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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-12675
KILROY REALTY CORPORATION
(Exact name of registrant as specified in its charter)
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Maryland 95-4598246
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
2250 East Imperial Highway, Suite 1200 90245
El Segundo, California (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (310) 563-5500
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on which
Title of each class registered
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Common Stock, $.01 par value New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of the shares of common stock held by non-
affiliates of the registrant was approximately $523,466,200 based on the
closing price on the New York Stock Exchange for such shares on March 10,
2000.
As of March 10, 2000, 26,173,310 shares of common stock, par value $.01 per
share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement with respect to its 2000 Annual
Meeting of Stockholders to be filed not later than 120 days after the end of
the registrant's fiscal year are incorporated by reference into Part III
hereof.
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TABLE OF CONTENTS
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Page
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PART I
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Item 1. Business...................................................... 1
Item 2. Properties.................................................... 14
Item 3. Legal Proceedings............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24
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PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters....................................................... 25
Item 6. Selected Financial Data....................................... 26
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 28
Item 7A. Quantitative and Qualitative Disclosures About Market Risks... 46
Item 8. Financial Statements and Supplementary Data................... 48
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................... 48
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PART III
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Item 10. Directors and Executive Officers of the Registrant............ 49
Item 11. Executive Compensation........................................ 49
Item 12. Security Ownership of Certain Beneficial Owners and 49
Management....................................................
Item 13. Certain Relationships and Related Transactions................ 49
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PART IV
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Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K...................................................... 50
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PART I
ITEM 1. BUSINESS
General
Kilroy Realty Corporation (the "Company") develops, owns, and operates
office and industrial real estate, primarily in Southern California. The
Company, which operates, qualifies, and intends to continue to qualify as a
self-administered and self-managed real estate investment trust ("REIT") for
federal and state income tax purposes, was incorporated in September 1996 and
commenced operations upon the completion of its initial public offering in
January 1997. The Company is the successor to the real estate business of
Kilroy Industries, a California corporation ("KI"), and certain of its
affiliated corporations, partnerships and trusts (collectively, the "Kilroy
Group").
As of December 31, 1999, the Company's portfolio of stabilized operating
properties was comprised of 84 office buildings encompassing approximately 6.1
million rentable square feet (the "Office Properties") and 87 industrial
buildings encompassing approximately 6.5 million rentable square feet (the
"Industrial Properties" and, together with the Office Properties, the
"Properties"). The Company's stabilized portfolio consists of all of the
Company's Office and Industrial Properties, excluding projects recently
developed by the Company that have not yet reached 95% occupancy ("lease-up"
properties) and projects currently under construction or in pre-development.
As of December 31, 1999, the Office Properties were approximately 96.4% leased
to 395 tenants and the Industrial Properties were approximately 96.9% leased
to 258 tenants. As of December 31, 1999, the Company had seven office
buildings under construction which when completed are expected to encompass an
aggregate of approximately 861,500 rentable square feet. The Company did not
have any properties in lease-up at December 31, 1999 since all of the
properties developed and completed by the Company during 1999 and 1998,
encompassing an aggregate of approximately 862,400 and 1.1 million rentable
square feet, respectively, stabilized during 1999. All but 15 of the Company's
properties are located in Southern California. All of the Company's
development projects are located in Southern California.
The Company owns its interests in all of its properties through Kilroy
Realty, L.P. (the "Operating Partnership") and Kilroy Realty Finance
Partnership, L.P., a Delaware limited partnership (the "Finance Partnership").
The Company conducts substantially all of its activities through the Operating
Partnership in which, as of December 31, 1999, it owned an approximate 86.8%
general partnership interest. The remaining 13.2% limited partnership interest
in the Operating Partnership was owned by certain of the Company's executive
officers and directors, certain of their affiliates, and other outside
investors. As the sole general partner of the Operating Partnership, the
Company has control over the management of the Operating Partnership, which
owns 151 of the Company's 171 properties. The remaining properties, other than
two properties which are owned by the Operating Partnership through KR-Carmel
Partners and KR-Gateway Partners, two development LLCs (the "Development
LLCs") in which the Company owned a 50% managing interest at December 31,
1999, are owned by the Finance Partnership. Kilroy Realty Finance, Inc., a
wholly owned subsidiary of the Company is the sole general partner of the
Finance Partnership and owns a 1% general partnership interest. The Operating
Partnership owns the remaining 99% limited partnership interest.
The Company's strategy is to own, develop, acquire, lease and manage Class
A suburban office and industrial real estate properties in select locations in
key suburban submarkets, primarily in Southern California, that the Company
believes have strategic advantages compared to neighboring submarkets.
At December 31, 1999, the Company's ten largest office tenants represented
approximately 25.0% of total annual base rental revenues, defined as
annualized monthly contractual rents from existing tenants at December 31,
1999 determined in accordance with generally accepted accounting principles,
and its ten largest industrial tenants represented approximately 8.7% of total
annual base rental revenues. Of this amount, its largest tenant, Hughes
Electronics Corporation's Space and Communications Company ("Hughes Space and
Communications"), currently leases approximately 405,300 rentable square feet
of office space under five separate leases, representing approximately 6.4% of
the Company's total annual base rental revenues at
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December 31, 1999. The base periods for 95.6% of the Hughes Space and
Communications leases expire in January and July 2004. The base periods for
the remaining Hughes Space and Communications leases expire during the period
from November 2001 through December 2001.
The Company's five largest office tenants, based on annualized base rental
revenues, include: Hughes Space and Communications, a tenant since 1984 which
is engaged in high-technology commercial activities including satellite
development and related applications such as DirecTV; The Boeing Company;
Epson America, Inc.; Epicor Software Corporation; and Intuit, Inc. The
Company's five largest industrial tenants, based on annualized base rental
revenues, include: Mattel, Inc.; Celestica California, Inc.; Natural
Alternatives International, Inc.; OmniPak (d.b.a. Raven Industries); and Mazda
Motor of America, Inc. (See Item 2: Properties--Tenant Information for further
discussion on the Company's tenant base.)
Business and Growth Strategies
Growth Strategies. The Company believes that a number of factors will
enable it to continue to achieve growth in Funds From Operations, as defined
by the National Association of Real Estate Investment Trusts, including: (i)
the opportunity to lease available space at attractive rental rates because of
high demand and frictional vacancy levels in the Southern California
submarkets in which most of the properties are located; (ii) the quality and
location of the properties; (iii) the Company's ability to efficiently manage
its assets as a low cost provider of commercial real estate due to its core
capabilities in all aspects of real estate ownership including property
management, leasing, marketing, financing, accounting, legal, construction
management and new development; (iv) the Company's substantial development
pipeline established over the past several years; and (v) the Company's access
to development and leasing opportunities as a result of its significant
relationship with large Southern California corporate tenants, municipalities
and landowners and the Company's 50-year presence in the Southern California
market. Management believes that the Company is well positioned to capitalize
on existing opportunities because of its extensive experience in certain of
its submarkets, its seasoned management team and its proven ability to
acquire, develop, lease and efficiently manage office and industrial
properties.
Operating Strategies. The Company focuses on enhancing growth in Funds From
Operations, from its properties by: (i) maximizing cash flow from the
properties through active leasing and early renewals, increasing contractual
base rent to current market levels as leases expire and effective property
management; (ii) managing operating expenses through the use of internal
management, leasing, marketing, financing, accounting, legal administration
and construction management 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 respective markets and improve the efficiency of building systems.
Development Strategies. The Company and its predecessors have developed
office and industrial properties, including high technology facilities,
primarily located in Southern California, for its own portfolio and for third
parties, since 1947. Over the past several years, the Company has established
a substantial development pipeline in its three target market regions, Los
Angeles, Orange and San Diego Counties. The Company's committed and future
development pipeline (including projects held through joint venture
arrangements) can support future development of over 2.8 million rentable
square feet of office space at a total budgeted cost of over $550 million over
the next four to five years. The Company's strategy is to maintain a
disciplined approach to development by focusing on pre-leasing, phasing and
cost control. During 1999 and 1998, the Company completed 17 buildings
encompassing an aggregate of approximately 2.0 million rentable square feet at
an aggregate cost of approximately $171 million. As of December 31, 1999, the
Company had seven office buildings under construction which when completed are
expected to encompass an aggregate of approximately 861,500 rentable square
feet at a total budgeted cost of approximately $174 million.
The Company may engage in the additional development of office and/or
industrial properties, primarily in Southern California, when market
conditions support a favorable risk-adjusted return on such development. The
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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 properties.
Financing Policies. The Company's financing policies and objectives are
determined by the Company's Board of Directors. The Company presently intends
to maintain a conservative 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). This ratio may be increased or decreased 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. At December
31, 1999, total debt constituted approximately 38.8% of the total market
capitalization of the Company. The Company intends to utilize one or more
sources of capital for future growth, which may include undistributed cash
flow, borrowings under the Company's unsecured credit facility (the "Credit
Facility"), the 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 on terms favorable to the Company.
Government Regulations
Many laws and governmental regulations are applicable to the Company's
properties and changes in these laws and regulations, or their interpretation
by agencies and the courts, occur frequently.
Costs of Compliance with the Americans with Disabilities Act. Under the
Americans with Disabilities Act of 1990 (the "ADA"), all public accommodations
must meet federal requirements related to access and use by disabled persons.
Although management believes that its properties substantially comply with
present requirements of the ADA, none of its properties have been audited and
investigations of all of its properties have not been conducted to determine
compliance. The Company may incur additional costs of complying with the ADA.
Additional federal, state and local laws also may require modifications to the
Company's properties, or restrict its ability to renovate the properties.
Management cannot predict the ultimate amount of the cost of compliance with
the ADA or other legislation. If the Company incurs substantial costs to
comply with the ADA and any other legislation, its financial condition,
results of operations, cash flow, quoted per share trading price of its common
stock and ability to pay distributions to stockholders could be adversely
affected.
Environmental Matters
Costs related to government regulation and private
litigation. Environmental laws and regulations hold the Company liable for the
costs of removal or remediation of certain hazardous or toxic substances
released on its properties. These laws could impose liability without regard
to whether the Company is responsible for, or even knew of, the presence of
the hazardous materials. Government investigations and remediation actions may
have substantial costs and the presence of hazardous wastes on a property
could result in personal injury or similar claims by private plaintiffs. For
instance, if asbestos-containing materials and other hazardous or toxic
substances were found on the Company's properties, third parties might seek
recovery from the Company for personal injuries resulting from the existence
of those substances. As of December 31, 1999, 29 of the Company's properties
contained asbestos-containing materials. Various laws also impose liability on
persons who arrange for the disposal or treatment of hazardous or toxic
substances for the cost of removal or remediation of hazardous substances at
the disposal or treatment facility. These laws often impose liability whether
or not the person arranging for the disposal ever owned or operated the
disposal facility. As the owner and operator of its properties, the Company
may be considered to have arranged for the disposal or treatment of hazardous
or toxic substances.
Use of hazardous materials by some of our tenants. Some of the Company's
tenants routinely handle hazardous substances and wastes on its properties as
part of their routine operations. Environmental laws and regulations subject
these tenants, and potentially the Company, to liability resulting from such
activities. The Company requires its tenants, in their leases, to comply with
these environmental laws and regulations and to
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indemnify the Company for any related liabilities. As of December 31, 1999,
less than 5% of the Company's tenants routinely handled hazardous substances
and/or wastes on the Company's properties as part of their routine operations.
These tenants were primarily involved in the light industrial and warehouse
business and more specifically the light electronics assembly business.
Management does not believe that these activities by its tenants will have any
material adverse effect on the Company's operations. Furthermore, management
is unaware of any material noncompliance, liability or claim relating to
hazardous or toxic substances or petroleum products in connection with any of
the Company's properties.
Existing conditions at some of our properties. Independent environmental
consultants conducted Phase I or similar environmental site assessments on all
of the Company's properties. Site assessments generally include a historical
review, a public records review, an investigation of the surveyed site and
surrounding properties, and the issuance of a written report. These
assessments do not generally include soil samplings or subsurface
investigations. The Company's site assessments revealed that some of its
properties contain asbestos-containing materials and that historical
operations at or near some of its properties, including the operation of
underground storage tanks, may have caused soil or groundwater contamination.
Prior owners of the affected properties conducted clean-up of contamination in
the soils on the properties and management does not believe that further
clean-up of the soils is required. None of the Company's site assessments
revealed any other environmental liability that management believes would have
a material adverse effect on the Company's business, assets, or results of
operations. Management is not aware of any such condition, liability, or
concern by any other means that would give rise to material environmental
liability. However, the assessments may have failed to reveal all
environmental conditions, liabilities, or compliance concerns; there may be
material environmental conditions, liabilities, or compliance concerns that
arose at a property after the review was completed; future laws, ordinances or
regulations may impose material additional environmental liability; and
current environmental conditions at the Company's properties may be affected
in the future by tenants, third parties, or the condition of land or
operations near its properties (such as the presence of underground storage
tanks). The Company cannot give assurance that the costs of future
environmental compliance will not affect its ability to make distributions to
stockholders.
Environmental insurance coverage limits. The Company carries what
management believes to be sufficient environmental insurance to cover any
potential liability for soil and groundwater contamination at the affected
sites identified in the environmental site assessments. However, management
cannot provide any assurance that the Company's insurance coverage will be
sufficient or that its liability, if any, will not have a material adverse
effect on the Company's financial condition, results of its operations, cash
flow, quoted per share trading price of its common stock and ability to pay
distributions to stockholders.
Other federal, state and local regulations. The Company's properties are
subject to various federal, state and local regulatory requirements, such as
state and local fire and life safety requirements. If the Company failed to
comply with these various requirements, it might incur governmental fines or
private damage awards. Management believes that the Company's properties are
currently in material compliance with all of these regulatory requirements.
However, management does not know whether existing requirements will change or
whether future requirements will require the Company to make significant
unanticipated expenditures that will adversely affect its ability to make
distributions to its stockholders. The City of Los Angeles adopted regulations
relating to the repair of welded steel moment frames located in certain areas
damaged as a result of the January 17, 1994 Northridge earthquake in Southern
California. Currently, these regulations apply to only one of the Company's
properties representing approximately 78,000 square feet. Management believes
that this property complies with these regulations. Management does not know,
however, whether other regulatory agencies will adopt similar regulations or
whether the Company will acquire additional properties which may be subject to
these or similar regulations. Management believes, based in part on
engineering reports, that all of its properties are in good condition.
However, if the Company were required to make significant expenditures under
applicable regulations, its financial condition, results of operations, cash
flow, quoted per share trading price of its common stock and ability to pay
distributions to stockholders could be adversely affected.
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Employees
As of March 10, 2000, the Company, through the Operating Partnership and
Kilroy Services, Inc., an unconsolidated subsidiary of the Company ("KSI"),
employed 130 persons. Of the Company's total 130 employees, approximately 40
are employed as on-site building employees who provide services for the
Company's properties. The Company, the Operating Partnership and KSI believe
that relations with their employees are good.
Business Risks
This document contains certain forward-looking statements (as such term is
defined in Section 27A of the Securities Act of 1933, as amended (the "1933
Act"), and Section 21E of the Exchange Act of 1934, as amended (the "1934
Act")) pertaining to, among other things, the Company's future results of
operations, cash available for distribution, property acquisitions, lease
renewals, increases in base rent, fee development activities, sources of
growth, planned development and expansion of owned or leased property, capital
requirements, compliance with contractual obligations and general business,
industry and economic conditions applicable to the Company. These statements
are based largely on the Company's current expectations and are subject to a
number of risks uncertainties. Actual results could differ materially from
these forward-looking statements. Factors that can cause actual results to
differ materially include, but are not limited to, those discussed below.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The following factors
should be considered in addition to the other information contained herein in
evaluating the Company and its business:
Most of the Company's properties depend upon the Southern California
economy. As of December 31, 1999, 86.5% of the aggregate square footage of the
Company's stabilized portfolio and 87.9% of the Company's annualized base
rent, excluding expense reimbursements and rental abatements, came from
properties located in Southern California. The Company's ability to make
expected distributions to stockholders depends on its ability to generate
Funds from Operations in excess of scheduled principal payments on debt,
payments on the preferred limited partnership units issued by the Operating
Partnership, and capital expenditure requirements. Events and conditions
applicable to owners and operators of real property that are beyond the
Company's control may decrease funds available for distribution and the value
of the Company's properties. These events include: local oversupply or
reduction in demand of office, industrial or other commercial space; inability
to collect rent from tenants; vacancies or inability to rent spaces on
favorable terms; inability to finance property development and acquisitions on
favorable terms; increased operating costs, including insurance premiums,
utilities, and real estate taxes; costs of complying with changes in
governmental regulations; the relative illiquidity of real estate investments;
changing submarket demographics and property damage resulting from seismic
activity. The geographical concentration of the Company's properties may
expose it to greater economic risks than if it owned properties in several
geographic regions. Any adverse economic or real estate developments in the
Southern California region could adversely impact the Company's financial
condition, results from operations and cash flows.
The Company's significant debt level reduces cash available for
distribution and may expose the Company to the risk of default under its debt
obligations. Payments of principal and interest on borrowings may leave the
Company with insufficient cash resources to operate its properties or to pay
distributions necessary to maintain its REIT qualification. The Company's
level of debt and the limitations imposed by its debt agreements may have
important consequences on the Company, including the following: cash flow may
be insufficient to meet required principal and interest payments; the Company
may be unable to refinance its indebtedness at maturity or the refinancing
terms may be less favorable than the terms of its original indebtedness; the
Company may be forced to dispose of one or more of its properties, possibly on
disadvantageous terms; the Company may default on its obligations and the
lenders or mortgagees may foreclose on the properties that secure the loans
and receive an assignment of rents and leases; and the Company's default under
one mortgage loan with cross default provisions could result in a default on
other indebtedness. If any one of these events were to occur, the Company's
financial position, results of operations, cash flow, quoted per share trading
price of its common stock
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and ability to pay distributions to stockholders could be adversely affected.
In addition, foreclosures could create taxable income without accompanying
cash proceeds, a circumstance which could hinder the Company's ability to meet
the strict REIT distribution requirements imposed by the Internal Revenue Code
of 1986, as amended. As of December 31, 1999, the Company had $554 million
aggregate principal amount of indebtedness, $4.8 million of which is due prior
to December 31, 2000. The Company's total debt represented 38.8% of its total
market capitalization at December 31, 1999.
The Company faces significant competition which may decrease the occupancy
and rental rates of its properties. The Company competes with several
developers, owners and operators of office, industrial and other commercial
real estate, many of which have higher vacancy rates. Substantially all of the
Company's properties are located in areas with similar properties as its
competitors. For instance, occupancy rates in the Company's El Segundo and
Long Beach office property portfolios at December 31, 1999 were 99.0% and
95.6%, respectively, in comparison to 86.4% and 86.5%, respectively, for the
El Segundo and Long Beach office submarkets in total. In addition, the
occupancy rate in the Company's Anaheim industrial property portfolio at
December 31, 1999 was 100.0% in comparison to 94.2% for the Anaheim industrial
property submarket in total. The Company believes that its lower vacancy rates
means that, on average, its competitors have more space currently available
for lease than the Company. As a result, the Company's competitors have an
incentive to decrease rental rates until their available space is leased. If
the Company's competitors offer space at rental rates below current market
rates, the Company may be pressured to reduce its rental rates below those
currently charged in order to retain tenants when its tenant leases expire. As
a result, the Company's financial condition, results of operations and cash
flows may be adversely affected.
Potential losses may not be covered by insurance. The Company carries
comprehensive liability, fire, extended coverage and rental loss insurance
covering all of its properties. Management believes the policy specifications
and insured limits are appropriate given the relative risk of loss, the cost
of the coverage and industry practice. The Company does not carry insurance
for generally uninsured losses such as loss from riots or acts of God. Some of
the Company's policies, like those covering losses due to floods, are insured
subject to limitations involving large deductibles or co-payments and policy
limits. In addition, the Company carries earthquake insurance on properties
located in areas known to be subject to earthquakes in an amount and with
deductions which management believes are commercially reasonable. As of
December 31, 1999, 81 of the Office Properties aggregating 5.6 million square
feet (representing 44.5% of the Company's stabilized portfolio based on
aggregate square footage and 64.4% based on annualized base rent) were located
in areas known to be subject to earthquakes. As of December 31, 1999, 75 of
the Company's Industrial Properties aggregating 5.3 million square feet
(representing 42.0% of the Company's stabilized portfolio based on aggregate
square footage and 23.5% based on annualized base rent) were located in areas
known to be subject to earthquakes. While the Company presently carries
earthquake insurance on these properties, the amount of its earthquake
insurance coverage may not be sufficient to cover losses from earthquakes. In
addition, the Company may discontinue earthquake insurance on some or all of
its properties in the future if the cost of premiums for earthquake insurance
exceeds the value of the coverage discounted for the risk of loss. If the
Company experiences a loss which is uninsured or which exceeds policy limits,
it could lose the capital invested in the damaged properties as well as the
anticipated future revenue from those properties. In addition, if the damaged
properties are subject to recourse indebtedness, the Company would continue to
be liable for the indebtedness, even if the properties were unrepairable.
The Company may be unable to successfully complete and operate developed
properties. Property development involves the following significant risks: the
Company may be unable to obtain construction financing on favorable terms; the
Company may be unable to obtain permanent financing at all or on advantageous
terms if development projects are financed through construction loans; the
Company may not complete development projects on schedule or within budgeted
amounts; the Company may encounter delays or refusals in obtaining all
necessary zoning, land use, building, occupancy, and other required
governmental permits and authorizations; the Company may expend funds on and
devote management's time to projects which the Company may not complete; and
the Company may lease the developed properties at below expected rental
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rates. For example, one of the Company's development projects was completed
three months later than initially projected, resulting in a corresponding
delay in the commencement of leasing activity at the particular property. The
delay was attributable to bad weather conditions which inhibited construction
during the "El Nino" climate condition which ran from 1997 through 1998. In
addition, during the fourth quarter of 1998, the Company withdrew its
participation from a master planned commercial development prior to the
commencement of construction. If any one of these events were to occur in
connection with projects currently under development, the Company's financial
position, results of operations, cash flow, quoted per share trading price of
its common stock and ability to pay distributions to stockholders could be
adversely affected. While the Company primarily develops office and industrial
properties in Southern California markets, it may in the future develop
properties for retail or other use and expand its business to other geographic
regions where it expects the development of property to result in favorable
risk-adjusted returns on its investment. Presently, the Company does not
possess the same level of familiarity with development of other property types
or outside markets which could adversely affect its ability to develop
properties or to achieve expected performance.
The Company may be unable to complete acquisitions and successfully operate
acquired properties. The Company may acquire office and industrial properties
when strategic opportunities exist. The Company's ability to acquire
properties on favorable terms and successfully operate them is subject to the
following risks: the potential inability to acquire a desired property because
of competition from other real estate investors with significant capital,
including both publicly traded REITs and institutional investment funds; even
if the Company enters into agreements for the acquisition of office and
industrial properties, these agreements are subject to customary conditions to
closing, including completion of due diligence investigations to management's
satisfaction; the Company may be unable to finance the acquisition on
favorable terms; the Company may spend more than budgeted amounts to make
necessary improvements or renovations to acquired properties; and the Company
may lease the acquired properties at below expected rental rates. If the
Company cannot finance property acquisitions on favorable terms or operate
acquired properties to meet financial expectations, its financial position,
results of operations, cash flow, quoted per share trading price of its common
stock and ability to pay distributions to stockholders could be adversely
affected.
The Company could default on leases for land on which some of its
properties are located. The Company owns ten office buildings located on
various parcels, each of which the Company leases on a long-term basis. If the
Company defaults under the terms of any particular lease, it may lose the
property subject to the lease. The Company may not be able to renegotiate a
new lease on favorable terms, if at all, upon expiration of the lease and all
of its options. The loss of these properties or an increase of rental expense
would have an adverse effect on the Company's financial position, results of
operations, cash flow, quoted per share trading price of its common stock and
ability to pay distributions to stockholders. The Company has approximately
1.5 million aggregate rentable square feet of rental space located on these
leased parcels. The leases for the land under the SeaTac Office Center,
including renewal options, expire in 2062. The lease for the land under
9455 Towne Center in San Diego expires in October 2043. The primary lease for
the land under 12312 West Olympic Boulevard in Santa Monica expire in January
2065 with a smaller secondary lease expiring in September 2011. The leases for
the land under the Kilroy Airport Center, Long Beach expire in 2035.
The Company depends on significant tenants. At December 31, 1999, the
Company's ten largest office tenants represented approximately 25.0% of total
annual base rental revenues and its ten largest industrial tenants represented
approximately 8.7% of total annual base rental revenues. Of this amount, its
largest tenant, Hughes Space and Communications, currently leases
approximately 405,300 rentable square feet of office space, representing
approximately 6.4% of the Company's total annual base rental revenues. The
Company's revenue and cash available for distribution to stockholders would be
disproportionately and materially adversely affected if any of its significant
tenants were to become bankrupt or insolvent, or suffer a downturn in their
business, or fail to renew their leases at all or on terms less favorable to
the Company than their current terms.
Downturns in tenants' businesses may reduce the Company's cash flow. As of
December 31, 1999, the Company derived 98.0% of its revenues from rental
income and tenant reimbursements. A tenant may experience a downturn in its
business, which may weaken its financial condition and result in its failure
to make timely
7
<PAGE>
rental payments. In the event of default by a tenant, the Company may
experience delays in enforcing its rights as landlord and may incur
substantial costs in protecting its investment. The bankruptcy or insolvency
of a major tenant also may adversely affect the income produced by the
Company's properties. If any tenant becomes a debtor in a case under the
Bankruptcy Code, the Company cannot evict the tenant solely because of the
bankruptcy. On the other hand, the bankruptcy court might authorize the tenant
to reject and terminate its lease. The Company's claim against the tenant for
unpaid, future rent would be subject to a statutory cap that might be
substantially less than the remaining rent actually owed under the lease. Even
so, the Company's claim for unpaid rent would likely not be paid in full. This
shortfall could adversely affect the Company's cash flow and its ability to
make distributions to stockholders. Although the Company has not experienced
material losses from tenant bankruptcies, its tenants could file for
bankruptcy protection in the future.
The Company may be unable to renew leases or re-let space as leases
expire. As of December 31, 1999, leases representing 11.2% and 14.2% of the
square footage of the Company's properties will expire in 2000 and 2001. Above
market rental rates on some of the Company's properties may force it to renew
or re-lease some expiring leases at lower rates. While the Company believes
that the average rental rates for most of its properties are below quoted
market rates in each of its submarkets, the Company cannot give any assurance
that leases will be renewed or that its properties will be re-leased at rental
rates equal to or above the current rental rates. If the rental rates for the
Company's properties decrease, existing tenants do not renew their leases, or
the Company does not re-lease a significant portion of its available space,
its financial position, results of operations, cash flow, quoted per share
trading price of its common stock and ability to pay distributions to its
stockholders would be adversely affected.
Real estate assets are illiquid and the Company may not be able to sell its
properties when it desires. The Company's investments in its properties are
relatively illiquid which limits the Company's ability to sell its properties
quickly in response to changes in economic or other conditions. Limitations in
the Internal Revenue Code and related Treasury Regulations applicable to REITs
may also limit the Company's ability to sell its properties. These
restrictions on the Company' ability to sell its properties could have an
adverse effect on its financial position, results from operations, cash flow,
quoted per share trading price of its common stock and ability to pay
distributions to stockholders.
KSI is subject to tax liabilities on net income which reduces the Company's
cash flow. KSI is subject to federal and state income tax on its taxable
income at regular corporate rates. Any federal, state or local income taxes
that KSI must pay will reduce the cash available for distribution to the
Operating Partnership and, ultimately, to the Company's stockholders.
