ranging from 5
to 20 years
Deferred Charges--Deferred charges include deferred leasing costs and loan
fees. Leasing costs include leasing commissions that are amortized on the
straight-line basis over the initial lives of the leases, which range from 5
to 10 years. Deferred loan fees are amortized on a straight-line basis over
the terms of the respective loans, which approximates the effective interest
method.
Accrued Property Taxes--As of September 30, 1996 and December 31, 1995 and
1994, $202,000, $696,000 and $783,000, respectively, of accrued property taxes
were past due.
F-18
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition and Tenant Receivables--Leases with tenants are
accounted for as operating leases. Minimum annual rentals are recognized on a
straight-line basis over the lease term. Unbilled deferred rent represents the
amount that expected straight-line rental income exceeds rents currently due
under the lease agreement. Total tenant receivables consists of the following
amounts:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, ---------------
1996 1995 1994
------------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Tenant rent and reimbursements receivable... $ 3,889 $ 3,171 $1,981
Allowance for uncollectible rent............ (2,757) (1,837) (837)
Unbilled deferred rent...................... 2,231 2,639 2,817
------- ------- ------
Tenants receivables, net.................... $ 3,363 $ 3,973 $3,961
======= ======= ======
</TABLE>
Included in tenant rent and reimbursements receivable are additional rentals
based on common area maintenance expenses and certain other expenses that are
accrued in the period in which the related expenses are incurred.
Rents Received in Advance and Tenant Security Deposits--The balances as of
September 30, 1996 and December 31, 1995 and 1994 include a $4,000,000 payment
received from a tenant in connection with the tenant's obligation to remove
tenant improvements upon termination of the lease. Such payment is
nonrefundable and will be recognized as income, net of the costs of removal of
improvements, upon termination of the lease. The related lease expires in
1999, subject to a five-year option to renew.
Use of Estimates--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.
Parking--The Kilroy Airport Center--LAX and the SeaTac Office Center include
parking facilities. KG records as revenue the gross parking receipts. KG
contracts with parking management companies to operate the parking facilities,
and such contract costs are included in property expenses.
Development Services--Development and management fees represent fees earned
by KG for supervision services provided for building development and
management of nonowned properties. Fees are typically a percentage of total
development costs plus reimbursement for certain expenses. Unreimbursed
expenses are recorded as development expenses and include items such as wages,
equipment rental, supplies, etc.
Sale of Air Rights--In 1995, based on an agreement between KG and the
California Transportation Commission, KG received $4,456,000, net of related
expenses, for granting temporary construction and permanent air right
easements over a portion of its property for the construction of a freeway on-
ramp. In connection with this transaction, KG accrued $874,000 as of December
31, 1995 for the costs of restoration of the property after construction of
the on-ramp.
F-19
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges and other assets are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Deferred assets:
Deferred financing costs................ $ 2,631 $ 3,436 $ 3,333
Deferred leasing costs (Note 7)......... 11,069 11,327 10,650
------- -------- -------
Total deferred assets................. 13,700 14,763 13,983
Accumulated amortization.................. (6,791) (10,142) (8,934)
------- -------- -------
Deferred assets, net...................... 6,909 4,621 5,049
Prepaid expenses.......................... 1,385 1,054 1,075
Property tax refunds receivable........... --- --- 2,820
------- -------- -------
Total deferred charges and other
assets............................... $ 8,294 $ 5,675 $ 8,944
======= ======== =======
</TABLE>
Property tax refunds, which were collected in 1995, relate to appeals filed
by KG in the fourth quarter of 1994 for refunds of property taxes paid in 1990
through 1994 and include related interest income of $441,000. Such amounts
were recorded as a reduction of property taxes and as other income during the
year ended December 31, 1994. Of these property tax recoveries, approximately
$1,500,000 was refunded to tenants of the related properties and has been
recorded as a reduction to tenant reimbursements income during the year ended
December 31, 1994.
4. DEBT
Debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -----------------
1996 1995 1994
------------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Bank notes payable, due in December 1994,
bearing interest at prime (8.5% at
December 31, 1995)(a)..................... --- $ 16,536 $ 30,536
Bank notes payable, due in January 1999,
bearing interest at LIBOR + 1.15% (6.4% at
September 30, 1996 and 6.9% at December
31, 1995)................................. $ 56,168 54,811 54,186
Notes payable to finance company and
related pension funds, maturing in 1997
and 1998, bearing interest at rates from
8.5% to 12.7%(b)(c)....................... 28,537 33,447 33,705
Note payable to insurance company, maturing
April 2001, bearing interest at 9.75%(d).. 20,162 20,162 21,173
Notes payable to insurance companies,
maturing March 2006, bearing interest at
9.5%(c)................................... 1,989 10,722 11,170
Note payable to insurance company due April
2002, bearing interest at 9.25%(e)........ 94,799 97,283 98,347
Notes payable to underwriter due in June
1997, bearing
interest at LIBOR + 3% (8.5% at September
30, 1996)(c).............................. 21,525 -- --
Bank notes payable, due in July 2008,
bearing interest at 10%................... 866 896 942
-------- -------- --------
$224,046 $233,857 $250,059
======== ======== ========
</TABLE>
- --------
(a) In September 1995, a note payable to a bank of $14,000,000 due in December
1994 and accrued interest payable of $3,867,000 was retired by a cash
payment of $2,600,000. KG recorded an extraordinary gain of
F-20
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
$15,267,000 as a result of this transaction. The remaining notes payable of
$16,536,000 were in default as of December 31, 1995 and 1994. Past due
interest on the remaining notes, approximately $5,003,000 at December 31,
1995, is included in accrued interest. See discussion below under (c)
regarding settlement of this loan and accrued interest.
(b) During the nine months ended September 30, 1996, three of the notes payable
totaling $16,608,000 were amended to extend the maturity dates from 1996 to
1997 and 1998. In May, 1996, an additional note with a principal balance of
$2,500,000 which was due in February 1996 was amended to extend the
maturity date from February 1996 to 1997. During June 1996, notes payable
of $5,765,000 were amended to extend the maturity date from June 1996 to
April 1998.
(c) On June 20, 1996, KG obtained a mortgage loan of $21,525,000 from one of
the underwriters of the proposed public offering of common stock referred
to in Note 1. Such loan is due on June 20, 1997 and bears interest at 3%
above LIBOR. Fees of $2,279,000 were incurred in connection with obtaining
this loan. An additional fee of $337,500 is payable if the loan is not
repaid within 150 days after June 20, 1996. The proceeds were used to pay:
$2,100,000 as settlement of bank notes with an aggregate principal balance
of $16,536,000 and $5,659,000 of unpaid interest, a note payable to an
insurance company with a principal balance of $8,549,000 and a note payable
to a finance company with a principal balance of $4,600,000. The
forgiveness of $20,095,000 has been recorded as an extraordinary gain.
(d) KG is not currently making the required monthly principal installments of
$239,000 on this note and accrued interest of $1,894,000 is unpaid as of
September 30, 1996. The SeaTac Office Center is pledged as collateral for
the note payable. On October 25, 1996, KG and the insurance company entered
into a forbearance agreement which provides KG with the exclusive right to
purchase the note payable for $16,100,000 on or before January 31, 1997. In
the event KG does not acquire the loan, the fee owner of the property has
the right from February 1, 1997 through February 28, 1997 to pay off the
loan on the same terms and conditions. In the event KG is unable to acquire
the loan on or prior to January 31, 1997, the fee owner has assigned its
rights to KG for the period February 1, 1997 to February 10, 1997. If KG
fails to perform any of its obligations under the agreement, an event of
default shall occur and the insurance company shall have the right to
pursue any and all remedies available under the agreement and the note
payable, including foreclosure. It is contemplated that a portion of the
proceeds from the initial public offering referred to in Note 1, will be
used to purchase this note. KG believes it will be able to meet this
commitment irrespective of the consummation of the Offering referred to in
Note 1 based upon discussions with other sources of financing.
(e) Under an agreement with the insurance company, monthly payments of
principal and interest are calculated based on gross receipts from leases
of the property that secures the loan. All receipts from the property are
deposited into a lock box account from which all operating costs, which
must be approved by the lender, are to be paid. Monthly installments of
principal and interest of $881,475 and property taxes are payable from the
lockbox account and any deficiency must be funded by KG. There are certain
provisions in the agreement that may require additional payments of
principal.
In 1994, two notes payable to insurance companies, with an aggregate unpaid
balance of $6,782,000 were paid after forgiveness of $1,847,000 of principal by
the lenders, which has been recorded as an extraordinary gain.
The notes payable are secured by deeds of trust on all Kilroy Properties and
the assignment of certain rents and leases associated with the related
properties. The notes are generally due in monthly installments of principal
and interest or interest only. As of September 30, 1996, approximately $37.2
million of notes payable are guaranteed by certain members of KG. Several notes
contain restrictive covenants with which KG has complied as well as penalties
for early repayment of principal equal to a percentage of the unpaid balance.
F-21
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Aggregate future principal payments on notes payable are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
YEAR ENDING 1996 1995
----------- ------------- ------------
(IN THOUSANDS)
<S> <C> <C>
1996........................................... $ 41 $ 4,301
1997........................................... 64,174 69,935
1998........................................... 10,317 10,626
1999........................................... 58,658 57,301
2000........................................... 2,722 2,722
Thereafter..................................... 88,134 88,972
-------- --------
Total........................................ $224,046 $233,857
======== ========
</TABLE>
5. FUTURE MINIMUM RENT
KG has operating leases with tenants that expire at various dates through
2006 and are either subject to scheduled fixed increases or adjustments based
on the Consumer Price Index. Generally, the leases grant tenants renewal
options. Leases also provide for additional rents based on certain operating
expenses as well as sales volume of certain retail space within the office
buildings. Future minimum rent to be received under operating leases,
excluding tenant reimbursements of certain costs, are as follows as of:
<TABLE>
<CAPTION>
DECEMBER 31,
YEAR ENDING 1995
----------- ------------
(IN THOUSANDS)
<S> <C>
1996....................................................... $ 33,359
1997....................................................... 33,013
1998....................................................... 30,750
1999....................................................... 26,999
2000....................................................... 23,297
Thereafter................................................. 67,612
--------
Total.................................................... $215,030
========
</TABLE>
Rental revenue from one tenant, Hughes Electronic Corporation's Space &
Communications Company ("Hughes"), was $8,161,142, $10,817,000, $11,395,000
and $12,258,000 for the nine months ended September 30, 1996 and the years
ended December 31, 1995, 1994 and 1993, respectively. Future minimum rents
from this tenant are $66,949,000 at December 31, 1995.
On September 18, 1996, KG and Hughes amended the terms of certain of their
lease agreements. Such amendments included the extension of one lease through
October 31, 2001 and a $500,000 allowance for tenant improvements. In
addition, KG agreed to pay Hughes $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 has been reflected in the statement of operations
for the nine months ended September 30, 1996. In November 1996, $2,260,000 of
the total liability of $3,650,000 was paid by KI and its stockholders. The
remaining balance is payable in monthly installments of $100,000 commencing in
January 1997.
The majority of Kilroy Properties are located in Southern California. The
ability of the tenants to honor the terms of their respective leases is
dependent upon the economic, regulatory and social factors affecting the
communities and industries in which the tenants operate.
F-22
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
Operating Leases--KG 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, KG 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. Rentals are
subject to adjustment every five years based on the variation of the Consumer
Price Index. The minimum commitment under these leases at December 31, 1995 is
as follows:
<TABLE>
<CAPTION>
YEAR ENDING
----------- (IN THOUSANDS)
<S> <C>
1996....................................................... $ 743
1997....................................................... 743
1998....................................................... 761
1999....................................................... 923
2000....................................................... 1,056
Thereafter................................................. 35,737
-------
Total.................................................... $39,963
=======
</TABLE>
Litigation--KG is subject to various legal proceedings and claims that arise
in the ordinary course of business. These matters are generally covered by
insurance. While the resolution of these matters cannot be predicted with
certainty, management believes that the final outcome of such matters will not
have a material adverse effect on the financial position or results of
operations of KG.
7. RELATED-PARTY TRANSACTIONS
KI provides management, legal, accounting and general administrative
services pursuant to agreements that provide for management fees based upon a
percentage of gross revenues from the Kilroy Properties and reimbursement of
other costs incurred by KI in connection with providing the aforementioned
services. Kilroy Company ("KC"), an affiliated entity, provides marketing and
leasing services. Charges by KC include leasing commissions paid to employees
and outside leasing brokers as well as fees to cover its general
administrative costs. Management fees are expensed as incurred and are
included in property expenses. Leasing fees are capitalized and amortized over
the life of the related leases. In the opinion of KG management, the fees paid
to KI and KC for management and leasing services are comparable to the rates
which KG would have paid an independent company to provide similar services.
In addition, KI is a tenant at the Kilroy Airport Center--LAX, Kilroy Airport
Center--Long Beach and SeaTac Office Center, under month-to-month leases.
Charges for services provided by KI and KC and rental income from KI are
summarized as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER YEAR ENDED DECEMBER
30, 31,
----------- --------------------
1996 1995 1995 1994 1993
------ ---- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Management fees................................ $ 916 $754 $1,343 $1,026 $1,359
Leasing fees................................... $1,372 $743 $ 804 $1,456 $ 431
Rental income.................................. $ 396 $396 $ 528 $ 528 $ 797
</TABLE>
Management fees in 1995 include a fourth quarter charge of $321,000 relating
to management time incurred for the renegotiation of loans.
F-23
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. FAIR VALUE DISCLOSURES OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value was determined by KG using
available market information and appropriate valuation methodologies. However,
considerable judgment is necessary to interpret market data and develop the
related estimates of fair value. Accordingly, the estimates presented herein
are not necessarily indicative of the amounts that could be realized upon
disposition of the financial instruments. The use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts.
Receivables, accounts payable and other liabilities are carried at amounts
that reasonably approximate their fair value.
The fixed rate mortgage notes payable totaling $146,352,000, $162,510,000
and $165,325,000 as of September 30, 1996, December 31, 1995 and 1994 have
fair values of $149,600,000, $165,300,000 and $169,900,000, respectively
(excluding prepayment penalties), as estimated based upon interest rates
available for the issuance of debt with similar terms and remaining
maturities. These notes were subject to prepayment penalties of $542,000,
$722,000 and $757,000 at September 30, 1996, December 31, 1995 and 1994,
respectively, that would be required to retire these notes prior to maturity.
The carrying values of floating rate mortgages totaling $77,694,000,
$71,347,000 and $84,734,000 at September 30, 1996, December 31, 1995 and 1994,
respectively, reasonably approximate their fair values.
The fair value estimates presented herein are based on information available
to KG management as of September 30, 1996, December 31, 1995 and 1994.
Although KG management is not aware of any factors that would significantly
affect the estimated fair value amounts, such amounts have not been
comprehensively revalued for purposes of these financial statements since that
date, and current estimates of fair value may differ significantly from the
amounts presented herein.
F-24
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
9. SCHEDULE OF RENTAL PROPERTY
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------------------------------------------
GROSS AMOUNTS
AT WHICH CARRIED AT CLOSE OF
INITIAL COST COSTS PERIOD
-------------------- CAPITALIZED -----------------------------
BUILDINGS SUBSEQUENT TO DATE OF
AND ACQUISITION/ BUILDING AND ACCUMULATED ACQUIS. (A)
PROPERTY ENCUMBRANCES LAND IMPROVEMENTS IMPROVEMENT LAND IMPROVEMENTS TOTAL DEPRECIATION CONSTR. (C)
-------- ------------ ------- ------------ ------------- ------- ------------ -------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Kilroy Airport
Center
El Segundo, CA..... $97,283 $ 6,141 $69,195 $18,884 $ 6,141 $88,079 $94,220 $42,495 1983(C)
Kilroy Airport
Center
Long Beach, CA..... 54,811 -- 47,387 11,041 -- 58,428 58,428 15,322 1989(C)
185/181 S. Douglas
Street
El Segundo,
California(1)...... 15,639 525 4,687 1,845 628 6,429 7,057 3,509 1978(C)
SeaTac Office
Center............. 26,999 -- 25,993 8,109 -- 33,239 33,239 22,523 1977(C)
2270 E. El Segundo
Boulevard
El Segundo,
California(1)...... -- 361 100 76 419 118 537 73 1977(C)
2260 E. El Segundo
Boulevard,
El Segundo,
California(1)...... -- 1,423 4,194 1,236 1,703 5,150 6,853 2,914 1979(C)
2031 E. Mariposa
Avenue,
El Segundo,
California......... 12,000 132 867 2,668 132 3,535 3,667 2,328 1954(C)
3332 E. La Palma
Avenue,
Anaheim,
California......... 7,683 67 1,521 2,851 67 4,372 4,439 3,028 1966(C)
2265 E. El Segundo
Boulevard,
El Segundo,
California......... 4,600 1,352 2,028 644 1,570 2,454 4,024 1,550 1978(C)
5115 N. 27th
Avenue,
Phoenix, Arizona... 3,000 125 1,206 (27) 126 1,178 1,304 1,168 1962(C)
1000 E. Ball Road,
Anaheim,
California(2)...... 5,846 838 1,984 719 838 2,703 3,541 1,563 1979(A)(3)
1956(C)
1230 S. Lewis
Street,
Anaheim,
California(2)...... -- 395 1,489 1,994 395 3,483 3,878 2,444 1982(C)
12681/12691 Pala
Drive,
Garden Grove,
California......... 5,996 471 2,115 1,210 471 3,325 3,796 2,857 1980(A)
1970(C)
-------- ------- -------- ------- ------- -------- -------- --------
Total........... $233,857 $11,830 $162,766 $51,250 $12,490 $212,493 $224,983 $101,774
======== ======= ======== ======= ======= ======== ======== ========
</TABLE>
- ----
(1) Two notes payable of $8,639,000 and $7,000,000 are secured by the
buildings located at 2260 and 2270 E. El Segundo Boulevard, El Segundo,
California, and the buildings located at 185/181 S. Douglas Street, El
Segundo, California.
(2) A note payable of $5,846,000 is secured by the buildings located at 1000
East Ball Road, Anaheim, California and 1230 South Lewis Street, Anaheim,
California.
(3) The Property located at 1000 E. Ball Road, Anaheim, California, was
developed for a third party by the Company in 1956, and acquired by the
Company in 1979.
F-25
<PAGE>
KILROY GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The aggregate gross cost of property included above, for federal income tax
purposes, approximated $200,782,000 as of December 31, 1995.
The following table reconciles the historical cost of the Kilroy Properties
from January 1, 1993 to December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period.................... $223,821 $222,056 $235,549
Additions during period--Acquisition,
improvements, etc............................ 1,162 1,765 633
Deductions during period--Write-off of tenant
improvements................................. -- -- (14,126)
-------- -------- --------
Balance, close of period........................ $224,983 $223,821 $222,056
======== ======== ========
</TABLE>
The following table reconciles the accumulated depreciation from January 1,
1993 to December 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Balance, beginning of period..................... $ 93,475 $84,759 $ 86,442
Additions during period--Depreciation and
amortization for the year..................... 8,299 8,716 9,782
Deductions during period--Accumulated
depreciation of written-off tenant
improvements.................................. -- -- (11,465)
-------- ------- --------
Balance, close of period......................... $101,774 $93,475 $ 84,759
======== ======= ========
</TABLE>
F-26
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of Kilroy Group:
We have audited the accompanying combined historical summaries of certain
revenues and certain expenses (defined as operating revenues less direct
operating expenses) of the Acquisition Properties for the nine months ended
September 30, 1996 and the year ended December 31, 1995. These financial
statements are the responsibility of the Acquisition Properties' management.
Our responsibility is to express an opinion on these combined financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the combined historical summary of
certain revenues and certain expenses is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the combined historical summary of certain revenues and certain
expenses. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
presentation of the combined historical summary of certain revenues and
certain expenses. We believe our audits provide a reasonable basis for our
opinion.
The accompanying combined historical summaries of certain revenues and
certain expenses were prepared for the purpose of complying with the rules and
regulations of the Securities and Exchange Commission for inclusion in the
Form S-11 Registration Statement of Kilroy Realty Corporation. Material
amounts, described in Note 1 to the historical summaries of certain revenues
and certain expenses, that would not be comparable to those resulting from the
proposed future operation of the Acquisition Properties are excluded, and the
summaries are not intended to be a complete presentation of the revenues and
expenses of these properties.
In our opinion, such historical summaries of certain revenues and certain
expenses present fairly, in all material respects, the combined certain
revenues and certain expenses, as defined in Note 1, of the Acquisition
Properties for the nine months ended September 30, 1996 and the year ended
December 31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Los Angeles, California
December 20, 1996
F-27
<PAGE>
ACQUISITION PROPERTIES
COMBINED HISTORICAL SUMMARIES OF CERTAIN REVENUES AND CERTAIN EXPENSES
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND
YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------- ------------
<S> <C> <C>
CERTAIN REVENUES:
Rental income..................................... $5,875 $7,355
Tenant reimbursements............................. 743 884
Other income...................................... 299 407
------ ------
Total certain revenues.......................... 6,917 8,646
------ ------
CERTAIN EXPENSES:
Property expenses (Note 3)........................ 1,315 1,882
Real estate taxes................................. 417 495
Ground rent (Note 4).............................. 253 338
General and administrative........................ 200 303
------ ------
Total certain expenses.......................... 2,185 3,018
------ ------
CERTAIN REVENUES IN EXCESS OF CERTAIN EXPENSES...... $4,732 $5,628
====== ======
</TABLE>
See notes to combined statements of certain revenues and certain expenses.
F-28
<PAGE>
ACQUISITION PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARIES OF CERTAIN REVENUES AND CERTAIN
EXPENSES
1. BASIS OF PRESENTATION
The combined historical summaries of certain revenues and certain expenses
relate to the operations of four properties, Westlake Plaza Centre (located in
Thousand Oaks), Long Beach Phase I, La Palma Business Center (located in
Anaheim) and the Monarch Building (located in Garden Grove) (collectively, the
"Acquisition Properties"), which are expected to be acquired by Kilroy Realty
Corporation (the "Company") from four unaffiliated third parties.
Operating revenues and operating expenses are presented on the accrual basis
of accounting. The accompanying statements of certain revenues and certain
expenses are not representative of the actual operations for the period
presented, as certain revenues and certain expenses that may not be comparable
to the revenues and expenses expected to be incurred by the Company in the
proposed future operation of the Acquisition Properties have been excluded.
Revenues excluded consist of termination fees and interest income. Expenses
excluded consist of interest, depreciation, professional fees and other costs
not directly related to the future operations of the Acquisition Properties.
Financial statements for the three years ended December 31, 1995, as
required by Rule 3-14(a)(1), have not been provided because:
(i) the properties were not acquired from a related party;
(ii) material factors such as rental markets and occupancy rates have
been disclosed in the Prospectus under the caption "Prospectus
Summary--The Office and Industrial Properties" and "Business and
Properties--General"; and
(iii) management is not aware of any material factors relating to the
properties that would cause the summaries of certain revenues and
certain expenses for the nine months ended September 30, 1996 and
the year ended December 31, 1995 not to be indicative of future
operating results.
2. OPERATING LEASES
Rental income is recognized on the accrual method as earned, which
approximates recognition on a straight line basis.
The Acquisition Properties are leased to tenants under operating leases with
expiration dates extending to the year 2009. Future minimum rents under the
Acquisition Property's office leases, excluding tenant reimbursements are as
follows as of September 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------ (IN THOUSANDS)
<S> <C>
1996 (three months)....................................... $ 1,988
1997...................................................... 8,244
1998...................................................... 8,119
1999...................................................... 7,270
2000...................................................... 6,413
Thereafter................................................ 25,768
-------
Total................................................... $57,802
=======
</TABLE>
F-29
<PAGE>
ACQUISITION PROPERTIES
NOTES TO COMBINED HISTORICAL SUMMARIES OF CERTAIN REVENUES AND CERTAIN
EXPENSES--(CONTINUED)
3. RELATED-PARTY TRANSACTIONS
Property expenses include $137,000 and $181,000 of management fees for the
nine months ended September 30, 1996 and for the year ended December 31, 1995,
respectively, related to Long Beach Phase I, which was paid to an affiliate of
the Company.
4. COMMITMENTS
Long Beach Phase I is located on land that is under a noncancelable ground
lease which expires in 2035 and is classified as an operating lease. Minimum
annual lease payments are as follows as of September 30, 1996:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------ (IN THOUSANDS)
<S> <C>
1996 (three months)....................................... $ 85
1997...................................................... 338
1998...................................................... 338
1999...................................................... 338
2000...................................................... 338
Thereafter................................................ 11,661
-------
Total................................................... $13,098
=======
</TABLE>
F-30
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY ANY
SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS PROSPECTUS, NOR
DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY THE
SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT ANY INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1997 (25 DAYS AFTER COMMENCEMENT OF THIS OFFERING), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
--------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 20
Formation and Structure of the Company................................... 36
Formation of Kilroy Services, Inc........................................ 44
The Company.............................................................. 45
Use of Proceeds.......................................................... 51
Distribution Policy...................................................... 53
Capitalization........................................................... 58
Dilution................................................................. 59
Selected Financial Data.................................................. 60
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 62
Business and Properties.................................................. 68
Policies with Respect to Certain Activities.............................. 111
The Financing............................................................ 116
Management............................................................... 118
Certain Relationships and Related Transactions........................... 128
Principal Stockholders................................................... 129
Description of Capital Stock............................................. 130
Certain Provisions of Maryland Law and of the Company's Articles of
Incorporation and Bylaws............................................... 134
Partnership Agreement of the Operating Partnership....................... 139
Shares Available for Future Sale......................................... 143
Federal Income Tax Consequences.......................................... 145
Other Tax Consequences................................................... 158
ERISA Considerations..................................................... 158
Underwriting............................................................. 160
Legal Matters............................................................ 161
Experts.................................................................. 161
Additional Information................................................... 162
Glossary................................................................. 163
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11,300,000 Shares
[LOGO OF KILROY REALTY CORPORATION]
KILROY REALTY CORPORATION
Common Stock
----------
PROSPECTUS
----------
PRUDENTIAL SECURITIES INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
J.P. MORGAN & CO.
SMITH BARNEY INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
DESCRIPTION OF GRAPHICS AND PHOTOS FOR EDGAR TRANSMISSION
Inside Front Cover: Map of Southern California, indicating the Company's office
and industrial properties by location.
Fold-out Inside Front Cover: Ten photos of Office Properties: Clockwise, in
order: 1. Two photos of SeaTac Office Center in Seattle, Washington --
pedestrian view of the office's exterior at night and aerial view of the Office
Property and parking lot during the day; 2. Four photos of Kilroy Airport
Center Long Beach in Long Beach, California -- pedestrian views of the office's
main entrance at night and during the day and interior view of the office's
reception area; 3. 2829 Townsgate Road in Thousand Oaks, California -- view from
across the parking lot of the office building; 4. Three photos of Kilroy
Airport Center in El Segundo, California -- the office's main entrance from two
different pedestrian views, and two office buildings on the northwest corner of
the property from across the street.
Inside Back Cover: Five photos of Industrial Properties: Top to bottom, in
order: 1. Photo of 3340 East La Palma in Anaheim, California; 2. 1230 South
Lewis Street in Anaheim, California; 3. 2031 East Mariposa Avenue in El
Segundo, California; 4. 2265 East El Segundo Boulevard in El Segundo,
California; 5. 2260 East El Segundo Boulevard in El Segundo, California.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 30. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 64,539
NYSE Filing Fee................................................ 126,600
Printing and Engraving Expenses................................ 800,000
Legal Fees and Expenses........................................ 1,600,000
Accounting Fees and Expenses................................... 1,350,000
Registrar and Transfer Agent Fees and Expenses................. 2,500
Blue Sky Fees and Expenses..................................... 20,000
National Association of Securities Dealers, Inc. .............. 26,375
Miscellaneous Expenses......................................... 9,986
----------
Total........................................................ $4,000,000
==========
</TABLE>
All of the costs identified above will be paid by the Company.
ITEM 31. SALES TO SPECIAL PARTIES.
See Item 32.
ITEM 32. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the Formation Transactions, immediately prior to or
simultaneous with the consummation of the Offering an aggregate of 2,692,374
Units will be issued to Kilroy Industries, Kilroy Technologies Company, LLC, a
California limited liability company, John B. Kilroy, Sr., John B. Kilroy,
Jr., Ms. Patrice Bouzaid, Ms. Susan Hahn, Ms. Anne McCahon and Ms. Dana
Pantuso, the daughters of John B. Kilroy, Sr., and Marshall L. McDaniel, a
long-time employee of Kilroy Industries, each of which will be transferring
interests in the Properties and certain other assets to the Company in
consideration of the transfer of such Properties and assets. The book value to
the Continuing Investors of the assets to be contributed to the Operating
Partnership is a negative $113.2 million and the value of the Units
representing limited partnership interests in the Operating Partnership to be
received by the Continuing Investors is $53.8 million, assuming a Unit value
equal to the assumed initial public offering price of $20.00 per share. No
independent valuations or appraisals of the Properties were obtained in
connection with the Formation Transactions. All of such persons irrevocably
committed to the exchange of Units for the contribution of their respective
interests in the Properties on November 3, 1996, prior to the filing of the
Registration Statement, and are "accredited investors" as defined under
Regulation D. The issuance of such Units will be effected in reliance upon an
exemption from registration under Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering. See "The Formation
and Structure of the Company."
In September 1996, 50 shares of Common Stock were issued to John B. Kilroy,
Sr. for an aggregate purchase price of $1,000. The issuance of such shares was
effected in reliance upon an exemption from registration under Section 4(2) of
the Securities Act as a transaction by an issuer not involving a public
offering. In addition, upon consummation of the Offering, 60,000 restricted
shares of Common Stock will be issued to Mr. Richard E. Moran Jr. against the
payment of $600 in cash therefor pursuant to the terms of his employment
agreement. The issuance of such shares will be effected in reliance upon an
exemption from registration under Section 4(2) of the Securities Act as a
transaction by an issuer not involving a public offering.
II-1
<PAGE>
ITEM 33. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 2-418 of the MGCL permits a corporation to indemnify its directors
and officers and certain other parties against judgments, penalties, fines,
settlements, and reasonable expenses actually incurred by them in connection
with any proceeding to which they may be made a party by reason of their
service in those or other capacities unless it is established that (i) the act
or omission of the director or officer was material to the matter giving rise
to the proceeding and (a) was committed in bad faith or (b) was the result of
active and deliberate dishonesty; (ii) the director or officer actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the director or officer had reasonable
cause to believe that the act or omission was unlawful. Indemnification may be
made against judgments, penalties, fines, settlements and reasonable expenses
actually incurred by the director or officer in connection with the
proceeding; provided, however, that if the proceeding is one by or in the
right of the corporation, indemnification may not be made with respect to any
proceeding in which the director or officer has been adjudged to be liable to
the corporation. In addition, a director or officer may not be indemnified
with respect to any proceeding charging improper personal benefit to the
director or officer, whether or not involving action in the director's or
officer's official capacity, in which the director or officer was adjudged to
be liable on the basis that personal benefit was received. The termination of
any proceeding by conviction, or upon a plea of nolo contendere or its
equivalent, or an entry of any order of probation prior to judgment, creates a
rebuttable presumption that the director or officer did not meet the requisite
standard of conduct required for indemnification to be permitted.
In addition, Section 2-418 of the MGCL requires that, unless prohibited by
its charter, a corporation indemnify any director or officer who is made a
party to any proceeding by reason of service in that capacity against
reasonable expenses incurred by the director or officer in connection with the
proceeding, in the event that the director or officer is successful, on the
merits or otherwise, in the defense of the proceeding.
The Company's Charter and Bylaws provide in effect for the indemnification
by the Company of the directors and officers of the Company to the fullest
extent permitted by applicable law. The Company is currently in the process of
purchasing directors' and officers' liability insurance for the benefit of its
directors and officers and expects such insurance to be in effect prior to
consummation of the Offering.
ITEM 34. TREATMENT OF PROCEEDS FROM STOCK BEING REGISTERED.
Not applicable.
II-2
<PAGE>
ITEM 35. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
(a)(1) FINANCIAL STATEMENTS
Kilroy Realty Corporation
Pro Forma (Unaudited):
Pro Forma Condensed Consolidated Balance Sheet as of September 30, 1996
Notes to Pro Forma Condensed Consolidated Balance Sheet
Pro Forma Condensed Consolidated Statements of Operations for the nine
months ended September 30, 1996 and the Year Ended December 31, 1995
Notes to Pro Forma Condensed Consolidated Statements of Operations
Historical:
Independent Auditors' Report
Balance Sheet as of September 30, 1996
Notes to Balance Sheet
Kilroy Group (Predecessor Affiliates)
Independent Auditors' Report
Combined Balance Sheets as of September 30, 1996, and December 31, 1995
and 1994
Combined Statements of Operations for the nine months ended September 30,
1996 and 1995 and the three years ended December 31, 1995
Combined Statements of Partners' Deficit for the nine months ended
September 30, 1996 and for the three years ended December 31, 1995
Combined Statements of Cash Flows for the nine months ended September 30,
1996 and 1995 and the three years ended December 31, 1995
Notes to Combined Financial Statements
Acquisition Properties
Independent Auditors' Report
Combined Historical Summaries of Certain Revenues and Certain Expenses
for the nine months ended September 30, 1996 and for the year ended
December 31, 1995
Notes to Combined Historical Summaries of Certain Revenues and Certain
Expenses
(a)(2) FINANCIAL STATEMENT SCHEDULE
Schedule II--Valuation and qualifying accounts for the three years ended
December 31, 1995
(b) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
*1.1 Form of Underwriting Agreement.
***3.1 Articles of Amendment and Restatement of the Registrant.
***3.2 Amended and Restated Bylaws of the Registrant.
***3.3 Form of Certificate for Common Stock of the Registrant.
***5.1 Opinion of Ballard Spahr Andrews & Ingersoll regarding the validity of
the Common Stock being registered.
***8.1 Opinion of Latham & Watkins regarding certain federal income tax
matters.
***10.1 Amended and Restated Agreement of Limited Partnership of Kilroy
Realty, L.P.
***10.2 Form of Registration Rights Agreement among the Registrant and the
persons named therein.
***10.3 Omnibus Agreement dated as of October 30, 1996 by and among Kilroy
Realty, L.P. and the parties named therein.
***10.4 Supplemental Representations, Warranties and Indemnity Agreement by
and among Kilroy Realty, L.P. and the parties named therein.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- -----------
<C> <S>
***10.5 Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy,
Sr., John B. Kilroy, Jr. and Kilroy Industries.
***10.6 1997 Stock Incentive Plan of the Registrant and Kilroy Realty, L.P.
***10.7 Form of Indemnity Agreement of the Registrant and Kilroy Realty, L.P.
with certain officers and directors.
**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.
**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.
**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.
**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.
**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.
**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.
**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.
**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.
**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.
**10.17 Development Agreement by and between Kilroy Long Beach Associates and
the City of Long Beach.
**10.18 Amendment No. 1 to Development Agreement by and between Kilroy Long
Beach Associates and the City of Long Beach.
**10.19 Ground Lease by and between Frederick Boysen and Ted Boysen and
Kilroy Industries dated May 15, 1969 for SeaTac Office Center.
**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.
**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.
**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.
**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.
**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.
**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.
*10.26 Management Agreement by and between Kilroy Realty, L.P. and Kilroy
Airport Imperial Co.
*10.27 Management Agreement by and between Kilroy Realty, L.P. and Kilroy
Calabasas Associates.
*10.28 Option Agreement by and between Kilroy Realty, L.P. and Kilroy
Airport Imperial Co.
*10.29 Option Agreement by and between Kilroy Realty, L.P. and Kilroy
Calabasas Associates.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
-------- -----------
<C> <S>
*10.30 Employment Agreement between the Registrant and John B. Kilroy, Jr.
*10.31 Employment Agreement between the Registrant and Richard E. Moran Jr.
*10.32 Employment Agreement between the Registrant and Jeffrey C. Hawken.
*10.33 Employment Agreement between the Registrant and C. Hugh Greenup.
***10.34 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Sr.
***10.35 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Jr.
*10.36 License Agreement by and among the Registrant and the other persons
named therein.
*21.1 List of Subsidiaries of the Registrant.
***23.1 Consent of Latham & Watkins (filed with Exhibit 8.1).
***23.2 Consent of Ballard Spahr Andrews & Ingersoll (filed with Exhibit
5.1).
***23.3 Consent of Deloitte & Touche LLP.
***23.4 Consent of Robert Charles Lesser & Co.
***23.5 Consent of William P. Dickey.
***23.6 Consent of Matthew J. Hart.
***23.7 Consent of Dale F. Kinsella.
**24.1 Power of Attorney.
**24.2 Power of Attorney.
**27.1 Financial Data Schedule
</TABLE>
- --------
* To Be Filed By Amendment
** Previously Filed
*** Filed Herewith
ITEM 36. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the provisions described under Item 33
above, or otherwise, the Registrant has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer,
or controlling person of the registrant in the successful defense of any
action, suit, or proceeding) is asserted by such director, officer, or
controlling person in connection with the securities registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication
of such issue.
The Registrant hereby undertakes:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of Prospectus filed as part of the
Registration Statement in reliance upon Rule 430A and contained in the form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of the Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
II-5
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT NO. 3 TO ITS REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED THEREUNTO DULY AUTHORIZED IN THE CITY
OF EL SEGUNDO, STATE OF CALIFORNIA, ON THE 24TH DAY OF JANUARY, 1997.
Kilroy Realty Corporation
By: /s/ John B. Kilroy, Sr.
------------------------
JOHN B. KILROY, SR.
Chairman of the Board of Directors
Date: January 24, 1997
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT NO. 3 HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF
THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John B. Kilroy, Sr. Chairman of the
- ------------------------------------- Board and Director January 24, 1997
JOHN B. KILROY, SR.
President, Chief
* Executive Officer January 24, 1997
- ------------------------------------- and Director
JOHN B. KILROY, JR. (Principal
Executive Officer)
Chief Financial
/s/ Richard E. Moran Jr. Officer and January 24, 1997
- ------------------------------------- Secretary
RICHARD E. MORAN JR. (Principal
Financial Officer
and Principal
Accounting Officer)
</TABLE>
* By /s/ John B. Kilroy, Sr.
-----------------------
JOHN B. KILROY, SR.
Attorney-in-Fact
II-6
<PAGE>
KILROY GROUP
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
EACH OF THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
CHARGED TO
BALANCE AT COSTS AND BALANCE
BEGINNING EXPENSES OR AT END
OF PERIOD RENTAL REVENUE DEDUCTIONS OF PERIOD
---------- -------------- ---------- ---------
<S> <C> <C> <C> <C>
Year Ended December 31, 1995
Allowance for uncollectible
rent......................... $837 $1,000 $ -- $1,837
==== ====== ===== ======
Year Ended December 31, 1994
Allowance for uncollectible
rent......................... $514 $ 909 $(586) $ 837
==== ====== ===== ======
Year Ended December 31, 1993
Allowance for uncollectible
rent......................... $337 $ 350 $(173) $ 514
==== ====== ===== ======
</TABLE>
S-1
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NO.
-------- ---------------------- ----------
<C> <S> <C>
*1.1 Form of Underwriting Agreement.
***3.1 Articles of Amendment and Restatement of the Registrant.
***3.2 Amended and Restated Bylaws of the Registrant.
***3.3 Form of Certificate for Common Stock of the Registrant.
***5.1 Opinion of Ballard Spahr Andrews & Ingersoll regarding
the validity of the Common Stock being registered.
***8.1 Opinion of Latham & Watkins regarding certain federal
income tax matters.
***10.1 Amended and Restated Agreement of Limited Partnership of
Kilroy Realty, L.P.
***10.2 Form of Registration Rights Agreement among the
Registrant and the persons named therein.
***10.3 Omnibus Agreement dated as of October 30, 1996 by and
among Kilroy Realty, L.P. and the parties named therein.
***10.4 Supplemental Representations, Warranties and Indemnity
Agreement by and among Kilroy Realty, L.P. and the
parties named therein.
***10.5 Pledge Agreement by and among Kilroy Realty, L.P., John
B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy
Industries.
***10.6 1997 Stock Incentive Plan of the Registrant and Kilroy
Realty, L.P.
***10.7 Form of Indemnity Agreement of the Registrant and Kilroy
Realty, L.P. with certain officers and directors.
**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.
**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.
**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.
**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.
**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.
**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.
**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.
**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.
**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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NO.
-------- ---------------------- ----------
<C> <S> <C>
**10.17 Development Agreement by and between Kilroy Long Beach
Associates and the City of Long Beach.
**10.18 Amendment No. 1 to Development Agreement by and between
Kilroy Long Beach Associates and the City of Long Beach.
**10.19 Ground Lease by and between Frederick Boysen and Ted
Boysen and Kilroy Industries dated May 15, 1969 for
SeaTac Office Center.
**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.
**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.
**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.
**10.23 Lease dated April 1, 1980 by and among Bow Lake, Inc.,
as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessees for Sea/Tac Office Center.
**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.
**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.
*10.26 Management Agreement by and between Kilroy Realty, L.P.
and Kilroy Airport Imperial Co.
*10.27 Management Agreement by and between Kilroy Realty, L.P.
and Kilroy Calabasas Associates.
*10.28 Option Agreement by and between Kilroy Realty, L.P. and
Kilroy Airport Imperial Co.
*10.29 Option Agreement by and between Kilroy Realty, L.P. and
Kilroy Calabasas Associates.
*10.30 Employment Agreement between the Registrant and John B.
Kilroy, Jr.
*10.31 Employment Agreement between the Registrant and Richard
E. Moran Jr.
*10.32 Employment Agreement between the Registrant and Jeffrey
C. Hawken.
*10.33 Employment Agreement between the Registrant and C. Hugh
Greenup.
***10.34 Noncompetition Agreement by and between the Registrant
and John B. Kilroy, Sr.
***10.35 Noncompetition Agreement by and between the Registrant
and John B. Kilroy, Jr.
*10.36 License Agreement by and among the Registrant and the
other parties named therein.
*21.1 List of Subsidiaries of the Registrant.
***23.1 Consent of Latham & Watkins (filed with Exhibit 8.1).
***23.2 Consent of Ballard Spahr Andrews & Ingersoll (filed with
Exhibit 5.1).
***23.3 Consent of Deloitte & Touche LLP.
***23.4 Consent of Robert Charles Lesser & Co.
***23.5 Consent of William P. Dickey.
***23.6 Consent of Matthew J. Hart.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
EXHIBIT PAGE
NO. DESCRIPTION OF EXHIBIT NO.
------- ---------------------- ----------
<C> <S> <C>
***23.7 Consent of Dale F. Kinsella.
**24.1 Power of Attorney.
**24.2 Power of Attorney.
**27.1 Financial Data Schedule
</TABLE>
- --------
* To Be Filed By Amendment
** Previously Filed
*** Filed Herewith
<PAGE>
EXHIBIT 3.1
ARTICLES OF AMENDMENT AND RESTATEMENT
OF
KILROY REALTY CORPORATION,
A MARYLAND CORPORATION
KILROY REALTY CORPORATION, a Maryland corporation (the "Corporation"),
hereby certifies to the State Department of Assessments and Taxation of Maryland
(the "Department") that:
FIRST: The Corporation desires to and does hereby amend and restate
-----
its Charter, as currently in effect, consisting of Articles of Incorporation
filed on September 13, 1996 with the Department (the "Articles of
Incorporation"), as hereinafter provided. The provisions set forth in these
Articles of Amendment and Restatement are all of the provisions of the Charter
of the Corporation as currently in effect.
SECOND: The Charter of the Corporation is hereby amended by striking
------
in their entirety Articles FIRST through EIGHTH of the Articles of Incorporation
and by substituting in lieu thereof the following:
ARTICLE I
NAME OF THE CORPORATION
The name of the corporation (hereinafter the "Corporation") is:
Kilroy Realty Corporation
ARTICLE II
REGISTERED AGENT: PRINCIPAL OFFICE IN STATE
The address of the Corporation's principal office in the State of
Maryland is c/o Ballard, Spahr, Andrews & Ingersoll, 300 E. Lombard Street,
Baltimore, Maryland 21202. The name of the Corporation's registered agent is
Charles R. Moran, Esq., whose address is c/o Ballard, Spahr, Andrews &
Ingersoll, 300 E. Lombard Street, Baltimore, Maryland 21202, said resident agent
being a citizen of the state of Maryland residing therein.
ARTICLE III
PURPOSE OF THE CORPORATION
The purpose for which the Corporation is formed is to engage in any
lawful act or activity (including, without limitation or obligation, engaging in
business as a real estate
1
<PAGE>
investment trust (a "REIT") under Sections 856 to 860 of the Internal Revenue
Code of 1986, as amended, or any successor statute of similar import (the
"Code")) for which corporations may be organized under the Maryland General
Corporation Law, as amended from time to time, and any successor statute
hereafter enacted ("the MGCL").
ARTICLE IV
AUTHORIZED CAPITAL STOCK
The total number of shares of all classes of capital stock which the
Corporation shall have authority to issue is 180,000,000, consisting of
150,000,000 shares of common stock, par value $.01 per share (the "Common
Stock"), and 30,000,000 shares of preferred stock, par value $.01 per share (the
"Preferred Stock") which may be issued in one or more classes as described in
Paragraph C of this Article IV. The aggregate par value of all of the
Corporation's authorized shares having par value is $1,800,000. The Common
Stock and each class of the Preferred Stock shall each constitute a separate
class of capital stock of the Corporation.
The following is a description of each of the classes of stock of the
Corporation and a statement of the powers, preferences and rights of such stock,
and the qualifications, limitations and restrictions thereof:
A. Voting Rights.
-------------
1. Common Stock. Except as may otherwise be required by law,
------------
and subject to the provisions of such resolution or resolutions as may be
adopted by the Board of Directors pursuant to Paragraph C of this Article IV
granting the holders of one or more classes of Preferred Stock exclusive voting
powers with respect to any matter, each holder of Common Stock shall have one
vote in respect of each share of Common Stock held on all matters voted upon by
the stockholders.
2. Preferred Stock. Except as may otherwise be required by law,
---------------
and subject to the provisions of such resolution or resolutions as may be
adopted by the Board of Directors pursuant to Paragraph C of this Article IV
granting the holders of one or more classes of Preferred Stock voting powers
with respect to any matter, the Preferred Stock shall have no voting rights and
shall have no rights to receive notice of any meetings except as expressly
provided in the resolution establishing any class thereof.
B. Terms of Common Stock. The Common Stock shall be subject to the
---------------------
express terms of the Preferred Stock or any classes thereof.
1. Dividend Rights. After the provisions with respect to
---------------
preferential dividends on any class of Preferred Stock (fixed in accordance with
the provisions of Paragraph C of this Article IV), if any, shall have been
satisfied and after the Corporation shall have complied with all the
requirements, if any, with respect to redemption of, or the setting aside of
sums as sinking funds or redemption or purchase accounts with respect to, any
class of Preferred Stock (fixed in accordance with the provisions of Paragraph C
of this Article IV), and subject further to any other conditions that may be
fixed in accordance with the provisions of Paragraph
2
<PAGE>
C of this Article IV, then, and not otherwise, the holders of Common Stock shall
be entitled to receive such dividends as may be authorized and declared from
time to time by the Board of Directors out of funds legally available therefor.
All distributions paid with respect to the Common Stock shall be paid pro rata,
with no preference to any share of Common Stock as compared with other shares of
Common Stock.
2. Rights Upon Liquidation. In the event of the voluntary or
-----------------------
involuntary liquidation, dissolution or winding-up of the Corporation, after
distribution in full of the preferential amounts, if any (fixed in accordance
with the provisions of Paragraph C of this Article IV), to be distributed to the
holders of Preferred Stock by reason thereof, the holders of Common Stock shall,
subject to the additional rights, if any (fixed in accordance with the
provisions of Paragraph C of this Article IV), of the holders of any outstanding
shares of Preferred Stock, be entitled to receive all of the remaining assets of
the Corporation, tangible and intangible, of whatever kind available for
distribution to stockholders ratably in proportion to the number of shares of
Common Stock held by them.
C. Issuance and Terms of Preferred Stock. The Preferred Stock may
-------------------------------------
be issued, from time to time, in one or more classes, and each class shall be
known and designated by such designations, as may be stated and expressed in a
resolution or resolutions adopted by the Board of Directors of the Corporation
and as shall have been set forth in articles supplementary made, executed,
acknowledged, filed and recorded in the manner required by the MGCL in order to
make the same effective. Each class shall consist of such number of shares as
shall be stated and expressed in such resolution or resolutions providing for
the issue of Preferred Stock of such class together with such additional number
of shares as the Board of Directors by resolution or resolutions may from time
to time determine to issue as a part of such class. All shares of any one class
of such Preferred Stock shall be alike in every particular except that shares
issued at different times may accumulate dividends from different dates. The
Board of Directors shall have power and authority to state and determine in the
resolution or resolutions providing for the issue of each class of Preferred
Stock the number of shares of each such class authorized to be issued, the
voting powers (if any) and the designations, preferences and relative,
participating, optional, conversion or other rights appertaining to each such
class, and the qualifications, limitations or restrictions thereof (including,
but not by way of limitation, full power and authority to determine as to the
Preferred Stock of each such class, the rate or rates of dividends payable
thereon, the times of payment of such dividends, the prices and manner upon
which the Preferred Stock may be redeemed, the amount or amounts payable thereon
in the event of liquidation, dissolution or winding up of the Corporation or in
the event of any merger or consolidation of or sale of assets by the
Corporation, the rights (if any) to convert the Preferred Stock into, and/or to
purchase, stock of any other class or series, the terms of any sinking fund or
redemption or purchase account (if any) to be provided for shares of such class
of Preferred Stock, restrictions on ownership and transfer to preserve tax
benefits, and the voting powers (if any) of the holders of any class of
Preferred Stock generally or with respect to any particular matter, which may be
less than, equal to or greater than one vote per share, and which may, without
limiting the generality of the foregoing, include the right, voting as a class
by itself or together with the holders of any other class of Preferred Stock or
all classes of Preferred Stock as a single class, to elect one or more directors
of the Corporation generally or under such specific
3
<PAGE>
circumstances and on such conditions, as shall be provided in the resolution or
resolutions of the Board of Directors adopted pursuant hereto, including,
without limitation, in the event there shall have been a default in the payment
of dividends on or redemption of any one or more classes of Preferred Stock).
The Board of Directors may from time to time decrease the number of shares of
any class of Preferred Stock (but not below the number thereof then outstanding)
by providing that any unissued shares previously assigned to such class shall no
longer constitute part thereof and may assign such unissued shares to an
existing or newly created class. The foregoing provisions of this Paragraph C
with respect to the creation or issuance of classes of Preferred Stock shall be
subject to any additional conditions with respect thereto which may be contained
in any resolutions then in effect which shall have theretofore been adopted in
accordance with the foregoing provisions of this Paragraph C with respect to any
then outstanding class of Preferred Stock.
D. Authorization of Capital Stock; Issuance and Reclassification of
----------------------------------------------------------------
Shares. The Board of Directors may authorize the issuance from time to time of
- ------
shares of its capital stock of any class or series whether now or hereafter
authorized, or securities convertible into shares of its capital stock of any
class or series, whether now or hereafter authorized, for such consideration as
the Board of Directors may deem advisable, subject to such restrictions or
limitations, if any, as may be set forth in the Charter of the Corporation or
the Bylaws of the Corporation, or in the MGCL. In addition, the Board of
Directors shall have the power, in its sole discretion without limitation, to
classify or reclassify any unissued shares of capital stock of the Corporation,
whether now or hereafter authorized, by setting, altering or eliminating, in any
one or more respects, from time to time, before the issuance of such shares of
capital stock of the Corporation, any feature of such shares including, but not
limited to, the designation, par value, preferences or conversion or other
rights, voting powers, qualifications and terms and conditions of redemption,
limitations as to dividends and other distributions, restrictions on ownership
and transfer to preserve tax benefits and any other restrictions on such shares.
E. Restrictions on Ownership and Transfer to Preserve Tax Benefits.
----------------------------------------------------------------
1. Definitions. For the purposes of Paragraph E of this Article IV,
-----------
the following terms shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Common Stock
by a Person who is or would be treated as an owner of such Common
Stock either actually or constructively through the application of
Section 544 of the Code, as modified by Section 856(h)(1)(B) of the
Code. The terms "Beneficial Owner," "Beneficially Own," "Beneficially
Owns" and "Beneficially Owned" shall have the correlative meanings.
"Charitable Beneficiary" shall mean one or more
beneficiaries of a Trust, as determined pursuant to Subparagraph
E(3)(f) of this Article IV.
"Code" shall have the meaning set forth in Article III
hereof. All section references to the Code shall include any
successor provisions thereof as may be adopted from time to time.
4
<PAGE>
"Common Stock" shall have the meaning set forth in the
preamble to Article IV hereof.
"Corporation" shall have the meaning set forth in the
preamble to these Articles of Amendment and Restatement.
"Constructive Ownership" shall mean ownership of Common
Stock by a Person who is or would be treated as an owner of such
Common Stock either actually or constructively through the application
of Section 318 of the Code, as modified by Section 856(d)(5) of the
Code. The terms "Constructive Owner," "Constructively Own,"
"Constructively Owns" and "Constructively Owned" shall have the
correlative meanings.
"Initial Public Offering" shall mean the sale of Common
Stock pursuant to the Corporation's first effective registration
statement for such Common Stock filed under the Securities Act of
1933, as amended.
"IRS" means the United States Internal Revenue Service.
"Market Price" shall mean the last reported sales price
reported on the New York Stock Exchange of the Common Stock on the
trading day immediately preceding the relevant date, or if the Common
Stock is not then traded on the New York Stock Exchange, the last
reported sales price of the Common Stock on the trading day
immediately preceding the relevant date as reported on any exchange or
quotation system over which the Common Stock may be traded, or if the
Common Stock is not then traded over any exchange or quotation system,
then the market price of the Common Stock on the relevant date as
determined in good faith by the Board of Directors of the Corporation.
"Operating Partnership" shall mean Kilroy Realty, L.P., a
Delaware limited partnership.
"OP Units" shall have the meaning set forth in paragraph H
of Article IV hereof.
"Ownership Limit" shall mean 7.0% (by value or by number of
shares, whichever is more restrictive) of the outstanding Common Stock
of the Corporation.
"Partnership Agreement" shall mean the Agreement of Limited
Partnership of Kilroy Realty, L.P., as such agreement may be amended
from time to time.
"Person" shall mean an individual, corporation, partnership,
limited liability company, estate, trust (including a trust qualified
under Section 401(a) or 501(c)(17) of the Code), a portion of a trust
permanently set aside for or
5
<PAGE>
to be used exclusively for the purposes described in Section 642(c) of
the Code, association, private foundation within the meaning of
Section 509(a) of the Code, joint stock company or other entity; but
does not include an underwriter acting in a capacity as such in a
public offering of shares of Common Stock provided that the ownership
of such shares of Common Stock by such underwriter would not result in
the Corporation being "closely held" within the meaning of Section
856(h) of the Code, or otherwise result in the Corporation failing to
qualify as a REIT.
"Purported Beneficial Transferee" shall mean, with respect
to any purported Transfer (or other event) which results in a transfer
to a Trust, as provided in Subparagraph E(2)(b) of this Article IV,
the purported beneficial transferee or owner for whom the Purported
Record Transferee would have acquired or owned shares of Common Stock,
if such Transfer had been valid under Subparagraph E(2)(a) of this
Article IV.
"Purported Record Transferee" shall mean, with respect to
any purported Transfer (or other event) which results in a transfer to
a Trust, as provided in Subparagraph E(2)(b) of this Article IV, the
record holder of the shares of Common Stock if such Transfer had been
valid under Subparagraph E(2)(a) of this Article IV.
"REIT" shall mean a real estate investment trust under
Sections 856 through 860 of the Code.
"Restriction Termination Date" shall mean the first day
after the date of the Initial Public Offering on which (1) the Board
of Directors of the Corporation determines that it is no longer in the
best interests of the Corporation to attempt to, or continue to,
qualify as a REIT and (2) such determination is approved by the
affirmative vote of the holders of not less than two-thirds of the
shares of the Corporation's capital stock outstanding and entitled to
vote thereon.
"Transfer" shall mean any sale, transfer, gift, assignment,
devise or other disposition of Common Stock, including (i) the
granting of any option or entering into any agreement for the sale,
transfer or other disposition of Common Stock or (ii) the sale,
transfer, assignment or other disposition of any securities (or rights
convertible into or exchangeable for Common Stock), whether voluntary
or involuntary, whether such transfer has occurred of record or
beneficially or Beneficially or Constructively (including but not
limited to transfers of interests in other entities which results in
changes in Beneficial or Constructive Ownership of Common Stock), and
whether such transfer has occurred by operation of law or otherwise.
"Trust" shall mean each of the trusts provided for in
Subparagraph E(3) of this Article IV.
6
<PAGE>
"Trustee" shall mean any Person unaffiliated with the
Corporation, or a Purported Beneficial Transferee, or a Purported
Record Transferee, that is appointed by the Corporation to serve as
trustee of a Trust.
2. Restriction on Ownership and Transfers.
--------------------------------------
(a) From the date of the Initial Public Offering and prior to the
Restriction Termination Date:
(i) except as provided in Subparagraph E(9) of this Article
IV, no Person shall Beneficially Own Common Stock in excess of the Ownership
Limit;
(ii) except as provided in Subparagraph E(9) of this Article
IV, no Person shall Constructively Own in excess of 9.8% by value or number of
shares, whichever is more restrictive, of the outstanding shares of Common Stock
of the Corporation; and
(iii) no Person shall Beneficially or Constructively Own Common
Stock to the extent that such Beneficial or Constructive Ownership would result
in the Corporation being "closely held" within the meaning of Section 856(h) of
the Code, or otherwise failing to qualify as a REIT (including but not limited
to ownership that would result in the Corporation owning (actually or
Constructively) an interest in a tenant that is described in Section
856(d)(2)(B) of the Code if the income derived by the Corporation (either
directly or indirectly through one or more partnerships) from such tenant would
cause the Corporation to fail to satisfy any of the gross income requirements of
Section 856(c) of the Code).
(b) If, during the period commencing on the date of the Initial
Public Offering and prior to the Restriction Termination Date, any Transfer
(whether or not such Transfer is the result of a transaction entered into
through the facilities of the New York Stock Exchange ("NYSE")) or other event
occurs that, if effective, would result in any Person Beneficially or
Constructively Owning Common Stock in violation of Subparagraph E(2)(a) of this
Article IV, (i) then that number of shares of Common Stock that otherwise would
cause such Person to violate Subparagraph E(2)(a) of this Article IV (rounded up
to the nearest whole share) shall be automatically transferred to a Trust for
the benefit of a Charitable Beneficiary, as described in Subparagraph E(3),
effective as of the close of business on the business day prior to the date of
such Transfer or other event, and such Purported Beneficial Transferee shall
thereafter have no rights in such shares or (ii) if, for any reason, the
transfer to the Trust described in clause (i) of this sentence is not
automatically effective as provided therein to prevent any Person from
Beneficially or Constructively Owning Common Stock in violation of Subparagraph
E(2)(a) of this Article IV, then the Transfer of that number of shares of Common
Stock that otherwise would cause any Person to violate Subparagraph E(2)(a)
shall be void ab initio, and the Purported Beneficial Transferee shall have no
rights in such shares.
(c) Subject to Section K of this Article IV and notwithstanding
any other provisions contained herein, during the period commencing on the date
of the Initial Public Offering and prior to the Restriction Termination Date,
any Transfer of Common Stock (whether or not such Transfer is the result of a
transaction entered into through the facilities of the NYSE)
7
<PAGE>
that, if effective, would result in the capital stock of the Corporation being
beneficially owned by less than 100 Persons (determined without reference to any
rules of attribution) shall be void ab initio, and the intended transferee shall
acquire no rights in such Common Stock.
(d) It is expressly intended that the restrictions on ownership
and Transfer described in this Subparagraph E(2) of Article IV shall apply to
the redemption/exchange rights provided in Section 8.6 of the Partnership
Agreement. Notwithstanding any of the provisions of the Partnership Agreement to
the contrary, a partner of the Operating Partnership shall not be entitled to
effect an exchange of an interest in the Operating Partnership for Common Stock
if the actual or beneficial or Beneficial or Constructive ownership of Common
Stock would be prohibited under the provisions of this Article IV.
3. Transfers of Common Stock in Trust.
----------------------------------
(a) Upon any purported Transfer or other event described in
Subparagraph E(2)(b) of this Article IV, such Common Stock shall be deemed to
have been transferred to the Trustee in his capacity as trustee of a Trust for
the exclusive benefit of one or more Charitable Beneficiaries. Such transfer to
the Trustee shall be deemed to be effective as of the close of business on the
business day prior to the purported Transfer or other event that results in a
transfer to the Trust pursuant to Subparagraph E(2)(b). The Trustee shall be
appointed by the Corporation and shall be a Person unaffiliated with the
Corporation, any Purported Beneficial Transferee, and any Purported Record
Transferee. Each Charitable Beneficiary shall be designated by the Corporation
as provided in Subparagraph E(3)(f) of this Article IV.
(b) Common Stock held by the Trustee shall be issued and
outstanding Common Stock of the Corporation. The Purported Beneficial Transferee
or Purported Record Transferee shall have no rights in the shares of Common
Stock held by the Trustee. The Purported Beneficial Transferee or Purported
Record Transferee shall not benefit economically from ownership of any shares
held in trust by the Trustee, shall have no rights to dividends and shall not
possess any rights to vote or other rights attributable to the shares of Common
Stock held in the Trust.
(c) The Trustee shall have all voting rights and rights to
dividends with respect to Common Stock held in the Trust, which rights shall be
exercised for the exclusive benefit of the Charitable Beneficiary. Any dividend
or distribution paid prior to the discovery by the Corporation that shares of
Common Stock have been transferred to the Trustee shall be paid to the Trustee
upon demand, and any dividend or distribution declared but unpaid shall be paid
when due to the Trustee with respect to such Common Stock. Any dividends or
distributions so paid over to the Trustee shall be held in trust for the
Charitable Beneficiary. The Purported Record Transferee and Purported Beneficial
Transferee shall have no voting rights with respect to the Common Stock held in
the Trust and, subject to Maryland law, effective as of the date the Common
Stock has been transferred to the Trustee, the Trustee shall have the authority
(at the Trustee's sole discretion) (i) to rescind as void any vote cast by a
Purported Record Transferee with respect to such Common Stock prior to the
discovery by the Corporation that the Common
8
<PAGE>
Stock has been transferred to the Trustee and (ii) to recast such vote in
accordance with the desires of the Trustee acting for the benefit of the
Charitable Beneficiary; provided, however, that if the Corporation has already
taken irreversible corporate action, then the Trustee shall not have the
authority to rescind and recast such vote. Notwithstanding the provisions of
this Article IV, until the Corporation has received notification that the Common
Stock has been transferred into a Trust, the Corporation shall be entitled to
rely on its share transfer and other stockholder records for purposes of
preparing lists of stockholders entitled to vote at meetings, determining the
validity and authority of proxies and otherwise conducting votes of
stockholders.
(d) Within 20 days of receiving notice from the Corporation that
shares of Common Stock have been transferred to the Trust, the Trustee of the
Trust shall sell the shares of Common Stock held in the Trust to a person,
designated by the Trustee, whose ownership of the shares of Common Stock will
not violate the ownership limitations set forth in Subparagraph E(2)(a). Upon
such sale, the interest of the Charitable Beneficiary in the shares of Common
Stock sold shall terminate and the Trustee shall distribute the net proceeds of
the sale to the Purported Record Transferee and to the Charitable Beneficiary as
provided in this Subparagraph E(3)(d). The Purported Record Transferee shall
receive the lesser of (i) the price paid by the Purported Record Transferee for
the shares of Common Stock in the transaction that resulted in such transfer to
the Trust (or, if the event which resulted in the transfer to the Trust did not
involve a purchase of such shares of Common Stock at Market Price, the Market
Price of such shares of Common Stock on the day of the event which resulted in
the transfer of such shares of Common Stock to the Trust) and (ii) the price per
share received by the Trustee (net of any commissions and other expenses of
sale) from the sale or other disposition of the shares of Common Stock held in
the Trust. Any net sales proceeds in excess of the amount payable to the
Purported Record Transferee shall be immediately paid to the Charitable
Beneficiary together with any dividends or other distributions thereon. If,
prior to the discovery by the Corporation that shares of such Common Stock have
been transferred to the Trustee, such shares of Common Stock are sold by a
Purported Record Transferee then (x) such shares of Common Stock shall be deemed
to have been sold on behalf of the Trust and (y) to the extent that the
Purported Record Transferee received an amount for such shares of Common Stock
that exceeds the amount that such Purported Record Transferee was entitled to
receive pursuant to this Subparagraph E(3)(d), such excess shall be paid to the
Trustee upon demand.
(e) Common Stock transferred to the Trustee shall be deemed to
have been offered for sale to the Corporation, or its designee, at a price per
share equal to the lesser of (i) the price paid by the Purported Record
Transferee for the shares of Common Stock in the transaction that resulted in
such transfer to the Trust (or, if the event which resulted in the transfer to
the Trust did not involve a purchase of such shares of Common Stock at Market
Price, the Market Price of such shares of Common Stock on the day of the event
which resulted in the transfer of such shares of Common Stock to the Trust) and
(ii) the Market Price on the date the Corporation, or its designee, accepts such
offer. The Corporation shall have the right to accept such offer until the
Trustee has sold the shares of Common Stock held in the Trust pursuant to
Subparagraph E(3)(d). Upon such a sale to the Corporation, the interest of the
Charitable Beneficiary in the shares of Common Stock sold shall terminate and
the Trustee shall distribute the net proceeds of the sale to the Purported
Record Transferee and any dividends or other
9
<PAGE>
distributions held by the Trustee with respect to such Common Stock shall
thereupon be paid to the Charitable Beneficiary.
(f) By written notice to the Trustee, the Corporation shall
designate one or more nonprofit organizations to be the Charitable Beneficiary
of the interest in the Trust such that (i) the shares of Common Stock held in
the Trust would not violate the restrictions set forth in Subparagraph E(2)(a)
in the hands of such Charitable Beneficiary and (ii) each Charitable Beneficiary
is an organization described in Sections 170(b)(1)(A), 170(c)(2) or 501(c)(3) of
the Code.
4. Remedies For Breach. If the Board of Directors or a committee
-------------------
thereof or other designees if permitted by the MGCL shall at any time determine
in good faith that a Transfer or other event has taken place in violation of
Subparagraph E(2) of this Article IV or that a Person intends to acquire, has
attempted to acquire or may acquire beneficial ownership (determined without
reference to any rules of attribution), Beneficial Ownership or Constructive
Ownership of any shares of the Corporation in violation of Subparagraph E(2) of
this Article IV, the Board of Directors or a committee thereof or other
designees if permitted by the MGCL shall take such action as it deems advisable
to refuse to give effect or to prevent such Transfer, including, but not limited
to, causing the Corporation to redeem shares of Common Stock, refusing to give
effect to such Transfer on the books of the Corporation or instituting
proceedings to enjoin such Transfer; provided, however, that any Transfers (or,
in the case of events other than a Transfer, ownership or Constructive Ownership
or Beneficial Ownership) in violation of Subparagraph E(2)(a) of this Article
IV, shall automatically result in the transfer to a Trust as described in
Subparagraph E(2)(b) and any Transfer in violation of Subparagraph E(2)(c) shall
automatically be void ab initio irrespective of any action (or non-action) by
the Board of Directors.
5. Notice of Restricted Transfer. Any Person who acquires or
-----------------------------
attempts to acquire shares in violation of Subparagraph E(2) of this Article IV,
or any Person who is a Purported Beneficial Transferee such that an automatic
transfer to a Trust results under Subparagraph E(2)(b) of this Article IV, shall
immediately give written notice to the Corporation of such event and shall
provide to the Corporation such other information as the Corporation may request
in order to determine the effect, if any, of such Transfer or attempted Transfer
on the Corporation's status as a REIT.
6. Owners Required to Provide Information. From the date of the
--------------------------------------
Initial Public Offering and prior to the Restriction Termination Date each
Person who is a beneficial owner or Beneficial Owner or Constructive Owner of
shares of Common Stock and each Person (including the stockholder of record) who
is holding shares of Common Stock for a beneficial owner or Beneficial Owner or
Constructive Owner shall, on demand, provide to the Corporation a completed
questionnaire containing the information regarding their ownership of such
shares, as set forth in the regulations (as in effect from time to time) of the
U.S. Department of Treasury under the Code. In addition, each Person who is a
beneficial owner or Beneficial Owner or Constructive Owner of shares of Common
Stock and each Person (including the stockholder of record) who is holding
shares of Common Stock for a beneficial owner or Beneficial Owner or
10
<PAGE>
Constructive Owner shall, on demand, be required to disclose to the Corporation
in writing such information as the Corporation may request in order to determine
the effect, if any, of such stockholder's actual and constructive ownership of
shares of Common Stock on the Corporation's status as a REIT and to ensure
compliance with the Ownership Limit, or such other limit as provided from time
to time in these Articles of Amendment and Restatement or as otherwise permitted
by the Board of Directors.
7. Remedies Not Limited. Nothing contained in this Article IV (but
--------------------
subject to Paragraph K of this Article IV) shall limit the authority of the
Board of Directors to take such other action as it deems necessary or advisable
to protect the Corporation and the interests of its stockholders by preservation
of the Corporation's status as a REIT.
8. Ambiguity. In the case of an ambiguity in the application of any
---------
of the provisions of this Paragraph E of this Article IV, including any
definition contained in Subparagraph E(1), the Board of Directors shall have the
power to determine the application of the provisions of this Paragraph E with
respect to any situation based on the facts known to it (subject, however, to
the provisions of Paragraph K of this Article IV). In the event Paragraph E
requires an action by the Board of Directors and these Articles of Amendment and
Restatement fail to provide specific guidance with respect to such action, the
Board of Directors shall have the power to determine the action to be taken so
long as such action is not contrary to the provisions of Paragraph E. Absent a
decision to the contrary by the Board of Directors (which the Board may make in
its sole and absolute discretion), if a Person would have (but for the remedies
set forth in Subparagraph E(2)(b)) acquired Beneficial or Constructive Ownership
of Common Stock in violation of Subparagraph E(2)(a), such remedies (as
applicable) shall apply first to the shares of Common Stock which, but for such
remedies, would have been actually owned by such Person, and second to shares of
Common Stock which, but for such remedies, would have been Beneficially Owned or
Constructively Owned (but not actually owned) by such Person, pro rata among the
Persons who actually own such shares of Common Stock based upon the relative
number of the shares of Common Stock held by each such Person.
9. Exceptions.
----------
(a) Subject to Subparagraph E(2)(a)(iii), the Board of Directors,
in its sole discretion, may exempt a Person from the limitation on a Person
Beneficially Owning shares of Common Stock in excess of the Ownership Limit
if the Board of Directors obtains such representations and undertakings
from such Person as are reasonably necessary to ascertain that no
individual's Beneficial Ownership of such shares of Common Stock will
violate the Ownership Limit or that any such violation will not cause the
Corporation to fail to qualify as a REIT under the Code, and agrees that
any violation of such representations or undertaking (or other action which
is contrary to the restrictions contained in Subparagraph E(2) of this
Article IV) or attempted violation will result in such Common Stock being
transferred to a Trust in accordance with Subparagraph E(2)(b) of this
Article IV.
(b) Subject to Subparagraph E(2)(a)(iii), the Board of Directors,
in its sole discretion, may exempt a Person from the limitation on a Person
Constructively Owning
11
<PAGE>
Common Stock in excess of 9.8% (by value or by number of shares of Common
Stock, whichever is more restrictive) of the outstanding shares of Common
Stock of the Corporation, if such Person does not and represents that it
will not own, actually or Constructively, an interest in a tenant of the
Corporation (or a tenant of any entity owned in whole or in part by the
Corporation) that would cause the Corporation to own, actually or
Constructively more than a 9.8% interest (as set forth in Section
856(d)(2)(B) of the Code) in such tenant and the Corporation obtains such
representations and undertakings from such Person as are reasonably
necessary to ascertain this fact and agrees that any violation or attempted
violation will result in such Common Stock being transferred to a Trust in
accordance with Subparagraph E(2)(b) of this Article IV. Notwithstanding
the foregoing, the inability of a Person to make the certification
described in this Subparagraph E(9)(b) shall not prevent the Board of
Directors, in its sole discretion, from exempting such Person from the
limitation on a Person Constructively Owning Common Stock in excess of 9.8%
of the outstanding shares of Common Stock if the Board of Directors
determines that the resulting application of Section 856(d)(2)(B) of the
Code would affect the characterization of less than 0.5% of the gross
income (as such term is used in Section 856(c)(2) of the Code) of the
Corporation in any taxable year, after taking into account the effect of
this sentence with respect to all other Common Stock to which this sentence
applies.
(c) Prior to granting any exception pursuant to Subparagraph
E(9)(a) or (b) of this Article IV, the Board of Directors may require a
ruling from the Internal Revenue Service, or an opinion of counsel, in
either case in form and substance satisfactory to the Board of Directors in
its sole discretion, as it may deem necessary or advisable in order to
determine or ensure the Corporation's status as a REIT.
F. Preemptive Rights. No holder of shares of stock of any class
-----------------
shall have any preemptive or preferential right to subscribe or to purchase any
additional shares of any class, or any bonds or convertible securities of any
nature; provided, however, that the Board of Directors may, in authorizing the
issuance of shares of stock of any class or series, confer any preemptive or
preferential right that the Board of Directors may deem advisable in connection
with such issuance.