The Company cannot depend upon distributions from KSI because its business
is not controlled by the Company. The Company has set up the following
structure to comply with the REIT asset tests that restrict its ability to own
shares of other corporations: the Operating Partnership owns 100% of the non-
voting preferred stock of KSI, representing approximately 95.0% of its
economic value; and John B. Kilroy, Sr. and John B. Kilroy, Jr., the Company's
Chairman of the Board of Directors and President and Chief Executive Officer,
respectively, own all of the outstanding voting common stock of KSI,
representing approximately 5.0% of its economic value. The Company receives
substantially all of the economic benefit derived from KSI's business by
virtue of the dividends that the Company receives from its investment in the
preferred stock. However, the Company cannot influence KSI's operations, elect
its directors, appoint its officers, or require its Board of Directors to
declare and pay a cash dividend on the nonvoting preferred stock owned by the
Operating Partnership. As a result, KSI may make decisions or pursue business
policies which could have an adverse effect on the Company's financial
position, results of operations, cash flow, quoted per share trading price of
its common stock and ability to pay distributions to stockholders.
KSI may be adversely affected by the Company's REIT status. Changes in the
requirements for REIT qualification may in the future limit the Company's
ability to receive increased distributions from the fee development operations
and related services offered by KSI.
8
<PAGE>
Common limited partners of the Operating Partnership have limited approval
rights which may prevent the Company from completing a change of control
transaction which may be in the best interests of stockholders. The Company
may not withdraw from the Operating Partnership or transfer its general
partnership interest or admit another general partner without the approval of
a majority of the common limited partnership unitholders except in the case of
a "termination transaction" which requires the approval of 60% of the common
unitholders, including the Company, because of the common units it holds in
its capacity as general partner. The right of common limited partners to vote
on these transactions could limit the Company's ability to complete a change
of control transaction that might otherwise be in the best interest of its
stockholders.
Limited partners of the Operating Partnership must approve the dissolution
of the Operating Partnership and the disposition of properties they
contributed. For as long as limited partners own at least 5% of all of the
common units of the Operating Partnership, the Company must obtain the
approval of limited partners holding a majority of the common units before it
may dissolve the partnership or sell the property located at
2260 East Imperial Highway at Kilroy Airport Center in El Segundo prior to
January 31, 2004. In addition, the Company may not sell 11 of its properties
prior to October 31, 2002 without the consent of the limited partners that
contributed the properties to the Operating Partnership, except in connection
with the sale or transfer of all or substantially all of its assets or those
of the Operating Partnership or in connection with a transaction which does
not cause the limited partners that contributed the property to recognize
taxable income. In addition, the Operating Partnership agreed to use
commercially reasonable efforts to minimize the tax consequences to common
limited partners resulting from the repayment, refinancing, replacement or
restructuring of debt, or any sale, exchange or other disposition of any of
its other assets. The exercise of one or more of these approval rights by the
limited partners could delay or prevent the Company from completing a
transaction which may be in the best interest of its stockholders.
The Company's Chairman of the Board of Directors and its President and Chief
Executive Officer each have potential conflicts of interest with the Company.
The Company's Chairman of the Board of Directors and its President and
Chief Executive Officer each are engaged in competitive real estate
activities. The Company owns four office buildings and four industrial
buildings in the El Segundo submarket. John B. Kilroy, Sr. and John B. Kilroy,
Jr., the Company's Chairman of the Board of Directors and President and Chief
Executive Officer, respectively, own controlling interests in partnerships
which own a complex of three office buildings in the same submarket. The
Operating partnership manages the complex pursuant to a management agreement
on market terms. Policies adopted by the Company's Board of Directors to
minimize this conflict, including the requirement that John B. Kilroy, Sr. and
John B. Kilroy, Jr. enter into non-competition agreements with the Company,
may not eliminate their influence over transactions involving these competing
properties.
The Company's Chairman of the Board of Directors and its President and
Chief Executive Officer each have substantial influence over the Company's
affairs. John B. Kilroy, Sr. and John B. Kilroy, Jr., the Company's Chairman
of the Board of Directors and President and Chief Executive Officer,
respectively, together hold two of the six seats on the Company's Board of
Directors. They also beneficially own common limited partnership units
exchangeable for an aggregate of 2,158,639 shares of the Company's common
stock and currently vested options to purchase an aggregate of 350,000 shares
of common stock, representing a total of approximately 9.02% of the total
outstanding shares of common stock as of December 31, 1999. Pursuant to the
Company's charter no other stockholder may own, actually or constructively,
more than 7.0% of the Company's common stock. The Board of Directors has
already waived the ownership limits with respect to John B. Kilroy, Sr.,
John B., Kilroy, Jr., members of their families and some affiliated entities.
Consequently, Messrs. Kilroy have substantial influence on the Company and
could exercise their influence in a manner that is not in the best interest of
the Company's stockholders. Also, they may, in the future, have a substantial
influence on the outcome of any matters submitted to the Company's
stockholders for approval.
9
<PAGE>
There are limits on the ownership of the Company's capital stock which
limit the opportunities for a change of control at a premium to existing
stockholders. Provisions of the Maryland General Corporation Law, the
Company's charter, the Company's bylaws, and the Operating Partnership's
partnership agreement may delay, defer, or prevent a change in control over
the Company or the removal of existing management. Any of these actions might
prevent the stockholders from receiving a premium for their shares of stock
over the then prevailing market prices.
The Internal Revenue Code sets forth stringent ownership limits on the
Company as a result of its decision to be taxed as a REIT, including: no more
than 50% in value of the Company's capital stock may be owned, actually or
constructively, by five or fewer individuals, including some entities, during
the last half of a taxable year; subject to exceptions, the Company's common
stock 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 taxable year; and
if the Company, or any entity which owns 10% or more of its capital stock,
actually or constructively owns 10% or more of one of the Company's tenants,
or a tenant of any partnership in which the Company is a partner, then any
rents that the Company receives from that tenant in question will not be
qualifying income for purposes of the Internal Revenue Code's REIT gross
income tests regardless of whether the Company receives the rents directly or
through a partnership.
The Company's charter establishes clear ownership limits to protect its
REIT status. No single stockholder may own, either actually or constructively,
more than 7.0% of the Company's common stock outstanding. Similarly, no single
holder of the Company's Series A Preferred Stock, Series C Preferred Stock and
Series D Preferred Stock may actually or constructively own any class or
series of its preferred stock, so that their total capital stock ownership
would exceed 7.0% by value of the Company's total capital stock, and no single
holder of Series B Preferred Stock, if issued, may actually or constructively
own more than 7.0% of the Company's Series B Preferred Stock.
The Board of Directors may waive the ownership limits if it is satisfied
that the excess ownership would not jeopardize the Company's REIT status and
if it believes that the waiver would be in the Company's best interests. The
Board of Directors has already waived the ownership limits with respect to
John B. Kilroy, Sr., John B. Kilroy, Jr., members of their families and some
affiliated entities. These named individuals and entities may own either
actually or constructively, in the aggregate, up to 21% of the outstanding
common stock.
If anyone acquires shares in excess of any ownership limits, the transfer
to the transferee will be void with respect to these excess shares; the excess
shares will be automatically transferred from the transferee or owner to a
trust for the benefit of a qualified charitable organization, the purported
transferee or owner will have no right to vote those excess shares, and the
purported transferee or owner will have no right to receive dividends or other
distributions from these excess shares.
The Company's charter contains provisions that may delay, defer, or prevent a
change of control transaction.
The Company's Board of Directors is divided into classes that serve
staggered terms. The Company's Board of Directors is divided into three
classes with staggered terms. The staggered terms for directors may reduce the
possibility of a tender offer or an attempt to complete a change of control
transaction even if a tender offer or a change in control was in the Company's
stockholders' interest.
The Company could issue preferred stock without stockholder approval. The
Company's charter authorizes its Board of Directors to issue up to 30,000,000
shares of preferred stock, including convertible preferred stock, without
stockholder approval. The Board of Directors may establish the preferences,
rights and other terms, including the right to vote and the right to convert
into common stock any shares issued. The issuance of preferred stock could
delay or prevent a tender offer or a change of control even if a tender offer
or a change of control was in the Company's stockholders' interest. The
Operating Partnership has issued 1,500,000 Series A Cumulative Redeemable
Preferred units which in the future may be exchanged one-for-one into shares
of 8.075% Series A Cumulative Redeemable Preferred stock, 700,000 Series C
Cumulative Redeemable Preferred units
10
<PAGE>
which in the future may be exchanged one for one into shares of 9.375% Series
C Cumulative Redeemable Preferred stock, and 900,000 Series D Cumulative
Redeemable Preferred units which in the future may be exchanged one for one
into shares of 9.250% Series D Cumulative Redeemable Preferred stock. In
addition, the Company has designated and authorized the issuance of up to
400,000 shares of Series B Junior Participating Preferred stock. However, no
shares of preferred stock of any series are currently issued or outstanding.
The Company has a stockholders' rights plan. In October 1998, the Company's
Board of Directors adopted a stockholders' rights plan. The rights have anti-
takeover effects and would cause substantial dilution to a person or group
that attempts to acquire the Company on terms that the Company's Board of
Directors does not approve. The Company may redeem the shares for $.01 per
right, prior to the time that a person or group has acquired beneficial
ownership of 15% or more of its common stock. Therefore, the rights should not
interfere with any merger or business combination approved by the Company's
Board of Directors.
The staggered terms for directors, the future issuance of additional common
or preferred stock and the Company's stockholders rights plan may: delay or
prevent a change of control, even if a change of control might be beneficial
to the Company's stockholders; deter tender offers that may be beneficial to
the Company's stockholders; or limit stockholders' opportunity to receive a
potential premium for their shares if an investor attempted to gain shares
beyond the Company's ownership limits or otherwise to effect a change of
control.
Loss of the Company's REIT status would have significant adverse
consequences to it and the value of the Company's stock. The Company currently
operates and has operated since 1997 in a manner that is intended to allow it
to qualify as a REIT for federal income tax purposes under the Internal
Revenue Code. If the Company were to lose its REIT status, it would face
serious tax consequences that would substantially reduce the funds available
for distribution to stockholders for each of the years involved because: the
Company would not be allowed a deduction for distributions to stockholders in
computing its taxable income and would be subject to federal income tax at
regular corporate rates; the Company could be subject to the federal
alternative minimum tax and possibly increased state and local taxes; and
unless entitled to relief under statutory provisions, the Company could not
elect to be subject to tax as a REIT for four taxable years following the year
during which it was disqualified. In addition, if the Company fails to qualify
as a REIT, it will not be required to make distributions to stockholders and
all distributions to stockholders will be subject to tax as ordinary income to
the extent of the Company's current and accumulated earnings and profits. As a
result of all these factors, the Company's failure to qualify as a REIT also
could impair its ability to expand its business and raise capital, and would
adversely affect the value of the Company's common stock.
Qualification as a REIT involves the application of highly technical and
complex Internal Revenue Code provisions for which there are only limited
judicial and administrative interpretations. The complexity of these
provisions and of the applicable treasury regulations that have been
promulgated under the Internal Revenue Code is greater in the case of a REIT
that holds its assets through a partnership. The determination of various
factual matters and circumstances not entirely within the Company's control
may affect its ability to qualify as a REIT. 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. Also, the Company must make distributions to
stockholders aggregating annually at least 95% of its net taxable income,
excluding capital gains. In addition, legislation, new regulations,
administrative interpretations or court decisions may adversely affect the
Company's investors or the Company's ability to qualify as a REIT for tax
purposes. Although management believes that the Company is organized and
operates in a manner so as to qualify as a REIT, no assurance can be given
that the Company will continue to be organized or be able to operate in a
manner so as to qualify or remain qualified as a REIT for tax purposes.
To maintain its REIT status, the Company may be forced to borrow funds on a
short-term basis during unfavorable market conditions. In order to maintain
its REIT status, the Company may need to borrow funds on a short-term basis to
meet the REIT distribution requirements even if the then prevailing market
conditions are not favorable for these borrowings. To qualify as a REIT, the
Company generally must distribute to its stockholders at least 95% of the
Company's net taxable income each year, excluding capital gains. In addition,
the Company will be subject to a 4% nondeductible excise tax on the amount, if
any, by which certain
11
<PAGE>
distributions paid in 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. These short-term borrowing needs could
result from differences in timing between the actual receipt of income and
inclusion of income for federal income tax purposes, or the effect of non-
deductible capital expenditures, the creation of reserves or required debt or
amortization payments.
The Company's growth depends on external sources of capital which are
outside of the Company's control. The Company is required under the Internal
Revenue Code to distribute at least 95% of its taxable income, determined
without regard to the dividends-paid deduction and excluding any net capital
gain. Because of this distribution requirement, it may not be able to fund
future capital needs, including any necessary acquisition financing, from
operating cash flow. Consequently, management relies on third-party sources of
capital to fund the Company's capital needs. The Company may not be able to
obtain the financing on favorable terms or at all. Any additional debt the
Company incurs will increase its leverage. Access to third-party sources of
capital depends, in part, on: general market conditions; the market's
perception of the Company's growth potential; the Company's current and
expected future earnings; the Company's cash distributions; and the market
price per share of the Company's common stock. If the Company cannot obtain
capital from third-party sources, it may not be able to acquire properties
when strategic opportunities exist or make the cash distributions to
stockholders necessary to maintain its qualification as a REIT.
The Company's Board of Directors may change investment and financing policies
without stockholder approval and become more highly leveraged which may
increase the Company's risk of default under its debt obligations.
The Company is not limited in its ability to incur debt. The Company's
Board of Directors adopted a policy of limiting indebtedness to approximately
50% of the Company's total market capitalization. Total market capitalization
is the market value of the Company's capital stock, including interests and
units exchangeable for shares of capital stock, plus total debt. However, the
Company's organizational documents do not limit the amount or percentage of
indebtedness, funded or otherwise, that it may incur. The Company's Board of
Directors may alter or eliminate management's current policy on borrowing at
any time without stockholder approval. If this policy changed, the Company
could become more highly leveraged which would result in an increase in its
debt service and which could adversely affect cash flow and the ability to
make expected distributions to stockholders. Higher leverage also increases
the risk of default on the Company's obligations.
The Company may issue additional shares of capital stock without
stockholder approval that may dilute shareholder investment. The Company may
issue shares of its common stock, preferred stock or other equity or debt
securities without stockholder approval. Similarly, the Company may cause the
Operating Partnership to offer its common or preferred units for contributions
of cash or property without approval by the limited partners of the Operating
Partnership or the Company's stockholders. Existing stockholders have no
preemptive rights to acquire any of these securities, and any issuance of
equity securities under these circumstances may dilute a stockholder's
investment.
The Company may invest in securities related to real estate which could
adversely affect its ability to make distributions to stockholders. The
Company may purchase securities issued by entities which own real estate and
may, in the future, also invest in mortgages. In general, investments in
mortgages include several risks, including: borrowers may fail to make debt
service payments or pay the principal when due; the value of the mortgaged
property may be less than the principal amount of the mortgage note securing
the property; and interest rates payable on the mortgages may be lower than
the Company's cost for the funds used to acquire these mortgages. Owning these
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
control over the distributions with respect to these securities, which could
adversely affect its ability to make distributions to stockholders.
Sales of a substantial number of shares of common stock, or the perception
that this could occur, could result in decreasing the market price per share
for the Company's common stock. Management cannot predict
12
<PAGE>
whether future issuances of shares of the Company's common stock or the
availability of shares for resale in the open market will result in decreasing
the market price per share of its common stock.
As of December 31, 1999, 27,808,410 shares of the Company's common stock
were issued and outstanding and the Company had reserved for future issuance
the following shares of common stock: 4,228,702 shares issuable upon the
exchange, at the Company's option, of common units issued in connection with
the formation of the Operating Partnership and in connection with property
acquisitions; 2,900,000 shares issuable under the Company's 1997 Stock Option
and Incentive Plan; and 1,000,000 shares issuable under the Company's Dividend
Reinvestment and Direct Stock Purchase Plan. Of the 27,808,410 shares of
common stock presently outstanding, all but 40,000 shares may be freely traded
in the public market by persons other than the Company's affiliates. In
addition, the Company has filed or has agreed to file registration statements
covering all of the shares of common stock reserved for future issuance.
Consequently, if and when the shares are issued, they may be freely traded in
the public markets.
13
<PAGE>
ITEM 2. PROPERTIES
General
As of December 31, 1999, the Company's portfolio of stabilized operating
properties was comprised of 84 Office Properties encompassing approximately
6.1 million rentable square feet and 87 Industrial Properties encompassing
approximately 6.5 million rentable square feet. The Company's stabilized
portfolio consists of all of the Company's Office and Industrial Properties,
excluding projects recently developed by the Company that have not yet reached
95% occupancy ("lease-up" properties) and projects currently under
construction or in pre-development. As of December 31, 1999, the Office
Properties were approximately 96.4% leased to 395 tenants and the Industrial
Properties were approximately 96.9% leased to 258 tenants. All but 15 of the
Company's properties are located in Southern California.
As of December 31, 1999, the Company had seven office buildings under
construction which when completed are expected to encompass an aggregate of
approximately 861,500 rentable square feet. The Company did not have any
properties in lease-up at December 31, 1999 since all of the properties
developed and completed by the Company during 1999 and 1998 stabilized during
1999. All of the Company's development projects are located in Southern
California.
In general, the Office Properties are leased to tenants on a full service
gross basis and the Industrial Properties are leased to tenants on a triple
net basis. Under a full service lease, the landlord is 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. Under a triple net lease, tenants pay their proportionate share
of real estate taxes, operating costs and utility costs.
The Company believes that all of its properties are well maintained and,
based on engineering reports obtained within the last five years, do not
require significant capital improvements. As of December 31, 1999, the Company
managed all of its 84 Office Properties and 80 of its 87 Industrial Properties
through internal property managers.
14
<PAGE>
The Office and Industrial Properties
The following table sets forth certain information relating to each of the
Office and Industrial Properties owned as of December 31, 1999. The Company
(through the Operating Partnership and the Finance Partnership) owns a 100%
interest in all of the Office and Industrial Properties, except for the three
buildings located at 3579 Valley Center Drive and 5005/5010 Wateridge Vista
Drive in which the Company owns a 50% interest through the Development LLCs,
and the five office properties located at Kilroy Airport Center, Long Beach,
three office properties located at the SeaTac Office Center, one office
property located at 2100 Colorado Blvd. in Santa Monica, California and one
office property located at 9455 Towne Center Drive in San Diego, California,
each of which are held subject to leases for the land on which the properties
are located expiring in 2035, 2062, 2065 and 2043 (assuming the exercise of
the Company's options to extend such leases), respectively.
<TABLE>
<CAPTION>
Average
Year Net Percentage Annual Base Rent
No. of Built/ Rentable Leased at Base Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/99(1) ($000's)(2) ($)(3)
----------------- --------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Office Properties:
Los Angeles County
26541 Agoura Road
Calabasas, California(7)..... 1 1988 90,878 100.0% $1,955 $21.51
5151-5155 Camino Ruiz
Camarillo, California(7)(4).. 4 1982 276,216 100.0% 2,678 9.69
4880 Santa Rosa Road
Camarillo, California(7)..... 1 1998 41,131 100.0% 732 17.80
Kilroy Airport Center, El
Segundo 2250 E. Imperial
Highway(5)................... 1 1983 291,187 95.9% 4,755 16.33
2260 E. Imperial Highway(6).. 1 1983 291,187 100.0% 7,677 26.37
2240 E. Imperial Highway(8).. 1 1983 118,933 100.0% 1,868 15.71
El Segundo, California
185 S. Douglas Street
El Segundo, California(7).... 1 1978 60,000 100.0% 1,523 25.38
525 N. Brand Blvd.
Glendale, California......... 1 1990 43,647 100.0% 1,254 28.73
Kilroy Airport Center, Long
Beach 3900 Kilroy Airport
Way.......................... 1 1987 126,840 94.4% 2,695 21.24
3880 Kilroy Airport Way...... 1 1987 98,243 100.0% 1,325 13.49
3760 Kilroy Airport Way...... 1 1989 165,279 85.8% 3,428 20.74
3780 Kilroy Airport Way...... 1 1989 219,743 99.5% 5,038 22.93
3760 Kilroy Airport Way...... 1 1989 10,592 100.0% 66 6.24
Phase III-Bldg 8, Long Beach,
Calif....................... 1 1999 136,026 100.0% 3,911 28.76
12312 W. Olympic Blvd.
Los Angeles, California(7)... 1 1950/1998 78,000 100.0% 1,608 20.61
12100-12166 West Olympic Blvd.
Los Angeles, California...... 1 1968 48,356 85.9% 583 12.05
2100 Colorado Avenue
Santa Monica, California(7).. 3 1992 94,844 100.0% 2,791 29.42
1633 26th Street
Santa Monica, California(7).. 1 1972/1997 43,800 100.0% 845 19.30
3130 Wilshire Blvd.
Santa Monica, California..... 1 1969/1998 88,338 100.0% 2,224 25.18
501 Santa Monica Blvd.
Santa Monica, California..... 1 1974 70,089 100.0% 1,689 24.10
2829 Townsgate Road
Thousand Oaks, California.... 1 1990 81,158 100.0% 2,018 24.87
23600-23610 Telo Avenue
Torrance, California(9)...... 2 1984 79,967 80.4% 733 9.17
--- --------- ------
Subtotal/Weighted Average--
Los Angeles County........... 28 2,554,454 97.4% 51,396 20.12
--- --------- ------
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
Average
Year Net Percentage Annual Base Rent
No. of Built/ Rentable Leased at Base Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/99(1) ($000's)(2) ($)(3)
----------------- --------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Orange County
Pacific Park Plaza
Aliso Viejo, California(10).. 5 1992 134,667 91.8% $1,857 $13.79
La Palma Business Center
4175 E. La Palma Avenue
Anaheim, California.......... 1 1985 42,790 96.6% 766 17.89
8101 Kaiser Blvd.
Anaheim, California.......... 1 1988 60,177 92.2% 1,253 20.82
Anaheim Corporate Center
Anaheim, California(11)...... 4 1985 159,222 80.8% 1,700 10.68
1240 & 1250 Lakeview Avenue
Anaheim, California.......... 2 1987 78,903 94.7% 922 11.69
601 Valencia Avenue,
Brea, California(7).......... 1 1982 60,891 100.0% 784 12.87
1501-1561 East Orangethorpe
Avenue Fullerton,
California(12)............... 4 1985 151,975 90.5% 1,489 9.79
111 Pacifica
Irvine, California........... 1 1991 67,401 99.9% 1,913 28.39
9451 Toledo Way
Irvine, California(13)....... 1 1984 27,200 0.0%
2501 Pullman/1700 E. Carnegie
Santa Ana, California(14).... 2 1969/1988 124,921 72.6% 1,448 11.60
--- --------- ------
Subtotal/Weighted Average--
Orange County................ 22 908,147 85.9% 12,132 13.36
--- --------- ------
San Diego County
5770 Armada Drive
Carlsbad, California(7)...... 1 1998 81,712 100.0% 1,074 13.14
2231 Rutherford
Carlsbad, California......... 1 1998 40,772 95.7% 592 14.52
6215/6220 Greenwich Drive
San Diego, California(15).... 2 1996 212,214 100.0% 3,891 18.34
6055 Lusk Avenue
San Diego, California(7)..... 1 1997 93,000 100.0% 1,149 12.35
6260 Sequence Drive
San Diego, California(7)..... 1 1997 130,000 100.0% 1,192 9.17
6290 Sequence Drive
San Diego, California(7)..... 1 1997 90,000 100.0% 894 9.94
6340 & 6350 Sequence Drive
San Diego, California(7)..... 2 1998 200,000 100.0% 2,936 14.68
15378 Avenue of Science
San Diego, California(7)..... 1 1984 68,910 100.0% 631 9.16
Pacific Corporate Center
San Diego, California(16).... 7 1995 411,402 96.0% 4,861 11.81
3990 Ruffin Road
San Diego, California........ 1 1998 45,634 100.0% 663 14.53
9455 Towne Center Drive
San Diego, California(7)..... 1 1998 45,195 100.0% 589 13.04
12225-12235 El Camino Real
San Diego, California(17).... 2 1998 115,513 100.0% 2,368 20.50
4690 Executive Drive
San Diego, California(7)..... 1 1999 50,929 100.0% 955 18.76
12348 High Bluff Drive
San Diego, California(18).... 1 1999 39,336 100.0% 997 25.33
9785/9791 Towne Center Drive
San Diego, California(7)..... 2 1999 126,000 100.0% 2,250 17.86
5005/5010 Wateridge Vista
Drive
San Diego, California(7)..... 2 1999 172,778 100.0% 3,367 19.49
3579 Valley Center Drive
San Diego, California(18).... 1 1999 52,375 100.0% 1,617 30.87
--- --------- ------
Subtotal/Weighted Average--
San Diego County............. 28 1,975,770 99.1% 30,026 15.20
--- --------- ------
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
Average
Year Net Percentage Annual Base Rent
No. of Built/ Rentable Leased at Base Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/99(1) ($000's)(2) ($)(3)
----------------- --------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Other
4351 Latham Avenue
Riverside, California...... 1 1990 21,356 100.0% $ 368 $17.22
4361 Latham Avenue
Riverside, California(19).. 1 1992 30,842 92.5% 516 16.72
3750 University Avenue
Riverside, California...... 1 1982 124,986 96.1% 2,707 21.66
SeaTac Office Center
18000 Pacific Highway...... 1 1974 209,904 100.0% 3,194 15.22
17930 Pacific Highway...... 1 1980/1997 211,139 100.0% 2,172 10.29
17900 Pacific Highway
Seattle, Washington........ 1 1980 111,387 100.0% 2,034 18.26
--- --------- --------
Subtotal/Weighted Average--
Other...................... 6 709,614 99.0% 10,991 15.49
--- --------- --------
TOTAL/WEIGHTED AVERAGE
OFFICE PROPERTIES.......... 84 6,147,985 96.4% $104,545 $17.00
--- --------- --------
Industrial Properties:
Los Angeles County
Walnut Park Business Center
Diamond Bar, California.... 3 1987 165,420 97.4% 1,193 7.21
2031 E. Mariposa Avenue
El Segundo, California..... 1 1954 192,053 100.0% 1,840 9.58
2260 E. El Segundo Blvd.
El Segundo, California..... 1 1979 113,820 100.0% 555 4.87
2265 E. El Segundo Blvd.
El Segundo, California..... 1 1978 76,570 100.0% 555 7.24
2270 E. El Segundo Blvd.
El Segundo, California..... 1 1975 6,362 100.0% 88 13.80
--- --------- --------
Subtotal/Weighted Average--
Los Angeles County......... 7 554,225 99.2% 4,231 7.63
--- --------- --------
Orange County
3340 E. La Palma Avenue
Anaheim, California........ 1 1966 153,320 100.0% 1,064 6.94
1000 E. Ball Road
Anaheim, California........ 1 1956 100,000 100.0% 639 6.39
1230 S. Lewis Road
Anaheim, California........ 1 1982 57,730 100.0% 291 5.04
4155 E. La Palma Avenue
Anaheim, California(20).... 1 1985 74,618 100.0% 861 11.53
4125 E. La Palma Avenue
Anaheim, California(20).... 1 1985 69,472 100.0% 519 7.46
5325 East Hunter Avenue
Anaheim, California........ 1 1983 109,449 100.0% 606 5.54
3130-3150 Miraloma
Anaheim, California........ 1 1970 144,000 100.0% 687 4.77
3125 E. Coronado Street
Anaheim, California........ 1 1970 144,000 100.0% 774 5.37
5115 E. La Palma Avenue
Anaheim, California........ 1 1967/1999 286,139 100.0% 1,453 5.08
1250 N. Tustin Avenue
Anaheim, California........ 1 1984 84,185 100.0% 751 8.93
Anaheim Tech Center
Anaheim, California........ 5 1999 593,992 100.0% 3,391 5.71
3250 East Carpenter
Anaheim, California........ 1 1998 41,225 100.0% 242 5.88
Brea Industrial Complex
Brea, California(21)....... 7 1981 276,278 92.8% 1,605 5.81
Brea Industrial--Lambert
Road Brea, California(20).. 2 1999 178,811 100.0% 1,190 6.66
1675 MacArthur
Costa Mesa, California..... 1 1986 50,842 100.0% 512 10.07
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
Average
Year Net Percentage Annual Base Rent
No. of Built/ Rentable Leased at Base Rent Per Sq. Ft.
Property Location Buildings Renovated Square Feet 12/31/99(1) ($000's)(2) ($)(3)
----------------- --------- --------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Dimension Business Park
El Toro, California(22)......... 2 1990 45,257 100.0% 494 $10.92
892/909 Towne Center Drive
Foothill Ranch, California...... 1 1998 303,327 58.9% 1,561 5.15
12681/12691 Pala Drive
Garden Grove, California........ 1 1970 84,700 100.0% 580 6.85
Garden Grove Industrial Complex
Garden Grove, California(23).... 6 1971 275,971 100.0% 1,708 6.19
12752-12822 Monarch Street
Garden Grove, California........ 1 1970 277,037 100.0% 1,068 3.86
7421 Orangewood Avenue
Garden Grove, California........ 1 1981 82,602 100.0% 575 6.96
12400 Industry Street
Garden Grove, California........ 1 1972 64,200 100.0% 369 5.74
Giltspur Building
Garden Grove, California........ 1 1974 110,220 100.0% 777 7.05
17150 Von Karman
Irvine, California.............. 1 1977 157,458 100.0% 1,139 7.24
184-220 Technology Drive
Irvine, California.............. 10 1990 157,499 93.2% 1,719 10.92
9401 Toledo Way
Irvine, California.............. 1 1984 244,800 100.0% 1,355 5.53
2055 S.E. Main Street
Irvine, California(24).......... 1 1973 47,583 100.0% 371 7.81
13645-13885 Alton Parkway
Irvine, California(25).......... 9 1989 143,117 95.6% 1,203 8.41
1951 E. Carnegie
Santa Ana, California........... 1 1981 100,000 100.0% 734 7.34
14831 Franklin Avenue
Tustin, California(24).......... 1 1978 36,256 100.0% 226 6.25
2911 Dow Avenue
Tustin, California.............. 1 1998 54,720 100.0% 361 6.60
--- ---------- --------
Subtotal/Weighted Average--
Orange County................... 65 4,548,808 96.4% 28,825 6.34
--- ---------- --------
San Diego County
5759 Fleet Street
Carlsbad, California............ 1 1998 82,923 100.0% 1,504 18.14
6828 Nancy Ridge Drive
San Diego, California........... 1 1982 39,669 100.0% 385 9.70
41093 Country Center Drive
San Diego, California........... 1 1997 77,582 100.0% 546 7.04
--- ---------- --------
Subtotal/Weighted Average--
San Diego County................ 3 200,174 100.0% 2,435 12.17
--- ---------- --------
Other
1840 Aerojet Way
Las Vegas, Nevada............... 1 1993 102,948 100.0% 514 4.91
1900 Aerojet Way
Las Vegas, Nevada............... 1 1995 106,717 100.0% 505 4.82
795 Trademark Drive
Reno, Nevada.................... 1 1998 75,257 100.0% 809 10.75
5115 N. 27th Avenue
Phoenix, Arizona(26)............ 1 1962 130,877 100.0% 649 4.96
199/201 North Sunrise Avenue
Roseville, California(27)(28)... 2 1981 162,203 100.0% 1,612 9.94
1961 Concourse Drive
San Jose, California(28)........ 1 1984 110,132 70.7% 837 7.60
1710 Fortune Drive
San Jose, California(28)........ 1 1983 86,000 100.0% 1,244 14.46
2010-2040 Fortune Drive
San Jose, California(28)........ 3 1998 235,251 100.0% 3,447 14.65
3735 Imperial Highway
Stockton, California....... 1 1996 164,540 100.0% 1,180 7.17
--- ---------- --------
Subtotal/Weighted Average--
Other...................... 12 1,173,925 97.2% 10,797 9.2
--- ---------- --------
TOTAL/WEIGHTED AVERAGE
INDUSTRIAL PROPERTIES........... 87 6,477,132 96.9% $ 46,288 $ 7.15
--- ---------- ----- --------
TOTAL/WEIGHTED AVERAGE ALL
PROPERTIES...................... 171 12,625,117 96.7% $150,833 $11.95
=== ========== ===== ========
</TABLE>
(footnotes continued on next page)
18
<PAGE>
- --------
(1) Based on all leases at the respective properties in effect as of December
31, 1999.
(2) Calculated as base rent for the year ended December 31, 1999, determined
in accordance with generally accepted accounting principles ("GAAP"), and
annualized to reflect a twelve-month period. Unless otherwise indicated,
leases at the Industrial Properties are written on a triple net basis and
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 of Expense Stop.
(3) Calculated as Annual Base Rent divided by net rentable square feet leased
at December 31, 1999.
(4) The four properties at 5151-5155 Camino Ruiz were built between 1982 and
1985.
(5) For this property, leases with Hughes Space and Communications for
approximately 96,000 rentable square feet and 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.
(6) For this property, the lease with Hughes Space and Communications is
written on a modified full service gross basis under which Hughes Space
and 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.
(7) For this property, the lease is written on a triple net basis.
(8) For this property, leases with Hughes Space and Communications for
approximately 103,000 rentable square feet are written on a full service
gross basis, except that there is no Expense Stop.
(9) For this property, a lease for approximately 41,000 rentable square feet
is written on a modified gross basis, with the tenant paying its share of
taxes and insurance above base year amounts. The leases for the remaining
23,000 rentable square feet are written on a full service gross basis.
(10) For this property, leases for approximately 65,000 rentable square feet
are written on a full service basis, with the tenants paying no expense
reimbursement, leases for approximately 38,000 rentable square feet are
written on a modified full service gross basis, and leases for
approximately 29,000 rentable square feet are written on a triple net
basis.
(11) For this property, leases for approximately 70,500 rentable square feet
are written on a full service gross basis, with the tenants paying no
expense reimbursement, leases for approximately 48,500 rentable square
feet are written on a modified full service gross basis, and leases for
approximately 21,000 rentable square feet are written on a triple net
basis.
(12) For this property, a lease for approximately 21,000 rentable square feet
is written on a modified full service gross basis, and leases for
approximately 11,000 rentable square feet are written on a triple net
basis.
(13) This property was 100% leased to one tenant in January 2000 with
annualized base rent of $375,000.
(14) For this property, a lease for approximately 52,000 rentable square feet
is written on a modified full service gross basis, and a lease for
approximately 39,000 rentable square feet is written on a triple net
basis.
(15) This property includes an expansion building with 71,000 rentable square
feet developed by the Company in 1999.
(16) The leases for this property are written on a modified net basis, with the
tenants responsible for their pro-rata share of common area expenses and
real estate taxes.
(17) For this property, a lease for 60,840 rentable square feet is written on a
triple net basis.
(18) For this property, the leases are written on a modified full service gross
basis, with the tenants responsible for paying utilities directly.
(19) For this property, a lease for 15,728 rentable square feet is written on a
triple net basis, and leases for 15,114 rentable square feet are written
on a modified full service gross basis.
(20) The leases for these industrial properties are written on a modified
triple net basis, with the tenants responsible for estimated allocated
common area expenses.
(21) The seven properties at the Brea Industrial Complex were built between
1981 and 1988.
(22) For this property, leases for approximately 26,000 rentable square feet
are written on a full service basis, with the tenants paying no expense
reimbursement, and leases for approximately 19,000 rentable square feet
are written on a modified full service gross basis.
(23) The six properties at the Garden Grove Industrial Complex were built
between 1971 and 1985.
(footnotes continued on next page)
19
<PAGE>
(24) For this property, the lease is written on a full service gross basis.
(25) For this property, leases for approximately 53,000 rentable square feet
are written on a full service gross basis, with the tenants paying no
expense reimbursement, leases for approximately 53,000 rentable square
feet are written on a modified triple net basis with the tenants
responsible for estimated allocated common area expenses.
(26) 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.
(27) For this property, leases for approximately 115,500 rentable square feet
are written on a triple net basis and, leases for approximately 46,500
rentable square feet are written on a full service basis, with the
tenants paying no expense reimbursement.
(28) This property was managed by third-party managers at December 31, 1999.
20
<PAGE>
Development Projects
The following table sets forth certain information relating to each of the
development projects that the Company had under construction at December 31,
1999. The Company owns a 100% interest in all of the development projects
other than Peregrine Systems Corporate Center--Buildings 2 and 5 in which the
Company owns a 50% managing interest through a Development LLC. The Company
did not have any projects in lease-up at December 31, 1999 since all of the
properties developed and completed by the Company during 1999 and 1998,
encompassing an aggregate of approximately 2.0 million rentable square feet,
stabilized during 1999. All of the development projects under construction at
December 31, 1999 were office projects.
<TABLE>
<CAPTION>
Projected %
Estimated Total Square Feet Committed at
Stabilization Estimated upon December 31,
Project Name/Submarket Date(1) Investment(2) Completion 1999(3)
---------------------- ------------- -------------- ------------ -------------
(in thousands)
<S> <C> <C> <C> <C>
Development Projects in
Lease-up:
None
Development Projects
Under Construction:
Brobeck, Phleger and
Harrison/San Diego..... 1st Quarter 2000 $ 15,548 72,300 100%
Calabasas Park Centre--
Phase I/Los Angeles.... 4th Quarter 2000 17,757 101,600 88%
Carmel Mountain
Technology
Center/San Diego....... 1st Quarter 2001 17,160 103,000 100%
Kilroy Airport Center,
Long Beach--7 Story/Los
Angeles................ 3rd Quarter 2001 31,939 191,800 77%
Peregrine Systems
Corporate Ctr.--
Building 2/San
Diego(4)............... 2nd Quarter 2000 26,334 129,700 100%
Peregrine Systems
Corporate Ctr.--
Building 5/San
Diego(4)............... 3rd Quarter 2000 22,668 112,100 100%
Westside Media Center--
Phase II/Los Angeles... 4th Quarter 2000 42,412 151,000 100%
-------- -------
Total Development
Projects Under
Construction......... $173,818 861,500 93%
======== =======
</TABLE>
- --------
(1) Based on management's estimation of the earlier of stabilized occupancy
(95.0%) or one year from the date of substantial completion.
(2) Represents total projected development costs at December 31, 1999.
(3) Represents executed leases and signed letters of intent to lease
calculated on a square footage basis at December 31, 1999.
(4) Represents projects being developed by the Development LLCs in conjunction
with The Allen Group, a group of affiliated real estate and development
companies based in Visalia, California. See separate discussion in Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operations--Capital Expenditures Section for further discussion.
21
<PAGE>
Tenant Information
The following table sets forth information as to the Company's ten largest
office and industrial tenants based upon annualized rental revenues for the
year ended December 31, 1999.
<TABLE>
<CAPTION>
Percentage of
Annual Total Base Lease
Base Rental Rental Initial Lease Expiration
Tenant Name Revenues(1) Revenues Date(2) Date
----------- -------------- ------------- ------------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Office Properties:
Hughes Aircraft
Corporation's Space and
Communications
Company(3),(4)......... $ 9,630 6.4% August 1984 Various
The Boeing
Company(3),(5)......... 5,742 3.8 February 1992 Various
Epson America, Inc.(6).. 4,211 2.8 October 1999 Various
Epicor Software
Corporation............ 3,016 2.0 September 1999 August 2009
Intuit, Inc. ........... 2,937 2.0 November 1997 June 2004
Sony Music
Entertainment, Inc. ... 2,791 1.9 June 1997 December 2008
Unisys Corporation...... 2,678 1.8 March 1997 April 2001
LPL Holdings............ 2,247 1.5 October 1998 February 2014
Northwest Airlines,
Inc.(7)................ 2,236 1.5 August 1978 Various
Pacific Bell............ 1,994 1.3 December 1998 February 2009
------- ----
Total Office
Properties........... $37,482 25.0%
======= ====
Industrial Properties:
Mattel, Inc. ........... $ 1,840 1.2% May 1990 October 2000
Celestica California,
Inc. .................. 1,561 1.0 May 1998 May 2008
Natural Alternatives
Intl., Inc. ........... 1,504 1.0 October 1998 October 2013
OmniPak................. 1,453 1.0 August 1998 July 2008
Mazda Motor of America,
Inc.................... 1,355 0.9 July 1997 July 2000
Flextronics Intl USA,
Inc. .................. 1,244 0.8 September 1999 August 2006
Kraft Foods, Inc. ...... 1,180 0.8 February 1996 February 2006
Packard Hughes
Interconnect........... 1,094 0.7 May 1997 January 2001
Targus, Inc. ........... 1,043 0.7 December 1998 March 2009
Southern Plastic
Mold(8)................ 952 0.6 August 1992 Various
------- ----
Total Industrial
Properties........... $13,226 8.7%
======= ====
</TABLE>
- --------
(1) Determined in accordance with generally accepted accounting principles.
(2) Represents date of first relationship between tenant and the Company or
the Company's predecessor, the Kilroy Group.
(3) In January 2000, The Boeing Company announced the pending acquisition of
Hughes' Space and Communications business and related operations (not
including DirecTV). While the transaction has not yet closed, the combined
entity would have accounted for 10.1% of the Company's total base rental
revenues for the year ended December 31, 1999, and total combined net
rentable square feet of 841,580 at December 31, 1999.
(4) Hughes Space and Communications leases of 286,151 and 100,978 net rentable
square feet expire July 2004 and January 2004, respectively. Leases with
other Hughes-affiliated entities of 7,515, 5,388 and 5,234 net rentable
square feet expire November 2001, December 2001 and December 2001,
respectively.
(5) The Boeing Company leases of 211,139, 49,988, 26,620, 24,356, 14,777, and
6,814 net rentable square feet expire December 2004, January 2002,
December 2000, December 2000, June 2000, and January 2001, respectively.
Boeing North America lease of 113,242 net rentable square feet expires May
2009.
(6) Epson America, Inc. and Epson Seiko leases of 123,737, 26,832 and 3,562
net rentable square feet expire October 2009, October 2009 and October
2002, respectively.
(7) Northwest Airlines leases of 60,000 and 27,861 net rentable square feet
expire in February 2001 and April 2005, respectively.
(8) Southern Plastic Mold leases of 144,000 and 44,000 rentable square feet
expire September 2003 and February 2005, respectively.
22
<PAGE>
At December 31, 1999, the Company's tenant base was comprised of the
following industries, broken down by percentage of total portfolio base rent:
manufacturing, 41.9%; services, 23.7%; transportation, communications and
public utilities, 12.9%; finance, insurance and real estate, 10.5%; retail
trade, 4.2%; wholesale trade, 3.2%; government, 2.3%; construction, 1.1%; and
agriculture, forestry and fishing, 0.2%. Following is a list comprised of a
representative sample of 25 of the Company's tenants whose annual base rental
revenues were less than 1.0% of the Company's total annual base revenue at
December 31, 1999:
<TABLE>
<C> <C> <S>
ACG Green Group, Inc. Hanger Orthopedic Group Premier, Inc.
Advanced Tool Systems LEA Corporation QSC Audio Products, Inc.
Affiliated Computer Services, Inc. Medibuy.com, Inc. Raab Karcher Electronics
Alesis Studio Electronics, Inc. MRJ Industries, Inc. Rayonier, Inc.
AMN Healthcare, Inc. National Digital Television Center Ricoh Electronics, Inc.
Applied Micro Circuits Corp. Otis Elevator Company Rosemount Analytical, Inc.
Calbiochem Pacific Parking System, Inc. Troika Network, Inc.
Celebrity Prime Foods Pepperdine University Webhouse, Inc.
Dovatron Manufacturing S. Calif
</TABLE>
Lease Expirations
The following table sets forth a summary of the Company's lease expirations
for the Office and Industrial Properties for each of the ten years beginning
with 2000, assuming that none of the tenants exercise renewal options or
termination rights.
<TABLE>
<CAPTION>
Percentage of Average Annual
Net Rentable Total Leased Annual Base Rent Per Net
Area Subject Square Feet Rent Under Rentable Square
Number of to Expiring Represented Expiring Foot
Expiring Leases by Expiring Leases Represented by
Year of Lease Expiration Leases(1) (Sq. Ft.) Leases(2) (000's)(3) Expiring Leases
- ------------------------ --------- ------------ ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Office Properties:
2000.................... 89 379,552 6.2% $ 7,050 $18.57
2001.................... 84 1,075,655 17.6 16,454 15.30
2002.................... 66 571,575 9.4 8,882 15.54
2003.................... 39 228,146 3.7 4,339 19.02
2004.................... 51 826,376 13.5 18,697 22.63
2005.................... 22 704,601 11.6 10,064 14.28
2006.................... 13 369,133 6.1 6,994 18.95
2007.................... 10 511,571 8.4 8,948 17.49
2008.................... 8 315,214 5.2 6,277 19.91
2009 and beyond......... 16 1,117,962 18.3 28,989 25.93
--- ---------- ----- --------
398 6,099,785 100.0% $116,694 $19.13
--- ---------- --------
Industrial Properties:
2000.................... 75 980,430 16.2% $ 7,432 $ 7.58
2001.................... 64 651,980 10.8 4,778 7.33
2002.................... 37 222,065 3.7 2,190 9.86
2003.................... 28 754,993 12.5 5,763 7.63
2004.................... 17 591,256 9.8 4,506 7.62
2005.................... 9 420,618 7.0 2,908 6.91
2006.................... 9 693,936 11.5 5,984 8.62
2007.................... 3 164,595 2.7 1,396 8.48
2008.................... 7 859,786 14.2 6,680 7.77
2009 and beyond......... 12 707,345 11.6 5,547 7.84
--- ---------- ----- --------
261 6,047,004 100.0% $ 47,184 $ 7.80
--- ---------- --------
Total Portfolio......... 659 12,146,789 100.0% $163,878 $13.49
=== ========== ========
</TABLE>
(footnotes on next page)
23
<PAGE>
- --------
(1) Includes tenants only. Excludes leases for amenity, retail, parking and
month-to-month tenants. Some tenants have multiple leases.
(2) Based on total leased square footage for the respective portfolios as of
December 31, 1999 unless a lease for a replacement tenant had been
executed on or before January 1, 2000.
(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
executed on or before January 1, 2000.
Mortgage Debt
At December 31, 1999, the Operating Partnership had seven mortgage loans
outstanding, representing aggregate indebtedness of approximately $326
million, which were secured by certain of the Office and Industrial Properties
(the "Secured Obligations"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources" and Note 6 to the Company's consolidated and combined financial
statements included herewith. Management believes that as of December 31,
1999, the value of the properties securing the respective Secured Obligations
in each case exceeded the principal amount of the outstanding obligation.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor any of the Company's properties are presently
subject to any material litigation nor, to the Company's knowledge, is any
material litigation threatened against any of them which if determined
unfavorably to the Company would have a material adverse effect on the
Company's cash flows, financial condition or results of operations. The
Company is party to litigation arising in the ordinary course of business,
none of which if determined unfavorably to the Company is expected to have a
material adverse effect on the Company's cash flows, financial condition or
results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of the year ended December 31, 1999.
24
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock began trading on the New York Stock Exchange
("NYSE") on January 28, 1997, under the symbol "KRC." The following table
illustrates the high, low and closing prices by quarter during 1999 and 1998
as reported on the NYSE. On March 10, 2000, there were approximately 230
registered holders of the Company's common stock.
<TABLE>
<CAPTION>
Common
Stock
Dividends
1999 High Low Close Declared
- ---- ------ ------ ------ ---------
<S> <C> <C> <C> <C>
First quarter.................................... $23.38 $19.94 $20.50 $0.4200
Second quarter................................... 26.19 19.69 24.38 0.4200
Third quarter.................................... 24.31 20.31 21.13 0.4200
Fourth quarter................................... 22.38 18.00 22.38 0.4200
</TABLE>
<TABLE>
<CAPTION>
Common
Stock
Dividends
1998 High Low Close Declared
- ---- ------ ------ ------ ---------
<S> <C> <C> <C> <C>
First quarter.................................... $29.25 $26.31 $28.56 $0.4050
Second quarter................................... 28.31 24.69 25.00 0.4050
Third quarter.................................... 25.56 19.00 23.00 0.4050
Fourth quarter................................... 23.38 19.50 23.00 0.4050
</TABLE>
The Company pays distributions to common stockholders on or about the 10th
day of each January, April, July and October at the discretion of the Board of
Directors. Distribution amounts depend on the Company's Funds from Operations,
financial condition and capital requirements, the annual distribution
requirements under the REIT provisions of the Internal Revenue Code of 1986,
as amended (the "Code"), and such other factors as the Board of Directors
deems relevant.
During fiscal year 1999, the Operating Partnership issued 472,034 common
units of the Operating Partnership, valued by the Company at approximately
$9.9 million based upon the closing share price of the Company's common stock
as reported on the NYSE at the time of the respective transactions, to
entities controlled by Richard S. Allen, a former member of the Company's
Board of Directors, in partial consideration for the contribution of certain
properties and undeveloped land to the Operating Partnership. A former
Executive Vice President of the Company received 245,066 of the total 472,034
common units. The common units become convertible into shares of the Company's
common stock, on a one-for-one basis, one year after issuance date. The common
units were issued in reliance upon an exemption from registration provided by
Regulation D under the Securities Act as a transaction by an issuer not
involving a public offering.
During the fourth quarter of fiscal year 1999, the Company issued 900,000
9.250% Series D Cumulative Redeemable Preferred units, representing limited
partnership interests in the Operating Partnership with a liquidation value of
$50.00 per unit, in exchange for a gross contribution to the Operating
Partnership of $45.0 million. The Series D Preferred units are exchangeable,
at the option of the majority of the holders, for shares of the Company's
9.250% Series D Cumulative Redeemable Preferred stock, beginning ten years
from the date of issuance, or earlier under certain circumstances. The Series
D Cumulative Redeemable Preferred units were issued in reliance upon an
exemption from registration provided by Regulation D under the Securities Act
as a transaction by an issuer not involving a public offering.
During 1999, the Company issued 442,200 shares of common stock upon the
conversion of 442,200 common units of the Operating Partnership by limited
partners. The issuance of the common shares on a one-for-one basis was made
pursuant to the terms set forth in the partnership agreement of the Operating
Partnership. The shares of common stock were issued in a transaction not
requiring registration under federal securities laws pursuant to Section 4(2)
of the Securities Act of 1933.
25
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
Kilroy Realty Corporation and the Kilroy Group
(in thousands, except per share, square footage and occupancy data)
<TABLE>
<CAPTION>
Kilroy Realty Corporation Consolidated Kilroy Group Combined
-------------------------------------- -------------------------------------
February 1, January 1,
Year Ended Year Ended 1997 to 1997 to Year Ended Year Ended
December 31, December 31, December 31, January 31, December 31, December 31,
1999 1998 1997 1997 1996 1995
------------ ------------ ------------ ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Rental income.......... $140,182 $117,338 $56,069 $2,760 $35,022 $33,896
Tenant
reimbursements........ 16,316 14,956 6,751 306 3,752 3,002
Development services... 14 698 1,156
Sale of air rights..... 4,456
Interest income........ 1,175 1,698 3,571
Other income........... 2,027 3,096 889 4 76 398
-------- -------- ------- ------ ------- -------
Total revenues....... 159,700 137,088 67,280 3,084 39,548 42,908
-------- -------- ------- ------ ------- -------
Property expenses...... 20,669 19,281 8,770 579 6,788 6,834
Real estate taxes...... 12,369 10,383 4,199 137 1,673 1,416
General and
administrative
expenses.............. 9,091 7,739 4,949 78 2,383 2,152
Ground leases.......... 1,397 1,223 938 64 768 789
Provision for
potentially
unrecoverable pre-
development costs..... 1,700
Development expenses... 46 650 737
Option buy-out cost ... 3,150
Interest expense....... 26,309 20,568 9,738 1,895 21,853 24,159
Depreciation and
amortization.......... 33,794 26,200 13,236 787 9,111 9,474
-------- -------- ------- ------ ------- -------
Total expenses....... 103,629 87,094 41,830 3,586 46,376 45,561
-------- -------- ------- ------ ------- -------
Income (loss) before
gains on dispositions
of operating
properties, equity in
income of
unconsolidated
subsidiary, minority
interests and
extraordinary gains... 56,071 49,994 25,450 (502) (6,828) (2,653)
Gains on dispositions
of operating
properties............ 46
Equity in income of
unconsolidated
subsidiary............ 17 5 23
-------- -------- ------- ------ ------- -------
Income (loss) before
minority interests
and extraordinary
gains................. 56,134 49,999 25,473 (502) (6,828) (2,653)
Minority interests:
Distributions on
Cumulative
Redeemable Preferred
units............... (9,560) (5,556)
Minority interest in
earnings of
Operating
Partnership......... (6,480) (5,621) (3,413)
Minority interest in
earnings of
Development LLCs.... (199)
-------- -------- ------- ------ ------- -------
Total minority
interests............. (16,239) (11,177) (3,413)
-------- -------- -------
Income (loss) before
extraordinary gains... 39,895 38,822 22,060 (502) (6,828) (2,653)
Extraordinary gains--
extinguishment of
debt.................. 3,204 20,095 15,267
-------- -------- ------- ------ ------- -------
Net income........... $ 39,895 $ 38,822 $22,060 $2,702 $13,267 $12,614
======== ======== ======= ====== ======= =======
Share Data:
Weighted average
shares outstanding--
basic................. 27,701 26,989 18,445
======== ======== =======
Weighted average
shares outstanding--
diluted............... 27,727 27,060 18,539
======== ======== =======
Net income per common
share--basic.......... $ 1.44 $ 1.44 $ 1.20
======== ======== =======
Net income per common
share--diluted........ $ 1.44 $ 1.43 $ 1.19
======== ======== =======
Distributions per
common share.......... $ 1.68 $ 1.62 $ 1.42
======== ======== =======
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------
Kilroy Realty Corporation Kilroy Group
Consolidated Combined
----------------------------------- ---------------------
1999 1998 1997 1996 1995
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Investment in real
estate, before
accumulated
depreciation and
amortization.......... $1,410,238 $1,194,284 $ 834,690 $ 227,337 $ 224,983
Total assets........... 1,320,501 1,109,217 757,654 128,339 132,857
Mortgage debt and
unsecured line of
credit................ 553,516 405,383 273,363 223,297 233,857
Total liabilities...... 613,519 452,818 305,319 242,116 254,683
Total minority
interests............. 234,053 180,500 55,185
Total stockholders'
equity/(accumulated
deficit).............. 472,929 475,899 397,150 (113,777) (121,826)
Other Data:
Funds From
Operations(1),(2)..... $ 80,631 $ 71,174 $ 39,142 $ 5,433 $ 2,365
Cash flows from(3):
Operating
activities.......... 84,635 73,429 28,928 5,520 10,071
Investing
activities.......... (192,795) (343,717) (551,956) (2,354) (1,162)
Financing
activities.......... 127,833 267,802 531,957 (3,166) (8,909)
Office Properties:
Rentable square
footage............. 6,147,985 5,600,459 4,200,734 1,688,383 1,688,383
Occupancy............ 96.4 % 95.7 % 94.3 % 76.0 % 72.8 %
Industrial Properties:
Rentable square
footage............. 6,477,132 6,157,107 5,027,716 916,570 916,570
Occupancy............ 96.9 % 96.0 % 91.9 % 97.6 % 98.4 %
</TABLE>
- --------
(1) As defined by the National Association of Real Estate Investment Trusts
("NAREIT"), "Funds From Operations" represents net income (loss) before
minority interest of common unitholders (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 depreciation of
non-real estate assets) and after adjustments for unconsolidated
partnerships and joint ventures. Non-cash adjustments to arrive at Funds
From Operations were as follows: in all periods, depreciation and
amortization; in 1996, 1995 and 1994 gains on extinguishment of debt; and
in 1999, 1998 and 1997 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 it is predicated on cash
flow analyses. 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 Funds From Operations reported by
such other REITs. Further, Funds From Operations does not represent
amounts available for management's discretionary use because of needed
capital reinvestment or expansion, debt service obligations, or other
commitments and uncertainties. See the notes to the financial statements
of the Company and the Kilroy Group. Funds From Operations should not be
considered as an alternative to net income (loss) (computed in accordance
with GAAP) as an indicator of the properties' financial performance or to
cash flow from operating activities (computed in accordance with GAAP) as
a measure or indicator of the properties' liquidity, nor is it indicative
of funds available to fund the properties' cash needs, including the
Company's ability to pay dividends or make distributions.