G. Legends. Each certificate for Common Stock and Preferred Stock
-------
shall bear the following legends:
CLASS OF STOCK
"THE CORPORATION IS AUTHORIZED TO ISSUE CAPITAL STOCK OF MORE THAN ONE
CLASS, CONSISTING OF COMMON STOCK AND ONE OR MORE CLASSES OF PREFERRED
STOCK. THE BOARD OF DIRECTORS IS AUTHORIZED TO DETERMINE THE PREFERENCES,
LIMITATIONS AND RELATIVE RIGHTS OF ANY CLASS OF THE PREFERRED STOCK BEFORE
THE ISSUANCE OF SHARES OF SUCH CLASS OF PREFERRED STOCK. THE CORPORATION
WILL FURNISH, WITHOUT CHARGE, TO ANY STOCKHOLDER MAKING A WRITTEN REQUEST
THEREFOR, A COPY OF THE CORPORATION'S CHARTER AND A WRITTEN STATEMENT OF
THE
12
<PAGE>
DESIGNATIONS, RELATIVE RIGHTS, PREFERENCES, CONVERSION OR OTHER RIGHTS,
VOTING POWERS, RESTRICTIONS, LIMITATIONS AS TO DIVIDENDS AND OTHER
DISTRIBUTIONS, QUALIFICATIONS AND TERMS AND CONDITIONS OF REDEMPTION OF THE
STOCK OF EACH CLASS WHICH THE CORPORATION HAS THE AUTHORITY TO ISSUE AND,
IF THE CORPORATION IS AUTHORIZED TO ISSUE ANY PREFERRED OR SPECIAL CLASS
AND SERIES, (i) THE DIFFERENCES IN THE RELATIVE RIGHTS AND PREFERENCES
BETWEEN THE SHARES OF EACH SERIES TO THE EXTENT SET, AND (ii) THE AUTHORITY
OF THE BOARD OF DIRECTORS TO SET SUCH RIGHTS AND PREFERENCES OF SUBSEQUENT
SERIES. REQUESTS FOR SUCH WRITTEN STATEMENT MAY BE DIRECTED TO THE
SECRETARY OF THE CORPORATION AT ITS PRINCIPAL OFFICE."
RESTRICTION ON OWNERSHIP AND TRANSFER
"THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON BENEFICIAL AND CONSTRUCTIVE OWNERSHIP AND TRANSFER FOR THE
PURPOSE OF THE CORPORATION'S MAINTENANCE OF ITS STATUS AS A REAL ESTATE
INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"). SUBJECT TO CERTAIN FURTHER RESTRICTIONS AND EXCEPT AS EXPRESSLY
PROVIDED IN THE CORPORATION'S CHARTER, (i) NO PERSON MAY BENEFICIALLY OWN
SHARES OF THE CORPORATION'S COMMON STOCK IN EXCESS OF 7.0% (BY VALUE OR BY
NUMBER OF SHARES, WHICHEVER IS MORE RESTRICTIVE) OF THE OUTSTANDING COMMON
STOCK OF THE CORPORATION; (ii) NO PERSON MAY CONSTRUCTIVELY OWN SHARES OF
THE CORPORATION'S COMMON STOCK IN EXCESS OF 9.8% (BY VALUE OR BY NUMBER OF
SHARES, WHICHEVER IS MORE RESTRICTIVE) OF THE OUTSTANDING COMMON STOCK OF
THE CORPORATION; (iii) NO PERSON MAY BENEFICIALLY OR CONSTRUCTIVELY OWN
SHARES OF COMMON STOCK THAT WOULD RESULT IN THE CORPORATION BEING "CLOSELY
HELD" UNDER SECTION 856(h) OF THE CODE OR OTHERWISE CAUSE THE CORPORATION
TO FAIL TO QUALIFY AS A REIT; AND (iv) NO PERSON MAY TRANSFER SHARES OF
COMMON STOCK IF SUCH TRANSFER WOULD RESULT IN THE CAPITAL STOCK OF THE
CORPORATION BEING OWNED BY FEWER THAN 100 PERSONS. ANY PERSON WHO
BENEFICIALLY OR CONSTRUCTIVELY OWNS OR ATTEMPTS TO BENEFICIALLY OR
CONSTRUCTIVELY OWN SHARES OF COMMON STOCK WHICH CAUSES OR WILL CAUSE A
PERSON TO BENEFICIALLY OR CONSTRUCTIVELY OWN SHARES OF COMMON STOCK IN
EXCESS OF THE ABOVE LIMITATIONS MUST IMMEDIATELY NOTIFY THE CORPORATION.
IF ANY OF THE RESTRICTIONS ON TRANSFER OR OWNERSHIP ARE VIOLATED, THE
SHARES OF COMMON STOCK REPRESENTED HEREBY WILL BE AUTOMATICALLY TRANSFERRED
TO THE TRUSTEE OF A TRUST FOR THE BENEFIT OF ONE OR MORE CHARITABLE
BENEFICIARIES. IN ADDITION,
13
<PAGE>
THE CORPORATION MAY REDEEM SHARES UPON THE TERMS AND CONDITIONS SPECIFIED
BY THE BOARD OF DIRECTORS IN ITS SOLE DISCRETION IF THE BOARD OF DIRECTORS
DETERMINES THAT OWNERSHIP OR A TRANSFER OR OTHER EVENT MAY VIOLATE THE
RESTRICTIONS DESCRIBED ABOVE. FURTHERMORE, UPON THE OCCURRENCE OF CERTAIN
EVENTS, ATTEMPTED TRANSFERS IN VIOLATION OF THE RESTRICTIONS DESCRIBED
ABOVE MAY BE VOID AB INITIO. ALL TERMS IN THIS LEGEND THAT ARE DEFINED IN
THE CHARTER OF THE CORPORATION SHALL HAVE THE MEANINGS ASCRIBED TO THEM IN
THE CHARTER OF THE CORPORATION, AS THE SAME MAY BE AMENDED FROM TIME TO
TIME, A COPY OF WHICH, INCLUDING THE RESTRICTIONS ON TRANSFER AND
OWNERSHIP, WILL BE FURNISHED TO EACH HOLDER OF SHARES OF COMMON STOCK ON
REQUEST AND WITHOUT CHARGE. REQUESTS FOR SUCH A COPY MAY BE DIRECTED TO THE
SECRETARY OF THE CORPORATION AT ITS PRINCIPAL OFFICE."
H. Exchange of OP Units. So long as the Corporation remains the
--------------------
general partner of the Operating Partnership, the Board of Directors of the
Corporation is hereby expressly vested with authority (subject to the
restrictions on ownership, transfer and redemption of Common Stock set forth in
this Article IV) to issue, and shall issue to the extent provided in the
Partnership Agreement, Common Stock in exchange for the units into which
partnership interests of the Operating Partnership are divided (the "OP Units"),
and as the same may be adjusted, as provided in the Partnership Agreement.
I. Reservation of Shares. Pursuant to the obligations of the
---------------------
Corporation under the Partnership Agreement to issue Common Stock in exchange
for OP Units, the Board of Directors is hereby required to reserve and authorize
for issuance a sufficient number of authorized but unissued shares of Common
Stock to permit the Corporation to issue Common Stock in exchange for OP Units
that may be exchanged for or converted into Common Stock as provided in the
Partnership Agreement.
J. Severability. If any provision of this Article IV or any
------------
application of any such provision is determined to be invalid by any federal or
state court having jurisdiction over the issues, the validity of the remaining
provisions shall not be affected and other applications of such provision shall
be affected only to the extent necessary to comply with the determination of
such court.
K. NYSE. Nothing in this Article IV shall preclude the settlement
----
of any transaction entered into through the facilities of the New York Stock
Exchange. The shares of Common Stock that are the subject of such transaction
shall continue to be subject to the provisions of this Article IV after such
settlement.
ARTICLE V
CORPORATE EXISTENCE
A. The Corporation is to have perpetual existence.
14
<PAGE>
ARTICLE VI
CLASSIFIED BOARD
A. The business and affairs of the Corporation shall be managed by the
Board of Directors. The Corporation shall have a board of two (2) directors
until that number is increased or decreased in accordance with the Bylaws of the
Corporation, or as contemplated by the provisions of Paragraph F of this Article
VI, provided that, upon the consummation of the Initial Public Offering (as
defined in Article IV hereof), the Corporation shall have a board of five (5)
directors until that number is increased or decreased in accordance with the
Bylaws of the Corporation. However, the number of directors shall never be less
than the minimum number required by the MGCL. Upon consummation of the Initial
Public Offering, at least a majority of the directors shall be Independent
Directors (as defined in the next sentence). An Independent Director is a
director who is not an employee, officer or affiliate of the Corporation or
Kilroy Industries or a subsidiary or division thereof, or a relative of a
principal executive officer, or who is not an individual member of an
organization acting as an advisor, consultant or legal counsel receiving
compensation on a continuing basis from the Company in addition to director's
fees. The following persons shall be the directors of the Corporation until the
expiration of their respective terms as set forth in Paragraph B of this Article
VI:
John B. Kilroy, Sr.
John B. Kilroy, Jr.
B. Upon consummation of the Initial Public Offering, the directors of
the Corporation (other than any directors who may be elected by holders of
Preferred Stock as provided for pursuant to Paragraph F of this Article VI)
shall be divided into three classes: Class I, Class II and Class III. The number
of directors in each class shall be as nearly equal as the then-authorized
number of directors constituting the Board of Directors permits. Upon
consummation of the Initial Public Offering, John B. Kilroy, Jr. shall be
designated as a Class III director and John B. Kilroy, Sr. shall be designated
as a Class II director. Each director shall serve for a term ending on the date
of the third annual meeting following the annual meeting at which such director
was elected; provided, however, that each director in Class I at the time of the
consummation of the Initial Public Offering shall serve for a term ending on the
date of the annual meeting held in 1998, each director in Class II at the time
of the consummation of the Initial Public Offering shall serve for a term ending
on the date of the annual meeting held in 1999, and each director in Class III
at the time of the consummation of the Initial Public Offering shall serve for a
term ending on the date of the annual meeting held in 2000.
C. In the event of any increase or decrease in the authorized number
of directors:
15
<PAGE>
1. Each director then serving shall nevertheless continue as a
director of the class of which he is a member until the expiration of his term
or his prior death, retirement, resignation or removal; and
2. Except to the extent that an increase or decrease in the
authorized number of directors occurs in connection with the rights of holders
of Preferred Stock to elect additional directors, the newly-created or
eliminated directorships resulting from any increase or decrease shall be
apportioned by the Board of Directors among the three classes so as to keep the
number of directors in each class as nearly equal as possible.
D. Notwithstanding the provisions of Paragraphs B and C of this
Article VI, each director (other than any director who may be elected by holders
of Preferred Stock as provided for pursuant to Article IV hereof), shall serve
until his successor is elected and qualified or until his earlier death,
retirement, resignation or removal.
E. Except as may otherwise be provided pursuant to Article IV hereof
with respect to any rights of holders of Preferred Stock to elect additional
directors or any agreement relating to the right to designate nominees for
election to the Board of Directors, should a vacancy in the Board of Directors
occur or be created (whether arising through death, retirement or resignation),
such vacancy shall be filled by the affirmative vote of a majority of the
remaining directors, even though less than a quorum of the Board of Directors
or, in the case of a vacancy resulting from an increase in the number of
directors, by a majority of the Board of Directors. In the case of a vacancy
created by the removal of a director, the vacancy shall be filled by the
stockholders at the next annual meeting of the stockholders or at a special
meeting of the stockholders called for such purpose, provided, however, that
such vacancy may be filled by the affirmative vote of a majority of the
remaining directors (subject to approval by the stockholders at the next annual
meeting of the stockholders or at a special meeting of the stockholders called
for such purpose). A director so elected to fill a vacancy shall serve for the
remainder of the term of the class to which he was elected. If the stockholders
of any class or series of Preferred Stock are entitled separately to elect one
or more directors, the stockholders of that class or series shall fill a vacancy
on the Board of Directors which results from the removal of a director elected
by that class or series.
F. During any period when the holders of any class of Preferred Stock
have the right to elect additional directors as provided for or fixed pursuant
to the provisions of Article IV hereof, then upon commencement and for the
duration of the period during which such right continues (i) the then otherwise
total and authorized number of directors of the Corporation shall automatically
be increased by that number of such additional directors, and the holders of
such Preferred Stock shall be entitled to elect the additional directors so
provided for or fixed pursuant to said provisions, and (ii) each such additional
director shall serve until such director's successor shall have been duly
elected and qualified, or until such director's right to hold such office
terminates pursuant to said provisions, whichever occurs earlier, subject to his
earlier death, disqualification, resignation or removal. Except as otherwise
provided by the Board of Directors in the resolution or resolutions establishing
such class, whenever the holders of any class of Preferred Stock having such
right to elect additional directors are divested of such right
16
<PAGE>
pursuant to the provisions of such stock, the term of office of all such
additional directors elected by the holders of such stock, or elected to fill
any vacancies resulting from the death, resignation, disqualification or removal
of such additional directors, shall forthwith terminate and the total and
authorized number of directors of the Corporation shall be reduced accordingly.
ARTICLE VII
RELATED PARTY TRANSACTIONS
A. Without limiting any other procedures available by law or otherwise
to the Corporation, the Board of Directors may authorize any agreement or other
transaction with any person, corporation, association, company, trust, limited
liability company, partnership (limited or general) or other organization,
although one or more of the directors or officers of the Corporation may be a
party to any such agreement or an officer, director, stockholder, member or
partner (general or limited) of such other party (an "Interested
Officer/Director"), and no such agreement or transaction shall be invalidated or
rendered void or voidable solely by reason of the existence of any such
relationship if: (i) the existence is disclosed or known to the Board of
Directors, and the contract or transaction is authorized, approved or ratified
by the affirmative vote of not less than a majority of the disinterested
directors, even if they constitute less than a quorum of the Board of Directors;
(ii) the existence is disclosed to the stockholders entitled to vote, and the
contract or transaction is authorized, approved or ratified by a majority of the
votes cast by the stockholders entitled to vote, other than the votes of the
shares held of record by the Interested Officers/Directors or by any
corporation, association, company, trust, limited liability company, partnership
(limited or general) or other organization in which any Interested
Officer/Director is a director or has a material financial interest; or (iii)
the contract or transaction is fair and reasonable to the Corporation. Any
Interested Officer/Director, or the stock owned by them or by a corporation,
association, company, trust, limited liability company, partnership (limited or
general) or other organization in which an Interested Officer/Director may have
an interest, may be counted in determining the presence of a quorum at a meeting
of the Board of Directors or a committee of the Board of Directors or at a
meeting of the stockholders, as the case may be, at which the contract or
transaction is authorized, approved or ratified.
ARTICLE VIII
DIRECTOR AND OFFICER LIABILITY; INDEMNIFICATION
A. To the maximum extent that Maryland law in effect from time to time
permits limitation of the liability of directors and officers, no director or
officer of the Corporation shall be liable to the Corporation or its
stockholders for money damages. Neither the amendment nor repeal of this
Article, nor the adoption or amendment of any other provision of the Charter of
the Corporation or the Bylaws of the Corporation inconsistent with this Article,
shall apply to or affect in any respect the applicability of the preceding
sentence with respect to any act or failure to act which occurred prior to such
amendment, repeal or adoption.
B. The Corporation shall indemnify, in the manner and to the maximum
extent permitted by law, any person (or the estate of any person) who is or was
a party to, or is threatened to be made a party to, any threatened, pending or
completed action, suit or proceeding,
17
<PAGE>
whether or not by or in the right of the Corporation, and whether civil,
criminal, administrative, investigative, or otherwise, by reason of the fact
that such person is or was a director or officer of the Corporation or that such
person while a director or officer of the Corporation, is or was serving at the
request of the Corporation as a director, officer, trustee, partner, member,
agent or employee of another corporation, partnership, limited liability
company, association, joint venture, trust or other enterprise. To the maximum
extent permitted by law, the indemnification provided herein shall include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, and any such expenses may be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding. Neither the amendment
nor repeal of this Article, nor the adoption or amendment of any other provision
of the Charter of the Corporation or the Bylaws of the Corporation inconsistent
with this Article, shall apply to or affect in any respect the applicability of
this Paragraph B of Article VIII with respect to any act or failure to act which
occurred prior to such amendment, repeal or adoption.
The indemnification and reimbursement of expenses provided herein
shall not be deemed to limit the right of the Corporation to indemnify any other
person against any liability and expenses to the fullest extent permitted by
law, nor shall it be deemed exclusive of any other rights to which any person
seeking indemnification from the Corporation may be entitled under any
agreement, the Charter of the Corporation or the Bylaws of the Corporation, a
vote of stockholders or disinterested directors, or otherwise, both as to action
in such person's official capacity as an officer or director and as to action in
another capacity, at the request of the Corporation, while acting as an officer
or director of the Corporation.
ARTICLE IX
ELECTION OF DIRECTORS
Elections of directors need not be by written ballot unless the Bylaws
of the Corporation shall so provide.
ARTICLE X
CERTAIN POWERS OF THE DIRECTORS
A. Determinations by Board. The determination as to any of the
-----------------------
following matters, made in good faith by or pursuant to the direction of the
Board of Directors consistent with the Charter of the Corporation and in the
absence of actual receipt of an improper benefit in money, property or services
or active and deliberate dishonesty established by a court, shall be final and
conclusive and shall be binding upon the Corporation and every holder of shares
of its stock: the amount of the net income of the Corporation for any period
and the amount of assets at any time legally available for the payment of
dividends, redemption of its stock or the payment of other distributions on its
stock; the amount of paid-in surplus, net assets, other surplus, annual or other
net profit, net assets in excess of capital, undivided profits or excess of
profits over losses on sales of assets; the amount, purpose, time of creation,
increase or decrease, alteration or cancellation of any reserves or charges and
the propriety thereof (whether or not any obligation or liability for which such
reserves or charges shall have been created shall have been paid or discharged);
the fair value, or any sale, bid or asked price to be applied in determining the
fair
18
<PAGE>
value, of any asset owned or held by the Corporation; and any matters relating
to the acquisition, holding and disposition of any assets by the Corporation.
B. REIT Qualification. Subject to paragraph (K) of Article IV
------------------
hereof, the Board of Directors shall use its reasonable best efforts to take
such actions as are necessary or appropriate to preserve the status of the
Corporation as a REIT; however, if the Board of Directors determines that it is
no longer in the best interests of the Corporation to qualify or continue to be
qualified as a REIT and such determination is approved by the affirmative vote
of holders of at least two-thirds of the shares of the Corporation's capital
stock outstanding and entitled to vote thereon, the Board of Directors may
revoke or otherwise terminate the Corporation's REIT election pursuant to
Section 856(g) of the Code. The Board of Directors also may determine that
compliance with any restriction or limitation on stock ownership and transfers
set forth in Article IV is no longer required for REIT qualification.
C. Advisor Agreements. Subject to such approval of stockholders and
------------------
other conditions, if any, as may be required by any applicable statute, rule or
regulation, the Board of Directors may authorize the execution and performance
by the Corporation of one or more agreements with any person, corporation,
association, company, trust, partnership (limited or general) or other
organization whereby, subject to the supervision and control of the Board of
Directors, any such other person, corporation, association, company, trust,
partnership (limited or general) or other organization shall render or make
available to the Corporation managerial, investment, advisory and/or related
services, office space and other services and facilities (including, if deemed
advisable by the Board of Directors, the management or supervision of the
investments of the Corporation) upon such terms and conditions as may be
provided in such agreement or agreements (including, if deemed fair and
equitable by the Board of Directors, the compensation payable thereunder by the
Corporation).
D. Irrevocable Resolutions. The Board of Directors may designate any
-----------------------
of its resolutions to be "irrevocable." Resolutions so designated may not be
revoked subsequently by the Board of Directors without the approval of the
issued and outstanding shares of Common Stock of the Corporation by the
affirmative vote of a majority of all votes entitled to be cast in respect of
such shares of Common Stock.
ARTICLE XI
REMOVAL OF DIRECTORS
Subject to the rights of one or more classes or series of Preferred
Stock to elect one or more directors, any director, or the entire Board of
Directors, may be removed from office at any time, but only for cause and then
only by the affirmative vote of the holders of at least two thirds of the votes
entitled to be cast in the election of directors.
19
<PAGE>
ARTICLE XII
AMENDMENTS
Subject to the provisions hereof, the Corporation reserves the right
at any time, and from time to time, to amend, alter, repeal, or rescind any
provision of its Charter, in the manner now or hereafter prescribed by law,
including without limitation any amendment altering the terms or contract
rights, as expressly set forth in the Charter of the Corporation, of any
outstanding shares of stock; and other provisions authorized or permitted by the
laws of the State of Maryland at the time in force may be added or inserted, in
the manner now or hereafter prescribed by law; and all rights, preferences and
privileges of whatsoever nature conferred upon stockholders, directors, or any
other persons whomsoever by and pursuant to the Charter of the Corporation in
its present form or as hereafter amended are granted subject to this
reservation.
THIRD: These Articles of Amendment and Restatement were duly advised
-----
by the Board of Directors of the Corporation by unanimous written consent
pursuant to and in accordance with Section 2-408(c) of the MGCL and were duly
approved by the stockholders of the Corporation by unanimous written consent
pursuant to and in accordance with Section 2-505 of the MGCL.
FOURTH: The current address of the principal office of the
------
Corporation in the State of Maryland is c/o Ballard Spahr Andrews & Ingersoll,
300 East Lombard Street, Baltimore, Maryland 21202 and the name and address of
the current resident agent of the Corporation is Charles R. Moran, Esq., c/o
Ballard Spahr Andrews & Ingersoll, 300 East Lombard Street, Baltimore, Maryland
21202.
FIFTH: Immediately prior to the amendments contained in these
-----
Articles of Amendment and Restatement, the number of Directors of the
Corporation was two (2) and the names of those Directors are John B. Kilroy, Sr.
and John B. Kilroy, Jr.
SIXTH: Immediately following the amendments contained in these
-----
Articles of Amendment and Restatement, the number of Directors of the
Corporation will be two (2) and the names of those Directors are John B. Kilroy,
Sr., John B. Kilroy, Jr.; provided, however, that upon consummation of the
Initial Public Offering (as defined in Article IV hereof), the number of
Directors of the Corporation shall be five (5).
SEVENTH: Immediately prior to the amendments contained in these
-------
Articles of Amendment and Restatement, the Corporation had authority to issue
Ten Million (10,000,000) shares of common stock, par value one cent ($0.01) per
share, and the aggregate par value of all such authorized shares of stock of the
Corporation having par value was One Hundred Thousand Dollars ($100,000.00).
20
<PAGE>
EIGHTH: Immediately following the amendments contained in these
------
Articles of Amendment and Restatement, the Corporation will have authority to
issue One Hundred Eighty Million (180,000,000) Shares of capital stock
consisting of One Hundred Fifty Million (150,000,000) shares of common stock,
par value one cent ($0.01) per share, and Thirty Million (30,000,000) shares of
preferred stock, par value one cent ($0.01) per share, and the aggregate par
value of all such authorized shares of stock of the Corporation having par value
will be One Million Eight Hundred Thousand Dollars ($1,800,000.00).
NINTH: A description, as amended, of each class of capital stock of
-----
the Corporation, including the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications and terms and
conditions of redemption is set forth in Paragraph SECOND of these Articles of
Amendment and Restatement in Article IV entitled "Authorized Capital Stock".
(signature page follows)
21
<PAGE>
IN WITNESS WHEREOF, Kilroy Realty Corporation has caused these
Articles of Amendment and Restatement to be executed in its name and on its
behalf by its President and its corporate seal to be affixed and attested to by
its Secretary, on this 21st day of January, 1997 and its said President
acknowledges that these Articles of Amendment and Restatement are the corporate
act of the said Corporation and further certifies, under penalties of perjury,
that to the best of his knowledge, information and belief, matters and facts set
forth herein are true in all material respects.
ATTEST: KILROY REALTY CORPORATION
-------------------------- -------------------------
Richard E. Moran Jr., John B. Kilroy, Jr.,
Secretary President
S-1
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS
OF
KILROY REALTY CORPORATION
ARTICLE I
OFFICES
-------
Section 1. The principal executive office of Kilroy Realty
Corporation, a Maryland corporation (the "Corporation"), shall be located at
such place or places as the board of directors may designate.
Section 2. The Corporation may also have offices at such other places
as the board of directors may from time to time determine or the business of the
Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. All meetings of the stockholders shall be held in the City
of El Segundo, State of California, at such place as may be fixed from time to
time by the board of directors, or at such other place as shall be designated
from time to time by the board of directors and stated in the notice of the
meeting.
Section 2. An annual meeting of stockholders shall be held at such
date and time as may be determined from time to time by resolution adopted by
the board of directors, when they shall elect by a plurality vote a board of
directors, and transact such other business as may properly be brought before
the meeting in accordance with these bylaws. To be properly brought before the
annual meeting, business must be either (i) specified in the notice of annual
meeting (or any supplement or amendment thereto) given by or at the direction of
the board of directors, (ii) otherwise brought before the annual meeting by or
at the direction of the board of directors, or (iii) otherwise brought before
the annual meeting by a stockholder. In addition to any other
<PAGE>
applicable requirements, for business to be properly brought before an annual
meeting by a stockholder, the stockholder must have given timely notice thereof
in writing to the secretary of the Corporation. To be timely, a stockholder's
notice must be delivered to or mailed and received at the principal executive
offices of the Corporation, not less than fifty (50) days nor more than seventy-
five (75) days prior to the meeting; provided, however, that in the event that
-------- -------
less than sixty-five (65) days' notice or prior public disclosure of the date of
the annual meeting is given or made to stockholders, notice by a stockholder to
be timely must be so received not later than the close of business on the
fifteenth (15th) day following the day on which such notice of the date of the
annual meeting was mailed or such public disclosure was made, whichever first
occurs. A stockholder's notice to the secretary shall set forth (a) as to each
matter the stockholder proposes to bring before the annual meeting (i) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (ii) the name
and record address of the stockholder proposing such business, (iii) the class,
series and number of shares of capital stock of the Corporation which are
beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business and (b) as to the stockholder giving the notice (i)
the name and record address of the stockholder and (ii) the class, series and
number of shares of capital stock of the Corporation which are beneficially
owned by the stockholder. Notwithstanding anything in these bylaws to the
contrary, no business shall be conducted at the annual meeting except in
accordance with the procedures set forth in this Article II, Section 2. The
officer of the Corporation presiding at an annual meeting shall, if the facts
warrant, determine that business was not properly brought before the annual
meeting in accordance with the provisions of this Article II, Section 2, and if
he should so determine, he shall so declare to the annual meeting and any such
business not properly brought before the meeting shall not be transacted.
Section 3. A majority of the stock issued and outstanding and
entitled to vote at any meeting of stockholders, the holders of which are
present in person or represented by proxy, shall constitute a quorum for the
transaction of business except as otherwise provided by law, by the
Corporation's charter or by these bylaws. A quorum, once established, shall not
be broken by the withdrawal of enough votes to leave less than a quorum and the
votes present may continue to transact business until adjournment. If, however,
such quorum shall not be present or represented at any meeting of the
stockholders, a majority of the voting stock represented in person or by proxy
may adjourn the meeting from time to time until a date not more than 120 days
after the original record date, without notice other than announcement at the
meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than 120 days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote thereat.
Section 4. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the Maryland
General Corporation Law ("MGCL") or the rules of any securities exchange on
which the Corporation's capital stock is listed or the Corporation's charter or
these
2
<PAGE>
bylaws a different vote is required, in which case such express provision shall
govern and control the decision of such question.
Section 5. At each meeting of the stockholders, each stockholder
having the right to vote may vote in person or may authorize another person or
persons to act for him by proxy appointed by an instrument in writing subscribed
by such stockholder and bearing a date not more than eleven (11) months prior to
said meeting, unless said instrument provides for a longer period. All proxies
must be filed with the secretary of the Corporation at the beginning of each
meeting in order to be counted in any vote at the meeting. Subject to the
provisions of the charter of the Corporation, each stockholder shall have one
vote for each share of stock having voting power registered in his name on the
books of the Corporation on the record date set by the board of directors as
provided in Article V, Section 6 hereof. All elections shall be by and all
questions shall be decided by a plurality vote.
Section 6. Special meetings of the stockholders, for any purpose or
purposes, unless otherwise proscribed by the charter, may be called at any time
by the president, the chairman of the board, or by a majority of the directors,
or by a committee of the board of directors which has been duly designated by
the board of directors and whose powers and authority, as provided in a
resolution of the board of directors or these bylaws, include the power to call
such meetings. In addition, a special meeting of the stockholders of the
Corporation shall be called by the secretary of the Corporation on the written
request of stockholders entitled to cast at least fifty percent (50%) of all
votes entitled to be cast at the meeting, except that, in the case of a special
meeting called to consider any matter which is substantially the same as a
matter voted on at any special meeting for the stockholders held during the
preceding twelve (12) months, the secretary of the Corporation shall not be
required to call any such special meeting unless requested by stockholders
entitled to cast a majority of all of the votes entitled to be cast at the
meeting.
Section 7. Business transacted at any special meeting of stockholders
shall be limited to the purposes stated in the notice. Where the Company's
notice of meeting specifies that directors are to be elected at such special
meeting, nominations of persons for election to the board of directors may be
made (i) pursuant to the Company's notice of meeting, (ii) by or at the
direction of the board of directors or (iii) by any committee of persons
appointed by the board of directors with authority therefor or by a stockholder
as provided in Section 2 of Article III hereof.
Section 8. Whenever stockholders are required or permitted to take
any action at a meeting, a written notice of the meeting shall be given which
notice shall state the place, date and hour of the meeting, and, in the case of
a special meeting, the purpose or purposes for which the meeting is called. The
written notice of any meeting shall be given to each stockholder entitled to
vote at such meeting not less than 10 nor more than 90 days before the date of
the meeting. If mailed, notice is given when deposited in the United States
mail, postage prepaid, directed to the stockholder at his address as it appears
on the records of the Corporation.
Section 9. The officer who has charge of the stock ledger of the
Corporation shall prepare and make, at least 10 days before every meeting of
stockholders, a complete list of
3
<PAGE>
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least 10 days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
principal executive office of the Corporation. The list shall also be produced
and kept at the time and place of the meeting during the whole time thereof, and
may be inspected by any stockholder who is present.
Section 10. Notwithstanding any other provision of the charter of the
Corporation or these bylaws, Subtitle 7 of Title 3 of the MGCL (as the same may
hereafter be amended from time to time) shall not apply to the voting rights of
any shares of stock of the Corporation now or hereafter held by any existing or
future stockholder of the Corporation (regardless of the identity of such
stockholder).
ARTICLE III
DIRECTORS
Section 1. The board of directors shall consist of a minimum of three
(3) and a maximum of thirteen (13) directors, provided however, that prior to
the consummation of the initial public offering of the Common Stock of the
Corporation, the board of directors shall consist of a minimum of two (2)
directors. The number of directors shall be fixed or changed from time to time,
within the minimum and maximum, by the then elected directors, provided that,
upon the consummation of the initial public offering of Common Stock of the
Corporation, at least a majority of the directors shall be Independent Directors
(as defined in the next sentence). An Independent Director is a director who is
not an employee, officer or affiliate of the Corporation or Kilroy Industries or
a subsidiary or division thereof, or a relative of a principal executive
officer, and who is not an individual member of an organization acting as an
advisor, consultant or legal counsel receiving compensation on a continuing
basis from the Company in addition to director's fees. Upon consummation of the
initial public offering of Common Stock of the Corporation, and until increased
or decreased by the directors pursuant to these bylaws, the exact number of
directors shall be five (5). The directors need not be stockholders. The
directors shall be divided into three classes in accordance with the charter of
the Corporation and, except as provided in Section 2 of this Article III with
respect to vacancies, shall be elected as provided in the charter at the annual
meeting of the stockholders, and each director elected shall hold office until
his successor is elected and qualified or until his death, retirement,
resignation or removal.
Section 2. (a) Nominations of persons for election to the board of
directors of the Corporation at the annual meeting of stockholders may be made
(i) pursuant to the Corporation's notice of meeting; (ii) by or at the direction
of the board of directors or (iii) by any committee of persons appointed by the
board of directors with authority therefor or by any stockholder of the
Corporation entitled to vote for the election of directors at the meeting who
complies with the notice procedures set forth in this Article III, Section 2(a).
Such nominations by any stockholder
4
<PAGE>
shall be made pursuant to timely notice in writing to the Secretary of the
Corporation. To be timely, a stockholder's notice shall be delivered to or
mailed and received at the principal executive offices of the Corporation not
less than 50 days nor more than 75 days prior to the meeting; provided, however,
-------- -------
that in the event that less than 65 days notice or prior public disclosure of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business of the fifteenth (15th) day following the day on which such notice of
the date of the meeting was mailed or such public disclosure was made, whichever
first occurs. Such stockholder's notice to the Secretary shall set forth (i) as
to each person whom the stockholder proposes to nominate for election or re-
election as a director, (a) the name, age, business address and residence
address of the person, (b) the principal occupation or employment of the person,
(c) the class, series and number of shares of capital stock of the Corporation
which are beneficially owned by the person, and (d) any other information
relating to the person that is required to be disclosed in solicitations for
proxies for election of directors pursuant to the Rules and Regulations of the
Securities and Exchange Commission under Section 14 of the Securities Exchange
Act of 1934, as amended; and (ii) as to the stockholder giving the notice (a)
the name and record address of the stockholder and (b) the class, series and
number of shares of capital stock of the Corporation which are beneficially
owned by the stockholder. The Corporation may require any proposed nominee to
furnish such other information as may reasonably be required by the Corporation
to determine the eligibility of such proposed nominee to serve as a director of
the Corporation. Except as may otherwise be provided in these bylaws or any
other agreement relating to the right to designate nominees for election to the
board of directors, no person shall be eligible for election as a director of
the Corporation unless nominated in accordance with the procedures set forth
herein. The officer of the Corporation presiding at an annual meeting shall, if
the facts warrant, determine that a nomination was not made in accordance with
the foregoing procedure, and if he should so determine, he shall so declare to
the meeting and the defective nomination shall be disregarded.
(b) Except as may otherwise be provided pursuant to Article IV of the
to elect additional directors and any other requirement in these bylaws or other
of directors, should a vacancy in the board of directors occur or be created
(whether arising through death, retirement or resignation), such vacancy shall
be filled by the affirmative vote of a majority of the remaining directors, even
though less than a quorum of the board of directors or, in the case of a vacancy
resulting from an increase in the number of directors, by a majority of the
board of directors. In the case of a vacancy created by the removal of a
director, the vacancy shall be filled by the stockholders at the next annual
meeting of the stockholders or at a special meeting of the stockholders called
for such purpose, provided, however, that such vacancy may be filled by the
affirmative vote of a majority of the remaining directors (subject to approval
by the stockholders at the next annual meeting of the stockholders or at a
special meeting of the stockholders called for such purpose). A director so
elected to fill a vacancy shall serve for the remainder of the term of the class
to which he was elected.
Section 3. The property and business of the Corporation shall be
managed by or under the direction of its board of directors. In addition to the
powers and authorities by these
5
<PAGE>
bylaws expressly conferred upon it, the board may exercise all such powers of
the Corporation and do all such lawful acts and things as are not by statute or
by the Corporation's charter or by these bylaws directed or required to be
exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
----------------------------------
Section 4. The directors may hold their meetings and have one or more
offices, and keep the books of the Corporation, outside the State of Maryland.
Section 5. Regular meetings of the board of directors may be held at
such time and place as shall from time to time be determined by resolution of
the board, and no additional notice shall be required.
Section 6. Special meetings of the board of directors may be called
by the President or the Chairman of the board of directors on forty-eight hours'
notice to each director, either personally or by mail or by telegram; special
meetings shall be called by the President or the Secretary in like manner and on
like notice on the written request of two directors unless the board consists of
only one director, in which case special meetings shall be called by the
President or Secretary in like manner and on like notice on the written request
of the sole director. reasonable judgment, appropriate.
Section 7. Notwithstanding any other provision of these bylaws, from
and after the consummation of the initial public offering of Common Stock of the
Corporation, the following actions of the board of directors shall require the
approval of a majority of the Independent Committee (as defined in section
12(ii) of this Article III): (i) the selection of operators for the
Corporation's or the Operating Partnership's properties; and (ii) all
transactions between the Corporation or any subsidiary of the Corporation
(including, without limitation, the Operating Partnership) and John B. Kilroy,
Sr. or John B. Kilroy, Jr. and their respective affiliates (not including the
Corporation, the Operating Partnership or any subsidiary of the Corporation or
the Operating Partnership), including, but not limited to, (a) the negotiation,
enforcement and renegotiation of the terms of a lease, sale or refinancing of
any of the Corporation's or the Operating partnership's properties, (b) the
consideration of the General Partner's right of first refusal as set forth in
Section 11.3 of the Amended and Restated Agreement of Limited Partnership of the
operating partnership and (c) the enforcement of the terms of transfer of any
property to the Operating Partnership.
Section 8. Unless otherwise restricted by the Corporation's charter
or these bylaws, any action required or permitted to be taken at any meeting of
the board of directors or of any committee thereof may be taken without a
meeting, if all members of the board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the board or committee.
Section 9. Unless otherwise restricted by the Corporation's charter
or these bylaws, members of the board of directors, or any committee designated
by the board of directors, may participate in a meeting of the board of
directors, or any committee, by means of conference telephone or similar
communications equipment by means of which all persons
6
<PAGE>
participating in the meeting can hear each other, and such participation in a
meeting shall constitute presence in person at such meeting.
RESIGNATION FROM THE BOARD OF DIRECTORS
---------------------------------------
Section 10. A director may resign at any time upon written notice to
the Corporation's board of directors, chairman of the board, president or
secretary. Any such resignation shall take effect at the time specified therein
or, if the time is not specified, upon receipt thereof, and the acceptance of
such resignation, unless required by the terms thereof, shall not be necessary
to make such resignation effective.
COMMITTEES OF DIRECTORS
-----------------------
Section 11. The board of directors may, by resolution passed by a
majority of the whole board, designate one or more committees, each such
committee to consist of not less than the minimum number of directors required
for committees of the board of directors under the MGCL. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. Any
such committee, to the extent provided in the resolution of the board of
directors, and to the maximum extent permitted under the MGCL, shall have and
may exercise all the powers and authority of the board of directors in the
management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to amending the
charter (except that a committee may, in accordance with a general formula or
method specified by the board of directors, and to the extent authorized in the
resolution or resolutions providing for the issuance of shares of stock adopted
by the board of directors, fix the designations and any of the preferences or
rights of such shares relating to dividends, redemption, dissolution, any
distribution of assets of the Corporation or the conversion into, or the
exchange of such shares for, shares of any other class or classes or any other
series of the same or any other class or classes of stock of the Corporation or
fix the number of shares of any series of stock or authorize the increase or
decrease of the shares of any series), adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of a
dissolution or any other matter requiring the approval of the stockholders of
the Corporation, or amending the bylaws of the Corporation; and no such
committee shall have the power or authority to authorize or declare a dividend,
to authorize the issuance of stock (except that, if the board of directors has
given general authorization for the issuance of stock, a committee of the board,
in accordance with a general formula or method specified by the board by
resolution or by adoption of a stock option or other plan, may fix the terms of
stock subject to classification or reclassification and the terms on which any
stock may be issued, including the price and consideration for such stock) or to
approve any merger or share exchange which does not require stockholder
approval.
7
<PAGE>
Section 12. The Corporation shall from and after the incorporation
have the following committees, the specific authority and members of which shall
be as designated herein or by resolution of the board of directors:
(i) An Executive Committee, which shall have such authority as
granted by the board of directors, including the power to acquire and
dispose of real property and the power to authorize the execution of
certain contracts and agreements.
(ii) An Independent Committee, which shall consist solely of
Independent Directors and which shall have the authority to approve the
actions of the board of directors as specified in Section 7 of this Article
III.
(iii) An Audit Committee, which will consist solely of
Independent Directors and which shall make recommendations concerning the
engagement of independent public accountants, review with the independent
public accountants the scope and results of the audit engagement, approve
professional services provided by the independent public accountants,
review the independence of the independent public accountants, consider the
range of audit and non-audit fees and review the adequacy of the
Corporation's internal accounting controls.
(iv) An Executive Compensation Committee, which shall consist
solely of Independent Directors and which shall determine compensation for
the Corporation's executive officers and administer a stock incentive plan
adopted by the Corporation and any other incentive programs now or
hereafter adopted by the Corporation.
Section 13. Each committee shall keep regular minutes of its meetings
and report the same to the board of directors when required. The presence of a
majority of the total membership of any committee shall constitute a quorum for
the transaction of business at any meeting of such committee and the act of a
majority of those present shall be necessary and sufficient for the taking of
any action thereat.
COMPENSATION OF DIRECTORS
-------------------------
Section 14. Unless otherwise restricted by the charter of the
Corporation or these bylaws, the board of directors shall have the authority to
fix the compensation of non-employee directors. The non-employee directors may
be paid their expenses, if any, of attendance at each meeting of the board of
directors and may be paid a fixed sum for attendance at each meeting of the
board of directors or a stated salary as director. Officers of the Corporation
who are also members of the board of directors shall not be paid any director's
fees.
INDEMNIFICATION
---------------
Section 15. The Corporation shall indemnify, in the manner and to the
maximum extent permitted by law, any person (or the estate of any person) who is
or was a party to, or is threatened to be made a party to, any threatened,
pending or completed action, suit or proceeding, whether or not by or in the
right of the Corporation, and whether civil, criminal, administrative,
8
<PAGE>
investigative, or otherwise, by reason of the fact that such person is or was a
director or officer of the Corporation or that such person while a director or
officer of the Corporation, is or was serving at the request of the Corporation
as a director, officer, trustee, partner, member, agent or employee of another
corporation, partnership, limited liability company, association, joint venture,
trust or other enterprise. To the maximum extent permitted by law, the
indemnification provided herein shall include expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, and any such expenses
may be paid by the Corporation in advance of the final disposition of such
action, suit or proceeding.
Neither the amendment nor repeal of this Section 15 of this Article
III, nor the adoption or amendment of any other provision of the charter or
bylaws of the Corporation inconsistent with this Section, shall apply to or
affect in any respect the applicability of the preceding paragraph with respect
to any act or failure to act which occurred prior to such amendment, repeal or
adoption.
The indemnification and reimbursement of expenses provided herein
shall not be deemed to limit the right of the Corporation to indemnify any other
person against any liability and expenses to the fullest extent permitted by
law, nor shall it be deemed exclusive of any other rights to which any person
seeking indemnification from the Corporation may be entitled under any
agreement, the charter or bylaws of the Corporation, a vote of stockholders or
Independent Directors, or otherwise, both as to action in such person's official
capacity as an officer or director and as to action in another capacity, at the
request of the Corporation, while acting as an officer or director of the
Corporation.
ARTICLE IV
OFFICERS
--------
Section 1. The officers of this Corporation shall be chosen by the
board of directors and shall include a president, a vice president, a secretary
and a treasurer. The Corporation may also have at the discretion of the board
of directors such other officers as are desired, including a chairman of the
board, additional vice presidents, a chief executive officer, a chief financial
officer, a chief operating officer, one or more assistant secretaries and one or
more assistant treasurers, and such other officers as may be appointed in
accordance with the provisions of Section 3 of this Article IV. In the event
there are two or more vice presidents, then one or more may be designated as
executive vice president, senior vice president, vice president/acquisitions or
other similar or dissimilar title. At the time of the election of officers, the
directors may by resolution determine the order of their rank. Any number of
offices may be held by the same person, unless the charter or these bylaws
otherwise provide, except that one individual may not simultaneously hold the
office of president and vice president.
Section 2. The board of directors, at its first meeting after each
annual meeting of stockholders, shall choose the officers of the Corporation.
9
<PAGE>
Section 3. The board of directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers and agents of the Corporation
shall be fixed by the board of directors, provided, however, that the
compensation of the Corporation's executive officers shall be determined by the
Corporation's Executive Compensation Committee.
Section 5. The officers of the Corporation shall hold office until
their successors are chosen and qualify in their stead. Any officer elected or
appointed by the board of directors may be removed at any time, with or without
cause, by the affirmative vote of a majority of the board of directors. If the
office of any officer or officers becomes vacant for any reason, the vacancy
shall be filled by the board of directors.
Section 6. Any officer may resign at any time upon written notice to
the Corporation's board of directors, chairman of the board, president or
secretary. Any such resignation shall take effect at the time specified therein
or, if the time is not specified, upon receipt thereof, and the acceptance of
such resignation, unless required by the terms thereof, shall not be necessary
to make such resignation effective. Any such resignation will not prejudice the
rights, if any, of the Corporation under any contract to which the officer is a
party.
CHAIRMAN OF THE BOARD
---------------------
Section 7. The chairman of the board, if such an officer be elected,
shall, if present, preside at all meetings of the board of directors and
exercise and perform such other powers and duties as may be from time to time
assigned to him by the board of directors or prescribed by the bylaws. If there
is no president, the chairman of the board shall in addition be the chief
executive officer of the Corporation and shall have the powers and duties
prescribed in Section 8 of this Article IV.
PRESIDENT
---------
Section 8. Subject to such supervisory powers, if any, as may be
given by the board of directors to the chairman of the board, if there be such
an officer, the president shall be the chief executive officer of the
Corporation and shall, subject to the control of the board of directors, have
general supervision, direction and control of the business and officers of the
Corporation. He shall preside at all meetings of the stockholders and, in the
absence of the chairman of the board, or if there be none, at all meetings of
the board of directors. He shall have the general powers and duties of
management usually vested in the office of president and chief executive officer
of Corporations, and shall have such other powers and duties as may be
prescribed by the board of directors or these bylaws.
VICE PRESIDENTS AND CHIEF OPERATING OFFICER
-------------------------------------------
Section 9. In the absence or disability of the president, the vice
presidents and the chief operating officer in order of their rank as fixed by
the board of directors, or if not
10
<PAGE>
ranked, the vice president designated by the board of directors (or the chief
operating officer if designated by the board of directors), shall perform all
the duties of the president, and when so acting shall have all the powers of and
be subject to all the restrictions upon the president. T he vice presidents and
the chief operating officer shall have such other duties as from time to time
may be prescribed for them, respectively, by the board of directors.
SECRETARY AND ASSISTANT SECRETARY
---------------------------------
Section 10. The secretary shall attend all sessions of the board of
directors and all meetings of the stockholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose; and shall
perform like duties for the standing committees when required by the board of
directors. He shall give, or cause to be given, notice of all meetings of the
stockholders and of the board of directors, and shall perform such other duties
as may be prescribed by the board of directors or the bylaws. He shall keep in
safe custody the seal of the Corporation, and when authorized by the board,
affix the same to any instrument requiring it, and when so affixed it shall be
attested by his signature or by the signature of an assistant secretary. The
board of directors may give general authority to any other officer to affix the
seal of the Corporation and to attest the affixing by his signature.
Section 11. The assistant secretary, or if there be more than one,
the assistant secretaries in the order determined by the board of directors, or
if there be no such determination, the assistant secretary designated by the
board of directors, shall, in the absence or disability of the secretary,
perform the duties and exercise the powers of the secretary and shall perform
such other duties and have such other powers as the board of directors may from
time to time prescribe.
CHIEF FINANCIAL OFFICER, TREASURER AND ASSISTANT TREASURERS
-----------------------------------------------------------
Section 12. The chief financial officer of the Corporation shall have
the custody of the corporate funds and securities and shall keep full and
accurate accounts of receipts and disbursements in books belonging to the
Corporation and shall deposit all moneys, and other valuable effects in the name
and to the credit of the Corporation, in such depositories as may be designated
by the board of directors. He shall disburse the funds of the Corporation as
may be ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the board of directors, at its regular
meetings, or when the board of directors so requires, an account of all his
transactions as chief financial officer and of the financial condition of the
Corporation. If required by the board of directors, he shall give the
Corporation a bond, in such sum and with such surety or sureties as shall be
satisfactory to the board of directors, for the faithful performance of the
duties of his office and for the restoration to the Corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of whatever kind in his possession or under
his control belonging to the Corporation. If no other person then be appointed
to the position of treasurer of the Corporation, the person holding the office
of chief financial officer shall also be the treasurer of the Corporation.
11
<PAGE>
Section 13. The treasurer or assistant treasurer, or if there shall
be more than one, the assistant treasurers in the order determined by the board
of directors, or if there be no such determination, the treasurer or assistant
treasurer designated by the board of directors, shall, in the absence or
disability of the chief financial officer, perform the duties and exercise the
powers of the chief financial officer and shall perform such other duties and
have such other powers as the board of directors may from time to time
prescribe.
ARTICLE V
CERTIFICATES OF STOCK
---------------------
Section 1. Every holder of stock of the Corporation shall be entitled
to have a certificate signed by, or in the name of the Corporation by, the
chairman of the board of directors, or the president or a vice president, and
countersigned by the secretary or an assistant secretary, or the treasurer or an
assistant treasurer of the Corporation, certifying the number of shares of
capital stock represented by the certificate owned by such stockholder in the
Corporation.
Section 2. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
Section 3. If the Corporation shall be authorized to issue more than
one class of stock or more than one series of any class, the powers,
designations, preferences and relative, participating, optional or other special
rights of each class of capital stock or series thereof and the qualification,
limitations or restrictions of such preferences and/or rights shall be set forth
in full or summarized on the face or back of the certificate which the
Corporation shall issue to represent such class or series of stock, provided
that, in lieu of the foregoing requirements, there may be set forth on the face
or back of the certificate which the Corporation shall issue to represent such
class or series of stock, a statement that the Corporation will furnish without
charge to each stockholder who so requests the powers, designations, preferences
and relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights. In addition, in the event that any stock issued
by the Corporation is subject to a restriction on its transferability, the stock
certificate shall on its face or back contain a full statement of the
restriction or state that the Corporation will furnish information about the
restriction to the stockholder on request and without charge.
LOST, STOLEN OR DESTROYED CERTIFICATES
--------------------------------------
Section 4. The board of directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a
12
<PAGE>
new certificate or certificates, the board of directors may, in its discretion
and as a condition precedent to the issuance thereof, require the owner of such
lost, stolen or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require and/or
to give the Corporation a bond in such sum as it may direct as indemnity against
any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFERS OF STOCK
------------------
Section 5. Upon surrender to the Corporation, or the transfer agent
of the Corporation, of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books,
subject, however, to the Ownership Limit (as defined in the charter of the
Corporation) and other restrictions on transferability applicable thereto from
time to time.
FIXING RECORD DATE
------------------
Section 6. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of the
stockholders, or any adjournment thereof, or to express consent to corporate
action in writing without a meeting, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the board of directors may fix a
record date which shall not be more than 90 nor less than 10 days before the
date of such meeting, nor more than 90 days prior to any other action. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the board of directors may fix a new record date for the adjourned
meeting. A meeting of stockholders convened on the date for which it was called
may be adjourned from time to time without further notice to a date not more
than 120 days after the original record date.
REGISTERED STOCKHOLDERS
-----------------------
Section 7. The Corporation shall be entitled to treat the holder of
record of any share or shares of stock as the holder in fact thereof and
accordingly shall not be bound to recognize any equitable or other claim or
interest in such share on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by the laws of
the State of Maryland.
ARTICLE VI
GENERAL PROVISIONS
------------------
DIVIDENDS
---------
13
<PAGE>
Section 1. Dividends upon the capital stock of the Corporation,
subject to the provisions of the Corporation's charter, if any, may be
authorized and declared by the board of directors at any regular or special
meeting, pursuant to law. Dividends may be paid in cash, in property, or in
shares of the capital stock, subject to the provisions of the Corporation's
charter and the MGCL.
Section 2. Before payment of any dividend there may be set aside out
of any funds of the Corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the directors shall think conducive to the interests of the
Corporation, and the directors may abolish any such reserve.
CHECKS
------
Section 3. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers as the board of
directors may from time to time designate.
FISCAL YEAR
-----------
Section 4. The fiscal year of the Corporation shall be fixed by
resolution of the board of directors.
SEAL
----
Section 5. The corporate seal shall have inscribed thereon the name
of the Corporation, the year of its organization and the words "Corporate Seal,
Maryland." Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
NOTICES
-------
Section 6. Whenever, under the provisions of the MGCL or of the
charter of the Corporation or of these bylaws, notice is required to be given to
any director or stockholder, it shall not be construed to mean personal notice,
but such notice may be given in writing, by mail, addressed to such director or
stockholder, at his address as it appears on the records of the Corporation,
with postage thereon prepaid, and such notice shall be deemed to be given at the
time when the same shall be deposited in the United States mail. Notice to
directors may also be given by telegram, telecopy or cable.
Section 7. Whenever any notice is required to be given under the
provisions of the MGCL or of the charter of the Corporation or of these bylaws,
a waiver thereof in writing, signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ANNUAL STATEMENT
----------------
14
<PAGE>
Section 8. The board of directors may present at each annual meeting
of stockholders, and when called for by vote of the stockholders shall present
to any annual or special meeting of the stockholders, a full and clear statement
of the business and condition of the Corporation.
ARTICLE VII
AMENDMENTS
----------
Section 1. These bylaws may be altered, amended or repealed or new
bylaws may be adopted by the vote of a majority of the board of directors or by
the affirmative vote of a majority of all votes entitled to be cast by the
holders of the issued and outstanding shares of Common Stock of the Corporation.
Notwithstanding anything to the contrary herein, this Section 1 of Article VII,
Section 7 of Article III and Section 10 of Article II hereof may not be altered,
amended or repealed except by the affirmative vote of a majority of all votes
entitled to be cast by the holders of the issued and outstanding shares of
Common Stock of the Corporation.
15
<PAGE>
EXHIBIT 3.3
Temporary Certificate - Exchangeable for Definitive Engraved Certificate When
Ready for Delivery
[KILROY LOGO]
COMMON STOCK COMMON STOCK
KRC
INCORPORATED UNDER THE LAWS SEE REVERSE FOR IMPORTANT NOTICE
OF THE STATE OF MARYLAND ON TRANSFER RESTRICTIONS
AND OTHER INFORMATION
CUSIP 49427F 10 8
THIS CERTIFIES THAT
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF THE COMMON STOCK, $0.1 PAR VALUE, OF
KILROY REALTY CORPORATION
(the "Corporation") transferable on the books of the Corporation by the holder
hereof in person or by its duly authorized attorney, upon surrender of this
Certificate properly endorsed. This Certificate and the shares represented
hereby are issued and shall be held subject to all of the provisions of the
charter of the Corporation (the "Charter") and the Bylaws of the Corporation and
any amendments thereto. This Certificate is not valid unless countersigned and
registered by the Transfer Agent and Registrar.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
executed on its behalf by its duly authorized officers.
Dated:
- --------------- --------------
SECRETARY PRESIDENT
[KILROY SEAL]
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY:
------------------------
AUTHORIZED SIGNATURE
<PAGE>
THE CORPORATION IS AUTHORIZED TO ISSUE CAPITAL STOCK OF MORE THAN ONE CLASS,
CONSISTING OF COMMON STOCK AND ONE OR MORE CLASSES OF PREFERRED STOCK. THE BOARD
OF DIRECTORS IS AUTHORIZED TO DETERMINE THE PREFERENCES, LIMITATIONS AND
RELATIVE RIGHTS OF ANY CLASS OF THE PREFERRED STOCK BEFORE THE ISSUANCE OF
SHARES OF SUCH CLASS OF PREFERRED STOCK. THE CORPORATION WILL FURNISH, WITHOUT
CHARGE, TO ANY STOCKHOLDER MAKING A WRITTEN REQUEST THEREFOR, A COPY OF THE
CORPORATION'S CHARTER AND A WRITTEN STATEMENT OF THE DESIGNATIONS, RELATIVE
RIGHTS, PREFERENCES, CONVERSION OR OTHER RIGHTS, VOTING POWERS, RESTRICTIONS,
LIMITATIONS AS TO DIVIDENDS AND OTHER DISTRIBUTIONS, QUALIFICATIONS AND TERMS
AND CONDITIONS OF REDEMPTION OF THE STOCK OF EACH CLASS WHICH THE CORPORATION
HAS THE AUTHORITY TO ISSUE AND, IF THE CORPORATION IS AUTHORIZED TO ISSUE ANY
PREFERRED OR SPECIAL CLASS AND SERIES, (i) THE DIFFERENCES IN THE RELATIVE
RIGHTS AND PREFERENCES BETWEEN THE SHARES OF EACH SERIES TO THE EXTENT SET, AND
(ii) THE AUTHORITY OF THE BOARD OF DIRECTORS TO SET SUCH RIGHTS AND PREFERENCES
OF SUBSEQUENT SERIES. REQUESTS FOR SUCH WRITTEN STATEMENT MAY BE DIRECTED TO THE
SECRETARY OF THE CORPORATION AT ITS PRINCIPAL OFFICE.
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO
RESTRICTIONS ON BENEFICIAL AND CONSTRUCTIVE OWNERSHIP AND TRANSFER FOR THE
PURPOSE OF THE CORPORATION'S MAINTENANCE OF ITS STATUS AS A REAL ESTATE
INVESTMENT TRUST UNDER THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (THE
"CODE"). SUBJECT TO CERTAIN FURTHER RESTRICTIONS AND EXCEPT AS EXPRESSLY
PROVIDED IN THE CORPORATION'S CHARTER, (i) NO PERSON MAY BENEFICIALLY OWN SHARES
OF THE CORPORATION'S COMMON STOCK IN EXCESS OF 7.0% (BY VALUE OR BY NUMBER OF
SHARES, WHICHEVER IS MORE RESTRICTIVE) OF THE OUTSTANDING COMMON STOCK OF THE
CORPORATION; (ii) NO PERSON MAY CONSTRUCTIVELY OWN SHARES OF THE CORPORATION'S
COMMON STOCK IN EXCESS OF 9.8% (BY VALUE OR BY NUMBER OF SHARES, WHICHEVER IS
MORE RESTRICTIVE) OF THE OUTSTANDING COMMON STOCK OF THE CORPORATION; (iii) NO
PERSON MAY BENEFICIALLY OR CONSTRUCTIVELY OWNS SHARES OF COMMON STOCK THAT WOULD
RESULT IN THE CORPORATION BEING "CLOSELY HELD" UNDER SECTION 856(h) OF THE CODE
OR OTHERWISE CAUSE THE CORPORATION TO FAIL TO QUALIFY AS A REIT; AND (iv) NO
PERSON MAY TRANSFER SHARES OF COMMON STOCK IF SUCH TRANSFER WOULD RESULT IN THE
CAPITAL STOCK OF THE CORPORATION BEING OWNED BY FEWER THAN 100 PERSONS. ANY
PERSON WHO BENEFICIALLY OR CONSTRUCTIVELY OWNS SHARES OF COMMON STOCK WHICH
CAUSES OR WILL CAUSE A PERSON TO BENEFICIALLY OR CONSTRUCTIVELY OWN SHARES OF
COMMON STOCK IN EXCESS OF THE ABOVE LIMITATIONS MUST IMMEDIATELY NOTIFY THE
CORPORATION. IF ANY OF THE RESTRICTIONS ON TRANSFER OR OWNERSHIP ARE VIOLATED,
THE SHARES OF COMMON STOCK REPRESENTED HEREBY WILL BE AUTOMATICALLY TRANSFERRED
TO THE TRUSTEE OF A TRUST FOR THE BENEFIT OF ONE OR MORE CHARITABLE
BENEFICIARIES. IN ADDITION, THE CORPORATION MAY REDEEM SHARES UPON THE TERMS AND
CONDITIONS SPECIFIED BY THE BOARD OF DIRECTORS IN ITS SOLE DISCRETION IF THE
BOARD OF DIRECTORS DETERMINES THAT OWNERSHIP OR A TRANSFER OR OTHER EVENT MAY
VIOLATE THE RESTRICTIONS DESCRIBED ABOVE. FURTHERMORE, UPON THE OCCURRENCE OF
CERTAIN EVENTS, ATTEMPTED TRANSFERS IN VIOLATION OF THE RESTRICTIONS DESCRIBED
ABOVE MAY BE VOID AB INITIO. ALL TERMS IN THIS LEGEND THAT ARE DEFINED IN THE
CHARTER OF THE CORPORATION SHALL HAVE THE MEANINGS ASCRIBED TO THEM IN THE
CHARTER OF THE CORPORATION, AS THE SAME MAY BE AMENDED FROM TIME TO TIME, A COPY
OF WHICH, INCLUDING THE RESTRICTIONS ON TRANSFER AND OWNERSHIP, WILL BE
FURNISHED TO EACH HOLDER OF SHARES OF COMMON STOCK ON REQUEST AND WITHOUT
CHARGE. REQUESTS FOR SUCH A COPY MAY BE DIRECTED TO THE SECRETARY OF THE
CORPORATION AT ITS PRINCIPAL OFFICE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- Custodian
........ ..........
(Cust) (Minor)
TEN ENT -- as tenants by the entireties under Uniform Gifts to Minors
Act
JT TEN -- as joint tenants with right of ..........................
survivorship and not as tenants (State)
in common
UNIF TRF MIN ACT -- Custodian (until age )
............ ............
(Cust)
under Uniform Transfers
...............
(Minor)
to Minors Act
-----------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, hereby sell, assign and transfer unto
------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ---------------------------------------
- ---------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ------------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated
--------------------------
X
-----------------------------
X
-----------------------------
NOTICE THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER
Signature(s) Guaranteed
By
---------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF BALLARD SPAHR ANDREWS & INGERSOLL]
January 21, 1997
Kilroy Realty Corporation
2250 East Imperial Highway
El Segundo, California 90245672
Re: Kilroy Realty Corporation, a Maryland
corporation, (the "Company") - Registration
Statement on Form S-11 pertaining to Twelve
Million Nine Hundred Ninety Five Thousand
(12,995,000) shares of common stock, par value
one cent ($.01) per share (the "Shares")
-----------------------------------------------
Ladies and Gentlemen:
In connection with the registration of the Shares under the Securities Act
of 1933 as amended (the "Act"), by the Company on Form S-11 filed with the
Securities and Exchange Commission (the "Commission") on or about November 5,
1996, as amended (the "Registration Statement"), you have requested our opinion
with respect to the matters set forth below.
We have acted as special Maryland corporate counsel for the Company in
connection with the matters described herein. In our capacity as special
Maryland corporate counsel to the Company, we have reviewed and are familiar
with proceedings taken and proposed to be taken by the Company in connection
with the authorization, issuance and sale of the Shares, and for purposes of
this opinion have assumed such proceedings will be timely completed in the
manner presently proposed. In addition, we have relied upon certificates and
advice from the officers of the Company upon which we believe we are justified
in relying and on various certificates form the documents recorded with, the
State Department of Assessments and Taxation of Maryland (the "SDAT"), including
the charter of the Corporation (the "Charter"), consisting of Articles of
Incorporation filed with the SDAT on September 13, 1996 and Articles of
Amendment and Restatement filed with the SDAT on January 20, 1997. We have also
examined the Bylaws of the Company adopted as of September 13, 1996, (the
Bylaws") and Resolutions of the Board of Directors of the Company adopted on or
before January 20, 1997 and in full force and effect on January 20, 1997; and
such
<PAGE>
Kilroy Realty Corporation
January 21, 1997
Page 2
laws, records, documents, certificates, opinions and instruments as we deem
necessary to render this opinion.
We have assumed the genuineness of all signatures and the authenticity of
all documents submitted to us as originals and the conformity to the originals
of all documents submitted to us as certified, photostatic or conformed copies.
In addition, we have assumed that each person executing any instrument, document
or certificate referred to herein on behalf of any party is duly authorized to
do so.
Based on the foregoing, and subject to the assumptions and qualifications
set forth herein, it is our opinion that, as of the date of this letter, the
Shares have been duly authorized by all necessary corporation action on the part
of the Company, and the Shares will, upon issuance and delivery in accordance
with and subject to the terms and conditions described in the Registration
Statement against payment of the purchase price therefore as determined by the
Board of Directors of the Company or a committee thereof, by validly issued,
fully paid and nonassessable.
We consent to your filing this opinion as an exhibit to the Registration
Statement, and further consent to the filing of this opinion as an exhibit to
the applications to securities commissioners for the various states of the
United States for registration of the Shares. We also consent to the
identification of our firm as Maryland counsel to the Company in the section of
the Prospectus (which is part of the Registration Statement) entitled "Legal
Matters."
The opinions expressed herein are limited to the laws of the State of
Maryland and we express no opinion concerning any laws other than the laws of
the State of Maryland. Furthermore, the opinions presented in this letter are
limited to the matters specifically set forth herein and no other opinion shall
be inferred beyond the matters expressly stated.
The opinions expressed in this letter are solely for your use and may not
be relied upon by any other person without our prior written consent.
Very truly yours,
/s/ Ballard Spahr Andrews & Ingersoll
-------------------------------------
<PAGE>
EXHIBIT 8.1
[LETTERHEAD OF LATHAM & WATKINS]
January 24, 1997
Kilroy Realty Corporation
2250 East Imperial Highway
El Segundo, California 90245
Re: Federal Income Tax Consequences
-------------------------------
Ladies and Gentlemen:
We have acted as tax counsel to Kilroy Realty Corporation, a Maryland
corporation (the "Company"), in connection with its formation and its sale of
11,300,000 shares of common stock (the "Common Stock"), par value $.01 per share
of the Company, registered under the Securities Act of 1933, as amended,
pursuant to a registration statement on Form S-11 (File No. 333-15553) filed
with the Securities and Exchange Commission (the "Commission") on November 5,
1996, as amended by a registration statement (Amendment No. 1) on Form S-11
filed with the Commission on December 27, 1996, as amended by a registration
statement (Amendment No. 2) on Form S-11 filed with the Commission on January
15, 1997 (such registration statement, as amended as of the time it became
effective, the "Registration Statement").
You have requested our opinion concerning certain of the federal
income tax consequences to the Company and the purchasers of the Common Stock in
connection with the sale described above. This opinion is based on various
facts and assumptions, including the facts set forth in the Registration
Statement concerning the business, properties and governing documents of the
Company, Kilroy Realty, L.P. (the "Operating Partnership") and their
subsidiaries. Moreover, we are familiar with certain events and proceedings
which are expected to take place prior to the closing of the transactions
described in the Registration Statement, and this opinion is conditioned upon
the occurrence of such events prior to closing. We have also been furnished
with, and with your consent have relied upon, certain representations made by
the Company, the Operating Partnership and their subsidiaries with respect to
certain factual matters through a certificate of an officer of the Company (the
<PAGE>
Kilroy Realty Corporation
January 24, 1997
Page 2
"Officer's Certificate"). With respect to matters of Maryland law, we have
relied upon the opinion of Ballard Spahr Andrews & Ingersoll, counsel for the
Company, dated January 24, 1997.
In our capacity as tax counsel to the Company, we have made such legal
and factual examinations and inquiries, including an examination of originals or
copies certified or otherwise identified to our satisfaction of such documents,
corporate records and other instruments as we have deemed necessary or
appropriate for purposes of this opinion. In our examination, we have assumed
the authenticity of all documents submitted to us as originals, the genuineness
of all signatures thereon, the legal capacity of natural persons executing such
documents and the conformity to authentic original documents of all documents
submitted to us as copies.
We are opining herein as to the effect on the subject transaction only
of the federal income tax laws of the United States and we express no opinion
with respect to the applicability thereto, or the effect thereon, of other
federal laws, the laws of any state or other jurisdiction or as to any matters
of municipal law or the laws of any other local agencies within any state.
Based on such facts, assumptions and representations, it is our
opinion that:
1. Commencing with the Company's taxable year ending December 31,
1997, the Company will be organized in conformity with the requirements for
qualification as a "real estate investment trust," and its proposed method
of operation, as described in the representations of the Company, the
Operating Partnership and their subsidiaries referred to above, will enable
the Company to meet the require ments for qualification and taxation as a
"real estate investment trust" under the Internal Revenue Code of 1986, as
amended (the "Code").
2. The Operating Partnership will be treated as a partnership for
federal income tax purposes (and not as an association or publicly traded
partnership taxable as a corporation).
3. The statements in the Registration Statement set forth under the
caption "Federal Income Tax Consequences" to the extent such information
constitutes matters of law, summaries of legal matters, or legal
conclusions, have been reviewed by us and are accurate in all material
respects.
No opinion is expressed as to any matter not discussed herein.
<PAGE>
Kilroy Realty Corporation
January 24, 1997
Page 3
This opinion is based on various statutory provisions, regulations
promulgated thereunder and interpretations thereof by the Internal Revenue
Service and the courts having jurisdiction over such matters, all of which are
subject to change either prospectively or retroactively. Any such change may
affect the conclusions stated herein. Also, any variation or difference in the
facts from those set forth in the representations of the Company, the Operating
Partnership and their subsidiaries (including those set forth in the
Registration Statement or the Officer's Certificate) may affect the conclusions
stated herein. Moreover, the Company's qualification and taxation as a real
estate investment trust depends upon the Company's ability to meet, through
actual annual operating results, distribution levels and diversity of stock
ownership, the various qualification tests imposed under the Code, the results
of which have not been and will not be reviewed by Latham & Watkins.
Accordingly, no assurance can be given that the actual results of the Company's
operation for any one taxable year will satisfy such requirements.
This opinion is rendered only to you, and is solely for your use in
connection with the transactions set forth in the Registration Statement. This
opinion may not be relied upon by you for any other purpose, or furnished to,
quoted to, or relied upon by any other person, firm or corporation, for any
purpose, without our prior written consent. We hereby consent to the filing of
this opinion as an exhibit to the Registration Statement and to the use of our
name under the caption "Legal Matters" in the Registration Statement.
Very truly yours,
/s/ Latham & Watkins
<PAGE>
EXHIBIT 10.1
-----------------------------------------------
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
KILROY REALTY, L.P.
----------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
ARTICLE 1
DEFINED TERMS
Section 1.1 Definitions............................................................ 1
ARTICLE 2
ORGANIZATIONAL MATTERS
Section 2.1 Organization........................................................... 15
Section 2.2 Name................................................................... 15
Section 2.3 Resident Agent; Principal Office....................................... 15
Section 2.4 Power of Attorney...................................................... 15
Section 2.5 Term................................................................... 17
Section 2.6 Number of Partners..................................................... 17
ARTICLE 3
PURPOSE
Section 3.1 Purpose and Business................................................... 17
Section 3.2 Powers................................................................. 17
Section 3.3 Partnership Only for Purposes Specified................................ 18
Section 3.4 Representations and Warranties by the Parties.......................... 18
ARTICLE 4
CAPITAL CONTRIBUTIONS
Section 4.1 Capital Contributions of the Partners.................................. 20
Section 4.2 Loans by Third Parties................................................. 20
Section 4.3 Additional Funding and Capital Contributions........................... 21
Section 4.4 Stock Incentive Plan................................................... 23
Section 4.5 Other Contribution Provisions.......................................... 23
ARTICLE 5
DISTRIBUTIONS
Section 5.1 Requirement and Characterization of Distributions...................... 23
Section 5.2 Distributions in Kind.................................................. 24
Section 5.3 Distributions Upon Liquidation......................................... 24
Section 5.4 Distributions to Reflect Issuance of Additional Partnership Interests.. 24
ARTICLE 6
ALLOCATIONS
Section 6.1 Timing and Amount of Allocations of Net Income and Net Loss............ 24
Section 6.2 General Allocations.................................................... 24
Section 6.3 Additional Allocation Provisions....................................... 25
</TABLE>
i
<PAGE>
<TABLE>
<C> <S> <C>
Section 6.4 Tax Allocations........................................................ 27
ARTICLE 7
MANAGEMENT AND OPERATIONS OF BUSINESS
Section 7.1 Management............................................................. 28
Section 7.2 Certificate of Limited Partnership..................................... 31
Section 7.3 Restrictions on General Partner's Authority............................ 32
Section 7.4 Reimbursement of the General Partner................................... 34
Section 7.5 Outside Activities of the General Partner.............................. 35
Section 7.6 Contracts with Affiliates.............................................. 36
Section 7.7 Indemnification........................................................ 36
Section 7.8 Liability of the General Partner....................................... 38
Section 7.9 Other Matters Concerning the General Partner........................... 39
Section 7.10 Title to Partnership Assets............................................ 40
Section 7.11 Reliance by Third Parties.............................................. 40
ARTICLE 8
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
Section 8.1 Limitation of Liability................................................ 41
Section 8.2 Management of Business................................................. 41
Section 8.3 Outside Activities of Limited Partners................................. 41
Section 8.4 Return of Capital...................................................... 41
Section 8.5 Rights of Limited Partners Relating to the Partnership................. 42
Section 8.6 Redemption Rights...................................................... 43
ARTICLE 9
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 9.1 Records and Accounting................................................. 45
Section 9.2 Fiscal Year............................................................ 45
Section 9.3 Reports................................................................ 45
ARTICLE 10
TAX MATTERS
Section 10.1 Preparation of Tax Returns............................................. 46
Section 10.2 Tax Elections.......................................................... 46
Section 10.3 Tax Matters Partner.................................................... 46
Section 10.4 Organizational Expenses................................................ 48
Section 10.5 Withholding............................................................ 48
ARTICLE 11
TRANSFERS AND WITHDRAWALS
Section 11.1 Transfer............................................................... 49
Section 11.2 Transfer of General Partner's Partnership Interest..................... 49
Section 11.3 Limited Partners' Rights to Transfer................................... 51
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
Section 11.4 Substituted Limited Partners........................................... 52
Section 11.5 Assignees.............................................................. 53
Section 11.6 General Provisions..................................................... 53
Section 11.7 Transfer of Pledged Partnership Units.................................. 55
ARTICLE 12
ADMISSION OF PARTNERS
Section 12.1 Admission of Successor General Partner................................. 56
Section 12.2 Admission of Additional Limited Partners............................... 56
Section 12.3 Amendment of Agreement and Certificate of Limited Partnership.......... 57
ARTICLE 13
DISSOLUTION AND LIQUIDATION
Section 13.1 Dissolution............................................................ 57
Section 13.2 Winding Up............................................................. 58
Section 13.3 Compliance with Timing Requirements of Regulations..................... 59
Section 13.4 Deemed Distribution and Recontribution................................. 59
Section 13.5 Rights of Limited Partners............................................. 60
Section 13.6 Notice of Dissolution.................................................. 60
Section 13.7 Cancellation of Certificate of Limited Partnership..................... 60
Section 13.8 Reasonable Time for Winding-Up......................................... 60
Section 13.9 Waiver of Partition.................................................... 60
ARTICLE 14
AMENDMENT OF PARTNERSHIP AGREEMENT; CONSENTS
Section 14.1 Amendments............................................................. 60
Section 14.2 Action by the Partners................................................. 61
ARTICLE 15
GENERAL PROVISIONS
Section 15.1 Addresses and Notice................................................... 62
Section 15.2 Titles and Captions.................................................... 62
Section 15.3 Pronouns and Plurals................................................... 62
Section 15.4 Further Action......................................................... 62
Section 15.5 Binding Effect......................................................... 62
Section 15.6 Creditors.............................................................. 63
Section 15.7 Waiver................................................................. 63
Section 15.8 Counterparts........................................................... 63
Section 15.9 Applicable Law......................................................... 63
Section 15.10 Invalidity of Provisions............................................... 63
Section 15.11 Limitation to Preserve REIT Status..................................... 63
Section 15.12 Entire Agreement....................................................... 64
Section 15.13 No Rights as Stockholders.............................................. 64
</TABLE>
iii
<PAGE>
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
KILROY REALTY, L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP, dated as
of _________, 1997, is entered into by and among Kilroy Realty Corporation, a
Maryland corporation (the "Company"), as the General Partner and the Persons
whose names are set forth on Exhibit A attached hereto, as the Limited Partners,
together with any other Persons who become Partners in the Partnership as
provided herein.