(2) Funds From Operations for 1997 is derived from the results of operations
of Kilroy Realty Corporation for the period February 1, 1997 to December
31, 1997.
(3) Cash flow for 1997 represents the cash flow of the Kilroy Group for the
period January 1, 1997 to January 31, 1997 and Kilroy Realty Corporation
for the period February 1, 1997 to December 31, 1997.
27
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion relates to the consolidated financial statements
of the Company and should be read in conjunction with the financial statements
and related notes thereto. Statements contained in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations" that
are not historical facts may be forward-looking statements. Such statements
are subject to certain risks and uncertainties, which could cause actual
results to differ materially from those projected. You are cautioned not to
place undue reliance on these forward-looking statements.
Overview and Background
The Company, which develops, owns, and operates office and industrial real
estate, primarily in Southern California, commenced operations upon the
completion of its initial public offering in January 1997 and operates as a
self-administered REIT. The Company owns its interests in all of its
properties through the Operating Partnership and the Finance Partnership and
conducts substantially all of its operations through the Operating
Partnership. The Company owned an 86.8% general partnership interest in the
Operating Partnership as of December 31, 1999 and 1998.
The Company's revenue is derived primarily from rental income, including
tenant reimbursements. The Company's revenue growth in 1999 was due primarily
to a full year of operating results from $254 million in acquisitions
completed in 1998 and operating results from $171 million of development
projects completed by the Company in 1998 and 1999. While a significant
portion of the Company's revenue growth in 1999 and most of the Company's
revenue growth in 1998 and 1997 was due to the acquisition of $792 million of
properties in aggregate during the three-year period, the market for property
acquisitions continues to be competitive. As a result, management believes
that the most significant part of the Company's revenue growth over the next
two to three years will come from its substantial development pipeline of over
2.8 million rentable square feet of office space. Management also believes
that continued improvement of the real estate market in the Company's
principal markets and the continued economic expansion of Southern California
will result in strong demand for office and industrial space. Consequently,
management currently expects that the Company's revenue in the next one to two
years will also grow as a result of re-leasing, at higher lease rates,
approximately 1.5 million square feet of office space and 1.6 million square
feet of industrial space currently subject to leases expiring during the next
two years. In addition, the Company intends to continue its leadership as a
low cost operator through integrated operations and disciplined cost
management.
Results of Operations
During the year ended December 31, 1999, the Company acquired three office
buildings encompassing 176,900 aggregate rentable square feet for an aggregate
acquisition cost of $30.6 million and disposed of five office and five
industrial buildings encompassing 113,700 and 335,800 aggregate rentable
square feet, respectively, for an aggregate sales price of $22.6 million.
During the year ended December 31, 1998, the Company acquired 25 office and 16
industrial buildings encompassing 1.4 million and 674,000 aggregate rentable
square feet, respectively, for an aggregate acquisition cost of $254 million.
Operating results for acquired properties are included in the consolidated
financial statements of the Company subsequent to their respective acquisition
dates.
During the year ended December 31, 1999, the Company completed the
development of six office and four industrial buildings encompassing an
aggregate of 472,200 and 390,200 rentable square feet, respectively. During
the year ended December 31, 1998, the Company completed the development of one
office and six industrial buildings encompassing an aggregate of 78,000 and
1.0 million rentable square feet, respectively. All of the aforementioned
development projects completed by the Company during 1999 and 1998 were
included in the Company's portfolio of stabilized operating properties at
December 31, 1999. The Company's stabilized portfolio consists of all of the
Company's Office and Industrial Properties, excluding properties recently
developed by the
28
<PAGE>
Company that have not yet reached 95.0% occupancy ("lease-up" properties) and
projects currently under construction or in pre-development. The Company did
not have any lease-up properties at December 31, 1999 since all of the
development projects completed during 1998 and 1999 stabilized during 1999. At
December 31, 1999, the Company had seven office buildings under construction
which when completed are expected to encompass an aggregate of approximately
861,500 rentable square feet.
As a result of the properties acquired and developed by the Company
subsequent to December 31, 1998, net of the effect of properties disposed of
during 1999, rentable square footage in the Company's portfolio of stabilized
operating properties increased approximately 868,000 rentable square feet, or
7.4%, to 12.6 million rentable square feet at December 31, 1999 compared to
11.8 million rentable square feet at December 31, 1998. As of December 31,
1999, the Company's portfolio of stabilized operating properties was comprised
of 84 Office Properties encompassing 6.1 million rentable square feet and 87
Industrial Properties encompassing 6.5 million rentable square feet. The
stabilized portfolio occupancy rate at December 31, 1999 was 96.7%, with the
Office and Industrial Properties 96.4% and 96.9% occupied, respectively, as of
such date.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
<TABLE>
<CAPTION>
Year ended
December 31,
----------------- Dollar Percentage
1999 1998 Change Change
-------- -------- ------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Rental income.......................... $140,182 $117,338 $22,844 19.5 %
Tenant reimbursements.................. 16,316 14,956 1,360 9.1
Interest income........................ 1,175 1,698 (523) (30.8)
Other income........................... 2,027 3,096 (1,069) (34.5)
-------- -------- -------
Total revenues....................... 159,700 137,088 22,612 16.5
-------- -------- -------
Expenses:
Property expenses...................... 20,669 19,281 1,388 7.2
Real estate taxes...................... 12,369 10,383 1,986 19.1
General and administrative expenses.... 9,091 7,739 1,352 17.5
Ground leases.......................... 1,397 1,223 174 14.2
Provision for potentially unrecoverable
pre-development costs................. 1,700 (1,700) (100.0)
Interest expense....................... 26,309 20,568 5,741 27.9
Depreciation and amortization.......... 33,794 26,200 7,594 29.0
-------- -------- -------
Total expenses....................... 103,629 87,094 16,535 19.0
-------- -------- -------
Income before gains on dispositions of
operating properties, equity in income
of unconsolidated subsidiary, and
minority interests...................... $ 56,071 $ 49,994 $ 6,077 12.2 %
======== ======== =======
</TABLE>
29
<PAGE>
Rental Operations
Management evaluates the operations of its portfolio based on operating
property segment type. The following tables compare the net operating income,
defined as operating revenues less property and related expenses (property
expenses, real estate taxes and ground leases) before depreciation, for the
Office and Industrial Properties for the years ended December 31, 1999 and
1998.
<TABLE>
<CAPTION>
Year ended
December 31,
--------------- Dollar Percentage
1999 1998 Change Change
------- ------- ------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Office Properties
Operating revenues:
Rental income............................. $96,527 $82,164 $14,363 17.5 %
Tenant reimbursements..................... 10,966 10,957 9 0.1
Other income.............................. 1,779 2,956 (1,177) (39.8)
------- ------- -------
Total................................... 109,272 96,077 13,195 13.7
------- ------- -------
Property and related expenses:
Property expenses......................... 17,553 16,373 1,180 7.2
Real estate taxes......................... 7,589 6,567 1,022 15.6
Ground leases............................. 1,397 1,223 174 14.2
------- ------- -------
Total................................... 26,539 24,163 2,376 9.8
------- ------- -------
Net operating income, as defined............ $82,733 $71,914 $10,819 15.0 %
======= ======= =======
</TABLE>
Total revenues from Office Properties increased $13.2 million, or 13.7% to
$109.3 million for the year ended December 31, 1999 compared to $96.1 million
for the year ended December 31, 1998. Rental income from Office Properties
increased $14.4 million, or 17.5% to $96.5 million for the year ended December
31, 1999 compared to $82.1 million for the year ended December 31, 1998. Of
this increase, $7.2 million was generated by office buildings acquired during
1998 and 1999, net of the effect of five office properties disposed of during
1999, (the "Net Office Acquisitions") and $5.5 million was generated by the
office buildings developed by the Company in 1998 and 1999 (the "Office
Development Properties"). The remaining $1.7 million of the increase was
generated by the stabilized office properties owned at January 1, 1998 and
still owned at December 31, 1999 (the "Core Office Properties"), and
represented a 3.4% increase in rental income for the Core Office Properties.
This increase was primarily attributable to increases in rental rates. Average
occupancy for the Core Office Properties decreased 0.8%, to 93.4% at December
31, 1999 from 94.2% at December 31, 1998.
Tenant reimbursements from Office Properties remained consistent for the
years ended December 31, 1999 and 1998. An increase of $0.7 million in tenant
reimbursements generated by the Net Office Acquisitions and Office Development
Properties was offset by a decrease of $0.7 million in tenant reimbursements
generated by the Core Office Properties. This decrease in tenant
reimbursements for the Core Office Properties is due in part to the decrease
in average occupancy in this portfolio, and also to the decrease in property
expenses for this portfolio of properties as discussed below. Other income
from Office Properties decreased $1.2 million, or 39.8% to $1.8 million for
the year ended December 31, 1999 compared to $3.0 million for the same period
in 1998. For the year ended December 31, 1999, other income from Office
Properties included $0.5 million in gains from the sale of 13 acres of
undeveloped land in Calabasas and San Diego, California and $0.8 million in
lease termination fees from Core Office Portfolio properties. Other income
from Office Properties for the year ended December 31, 1998 included a $1.9
million net lease termination fee from an office property in San Diego,
California and $0.5 million in lease termination fees at various properties.
In addition, in 1998 the Company earned a $0.5 million consulting fee for
assisting an existing tenant with potential expansion plans. The remaining
amounts in other income from Office Properties for both periods consisted
primarily of management fees and tenant late charges.
30
<PAGE>
Total expenses from Office Properties increased $2.4 million, or 9.8% to
$26.5 million for the year ended December 31, 1999 compared to $24.1 million
for the year ended December 31, 1998. Property expenses increased $1.2
million, or 7.2% to $17.6 million for the year ended December 31, 1999
compared to $16.4 million for the year ended December 31, 1998. An increase of
$1.6 million in property expenses attributable to the Net Office Acquisitions
and the Office Development Properties was offset by a $0.4 million decrease in
property expenses at the Core Office Properties. This decrease was primarily
attributable to renegotiated property insurance premiums and a decrease in
electricity expense resulting from the implementation of energy management
systems in several of the buildings. Real estate taxes increased $1.0 million,
or 15.6% to $7.6 million for the year ended December 31, 1999 compared to $6.6
million for the year ended December 31, 1998. An increase of $1.1 million
attributable to the Net Office Acquisitions and the Office Development
Properties was offset by a decrease of $0.1 million for the Core Office
Properties. This decrease at the Core Office Properties was due primarily to
the effects of prior year property taxes which were successfully appealed and
refunded to the Company in 1999. Ground lease expense increased $0.2 million
for the year ended December 31, 1999 compared to the same period in 1998
primarily due to a full year of ground lease expense at one of the 1998 office
acquisition properties.
Net operating income, as defined, from Office Properties increased $10.8
million, or 15.0% to $82.7 million for the year ended December 31, 1999
compared to $71.9 million for the year ended December 31, 1998. Of this
increase, $8.8 million was generated by the Net Office Acquisitions and the
Office Development Properties. The remaining increase of $2.0 million was
generated by the Core Office Properties and represented a 3.7% increase in net
operating income for the Core Office Properties.
<TABLE>
<CAPTION>
Year ended
December 31,
--------------- Dollar Percentage
1999 1998 Change Change
------- ------- ------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Industrial Properties
Operating revenues:
Rental income............................... $43,655 $35,174 $8,481 24.1%
Tenant reimbursements....................... 5,350 3,999 1,351 33.8
Other income................................ 248 140 108 77.1
------- ------- ------
Total..................................... 49,253 39,313 9,940 25.3
------- ------- ------
Property and related expenses:
Property expenses........................... 3,116 2,908 208 7.2
Real estate taxes........................... 4,780 3,816 964 25.3
------- ------- ------
Total..................................... 7,896 6,724 1,172 17.4
------- ------- ------
Net operating income, as defined.............. $41,357 $32,589 $8,768 26.9%
======= ======= ======
</TABLE>
Total revenues from Industrial Properties increased $9.9 million, or 25.3%
to $49.2 million for the year ended December 31, 1999 compared to $39.3
million for the year ended December 31, 1998. Rental income from Industrial
Properties increased $8.5 million, or 24.1% to $43.7 million for the year
ended December 31, 1999 compared to $35.2 million for the year ended December
31, 1998. Of this increase, $3.4 million was generated by the industrial
buildings acquired during 1998 and 1999, net of the effect of the five
industrial buildings disposed of during 1999 (the "Net Industrial
Acquisitions") and $4.6 million was generated by the industrial buildings
developed by the Company in 1998 and 1999 (the "Industrial Development
Properties"). The remaining $0.5 million of the increase was generated by the
stabilized industrial buildings owned at January 1, 1998 and still owned at
December 31, 1999 (the "Core Industrial Properties"), and represented a 1.8%
increase in rental income for the Core Industrial Properties. This increase
was attributable to both an increase in average occupancy of 0.6% and an
increase in rental rates of 1.0% for this portfolio.
31
<PAGE>
Tenant reimbursements from Industrial Properties increased $1.4 million, or
33.8% to $5.4 million for the year ended December 31, 1999 compared to $4.0
million for year ended December 31, 1998. Of this increase, $1.1 million was
attributable to the Net Industrial Acquisitions and the Industrial Development
Properties. The remaining $0.3 million was attributable to the Core Industrial
Properties and was primarily due to an increase in real estate taxes
reimbursable by tenants. Other income from Industrial Properties increased
$0.1 million, or 77.1% to $0.2 million for the year ended December 31, 1999
compared to $0.1 million for the comparable period in 1998. Other income for
the years ended December 31, 1999 and 1998 consisted primarily of lease
termination fees.
Total expenses from Industrial Properties increased $1.2 million, or 17.4%
to $7.9 million for the year ended December 31, 1999 compared to $6.7 million
for the year ended December 31, 1998. Property expenses increased $0.2
million, or 7.2% to $3.1 million for the year ended December 31, 1999 compared
to $2.9 million for the year ended December 31, 1998. An increase of $0.5
million in property expenses attributable to the Net Industrial Acquisitions
and the Industrial Development Properties was offset by a decrease of $0.3
million in property expenses at the Core Industrial Properties. This decrease
was primarily due to renegotiated property insurance premiums and a decrease
in electricity expense resulting from the implementation of energy management
systems at several of the buildings. Real estate taxes increased $1.0 million,
or 25.3% to $4.8 million for the year ended December 31, 1999 compared to $3.8
million for the year ended December 31, 1998. Of this increase, $0.8 million
was attributable to the Net Industrial Acquisitions and Industrial Development
Properties. The remaining $0.2 million increase was generated by the Core
Industrial Properties and was primarily due to acquisition related assessments
on industrial buildings acquired by the Company in 1997.
Net operating income, as defined, from Industrial Properties increased $8.8
million, or 26.9% to $41.4 million for the year ended December 31, 1999
compared to $32.6 million for the year ended December 31, 1998. Of this
increase, $8.0 million was generated by the Net Industrial Acquisitions and
the Industrial Development Properties. The remaining increase of $0.8 million
was generated by the Core Industrial Properties and represented a 3.2%
increase in net operating income for the Core Industrial Properties.
Non-Property Related Income and Expenses
Interest income decreased $0.5 million, or 30.8% to $1.2 million for the
year ended December 31, 1999 compared to $1.7 million for the year ended
December 31, 1998. This decrease was due primarily to the receipt of interest
income on notes receivable from related parties for three months during the
year ended December 31, 1999 versus seven months for the year ended December
31, 1998.
General and administrative expenses increased $1.4 million, or 17.5% to
$9.1 million for the year ended December 31, 1999 compared to $7.7 million for
the year ended December 31, 1998. This increase was due primarily to annual
increases for salaries and benefits and increased depreciation related to the
Company's increased investment in its information systems.
Interest expense increased $5.7 million, or 27.9% to $26.3 million for the
year ended December 31, 1999 compared to $20.6 million for the same period in
1998, primarily due to a net increase in the Company's aggregate indebtedness
during 1999 and a general increase in market LIBOR rates during 1999. The
Company's weighted average interest rate increased 0.4% to 7.7% at December
31, 1999 compared to 7.3% at December 31, 1998.
Depreciation and amortization expense increased $7.6 million, or 29.0% to
$33.8 million for the year ended December 31, 1999 compared to $26.2 million
for the same period in 1998. The increase was primarily due to depreciation on
the Net Office and Industrial Acquisitions and the Office and Industrial
Development Properties.
Net income for the year ended December 31, 1998 included a $1.7 million
provision for potentially unrecoverable pre-development costs. The provision
provided for costs incurred for development projects that the Company may at
some point in the development process decide not to pursue. The provision was
established
32
<PAGE>
by estimating probable exposures to these types of costs for each of the
projects in the Company's development pipeline and applying a series of
probability factors based on the Company's historical experience. The Company
did not record an additional provision for potentially unrecoverable pre-
development costs during the year ended December 31, 1999 since the Company's
probability analyses supported the adequacy of the related allowance
throughout 1999.
Income
Net income before gains on dispositions of operating properties, equity in
income of unconsolidated subsidiary, and minority interests increased $6.1
million, or 12.2% to $56.1 million for the year ended December 31, 1999 from
$50.0 million for the year ended December 31, 1998. The increase was primarily
due to the increase in net operating income from the Office and Industrial
Properties of $10.8 million and $8.8 million, respectively, offset primarily
by an increase in interest expense of $5.7 million and an increase in
depreciation and amortization of $7.6 million.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The 1997 results include the Company's results for the period February 1,
1997 to December 31, 1997 and the Kilroy Group's results for the period
January 1, 1997 to January 31, 1997.
<TABLE>
<CAPTION>
Year ended
December 31,
---------------- Dollar Percentage
1998 1997 Change Change
-------- ------- ------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Revenues:
Rental income........................... $117,338 $58,829 $58,509 99.5%
Tenant reimbursements................... 14,956 7,057 7,899 111.9
Interest income......................... 1,698 3,571 (1,873) (52.5)
Other income............................ 3,096 907 2,189 241.3
-------- ------- -------
Total revenues........................ 137,088 70,364 66,724 94.8
-------- ------- -------
Expenses:
Property expenses....................... 19,281 9,349 9,932 106.2
Real estate taxes....................... 10,383 4,336 6,047 139.5
General and administrative expenses..... 7,739 5,027 2,712 53.9
Ground leases........................... 1,223 1,002 221 22.1
Provision for potentially unrecoverable
pre-development costs.................. 1,700 1,700 100.0
Development expense..................... 46 (46) (100.0)
Interest expense........................ 20,568 11,633 8,935 76.8
Depreciation and amortization........... 26,200 14,023 12,177 86.8
-------- ------- -------
Total expenses........................ 87,094 45,416 41,678 91.8
-------- ------- -------
Income before gains on dispositions of
operating properties, equity in income of
unconsolidated subsidiary, and minority
interests................................ $ 49,994 $24,948 $25,046 100.4%
======== ======= =======
</TABLE>
33
<PAGE>
Rental Operations
Management evaluates the operations of its portfolio based on operating
property segment type. The following tables compare the net operating income,
defined as operating revenues less property and related expenses (property
expenses, real estate taxes and ground leases) before depreciation, for the
Office and Industrial Properties for the years ended December 31, 1998 and
1997. The 1997 results include the Company's results for the period February
1, 1997 to December 31, 1997 and the Kilroy Group's results for the period
January 1, 1997 to January 31, 1997.
<TABLE>
<CAPTION>
Year ended
December 31,
--------------- Dollar Percentage
1998 1997 Change Change
------- ------- ------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Office Properties
Operating revenues:
Rental income.............................. $82,164 $43,756 $38,408 87.8%
Tenant reimbursements...................... 10,957 5,490 5,467 99.6
Other income............................... 2,956 488 2,468 505.7
------- ------- -------
Total.................................... 96,077 49,734 46,343 93.2
------- ------- -------
Property and related expenses:
Property expenses.......................... 16,373 8,516 7,857 92.3
Real estate taxes.......................... 6,567 2,710 3,857 142.3
Ground leases.............................. 1,223 1,002 221 22.1
------- ------- -------
Total.................................... 24,163 12,228 11,935 97.6
------- ------- -------
Net operating income, as defined............. $71,914 $37,506 $34,408 91.7%
======= ======= =======
</TABLE>
Total revenues from Office Properties increased $46.4 million, or 93.2% to
$96.1 million for the year ended December 31, 1998 compared to $49.7 million
for the year ended December 31, 1997. Rental income from Office Properties
increased $38.4 million, or 87.8% to $82.2 million for the year ended December
31, 1998 compared to $43.8 million for the year ended December 31, 1997. Of
this increase, $13.3 million was generated by office buildings acquired during
1998 (the "1998 Office Acquisitions") and $0.1 million was generated by the
Office Properties developed by the Company in 1998 (the "1998 Office
Development Properties"). In addition, $21.5 million of the increase was
attributable to a full year of operating results for the office buildings
acquired during 1997, subsequent to the IPO on January 31, 1997 (the "1997
Office Acquisitions"). The remaining $3.5 million of the increase was
generated by the 13 office buildings owned at the IPO and still owned at
December 31, 1998 (the "Existing Office Properties"), and represented a 10.0%
increase in rental income for the Existing Office Properties. This increase
was primarily attributable to leasing activity at the SeaTac Office Center,
including a lease for 211,000 rentable square feet with The Boeing Company
(the "Boeing Lease"), which was effective January 1, 1998. Excluding lease-up
at the SeaTac Office Center, occupancy remained consistent and the Existing
Office Properties experienced an approximate 2.8% increase in rental income
attributable to increases in rental rates.
Tenant reimbursements from Office Properties increased $5.5 million, or
99.6% to $11.0 million for the year ended December 31, 1998 compared to $5.5
million for year ended December 31, 1997. Of this increase, $1.2 million was
attributable to the 1998 Office Acquisitions and the 1998 Office Development
Properties and $2.7 million was attributable to a full year of operating
results from the 1997 Office Acquisitions. The remaining $1.6 million was
attributable to the Existing Office Properties, of which $1.2 million
represented tenant reimbursements under the Boeing Lease. Other income from
Office Properties increased $2.5 million, or 505.7% to $3.0 million for the
year ended December 31, 1998 compared to $0.5 million for the same period in
1997. This increase was primarily due to the recognition of a $1.9 million net
lease termination fee from an office property in San Diego, California. This
property was subsequently re-leased at higher rates for a longer term. In
addition, in 1998 the Company earned a $0.5 million consulting fee for
assisting an existing tenant with potential expansion plans.
34
<PAGE>
Total expenses from Office Properties increased $12.0 million, or 97.6% to
$24.2 million for the year ended December 31, 1998 compared to $12.2 million
for the year ended December 31, 1997. Property expenses increased $7.9
million, or 92.3% to $16.4 million and real estate taxes increased $3.9
million, or 142.3% to $6.6 million for the year ended December 31, 1998
compared to $8.5 million and $2.7 million, respectively, for the year ended
December 31, 1997. Of the collective increase of $11.8 million in property
expenses and real estate taxes, $3.2 million was attributable to the 1998
Office Acquisitions and the 1998 Office Development Properties and $7.0
million was attributable to a full year of operating results from the 1997
Office Acquisitions. The remaining $1.6 million of the increase at the
Existing Office Properties was primarily due to the increase in variable costs
associated with the lease-up of space, and an increase in real estate taxes at
the SeaTac Office Center which resulted from the completion of substantial
renovations. Ground lease expense increased $0.2 million for the year ended
December 31, 1998 compared to the same period in 1997 primarily as a result of
a full year of ground lease expense on two of the 1997 Office Acquisitions.
Net operating income, as defined, from Office Properties increased $34.4
million, or 91.7% to $71.9 million for the year ended December 31, 1998
compared to $37.5 million for the year ended December 31, 1997. Of this
increase, $31.1 million was generated by the 1998 Office Acquisitions, the
1998 Office Development Properties and the 1997 Office Acquisitions. The
remaining increase of $3.3 million was generated by the Existing Office
Properties and represented an 11.2% increase in net operating income for the
Existing Office Properties, which was primarily attributable to lease-up at
the SeaTac Office Center.
<TABLE>
<CAPTION>
Year ended
December 31,
--------------- Dollar Percentage
1998 1997 Change Change
------- ------- ------- ----------
(dollars in thousands)
<S> <C> <C> <C> <C>
Industrial Properties
Operating revenues:
Rental income............................. $35,174 $15,073 $20,101 133.4%
Tenant reimbursements..................... 3,999 1,567 2,432 155.2
Other income.............................. 140 419 (279) (66.6)
------- ------- -------
Total................................... 39,313 17,059 22,254 130.5
------- ------- -------
Property and related expenses:
Property expenses......................... 2,908 833 2,075 249.1
Real estate taxes......................... 3,816 1,626 2,190 134.7
------- ------- -------
Total................................... 6,724 2,459 4,265 173.4
------- ------- -------
Net operating income, as defined............ $32,589 $14,600 $17,989 123.2%
======= ======= =======
</TABLE>
Total revenues from Industrial Properties increased $22.3 million, or
130.5% to $39.3 million for the year ended December 31, 1998 compared to $17.0
million for the year ended December 31, 1997. Rental income from Industrial
Properties increased $20.1 million, or 133.4% to $35.2 million for the year
ended December 31, 1998 compared to $15.1 million for the year ended December
31, 1997. Of this increase, $3.4 million was generated by the industrial
buildings acquired during 1998 (the "1998 Industrial Acquisitions") and $2.1
million was generated by the industrial buildings developed by the Company in
1998 (the "1998 Industrial Development Properties"). In addition, $14.0
million of the increase was attributable to a full year of operating results
from the industrial buildings acquired in 1997, subsequent to the IPO on
January 31, 1997 (the "1997 Industrial Acquisitions"). The remaining $0.6
million of the increase was generated by the 11 industrial buildings owned at
the IPO and still owned at December 31, 1998 (the "Existing Industrial
Properties"), and represented a 7.4% increase in rental income for the
Existing Industrial Properties. This increase was primarily attributable to
the lease-up of 46,000 rentable square feet at the La Palma Business Center in
the second quarter of 1998, which had been vacant since the second quarter of
1997. Excluding the lease-up at La Palma Business Center, occupancy and rental
rates for the Existing Industrial Properties remained consistent.
35
<PAGE>
Tenant reimbursements from Industrial Properties increased $2.4 million, or
155.2% to $4.0 million for the year ended December 31, 1998 compared to $1.6
million for year ended December 31, 1997. Of this increase, $0.4 million was
attributable to the 1998 Industrial Acquisitions and the 1998 Industrial
Development Properties, and $1.8 million was attributable to a full year of
operating results from the 1997 Industrial Acquisitions. The remaining $0.2
million was attributable to the Existing Industrial Properties, of which $0.1
million represented an increase in tenant reimbursements at the La Palma
Business Center due to the lease-up of space, and $0.1 million correlated with
an increase in real estate taxes reimbursable by tenants. Other income from
Industrial Properties decreased $0.3 million, or 66.6% to $0.1 million for the
year ended December 31, 1998 compared to $0.4 million for the same period in
1997. Other income for the year ended December 31, 1997 included $0.2 million
related to receivables which were previously written off as uncollectible.
Total expenses from Industrial Properties increased $4.3 million, or 173.4%
to $6.7 million for the year ended December 31, 1998 compared to $2.4 million
for the year ended December 31, 1997. Property expenses increased $2.1
million, or 249.1% to $2.9 million and real estate taxes increased $2.2
million, or 134.7% to $3.8 million for the year ended December 31, 1998
compared to $0.8 million and $1.6 million, respectively, for the year ended
December 31, 1997. Of the collective increase of $4.3 million in property
expenses and real estate taxes, $1.1 million was attributable to the 1998
Industrial Acquisitions and the 1998 Industrial Development Properties and
$3.1 million was attributable to the 1997 Industrial Acquisitions. The
remaining $0.1 million of the increase was attributable to the Existing
Industrial Properties and was due to an increase in real estate taxes
attributable to the reassessment of property values at the date of the IPO.
Property expenses for the Existing Industrial Properties remained consistent
for the year ended December 31, 1998 compared to the same period in 1997.