ARTICLE 1
DEFINED TERMS
WHEREAS, the limited partnership was formed on October 2, 1996 and an
original agreement of limited partnership was entered into between the Company,
as general partner and John B. Kilroy, Jr. as limited partner;
WHEREAS, the Company proposes to effect a public offering of its
common stock, to acquire and cause the Partnership to acquire direct and
indirect interests in 26 office and industrial properties and other assets, to
cause the Partnership to enter into certain mortgage financing transactions, and
to contribute the remaining net proceeds from the public offering to the
Partnership;
WHEREAS, the Partnership will issue Partnership Interests to the
Company and other persons in accordance with the foregoing transactions;
WHEREAS, upon the completion of the foregoing transactions, the
Partnership shall return the original capital contributions made by the Company
and Mr. Kilroy and any ongoing interest in the Partnership of the Company and
Mr. Kilroy shall be based on their respective contributions as contemplated
below;
WHEREAS, by virtue of their respective execution of this Agreement the
Company and Mr. Kilroy hereby consent to the amendment and restatement of the
original agreement of limited partnership;
NOW, THEREFORE, BE IT RESOLVED, that for good and adequate
consideration, the receipt of which is hereby acknowledged, the parties hereto
agree as follows:
Section 1.1 Definitions.
-----------
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this Agreement.
<PAGE>
"Act" means the Delaware Revised Uniform Limited Partnership Act, as
---
it may be amended from time to time, and any successor to such statute.
"Additional Funds" shall have the meaning set forth in Section 4.3.A.
----------------
"Additional Limited Partner" means a Person admitted to the
--------------------------
Partnership as a Limited Partner pursuant to Section 12.2 hereof and who is
shown as such on the books and records of the Partnership.
"Adjusted Capital Account Deficit" means, with respect to any Partner,
--------------------------------
the deficit balance, if any, in such Partner's Capital Account as of the end of
the relevant fiscal year, after giving effect to the following adjustments:
(i) decrease such deficit by any amounts which such Partner is
obligated to restore pursuant to this Agreement or is deemed to
be obligated to restore pursuant to Regulations Section 1.704-
1(b)(2)(ii)(c) or the penultimate sentence of each of Regulations
Sections 1.704-2(i)(5) and 1.704-2(g); and
(ii) increase such deficit by the items described in Regulations
Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6).
The foregoing definition of Adjusted Capital Account Deficit is
intended to comply with the provisions of Regulations Section 1.704-
1(b)(2)(ii)(d) and shall be interpreted consistently therewith.
"Adjustment Date" means, with respect to any Capital Contribution, the
---------------
close of business on the Business Day last preceding the date of the Capital
Contribution, provided, that if such Capital Contribution is being made by the
-------- ----
General Partner in respect of the proceeds from the issuance of REIT Shares (or
the issuance of the General Partner's securities exercisable for, convertible
into or exchangeable for REIT Shares), then the Adjustment Date shall be as of
the close of business on the Business Day last preceding the date of the
issuance of such securities.
"Affiliate" means, with respect to any Person, any Person directly or
---------
indirectly controlling, controlled by or under common control with such Person.
"Agreed Value" means (i) in the case of any Contributed Property set
------------
forth in Exhibit A and as of the time of its contribution to the Partnership,
the Agreed Value of such property as set forth in Exhibit A; (ii) in the case of
any Contributed Property not set forth in Exhibit A and as of the time of its
contribution to the Partnership, the fair market value of such property or other
consideration as determined by the General Partner, reduced by any liabilities
either assumed by the Partnership upon such contribution or to which such
property is subject when contributed; and (iii) in the case of any property
distributed to a Partner by the Partnership, the fair market value of such
property as determined by the General Partner at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner
2
<PAGE>
upon such distribution or to which such property is subject at the time of the
distribution as determined under Section 752 of the Code and the Regulations
thereunder.
"Agreement" means this Agreement of Limited Partnership, as it may be
---------
amended, modified, supplemented or restated from time to time.
"Appraisal" means with respect to any assets, the opinion of an
---------
independent third party experienced in the valuation of similar assets, selected
by the General Partner in good faith; such opinion may be in the form of an
opinion by such independent third party that the value for such asset as set by
the General Partner is fair, from a financial point of view, to the Partnership.
"Assignee" means a Person to whom one or more Partnership Units have
--------
been transferred in a manner permitted under this Agreement, but who has not
become a Substituted Limited Partner, and who has the rights set forth in
Section 11.5.
"Available Cash" means, with respect to any period for which such
--------------
calculation is being made, (i) the sum of:
a. the Partnership's Net Income or Net Loss (as the case may be)
for such period,
b. Depreciation and all other noncash charges deducted in
determining Net Income or Net Loss for such period,
c. the amount of any reduction in reserves of the Partnership
referred to in clause (ii)(f) below (including, without limitation,
reductions resulting because the General Partner determines such
amounts are no longer necessary),
d. the excess of the net proceeds from the sale, exchange,
disposition, or refinancing of Partnership property for such period
over the gain (or loss, as the case may be) recognized from any such
sale, exchange, disposition, or refinancing during such period
(excluding Terminating Capital Transactions), and
e. all other cash received by the Partnership for such period
that was not included in determining Net Income or Net Loss for such
period;
(ii) less the sum of:
a. all principal debt payments made during such period by the
Partnership,
b. capital expenditures made by the Partnership during such
period,
c. investments in any entity (including loans made thereto) to
the extent that such investments are not otherwise described in
clauses (ii)(a) or (b),
3
<PAGE>
d. all other expenditures and payments not deducted in
determining Net Income or Net Loss for such period,
e. any amount included in determining Net Income or Net Loss for
such period that was not received by the Partnership during such
period,
f. the amount of any increase in reserves established during
such period which the General Partner determines are necessary or
appropriate in its sole and absolute discretion, and
g. the amount of any working capital accounts and other cash or
similar balances which the General Partner determines to be necessary
or appropriate in its sole and absolute discretion.
Notwithstanding the foregoing, Available Cash shall not include any
cash received or reductions in reserves, or take into account any disbursements
made or reserves established, after commencement of the dissolution and
liquidation of the Partnership.
"Board of Directors" means the Board of Directors of the General
------------------
Partner.
"Business Day" means any day except a Saturday, Sunday or other day on
------------
which commercial banks in Los Angeles, California and New York, New York are
authorized or required by law to be closed.
"Capital Account" means, with respect to any Partner, the Capital
---------------
Account maintained for such Partner in accordance with the following provisions:
(a) To each Partner's Capital Account there shall be added such
Partner's Capital Contributions, such Partner's share of Net Income and any
items in the nature of income or gain which are specially allocated pursuant to
Section 6.3, and the amount of any Partnership liabilities assumed by such
Partner or which are secured by any property distributed to such Partner.
(b) From each Partner's Capital Account there shall be subtracted the
amount of cash and the Gross Asset Value of any property distributed to such
Partner pursuant to any provision of this Agreement, such Partner's distributive
share of Net Losses and any items in the nature of expenses or losses which are
specially allocated pursuant to Section 6.3 hereof, and the amount of any
liabilities of such Partner assumed by the Partnership or which are secured by
any property contributed by such Partner to the Partnership.
(c) In the event any interest in the Partnership is transferred in
accordance with the terms of this Agreement (which does not result in a
termination of the Partnership for federal income tax purposes), the transferee
shall succeed to the Capital Account of the transferor to the extent it relates
to the transferred interest.
4
<PAGE>
(d) In determining the amount of any liability for purposes of
subsections (a) and (b) hereof, there shall be taken into account Code section
752(c) and any other applicable provisions of the Code and Regulations.
(e) The foregoing provisions and the other provisions of this
Agreement relating to the maintenance of Capital Accounts are intended to comply
with Regulations Sections 1.704-1(b) and 1.704-2, and shall be interpreted and
applied in a manner consistent with such Regulations. In the event the General
Partner shall determine that it is prudent to modify the manner in which the
Capital Accounts, or any debits or credits thereto (including, without
limitation, debits or credits relating to liabilities which are secured by
contributed or distributed property or which are assumed by the Partnership, the
General Partner, or the Limited Partners) are computed in order to comply with
such Regulations, the General Partner may make such modification, provided that
-------- ----
it is not likely to have a material effect on the amounts distributable to any
Person pursuant to Article 13 of this Agreement upon the dissolution of the
Partnership. The General Partner also shall (i) make any adjustments that are
necessary or appropriate to maintain equality between the Capital Accounts of
the Partners and the amount of Partnership capital reflected on the
Partnership's balance sheet, as computed for book purposes, in accordance with
Regulations Section 1.704-1(b)(2)(iv)(q), and (ii) make any appropriate
modifications in the event unanticipated events might otherwise cause this
Agreement not to comply with Regulations Section 1.704-1(b) or Section 1.704-2.
"Capital Contribution" means, with respect to any Partner, the amount
--------------------
of money and the initial Gross Asset Value of any property (other than money)
contributed to the Partnership by such Partner.
"Cash Amount" means, with respect to any Partnership Units subject to
-----------
a Redemption, an amount of cash equal to the Deemed Partnership Interest Value
attributable to such Partnership Units.
"Certificate" means the Certificate of Limited Partnership relating to
-----------
the Partnership filed in the office of the Secretary of State of Delaware, as
amended from time to time in accordance with the terms hereof and the Act.
"Charter" means the Articles of Incorporation of the General Partner
-------
filed with the Maryland State Department of Assessments and Taxation on
September 13, 1996, as amended or restated from time to time.
"Code" means the Internal Revenue Code of 1986, as amended from time
----
to time or any successor statute thereto, as interpreted by the applicable
regulations thereunder. Any reference herein to a specific section or sections
of the Code shall be deemed to include a reference to any corresponding
provision of future law.
"Consent" means the consent to, approval of, or vote on a proposed
-------
action by a Partner given in accordance with Article 14 hereof.
5
<PAGE>
"Consent of the Limited Partners" means the Consent of a Majority in
-------------------------------
Interest of the Limited Partners, which Consent shall be obtained prior to the
taking of any action for which it is required by this Agreement and may be given
or withheld by a Majority in Interest of the Limited Partners, unless otherwise
expressly provided herein, in their sole and absolute discretion.
"Consent of the Partners" means the Consent of Partners holding
-----------------------
Percentage Interests that in the aggregate are equal to or greater than 60% of
the aggregate Percentage Interests of all Partners, which Consent shall be
obtained prior to the taking of any action for which it is required by this
Agreement and may be given or withheld by such Partners, in their sole and
absolute discretion.
"Constructively Own" means ownership under the constructive ownership
------------------
rules described in Exhibit C.
"Contributed Property" means each property or other asset, in such
--------------------
form as may be permitted by the Act, but excluding cash, contributed or deemed
contributed to the Partnership (or, to the extent provided in applicable
regulations, deemed contributed to the Partnership on termination and
reconstitution thereof pursuant to Section 708 of the Code).
"Debt" means, as to any Person, as of any date of determination, (i)
----
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services; (ii) all amounts owed by such Person to banks or
other Persons in respect of reimbursement obligations under letters of credit,
surety bonds and other similar instruments guaranteeing payment or other
performance of obligations by such Person; (iii) all indebtedness for borrowed
money or for the deferred purchase price of property or services secured by any
lien on any property owned by such Person, to the extent attributable to such
Person's interest in such property, even though such Person has not assumed or
become liable for the payment thereof; and (iv) lease obligations of such Person
which, in accordance with generally accepted accounting principles, should be
capitalized.
"Deemed Partnership Interest Value" means, as of any date with respect
---------------------------------
to any class of Partnership Interests, the Deemed Value of the Partnership
Interests of such class multiplied by the applicable Partner's Percentage
Interest of such class.
"Deemed Value of the Partnership Interests" means, as of any date with
-----------------------------------------
respect to any class of Partnership Interests, (i) the total number of shares of
capital stock of the General Partner corresponding to such class of Partnership
Interests (as provided for in Sections 4.1 and 4.3.C) issued and outstanding as
of the close of business on such date (excluding any treasury shares) multiplied
by the Fair Market Value of a share of such capital stock on such date; (ii)
divided by the Percentage Interest of the General Partner in such class of
- ------- --
Partnership Interests on such date.
"Depreciation" means, for each fiscal year or other period, an amount
------------
equal to the depreciation, amortization or other cost recovery deduction
allowable with respect to an asset for such year or other period, except that if
the Gross Asset Value of an asset differs from its
6
<PAGE>
adjusted basis for federal income tax purposes at the beginning of such year or
other period, Depreciation shall be an amount which bears the same ratio to such
beginning Gross Asset Value as the federal income tax depreciation, amortization
or other cost recovery deduction for such year or other period bears to such
beginning adjusted tax basis; provided, however, that if the federal income tax
-------- -------
depreciation, amortization or other cost recovery deduction for such year is
zero, Depreciation shall be determined with reference to such beginning Gross
Asset Value using any reasonable method selected by the General Partner.
"Effective Date" means the date of closing of the initial public
--------------
offering of REIT Shares upon which date contributions set forth on Exhibit A
shall become effective.
"Fair Market Value" means, with respect to any share of capital stock
-----------------
of the General Partner, the average of the daily market price for the ten (10)
consecutive trading days immediately preceding the date with respect to which
"Fair Market Value" must be determined hereunder or, if such date is not a
Business Day, the immediately preceding Business Day. The market price for each
such trading day shall be: (i) if such shares are listed or admitted to trading
on any securities exchange or the Nasdaq National Market, the closing price,
regular way, on such day, or if no such sale takes place on such day, the
average of the closing bid and asked prices on such day, (ii) if such shares are
not listed or admitted to trading on any securities exchange or the Nasdaq
National Market, the last reported sale price on such day or, if no sale takes
place on such day, the average of the closing bid and asked prices on such day,
as reported by a reliable quotation source designated by the General Partner, or
(iii) if such shares are not listed or admitted to trading on any securities
exchange or the Nasdaq National Market and no such last reported sale price or
closing bid and asked prices are available, the average of the reported high bid
and low asked prices on such day, as reported by a reliable quotation source
designated by the General Partner, or if there shall be no bid and asked prices
on such day, the average of the high bid and low asked prices, as so reported,
on the most recent day (not more than 10 days prior to the date in question) for
which prices have been so reported; provided that, if there are no bid and asked
-------- ----
prices reported during the 10 days prior to the date in question, the Fair
Market Value of such shares shall be determined by the General Partner acting in
good faith on the basis of such quotations and other information as it
considers, in its reasonable judgment, appropriate. In the event the REIT
Shares Amount for such shares includes rights that a holder of such shares would
be entitled to receive, then the Fair Market Value of such rights shall be
determined by the General Partner acting in good faith on the basis of such
quotations and other information as it considers, in its reasonable judgment,
appropriate; and provided further that, in connection with determining the
-------- ------- ----
Deemed Value of the Partnership Interests for purposes of determining the number
of additional Partnership Units issuable upon a Capital Contribution funded by
an underwritten public offering of shares of capital stock of the General
Partner, the Fair Market Value of such shares shall be the public offering price
per share of such class of capital stock sold.
"Funding Debt" means the incurrence of any Debt by or on behalf of the
------------
General Partner for the purpose of providing funds to the Partnership.
"General Partner" means the Company or its successors as general
---------------
partner of the Partnership.
7
<PAGE>
"General Partner Interest" means a Partnership Interest held by the
------------------------
General Partner. A General Partner Interest may be expressed as a number of
Partnership Units.
"General Partner Loan" shall have the meaning set forth in Section
--------------------
4.3.B.
"General Partner Payment" shall have the meaning set forth in Section
-----------------------
15.11.
"Gross Asset Value" means, with respect to any asset, the asset's
-----------------
adjusted basis for federal income tax purposes, except as follows:
(a) The initial Gross Asset Value of any asset contributed by a
Partner to the Partnership shall be the gross fair market value of such asset,
as determined by the contributing Partner and the General Partner (as set forth
on Exhibit A attached hereto, as such Exhibit may be amended from time to time);
provided that, if the contributing Partner is the General Partner then, except
- -------- ----
with respect to the General Partner's initial Capital Contribution which shall
be determined as set forth on Exhibit A, or capital contributions of cash, REIT
Shares or other shares of capital stock of the General Partner, the
determination of the fair market value of the contributed asset shall be
determined by (i) the price paid by the General Partner if the asset is acquired
by the General Partner contemporaneously with its contribution to the
Partnership, or (ii) by Appraisal if otherwise acquired by the General Partner.
(b) As of the times listed below, the Gross Asset Values of all
Partnership assets shall be adjusted to equal their respective gross fair market
values, as determined by the General Partner using such reasonable method of
valuation as it may adopt, provided however, that for such purpose, the net
-------- -------
value of all of the Partnership assets, in the aggregate, shall be equal to the
Deemed Value of the Partnership Interests of all classes of Partnership
Interests then outstanding, regardless of the method of valuation adopted by the
General Partner:
(i) the acquisition of an additional interest in the Partnership by a
new or existing Partner in exchange for more than a de minimis
Capital Contribution, if the General Partner reasonably
determines that such adjustment is necessary or appropriate to
reflect the relative economic interests of the Partners in the
Partnership;
(ii) the distribution by the Partnership to a Partner of more than a
de minimis amount of Partnership property as consideration for an
interest in the Partnership if the General Partner reasonably
determines that such adjustment is necessary or appropriate to
reflect the relative economic interests of the Partners in the
Partnership;
(iii) the liquidation of the Partnership within the meaning of
Regulations Section 1.704-1(b)(2)(ii)(g); and
(iv) at such other times as the General Partner shall reasonably
determine necessary or advisable in order to comply with
Regulations Sections 1.704-1(b) and 1.704-2.
8
<PAGE>
(c) The Gross Asset Value of any Partnership asset distributed to a
Partner shall be the gross fair market value of such asset on the date of
distribution as determined by the distributee and the General Partner, or if the
distributee and the General Partner cannot agree on such a determination, by
Appraisal.
(d) The Gross Asset Values of Partnership assets shall be increased
(or decreased) to reflect any adjustments to the adjusted basis of such assets
pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent
that such adjustments are taken into account in determining Capital Accounts
pursuant to Regulations Section 1.704-1(b)(2)(iv)(m); provided, however, that
-------- -------
Gross Asset Values shall not be adjusted pursuant to this subparagraph (d) to
the extent that the General Partner reasonably determines that an adjustment
pursuant to subparagraph (b) is necessary or appropriate in connection with a
transaction that would otherwise result in an adjustment pursuant to this
subparagraph (d).
(e) If the Gross Asset Value of a Partnership asset has been
determined or adjusted pursuant to subparagraph (a), (b) or (d), such Gross
Asset Value shall thereafter be adjusted by the Depreciation taken into account
with respect to such asset for purposes of computing Net Income and Net Losses.
"Holder" means either the Partner or Assignee owning a Partnership
------
Unit.
"Immediate Family" means, with respect to any natural Person, such
----------------
natural Person's estate or heirs or current spouse or former spouse, parents,
parents-in-law, children, siblings and grandchildren and any trust or estate,
all of the beneficiaries of which consist of such Person or such Person's
spouse, former spouse, parents, parents-in-law, children, siblings or
grandchildren.
"Incapacity" or "Incapacitated" means, (i) as to any individual
---------- -------------
Partner, death, total physical disability or entry by a court of competent
jurisdiction adjudicating him or her incompetent to manage his or her Person or
his or her estate; (ii) as to any corporation which is a Partner, the filing of
a certificate of dissolution, or its equivalent, for the corporation or the
revocation of its charter; (iii) as to any partnership which is a Partner, the
dissolution and commencement of winding up of the partnership; (iv) as to any
estate which is a Partner, the distribution by the fiduciary of the estate's
entire interest in the Partnership; (v) as to any trustee of a trust which is a
Partner, the termination of the trust (but not the substitution of a new
trustee); or (vi) as to any Partner, the bankruptcy of such Partner. For
purposes of this definition, bankruptcy of a Partner shall be deemed to have
occurred when (a) the Partner commences a voluntary proceeding seeking
liquidation, reorganization or other relief under any bankruptcy, insolvency or
other similar law now or hereafter in effect, (b) the Partner is adjudged as
bankrupt or insolvent, or a final and nonappealable order for relief under any
bankruptcy, insolvency or similar law now or hereafter in effect has been
entered against the Partner, (c) the Partner executes and delivers a general
assignment for the benefit of the Partner's creditors, (d) the Partner files an
answer or other pleading admitting or failing to contest the material
allegations of a petition filed against the Partner in any proceeding of the
nature described in clause (b) above, (e) the Partner seeks, consents to or
acquiesces in the appointment of a trustee, receiver or liquidator for the
Partner or for all or any substantial part
9
<PAGE>
of the Partner's properties, (f) any proceeding seeking liquidation,
reorganization or other relief under any bankruptcy, insolvency or other similar
law now or hereafter in effect has not been dismissed within 120 days after the
commencement thereof, (g) the appointment without the Partner's consent or
acquiescence of a trustee, receiver or liquidator has not been vacated or stayed
within 90 days of such appointment, or (h) an appointment referred to in clause
(g) is not vacated within 90 days after the expiration of any such stay.
"Indemnitee" means (i) any Person subject to a claim or demand or made
----------
or threatened to be made a party to, or involved or threatened to be involved
in, an action, suit or proceeding by reason of his or her status as (A) the
General Partner or (B) a director, officer, employee or agent of the Partnership
or the General Partner, and (ii) such other Persons (including Affiliates of the
General Partner or the Partnership) as the General Partner may designate from
time to time, in its sole and absolute discretion.
"IRS" means the Internal Revenue Service, which administers the
---
internal revenue laws of the United States.
"Limited Partner" means any Person named as a Limited Partner in
---------------
Exhibit A attached hereto, as such Exhibit may be amended from time to time, or
any Substituted Limited Partner or Additional Limited Partner, in such Person's
capacity as a Limited Partner in the Partnership.
"Limited Partnership Interest" means a Partnership Interest of a
----------------------------
Limited Partner representing a fractional part of the Partnership Interests of
all Limited Partners and includes any and all benefits to which the holder of
such a Partnership Interest may be entitled as provided in this Agreement,
together with all obligations of such Person to comply with the terms and
provisions of this Agreement. A Limited Partnership Interest may be expressed
as a number of Partnership Units.
"Liquidating Events" shall have the meaning set forth in Section 13.1.
------------------
"Liquidator" shall have the meaning set forth in Section 13.2.A.
----------
"Majority in Interest of the Limited Partners" means Limited Partners
--------------------------------------------
(other than the General Partner and any Limited Partner 50% or more of whose
equity is owned, directly or indirectly, by the General Partner) holding
Percentage Interests that in the aggregate are greater than fifty percent (50%)
of the aggregate Percentage Interests of all Limited Partners (other than the
General Partner and any Limited Partner 50% or more of whose equity is owned,
directly or indirectly, by the General Partner).
"Majority in Interest of Partners" means Partners holding Percentage
--------------------------------
Interests that are greater than fifty percent (50%) of the aggregate Percentage
Interests of all Partners.
"Net Income" or "Net Loss" means for each fiscal year of the
---------- --------
Partnership, an amount equal to the Partnership's taxable income or loss for
such fiscal year, determined in accordance with Code Section 703(a) (for this
purpose, all items of income, gain, loss or
10
<PAGE>
deduction required to be stated separately pursuant to Code Section 703(a)(1)
shall be included in taxable income or loss), with the following adjustments:
(a) Any income of the Partnership that is exempt from federal income
tax and not otherwise taken into account in computing Net Income or Net Loss
pursuant to this definition of Net Income or Net Loss shall be added to such
taxable income or loss;
(b) Any expenditures of the Partnership described in Code Section
705(a)(2)(B) or treated as Code Section 705(a)(2)(B) expenditures pursuant to
Regulations Section 1.704-1(b)(2)(iv)(i), and not otherwise taken into account
in computing Net Income or Net Loss pursuant to this definition of Net Income or
Net Loss shall be subtracted from such taxable income or loss;
(c) In the event the Gross Asset Value of any Partnership asset is
adjusted pursuant to subparagraph (b) or subparagraph (c) of the definition of
Gross Asset Value, the amount of such adjustment shall be taken into account as
gain or loss from the disposition of such asset for purposes of computing Net
Income or Net Loss;
(d) Gain or loss resulting from any disposition of property with
respect to which gain or loss is recognized for federal income tax purposes
shall be computed by reference to the Gross Asset Value of the property disposed
of, notwithstanding that the adjusted tax basis of such property differs from
its Gross Asset Value;
(e) In lieu of the depreciation, amortization, and other cost recovery
deductions taken into account in computing such taxable income or loss, there
shall be taken into account Depreciation for such fiscal year;
(f) To the extent an adjustment to the adjusted tax basis of any
Partnership asset pursuant to Code Section 734(b) or Code Section 743(b) is
required pursuant to Regulations Section 1.704-1(b)(2)(iv)(m)(4) to be taken
into account in determining Capital Accounts as a result of a distribution other
than in liquidation of a Partner's interest in the Partnership, the amount of
such adjustment shall be treated as an item of gain (if the adjustment increases
the basis of the asset) or loss (if the adjustment decreases the basis of the
asset) from the disposition of the asset and shall be taken into account for
purposes of computing Net Income or Net Loss; and
(g) Notwithstanding any other provision of this definition of Net
Income or Net Loss, any items which are specially allocated pursuant to Section
6.3 hereof shall not be taken into account in computing Net Income or Net Loss.
The amounts of the items of Partnership income, gain, loss, or deduction
available to be specially allocated pursuant to Section 6.3 hereof shall be
determined by applying rules analogous to those set forth in this definition of
Net Income or Net Loss.
"New Securities" means (i) any rights, options, warrants or
--------------
convertible or exchangeable securities having the right to subscribe for or
purchase REIT Shares or other shares of capital stock of the General Partner,
excluding grants under any Stock Option Plan,
11
<PAGE>
or (ii) any Debt issued by the General Partner that provides any of the rights
described in clause (i).
"Nonrecourse Deductions" shall have the meaning set forth in
----------------------
Regulations Section 1.704-2(b)(1), and the amount of Nonrecourse Deductions for
a Partnership Year shall be determined in accordance with the rules of
Regulations Section 1.704-2(c).
"Nonrecourse Liability" shall have the meaning set forth in
---------------------
Regulations Section 1.752-1(a)(2).
"Notice of Redemption" means the Notice of Redemption substantially in
--------------------
the form of Exhibit B to this Agreement.
"Original Limited Partner" means the Limited Partner of the
------------------------
Partnership, listed on Schedule A hereto, as of ____________, 1997.
"Partner" means a General Partner or a Limited Partner, and "Partners"
------- --------
means the General Partner and the Limited Partners.
"Partner Minimum Gain" means an amount, with respect to each Partner
--------------------
Nonrecourse Debt, equal to the Partnership Minimum Gain that would result if
such Partner Nonrecourse Debt were treated as a Nonrecourse Liability,
determined in accordance with Regulations Section 1.704-2(i)(3).
"Partner Nonrecourse Debt" shall have the meaning set forth in
------------------------
Regulations Section 1.704-2(b)(4).
"Partner Nonrecourse Deductions" shall have the meaning set forth in
------------------------------
Regulations Section 1.704-2(i)(2), and the amount of Partner Nonrecourse
Deductions with respect to a Partner Nonrecourse Debt for a Partnership Year
shall be determined in accordance with the rules of Regulations Section 1.704-
2(i)(2).
"Partnership" means the limited partnership formed under the Act and
-----------
pursuant to this Agreement, and any successor thereto.
"Partnership Interest" means, an ownership interest in the Partnership
--------------------
of either a Limited Partner or the General Partner and includes any and all
benefits to which the holder of such a Partnership Interest may be entitled as
provided in this Agreement, together with all obligations of such Person to
comply with the terms and provisions of this Agreement. There may be one or
more classes of Partnership Interests as provided in Section 4.3. A Partnership
Interest may be expressed as a number of Partnership Units. Unless otherwise
expressly provided for by the General Partner at the time of the original
issuance of any Partnership Interests, all Partnership Interests (whether of a
Limited Partner or a General Partner) shall be of the same class.
12
<PAGE>
"Partnership Minimum Gain" shall have the meaning set forth in
------------------------
Regulations Section 1.704-2(b)(2), and the amount of Partnership Minimum Gain,
as well as any net increase or decrease in Partnership Minimum Gain, for a
Partnership Year shall be determined in accordance with the rules of Regulations
Section 1.704-2(d).
"Partnership Record Date" means the record date established by the
-----------------------
General Partner for the distribution of Available Cash pursuant to Section 5.1
hereof which record date shall be the same as the record date established by the
General Partner for a distribution to its stockholders of some or all of its
portion of such distribution.
"Partnership Unit" means, with respect to any class of Partnership
----------------
Interest, a fractional, undivided share of such class of Partnership Interest
issued pursuant to Sections 4.1 and 4.3. The ownership of Partnership Units may
be evidenced by a certificate for units substantially in the form of Exhibit D
hereto or as the General Partner may determine with respect to any class of
Partnership Units issued from time to time under Section 4.1 and 4.3.
"Partnership Year" means the fiscal year of the Partnership, which
----------------
shall be the calendar year.
"Percentage Interest" means, as to a Partner holding a class of
-------------------
Partnership Interests, its interest in the Partnership as determined by dividing
the Partnership Units of such class owned by such Partner by the total number of
Partnership Units of such class then outstanding as specified in Exhibit A
attached hereto, as such Exhibit may be amended from time to time. If the
Partnership issues more than one class of Partnership Interest, the interest in
the Partnership among the classes of Partnership Interests shall be determined
as set forth in the amendment to the Partnership Agreement setting forth the
rights and privileges of such additional classes of Partnership Interest, if
any, as contemplated by Section 4.3.C hereof.
"Person" means an individual or a corporation, partnership, limited
------
liability company, trust, unincorporated organization, association or other
entity.
"Pledge" shall have the meaning set forth in Section 11.3.A.
------
"Pledge Agreement" means the Pledge Agreement dated as of
----------------
_______________, 1997 among the Company, as agent, and the Pledgors, as same may
be amended, modified or supplemented from time to time in accordance with its
terms.
"Pledgors" means Kilroy Industries, a California corporation, John B.
--------
Kilroy, Sr. and John B. Kilroy, Jr.
"Properties" means such interests in real property and personal
----------
property including without limitation, fee interests, interests in ground
leases, interests in joint ventures, interests in mortgages, and Debt
instruments as the Partnership may hold from time to time.
"Qualified REIT Subsidiary" means any Subsidiary of the General
-------------------------
Partner that is a "qualified REIT subsidiary" within the meaning of Section
856(i) of the Code.
13
<PAGE>
"Qualified Transferee" means an "Accredited Investor" as defined in
--------------------
Rule 501 promulgated under the Securities Act.
"Redemption" shall have the meaning set forth in Section 8.6.A.
----------
"Regulations" means the Income Tax Regulations promulgated under the
-----------
Code, as such regulations may be amended from time to time (including
corresponding provisions of succeeding regulations).
"Regulatory Allocations" shall have the meaning set forth in Section
----------------------
6.3.A(viii) of this Agreement.
"REIT" means a real estate investment trust under Sections 856 through
----
860 of the Code.
"REIT Requirements" shall have the meaning set forth in Section 5.1.
-----------------
"REIT Share" means a share of common stock, par value $.01 per share,
----------
of the General Partner.
"REIT Shares Amount" means, as of any date, an aggregate number of
------------------
REIT Shares equal to the number of Tendered Units, or in the case of Section
11.2.B, all Units, as adjusted pursuant to Section 7.5 (in the event the General
Partner acquires material assets, other than on behalf of the Partnership) and
for stock dividends and distributions, stock splits and subdivisions, reverse
stock splits and combinations, distributions of rights, warrants or options, and
distributions of evidences of indebtedness or assets relating to assets not
received by the General Partner pursuant to a pro rata distribution by the
--- ----
Partnership.
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations of the Securities and Exchange Commission promulgated
thereunder.
"Securities Exchange Act" means the Securities Exchange Act of 1934,
-----------------------
as amended, and the rules and regulations of the Securities and Exchange
Commission promulgated thereunder.
"Specified Redemption Date" means the day of receipt by the General
-------------------------
Partner of a Notice of Redemption.
"Stock Incentive Plan" means any stock incentive plan of the General
--------------------
Partner.
"Subsidiary" means, with respect to any Person, any corporation or
----------
other entity of which a majority of (i) the voting power of the voting equity
securities or (ii) the outstanding equity interests is owned, directly or
indirectly, by such Person.
"Subsidiary Partnership" means any partnership that is a Subsidiary of
----------------------
the Partnership.
14
<PAGE>
"Substituted Limited Partner" means a Person who is admitted as a
---------------------------
Limited Partner to the Partnership pursuant to Section 11.4.
"Surviving Partnership" shall have the meaning set forth in Section
---------------------
11.2.C.
"Tax Items" shall have the meaning set forth in Section 6.4.A.
---------
"Tenant" means any tenant from which the General Partner derives rent
------
either directly or indirectly through partnerships, including the Partnership.
"Tendered Units" shall have the meaning set forth in Section 8.6.A.
--------------
"Tendering Partner" shall have the meaning set forth in Section 8.6.A.
-----------------
"Terminating Capital Transaction" means any sale or other disposition
-------------------------------
of all or substantially all of the assets of the Partnership or a related series
of transactions that, taken together, result in the sale or other disposition of
all or substantially all of the assets of the Partnership.
ARTICLE 2
ORGANIZATIONAL MATTERS
Section 2.1 Organization
------------
The Partnership is a limited partnership formed pursuant to the
provisions of the Act and upon the terms and conditions set forth in this
Agreement. Except as expressly provided herein, the rights and obligations of
the Partners and the administration and termination of the Partnership shall be
governed by the Act. The Partnership Interest of each Partner shall be personal
property for all purposes.
Section 2.2 Name
----
The name of the Partnership is Kilroy Realty, L.P. The Partnership's
business may be conducted under any other name or names deemed advisable by the
General Partner, including the name of the General Partner or any Affiliate
thereof. The words "Limited Partnership," "L.P.," "Ltd." or similar words or
letters shall be included in the Partnership's name where necessary for the
purposes of complying with the laws of any jurisdiction that so requires. The
General Partner in its sole and absolute discretion may change the name of the
Partnership at any time and from time to time and shall notify the Limited
Partners of such change in the next regular communication to the Limited
Partners.
Section 2.3 Resident Agent; Principal Office
--------------------------------
The name and address of the resident agent of the Partnership in the
State of Delaware is Prentice-Hall Corporation Systems, Inc., 1013 Centre Road,
Wilmington, DE
15
<PAGE>
19805. The address of the principal office of the Partnership in the State of
Delaware is c/o Prentice-Hall Corporation Systems, Inc., 1013 Centre Road,
Wilmington, DE 19805 at such address. The principal office of the Partnership
is located at 2250 East Imperial Highway, El Segundo, California 90245, or such
other place as the General Partner may from time to time designate by notice to
the Limited Partners. The Partnership may maintain offices at such other place
or places within or outside the State of Delaware as the General Partner deems
advisable.
Section 2.4 Power of Attorney
-----------------
A. Each Limited Partner and each Assignee constitutes and appoints
the General Partner, any Liquidator, and authorized officers and attorneys-in-
fact of each, and each of those acting singly, in each case with full power of
substitution, as its true and lawful agent and attorney-in-fact, with full power
and authority in its name, place and stead to:
(1) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (a) all certificates, documents and
other instruments (including, without limitation, this Agreement
and the Certificate and all amendments or restatements thereof)
that the General Partner or the Liquidator deems appropriate or
necessary to form, qualify or continue the existence or
qualification of the Partnership as a limited partnership (or a
partnership in which the Limited Partners have limited liability)
in the State of Delaware and in all other jurisdictions in which
the Partnership may conduct business or own property; (b) all
instruments that the General Partner or any Liquidator deems
appropriate or necessary to reflect any amendment, change,
modification or restatement of this Agreement in accordance with
its terms; (c) all conveyances and other instruments or documents
that the General Partner or any Liquidator deems appropriate or
necessary to reflect the dissolution and liquidation of the
Partnership pursuant to the terms of this Agreement, including,
without limitation, a certificate of cancellation; (d) all
instruments relating to the admission, withdrawal, removal or
substitution of any Partner pursuant to, or other events
described in, Articles 11, 12 and 13 hereof or the Capital
Contribution of any Partner; and (e) all certificates, documents
and other instruments relating to the determination of the
rights, preferences and privileges of Partnership Interests; and
(2) execute, swear to, acknowledge and file all ballots, consents,
approvals, waivers, certificates and other instruments
appropriate or necessary, in the sole and absolute discretion of
the General Partner or any Liquidator, to make, evidence, give,
confirm or ratify any vote, consent, approval, agreement or other
action which is made or given by the Partners hereunder or is
consistent with the terms of this Agreement or appropriate or
necessary, in the sole discretion of the General Partner or any
Liquidator, to effectuate the terms or intent of this Agreement.
16
<PAGE>
Nothing contained herein shall be construed as authorizing the General Partner
or any Liquidator to amend this Agreement except in accordance with Article 14
hereof or as may be otherwise expressly provided for in this Agreement.
B. The foregoing power of attorney is hereby declared to be
irrevocable and a power coupled with an interest, in recognition of the fact
that each of the Partners will be relying upon the power of the General Partner
and any Liquidator to act as contemplated by this Agreement in any filing or
other action by it on behalf of the Partnership, and it shall survive and not be
affected by the subsequent Incapacity of any Limited Partner or Assignee and the
transfer of all or any portion of such Limited Partner's or Assignee's
Partnership Units and shall extend to such Limited Partner's or Assignee's
heirs, successors, assigns and personal representatives. Each such Limited
Partner or Assignee hereby agrees to be bound by any representation made by the
General Partner or any Liquidator, acting in good faith pursuant to such power
of attorney; and each such Limited Partner or Assignee hereby waives any and all
defenses which may be available to contest, negate or disaffirm the action of
the General Partner or any Liquidator, taken in good faith under such power of
attorney. Each Limited Partner or Assignee shall execute and deliver to the
General Partner or any Liquidator, within 15 days after receipt of the General
Partner's or Liquidator's request therefor, such further designation, powers of
attorney and other instruments as the General Partner or the Liquidator, as the
case may be, deems necessary to effectuate this Agreement and the purposes of
the Partnership.
Section 2.5 Term
----
The term of the Partnership commenced on October 2, 1996 and shall
continue until December 31, 2095 unless it is dissolved sooner pursuant to the
provisions of Article 13 or as otherwise provided by law.
Section 2.6 Number of Partners
------------------
The Partnership shall not at any time have more than 100 partners
(including as partners those persons indirectly owning an interest in the
Partnership through a partnership, limited liability company, S corporation or
grantor trust (such entity, a "flow through entity"), but only if substantially
all of the value of such person's interest in the flow through entity is
attributable to the flow through entity's interest (direct or indirect) in the
Partnership).
ARTICLE 3
PURPOSE
Section 3.1 Purpose and Business
--------------------
The purpose and nature of the business to be conducted by the
Partnership is (i) to conduct any business that may be lawfully conducted by a
limited partnership organized pursuant to the Act, provided, however, that such
-------- -------
business shall be limited to and conducted in such a manner as to permit the
General Partner at all times to be classified as a REIT for federal
17
<PAGE>
income tax purposes, unless the General Partner ceases to qualify as a REIT for
reasons other than the conduct of the business of the Partnership, (ii) to enter
into any partnership, joint venture or other similar arrangement to engage in
any of the foregoing or to own interests in any entity engaged, directly or
indirectly, in any of the foregoing and (iii) to do anything necessary or
incidental to the foregoing. In connection with the foregoing, and without
limiting the General Partner's right in its sole discretion to cease qualifying
as a REIT, the Partners acknowledge that the General Partner's current status as
a REIT inures to the benefit of all the Partners and not solely the General
Partner.
Section 3.2 Powers
------
The Partnership is empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described herein and
for the protection and benefit of the Partnership, including, without
limitation, full power and authority, directly or through its ownership interest
in other entities, to enter into, perform and carry out contracts of any kind,
borrow money and issue evidences of indebtedness, whether or not secured by
mortgage, deed of trust, pledge or other lien, acquire and develop real
property, and manage, lease, sell, transfer and dispose of real property;
provided, however, that the Partnership shall not take, or refrain from taking,
- -------- -------
any action which, in the judgment of the General Partner, in its sole and
absolute discretion, (i) could adversely affect the ability of the General
Partner to continue to qualify as a REIT, (ii) could subject the General Partner
to any taxes under Section 857 or Section 4981 of the Code, or (iii) could
violate any law or regulation of any governmental body or agency having
jurisdiction over the General Partner or its securities, unless any such action
(or inaction) under (i), (ii) or (iii) shall have been specifically consented to
by the General Partner in writing.
Section 3.3 Partnership Only for Purposes Specified
---------------------------------------
The Partnership shall be a partnership only for the purposes specified
in Section 3.1 hereof, and this Agreement shall not be deemed to create a
partnership among the Partners with respect to any activities whatsoever other
than the activities within the purposes of the Partnership as specified in
Section 3.1 hereof. Except as otherwise provided in this Agreement, no Partner
shall have any authority to act for, bind, commit or assume any obligation or
responsibility on behalf of the Partnership, its properties or any other
Partner. No Partner, in its capacity as a Partner under this Agreement, shall
be responsible or liable for any indebtedness or obligation of another Partner,
nor shall the Partnership be responsible or liable for any indebtedness or
obligation of any Partner, incurred either before or after the execution and
delivery of this Agreement by such Partner, except as to those responsibilities,
liabilities, indebtedness or obligations incurred pursuant to and as limited by
the terms of this Agreement and the Act.
Section 3.4 Representations and Warranties by the Parties
---------------------------------------------
A. Each Partner that is an individual represents and warrants to
each other Partner that (i) such Partner has in the case of any Person other
than an individual, the power
18
<PAGE>
and authority, and in the case of an individual, the legal capacity, to enter
into this Agreement and perform such Partner's obligations hereunder, (ii) the
consummation of the transactions contemplated by this Agreement to be performed
by such Partner will not result in a breach or violation of, or a default under,
any agreement by which such Partner or any of such Partner's property is or are
bound, or any statute, regulation, order or other law to which such Partner is
subject, (iii) such Partner is neither a "foreign person" within the meaning of
Section 1445(f) of the Code nor a "foreign partner" within the meaning of
Section 1446(e) of the Code, and (iv) this Agreement has been duly executed and
delivered by such Partner and is binding upon, and enforceable against, such
Partner in accordance with its terms.
B. Each Partner that is not an individual represents and warrants to
each other Partner that (i) its execution and delivery of this Agreement and all
transactions contemplated by this Agreement to be performed by it have been duly
authorized by all necessary action, including without limitation, that of its
general partner(s), committee(s), trustee(s), beneficiaries, directors and/or
stockholder(s), as the case may be, as required, (ii) the consummation of such
transactions shall not result in a breach or violation of, or a default under,
its certificate of limited partnership, partnership agreement, trust agreement,
limited liability company operating agreement, charter or by-laws, as the case
may be, any agreement by which such Partner or any of such Partner's properties
or any of its partners, beneficiaries, trustees or stockholders, as the case may
be, is or are bound, or any statute, regulation, order or other law to which
such Partner or any of its partners, trustees, beneficiaries or stockholders, as
the case may be, is or are subject, (iii) such Partner is neither a "foreign
person" within the meaning of Section 1445(f) of the Code nor a "foreign
partner" within the meaning of Section 1446(e) of the Code, and (iv) this
Agreement has been duly executed and delivered by such Partner and is binding
upon, and enforceable against, such Partner in accordance with its terms.
C. Each Partner represents, warrants and agrees that it has acquired
and continues to hold its interest in the Partnership for its own account for
investment only and not for the purpose of, or with a view toward, the resale or
distribution of all or any part thereof, nor with a view toward selling or
otherwise distributing such interest or any part thereof at any particular time
or under any predetermined circumstances. Each Partner further represents and
warrants that it is a sophisticated investor, able and accustomed to handling
sophisticated financial matters for itself, particularly real estate
investments, and that it has a sufficiently high net worth that it does not
anticipate a need for the funds it has invested in the Partnership in what it
understands to be a highly speculative and illiquid investment.
D. Each Partner further represents, warrants and agrees as follows:
(i) Except as provided in Exhibit E, it does not and will not,
without the prior written consent of the General Partner, actually own or
Constructively Own (a) with respect to any Tenant that is a corporation, any
stock of such Tenant, and (b) with respect to any Tenant that is not a
corporation, any interests in either the assets or net profits of such Tenant;
provided, however, that so long as there are fewer than 20 Partners, each
- -------- -------
Partner may own or Constructively Own (x) with respect to any Tenant that is a
corporation, stock of such Tenant possessing up to, but not more than, one-half
of one percent (0.5%) of the total combined voting power of all classes of stock
entitled to vote and one-half of one percent (0.5%) of the total
19
<PAGE>
number of shares of all classes of stock of such Tenant and (y) with respect to
any Tenant that is not a corporation, interests in such Tenant representing up
to, but not more than, one-half of one percent (0.5%) of the assets and one-half
of one percent (0.5%) of the net profits of such Tenant, so long as such actual
or Constructive Ownership otherwise permitted under clause (x) or (y) would not
cause the General Partner to receive amounts described in Section 856 (d)(2)(B)
of the Code.
(ii) Except as provided in Exhibit F, it does not, and agrees
that it will not without the prior written consent of the General Partner,
actually own or Constructively Own, any stock in the General Partner, other than
any REIT Shares or other shares of capital stock of the General Partner such
Partner may acquire (a) as a result of an exchange of Tendered Units pursuant to
Section 8.6 or (b) upon the exercise of options granted or delivery of REIT
Shares pursuant to any Stock Incentive Plan, in each case subject to the
ownership limitations set forth in the General Partner's Charter.
(iii) Upon request of the General Partner, it will disclose to
the General Partner the amount of REIT Shares or other shares of capital stock
of the General Partner that it actually owns or Constructively Owns.
(iv) It understands that if, for any reason, (a) the
representations, warranties or agreements set forth in Subparagraph D(i) or (ii)
of this Section 3.4 are violated, or (b) the Partnership's actual or
Constructive Ownership of the REIT Shares or other shares of capital stock of
the General Partner violates the limitations set forth in the Charter, then (1)
some or all of the Redemption rights of the Partners may become non-exercisable,
and (2) some or all of the REIT Shares owned by the Partners may be
automatically transferred to a trust for the benefit of a charitable
beneficiary, as provided in the Charter.
E. The representations and warranties contained in Sections 3.4.A,
3.4.B, 3.4.C and 3.4.D hereof shall survive the execution and delivery of this
Agreement by each Partner and the dissolution and winding up of the Partnership.
F. Each Partner hereby acknowledges that no representations as to
potential profit, cash flows, funds from operations or yield, if any, in respect
of the Partnership or the General Partner have been made by any Partner or any
employee or representative or Affiliate of any Partner, and that projections and
any other information, including, without limitation, financial and descriptive
information and documentation, which may have been in any manner submitted to
such Partner shall not constitute any representation or warranty of any kind or
nature, express or implied.
20
<PAGE>
ARTICLE 4
CAPITAL CONTRIBUTIONS
Section 4.1 Capital Contributions of the Partners
-------------------------------------
At the time of their respective execution of this Agreement, the
Partners shall make Capital Contributions as set forth in Exhibit A to this
Agreement. The Partners shall own Partnership Units of the class and in the
amounts set forth in Exhibit A and shall have a Percentage Interest in the
Partnership as set forth in Exhibit A, which Percentage Interest shall be
adjusted in Exhibit A from time to time by the General Partner to the extent
necessary to accurately reflect exchanges, redemptions, Capital Contributions,
the issuance of additional Partnership Units or similar events having an effect
on a Partner's Percentage Interest. Except as required by law or as otherwise
provided in Sections 4.3, 4.4 and 10.5, no Partner shall be required or
permitted to make any additional Capital Contributions or loans to the
Partnership. Unless otherwise specified by the General Partner at the time of
the creation of any class of Partnership Interests, the corresponding class of
capital stock for any Partnership Units issued shall be REIT Shares.
Section 4.2 Loans by Third Parties
----------------------
Subject to Section 4.3, the Partnership may incur Debt, or enter into
other similar credit, guarantee, financing or refinancing arrangements for any
purpose (including, without limitation, in connection with any further
acquisition of Properties) with any Person that is not the General Partner upon
such terms as the General Partner determines appropriate; provided that, the
-------- ----
Partnership shall not incur any Debt that is recourse to the General Partner,
except to the extent otherwise agreed to by the General Partner in its sole
discretion.
Section 4.3 Additional Funding and Capital Contributions
--------------------------------------------
A. General. The General Partner may, at any time and from time to
-------
time, determine that the Partnership requires additional funds ("Additional
Funds") for the acquisition of additional Properties or for such other
Partnership purposes as the General Partner may determine. Additional Funds may
be raised by the Partnership, at the election of the General Partner, in any
manner provided in, and in accordance with, the terms of this Section 4.3. No
Person shall have any preemptive, preferential or similar right or rights to
subscribe for or acquire any Partnership Interest, except as set forth in this
Section 4.3.
B. General Partner Loans. The General Partner may enter into a
---------------------
Funding Debt, including, without limitation, a Funding Debt that is convertible
into REIT Shares, and lend the Additional Funds to the Partnership (a "General
Partner Loan"); provided, however, that the General Partner shall not be
-------- -------
obligated to lend the net proceeds of any Funding Debt to the Partnership in a
manner that would be inconsistent with the General Partner's ability to remain
qualified as a REIT. If the General Partner enters into such a Funding Debt,
the General Partner Loan will consist of the net proceeds from such Funding Debt
and will be on comparable terms and conditions, including interest rate,
repayment schedule and costs and expenses, as shall be applicable with respect
to or incurred in connection with such Funding Debt.
21
<PAGE>
C. Issuance of Additional Partnership Interests. The General Partner
--------------------------------------------
may raise all or any portion of the Additional Funds by accepting additional
Capital Contributions, including, without limitation, the issuance of Units for
interests in real property. In connection with any such additional Capital
Contributions (of cash or property), the General Partner is hereby authorized to
cause the Partnership from time to time to issue to Partners (including the
General Partner) or other Persons (including, without limitation, in connection
with the contribution of property to the Partnership) additional Partnership
Units or other Partnership Interests in one or more classes, or one or more
series of any of such classes, with such designations, preferences and relative,
participating, optional or other special rights, powers, and duties, including
rights, powers, and duties senior to then existing Limited Partnership
Interests, all as shall be determined by the General Partner in its sole and
absolute discretion subject to Delaware law, and as set forth by amendment to
this Agreement, including without limitation, (i) the allocations of items of
Partnership income, gain, loss, deduction, and credit to such class or series of
Partnership Interests; (ii) the right of each such class or series of
Partnership Interests to share in Partnership distributions; (iii) the rights of
each such class or series of Partnership Interests upon dissolution and
liquidation of the Partnership; and (iv) the right to vote, including, without
limitation, the limited partner approval rights set forth in Section 11.2.A
hereof; provided that no such additional Partnership Units or other Partnership
-------------
Interests shall be issued to the General Partner unless either (a) the
additional Partnership Interests are issued in connection with the grant, award,
or issuance of shares of the General Partner pursuant to Section 4.3.D below,
which shares have designations, preferences, and other rights (except voting
rights) such that the economic interests attributable to such shares are
substantially similar to the designations, preferences and other rights of the
additional Partnership Interests issued to the General Partner in accordance
with this Section 4.3.C, or (b) the additional Partnership Interests are issued
to all Partners holding Partnership Interests in the same class in proportion to
their respective Percentage Interests in such class. In the event that the
Partnership issues additional Partnership Interests pursuant to this Section
4.3.C, the General Partner shall make such revisions to this Agreement
(including but not limited to the revisions described in Section 5.4, Section
6.2.B, and Section 8.6) as it determines are necessary to reflect the issuance
of such additional Partnership Interests.
D. Issuance of REIT Shares or Other Securities by the General
----------------------------------------------------------
Partner. The General Partner shall not issue any additional REIT Shares (other
- -------
than REIT Shares issued pursuant to Section 8.6 hereof or pursuant to a dividend
or distribution (including any stock split) of REIT Shares to all of its
stockholders), other shares of capital stock of the General Partner or New
Securities unless the General Partner shall make a Capital Contribution of the
net proceeds from the issuance of such additional REIT Shares, other shares of
capital stock or New Securities, as the case may be, and from the exercise of
the rights contained in such additional New Securities, as the case may be. The
General Partner's Capital Account shall be increased by the amount of cash so
contributed.
E. Percentage Interest Adjustments in the Case of Capital
------------------------------------------------------
Contributions for Partnership Units. Upon the acceptance of additional Capital
- -----------------------------------
Contributions in exchange for Partnership Units, the Percentage Interest related
thereto shall be equal to a fraction, the numerator of which is equal to the
amount of cash and the Agreed Value of the Property contributed as of the
Business Day immediately preceding the date on which the additional
22
<PAGE>
Capital Contributions are made (an "Adjustment Date") and the denominator of
which is equal to the sum of (i) the Deemed Value of the Partnership Interests
of such class (computed as of the Business Day immediately preceding the
Adjustment Date) and (ii) the aggregate amount of additional Capital
Contributions contributed to the Partnership on such Adjustment Date in respect
of such class of Partnership Interests. The Percentage Interest of each other
Partner holding Partnership Interests of such class not making a full pro rata
--- ----
Capital Contribution shall be adjusted to equal a fraction, the numerator of
which is equal to the sum of (i) the Deemed Partnership Interest Value of such
Limited Partner of such class (computed as of the Business Day immediately
preceding the Adjustment Date) and (ii) the amount of additional Capital
Contributions made by such Partner to the Partnership in respect of such class
of Partnership Interests as of such Adjustment Date, and the denominator of
which is equal to the sum of (i) the Deemed Value of the Partnership Interests
of such class (computed as of the Business Day immediately preceding the
Adjustment Date), plus (ii) the aggregate amount of additional Capital
----
Contributions contributed to the Partnership on such Adjustment Date in respect
of such class. Notwithstanding the foregoing, solely for purposes of
calculating a Partner's Percentage Interest pursuant to this Section 4.3.E, cash
Capital Contributions by the General Partner will be deemed to equal the cash
contributed by the General Partner plus, in the case of cash contributions
funded by an offering of any capital stock of the General Partner, the offering
costs attributable to the cash contributed to the Partnership. The General
Partner shall promptly give each Partner written notice of its Percentage
Interest, as adjusted.
Section 4.4 Stock Incentive Plan
--------------------
If at any time or from time to time the General Partner sells or
issues REIT Shares pursuant to any Stock Incentive Plan, the General Partner
shall contribute any proceeds therefrom to the Partnership as an additional
Capital Contribution and shall receive an amount of additional Partnership Units
equal to the number of REIT Shares so sold or issued. The General Partner's
Capital Account shall be increased by the amount of cash so contributed.
Section 4.5 Other Contribution Provisions
-----------------------------
In the event that any Partner is admitted to the Partnership and is
given a Capital Account in exchange for services rendered to the Partnership,
such transaction shall be treated by the Partnership and the affected Partner as
if the Partnership had compensated such Partner in cash, and the Partner had
contributed such cash to the capital of the Partnership. In addition, with the
consent of the General Partner, one or more Limited Partners may enter into
contribution agreements with the Partnership which have the effect of providing
a guarantee of certain obligations of the Partnership.
23
<PAGE>
ARTICLE 5
DISTRIBUTIONS
Section 5.1 Requirement and Characterization of Distributions
-------------------------------------------------
The General Partner shall cause the Partnership to distribute
quarterly all, or such portion as the General Partner may in its discretion
determine, of Available Cash generated by the Partnership during such quarter to
the Partners who are Partners on the Partnership Record Date with respect to
such quarter, (1) first, with respect to any Partnership Interests that are
entitled to any preference in distribution, in accordance with the rights of
such class of Partnership Interests (and within such class, pro rata in
proportion to the respective Percentage Interests on such Partnership Record
Date), and, (2) second, with respect to Partnership Interests that are not
entitled to any preference in distribution, pro rata to each such class in
accordance with the terms of such class (and within each such class, pro rata in
proportion with the respective Percentage Interests on such Partnership Record
Date). Unless otherwise expressly provided for herein or in an agreement at the
time a new class of Partnership Interests is created in accordance with Article
4 hereof, no Partnership Interest shall be entitled to a distribution in
preference to any other Partnership Interest. The General Partner shall take
such reasonable efforts, as determined by it in its sole and absolute discretion
and consistent with its qualification as a REIT, to cause the Partnership to
distribute sufficient amounts to enable the General Partner to pay stockholder
dividends that will (a) satisfy the requirements for qualifying as a REIT under
the Code and Regulations ("REIT Requirements"), and (b) avoid any federal income
or excise tax liability of the General Partner.
Section 5.2 Distributions in Kind
---------------------
No right is given to any Partner to demand and receive property other
than cash. The General Partner may determine, in its sole and absolute
discretion, to make a distribution in kind to the Partners of Partnership
assets, and such assets shall be distributed in such a fashion as to ensure that
the fair market value is distributed and allocated in accordance with Articles
5, 6 and 10.
Section 5.3 Distributions Upon Liquidation
------------------------------
Proceeds from a Terminating Capital Transaction shall be distributed
to the Partners in accordance with Section 13.2.
Section 5.4 Distributions to Reflect Issuance of Additional
-----------------------------------------------
Partnership Interests. In the event that the Partnership issues additional
- ---------------------
Partnership Interests to the General Partner or any Additional Limited Partner
pursuant to Section 4.3.C or 4.4 hereof, the General Partner shall make such
revisions to this Article 5 as it determines are necessary to reflect the
issuance of such additional Partnership Interests.
24
<PAGE>
ARTICLE 6
ALLOCATIONS
Section 6.1 Timing and Amount of Allocations of Net Income and Net
------------------------------------------------------
Loss
- ----
Net Income and Net Loss of the Partnership shall be determined and
allocated with respect to each fiscal year of the Partnership as of the end of
each such year. Subject to the other provisions of this Article 6, an
allocation to a Partner of a share of Net Income or Net Loss shall be treated as
an allocation of the same share of each item of income, gain, loss or deduction
that is taken into account in computing Net Income or Net Loss.
Section 6.2 General Allocations
-------------------
A. In General. Except as otherwise provided in this Article 6, Net
----------
Income and Net Loss shall be allocated to each of the Partners holding the same
class of Partnership Interests in accordance with their respective Percentage
Interest of such class.
B. Allocations to Reflect Issuance of Additional Partnership
---------------------------------------------------------
Interests. In the event that the Partnership issues additional Partnership
- ---------
Interests to the General Partner or any Additional Limited Partner pursuant to
Section 4.3 or 4.4 hereof, the General Partner shall make such revisions to this
Section 6.2 as it determines are necessary to reflect the terms of the issuance
of such additional Partnership Interests, including making preferential
allocations to certain classes of Partnership Interests.
Section 6.3 Additional Allocation Provisions
--------------------------------
Notwithstanding the foregoing provisions of this Article 6:
A. Regulatory Allocations.
----------------------
(i) Minimum Gain Chargeback. Except as otherwise provided in
-----------------------
Regulations Section 1.704-2(f), notwithstanding the provisions of Section
6.2 of the Agreement, or any other provision of this Article 6, if there is
a net decrease in Partnership Minimum Gain during any fiscal year, each
Partner shall be specially allocated items of Partnership income and gain
for such year (and, if necessary, subsequent years) in an amount equal to
such Partner's share of the net decrease in Partnership Minimum Gain, as
determined under Regulations Section 1.704-2(g). Allocations pursuant to
the previous sentence shall be made in proportion to the respective amounts
required to be allocated to each Partner pursuant thereto. The items to be
allocated shall be determined in accordance with Regulations Sections
1.704-2(f)(6) and 1.704-2(j)(2). This Section 6.3.A(i) is intended to
qualify as a "minimum gain chargeback" within the meaning of Regulation
Section 1.704-2(f) which shall be controlling in the event of a conflict
between such Regulation and this Section 6.3.A(i).
(ii) Partner Minimum Gain Chargeback. Except as otherwise
-------------------------------
provided in Regulations Section 1.704-2(i)(4), and notwithstanding the
provisions of Section 6.2
25
<PAGE>
of the Agreement, or any other provision of this Article 6 (except
Section 6.3.A(i)), if there is a net decrease in Partner Minimum Gain
attributable to a Partner Nonrecourse Debt during any fiscal year, each
Partner who has a share of the Partner Minimum Gain attributable to such
Partner Nonrecourse Debt, determined in accordance with Regulations Section
1.704-2(i)(5), shall be specially allocated items of Partnership income and
gain for such year (and, if necessary, subsequent years) in an amount equal
to such Partner's share of the net decrease in Partner Minimum Gain
attributable to such Partner Nonrecourse Debt, determined in accordance
with Regulations Section 1.704-2(i)(4). Allocations pursuant to the
previous sentence shall be made in proportion to the respective amounts
required to be allocated to each General Partner and Limited Partner
pursuant thereto. The items to be so allocated shall be determined in
accordance with Regulations Sections 1.704-2(i)(4) and 1.704-2(j)(2). This
Section 6.3.A(ii) is intended to qualify as a "chargeback of partner
nonrecourse debt minimum gain" within the meaning of Regulation Section
1.704-2(i) which shall be controlling in the event of a conflict between
such Regulation and this Section 6.3.A(ii).
(iii) Nonrecourse Deductions and Partner Nonrecourse Deductions.
---------------------------------------------------------
Any Nonrecourse Deductions for any fiscal year shall be specially allocated
to the Partners in accordance with their Percentage Interests. Any Partner
Nonrecourse Deductions for any fiscal year shall be specially allocated to
the Partner(s) who bears the economic risk of loss with respect to the
Partner Nonrecourse Debt to which such Partner Nonrecourse Deductions are
attributable, in accordance with Regulations Sections 1.704-2(b)(4) and
1.704-2(i).
(iv) Qualified Income Offset. If any Partner unexpectedly
-----------------------
receives an adjustment, allocation or distribution described in Regulations
Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Partnership income
and gain shall be allocated, in accordance with Regulations Section 1.704-
1(b)(2)(ii)(d), to the Partner in an amount and manner sufficient to
eliminate, to the extent required by such Regulations, the Adjusted Capital
Account Deficit of the Partner as quickly as possible provided that an
allocation pursuant to this Section 6.3.A(iv) shall be made if and only to
the extent that such Partner would have an Adjusted Capital Account Deficit
after all other allocations provided in this Article 6 have been
tentatively made as if this Section 6.3.A(iv) were not in the Agreement.
It is intended that this Section 6.3.A(iv) qualify and be construed as a
"qualified income offset" within the meaning of Regulations 1.704-
1(b)(2)(ii)(d), which shall be controlling in the event of a conflict
between such Regulations and this Section 6.3.A(iv).
(v) Gross Income Allocation. In the event any Partner has a
-----------------------
deficit Capital Account at the end of any fiscal year which is in excess of
the sum of (1) the amount (if any) such Partner is obligated to restore to
the Partnership, and (2) the amount such Partner is deemed to be obligated
to restore pursuant to Regulations Section 1.704-1(b)(2)(ii)(c) or the
penultimate sentences of Regulations Sections 1.704-2(g)(1) and 1.704-
2(i)(5), each such Partner shall be specially allocated items of
Partnership income and gain in the amount of such excess as quickly as
possible, provided that an allocation pursuant to this Section 6.3.A(v)
-------- ----
shall be made if and only to the extent that such Partner
26
<PAGE>
would have a deficit Capital Account in excess of such sum after all other
allocations provided in this Article 6 have been tentatively made as if
this Section 6.3.A(v) and Section 6.3.A(iv) were not in the Agreement.
(vi) Limitation on Allocation of Net Loss. To the extent any
------------------------------------
allocation of Net Loss would cause or increase an Adjusted Capital Account
Deficit as to any Partner, such allocation of Net Loss shall be reallocated
among the other Partners in accordance with their respective Percentage
Interests, subject to the limitations of this Section 6.3.A(vi).
(vii) Section 754 Adjustment. To the extent an adjustment to
----------------------
the adjusted tax basis of any Partnership asset pursuant to Code Section
734(b) or Code Section 743(b) is required, pursuant to Regulations Section
1.704-1(b)(2)(iv)(m)(2) or Regulations Section 1.704-1(b)(2)(iv)(m)(4), to
be taken into account in determining Capital Accounts as the result of a
distribution to a Partner in complete liquidation of his interest in the
Partnership, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis) and such gain or
loss shall be specially allocated to the Partners in accordance with their
interests in the Partnership in the event that Regulations Section 1.704-
1(b)(2)(iv)(m)(2) applies, or to the Partners to whom such distribution was
made in the event that Regulations Section 1.704-1(b)(2)(iv)(m)(4) applies.
(viii) Curative Allocation. The allocations set forth in
-------------------
Sections 6.3.A(i), (ii), (iii), (iv), (v), (vi), and (vii) (the "Regulatory
Allocations") are intended to comply with certain regulatory requirements,
including the requirements of Regulations Sections 1.704-1(b) and 1.704-2.
Notwithstanding the provisions of Sections 6.1 and 6.2, the Regulatory
Allocations shall be taken into account in allocating other items of
income, gain, loss and deduction among the Partners so that, to the extent
possible, the net amount of such allocations of other items and the
Regulatory Allocations to each Partner shall be equal to the net amount
that would have been allocated to each such Partner if the Regulatory
Allocations had not occurred.
B. For purposes of determining a Partner's proportional share of the
"excess nonrecourse liabilities" of the Partnership within the meaning of
Regulations Section 1.752-3(a)(3), each Partner's interest in Partnership
profits shall be such Partner's Percentage Interest.
Section 6.4 Tax Allocations
---------------
A. In General. Except as otherwise provided in this Section 6.4,
----------
for income tax purposes each item of income, gain, loss and deduction
(collectively, "Tax Items") shall be allocated among the Partners in the same
manner as its correlative item of "book" income, gain, loss or deduction is
allocated pursuant to Sections 6.2 and 6.3.
B. Allocations Respecting Section 704(c) Revaluations.
--------------------------------------------------
Notwithstanding Section 6.4.A, Tax Items with respect to Partnership property
that is contributed to the
27
<PAGE>
Partnership by a Partner shall be shared among the Partners for income tax
purposes pursuant to Regulations promulgated under Section 704(c) of the Code,
so as to take into account the variation, if any, between the basis of the
property to the Partnership and its initial Gross Asset Value. With respect to
Partnership property that is initially contributed to the Partnership upon its
formation pursuant to Section 4.1, such variation between basis and initial
Gross Asset Value shall be taken into account under the "traditional method" as
described in Regulations Section 1.704-3(b). With respect to properties
subsequently contributed to the Partnership, the Partnership shall account for
such variation under any method approved under Section 704(c) of the Code and
the applicable regulations as chosen by the General Partner. In the event the
Gross Asset Value of any Partnership asset is adjusted pursuant to subparagraph
(b) of the definition of Gross Asset Value (provided in Article 1 of this
Agreement), subsequent allocations of Tax Items with respect to such asset shall
take account of the variation, if any, between the adjusted basis of such asset
and its Gross Asset Value in the same manner as under Section 704(c) of the Code
and the applicable regulations consistent with the requirements of Regulations
Section 1.704-1(b)(2)(iv)(g) using any method approved under 704(c) of the Code
and the applicable regulations as chosen by the General Partner.
ARTICLE 7
MANAGEMENT AND OPERATIONS OF BUSINESS
Section 7.1 Management
----------
A. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the Partnership are
exclusively vested in the General Partner, and no Limited Partner shall have any
right to participate in or exercise control or management power over the
business and affairs of the Partnership. The General Partner may not be removed
by the Limited Partners with or without cause, except with the consent of the
General Partner. In addition to the powers now or hereafter granted a general
partner of a limited partnership under the Act and other applicable law or which
are granted to the General Partner under any other provision of this Agreement,
the General Partner, subject to the other provisions hereof including Section
7.3, shall have full power and authority to do all things deemed necessary or
desirable by it to conduct the business of the Partnership, to exercise all
powers set forth in Section 3.2 hereof and to effectuate the purposes set forth
in Section 3.1 hereof, including, without limitation:
(1) the making of any expenditures, the lending or borrowing of money
(including, without limitation, making prepayments on loans and
borrowing money to permit the Partnership to make distributions
to its Partners in such amounts as will permit the General
Partner (so long as the General Partner has determined to qualify
as a REIT) to avoid the payment of any federal income tax
(including, for this purpose, any excise tax pursuant to Section
4981 of the Code) and to make distributions to its stockholders
sufficient to permit the General Partner to maintain REIT
status), the assumption or guarantee of, or other contracting
for, indebtedness and other liabilities, the issuance of
evidences of
28
<PAGE>
indebtedness (including the securing of same by mortgage, deed of
trust or other lien or encumbrance on all or any of the
Partnership's assets) and the incurring of any obligations it
deems necessary for the conduct of the activities of the
Partnership;
(2) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies
having jurisdiction over the business or assets of the
Partnership;
(3) subject to the provisions of Section 7.3.D hereof, the
acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any assets of the Partnership or the
merger or other combination of the Partnership with or into
another entity;
(4) the mortgage, pledge, encumbrance or hypothecation of all or any
assets of the Partnership, and the use of the assets of the
Partnership (including, without limitation, cash on hand) for any
purpose consistent with the terms of this Agreement and on any
terms it sees fit, including, without limitation, the financing
of the conduct or the operations of the General Partner or the
Partnership, the lending of funds to other Persons (including,
without limitation, the General Partner (if necessary to permit
the financing or capitalization of a subsidiary of the General
Partner or the Partnership) and any Subsidiaries of the
Partnership) and the repayment of obligations of the Partnership,
any of its Subsidiaries and any other Person in which it has an
equity investment;
(5) the negotiation, execution, and performance of any contracts,
leases, conveyances or other instruments that the General Partner
considers useful or necessary to the conduct of the Partnership's
operations or the implementation of the General Partner's powers
under this Agreement;
(6) the distribution of Partnership cash or other Partnership assets
in accordance with this Agreement;
(7) the selection and dismissal of employees of the Partnership
(including, without limitation, employees having titles such as
"president," "vice president," "secretary" and "treasurer"), and
agents, outside attorneys, accountants, consultants and
contractors of the Partnership, the determination of their
compensation and other terms of employment or hiring, including
waivers of conflicts of interest and the payment of their
expenses and compensation out of the Partnership's assets;
(8) the maintenance of such insurance for the benefit of the
Partnership and the Partners as it deems necessary or
appropriate;
29
<PAGE>
(9) the formation of, or acquisition of an interest in, and the
contribution of property to, any further limited or general
partnerships, joint ventures or other relationships that it deems
desirable (including, without limitation, the acquisition of
interests in, and the contributions of property to any Subsidiary
and any other Person in which it has an equity investment from
time to time); provided that, as long as the General Partner has
-------- ----
determined to continue to qualify as a REIT, the Partnership may
not engage in any such formation, acquisition or contribution
that would cause the General Partner to fail to qualify as a
REIT;
(10) the control of any matters affecting the rights and obligations
of the Partnership, including the conduct of litigation and the
incurring of legal expense and the settlement of claims and
litigation, and the indemnification of any Person against
liabilities and contingencies to the extent permitted by law;
(11) the undertaking of any action in connection with the
Partnership's direct or indirect investment in any Person
(including, without limitation, contributing or loaning
Partnership funds to, incurring indebtedness on behalf of, or
guarantying the obligations of any such Persons);
(12) subject to the other provisions in this Agreement, the
determination of the fair market value of any Partnership
property distributed in kind using such reasonable method of
valuation as it may adopt, provided that such methods are
-------- ----
otherwise consistent with requirements of this Agreement;
(13) the management, operation, leasing, landscaping, repair,
alteration, demolition or improvement of any real property or
improvements owned by the Partnership or any Subsidiary of the
Partnership or any Person in which the Partnership has made a
direct or indirect equity investment;
(14) holding, managing, investing and reinvesting cash and other
assets of the Partnership;
(15) the collection and receipt of revenues and income of the
Partnership;
(16) the exercise, directly or indirectly through any attorney-in-fact
acting under a general or limited power of attorney, of any
right, including the right to vote, appurtenant to any asset or
investment held by the Partnership;
(17) the exercise of any of the powers of the General Partner
enumerated in this Agreement on behalf of or in connection with
any Subsidiary of the Partnership or any other Person in which
the Partnership has a direct or indirect interest, or jointly
with any such Subsidiary or other Person;
30
<PAGE>
(18) the exercise of any of the powers of the General Partner
enumerated in this Agreement on behalf of any Person in which the
Partnership does not have an interest, pursuant to contractual or
other arrangements with such Person; and
(19) the making, execution and delivery of any and all deeds, leases,
notes, deeds to secure debt, mortgages, deeds of trust, security
agreements, conveyances, contracts, guarantees, warranties,
indemnities, waivers, releases or legal instruments or other
agreements in writing necessary or appropriate in the judgment of
the General Partner for the accomplishment of any of the powers
of the General Partner enumerated in this Agreement.