Net operating income, as defined, from Industrial Properties increased
$18.0 million, or 123.2% to $32.6 million for the year ended December 31, 1998
compared to $14.6 million for the year ended December 31, 1997. Of this
increase, $17.7 million was generated from the 1998 Industrial Acquisitions,
the 1998 Industrial Development Properties and a full year of operating
results from the 1997 Industrial Acquisitions. The remaining increase of $0.3
million was generated by the Existing Industrial Properties and represented a
4.3% increase in net operating income for the Existing Industrial Properties,
which was primarily attributable to lease-up at the La Palma Business Center.
Non-Property Related Income and Expenses
Interest income decreased $1.9 million, or 52.5% to $1.7 million for the
year ended December 31, 1998 compared to $3.6 million for the year ended
December 31, 1997. This decrease was attributable to the interest earned in
the prior year on the $116 million of net proceeds received from the Company's
IPO on January 31, 1997 and the $146 million of net proceeds received from the
Company's follow-on offering in August 1997 (the "August Offering"), which
were invested in short-term investments and which the Company used for the
acquisition of properties and repayment of indebtedness prior to January 1,
1998.
General and administrative expenses increased $2.7 million, or 53.9% to
$7.7 million for the year ended December 31, 1998 compared to $5.0 million for
the year ended December 31, 1997, due to increased management, administrative
and personnel costs associated with the Company's increased portfolio size.
Interest expense increased $9.0 million, or 76.8% to $20.6 million for the
year ended December 31, 1998 compared to $11.6 million for the same period in
1997, primarily due to a general increase in borrowings and higher monthly
average outstanding balances under the Company's unsecured credit facility
during 1998 and $32.9 million of mortgage debt assumed in connection with
fourth quarter 1997 acquisitions. The Company's weighted average interest rate
decreased 0.5% to 7.3% at December 31, 1998 compared to 7.8% at December 31,
1997.
Depreciation and amortization expense increased $12.2 million, or 86.8% to
$26.2 million for the year ended December 31, 1998 compared to $14.0 million
for the same period in 1997. The increase was due to partial
36
<PAGE>
year depreciation on $254 million of 1998 Office and Industrial Acquisitions
and a full year of depreciation on the 1997 Office and Industrial
Acquisitions.
Net income for the year ended December 31, 1998 included a $1.7 million
provision for potentially unrecoverable pre-development costs. The provision
provided for costs incurred for development projects that the Company may at
some point in the development process decide not to pursue. The provision was
established by estimating probable exposures to these types of costs for each
of the projects in the Company's development pipeline and applying a series of
probability factors based on the Company's historical experience.
Income
Net income before gains on dispositions of operating properties, equity in
income of unconsolidated subsidiary, and minority interests increased $25.0
million, or 100.4% to $50.0 million for the year ended December 31, 1998 from
$25.0 million for the year ended December 31, 1997. The increase was primarily
due to the increase in net operating income from the Office and Industrial
Properties of $34.4 million and $18.0 million, respectively, which was
primarily due to the acquisition of 1.4 million and 674,000 rentable square
feet of office and industrial space, respectively, during 1998, and operating
the 2.2 million and 3.7 million rentable square feet of office and industrial
space acquired during 1997 for a full year in 1998. The increase in net
operating income was offset primarily by an increase in interest expense of
$8.9 million and an increase in depreciation and amortization of $12.2
million.
Liquidity and Capital Resources
In November 1999, the Company increased its borrowing capacity and obtained
a new $400 million unsecured revolving credit facility (the "Credit Facility")
to replace its previous $350 million Credit Facility which was scheduled to
mature in February 2000. The Credit Facility bears interest at a rate between
LIBOR plus 1.13% and LIBOR plus 1.75% (7.56% at December 31, 1999), depending
upon the Company's leverage ratio at the time of borrowing, and matures in
November 2002. At December 31, 1999, the Company had borrowings of $228
million outstanding under the Credit Facility and availability of
approximately $86.7 million. Availability under the Credit Facility depends
upon the value of the Company's pool of unencumbered assets. The Company
expects to use the $400 million Credit Facility to finance development
expenditures and for general corporate uses.
In March 1999, the Company borrowed $95.0 million under a mortgage loan
that is secured by nine office and industrial properties, requires monthly
principal and interest payments based on a fixed annual interest rate of
7.20%, amortizes over 25 years and matures in April 2009. The Company used the
proceeds from the mortgage loan to repay borrowings under the $350 million
Credit Facility and to fund development expenditures.
In April 1999, the Company borrowed $30.0 million under a mortgage loan
that is secured by one office property and the related ground leases, requires
monthly principal and interest payments based on a fixed annual interest rate
of 7.15% and matures in May 2017. The Company used the proceeds from the loan
to repay an existing variable rate mortgage loan with an outstanding balance
of $19.0 million, to repay outstanding borrowings under the $350 million
Credit Facility and to fund development expenditures.
In October 1999, the Company borrowed $90.0 million under a secured debt
facility that is secured by 13 office properties, requires monthly interest
payments based on a floating interest rate of LIBOR plus 1.75% and matures in
October 2003. The Company used the proceeds from the secured debt facility to
repay outstanding borrowings under the $350 million Credit Facility and to
fund development expenditures.
37
<PAGE>
As a result of the three new mortgage loans obtained during 1999 and the
repayment of the one previously existing mortgage loan as discussed above, the
Company's outstanding mortgage debt increased to $326 million or 38.8% of the
Company's total market capitalization at December 31, 1999 from $133 million
or 32.0% of the Company's total market capitalization at December 31, 1998.
The following table lists the composition of the Company's mortgage debt at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Mortgage note payable, due April 2009, fixed interest at
7.20%, monthly principal and interest payments......... $ 93,953
Mortgage note payable, due October 2003, interest at
LIBOR + 1.75%, (7.94% at December 31, 1999), monthly
interest-only payments................................. 90,000
Mortgage note payable, due February 2022, fixed interest
at 8.35%, monthly principal and interest payments(a)... 80,812 $ 82,025
Mortgage note payable, due May 2017, fixed interest at
7.15%, monthly principal and interest payments......... 29,440
Mortgage note payable, due January 2000, interest at
LIBOR + 1.50%, (7.05% at December 31, 1998), monthly
interest-only payments................................. 19,000
Mortgage note payable, due December 2005, fixed interest
at 8.45%, monthly principal and interest payments...... 12,973 13,385
Mortgage note payable, due November 2014, fixed interest
at 8.43%, monthly principal and interest payments...... 10,966 11,323
Mortgage note payable, due October 2013, fixed interest
at 8.21%, monthly principal and interest payments...... 7,372 7,650
-------- --------
$325,516 $133,383
======== ========
</TABLE>
- --------
(a) Beginning February 2005, the mortgage note is subject to increases in the
effective interest rate to the greater of 13.35% or the sum of the
interest rate for U.S. Treasury Securities maturing 15 years from the
reset date plus 2.00%.
The following table sets forth certain information with respect to the
Company's aggregate debt composition at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
Weighted
% of Average
Total Interest
Debt Rate
---------- ----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Secured vs. unsecured:
Secured........................................... 58.8% 32.9% 7.8% 8.2%
Unsecured......................................... 41.2% 67.1% 7.6% 6.8%
Variable rate vs. fixed rate:
Variable rate(1), (2), (3)........................ 57.5% 71.8% 7.7% 6.8%
Fixed rate........................................ 42.5% 28.2% 7.8% 8.4%
</TABLE>
- --------
(1) At December 31, 1999, the Company had an interest rate cap agreement to
cap LIBOR on $150 million of its floating rate debt at 6.5% which expires
in July 2000.
(2) Subsequent to December 31, 1999, the Company entered into an 18-month
interest rate cap agreement to cap LIBOR on $150 million of its floating
rate debt at 6.5% starting in July 2000.
(3) Subsequent to December 31, 1999, the Company entered into a two-year
interest rate swap agreement to fix $150 million of its floating rate
debt. Had this agreement been in place at December 31, 1999, the Company's
percentage of fixed rate debt to total debt would have increased to 69.7%
and the Company's weighted average interest rate for variable and fixed
rate debt would have been 8.0% and 7.8%, respectively.
38
<PAGE>
In December 1999, the Company issued 900,000 9.250% Series D Cumulative
Redeemable Preferred units, representing limited partnership interests in the
Operating Partnership (the "Series D Preferred units"), with a liquidation
value of $50.00 per unit, in exchange for a gross contribution to the
Operating Partnership of $45.0 million. The Company used the contribution
proceeds, less applicable transaction costs and expenses of $1.2 million, for
the repayment of borrowings outstanding under the Credit Facility. The Series
D Preferred units, which may be called by the Operating Partnership at par on
or after December 9, 2004, have no stated maturity or mandatory redemption and
are not convertible into any other securities of the Operating Partnership.
The Series D Preferred units are exchangeable at the option of the majority of
the holders for shares of the Company's 9.250% Series D Cumulative Redeemable
Preferred stock beginning December 9, 2009, or earlier under certain
circumstances.
In December 1999, the Company announced the implementation of its share
repurchase program, pursuant to which the Company is authorized to repurchase
up to an aggregate of 3.0 million shares of its outstanding common stock,
representing up to approximately 11% of the Company's currently outstanding
shares at December 31, 1999. During December 1999, the Company repurchased
265,000 shares in open market transactions for an aggregate repurchase price
of $5.4 million or $20.19 per share. Repurchases transacted during December
1999 were funded through proceeds received from the sale of operating
properties during December 1999. The Company intends to finance the
continuation of its share repurchase program in 2000 through proceeds from a
targeted dispositions program of non-strategic and mature industrial assets.
Repurchases during 2000 will be made from time to time in the open market or
through privately negotiated transactions, and may be discontinued at any
time.
In September 1999, the SEC declared effective the Company's registration
statement on Form S-3 with respect to 1,000,000 shares of the Company's common
stock to be issued under the Company's Dividend Reinvestment and Direct
Purchase Plan (the "Plan"). The Plan, which is designed to provide the
Company's stockholders and other investors with a convenient and economical
method to purchase shares of the Company's common stock, consists of three
programs: the Dividend Reinvestment Program (the "DRIP"), the Cash Option
Purchase Plan (the "COPP"), and the Waiver Discount Plan (the "WDP"). The DRIP
provides existing common stockholders with the opportunity to purchase
additional shares of the Company's common stock by automatically reinvesting
all or a portion of their cash dividends. The COPP provides existing common
stockholders and other investors with the opportunity to purchase additional
shares of the Company's common stock by making optional cash purchases, at no
discount to market, between $100 to $5,000 and $750 to $5,000, respectively,
in any calendar month. The WDP provides existing common stockholders and other
investors with the opportunity to purchase additional shares of the Company's
common stock by making optional cash purchases, at a discount to market of up
to 2.00% of the average per share price reported on the NYSE, of greater than
$5,000 in any calendar month. The Plan acquires shares of the Company's common
stock from either new issuances directly from the Company, from the open
market or from privately negotiated transactions, except for shares acquired
under the WDP which are purchased only from previously unissued shares of
common stock. Participation in the Plan is entirely voluntary, and can be
terminated at any time. The Company intends to use the proceeds received from
the Plan, less transaction costs, for development and investment activities,
repayment of outstanding indebtedness and general corporate uses. As of
December 31, 1999, there have been no previously unissued shares acquired
under the Plan.
In February 1998, the SEC declared effective the Company's "shelf"
registration statement on Form S-3 with respect to $400 million of the
Company's equity securities. As of March 10, 2000, an aggregate of
$313 million of equity securities were available for issuance under the
registration statement.
Capital Expenditures
As of December 31, 1999, the Company had approximately 1.4 million rentable
square feet of office space that was either under construction or committed
for construction at a total budgeted cost of approximately $274 million. The
Company has spent an aggregate of $122 million on these projects as of
December 31, 1999.
39
<PAGE>
The Company intends to finance the presently budgeted $152 million of
remaining development costs with additional construction loan financing,
borrowings under the Credit Facility and working capital.
In connection with an agreement signed with The Allen Group in October
1997, the Company has agreed to purchase one office property encompassing
128,000 rentable square feet, subject to the property meeting certain
occupancy thresholds. The purchase price for this property will be determined
at the time of acquisition based on the net operating income at that time. The
Company expects that in the event that this acquisition does occur, it would
be financed with borrowings under the Credit Facility and the issuance of
common limited partnership units of the Operating Partnership.
The agreement with The Allen Group also provides for the development of two
office projects in San Diego, California with approximately 1.1 million
aggregate rentable square feet for an estimated aggregate development cost of
approximately $200 million. During the first quarter of 1999, the Company
purchased a 50% managing interest in both of the development projects. The
Company has the option to purchase The Allen Group's remaining interest in
both projects for a purchase price to be determined upon completion of the
projects. Construction of phase I of both of the office projects was completed
during the third and fourth quarters of 1999. Construction of phases II and
III of the first office project commenced during the second and third quarters
of 1999, respectively, and phase IV is scheduled to begin during the second
quarter of 2000. Construction of phases II and III of the second office
project is scheduled to begin during the first quarters of 2000 and 2001,
respectively. The total presently budgeted investment of $109 million for the
in process and committed phases of these two office projects discussed herein
are included in the Company's total budgeted development costs of $274 million
discussed above. In addition, the Company has spent an aggregate of $42.3
million on the development of these phases as of December 31, 1999, which is
included in the aggregate expenditures of $122 million discussed above.
The Company believes that it will have sufficient capital resources to
satisfy its obligations and planned capital expenditures for the next twelve
months. The Company expects to meet its long-term liquidity requirements
including possible future development and property acquisitions, through
retained cash flow, long-term secured and unsecured borrowings, the issuance
of debt or equity securities or the issuance of common or preferred units of
the Operating Partnership.
40
<PAGE>
Historical Recurring Capital Expenditures, Tenant Improvements and Leasing
Costs
The following tables set forth the non-incremental revenue generating
recurring capital expenditures, excluding expenditures that are recoverable
from tenants, tenant improvements and leasing commissions for renewed and re-
tenanted space incurred for the three years ended December 31, 1999, 1998, and
1997 on a per square foot basis.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Office Properties:
Capital Expenditures:
Capital expenditures per square foot............... $ 0.08 $ 0.20 $ 0.16
Tenant Improvement and Leasing Costs(1):
Replacement tenant square feet..................... 196,615 276,992 17,068
Tenant improvements per square foot leased....... $ 5.61 $ 1.21 $ 6.56
Leasing commissions per square foot leased....... $ 4.18 $ 2.12 $ 1.64
Total per square foot............................ $ 9.79 $ 3.33 $ 8.20
Renewal tenant square feet......................... 421,685 265,154
Tenant improvements per square foot leased....... $ 2.85 $ 1.00
Leasing commissions per square foot leased....... $ 0.84 $ 0.89
Total per square foot............................ $ 3.69 $ 1.89
Total per square foot per year....................... $ 2.32 $ 0.84 $ 1.55
Average lease term................................... 5.8 6.2 5.3
Industrial Properties:
Capital Expenditures:
Capital expenditures per square foot............... $ 0.02 $ 0.05 $ 0.11
Tenant Improvement and Leasing Costs(1):
Replacement tenant square feet..................... 323,432 420,194 145,581
Tenant improvements per square foot leased....... $ 2.41 $ 0.61
Leasing commissions per square foot leased....... $ 1.76 $ 0.44 $ 1.08
Total per square foot............................ $ 4.17 $ 1.05 $ 1.08
Renewal tenant square feet......................... 398,184 549,158 323,825
Tenant improvements per square foot leased....... $ 0.20 $ 0.06 $ 0.02
Leasing commissions per square foot leased....... $ 0.07 $ 0.16 $ 0.23
Total per square foot............................ $ 0.27 $ 0.22 $ 0.25
Total per square foot per year....................... $ 0.94 $ 0.22 $ 0.31
Average lease term................................... 4.7 5.8 4.3
</TABLE>
- --------
(1) Includes only tenants with lease terms of 12 months or longer. Excludes
leases for amenity, parking, retail and month-to-month tenants.
Capital expenditures may fluctuate in any given period subject to the
nature, extent, and timing of improvements required to be made to the
properties. The Company believes that all of its Office and Industrial
Properties are well maintained and, based on engineering reports obtained
within the last five years, do not require significant capital improvements.
Tenant improvements and leasing costs may also fluctuate in any given year
depending upon factors such as the property, the term of the lease, the type
of lease, the involvement of external leasing agents and overall market
conditions.
41
<PAGE>
Building and Lease Information
The following tables set forth certain information regarding the Company's
Office and Industrial Properties at December 31, 1999:
Occupancy by Segment Type
<TABLE>
<CAPTION>
Square Feet
Number of -------------------------------
Region Buildings Total Leased Available Occupancy
- ------ --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C>
Office Properties:
Los Angeles............... 28 2,554,454 2,488,347 66,107 97.4%
Orange County............. 22 908,147 780,395 127,752 85.9
San Diego................. 28 1,975,770 1,957,549 18,221 99.1
Other..................... 6 709,614 700,322 9,292 98.7
--- ---------- ---------- -------
84 6,147,985 5,926,613 221,372 96.4%
--- ---------- ---------- -------
Industrial Properties:
Los Angeles............... 7 554,225 549,928 4,297 99.2%
Orange County............. 65 4,548,808 4,386,964 161,844 96.4
San Diego................. 3 200,174 200,174 -- 100.0
Other..................... 12 1,173,925 1,141,602 32,323 97.2
--- ---------- ---------- -------
87 6,477,132 6,278,668 198,464 96.9%
--- ---------- ---------- -------
Total Portfolio............. 171 12,625,117 12,205,281 419,836 96.7%
=== ========== ========== =======
</TABLE>
Lease Expirations by Segment Type
<TABLE>
<CAPTION>
Percentage of
Square Total Leased
Footage Square Feet Annual Base
Number of of Represented Rent Under
Expiring Expiring by Expiring Expiring Leases
Year of Lease Expiration Leases(1) Leases Leases(2) (in 000's)(3)
- ------------------------ --------- --------- ------------- ---------------
<S> <C> <C> <C> <C>
Office Properties:
2000......................... 89 379,552 6.2% $ 7,050
2001......................... 84 1,075,655 17.6 16,454
2002......................... 66 571,575 9.4 8,882
2003......................... 39 228,146 3.7 4,339
2004......................... 51 826,376 13.5 18,697
--- --------- ---- -------
329 3,081,304 50.4% $55,422
--- --------- -------
Industrial Properties:
2000......................... 75 980,430 16.2% $ 7,432
2001......................... 64 651,980 10.8 4,778
2002......................... 37 222,065 3.7 2,190
2003......................... 28 754,993 12.5 5,763
2004......................... 17 591,256 9.8 4,506
--- --------- ---- -------
221 3,200,704 53.0% $24,699
--- --------- -------
Total Portfolio.............. 550 6,282,028 51.7% $80,091
=== ========= =======
</TABLE>
- --------
(1) Includes tenants only. Excludes leases for amenity, retail, parking and
month to month tenants. Some tenants have multiple leases.
(2) Based on total leased square footage for the respective portfolios as of
December 31, 1999, unless a lease for a replacement tenant had been
executed on or before January 1, 2000.
(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
executed on or before January 1, 2000.
42
<PAGE>
Leasing Activity by Segment Type
For the year ended December 31, 1999
<TABLE>
<CAPTION>
Number of Weighted
Leases Square Feet Average
----------- ----------------- Retention Lease Term
New Renewal New(1) Renewal Rate (in months.)
--- ------- --------- ------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Office Properties.......... 84 71 694,620 435,164 44.4% 70
Industrial Properties...... 70 51 518,443 470,119 51.5% 56
--- --- --------- -------
Total Portfolio............ 154 122 1,213,063 905,283 47.8% 63
=== === ========= =======
</TABLE>
- --------
(1) The lease-up of 1,213,063 square feet to new tenants includes re-leasing
of 853,964 square feet and first generation leasing of 359,099 square
feet.
Year 2000
The Year 2000 issue ("Y2K") refers to the inability of certain computer
systems, as well as certain hardware and equipment containing date sensitive
data, to recognize accurate dates commencing on or after January 1, 2000. This
has the ability to affect those systems adversely.
In 1997, the Company's Information Technology Committee, comprised of
representatives from senior management and various departments including
accounting, property management and management information systems, identified
three phases in the Company's Y2K efforts: discovery and assessment,
remediation and implementation, and testing and verification. The Company had
successfully completed all of the aforementioned stages by November 1999.
As of March 10, 2000, the Company has not experienced any significant Y2K
problems nor has the Company experienced any interruptions in its normal
operations from Y2K issues experienced by any of its significant tenants,
vendors, suppliers or other relevant third parties. Further, the Company's Y2K
costs incurred to date have been minimal and have not been material to the
Company's financial position or results of operations. The Company does not
expect to incur any significant additional costs for Y2K related issues in the
future.
Distribution Policy
The Company makes quarterly distributions to common stockholders from cash
available for distribution and, if necessary to meet REIT distribution
requirements and maintain its REIT status, may use borrowings under the Credit
Facility. All such distributions are at the discretion of the Board of
Directors. Amounts accumulated for distribution are invested primarily in
interest-bearing accounts and short-term interest-bearing securities, which
are consistent with the Company's intention to maintain its qualification 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.
Historical Cash Flows
The principal sources of funding for development, acquisitions, and capital
expenditures are the Credit Facility, public equity financing, cash flow from
operating activities and secured debt financing. The Company's net cash
provided by operating activities increased $11.2 million, or 15.2% to $84.6
million for the year ended December 31, 1999 compared to $73.4 million for the
year ended December 31, 1998. This increase was primarily attributable to the
increase in net income resulting from the Net Office and Industrial
Acquisitions and the Office and Industrial Development Properties and an
increase in net operating income, as defined, generated by the Core Office and
Industrial Properties. The increase was partially offset by increased interest
expense and general and administrative expenses and a decrease in interest
income.
43
<PAGE>
Cash used in investing activities decreased $151 million, or 43.9% to $193
million for the year ended December 31, 1999 compared to $344 million for the
year ended December 31, 1998. Cash used in investing activities for the year
ended December 31, 1999 consisted primarily of the purchase of three office
buildings for $24.7 million (net of $3.6 million of contributed value in
exchange for which the Company issued common units of the Operating
Partnership and the repayment of an existing $2.3 million note receivable from
related parties), the purchase of the minority interest in one office complex
for $1.2 million, the purchase of 31 acres of undeveloped land for $16.3
million (net of $2.5 million of contributed value in exchange for which the
Company issued common units of the Operating Partnership), the acquisition of
a 50% interest in 55 acres of undeveloped land for $16.1 million (net of $3.8
million of contributed value in exchange for which the Company issued common
limited partnership units of the Operating Partnership), the sale of five
office and five industrial properties for $22.6 million, the sale of 13 acres
of undeveloped land for $5.1 million, expenditures for construction in
progress of $144 million, and $17.0 million in additional tenant improvements
and capital expenditures. Cash used in investing activities for year ended
December 31, 1998 consisted primarily of the purchase of 25 Office and 16
Industrial Properties during 1998 for $236 million (net of $18.1 million of
contributed value in exchange for which the Company issued common units of the
Operating Partnership), the purchase of 56 acres of undeveloped land for $25.4
million (net of $2.5 million of contributed value in exchange for which the
Company issued common units of the Operating Partnership), expenditures for
construction in progress of $65.5 million, and $13.5 million in additional
tenant improvements and capital expenditures.
Cash provided by financing activities decreased $140 million, or 52.3% to
$128 million for the year ended December 31, 1999 compared to $268 million for
the year ended December 31, 1998. Cash provided by financing activities for
the year ended December 31, 1999 consisted primarily of $192 million in net
proceeds from the issuance of mortgage debt and the issuance of $45.0 million
of 9.250% Series D Preferred units (net of $1.2 million aggregate transaction
costs), partially offset by $44.0 million in repayments to the Credit
Facility, $53.6 million in distributions paid to common stockholders and
common unitholders and $5.4 million for the Company's stock repurchase
program. Cash provided by financing activities for the year ended December 31,
1998 consisted primarily of $81.8 million in net proceeds from the issuance of
3,012,326 shares of common stock through four underwritten public offerings
and the issuance of 161,884 shares of common stock through two public direct
placements, the issuance of $75.0 million of 8.075% Series A Preferred units
and $35.0 million of 9.375% Series C Preferred units (net of $3.0 million
aggregate transaction costs), and net proceeds of $132 million from the
issuance of mortgage debt and net borrowings on the Credit Facility, partially
offset by $48.8 million in distributions paid to common stockholders and
common unitholders.
Funds from Operations
Industry analysts generally consider Funds From Operations, as defined by
NAREIT, an alternative measure of performance for an equity REIT. Funds From
Operations is defined by NAREIT to mean net income (loss) before minority
interests of common unitholders (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 depreciation of non-real estate assets), and
after adjustment for unconsolidated partnerships and joint ventures. The
Company considers Funds From Operations an appropriate measure of performance
of an equity REIT because it is predicated on cash flow analyses. The Company
believes that in order to facilitate a clear understanding of the historical
operating results of the Company, Funds From Operations should be examined in
conjunction with net income as presented in the financial statements included
elsewhere in this report. The Company computes Funds From Operations in
accordance with standards established by the Board of Governors of NAREIT in
its March 1995 White Paper, which may differ from the methodologies used by
other equity REITs and, accordingly, may not be comparable to Funds From
Operations published by such other REITs. Funds From Operations should not be
considered as an alternative to net income (loss) (computed in accordance with
GAAP) as an indicator of the properties' financial performance or to cash flow
from operating activities (computed in accordance with GAAP) as an indicator
of the properties' liquidity, nor is it indicative of funds available to fund
the properties' cash needs, including the Company's ability to pay dividends
or make distributions.
44
<PAGE>
The following table presents the Company's Funds from Operations, by
quarter, for the years ended December 31, 1999 and 1998 and the period
February 1, 1997 to December 31, 1997:
<TABLE>
<CAPTION>
1999 Quarter Ended
-----------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- -----------
(in thousands)
<S> <C> <C> <C> <C>
Net income..................... $ 8,278 $10,911 $10,796 $ 9,910
Add:
Minority interest in earnings
of Operating Partnership.... 1,294 1,830 1,820 1,536
Depreciation and
amortization................ 11,217 7,900 7,460 7,217
(Gains) losses on
dispositions of operating
properties.................. 29 (75)
Other........................ 127 127 127 127
------- ------- ------- -------
Funds From Operations.......... $20,945 $20,693 $20,203 $18,790
======= ======= ======= =======
<CAPTION>
1998 Quarter Ended
-----------------------------------------------
December 31, September 30, June 30, March 31,
------------ ------------- -------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Net income..................... $10,173 $ 9,985 $ 9,785 $ 8,879
Add:
Minority interest in earnings
of Operating Partnership.... 1,528 1,451 1,432 1,210
Depreciation and
amortization................ 7,041 6,740 6,565 5,854
Other........................ 126 175 112 118
------- ------- ------- -------
Funds From Operations.......... $18,868 $18,351 $17,894 $16,061
======= ======= ======= =======
<CAPTION>
1997 Quarter Ended
---------------------------------- February 1,
to March 31,
December 31, September 30, June 30, 1997
------------ ------------- -------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Net income..................... $ 8,820 $ 6,480 $ 4,108 $ 2,652
Add:
Minority interest in
earnings.................... 1,182 977 768 486
Depreciation and
amortization................ 4,832 3,660 3,000 1,744
Other........................ 118 118 120 77
------- ------- ------- -------
Funds From Operations.......... $14,952 $11,235 $ 7,996 $ 4,959
======= ======= ======= =======
</TABLE>
Inflation
The majority of the Company's leases require tenants to pay most operating
expenses, including real estate taxes and insurance, and increases in common
area maintenance expenses. The effect of such provisions is to reduce the
Company's exposure to increases in costs and operating expenses resulting from
inflation.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for fiscal years
beginning after June 15, 2000 and requires all derivatives to be recorded on
the balance sheet at fair value as either assets or liabilities depending on
the rights or obligations under the contract. SFAS 133 also establishes new
accounting methodologies for the following three classifications of hedges:
fair value, cash flow and net investment in foreign operations. Depending on
the nature of the hedge, changes in fair value of derivatives will either be
offset against the change in fair value of the hedged assets, liabilities, or
firm commitments or recognized in earnings. The ineffective portion of a
derivative's change in fair value will be immediately recognized in earnings.
Management believes the adoption of SFAS 133 will not have a material impact
on the Company's financial position or results of operations.
45
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Since the Company's IPO in January 1997, management has executed a
financial strategy which has positioned the Company to be flexible and
responsive to the variations in the public and private financial markets. The
principal objectives of the Company's current debt and capital management
strategies are to maintain prudent amounts of leverage and to minimize capital
costs and interest expense while carefully and continuously evaluating
available debt and equity resources.
The primary market risk faced by the Company is the risk of interest rate
fluctuations. More specifically, the primary market risk faced by the Company
is market risk resulting from increasing LIBOR based interest rates since at
December 31, 1999, interest expense on $318 million, or 57.5%, of the
Company's total $554 million of debt, including borrowings under the Credit
Facility, are tied to a LIBOR based interest rate. As a result, the Company
pays lower rates of interest in periods of decreasing interest rates and
higher rates of interest in periods of increasing interest rates. To mitigate
the effect of changes in interest rates on Credit Facility borrowings and in
compliance with Credit Facility debt covenants, in July 1999, the Company
entered into two interest rate cap agreements with a total notional amount of
$150 million to effectively limit interest expense for borrowings under the
Credit Facility during periods of increasing interest rates. The agreements
have LIBOR based cap rates of 6.50% and expire in July 2000. The Company's
exposure is limited to the unamortized cost of the caps. The cost of the cap
agreements were fully amortized at December 31, 1999.
The Company is also subject to risk resulting from fluctuations in the
general level of U.S. interest rates since at December 31, 1999, $236 million,
or 42.5%, of the Company's total $554 million of debt arrangements are
established at a fixed weighted average interest rate of 7.75%, and since
quarterly distributions of $1.5 million, $0.8 million, and $1.0 million paid
to Series A, Series C and Series D Preferred unitholders, respectively, are
calculated based upon a fixed rate of 8.075%, 9.375%, and 9.250% respectively.
As a result, the Company will pay contractually agreed upon fixed rates of
interest regardless of fluctuations in the general interest rate environment.
The tabular presentation below provides information about the Company's
interest rate sensitive financial and derivative instruments at December 31,
1999. All of the Company's interest rate sensitive financial and derivative
instruments are designated as held for purposes other than trading. Following
the tabular presentation is additional information summarizing changes in the
Company's market risk profile from 1998 to 1999 as well as changes in the
Company's market risk profile subsequent to December 31, 1999.
For the Credit Facility, the table presents the assumption that the
outstanding principal balance at December 31, 1999 will be paid upon the
Credit Facility's maturity in November 2002. The table also presents the
related expected maximum interest rate index for outstanding Credit Facility
borrowings from 2000 through 2002.
For variable rate mortgage debt, the table presents the assumption that the
outstanding principal balance at December 31, 1999 will be paid upon maturity
in October 2003. The table also presents the related interest rate index for
outstanding variable rate mortgage debt borrowings from 2000 through 2003.
For fixed rate mortgage debt, the table presents the assumption that the
outstanding principal balance at December 31, 1999 will be paid according to
scheduled principal payments and that the Company will not prepay any of the
outstanding principal balance. The table also presents the related weighted-
average interest rate for outstanding fixed rate mortgage debt borrowings from
2000 through 2004 and thereafter.
For the Series A and Series C Cumulative Redeemable Preferred units (the
"Preferred units"), the table reflects the assumption that the Company is not
contractually obligated to repay the outstanding balance of the Preferred
units since the Preferred units will either remain outstanding or be converted
into shares of the Company's 8.075% Series A and 9.375% Series C Cumulative
Redeemable Preferred stock, respectively, in 2008 when the Preferred units
become exchangeable at the option of the majority of the holders. For the
Series D Cumulative Redeemable Preferred units (the "Preferred units"), the
table reflects the assumption that the
46
<PAGE>
Company is not contractually obligated to repay the outstanding balance of the
Preferred units since the Preferred units will either remain outstanding or be
converted into shares of the 9.250% Series D Cumulative Redeemable Preferred
stock, in 2009 when the Preferred units become exchangeable at the option of
the majority of the holders. The table also presents the related weighted-
average interest rate for outstanding Preferred units from 2000 through the
exchange date. The same interest rates will apply when the Preferred units are
exchanged into the Cumulative Redeemable Preferred stock.
For interest rate caps, the table presents notional amounts, average cap
rates and the related interest rate index upon which cap rates are based, by
contractual maturity date. Notional amounts are used solely to calculate the
contractual cash flow to be received under the contract and do not reflect
outstanding principal balances at December 31, 1999.
Interest Rate Risk Analysis--Tabular Presentation
Financial Assets and Liabilities
Outstanding Principal by Expected Maturity Date
(dollars in millions)
<TABLE>
<CAPTION>
Maturity Date Fair Value
----------------------------------------- at
There- December 31,
2000 2001 2002 2003 2004 after Total 1999
------ ------ ------ ------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Unsecured line of
credit:
Variable rate......... $228.0 $228.0 $228.0
Average interest rate
index................ LIBOR LIBOR LIBOR
+1.50% +1.50% +1.50%
Mortgage debt:
Variable rate......... $ 90.0 $ 90.0 $ 90.0
Average interest rate
index................ LIBOR LIBOR LIBOR LIBOR LIBOR
+1.75% +1.75% +1.75% +1.75% +1.75%
Fixed rate............ $ 4.8 $ 5.2 $ 5.6 $ 6.1 $ 6.6 $207.2 $235.5 $225.4
Average interest
rate................. 7.75% 7.75% 7.75% 7.75% 7.75% 7.75%
Series A, C and D
Preferred units:
Fixed rate............ $145.9
Average interest
rate................. 8.71% 8.71% 8.71% 8.71% 8.71% 8.71%
</TABLE>
Interest Rate Risk Analysis--Tabular Presentation
Financial Derivative Instruments
Notional Amounts by Contractual Maturity
(dollars in millions)
<TABLE>
<CAPTION>
Maturity Date Fair Value
--------------------------------- at
There- December 31,
2000 2001 2002 2003 2004 after Total 1999
------ ---- ---- ---- ---- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Rate
Derivatives Used to
Hedge the Line of
Credit:
Interest rate cap
agreements:
Notional amount....... $150.0 $150.0 $ --
Cap rate.............. 6.50%
Forward rate index.... LIBOR
</TABLE>
47
<PAGE>
Changes in Primary Risk Exposures
Changes from December 31, 1998 to December 31, 1999
The following table demonstrates the change in market risk profile of the
Company's outstanding debt from December 31, 1998 to December 31, 1999. The
change from year to year reflects a conscious strategy by management to fix a
larger proportion of the Company's outstanding debt balances during 1999.
<TABLE>
<CAPTION>
Weighted
% of Average
Total Interest
Debt Rate
---------- ----------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Variable rate vs. fixed rate debt:
Variable rate(1),(2),(3)........................... 57.5% 71.8% 7.7% 6.8%
Fixed rate......................................... 42.5% 28.2% 7.8% 8.4%
</TABLE>
- --------
(1) At December 31, 1999, the Company had an interest rate cap agreement to
cap LIBOR on $150 million of its floating rate debt at 6.5% which expires
in July 2000.
(2) Subsequent to December 31, 1999, the Company entered into an 18-month
interest rate cap agreement to cap LIBOR on $150 million of its floating
rate debt at 6.5% starting in July 2000.
(3) Subsequent to December 31, 1999, the Company entered into a two-year
interest rate swap agreement to fix $150 million of its floating rate
debt. Had this agreement been in place at December 31, 1999, the Company's
percentage of fixed rate debt to total debt would have increased to 69.7%
and the Company's weighted average interest rate for variable and fixed
rate debt would have been 8.0% and 7.8%, respectively.
During 1999, the Company issued 900,000 Series D Preferred units in
addition to the 1,200,000 Series A and 700,000 Series C Preferred units issued
during the year ended December 31, 1998. Beginning in the first quarter of
2000, quarterly distributions of $1.0 million, calculated using a fixed rate
of 9.25%, will be payable to the Series D Preferred unitholders in addition to
the $1.5 million and $0.8 million currently paid to the Series A and Series C
unitholders, respectively. For the year ended December 31, 1999, distributions
accrued for the Series D Preferred unitholders totaled approximately $0.2
million.
Changes Subsequent to December 31, 1999
In February 2000, the Company entered into an interest rate swap agreement
with a total notional amount of $150 million and an interest rate cap
agreement with a total notional amount of $150 million to effectively limit
interest expense on the Company's floating rate debt instruments during
periods of increasing interest rates. The swap agreement, which begins in
February 2000 and expires in February 2002, requires the Company to pay a
fixed rate interest payment based on an interest rate of 6.95% and receive a
floating rate interest payment based on one-month LIBOR. The cap agreement,
which begins in July 2000 when the Company's existing $150 million cap
agreements expire, has a LIBOR based cap rate of 6.50% and expires in January
2002. The Company's exposure on the cap agreement is limited to the $1.9
million cost of the cap agreement which the Company will amortize over the
life of the agreement. Had these two agreements been in place as of December
31, 1999, the Company's ratio of fixed rate debt to total debt would have
increased from 42.5% to 69.7% and the Company's weighted average interest rate
for fixed and variable rate debt would have increased from 7.75% and 7.67%,
respectively, to 7.97% and 7.76%, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See the index included at "Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
48
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by Item 10 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting
presently scheduled to be held on May 23, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting
presently scheduled to be held on May 23, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting
presently scheduled to be held on May 23, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference from the
Company's definitive proxy statement for its annual stockholders' meeting
presently scheduled to be held on May 23, 2000.
49
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) and (2) Financial Statements and Schedules
The following consolidated financial information is included as a separate
section of this annual report on Form 10-K:
<TABLE>
<S> <C>
Independent Auditors' Report........................................... F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998........... F-3
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998 and the period February 1, 1997 to December 31, 1997 and
Combined Statement of Operations for the period January 1, 1997 to
January 31, 1997...................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999 and 1998 and the period from February 1, 1997 to
December 31, 1997..................................................... F-5
Combined Statement of Accumulated Deficit for the period January 1,
1997 to January 31, 1997.............................................. F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998 and Combined Statement of Cash Flows for the year ended
December 31, 1997..................................................... F-7
Notes to Consolidated and Combined Financial Statements................ F-8
Schedule of Valuation and Qualifying Accounts.......................... F-38
</TABLE>
All other schedules are omitted since the required information is not
present in amounts sufficient to require submission of the schedule or because
the information required is included in the financial statements and notes
thereto.
(3) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Articles of Amendment and Restatement of the Registrant(1)
3.2 Amended and Restated Bylaws of the Registrant(1)
3.3 Form of Certificate for Common Stock of the Registrant(1)
3.4 Articles Supplementary of the Registrant designating 8.075% Series A
Cumulative Redeemable Preferred Stock(10)
3.5 Articles Supplementary of the Registrant, designating 8.075% Series A
Cumulative Redeemable Preferred Stock(13)
3.6 Articles Supplementary of the Registrant designating its Series B
Junior Participating Preferred Stock (to be filed by amendment)
3.7 Articles Supplementary of the Registrant designating its 9.375% Series
C Cumulative Redeemable Preferred Stock(15)
*3.8 Articles Supplementary of the Registrant designating its 9.250% Series
D Cumulative Redeemable Preferred Stock
4.1 Registration Rights Agreement, dated January 31, 1998(1)
4.2 Registration Rights Agreement, dated February 6, 1999(10)
4.3 Registration Rights Agreement, dated April 20, 1999(13)
4.4 Registration Rights Agreement, dated November 24, 1999(15)
4.5 Registration Rights Agreement, dated as of October 31, 1998(7)
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
4.6 Rights Agreement, dated as of October 2, 1999 between Kilroy Realty
Corporation and ChaseMellon Shareholder Services, L.L.C., as Rights
Agent, which includes the form of Articles Supplementary of the
Series B Junior Participating Preferred Stock of Kilroy Realty
Corporation as Exhibit A, the form of Right Certificate as Exhibit B
and the Summary of Rights to Purchase Preferred Shares as Exhibit
C(16)
*4.7 Registration Rights Agreement, dated as of December 9, 1999
10.1 Fourth Amended and Restated Agreement of Limited Partnership of Kilroy
Realty, L.P., dated November 24, 1999(15)
10.2 Omnibus Agreement, dated as of October 30, 1996, by and among Kilroy
Realty, L.P. and the parties named therein(1)
10.3 Supplemental Representations, Warranties and Indemnity Agreement by
and among Kilroy Realty, L.P. and the parties named therein(1)
10.4 Pledge Agreement by and among Kilroy Realty, L.P., John B. Kilroy,
Sr., John B. Kilroy, Jr. and Kilroy Industries(1)
10.5 1998 Stock Option and Incentive Plan of the Registrant and Kilroy
Realty, L.P(1)
10.6 Form of Indemnity Agreement of the Registrant and Kilroy Realty, L.P.
with certain officers and directors(1)
10.7 Lease Agreement, dated January 24, 1989, by and between Kilroy Long
Beach Associates and the City of Long Beach for Kilroy Long Beach
Phase I(1)
10.8 First Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase I(1)
10.9 Lease Agreement, dated July 17, 1985, by and between Kilroy Long Beach
Associates and the City of Long Beach for Kilroy Long Beach Phase
III(1)
10.10 Lease Agreement, dated April 21, 1988, by and between Kilroy Long
Beach Associates and the Board of Water Commissioners of the City of
Long Beach, acting for and on behalf of the City of Long Beach, for
Long Beach Phase IV(1)
10.11 Lease Agreement, dated December 30, 1988, by and between Kilroy Long
Beach Associates and City of Long Beach for Kilroy Long Beach Phase
II(1)
10.12 First Amendment to Lease, dated January 24, 1989, by and between
Kilroy Long Beach Associates and the City of Long Beach for Kilroy
Long Beach Phase III(1)
10.13 Second Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III(1)
10.14 First Amendment to Lease Agreement, dated December 28, 1990, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase II(1)
10.15 Third Amendment to Lease Agreement, dated October 10, 1994, by and
between Kilroy Long Beach Associates and the City of Long Beach for
Kilroy Long Beach Phase III(1)
10.16 Development Agreement by and between Kilroy Long Beach Associates and
the City of Long Beach(1)
10.17 Amendment No. 1 to Development Agreement by and between Kilroy Long
Beach Associates and the City of Long Beach(1)
10.18 Ground Lease by and between Frederick Boysen and Ted Boysen and Kilroy
Industries, dated May 15, 1969, for SeaTac Office Center(1)
10.19 Amendment No. 1 to Ground Lease and Grant of Easement, dated April 27,
1973, among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties(1)
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.20 Amendment No. 2 to Ground Lease and Grant of Easement, dated May 17,
1977, among Frederick Boysen and Dorothy Boysen, Ted Boysen and Rose
Boysen and Sea/Tac Properties(1)
10.21 Airspace Lease, dated July 10, 1980, by and among the Washington State
Department of Transportation, as lessor, and Sea Tac Properties, Ltd.
and Kilroy Industries, as lessee(1)
10.22 Lease, dated April 1, 1980, by and among Bow Lake, Inc., as lessor,
and Kilroy Industries and SeaTac Properties, Ltd., as lessees for
Sea/Tac Office Center(1)
10.23 Amendment No. 1 to Ground Lease, dated September 17, 1990, between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee(1)
10.24 Amendment No. 2 to Ground Lease, dated March 21, 1991, between Bow
Lake, Inc., as lessor, and Kilroy Industries and Sea/Tac Properties,
Ltd., as lessee(1)
10.25 Property Management Agreement between Kilroy Realty Finance
Partnership, L.P. and Kilroy Realty, L.P.(1)
10.26 Environmental Indemnity Agreement(1)
10.27 Option Agreement by and between Kilroy Realty, L.P. and Kilroy Airport
Imperial Co.(1)
10.28 Option Agreement by and between Kilroy Realty, L.P. and Kilroy
Calabasas Associates(1)
10.29 Employment Agreement between the Registrant and John B. Kilroy, Jr.(1)
10.30 Employment Agreement between the Registrant and Richard E. Moran Jr.(1)
10.31 Employment Agreement between the Registrant and Jeffrey C. Hawken(1)
10.32 Employment Agreement between the Registrant and C. Hugh Greenup(1)
10.33 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Sr.(1)
10.34 Noncompetition Agreement by and between the Registrant and John B.
Kilroy, Jr.(1)
10.35 License Agreement by and among the Registrant and the other persons
named therein(1)
10.36 Form of Indenture of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of Leases, Rents
and Security Deposits(1)
10.37 Mortgage Note(1)
10.38 Indemnity Agreement(1)
10.39 Assignment of Leases, Rents and Security Deposits(1)
10.40 Variable Interest Rate Indenture of Mortgage, Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and Assignment of
Leases and Rents(1)
10.41 Environmental Indemnity Agreement(1)
10.42 Assignment, Rents and Security Deposits(1)
10.43 Form of Mortgage, Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Leases and Rents(1)
10.44 Assignment of Leases, Rents and Security Deposits(1)
10.45 Purchase and Sale Agreement and Joint Escrow Instructions, dated April
30, 1998, by and between Mission Land Company, Mission-Vacaville,
L.P. and Kilroy Realty, L.P.(2)
10.46 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
April 30, 1998, by and between Camarillo Partners and Kilroy Realty,
L.P.(2)
10.47 Purchase and Sale Agreement and Escrow Instructions, dated May 5,
1998, by and between Kilroy Realty, L.P. and Pullman Carnegie
Associates(4)
10.48 Amendment to Purchase and Sale Agreement and Escrow Instructions,
dated June 27, 1998, by and between Pullman Carnegie Associates and
Kilroy Realty, L.P.(4)
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.49 Purchase and Sale Agreement, Contribution Agreement and Joint Escrow
Instructions, dated May 12, 1998, by and between Shidler West
Acquisition Company, LLC and Kilroy Realty, L.P.(3)
10.50 First Amendment to Purchase and Sale Agreement, Contribution Agreement
and Joint Escrow Instructions, dated June 6, 1998, between Kilroy
Realty, L.P. and Shidler West Acquisition Company, L.L.C. and Kilroy
Realty, L.P.(3)
10.51 Second Amendment to Purchase and Sale Agreement, Contribution
Agreement and Joint Escrow Instructions, dated June 12, 1998, by and
between Shidler West Acquisition Company, LLC and Kilroy Realty,
L.P.(3)
10.52 Agreement of Purchase and Sale and Joint Escrow Instructions, dated
June 12, 1998, by and between Mazda Motor of America, Inc. and Kilroy
Realty, L.P.(4)
10.53 Amendment to Agreement of Purchase and Sale and Joint Escrow
Instructions, dated June 30, 1998, by and between Mazda Motor of
America, Inc. and Kilroy Realty, L.P.(4)
10.54 Agreement for Purchase and Sale of 2100 Colorado Avenue, Santa Monica,
California, dated June 16, 1998, by and between Santa Monica Number
Seven Associates L.P. and Kilroy Realty L.P.(4)
10.55 Second Amendment to Credit Agreement and First Amendment to Variable
Interest Rate Indenture of Mortgage, Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and Assignment of
Leases and Rent dated August 13, 1998(5)
10.56 Purchase and Sale Agreement and Joint Escrow Instructions, dated July
10, 1998, by and between Kilroy Realty, L.P. and Mission Square
Partners(6)
10.57 First Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated August 22, 1998(6)
10.58 Second Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 5, 1998(6)
10.59 Third Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 19, 1998(6)
10.60 Fourth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 22, 1998(6)
10.61 Fifth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 23, 1998(6)
10.62 Sixth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 25, 1998(6)
10.63 Seventh Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated September 29, 1998(6)
10.64 Eighth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated October 2, 1998(6)
10.65 Ninth Amendment to the Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between Kilroy Realty, L.P.
and Mission Square Partners, dated October 24, 1998(6)
10.66 Contribution Agreement, dated October 21, 1998, by and between Kilroy
Realty, L.P. and Kilroy Realty Corporation and The Allen Group and
the Allens(8)
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.67 Purchase and Sale Agreement and Escrow Instructions, dated December
11, 1998, by and between Kilroy Realty, L.P. and Swede-Cal
Properties, Inc., Viking Investors of Southern California, L.P. and
Viking Investors of Southern California II, L.P.(9)
10.68 Amendment to the Contribution Agreement, dated October 14, 1999, by
and between Kilroy Realty, L.P. and Kilroy Realty Corporation and The
Allen Group and the Allens, dated October 21, 1998(15)
10.69 Amended and Restated Revolving Credit Agreement, dated as of October
8, 1999 among Kilroy Realty, L.P., Morgan Guaranty Trust Company of
New York, as Bank and as Lead Agent for the Banks, and the Banks
listed therein.(14)
10.70 Amended and Restated Guaranty of Payment, dated as of October 8, 1999,
between Kilroy Realty Corporation and Morgan Guaranty Trust Company
of New York.(14)
10.71 Promissory Notes Aggregating $95.0 Million Payable to Teachers
Insurance and Annuity Association of America(18)
10.72 Form of Deed of Trust, Assignment of Leases and Rents, Security
Agreement and Fixture Filing Statement Securing Promissory Notes
Payable to Teachers Insurance and Annuity Association of America(18)
10.73 Second Amended and Restated Revolving Credit Agreement and Form of
Notes Aggregating $400 million(19)
10.74 Second Amended and Restated Guaranty of Payment(19)
10.75 Credit Agreement and Form of Promissory Notes Aggregating $90.0
million(19)
10.76 Variable Interest Rate Deed of Trust, Leasehold Deed of Trust,
Assignment of Rents, Security Agreement and Fixture Filing(19)
10.77 Guaranty of Recourse Obligations of Borrowing(19)
*10.78 First Amendment to Fourth Amended and Restated Agreement of Limited
Partnership of Kilroy Realty, L.P., dated December 9, 1999
21.1 List of Subsidiaries of the Registrant(17)
*23.1 Consent of Deloitte & Touche LLP
*24.1 Power of Attorney (included in the signature page of this Form 10-K)
*27.1 Financial Data Schedule
</TABLE>
- --------
* Filed herewith
** Previously filed
(1) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) as declared effective in January 28, 1998 and
incorporated herein by reference.
(2) Previously filed as exhibit 10.11 and 10.12, respectively, to the Current
Report on Form 8-K, dated May 22, 1998, and incorporated herein by
reference.
(3) Previously filed as exhibit 10.57, 10.58 and 10.59, respectively, to the
Current Report on Form 8-K, dated June 30, 1998, and incorporated herein
by reference.
(4) Previously filed as exhibit 10.54, 10.59, 10.60, 10.61 and 10.62,
respectively, to the Current Report on Form 8-K, dated June 30, 1998, and
incorporated herein by reference.
(5) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-32261), and incorporated herein by reference.
54
<PAGE>
(6) Previously filed as an exhibit on Form 10-Q, for the quarterly period
ended September 30, 1998, and incorporated herein by reference.
(7) Previously filed as an exhibit to the Current Report on Form 8-K/A, dated
October 29, 1998, and incorporated herein by reference.
(8) Previously filed as exhibit 10.70 and 10.71, respectively, to the Current
Report on Form 8-K, dated November 7, 1998, and incorporated herein by
reference.
(9) Previously filed as exhibit 10.70 to the Current Report on Form 8-K,
dated December 17, 1998, and incorporated herein by reference.
(10) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K dated February 6, 1999 and incorporated herein by reference.
(11) Previously filed as an exhibits to the Current Report on Form 8-K (No. 1-
12675) dated October 2, 1999 and incorporated herein by reference.
(12) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated October 29, 1998 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated April 20, 1999 and incorporated herein by reference.
(14) Previously filed as an exhibit on Form 10-Q (No. 1-12675) for the
quarterly period ended September 30, 1999 and incorporated herein by
reference.
(15) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated November 24, 1999 and incorporated herein by reference.
(16) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated October 2, 1999 and incorporated herein by reference.
(17) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) and incorporated herein by reference.
(18) Previously filed as an exhibit on Form 10-Q, for the quarterly period
ended March 31, 1999, and incorporated herein by reference.
(19) Previously filed as an exhibit on Form 10-Q, for the quarterly period
ended September 30, 1999, and incorporated herein by reference.
(b) Reports on Form 8K
The Company filed the Current Report on Form 8-K (No. 1-12675) dated
December 9, 1999 in connection with the announcement of the Company's up to
3.0 million share repurchase program.
55
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on March 16, 2000.
Kilroy Realty Corporation
/s/ John B. Kilroy, Jr.
By: _________________________________
John B. Kilroy, Jr.
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned officers and
directors of Kilroy Realty Corporation, hereby severally constitute John B.
Kilroy, Sr., John B. Kilroy, Jr., Jeffrey C. Hawken, Richard E. Moran Jr. and
Ann Marie Whitney, and each of them singly, our true and lawful attorneys with
full power to them, and each of them singly, to sign for us and in our names
in the capacities indicated below, the Form 10-K filed herewith and any and
all amendments to said Form 10-K, and generally to do all such things in our
names and in our capacities as officers and directors to enable Kilroy Realty
Corporation to comply with the provisions of the Securities Exchange Act of
1934, and all requirements of the Securities and Exchange Commission, hereby
ratifying and confirming our signatures as they may be signed by our said
attorneys, or any of them, to said Form 10-K and any and all amendments
thereto.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<C> <S> <C>
/s/ John B. Kilroy, Sr. Chairman of the Board March 16, 2000
____________________________________
John B. Kilroy, Sr.
/s/ John B. Kilroy, Jr. President, Chief March 16, 2000
____________________________________ Executive Officer and
John B. Kilroy, Jr. Director (Principal
Executive Officer)
/s/ Richard E. Moran Jr. Executive Vice President March 16, 2000
____________________________________ and Chief Financial
Richard E. Moran Jr. Officer (Principal
Financial Officer)
/s/ Ann Marie Whitney Vice President and March 16, 2000
____________________________________ Controller (Principal
Ann Marie Whitney Accounting Officer)
/s/ John R. D'Eathe Director March 16, 2000
____________________________________
John R. D'Eathe
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<C> <S> <C>
/s/ William P. Dickey Director March 16, 2000
____________________________________
William P. Dickey
/s/ Matthew J. Hart Director March 16, 2000
____________________________________
Matthew J. Hart
/s/ Dale F. Kinsella Director March 16, 2000
____________________________________
Dale F. Kinsella
</TABLE>
57
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
FINANCIAL STATEMENTS AS OF DECEMBER 31, 1999 AND 1998
AND FOR THE THREE YEARS THEN ENDED
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998............ F-3
Consolidated Statements of Operations for the years ended December 31,
1999 and 1998 and the period February 1, 1997 to December 31, 1997 and
Combined Statement of Operations for the period January 1, 1997 to
January 31, 1997....................................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1999 and 1998 and the period February 1, 1997 to December
31, 1997............................................................... F-5
Combined Statement of Accumulated Deficit for the period January 1, 1997
to January 31, 1997.................................................... F-6
Consolidated Statements of Cash Flows for the years ended December 31,
1999 and 1998 and Combined Statement of Cash Flows for the year ended
December 31, 1997...................................................... F-7
Notes to Consolidated and Combined Financial Statements................. F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Kilroy Realty Corporation:
We have audited the accompanying consolidated balance sheets of Kilroy
Realty Corporation (the "Company") as of December 31, 1999 and 1998, the
related consolidated statements of operations and shareholders' equity for the
years ended December 31, 1999 and 1998 and the period February 1, 1997 to
December 31, 1997, and the combined statements of operations and accumulated
deficit of the Kilroy Group (described in Note 1) for the period January 1,
1997 to January 31, 1997; and the consolidated statements of cash flows for
the years ended December 31, 1999 and 1998 and the combined statement of cash
flows for the year ended December 31, 1997. Our audits also included the
financial statement schedule listed in the index at Item 8. These financial
statements and the financial statement schedule are the responsibility of the
management of the Company. Our responsibility is to express an opinion on
these financial statements and the financial statement schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the 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 the Company as of December 31, 1999 and
1998, and the results of operations and cash flows of the Company and the
Kilroy Group for the respective stated periods in conformity with accounting
principles generally accepted in the United States of America. Also in our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated and combined financial statements taken as a whole,
presents fairly in all material respects, the information set forth therein.