B. Each of the Limited Partners agrees that the General Partner is
authorized to execute, deliver and perform the above-mentioned agreements and
transactions on behalf of the Partnership without any further act, approval or
vote of the partners, notwithstanding any other provisions of this Agreement
(except as provided in Section 7.3), the Act or any applicable law, rule or
regulation. The execution, delivery or performance by the General Partner or
the Partnership of any agreement authorized or permitted under this Agreement
shall not constitute a breach by the General Partner of any duty that the
General Partner may owe the Partnership or the Limited Partners or any other
Persons under this Agreement or of any duty stated or implied by law or equity.
C. At all times from and after the date hereof, the General Partner
may cause the Partnership to obtain and maintain (i) casualty, liability and
other insurance (including, without limitation, earthquake insurance) on the
properties of the Partnership and (ii) liability insurance for the Indemnities
hereunder.
D. At all times from and after the date hereof, the General Partner
may cause the Partnership to establish and maintain working capital and other
reserves in such amounts as the General Partner, in it sole and absolute
discretion, deems appropriate and reasonable from time to time.
E. In exercising its authority under this Agreement, the General
Partner may, but, other than as set forth in the following sentence and to
Section 11.2.D, shall be under no obligation to, take into account the tax
consequences to any Partner (including the General Partner) of any action taken
by the General Partner. The General Partner, on behalf of the Partnership,
shall use commercially reasonable efforts to cooperate with the Limited Partners
to minimize any taxes payable in connection with any repayment, refinancing,
replacement or restructuring of Debt, or any sale, exchange or any other
disposition of assets, of the Partnership. The General Partner and the
Partnership shall not have liability to a Limited Partner under any
circumstances as a result of an income tax liability incurred by such Limited
Partner as a result of an action (or inaction) by the General Partner pursuant
to its authority under this Agreement.
31
<PAGE>
F. Except as otherwise provided herein, to the extent the duties of
the General Partner require expenditures of funds to be paid to third parties,
the General Partner shall not have any obligations hereunder except to the
extent that Partnership funds are reasonably available to it for the performance
of such duties, and nothing herein contained shall be deemed to authorize or
require the General Partner, in its capacity as such, to expend its individual
funds for payment to third parties or to undertake any individual liability or
obligation on behalf of the Partnership.
Section 7.2 Certificate of Limited Partnership
----------------------------------
To the extent that such action is determined by the General Partner to
be reasonable and necessary or appropriate, the General Partner shall file
amendments to and restatements of the Certificate and do all the things to
maintain the Partnership as a limited partnership (or a partnership in which the
limited partners have limited liability) under the laws of the State of Delaware
and to maintain the Partnership's qualification to do business as a foreign
limited partnership in each other state, the District of Columbia or other
jurisdiction, in which the Partnership may elect to do business or own property.
Subject to the terms of Section 8.5.A(4) hereof, the General Partner shall not
be required, before or after filing, to deliver or mail a copy of the
Certificate or any amendment thereto to any Limited Partner. The General
Partner shall use all reasonable efforts to cause to be filed such other
certificates or documents as may be reasonable and necessary or appropriate for
the formation, continuation, qualification and operation of a limited
partnership (or a partnership in which the limited partners have limited
liability) in the State of Delaware, and any other state, or the District of
Columbia or other jurisdiction, in which the Partnership may elect to do
business or own property.
Section 7.3 Restrictions on General Partner's Authority
-------------------------------------------
A. The General Partner may not take any action in contravention of
this Agreement, including, without limitation:
(1) take any action that would make it impossible to carry on the
ordinary business of the Partnership, except as otherwise
provided in this Agreement;
(2) possess Partnership property, or assign any rights in specific
Partnership property, for other than a Partnership purpose except
as otherwise provided in this Agreement;
(3) admit a Person as a Partner, except as otherwise provided in this
Agreement;
(4) perform any act that would subject a Limited Partner to liability
as a general partner in any jurisdiction or any other liability
except as provided herein or under the Act; or
32
<PAGE>
(5) enter into any contract, mortgage, loan or other agreement that
prohibits or restricts, or has the effect of prohibiting or
restricting, the ability of a Limited Partner to exercise its
rights to a Redemption in full, except with the written consent
of such Limited Partner.
B. The General Partner shall not, without the prior Consent of the
Partners, undertake, on behalf of the Partnership, any of the following actions
or enter into any transaction which would have the effect of such transactions:
(1) except as provided in Section 7.3.E, amend, modify or terminate
this Agreement other than to reflect the admission, substitution,
termination or withdrawal of partners pursuant to Article 12
hereof;
(2) make a general assignment for the benefit of creditors or appoint
or acquiesce in the appointment of a custodian, receiver or
trustee for all or any part of the assets of the Partnership;
(3) institute any proceeding for bankruptcy on behalf of the
Partnership; or
(4) confess a judgment against the Partnership;
C. The General Partner shall not, without the prior Consent of the
Super Majority Limited Partners, undertake, on behalf of the Partnership, any of
the following actions or enter into any transaction which would have the effect
of such transactions:
(1) approve or acquiesce to the transfer of the Partnership Interest
of the General Partner to any Person other than the Partnership;
or
(2) admit into the Partnership any Additional or Substitute General
Partners.
D. If the aggregate Limited Partnership Interests of all Limited
Partners represents 5.0% or more of the aggregate Partnership Interests, the
General Partner shall not, without the prior Consent of the Limited Partners,
undertake, on behalf of the Partnership, any of the following actions or enter
into any transaction which would have the effect of such transactions:
(1) dissolve the Partnership, or
(2) prior to the seventh anniversary of the date of this Agreement,
sell any of the property listed on Exhibit G,
in each case other than incident to a transaction pursuant to Section 11.2.B or
Section 11.2.C.
E. Notwithstanding Sections 7.3.B, 7.3.C and 7.3.D hereof, but
subject to Section 7.3.F hereof, the General Partner shall have the power,
without the Consent of the
33
<PAGE>
Limited Partners, to amend this Agreement as may be required to facilitate or
implement any of the following purposes:
(1) to add to the obligations of the General Partner or surrender any
right or power granted to the General Partner or any Affiliate of
the General Partner for the benefit of the Limited Partners;
(2) to reflect the issuance of additional Partnership Interests
pursuant to Sections 4.3.C and 4.4 or the admission,
substitution, termination, or withdrawal of Partners in
accordance with this Agreement;
(3) to reflect a change that is of an inconsequential nature and does
not adversely affect the Limited Partners in any material
respect, or to cure any ambiguity in, correct or supplement any
provision in, or make other changes with respect to matters
arising under, this Agreement that will not be inconsistent with
law or with the provisions of this Agreement;
(4) to satisfy any requirements, conditions, or guidelines contained
in any order, directive, opinion, ruling or regulation of a
federal or state agency or contained in federal or state law;
(5) to reflect such changes as are reasonably necessary for the
General Partner to maintain its status as a REIT, including
changes which may be necessitated due to a change in applicable
law (or an authoritative interpretation thereof) or a ruling of
the IRS; and
(6) to modify, as set forth in the definition of "Capital Account,"
the manner in which Capital Accounts are computed.
The General Partner will provide notice to the Limited Partners when any action
under this Section 7.3.E is taken.
F. Notwithstanding Sections 7.3.B, 7.3.C, 7.3.D and 7.3.E hereof,
this Agreement shall not be amended, and no action may be taken by the General
Partner, without the Consent of each Partner adversely affected if such
amendment or action would (i) convert a Limited Partner's interest in the
Partnership into a general partner's interest (except as the result of the
General Partner acquiring such interest), (ii) modify the limited liability of a
Limited Partner, (iii) alter rights of the Partner to receive distributions
pursuant to Article 5 or Section 13.2.A(4), or the allocations specified in
Article 6 (except as permitted pursuant to Section 4.3 and Section 7.3.E(2)
hereof), (iv) alter or modify the rights to a Redemption or the REIT Shares
Amount as set forth in Section 8.6, and related definitions hereof or (v) amend
this Section 7.3.F. Further, no amendment may alter the restrictions on the
General Partner's authority set forth elsewhere in this Section 7.3 without the
Consent specified in such section. In addition, notwithstanding Sections 7.3.B,
7.3.C, 7.3.D and 7.3.E hereof, Section 11.2 of this Agreement shall not be
amended, and no action in contravention of Section 11.2 hereof shall be taken,
without the Consent of the Limited Partners.
34
<PAGE>
Section 7.4 Reimbursement of the General Partner
------------------------------------
A. Except as provided in this Section 7.4 and elsewhere in this
Agreement (including the provisions of Articles 5 and 6 regarding distributions,
payments and allocations to which it may be entitled), the General Partner shall
not be compensated for its services as general partner of the Partnership.
B. Subject to Section 15.11, the General Partner shall be reimbursed
on a monthly basis, or such other basis as the General Partner may determine in
its sole and absolute discretion, for all expenses it incurs relating to the
ownership of interests in and operation of, or for the benefit of, the
Partnership. The Limited Partners acknowledge that the General Partner's sole
business is the ownership of interests in and operation of the Partnership and
that such expenses are incurred for the benefit of the Partnership; provided
--------
that, the General Partner shall not be reimbursed for expenses it incurs
- ----
relating to the organization of the Partnership and the General Partner or the
initial public offering or subsequent public offerings of REIT Shares, other
shares of capital stock or Funding Debt by the General Partner, but shall be
reimbursed for expenses it incurs with respect to any other issuance of
additional Partnership Interests pursuant to the provisions hereof. Such
reimbursements shall be in addition to any reimbursement to the General Partner
as a result of indemnification pursuant to Section 7.7 hereof.
C. If and to the extent any reimbursements to the General Partner
pursuant to this Section 7.4 constitute gross income of the General Partner (as
opposed to the repayment of advances made by the General Partner on behalf of
the Partnership), such amounts shall constitute guaranteed payments within the
meaning of Section 707(c) of the Code, shall be treated consistently therewith
by the Partnership and all Partners, and shall not be treated as distributions
for purposes of computing the Partners' Capital Accounts.
Section 7.5 Outside Activities of the General Partner
-----------------------------------------
A. Except in connection with a transaction authorized in Section
11.2 hereof, without the Consent of the Limited Partners, the General Partner
shall not, directly or indirectly, enter into or conduct any business, other
than in connection with the ownership, acquisition and disposition of
Partnership Interests as a General Partner and the management of the business of
the Partnership, its operation as a public reporting company with a class (or
classes) of securities registered under the Securities Exchange Act, its
operation as a REIT and such activities as are incidental to the same. Without
the Consent of the Limited Partners, the General Partner shall not, directly or
indirectly, participate in or otherwise acquire any interest in any real or
personal property, except its General Partner Interest, its minority interest in
any Subsidiary Partnership(s) (held directly or indirectly through a Qualified
REIT Subsidiary) that the General Partner holds in order to maintain such
Subsidiary Partnership's status as a partnership, and such bank accounts,
similar instruments or other short-term investments as it deems necessary to
carry out its responsibilities contemplated under this Agreement and the
Charter. Any Limited Partner Interests acquired by the General Partner, whether
pursuant to exercise by a Limited Partner of its right of Redemption, or
otherwise, shall be automatically converted into a General Partner Interest
comprised of an identical number of Partnership Units of the same class. If, at
any
35
<PAGE>
time, the General Partner acquires material assets (other than on behalf of the
Partnership) the definition of "REIT Shares Amount" shall be adjusted, as
reasonably agreed to by the General Partner and the other Limited Partners, to
reflect the relative Fair Market Value of a share of capital stock of the
General Partner relative to the Deemed Partnership Interest Value of the related
Partnership Unit. The General Partner's General Partner Interest in the
Partnership, its minority interest in any Subsidiary Partnership(s) (held
directly or indirectly through a Qualified REIT Subsidiary) that the General
Partner holds in order to maintain such Subsidiary Partnership's status as a
partnership, and interests in such short-term liquid investments, bank accounts
or similar instruments as the General Partner deems necessary to carry out its
responsibilities contemplated under this Agreement and the Charter are interests
which the General Partner is permitted to acquire and hold for purposes of this
Section 7.5.A.
B. In the event the General Partner exercises its rights under the
Charter to purchase REIT Shares, then the General Partner shall cause the
Partnership to purchase from it a number of Partnership Units of the appropriate
class as determined based on the REIT Shares Amount equal to the number of REIT
Shares so purchased on the same terms that the General Partner purchased such
REIT Shares.
Section 7.6 Contracts with Affiliates
-------------------------
A. The Partnership may lend or contribute to Persons in which it has
an equity investment, and such Persons may borrow funds from the Partnership, on
terms and conditions established in the sole and absolute discretion of the
General Partner. The foregoing authority shall not create any right or benefit
in favor of any Person.
B. Except as provided in Section 7.5.A, the Partnership may transfer
assets to joint ventures, other partnerships, corporations or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions consistent with this Agreement and applicable law.
C. The General Partner, in its sole and absolute discretion and
without the approval of the Limited Partners, may propose and adopt on behalf of
the Partnership employee benefit plans funded by the Partnership for the benefit
of employees of the General Partner, the Partnership, Subsidiaries of the
Partnership or any Affiliate of any of them in respect of services performed,
directly or indirectly, for the benefit of the Partnership, the General Partner,
or any of the Partnership's Subsidiaries. The General Partner also is expressly
authorized to cause the Partnership to issue to it Partnership Units
corresponding to REIT Shares issued by the General Partner pursuant to its Stock
Incentive Plan or any similar or successor plan and to repurchase such
Partnership Units from the General Partner to the extent necessary to permit the
General Partner to repurchase such REIT Shares in accordance with such plan.
D. The General Partner is expressly authorized to enter into, in the
name and on behalf of the Partnership, a right of first opportunity arrangement
and other conflict avoidance agreements with various Affiliates of the
Partnership and the General Partner, on such terms as the General Partner, in
its sole and absolute discretion, believes are advisable.
36
<PAGE>
Section 7.7 Indemnification
---------------
A. The Partnership shall indemnify an Indemnitee from and against
any and all losses, claims, damages, liabilities, joint or several, expenses
(including legal fees and expenses), judgments, fines, settlements, and other
amounts arising from any and all claims, demands, actions, suits or proceedings,
civil, criminal, administrative or investigative, that relate to the operations
of the Partnership as set forth in this Agreement in which any Indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, unless it is
established that: (i) the act or omission of the Indemnitee was material to the
matter giving rise to the proceeding and either was committed in bad faith or
was the result of active and deliberate dishonesty; (ii) the Indemnitee actually
received an improper personal benefit in money, property or services; or (iii)
in the case of any criminal proceeding, the Indemnitee had reasonable cause to
believe that the act or omission was unlawful. Without limitation, the
foregoing indemnity shall extend to any liability of any Indemnitee, pursuant to
a loan guaranty or otherwise, for any indebtedness of the Partnership or any
Subsidiary of the Partnership (including, without limitation, any indebtedness
which the Partnership or any Subsidiary of the Partnership has assumed or taken
subject to), and the General Partner is hereby authorized and empowered, on
behalf of the Partnership, to enter into one or more indemnity agreements
consistent with the provisions of this Section 7.7 in favor of any Indemnitee
having or potentially having liability for any such indebtedness. The
termination of any proceeding by judgment, order or settlement does not create a
presumption that the Indemnitee did not meet the requisite standard of conduct
set forth in this Section 7.7.A. The termination of any proceeding by
conviction or upon a plea of nolo contendere or its equivalent, or any entry of
an order of probation prior to judgment, creates a rebuttable presumption that
the Indemnitee acted in a manner contrary to that specified in this Section
7.7.A. Any indemnification pursuant to this Section 7.7 shall be made only out
of the assets of the Partnership.
B. Reasonable expenses incurred by an Indemnitee who is a party to a
proceeding may be paid or reimbursed by the Partnership in advance of the final
disposition of the proceeding upon receipt by the Partnership of (i) a written
affirmation by the Indemnitee of the Indemnitee's good faith belief that the
standard of conduct necessary for indemnification by the Partnership as
authorized in Subparagraph A of this Section 7.7 has been met, and (ii) a
written undertaking by or on behalf of the Indemnitee to repay the amount if it
shall ultimately be determined that the standard of conduct has not been met.
C. The indemnification provided by this Section 7.7 shall be in
addition to any other rights to which an Indemnitee or any other Person may be
entitled under any agreement, pursuant to any vote of the Partners, as a matter
of law or otherwise, and shall continue as to an Indemnitee who has ceased to
serve in such capacity.
D. The Partnership may purchase and maintain insurance, on behalf of
the Indemnitees and such other Persons as the General Partner shall determine,
against any liability that may be asserted against or expenses that may be
incurred by any such Person in connection with the Partnership's activities,
regardless of whether the Partnership would have the power to indemnify such
Person against such liability under the provisions of this Agreement.
37
<PAGE>
E. For purposes of this Section 7.7, the Partnership shall be deemed
to have requested an Indemnitee to serve as fiduciary of an employee benefit
plan whenever the performance by it of its duties to the Partnership also
imposes duties on, or otherwise involves services by, it to the plan or
participants or beneficiaries of the plan; excise taxes assessed on an
Indemnitee with respect to an employee benefit plan pursuant to applicable law
shall constitute fines within the meaning of Section 7.7; and actions taken or
omitted by the Indemnitee with respect to an employee benefit plan in the
performance of its duties for a purpose reasonably believed by it to be in the
interest of the participants and beneficiaries of the plan shall be deemed to be
for a purpose which is not opposed to the best interests of the Partnership.
F. In no event may an Indemnitee subject the Limited Partners to
personal liability by reason of the indemnification provisions set forth in this
Agreement.
G. An Indemnitee shall not be denied indemnification in whole or in
part under this Section 7.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the transaction
was otherwise permitted by the terms of this Agreement.
H. The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons. Any
amendment, modification or repeal of this Section 7.7 or any provision hereof
shall be prospective only and shall not in any way affect the limitations on the
Partnership's liability to any Indemnitee under this Section 7.7 as in effect
immediately prior to such amendment, modification or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part, prior
to such amendment, modification or repeal, regardless of when such claims may
arise or be asserted.
I. If and to the extent any reimbursements to the General Partner
pursuant to this Section 7.7 constitute gross income of the General Partner (as
opposed to the repayment of advances made by the General Partner on behalf of
the Partnership) such amounts shall constitute guaranteed payments within the
meaning of Section 707(c) of the Code, shall be treated consistently therewith
by the Partnership and all Partners, and shall not be treated as distributions
for purposes of computing the Partners' Capital Accounts.
J. Any indemnification hereunder is subject to, and limited by, the
provisions of Section 17-108 of the Act.
K. In the event the Partnership is made a party to any litigation or
otherwise incurs any loss or expense as a result of or in connection with any
Partner's personal obligations or liabilities unrelated to Partnership business,
such Partner shall indemnify and reimburse the Partnership for all such loss and
expense incurred, including legal fees, and the Partnership Interest of such
Partner may be charged therefor. The liability of a Partner under this Section
7.7.K shall not be limited to such Partner's Partnership Interest, but shall be
enforceable against such Partner personally.
38
<PAGE>
Section 7.8 Liability of the General Partner
--------------------------------
A. Notwithstanding anything to the contrary set forth in this
Agreement, none of the General Partner and any of its officers, directors,
agents and employees shall be liable or accountable in damages or otherwise to
the Partnership, any Partners or any Assignees, or their successors or assigns,
for losses sustained, liabilities incurred or benefits not derived as a result
of errors in judgment or mistakes of fact or law or any act or omission if the
General Partner acted in good faith.
B. The Limited Partners expressly acknowledge that the General
Partner is acting for the benefit of the Partnership, the Limited Partners and
the General Partner's stockholders collectively, that the General Partner is
under no obligation to give priority to the separate interests of the Limited
Partners or the General Partner's stockholders (including, without limitation,
the tax consequences to Limited Partners or Assignees or to stockholders) in
deciding whether to cause the Partnership to take (or decline to take) any
actions and that the General Partner shall not be liable to the Partnership or
to any Limited Partner for monetary damages for losses sustained, liabilities
incurred, or benefits not derived by Limited Partners in connection with such
decisions, provided that the General Partner has acted in good faith.
-------- ----
C. Subject to its obligations and duties as General Partner set
forth in Section 7.1.A hereof, the General Partner may exercise any of the
powers granted to it by this Agreement and perform any of the duties imposed
upon it hereunder either directly or by or through its agents. The General
Partner shall not be responsible for any misconduct or negligence on the part of
any such agent appointed by it in good faith.
D. Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability of the General Partner and any of its officers,
directors, agents and employees to the Partnership and the Limited Partners
under this Section 7.8 as in effect immediately prior to such amendment,
modification or repeal with respect to claims arising from or relating to
matters occurring, in whole or in part, prior to such amendment, modification or
repeal, regardless of when such claims may arise or be asserted.
Section 7.9 Other Matters Concerning the General Partner
--------------------------------------------
A. The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement, instrument,
opinion, report, notice, request, consent, order, bond, debenture, or other
paper or document believed by it to be genuine and to have been signed or
presented by the proper party or parties.
B. The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants and
advisers selected by it, and any act taken or omitted to be taken in reliance
upon the opinion of such Persons as to matters which such General Partner
reasonably believes to be within such Person's professional or expert competence
shall be conclusively presumed to have been done or omitted in good faith and in
accordance with such opinion.
39
<PAGE>
C. The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers and a duly appointed attorney or attorneys-in-fact. Each such attorney
shall, to the extent provided by the General Partner in the power of attorney,
have full power and authority to do and perform all and every act and duty which
is permitted or required to be done by the General Partner hereunder.
D. Notwithstanding any other provisions of this Agreement or any
non-mandatory provision of the Act, any action of the General Partner on behalf
of the Partnership or any decision of the General Partner to refrain from acting
on behalf of the Partnership, undertaken in the good faith belief that such
action or omission is necessary or advisable in order (i) to protect the ability
of the General Partner to continue to qualify as a REIT or (ii) to avoid the
General Partner incurring any taxes under Section 857 or Section 4981 of the
Code, is expressly authorized under this Agreement and is deemed approved by all
of the Limited Partners.
Section 7.10 Title to Partnership Assets
---------------------------
Title to Partnership assets, whether real, personal or mixed and
whether tangible or intangible, shall be deemed to be owned by the Partnership
as an entity, and no Partners, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion thereof. Title to
any or all of the Partnership assets may be held in the name of the Partnership,
the General Partner or one or more nominees, as the General Partner may
determine, including Affiliates of the General Partner. The General Partner
hereby declares and warrants that any Partnership assets for which legal title
is held in the name of the General Partner or any nominee or Affiliate of the
General Partner shall be deemed held by the General Partner or such nominee or
Affiliate for the use and benefit of the Partnership in accordance with the
provisions of this Agreement; provided, however, that the General Partner shall
-------- -------
use its best efforts to cause beneficial and record title to such assets to be
vested in the Partnership as soon as reasonably practicable. All Partnership
assets shall be recorded as the property of the Partnership in its books and
records, irrespective of the name in which legal title to such Partnership
assets is held.
Section 7.11 Reliance by Third Parties
-------------------------
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner has full power and authority to encumber, sell or otherwise use in any
manner any and all assets of the Partnership and to enter into any contracts on
behalf of the Partnership, and such Person shall be entitled to deal with the
General Partner as if it were the Partnership's sole party in interest, both
legally and beneficially. Each Limited Partner hereby waives any and all
defenses or other remedies which may be available against such Person to
contest, negate or disaffirm any action of the General Partner in connection
with any such dealing. In no event shall any Person dealing with the General
Partner or its representatives be obligated to ascertain that the terms of this
Agreement have been complied with or to inquire into the necessity or expedience
of any act or action of the General Partner or its representatives. Each and
every certificate, document or other instrument executed on behalf of the
Partnership by the General Partner or its
40
<PAGE>
representatives shall be conclusive evidence in favor of any and every Person
relying thereon or claiming thereunder that (i) at the time of the execution and
delivery of such certificate, document or instrument, this Agreement was in full
force and effect, (ii) the Person executing and delivering such certificate,
document or instrument was duly authorized and empowered to do so for and on
behalf of the Partnership and (iii) such certificate, document or instrument was
duly executed and delivered in accordance with the terms and provisions of this
Agreement and is binding upon the Partnership.
ARTICLE 8
RIGHTS AND OBLIGATIONS OF LIMITED PARTNERS
Section 8.1 Limitation of Liability
-----------------------
The Limited Partners shall have no liability under this Agreement
except as expressly provided in this Agreement or under the Act.
Section 8.2 Management of Business
----------------------
No Limited Partner or Assignee (other than the General Partner, any of
its Affiliates or any officer, director, employee, general partner, agent or
trustee of the General Partner, the Partnership or any of their Affiliates, in
their capacity as such) shall take part in the operations, management or control
(within the meaning of the Act) of the Partnership's business, transact any
business in the Partnership's name or have the power to sign documents for or
otherwise bind the Partnership. The transaction of any such business by the
General Partner, any of its Affiliates or any officer, director, employee,
general partner, agent or trustee of the General Partner, the Partnership or any
of their Affiliates, in their capacity as such, shall not affect, impair or
eliminate the limitations on the liability of the Limited Partners or Assignees
under this Agreement.
Section 8.3 Outside Activities of Limited Partners
--------------------------------------
Subject to any agreements entered into by a Limited Partner or its
Affiliates with the General Partner, Partnership or a Subsidiary, any Limited
Partner and any officer, director, employee, agent, trustee, Affiliate or
stockholder of any Limited Partner shall be entitled to and may have business
interests and engage in business activities in addition to those relating to the
Partnership, including business interests and activities in direct competition
with the Partnership or that are enhanced by the activities of the Partnership.
Neither the Partnership nor any Partners shall have any rights by virtue of this
Agreement in any business ventures of any Limited Partner or Assignee. Subject
to such agreements, none of the Limited Partners nor any other Person shall have
any rights by virtue of this Agreement or the partnership relationship
established hereby in any business ventures of any other Person, other than the
Limited Partners benefitting from the business conducted by the General Partner,
and such other Person shall have no obligation pursuant to this Agreement to
offer any interest in any such business ventures to the Partnership, any Limited
Partner or any such other Person, even if such opportunity is of
41
<PAGE>
a character which, if presented to the Partnership, any Limited Partner or such
other Person, could be taken by such other Person.
Section 8.4 Return of Capital
-----------------
Except pursuant to the rights of Redemption set forth in Section 8.6,
no Limited Partner shall be entitled to the withdrawal or return of his or her
Capital Contribution, except to the extent of distributions made pursuant to
this Agreement or upon termination of the Partnership as provided herein. No
Limited Partner or Assignee shall have priority over any other Limited Partner
or Assignee either as to the return of Capital Contributions, or as otherwise
expressly provided in this Agreement, as to profits, losses, distributions or
credits.
Section 8.5 Rights of Limited Partners Relating to the Partnership
------------------------------------------------------
A. In addition to other rights provided by this Agreement or by the
Act, and except as limited by Section 8.5.C hereof, each Limited Partner shall
have the right, for a purpose reasonably related to such Limited Partner's
interest as a limited partner in the Partnership, upon written demand with a
statement of the purpose of such demand and at the Partnership's expense:
(1) to obtain a copy of the most recent annual and quarterly reports
filed with the Securities and Exchange Commission by the General
Partner pursuant to the Securities Exchange Act, and each
communication sent to the stockholders of the General Partner;
(2) to obtain a copy of the Partnership's federal, state and local
income tax returns for each Partnership Year;
(3) to obtain a current list of the name and last known business,
residence or mailing address of each Partner;
(4) to obtain a copy of this Agreement and the Certificate and all
amendments thereto, together with executed copies of all powers
of attorney pursuant to which this Agreement, the Certificate and
all amendments thereto have been executed; and
(5) to obtain true and full information regarding the amount of cash
and a description and statement of any other property or services
contributed by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a
Partner.
B. The Partnership shall notify each Limited Partner in writing of
any adjustment made in the calculation of the REIT Shares Amount within 10
Business Days of the date such change becomes effective.
42
<PAGE>
C. Notwithstanding any other provision of this Section 8.5, the
General Partner may keep confidential from the Limited Partners, for such period
of time as the General Partner determines in its sole and absolute discretion to
be reasonable, any information that (i) the General Partner believes to be in
the nature of trade secrets or other information the disclosure of which the
General Partner in good faith believes is not in the best interests of the
Partnership or (ii) the Partnership or the General Partner is required by law or
by agreements with unaffiliated third parties to keep confidential.
Section 8.6 Redemption Rights
-----------------
A. On or after the date two years after the Effective Date, each
Limited Partner shall have the right (subject to the terms and conditions set
forth herein) to require the Partnership to redeem all or a portion of the
Partnership Units held by such Limited Partner (such Partnership Units being
hereafter referred to as "Tendered Units") in exchange for the Cash Amount (a
"Redemption"), provided that the terms of such Partnership Units do not provide
--------
that such Partnership Units are not entitled to a right of Redemption; provided,
--------
that, Partnership Units subject to that Pledge Agreement shall, to the extent
the pledgee thereunder is entitled to exercise remedies thereunder, be subject
to redemption prior to the date two years after the Effective Date. Unless
otherwise expressly provided in this Agreement or a separate agreement entered
into between the Partnership and the holders of such Partnership Units, all
Partnership Units shall be entitled to a right of Redemption hereunder. Any
Redemption shall be exercised pursuant to a Notice of Redemption delivered to
the General Partner by the Limited Partner who is exercising the right (the
"Tendering Partner"). The Cash Amount shall be delivered as a certified check
payable to the Tendering Partner within ten (10) days of the Specified
Redemption Date in accordance with the instructions set forth in the Notice of
Redemption.
B. Notwithstanding Section 8.6.A above, if a Limited Partner has
delivered to the General Partner a Notice of Redemption then the General Partner
may, in its sole and absolute discretion, (subject to the limitations on
ownership and transfer of REIT Shares set forth in Article IV.E of the Charter)
elect to acquire some or all of the Tendered Units from the Tendering Partner in
exchange for the REIT Shares Amount (as of the Specified Redemption Date) and,
if the General Partner so elects, the Tendering Partner shall sell the Tendered
Units to the General Partner in exchange for the REIT Shares Amount. In such
event, the Tendering Partner shall have no right to cause the Partnership to
redeem such Tendered Units. The General Partner shall promptly give such
Tendering Partner written notice of its election, and the Tendering Partner may
elect to withdraw its redemption request at any time prior to the acceptance of
the Cash Amount or REIT Shares Amount by such Tendering Partner.
Notwithstanding the foregoing, the General Partner, at the request of a Limited
Partner that is a corporation or limited liability company, shall be required to
issue, and the General Partner agrees to issue, the REIT Shares Amount in
exchange for such Limited Partner's Tendered Units, subject to the ownership
restrictions applicable to such shares set forth in the Charter. In addition,
the General Partner agrees to maintain an amount of authorized but unissued REIT
Shares equal to the number of REIT Shares issuable upon the exchange of
Partnership Units owned from time to time by Limited Partners that are
corporations.
43
<PAGE>
C. The REIT Shares Amount, if applicable, shall be delivered as duly
authorized, validly issued, fully paid and nonassessable REIT Shares and, if
applicable, free of any pledge, lien, encumbrance or restriction, other than
those provided in the Charter, the Bylaws of the General Partner, the Securities
Act, relevant state securities or blue sky laws and any applicable registration
rights agreement with respect to such REIT Shares entered into by the Tendering
Partner. The REIT Shares Amount shall be registered in the name and otherwise
delivered as set forth in the Notice of Redemption. Notwithstanding any delay
in such delivery (but subject to Section 8.6.E), the Tendering Partner shall be
deemed the owner of such REIT Shares for all purposes, including without
limitation, rights to vote or consent, and receive dividends, as of the
Specified Redemption Date.
D. Each Limited Partner covenants and agrees with the General
Partner that all Tendered Units shall be delivered to the General Partner free
and clear of all liens, claims and encumbrances whatsoever and should any such
liens, claims and/or encumbrances exist or arise with respect to such Tendered
Units, the General Partner shall be under no obligation to acquire the same.
Each Limited Partner further agrees that, in the event any state or local
property transfer tax is payable as a result of the transfer of its Tendered
Units to the General Partner (or its designee), such Limited Partner shall
assume and pay such transfer tax.
E. Notwithstanding the provisions of Section 8.6.A, 8.6.B, 8.6.C or
any other provision of this Agreement, a Limited Partner (i) shall not be
entitled to effect a Redemption for cash or an exchange for REIT Shares to the
extent the ownership or right to acquire REIT Shares pursuant to such exchange
by such Partner on the Specified Redemption Date would cause such Partner or any
other Person, or, in the opinion of counsel selected by the General Partner, may
cause such Partner or any other Person, to violate the restrictions on ownership
and transfer of REIT Shares set forth in Article IV.E of the Charter and (ii)
shall have no rights under this Agreement to acquire REIT Shares which would
otherwise be prohibited under the Charter. To the extent any attempted
Redemption or exchange for REIT Shares would be in violation of this Section
8.6.E, it shall be null and void ab initio and such Limited Partner shall not
acquire any rights or economic interest in the cash otherwise payable upon such
redemption or the REIT Shares otherwise issuable upon such exchange.
F. Notwithstanding anything herein to the contrary (but subject to
Section 8.6.E), with respect to any Redemption or exchange for REIT Shares
pursuant to this Section 8.6:
(1) All Partnership Units acquired by the General Partner pursuant
thereto shall automatically, and without further action required,
be converted into and deemed to be General Partner Interests
comprised of the same number and class of Partnership Units.
(2) Without the consent of the General Partner, each Limited Partner
may not effect a Redemption for less than 500 Partnership Units
or, if the Limited Partner holds less than 500 Partnership Units,
all of the Partnership Units held by such Limited Partner.
44
<PAGE>
(3) Without the consent of the General Partner, each Limited Partner
may not effect a Redemption during the period after the
Partnership Record Date with respect to a distribution and before
the record date established by the General Partner for a
distribution to its stockholders of some or all of its portion of
such distribution.
(4) The consummation of any Redemption or exchange for REIT Shares
shall be subject to the expiration or termination of the
applicable waiting period, if any, under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
(5) Each Tendering Partner shall continue to own all Partnership
Units subject to any Redemption or exchange for REIT Shares, and
be treated as a Limited Partner with respect to such Partnership
Units for all purposes of this Agreement, until such Partnership
Units are transferred to the General Partner and paid for or
exchanged on the Specified Redemption Date. Until a Specified
Redemption Date, the Tendering Partner shall have no rights as a
stockholder of the General Partner with respect to such Tendering
Partner's Partnership Units.
G. In the event that the Partnership issues additional Partnership
Interests to any Additional Limited Partner pursuant to Section 4.3.C hereof,
the General Partner shall make such revisions to this Section 8.6 as it
determines are necessary to reflect the issuance of such additional Partnership
Interests.
ARTICLE 9
BOOKS, RECORDS, ACCOUNTING AND REPORTS
Section 9.1 Records and Accounting
----------------------
The General Partner shall keep or cause to be kept at the principal
office of the Partnership appropriate books and records with respect to the
Partnership's business, including without limitation, all books and records
necessary to provide to the Limited Partners any information, lists and copies
of documents required to be provided pursuant to Section 9.3 hereof. Any
records maintained by or on behalf of the Partnership in the regular course of
its business may be kept on, or be in the form of, punch cards, magnetic tape,
photographs, micrographics or any other information storage device, provided
--------
that the records so maintained are convertible into clearly legible written form
- ----
within a reasonable period of time. The books of the Partnership shall be
maintained, for financial and tax reporting purposes, on an accrual basis in
accordance with generally accepted accounting principles.
Section 9.2 Fiscal Year
-----------
The fiscal year of the Partnership shall be the calendar year.
45
<PAGE>
Section 9.3 Reports
-------
A. As soon as practicable, but in no event later than 105 days after
the close of each Partnership Year, or such earlier date as they are filed with
the Securities and Exchange Commission, the General Partner shall cause to be
mailed to each Limited Partner as of the close of the Partnership Year, an
annual report containing financial statements of the Partnership, or of the
General Partner if such statements are prepared solely on a consolidated basis
with the General Partner, for such Partnership Year, presented in accordance
with generally accepted accounting principles, such statements to be audited by
a nationally recognized firm of independent public accountants selected by the
General Partner.
B. As soon as practicable, but in no event later than 45 days after
the close of each calendar quarter (except the last calendar quarter of each
year), or such earlier date as they are filed with the Securities and Exchange
Commission, the General Partner shall cause to be mailed to each Limited Partner
as of the last day of the calendar quarter, a report containing unaudited
financial statements of the Partnership, or of the General Partner, if such
statements are prepared solely on a consolidated basis with the General Partner,
presented in accordance with the applicable law or regulation, or as the General
Partner determines to be appropriate.
ARTICLE 10
TAX MATTERS
Section 10.1 Preparation of Tax Returns
--------------------------
The General Partner shall arrange for the preparation and timely
filing of all returns of Partnership income, gains, deductions, losses and other
items required of the Partnership for federal and state income tax purposes and
shall use all reasonable efforts to furnish, within 90 days of the close of each
taxable year, the tax information reasonably required by Limited Partners for
federal and state income tax reporting purposes.
Section 10.2 Tax Elections
-------------
Except as otherwise provided herein, the General Partner shall, in its
sole and absolute discretion, determine whether to make any available election
pursuant to the Code, including the election under Section 754 of the Code. The
General Partner shall have the right to seek to revoke any such election
(including without limitation, any election under Section 754 of the Code) upon
the General Partner's determination in its sole and absolute discretion that
such revocation is the best interests of the Partners.
Section 10.3 Tax Matters Partner
-------------------
A. The General Partner shall be the "tax matters partner" of the
Partnership for federal income tax purposes. Pursuant to Section 6223(c) of the
Code, upon receipt of notice from the IRS of the beginning of an administrative
proceeding with respect to the Partnership, the tax matters partner shall
furnish the IRS with the name, address and profit interest of each
46
<PAGE>
of the Limited Partners and Assignees; provided, however, that such information
-------- -------
is provided to the Partnership by the Limited Partners and Assignees.
B. The tax matters partner is authorized, but not required:
(1) to enter into any settlement with the IRS with respect to any
administrative or judicial proceedings for the adjustment of
Partnership items required to be taken into account by a Partner
for income tax purposes (such administrative proceedings being
referred to as a "tax audit" and such judicial proceedings being
referred to as "judicial review"), and in the settlement
agreement the tax matters partner may expressly state that such
agreement shall bind all Partners, except that such settlement
agreement shall not bind any Partner (i) who (within the time
prescribed pursuant to the Code and Regulations) files a
statement with the IRS providing that the tax matters partner
shall not have the authority to enter into a settlement agreement
on behalf of such Partner or (ii) who is a "notice partner" (as
defined in Section 6231 of the Code) or a member of a "notice
group" (as defined in Section 6223(b)(2) of the Code);
(2) in the event that a notice of a final administrative adjustment
at the Partnership level of any item required to be taken into
account by a Partner for tax purposes (a "final adjustment") is
mailed to the tax matters partner, to seek judicial review of
such final adjustment, including the filing of a petition for
readjustment with the Tax Court or the United States Claims
Court, or the filing of a complaint for refund with the District
Court of the United States for the district in which the
Partnership's principal place of business is located;
(3) to intervene in any action brought by any other Partner for
judicial review of a final adjustment;
(4) to file a request for an administrative adjustment with the IRS
at any time and, if any part of such request is not allowed by
the IRS, to file an appropriate pleading (petition or complaint)
for judicial review with respect to such request;
(5) to enter into an agreement with the IRS to extend the period for
assessing any tax which is attributable to any item required to
be taken into account by a Partner for tax purposes, or an item
affected by such item; and
(6) to take any other action on behalf of the Partners of the
Partnership in connection with any tax audit or judicial review
proceeding to the extent permitted by applicable law or
regulations.
The taking of any action and the incurring of any expense by the tax
matters partner in connection with any such proceeding, except to the extent
required by law, is a matter
47
<PAGE>
in the sole and absolute discretion of the tax matters partner and the
provisions relating to indemnification of the General Partner set forth in
Section 7.7 of this Agreement shall be fully applicable to the tax matters
partner in its capacity as such.
C. The tax matters partner shall receive no compensation for its
services. All third party costs and expenses incurred by the tax matters
partner in performing its duties as such (including legal and accounting fees)
shall be borne by the Partnership. Nothing herein shall be construed to
restrict the Partnership from engaging an accounting firm to assist the tax
matters partner in discharging its duties hereunder, so long as the compensation
paid by the Partnership for such services is reasonable.
Section 10.4 Organizational Expenses
-----------------------
The Partnership shall elect to deduct expenses, if any, incurred by it
in organizing the Partnership ratably over a 60-month period as provided in
Section 709 of the Code.
Section 10.5 Withholding
-----------
Each Limited Partner hereby authorizes the Partnership to withhold
from or pay on behalf of or with respect to such Limited Partner any amount of
federal, state, local, or foreign taxes that the General Partner determines that
the Partnership is required to withhold or pay with respect to any amount
distributable or allocable to such Limited Partner pursuant to this Agreement,
including, without limitation, any taxes required to be withheld or paid by the
Partnership pursuant to Sections 1441, 1442, 1445 or 1446 of the Code. Any
amount paid on behalf of or with respect to a Limited Partner shall constitute a
loan by the Partnership to such Limited Partner, which loan shall be repaid by
such Limited Partner within 15 days after notice from the General Partner that
such payment must be made unless (i) the Partnership withholds such payment from
a distribution which would otherwise be made to the Limited Partner or (ii) the
General Partner determines, in its sole and absolute discretion, that such
payment may be satisfied out of the available funds of the Partnership which
would, but for such payment, be distributed to the Limited Partner. Any amounts
withheld pursuant to the foregoing clauses (i) or (ii) shall be treated as
having been distributed to such Limited Partner. Each Limited Partner hereby
unconditionally and irrevocably grants to the Partnership a security interest in
such Limited Partner's Partnership Interest to secure such Limited Partner's
obligation to pay to the Partnership any amounts required to be paid pursuant to
this Section 10.5. In the event that a Limited Partner fails to pay any amounts
owed to the Partnership pursuant to this Section 10.5 when due, the General
Partner may, in its sole and absolute discretion, elect to make the payment to
the Partnership on behalf of such defaulting Limited Partner, and in such event
shall be deemed to have loaned such amount to such defaulting Limited Partner
and shall succeed to all rights and remedies of the Partnership as against such
defaulting Limited Partner (including, without limitation, the right to receive
distributions and the holding of a security interest in such Limited Partner's
Partnership Interest). Any amounts payable by a Limited Partner hereunder shall
bear interest at the base rate on corporate loans at large United States money
center commercial banks, as published from time to time in the Wall Street
-----------
Journal, plus two percentage points (but not higher than the maximum lawful
- -------
rate) from the date such amount is due (i.e., 15 days after demand) until such
----
amount is paid in full. Each Limited Partner shall
48
<PAGE>
take such actions as the Partnership or the General Partner shall request in
order to perfect or enforce the security interest created hereunder.
ARTICLE 11
TRANSFERS AND WITHDRAWALS
Section 11.1 Transfer
--------
A. The term "transfer," when used in this Article 11 with respect to
a Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner purports to assign its General Partner Interest to another
Person or by which a Limited Partner purports to assign its Limited Partnership
Interest to another Person, and includes a sale, assignment, gift (outright or
in trust), pledge, encumbrance, hypothecation, mortgage, exchange or any other
disposition by law or otherwise. The term "transfer" when used in this Article
11 does not include any Redemption or exchange for REIT Shares pursuant to
Section 8.6. No part of the interest of a Limited Partner shall be subject to
the claims of any creditor, any spouse for alimony or support, or to legal
process, and may not be voluntarily or involuntarily alienated or encumbered,
except as may be specifically provided for in this Agreement.
B. No Partnership Interest shall be transferred, in whole or in
part, except in accordance with the terms and conditions set forth in this
Article 11. Any transfer or purported transfer of a Partnership Interest not
made in accordance with this Article 11 shall be null and void.
Section 11.2 Transfer of General Partner's Partnership Interest
--------------------------------------------------
A. The General Partner shall not withdraw from the Partnership and
shall not transfer all or any portion of its interest in the Partnership
(whether by sale, statutory merger or consolidation, liquidation or otherwise)
without the Consent of the Partners, which may be given or withheld by each
Partner in its sole and absolute discretion, and only upon the admission of a
successor General Partner pursuant to Section 12.1. Upon any transfer of a
Partnership Interest in accordance with the provisions of this Section 11.2, the
transferee shall become a substitute General Partner for all purposes herein,
and shall be vested with the powers and rights of the transferor General
Partner, and shall be liable for all obligations and responsible for all duties
of the General Partner, once such transferee has executed such instruments as
may be necessary to effectuate such admission and to confirm the agreement of
such transferee to be bound by all the terms and provisions of this Agreement
with respect to the Partnership Interest so acquired. It is a condition to any
transfer otherwise permitted hereunder that the transferee assumes, by operation
of law or express agreement, all of the obligations of the transferor General
Partner under this Agreement with respect to such transferred Partnership
Interest, and no such transfer (other than pursuant to a statutory merger or
consolidation wherein all obligations and liabilities of the transferor General
Partner are assumed by a successor corporation by operation of law) shall
relieve the transferor General Partner of its obligations under this Agreement
without the Consent of the Partners, in their reasonable discretion. In the
event the General Partner withdraws from the Partnership, in
49
<PAGE>
violation of this Agreement or otherwise, or otherwise dissolves or terminates,
or upon the Incapacity of the General Partner, all of the remaining Partners may
elect to continue the Partnership business by selecting a substitute General
Partner in accordance with the Act.
B. The General Partner shall not engage in any merger, consolidation
or other combination with or into another person, sale of all or substantially
all of its assets or any reclassification, recapitalization or change of its
outstanding equity interests (each, a "Termination Transaction"), unless (i) the
Termination Transaction has been approved by a Consent of the Partners and,
except as otherwise provided in Section 11.2.C, in connection with which all
Limited Partners either will receive, or will have the right to elect to
receive, for each Partnership Unit an amount of cash, securities, or other
property equal to the product of the REIT Shares Amount and the greatest amount
of cash, securities or other property paid to a holder of one REIT Share in
consideration of one REIT Share pursuant to the terms of the Termination
Transaction; provided that, if, in connection with the Termination Transaction,
-------------
a purchase, tender or exchange offer shall have been made to and accepted by the
holders of the outstanding REIT Shares, each holder of Partnership Units shall
receive, or shall have the right to elect to receive, the greatest amount of
cash, securities, or other property which such holder would have received had it
exercised its right to Redemption (as set forth in Section 8.6) and received
REIT Shares in exchange for its Partnership Units immediately prior to the
expiration of such purchase, tender or exchange offer and had thereupon accepted
such purchase, tender or exchange offer and then such Termination Transaction
shall have been consummated.
C. The General Partner may merge, or otherwise combine its assets,
with another entity without satisfying the requirements of Section 11.2.B(ii)
hereof if: (i) immediately after such merger or other combination, substantially
all of the assets directly or indirectly owned by the surviving entity, other
than Partnership Units held by such General Partner, are owned directly or
indirectly by the Partnership or another limited partnership or limited
liability company which is the survivor of a merger, consolidation or
combination of assets with the Partnership (in each case, the "Surviving
Partnership"); (ii) the Limited Partners own a percentage interest of the
Surviving Partnership based on the relative fair market value of the net assets
of the Partnership (as determined pursuant to Section 11.2.E) and the other net
assets of the Surviving Partnership (as determined pursuant to Section 11.2.E)
immediately prior to the consummation of such transaction; (iii) the rights
preferences and privileges of the Limited Partners in the Surviving Partnership
are at least as favorable as those in effect immediately prior to the
consummation of such transaction and as those applicable to any other limited
partners or non-managing members of the Surviving Partnership; and (iv) such
rights of the Limited Partners include the right to exchange their interests in
the Surviving Partnership for at least one of: (a) the consideration available
to such Limited Partners pursuant to Section 11.2.B or (b) if the ultimate
controlling person of the Surviving Partnership has publicly traded common
equity securities, such common equity securities, with an exchange ratio based
on the relative fair market value of such securities (as determined pursuant to
Section 11.2.E) and the REIT Shares.
D. In connection with any transaction permitted by Section 11.2.B or
Section 11.2.C hereof, the General Partner shall use its commercially reasonable
efforts to structure such Termination Transaction to avoid causing the Limited
Partners to recognize gain for federal
50
<PAGE>
income tax purposes by virtue of the occurrence of or their participation in
such Termination Transaction.
E. In connection with any transaction permitted by Section 11.2.B or
11.2.C, the relative fair market values shall be reasonably determined by the
General Partner as of the time of such transaction and, to the extent
applicable, shall be no less favorable to the Limited Partners than the relative
values reflected in the terms of such transaction.
Section 11.3 Limited Partners' Rights to Transfer
------------------------------------
A. Prior to the second anniversary of the closing of the initial
public offering of REIT Shares, no Limited Partner shall transfer all or any
portion of its Partnership Interest to any transferee without the consent of the
General Partner, which consent may be withheld in its sole and absolute
discretion; provided, however, that any Limited Partner may, at any time
-------- -------
(whether prior to or after such second anniversary), without the consent of the
General Partner, (i) transfer all or any portion of its Partnership Interest to
the General Partner, (ii) transfer all or any portion of its Partnership
Interest to an Affiliate, another Original Limited Partner or to an Immediate
Family member, subject to the provisions of Section 11.6, or in the case of an
Original Limited Partner, to such Original Limited Partner's shareholders,
members, partners or beneficiaries, as the case may be, (iii) transfer all or
any portion of its Partnership Interest to a trust for the benefit of a
charitable beneficiary or to a charitable foundation, subject to the provisions
of Section 11.6, and (iv) subject to the provisions of Section 11.6, pledge (a
"Pledge") all or any portion of its Partnership Interest to a lending
institution, which is not an Affiliate of such Limited Partner, as collateral or
security for a bona fide loan or other extension of credit, and transfer such
pledged Partnership Interest to such lending institution in connection with the
exercise of remedies under such loan or extension or credit. Each Limited
Partner or Assignee (resulting from a transfer made pursuant to clauses (i)-(iv)
of the proviso of the preceding sentence) shall have the right to transfer all
or any portion of its Partnership Interest, subject to the provisions of Section
11.6 and the satisfaction of each of the following conditions (in addition to
the right of each such Limited Partner or Assignee to continue to make any such
transfer permitted by clauses (i)-(iv) of such proviso without satisfying either
of the following conditions):
(a) General Partner Right of First Refusal. The transferring Partner
--------------------------------------
shall give written notice of the proposed transfer to the General
Partner, which notice shall state (i) the identity of the
proposed transferee, and (ii) the amount and type of
consideration proposed to be received for the transferred
Partnership Units. The General Partner shall have ten (10) days
upon which to give the transferring Partner notice of its
election to acquire the Partnership Units on the proposed terms.
If it so elects, it shall purchase the Partnership Units on such
terms within ten (10) days after giving notice of such election.
If it does not so elect, the transferring Partner may transfer
such Partnership Units to a third party, on economic terms no
more favorable to the transferee than the proposed terms, subject
to the other conditions of this Section 11.3.
51
<PAGE>
(b) Qualified Transferee. Any transfer of a Partnership Interest
--------------------
shall be made only to Qualified Transferees.
It is a condition to any transfer otherwise permitted hereunder that
the transferee assumes by operation of law or express agreement all of the
obligations of the transferor Limited Partner under this Agreement with respect
to such transferred Partnership Interest and no such transfer (other than
pursuant to a statutory merger or consolidation wherein all obligations and
liabilities of the transferor Partner are assumed by a successor corporation by
operation of law) shall relieve the transferor Partner of its obligations under
this Agreement without the approval of the General Partner, in its reasonable
discretion. Notwithstanding the foregoing, any transferee of any transferred
Partnership Interest shall be subject to any and all ownership limitations
contained in the Charter and the representations in Section 3.4.D. Any
transferee, whether or not admitted as a Substituted Limited Partner, shall take
subject to the obligations of the transferor hereunder. Unless admitted as a
Substitute Limited Partner, no transferee, whether by a voluntary transfer, by
operation of law or otherwise, shall have rights hereunder, other than the
rights of an Assignee as provided in Section 11.5.
B. If a Limited Partner is subject to Incapacity, the executor,
administrator, trustee, committee, guardian, conservator, or receiver of such
Limited Partner's estate shall have all the rights of a Limited Partner, but not
more rights than those enjoyed by other Limited Partners, for the purpose of
settling or managing the estate, and such power as the Incapacitated Limited
Partner possessed to transfer all or any part of his or its interest in the
Partnership. The Incapacity of a Limited Partner, in and of itself, shall not
dissolve or terminate the Partnership.
C. The General Partner may prohibit any transfer otherwise permitted
under Section 11.3 by a Limited Partner of his or her Partnership Units if, in
the opinion of legal counsel to the Partnership, such transfer would require the
filing of a registration statement under the Securities Act by the Partnership
or would otherwise violate any federal or state securities laws or regulations
applicable to the Partnership or the Partnership Unit.
D. No transfer by a Limited Partner of his or her Partnership Units
(including any Redemption or exchange for REIT Shares pursuant to Section 8.6)
may be made to any person if (i) in the opinion of legal counsel for the
Partnership, it would result in the Partnership being treated as an association
taxable as a corporation, or (ii) such transfer is effectuated through an
"established securities market" or a "secondary market (or the substantial
equivalent thereof)" within the meaning of Section 7704 of the Code.
E. No transfer of any Partnership Units may be made to a lender to
the Partnership or any Person who is related (within the meaning of Section
1.752-4(b) of the Regulations) to any lender to the Partnership whose loan
constitutes a Nonrecourse Liability, without the consent of the General Partner,
in its sole and absolute discretion; provided that, as a condition to such
-------- ----
consent, the lender will be required to enter into an arrangement with the
Partnership and the General Partner to redeem or exchange for the REIT Shares
Amount any Partnership Units in which a security interest is held simultaneously
with the time at which such lender would be deemed to be a partner in the
Partnership for purposes of allocating liabilities to such lender under Section
752 of the Code.
52
<PAGE>
Section 11.4 Substituted Limited Partners
----------------------------
A. No Limited Partner shall have the right to substitute a
transferee as a Limited Partner in his or her place (including any transferee
permitted by Section 11.3). The General Partner shall, however, have the right
to consent to the admission of a permitted transferee of the interest of a
Limited Partner, other than a transferee in a transfer permitted by Section 11.3
hereof, as a Substituted Limited Partner, pursuant to this Section 11.4, which
consent may be given or withheld by the General Partner in its sole and absolute
discretion. The General Partner's failure or refusal to permit a transferee of
any such interests to become a Substituted Limited Partner shall not give rise
to any cause of action against the Partnership or any Partner.
B. A transferee who has been admitted as a Substituted Limited
Partner in accordance with this Article 11 shall have all the rights and powers
and be subject to all the restrictions and liabilities of a Limited Partner
under this Agreement. The admission of any transferee as a Substituted Limited
Partner shall be subject to the transferee executing and delivering to the
Partnership an acceptance of all of the terms and conditions of this Agreement
(including without limitation, the provisions of Section 2.4 and such other
documents or instruments as may be required to effect the admission, each in
form and substance satisfactory to the General Partner) and the acknowledgement
by such transferee that each of the representations and warranties set forth in
Section 3.4 hereof are true and correct with respect to such transferee as of
the date of the transfer of the Partnership Interest to such transferee.
C. Upon the admission of a Substituted Limited Partner, the General
Partner shall amend Exhibit A to reflect the name, address, number of
Partnership Units, and Percentage Interest of such Substituted Limited Partner
and to eliminate or adjust, if necessary, the name, address and interest of the
predecessor of such Substituted Limited Partner.
Section 11.5 Assignees
---------
If the General Partner, in its sole and absolute discretion, does not
consent to the admission of any permitted transferee under Section 11.3 as a
Substituted Limited Partner, as described in Section 11.4, such transferee shall
be considered an Assignee for purposes of this Agreement. An Assignee shall be
entitled to all the rights of an assignee of a limited partnership interest
under the Act, including the right to receive distributions from the Partnership
and the share of Net Income, Net Losses, gain and loss attributable to the
Partnership Units assigned to such transferee, the rights to transfer the
Partnership Units provided in this Article 11, and the right of Redemption
provided in Section 8.6, but shall not be deemed to be a holder of Partnership
Units for any other purpose under this Agreement, and shall not be entitled to
effect a Consent with respect to such Partnership Units on any matter presented
to the Limited Partners for approval (such Consent remaining with the transferor
Limited Partner). In the event any such transferee desires to make a further
assignment of any such Partnership Units, such transferee shall be subject to
all the provisions of this Article 11 to the same extent and in the same manner
as any Limited Partner desiring to make an assignment of Partnership Units.
53
<PAGE>
Section 11.6 General Provisions
------------------
A. No Limited Partner may withdraw from the Partnership other than
as a result of (i) a permitted transfer of all of such Limited Partner's
Partnership Units in accordance with this Article 11 and the transferee(s) of
such Units being admitted to the Partnership as a Substituted Limited Partner(s)
or (ii) pursuant to the exercise of its right of Redemption of all of such
Limited Partner's Partnership Units under Section 8.6.
B. Any Limited Partner who shall transfer all of such Limited
Partner's Partnership Units in a transfer permitted pursuant to this Article 11
where such transferee was admitted as a Substituted Limited Partner or pursuant
to the exercise of its rights of Redemption of all of such Limited Partner's
Partnership Units under Section 8.6 shall cease to be a Limited Partner.
C. Transfers pursuant to this Article 11 may only be made on the
first day of a fiscal quarter of the Partnership, unless the General Partner
otherwise agrees.
D. If any Partnership Interest is transferred, assigned or redeemed
during any quarterly segment of the Partnership's fiscal year in compliance with
the provisions of this Article 11 or transferred or redeemed pursuant to Section
8.6, on any day other than the first day of a Partnership Year, then Net Income,
Net Losses, each item thereof and all other items attributable to such
Partnership Interest for such fiscal year shall be divided and allocated between
the transferor Partner and the transferee Partner by taking into account their
varying interests during the fiscal year in accordance with Section 706(d) of
the Code, using the interim closing of the books method. Except as otherwise
required by Section 706(d) of the Code, solely for purposes of making such
allocations, each of such items for the calendar month in which the transfer,
assignment or redemption occurs shall be allocated to the Person who is a
Partner as of midnight on the last day of said month and none of such items for
the calendar month in which a redemption occurs will be allocated to the
redeeming Partner. All distributions of Available Cash with respect to which
the Partnership Record Date is before the date of such transfer, assignment or
redemption shall be made to the transferor Partner, and all distributions of
Available Cash thereafter, in the case of a transfer or assignment other than a
redemption, shall be made to the transferee Partner.
E. In addition to any other restrictions on transfer herein
contained, including without limitation the provisions of this Article 11 and
Section 2.6, in no event may any transfer or assignment of a Partnership
Interest by any Partner (including by way of a Redemption) be made (i) to any
person or entity who lacks the legal right, power or capacity to own a
Partnership Interest; (ii) in violation of applicable law; (iii) of any
component portion of a Partnership Interest, such as the Capital Account, or
rights to distributions, separate and apart from all other components of a
Partnership Interest; (iv) if in the opinion of legal counsel to the Partnership
such transfer would cause a termination of the Partnership for federal or state
income tax purposes (except as a result of the Redemption or exchange for REIT
Shares of all Partnership Units held by all Limited Partners or pursuant to a
Termination Transaction expressly permitted under Section 11.2); (v) if in the
opinion of counsel to the Partnership such transfer would cause the Partnership
to cease to be classified as a partnership for federal or state
54
<PAGE>
income tax purposes (except as a result of the Redemption or exchange for REIT
Shares of all Partnership Units held by all Limited Partners); (vi) if such
transfer would cause the Partnership to become, with respect to any employee
benefit plan subject to Title I of ERISA, a "party-in-interest" (as defined in
Section 3(14) of ERISA) or a "disqualified person" (as defined in Section
4975(c) of the Code); (vii) if such transfer would, in the opinion of counsel to
the Partnership, cause any portion of the assets of the Partnership to
constitute assets of any employee benefit plan pursuant to Department of Labor
Regulations Section 2510.2-101; (viii) if such transfer requires the
registration of such Partnership Interest pursuant to any applicable federal or
state securities laws; (ix) if such transfer is effectuated through an
"established securities market" or a "secondary market" (or the substantial
equivalent thereof) within the meaning of Section 7704 of the Code or such
transfer causes the Partnership to become a "Publicly Traded Partnership," as
such term is defined in Sections 469(k)(2) or 7704(b) of the Code; (x) if such
transfer subjects the Partnership to be regulated under the Investment Company
Act of 1940, the Investment Advisors Act of 1940 or the Employee Retirement
Income Security Act of 1974, each as amended; (xi) if the transferee or assignee
of such Partnership Interest is unable to make the representations set forth in
Section 3.4.D or such transfer could otherwise adversely affect the ability of
the General Partner to remain qualified as a REIT; or (xii) if in the opinion of
legal counsel for the Partnership such transfer would adversely affect the
ability of the General Partner to continue to qualify as a REIT or subject the
General Partner to any additional taxes under Section 857 or Section 4981 of the
Code.
F. The General Partner shall monitor the transfers of interests in
the Partnership to determine (i) if such interests are being traded on an
"established securities market" or a "secondary market (or the substantial
equivalent thereof)" within the meaning of Section 7704 of the Code, and (ii)
whether additional transfers of interests would result in the Partnership being
unable to qualify for at least one of the "safe harbors" set forth in
Regulations Section 1.7704-1 (or such other guidance subsequently published by
the IRS setting forth safe harbors under which interests will not be treated as
"readily tradable on a secondary market (or the substantial equivalent thereof)"
within the meaning of Section 7704 of the Code) (the "Safe Harbors"). The
General Partner shall take all steps reasonably necessary or appropriate to
prevent any trading of interests or any recognition by the Partnership of
transfers made on such markets and, except as otherwise provided herein, to
insure that at least one of the Safe Harbors is met.
Section 11.7 Transfer of Pledged Partnership Units
-------------------------------------
A. Notwithstanding anything to the contrary in this Agreement but
subject to Section 11.6 hereof, any or all of the Limited Partnership Interests
pledged to the Company, as agent on behalf of the pledgees, pursuant to the
Pledge Agreement may be transferred, without the consent of any other Partner,
to any Person designated by the Company in its sole and absolute discretion in
connection with the exercise by the Company of its rights and remedies under the
Pledge Agreement. Any such transferee shall be admitted as a Substituted
Limited Partner, subject to the provisions of Section 11.4 hereof.
B. Each of the Pledgors hereby constitutes and appoints the Company
and authorized officers and attorneys-in-fact of the Company, and each of those
acting singly, in
55
<PAGE>
each case with full power of substitution, as its true and lawful agent and
attorney-in-fact, with full power and authority in its name, place and stead to
effect any transfer of Partnership Interests pledged pursuant to the Pledge
Agreement referred to in Subparagraph A of this Section 11.7. The foregoing
power of attorney is hereby declared to be irrevocable and a power coupled with
an interest, and it shall survive and not be affected by the subsequent
Incapacity of any Pledgor and shall extend to such Pledgor's heirs, successors,
assigns and personal representatives. Each such Pledgor hereby waives any and
all defenses which may be available to contest, negate or disaffirm the action
of the Company taken in good faith under such power of attorney.
ARTICLE 12
ADMISSION OF PARTNERS
Section 12.1 Admission of Successor General Partner
--------------------------------------
A successor to all of the General Partner's General Partner Interest
pursuant to Section 11.2 hereof who is proposed to be admitted as a successor
General Partner shall be admitted to the Partnership as the General Partner,
effective upon such transfer. Any such transferee shall carry on the business
of the Partnership without dissolution. In each case, the admission shall be
subject to the successor General Partner executing and delivering to the
Partnership an acceptance of all of the terms and conditions of this Agreement
and such other documents or instruments as may be required to effect the
admission. In the case of such admission on any day other than the first day of
a Partnership Year, all items attributable to the General Partner Interest for
such Partnership Year shall be allocated between the transferring General
Partner and such successor as provided in Article 11 hereof.
Section 12.2 Admission of Additional Limited Partners
----------------------------------------
A. After the admission to the Partnership of the initial Limited
Partners on the date hereof, a Person who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the General
Partner (i) evidence of acceptance in form satisfactory to the General Partner
of all of the terms and conditions of this Agreement, including, without
limitation, the power of attorney granted in Section 2.4 hereof and (ii) such
other documents or instruments as may be required in the discretion of the
General Partner in order to effect such Person's admission as an Additional
Limited Partner.
B. Notwithstanding anything to the contrary in this Section 12.2, no
Person shall be admitted as an Additional Limited Partner without the consent of
the General Partner, which consent may be given or withheld in the General
Partner's sole and absolute discretion. The admission of any Person as an
Additional Limited Partner shall become effective on the date upon which the
name of such Person is recorded on the books and records of the Partnership,
following the receipt of the Capital Contribution in respect of such Limited
Partner, the documents set forth in Paragraph A of this Section 12.2 hereof and
the consent of the General Partner to such admission. If any Additional Limited
Partner is admitted to the Partnership on
56
<PAGE>
any day other than the first day of a Partnership Year, then Net Income, Net
Losses, each item thereof and all other items allocable among Partners and
Assignees for such Partnership Year shall be allocated among such Limited
Partner and all other Partners and Assignees by taking into account their
varying interests during the Partnership Year in accordance with Section 706(d)
of the Code, using the interim closing books method. Solely for purposes of
making such allocations, each of such items for the calendar month in which an
admission of an Additional Limited Partner occurs shall be allocated among all
the Partners and Assignees including such Additional Limited Partner. All
distributions of Available Cash with respect to which the Partnership Record
Date is before the date of such admission shall be made solely to Partners and
Assignees other than the Additional Limited Partner (other than in its capacity
as an Assignee) and except as otherwise agreed to by the Additional Limited
Partners and the General Partner, and all distributions of Available Cash
thereafter shall be made to all Partners and Assignees including such Additional
Limited Partner.
Section 12.3 Amendment of Agreement and Certificate of Limited
-------------------------------------------------
Partnership
- -----------
For the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Act to amend
the records of the Partnership and, if necessary, to prepare as soon as
practical an amendment of this Agreement (including an amendment of Exhibit A)
and, if required by law, shall prepare and file an amendment to the Certificate
and may for this purpose exercise the power of attorney granted pursuant to
Section 2.4 hereof.
ARTICLE 13
DISSOLUTION AND LIQUIDATION
Section 13.1 Dissolution
-----------
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the withdrawal of the General Partner, any successor General Partner (selected
as described in Section 13.1.B below) shall continue the business of the
Partnership. The Partnership shall dissolve, and its affairs shall be wound up,
upon the first to occur of any of the following ("Liquidating Events"):
A. the expiration of its term as provided in Section 2.5 hereof;
B. an event of withdrawal of the General Partner, as defined in the
Act, unless, within 90 days after the withdrawal, all of the remaining Partners
agree in writing, in their sole and absolute discretion, to continue the
business of the Partnership and to the appointment, effective as of the date of
withdrawal, of a substitute General Partner;
C. subject to the provisions of Section 7.3.D(1) hereof, an election
to dissolve the Partnership made by the General Partner;
57
<PAGE>
D. entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Act;
E. the sale of all or substantially all of the assets and properties
of the Partnership;
F. the Incapacity of the General Partner, unless all of the
remaining Partners in their sole and absolute discretion agree in writing to
continue the business of the Partnership and to the appointment, effective as of
a date prior to the date of such Incapacity, of a substitute General Partner; or
G. the Redemption or exchange for REIT Shares of all Partnership
Units (other than those of the General Partner).
Section 13.2 Winding Up
----------
A. Upon the occurrence of a Liquidating Event, the Partnership shall
continue solely for the purposes of winding up its affairs in an orderly manner,
liquidating its assets, and satisfying the claims of its creditors and Partners.
No Partner shall take any action that is inconsistent with, or not necessary to
or appropriate for, the winding up of the Partnership's business and affairs.
The General Partner (or, in the event there is no remaining General Partner, any
Person elected by a Majority in Interest of the Limited Partners (the
"Liquidator")) shall be responsible for overseeing the winding up and
dissolution of the Partnership and shall take full account of the Partnership's
liabilities and assets and the Partnership property shall be liquidated as
promptly as is consistent with obtaining the fair value thereof, and the
proceeds therefrom (which may, to the extent determined by the General Partner,
include shares of stock of the General Partner) shall be applied and distributed
in the following order:
(1) First, to the payment and discharge of all of the Partnership's
debts and liabilities to creditors other than the Partners;
(2) Second, to the payment and discharge of all of the Partnership's
debts and liabilities to the General Partner;
(3) Third, to the payment and discharge of all of the Partnership's
debts and liabilities to the other Partners; and
(4) The balance, if any, to the General Partner and Limited Partners
in accordance with their positive Capital Account balances,
determined after taking into account all Capital Account
adjustments for the Partnership taxable year during which the
liquidation occurs (other than those made as a result of the
liquidating distribution set forth in this Section 13.2.A(4)).
The General Partner shall not receive any additional compensation for any
services performed pursuant to this Article 13 other than reimbursement of its
expenses as provided in Section 7.4.
58
<PAGE>
B. Notwithstanding the provisions of Section 13.2.A hereof which
require liquidation of the assets of the Partnership, but subject to the order
of priorities set forth therein, if prior to or upon dissolution of the
Partnership the Liquidator determines that an immediate sale of part or all of
the Partnership's assets would be impractical or would cause undue loss to the
Partners, the Liquidator may, in its sole and absolute discretion, defer for a
reasonable time the liquidation of any assets except those necessary to satisfy
liabilities of the Partnership (including to those Partners as creditors) and/or
distribute to the Partners, in lieu of cash, as tenants in common and in
accordance with the provisions of Section 13.2.A hereof, undivided interests in
such Partnership assets as the Liquidator deems not suitable for liquidation.
Any such distributions in kind shall be made only if, in the good faith judgment
of the Liquidator, such distributions in kind are in the best interest of the
Partners, and shall be subject to such conditions relating to the disposition
and management of such properties as the Liquidator deems reasonable and
equitable and to any agreements governing the operation of such properties at
such time. The Liquidator shall determine the fair market value of any property
distributed in kind using such reasonable method of valuation as it may adopt.
Section 13.3 Compliance with Timing Requirements of Regulations
--------------------------------------------------
In the event the Partnership is "liquidated" within the meaning of
Regulations Section 1.704-1(b)(2)(ii)(g), distributions shall be made pursuant
to this Article 13 to the General Partner and Limited Partners who have positive
Capital Accounts in compliance with Regulations Section 1.704-1(b)(2)(ii)(b)(2).
If any Partner has a deficit balance in his or her Capital Account (after giving
effect to all contributions, distributions and allocations for the taxable
years, including the year during which such liquidation occurs), such Partner
shall have no obligation to make any contribution to the capital of the
Partnership with respect to such deficit, and such deficit shall not be
considered a debt owed to the Partnership or to any other Person for any purpose
whatsoever. In the discretion of the Liquidator or the General Partner, a pro
rata portion of the distributions that would otherwise be made to the General
Partner and Limited Partners pursuant to this Article 13 may be:
A. distributed to a trust established for the benefit of the General
Partner and Limited Partners for the purposes of liquidating Partnership assets,
collecting amounts owed to the Partnership, and paying any contingent or
unforeseen liabilities or obligations of the Partnership or of the General
Partner arising out of or in connection with the Partnership. The assets of any
such trust shall be distributed to the General Partner and Limited Partners from
time to time, in the reasonable discretion of the Liquidator or the General
Partner, in the same proportions and the amount distributed to such trust by the
Partnership would otherwise have been distributed to the General Partner and
Limited Partners pursuant to this Agreement; or
B. withheld to provide a reasonable reserve for Partnership
liabilities (contingent or otherwise) and to reflect the unrealized portion of
any installment obligations owed to the Partnership, provided that such withheld
-------- ----
amounts shall be distributed to the General Partner and Limited Partners as soon
as practicable.
59
<PAGE>
Section 13.4 Deemed Distribution and Recontribution
--------------------------------------
Notwithstanding any other provision of this Article 13, in the event
the Partnership is liquidated within the meaning of Regulations Section 1.704-
1(b)(2)(ii)(g) but no Liquidating Event has occurred, the Partnership's property
shall not be liquidated, the Partnership's liabilities shall not be paid or
discharged, and the Partnership's affairs shall not be wound up. Instead, the
Partnership shall be deemed to have distributed the Partnership property in kind
to the General Partner and Limited Partners, who shall be deemed to have assumed
and taken such property subject to all Partnership liabilities, all in
accordance with their respective Capital Accounts. Immediately thereafter, the
General Partner and Limited Partners shall be deemed to have recontributed the
Partnership property in kind to the Partnership, which shall be deemed to have
assumed and taken such property subject to all such liabilities.