/s/ Deloitte & Touche LLP
Los Angeles, California
March 10, 2000
F-2
<PAGE>
KILROY REALTY CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
------
INVESTMENT IN REAL ESTATE (Notes 2, 3, 6, 13, 15, 19,
and 20):
Land and improvements................................ $ 274,463 $ 253,500
Buildings and improvements........................... 946,130 828,425
Undeveloped land and construction in progress, net... 189,645 112,359
---------- ----------
Total investment in real estate.................... 1,410,238 1,194,284
Accumulated depreciation and amortization............ (174,427) (145,437)
---------- ----------
Investment in real estate, net..................... 1,235,811 1,048,847
CASH AND CASH EQUIVALENTS.............................. 26,116 6,443
RESTRICTED CASH........................................ 6,636 6,896
TENANT RECEIVABLES, NET (Note 4)....................... 22,078 18,919
NOTES RECEIVABLE FROM RELATED PARTIES (Note 13)........ 8,798
DEFERRED FINANCING AND LEASING COSTS, NET (Note 5)..... 27,840 16,168
PREPAID EXPENSES AND OTHER ASSETS...................... 2,020 3,146
---------- ----------
TOTAL ASSETS....................................... $1,320,501 $1,109,217
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
LIABILITIES:
Mortgage debt (Note 6)............................... $ 325,516 $ 133,383
Unsecured line of credit (Note 7).................... 228,000 272,000
Accounts payable and accrued expenses................ 26,260 16,791
Accrued distributions (Note 9)....................... 13,456 12,895
Rents received in advance and tenant security
deposits............................................ 20,287 17,749
---------- ----------
Total liabilities.................................. 613,519 452,818
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 12 and 13)
MINORITY INTERESTS (Note 8):
8.075% Series A Cumulative Redeemable Preferred
unitholders......................................... 73,716 73,718
9.375% Series C Cumulative Redeemable Preferred
unitholders......................................... 34,464 34,410
9.250% Series D Cumulative Redeemable Preferred
unitholders......................................... 44,022
Common unitholders of the Operating Partnership...... 71,920 72,372
Minority interest in Development LLCs................ 9,931
---------- ----------
Total minority interests........................... 234,053 180,500
---------- ----------
STOCKHOLDERS' EQUITY (Note 9):
Preferred stock, $.01 par value, 28,300,000 shares
authorized,
none issued and outstanding.........................
8.075% Series A Cumulative Redeemable Preferred
stock, $.01 par value, 1,700,000 shares authorized,
none issued and outstanding.........................
Series B Junior Participating Preferred stock, $.01
par value,
400,000 shares authorized, none issued and
outstanding.........................................
9.375% Series C Cumulative Redeemable Preferred
stock, $.01 par value, 700,000 shares authorized,
none issued and outstanding.........................
9.250% Series D Cumulative Redeemable Preferred
stock, $.01 par value, 1,000,000 shares authorized,
none issued and outstanding.........................
Common stock, $.01 par value, 150,000,000 shares
authorized,
27,808,410, and 27,639,210 shares issued and
outstanding, respectively........................... 278 276
Additional paid-in capital........................... 491,204 487,467
Distributions in excess of earnings.................. (18,553) (11,844)
---------- ----------
Total stockholders' equity......................... 472,929 475,899
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY......... $1,320,501 $1,109,217
========== ==========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-3
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED AND
KILROY GROUP COMBINED
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Kilroy Realty Corporation Kilroy Group
-------------------------------------- ------------
February 1, January 1,
Year Ended Year Ended 1997 to 1997 to
December 31, December 31, December 31, January 31,
1999 1998 1997 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES (Note 15):
Rental income............... $ 140,182 $ 117,338 $ 56,069 $2,760
Tenant reimbursements....... 16,316 14,956 6,751 306
Interest income............. 1,175 1,698 3,571
Other income (Note 2)....... 2,027 3,096 889 18
---------- ---------- ---------- ------
Total revenues............ 159,700 137,088 67,280 3,084
---------- ---------- ---------- ------
EXPENSES:
Property expenses (Note
15)........................ 20,669 19,281 8,770 579
Real estate taxes (Note
15)........................ 12,369 10,383 4,199 137
General and administrative
expenses................... 9,091 7,739 4,949 78
Ground leases (Note 15)..... 1,397 1,223 938 64
Provision for potentially
unrecoverable pre-
development costs (Note 2).. 1,700
Development expense......... 46
Interest expense............ 26,309 20,568 9,738 1,895
Depreciation and
amortization............... 33,794 26,200 13,236 787
---------- ---------- ---------- ------
Total expenses............ 103,629 87,094 41,830 3,586
---------- ---------- ---------- ------
INCOME (LOSS) BEFORE GAINS ON
DISPOSITIONS OF OPERATING
PROPERTIES, EQUITY IN INCOME
OF UNCONSOLIDATED SUBSIDIARY,
MINORITY INTERESTS AND
EXTRAORDINARY GAINS.......... 56,071 49,994 25,450 (502)
GAINS ON DISPOSITIONS OF
OPERATING PROPERTIES......... 46
EQUITY IN INCOME OF
UNCONSOLIDATED SUBSIDIARY.... 17 5 23
---------- ---------- ---------- ------
INCOME (LOSS) BEFORE MINORITY
INTERESTS AND EXTRAORDINARY
GAINS........................ 56,134 49,999 25,473 (502)
MINORITY INTERESTS:
Distributions on Cumulative
Redeemable Preferred
units...................... (9,560) (5,556)
Minority interest in
earnings of Operating
Partnership................ (6,480) (5,621) (3,413)
Minority interest in
earnings of Development
LLCs....................... (199)
---------- ---------- ---------- ------
Total minority interests.. (16,239) (11,177) (3,413)
---------- ---------- ---------- ------
INCOME (LOSS) BEFORE
EXTRAORDINARY GAINS.......... 39,895 38,822 22,060 (502)
EXTRAORDINARY GAINS (Note 2).. 3,204
---------- ---------- ---------- ------
NET INCOME.................... $ 39,895 $ 38,822 $ 22,060 $2,702
========== ========== ========== ======
Net income per common share--
basic (Note 16).............. $ 1.44 $ 1.44 $ 1.20
========== ========== ==========
Net income per common share--
diluted (Note 16)............ $ 1.44 $ 1.43 $ 1.19
========== ========== ==========
Weighted average shares
outstanding--basic (Note
16).......................... 27,701,495 26,989,422 18,445,149
========== ========== ==========
Weighted average shares
outstanding--diluted
(Note 16) ................... 27,727,303 27,059,988 18,539,299
========== ========== ==========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-4
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Two Years Ended December 31, 1999 and 1998 and the
Period February 1, 1997 to December 31, 1997
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Additional Distributions
Number of Common Paid-in in Excess of
Shares Stock Capital Earnings Total
---------- ------ ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 1,
1997................... 50 $ 1 $(104,540) $(104,539)
Issuance of common
stock................ 24,375,000 $244 438,894 104,540 543,678
Issuance of restricted
stock (Note 11)...... 100,000 1 1
Restricted stock
compensation (Note
11).................. 422 422
Repurchase of common
stock................ (50) (1) (1)
Adjustment for
minority interest.... (36,153) (36,153)
Dividends declared
($1.42 per share).... (28,318) (28,318)
Net income............ 22,060 22,060
---------- ---- -------- --------- ---------
BALANCE AT DECEMBER 31,
1997................... 24,475,000 245 403,163 (6,258) 397,150
Issuance of common
stock (Note 9)....... 3,174,210 31 81,782 81,813
Restricted stock
compensation (Note
11).................. 531 531
Repurchase of common
stock................ (10,000) (285) (285)
Adjustment for
minority interest.... 2,276 2,276
Dividends declared
($1.62 per share).... (44,408) (44,408)
Net income............ 38,822 38,822
---------- ---- -------- --------- ---------
BALANCE AT DECEMBER 31,
1998................... 27,639,210 276 487,467 (11,844) 475,899
Conversion of common
units of the
Operating Partnership
(Note 9)............. 444,200 4 (15,644) (15,640)
Restricted stock
compensation (Note
11).................. 508 508
Repurchase of common
stock (Note 9)....... (275,000) (2) (5,564) (5,566)
Adjustment for
minority interest.... 24,437 24,437
Dividends declared
($1.68 per share).... (46,604) (46,604)
Net income............ 39,895 39,895
---------- ---- -------- --------- ---------
BALANCE AT DECEMBER 31,
1999................... 27,808,410 $278 $491,204 $ (18,553) $ 472,929
========== ==== ======== ========= =========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-5
<PAGE>
KILROY GROUP
COMBINED STATEMENT OF ACCUMULATED DEFICIT
January 1, 1997 to January 31, 1997
(in thousands)
<TABLE>
<S> <C>
BALANCE AT DECEMBER 31, 1996........................................ $(113,777)
Deemed and actual contributions from partners, net of
distributions.................................................... 6,535
Net income........................................................ 2,702
---------
BALANCE AT JANUARY 31, 1997......................................... $(104,540)
=========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-6
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(in thousands)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 39,895 $ 38,822 $ 24,762
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization.............. 33,794 26,200 14,023
Provision for uncollectible tenant
receivables and unbilled deferred rent.... 2,158 1,107 1,078
Provision for potentially unrecoverable
pre-development costs..................... 1,700
Minority interests in earnings of
Operating Partnership and Development
LLCs ..................................... 6,679 5,621 3,413
Restricted stock compensation.............. 508 531 422
Gains on dispositions of operating
properties and undeveloped land........... (585)
Extraordinary gains........................ (3,204)
Other, net................................. (216) (281) (23)
Changes in assets and liabilities:
Tenant receivables....................... (5,317) (9,370) (5,403)
Deferred leasing costs................... (4,808) (2,652) (4,819)
Prepaid expenses and other assets........ (698) 1,483 (3,654)
Accounts payable and accrued expenses.... 10,392 7,455 2,097
Accrued cost of option buy-out and
tenant improvements..................... (1,390)
Rents received in advance and tenant
security deposits....................... 2,538 1,719 1,626
Accrued distributions on Cumulative
Redeemable Preferred units.............. 295 1,094
--------- --------- ---------
Net cash provided by operating
activities............................ 84,635 73,429 28,928
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for operating properties....... (43,159) (242,287) (512,071)
Expenditures for undeveloped land and
construction in progress................... (178,244) (98,438) (34,671)
Proceeds from dispositions of operating
properties................................. 22,612
Proceeds from dispositions of undeveloped
land....................................... 5,051
Notes receivable from related parties....... (8,798)
Decrease (increase) in escrow deposits...... 350 4,764 (5,114)
Net investment in and advances from (to)
unconsolidated subsidiary.................. 595 1,042 (100)
--------- --------- ---------
Net cash used in investing activities.. (192,795) (343,717) (551,956)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock.. 81,813 543,678
Repurchases of common stock................. (5,350)
Net proceeds from issuance of Cumulative
Redeemable Preferred units................. 43,779 107,034
Proceeds from issuance of mortgage debt..... 215,000 5,000 98,000
Net (repayments) borrowings on line of
credit..................................... (44,000) 130,000 142,000
Principal payments on mortgage debt......... (22,867) (2,979) (226,549)
Financing costs............................. (5,392) (3,007) (4,325)
Decrease (increase) in restricted cash...... 260 (1,216) (5,680)
Distributions paid.......................... (53,597) (48,843) (21,702)
Deemed and actual contributions from
partners, net.............................. 6,535
--------- --------- ---------
Net cash provided by financing
activities............................ 127,833 267,802 531,957
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents.................................. 19,673 (2,486) 8,929
Cash and cash equivalents, beginning of year.. 6,443 8,929
--------- --------- ---------
Cash and cash equivalents, end of year........ $ 26,116 $ 6,443 $ 8,929
========= ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest, net of capitalized
interest................................... $ 25,035 $ 18,442 $ 13,095
========= ========= =========
Distributions paid to Cumulative Redeemable
Preferred unitholders ..................... $ 9,265 $ 4,462
========= =========
NON-CASH TRANSACTIONS:
Accrual of distributions payable (Note 9)... $ 13,456 $ 12,895 $ 10,804
========= ========= =========
Issuance of common limited partnership units
of the Operating Partnership to acquire
operating properties and undeveloped land
(Notes 3 and 13)........................... $ 9,915 $ 20,569 $ 19,263
========= ========= =========
Minority interest recorded in connection
with Development LLCs undeveloped land
acquisitions (Notes 3, 8 and 13)........... $ 9,732
=========
Note receivable from related parties repaid
in connection with operating property
acquisition (Note 13)...................... $ 2,267
=========
Note receivable from related parties
satisfied in connection with Development
LLCs undeveloped land acquisitions (Note
13)........................................ $ 6,531
=========
Issuance of mortgage debt to acquire
operating properties....................... $ 41,102
=========
</TABLE>
See accompanying notes to consolidated and combined financial statements.
F-7
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
Three Years Ended December 31, 1999
1. Organization and Ownership
Kilroy Realty Corporation (the "Company") develops, owns, and operates
office and industrial real estate located in California, Washington, Nevada
and Arizona. The Company, which qualifies and operates as a self-administered
real estate investment trust ("REIT") under the Internal Revenue Code of 1986,
as amended, commenced operations upon the completion of its initial public
offering in January 1997.
As of December 31, 1999, the Company's stabilized portfolio of operating
properties consisted of 84 office buildings (the "Office Properties") and 87
industrial buildings (the "Industrial Properties," and together with the
Office Properties, the "Properties") which encompassed approximately 6.1
million and 6.5 million rentable square feet, respectively, and was 96.7%
occupied. The Company's stabilized portfolio consists of all of the Company's
Office and Industrial Properties, excluding properties recently developed by
the Company that have not yet reached 95.0% occupancy ("lease-up" properties)
and projects currently under construction or in pre-development. As of
December 31, 1999, the Company had seven office properties under construction
which when completed are expected to encompass an aggregate of approximately
861,500 rentable square feet. The Company did not have any properties in
lease-up at December 31, 1999 since all of the properties developed and
completed by the Company during 1999 and 1998, encompassing an aggregate of
approximately 862,400 and 1.1 million of rentable square feet, respectively,
stabilized during 1999. All but 15 of the Company's properties are located in
Southern California. All of the Company's development projects are located in
Southern California.
The Company owns its interests in all of its properties through Kilroy
Realty, L.P. (the "Operating Partnership") and Kilroy Realty Finance
Partnership, L.P. (the "Finance Partnership"). The Company conducts
substantially all of its activities through the Operating Partnership in
which, as of December 31, 1999 and 1998, it owned an 86.8% general partnership
interest. The remaining 13.2% limited partnership interest in the Operating
Partnership was owned by certain of the Company's executive officers and
directors, certain of their affiliates, and other outside investors (see Note
8). Kilroy Realty Finance, Inc, ("Finance Inc."), a wholly owned subsidiary of
the Company, is the sole general partner of the Finance Partnership and owns a
1% general partner interest. The Operating Partnership, owns the remaining 99%
limited partner interest.
In 1998, the Company formed two limited liability companies, Kilroy Gateway
Partners, L.L.C. and Kilroy Carmel Partners, L.L.C. (collectively, the
"Development LLCs") to develop two multi-phased office projects in San Diego,
California. During the first quarter of 1999, the Company, through the
Operating Partnership, became a 50% managing partner in the Development LLCs
as a result of the acquisitions of certain undeveloped land and the
simultaneous contribution of such land to the Development LLCs (see Notes 3
and 13). The Allen Group, a group of affiliated real estate development and
investment companies based in Visalia, California, is the other 50% owner.
Unless otherwise indicated, all references to the Company include the
Operating Partnership, the Finance Partnership, Finance Inc. and the
Development LLCs.
The Company is the successor to the real estate business of the Kilroy
Group, which consisted of the combination of Kilroy Industries ("KI") and
various entities, the properties of which were under the common control of KI
and/or its stockholders, including the Company's Chairman of the Board of
Directors, John B. Kilroy, Sr., and the Company's President and Chief
Executive Officer, John B. Kilroy, Jr. KI had historically been engaged in the
acquisition, management, financing, construction and leasing of office and
industrial properties and providing development services to third party owners
for a fee. The accompanying combined financial statements of the Kilroy Group
have been presented on a combined basis because of common ownership and
management and because the entities were the subject of a business combination
with the Company in 1997.
F-8
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
2. Basis of Presentation and Significant Accounting Policies
Basis of Presentation:
The consolidated financial statements of the Company include the
consolidated financial position and results of operations of the Company, the
Operating Partnership, the Finance Partnership and Finance Inc. The
consolidated financial statements as of and for the years ended December 31,
1999 and 1998 also include the consolidated financial position and results of
operations of the Development LLCs. The Development LLCs are consolidated for
financial reporting purposes since the Company holds significant control over
the entities through a 50% managing partner ownership interest, combined with
the ability to control all significant development and operating decisions.
The operating results of the development services business conducted by Kilroy
Services, Inc. ("KSI") are accounted for under the equity method of
accounting. All significant intercompany balances and transactions have been
eliminated in the consolidated financial statements.
The combined financial statements of the Kilroy Group reflect a combination
of real estate properties which were under the common control of KI and/or its
stockholders, including John B. Kilroy, Sr. and John B. Kilroy, Jr., and which
were contributed to the Operating Partnership upon the consummation of the
IPO. The Kilroy Group is considered the predecessor entity to the Company due
to common ownership and management; therefore, its combined financial
statements are presented for comparative purposes. All significant
intercompany balances and transactions have been eliminated in the combined
financial statements.
Significant Accounting Policies:
Operating properties--Operating properties are stated at the lower of
historical cost less accumulated depreciation or estimated fair value. The
cost of operating properties includes the purchase price or development costs
of the properties. Costs incurred for the acquisition, renovation and
betterment of the operating properties are capitalized to the Company's
investment in that property. Maintenance and repairs are charged to expense as
incurred. The Company's stabilized portfolio of operating properties consists
of all of the Company's Office and Industrial Properties, excluding properties
recently developed by the Company that have not yet reached 95.0% occupancy
("lease-up" properties) and projects currently under construction or in pre-
development. Lease-up properties are included in land and improvements and
building and improvements on the consolidated balance sheets upon building
shell completion.
The Company evaluates fair value for financial reporting purposes on a
property by property basis using future undiscounted cash flows, excluding
interest charges. In the event that periodic assessments or other factors
reveal a potential impairment condition, the Company would recognize an
impairment loss to the extent the carrying amount exceeded the fair value of
the property. The Company had not recorded any such impairment losses at
December 31, 1999 and 1998.
Depreciation and amortization--The cost of buildings and improvements are
depreciated on the straight-line method over estimated useful lives of 25 to
40 years for buildings and the shorter of the lease term or useful life,
ranging from one to 20 years, for tenant improvements. Depreciation expense
for buildings and improvements for the years ended December 31, 1999 and 1998,
the eleven months ended December 31, 1997, and the one month ended January 31,
1997 was $29.0 million, $23.7 million, $11.5 million and $0.7 million,
respectively.
Construction in progress--Project costs clearly associated with the
development and construction of a real estate project are capitalized as
construction in progress. In addition, interest, real estate taxes and other
costs are capitalized during the period in which activities necessary to get
the property ready for its intended use are in
F-9
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
progress. Once the development and construction of the building shell of a
real estate project is completed, the costs capitalized to construction in
progress are transferred to land and improvements and buildings and
improvements on the consolidated balance sheets as the historical cost of the
property.
At December 31, 1999 and 1998, construction in progress was carried net of
a $0.7 million and $1.7 million allowance for potentially unrecoverable pre-
development costs, respectively. The allowance, which provides for costs
incurred for development projects that the Company may at some point in the
development process decide not to pursue, was established by estimating
probable exposures to these types of costs for each of the projects in the
Company's development pipeline. Management's determination of the allowance
was calculated on a project by project basis using a series of probability
factors based on the Company's historical experience. The allowance is
increased by provisions charged against income. The allowance for potentially
unrecoverable pre-development costs at December 31, 1999 and 1998 was
maintained at a level believed to be adequate by management.
Cash and cash equivalents--The Company considers all money market funds
with an original maturity of three months or less at the date of purchase to
be cash equivalents.
Restricted cash--Restricted cash consists of cash held as collateral to
provide credit enhancement for the Company's mortgage debt and cash reserves
for property taxes, capital expenditures and tenant improvements.
Tenant receivables and related revenue recognition--Leases with tenants are
accounted for as operating leases. Minimum annual rentals are recognized on a
straight-line basis over the term of the related lease. Unbilled deferred rent
receivables represent the amount that straight-line rental income exceeds
rents currently due under the lease agreement. Included in tenant receivables
are tenant reimbursements which are comprised of additional amounts receivable
from tenants based on common area maintenance expenses and certain other
expenses that are accrued in the period in which the related expenses are
incurred.
Tenant receivables and unbilled deferred rent receivables are carried net
of an allowance for uncollectible tenant receivables and unbilled deferred
rent. Management's determination of the adequacy of the allowance is based
upon evaluations of individual receivables, past loss experience, current
economic conditions, and other relevant factors. The allowance is increased by
provisions charged against income. The allowance for uncollectible tenant
receivables and unbilled deferred rent was maintained at a level believed
adequate by management to absorb potential losses from both current and
deferred tenant receivables at December 31, 1999 and 1998.
Deferred financing and leasing costs--Costs incurred in connection with
debt financing and property leasing are capitalized as deferred financing and
leasing costs. Deferred financing costs include loan fees which are amortized
using the effective interest method over the terms of the respective loans.
Deferred leasing costs include leasing commissions which are amortized on the
straight-line method over the initial lives of the leases which range from one
to 20 years.
Minority interests--Minority interests represent the preferred and common
limited partnership interests in the Operating Partnership and interests held
by The Allen Group in the Development LLCs (see Note 8).
Other income--Other income includes revenue earned from lease termination
fees, management fees, and for the year ended December 31, 1999, gains on
dispositions of undeveloped land.
Extraordinary gains--On January 31, 1997, pursuant to a forbearance
agreement with an insurance company, the Kilroy Group exercised the right to
purchase a mortgage note payable with a principal balance of
F-10
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
$20.2 million and $2.4 million of accrued interest for $16.1 million. The
forgiveness resulted in an extraordinary gain of $3.2 million including the
write-off of $1.3 million of deferred financing fees.
Income taxes--The Company believes it qualifies and intends to continue to
qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code
of 1986, as amended (the "Code"), beginning with the taxable year ended
December 31, 1997. As a REIT, the Company is generally not subject to
corporate Federal income taxes so long as it distributes at least 95% of its
taxable income to its stockholders and satisfies certain quarterly
requirements of the Code relating to the composition of its income and assets.
The Company had met all of its REIT distribution and technical requirements at
December 31, 1999, 1998 and 1997. State income tax requirements are
essentially the same as Federal tax requirements.
Fair value of financial instruments--The Company calculates the fair value
of financial instruments using available market information and appropriate
present value or other valuation techniques. Those techniques are
significantly affected by the assumptions used, including the discount rate
and estimates of future cash flows. In that regard, the derived fair value
estimates cannot be substantiated by comparison to independent markets and in
many cases, could not be realized in immediate settlement of the instrument.
Fair values for certain financial instruments and all non-financial
instruments are not required to be disclosed. Accordingly, the aggregate fair
value amounts presented do not represent the underlying value of the Company
at December 31, 1999 and 1998.
Derivative financial instruments--The Company's derivative financial
instruments at December 31, 1999 and 1998 consisted of two interest rate cap
agreements with an aggregate notional amount of $150 million. The Company
purchased the interest rate cap agreements to effectively limit interest
expense exposure on borrowings under the Company's floating rate debt
instruments during periods of increasing interest rates.
The Company's interest rate cap agreements consist of agreements with other
counterparties to receive, at specified intervals and over specified periods
of time, payments equal to the excess, if any, between the hypothetical
interest rate (cap rate) and the then current market rate of interest as
calculated by reference to a specified notional amount and a specified
interest rate index. The only amount the Company is obligated to pay is an
initial premium, which is included in other assets on the consolidated balance
sheets and amortized to interest expense ratably over the shorter of the term
of the cap agreement or the remaining life of the debt instrument the cap
agreement is hedging. At the time the agreements were entered into, the cap
rates exceeded market. The interest rate specified by the agreements have been
and are expected to continue to be highly correlated with the interest rates
on the Company's floating rate debt. Interest payments to be received as a
result of interest rate cap agreements are accrued in other assets and
recognized as a reduction of interest expense related to the designated debt
(the accrual accounting method). There were no payments from the interest rate
cap agreements accrued at December 31, 1999 and 1998.
Subsequent to December 31, 1999, the Company entered into an interest rate
swap agreement with a notional amount of $150 million and an interest rate cap
agreement with a notional amount of $150 million. Under the Company's swap
agreement the Company will be obligated to pay a fixed interest rate and
receive a floating interest rate as calculated by reference to a specified
interest rate index. The floating interest rate specified by the agreement has
been and is expected to continue to be highly correlated with the floating
interest rates on the Company's floating rate debt. Interest payments to be
paid or received as a result of interest rate swap agreements will be accrued
in accrued expenses on the consolidated balance sheets and recognized as an
adjustment of interest expense related to the designated debt (the accrual
accounting method).
F-11
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
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 reported periods. Actual results could differ from those estimates.
Reclassifications--Certain prior year amounts have been reclassified to
conform to the current year's presentation.
Concentration of credit risk--156 of the Company's total 171 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 in which the tenants operate.
One office property tenant, Hughes Space and Communications, accounted for
approximately 6.4%, 7.4%, and 14.7% of the Company's total base rental
revenues for the years ended December 31, 1999 and 1998, and the eleven months
ended December 31, 1997, respectively. At December 31, 1999 and 1998, the
Company had no outstanding tenant receivables from this tenant.
The Company has cash in financial institutions which is insured by the
Federal Deposit Insurance Corporation ("FDIC") up to $0.1 million per
institution. At December 31, 1999 and 1998, the Company had cash accounts in
excess of FDIC insured limits.
Recent accounting pronouncements--In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 133
"Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133").
SFAS 133 is effective for fiscal years beginning after June 15, 2000 and
requires all derivatives to be recorded on the balance sheet at fair value as
either assets or liabilities depending on the rights or obligations under the
contract. SFAS 133 also establishes new accounting methodologies for the
following three classifications of hedges: fair value, cash flow and net
investment in foreign operations. Depending on the nature of the hedge,
changes in fair value of derivatives will either be offset against the change
in fair value of the hedged assets, liabilities, or firm commitments or
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. Management believes the
adoption of SFAS 133 will not have a material impact on the Company's
financial position or results of operations.
3. Acquisitions, Dispositions, and Completed Development Projects
Acquisitions
During the year ended December 31, 1999, the Company consummated a series
of transactions to acquire three office buildings (see Note 21) and the 12.5%
minority interest in a three-building complex the Company owns in Diamond Bar,
California for an aggregate purchase price of approximately $28.2 million in
cash and 168,402 common units of the Operating Partnership valued at
approximately $3.6 million based upon the closing share price of the Company's
common stock as reported on the New York Stock Exchange ("NYSE") at the time
of acquisition. The three office buildings contain approximately 176,900
aggregate rentable square feet. The common units were issued in connection
with the acquisition of two office buildings located in San Diego, California
from entities controlled by Richard S. Allen, a former member of the Company's
Board of Directors (see Note 13).
During the year ended December 31, 1999, the Company consummated a series
of transactions to acquire 31 acres of undeveloped land for an aggregate
purchase price of approximately $16.3 million in cash and 119,460
F-12
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
common units of the Operating Partnership valued at approximately $2.5 million
based upon the closing share price of the Company's common stock as reported
on the NYSE at the time of acquisition. The common units were issued in
connection with the acquisition of three acres of undeveloped land located in
San Diego, California from The Allen Group, a group of affiliated real estate
development and investment companies based in Visalia, California (see Note
13).
During the first quarter of 1999, the Company acquired a 50% interest in 55
acres of undeveloped land in San Diego, California for $16.1 million and
184,172 common limited partnership units of the Operating Partnership valued
at $3.8 million based upon the closing share price of the Company's common
stock as reported on the NYSE at the time of acquisition. The undeveloped land
was acquired pursuant to an existing agreement executed by the Company and The
Allen Group in October 1997 that provided for the joint development of two
office projects with approximately 1.1 million aggregate rentable square feet
over the next five years (see Note 13).