Section 13.5 Rights of Limited Partners
--------------------------
Except as otherwise provided in this Agreement, each Limited Partner
shall look solely to the assets of the Partnership for the return of his Capital
Contribution and shall have no right or power to demand or receive property from
the General Partner. No Limited Partner shall have priority over any other
Limited Partner as to the return of his Capital Contributions, distributions or
allocations.
Section 13.6 Notice of Dissolution
---------------------
In the event a Liquidating Event occurs or an event occurs that would,
but for provisions of Section 13.1, result in a dissolution of the Partnership,
the General Partner shall, within 30 days thereafter, provide written notice
thereof to each of the Partners and to all other parties with whom the
Partnership regularly conducts business (as determined in the discretion of the
General Partner) and shall publish notice thereof in a newspaper of general
circulation in each place in which the Partnership regularly conducts business
(as determined in the discretion of the General Partner).
Section 13.7 Cancellation of Certificate of Limited Partnership
--------------------------------------------------
Upon the completion of the liquidation of the Partnership cash and
property as provided in Section 13.2 hereof, the Partnership shall be terminated
and the Certificate and all qualifications of the Partnership as a foreign
limited partnership in jurisdictions other than the State of Delaware shall be
cancelled and such other actions as may be necessary to terminate the
Partnership shall be taken.
Section 13.8 Reasonable Time for Winding-Up
------------------------------
A reasonable time shall be allowed for the orderly winding-up of the
business and affairs of the Partnership and the liquidation of its assets
pursuant to Section 13.2 hereof, in order to minimize any losses otherwise
attendant upon such winding-up, and the provisions of this Agreement shall
remain in effect between the Partners during the period of liquidation.
60
<PAGE>
Section 13.9 Waiver of Partition
-------------------
Each Partner hereby waives any right to partition of the Partnership
property.
ARTICLE 14
AMENDMENT OF PARTNERSHIP AGREEMENT; CONSENTS
Section 14.1 Amendments
----------
A. The actions requiring consent or approval of the Partners or of
the Limited Partners pursuant to this Agreement, including Section 7.3, or
otherwise pursuant to applicable law, are subject to the procedures in this
Article 14.
B. Amendments to this Agreement requiring the consent or approval of
Limited Partners may be proposed by the General Partner or by any Limited
Partner. Following such proposal, the General Partner shall submit any proposed
amendment to the Partners or of the Limited Partners, as applicable. The
General Partner shall seek the written consent or approval of the Partners or of
the Limited Partners on the proposed amendment or shall call a meeting to vote
thereon and to transact any other business that it may deem appropriate. For
purposes of obtaining a written consent, the General Partner may require a
response within a reasonable specified time, but not less than 15 days, and
failure to respond in such time period shall constitute a consent which is
consistent with the General Partner's recommendation (if so recommended) with
respect to the proposal; provided, that, an action shall become effective at
-------- ----
such time as requisite consents are received even if prior to such specified
time.
Section 14.2 Action by the Partners
----------------------
A. Meetings of the Partners may be called by the General Partner and
shall be called upon the receipt by the General Partner of a written request by
Limited Partners holding 25 percent or more of the Partnership Interests held by
Limited Partners. The call shall state the nature of the business to be
transacted. Notice of any such meeting shall be given to all Partners not less
than seven days nor more than 30 days prior to the date of such meeting.
Partners may vote in person or by proxy at such meeting. Whenever the vote of
the Percentage Interests of the Partners, or the Consent of the Partners or
Consent of the Limited Partners is permitted or required under this Agreement,
such vote or Consent may be given at a meeting of Partners or may be given in
accordance with the procedure prescribed in Section 14.1 hereof.
B. Any action required or permitted to be taken at a meeting of the
Partners may be taken without a meeting if a written consent setting forth the
action so taken is signed by the percentage as is expressly required by this
Agreement for the action in question. Such consent may be in one instrument or
in several instruments, and shall have the same force and effect as a vote of
the Percentage Interests of the Partners (expressly required by this Agreement).
Such consent shall be filed with the General Partner. An action so taken shall
be deemed to have been taken at a meeting held on the effective date so
certified.
61
<PAGE>
C. Each Limited Partner may authorize any Person or Persons to act
for him by proxy on all matters in which a Limited Partner is entitled to
participate, including waiving notice of any meeting, or voting or participating
at a meeting. Every proxy must be signed by the Limited Partner or his
attorney-in-fact. No proxy shall be valid after the expiration of 11 months
from the date thereof unless otherwise provided in the proxy. Every proxy shall
be revocable at the pleasure of the Limited Partner executing it.
D. To the extent the Company is entitled to exercise its rights and
remedies under the Pledge Agreement, the Company is hereby authorized to act for
each Pledgor with respect to such Pledgor's Partnership Interests pledged
pursuant to the Pledge Agreement by proxy on all matters in which such Pledgor
is now or hereafter entitled to participate under this Agreement by reason of
such pledged Partnership Interests, including waiving notice of any meeting, or
voting or participating at a meeting. Notwithstanding anything to the contrary
in Subparagraph C of this Section 14.2, the foregoing proxy is irrevocable and
coupled with an interest, shall survive and not be affected by the subsequent
Incapacity of any Pledgor and shall extend to such Pledgor's heirs, successors,
assigns and personal representatives and shall be valid until such time as all
collateral subject to the Pledge Agreement, if any, is returned to the Pledgors
pursuant to the terms of the Pledge Agreement.
E. Each meeting of Partners shall be conducted by the General
Partner or such other Person as the General Partner may appoint pursuant to such
rules for the conduct of the meeting as the General Partner or such other Person
deems appropriate.
ARTICLE 15
GENERAL PROVISIONS
Section 15.1 Addresses and Notice
--------------------
Any notice, demand, request or report required or permitted to be
given or made to a Partner or Assignee under this Agreement shall be in writing
and shall be deemed given or made when delivered in person or when sent by
certified first class United States mail, nationally recognized overnight
delivery service or facsimile transmission to the Partner or Assignee at the
address set forth in Exhibit A or such other address as the Partners shall
notify the General Partner in writing.
Section 15.2 Titles and Captions
-------------------
All article or section titles or captions in this Agreement are for
convenience only. They shall not be deemed part of this Agreement and in no way
define, limit, extend or describe the scope or intent of any provisions hereof.
Except as specifically provided otherwise, references to "Articles" and
"Sections" are to Articles and Sections of this Agreement.
62
<PAGE>
Section 15.3 Pronouns and Plurals
--------------------
Whenever the context may require, any pronoun used in this Agreement
shall include the corresponding masculine, feminine or neuter forms, and the
singular form of nouns, pronouns and verbs shall include the plural and vice
versa.
Section 15.4 Further Action
--------------
The parties shall execute and deliver all documents, provide all
information and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
Section 15.5 Binding Effect
--------------
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
Section 15.6 Creditors
---------
Other than as expressly set forth herein with respect to Indemnitees,
none of the provisions of this Agreement shall be for the benefit of, or shall
be enforceable by, any creditor of the Partnership.
Section 15.7 Waiver
------
No failure or delay by any party to insist upon the strict performance
of any covenant, duty, agreement or condition of this Agreement or to exercise
any right or remedy consequent upon any breach thereof shall constitute waiver
of any such breach or any other covenant, duty, agreement or condition.
Section 15.8 Counterparts
------------
This Agreement may be executed in counterparts, all of which together
shall constitute one agreement binding on all the parties hereto,
notwithstanding that all such parties are not signatories to the original or the
same counterpart. Each party shall become bound by this Agreement immediately
upon affixing its signature hereto.
Section 15.9 Applicable Law
--------------
This Agreement shall be construed in accordance with and governed by
the laws of the State of Delaware, without regard to the principles of conflicts
of law.
63
<PAGE>
Section 15.10 Invalidity of Provisions
------------------------
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
Section 15.11 Limitation to Preserve REIT Status
----------------------------------
To the extent that any amount paid or credited to the General Partner
or its officers, directors, employees or agents pursuant to Section 7.4 or
Section 7.7 would constitute gross income to the General Partner for purposes of
Sections 856(c)(2) or 856(c)(3) of the Code (a "General Partner Payment") then,
notwithstanding any other provision of this Agreement, the amount of such
General Partner Payments for any fiscal year shall not exceed the lesser of:
(i) an amount equal to the excess, if any, of (a) 4.17% of the
General Partner's total gross income (but not including the
amount of any General Partner Payments) for the fiscal year which
is described in subsections (A) through (H) of Section 856(c)(2)
of the Code over (b) the amount of gross income (within the
meaning of Section 856(c)(2) of the Code) derived by the General
Partner from sources other than those described in subsections
(A) through (H) of Section 856(c)(2) of the Code (but not
including the amount of any General Partner Payments); or
(ii) an amount equal to the excess, if any, of (a) 25% of the General
Partner's total gross income (but not including the amount of any
General Partner Payments) for the fiscal year which is described
in subsections (A) through (I) of Section 856(c)(3) of the Code
over (b) the amount of gross income (within the meaning of
Section 856(c)(3) of the Code) derived by the General Partner
from sources other than those described in subsections (A)
through (I) of Section 856(c)(3) of the Code (but not including
the amount of any General Partner Payments);
provided, however, that General Partner Payments in excess of the amounts set
- -------- -------
forth in subparagraphs (i) and (ii) above may be made if the General Partner, as
a condition precedent, obtains an opinion of tax counsel that the receipt of
such excess amounts would not adversely affect the General Partner's ability to
qualify as a REIT. To the extent General Partner Payments may not be made in a
year due to the foregoing limitations, such General Partner Payments shall carry
over and be treated as arising in the following year, provided, however, that
-------- -------
such amounts shall not carry over for more than five years, and if not paid
within such five year period, shall expire; provided further, that (i) as
-------- -------
General Partner Payments are made, such payments shall be applied first to carry
over amounts outstanding, if any, and (ii) with respect to carry over amounts
for more than one Partnership Year, such payments shall be applied to the
earliest Partnership Year first.
64
<PAGE>
Section 15.12 Entire Agreement
----------------
This Agreement contains the entire understanding and agreement among
the Partners with respect to the subject matter hereof and supersedes any other
prior written or oral understandings or agreements among them with respect
thereto.
Section 15.13 No Rights as Stockholders
-------------------------
Nothing contained in this Agreement shall be construed as conferring
upon the holders of Partnership Units any rights whatsoever as stockholders of
the General Partner, including without limitation any right to receive dividends
or other distributions made to stockholders of the General Partner or to vote or
to consent or to receive notice as stockholders in respect of any meeting of
stockholders for the election of directors of the General Partner or any other
matter.
65
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
KILROY REALTY, L. P.
By: Kilroy Realty Corporation,
its General Partner
By:_______________________________________
John B. Kilroy, Jr.
President and Chief Executive Officer
LIMITED PARTNERS:
JOHN B. KILROY, SR.
_______________________________________________
John B. Kilroy, Sr.
JOHN B. KILROY, JR.
_______________________________________________
John B. Kilroy, Jr.
PATRICE BOUZAID
SUSAN HAHN
ANNE McCAHON
DANA PANTUSO
By:_______________________________________
John B. Kilroy, Sr.
Attorney-in-Fact
MARSHALL L. McDANIEL
_______________________________________________
Marshall L. McDaniel
S-1
<PAGE>
A
PARTNERS, CONTRIBUTIONS AND PARTNERSHIP INTERESTS
A-1
<PAGE>
EXHIBIT B
NOTICE OF REDEMPTION
The undersigned hereby [irrevocably] (i) exchanges ____________ Limited
Partnership Units in Kilroy Realty, L.P. in accordance with the terms of the
Limited Partnership Agreement of Kilroy Realty, L.P. dated as of __________, as
amended, and the rights of Redemption referred to therein, (ii) surrenders such
Limited Partnership Units and all right, title and interest therein, and (iii)
directs that the cash (or, if applicable, REIT Shares) deliverable upon
Redemption or exchange be delivered to the address specified below, and if
applicable, that such REIT Shares be registered or placed in the name(s) and at
the address(es) specified below.
Dated: ________________________
Name of Limited Partner:
____________________________________
(Signature of Limited Partner)
____________________________________
(Street Address)
____________________________________
(City) (State) (Zip Code)
Signature Guaranteed by:
____________________________________
Issue REIT Shares in the name of:
Please insert social security or identifying number:
Address (if different than above):
A-2
<PAGE>
EXHIBIT C
CONSTRUCTIVE OWNERSHIP DEFINITION
The term "Constructively Owns" means ownership determined through the
application of the constructive ownership rules of Section 318 of the Code, as
modified by Section 856(d)(5) of the Code. Generally, these rules provide the
following:
a. an individual is considered as owning the Ownership Interest that is
owned, actually or constructively, by or for his spouse, his children, his
grandchildren, and his parents;
b. an Ownership Interest that is owned, actually or constructively, by or
for a partnership or estate is considered as owned proportionately by its
partners or beneficiaries;
c. an Ownership Interest that is owned, actually or constructively, by or
for a trust is considered as owned by its beneficiaries in proportion to the
actuarial interest of such beneficiaries (provided, however, that in the case of
a "grantor trust" the Ownership Interest will be considered as owned by the
grantors);
d. if 10 percent or more in value of the stock in a corporation is owned,
actually or constructively, by or for any person, such person shall be
considered as owning the Ownership Interest that is owned, actually or
constructively, by or for such corporation in that proportion which the value of
the stock which such person so owns bears to the value of all the stock in such
corporation;
e. an Ownership Interest that is owned, actually or constructively, by or
for a partner of a partnership or a beneficiary of an estate or trust shall be
considered as owned by the partnership, estate, or trust (or, in the case of a
grantor trust, the grantors);
f. if 10 percent or more in value of the stock in a corporation is owned,
actually or constructively, by or for any person, such corporation shall be
considered as owning the Ownership Interest that is owned, actually or
constructively, by or for such person;
g. if any person has an option to acquire an Ownership Interest
(including an option to acquire an option or any one of a series of such
options), such Ownership Interest shall be considered as owned by such person;
h. an Ownership Interest that is constructively owned by a person by
reason of the application of the rules described in paragraphs (a) through (g)
above shall, for purposes of applying paragraphs (a) through (g), be considered
as actually owned by such person provided, however, that (i) an Ownership
Interest constructively owned by an individual by reason of paragraph (a) shall
not be considered as owned by him for purposes of again applying paragraph (a)
in order to make another the constructive owner of such Ownership Interest, (ii)
an Ownership Interest constructively owned by a partnership, estate, trust, or
corporation by reason of the application of paragraphs (e) or (f) shall not be
considered as owned by it for purposes of applying paragraphs (b), (c), or (d)
in order to make another the constructive owner of such Ownership Interest,
(iii) if an Ownership Interest may be considered as owned by an individual under
paragraphs (a) or (g), it shall be considered as owned by him under paragraph
(g), and (iv) for purposes of the above described rules, an S corporation shall
be treated as a partnership and any stockholder of the S corporation shall be
treated as a partner of such partnership except that this rule shall not apply
for purposes of determining whether stock in the S corporation is constructively
owned by any person.
i. For purposes of the above summary of the constructive ownership rules,
the term "Ownership Interest" means the ownership of stock with respect to a
corporation and, with respect to any other type of entity, the ownership of an
interest in either its assets or net profits.
C-1
<PAGE>
EXHIBIT D
FORM OF PARTNERSHIP UNIT CERTIFICATE
CERTIFICATE FOR PARTNERSHIP UNITS OF
KILROY REALTY, L.P.
No. ____________________ ______________________ UNITS
Kilroy Realty Corporation as the General Partner of Kilroy Realty, L.P., a
Delaware limited partnership (the "Operating Partnership"), hereby certifies
that ______________________________________________________ is a Limited Partner
of the Operating Partnership whose Partnership Interests therein, as set forth
in the Agreement of Limited Partnership of Kilroy Realty, L.P., dated as of
______________, 1997 (as it may be amended, modified or supplemented from time
to time in accordance with its terms, (the "Partnership Agreement"), under which
the Operating Partnership is existing and as filed in the office of the Delaware
[State Department of Assessments and Taxation] (copies of which are on file at
the Operating Partnership's principal office at
__________________________________________________, represent ______________
units of limited partnership interest in the Operating Partnership (the
"Partnership Units").
THE PARTNERSHIP UNITS REPRESENTED BY THIS CERTIFICATE OR INSTRUMENT MAY NOT
BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR OTHERWISE DISPOSED OF
UNLESS SUCH TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER
DISPOSITION COMPLIES WITH THE PROVISIONS OF THE PARTNERSHIP AGREEMENT (A COPY OF
WHICH IS ON FILE WITH THE OPERATING PARTNERSHIP). EXCEPT AS OTHERWISE PROVIDED
IN THE PARTNERSHIP AGREEMENT, NO TRANSFER, SALE, ASSIGNMENT, PLEDGE,
HYPOTHECATION OR OTHER DISPOSITION OF THE PARTNERSHIP UNITS REPRESENTED BY THIS
CERTIFICATE MAY BE MADE EXCEPT (A) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR (B) IF
THE OPERATING PARTNERSHIP HAS BEEN FURNISHED WITH A SATISFACTORY OPINION OF
COUNSEL FOR THE HOLDER OF THE PARTNERSHIP UNITS REPRESENTED BY THIS CERTIFICATE
THAT SUCH TRANSFER, SALE ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION
IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF THE ACT AND THE RULES AND
REGULATIONS IN EFFECT THEREUNDER.
DATED: _____________________________, 1997.
KILROY REALTY CORPORATION
General Partner of
Kilroy Realty, L.P.
ATTEST:
By: _____________________________ By: _____________________________
D-1
<PAGE>
EXHIBIT E
SCHEDULE OF PARTNERS' OWNERSHIP
WITH RESPECT TO TENANTS
E-1
<PAGE>
EXHIBIT F
SCHEDULE OF REIT SHARES
ACTUALLY OR CONSTRUCTIVELY OWNED BY LIMITED PARTNERS
OTHER THAN THOSE ACQUIRED PURSUANT TO AN EXCHANGE
F-1
<PAGE>
EXHIBIT G
SCHEDULE OF CERTAIN PROPERTY OF THE PARTNERSHIP
2260 E. Imperial Highway, El Segundo, California
G-1
<PAGE>
EXHIBIT 10.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of __________, 1997, is
entered into by and among Kilroy Realty Corporation, a Maryland corporation (the
"Company" or the "REIT"), Kilroy Realty, L.P., a Delaware limited partnership
(the "Operating Partnership"), and the unit holders whose names are set forth on
the signature pages hereto (each, a "Unit Holder" and collectively, the "Unit
Holders").
RECITALS
--------
WHEREAS, in connection with the initial public offering of shares of
the Company's common stock, par value $.01 per share (the "Common Stock"), the
Company, the Operating Partnership and the Unit Holders as the parties which
hold ownership interests in certain office properties and other assets (the
"Properties") will engage in certain formation transactions whereby the Unit
Holders will contribute to the Operating Partnership their interests in the
Properties;
WHEREAS, the Unit Holders will receive units of limited partnership
interests ("OP Units") in the Operating Partnership in exchange for their
respective interests in the Properties and the Company will be the general
partner of the Operating Partnership;
WHEREAS, pursuant to the Partnership Agreement (as defined below), OP
Units owned by the Unit Holders will be redeemable for cash or exchangeable for
shares of Common Stock of the Company upon the terms and subject to the
conditions contained therein; and
WHEREAS, the Unit Holders are willing to contribute their respective
interests in the Properties in consideration of receiving the registration
rights provided for in this Agreement;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. Definitions. In addition to the definitions set forth
-----------
above, the following terms, as used herein, have the following meanings:
"Affiliate" of any Person means any other Person directly or
indirectly controlling or controlled by or under common control with such
Person. For the purposes of this definition, "control" when used with respect
to any Person, means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such Person,
1
<PAGE>
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Agreement" means this Registration Rights Agreement, as it may be
amended, supplemented or restated from time to time.
"Articles of Incorporation" means the Articles of Amendment and
Restatement of the Company as filed with the Secretary of State of the State of
Maryland on _____________, 1997, as the same may be amended, modified or
restated from time to time.
"Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in New York, New York or Los Angeles, California are
authorized by law to close.
"Code" means the Internal Revenue Code of 1986, as amended from time
to time or any successor statute thereto, as interpreted by the applicable
regulations thereunder.
"Commission" means the Securities and Exchange Commission.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchangeable OP Units" means OP Units which may be redeemable for
cash or exchangeable for Common Stock pursuant to Section 8.6 of the Partnership
Agreement (without regard to any limitations on the exercise of such exchange
right as a result of the Ownership Limit Provisions, as defined below).
"General Partner" means the Company or its successors as general
partner of the Operating Partnership.
"Holder" means any Unit Holder who is the record or beneficial owner
of any Registrable Security or any assignee or transferee of such Registrable
Security (including assignments or transfers of Registrable Securities to such
assignees or transferees as a result of the foreclosure on any loans secured by
such Registrable Securities) unless such Registrable Security is acquired in a
public distribution pursuant to a registration statement under the Securities
Act or pursuant to transactions exempt from registration under the Securities
Act, in each such case where securities sold in such transaction may be resold
without subsequent registration under the Securities Act.
"Incapacitated" shall have the meaning set forth in the Partnership
Agreement.
"Initial Public Offering" means the offering of the Company's Common
Stock pursuant to the Form S-11 Registration Statement (No. 333-15553) filed by
the Company with the Commission under the Securities Act.
"Ownership Limit Provisions" mean the various provisions of the
Articles of Incorporation set forth in Article IV thereof restricting the
ownership of Common Stock by certain Persons to specified percentages of the
outstanding Common Stock.
2
<PAGE>
"Partnership Agreement" means the amended and restated agreement of
limited partnership of the Operating Partnership dated as of _________, 1997, as
the same may be amended, modified or restated from time to time.
"Person" means an individual or a corporation, partnership, limited
liability company, association, trust, or any other entity or organization,
including a government or political subdivision or an agency or instrumentality
thereof.
"Piggy-Back Registration" means a Piggy-Back Registration as defined
in Section 2.2 hereof.
"REIT" means a real estate investment trust under Section 856 through
Section 860 of the Code.
"Registrable Securities" means shares of Common Stock of the Company
at any time owned, either of record or beneficially, by any Holder and no matter
how acquired (including, without limitation, shares of Common Stock issuable
upon exchange of Exchangeable OP Units) until (i) a registration statement
covering such securities has been declared effective by the Commission and such
shares have been sold or transferred pursuant to such effective registration
statement, (ii) such shares are sold under circumstances in which all of the
applicable conditions of Rule 144 under the Securities Act (or any similar
provisions then in force) under the Securities Act are met or under which such
shares may be sold pursuant to Rule 144(k) under the Securities Act or (iii)
such shares have been otherwise transferred in a transaction that would
constitute a sale thereof under the Securities Act, the Company has delivered a
new certificate or other evidence of ownership for such shares not bearing the
Securities Act restricted stock legend and such shares may be resold without
subsequent registration under the Securities Act.
"Securities Act" means the Securities Act of 1933, as amended.
"Selling Holder" means a Holder who is selling Registrable Securities
pursuant to a registration statement under the Securities Act pursuant to this
Agreement.
"Underwriter" means a securities dealer who purchases any Registrable
Securities as principal and not as part of such dealer's market-making
activities.
ARTICLE II
REGISTRATION RIGHTS
-------------------
SECTION 2.1. Shelf Registration. Commencing on or after the second
------------------
anniversary of the date that the Common Stock is first offered to the public in
the Initial Public Offering, the Company shall prepare and file a "shelf"
registration statement with respect to shares of Common Stock issuable upon the
exchange of Exchangeable OP Units covering the issuance by the Company and the
resale thereof by the Holders on an appropriate form for an offering to be made
on a continuous basis pursuant to Rule 415 under the Securities Act (the "Shelf
Registration Statement") and shall use its best efforts to cause the Shelf
Registration
3
<PAGE>
Statement to be declared effective on or as soon as practicable after such
second anniversary, and to keep such Shelf Registration Statement continuously
effective for a period ending when all shares of Common Stock covered by the
Shelf Registration Statement have been issued and resold.
SECTION 2.2. Piggy-Back Registration. (a) If the Company proposes to
-----------------------
file a registration statement under the Securities Act with respect to an
offering by the Company for its own account (a "Primary Registration") or for
the account of any of its respective securityholders of Common Stock (other than
(i) any registration statement filed by the Company under the Securities Act
relating to an offering of Common Stock for its own account as a result of the
exercise of the exchange rights set forth in Section 8.6 of the Partnership
Agreement, and covering the resale by the Holders of the shares of common stock
received in such exchange, or (ii) a registration statement on Form S-4 or S-8
(or any substitute form that may be adopted by the Commission) or filed in
connection with an exchange offer or offering of securities solely to the
Company's existing securityholders) (a "Secondary Registration"), then the
Company shall give written notice of such proposed filing to the Holders of
Registrable Securities as soon as practicable (but in no event less than ten
(10) days before the anticipated filing date), and such notice shall offer such
Holders the opportunity to register such number of shares of Registrable
Securities as each such Holder may request (a "Piggy-Back Registration"). The
Company shall use its commercially reasonable efforts to cause the managing
Underwriter or Underwriters of a proposed underwritten offering to permit the
Registrable Securities requested to be included in a Piggy-Back Registration to
be included on the same terms and conditions as any similar securities of the
Company included therein.
(b) Withdrawal from Registration. Any Holder requesting inclusion of
----------------------------
Registrable Securities pursuant to this Section 2.2 may, at any time prior to
the effective date of the registration statement relating to such registration,
revoke such request by delivering written notice of such revocation to the
Company; provided, however, that if the Company, in consultation with its
-------- -------
financial and legal advisors, determines that such revocation would materially
delay the registration or otherwise require a recirculation of the prospectus
contained in the registration statement, then such Holder shall have no such
right to revoke its request. If the withdrawal of any Registrable Securities
would allow, within the marketing limitations set forth above, the inclusion in
the underwriting of a greater number of shares of Registrable Securities, then,
to the extent practicable and without delaying the underwriting, the Company
shall offer to the Holders an opportunity to include additional shares of
Registrable Securities in the proportions discussed in Section 2.3 below.
(c) Termination or Withdrawal by the Company. The Company shall have
----------------------------------------
the right to terminate or withdraw any registration initiated by it under this
Section 2.2 prior to the effectiveness of such registration whether or not any
Holder has elected to include securities in such registration.
4
<PAGE>
SECTION 2.3. Reduction of Offering. Notwithstanding anything
---------------------
contained herein, if the managing Underwriter or Underwriters of an offering
described in Section 2.2 hereof are of the opinion that (i) the size of the
offering that the Holders, the Company and/or such other persons intend to make
or (ii) the kind of securities that the Holders, the Company and/or any other
persons or entities intend to include in such offering are such that the success
of the offering would be materially and adversely affected by inclusion of the
Registrable Securities requested to be included, then (A) if the size of the
offering is the basis of such Underwriter's opinion, the amount of securities to
be offered for the accounts of Holders shall be reduced pro rata (according to
the Registrable Securities proposed for registration) to the extent necessary to
reduce the total amount of securities to be included in such offering to the
amount recommended by such managing Underwriter or Underwriters; provided that
--------
if securities are being offered for the account of other persons or entities as
well as the Company, then (1) in the case of a Primary Registration, the
reduction in the amount of securities requested to be offered shall be made
first pro rata among securities offered for the accounts of Holders and such
other persons or entities, and (2) in the case of a Secondary Registration, the
reduction in the amount of securities requested to be offered shall be made in
accordance with the terms of the registration rights agreement pursuant to which
such Secondary Registration is made, provided that if any such registration
rights agreement is silent with respect to reductions in shares being registered
thereunder, then with respect to the Registrable Securities intended to be
offered by Holders, the proportion by which the amount of such class of
securities intended to be offered by Holders is reduced shall not exceed the
proportion by which the amount of such class of securities intended to be
offered by such other persons or entities is reduced and (B) if the combination
of securities to be offered is the basis of such Underwriter's opinion, (x) the
Registrable Securities to be included in such offering shall be reduced as
described in clause (A) above (subject to the proviso in clause (A)) or, (y) if
the actions described in clause (x) would, in the judgment of the managing
Underwriter, be insufficient to substantially eliminate the adverse effect that
inclusion of the Registrable Securities requested to be included would have on
such offering, such Registrable Securities will be excluded from such offering.
SECTION 2.4. Registration Procedures; Filings; Information. In
---------------------------------------------
connection with any Shelf Registration Statement under Section 2.1 hereof, the
Company will use its best efforts to effect the registration and the sale of
such Registrable Securities in accordance with the intended method of
disposition thereof as quickly as practicable, and in connection with any such
request:
(a) The Company will as expeditiously as possible prepare and file
with the Commission a registration statement on any form for which the Company
then qualifies or which counsel for the Company shall deem appropriate and which
form shall be available for the sale of the Registrable Securities to be
registered thereunder in accordance with the intended method of distribution
thereof, and use its best efforts to cause such filed registration statement to
become and remain effective for a period of not less than 180 days or in the
case of a Shelf Registration Statement as provided in Section 2.1 hereof.
(b) The Company will, if requested, prior to filing a registration
statement or prospectus or any amendment or supplement thereto, furnish to each
Selling Holder
5
<PAGE>
and each Underwriter, if any, of the Registrable Securities covered by such
registration statement or prospectus copies of such registration statement or
prospectus or any amendment or supplement thereto as proposed to be filed, and
thereafter furnish to such Selling Holder and Underwriter, if any, such number
of conformed copies of such registration statement, each amendment and
supplement thereto (in each case including all exhibits thereto and documents
incorporated by reference therein), the prospectus included in such registration
statement (including each preliminary prospectus) and such other documents as
such Selling Holder or Underwriter may reasonably request in order to facilitate
the disposition of the Registrable Securities owned by such Selling Holder.
(c) After the filing of the registration statement, the Company will
promptly notify each Selling Holder of Registrable Securities covered by such
registration statement of any stop order issued or threatened by the Commission
and take all reasonable actions required to prevent the entry of such stop order
or to remove it if entered.
(d) The Company will use its best efforts to (i) register or qualify
the Registrable Securities under such other securities or blue sky laws of such
jurisdictions in the United States (where an exemption is not available) as any
Selling Holder or managing Underwriter or Underwriters, if any, reasonably (in
light of such Selling Holder's intended plan of distribution) requests and (ii)
cause such Registrable Securities to be registered with or approved by such
other governmental agencies or authorities as may be necessary by virtue of the
business and operations of the Company and do any and all other acts and things
that may be reasonably necessary or advisable to enable such Selling Holder to
consummate the disposition of the Registrable Securities owned by such Selling
Holder; provided that the Company will not be required to (A) qualify generally
--------
to do business in any jurisdiction where it would not otherwise be required to
qualify but for this paragraph (d), (B) subject itself to taxation in any such
jurisdiction or (C) consent to general service of process in any such
jurisdiction.
(e) The Company will immediately notify each Selling Holder of such
Registrable Securities, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the occurrence of an event
requiring the preparation of a supplement or amendment to such prospectus so
that, as thereafter delivered to the purchasers of such Registrable Securities,
such prospectus will not contain an untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances then existing, not
misleading and promptly make available to each Selling Holder a reasonable
number of copies of any such supplement or amendment.
(f) The Company will enter into customary agreements (including an
underwriting agreement, if any, in customary form) and take such other actions
as are reasonably required in order to expedite or facilitate the disposition of
such Registrable Securities.
(g) The Company will make available for inspection by any Selling
Holder of such Registrable Securities, any Underwriter participating in any
disposition pursuant to such registration statement and any attorney, accountant
or other professional retained by any such Selling Holder or Underwriter
(collectively, the "Inspectors"), all financial and other
6
<PAGE>
records, pertinent corporate documents and properties of the Company
(collectively, the "Records") as shall be reasonably necessary to enable them to
exercise their due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information reasonably requested by any
Inspectors in connection with such registration statement. Records which the
Company determines, in good faith, to be confidential and which it notifies the
Inspectors are confidential shall not be disclosed by the Inspectors unless (i)
the disclosure of such Records is necessary to avoid or correct a misstatement
or omission in such registration statement or (ii) the release of such Records
is ordered pursuant to a subpoena or other order from a court of competent
jurisdiction. Each Selling Holder of such Registrable Securities agrees that
information obtained by it as a result of such inspections shall be deemed
confidential and shall not be used by it as the basis for any market
transactions in the securities of the company or its Affiliates or otherwise
disclosed by it unless and until such is made generally available to the public.
Each Selling Holder of such Registrable Securities further agrees that it will,
upon learning that disclosure of such Records is sought in a court of competent
jurisdiction, give notice to the Company and allow the Company, at its expense,
to undertake appropriate action to prevent disclosure of the Records deemed
confidential.
(h) The Company will furnish to each Selling Holder and to each
Underwriter, if any, a signed counterpart, addressed to such Selling Holder or
Underwriter, of (i) an opinion or opinions of counsel to the Company and (ii) a
comfort letter or comfort letters from the Company's independent public
accountants (to the extent permitted by the standards of the American Institute
of Certified Public Accountants), each in customary form and covering such
matters of the type customarily covered by opinions or comfort letters, as the
case may be, as the Holders of a majority of the Registrable Securities included
in such offering or the managing Underwriter or Underwriters therefor reasonably
requests.
(i) The Company will otherwise use its best efforts to comply with all
applicable rules and regulations of the Commission, and make available to its
securityholders, as soon as reasonably practicable, an earnings statement
covering a period of twelve (12) months, beginning within three (3) months after
the effective date of the registration statement, which earnings statement shall
satisfy the provisions of Section 11(a) of the Securities Act and Rule 158 of
the Commission promulgated thereunder (or any successor rule or regulation
hereafter adopted by the Commission).
(j) The Company will use its best efforts to cause all such
Registrable Securities to be listed on each securities exchange on which similar
securities issued by the Company are then listed.
The Company may require, as a condition precedent to the obligations
of the Company under the Agreement, each Selling Holder of Registrable
Securities to promptly furnish in writing to the Company such information
regarding such selling Holder, the Registrable Securities held by it and the
intended method of distribution of the Registrable Securities as the Company may
from time to time reasonably request and such other information as may be
legally required in connection with such registration.
7
<PAGE>
Each Selling Holder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 2.4(e)
hereof, such Selling Holder will forthwith discontinue disposition of
Registrable Securities pursuant to the registration statement and prospectus
covering such Registrable Securities until such Selling Holder's receipt of the
copies of the supplemented or amended prospectus contemplated by Section 2.4(e)
hereof, and, if so directed by the Company, such Selling Holder will deliver to
the Company all copies, other than permanent file copies then in such Selling
Holder's possession, of the most recent prospectus covering such Registrable
Securities at the time of receipt of such notice. Each Selling Holder of
Registrable Securities agrees that it will immediately notify the Company at any
time when a prospectus relating to the registration of such Registrable
securities is required to be delivered under the Securities Act of the happening
of an event as a result of which information previously furnished by such
Selling Holder to the Company in writing for inclusion in such prospectus
contains an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances in which they were made, not misleading. In the
event the Company shall give such notice, the Company shall extend the period
during which such registration statement shall be maintained effective
(including the period referred to in Section 2.4(a) hereof) by the number of
days during the period from and including the date of the giving of notice
pursuant to Section 2.4(e) hereof to the date when the Company shall make
available to the Selling Holders of Registrable Securities covered by such
registration statement a prospectus supplemented or amended to conform with the
requirements of Section 2.4(e) hereof.
SECTION 2.5. Registration Expenses. In connection with any
---------------------
registration statement required to be filed hereunder, the Company shall pay the
following registration expenses incurred in connection with the registration
hereunder (the "Registration Expenses"): (i) all registration and filing fees,
(ii) fees and expenses of compliance with securities or blue sky laws (including
reasonable fees and disbursements of counsel in connection with blue sky
qualifications of the Registrable Securities), (iii) printing expenses, (iv)
internal expenses (including, without limitation, all salaries and expenses of
its officers and employees performing legal or accounting duties), (v) the fees
and expenses incurred in connection with the listing of the Registrable
Securities on each securities exchange on which similar securities issued by the
Company are then listed, (vi) reasonable fees and disbursements of counsel for
the Company and customary fees and expenses for independent certified public
accountants retained by the Company (including the expenses of any comfort
letters or costs associated with the delivery by independent certified public
accountants of a comfort letter or comfort letters requested pursuant to Section
2.4(h) hereof), (vii) the reasonable fees and expenses of any special experts
retained by the Company in connection with such registration, and (viii)
reasonable fees and expenses of one counsel (who shall be reasonably acceptable
to the Company) for the Selling Holders. The Company shall have no obligation
to pay any underwriting fees, discounts or commissions attributable to the sale
of Registrable Securities, or any out-of-pocket expenses of the Holders (or the
agents who manage their accounts) or any transfer taxes relating to the
registration or sale of the Registrable Securities.
SECTION 2.6. Indemnification by the Company. The Company agrees to
------------------------------
indemnify and hold harmless each Selling Holder of Registrable Securities, its
officers, directors
8
<PAGE>
and agents, and each Person, if any, who controls such Selling Holder within the
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
from and against any and all losses, claims, damages and liabilities caused by
any untrue statement or alleged untrue statement of a material fact contained in
any registration statement or prospectus relating to the Registrable Securities
(as amended or supplemented if the Company shall have furnished any amendments
or supplements thereto) or any preliminary prospectus, or caused by any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances in which they were made, not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
furnished in writing to the Company by such Selling Holder or on such Selling
Holder's behalf expressly for inclusion therein. The Company also agrees to
indemnify any Underwriters of the Registrable Securities, their officers and
directors and each Person who controls such Underwriters within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act on
substantially the same basis as that of the indemnification of the Selling
Holders provided in this Section 2.6, provided that the foregoing indemnity
--------
with respect to any preliminary prospectus shall not inure to the benefit of any
Underwriter of the Registrable Securities from whom the person asserting any
such losses, claims, damages or liabilities purchased the Registrable Securities
which are the subject thereof if such person did not receive a copy of the
prospectus (or the prospectus as supplemented) at or prior to the confirmation
of the sale of such Registrable Securities to such person in any case where such
delivery is required by the Securities Act and the untrue statement or omission
of a material fact contained in such preliminary prospectus was corrected in the
prospectus (or the prospectus as supplemented).
SECTION 2.7. Indemnification by Holders of Registrable Securities.
----------------------------------------------------
Each Selling Holder agrees, severally but not jointly, to indemnify and hold
harmless the Company, its officers, directors and agents and each Person, if
any, who controls the Company within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act to the same extent as the
foregoing indemnity from the Company to such Selling Holder, but only with
respect to information relating to such Selling Holder furnished in writing by
such Selling Holder or on such Selling Holder's behalf expressly for use in any
registration statement or prospectus relating to the Registrable Securities, or
any amendment or supplement thereto, or any preliminary prospectus. In case any
action or proceeding shall be brought against the Company or its officers,
directors or agents or any such controlling person, in respect of which
indemnity may be sought against such Selling Holder, such Selling Holder shall
have the rights and duties given to the Company, and the Company or its
officers, directors or agents or such controlling person shall have the rights
and duties given to such Selling Holder, by Section 2.6 hereof. Each Selling
Holder also agrees to indemnify and hold harmless Underwriters of the
Registrable Securities, their officers and directors and each Person who
controls such Underwriters within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act on substantially the same basis as that of
the indemnification of the Company provided in this Section 2.7.
SECTION 2.8. Conduct of Indemnification Proceedings. In case any
--------------------------------------
proceeding (including any governmental investigation) shall be instituted
involving any person in respect of
9
<PAGE>
which indemnity may be sought pursuant to Sections 2.6 or 2.7 hereof, such
person (an "Indemnified Party") shall promptly notify the person against whom
such indemnity may be sought (an "Indemnifying Party") in writing and the
Indemnifying Party shall assume the defense thereof, including the employment of
counsel reasonably satisfactory to such Indemnified Party, and shall assume the
payment of all fees and expenses. In any such proceeding, any Indemnified Party
shall have the right to retain its own counsel, but the fees and expenses of
such counsel shall be at the expense of such Indemnified Party unless (i) the
Indemnifying Party and the Indemnified Party shall have mutually agreed to the
retention of such counsel or (ii) the named parties to any such proceeding
(including any impleaded parties) include both the Indemnified Party and the
Indemnifying Party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them. It
is understood that the Indemnifying Party shall not, in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys (in
addition to any local counsel) at any time for all such Indemnified Parties, and
that all such fees and expenses shall be reimbursed as they are incurred. In the
case of any such separate firm for the Indemnified Parties, such firm shall be
designated in writing by (i) in the case of Persons indemnified pursuant to
Section 2.6 hereof, by the Selling Holders which owned a majority of the
Registrable Securities sold under the applicable registration statement and (ii)
in the case of Persons indemnified pursuant to Section 2.7 hereof, the Company.
The Indemnifying Party shall not be liable for any settlement of any proceeding
effected without its written consent, but if settled with such consent, or if
there be a final judgment for the plaintiff, the Indemnifying Party shall
indemnify and hold harmless such Indemnified Parties from and against any loss
or liability (to the extent stated above) by reason of such settlement or
judgment. Notwithstanding the foregoing sentence, if at any time an Indemnified
Party shall have requested an Indemnifying Party to reimburse the Indemnified
Party for fees and expenses of counsel as contemplated by the third sentence of
this paragraph, the Indemnifying Party agrees that it shall be liable for any
settlement of any proceeding effected without its written consent if (i) such
settlement is entered into more than thirty (30) Business Days after receipt by
such Indemnifying Party of the aforesaid request and (ii) such Indemnifying
Party shall not have reimbursed the Indemnified Party in accordance with such
request prior to the date of such settlement. No Indemnifying Party shall,
without the prior written consent of the Indemnified Party, effect any
settlement of any pending or threatened proceeding in which any Indemnified
Party is or could have been a party and indemnity could have been sought
hereunder by such Indemnified Party, unless such settlement includes an
unconditional release of such Indemnified Party from all liability arising out
of such proceeding.
SECTION 2.9. Contribution. If the indemnification provided for in
------------
Sections 2.6 or 2.7 hereof is unavailable to an Indemnified Party or
insufficient in respect of any losses, claims, damages or liabilities referred
to therein, then each such Indemnifying Party, in lieu of indemnifying such
Indemnified Party, shall contribute to the amount paid or payable by such
Indemnified Party as a result of such losses, claims, damages or liabilities (i)
as between the Company and the Selling Holders on the one hand and the
Underwriters on the other, in such proportion as is
10
<PAGE>
appropriate to reflect the relative benefits received by the Company and the
Selling Holders on the one hand and the Underwriters on the other from the
offering of the securities, or if such allocation is not permitted by applicable
law, in such proportion as is appropriate to reflect not only the relative
benefits but also the relative fault of the Company and the Selling Holders on
the one hand and of the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations and (ii) as
between the Company on the one hand and each Selling Holder on the other, in
such proportion as is appropriate to reflect the relative fault of the Company
and of each Selling Holder in connection with such statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative benefits received by the Company
and the Selling Holders on the one hand and the Underwriters on the other shall
be deemed to be in the same proportion as the total proceeds from the offering
(net of underwriting discounts and commissions but before deducting expenses)
received by the Company and the Selling Holders bear to the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover page of the prospectus. The relative fault of
the Company and the Selling Holders on the one hand and of the Underwriters on
the other shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
and the Selling Holders or by the Underwriters. The relative fault of the
Company on the one hand and of each Selling Holder on the other shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or such Selling
Holder, and the Company's and the Selling Holder's relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The Company and the Selling Holders agree that it would not be just
and equitable if contribution pursuant to this Section 2.9 were determined by
pro rata allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. The amount paid or payable by an Indemnified Party as a result of
the losses, claims, damages or liabilities referred to in Sections 2.6 and 2.7
hereof shall be deemed to include, subject to the limitations set forth above,
any legal or other expenses reasonably incurred by such Indemnified Party in
connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 2.9, no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission, and no Selling Holder
shall be required to contribute any amount in excess of the amount by which the
total price at which the securities of such Selling Holder were offered to the
public exceeds the amount of any damages which such Selling Holder has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Selling Holder's obligations to contribute pursuant to
this Section 2.9 are several in the
11
<PAGE>
proportion that the proceeds of the offering received by such Selling Holder
bears to the total proceeds of the offering received by all the Selling Holders
and not joint.
SECTION 2.10. Participation in Underwritten Registrations. No Person
-------------------------------------------
may participate in any underwritten registration hereunder unless such Person
(a) agrees to sell such Person's securities on the basis provided in any
underwriting arrangements approved by the Persons entitled hereunder to approve
such arrangements and (b) completes and executes all questionnaires, powers of
attorney, indemnities, underwriting agreements and other documents in customary
form and reasonably required under the terms of such underwriting arrangements
and these registration rights provided for in this Article II.
SECTION 2.11. Rule 144. The Company covenants that it will file any
--------
reports required to be filed by it under the Securities Act and the Exchange Act
and that it will take such further action as any Holder may reasonably request,
all to the extent required from time to time to enable Holders to sell
Registrable Securities without registration under the Securities Act within the
limitation of the exemptions provided by (a) Rule 144 under the Securities Act,
as such Rule may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the Commission. Upon the request of any Holder,
the Company will deliver to such Holder a written statement as to whether it has
complied with such requirements.
SECTION 2.12. Holdback Agreements.
-------------------
(a) Restrictions on Public Sale by Holder of Registrable Securities.
---------------------------------------------------------------
To the extent not inconsistent with applicable law, each Holder whose securities
are included in a registration statement agrees, upon receipt of prior written
notice from the Company received not later than 17 days prior to the effective
date of such registration statement, not to effect any sale or distribution of
the issue being registered or a similar security of the Company, or any
securities convertible into or exchangeable or exercisable for such securities,
including a sale pursuant to Rule 144 under the Securities Act, during the 14
days prior to, and during the 90-day period beginning on, the effective date of
such registration statement (except as part of such registration), if and to the
extent requested in writing by the Company in the case of a non-underwritten
public offering or if and to the extent requested in writing by the managing
Underwriter or Underwriters in the case of an underwritten public offering.
(b) If the Company determines in its good faith judgment that the
filing of the Shelf Registration Statement under Section 2.1 hereof or the use
of any related prospectus would require the disclosure of non-public material
information that the Company has a bona fide business purpose for preserving as
confidential or the disclosure of which would impede the Company's ability to
consummate a material transaction, and that the Company is not otherwise
required by applicable securities laws or regulations to disclose, upon written
notice of such determination by the Company, the rights of the Holders to offer,
sell or distribute any Registrable Securities pursuant to the Shelf Registration
Statement or to require the Company to take action with respect to the
registration or sale of any Registrable Securities pursuant to the Shelf
Registration Statement shall be suspended until the earlier of (i) the date upon
which the Company notifies the Holders in writing that suspension of such rights
for the grounds set forth
12
<PAGE>
in this Section 2.11(b) is no longer necessary and (ii) 180 days. The Company
agrees to give such notice as promptly as practicable following the date that
such suspension of rights is no longer necessary.
(c) If all reports required to be filed by the Company pursuant to the
Exchange Act have not been filed by the required date without regard to any
extension, or if the consummation of any business combination by the Company has
occurred or is probable for purposes of Rule 3-05 or Article 11 of Regulation
S-X under the Act, upon written notice thereof by the Company to the Holders,
the rights of the Holders to offer, sell or distribute any Registrable
Securities pursuant to the Shelf Registration Statement or to require the
Company to take action with respect to the registration or sale of any
Registrable Securities pursuant to the Shelf Registration Statement shall be
suspended until the date on which the Company has filed such reports or obtained
and filed the financial information required by Rule 3-05 or Article 11 of
Regulation S-X to be included or incorporated by reference, as applicable, in
the Shelf Registration Statement, and the Company shall notify the Holders as
promptly as practicable when such suspension is no longer required.
ARTICLE III
MISCELLANEOUS
SECTION 3.1. New York Stock Exchange Listing. In the event that the
-------------------------------
Company shall issue any Common Stock in exchange for OP Units pursuant to
Section 8.6 of the Partnership Agreement, then in any such case the Company
agrees to cause any such shares of Common Stock to be listed on the New York
Stock Exchange prior to or concurrently with the issuance thereof by the
Company.
SECTION 3.2. Remedies. In addition to being entitled to exercise all
--------
rights provided herein and granted by law, including recovery of damages, the
Holders shall be entitled to specific performance of the rights under this
Agreement. The Company agrees that monetary damages would not be adequate
compensation for any loss incurred by reason of a breach by it of the provisions
of this Agreement and hereby agrees to waive the defense in any action for
specific performance that a remedy at law would be adequate.
SECTION 3.3. Amendments and Waivers. The provisions of this
----------------------
Agreement, including the provisions of this sentence, may not be amended,
modified or supplemented, and waivers or consents to departures from the
provisions hereof may not be given without the prior written consent of the
Company and the Holders or any such Holder's representative if any such Holder
is Incapacitated. No failure or delay by any party to insist upon the strict
performance of any covenant, duty, agreement or condition of this Agreement or
to exercise any right or remedy consequent upon any breach thereof shall
constitute a waiver of any such breach or any other covenant, duty, agreement or
condition.
SECTION 3.4. Notices. All notices and other communications in
-------
connection with this Agreement shall be made in writing by hand delivery,
registered first-class mail, telex, telecopier, or air courier guaranteeing
overnight delivery:
13
<PAGE>
(1) if to any Unit Holder, initially c/o Kilroy Realty Corporation,
2250 East Imperial Highway, El Segundo, California 90245 (Attention: President
and Chief Executive Officer), or to such other address and to such other Persons
as the Unit Holders may hereafter specify in writing; and
(2) if to the Company, initially at 2250 East Imperial Highway, El
Segundo, California 90245 (Attention: President and Chief Executive Officer), or
to such other address as the Company may hereafter specify in writing.
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; when received if
deposited in the mail, postage prepaid, if mailed; when answered back, if
telexed; when receipt acknowledged, if telecopied; and on the next business day,
if timely delivered to an air courier guaranteeing overnight delivery.
SECTION 3.5. Successors and Assigns. Except as expressly provided in
----------------------
this Agreement, the rights and obligations of the Holders under this Agreement
shall not be assignable by any Holder to any Person that is not a Holder. This
Agreement shall be binding upon the parties hereto and their respective
successors and assigns.
SECTION 3.6. Counterparts. This Agreement may be executed in any
------------
number of counterparts and by the parties hereto in separate counterparts, each
of which when so executed shall be deemed to be an original and all of which
taken together shall constitute one and the same agreement. Each party shall
become bound by this Agreement immediately upon affixing its signature hereto.
SECTION 3.7. Governing Law. This Agreement shall be governed by and
-------------
construed in accordance with the internal laws of the State of California
without regard to the choice of law provisions thereof.
SECTION 3.8. Severability. In the event that any one or more of the
------------
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
SECTION 3.9. Entire Agreement. This Agreement is intended by the
----------------
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company with
respect to the Registrable Securities. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
SECTION 3.10. Headings. The headings in this Agreement are for
--------
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
14
<PAGE>
SECTION 3.11. No Third Party Beneficiaries. Nothing express or
----------------------------
implied herein is intended or shall be construed to confer upon any person or
entity, other than the parties hereto and their respective successors and
assigns, any rights, remedies or other benefits under or by reason of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
KILROY REALTY CORPORATION,
a Maryland corporation
By: _____________________________________
John B. Kilroy, Jr.
President and Chief Executive Officer
KILROY REALTY, L.P., a Delaware limited
partnership
By: Kilroy Realty Corporation,
its general partner
By: _____________________________________
John B. Kilroy, Jr.
President and Chief Executive Officer
KILROY INDUSTRIES,
a California corporation
By: _____________________________________
John B. Kilroy, Jr.
President and Chief Executive Officer
15
<PAGE>
PATRICE BOUZAID
SUSAN HAHN
ANNE McCAHON
DANA PANTUSO
By: _____________________________________
John B. Kilroy, Sr.
Attorney-in-Fact
MARSHALL McDANIEL
_________________________________________
16
<PAGE>
EXHIBIT 10.3
OMNIBUS OPTION AGREEMENT
BY AND AMONG
KILROY REALTY, L.P.
AND
THE GRANTORS NAMED HEREIN
Dated as of October 30, 1996
<PAGE>
OMNIBUS OPTION AGREEMENT
------------------------
This Omnibus Option Agreement (this "Agreement") is executed as of the
___ day of October, 1996 by Kilroy Realty, L.P., a Delaware limited partnership
(the "Operating Partnership" or "Optionee"), and the grantors whose names are
set forth on the signature pages hereto (each, a "Grantor" and, collectively,
the "Grantors"). Capitalized terms used but not defined herein shall have the
meaning given to each such term in the Memorandum (as defined below).
WHEREAS, the Grantor owns a direct or indirect interest in one or more
of the office and industrial properties and related real and personal property,
contracts and other rights (collectively, the "Properties") affiliated with the
business of Kilroy Industries, a California corporation ("KI") and set forth on
Exhibit A hereto;
WHEREAS, the Grantor holds such interest (an "Interest") directly (any
entity owning a Property directly is referred to herein as an "Entity"), as a
beneficiary of a trust, in the form of general or limited partnership interests
in one or more partnerships or in the form of membership interests in a limited
liability company;
WHEREAS, Optionee desires to acquire from each Grantor, and each
Grantor desires to grant to Optionee, an option (the "Option") to require
Grantor's contribution, transfer, assignment and conveyance of the Interests
(the "Contribution"), including the Option Property (as defined below), to
Optionee in exchange (the "Exchange") for limited partnership interests ("OP
Units") in the Operating Partnership on the terms and conditions set forth
herein;
WHEREAS, the Contribution may be effected, with respect to certain
partnerships and limited liability companies at the discretion of the general
partner(s) or members thereof, as applicable, either by (i) the direct transfer
of all or a portion of the Grantor's direct or indirect interests in an Entity
to the Operating Partnership in exchange for OP Units, followed in certain cases
by the Entity's distribution of its Properties to the Operating Partnership in
redemption of such transferred interests, or (ii) the direct transfer of a
Property by an Entity to the Operating Partnership in exchange for OP Units
followed, in the case of certain partnerships, limited liability companies or
trusts, by the Entity's distribution, either directly or through a constituent
entity that owns an interest in an Entity, of such OP Units to the holders of
direct or indirect interests in that Entity, as more fully described in the
private placement memorandum dated as of October 29, 1996 delivered to Grantors
and attached hereto as Exhibit D (the "Memorandum"), and the Representation
Letter, Consent and Power of Attorney of even date herewith delivered by or on
behalf of such Grantor to the Operating Partnership (each such letter is
hereinafter referred to as such Grantor's "Consent Letter"); and
WHEREAS, the parties acknowledge that the Operating Partnership is
considering the acquisition of each Grantor's Interests in connection with the
formation of a real estate investment trust, Kilroy Realty Corporation, a
Maryland corporation (the
1
<PAGE>
"Company"), which will be the sole general partner of the Operating Partnership
and a proposed initial public offering (the "IPO") of the Company's shares of
common stock (the "REIT Shares");
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and conditions set forth herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Optionee and each of the Grantors agree as follows:
ARTICLE I. THE OPTION
----------
1.1 Grant of Option. Each Grantor hereby grants to Optionee an
---------------
option (each such option is hereinafter referred to as such Grantor's "Option"
and collectively, the "Options") to require the Contribution to Optionee of all
right, title and interest of such Grantor in its Interests, free and clear of
any security interests, claims, liens, equities, or other encumbrances of any
kind or nature whatsoever and any preemptive or preferential rights, except as
previously disclosed to the Operating Partnership, all on the terms and
conditions hereinafter set forth.
1.2 Term and Exercise of Option. Optionee may exercise an Option at
---------------------------
any time from and after the date hereof through the date of the closing of the
IPO; provided, however, that in the case of the Option with respect to Interests
-------- -------
in the Property set forth in Exhibit C (the "Option Property"), such Option
shall be exercisable in accordance with the provisions set forth in such
Exhibit. The last date on which an Option may be exercised is referred to
herein as an "Option Termination Date." Each Option may be exercised by the
giving of notice by Optionee to the Grantor. If Optionee does not exercise an
Option by the Option Termination Date, such Option shall be deemed terminated
and shall be of no further force and effect and neither Grantor nor Optionee
shall have any further obligations hereunder. Notwithstanding the foregoing,
from the date hereof through the applicable Option Termination Date, each
Grantor's Option shall be irrevocable.
1.3 Treatment as Contribution. The Contribution shall constitute a
-------------------------
"Capital Contribution" pursuant to Article 4 of the Agreement of Limited
Partnership of the Operating Partnership to be executed on or prior to the
closing of the IPO (the "OP Partnership Agreement"), a draft of which is
included in the disclosure materials accompanying the Consent Letter, and is
intended to be governed by Section 721(a) of the Internal Revenue Code of 1986,
as amended.
1.4 Consideration. The full consideration for each Grantor's
-------------
Interests (such consideration with respect to such Grantor is hereinafter
referred to as such Grantor's "Option Consideration") shall be such number of OP
Units to be determined as set forth in the Memorandum or, in the case of the
Option Property, as set forth in Exhibit C, as such Option Consideration may be
adjusted pursuant to Section 4.2 hereof.
2
<PAGE>
1.5 Acknowledgment Regarding Memorandum and Consent Letter. Each
------------------------------------------------------
Grantor acknowledges the receipt and review of the Memorandum describing the
terms of the Contribution and relevant information concerning the Operating
Partnership, the Company and the IPO, and each Grantor has executed the Consent
Letter concurrently herewith.
1.6 Acquisition of Interests. Upon Optionee's exercise of an Option,
------------------------
such Grantor shall make the Contribution and the Operating Partnership shall
acquire and accept the Interests from such Grantor, as set forth in the recitals
hereto, and the Operating Partnership shall deliver to such Grantor such
Grantor's Option Consideration in accordance with the terms of this Agreement.
Such Contribution will be evidenced by a form of assignment or other
documentation satisfactory in form and substance to the Operating Partnership.
1.7 Assumption of Obligation. Except as otherwise expressly provided
------------------------
herein, upon the Closing (as hereinafter defined) the Operating Partnership
shall assume the obligations of the Entities under all leases, contracts and
other agreements or other obligations of Grantors relating to the Properties, in
each case, which have been entered into in the ordinary course of business or
have been previously disclosed to the Operating Partnership and which are not
otherwise in violation of this Agreement except claims of any Grantor or other
liabilities arising out of the consummation of the transactions contemplated by
the Memorandum.
1.8 Kilroy LAX. Any payments with respect to (i) obligations in an
----------
amount up to $3,650,000 plus any interest or penalties in connection with the
elimination of the joint venture obligation relating to Tower VI at Kilroy LAX
and the extension of the Hughes Electronic Corporation's Space & Communications
Company lease at Kilroy LAX and (ii) the freeway on-ramp under construction
(including, without limitation, reparations and improvements as a result thereof
or in connection therewith) at Kilroy LAX, shall, in each case, be the
responsibility of the Grantor who is the owner of such Property and such Grantor
agrees that any such payment is such Grantor's responsibility.
1.9 Contract Rights. Upon Optionee's exercise of any Option, the
---------------
Grantor of such Option agrees to transfer, or to cause any of its affiliates to
transfer, as contemplated in Section 5.3.A hereto, all of such Grantor's right,
title and interest in the contracts set forth in Exhibit B hereto to the
Operating Partnership or an affiliate thereof, free and clear of any security
interests, claims, liens, equities or other encumbrances of any kind or nature
whatsoever other than those which are disclosed to, and approved by, Optionee.
ARTICLE II. CONDITIONS TO OBLIGATIONS TO CLOSE
----------------------------------
2.1 Conditions to Grantor's Obligation to Close. The obligation of
-------------------------------------------
each Grantor to close hereunder upon the exercise of any Option shall be subject
to (i) the consummation of the IPO, (ii) the issuance to those Grantors whose
Option Consideration is determined by the amount that the value of such
Grantor's Interest in the Properties bears to the aggregate value of all such
Grantors' Interests in the Properties (the "Percentage Valuation Grantors") and
whose Options are exercised at the closing of the IPO of OP Units
3
<PAGE>
which in the aggregate have an initial value of at least $5.0 million (each OP
Unit to be deemed to have an initial value equal to the public offering price of
one REIT Share in the IPO), and (iii) the approval for listing, subject to
notice of issuance, of the REIT Shares on a national securities exchange or the
approval for designation, subject to notice of issuance, of the REIT Shares as
national market system securities on an interdealer quotation system by the
National Association of Securities Dealers, Inc.
2.2 Conditions to Operating Partnership's Obligations to Close. The
----------------------------------------------------------
obligation of the Operating Partnership to close hereunder upon the exercise of
any Option shall be subject to the satisfaction of the following conditions
unless waived by the Operating Partnership in its sole and absolute discretion:
A. Closing of IPO. The Company shall have consummated the IPO and
--------------
received proceeds therefrom in such amount as to adequately
provide for the issuance to the Percentage Valuation Grantors
whose Options are exercised at or prior to the closing of the IPO
of OP Units which in the aggregate have an initial value of at
least $5.0 million (each OP Unit to be deemed to have an initial
value equal to the public offering price in the IPO of one REIT
Share).
B. Representations and Warranties True at Closing. The
----------------------------------------------
representations and warranties made by the Grantor in the Consent
Letter shall be true in all material respects as of the Closing
(as defined herein) with the same effect as though such
representations and warranties had been made or given at the
Closing.
C. Compliance with Agreements. The Grantor shall have timely and
--------------------------
duly performed and complied in all respects with such Grantor's
respective obligations under this Agreement and the Consent
Letter prior to or at the Closing and shall have executed and
delivered the OP Partnership Agreement.
D. Supplemental Representations, Warranty and Indemnity Agreement.
--------------------------------------------------------------
The Grantors named as parties to that certain Supplemental
Representations, Warranties and Indemnity Agreement (the
"Supplemental Agreement"), shall have entered into the
Supplemental Agreement and such Supplemental Agreement shall be
in form and substance satisfactory to the Operating Partnership
in its sole discretion and the representations and warranties of
the Grantors contained therein shall be true in all material
respects as of the Closing. The parties thereto shall have
pledged their OP Units in accordance therewith to secure their
indemnity obligations under the Supplemental Agreement, and such
pledge shall be in form and substance satisfactory to the
Operating Partnership.
4
<PAGE>
E. No Material Adverse Change. There shall not have occurred
--------------------------
between the date hereof and the Closing any casualty, loss,
condemnation or other adverse event with respect to any Property,
or any development involving a prospective adverse event with
respect to any Property, including, without limitation, any
change in the level of occupancy of any Property (as applicable)
or any change in the rental rates with respect to any Property,
that would be material to the business proposed to be conducted
by the Operating Partnership.
F. No Prohibition on Consummation of Transactions. No order,
----------------------------------------------
statute, rule, regulation, executive order, injunction, stay,
decree or restraining order shall have been enacted, entered,
promulgated or enforced by any court of competent jurisdiction or
governmental or regulatory authority or instrumentality that
prohibits the consummation of the transactions contemplated
hereby, and no litigation or governmental proceeding seeking such
an order shall be pending or threatened.
G. Delivery of Documents. The Grantor shall have executed and
---------------------
delivered to the Operating Partnership all documents the
Operating Partnership shall deem necessary for the transfer of
the Interests and the consummation of the transactions
contemplated herein, including, without limitation, the documents
set forth in Section 5.3 hereof.
H. Consents. The Grantor shall have obtained all consents or
--------
approvals of governmental authorities or third parties to the
consummation of the transactions contemplated herein that the
Operating Partnership shall deem necessary for the transfer of
the Interests.
I. No Breach. Each Grantor shall not have breached any of its
---------
covenants contained herein.
J. Hart-Scott Rodino Act. If Optionee shall determine that any of
---------------------
the transactions contemplated hereby is subject to the reporting
requirements of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, then all filings shall have been made and all other
actions shall have been taken as necessary to comply with such
act and the rules and regulations thereunder. Each Grantor
covenants to take all such actions and make all such filings
requested by Optionee as necessary to comply with such act and
the rules and regulations thereunder.
K. No Condemnation. There shall be no pending or threatened
---------------
condemnation or taking of any part of any Property or any means
of ingress or egress thereto (other than any such taking which,
in the Optionee's reasonable judgment, does not materially
adversely affect such Property).
5
<PAGE>
ARTICLE III. COVENANTS
---------
3.1 Covenants of Grantor. Each Grantor covenants and agrees that
--------------------
from the date hereof through the Closing:
A. Such Grantor will not, and will not enter into any agreement to,
transfer, sell or otherwise dispose of any of such Grantor's
Interests to any other person or entity, subject to the rights of
certain of the Grantors to sell the Option Property following
consummation of the IPO as provided on Exhibit C.
B. Such Grantor will, or (if not an Entity) will cause any Entity in
which it has a direct or indirect interest, to conduct its
business in the ordinary course, and operate and maintain the
Properties, in each case, consistent with past practice.
C. Such Grantor will allow, and will cause an Entity over which it
has control to allow, the Operating Partnership and its agents
and representatives to inspect the Properties and the records,
books and accounts of the Entities at all reasonable times.
D. Such Grantor will promptly notify the Operating Partnership if
any of its representations or warranties in the Consent Letter is
untrue or if it becomes aware of any transaction or occurrence
which would make any of such representations or warranties
untrue.
E. Such Grantor will or (if not an Entity) will cause any Entity
over which it has control, to maintain in effect insurance of
such types, in such amounts and on such terms as are currently in
effect with respect to the Properties and keep in force and renew
such permits and licenses as are necessary to own and operate the
Properties.
F. Such Grantor shall not modify or amend any partnership agreement,
limited liability company operating agreement or trust agreement
of any partnership, limited liability company or trust in which
it has an Interest without the prior consent of the Operating
Partnership other than as necessary to permit or facilitate the
Contribution and the transactions related thereto contemplated
thereby.
G. Such Grantor shall not, without the Operating Partnership's prior
consent and other than in connection with the arrangement of any
interim financing with respect to the Properties, permit any
Entity to:
1. enter into any material transaction or contract;
6
<PAGE>
2. amend, modify or terminate any material agreement to which
the Entity is a party; or
3. materially alter the manner of keeping the Entity's books,
accounts or records or the accounting practices therein
reflected.
H. Such Grantor will, or (if not an Entity) will cause any Entity
over which it has control to, maintain the Properties in at least
as good condition and repair as prevails on the date hereof
except for reasonable wear and tear.
I. The Grantor agrees to transfer any and all insurance and
condemnation proceeds payable to a Grantor with respect to a
Property, provided, however, that the obligation to restore such
-------- -------
Property related thereto shall be the obligation of the Operating
Partnership.
J. Such Grantor shall use its good faith best efforts to obtain any
approvals, waivers or other consents of governmental authorities
or other third parties required to effect the transactions
contemplated by this Agreement.
ARTICLE IV. CLOSING ADJUSTMENTS
-------------------
4.1 Prorations. On the Closing Date (as defined below), or as
----------
promptly as practicable following the Closing Date, to the extent such matters
are not the right or responsibility of any tenant of a Property, all revenues
and all charges that are customarily prorated in transactions of this nature,
including, without limitation, accrued rent, overpaid taxes or fees, real and
personal property taxes, and other similar periodic charges payable or
receivable with respect to each applicable Property shall be ratably prorated
between the Operating Partnership and the applicable Grantor(s) effective as of
the Closing Date.
4.2 Allocation of Adjustments. All adjustments contemplated by this
-------------------------
Article 4 shall be made by adjusting the Option Consideration to each Percentage
Valuation Grantor by debiting or crediting (as the case may be) such Grantor's
Option Consideration.
ARTICLE V. CLOSING
-------
5.1 Closing. In connection with or at any time after the exercise by
-------
Optionee of an Option, the Operating Partnership will specify a closing date
(the "Closing Date") for the closing of a Contribution or Contributions (a
"Closing"), which shall occur on the date of, the closing of the IPO, provided,
--------
however, that in the event the Option with respect to the Option Property is not
- -------
exercised by the Operating Partnership prior to the closing of the IPO, the
Closing of such Contribution shall occur on such date, consistent with the
provisions of Exhibit C, as the Operating Partnership shall determine in its
discretion but in no event later than 60 days after the exercise of the Option
for such Option Property (such exercise to be deemed to occur on the date the
Operating Partnership gives the OP Notice (as
7
<PAGE>
defined in Exhibit C)). The consummation of the Contributions made on the
closing of the IPO shall be deemed to occur concurrently with the consummation
of the IPO. Any Closing of the Option with respect to the Option Property
exercised after the consummation of the IPO shall be held at such place and time
as determined by the Operating Partnership in its sole discretion and, with
respect to all other Properties, shall be held at such place and time as the
closing of the IPO is held.
5.2 Failure of Closing to Occur. If, other than with respect to the
---------------------------
Option Property, the Closing does not occur on or before December 31, 1998, this
Agreement will terminate, and any and all rights or obligations hereunder shall
cease and no longer be binding on the parties hereto and no party shall
thereafter have any liability or obligation hereunder to any other party.
5.3 Closing Deliveries.
------------------
A. At the Closing, each Grantor shall, directly or through its
attorney-in-fact, execute, acknowledge and deliver to the Operating Partnership
the legal documents and other items necessary to carry out the intention of this
Agreement, including, but not limited to, deeds and bills of sale and
assignments of such Grantor's Interests, including bills of sale and assignments
(as applicable) for such Grantor's interest in leases (including, without
limitation, ground leases and space leases), contracts, licenses, permits,
personalty agreements and proprietary rights related to the ownership,
development, use and operation of the Properties, as well as assignments of the
interests in the agreements listed on Exhibit B, in a form reasonably
satisfactory to the Operating Partnership.
B. In addition to the documents mentioned above and herein,
each Grantor shall deliver or cause to be delivered any other documents
reasonably requested by Operating Partnership or reasonably necessary to assign,
transfer and convey such Grantor's Interests and effectuate the transactions
contemplated hereby.
C. At the Closing, each Grantor shall execute, acknowledge and
deliver and shall cause each entity in which the Grantor has a direct or
indirect interest to execute, acknowledge and deliver an affidavit from each of
such Grantor or entity as appropriate, stating under penalty of perjury the
United States Taxpayer Identification Number of the Grantor or entity, as
appropriate, and that Grantor or entity, as appropriate, is not a foreign person
pursuant to Section 1445(b)(2) of the Internal Revenue Code of 1986, as amended,
and a comparable affidavit satisfying state and any other withholding
requirements.
5.4 Breach of Agreement.
-------------------
(a) Optionee may, in its sole discretion, elect not to complete
the acquisition of all or any portion of the Interests of any Grantor in the
event that the Grantor breaches any provision of this Agreement (any such
Grantor, a "Non-Complying Grantor"). The election of Optionee to not acquire all
or any portion of the Interests of a particular Non-Complying Grantor shall not
affect the obligations of any other Grantor hereunder, including any other Non-
Complying Grantor.
8
<PAGE>
(b) If any Grantor defaults with respect to its obligations
under this Agreement, Optionee shall be entitled to exercise against each such
Grantor any and all remedies provided at law or in equity, including but not
limited to, the right to specific performance. No default by any Grantor
hereunder shall in any way limit or affect the obligations of any other Grantor
hereunder.
5.5 Cessation of Public Offering. If at any time Optionee or its
----------------------------
underwriter or underwriters determines in good faith to abandon the IPO,
Optionee will so advise each Grantor in writing and thereupon all parties hereto
will be relieved of all obligations under this Agreement.
5.6 Further Assurances. Each Grantor will, from time to time,
------------------
execute and deliver to Optionee all such other and further instruments and
documents and take or cause to be taken all such other and further action as
Optionee may reasonably request in order to effect the transactions contemplated
by this Agreement, including instruments or documents deemed necessary or
desirable by Optionee to effect and evidence the conveyance of such Grantor's
Interests and the interests described in Section 1.9 hereof in accordance with
the terms of this Agreement.
ARTICLE VI. MISCELLANEOUS
-------------
6.1 Entire Agreement. This Agreement and the Consent Letter,
----------------
including any exhibits and schedules hereto and thereto and other documents or
agreements, entered into pursuant hereto and thereto and all instruments and
certificates delivered pursuant to the terms hereof or thereof, constitutes the
entire agreement and understanding of the parties hereto in respect of the
subject matter hereof, and supersedes all prior agreements, promises, covenants,
arrangements, representations or warranties, whether oral or written, by any
party hereto or any officer, director, employee or representative of any party
hereto.
6.2 Counterparts. This Agreement may be executed in several
------------
counterparts, each of which will be deemed an original and all of which taken
together shall constitute one and the same instrument.
6.3 Governing Law. This Agreement shall be governed by the laws of
-------------
the State of California without giving effect to the conflict of law provisions
thereof.
6.4 Amendment. This Agreement may be amended or modified only in a
---------
writing signed by the parties to be bound by such amendment and any waiver of a
provision must be in writing signed by the parties to be bound and such waiver
shall not constitute a waiver of any other provisions of this Agreement;
provided, however, that no such amendment shall alter the irrevocability of a
- -------- -------
Grantor's Option as set forth in Section 1.2 or vary the obligation of each
Grantor to close hereunder as set forth in Section 2.1 hereof.
6.5 Successors. This Agreement shall be binding upon, and shall be
----------
enforceable by and inure to the benefit of, the parties hereto and their
respective heirs, legal
9
<PAGE>
representatives, successors and assigns; provided, that this agreement may not
--------
be assigned without the Operating Partnership's prior written consent.
6.6 Titles. The titles and captions of the Articles, Sections and
------
paragraphs of this Agreement are included for convenience of reference only and
shall have no effect on the construction or meaning of this Agreement.
6.7 Severability. If any provision of this Agreement, or the
------------
application thereof, is for any reason held to any extent to be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances will be interpreted so as reasonably to effect
the intent of the parties hereto.
6.8 Third Parties. Except as specifically set forth or referred to
-------------
herein, nothing herein expressed or implied is intended or shall be construed to
confer upon or give to any person or entity other than the parties hereto and
their successors or assigns any rights or remedies under or by reason of this
Agreement.
6.9 Notices. All notices, demands, requests, consents, approvals or
-------
other communications (collectively, "Notices") required or permitted to be given
hereunder or which are given with respect to this Agreement shall be in writing
and shall be personally served, delivered by reputable air courier service with
charges prepaid, or transmitted by hand delivery, telegram, telex or facsimile,
addressed as set forth below, or to such other address as such party shall have
specified most recently by written notice in accordance with this Section 6.9.
Notice shall be deemed given on the date of service or transmission if
personally served or transmitted by telegram, telex or facsimile. Notice
otherwise sent as provided herein shall be deemed given on the next business day
following delivery of such notice to a reputable air courier service.
To the Operating Partnership:
Kilroy Realty, L.P.
c/o Kilroy Industries
2250 East Imperial Highway
El Segundo, California 90245
To Grantor:
c/o Kilroy Industries, John B. Kilroy, Sr.
2250 East Imperial Highway
El Segundo, California 90245
6.10 Exhibits. Each of the exhibits referred to herein and attached
--------
hereto is an integral part of this Agreement and is incorporated herein by
reference.
6.11 Time of the Essence. Time is of the essence with respect to all
-------------------
obligations of each Grantor under this Agreement.
10
<PAGE>
6.12 Attorneys Fees. In the event of a dispute arising out of the
--------------
interpretation or enforcement of this Agreement, or a declaration of rights
hereunder, or enforcement of any judgment of any judicial or non-judicial body
with respect to the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorney's fees.
6.13 Trusts. In the event any Grantor which is a trust has
------
terminated or the Properties held by such trust are deemed distributed, this
Agreement shall be deemed modified to reflect the direct ownership by the
beneficiaries of such trust of the Properties held by such trust as set forth on
Exhibit A hereto.
11
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has executed this
Agreement, or caused the Agreement to be duly executed on its behalf, as of the
date first written above.
OPTIONEE: KILROY REALTY, L.P.
By: Kilroy Realty Corporation
Its: General Partner
By: /s/ John B. Kilroy, Jr.
-------------------------------
Name: John B. Kilroy, Jr.
Title: President
12
<PAGE>
GRANTOR SIGNATURE PAGE
The undersigned, desiring to become one of the within named Grantors
to this Omnibus Option Agreement by and among Optionee and the Grantors named
therein, dated as of October __, 1996, hereby becomes a party to such Agreement.
The undersigned agrees that this signature page may be attached to any
counterpart of this Agreement.
___________________________________
Name:
13
<PAGE>
EXHIBIT A
<TABLE>
<CAPTION>
Property/Agreement Party
------------------ -----
<S> <C>
(Other than as indicated below, each entry
below includes real estate (but only a
ground leasehold estate with respect to
land held subject to a ground lease),
substantially all personal property owned
by a Grantor related thereto, and leases)
Kilroy Airport Center at El Segundo Kilroy Airport Associates
2240, 2250, 2260 E. Imperial Hwy.
El Segundo, California
Kilroy Airport Center Long Beach Kilroy Long Beach
3750, 3760, 3780 Kilroy Airport Way Associates*
Long Beach, California Kilroy Long Beach Partner
(and ground lease) II**
Phases III and IV Kilroy Long Beach
Kilroy Airport Center Long Beach Associates
Long Beach, California
(all ground leases and development
agreement)
185 S. Douglas Street Kilroy-Freehold Industrial
El Segundo, California Development Organization
(Bldgs 213/215)
2031 E. Mariposa Avenue Kilroy Industries
El Segundo, California
(Bldg 51)
3320/3332 E. La Palma Avenue John B. Kilroy, Sr.*
Anaheim, California Kilroy Building 73
(Bldg 73) Partnership**
2260 E. El Segundo Blvd. Kilroy-Freehold Industrial
El Segundo, California Development Organization
(Bldg 214)
2265 E. El Segundo Blvd. Kilroy-Freehold Industrial
El Segundo, California Development Organization
(Bldg 218)
1000 E. Ball Road Kilroy 1979 Trust(1)/Kilroy
Anaheim, California Industries
(Bldg 235)
</TABLE>
A-1
<PAGE>
<TABLE>
<CAPTION>
Property/Agreement Party
------------------ -----
<S> <C>
(Other than as indicated below, each entry
below includes real estate (but only a
ground leasehold estate with respect to
land held subject to a ground lease),
substantially all personal property owned
by a Grantor related thereto, and leases)
1230/1240 South Lewis Street Kilroy 1979 Trust(1)/Kilroy
Anaheim, California Industries
(Bldg 236)
12681/12691 Pala Drive Kilroy Industries*
Garden Grove, California Kilroy Garden Grove
(Bldg 241) Associates**
2270 E. El Segundo Blvd. Kilroy-Freehold Industrial
El Segundo, California Development Organization
(Bldg 212)
5115 North 27th Avenue Kilroy A-102 Trust(2)
Phoenix, Arizona
SeaTac Office Center Sea/Tac Properties, Ltd.
17900, 17930, 18000 Pacific Highway Kilroy Industries***
Seattle, Washington
(and all ground and air leases)
Administrative Assets Kilroy Industries/Kilroy
Technologies Company,
LLC
Thousand Oaks Exclusive Negotiation Kilroy Industries
Agreement
</TABLE>
- ---------------------------
* holds legal title to property as agent on behalf of beneficial owner
** beneficial owner of 100% interest in property
*** Party to ground and air leases only
(1) Beneficiaries are John B. Kilroy, Sr., John B. Kilroy, Jr., Patrice
Bouzaid, Susan Hahn, Anne McCahon and Dana Pantuso
(2) Beneficiaries are John B. Kilroy, Jr., Patrice Bouzaid, Susan Hahn, Anne
McCahon and Dana Pantuso.
A-2
<PAGE>
EXHIBIT B
ASSIGNMENT OF CONTRACTS
<TABLE>
<CAPTION>
Agreement Party
- --------- -----
<S> <C>
Development Management Agreement Kilroy Technologies
(Riverside) Company, LLC
Agreement to Provide Real Estate Services Kilroy Technologies
(Northrop Grumman - Pico Rivera) Company, LLC
Exclusive Broker Employment Agreement The Kilroy
(Northrop Grumman) Companies,
LLC
Lease between Kilroy Industries, as Kilroy Industries
landlord, and United Artists Theatre
Circuit, Inc., as tenant
Option to Enter Into Ground Lease Kilroy Long Beach
between City of Long Beach and Kilroy Associates
Long Beach Associates, as amended
Any contract rights held by any Grantor
with respect to properties to be acquired
by the Operating Partnership or any
affiliate thereof
</TABLE>
B-1
<PAGE>
EXHIBIT C
I. TERMS OF OPTION FOR SEATAC OFFICE CENTER
1. Option Property: SeaTac Office Center at Seattle-Tacoma
---------------
International Airport, 17900, 17930 and 18000 Pacific Highway,
Seattle, Washington (the "SeaTac Property").
2. Term of Option: The option (the "SeaTac Option") is exercisable
--------------
by the Operating Partnership beginning on the date of this
Agreement and continues until the first anniversary of the
consummation of the IPO; provided, that, in the event that
--------------
SEA/TAC Properties, Ltd. (the "Owner") is unable to deliver to
the Operating Partnership (i) estoppel certificates reasonably
satisfactory to the Operating Partnership regarding the continued
validity of, and absence of breaches under, the ground leases
applicable to the SeaTac Property and (ii) assurance reasonably
satisfactory to the Operating Partnership with respect to the
indebtedness on the Option Property that such indebtedness can be
subject to at least one of the following: (A) assumption with
all prior defaults or breaches deemed cured or waived or (B)
repayment with the lenders' rights being deemed discharged in all
material respects (collectively, the "Estoppel Certificates")
prior to the 270th day following consummation of the IPO, then
the SeaTac Option shall be exercisable until the date that is 90
days following the delivery of the Estoppel Certificates. The
Owner shall use its reasonable efforts to obtain the Estoppel
Certificates as soon as reasonably practicable following the date
of this Agreement.
3. Purchase Price:
--------------
a. If the Operating Partnership exercises the SeaTac Option
prior to or concurrently with the closing of the IPO, the
Grantor(s) of the SeaTac Option shall be entitled to receive
such number of OP Units in exchange for its Interests as
described in the Memorandum.
b. In the event that the Operating Partnership exercises the
SeaTac Option following the consummation of the IPO, the
purchase price for such Option Property, payable in OP
Units, will be equal to the greater of (i) the Net Operating
Income (as defined below) for each of such office
properties, capitalized at a 9.5% rate, plus capitalized
expenditures and expenses, excluding carrying costs,
incurred from the date the underwriting agreement is
executed in connection with the IPO (the "Offering Date")
through the date of exercise of the SeaTac Option (the
"Exercise Date"), less the amount of outstanding debt on
such
C-1
<PAGE>
Property as of the Exercise Date or (ii) $20 million, plus
capitalized expenditures and expenses, excluding carrying
costs, incurred from the Offering Date through the Exercise
Date, net to holder less the amount of outstanding debt on
such Property as of the Exercise Date (but in no event less
than zero). Upon exercise of the Option, the Operating
Partnership will be responsible for all indebtedness related
to the Option Property. For purposes of this paragraph,
"Net Operating Income" is defined as net operating income
for the 12-month period ending the Offering Date, adjusted
for (A) the incremental increase in net operating income
attributable to contractual rental increases for the 12-
month period immediately following the Offering Date, (B)
the incremental increase in net operating income
attributable to rental revenue from leases commencing during
the 12-month period ending the Offering Date for the 12-
month period immediately following the Offering Date, (C)
the elimination of rental revenue reflected in rental
revenue for the 12-month period ending the Offering Date
from (1) leases which expired during such 12-month period,
and (2) leases which expire during the 12-month period
immediately following the Offering Date for that portion of
such 12-month period that such leases are no longer in
effect and (D) the effect of adjusting straight-line rental
income and expenses included in net operating income from an
accrual basis under GAAP to a cash basis. The number of OP
Units to be issued in respect of the foregoing will be in an
amount determined by reference to the average trading value
of the REIT Shares for the ten trading days immediately
preceding the Exercise Date. In exercising the Option
following the consummation of the IPO, the Operating
Partnership will use reasonable efforts to cooperate with
the Grantors to minimize any taxes payable in connection
with such exercise or the assumption or repayment of debt
relating to the SeaTac Property.
4. Third Party Offers. In the event the Grantor(s) desire to offer
------------------
the SeaTac Property to a third party, the Grantor(s) shall give
written notice (the "Notice") thereof to the Operating
Partnership (the date notice is given is referred to as the
"Notice Date"), which notice shall include the proposed purchase
price, leasing terms and other economic terms, as applicable (the
"Proposed Purchase Price"), of the proposed transfer of the
SeaTac Property, and the Operating Partnership shall then have 60
days to give notice (the "OP Notice") of its election to acquire
such property at the lower of the Option Price or the Proposed
Purchase Price. In the event the Operating Partnership does not
give the OP Notice, the SeaTac Option shall be suspended and the
Grantor(s) may proceed with the sale pursuant to the terms of
such
C-2
<PAGE>
offer, provided that the economic terms may be up to 5% below
those described in the Notice; provided, however, that if such
sale is at a price in excess of the Option Price and at the time
the Notice is given the Estoppel Certificates have not been
delivered, the Operating Partnership shall have the right to
acquire at the Option Price the Owner's rights and related
monetary obligations under such sales agreement. In the event
the Grantor(s) of the SeaTac Property (i) have not entered into a
letter of intent for the sale of the SeaTac Property within 180
days following the Notice Date, or (ii) have not completed the
sale of the SeaTac Property within 270 days following the Notice
Date, then the Operating Partnership's SeaTac Option will be
reinstated. The SeaTac Option shall be subject to any
arrangements entered into by the Grantor(s) in connection with
any financing, recapitalization or leasing of the SeaTac Property
including, without limitation, any rights of the current
lender(s) with respect to the SeaTac Property with respect to a
transfer pursuant to the SeaTac Option.
C-3
<PAGE>
EXHIBIT D
[Private Placement Memorandum]
C-4
<PAGE>
EXHIBIT 10.4
SUPPLEMENTAL REPRESENTATIONS,
-----------------------------
WARRANTIES AND INDEMNITY AGREEMENT
----------------------------------
THIS SUPPLEMENTAL REPRESENTATIONS, WARRANTIES AND INDEMNITY AGREEMENT (the
"Agreement") is made and entered into as of __________ __, 1997 by Kilroy
Industries, a California corporation, John B. Kilroy, Sr., and John B. Kilroy,
Jr. (all of the aforementioned individuals and entity being referred to herein
individually as an "Indemnitor" and collectively as the "Indemnitors"), and
Kilroy Realty, L.P., a Delaware limited partnership (the "Operating
Partnership"), and Kilroy Realty Corporation, a Maryland corporation (the
"REIT").
WHEREAS, the Indemnitors and certain other persons own interests in one or
more of the Properties (each as hereinafter defined) either directly or
indirectly through a trust or in the form of general or limited partnership
interests in one or more partnerships or in the form of a membership interest in
a limited liability company (each such interest is referred to herein as an
"Interest");
WHEREAS, the Indemnitors and certain other persons will transfer to the
Operating Partnership all of their Interests in the Properties (a) upon the
exercise by the Operating Partnership, on or before consummation of an initial
public offering of shares of common stock of the REIT (the "IPO"), of options
granted to it by such persons pursuant to the Omnibus Option Agreement dated as
of November 3, 1996 (the "Omnibus Agreement") by and among the Operating
Partnership and the grantors named therein and (b) upon the exercise by the
Operating Partnership, following the IPO, of options granted to it by such
persons pursuant to two separate Option Agreements, each dated as of
______________, 1997 (each individually, an "Option Properties Agreement", and
collectively, the "Option Properties Agreements") by and among the Operating
Partnership and the grantors named therein (all individuals and entities other
than the Operating Partnership which executed the Omnibus Agreement or the
Option Properties Agreements are referred to herein collectively as the
"Grantors" and individually as a "Grantor");
WHEREAS, certain of the Grantors executed a Representation Letter, Consent
and Power of Attorney (collectively, the "Consents and Power of Attorney")
pursuant to which they consented to the transfer of their Interests to the
Operating Partnership under the Omnibus Agreement, made certain representations
and warranties and appointed John B. Kilroy, Sr., John B. Kilroy, Jr. and
Jeffrey C. Hawken or any of them as their attorney-in-fact (each, an "Attorney-
in-Fact") to effect such transfers; all of the foregoing transfers and actions
contemplated in connection with the IPO under the Consents and Power of
Attorney, the Omnibus Agreement and the Option Properties Agreements are
collectively referred to herein as the "Transactions"; and
<PAGE>
WHEREAS, to induce the REIT to consummate the IPO and to induce the
Operating Partnership to exercise the options granted to it pursuant to the
Omnibus Agreement and the Option Properties Agreements, each Indemnitor has
agreed to make the representations and warranties contained in this Agreement
for the benefit of the REIT and the Operating Partnership.
NOW, THEREFORE, in consideration of the foregoing and other good and
valuable consideration, the receipt and sufficiency of which hereby are
acknowledged, the parties hereby agree as follows:
1. Defined Terms. As used herein, the following terms shall have the
-------------
respective meanings indicated below:
"Acquisition Properties" shall mean the properties located at (i) 3880
----------------------
and 3900 Kilroy Airport Way, Kilroy Airport Center, Long Beach, California, (ii)
2829 Townsgate Road, Thousand Oaks, California, (iii) 12752-12822 Monarch
Street, Garden Grove, California and (iv) 4125, 4155 and 4175 E. La Palma
Avenue, Anaheim, California.
"Assumed Liabilities" shall mean all accounts payable and accrued
-------------------
expenses (other than accounts payable or accrued expenses which by their terms
are past due), accrued property taxes (other than property taxes which by their
terms are past due), accrued cost of option buy-out and tenant improvements and
rent received in advance and tenant security deposits reflected on the September
30, 1996 pro forma condensed consolidated balance sheet of the Company included
in the Registration Statement or incurred in the ordinary course of the Kilroy
Group's Business consistent with past practices from October 1, 1996 until the
Closing Date and which remain unpaid on the Closing Date, but excluding any
amounts which by their terms are past due and excluding the liabilities set
forth on Schedule 1 attached hereto.
----------
"Attorney-in-Fact" shall have the meaning assigned to such term in
----------------
the recitals to this Agreement.
"Claim" shall have the meaning assigned to such term in Section 4
-----
hereof.
"Closing Date" shall mean the date of the closing of the IPO.
------------
"Code" shall mean the Internal Revenue Code of 1986, as amended.
----
"Collateral" shall have the meaning assigned to such term in the
----------
Pledge Agreement.
"Commission" shall mean the Securities and Exchange Commission.
----------
2
<PAGE>
"Consents and Power of Attorney" shall have the meaning assigned to
------------------------------
such term in the recitals to this Agreement.
"Contract" shall have the meaning assigned to such term in Section
--------
2.13 hereof.
"Covered Party" shall have the meaning assigned to such term in
-------------
Section 4 hereof.
"Entity" shall mean KI and each corporation, partnership, limited
------
liability company or trust affiliated with KI or any Grantor which prior to the
closing of the IPO directly owned or leased a Property and, in the event that
any such trust terminated or the Property of any such trust is deemed
distributed, each beneficiary of such trust.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended, and the rules and regulations promulgated thereunder.
"Excluded Liabilities" shall mean all obligations and liabilities of
--------------------
any nature of any Grantor other than the Assumed Liabilities including, without
limitation, the obligations and liabilities referred to on Schedule 1 hereto.
"Financial Statement" and "Financial Statements" shall have the
------------------- --------------------
meaning assigned to such terms in Section 2.11 hereof.
"Grantors" and "Grantor" shall have the meaning assigned to such
-------- -------
terms in the recitals to this Agreement.
"Grantor Agreement" and "Grantor Agreements" shall have the meaning
----------------- ------------------
assigned to such terms in Section 2.2 hereof.
"Indemnitor" and "Indemnitors" shall have the meaning assigned to
---------- -----------
such terms in the preamble to this Agreement.
"Intangibles" shall mean all intangible property used in the Kilroy
-----------
Group's Business, including, without limitation, all Proprietary Rights,
contract rights, rent receivables, licenses, permits, certificates, approvals,
authorizations, variances, consents, warranties and goodwill, but excluding the
intangible property set forth on Exhibit A attached hereto.
---------
"Interests" shall have the meaning assigned to such term in the
---------
recitals to this Agreement.
"IPO" shall have the meaning assigned to such term in the recitals to
---
this Agreement.
3
<PAGE>
"KI" shall mean Kilroy Industries, a California corporation.
--
"Kilroy Group" shall mean the Entities collectively.
------------
"Kilroy Group's Business" shall mean the real estate ownership,
-----------------------
acquisition, development, leasing and management businesses, collectively, of
the Kilroy Group.
"Lien" shall mean any mortgage, deed of trust, pledge, lien, option,
----
security interest, restriction, prior assignment, encumbrance, covenant,
encroachment, assessment, right of others, license, easement, servitude, right
of way, penalty, fine, charge, judgment, liability, debt, obligation or claim of
any kind or nature whatsoever, whether direct or indirect, and contingent or
non-contingent.
"Offering Date" shall mean the date on which the underwriting
-------------
agreement is executed with respect to the purchase of the REIT's common stock by
the underwriters in connection with the IPO.
"Omnibus Agreement" shall have the meaning assigned to such term in
-----------------
the recitals to this Agreement.
"Operating Partnership" shall have the meaning assigned to such term
---------------------
in the preamble to this Agreement.
"Option Properties" shall mean the Real Properties set forth in Part
-----------------
II of Exhibit C attached hereto. Each of the Option Properties may be
---------
separately referred to herein as an "Option Property".
"Option Properties Agreement" and "Option Properties Agreements" shall
--------------------------- ----------------------------
have the meaning assigned to such terms in the recitals to this Agreement.
"Organization Documents" shall mean (a) the articles or certificate of
----------------------
incorporation and the bylaws of a corporation, (b) the partnership agreement and
any statement of partnership of a general partnership, (c) the limited
partnership agreement and the certificate of limited partnership of a limited
partnership, (d) the declaration of trust of a trust, (e) the articles of
organization and limited liability company agreement of a limited liability
company, (f) any charter or similar document adopted or filed in connection with
the creation, formation or organization of a person and (g) any amendment to any
of the foregoing.
"Permit" shall have the meaning assigned to such term in Section 2.16
------
hereof.
"Permitted Liens" shall have the meaning assigned to such term in
---------------
Section 2.8 hereof.
4
<PAGE>
"person" shall mean any individual, corporation, partnership, limited
------
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization or governmental entity.
"Personalty" shall mean all personal property used or useful in the
----------
Kilroy Group's Business, including, without limitation, all tangible property
and all rights under the contracts referred to in Section 2.13 hereof and the
leases referred to in Sections 2.14 and 2.15 hereof and all other Intangibles,
as more fully described on Exhibit B attached hereto.
---------
"Pledge Agreement" shall have the meaning assigned to such term in
----------------
Section 5 hereof.
"Properties" shall mean the Real Properties and all Personalty. Each
----------
of the Properties may be separately referred to herein as a "Property".
"Proprietary Rights" shall have the meaning assigned to such term in
------------------
Section 2.26 hereof.
"Real Properties" shall mean the office, industrial and other real
---------------
properties set forth on Exhibit C attached hereto, including all buildings,
---------
structures (surface and sub-surface), mechanical systems and other improvements
located at and forming a part of such properties. Each of the Real Properties
may be separately referred to herein as a "Real Property".
"Registration Statement" shall mean the REIT's Registration Statement
----------------------
on Form S-11 (File No. 333-15553), as amended at any time prior to the date the
Registration Statement is declared effective by the Commission under the
Securities Act..
"REIT" shall have the meaning assigned to such term in the preamble
----
to this Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Services Company" shall mean Kilroy Services, Inc., a Maryland
----------------
corporation.
"Survival Period" shall have the meaning assigned to such term in
---------------
Section 6 hereof.
"Transactions" shall have the meaning assigned to such term in the
------------
recitals to this Agreement.
5
<PAGE>
2. Representations and Warranties with Respect to Properties and
-------------------------------------------------------------
Grantors. Each Indemnitor hereby makes the following representations and
- --------
warranties, as of the Offering Date and as of the Closing Date, with respect to
the Grantors, the Entities, the Interests and the Properties. Such
representations and warranties, other than those contained in Section 3.4
hereto, are deemed modified in full to the extent any specific statement of fact
in the Registration Statement conflicts with any similar statement of fact
contained in such representations and warranties.
2.1 Organization and Qualification. Each Grantor that is a limited
------------------------------
partnership or a limited liability company was duly formed and is validly
existing and in good standing under the laws of its jurisdiction of
organization, and has the requisite power and authority to own, lease or operate
its property and to carry on its business as it is now being conducted and to
engage in the Transactions to which it is a party. Each Grantor that is a
general partnership was duly formed and is validly existing under the laws of
its jurisdiction of organization, and has the requisite power and authority to
own, lease or operate its property and to carry on its business as it is now
being conducted and to engage in the Transactions to which it is a party. Each
Grantor that is a corporation was duly organized and is validly existing and in
good standing under the laws of its jurisdiction of organization, and has the
requisite power and authority to own, lease or operate its property and to carry
on its business as it is now being conducted and to engage in the Transactions
to which it is a party. Each Grantor that is a trust was validly created under
its declaration of trust, and the sole trustees of such trust are Marshall L.
McDaniel and John B. Kilroy, Sr. or John B. Kilroy, Jr. If such trust is in
full force and effect, it and its trustees have the requisite power and
authority under applicable law and under such trust's declaration of trust to
own, lease or operate its property and to carry on its business as it is now
being conducted and to engage in the Transactions to which it is a party. Each
Grantor that is a natural person has the full legal right and capacity to engage
in the Transactions to which he or she is a party. Each Grantor (other than a
Grantor that is a natural person) has made available to the Operating
Partnership or the REIT complete and correct copies of its Organizational
Documents. Each Grantor that is a limited partnership, limited liability
company or a corporation is duly qualified or registered to transact business as
a foreign limited partnership, limited liability company or corporation (as the
case may be) and is in good standing in each jurisdiction in which such
qualification or registration is required, whether by reason of the ownership or
leasing of property, the management of properties owned by others or the conduct
of its business, except where the failure to be so qualified or registered and
in good standing would not amount to a material disability on, or have a
material adverse effect on the condition (financial or otherwise), earnings,
assets, business affairs or business prospects of, any Real Property, the Kilroy
Group's Business or, following the consummation of the Transactions, the REIT or
the Operating Partnership or on the Transactions.
2.2 Authority Relative to Omnibus Agreement and Related Agreements.
--------------------------------------------------------------
Each Grantor had the requisite power and authority, and if a natural person the
full legal right and capacity, to execute and deliver the Consent and Power of
Attorney, the Omnibus
6
<PAGE>
Agreement and the Option Properties Agreements to which it is a party and had at
the time of execution and continues to have the requisite power and authority,
and if a natural person the full legal right and capacity, to perform its
obligations under the Consent and Power of Attorney, the Omnibus Agreement and
the Option Properties Agreements to which it is a party. All action of each
Grantor necessary to authorize the execution, delivery and performance by such
Grantor of the Consent and Power of Attorney, the Omnibus Agreement and the
Option Properties Agreements to which it is a party was taken, and no other
proceedings on the part of any Grantor (i) were or are necessary to authorize
the execution and delivery by such Grantor of the Consent and Power of Attorney,
the Omnibus Agreement and the Option Properties Agreements to which it is a
party or the execution and delivery by such Grantor, or by any Attorney-in-Fact
for such Grantor (as applicable), of the instruments of assignment of property
and assets and other deliveries contemplated by the foregoing agreements (all of
the foregoing agreements and instruments being referred to herein collectively
as the "Grantor Agreements" and individually as a "Grantor Agreement") or (ii)
are necessary to authorize the consummation by such Grantor (directly or through
an Attorney-in-Fact) of the Transactions to which it is a party. With respect
to each Grantor who is a natural person living in a community property state,
such Grantor either (a) held (at the time of execution and delivery of the
Consent and Power of Attorney, the Omnibus Agreement and/or the Option
Properties Agreements to which it is party) and continues to hold his or her
Interests as separate property and accordingly had (at the time of execution and
delivery of the Consent and Power of Attorney, the Omnibus Agreement and/or the
Option Properties Agreements to which it is party) and continues to have the
authority alone under applicable laws relating to transfers of community
property to engage in the Transactions to which he or she is a party (including,
without limitation, the transfer of his or her Interests to the Operating
Partnership) or (b) held (at the time of execution and delivery of the Consent
and Power of Attorney, the Omnibus Agreement and/or the Option Properties
Agreements to which it is party) and continues to hold his or her Interests as
community property and has obtained the consents, approvals or authorizations of
such persons and/or governmental authorities or courts required under applicable
laws relating to transfers of community property for such Grantor to engage in
the Transactions to which he or she is party (including, without limitation, the
transfer of his or her Interests to the Operating Partnership); attached hereto
as Schedule 2.2 is a true, correct and complete copy of each such consent,
------------
approval or authorization obtained. The execution and delivery by any Grantor
(directly or through an Attorney-in-Fact) of the Grantor Agreements to which it
is a party, the consummation by such Grantor (directly or through an Attorney-
in-Fact) of the Transactions to which it is a party and the performance by such
Grantor (directly or through an Attorney-in-Fact) of its obligations under the
Grantor Agreements to which it is a party, did not and will not (as the case may
be) (i) conflict with or result in a violation or breach of any provisions of
the Organizational Documents of any such Grantor, (ii) conflict with, result in
a violation or breach of, or constitute (with or without due notice or lapse of
time or both) a default (or give rise to any right of termination, cancellation
or acceleration) under any of the terms, conditions or provisions of any note,
bond, mortgage, indenture, lease, license, easement, restriction, contract,
agreement or other instrument or obligation to which such Grantor was at the
time
7
<PAGE>
of such action or is (as the case may be) a party or subject or by which such
Grantor or any of its properties or other assets was at the time of such action
or is (as the case may be) bound, (iii) conflict with or violate any provision
of any law, statute, rule or regulation or any judgment, order, writ,
injunction, decree, rule or regulation of any court or federal, state or other
governmental agency, authority or regulatory body to which such Grantor or any
of its properties or other assets was at the time of such action or is (as the
case may be) subject or (iv) result in the creation of any Lien upon the
Properties or such Grantor's Interest.
2.3 Consents and Approvals. No consent, waiver, approval,
----------------------
authorization or other action of, or filing or registration with, any federal,
state or other governmental agency, authority or regulatory body or any other
person (including, without limitation, any person who is a party to any lease,
agreement or commitment included in Schedule 2.13, 2.14 or 2.15 attached hereto)
------------- ---- ----
is required to be obtained in connection with the execution, delivery and
performance of the Grantor Agreements and the Transactions, except any of the
foregoing that shall have been obtained and are in full force and effect.
2.4 Binding Obligation. Each of the Grantor Agreements has been duly
------------------
executed and delivered by each Grantor that is a party thereto (directly or
through an Attorney-in-Fact) and constitutes a legal, valid and binding
obligation of such Grantor, enforceable against such Grantor in accordance with
its terms.
2.5 Brokers. No Grantor or any general partner, officer or director
-------
of any Grantor has incurred any liability or obligation for brokerage or
finders' fees or agents' commissions or other similar payment in connection with
the Transactions to which it is a party.
2.6 Ownership. (a) Attached hereto as Schedule 2.6 is a true and
--------- ------------
complete listing of each Entity, the Properties owned or leased by such Entity,
and the owners of each Entity and such owners' percentage ownership interest in
each Entity, and, if the owners of any Entities are themselves corporations or
partnerships, the owners of such corporations and partnerships and their
percentage ownership interest in such corporations or partnerships. In the event
that any Entity which is a trust terminated or the Properties of any such trust
are deemed distributed, the beneficiaries of such trust (prior to its
termination or the deemed distribution) as set forth on Schedule 2.6 directly
------------
own an interest in the Properties owned by such trust as set forth on Schedule
--------
2.6. Except as disclosed in the Registration Statement, no Grantor has granted
- ---
to any person (other than to the Operating Partnership pursuant to the Omnibus
Agreement and the Option Properties Agreements) any option, warrant,
subscription, conversion right, preemptive right or other right to purchase or
otherwise acquire any interest in any Property or in such Grantor, and, to the
knowledge of any Indemnitor, no other person or entity has granted to any person
any option, warrant, subscription, conversion right, preemptive right or other
right to acquire any interest in any Grantor or Property.
8
<PAGE>
(b) With respect to each Interest of a Grantor that constitutes
an interest in a partnership and that is being transferred to the Operating
Partnership pursuant to the Omnibus Agreement or the Option Properties
Agreements: (i) such Interest has been validly issued and the Grantor has funded
all capital contributions and advances to the partnership in which such Interest
constitutes an interest that are required to be funded or advanced prior to the
Closing Date; (ii) such Interest was issued in compliance with applicable
securities, partnership and other laws and the partnership agreement governing
such Interest and was not issued in violation of any preemptive rights; (iii)
there are no options, warrants, subscriptions, conversion rights, preemptive
rights or other rights or agreements of any kind to purchase or otherwise
acquire such Interest or other equity interests or profit participation of any
kind in the partnership in which such Interest constitutes an interest or any
securities or obligations of any kind convertible into such Interest or other
equity interests or profit participation of any kind in the partnership in which
such Interest constitutes an interest, and there are no other agreements,
instruments or understandings with respect to such Interest or other equity
interests or profit participation of any kind in the partnership in which such
Interest constitutes an interest except as set forth in the partnership
agreement of the partnership in which such Interest constitutes an interest;
(iv) such Grantor possesses the unrestricted right to assign and transfer such
Interest to the Operating Partnership; and (v) such Grantor is, and upon
consummation of the assignments and other transactions contemplated by the
Omnibus Agreement or the Option Properties Agreements the Operating Partnership
will be, the owner and holder of good title to such Interests, in each case free
and clear of any Liens; provided, however, that the Operating Partnership shall
-------- -------
not assume, incur or otherwise become responsible for any debts, obligations or
other liabilities of any nature of the partnership in which such Interest
constitutes a general or limited partnership interest, other than the Assumed
Liabilities applicable to such partnership.
2.7 No Other Assets. Except as reflected on Schedule 2.7 attached
--------------- ------------
hereto, no Entity (other than a beneficiary of a trust) owns or leases any
assets other than the Properties which may be transferred to the Operating
Partnership pursuant to the Omnibus Agreement or the Option Properties
Agreements. No Grantor has an interest, direct or indirect, in any of the
Properties except for the Interests subject to the Omnibus Agreement or the
Option Properties Agreements.
(b) Except as reflected on Schedule 2.7, the Properties
------------
constitute all of the properties and assets used or useful in the operation of
the Kilroy Group's Business in a manner consistent with its historic operations
up to the Closing Date.
2.8 Title to Real Properties. To the knowledge of the Indemnitors,
------------------------
upon consummation of the assignments and other transactions contemplated by the
Omnibus Agreement, the Operating Partnership will be (i) the owner and holder of
the ground leasehold estate and ground lessee's interest in the land comprising
the Kilroy Airport Center Long Beach Property and the ground and air space
leasehold estates and ground and air space lessees' interests in the land
comprising the SeaTac Office Center Property,
9
<PAGE>
pursuant to the applicable ground or air space lease or leases set forth on
Schedule 2.16 hereto and (ii) the owner and holder of good, valid and marketable
- -------------
fee simple title to each of the Real Properties (other than the land described
in clause (i) and the Option Properties), in each case free and clear of all
Liens other than the Permitted Liens (as defined below). To the knowledge of
the Indemnitors, upon consummation of the assignments and other transactions
contemplated by each Option Properties Agreement, the Operating Partnership will
be the owner and holder of good, valid and marketable fee simple title to each
of the Option Properties subject thereto, in each case free and clear of all
Liens other than the Permitted Liens. For purposes hereof, the term "Permitted
Liens" shall mean:
(a) Liens, or deposits made to secure the release of such Liens,
securing taxes, the payment of which is not delinquent or the payment of which
is actively being contested in good faith by appropriate proceedings diligently
pursued;
(b) Zoning laws and ordinances generally applicable to the
districts in which the Real Properties are located which are not violated by the
existing structures or present uses thereof;
(c) Liens imposed by laws, such as carriers', warehousemen's and
mechanics' liens, and other similar liens arising in the ordinary course of
business which secure payment of obligations not more than 60 days past due or
which are being contested in good faith by appropriate proceedings diligently
pursued;
(d) non-exclusive easements for public utilities, minor
encroachments, rights of access or other non-monetary matters that do not have a
material adverse effect upon, or materially interfere with the use of, the Real
Properties; and
(e) any exceptions contained in the title insurance policies
with respect to the Real Properties obtained in connection with the IPO and
acceptable to the representatives of the underwriters involved with the IPO.
2.9 Title to Personalty. To the knowledge of the Indemnitors, each
-------------------
Entity is, and upon consummation of the assignments and other transactions
contemplated by the Omnibus Agreement the Operating Partnership will be, the
owner and holder of good title to the Personalty (other than the Personalty
related to the Option Properties) owned by such Entity, in each case free and
clear of any Liens other than the Permitted Liens. To the knowledge of the
Indemnitors, each Entity is, and upon consummation of the assignments and other
transactions contemplated by each Option Properties Agreement the Operating
Partnership will be, the owner and holder of good title to the Personalty
related to the Option Properties subject thereto owned by such Entity, in each
case free and clear of any Liens other than the Permitted Liens.
10
<PAGE>
2.10 Debt; Solvency. (a) Except for the existing mortgage debt with
--------------
respect to each Real Property, as described on Schedule 2.10 attached hereto or
-------------
in the Registration Statement, no Grantor has any indebtedness other than
indebtedness incurred by it in its ordinary course of business (which in no case
exceeds $50,000 for any single Grantor or $100,000 in the aggregate). There
exists no default or, to the knowledge of the Indemnitors, any event which with
the passage of time or notice or both would constitute a default, with respect
to any indebtedness of any such person that has not been cured or waived. A
true, complete and correct copy of each loan and mortgage document with respect
to each Option Property has been delivered to the Operating Partnership or the
REIT.
(b) Each Grantor has been and will be solvent at all times prior
to and immediately following the transfer of its Interests to the Operating
Partnership in connection with the Transactions.
2.11 Financial Statements. The combined financial statements of the
--------------------
Kilroy Group (including the notes thereto) and schedule of the Kilroy Group and,
to the knowledge of the Indemnitors, the combined historical summaries of
certain revenues and certain expenses of the Acquisition Properties (including
the notes thereto) incorporated in the Registration Statement (collectively, the
"Financial Statements" and each, individually, a "Financial Statement") have
been prepared in accordance with generally accepted accounting principles
applied on a consistent basis throughout the periods specified. The combined
balance sheets in the Financial Statements fairly present the financial
condition of the Kilroy Group as of the dates shown and the combined income
statements and the combined cash flow statements in the Financial Statements
fairly present the results of operations and cash flows, respectively, of the
Kilroy Group for the periods indicated and, to the knowledge of the Indemnitors,
the combined historical summaries of certain revenues and certain expenses in
the Financial Statements fairly present certain revenues and certain expenses of
the Acquisition Properties for the periods indicated. There are no material
known encumbrances, debts, liabilities or obligations of any nature, whether
direct or indirect, contingent or non-contingent, or matured or unmatured of the
Kilroy Group that are not described in such Financial Statements.
2.12 Financial Condition. Since the date of the Financial Statements,
-------------------
there has been no material adverse change in the condition (financial or
otherwise), earnings, assets, business, affairs or business prospects of any
Grantor and no event has occurred or circumstance exists that may result in such
a material adverse change. No Grantor (i) is in receivership or dissolution,
(ii) has made an assignment for the benefit of creditors or admitted in writing
its inability to pay its debts as they mature, or (iii) has been adjudicated a
bankrupt or filed a petition in voluntary bankruptcy or a petition or answer
seeking reorganization or an arrangement with creditors under the federal
bankruptcy law or any other similar law or statute of the United States or any
jurisdiction and no such petition has been filed against any Grantor.
11
<PAGE>
2.13 Contracts. Except for (i) agreements relating to mortgage
---------
financing to be repaid on the Closing Date, (ii) the leases referred to in
Section 2.14 below, or (iii) the ground and air space leases referred to in
Section 2.15 below, Schedule 2.13 attached hereto lists all contracts or other
-------------
understandings, written or oral, to which any Grantor is a party or by which any
Grantor is bound that relate to the Properties or that will otherwise become
binding on the Operating Partnership, the REIT or the Services Company following
consummation of the Transactions (collectively, the "Contracts" and each, a
"Contract"). For purposes of this Section 2.13, "Contracts" means (a) contracts
which are required to be filed as exhibits to a registration statement or report
under Item 601 of Regulation S-K promulgated under the Securities Act and (b)
contracts or other understandings which are known to the Indemnitors and involve
performance of services or delivery of goods or materials of an amount or value
in excess $50,000 or were entered into by a Grantor other than in the ordinary
course of business. A true, complete and correct copy of each Contract
(including all amendments, modifications and supplements thereto) has been
delivered to the REIT or the Operating Partnership. To the knowledge of the
Indemnitors, each of the Contracts is valid and binding and is in full force and
effect. To the knowledge of the Indemnitors, no Grantor and no other party to
any Contract has breached or defaulted under the terms of such Contract or given
or received any notice of default of any provision of such Contract, except for
such breaches or defaults that would not, singly or in the aggregate, have a
material adverse effect on the condition (financial or otherwise), earnings,
assets, business affairs or business prospects of any Real Property, the Kilroy
Group's Business or, following the consummation of the Transactions, the REIT or
the Operating Partnership or on the Transactions. To the knowledge of the
Indemnitors, each of the Contracts will continue to be binding in accordance
with its terms following the consummation of the Transactions and is freely
assignable to the Operating Partnership.
2.14 Leases; Rent Rolls. A true, complete and correct copy of the
------------------
leases (including all amendments, modifications and supplements thereto) for
each Real Property (other than the ground and air space leases referred to in
Section 2.15 below) have been delivered to the REIT or the Operating
Partnership. The rent roll attached hereto as Schedule 2.14(a) for each Real
----------------
Property is a true, correct and complete schedule of all space leases, occupancy
agreements and licenses (and annexes and riders thereto) and tenants relating to
the Real Properties and was true and correct as of the date thereof, and there
have been no material changes to such rent roll since the date thereof. To the
knowledge of the Indemnitors, each of such leases is valid and binding and is in
full force and effect. To the knowledge of the Indemnitors, no party to any such
lease has breached or defaulted under the terms of such lease or given or
received any notice of default of any provision of any such lease, except for
such breaches or defaults as would not, singly or in the aggregate, have a
material adverse effect on the condition (financial or otherwise), earnings,
assets, business affairs or business prospects of any Real Property, the Kilroy
Group's Business or, following the consummation of the Transactions, the REIT or
the Operating Partnership or on the Transactions. No tenant under any such lease
has been granted a right to early termination of such lease, except as set forth
on Schedule 2.14(b) attached hereto. To the knowledge of the Indemnitors, each
----------------
of such leases will continue to
12
<PAGE>
be binding in accordance with its terms following the consummation of the
Transactions and is freely assignable to the Operating Partnership.
2.15 Ground and Air Space Leases. Schedule 2.15 attached hereto
--------------------------- -------------
lists all ground and air space leases held by Grantors with respect to the Real
Properties, and a true, complete and correct copy of each such ground and air
space lease (including all amendments, modifications and supplements thereto)
has been delivered to the REIT or the Operating Partnership. To the knowledge
of the Indemnitors, each of such ground and air space leases is valid and
binding and is in full force and effect. To the knowledge of the Indemnitors,
no party to any such ground or air space lease has breached or defaulted under
the terms of such lease or given or received any notice of default of any
provision of any such lease. To the knowledge of the Indemnitors, each of such
ground and air space leases will continue to be binding in accordance with its
terms following the consummation of the Transactions and is freely assignable to
the Operating Partnership.
2.16 Permits. To the knowledge of the Indemnitors, there exists for
-------
each Real Property, and the Grantors will convey to the Operating Partnership on
the applicable date of closing of the acquisition of a Real Property as set
forth in the Omnibus Agreement and in the Option Properties Agreements, all
certificates, licenses, permits, registrations and other authorizations from
federal, state or other governmental agencies, authorities or regulatory bodies
or political subdivisions (collectively, "Permits") as are necessary for the
ownership, use, occupancy, management, leasing, construction, operation and
licensing of such Real Property as it is currently being operated. To the
knowledge of the Indemnitors, all such Permits are in full force and effect and
no such Permit has been violated in any material respect. To the knowledge of
the Indemnitors, no Grantor has taken any action which, or failed to take any
action the omission of which, would result in the revocation of such Permits.
None of the Indemnitors has received notice of any intention of any such
granting authority to cancel, suspend or modify any of the Permits. To the
knowledge of the Indemnitors, the Permits are assignable to the Operating
Partnership. To the knowledge of the Indemnitors, neither the execution of this
Agreement nor the consummation of the Transactions will create any right of
termination, revocation or expiry on the part of any such granting authority.
2.17 Litigation; Moratoria, Etc. No claims, actions, suits,
--------------------------
proceedings or investigations have been instituted or, to the knowledge of the
Indemnitors, threatened against any Grantor, or any of the properties or rights
(including, without limitation, any Property) of any Grantor or that otherwise
relate to or may affect the business or any of the properties (including,
without limitation, any Property) of any Grantor, before or by any court,
administrative agency or body, or federal, state or other governmental agency,
authority or regulatory body, domestic or foreign, that would have a material
adverse effect on the condition (financial or otherwise), earnings, business,
affairs or business prospects of any Real Property, the Kilroy Group's Business
or, following the consummation of the Transactions, the REIT or the Operating
Partnership or on the Transactions. No Grantor or Real Property is subject to
any order, writ, judgment, injunction or decree of any court,
13
<PAGE>
tribunal or other federal, state or other governmental, agency, authority or
regulatory body (other than generally applicable laws, rules and regulations)
that would have a material adverse effect on the condition (financial or
otherwise), earnings, business, affairs or business prospects of any Real
Property, the Kilroy Group's Business or, following the consummation of the
Transactions, the REIT or the Operating Partnership or on the Transactions.
Except as disclosed in the Registration Statement, there is no pending or, to
the knowledge of the Indemnitors, threatened litigation, moratorium,
condemnation or eminent domain proceedings, zoning change, or other similar
proceeding or action, or private purchase in lieu of such a proceeding or
action, that is likely to in any manner affect the size of, use of, improvements
on, construction on, access to or availability of utilities or other necessary
services to, any Real Property, except such proceedings or actions that would
not, singly or in the aggregate, have a material adverse effect on the condition
(financial or otherwise), earnings, assets, business, affairs or business
prospects of or with respect to such Real Property, the Kilroy Group's Business
or, following the consummation of the Transactions, the REIT or the Operating
Partnership or on the Transactions.
(b) All claims, suits or proceedings asserted or instituted by
ACD2, a California corporation, or its affiliates or by Hughes Aircraft Company
or Hughes Electronic Corporation's Space & Communications Company or its
affiliates, in each case against any member of the Kilroy Group or its
affiliates either have been settled with prejudice or dismissed pursuant to a
final judgment with prejudice, the time for appeal therefrom having expired.
2.18 Compliance with Laws, Etc. To the knowledge of the Indemnitors,
-------------------------
no Grantor or proper representative thereof has received any written or other
notice of any violation of any applicable law, regulation, rule, order or code
(including, without limitation, any zoning code, building code, or similar law,
regulation or ordinance, or any employment, environmental, health or other
regulatory law, order, regulation, or requirement) or any recorded covenant,
easement, restriction or similar agreement or instrument, relating to a Real
Property which remains uncured, or has received any written or other notice that
any investigation has been commenced or is contemplated respecting any such
possible violation, and, to the knowledge of the Indemnitors, there are no such
violations which, individually or in the aggregate, would have a material
adverse effect on the condition (financial or otherwise), earnings, business,
affairs or business prospects of any Real Property, the Kilroy Group's Business
or, following the consummation of the Transactions, the REIT or the Operating
Partnership or on the Transactions.
2.19 Taxes, Utilities, Etc. (a) All tax or information returns for
---------------------
all periods ending on or before or including the Closing Date that are or were
required to be filed by or on behalf of any Grantor have been or will be filed
on a timely basis and in accordance with all applicable laws, regulations and
administrative requirements. All such tax or information returns that have been
filed on or before the Closing Date were, when filed, and continue to be, true,
correct and complete. All such tax or information returns that will
14
<PAGE>
be filed after the Closing Date will be true, correct and complete when filed by
or on behalf of such Grantor.
(b) There is no action, suit or proceeding pending against, or
with respect to, any Grantor or Property in respect of any tax (other than tax
abatement proceedings) nor is any claim for additional tax asserted by any
taxing authority. No Grantor has given or been requested to give waivers or
extensions (or is or would be subject to a waiver or extension given by any
other person) of any statute of limitations relating to the payment of taxes for
which such Grantor may be liable.
(c) Grantors have paid, or made provision for the payment of,
all taxes (other than transfer taxes incurred in connection with the
Transactions) that have or may become due for all periods ending on or before or
including the Closing Date, including, without limitation, all taxes reflected
on the tax returns referred to in this Section 2.19, or in any assessment or
notice (either formal or informal) received by Grantors or any affiliated party
with respect to any Grantor, except such taxes as are set forth in Schedule
--------
2.19(c) that are being contested in good faith and as to which adequate
- -------
reserves (determined in accordance with generally accepted accounting principles
consistently applied) have been provided. All taxes (other than transfer taxes
incurred in connection with the Transactions) that the Grantors are or were
required by law to withhold or collect have been duly withheld or collected and,
to the extent required, have been paid to the appropriate governmental
authority. There are no Liens with respect to taxes upon any of the properties
or assets of the Grantors.
(d) There is no existing tax sharing agreement to which any
Grantor is a party that may or will require that any payment be made by Grantors
or any of their affiliates on or after the date hereof.
(e) No amounts due and owing with respect to any Real Property
in connection with utilities, insurance, assessments or other charges
customarily prorated in real estate transactions have been outstanding.
(f) The Transactions will not result in any tax liability to the
REIT or the Operating Partnership, other than customary documentary real estate
transfer taxes with respect to Real Properties located in California in an
amount not to exceed [$1.10 per $1,000] in value of real property.
2.20 Insurance. Each Entity, as applicable, currently has in place,
---------
and upon consummation of the Transactions the REIT will have in place, the
public liability, casualty and other insurance coverage with respect to its Real
Property as is required by the applicable mortgage financing documents which may
be assumed by the REIT or the Operating Partnership if any of the Option
Properties is acquired by the Operating Partnership and the applicable mortgage
financing documents to be placed by the REIT or the Operating Partnership on any
Real Property (as described in the Registration Statement)
15
<PAGE>
and as would otherwise customarily be carried by owners or operators of projects
similar to the Real Properties in the markets in which such Real Properties are
located. Each insurance policy with respect to a Real Property currently in
place is, and each insurance policy with respect to a Real Property which will
be in place upon consummation of the Transactions will be on such date, in full
force and effect and all premiums due and payable thereunder have been or will
be (as the case may be) fully paid when due. None of the Indemnitors has
received from any insurance company notice of any material defects or
deficiencies affecting the insurability of any Real Property or any notices of
cancellation or intent to cancel any such insurance.
2.21 Employees. The employees listed on Schedule 2.21 attached
--------- -------------
hereto constitute all of the employees used in the operation of the Kilroy
Group's Business in a manner consistent with its historic operations up to the
Closing Date. Except for ______________________ [INSERT NAMES], all such persons
earn less than $______________ per annum, are entitled to no more than
______________ weeks of vacation per annum and are not entitled to any profit
sharing, severance pay or any health or benefit plans or arrangements other than
those substantially similar to ________________ plan which is described on
Schedule 2.21. Except as set forth on Schedule 2.21, there are no (a) union
- ------------- -------------
contracts, collective bargaining agreements or other written agreements in
respect of any employees and no verbal agreements requiring employment for any
specified period of time or under which employment cannot be terminated without
cause upon reasonable notice, (b) accrued or retroactive wage or salary
increases or pension or other benefits to which any employee is entitled, and
(c) profit sharing, bonus, deferred compensation, incentive compensation, stock
purchase, stock option, severance or termination pay, hospitalization or other
medical, life or other insurance, supplemental unemployment benefits, pension,
retirement or other benefit plans or "employee benefit plans" (withing the
meaning of Section 3(3) of ERISA), and no Grantor or affiliate thereof has
contributed to any "multiemployer plan" (within the meaning of Section 3(37) of
ERISA) during the five years preceding the date of this Agreement. All of the
employees listed on Schedule 2.21 have been paid in full to their last payment
-------------
period, in accordance with the terms of their respective employment agreements,
if any, all payroll taxes and other taxes, fees and charges in connection with
such employees have been paid to such date, and no employee has accrued vacation
time in excess of ________ days. Other than a $200,000 bonus payable to Richard
E. Moran Jr. if the IPO is consummated on or before June 30, 1997, no other
employee of the Kilroy Group or of the REIT or the Operating Partnership is or
will be entitled to receive a bonus in connection with the IPO.
[NOTE: ADDITIONAL REPRESENTATIONS CONCERNING ERISA PLANS MAY BE REQUIRED BASED
ON ITEMS DISCLOSED ON SCHEDULE.]
2.22 Environmental. To the knowledge of each Indemnitor, except as
-------------
set forth on Schedule 2.22 and in the Registration Statement:
-------------
16
<PAGE>
(a) no Hazardous Substances (as defined below) are present in
the Environment (as defined below) at any Real Property in amounts or
concentrations that would have a material adverse effect on the condition
(financial or otherwise), earnings, assets, business, affairs or business
prospects of any Real Property, the Kilroy Group's Business or, following the
consummation of the Transactions, the REIT or the Operating Partnership or on
the Transactions;
(b) no Grantor has caused or allowed any discharging or disposal
of any Hazardous Substance or pollutant into the Environment at any Real
Property in violation of any Environmental Law (as defined below) applicable to
such Real Property in an amount or concentration that would have a material
adverse effect on the condition (financial or otherwise), earnings, assets,
business, affairs, or business prospects of any Real Property, the Kilroy
Group's Business or, following the consummation of the Transactions, the REIT or
the Operating Partnership or on the Transactions;
(c) no Grantor has received any notice of a claim under or
pursuant to any Environmental Law applicable to a Real Property pertaining to
Hazardous Substances on any Real Property or pertaining to other property at
which Hazardous Substances generated at any Real Property have come to be
located, which claim would have a material adverse effect on the condition
(financial or otherwise), earnings, assets, business, affairs, or business
prospects of any Real Property, the Kilroy Group's Business or, following the
consummation of the Transactions, the REIT or the Operating Partnership or on
the Transactions;
(d) no Grantor has received any notice from any Governmental
Authority (as defined below) claiming any violation of any Environmental Law at
any Real Property that is uncured or unremediated as of the date hereof, which
violation would have a material adverse effect on the condition (financial or
otherwise), earnings, assets, business, affairs, or business prospects of any
Real Property, the Kilroy Group's Business or, following the consummation of the
Transactions, the REIT or the Operating Partnership or on the Transactions;
(e) no Real Property (A) is included in the National Priorities
List issued pursuant to CERCLA (as defined below) by the United States
Environmental Protection Agency (the "EPA") or in the Comprehensive
Environmental Response, Compensation and Liability Information System database
maintained by the EPA or (B) is included in any similar list of potentially
contaminated sites pursuant to any other applicable Environmental Law, and no
Grantor has received any written notice from the EPA or any other Governmental
Authority proposing the inclusion of any Real Property on such list;
(f) all reports of environmental surveys, audits, investigations
and assessments relating to the Real Properties have been disclosed to the
Operating Partnership or the REIT; and
17
<PAGE>
(g) except as would not have a material adverse effect on the
condition (financial or otherwise), earnings, assets, business, affairs, or
business prospects of any Real Property, the Kilroy Group's Business or,
following the consummation of the Transactions, the REIT or the Operating
Partnership or on the Transactions, all permits and licenses required under any
Environmental Law with respect to the Real Properties have been obtained and the
Real Properties are in compliance with the terms and conditions of such permits
and licenses.
As used in this Section 2.22, "Hazardous Substance" shall mean
asbestos containing materials, polychlorinated biphenyls or any hazardous
substance, hazardous material, hazardous waste, toxic substance, toxic material,
toxic waste, oil, petroleum, or petroleum-derived substance or waste, listed or
regulated under the Comprehensive Environmental Response, Compensation and
Liability Act, as amended (42 U.S.C. (S)(S) 9601 et seq.) ("CERCLA"), the
Resource Conservation and Recovery Act, as amended (42 U.S.C. (S)(S) 6901, et
seq.) ("RCRA"), or any other Environmental Law affecting the Real Properties;
"Environment" shall mean any ambient air, surface water, ground water, land
surface, or subsurface strata located at, on, or under the Real Properties;
"Environmental Law" shall mean CERCLA, RCRA, the Clean Air Act, as amended (42
U.S.C. (S)(S) 7401 et seq.), or the Clean Water Act, as amended (33 U.S.C.
(S)(S) 1251 et seq.), together with all laws, rules, regulations, statutes,
ordinances and orders promulgated thereunder and all other federal, state and
local laws, relating to the protection of the environment or the safety and
health of persons from exposure to any actual or potential release, removal,
discharge or emission of Hazardous Substances; "Governmental Authority" shall
mean any federal, state or local governmental office, agency or authority having
the duty or authority to promulgate, implement or enforce any Environmental Law.
2.23 Condition of Property; No Alterations. To the knowledge of the
-------------------------------------
Indemnitors, there is no material defect in the condition of any Real Property,
nor any material damage from uninsured casualty or other cause, nor any soil
condition of any such Real Property that will not support all of the
improvements thereon without the need for unusual or new subsurface excavations,
fill, footings, caissons or other installations, except for any such defect,
damage or condition that has been corrected or will be corrected in the ordinary
course of the business of such Real Property as part of its scheduled annual
maintenance and improvement program. Except as set forth on Schedule 2.23
-------------
attached hereto, to the knowledge of the Indemnitors, no Grantor has any
agreement or other arrangement with any governmental authority or any other
person to make capital improvements with respect to any Real Property. To the
knowledge of the Indemnitors, there have been no alterations to the exteriors of
any of the buildings or other improvements on any Real Property that would
render any surveys provided to the Operating Partnership or the REIT in
connection with the Transactions grossly inaccurate or otherwise reflect a
material deficiency in title to such improvements.
2.24 Non-Foreign Status. No Grantor is a foreign person, foreign
------------------
corporation, foreign partnership, foreign trust or foreign estate (as defined in
the Code),
18
<PAGE>
and, therefore, no Grantor is subject to the provisions of the Code relating to
the withholding of sales proceeds to foreign persons.
2.25 Mechanics' Liens. All material bills and claims for labor
----------------
performed and materials furnished to or for the benefit of the Real Properties
have been paid in full (or otherwise provided for), and there are no mechanics'
or materialmen's liens (whether or not perfected) affecting the Real Properties
which, individually or in the aggregate, would have a material adverse effect on
the condition (financial or otherwise), earnings, business, affairs or business
prospects of any Real Property, the Kilroy Group's Business or, following the
consummation of the Transactions, the REIT or the Operating Partnership or on
the Transactions.
2.26 Trademarks and Tradenames; Proprietary Rights. To the
---------------------------------------------
knowledge of the Indemnitors, there are no actions or other judicial or
administrative proceedings involving any Grantor, Entity or Property outstanding
or threatened that concern any copyrights, copyright application, trademarks,
trademark registrations, trade names, service marks, service mark registrations,
trade names and trade name registrations or any trade secrets (the "Proprietary
Rights") being transferred to the Operating Partnership in connection with the
Transactions or involving the "Kilroy" name. To the knowledge of the
Indemnitors, there are no patents or patent applications relating to the
operation of the Properties or the Kilroy Group's Business as conducted prior to
the Closing.
(b) The Grantors have the right and authority to use the
"Kilroy" name, and, to the knowledge of the Indemnitors, the right and authority
to use each Proprietary Right being transferred to the REIT or the Operating
Partnership in connection with the Transactions necessary, in connection with
the operation of the Properties and the Kilroy Group's Business in the manner in
which it is currently used. The Grantors have the right and authority to
license such right and authority with respect to the "Kilroy" name to the REIT
and the Operating Partnership and, to the knowledge of the Indemnitors, the
Grantors have the right and authority to convey such right and authority with
respect to such Proprietary Rights to the REIT and the Operating Partnership, in
each case in connection with the Transactions. The current use of the "Kilroy"
name, and, to the knowledge of the Indemnitors, each such Proprietary Right,
does not, and such use did not, conflict with, infringe upon or violate any
copyright, trade secret, trademark or registration of any other person.
(c) To the knowledge of the Indemnitors, there are no
outstanding or threatened disputes or disagreements with respect to any
Proprietary Right being transferred to the Operating Partnership in connection
with the Transactions, the "Kilroy" name or any license, contract, agreement or
other commitment, written or oral, relating to the same.
2.27 No Misrepresentations. No representation, warranty or statement
---------------------
made, or information provided, by the Indemnitors in this Agreement or the
Grantors in the Consents and Power of Attorney, the Omnibus Agreement or the
Option Properties
19
<PAGE>
Agreements or in any other document or instrument furnished or to be furnished
by or on behalf of the Grantors pursuant thereto or as contemplated thereby (i)
contains or will contain any untrue statement of a material fact or (ii) omits
or will omit to state a material fact necessary to make statements contained
herein or therein not misleading.
2.28 Prior Real Property Developments. The real property
--------------------------------
developments set forth on Schedule 2.28 attached hereto constitute all real
-------------
property development work that any member of the Kilroy Group or its affiliates
has performed since January 1, 1992.
2.29 Foreclosures. Except as described in the Registration
------------
Statement, no foreclosures have been instituted, and to the knowledge of the
Indemnitors none are currently threatened, with respect to any property or
assets (including the Properties) directly or indirectly owned (whether now or
in the past) by any member of the Kilroy Group or its affiliates.
2.30 Bankruptcy. (a) No proceeding or filing of a petition seeking
----------
relief under Title 11 of the United Sates Code or any other federal, state or
foreign bankruptcy, insolvency, liquidation or similar law has been commenced or
instituted (whether voluntary or involuntary) by or with respect to any member
of the Kilroy Group or its affiliates, (b) no member of the Kilroy Group or
affiliates thereof has applied for or consented to the appointment of a
receiver, trustee, custodian, sequestrator or similar official for any such
persons or for a substantial part of any such persons' property or assets and
(c) no member of the Kilroy Group or affiliates thereof has made a general
assignment for the benefit of its creditors.
2.31 Formation Transactions. Each of the transactions constituting
----------------------
the Formation Transactions (as defined in the Registration Statement) has
occurred, or, if contemplated in the Registration Statement to occur subsequent
to the Closing Date, will occur in the manner described in the Registration
Statement.
2.32 Termination of Falck. Randall Falck's employment with KI was
--------------------
terminated on October 31, 1996. Mr. Falck is not employed by any other member
of the Kilroy Group. Any and all claims of Mr. Falck against KI or any other
member of the Kilroy Group or its affiliates in connection with the termination
of his employment with KI and the related repurchase of his interests in certain
Properties and certain entities affiliated with the Kilroy Group have been
settled with prejudice pursuant to a Settlement Agreement and Mutual General
Release between KI and Randall Falk and Penny Falk effective as of January 8,
1997. A true, complete and correct copy of such Settlement Agreement has been
delivered to the REIT. Such Settlement Agreement is valid and binding and in
full force and effect and has not been amended. No party to such Settlement
Agreement has breached or defaulted under the terms of such Settlement Agreement
or given or received any notice of default of any provision of such Settlement
Agreement. Mr. Falk has no right to receive any property, other than cash
payable pursuant to the terms of such Settlement Agreement, in connection with
such termination of employment and repurchase of interests.
20
<PAGE>
2.33 Development Obligations. Except as described in the Registration
-----------------------
Statement or on Schedule 2.33 attached hereto, (a) no Grantor has any material
-------------
obligations or liabilities which remain to be performed or fulfilled under or in
connection with (i) the Development Management Agreement with respect to the
Riverside Judicial Center or (ii) the Agreement to Provide Real Estate Services
and Exclusive Broker Employment Agreement, each with respect to the property
located in the City of Pico Rivera which currently serves as Northrop Grumman's
headquarters for certain activities, and (b) no Grantor has any obligation to
make a material investment in additional infrastructure improvements with
respect to Kilroy Long Beach Phases III and IV.
3. Additional Representations and Warranties with Respect to the
-------------------------------------------------------------
Indemnitors. Each Indemnitor hereby further represents and warrants to the REIT
- -----------
and the Operating Partnership as follows:
3.1 Authority Relative to this Agreement. Each Indemnitor has the
------------------------------------
requisite power and authority and, with respect to each Indemnitor who is a
natural person, full legal right and capacity, to execute and deliver this
Agreement and to perform it or his obligations under this Agreement. All action
of each Indemnitor necessary to authorize the execution, delivery and
performance of this Agreement by such Indemnitor has been taken, and no other
proceedings on the part of such Indemnitor are necessary to authorize the
execution and delivery by such Indemnitor of this Agreement and the consummation
by such Indemnitor of the transactions contemplated hereunder. Neither the
execution and delivery of this Agreement by such Indemnitor, nor the
consummation by such Indemnitor of the transactions contemplated hereunder, nor
performance by such Indemnitor of any of its or his obligations under this
Agreement does or will (i) conflict with or result in a violation or any breach
of any provisions of the Organizational Documents, as applicable, of such
Indemnitor, (ii) conflict with, result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a default (or
give rise to any right of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
lease, license, easement, restriction, contract, agreement or other instrument
or obligation to which such Indemnitor is a party or is subject or by which such
Indemnitor or any of its properties or other assets may be bound, or (iii)
conflict with or violate any provision of any law, statute, rule or regulation
or any judgment, order, writ, injunction, decree, rule or regulation of any
court or federal, state or other governmental agency, authority or regulatory
body applicable to such Indemnitor or any of its properties or other assets or
result in the creation of any Lien upon the Properties or such Indemnitor's
Interest.
3.2 Binding Obligation. This Agreement has been duly and validly
------------------
executed and delivered by each Indemnitor and constitutes a legal, valid and
binding obligation of such Indemnitor, enforceable against such Indemnitor in
accordance with its terms.
21
<PAGE>
3.3 Consents and Approvals. No consent, waiver, approval,
----------------------
authorization or other action of, or filing or registration with, any federal,
state or other governmental agency, authority or regulatory body or any other
person is required to be obtained in connection with the execution, delivery and
performance of this Agreement, except any of the foregoing that shall have been
obtained and are in full force and effect.
3.4 Registration Statement. The Indemnitors have reviewed the
----------------------
Registration Statement and represent and warrant that it did not, when it was
declared effective, contain any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein not misleading.
The Indemnitors have reviewed each preliminary prospectus provided to the
underwriters for use in connection with the issuance and sale of the REIT's
common stock in the IPO and the final prospectus in connection with the IPO and
represent and warrant that each such preliminary prospectus and final prospectus
did not, when it was filed with the Commission, (i) contain any untrue statement
of a material fact or (ii) omit to state any material fact necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading. This Section 3.4 does not apply to statements or
omissions made in the Registration Statement or any preliminary or final
prospectus in connection with the IPO in reliance upon and in conformity with
written information furnished by the underwriters involved in the IPO.
4. Indemnity, Limitations on Liability. Subject to the terms hereof, the
-----------------------------------
Indemnitors hereby agree to indemnify and hold harmless the REIT and the
Operating Partnership (each, a "Covered Party") from any damage, expense, loss,
cost, claim or liability (each a "Claim") suffered or incurred by any Covered
Party as a result of (i) any inaccuracy in any representation or warranty
contained herein, in any Grantor Agreement or in the Pledge Agreement, (ii) any
breach or nonfulfillment by any Grantor of any of its covenants, agreements or
other obligations contained in or made pursuant to any Grantor Agreement or the
Pledge Agreement and (iii) any Excluded Liability. Notwithstanding anything to
the contrary contained in this Agreement, the liability of the Indemnitors
hereunder shall be joint and several; provided, however, that John B. Kilroy,
-------- -------
Sr. and John B. Kilroy, Jr. shall not be liable for any inaccuracy in the
representations and warranties set forth in Sections 2.1, 2.2, 2.3, 2.4, 3.1,
3.2 and 3.3 hereof to the extent only that such representations and warranties
pertain to John B. Kilroy, Jr. as an individual or John B. Kilroy, Sr. as an
individual, respectively; provided, further, that recourse against the
-------- -------
Indemnitors shall, so long as the REIT shall have a valid, first priority
perfected lien on and security interest in the Collateral described in the
Pledge Agreement referred to in Section 5 hereof, be limited to the rights of
the Indemnitors in such Collateral.
5. Pledge of Units.
---------------
5.1 Pledge Agreement. As security for the full and timely
----------------
performance of their indemnification obligations hereunder, the Indemnitor,
agree to execute and deliver a Pledge Agreement and the documents referred to
therein (the "Pledge Agreement") in the
22
<PAGE>
form of Exhibit D attached hereto and to make the deliveries and perform the
---------
obligations required thereunder.
5.2 Agent for Pledgees.
------------------
(a) Appointment. Each Covered Party hereby designates and
-----------
appoints the REIT as its agent under the Pledge Agreement, and each Covered
Party hereby irrevocably authorizes the REIT to take such action or to refrain
from taking such action on its behalf under the provisions of the Pledge
Agreement and to exercise such powers as are set forth therein, together with
such other powers as are reasonably incidental thereto. The REIT is authorized
and empowered to amend, modify or waive any provisions of the Pledge Agreement
on behalf of the Covered Parties. The REIT agrees to act as such on the express
conditions contained in this Section 5.2. The provisions of this Section 5.2 are
solely for the benefit of the REIT and the Covered Parties and no Indemnitor
shall have any rights as a third party beneficiary of any of the provisions
hereof. In performing its functions and duties under the Pledge Agreement, the
REIT shall act solely as an administrative representative of the Covered Parties
and does not assume and shall not be deemed to have assumed any obligation
toward or relationship of agency or trust with or for the Covered Parties, by or
through its agents or employees.
(b) Duties; Rights; Exculpation; Etc. The REIT shall have no
--------------------------------
duties, obligations or responsibilities to the Covered Parties except those
expressly set forth in this Section 5.2 or in the Pledge Agreement. Neither the
REIT nor any of its officers, directors, employees or agents shall be liable to
any Covered Party for any action taken or omitted by them under this Section 5.2
or under the Pledge Agreement, or in connection with this Section 5.2 or the
Pledge Agreement, except that the REIT shall be obligated on the terms set forth
in this Section 5.2 for performance of its express obligations under the Pledge
Agreement. In performing its functions and duties under the Pledge Agreement,
the REIT shall exercise the same care which it would exercise in dealing with a
security interest in collateral held for its own account, but the REIT shall not
be responsible to any Covered Party for any recitals, statements,
representations or warranties in the Pledge Agreement or for the execution,
effectiveness, genuineness, validity, enforceability or sufficiency of the
Pledge Agreement or the Collateral or the transactions contemplated thereby.
The REIT shall not be required to make any inquiry concerning either the
performance or observance of any of the terms, provisions or conditions of the
Pledge Agreement, or the existence or possible existence of any Event of Default
(as defined in the Pledge Agreement).
(c) Reliance. The REIT shall be entitled to rely upon any
--------
written notices, statements, certificates, orders or other documents or any
telephone message or other communication (including any writing, telex, telecopy
or telegram) believed by it in good faith to be genuine and correct and to have
been signed, sent or made by the proper person, and with respect to all matters
pertaining to this Section 5.2 and the Pledge Agreement and its duties under
this Section 5.2 or the Pledge Agreement, upon advice of
23
<PAGE>
counsel selected by it. The REIT shall be entitled to rely upon the advice of
legal counsel, independent accountants, and other experts selected by the REIT
in its sole discretion.
(d) Indemnification. Each Covered Party, jointly and
---------------
severally, reimburse and indemnify the REIT and its directors, officers,
employees and agents for any damage, expense, loss, cost, claim or liability
which may be imposed on, incurred by, or asserted against the REIT or such other
persons in any way relating to or arising out of this Section 5.2 or the Pledge
Agreement or any action taken or omitted by the REIT or such other persons under
this Section 5.2 or the Pledge Agreement. The obligations of the Covered
Parties under this Section 5.2(d) shall survive the termination of the Survival
Period, the return of any Collateral and the termination of this Agreement and
the Pledge Agreement.
(e) Other Business. The Covered Parties acknowledge and agree
--------------
that the REIT may exercise its rights and powers under other agreements and
instruments to which it is or may be a party, and engage in other transactions
and any kind of business with the Indemnitors or their affiliates, as though it
were not the agent of the Covered Parties under the Pledge Agreement.
6. Survival; Agreements Regarding Certain Claims. It is the express
---------------------------------------------
intention and agreement of the parties hereto that the representations,
warranties and indemnities set forth in this Agreement shall survive the closing
of the IPO for a period (the "Survival Period") commencing on the date hereof
and ending on the later of (a) June 30, 1998 and (b) the ninetieth day after the
date of delivery to the REIT's Board of Directors of audited financial
statements of the REIT for the REIT's first full fiscal year following the IPO
and (except as specifically provided below in this Section 6) shall expire and
be terminated and extinguished forever at such time, except with respect to
claims asserted against any Indemnitor in good faith pursuant hereto by written
notice from any or all of the Covered Parties to such Indemnitor at any time
within the Survival Period. Any written notice given within the Survival Period
must set forth the nature and details of the Claim with reasonable specificity
(to the extent then known) in order to constitute a valid notice pursuant to the
preceding sentence. Each Covered Party agrees that, in the event that such
Covered Party could reasonably make any claim with respect to a matter covered
by this Agreement under any existing policy of insurance or against any Grantor
under a Grantor Agreement, such Covered Party shall, prior to taking any action
hereunder against any Indemnitor, make a claim under such policy or against such
Grantor and thereafter shall use reasonable efforts to prosecute such claim to
completion; provided, however, that from and after (i) the time that notice is
-------- -------
given to an Indemnitor that a Claim exists but that coverage therefor is being
sought from an insurer or Grantor under a Grantor Agreement and that no action
or (in accordance with the preceding proviso) limited action is being taken
against such Indemnitor (provided such notice is given within the Survival
Period) through and including (ii) thirty days after the date of abandonment (by
non-prosecution or otherwise) of such Claim against such carrier or Grantor (or
other final disposition of such Claim) or, if earlier, the applicable
limitations period for such claim, the Survival Period with respect to
24
<PAGE>
that Indemnitor and that Claim only and no other Claim (other than other Claims
satisfying the conditions of this proviso) shall be stayed, as necessary, to
preserve such Covered Party's rights against such Indemnitor under this
Agreement. The amounts recovered under an insurance policy or from any Grantor
with respect to any Claim shall be credited against the Indemnitors' liability
with respect to such Claim.
7. Miscellaneous.
-------------
7.1 Notices. All notices, demands, requests or other communications
-------
which may be or are required to be given or made either by the Indemnitors, on
the one hand, or the REIT or the Operating Partnership, on the other hand,
pursuant to this Agreement shall be in writing and shall be hand delivered or
transmitted by certified mail (return receipt requested), express overnight mail
or delivery service, telegram, telex or facsimile transmission to the parties at
the following addresses:
If to any Indemnitor, to: c/o Kilroy Industries
2250 East Imperial Highway
El Segundo, California 90245
Attn: ___________________
Fax: (___) ___-____
With a copy to: ________________________
________________________
________________________
________________________
If to the REIT or the
Operating Partnership to: 2250 East Imperial Highway
El Segundo, California 90245
Attn: ____________________
Fax: (___) ___-____
With a copy to: Edward Sonnenschein, Jr., Esq.
Latham & Watkins
633 West Fifth Street
Los Angeles, California 90071
Fax: (213) 891-8763
or to such other address in the United States of America as the addressee may
indicate by written notice to the other party in conformance with this Section
7.1.
Each notice, demand, request or communication which shall be given or
made in the manner described above shall be deemed sufficiently given or made
for all purposes at such time as it is delivered to the addressee (with the
delivery receipt, the
25
<PAGE>
affidavit of messenger or (with respect to a telex) the answer back being deemed
conclusive but not exclusive evidence of such delivery) or at such time as
delivery is refused by the addressee upon presentation.
7.2 Further Assurances. The Indemnitors shall duly execute and
------------------
deliver, or cause to be duly executed and delivered, to the REIT or the
Operating Partnership (as applicable) such further instruments and documents and
take and cause to be taken such further actions as may be necessary or proper in
the reasonable opinion of the REIT or the Operating Partnership to cause the
Operating Partnership to be (a) (i) the owner and holder of the ground leasehold
estate and ground lessee's interest in the land comprising the Kilroy Airport
Center Long Beach Property and the ground and air space leasehold estates and
ground and air space lessees' interests in the land comprising the SeaTac Office
Center Property and (ii) the owner and holder of good, valid and marketable fee
simple title to each of the Real Properties (other than the land described in
clause (i)), in each case pursuant to the terms of the Omnibus Agreement or the
Option Properties Agreement (as applicable) and free and clear of all Liens
other than the Permitted Liens and (b) the owner and holder of good title to the
Personalty pursuant to the terms of the Omnibus Agreement or the Option
Properties Agreements (as applicable), free and clear of any Liens other than
the Permitted Liens.
7.3 Benefit and Assignment. No party hereto shall assign this
----------------------
Agreement, in whole or in part, whether by operation of law or otherwise,
without the prior written consent of the Indemnitor (if the assignor is the
Operating Partnership or the REIT) or of the Operating Partnership and the REIT
(if the assignor is any Indemnitor); and any purported assignment contrary to
the terms hereof shall be null, void and of no force and effect; provided,
--------
however, in the event that the Operating Partnership transfers title to any
- -------
Property to the Services Company and/or any direct or indirect subsidiary of the
REIT or the Operating Partnership, the rights, remedies and indemnities of the
Operating Partnership hereunder relating to any Property the title of which is
transferred shall automatically run to the benefit of the Services Company
and/or any such subsidiary and each such transferee shall be deemed to be a
Covered Party. In the event that the Operating Partnership transfers title to
any Property as described in the proviso of the foregoing sentence, such
transferee shall agree in writing that the REIT shall act as its agent under the
Pledge Agreement in accordance with Section 5.2 hereof. This Agreement shall be
binding upon and shall inure to the benefit of the parties hereto and their
respective successors and assigns as permitted hereunder. No person or entity
other than the parties hereto is or shall be entitled to bring any action to
enforce any provision of this Agreement against any of the parties hereto, and
the covenants and agreements set forth in this Agreement shall be solely for the
benefit of, and shall be enforceable only by, the parties hereto or their
respective successors and assigns as permitted hereunder.
7.4 Entire Agreement; Amendment. This Agreement contains the final
---------------------------
and entire agreement between the parties hereto with respect to the subject
matter hereof and is intended to be an integration of all prior negotiations and
understandings. The
26
<PAGE>
parties to this Agreement shall not be bound by any terms, conditions,
statements, warranties or representations, oral or written, not contained or
referred to herein or therein. No change or modification of this Agreement shall
be valid unless the same is in writing and signed by all of the parties hereto.
7.5 GOVERNING LAW. THIS AGREEMENT, THE RIGHTS AND OBLIGATIONS OF THE
-------------
PARTIES HERETO AND ANY CLAIMS OR DISPUTES RELATING THERETO SHALL BE GOVERNED BY
AND CONSTRUED UNDER THE LAWS OF THE STATE OF CALIFORNIA.
7.6 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which when
taken together shall constitute one and the same instrument.
7.7 Definition of Knowledge. As used herein, "to the knowledge" of
-----------------------
an Indemnitor means the actual knowledge of an individual Indemnitor.
27
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be duly executed and delivered on its behalf as of the date first
above written.
KILROY REALTY, L.P.
By: Kilroy Realty Corporation,
its General Partner
By: _______________________________
Name:
Title:
KILROY REALTY CORPORATION
By: _______________________________
Name:
Title:
INDEMNITORS:
KILROY INDUSTRIES
By: _______________________________
Name:
Title:
___________________________________
John B. Kilroy, Sr.
___________________________________
John B. Kilroy, Jr.
28
<PAGE>
SCHEDULE 1
LIABILITIES NOT ASSUMED
-----------------------
1. All obligations to fund tenant improvements and leasing commissions
pursuant to leases signed during the period commencing on October 1, 1996
and ending on December 20, 1996.
2. Any compensation payable to an officer or employee of the REIT or any of
its subsidiaries for his or her services in connection with the IPO,
including, without limitation, a $200,000 bonus payable to Richard E. Moran
Jr. if the IPO is consummated on or before June 30, 1997.
3. All liabilities in connection with the termination of employees by any
member of the Kilroy Group.
4. Other than as set forth in the September 30, 1996 pro forma condensed
consolidated balance sheet of the REIT included in the Registration
Statement, all liabilities in connection with actions taken by the Kilroy
Group to effect the Transactions and the IPO.
5. All liabilities in connection with development projects of the Kilroy Group
other than the Properties (including Kilroy Airport Center Long Beach
Phases III and IV).
6. All liabilities in connection with the construction of a freeway on-ramp at
the Kilroy Airport Center in El Segundo Property.
7. All mechanics' or materialmens' liens outstanding with respect to the
Properties.
8. All taxes other than real property taxes that are not by their terms past
due.
29
<PAGE>
EXHIBIT A
EXCLUDED INTANGIBLES
--------------------
[L&W to provide - include Kilroy name]
30
<PAGE>
EXHIBIT B
PERSONALITY
-----------
[L&W to provide]
31
<PAGE>
EXHIBIT C
REAL PROPERTIES
---------------
[L&W to provide]
32
<PAGE>
EXHIBIT D
FORM OF PLEDGE AGREEMENT
------------------------
[See Attached]
33
<PAGE>
EXHIBIT 10.5
PLEDGE AGREEMENT
----------------
PLEDGE AGREEMENT, dated ___________, 1997, between Kilroy Industries,
a California corporation, John B. Kilroy, Sr. and John B. Kilroy, Jr. (each of
the foregoing individuals and entity is referred to herein individually as a
"Pledgor" and collectively as the "Pledgors"), and Kilroy Realty Corporation, a
Maryland corporation (the "REIT"), for itself and as agent for Kilroy Realty,
L.P., a Delaware limited partnership (the "Operating Partnership") and each
other person who becomes a Covered Party (as defined in the Representations
Agreement defined below) and agrees to such agency (in both such capacities, the
"Pledgee").
WHEREAS, the Pledgors are limited partners of the Operating
Partnership, pursuant to the Amended and Restated Agreement of Limited
Partnership of Kilroy Realty, L.P. dated the date hereof among the REIT, as sole
general partner, the Pledgors, as limited partners, and the other limited
partners named therein (as such agreement may be amended, modified or
supplemented from time to time in accordance with its terms, the "Operating
Partnership Agreement"), and such limited partnership interests are evidenced by
certificates representing units of limited partnership interest in the Operating
Partnership (the "Units");
WHEREAS, the Pledgors, the REIT and the Operating Partnership are
parties to that certain Supplemental Representations, Warranties and Indemnity
Agreement dated the date hereof (as such agreement may be amended, modified or
supplemented from time to time in accordance with its terms, the
"Representations Agreement"); capitalized terms used herein but not otherwise
defined herein shall have the meanings assigned to such terms in the
Representations Agreement;
WHEREAS, the Pledgors agreed to indemnify the REIT and the Operating
Partnership for certain losses as set forth in Section 4 of the Representations
Agreement (the "Secured Obligations"); and
WHEREAS, in order to secure the full and timely performance of the
Secured Obligations, pursuant to the Representations Agreement each of the
Pledgors agreed to pledge and grant to the Pledgee, for the Pledgee's own
benefit and the benefit of the Operating Partnership and the other Covered
Parties, a lien and security interest in, to and under 50% of its Units, as more
fully described on Schedule I attached hereto (the "Pledged Units").
----------
NOW, THEREFORE, the parties agree as follows:
1. Grant of Security Interest. As collateral security for the
--------------------------
payment, performance and observance of the Secured Obligations, now existing or
hereafter arising, absolute or contingent, whether or not due and payable, each
of the Pledgors pledges to the
<PAGE>
Pledgee, for its own benefit and for the benefit of the Operating Partnership
and the other Covered Parties, and grants to the Pledgee, for its own benefit
and for the benefit of the Operating Partnership and the other Covered Parties,
a security interest in the following property (collectively, the "Collateral"):
(a) the Pledged Units, as more particularly described in Schedule I
----------
attached hereto;
(b) all rights of each Pledgor under the Operating Partnership
Agreement attributable to its ownership of the Pledged Units, including, without
limitation, all rights of such Pledgor in, to and under that portion of its
capital account and distributions represented by, or to which such Pledgor is
entitled as a result of its ownership of, the Pledged Units;
(c) any additional partnership interests in the Operating Partnership
("Partnership Interests") and/or obligations of the Operating Partnership which
may at any time hereafter be acquired by any Pledgor in connection with the
Pledged Units and the certificates or other instruments or documents evidencing
same;
(d) any additional partnership interests, shares of stock,
obligations and/or other property and the certificates or other instruments or
documents evidencing the same which may at any time hereafter be delivered by
the Pledgors to the Pledgee to be held pursuant to this Agreement;
(e) all distributions and moneys paid or distributed in respect of or
in exchange for any or all of the foregoing;
(f) all rights of Pledgor in and to all distributions declared in
respect of any or all of the foregoing;
(g) all books and records relating to the foregoing; and
(h) all proceeds and profits of any or all of the foregoing.
2. Delivery of Certificates and Instruments. The Pledgors shall
----------------------------------------
deliver to the Pledgee: (a) the original certificates or other instruments or
documents evidencing the Pledged Units concurrently with the execution and
delivery of this Agreement, and (b) the original certificates or other
instruments or documents evidencing all other Collateral (except for Collateral
which this Agreement specifically permits the Pledgors to retain) within ten
days after a Pledgor's receipt thereof. All Collateral which is certificated
securities shall be in bearer form or, if in registered form, shall be issued in
the name of the Pledgee or endorsed to the Pledgee or in blank.
3. Pledgors Remain Liable. Notwithstanding anything herein to the
----------------------
contrary, (a) the applicable Pledgors shall remain liable under the agreements
(including, without limitation, the Operating Partnership Agreement) included in
the Collateral to the
2
<PAGE>
extent set forth therein to perform all of their duties and obligations
thereunder to the same extent as if this Agreement had not been executed, (b)
the exercise by the Pledgee of any of its rights hereunder shall not release any
Pledgor from any of its duties or obligations under the agreements (including,
without limitation, the Operating Partnership Agreement) included in the
Collateral, except to the extent that such duties and obligations may have been
terminated by reason of a sale, transfer or other disposition of the Collateral
pursuant hereto, and (c) the Pledgee shall have no obligation or liability under
the agreements (including, without limitation, the Operating Partnership
Agreement) included in the Collateral by reason of this Agreement, nor shall the
Pledgee be obligated to perform any of the obligations or duties of any Pledgor
thereunder or to take any action to collect or enforce any claim for payment
assigned hereunder.
4. Representations, Warranties and Covenants. Each Pledgor
-----------------------------------------
represents, warrants and covenants as follows (provided, however, that John B.
-------- -------
Kilroy, Sr. makes no representation, warranty or covenant with respect to John
B. Kilroy, Jr. or Collateral delivered by John B. Kilroy, Jr. and John B.
Kilroy, Jr. makes no representation, warranty or covenant with respect to John
B. Kilroy, Sr. or Collateral delivered by John B. Kilroy, Sr.):
(a) Set forth on Schedule I attached hereto is a complete and
----------
accurate list and description of all Pledged Units delivered by such Pledgor and
such Pledgor is the sole holder of record and sole beneficial owner of the
Pledged Units set forth opposite its name free and clear of all claims,
mortgages, pledges, liens, encumbrances and security interests of every nature
whatsoever, except in favor of the Pledgee and except, with respect to the
Pledged Units owned by John B. Kilroy, Jr., Robin Kilroy's interests in
distributions in respect of such Pledged Units which are in all respects subject
and subordinate to the interests of the Pledgee hereunder as provided in that
certain Consent (the "Consent") executed by Robin Kilroy on October 23, 1996.
All other Collateral hereafter delivered by such Pledgor to the Pledgee will be
held of record and beneficially owned by such Pledgor free and clear of all
claims, mortgages, pledges, liens, encumbrances and security interests of every
nature whatsoever, except in favor of the Pledgee and except, with respect to
other Collateral hereafter delivered by John B. Kilroy, Jr., Robin Kilroy's
interests in distributions, if any, in respect of such Collateral which are in
all respects subject and subordinate to the interests of the Pledgee hereunder
as provided in the Consent.
With respect to each Pledgor which is an entity, the address of its
chief executive office and principal place of business, and the location of its
books and records relating to the Collateral, is set forth below its signature
hereto. With respect to each Pledgor which is an individual, the addresses of
its principal and only places of residence/business are set forth below its
signature hereto. No Pledgor will change said address or location, or merge or
consolidate with any person or change its name, without at least 15 days' prior
written notice to the Pledgee, and with respect to any such change in address or
name or merger or consolidation, each Pledgor shall execute and deliver to the
Pledgee such documents and take such actions as the Pledgee reasonably deems
necessary to perfect and protect the Pledgee's security interests in and to the
Collateral.
3
<PAGE>
(c) Such Pledgor will not create, incur, assume or permit to exist
any security interest in the Collateral other than the security interest created
hereby and other than, with respect to the Collateral delivered by John B.
Kilroy, Jr., Robin Kilroy's interests in distributions in respect of such
Collateral which are in all respects subject and subordinate to the interests of
the Pledgee hereunder as provided in the Consent, or sell, transfer, assign,
pledge or grant a security interest in the Collateral to any person other than
the Pledgee.
(d) The Pledged Units delivered by such Pledgor constitute the
percentage of the outstanding equity of the Operating Partnership as indicated
on Schedule I attached hereto.
----------
(e) The Pledged Units constitute 50% of the Partnership Interests of
the Operating Partnership owned by such Pledgor.
(f) The Collateral consisting of Partnership Interests are fully paid
and are not subject to any options to purchase or similar rights of any kind of
any person.
(g) Such Pledgor, if an entity, is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation and has the corporate power and authority to own its properties
and to transact the business in which it is engaged.
(h) Such Pledgor has the requisite power and authority and, if an
individual, full legal right and capacity, to execute and deliver, and to
perform its obligations under, this Agreement, and has taken all necessary
action to authorize the execution, delivery and performance of this Agreement.
Such Pledgor, if an individual living in a community property state, has
obtained all consents, approvals or authorizations required under applicable
laws relating to the transfer of community property to execute, deliver and
perform its obligations under this Agreement; a true, correct and complete copy
of all such consents, approvals or authorizations is attached as a Schedule to
the Representations Agreement.
(i) This Agreement constitutes the legal, valid and binding
obligation of such Pledgor, enforceable in accordance with its terms.
(j) The execution, delivery and performance of this Agreement will
not violate (as applicable) any law or regulation, or any order or decree of any
court or governmental instrumentality, or any provision of the charter or by-
laws of, or any securities issued by, such Pledgor, and will not conflict with,
or result in the breach of, or constitute a default under, any indenture,
mortgage, deed of trust, agreement or other instrument to which such Pledgor is
a party or by which it is bound, and will not result in the creation or
imposition of any lien, charge or encumbrance upon any of the property of such
Pledgor pursuant to the provisions of any of the foregoing.
4
<PAGE>
(k) No consent of any other person (including, without limitation, as
applicable, stockholders and creditors of such Pledgor) and no consent, license,
permit, approval or authorization of, exemption by, notice or report to, or
registration, filing or declaration with, any governmental instrumentality is
required in connection with the execution, delivery, performance, validity or
enforceability of this Agreement, except for the filing of any financing
statements required hereunder.
(l) The pledge of the Collateral pursuant to this Agreement creates a
valid and perfected first priority security interest in such Collateral, subject
to any filings or actions required pursuant to the California Uniform Commercial
Code or otherwise.
(m) It will defend the Pledgee's security interest in the Collateral
against the claims and demands of all persons whomsoever.
(n) It will take any and all actions necessary to maintain such
Pledgor's status as a limited partner of the Operating Partnership and the
limited liability represented by the Pledged Units.
(o) Such Pledgor will not enter into or assume any other agreement
containing a negative pledge with respect to the Collateral.
5. Registration. At any time and from time to time the Pledgee may
------------
cause all or any of the Collateral to be transferred to or registered in its
name or the name of its nominee or nominees.
6. Claims; Value of Collateral.
---------------------------
(a) Subject to Section 6 of the Representations Agreement, on or
prior to the date on which the Survival Period terminates, a Covered Party may
give notice (a "Claim Notice") to one or more of the Pledgors of any Claim it
may have against the Pledgor(s), or any claim against the Covered Party which it
reasonably believes may result in a Claim against the Pledgor(s) under Section 4
of the Representations Agreement, specifying in reasonable detail the nature and
dollar amount of any such Claim. A Pledgor shall be deemed to have accepted a
Claim if it does not give a Response Notice (as hereinafter defined) with
respect thereto within 30 days following receipt of the Claim Notice. In the
event that any Pledgor objects to any Claim and provides a written response (a
"Response Notice") to such Covered Party within 30 days following receipt of the
Claim Notice, which Response Notice describes in reasonable detail such
Pledgor's objection to the Claim (whether as to the facts giving rise thereto,
the amount thereof, or otherwise) and, if applicable, providing a recalculation
of the amount thereof, such Covered Party and such Pledgor shall meet within ten
days of the Covered Party's receipt of the Response Notice to discuss and
negotiate in good faith the Claim and such Pledgor's objection thereto. In the
event that such meeting is not held or, if held, no resolution or compromise is
reached within 30 days of such meeting, then at the election of either such
Covered Party or such Pledgor the dispute regarding the Claim shall be submitted
to and determined by the U.S. District Court for the Southern District of
California or, if such court does not have
5
<PAGE>
jurisdiction over such dispute, such dispute shall be submitted to and
determined by the Circuit Court of Los Angeles County, California. A Claim is
successful and is deemed to be a Secured Obligation on the earliest to occur of:
(i) the date on which the relevant Pledgor(s) accepts such Claim pursuant to the
second sentence of this paragraph (a) or otherwise; (ii) on the date the
relevant Pledgor(s) and Covered Party agree on the amount of such Claim; or
(iii) 30 days after a final adjudication of the relevant Pledgor's or Pledgors'
liability with respect to such Claim (which shall mean that all applicable
appeals of any decision have been made or the time periods for filing such
appeals have lapsed) in accordance with the procedures set forth above in this
paragraph (a).
(b) The value of Collateral (the "Value") shall be determined as
follows: (i) with respect to Collateral consisting of the Pledged Units or other
Partnership Interests, an amount equal to the fair market value of the number of
shares of the REIT's common stock for which such Collateral is exchangeable; and
(ii) for all other Collateral, the fair market value of such Collateral as
determined by the Independent Directors of the Pledgee. For purposes of clause
(i) of this Section 6(b), "fair market value" of a share of common stock of the
REIT shall have the meaning assigned to such term in the Operating Partnership
Agreement.
7. Voting Rights and Certain Payments Prior to Occurrence of Secured
-----------------------------------------------------------------
Obligations and Other Events.
- ----------------------------
(a) Until Collateral may be applied to satisfy a Secured Obligation
hereunder (such Collateral to consist only of Collateral delivered by a Pledgee
liable for such Secured Obligation), each Pledgor shall be entitled to exercise,
as it shall think fit, but in a manner in the judgment of the Pledgee not
inconsistent with the terms hereof, the voting power with respect to any such
Collateral, and for that purpose the Pledgee shall (if such Collateral shall be
registered in the name of the Pledgee or its nominee) execute or cause to be
executed from time to time, at the expense of such Pledgor, such proxies or
other instruments in favor of such Pledgor or its nominee, in such form and for
such purposes as shall be reasonably required by such Pledgor and, if such
Pledgor is an entity, shall be specified in a written request therefor of its
President or a Vice-President, to enable it to exercise such voting power with
respect to such Collateral.
(b) Until the Independent Directors of the Pledgee reasonably
determine that the outstanding Claims asserted by the Covered Parties in one or
more Claim Notices may equal or exceed the value of the Collateral then
available to satisfy such Claims, each Pledgor shall be entitled to receive and
retain for its own account any and all regular cash distributions (but not
distributions in the form of Partnership Interests or other securities or
liquidating distributions) and interest at any time and from time to time paid
upon any of such Collateral.
(c) Notwithstanding anything contained in this Agreement to the
contrary, except with the prior consent of the Pledgee, until such time as this
Agreement is terminated, no Pledgor shall have the right to exercise any of its
redemption rights under Section 8.6 of the Operating Partnership Agreement.
6
<PAGE>
8. Extraordinary Payments and Distributions. In case, upon the
----------------------------------------
dissolution or liquidation (in whole or in part) of the Operating Partnership,
any sum shall be paid as a liquidating distribution or otherwise upon or with
respect to any of the Collateral, such sum shall be paid over to the Pledgee
promptly, and in any event within ten days after receipt thereof, to be held by
the Pledgee as additional Collateral hereunder. In case any distribution of
Partnership Interests shall be made with respect to the Collateral, or
Partnership Interests or fractions thereof shall be issued pursuant to any split
involving any of the Collateral, or any distribution of capital shall be made on
any of the Collateral, or any partnership interests, shares, obligations or
other property shall be distributed upon or with respect to the Collateral
pursuant to a recapitalization or reclassification of the capital of the
Operating Partnership, or pursuant to the dissolution, liquidation (in whole or
in part), bankruptcy or reorganization of the Operating Partnership, or pursuant
to the merger or consolidation of the Operating Partnership with or into another
entity, the partnership interests, shares, obligations or other property so
distributed shall be delivered to the Pledgee promptly, and in any event within
ten days after receipt thereof, to be held by the Pledgee as additional
Collateral hereunder, and all of the same (other than cash) shall constitute
Collateral for all purposes hereof.
9. Voting Rights and Certain Payments After Occurrence of Secured
--------------------------------------------------------------
Obligation and Certain Other Events. (a) At such time that Collateral may be
- -----------------------------------
applied to satisfy a Secured Obligation hereunder, all rights of any Pledgor to
exercise or refrain from exercising all voting power with respect to such
Collateral and to otherwise exercise all ownership rights arising from such
Collateral shall cease, and thereupon the Pledgee shall be entitled to exercise
all voting power with respect to such Collateral and otherwise exercise such
ownership rights as though the Pledgee were the outright owner of such
Collateral. In the event that the Independent Directors of the Pledgee
reasonably determine that the outstanding Claims asserted by the Covered Parties
in one or more Claim Notices may equal or exceed the value of the Collateral
then available to satisfy such Claims, all rights of any Pledgor to receive and
retain the distributions and interest which it would otherwise be authorized to
receive and retain pursuant to Section 7 hereof shall cease, and thereupon the
Pledgee shall be entitled to receive and retain, as additional Collateral
hereunder, any and all distributions and interest at any time and from time to
time paid upon any of such Collateral, provided that, concurrent with making
--------
such determination, the Pledgee gives notice thereof to the affected Pledgor(s).
Upon receipt of any such notice, a Pledgor may submit the matter to arbitration
in accordance with the rules of the American Arbitration Association before a
tribunal in Los Angeles, California, and the decision of the arbitrators as to
the retention of any such distributions and interest shall be final and binding
between the parties and shall be enforceable in any court of competent
jurisdiction.
(b) All payments, distributions or other property or assets which are
received by any Pledgor contrary to the provisions of paragraph (a) of this
Section 9 shall be received and held in trust for the benefit of the Pledgee,
shall be segregated from other funds of such Pledgor and shall be forthwith paid
over to the Pledgee.
10. Application of Cash Collateral. Any cash received and retained
------------------------------
by the Pledgee as additional Collateral hereunder pursuant to the foregoing
provisions may at any
7
<PAGE>
time and from time to time be applied (in whole or in part) by the Pledgee, at
its option, to the payment of the Secured Obligations to which such Collateral
is subject (in such order as the Pledgee shall in its sole discretion
determine).
11. Remedies With Respect to the Collateral.
---------------------------------------
(a) At such time that a Claim becomes a Secured Obligation, the
Pledgee, without obligation to resort to other security, shall have the right at
any time and from time to time to cause the Operating Partnership to redeem,
sell, resell, assign and deliver, in its discretion, all or any part of
Collateral with a Value equal to the amount of the Secured Obligation (such
Collateral to consist of Collateral delivered by a Pledgor which is liable for
such Secured Obligation), in one or more parcels at the same or different times,
and all right, title and interest, claim and demand therein and right of
redemption thereof, at any public or private sale, for cash, upon credit or for
future delivery, and in connection therewith the Pledgee may grant options.
Each such purchaser at any such sale shall hold the property sold absolutely
free from any claim or right on the part of any Pledgor, and each Pledgor hereby
waives (to the extent permitted by law) all rights of redemption, stay and
appraisal which such Pledgor now has or may at any time in the future have under
any rule of law or statute now existing or hereafter enacted. If any part of
the Collateral is sold by the Pledgee upon credit or for future delivery, the
Pledgee shall not be liable for the failure of the purchaser to purchase or pay
for the same and, in the event of any such failure, the Pledgee may resell the
Collateral. In no event shall a Pledgor be credited with any part of the
proceeds of sale of any Collateral until cash payment thereof has actually been
received by the Pledgee.
(b) No demand, advertisement or notice, all of which are hereby
expressly waived, shall be required in connection with (i) any redemption by the
Operating Partnership of any Collateral in accordance with the Operating
Partnership Agreement or (ii) any sale or other disposition of any part of the
Collateral which threatens to decline speedily in value or which is of a type
customarily sold on a recognized market. Except as set forth in the preceding
sentence, the Pledgee shall give the Pledgors at least ten days' prior notice of
the time and place of any public sale and of the time after which any private
sale or other disposition is to be made, which notice the Pledgors agree is
reasonable, all other demands, advertisements and notices being hereby waived.
The Pledgee shall not be obligated to make any sale of Collateral if it shall
determine not to do so, regardless of the fact that notice of sale may have been
given. The Pledgee may, without notice or publication, adjourn any public or
private sale or cause the same to be adjourned from time to time by announcement
at the time and place fixed for sale, and such sale may, without further notice,
be made at the time and place to which the same was so adjourned. Upon each
private sale of Collateral of a type customarily sold in a recognized market and
upon each public sale, the REIT, the Operating Partnership or any other Covered
Party may purchase all or any of the Collateral being sold, free from any equity
or right of redemption, which is hereby waived and released, and may make
payment therefor by release or discharge of the Secured Obligations in lieu of
cash payment, and may, upon compliance with the terms of sale, hold, retain and
dispose of such Collateral without further accountability therefor. In the case
of all sales of Collateral, public or private, the
8
<PAGE>
Pledgee may deduct from the proceeds of sale all costs and expenses of every
kind for sale or delivery, including brokers' and attorneys' fees, and the
Pledgee shall apply any balance of the proceeds of sale to the payment of the
Secured Obligations. Recourse against the Pledgors is limited to the rights of
the Pledgors in the Collateral and the Pledgors shall not be liable for any
deficiency in the proceeds of sale of the Collateral to the payment of the
Secured Obligations. If any proceeds of sale remain after payment in full of
such costs and expenses and all of the Secured Obligations, they shall be held
by the Pledgee as additional Collateral hereunder, subject to any duty of the
Pledgee imposed by law to the holder of any subordinate security interest in the
Collateral known to the Pledgee.
(c) For purposes of this Section 11, an agreement to sell all or any
part of the Collateral shall be treated as a sale thereof and the Pledgee shall
be free to carry out such sale pursuant to such agreement, and no Pledgor shall
be entitled to the return of any of the same subject thereto, notwithstanding
that after the Pledgee shall have entered into such an agreement, all Secured
Obligations may have been paid and performed in full.
(d) Each Pledgor recognizes that the Pledgee may be unable to effect
a public sale of all or a part of the Collateral by reason of certain
prohibitions contained in the Securities Act of 1933, as amended, as now or
hereafter in effect, or in applicable Blue Sky or other state securities laws,
as now or hereafter in effect, but may be compelled to resort to one or more
private sales to a restricted group of purchasers who will be obliged to agree,
among other things, to acquire such Collateral for their own account, for
investment and not with a view to the distribution or resale thereof. Each
Pledgor agrees that private sales so made may be at prices and other terms less
favorable to the seller than if such Collateral were sold at public sales, and
that the Pledgee has no obligation to delay sale of any such Collateral for the
period of time necessary to permit the issuer of such Collateral, even if such
issuer would agree, to register such Collateral for public sale under such
applicable securities laws. Each Pledgor agrees that private sales made under
the foregoing circumstances shall be deemed to have been made in a commercially
reasonable manner.
(e) The remedies provided herein in favor of the Pledgee shall not be
deemed exclusive, but shall be cumulative, and shall be in addition to all other
remedies in favor of the Pledgee existing at law or in equity.
(f) The Pledgee shall not have any duty to exercise any of the
rights, privileges, options or powers or to sell or otherwise realize upon any
of the Collateral, as herein authorized, and the Pledgee shall not be
responsible for any failure to do so or delay in so doing.
12. Care of Collateral. The Pledgee shall have no duty as to the
------------------
collection or protection of the Collateral or any income thereon or as to the
preservation of any rights pertaining thereto, beyond the safe custody of any
thereof actually in its possession. With respect to any maturities, calls,
conversions, exchanges, redemptions, offers, tenders or similar matters relating
to any of the Collateral (herein called "events"), the Pledgee's duty shall be
fully satisfied if (i) the Pledgee exercises reasonable care to
9
<PAGE>
ascertain the occurrence and to give reasonable notice to the Pledgors of any
events applicable to any Collateral which are registered and held in the name of
the Pledgee or its nominee, (ii) the Pledgee gives the Pledgors reasonable
notice of the occurrence of any events, of which the Pledgee has received actual
knowledge, as to any securities which are in bearer form or are not registered
and held in the name of the Pledgee or its nominee (the Pledgors agreeing to
give the Pledgee reasonable notice of the occurrence of any events applicable to
any securities in the possession of the Pledgee of which the Pledgors have
received knowledge), and (iii) (a) the Pledgee endeavors to take such action
with respect to any of the events as the Pledgors may reasonably and
specifically request in writing in sufficient time for such action to be
evaluated and taken or (b) if the Pledgee determines that the action requested
might adversely affect the value of the Collateral, the collection of the
Secured Obligations, or otherwise prejudice the interests of the Pledgee, the
Pledgee gives reasonable notice to the Pledgors that any such requested action
will not be taken and if the Pledgee makes such determination or if any Pledgor
fails to make such timely request, the Pledgee takes such other action as it
deems advisable in the circumstances. Except as hereinabove specifically set
forth, the Pledgee shall have no further obligation to ascertain the occurrence
of, or to notify the Pledgors with respect to, any events and shall not be
deemed to assume any such further obligation as a result of the establishment by
the Pledgee of any internal procedures with respect to any securities in its
possession. Except for any claims, causes of action or demands arising out of
the Pledgee's failure to perform its agreements set forth in this Section, the
Pledgors release the Pledgee from any claims, causes of action and demands at
any time arising out of or with respect to this Agreement, the Collateral and/or
any actions taken or omitted to be taken by the Pledgee with respect thereto,
and the Pledgors hereby agree to hold the Pledgee harmless from and with respect
to any and all such claims, causes of action and demands.
13. Power of Attorney. Each Pledgor hereby appoints the Pledgee as
-----------------
such Pledgor's attorney-in-fact for the purpose of carrying out the provisions
of this Agreement and taking any action and executing any instrument which the
Pledgee may deem necessary or advisable to accomplish the purposes hereof.
Without limiting the generality of the foregoing, the Pledgee shall have the
right and power to (a) receive, endorse and collect all checks and other orders
for the payment of money made payable to a Pledgor representing any interest or
other distribution payable in respect of the Collateral or any part thereof and
to give full discharge for the same, and (b) to execute endorsements,
assignments or other instruments of conveyance or transfer with respect to all
or any of the Collateral.
14. Further Assurances. The Pledgors shall, at their sole cost and
------------------
expense, upon request of the Pledgee, duly execute and deliver, or cause to be
duly executed and delivered, to the Pledgee such further instruments and
documents and take and cause to be taken such further actions as may be
necessary or proper in the reasonable opinion of the Pledgee to carry out more
effectually the provisions and purposes of this Agreement.
15. No Waiver. No failure on the part of the Pledgee to exercise,
---------
and no delay on the part of the Pledgee or of any Covered Party in exercising,
any of its options, powers, rights or remedies hereunder, or partial or single
exercise thereof, shall constitute a
10
<PAGE>
waiver thereof or preclude any other or further exercise thereof or the exercise
of any other option, power, right or remedy.
16. Security Interest Absolute. All rights of the Pledgee
--------------------------
hereunder, grant of a security interest in the Collateral and all obligations of
the Pledgors hereunder, shall be absolute and unconditional irrespective of (a)
any lack of validity or enforceability of the Representations Agreement, any of
the Secured Obligations or any Grantor Agreement or any other agreement or
instrument relating thereto or relating to the Transactions, (b) any change in
any term of all or any of the Secured Obligations or any other amendment or
waiver of, or any consent to any departure from, the Representations Agreement,
any Grantor Agreement or any other agreement or instrument or (c) any other
circumstance which might otherwise constitute a defense available to, or a
discharge of, any Pledgor in respect of the Secured Obligations or in respect of
this Agreement.
17. Return of Collateral. Upon the termination of the Survival
--------------------
Period, the Pledgors shall be entitled to the return of all of the Collateral
and all other cash held as additional Collateral hereunder which have not been
used or applied toward the payment of the Secured Obligations, unless Claims
asserted in one or more Claim Notices pursuant to Section 6(a) hereof remain
outstanding, in which case Collateral with a Value equal to the aggregate dollar
amount of such Claims shall be retained by the Pledgee pursuant to the terms
hereof pending resolution of such Claims pursuant to Section 6 hereof (such
retained Collateral to consist of Collateral delivered by any Pledgor which may
be liable for such Claims (or, if more than one Pledgor may be liable as to any
Claim, then in proportion to such Pledgors' potential liability so long as the
Pledgee holds sufficient Collateral of each such Pledgor, and otherwise in any
proportion). The assignment by the Pledgee to the Pledgors of such Collateral
shall be without representation or warranty of any nature whatsoever and wholly
without recourse. Notwithstanding the foregoing, the Pledgors' release of the
Pledgee and agreement to hold the Pledgee harmless set forth in the last
sentence of Section 12 hereof shall survive any return of Collateral or
termination of this Agreement.
18. Notices. All notices and other communications to any party
-------
hereunder shall be in writing and shall be personally delivered or sent by
certified mail, postage prepaid, return receipt requested, or by a reputable
courier delivery service or by prepaid telex or telecopy and shall be given to
the address or telex or telecopier number for such party set forth below such
party's signature to this Agreement, or to such other address or telex or
telecopier number as such party may hereafter specify by notice to the other
party. Each such notice or other communica-tion shall be effective (a) if given
by telex or telecopier, when such telex or telecopy is trans-mitted to the telex
or telecopier number specified by this Section and the appropriate answerback or
confirmation is received or (b) if given by any other means (including, without
limitation, by courier), when delivered at the address specified by this
Section.
19. Amendments and Waivers. No amendment or waiver of any provision
----------------------
of this Agreement shall in any event be effective unless the same shall be in
writing and signed by the Pledgee and each Pledgor.
11
<PAGE>
20. Governing Law. This Agreement and the rights and obligations of
-------------
the Pledgee and the Pledgors hereunder shall be construed in accordance with and
governed by the law of the State of California (without giving effect to the
conflict of law principles thereof).
21. Submission to Jurisdiction.
--------------------------
(a) Any legal action or proceeding with respect to this Agreement may
be brought in the courts of the State of California or of the United States of
America located in California, and, by execution and delivery of this Agreement,
each Pledgor hereby accepts for itself and in respect of its property, generally
and unconditionally, the jurisdiction of the aforesaid courts. Each Pledgor
hereby irrevocably waives, in connection with any such action or proceeding, (i)
trial by jury, (ii) any objection, including, without limitation, any objection
to the laying of venue or based on the grounds of forum non conveniens, which it
may now or hereafter have to the bringing of any such action or proceeding in
such respective jurisdictions and (iii) the right to interpose any setoff,
counterclaim or cross-claim.
(b) Each Pledgor irrevocably consents to the service of process of
any of the aforementioned courts in any such action or proceeding by the mailing
of copies thereof by certified mail, postage prepaid, to such Pledgor at its
address determined pursuant to Section 18 hereof.
(c) Nothing herein shall affect the right of the Pledgee to serve
process in any other manner permitted by law or to commence legal proceedings or
otherwise proceed against the Pledgor in any other jurisdiction.
22. Assignment. Except with respect to any assignment by the
----------
Pledgee to the Operating Partnership or to any permitted assignee of the REIT or
the Operating Partnership under the Representations Agreement or other Covered
Party (which shall not require any Pledgor's consent but as to which the Pledgee
will give notice to the Pledgors), none of the Pledgors or Pledgee may assign
any of their respective rights under and interests in this Agreement without the
prior written consent of the Pledgors (if the assignor is the Pledgee) or of the
Pledgee (if the assignor is any Pledgor), which consent shall not be
unreasonably withheld or delayed; provided, however, that no consent of any of
-------- -------
the Pledgors is required hereunder for (a) the assignment by the Operating
Partnership or the REIT of any of its rights under and interests in the
Representations Agreement to any permitted assignee under the Representations
Agreement or (b) the Pledgee to act hereunder as agent on behalf of any person
who becomes a Covered Party. Upon receipt of such consent (if required under
this Section 22), the Pledgee may deliver the Collateral or any portion thereof
to its assignee who shall thereupon, to the extent provided in the instrument of
assignment, have all of the rights of the Pledgee hereunder with respect to the
Collateral, and the Pledgee shall thereafter be fully discharged from any
responsibility with respect to the Collateral so delivered to such assignee.
However, no such assignment shall relieve such assignee of those duties and
obligations of the Pledgee specified hereunder.
12
<PAGE>
23. Benefit of Agreement. This Agreement shall be binding upon and
--------------------
inure to the benefit of the Pledgors and the Pledgee and their respective heirs,
successors and permitted assigns, and all subsequent holders of the Secured
Obligations.
24. Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original and all of which
shall together constitute one and the same agreement.
25. Captions. The captions of the sections of this Agreement have
--------
been inserted for convenience only and shall not in any way affect the meaning
or construction of any provision of this Agreement.
26. Complete Agreement. This Agreement and the Representations
------------------
Agreement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede all other understandings, oral or written,
with respect to the subject matter hereof.
27. Severability. In case any one or more of the provisions
------------
contained in this Agreement should be invalid, illegal or unenforceable in any
respect, the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected or impaired.
13
<PAGE>
IN WITNESS WHEREOF, the Pledgors have duly executed this Agreement,
and the Pledgee has caused this Agreement to be duly executed by its officers
duly authorized, as of the day and year first above written.
PLEDGORS: KILROY INDUSTRIES
By:________________________________
Name:
Title:
Address:
2250 East Imperial Highway
El Segundo, California 90245
Attn:______________________________
Tel: ( ) ____-_______
Fax: ( ) ____-_______
Telex: ( ) ____-_______
___________________________________
John B. Kilroy, Sr.
Address (residence):
___________________________________
___________________________________
Address (business):
[Kilroy Realty Corporation]
2250 East Imperial Highway
El Segundo, California 90245
Tel: ( ) ____-_______
Fax: ( ) ____-_______
Telex: ( ) ____-_______
14
<PAGE>
___________________________________
John B. Kilroy, Sr.
Address (residence):
___________________________________
___________________________________
Address (business):
Kilroy Realty Corporation
2250 East Imperial Highway
El Segundo, California 90245
Tel: ( ) ____-_______
Fax: ( ) ____-_______
Telex: ( ) ____-_______
PLEDGEE: KILROY REALTY CORPORATION
By:________________________________
Name:
Title:
Address:
2250 East Imperial Highway
El Segundo, California 90245
Attn:______________________________
Tel: ( ) ____-_______
Fax: ( ) ____-_______
Telex: ( ) ____-_______
15
<PAGE>
SCHEDULE I
Description of Units
--------------------
<TABLE>
<CAPTION>
Percentage
Name of Certificate Number Percentage of Pledgors
Pledgor Number of Units of Equity Total Units
------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C>
Kilroy Industries 50%
John B. Kilroy, 50%
Sr.
John B. Kilroy, 50%
Jr.
</TABLE>
<PAGE>
EXHIBIT 10.6
THE 1997 STOCK OPTION AND INCENTIVE PLAN
OF KILROY REALTY CORPORATION
KILROY REALTY, L.P.
AND KILROY SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I
DEFINITIONS......................................... 1
1.1 General............................................................... 1
-------
1.2 Award Limit........................................................... 1
-----------
1.3 Beneficiary........................................................... 1
-----------
1.4 Board................................................................. 2
-----
1.5 Capital Stock......................................................... 2
-------------
1.6 Change in Control..................................................... 2
-----------------
1.7 Code.................................................................. 2
----
1.8 Committee............................................................. 2
---------
1.9 Common Stock.......................................................... 2
------------
1.10 Company............................................................... 2
-------
1.11 Company Employee...................................................... 2
----------------
1.12 Company Subsidiary.................................................... 3
------------------
1.13 Corporate Transaction................................................. 3
---------------------
1.14 Development Services Contract......................................... 3
-----------------------------
1.15 Director.............................................................. 3
--------
1.16 Employee.............................................................. 3
--------
1.17 Exchange Act.......................................................... 3
------------
1.18 Fair Market Value..................................................... 3
-----------------
1.19 General Partner Interest.............................................. 4
------------------------
1.20 Grantee............................................................... 4
-------
1.21 Incentive Stock Option................................................ 4
----------------------
1.22 Independent Director.................................................. 4
--------------------
1.23 Non-Employee Director................................................. 4
---------------------
1.24 Non-Qualified Stock Option............................................ 4
--------------------------
1.25 Option................................................................ 4
------
1.26 Optionee.............................................................. 5
--------
1.27 Partnership........................................................... 5
-----------
1.28 Partnership Agreement................................................. 5
---------------------
1.29 Partnership Employee.................................................. 5
--------------------
1.30 Partnership Optionee Purchased Shares................................. 5
-------------------------------------
1.31 Partnership Purchase Price............................................ 5
--------------------------
1.32 Partnership Purchased Shares.......................................... 5
----------------------------
1.33 Partnership Subsidiary................................................ 5
----------------------
1.34 Plan.................................................................. 5
----
1.35 QDRO.................................................................. 5
----
1.36 Restricted Stock...................................................... 5
----------------
1.37 Restricted Stockholder................................................ 5
----------------------
1.38 Rule 16b-3............................................................ 5
----------
1.39 Services Company...................................................... 6
----------------
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1.40 Services Company Board................................................ 6
----------------------
1.41 Services Company Employee............................................. 6
-------------------------
1.42 Services Company Independent Director................................. 6
-------------------------------------
1.43 Services Company Optionee Purchased Shares............................ 6
------------------------------------------
1.44 Services Company Purchase Price....................................... 6
-------------------------------
1.45 Services Company Purchased Shares..................................... 6
---------------------------------
1.46 Services Company Subsidiary........................................... 6
---------------------------
1.47 Stock Appreciation Right.............................................. 6
------------------------
1.48 Stock Ownership Limit................................................. 6
---------------------
1.49 Subsidiary............................................................ 7
----------
1.50 Termination of Consultancy............................................ 7
--------------------------
1.51 Termination of Directorship........................................... 7
---------------------------
1.52 Termination of Employment............................................. 7
-------------------------
ARTICLE II
SHARES SUBJECT TO PLAN................................... 8
2.1 Shares Subject to Plan................................................ 8
----------------------
2.2 Add-back of Options and Other Rights.................................. 8
------------------------------------
ARTICLE III
GRANTING OF OPTIONS..................................... 9
3.1 Eligibility........................................................... 9
-----------
3.2 Disqualification for Stock Ownership.................................. 9
------------------------------------
3.3 Qualification of Incentive Stock Options.............................. 9
----------------------------------------
3.4 Granting of Options................................................... 9
-------------------
ARTICLE IV
TERMS OF OPTIONS....................................... 11
4.1 Option Agreement...................................................... 11
----------------
4.2 Option Price.......................................................... 11
------------
4.3 Option Term........................................................... 11
-----------
4.4 Option Vesting........................................................ 12
--------------
4.5 No Right to Continue as Employee or Consultant........................ 12
----------------------------------------------
4.6 Exercise of Option after Termination of Employment, Consultancy or
------------------------------------------------------------------
Directorship.......................................................... 13
------------
4.7 Consideration......................................................... 14
-------------
ARTICLE V
EXERCISE OF OPTIONS..................................... 14
5.1 Partial Exercise...................................................... 14
----------------
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
5.2 Manner of Exercise.................................................... 14
------------------
5.3 Transfer of Shares to a Company Employee, Independent Director or
-----------------------------------------------------------------
Other Board Member.................................................... 15
------------------
5.4 Transfer of Shares to a Partnership Employee.......................... 16
--------------------------------------------
5.5 Transfer of Shares to a Services Company Employee, Services Company
-------------------------------------------------------------------
Independent Director or other Non-Employee Members of the Services
------------------------------------------------------------------
Company Board......................................................... 16
-------------
5.6 Transfer of Payment to the Partnership................................ 17
--------------------------------------
5.7 Conditions to Issuance of Stock Certificates.......................... 17
--------------------------------------------
5.8 Rights as Stockholders................................................ 18
----------------------
5.9 Ownership and Transfer Restrictions................................... 18
-----------------------------------
5.10 Restrictions on Exercise of Option.................................... 18
----------------------------------
ARTICLE VI
AWARD OF RESTRICTED STOCK.................................. 19
6.1 Award of Restricted Stock............................................. 19
-------------------------
6.2 Restricted Stock Agreement............................................ 19
--------------------------
6.3 Consideration......................................................... 19
-------------
6.4 Rights as Stockholders................................................ 20
----------------------
6.5 Restriction........................................................... 20
-----------
6.6 Repurchase of Restricted Stock........................................ 20
------------------------------
6.7 Escrow................................................................ 21
------
6.8 Legend................................................................ 21
------
ARTICLE VII
STOCK APPRECIATION RIGHTS.................................. 21
7.1 Grant of Stock Appreciation Rights.................................... 21
----------------------------------
7.2 Coupled Stock Appreciation Rights..................................... 22
---------------------------------
7.3 Independent Stock Appreciation Rights................................. 22
-------------------------------------
7.4 Payment and Limitations on Exercise................................... 23
-----------------------------------
7.5 Consideration......................................................... 23
-------------
ARTICLE VIII
ADMINISTRATION........................................ 23
8.1 Compensation Committee................................................ 23
----------------------
8.2 Duties and Powers of Committee........................................ 24
------------------------------
8.3 Majority Rule; Unanimous Written Consent.............................. 24
----------------------------------------
8.4 Compensation; Professional Assistance; Good Faith Actions............. 24
---------------------------------------------------------
ARTICLE IX
MISCELLANEOUS PROVISIONS................................... 25
9.1 Not Transferable...................................................... 25
----------------
9.2 Amendment, Suspension or Termination of this Plan..................... 25
-------------------------------------------------
</TABLE>
iii
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
9.3 Changes in Common Stock or Assets of the Company, Acquisition
-------------------------------------------------------------
or Liquidation of the Company and Other Corporate Events.............. 26
--------------------------------------------------------
9.4 Approval of Plan by Stockholders...................................... 28
--------------------------------
9.5 Tax Withholding....................................................... 29
---------------
9.6 Loans................................................................. 29
-----
9.7 Forfeiture Provisions................................................. 29
---------------------
9.8 Limitations Applicable to Section 16 Persons and Performance-Based
------------------------------------------------------------------
Compensation.......................................................... 29
------------
9.9 Effect of Plan Upon Options and Compensation Plans.................... 30
--------------------------------------------------
9.10 Section 83(b) Election Prohibited..................................... 30
---------------------------------
9.11 Compliance with Laws.................................................. 30
--------------------
9.12 Titles................................................................ 30
------
9.13 Governing Law......................................................... 31
-------------
9.14 Conflicts with Company's Restated Articles............................ 31
------------------------------------------
</TABLE>
iv
<PAGE>
THE 1997 STOCK OPTION AND INCENTIVE PLAN
OF KILROY REALTY CORPORATION,
KILROY REALTY, L.P.
AND KILROY SERVICES, INC.
Kilroy Realty Corporation, a Maryland corporation (the "Company"),
Kilroy Realty, L.P., a Delaware limited partnership (the "Partnership") and
Kilroy Services, Inc., a Maryland corporation (the "Services Company"), have
adopted The 1997 Stock Option and Incentive Plan of Kilroy Realty Corporation,
Kilroy Realty, L.P. and Kilroy Services, Inc. (the "Plan"), effective January
31, 1997, for the benefit of their eligible employees, consultants and
directors. The Plan consists of three plans, one for the benefit of the
employees, consultants and directors of the Company, one for the benefit of the
employees and consultants of the Partnership and one for the benefit of the
employees, consultants and directors of the Services Company.
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, key Employees
and consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock and/or
rights which recognize such growth, development and financial success.
(2) To enable the Company, the Partnership and the Services Company to
obtain and retain the services of directors, key Employees and consultants
considered essential to the long range success of the Company by offering them
an opportunity to own stock in the Company and/or rights which will reflect the
growth, development and financial success of the Company.
ARTICLE I
DEFINITIONS
1.1 General. Wherever the following terms are used in this Plan they
-------
shall have the meaning specified below, unless the context clearly indicates
otherwise.
1.2 Award Limit. "Award Limit" shall mean, in any fiscal year of the
-----------
Company, 300,000 shares of Common Stock.
1.3 Beneficiary. "Beneficiary" shall mean the person or persons
-----------
properly designated by the Optionee, including his spouse or heirs at law, to
exercise such Optionee's rights under this Plan in the event of the Optionee's
death, or if the Optionee has not designated such person or persons, or such
person or persons shall all have pre-deceased the Optionee, the executor or
administrator of the Optionee's estate. Designation, revocation and
redesignation of Beneficiaries must be made in writing in accordance with rules
established by the Committee and shall be effective upon delivery to the
Committee.
<PAGE>
1.4 Board. "Board" shall mean the Board of Directors of the Company.
-----
1.5 Capital Stock. "Capital Stock" shall mean all classes or series
-------------
of stock of the Company.
1.6 Change in Control. "Change in Control" shall mean a change in
-----------------
ownership or control of the Company effected through either of the following
transactions:
(a) any person or related group of persons (other than the Company or
a person that directly or indirectly controls, is controlled by, or is
under common control with, the Company) directly or indirectly acquires
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange
Act) of securities possessing more than fifty percent (50%) of the total
combined voting power of the Company's outstanding securities pursuant to a
tender or exchange offer made directly to the Company's stockholders which
the Board does not recommend such stockholders to accept; or
(b) there is a change in the composition of the Board over a period
of thirty-six (36) consecutive months (or less) such that a majority of the
Board members (rounded up to the nearest whole number) ceases, by reason of
one or more proxy contests for the election of Board members, to be
comprised of individuals who either (i) have been Board members
continuously since the beginning of such period or (ii) have been elected
or nominated for election as Board members during such period by at least a
majority of the Board members described in clause (i) who were still in
office at the time such election or nomination was approved by the Board.
1.7 Code. "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
1.8 Committee. "Committee" shall mean the Executive Compensation
---------
Committee of the Board, or another committee, or a subcommittee of the Board,
appointed as provided in Section 8.1.
1.9 Common Stock. "Common Stock" shall mean the common stock of the
------------
Company, par value $.01 per share, and any equity security of the Company issued
or authorized to be issued in the future, but excluding any preferred stock and
any warrants, options or other rights to purchase Common Stock. Debt securities
of the Company convertible into Common Stock shall be deemed equity securities
of the Company.
1.10 Company. "Company" shall mean Kilroy Realty Corporation, a
-------
Maryland corporation.
1.11 Company Employee. "Company Employee" shall mean any officer or
----------------
other employee (as defined in accordance with Section 3401(c) of the Code) of
the Company, or of any corporation which is then a Company Subsidiary.
2
<PAGE>
1.12 Company Subsidiary. "Company Subsidiary" shall mean any
------------------
corporation in an unbroken chain of corporations beginning with the Company if
each of the corporations other than the last corporation in the unbroken chain
then owns stock possessing 50 percent or more of the total combined voting power
of all classes of stock in one of the other corporations in such chain. Except
with respect to Incentive Stock Options, "Company Subsidiary" shall also mean
any partnership in which the Company and/or any Company Subsidiary owns more
than 50 percent of the capital or profits interests; provided, however, that
"Company Subsidiary" shall not include the Partnership nor any Partnership
Subsidiary; and provided further, that "Company Subsidiary" shall not include
Kilroy Realty Finance, Inc. or Kilroy Realty Finance, L.P. or any of their
respective subsidiaries.
1.13 Corporate Transaction. "Corporate Transaction" shall mean any of
---------------------
the following stockholder-approved transactions to which the Company is a party:
(a) a merger or consolidation in which the Company is not the
surviving entity, except for a transaction the principal purpose of which
is to change the State in which the Company is incorporated, form a holding
company or effect a similar reorganization as to form whereupon this Plan
and all Options are assumed by the successor entity;
(b) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company in a transaction not covered by the exceptions
to clause (a), above; or
(c) any reverse merger in which the Company is the surviving entity
but in which securities possessing more than fifty percent (50%) of the
total combined voting power of the Company's outstanding securities are
transferred to a person or persons different from those who held such
securities immediately prior to such merger.
1.14 Development Services Contract. "Development Services Contract"
-----------------------------
shall mean the agreement between the Partnership and the Services Company,
pursuant to which the Services Company will provide development services to the
Partnership.
1.15 Director. "Director" shall mean an Independent Director, a
--------
Service Company Director or a Non-Employee Director.
1.16 Employee. "Employee" shall mean any Company Employee,
--------
Partnership Employee or Services Company Employee.
1.17 Exchange Act. "Exchange Act" shall mean the Securities Exchange
------------
Act of 1934, as amended.
1.18 Fair Market Value. "Fair Market Value" of a share of Common
-----------------
Stock as of a given date shall be (i) the closing price of a share of Common
Stock on the principal exchange on which shares of Common Stock are then
trading, if any (or as reported on any
3
<PAGE>
composite index which includes such principal exchange), on the trading day
previous to such date, or if shares were not traded on the trading day previous
to such date, then on the next preceding date on which a trade occurred, or (ii)
if Common Stock is not traded on an exchange but is quoted on NASDAQ or a
successor quotation system, the mean between the closing representative bid and
asked prices for the Common Stock on the trading day previous to such date as
reported by NASDAQ or such successor quotation system; or (iii) if Common Stock
is not publicly traded on an exchange and not quoted on NASDAQ or a successor
quotation system, the Fair Market Value of a share of Common Stock as
established by the Committee (or the Board, in the case of Options granted to
Independent Directors) acting in good faith. Notwithstanding anything to the
contrary herein, the Fair Market Value at the time of grant of a share of Common
Stock underlying an option grant or other award made under this Plan and in
connection with the initial public offering of the Company shall be the initial
offering price per share.
1.19 General Partner Interest. "General Partner Interest" shall mean
------------------------
an ownership interest in the Partnership that is a general partner interest and
includes any and all benefits to which the holder of such an interest may be
entitled as provided in the Partnership Agreement, together with all obligations
of such holder to comply with the terms and provisions of such agreement.
1.20 Grantee. "Grantee" shall mean an Employee or consultant granted
-------
a Stock Appreciation Right under this Plan.
1.21 Incentive Stock Option. "Incentive Stock Option" shall mean an
----------------------
option which conforms to the applicable provisions of Section 422 of the Code
and which is designated as an Incentive Stock Option by the Committee.
1.22 Independent Director. "Independent Director" shall mean a
--------------------
member of the Board who is not an employee, officer or affiliate of the Company
or Kilroy Industries or a subsidiary or division thereof, or a relative of a
principal executive officer, and who is not an individual member of an
organization acting as an advisor, consultant or legal counsel receiving
compensation on a continuing basis from the Company in addition to director's
fees.
1.23 Non-Employee Director. "Non-Employee Director" shall mean a
---------------------
member of the Board or the Services Company Board who is not an Independent
Director, a Services Company Independent Director or an Employee.
1.24 Non-Qualified Stock Option. "Non-Qualified Stock Option" shall
--------------------------
mean an Option which is not designated as an Incentive Stock Option by the
Committee.
1.25 Option. "Option" shall mean a stock option granted under
------
Article III of this Plan. An Option granted under this Plan shall, as determined
by the Committee, be either a Non-Qualified Stock Option or an Incentive Stock
Option; provided, however, that Options granted to anyone other than Company
-------- -------
Employees shall be Non-Qualified Stock Options.
4
<PAGE>
1.26 Optionee. "Optionee" shall mean an Employee, Director or
--------
consultant granted an Option under this Plan.
1.27 Partnership. "Partnership" shall mean Kilroy Realty, L.P., a
-----------
Delaware limited partnership.
1.28 Partnership Agreement. "Partnership Agreement" shall mean the
---------------------
amended and restated agreement of limited partnership of the Partnership, as the
same may be amended, modified or restated from time to time.
1.29 Partnership Employee. "Partnership Employee" shall mean any
--------------------
officer, other employee (as defined in accordance with Section 3401(c) of the
Code) of the Partnership, or any entity which is then a Partnership Subsidiary.
1.30 Partnership Optionee Purchased Shares. "Partnership Optionee
-------------------------------------
Purchased Shares" shall have the meaning set forth in Section 5.4.
1.31 Partnership Purchase Price. "Partnership Purchase Price" shall
--------------------------
have the meaning set forth in Section 5.4.
1.32 Partnership Purchased Shares. "Partnership Purchased Shares"
----------------------------
shall have the meaning set forth in Section 5.4.
1.33 Partnership Subsidiary. "Partnership Subsidiary" shall mean any
----------------------
partnership in an unbroken chain of partnerships beginning with the Partnership
if each of the partnerships other than the last partnership in the unbroken
chain then owns more than 50 percent of the capital or profits interests in one
of the other partnerships. "Partnership Subsidiary" shall also mean any
corporation in which the Partnership and/or any Partnership Subsidiary owns
stock possessing 50 percent or more of the total combined voting power of all
classes of stock.
1.34 Plan. "Plan" shall mean The 1997 Stock Option and Incentive Plan
----
of Kilroy Realty Corporation and Kilroy Realty, L.P.
1.35 QDRO. "QDRO" shall mean a qualified domestic relations order as
----
defined by the Code or Title I of the Employee Retirement Income Security Act of
1974, as amended, or the rules thereunder.
1.36 Restricted Stock. "Restricted Stock" shall mean Common Stock
----------------
awarded under Article VI of this Plan.
1.37 Restricted Stockholder. "Restricted Stockholder" shall mean an
----------------------
Employee or consultant granted an award of Restricted Stock under Article VI of
this Plan.
1.38 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3
----------
under the Exchange Act, as such Rule may be amended from time to time.
5
<PAGE>
1.39 Services Company. "Services Company" shall mean Kilroy Services,
----------------
Inc., a Maryland corporation.
1.40 Services Company Board. "Services Company Board" shall mean the
----------------------
board of directors of the Services Company.
1.41 Services Company Employee. "Services Company Employee" shall
-------------------------
mean any officer or other employee (as defined in accordance with Section
3401(c) of the Code) of the Services Company, or of any corporation which is
then a Services Company Subsidiary.
1.42 Services Company Independent Director. "Services Company
-------------------------------------
Independent Director" shall mean a member of the Services Company Board who is
not (a) an employee, officer or affiliate of the Company, the Partnership, the
Services Company or Kilroy Industries or a subsidiary or division of any of the
foregoing, or a relative of a principal executive officer, and who is not an
individual member of an organization acting as an advisor, consultant or legal
counsel receiving compensation on a continuing basis from the Company, the
Partnership or the Services Company in addition to director's fees or (b) an
Independent Director.
1.43 Services Company Optionee Purchased Shares. "Services Company
------------------------------------------
Optionee Purchased Shares" shall have the meaning set forth in Section 5.5.
1.44 Services Company Purchase Price. "Services Company Purchase
-------------------------------
Price" shall have the meaning set forth in Section 5.5.
1.45 Services Company Purchased Shares. "Services Company Purchased
---------------------------------
Shares" shall have the meaning set forth in Section 5.5.
1.46 Services Company Subsidiary. "Services Company Subsidiary" shall
---------------------------
mean any corporation in an unbroken chain of corporations beginning with the
Services Company if each of the corporations other than the last corporation in
the unbroken chain then owns stock possessing 50 percent or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain. "Services Company Subsidiary" shall also mean any partnership in
which the Company and/or any Company Subsidiary owns more than 50 percent of the
capital or profits interests.
1.47 Stock Appreciation Right. "Stock Appreciation Right" shall mean
------------------------
a stock appreciation right granted under Article VII of this Plan.
1.48 Stock Ownership Limit. "Stock Ownership Limit" shall mean (i)
---------------------
the restrictions on ownership and transfer of Common Stock provided in Article
IV of the Company's Articles of Amendment and Restatement (the "Restated
Articles"); and (ii) any other restrictions on ownership or transfer set forth
in the Restated Articles.
6
<PAGE>
1.49 Subsidiary. "Subsidiary" shall mean any Company Subsidiary or
----------
Partnership Subsidiary.
1.50 Termination of Consultancy. "Termination of Consultancy" shall
--------------------------
mean the time when the engagement of an Optionee, Grantee or Restricted
Stockholder as a consultant to the Company, a Company Subsidiary, the
Partnership, a Partnership Subsidiary, the Services Company or a Services
Company Subsidiary is terminated for any reason, with or without cause,
including, but not by way of limitation, by resignation, discharge, death or
retirement; but excluding, at the discretion of the Committee, terminations
where there is a simultaneous commencement of employment or directorship or
continuing consultancy with the Company, any Company Subsidiary, the
Partnership, any Partnership Subsidiary, the Services Company or any Services
Company Subsidiary. The Committee, in its absolute discretion, shall determine
the effect of all matters and questions relating to Termination of Consultancy,
including, but not by way of limitation, the question of whether a Termination
of Consultancy resulted from a discharge for good cause, and all questions of
whether particular leaves of absence constitute Terminations of Consultancy.
Notwithstanding any other provision of this Plan, the Company, any Company
Subsidiary, the Partnership, any Partnership Subsidiary, the Services Company or
any Services Company Subsidiary has an absolute and unrestricted right to
terminate a consultant's service at any time for any reason whatsoever, with or
without cause, except to the extent expressly provided otherwise in writing.
1.51 Termination of Directorship. "Termination of Directorship"
---------------------------
shall mean the time when an Optionee who is a Director ceases to be a Director
for any reason, including, but not by way of limitation, a termination by
resignation, failure to be elected, death or retirement; but excluding, at the
discretion of the Committee, (i) terminations where there is a simultaneous
reemployment or continuing employment of an Optionee, Grantee or Restricted
Stockholder by the Company, any Company Subsidiary, the Partnership, any
Partnership Subsidiary, the Services Company or any Services Company Subsidiary
(ii) terminations which are followed by the simultaneous establishment of a
directorship with the Company, a Company Subsidiary, the Partnership, a
Partnership Subsidiary, the Services Company or a Services Company Subsidiary.
1.52 Termination of Employment. "Termination of Employment" shall
-------------------------
mean the time when the employee-employer relationship between an Optionee,
Grantee or Restricted Stockholder and the Company, a Company Subsidiary, the
Partnership, a Partnership Subsidiary, the Services Company or a Services
Company Subsidiary is terminated for any reason, with or without cause,
including, but not by way of limitation, a termination by resignation,
discharge, death, disability or retirement; but excluding, at the discretion of
the Committee, (i) terminations where there is a simultaneous reemployment or
continuing employment of an Optionee, Grantee or Restricted Stockholder by the
Company, any Company Subsidiary, the Partnership, any Partnership Subsidiary,
the Services Company or any Services Company Subsidiary, (ii) terminations which
result in a temporary severance of the employee-employer relationship, and (iii)
terminations which are followed by the simultaneous establishment of a
consulting relationship or directorship with the Company, a Company Subsidiary,
the Partnership, a Partnership Subsidiary, the Services Company or a
7
<PAGE>
Services Company Subsidiary. The Committee, in its absolute discretion, shall
determine the effect of all matters and questions relating to Termination of
Employment, including, but not by way of limitation, the question of whether a
Termination of Employment resulted from a discharge for good cause, and all
questions of whether particular leaves of absence constitute Terminations of
Employment; provided, however, that, with respect to Incentive Stock Options, a
-------- -------
leave of absence, change in status from an employee to an independent contractor
or other change in the employee-employer relationship shall constitute a
Termination of Employment if, and to the extent that, such leave of absence,
change in status or other change interrupts employment for the purposes of
Section 422(a)(2) of the Code and the then applicable regulations and revenue
rulings under said Section. Notwithstanding any other provision of this Plan,
the Company, any Company Subsidiary, the Partnership or any Partnership
Subsidiary has an absolute and unrestricted right to terminate an Employee's
employment at any time for any reason whatsoever, with or without cause, except
to the extent expressly provided otherwise in writing.
ARTICLE II
SHARES SUBJECT TO PLAN
2.1 Shares Subject to Plan.
----------------------
(a) The shares of stock subject to Options, awards of Restricted
Stock or Stock Appreciation Rights shall be shares of the Company's Common
Stock, par value $.01 per share. The aggregate number of such shares which may
be issued upon exercise of such options or rights or upon any such awards under
the Plan shall not exceed one million four hundred and sixty thousand
(1,460,000). The shares of Common Stock issuable upon exercise of such options
or rights or upon any such awards may be either previously authorized but
unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to options or
Stock Appreciation Rights granted under the Plan to any individual in any fiscal
year shall not exceed the Award Limit. To the extent required by Section 162(m)
of the Code, shares subject to Options which are canceled continue to be counted
against the Award Limit and if, after grant of an Option, the price of shares
subject to such Option is reduced, the transaction is treated as a cancellation
of the Option and a grant of a new Option and both the Option deemed to be
canceled and the Option deemed to be granted are counted against the Award
Limit. Furthermore, to the extent required by Section 162(m) of the Code, if,
after grant of a Stock Appreciation Right, the base amount on which stock
appreciation is calculated is reduced to reflect a reduction in the Fair Market
Value of the Company's Common Stock, the transaction is treated as a
cancellation of the Stock Appreciation Right and a grant of a new Stock
Appreciation Right and both the Stock Appreciation Right deemed to be canceled
and the Stock Appreciation Right deemed to be granted are counted against the
Award Limit.
2.2 Add-back of Options and Other Rights. If any Option, or other
------------------------------------
right to acquire shares of Common Stock under any other award under this Plan,
expires or is canceled without having been fully exercised, the number of shares
subject to such Option or
8
<PAGE>
other right but as to which such Option or other right was not exercised prior
to its expiration or cancellation may again be optioned, granted or awarded
hereunder, subject to the limitations of Section 2.1. Any shares subject to
Options or other awards which are adjusted pursuant to Section 9.3 and become
exercisable with respect to shares of stock of another corporation shall be
considered cancelled and may again be optioned, granted or awarded hereunder. If
any share of Restricted Stock is forfeited by the Grantee or repurchased by the
Company pursuant to Section 6.6 hereof, such share may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1.
ARTICLE III
GRANTING OF OPTIONS
3.1 Eligibility. Any Employee, consultant or Non-Employee Director
-----------
selected by the Committee pursuant to Section 3.4(a)(i) shall be eligible to be
granted an Option. Each Director (other than any Non-Employee Directors) shall
be eligible to be granted Options at the times and in the manner set forth in
Section 3.4(d).
3.2 Disqualification for Stock Ownership. No person may be granted
------------------------------------
an Incentive Stock Option under this Plan if such person, at the time the
Incentive Stock Option is granted, owns stock possessing more than ten percent
(10%) of the total combined voting power of all classes of stock of the Company
or any then existing Company Subsidiary unless such Incentive Stock Option
conforms to the applicable provisions of Section 422 of the Code.
3.3 Qualification of Incentive Stock Options. No Incentive Stock
----------------------------------------
Option shall be granted to any person who is not an employee (as defined in
Section 3401(c) of the Code) of the Company or of a Company Subsidiary (within
the meaning of the first sentence of the definition thereof).
3.4 Granting of Options.
-------------------
(a) The Committee shall from time to time, in its absolute
discretion, and subject to applicable limitations of this Plan:
(i) Determine which Employees are key Employees and select from
among the key Employees, consultants and Non-Employee Directors (including
Employees, consultants and Non-Employee Directors who have previously
received Options or other awards under this Plan) such of them as in its
opinion should be granted Options;
(ii) Subject to the Award Limit and the Stock Ownership Limit,
determine the number of shares to be subject to such Options granted to the
selected key Employees or consultants;
9
<PAGE>
(iii) Determine whether such Options are to be Incentive Stock
Options or Non-Qualified Stock Options and whether such Options are to
qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; provided, however, that the terms and conditions
-------- -------
of Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall include, but not be
limited to, such terms and conditions as may be necessary to meet the
applicable provisions of Section 162(m) of the Code.
(b) Upon the selection of a key Employee or consultant to be granted
an Option, the Committee shall instruct the Secretary of the Company to issue
the Option and may impose such conditions on the grant of the Option as it deems
appropriate. Without limiting the generality of the preceding sentence, the
Committee may, in its discretion and on such terms as it deems appropriate,
require as a condition on the grant of an Option to an Employee or consultant
that the Employee or consultant surrender for cancellation some or all of the
unexercised Options, awards of Restricted Stock or Stock Appreciation Rights or
other rights which have been previously granted to him under this Plan or
otherwise. An Option, the grant of which is conditioned upon such surrender, may
have an option price lower (or higher) than the exercise price of such
surrendered Option or other award, may cover the same (or a lesser or greater)
number of shares as such surrendered Option or other award, may contain such
other terms as the Committee deems appropriate, and shall be exercisable in
accordance with its terms, without regard to the number of shares, price,
exercise period or any other term or condition of such surrendered Option or
other award.
(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as an
"incentive stock option" under Section 422 of the Code.
(d) During the term of the Plan and subject to the Stock Ownership
Limit, each person who is an Independent Director as of the date of the
consummation of the initial public offering of Common Stock automatically shall
be granted (i) an Option to purchase 10,000 shares of Common Stock (subject to
adjustment as provided in Section 9.3) on the date of such initial public
offering and (ii) provided that the Independent Director is still an Independent
Director on the date of each such grant, an Option to purchase 1,000 shares of
Common Stock (subject to adjustment as provided in Section 9.3) on the date of
each anniversary of the initial election of such Independent Director to the
Board. During the term of the Plan, a person who is initially elected to the
Board after the consummation of the initial public offering of Common Stock and
who is an Independent Director at the time of such initial election shall be
granted an Option on the date of such initial election to purchase such number
of shares of Common Stock as the Board (excluding such Independent Director) may
determine in its sole discretion and (ii) provided that the Independent Director
is still an Independent Director on the date of each such grant, an Option to
purchase 1,000 shares of Common Stock (subject to adjustment as provided in
Section 9.3) on the date of each anniversary of the initial election of such
Independent Director to the Board. Any directors
10
<PAGE>
who are also Employees and who subsequently cease to be Employees but remain on
the Board will receive an initial Option grant pursuant to clause (i) of the
preceding sentence as the Committee shall determine in its sole discretion, and
to the extent that they are otherwise eligible, will receive, after the time
that they cease to be Employees, Options as described in clause (ii) of the
preceding sentence. All the foregoing Option grants authorized by this Section
3.4(d) are subject to stockholder approval of the Plan.
ARTICLE IV
TERMS OF OPTIONS
4.1 Option Agreement. Each Option shall be evidenced by a written
----------------
Stock Option Agreement, which shall be executed by the Optionee and an
authorized officer of the Company and which shall contain such terms and
conditions as the Committee (or the Board, in the case of Options granted to
Independent Directors) shall determine, consistent with this Plan. Stock Option
Agreements evidencing Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
Section 162(m) of the Code. Stock Option Agreements evidencing Incentive Stock
Options shall contain such terms and conditions as may be necessary to meet the
applicable provisions of Section 422 of the Code.
4.2 Option Price. The price per share of the shares subject to each
------------
Option shall be set by the Committee; provided, however, that such price shall
-------- -------
be no less than (i) the par value of a share of Common Stock unless otherwise
permitted by applicable state law, and (ii) the Fair Market Value of a share of
Common Stock on the date the Option is granted; provided, further, in the case
-------- -------
of Incentive Stock Options granted to an individual then owning (within the
meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or any Company Subsidiary
(including, for purposes of this determination, Partnership unit's convertible
into Common Stock) such price shall not be less than 110% of the Fair Market
Value of a share of Common Stock on the date the Option is granted.
4.3 Option Term. The term of an Option shall be set by the
-----------
Committee in its discretion, provided, however, that such term shall not be
-------- -------
greater than ten (10) years from the date the Option is granted, provided,
--------
further, in the case of Incentive Stock Options, the term shall not be more than
- -------
five (5) years from the date the Incentive Stock Option is granted if the
Incentive Stock Option is granted to an individual then owning (within the
meaning of Section 424(d) of the Code) more than 10% of the total combined
voting power of all classes of stock of the Company or any Company Subsidiary
(including, for purposes of this determination, Partnership unit's exchangeable
for Common Stock). Except as limited by (i) requirements of Section 422 of the
Code and regulations and rulings thereunder applicable to Incentive Stock
Options and (ii) the preceding sentence, the Committee may extend the term of
any outstanding Option in connection with any Termination of Employment or
11
<PAGE>
Termination of Consultancy of the Optionee, or amend any other term or condition
of such Option relating to such a termination.
4.4 Option Vesting.
--------------
(a) The period during which the right to exercise an Option in whole
or in part vests in the Optionee shall be set by the Committee and the Committee
may determine that an Option may not be exercised in whole or in part for a
specified period after it is granted; provided, however, that, unless the
-------- -------
Committee otherwise provides in the terms of the Option or otherwise, no Option
shall be exercisable by any Optionee who is then subject to Section 16 of the
Exchange Act within the period ending six months and one day after the date the
Option is granted; and provided, further, Options granted to Independent
-----------------
Directors and Services Company Independent Directors shall become exercisable in
cumulative annual installments of 33-1/3% on each of the first, second and third
anniversaries of the date of Option grant, without variation or acceleration
hereunder except as provided in Section 9.3(c). Unless the Committee provides
otherwise, all other Options granted by the Company shall become exercisable in
cumulative annual installments of 33-1/3% on each of the first, second and third
anniversaries of the date of Option grant. Subject to the terms of this Section
4.4(a), at any time after grant of an Option, the Committee may, in its sole and
absolute discretion and subject to whatever terms and conditions it selects,
accelerate the period during which an Option (except an Option granted to an
Independent Director or a Services Company Independent Director) vests.
(b) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Directorship or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Committee in the case of Options granted to Employees,
consultants or Non-Employee Directors either in the Stock Option Agreement or by
action of the Committee following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section 422 of
the Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an Optionee during any calendar year (under the Plan and all
other incentive stock option plans of the Company and any Company Subsidiary)
exceeds $100,000, such Options shall be treated as Non-Qualified Options to the
extent required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking Options into account in the order in which
they were granted. For purposes of this Section 4.4(c), the Fair Market Value
of stock shall be determined as of the time the Option with respect to such
stock is granted.
4.5 No Right to Continue as Employee or Consultant. Nothing in this
----------------------------------------------
Plan or in any Stock Option Agreement hereunder shall confer upon any Optionee
any right to continue in the employ of, or as a consultant for, the Company, any
Company Subsidiary, the Partnership or any Partnership Subsidiary, or as a
director of the Company, or shall interfere with or restrict in any way the
rights of the Company, any Company Subsidiary, the
12
<PAGE>
Partnership and any Partnership Subsidiary, which are hereby expressly reserved,
to discharge any Optionee at any time for any reason whatsoever, with or without
good cause.
4.6 Exercise of Option after Termination of Employment, Consultancy
---------------------------------------------------------------
or Directorship.
- ---------------
(a) An Option granted to an Employee is exercisable by an Optionee
only while the Optionee is an Employee. The preceding notwithstanding, the
Committee may determine that an Option granted to an Employee may be exercised
subsequent to an Optionee's Termination of Employment, subject to the following
limitations:
(i) If the Optionee dies while an Option is exercisable under
the terms of this Plan, the Optionee's Beneficiary may exercise such
rights, to the extent the Optionee could have done so immediately
preceding his death. Any such Option must be exercised within twelve
(12) months after the Optionee's death and the Committee may in its
sole and absolute discretion extend such period to accommodate such
exercise; or
(ii) If the Optionee's Termination of Employment is due to the
Optionee's permanent and total disability, as defined in Section
22(e)(3) of the Code, the Optionee may exercise his Option, to the
extent exercisable as of the Optionee's Termination of Employment,
within twelve (12) months after termination; or
(iii) If the Optionee's employment is terminated for any reason
other than those set forth in subsections (i) or (ii) above, the
Optionee may exercise his Option, to the extent exercisable as of his
Termination of Employment, within three (3) months after Termination
of Employment, unless the Employee dies within said three-month
period.
(iv) Notwithstanding (i) through (iii) above, an Option may not
be exercised later than the Option's Expiration Date.
(b) No Option granted to an Independent Director or a Services
Company Independent Director may be exercised to any extent by anyone after the
first to occur of the following events:
(i) The expiration of twelve (12) months from the date of the
Optionee's death; or
(ii) The expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship by reason of his permanent and
total disability (within the meaning of Section 22(e)(3) of the Code);
or
(iii) The expiration of three (3) months from the date of the
Optionee's Termination of Directorship for any reason other than such
13
<PAGE>
Optionee's death or his permanent and total disability, unless the
Optionee dies within said three-month period.
(iv) Notwithstanding (i) through (iii) above, an Option may not
be exercised later than the Option's Expiration Date.
4.7 Consideration. In consideration of the granting of a Non-
-------------
Qualified Stock Option, the Optionee shall agree, in the written Stock Option
Agreement, to remain in the employ of, or act as a consultant for, the Company,
a Company Subsidiary, the Partnership, a Partnership Subsidiary, the Services
Company or a Services Company Subsidiary (or to serve as a Director) for a
period of at least one year after the Non-Qualified Stock Option is granted (or
until the next annual meeting of the stockholders of the Company, in the case of
a Director). In consideration of the granting of an Incentive Stock Option, the
Optionee shall agree, in the written Stock Option Agreement, to remain in the
employ of the Company or a Company Subsidiary for a period of at least one year
after the Incentive Stock Option is granted. Nothing in this Plan or in any
Stock Option Agreement hereunder shall confer upon any Optionee any right to (i)
continue in the employ of or consult for the Company, any Company Subsidiary,
the Partnership, any Partnership Subsidiary, the Services Company or any
Services Company Subsidiary or as a director of the Company or the Services
Company or (ii) receive severance pay from the Company, any Company Subsidiary,
the Partnership, any Partnership Subsidiary, the Services Company or any
Services Company Subsidiary.
ARTICLE V
EXERCISE OF OPTIONS
5.1 Partial Exercise. An exercisable Option may be exercised in
----------------
whole or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Committee (or the Board, in the case of Options
granted to Independent Directors) may require that, by the terms of the Option,
a partial exercise be with respect to a minimum number of shares.
5.2 Manner of Exercise. All or a portion of an exercisable Option
------------------
shall be deemed exercised upon delivery of all of the following to the Secretary
of the Company or his office:
(a) A written notice complying with the applicable rules established
by the Committee (or the Board in the case of Options granted to Independent
Directors), the Company or the Partnership stating that the Option, or a portion
thereof, is exercised. The notice shall be signed by the Optionee or other
person then entitled to exercise the Option or such portion;
(b) Such representations and documents as the Committee (or the
Board, in the case of Options granted to Independent Directors), in its absolute
discretion, deems
14
<PAGE>
necessary or advisable to effect compliance with all applicable provisions of
the Securities Act of 1933, as amended, and any other federal or state
securities laws or regulations. The Committee or Board may, in its absolute
discretion, also take whatever additional actions it deems appropriate to effect
such compliance including, without limitation, placing legends on share
certificates and issuing stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 10.1 by any person or persons other than the Optionee, appropriate proof
of the right of such person or persons to exercise the Option; and
(d) Full cash payment to (i) the Secretary of the Company for the
shares with respect to which the Option, or portion thereof, is exercised.
However, the Committee (or the Board, in the case of Options granted to
Independent Directors), may in its discretion (i) allow a delay in payment up to
thirty (30) days from the date the Option, or portion thereof, is exercised;
(ii) allow payment, in whole or in part, through the delivery of shares of
Common Stock owned by the Optionee, duly endorsed for transfer to the Company
with a Fair Market Value on the date of delivery equal to the aggregate exercise
price of the Option or exercised portion thereof; (iii) allow payment, in whole
or in part, through the surrender of shares of Common Stock then issuable upon
exercise of the Option having a Fair Market Value on the date of Option exercise
equal to the aggregate exercise price of the Option or exercised portion
thereof; (iv) allow payment, in whole or in part, through the delivery of
property of any kind which constitutes good and valuable consideration; (v)
allow payment, in whole or in part, through the delivery of a full recourse
promissory note bearing interest (at no less than such rate as shall then
preclude the imputation of interest under the Code) and payable upon such terms
as may be prescribed by the Committee or the Board; (vi) allow payment, in whole
or in part, through the delivery of a notice that the Optionee has placed a
market sell order with a broker with respect to shares of Common Stock then
issuable upon exercise of the Option, and that the broker has been directed to
pay a sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the Option exercise price; or (vii) allow payment through any
combination of the consideration provided in the foregoing subparagraphs (ii),
(iii), (iv), (v) and (vi). In the case of a promissory note, the Committee (or
the Board, in the case of Options granted to Independent Directors) may also
prescribe the form of such note and the security to be given for such note. The
Option may not be exercised, however, by delivery of a promissory note or by a
loan from the Company when or where such loan or other extension of credit is
prohibited by law.
5.3 Transfer of Shares to a Company Employee, Independent Director or
-----------------------------------------------------------------
Other Board Member. As soon as practicable after receipt by the Company,
- ------------------
pursuant to Section 5.2(d), of payment for the shares with respect to which an
Option (which in the case of a Company Employee or Company consultant was issued
to and is held by such Company Employee or Company consultant in his capacity as
a Company Employee or a Company consultant, as the case may be), or portion
thereof, is exercised by an Optionee who is a Company Employee, Independent
Director or a consultant to the Company, with respect to each such exercise, the
Company shall transfer to the Optionee the number of shares equal to
15
<PAGE>
(a) the amount of the payment made by the Optionee to the Company
pursuant to Section 5.2(d), divided by
------- --
(b) the price per share of the shares subject to the Option as
determined pursuant to Section 4.2.
5.4 Transfer of Shares to a Partnership Employee. As soon as
--------------------------------------------
practicable after receipt by the Company, pursuant to Section 5.2(d), of payment
for the shares with respect to which an Option (which was issued to and is held
by a Partnership Employee in his capacity as a Partnership Employee), or portion
thereof, is exercised by an Optionee who is a Partnership Employee, with respect
to each such exercise:
(a) the Company shall transfer to the Optionee the number of shares
equal to (A) the amount of the payment made by the Optionee to the Company
pursuant to Section 5.2(d) divided by (B) the Fair Market Value of a share
----------
of Common Stock at the time of exercise (the "Partnership Optionee
Purchased Shares");
(b) the Company shall sell to the Partnership the number of shares
(the "Partnership Purchased Shares") equal to the excess of (A) the amount
obtained by dividing (i) the amount of the payment made by the Optionee to
the Company pursuant to Section 5.2(d) by (ii) the price per share of the
shares subject to the Option as determined pursuant to Section 4.2., over
(B) the Partnership Optionee Purchased Shares. The price to be paid by the
Partnership to the Company for the Partnership Purchased Shares (the
"Partnership Purchase Price") shall be an amount equal to the product of
(A) the number of Partnership Purchased Shares multiplied by (B) the Fair
---------- --
Market Value of a share of Common Stock at the time of the exercise; and
(c) As soon as practicable after receipt of the Partnership Purchased
Shares by the Partnership, the Partnership shall transfer such shares to
the Optionee at no additional cost, as additional compensation.
5.5 Transfer of Shares to a Services Company Employee, Services
-----------------------------------------------------------
Company Independent Director or other Non-Employee Members of the Services
- --------------------------------------------------------------------------
Company Board. As soon as practicable after receipt by the Company, pursuant to
- -------------
Section 5.2(d), of payment for the shares with respect to which an Option (which
in the case of a Services Company Employee was issued to and is held by such
Services Company Employee in his capacity as a Services Company Employee), or
portion thereof, is exercised by an Optionee who is a Services Company Employee,
a Services Company Independent Director or another member of the Services
Company Board who is not an Employee, with respect to each such exercise:
(a) the Company shall transfer to the Optionee the number of shares
equal to (A) the amount of the payment made by the Optionee to the Company
pursuant to Section 5.2(d) divided by (B) the Fair Market Value of a share of
----------
Common Stock at the time of exercise (the "Services Company Optionee Purchased
Shares");
16
<PAGE>
(b) the Company shall sell to the Partnership the number of shares
(the "Services Company Purchased Shares") equal to the excess of (A) the amount
obtained by dividing (i) the amount of the payment made by the Optionee to the
Company pursuant to Section 5.2(d) by (ii) the price per share of the shares
subject to the Option as determined pursuant to Section 4.2, over (B) the
Services Company Optionee Purchased Shares. The price to be paid by the
Partnership to the Company for the Services Company Purchased Shares (the
"Services Company Purchase Price") shall be an amount equal to the product of
(A) the number of Services Company Purchased Shares multiplied by (B) the Fair
-------------
Market Value of a share of Common Stock at the time of the exercise;
(c) as soon as practicable after receipt of the Services Company
Purchased Shares by the Partnership, the Partnership shall transfer such shares
to the Services Company at no additional cost;
(d) as soon as practicable after receipt of the Services Company
Purchased Shares by the Services Company, the Services Company shall transfer
such shares to the Optionee at no additional cost, as additional compensation;
and
(e) the value of any Options, Restricted Stock and other benefits
provided by the Partnership to the Services Company under this Plan are deemed
to constitute an additional development fee to the Services Company from the
Partnership under the Development Services Contract equal to the value of such
Options, Restricted Stock and other benefits.
5.6 Transfer of Payment to the Partnership. As soon as practicable
--------------------------------------
after receipt by the Company (i) of the amount described in Section 5.2(d) and,
where applicable, (ii) a related Partnership Purchase Price or Services Company
Purchase Price described in Section 5.4 or 5.5, the Company shall contribute to
the Partnership an amount of cash equal to such payment and the Partnership
shall issue an additional interest in the Partnership on the terms set forth in
the Partnership Agreement.
5.7 Conditions to Issuance of Stock Certificates. The Company or the
--------------------------------------------
Partnership shall not be required to issue or deliver any certificate or
certificates for shares of stock purchased upon the exercise of any Option or
portion thereof prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges on
which such class of stock is then listed;
(b) The completion of any registration or other qualification of such
shares under any state or federal law, or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental
regulatory body which the Committee or Board shall, in its absolute
discretion, deem necessary or advisable;
17
<PAGE>
(c) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Committee or Board shall, in its
absolute discretion, determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee or Board may establish from time to
time for reasons of administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
5.8 Rights as Stockholders. The holders of Options shall not be, nor
----------------------
have any of the rights or privileges of, stockholders of the Company in respect
of any shares purchasable upon the exercise of any part of an Option unless and
until certificates representing such shares have been issued by the Company to
such holders.
5.9 Ownership and Transfer Restrictions. Shares acquired through the
-----------------------------------
exercise of an Option shall be subject to the restrictions on ownership and
transfer set forth in the Restated Articles. The Committee (or the Board, in
the case of Options granted to Independent Directors), in its absolute
discretion, may impose such additional restrictions on the ownership and
transferability of the shares purchasable upon the exercise of an Option as it
deems appropriate. Any such restriction shall be set forth in the respective
Stock Option Agreement and may be referred to on the certificates evidencing
such shares. The Committee may require the Employee to give the Company prompt
notice of any disposition of shares of Common Stock acquired by exercise of an
Incentive Stock Option within the later of (i) two years from the date of
granting such Option to such Employee or (ii) one year after the transfer of
such shares to such Employee. The Committee (or the Board, in the case of
Options granted to Independent Directors) may direct that the certificates
evidencing shares acquired by exercise of an Option refer to such requirement to
give prompt notice of disposition.
5.10 Restrictions on Exercise of Option. An Option is not
----------------------------------
exercisable if in the sole and absolute discretion of the Committee the exercise
of such Option would likely result in any of the following:
(a) the Optionee's or any other person's ownership of Capital Stock
being in violation of the Stock Ownership Limit; or
(b) income to the Company that could impair the Company's status as a
real estate investment trust, within the meaning of Sections 856 through
860 of the Code.
18
<PAGE>
ARTICLE VI
AWARD OF RESTRICTED STOCK
6.1 Award of Restricted Stock.
-------------------------
(a) The Committee may from time to time, in its absolute discretion:
(i) Select from among the key Employees or consultants
(including Employees or consultants who have previously received other
awards under this Plan) such of them as in its opinion should be awarded
Restricted Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions (including without limitation, in the case of awards to
Partnership Employees, Services Company Employees and Services Company
Directors, the mechanism for the transfer of the Restricted Stock and
payment therefor) applicable to such Restricted Stock, consistent with this
Plan.
(b) The Committee shall establish the purchase price, if any, and
form of payment for Restricted Stock; provided, however, that such purchase
-------- -------
price shall be no less than the par value of the Common Stock to be purchased
unless otherwise permitted by applicable state law. In all cases, legal
consideration shall be required for each issuance of Restricted Stock.
(c) Upon the selection of a key Employee or consultant to be awarded
Restricted Stock, the Committee shall instruct the Secretary of the Company to
issue such Restricted Stock and may impose such conditions on the issuance of
such Restricted Stock as it deems appropriate.
6.2 Restricted Stock Agreement. Restricted Stock shall be issued
--------------------------
only pursuant to a written Restricted Stock Agreement, which shall be executed
by the selected key Employee or consultant and an authorized officer of the
Company and which shall contain such terms and conditions as the Committee shall
determine, consistent with this Plan.
6.3 Consideration. As consideration for the issuance of Restricted
-------------
Stock, in addition to payment of any purchase price, the Restricted Stockholder
shall agree, in the written Restricted Stock Agreement, to remain in the employ
of, or to consult for, the Company, a Company Subsidiary, the Partnership, a
Partnership Subsidiary, the Services Company or a Services Company Subsidiary
(whichever is applicable) for a period of at least one year after the Restricted
Stock is issued (or such shorter period as may be fixed in the Restricted Stock
Agreement or by action of the Committee following grant of the Restricted
Stock). Nothing in this Plan or in any Restricted Stock Agreement hereunder
shall (i) confer on any Restricted Stockholder any right to (a) continue in the
employ of, or as a consultant for, the Company, any Company Subsidiary, the
Partnership, any Partnership Subsidiary, the Services Company or any Services
Company Subsidiary or (b) receive severance pay from
19
<PAGE>
the Company, any Company Subsidiary, the Partnership, any Partnership
Subsidiary, the Services Company or any Services Company Subsidiary or (ii)
interfere with or restrict in any way the rights of the Company, any Company
Subsidiary, the Partnership, any Partnership Subsidiary, the Services Company or
any Services Company Subsidiary, which are hereby expressly reserved, to
discharge any Restricted Stockholder at any time for any reason whatsoever, with
or without good cause.
6.4 Rights as Stockholders. Upon delivery of the shares of
----------------------
Restricted Stock to the escrow holder pursuant to Section 6.7, the Restricted
Stockholder shall have, unless otherwise provided by the Committee, all the
rights of a stockholder with respect to said shares, subject to the restrictions
in his Restricted Stock Agreement, including the right to receive all dividends
and other distributions paid or made with respect to the shares; provided,
--------
however, that in the discretion of the Committee, any extraordinary
- -------
distributions with respect to the Common Stock shall be subject to the
restrictions set forth in Section 6.5.
6.5 Restriction. All shares of Restricted Stock issued under this
-----------
Plan (including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Restricted Stock
Agreement, be subject to such restrictions as the Committee shall provide, which
restrictions may include, without limitation, restrictions concerning voting
rights and transferability and restrictions based on duration of employment with
the Company, Company performance and individual performance; provided, however,
-------- -------
that, unless the Committee otherwise provides in the terms of the Restricted
Stock Agreement or otherwise, no share of Restricted Stock granted to a person
subject to Section 16 of the Exchange Act shall be sold, assigned or otherwise
transferred until at least six months have elapsed from (but excluding) the date
on which the Restricted Stock was issued, and provided, further, that by action
-------- -------
taken after the Restricted Stock is issued, the Committee may, on such terms and
conditions as it may determine to be appropriate, remove any or all of the
restrictions imposed by the terms of the Restricted Stock Agreement. Restricted
Stock may not be sold or encumbered until all restrictions are terminated or
expire. Unless provided otherwise by the Committee, if no consideration was
paid by the Restricted Stockholder upon issuance, a Restricted Stockholder's
rights in unvested Restricted Stock shall lapse upon Termination of Employment
or, if applicable, upon Termination of Consultancy with the Company or the
Partnership.
6.6 Repurchase of Restricted Stock. The Committee shall provide in
------------------------------
the terms of each individual Restricted Stock Agreement that the Company shall
have the right to repurchase from the Restricted Stockholder the Restricted
Stock then subject to restrictions under the Restricted Stock Agreement
immediately upon a Termination of Employment or, if applicable, upon a
Termination of Consultancy between the Restricted Stockholder and the Company,
at a cash price per share equal to the price paid by the Restricted Stockholder
for such Restricted Stock; provided, however, that provision may be made that no
-------- -------
such right of repurchase shall exist in the event of a Termination of Employment
or Termination of Consultancy without cause, or following a change in control of
the Company or the Partnership, or because of the Restricted Stockholder's
retirement, death or disability, or otherwise.
20
<PAGE>
6.7 Escrow. The Secretary of the Company or such other escrow
------
holder as the Committee may appoint shall retain physical custody of each
certificate representing Restricted Stock until all of the restrictions imposed
under the Restricted Stock Agreement with respect to the shares evidenced by
such certificate expire or shall have been removed.
6.8 Legend. In order to enforce the restrictions imposed upon
------
shares of Restricted Stock hereunder, the Committee shall cause a legend or
legends to be placed on certificates representing all shares of Restricted Stock
that are still subject to restrictions under Restricted Stock Agreements, which
legend or legends shall make appropriate reference to the conditions imposed
thereby.
ARTICLE VII
STOCK APPRECIATION RIGHTS
7.1 Grant of Stock Appreciation Rights. A Stock Appreciation Right
----------------------------------
may be granted to any key Employee or consultant selected by the Committee. A
Stock Appreciation Right may be granted (i) in connection and simultaneously
with the grant of an Option, (ii) with respect to a previously granted Option,
or (iii) independent of an Option. A Stock Appreciation Right shall be subject
to such terms and conditions (including, without limitation, in the case of
awards to Partnership Employees, Services Company Employees and Services Company
Directors, the mechanism for the transfer of rights under such awards and
payment therefor) not inconsistent with this Plan as the Committee shall impose
and shall be evidenced by a written Stock Appreciation Right Agreement, which
shall be executed by the Grantee and an authorized officer of the Company. The
Committee, in its discretion, may determine whether a Stock Appreciation Right
is to qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code and Stock Appreciation Right Agreements evidencing
Stock Appreciation Rights intended to so qualify shall contain such terms and
conditions as may be necessary to meet the applicable provisions of section
162(m) of the Code. Without limiting the generality of the foregoing, the
Committee may, in its discretion and on such terms as it deems appropriate,
require as a condition of the grant of a Stock Appreciation Right to an Employee
or consultant that the Employee or consultant surrender for cancellation some or
all of the unexercised Options, awards of Restricted Stock or Stock Appreciation
Rights, or other rights which have been previously granted to him under this
Plan or otherwise. A Stock Appreciation Right, the grant of which is
conditioned upon such surrender, may have an exercise price lower (or higher)
than the exercise price of the surrendered Option or other award, may cover the
same (or a lesser or greater) number of shares as such surrendered Option or
other award, may contain such other terms as the Committee deems appropriate,
and shall be exercisable in accordance with its terms, without regard to the
number of shares, price, exercise period or any other term or condition of such
surrendered Option or other award.
21
<PAGE>
7.2 Coupled Stock Appreciation Rights.
---------------------------------
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related to a
particular Option and shall be exercisable only when and to the extent the
related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the number
of shares subject to the simultaneously or previously granted Option to which it
is coupled.
(c) A CSAR shall entitle the Grantee (or other person entitled to
exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company or the
Partnership, as provided in the CSAR agreement, in exchange therefor an amount
determined by multiplying the difference obtained by subtracting the Option
exercise price from the Fair Market Value of a share of Common Stock on the date
of exercise of the CSAR by the number of shares of Common Stock with respect to
which the CSAR shall have been exercised, subject to any limitations the
Committee may impose.
7.3 Independent Stock Appreciation Rights.
-------------------------------------
(a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Committee. An ISAR
shall be exercisable in such installments as the Committee may determine. An
ISAR shall cover such number of shares of Common Stock as the Committee may
determine; provided, however, that unless the Committee otherwise provides in
the terms of the ISAR or otherwise, no ISAR granted to a person subject to
Section 16 of the Exchange Act shall be exercisable until at least six months
have elapsed from (but excluding) the date on which the Option was granted. The
exercise price per share of Common Stock subject to each ISAR shall be set by
the Committee. An ISAR is exercisable only while the Grantee is an Employee or
consultant; provided that the Committee may determine that the ISAR may be
exercised subsequent to Termination of Employment or Termination of Consultancy
without cause, or following a change in control of the Company or the
Partnership, or because of the Grantee's retirement, death or disability, or
otherwise.
(b) An ISAR shall entitle the Grantee (or other person entitled to
exercise the ISAR pursuant to this Plan) to exercise all or a specified portion
of the ISAR (to the extent then exercisable pursuant to its terms) and to
receive from the Company or the Partnership, as provided in the ISAR agreement,
an amount determined by multiplying the difference obtained by subtracting the
exercise price per share of the ISAR from the Fair Market Value of a share of
Common Stock on the date of exercise of the ISAR by the number of shares of
Common Stock with respect to which the ISAR shall have been exercised, subject
to any limitations the Committee may impose.
22
<PAGE>
7.4 Payment and Limitations on Exercise.
-----------------------------------
(a) Payment of the amount determined under Section 8.2(c) and 8.3(b)
above shall be in cash, in Common Stock (based on its Fair Market Value as of
the date the Stock Appreciation Right is exercised) or a combination of both, as
determined by the Committee. To the extent such payment is effected in Common
Stock it shall be made subject to satisfaction of all provisions of Section 5.6
and Section 5.8 hereinabove pertaining to Options.
(b) Grantees of Stock Appreciation Rights may be required to comply
with any timing or other restrictions with respect to the settlement or exercise
of a Stock Appreciation Right, including a window-period limitation, as may be
imposed in the discretion of the Board or Committee.
7.5 Consideration. In consideration of the granting of a Stock
-------------
Appreciation Right, the Grantee shall agree, in the written Stock Appreciation
Right Agreement, to remain in the employ of, or to consult for, the Company, any
Company Subsidiary, the Partnership, any Partnership Subsidiary, the Services
Company or any Services Company Subsidiary for a period of at least one year
after the Stock Appreciation Right is granted (or such shorter period as may be
fixed in the Stock appreciation Right Agreement or by action of the Committee
following grant of the Restricted Stock). Nothing in this Plan or in any Stock
Appreciation Right Agreement hereunder shall (i) confer on any Grantee any right
to (a) continue in the employ of, or as a consultant for, the Company, any
Company Subsidiary, the Partnership, any Partnership Subsidiary, the Services
Company or any Services Company Subsidiary or (b) receive severance pay from the
Company, any Company Subsidiary, the Partnership, any Partnership Subsidiary,
the Services Company or any Services Company Subsidiary or (ii) interfere with
or restrict in any way the rights of the Company, any Company Subsidiary, the
Partnership, any Partnership Subsidiary, the Services Company or any Services
Company Subsidiary, which are hereby expressly reserved, to discharge any
Grantee at any time for any reason whatsoever, with or without good cause.
ARTICLE VIII
ADMINISTRATION
8.1 Compensation Committee. Prior to the Company's initial
----------------------
registration of Common Stock under Section 12 of the Exchange Act, the Committee
shall consist of the entire Board. Following such registration, the Committee
(or another committee or a subcommittee of the Board assuming the functions of
the Committee under this Plan) shall consist solely of two or more Independent
Directors appointed by and holding office at the pleasure of the Board, each of
whom is both a "non-employee director" as defined by Rule 16b-3 and an "outside
director" for purposes of Section 162(m) of the Code. Appointment of Committee
members shall be effective upon acceptance of appointment. Committee members
23
<PAGE>
may resign at any time by delivering written notice to the Board. Vacancies in
the Committee may be filled by the Board.
8.2 Duties and Powers of Committee. It shall be the duty of the
------------------------------
Committee to conduct the general administration of this Plan in accordance with
its provisions. The Committee shall have the power to interpret this Plan and
the agreements pursuant to which Options, awards of Restricted Stock and Stock
Appreciation Rights are granted or awarded, and to adopt such rules for the
administration, interpretation, and application of this Plan as are consistent
therewith and to interpret, amend or revoke any such rules. Notwithstanding the
foregoing, the full Board, acting by a majority of its members in office, shall
conduct the general administration of the Plan with respect to Options granted
to Independent Directors. Any such grant or award under this Plan need not be
the same with respect to each Optionee, Grantee or Restricted Stockholder. Any
such interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its absolute
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under this Plan except with respect to
matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations
or rules issued thereunder, are required to be determined in the sole discretion
of the Committee.
8.3 Majority Rule; Unanimous Written Consent. The Committee shall
----------------------------------------
act by a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
8.4 Compensation; Professional Assistance; Good Faith Actions.
---------------------------------------------------------
Members of the Committee shall receive such compensation for their services as
members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of this
Plan shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee or the Board in good faith shall be final and binding upon all
Optionees, Grantees, Restricted Stockholders, the Company, the Partnership and
all other interested persons. No members of the Committee or Board shall be
personally liable for any action, determination or interpretation made in good
faith with respect to this Plan, Options, awards of Restricted Stock or Stock
Appreciation Rights, and all members of the Committee and the Board shall be
fully protected by the Company in respect of any such action, determination or
interpretation.
24
<PAGE>
ARTICLE IX
MISCELLANEOUS PROVISIONS
9.1 Not Transferable. Options, Restricted Stock awards and Stock
----------------
Appreciation Rights under this Plan may not be sold, pledged, assigned, or
transferred in any manner other than by will or the laws of descent and
distribution or pursuant to a QDRO, unless and until such rights or awards have
been exercised, or the shares underlying such rights or awards have been issued,
and all restrictions applicable to such shares have lapsed. No Option,
Restricted Stock award or Stock Appreciation Right or interest or right therein
shall be liable for the debts, contracts or engagements of the Optionee, Grantee
or Restricted Stockholder or his successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment or
any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.
During the lifetime of the Optionee or Grantee, only he may exercise
an Option or other right or award (or any portion thereof) granted to him under
the Plan, unless it has been disposed of pursuant to a QDRO. After the death of
the Optionee or Grantee, any exercisable portion of an Option or other right or
award may, prior to the time when such portion becomes unexercisable under the
Plan or the applicable Stock Option Agreement or other agreement, be exercised
by his personal representative or by any person empowered to do so under the
deceased Optionee's or Grantee's will or under the then applicable laws of
descent and distribution.
9.2 Amendment, Suspension or Termination of this Plan. Except as
-------------------------------------------------
otherwise provided in this Section 9.2, this Plan shall have a term of ten
years but may be wholly or partially amended or otherwise modified, suspended or
terminated at any time or from time to time by the Board or the Committee.
However, without approval of the Company's stockholders given within twelve
months before or after the action by the Board or the Committee, no action of
the Board or the Committee may, except as provided in Section 9.3, increase the
limits imposed in Section 2.1 on the maximum number of shares which may be
issued under this Plan, modify the Award Limit or reduce the minimum purchase
price for the exercise of Options as set forth in Section 4.2, and no action of
the Committee may be taken that would otherwise require stockholder approval as
a matter of applicable law, regulation or rule. No amendment, suspension or
termination of this Plan shall, without the consent of the holder of Options,
Restricted Stock awards or Stock Appreciation Rights, alter or impair any rights
or obligations under any Options, Restricted Stock awards or Stock Appreciation
Rights theretofore granted or awarded, unless the award itself otherwise
expressly so provides. No Options, Restricted Stock or Stock Appreciation Rights
may be granted or awarded during any period of suspension or after termination
of this Plan, and in no event may any Incentive Stock Option be granted under
this Plan after the first to occur of the following events:
25
<PAGE>
(a) The expiration of ten years from the date the Plan is adopted by
the Board; or
(b) The expiration of ten years from the date the Plan is approved by
the Company's stockholders under Section 9.4.
9.3 Changes in Common Stock or Assets of the Company, Acquisition or
----------------------------------------------------------------
Liquidation of the Company and Other Corporate Events.
- -----------------------------------------------------
(a) Subject to Section 9.3(e), in the event that the Committee (or
the Board, in the case of Options granted to Independent Directors) determines
that any dividend or other distribution (whether in the form of cash, Common
Stock, other securities, or other property), recapitalization, reclassification,
stock split, reverse stock split, reorganization, merger, consolidation, split-
up, spin-off, combination, repurchase, liquidation, dissolution, or sale,
transfer, exchange or other disposition of all or substantially all of the
assets of the Company (including, but not limited to, a Corporate Transaction),
or exchange of Common Stock or other securities of the Company, issuance of
warrants or other rights to purchase Common Stock or other securities of the
Company, or other similar corporate transaction or event, in the Committee's
sole discretion (or in the case of Options granted to Independent Directors, the
Board's sole discretion), affects the Common Stock such that an adjustment is
determined by the Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan or with respect to an Option, Restricted Stock award or Stock
Appreciation Right, then the Committee (or the Board, in the case of Options
granted to Independent Directors) shall, in such manner as it may deem
equitable, adjust any or all of
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Options or Stock Appreciation
Rights may be granted under the Plan, or which may be granted as Restricted
Stock (including, but not limited to, adjustments of the limitations in
Section 2.1 on the maximum number and kind of shares which may be issued
and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Options or Stock
Appreciation Rights, and in the number and kind of shares of outstanding
Restricted Stock, and
(iii) the grant or exercise price with respect to any Option or
Stock Appreciation Right.
(b) Subject to Section 9.3(e), in the event of any corporate
transaction or other transaction or event described in Section 9.3(a) which
results in shares of Common Stock being exchanged for or converted into cash,
securities (including securities of another corporation) or other property, the
Committee will have the right to terminate this Plan as of the date of the event
or transaction, in which case all options, rights and other awards
26
<PAGE>
granted under this Plan shall become the right to receive such cash, securities
or other property, net of any applicable exercise price.
(c) Subject to Sections 9.3(e), in the event of any Corporate
Transaction or other transaction or event described in Section 9.3(a) or any
unusual or nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company or any
affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Committee (or the Board, in the case of Options granted to
Independent Directors) in its discretion is hereby authorized to take any one or
more of the following actions whenever the Committee (or the Board, in the case
of Options granted to Independent Directors) determines that such action is
appropriate in order to prevent dilution or enlargement of the benefits or
potential benefits intended to be made available under the Plan or with respect
to any option, right or other award under this Plan, to facilitate such
transactions or events or to give effect to such changes in laws, regulations or
principles:
(i) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either by
the terms of the agreement or by action taken prior to the occurrence of
such transaction or event and either automatically or upon the optionee's
request, for either the purchase of any such Option, Stock Appreciation
Right or any Restricted Stock for an amount of cash equal to the amount
that could have been attained upon the exercise of such option, right or
award or realization of the optionee's rights had such option, right or
award been currently exercisable or payable or fully vested as the
replacement of such option, right or award with other rights or property
selected by the Committee (or the Board, in the case of Options granted to
Independent Directors) in its sole discretion;
(ii) In its sole and absolute discretion, the Committee (or the
Board, in the case of Options granted to Independent Directors) may
provide, either by the terms of such Option, Stock Appreciation Right or
Restricted Stock or by action taken prior to the occurrence of such
transaction or event that it cannot be exercised after such event;
(iii) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either by
the terms of such Option, Stock Appreciation Right or Restricted Stock or
by action taken prior to the occurrence of such transaction or event, that
for a specified period of time prior to such transaction or event, such
option, right or award shall be exercisable as to all shares covered
thereby, notwithstanding anything to the contrary in (i) Section 4.4 or
(ii) the provisions of such Option, Stock Appreciation Right or Restricted
Stock;
(iv) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may provide, either by
the terms of such Option, Stock Appreciation Right or Deferred Stock or by
action taken prior to the
27
<PAGE>
occurrence of such transaction or event, that upon such event, such option,
right or award be assumed by the successor or survivor corporation, or a
parent or subsidiary thereof, or shall be substituted for by similar
options, rights or awards covering the stock of the successor or survivor
corporation, or a parent or subsidiary thereof, with appropriate
adjustments as to the number and kind of shares and prices;
(v) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee (or the Board, in the
case of Options granted to Independent Directors) may make adjustments in
the number and type of shares of Common Stock (or other securities or
property) subject to outstanding Options, Stock Appreciation Rights, and in
the number and kind of outstanding Restricted Stock and/or in the terms and
conditions of (including the grant or exercise price), and the criteria
included in, outstanding options, rights and awards and options, rights and
awards which may be granted in the future; and
(vi) In its sole and absolute discretion, and on such terms and
conditions as it deems appropriate, the Committee may provide either by the
terms of a Restricted Stock award or by action taken prior to the
occurrence of such event that, for a specified period of time prior to such
event, the restrictions imposed under a Restricted Stock Agreement upon
some or all shares of Restricted Stock may be terminated and some or all
shares of such Restricted Stock may cease to be subject to repurchase under
Section 6.6 or forfeiture under Section 6.5 after such event;
(d) Subject to Section 9.3(e) and 9.8, the Committee (or the Board,
in the case of Options granted to Independent Directors) may, in its discretion,
include such further provisions and limitations in any Option, Stock
Appreciation Right or Restricted Stock agreement or certificate, as it may deem
equitable and in the best interests of the Company.
(e) With respect to Incentive Stock Options and Options and Stock
Appreciation Rights intended to qualify as performance-based compensation under
Section 162(m), no adjustment or action described in this Section 9.3 or in any
other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to violate Section 422(b)(1) of the
Code or would cause such option or stock appreciation right to fail to so
qualify under Section 162(m), as the case may be, or any successor provisions
thereto. Furthermore, no such adjustment or action shall be authorized to the
extent such adjustment or action would result in short-swing profits liability
under Section 16 or violate the exemptive conditions of Rule 16b-3 unless the
Committee (or the Board, in the case of Options granted to Independent
Directors) determines that the option or other award is not to comply with such
exemptive conditions. The number of shares of Common Stock subject to any
option, right or award shall always be rounded to the next whole number.
9.4 Approval of Plan by Stockholders. This Plan will be submitted
--------------------------------
for the approval of the Company's stockholders within twelve months after the
date of the Board's initial adoption of this Plan. Options and Stock
Appreciation Rights may be granted and
28
<PAGE>
Restricted Stock may be awarded prior to such stockholder approval, provided
that such Options or Stock Appreciation Rights shall not be exercisable and such
Restricted Stock shall not vest prior to the time when this Plan is approved by
the stockholders, and provided further that if such approval has not been
obtained at the end of said twelve-month period, all Options or Stock
Appreciation Rights previously granted and all Restricted Stock previously
awarded under this Plan shall thereupon be canceled and become null and void.
9.5 Tax Withholding. The Company and the Partnership shall be
---------------
entitled to require payment in cash or deduction from other compensation payable
to each Optionee, Grantee or Restricted Stockholder of any sums required by
federal, state or local tax law to be withheld with respect to the issuance,
vesting or exercise of any Option, Restricted Stock or Stock Appreciation Right.
The Committee (or the Board, in the case of Options granted to Independent
Directors) may in its discretion and in satisfaction of the foregoing
requirement allow such Optionee, Grantee or Restricted Stockholder to elect to
have the Company withhold shares of Common Stock otherwise issuable under such
Option or other award (or allow the return of shares of Common Stock) having a
Fair Market Value equal to the sums required to be withheld.
9.6 Loans. The Committee may, in its discretion, extend one or more
-----
loans to key Employees in connection with the exercise or receipt of an Option
or Stock Appreciation Right granted under this Plan, or the issuance of
Restricted Stock awarded under this Plan. The terms and conditions of any such
loan shall be set by the Committee.
9.7 Forfeiture Provisions. Pursuant to its general authority to
---------------------
determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall have the right (to the extent consistent with the applicable
exemptive conditions of Rule 16b-3) to provide, in the terms of Options or other
awards made under the Plan, or to require the recipient to agree by separate
written instrument, that (i) any proceeds, gains or other economic benefit
actually or constructively received by the recipient upon any receipt or
exercise of the award, or upon the receipt or resale of any Common Stock
underlying such award, must be paid to the Company, and (ii) the award shall
terminate and any unexercised portion of such award (whether or not vested)
shall be forfeited, if (a) a Termination of Employment, Termination of
Consultancy or Termination of Directorship occurs prior to a specified date, or
within a specified time period following receipt or exercise of the award, or
(b) the recipient at any time, or during a specified time period, engages in any
activity in competition with the Company, or which is inimical, contrary or
harmful to the interests of the Company, as further defined by the Committee (or
the Board, as applicable).
9.8 Limitations Applicable to Section 16 Persons and Performance-
-------------------------------------------------------------
Based Compensation. Notwithstanding any other provision of this Plan, this
- ------------------
Plan, and any Option or Stock Appreciation Right granted, or Restricted Stock
awarded, to any individual who is then subject to Section 16 of the Exchange
Act, shall be subject to any additional limitations set forth in any applicable
exemptive rule under Section 16 of the Exchange Act (including any amendment to
Rule 16b-3 of the Exchange Act) that are requirements for the application of
such exemptive rule. To the extent permitted by applicable law, the Plan,
Options, Stock
29
<PAGE>
Appreciation Rights and Restricted Stock granted or awarded hereunder shall be
deemed amended to the extent necessary to conform to such applicable exemptive
rule. Furthermore, notwithstanding any other provision of this Plan, any Option
or Stock Appreciation Right intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall be subject
to any additional limitations set forth in Section 162(m) of the Code (including
any amendment to Section 162(m) of the Code) or any regulations or rulings
issued thereunder that are requirements for qualification as performance-based
compensation as described in Section 162(m)(4)(C) of the Code, and this Plan
shall be deemed amended to the extent necessary to conform to such requirements.
9.9 Effect of Plan Upon Options and Compensation Plans. The
--------------------------------------------------
adoption of this Plan shall not affect any other compensation or incentive plans
in effect for the Company, any Company Subsidiary, the Partnership or any
Partnership Subsidiary. Nothing in this Plan shall be construed to limit the
right of the Company or the Partnership (i) to establish any other forms of
incentives or compensation for Employees, Directors or consultants of the
Company, any Company Subsidiary, the Partnership or any Partnership Subsidiary
or (ii) to grant or assume options or other rights otherwise than under this
Plan in connection with any proper corporate purpose including but not by way of
limitation, the grant or assumption of options in connection with the
acquisition by purchase, lease, merger, consolidation or otherwise, of the
business, stock or assets of any corporation, partnership, firm or association.
9.10 Section 83(b) Election Prohibited. No Grantee, Optionee or
---------------------------------
Restricted Stockholder may make an election under Section 83(b) of the Code with
respect to any award or grant under this Plan.
9.11 Compliance with Laws. This Plan, the granting and vesting of
--------------------
Options, Restricted Stock awards or Stock Appreciation Rights under this Plan
and the issuance and delivery of shares of Common Stock and the payment of money
under this Plan or under Options or Stock Appreciation Rights granted or
Restricted Stock awarded hereunder are subject to compliance with all applicable
federal and state laws, rules and regulations (including but not limited to
state and federal securities law and federal margin requirements) and to such
approvals by any listing, regulatory or governmental authority as may, in the
opinion of counsel for the Company, be necessary or advisable in connection
therewith. Any securities delivered under this Plan shall be subject to such
restrictions, and the person acquiring such securities shall, if requested by
the Company, provide such assurances and representations to the Company as the
Company may deem necessary or desirable to assure compliance with all applicable
legal requirements. To the extent permitted by applicable law, the Plan,
Options, Restricted Stock awards or Stock Appreciation Rights granted or awarded
hereunder shall be deemed amended to the extent necessary to conform to such
laws, rules and regulations.
9.12 Titles. Titles are provided herein for convenience only and
------
are not to serve as a basis for interpretation or construction of this Plan.
30
<PAGE>
9.13 Governing Law. This Plan and any agreements hereunder shall be
-------------
administered, interpreted and enforced under the internal laws of the State of
Maryland without regard to conflicts of laws thereof.
9.14 Conflicts with Company's Restated Articles. Notwithstanding
------------------------------------------
any other provision of this Plan, no Optionee, Grantee or Restricted Stockholder
shall acquire or have any right to acquire any Common Stock, and shall not have
other rights under this Plan, which are prohibited under the Company's Restated
Articles.
31
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers duly authorized on this 31st day of January, 1997.
Kilroy Realty Corporation, a Maryland
corporation.
By _____________________________________
John B. Kilroy, Jr.
Chief Executive Officer
Attest:
_________________________________
Secretary
Kilroy Realty, L.P., a Delaware limited
partnership.
By _____________________________________
John B. Kilroy, Jr.
Chief Executive Officer
On Behalf of Kilroy Realty
Corporation, a Maryland corporation,
in its capacity as General Partner
_________________________________
Secretary
32
<PAGE>
Kilroy Services, Inc., a Maryland
corporation.
By _____________________________________
Campbell Hugh Greenup
Chief Executive Officer
Attest:
_________________________________
Secretary
33
<PAGE>
EXHIBIT 10.7
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement"), dated as of ____________,
---------
1997, is entered into by and among Kilroy Realty Corporation, a Maryland
corporation (the "Company"), Kilroy Realty, L.P., a Delaware limited partnership
-------
(the "Operating Partnership") and the undersigned Director and/or Officer of the
Company (the "Indemnitee").
----------
RECITALS
--------
WHEREAS, the Indemnitee has agreed to serve as a Director and/or Officer of
the Company and the Company wishes the Indemnitee to continue in such capacity.
The Indemnitee is willing, under certain circumstances, to continue serving as a
Director and Officer of the Company;
WHEREAS, Section 2-418 of the General Corporation Law of the State of
Maryland, under which law the Company is organized, empowers corporations to
indemnify any person who is or was serving as a director, officer, employee or
agent of the corporation or any person who, while a director of the corporation,
is or was serving at the request of the corporation as a director, officer,
partner, trustee, employee or agent of another corporation, partnership, limited
liability company, association, joint venture, trust or other enterprise. As
used in this Agreement, the term "other enterprise" shall include, without
limitation, employee benefit plans and administrative committees thereof. In
addition, the Company includes any domestic or foreign predecessor entity of the
Company in a merger, consolidation or other transaction in which the
predecessor's existence ceased upon consummation of the transaction; and
WHEREAS, said Section 2-418 and the Bylaws of the Company specify that the
indemnification set forth in said Section 2-418 and in the Bylaws, respectively,
shall not be deemed to limit the right of the Corporation to indemnify any other
person against any liability and expenses to the fullest extent permitted by
law, nor shall it be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any agreement, the Articles or Bylaws of
the Company, a vote of stockholders or disinterested directors or otherwise,
both as to action in such person's official capacity as an officer or director
and as to action in another capacity, as the request of the Corporation, while
acting as an officer or director of the Corporation;
NOW, THEREFORE, in order to induce the Indemnitee to serve as a
Director and/or Officer of the Company and in consideration of his continued
service, the Company hereby agrees to indemnify the Indemnitee as follows:
<PAGE>
AGREEMENT
---------
1. Indemnity. The Company will indemnify, save and hold harmless the
---------
Indemnitee, his executors, administrators or assigns, or, if the Indemnitee is
deceased, his estate, spouse, heirs, executors and administrators, for any
Expenses (as defined in Section 2 hereof) which the Indemnitee is or becomes
legally obligated to pay in connection with any Proceeding. As used in this
Agreement, the term "Proceeding" shall mean any threatened, pending or completed
claim, action, suit or proceeding, including any appeals, whether brought by or
in the right of the Company or otherwise and whether of a civil, criminal,
administrative or investigative nature, in which the Indemnitee may be or may
have been involved as a party or otherwise, (i) by reason of the fact that the
Indemnitee is or was a director or officer of the Company, (ii) by reason of any
actual or alleged error or misstatement or misleading statement made or suffered
by the Indemnitee, (iii) by reason of any action taken by the Indemnitee or of
any inaction on the Indemnitee's part while acting as such director or officer,
or (iv) by reason of the fact that the Indemnitee was serving at the request of
the Company as a director, trustee, officer, employee or agent of another
corporation, partnership, limited liability company, association, joint venture,
trust or other enterprise (the "Proceeding"); provided that in each such case
---------- -------------
the Indemnitee acted in good faith within the course and scope of the
Indemnitee's duties and in a manner which the Indemnitee reasonably believed to
be in or not opposed to the best interests of the Company, and, in the case of a
criminal proceeding, in addition the Indemnitee had no reasonable cause to
believe that his act or omission was unlawful.
2. Expenses. As used in this Agreement, the term "Expenses" shall mean
--------
all reasonable expenses incurred by the Indemnitee in connection with the
Proceeding which shall include, without limitation, damages, judgments, fines,
penalties, settlements, costs, attorneys' fees, disbursements and costs of
attachment or similar bonds, investigations, and any such expenses of
establishing a right to indemnification under this Agreement (the "Expenses").
--------
"Fines" shall include, without limitation, any excise tax assessed with respect
to any employee benefit plan. Any such Expenses may be paid by the Company in
advance of the final disposition of such action, suit or proceeding.
3. Exclusions. The Company shall not be liable under this Agreement to
----------
pay any Expenses in connection with any claim made against the Indemnitee:
(a) to the extent that payment is actually made to the Indemnitee
under a valid, enforceable and collectible insurance policy;
2
<PAGE>
(b) to the extent that the Indemnitee is indemnified and actually paid
otherwise than pursuant to this Agreement;
(c) in connection with a judicial action by or in the right of the
Company, in respect of any claim, issue or matter as to which the Indemnitee
shall have been adjudged to be liable to the Company, unless and only to the
extent that any court in which such action was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, the Indemnitee is fairly and reasonably entitled to
indemnity for such expenses as such court shall deem proper;
(d) if it is established by final judgment in a court of law or other
final adjudication that the act or omission of the Indemnitee that (i) the act
or omission of the director or officer was material to the matter giving rise to
the proceeding and was committed in bad faith or was the result of active and
deliberate dishonesty, (ii) the director or officer actually received an
improper personal benefit in money, property or services, or (iii) in the case
of any criminal proceeding, the director or officer had reasonable cause to
believe that the act or omission was unlawful;
(e) if it is proved by final judgment in a court of law or other final
adjudication to have been based upon or attributable to the Indemnitee having
gained any personal profit or advantage to which he was not legally entitled;
(f) for a disgorgement of profits made from the purchase and sale by
the Indemnitee of securities pursuant to Section 16(b) of the Securities
Exchange Act of 1934 and amendments thereto or similar provisions of any state
statutory law or common law; or
(g) for any judgment, fine or penalty which the Company is prohibited
by applicable law from paying as indemnity or for any other reason.
4. Termination of the Proceeding.
-----------------------------
(a) The termination of any Proceeding, which is covered by this
Agreement, by judgment, order or settlement, shall not of itself create a
presumption for the purposes of this Agreement that the Indemnitee did not act
in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
action or proceeding, had reasonable cause to believe that his conduct was
unlawful.
3
<PAGE>
(b) The termination of any proceeding by conviction, or by a plea of
nolo contendere or its equivalent, or an entry of an order of probation prior to
judgment, creates a rebuttable presumption that the director did not meet the
requisite standard of conduct for good faith or otherwise.
5. Enforcement. If a claim or request under this Agreement is not paid
-----------
by the Company, or on its behalf, within thirty (30) days after a written claim
or request has been received by the Company, the Indemnitee may at any time
thereafter bring suit against the Company to recover the unpaid amount of the
claim or request, and if successful in whole or in part, the Indemnitee shall be
entitled to be paid all of the Expenses of prosecuting such suit. The burden of
proving that the Indemnitee is not entitled to indemnification for any reason
shall be upon the Company.
6. Recoupment. The Company shall have the right to recoup from the
----------
Indemnitee the amount of any item or items of Expenses theretofore paid by the
Company pursuant to this Agreement, to the extent that such Expenses are not
reasonable in nature or amounts; provided, however, that the Company shall have
-----------------
the burden of proving such Expenses to be unreasonable.
7. Subrogation. In the event of payment under this Agreement, the
-----------
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of the Indemnitee, who shall execute all papers required and shall
do everything that may be necessary to secure such rights, including the
execution of such documents necessary to enable the Company effectively to bring
suit to enforce such rights.
8. Indemnification of Expenses of Successful Party. Notwithstanding any
-----------------------------------------------
other provision of this Agreement, to the extent that the Indemnitee has been
successful on the merits or otherwise in defense of any Proceeding or in defense
of any claim, issue or matter therein, including dismissal without prejudice,
the Indemnitee shall be indemnified against any and all Expenses incurred in
connection therewith.
9. Partial Indemnification. If the Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of Expenses, but not, however, for the total amount thereof, the Company
shall nevertheless indemnify the Indemnitee for the portion of such Expenses to
which the Indemnitee is entitled.
10. Indemnification Hereunder Not Exclusive. Nothing herein shall be
---------------------------------------
deemed to diminish or otherwise restrict the Indemnitee's right to
indemnification under
4
<PAGE>
any provision of the Articles of Incorporation or Bylaws of the Company and
amendments thereto or under law.
11. Advance of Expenses. Expenses incurred by the Indemnitee in
-------------------
connection with any Proceeding, except the amount of any settlement, shall be
paid by the Company in advance upon request of the Indemnitee that the Company
pay such Expenses. The Indemnitee hereby undertakes to repay to the Company the
amount of any Expenses theretofore paid by the Company to the extent that it is
ultimately determined that such Expenses were not reasonable or that the
Indemnitee is not entitled to indemnification.
12. Approval of Expenses. No Expenses for which indemnity shall be sought
--------------------
under this Agreement, other than those in respect of judgments and verdicts
actually rendered, shall be incurred without the prior written consent of the
Company, which consent shall not be unreasonably withheld.
13. Coverage. The provisions of this Agreement shall apply with respect
--------
to the Indemnitee's service as a Director and Officer of the Company prior to
the date of this Agreement and with respect to all periods of such service after
the date of this Agreement, even though the Indemnitee may have ceased to be a
Director or Officer of the Company.
14. General Provisions
------------------
14.1 Notice of Claim. The Indemnitee, as a condition precedent to his
---------------
right to be indemnified under this Agreement, shall give to the Company notice
in writing as soon as practicable of any claim made against him for which
indemnity will or could be sought under this Agreement. Notice to the Company
shall be given at its principal office and shall be directed to the President
and CEO (or such other address as the Company shall designate in writing to the
Indemnitee). Notice shall be deemed duly given when addressed as follows and
(i) when personally delivered, (ii) when transmitted by telecopy, electronic or
digital transmission with receipt confirmed, (iii) one day after delivery to an
overnight air courier guaranteeing next day delivery, or (iv) upon receipt if
sent by certified or registered mail. In each case notice shall be sent to:
If to the Indemnitee: ______________________
If to the Company: Kilroy Realty Corporation
2250 East Imperial Highway
El Segundo, California 90245
5
<PAGE>
Attention: President and CEO
Facsimile: (310) 322-5981
14.2 Governing Law. This Agreement shall be governed by and construed
-------------
in accordance with the laws of the State of California without giving effect to
the principles of conflict of laws thereof.
14.3 Assignment. This Agreement may not be assigned by the
----------
Indemnitee, but may be assigned by the Company to any successor to its business
and will inure to the benefit and be binding upon any such successor.
14.4 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original but all of which
taken together shall constitute one and the same instrument.
14.5 Severability. The invalidity or unenforceability of any
------------
provision or provisions of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement, which shall remain in
full force and effect.
14.6 Entire Agreement. This Agreement contains the entire agreement
----------------
and understanding between the Company and the Indemnitee with respect to the
indemnification of the Indemnitee by the Company as contemplated hereby, and no
representations, promises, agreements or understandings, written or oral, not
herein contained shall be of any force or effect. This Agreement shall not be
changed unless in writing and signed by both the Indemnitee and the Board of
Directors of the Company.
14.7 The Indemnitee's Acknowledgment. The Indemnitee acknowledges
-------------------------------
(a) that he has had the opportunity to consult with independent counsel of his
own choice concerning this Agreement, and (b) that he has read and understands
the Agreement, is fully aware of its legal effect, and has entered into it
freely based on his own judgment.
(Signature Page Follows)
6
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first above written .
KILROY REALTY CORPORATION,
a Maryland corporation
By_______________________________________
Name:
Title:
KILROY REALTY, L.P.
a Delaware limited partnership
By_______________________________________
Name:
Title:
INDEMNITEE
----------------------------------------
[NAME]
7
<PAGE>
EXHIBIT 10.34
NONCOMPETITION AGREEMENT
THIS NONCOMPETITION AGREEMENT (this "Agreement") is dated as of __________,
---------
1997, by and among Kilroy Realty Corporation, a Maryland corporation (the
"Company"), Kilroy Realty, L.P., a Delaware limited partnership ("Kilroy Realty,
-------
L.P."), and John B. Kilroy, Sr. (the "Director").
--------
WHEREAS, Kilroy Realty, L.P., the Director and certain other parties have
entered into an Omnibus Option Agreement, dated as of October 30, 1996 (the
"Omnibus Option Agreement"), pursuant to which the Director has transferred all
of his right, title and interest in certain office and industrial buildings, the
related fee or leasehold real property interests, and the development,
management and leasing businesses in connection with therewith (collectively,
the "Contributed Properties"), in exchange for a limited partnership interest in
Kilroy Realty, L.P.;
WHEREAS, the Company desires the Director to serve, and the Director
desires to serve, on the Company's Board of Directors (the "Board") as provided
-----
for in the Company's Amended and Restated Articles of Incorporation and Bylaws;
and
WHEREAS, the Company and the Director agree that, in connection with the
contribution of the Contributed Properties to Kilroy Realty, L.P. and the
designation of the Director to serve on the Board, the Director will not engage
in competition with the Company and Kilroy Realty, L.P. pursuant to the terms
and conditions hereof;
NOW, THEREFORE, in furtherance of the foregoing and in exchange for good
and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. Noncompetition. (a) For as long as the Director is a member of the
--------------
Board (or the Board of Directors of any successor to the Company), the Director
shall be prohibited from engaging in Competition (as defined below) with the
Company, Kilroy Realty, L.P. or any of their respective subsidiaries.
(b) The term "Competition" for purposes of this Agreement shall mean
-----------
the taking of any of the following actions by the Director: conducting,
directly or indirectly, any property development, acquisition or management
activity with respect to office and industrial property in the Southern
California Area or in any other market in which the Company or any of its
subsidiaries owns, develops or manages property, whether such business is
conducted by the Director individually or as principal, partner, officer,
director, consultant, employee, stockholder or manager of any person,
partnership, corporation, limited liability company or any other entity;
provided, however, that the term "Competition" shall be deemed to exclude (i)
-----------
the Director's ownership, management or leasing of the Director's interests in
any of the properties listed on Schedule A hereto and any passive ownership
interest in real property received in exchange therefor, and (ii) the transfer
or exchange of any of the properties listed in the immediately preceding clause
(i), provided that the ownership and activities with respect to any such
property received in any exchange otherwise comply with the terms
<PAGE>
and conditions of this Agreement and (iii) the Director's activities related
solely to the marketing, entitlement, sale, transfer or exchange of the
approximately 66-acre site which currently comprises Calabasas Park Centre in
the City of Calabasas, California ("Calabasas Park Centre"). For purposes of
---------------------
the previous sentence, the "Southern California Area" shall be deemed to be
------------------------
comprised of the counties of Los Angeles, Orange, Riverside, San Bernardino and
Ventura.
(c) Notwithstanding the foregoing, the Director agrees not to sell,
assign or otherwise transfer (or cause to be sold, assigned or otherwise
transferred) the Director's interest (direct or indirect) in Calabasas Park
Centre (or any portion thereof) to any real estate investment trust with a
portfolio of existing office or industrial properties (a "Competing REIT")
--------------
unless such interest is offered first to the Company pursuant to the terms and
conditions of the Option Agreement, dated as of the date hereof, by and between
Kilroy Realty, L.P. and Kilroy Calabasas Associates, as amended from time to
time.
2. Specific Performance. The Director acknowledges that in the event of
--------------------
breach by the Director of the terms of Section 1 hereof, the remedies at law
available to the Company and to Kilroy Realty, L.P. may be inadequate and the
Company and Kilroy Realty, L.P. shall be entitled to institute legal proceedings
to enforce the specific performance of this Agreement by the Director and to
enjoin the Director from any further violation of Section 1 hereof and to
exercise such remedies cumulatively or in conjunction with all other rights and
remedies provided by law and not otherwise limited by this Agreement.
3. Attorneys Fees. If any legal action, arbitration or other proceeding
--------------
is brought for the enforcement of this Agreement, or because of an alleged
dispute, breach or default in connection with any of the provisions of this
Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, including
any appeal of such action or proceeding, in addition to any other relief to
which that party may be entitled.
4. Severability. Any provision of this Agreement which is deemed
------------
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this paragraph, be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof in such jurisdiction or rendering that any other
provisions of this Agreement invalid, illegal or unenforceable in any other
jurisdiction. If any covenant should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant shall be
modified so that the scope of the covenant is reduced only to the minimum extent
necessary to render the modified covenant valid, legal and enforceable.
5. Governing Law. This Agreement shall be governed, construed,
-------------
interpreted and enforced in accordance with the laws of the State of California,
without regard to the conflict of laws principles thereof.
6. Entire Agreement. This Agreement contains the entire agreement and
----------------
understanding between the Company, Kilroy Realty, L.P. and the Director with
respect to the subject matter hereof, and no representations, promises,
agreements or understandings, written or oral, not herein contained shall be of
any force or effect. This Agreement shall not be changed unless in writing and
signed by both the Director and the Board of Directors of the Company.
2
<PAGE>
7. Assignment. This Agreement may not be assigned by the Director, but
----------
may be assigned by the Company and Kilroy Realty, L.P. to any successor to its
business and will inure to the benefit of and be binding upon any such
successor.
8. Notice. For the purposes of this Agreement, notices, demands and all
------
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given (i) when personally delivered, (ii) when
transmitted by telecopy, electronic or digital transmission with receipt
confirmed, (iii) one day after delivery to a nationally recognized overnight air
courier guaranteeing next day delivery, or (iv) upon receipt if sent by
certified or registered mail. In each case, notice shall be sent to:
If to the Director: John B. Kilroy, Sr.
[Address]
If to the Company
and to Kilroy Realty, L.P.: Kilroy Realty Corporation
2250 East Imperial Highway
El Segundo, California 90245
Attention: Secretary
Facsimile: (310) 322-5981
9. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
10. The Director's Acknowledgment. The Director acknowledges (a) that he
-----------------------------
has had the opportunity to consult with independent counsel of his own choice
concerning this Agreement, and (b) that he has read and understands the
Agreement, is fully aware of its legal effect, and has entered into it freely
based on his own judgment.
(Signature Page Follows)
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
KILROY REALTY CORPORATION
By:
--------------------------------------
John B. Kilroy, Jr.
President and Chief Executive Officer
KILROY REALTY, L.P.
By Kilroy Realty Corporation, its
general partner
By:
----------------------------------
John B. Kilroy, Jr.
President and Chief Executive Officer
John B. Kilroy, Sr.
-----------------------------------
4
<PAGE>
EXHIBIT 10.35
NONCOMPETITION AGREEMENT
THIS NONCOMPETITION AGREEMENT (this "Agreement") is dated as of __________,
1997, by and among Kilroy Realty Corporation, a Maryland corporation (the
"Company"), Kilroy Realty, L.P., a Delaware limited partnership ("Kilroy Realty,
- --------
L.P."), and John B. Kilroy, Jr. (the "Executive"). Capitalized terms used
---------
herein but not otherwise defined herein shall have the meaning ascribed to them
in the Employment Agreement (as defined below).
WHEREAS, Kilroy Realty, L.P., the Executive and certain other parties have
entered into an Omnibus Option Agreement, dated as of October 30, 1996 (the
"Omnibus Option Agreement"), pursuant to which the Executive has transferred all
of his right, title and interest in certain office and industrial buildings, the
related fee or leasehold real property interests, and the development,
management and leasing businesses in connection with therewith (collectively,
the "Contributed Properties"), in exchange for a limited partnership interest in
Kilroy Realty, L.P.;
WHEREAS, concurrently with the execution of this Agreement, the Company,
Kilroy Realty, L.P. and the Executive have entered into an Employment Agreement,
pursuant to which the Company and Kilroy Realty, L.P. have agreed to employ the
Executive, and the Executive has agreed to be employed by the Company, as its
President and Chief Executive Officer, and by Kilroy Realty, L.P., as its
President and Chief Executive Officer (the "Employment Agreement"); and
--------------------
WHEREAS, the Company, Kilroy Realty, L.P. and the Executive agree that, in
connection with the contribution of the Contributed Properties to Kilroy Realty,
L.P. and the execution of the Employment Agreement and the Executive's
employment, the Executive will not engage in competition with the Company and
Kilroy Realty, L.P. pursuant to the terms and conditions hereof;
NOW, THEREFORE, in furtherance of the foregoing and in exchange for good
and valuable consideration, the receipt and adequacy of which is hereby
acknowledged, the parties hereto hereby agree as follows:
1. Noncompetition. (a) At any time during the Employment Period and for
--------------
one year thereafter, and thereafter continue for so long as the Executive is a
member of the Company's Board of Directors (or the Board of Directors of any
successor to the Company), the Executive shall be prohibited from engaging in
Competition (as defined below) with the Company, Kilroy Realty, L.P. or any of
their respective subsidiaries.
(b) The term "Competition" for purposes of this Agreement shall mean
-----------
the taking of any of the following actions by the Executive: (A) conducting,
directly or indirectly, any property development, acquisition, sale or
management activity, whether such business is conducted by the Executive
individually or as principal, partner, officer, director, consultant, employee,
stockholder or manager of any person, partnership, corporation, limited
liability company or any other entity; and (B) owning interests in real property
which are competitive, directly or indirectly, with any business carried on,
directly or through one or more subsidiaries or otherwise, by the Company;
provided, however, that the term "Competition" shall be deemed to exclude (i)
-----------
the Executive's ownership, management or leasing and any of the properties
listed on Schedule A hereto, including, without limitation, any passive
ownership interest in real property received in exchange therefor, (ii) the
transfer or exchange of any of the properties listed in the immediately
preceding clause (i), provided
<PAGE>
that the ownership and activities with respect to any such property received in
any exchange otherwise comply with the terms and conditions of this Agreement,
(iii) the Executive's ownership of a passive interest in real property which is
not competitive, directly or indirectly, with any business carried on, directly
or through one or more subsidiaries or otherwise, by the Company and (iv) the
Executive's activities related solely to the marketing, entitlement, sale,
transfer and exchange of the approximately 66-acre site which currently
comprises Calabasas Park Centre in the City of Calabasas, California ("Calabasas
---------
Park Centre").
- -----------
(c) Notwithstanding the foregoing, the Executive agrees not to sell,
assign or otherwise transfer (or cause to be sold, assigned or otherwise
transferred) the Executive's interest (direct or indirect) in Calabasas Park
Centre (or any portion thereof) to any real estate investment trust with a
portfolio of existing office and industrial properties (a "Competing REIT")
--------------
unless such interest is offered first to the Company pursuant to the terms and
conditions of the Option Agreement, dated as of the date hereof, by and between
Kilroy Realty, L.P. and Kilroy Calabasas Associates, as amended from time to
time.
(d) In the event that the Executives employment is terminated pursuant
to Sections 5.4, 5.5 or 5.7 of the Employment Agreement, the prohibitions and
restrictions set forth in Section 1(a) of this Agreement shall apply only for so
long as the Executive is a member of the Company's Board of Directors. Except
as set for in this Section 1(d), nothing herein shall relieve or limit
Executive's obligation to comply with the terms of this Agreement and the
Employment Agreement.
2. Specific Performance. The Executive acknowledges that in the event of
--------------------
breach by the Executive of the terms of Section 1 hereof, the Company's and
Kilroy Realty, L.P.'s remedies at law may be inadequate and the Company and
Kilroy Realty, L.P. shall be entitled to institute legal proceedings to enforce
the specific performance of this Agreement by the Executive and to enjoin the
Executive from any further violation of Section 1 hereof and to exercise such
remedies cumulatively or in conjunction with all other rights and remedies
provided by law and not otherwise limited by this Agreement.
3. Attorneys Fees. If any legal action, arbitration or other proceeding
--------------
is brought for the enforcement of this Agreement, or because of an alleged
dispute, breach or default in connection with any of the provisions of this
Agreement, the prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs incurred in that action or proceeding, including
any appeal of such action or proceeding, in addition to any other relief to
which that party may be entitled.
4. Severability. Any provision of this Agreement which is deemed
------------
invalid, illegal or unenforceable in any jurisdiction shall, as to that
jurisdiction and subject to this paragraph, be ineffective to the extent of such
invalidity, illegality or unenforceability, without affecting in any way the
remaining provisions hereof in such jurisdiction or rendering that any other
provisions of this Agreement invalid, illegal or unenforceable in any other
jurisdiction. If any covenant should be deemed invalid, illegal or
unenforceable because its scope is considered excessive, such covenant shall be
modified so that the scope of the covenant is reduced only to the minimum extent
necessary to render the modified covenant valid, legal and enforceable.
5. Governing Law. This Agreement shall be governed, construed,
-------------
interpreted and enforced in accordance with the laws of the State of California,
without regard to the conflict of laws principles thereof.
<PAGE>
6. Entire Agreement. This Agreement contains the entire agreement and
----------------
understanding between the Company, Kilroy Realty, L.P. and the Executive with
respect to the subject matter hereof, and no representations, promises,
agreements or understandings, written or oral, not herein contained shall be of
any force or effect. This Agreement shall not be changed unless in writing and
signed by both the Executive and the Board of Directors of the Company.
7. Assignment. This Agreement may not be assigned by the Executive, but
----------
may be assigned by the Company and Kilroy Realty, L.P. to any successor to its
business and will inure to the benefit of and be binding upon any such
successor.
8. Notice. For the purposes of this Agreement, notices, demands and all
------
other communications provided for in this Agreement shall be in writing and
shall be deemed to have been duly given (i) when personally delivered, (ii) when
transmitted by telecopy, electronic or digital transmission with receipt
confirmed, (iii) one day after delivery to a nationally recognized overnight air
courier guaranteeing next day delivery, or (iv) upon receipt if sent by
certified or registered mail. In each case, notice shall be sent to the
Executive, the Company or Kilroy Realty, L.P., as the case may be, at the
address set forth next to the Executive or the Company, as the case may be, in
Section 9.2 of the Employment Agreement.
9. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
10. The Executive's Acknowledgment. The Executive acknowledges (a) that
------------------------------
he has had the opportunity to consult with independent counsel of his own choice
concerning this Agreement, and (b) that he has read and understands the
Agreement, is fully aware of its legal effect, and has entered into it freely
based on his own judgment.
(Signature Page Follows)
3
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date and year first above written.
KILROY REALTY CORPORATION
By:
---------------------------
Richard E. Moran Jr.
Executive Vice President,
Chief Financial Officer and
Secretary
KILROY REALTY, L.P.
By Kilroy Realty Corporation, its
general partner
By:
-------------------------
Richard E. Moran Jr.
Executive Vice President,
Chief Financial Officer and
Secretary
John B. Kilroy, Jr.
---------------------------------
<PAGE>
EXHIBIT 23.3
REPORT AND CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Registration Statement of Kilroy Realty
Corporation on Form S-11 of our reports on Kilroy Realty Corporation, dated
October 25, 1996, Kilroy Group ("Predecessor Affiliates"), dated December 20,
1996, and the Acquisition Properties dated December 20, 1996, appearing in
this Registration Statement, and to the references to us under the captions
"Selected Combined Financial Data" and "Experts."
Our audits of the financial statements referred to in our aforementioned
report also included the combined financial statement schedule of Kilroy Group
listed in Item 35. This combined financial statement schedule is the
responsibility of the management of Kilroy Group. Our responsibility is to
express an opinion based on our audits. In our opinion, such financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Los Angeles, California
January 23, 1997
<PAGE>
EXHIBIT 23.4
CONSENT OF ROBERT CHARLES LESSER & CO.
To Kilroy Realty Corporation:
As experts in real estate consulting and urban economics, we hereby consent
to the use of our Regional Economic Overview and Market Analysis dated January
2, 1997 and to all references to our firm included in or made a part of this
Registration Statement.
/s/ Robert Charles Lesser & Co.
-------------------------------------
Robert Charles Lesser & Co.
Los Angeles, California
January 23, 1997
<PAGE>
EXHIBIT 23.5
CONSENT OF DIRECTOR NOMINEE
The undersigned hereby consents to the reference of the undersigned as a
director nominee of Kilroy Realty Corporation (the "Company") in the Company's
Registration Statement on Form S-11.
/s/ William P. Dickey, Esq.
-------------------------------------
William P. Dickey, Esq.
January 23, 1997
<PAGE>
EXHIBIT 23.6
CONSENT OF DIRECTOR NOMINEE
The undersigned hereby consents to the reference of the undersigned as a
director nominee of Kilroy Realty Corporation (the "Company") in the Company's
Registration Statement on Form S-11.
/s/ Matthew J. Hart
-------------------------------------
Matthew J. Hart
January 23, 1997
<PAGE>
EXHIBIT 23.7
CONSENT OF DIRECTOR NOMINEE
The undersigned hereby consents to the reference of the undersigned as a
director nominee of Kilroy Realty Corporation (the "Company") in the Company's
Registration Statement on Form S-11.
/s/ Dale F. Kinsella, Esq.
-------------------------------------
Dale F. Kinsella, Esq.
January 23, 1997