During the year ended December 31, 1998, the Company consummated a series
of transactions to acquire 25 office and 16 industrial buildings (the "1998
Acquisitions") (see Notes 20 and 21) for an aggregate purchase price of
approximately $236 million in cash and 703,869 common units of the Operating
Partnership valued at approximately $18.1 million based upon the closing share
price of the Company's common stock as reported on the NYSE at the time of
acquisition. The office and industrial buildings contain approximately 1.4
million and 674,000 aggregate rentable square feet, respectively. The common
units were issued in connection with the acquisition of four office buildings
located in San Diego, California and one industrial building located in Reno,
Nevada from entities controlled by Richard S. Allen (see Note 13).
During the year ended December 31, 1998, the Company consummated a series
of transactions to acquire approximately 56 acres of undeveloped land for an
aggregate purchase price of approximately $25.4 million in cash and 90,787
common units of the Operating Partnership valued at approximately $2.5 million
based upon the closing share price of the Company's common stock as reported
on the NYSE at the time of acquisition. The common units were issued in
connection with the acquisition of 18 acres of undeveloped land located in
Calabasas, California from a partnership controlled by John B. Kilroy, Sr.,
the Chairman of the Company's Board of Directors, and John B. Kilroy, Jr., the
Company's President and Chief Executive Officer (see Note 13).
The 1999 and 1998 operating property and undeveloped land acquisitions were
all funded primarily with existing working capital and borrowings on the
Company's revolving unsecured credit facility.
Dispositions
During the year ended December 31, 1999, the Company consummated a series
of transactions to sell five office and five industrial buildings for an
aggregate sales price of $14.6 million and $8.0 million, respectively. The
office and industrial buildings contained approximately 113,700 and 335,800
aggregate rentable square feet, respectively. The net gain on sale of $46,000
from these dispositions is reported after income from operations in the
consolidated statements of operations. The Company used the sales proceeds to
repay borrowings under its revolving unsecured credit facility, to fund
development expenditures and to fund the Company's share repurchase program
(see Note 9).
During the year ended December 31, 1999, the Company consummated a series
of transactions to sell 13 acres of undeveloped land for an aggregate sales
price of $5.1 million. Of the total 13 acres sold, eight acres related to the
sale of a portion of the 18-acre undeveloped land parcel in Calabassas,
California which the Company acquired from John B. Kilroy, Sr. and John B.
Kilroy, Jr. during 1998 (see Note 13). As a result of the sale, a portion of
the public facility bonds related to this undeveloped land parcel was defeased
(see Note 13).
F-13
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
The total gain on sale of $0.5 million from these dispositions is included in
other income in the consolidated statements of operations. The Company used
the sales proceeds to repay borrowings under its revolving credit facility and
to fund development expenditures.
Completed Development Projects
During the year ended December 31, 1999, the Company completed the
development of six office and four industrial buildings encompassing an
aggregate of approximately 472,200 and 390,200 rentable square feet of office
and industrial space, respectively. All 10 of these buildings were stabilized
by the Company during 1999 and were therefore included in the Company's
stabilized portfolio of operating properties at December 31, 1999.
During the year ended December 31, 1998, the Company completed the
development of one office and five industrial buildings encompassing an
aggregate of approximately 78,000 and 1.0 million rentable square feet,
respectively. Of the total 1.1 million rentable square feet completed during
1998, 344,500 rentable square feet was stabilized by the Company during 1998
and was included in the Company's stabilized operating portfolio at December
31, 1998. The Company stabilized the remaining rentable square feet during
1999.
4. Tenant Receivables
Tenant receivables consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Tenant rent, reimbursements, and other receivables....... $ 9,305 $12,126
Unbilled deferred rent................................... 15,466 8,249
Allowance for uncollectible tenant receivables and
unbilled deferred rent.................................. (2,693) (1,456)
------- -------
Tenant receivables, net................................ $22,078 $18,919
======= =======
</TABLE>
5. Deferred Financing and Leasing Costs
Deferred financing and leasing costs are summarized as follows at December
31:
<TABLE>
<CAPTION>
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Deferred financing costs................................... $ 6,892 $ 6,792
Deferred leasing costs..................................... 32,872 20,506
------- -------
Total deferred financing and leasing costs............... 39,764 27,298
Accumulated amortization................................... (11,924) (11,130)
------- -------
Deferred financing and leasing costs, net................ $27,840 $16,168
======= =======
</TABLE>
F-14
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
6. Mortgage Debt
Mortgage debt consisted of the following at December 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Mortgage note payable, due April 2009, fixed interest at
7.20%, monthly principal and interest payments.......... $ 93,953
Mortgage note payable, due October 2003, interest at
LIBOR + 1.75%, (7.94% at December 31, 1999), monthly
interest-only payments.................................. 90,000
Mortgage note payable, due February 2022, fixed interest
at 8.35%,
monthly principal and interest payments(a).............. 80,812 $ 82,025
Mortgage note payable, due May 2017, fixed interest at
7.15%, monthly principal and interest payments.......... 29,440
Mortgage note payable, due January 2000, interest at
LIBOR + 1.50%,
(7.05% at December 31, 1998), monthly interest-only
payments................................................ 19,000
Mortgage note payable, due December 2005, fixed interest
at 8.45%, monthly principal and interest payments....... 12,973 13,385
Mortgage note payable, due November 2014, fixed interest
at 8.43%, monthly principal and interest payments....... 10,966 11,323
Mortgage note payable, due October 2013, fixed interest
at 8.21%, monthly principal and interest payments....... 7,372 7,650
-------- --------
$325,516 $133,383
======== ========
</TABLE>
- --------
(a) Beginning February 2005, the mortgage note is subject to increases in the
effective interest rate to the greater of 13.35% or the sum of the
interest rate for U.S. Treasury Securities maturing 15 years from the
reset date plus 2.00%.
The Company's mortgage debt was secured by 55 properties at December 31,
1999 with a combined net book value of $459 million and 24 properties at
December 31, 1998 with a combined net book value of $166 million. As of
December 31, 1999 and 1998, the Company's mortgage debt had a weighted average
interest rate of 7.80% and 8.22%, respectively.
At December 31, 1999, six of the Company's mortgage loans contained
restrictions that would require the payment of prepayment penalties for the
acceleration of outstanding debt. The mortgage notes payable are secured by
deeds of trust on certain of the Company's properties and the assignment of
certain rents and leases associated with those properties.
Scheduled principal payments for the above mortgage loans at December 31,
1999 were as follows:
<TABLE>
<CAPTION>
Year Ending (in thousands)
----------- -------------
<S> <C>
2000........................................................ $ 4,834
2001........................................................ 5,225
2002........................................................ 5,647
2003........................................................ 96,103
2004........................................................ 6,596
Thereafter.................................................. 207,111
--------
Total..................................................... $325,516
========
</TABLE>
F-15
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
7. Unsecured Line of Credit
In November 1999, the Company increased its borrowing capacity and obtained
a new $400 million unsecured revolving credit facility (the "Credit Facility")
with a bank group lead by Morgan Guaranty Trust Company of New York and The
Chase Manhattan Bank, to replace its previous $350 million Credit Facility
(the "$350 million Credit Facility") which was scheduled to mature in February
2000, with the option to extend for one year. The Credit Facility bears
interest at a rate between LIBOR plus 1.13% and LIBOR plus 1.75% (7.56% at
December 31, 1999), depending upon the Company's leverage ratio at the time of
borrowing, and matures in November 2002. At December 31, 1999, the Company had
borrowings of $228 million outstanding under the Credit Facility and
availability of approximately $86.7 million. Availability under the Credit
Facility depends upon the value of the Company's pool of unencumbered assets.
The fee for unused funds ranges from 0.20% to 0.35% depending on the Company's
leverage ratios. The Company expects to use the Credit Facility to finance
development expenditures and for general corporate uses.
In July 1998, the Company entered into two interest rate cap agreements
with a total notional amount of $150 million to effectively limit interest
expense on the Company's floating rate debt instruments during periods of
increasing interest rates. The agreements have LIBOR based cap rates of 6.50%
and expire in July 2000. The Company's exposure is limited to the $0.2 million
cost of the cap agreements, which the Company has amortized and included as a
component of interest expense in the consolidated statement of operations. The
cost of the cap agreements were fully amortized at December 31, 1999. The $0.1
million unamortized balance of the cost of the cap agreements at December 31,
1998 was included in other assets in the consolidated balance sheet.
In February 2000, the Company entered into an interest rate swap agreement
with a total notional amount of $150 million to effectively limit interest
expense on the Company's floating rate debt during periods of increasing
interest rates. The agreement, which begins in February 2000 and expires in
February 2002, requires the Company to pay fixed rate interest payments based
on an interest rate of 6.95% and receive floating rate interest payments based
on one-month LIBOR.
In February 2000, the Company entered into an interest rate cap agreement
with a total notional amount of $150 million to effectively limit interest
expense on the Company's floating rate debt during periods of increasing
interest rates. The agreement, which begins in July 2000 when the Company's
existing $150 of cap agreements expire, has a LIBOR based cap rate of 6.50%
and expires in January 2002. The Company's exposure is limited to the $1.9
million cost of the cap agreement which the Company will amortize over the
life of the agreement and include as a component of interest expense in the
consolidated statements of operations.
As of December 31, 1998, the Company maintained a $350 million unsecured
Credit Facility with a bank group led by Morgan Guaranty Trust Company of New
York. The $350 million Credit Facility bore interest at a rates that ranged
from LIBOR plus 1.00% to LIBOR 1.38% (6.81% at December 31, 1998), depending
on the Company's leverage ratio at the time of borrowing, and was scheduled to
mature in February 2000, with the option to extend for one year. The fee for
unused funds was 0.20% based on outstanding balances. At December 31, 1998,
there were borrowings of $272 million and one letter of credit in the amount
of $1.0 million outstanding under the $350 million Credit Facility. The $1.0
million letter of credit was issued in connection with a signed commitment
letter for a mortgage loan that the Company executed during 1999. The $350
million Credit Facility was used to finance property acquisitions, development
and for general corporate uses.
The Credit Facility contains covenants requiring the Company to meet
certain financial ratios and reporting requirements. Some of the more
restrictive covenants include a minimum debt service coverage ratio, a maximum
total liabilities to total assets ratio, a maximum total secured debt to total
assets ratio, a minimum cash flow to debt service and fixed charges ratio, a
minimum consolidated tangible net worth and a limit of development activities
as compared to total assets. The Company was in compliance with all of the
Credit Facility covenants at December 31, 1999.
F-16
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
Interest capitalized for the years ended December 31, 1999 and 1998 and the
eleven months ended December 31, 1997 was $11.3 million, $8.2 million, and
$1.5 million, respectively. There was no interest capitalized for the month of
January 1997.
8. Minority Interests
During the year ended December 31, 1999 and 1998, the Operating Partnership
issued 472,034 and 794,656 common limited partnership units in the Operating
Partnership, respectively, in connection with certain operating property and
undeveloped land acquisitions (see Notes 3 and 13). In addition, 444,200
common limited partnership units of the Operating Partnership, of which
440,000 common limited partnership units were owned by John B. Kilroy, Sr.,
John B. Kilroy, Jr., and Kilroy Industries were exchanged during the third and
fourth quarters of 1999 into shares of the Company's common stock on a one-
for-one basis (see Notes 9 and 13). The Company owned an 86.8% general
partnership interest in the Operating Partnership as of December 31, 1999 and
1998.
In March 1999, the Company became a 50% managing member in each of the
Development LLCs as a result of the acquisition of certain undeveloped land
and the simultaneous contribution of such land to the Development LLCs (see
Notes 3 and 13). The Development LLCs are consolidated for financial reporting
purposes because the Company holds a 50% ownership interest combined with the
ability to control all significant development decisions.
In December 1999, the Company issued 900,000 9.250% Series D Cumulative
Redeemable Preferred units, representing limited partnership interests in the
Operating Partnership (the "Series D Preferred units"), with a liquidation
value of $50.00 per unit, in exchange for a gross contribution to the
Operating Partnership of $45.0 million. The Company used the contribution
proceeds, less applicable transaction costs and expenses of $1.2 million, for
the repayment of borrowings outstanding under the Credit Facility. The Series
D Preferred units, which may be called by the Operating Partnership at par on
or after December 9, 2004, have no stated maturity or mandatory redemption and
are not convertible into any other securities of the Operating Partnership.
The Series D Preferred units are exchangeable at the option of the majority of
the holders for shares of the Company's 9.250% Series C Cumulative Redeemable
Preferred stock beginning December 9, 2009, or earlier under certain
circumstances.
In November 1998, the Company issued 700,000 9.375% Series C Cumulative
Redeemable Preferred units, representing limited partnership interests in the
Operating Partnership (the "Series C Preferred units"), with a liquidation
value of $50.00 per unit, in exchange for a gross contribution to the
Operating Partnership of $35.0 million. The Company used the contribution
proceeds, less applicable transaction costs and expenses of $0.9 million, for
the repayment of borrowings outstanding under the Credit Facility. The Series
C Preferred units, which may be called by the Operating Partnership at par on
or after November 24, 2003, have no stated maturity or mandatory redemption
and are not convertible into any other securities of the Operating
Partnership. The Series C Preferred Units are exchangeable at the option of
the majority of the holders for shares of the Company's 9.375% Series C
Cumulative Redeemable Preferred stock beginning November 24, 2008, or earlier
under certain circumstances.
In February 1998, the Company issued 1,200,000 8.075% Series A Cumulative
Redeemable Preferred units, representing limited partnership interests in the
Operating Partnership (the "Series A Preferred units"), with a liquidation
value of $50.00 per unit, in exchange for a gross contribution to the
Operating Partnership of $60.0 million. The Company used the contribution
proceeds, less applicable transaction costs and expenses of $1.7 million, for
the repayment of borrowings outstanding under the Credit Facility. In April
1998, the Company
F-17
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
issued an additional 300,000 Series A Preferred units for a gross contribution
to the Operating Partnership of $15.0 million. The Company used the
contribution proceeds, less applicable transaction costs and expenses of $0.4
million for the repayment of borrowings outstanding under the Credit Facility.
The Series A Preferred units, which may be called by the Operating Partnership
at par on or after February 6, 2003, have no stated maturity or mandatory
redemption and are not convertible into any other securities of the Operating
Partnership. The Series A Preferred units are exchangeable at the option of
the majority of the holders for shares of the Company's 8.075% Series A
Cumulative Redeemable Preferred stock beginning February 6, 2008, or earlier
under certain circumstances.
The Company makes quarterly distributions to the Series A, Series C and
Series D Preferred unitholders on the 15th day of each February, May, August
and November. Included in the Series A, Series C and Series D Preferred unit
balances on the balance sheet at December 31, 1999 were $0.8 million, $0.4
million and $0.2 million of accrued distributions payable to the Series A,
Series C and Series D Preferred unitholders, respectively. Included in the
Series A and Series C Preferred unit balances on the balance sheet at December
31, 1998 were $0.8 million and $0.3 million of accrued distributions payable
to the Series A and Series C Preferred unitholders, respectively.
9. Stockholders' Equity
In December 1999, the Company announced the implementation of its share
repurchase program pursuant to which the Company is authorized to repurchase
up to an aggregate of 3.0 million shares of its outstanding common stock,
representing up to approximately 11% of the Company's currently outstanding
shares at December 31, 1999. During December 1999, the Company repurchased
265,000 shares in open market transactions for an aggregate repurchase price
of $5.4 million or $20.19 per share. Repurchases transacted during December
1999 were funded through proceeds received from the sale of operating
properties disposed of by the Company during December 1999 (see Note 3). The
Company intends to finance the continuation of its share repurchase program
during 2000 through proceeds from a targeted dispositions program of non-
strategic and mature industrial assets. Repurchases during 2000 will be made
from time to time in the open market or through privately negotiated
transactions, and may be discontinued at any time.
In September 1999, the SEC declared effective the Company's registration
statement on Form S-3 with respect to 1,000,000 shares of the Company's common
stock to be issued under the Company's Dividend Reinvestment and Direct
Purchase Plan (the "Plan"). The Plan, which is designed to provide the
Company's stockholders and other investors with a convenient and economical
method to purchase shares of the Company's common stock, consists of three
programs: the Dividend Reinvestment Program (the "DRIP"), the Cash Option
Purchase Plan (the "COPP"), and the Waiver Discount Plan (the "WDP"). The DRIP
provides existing common stockholders with the opportunity to purchase
additional shares of the Company's common stock by automatically reinvesting
all or a portion of their cash dividends. The COPP provides existing common
stockholders and other investors with the opportunity to purchase additional
shares of the Company's common stock by making optional cash purchases, at no
discount to market, between $100 to $5,000 and $750 to $5,000, respectively,
in any calendar month. The WDP provides existing common stockholders and other
investors with the opportunity to purchase additional shares of the Company's
common stock by making optional cash purchases, at a discount to market of up
to 2.00% of the average per share price reported on the NYSE, of greater than
$5,000 in any calendar month. The Plan acquires shares of the Company's common
stock from either new issuances directly from the Company, from the open
market or from privately negotiated transactions, except for shares acquired
under the WDP which are purchased only from previously unissued shares of
common stock. Participation in the Plan is entirely voluntary, and can be
terminated at any time. The Company intends to use the proceeds received from
the Plan, less transaction costs, for development and investment activities,
repayment
F-18
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
of outstanding indebtedness and general corporate uses. As of December 31,
1999, there have been no previously unissued shares acquired under the Plan.
During 1999, the Company filed two registration statements on Form S-3 with
the SEC which registered the potential issuance and resale of up to a total of
3,867,850 shares of the Company's common stock in exchange for 3,867,850
common limited partnership units of the Operating Partnership previously
issued in connection with certain 1997 and 1998 property acquisitions. The SEC
declared the registration statements effective in September and October 1999.
The common limited partnership units may be exchanged at the Company's option
into shares of the Company's common stock on a one-for-one basis. Neither the
Company nor the Operating Partnership will receive any of the proceeds from
the issuance of the common stock to the identified common unitholders. During
1999, 444,200 common limited partnership units of the Operating Partnership,
of which 440,000 common limited partnership units were owned by John B.
Kilroy, Sr., John B. Kilroy, Jr., and Kilroy Industries were exchanged during
the third and fourth quarters of 1999 into shares of the Company's common
stock (see Notes 8 and 13).
In May 1999, the Company filed a registration statement on Form S-8 with
the SEC that registered the potential issuance and resale of up to 1,500,000
shares of the Company's common stock issuable to the Company's employees and
directors under the 1997 Stock Option and Incentive Plan.
In October 1998, the Company adopted a Preferred Stock Purchase Rights Plan
(the "Rights Plan") under which common stockholders of record on October 15,
1998 received one Right for each share of the Company's outstanding common
stock. Each Right, which entitles its holder to buy one one-hundredth of a
share of voting preferred stock at an exercise price of $71.00, becomes
exercisable, subject to limited exceptions, if a person or group acquires 15%
or more of the Company's common stock or announces a tender offer for 15% or
more of the Company's common stock. Upon such event, each Right entitles its
holder to purchase, at the Right's then exercise price, a number of shares of
the Company's common stock equal to the market value at that time of twice the
Right's exercise price. Rights held by the acquirer will become void and will
not be exercisable upon the announcement of the acquisition. In the event that
the Company is acquired in a merger or other business combination, each Right
entitles its holder to purchase, at the Right's then current exercise price, a
number of shares of the acquiring company's common stock equal to the market
value at that time of twice the Right's exercise price. The Rights Plan
expires October 2, 2008. The Board may elect to redeem the Rights at $.001 per
Right.
In February 1998, the SEC declared effective the Company's "shelf"
registration statement on Form S-3 with respect to $400 million of the
Company's equity securities. Through December 31, 1999, the Company completed
four underwritten offerings aggregating 3,012,326 shares of common stock and
two direct placements aggregating 161,884 shares of common stock with
aggregate net proceeds of $81.8 million. As of March 10, 2000, an aggregate of
$313 million of equity securities were available for issuance under the
registration statement. The Company, as general partner of the Operating
Partnership and as required by the terms and conditions of the Operating
Partnership's partnership agreement, contributed the net proceeds of the
offerings to the Operating Partnership, which used the net proceeds to repay
borrowings under the Credit Facility.
F-19
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
Accrued distributions at December 31, 1999 and 1998, consisted of the
following amounts payable to registered common stockholders of record holding
27,808,410 and 27,639,210 shares of common stock, respectively, and common
unitholders holding 4,228,702 and 4,200,868 common units of the Operating
Partnership, respectively:
<TABLE>
<CAPTION>
December 31,
---------------
1999 1998
------- -------
(in thousands)
<S> <C> <C>
Distributions payable to:
Common stockholders....................................... $11,680 $11,194
Common unitholders........................................ 1,776 1,701
------- -------
Total accrued distributions............................. $13,456 $12,895
======= =======
</TABLE>
10. Future Minimum Rent
The Company has operating leases with tenants that expire at various dates
through 2014 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. Future minimum rent under operating leases,
excluding tenant reimbursements of certain costs, as of December 31, 1999, are
summarized as follows:
<TABLE>
<CAPTION>
Year Ending
----------- (in thousands)
<S> <C>
2000.......................................................... $136,302
2001.......................................................... 119,611
2002.......................................................... 106,972
2003.......................................................... 100,039
2004.......................................................... 84,250
Thereafter.................................................... 244,362
--------
Total....................................................... $791,536
========
</TABLE>
11. Employee Retirement and Stock Option and Incentive Plans
Retirement Savings Plan
Effective November 1, 1997, the Company adopted a retirement savings plan
designed to qualify under Section 401(k) of the Internal Revenue Code (the
"401(k) Plan"). The 401(k) Plan allows participants to defer up to twenty
percent of their eligible compensation on a pre-tax basis, subject to certain
maximum amounts allowed by the Internal Revenue Code. The 401(k) Plan provides
for a matching contribution by the Company in an amount equal to fifty-cents
for each one dollar of participant contributions up to a maximum of five
percent of the participant's annual salary. Participants vest immediately in
the amounts contributed by the Company. Employees of the Company are eligible
to participate in the 401(k) Plan when they meet certain requirements
concerning minimum period of credited service. For the years ended December
31, 1999 and 1998, the Company contributed $0.1 million to the 401(k) Plan.
Stock Option and Incentive Plan
The Company has established a stock option and incentive plan (the "Stock
Plan") for the purpose of attracting and retaining officers and key employees,
under which restricted shares or stock options may be
F-20
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
granted. The Stock Plan authorizes the issuance of 3,000,000 shares of common
stock of the Company. As of December 31, 1999 and 1998, 100,000 shares have
been issued as restricted shares of common stock and options to purchase
25,000 and 1,339,000 shares of common stock, respectively, were granted to
Directors, officers and employees under the Stock Plan. At December 31, 1999
and 1998, 1,003,000 and 355,000 of the options, respectively were exercisable
and had a weighted average exercise price of $23.24 and $23.59, respectively.
The weighted average exercise price of the options outstanding at December 31,
1999 and 1998 was $23.07 and $23.37, respectively, with a weighted average
remaining contractual life of 8.0 and 9.1 years, respectively. Stock options
vest at 33 1/3% per year over three years beginning on the first anniversary
date of the grant and are exercisable at the market value on the date of the
grant. The term of each option is ten years from the date of the grant.
Restricted stock is subject to restrictions determined by the Company's
Compensation Committee. The Compensation Committee, comprised of two Directors
who are not officers of the Company, determines compensation, including awards
under the Stock Plan, for the Company's executive officers. The shares of
restricted stock which have been granted, were sold at a purchase price equal
to $0.01 and vest 20% per year over a five-year period. Restricted stock has
the same dividend and voting rights as common stock and is considered to be
currently issued and outstanding. Compensation expense is determined by
reference to the market value of the Company's common shares and is being
amortized on a monthly basis over the five-year vesting period. In connection
with the IPO in January 1997, 100,000 shares of restricted stock were issued
to an executive officer of the Company for a price of $1,000. Compensation
expense relating to these shares was approximately $0.5 million for the years
ended December 31, 1999 and 1998 and $0.4 million for the eleven months ended
December 31, 1997.
The Company's stock option activity is summarized as follows:
<TABLE>
<CAPTION>
Number of Weighted Average
Options Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at February 1, 1997.................. --
Granted........................................ 1,185,000 $23.80
---------
Outstanding at December 31, 1997................. 1,185,000 23.80
Granted........................................ 1,339,000 23.28
Cancelled...................................... (180,000) 26.30
---------
Outstanding at December 31, 1998................. 2,344,000 23.37
Granted........................................ 25,000 20.38
Cancelled...................................... (375,000) 24.43
---------
Outstanding at December 31, 1999................. 1,994,000 $23.07
=========
</TABLE>
F-21
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") and will continue to use the intrinsic value
based method of accounting prescribed by Account Practice Bulletin opinion No.
25, "Accounting for Stock Issued to Employees." Accordingly, no compensation
cost has been recognized for the options granted under the Stock Plan. Had
compensation cost for the Company's Stock Plan been determined based on the
fair value at the grant date consistent with the provisions of SFAS No. 123,
the Company's net income and net income on a per share basis would have been
adjusted to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
February 1,
Year Ended Year Ended 1997 to
December 31, December 31, December 31,
1999 1998 1997
------------ ------------ ------------
(in thousands, except per share
amounts)
<S> <C> <C> <C>
Net income:
As reported............. $39,895 $38,822 $22,060
Pro forma............... 37,264 37,265 20,981
Net income per common
share--basic:
As reported............. 1.44 1.44 1.20
Pro forma............... 1.35 1.38 1.14
Net income per common
share--diluted:
As reported............. 1.44 1.43 1.19
Pro forma............... $ 1.34 $ 1.38 $ 1.13
</TABLE>
The fair value of each option grant issued in 1999, 1998, and 1997 is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions (amounts shown as 1999, 1998
and 1997, respectively): (a) dividend yield of 6.73%, 6.31% and 6.00%, (b)
expected volatility of the Company's stock of 27.0%, 26.2% and 21.8%, (c) risk
free interest rate of 6.64%, 4.73% and 5.44%, (d) expected option life of
seven years. The effects of applying SFAS No. 123 may not be representative of
the effects on disclosed pro forma net income for future years because options
vest over several years and additional awards can be made each year.
12. Commitments and Contingencies
Operating leases--The Company has noncancelable ground lease obligations on
the SeaTac Office Center in Seattle, Washington expiring December 2032, with
an option to extend the lease for an additional 30 years; 12312 W. Olympic
Boulevard in Santa Monica, California with the primary lease expiring in
January 2065 and a smaller secondary lease expiring in September 2011; Kilroy
Airport Center, Long Beach, California with an initial lease period expiring
July 2035; and 9455 Towne Center in San Diego, California expiring in October
2043. On the Kilroy Airport Center and the SeaTac Office Center ground leases,
rentals are subject to adjustments every five years based on the Consumer
Price Index. On the 12312 W. Olympic Boulevard ground lease, rentals are
subject to adjustments every year based on the Consumer Price Index. On the
9455 Towne Center ground lease, rentals are subject to 5% annual increases.
F-22
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
The minimum commitment under these leases at December 31, 1999 was as
follows:
<TABLE>
<CAPTION>
Year Ending
----------- (in thousands)
<S> <C>
2000......................................................... $ 1,879
2001......................................................... 1,889
2002......................................................... 1,899
2003......................................................... 1,909
2004......................................................... 1,899
Thereafter................................................... 73,724
-------
Total...................................................... $83,199
=======
</TABLE>
Purchase agreement--In connection with an agreement signed with The Allen
Group in October 1997, the Company has agreed to purchase one office property
encompassing 128,000 rentable square feet, subject to the property meeting
certain occupancy thresholds. The purchase price for this property will be
determined at the time of acquisition based on the net operating income at
that time. The Company expects that in the event that this acquisition does
occur, it would be financed with borrowings under the Credit Facility and the
issuance of common limited partnership units of the Operating Partnership.
The agreement with The Allen Group also provides for the development of two
office projects in San Diego, California with approximately 1.1 million
aggregate rentable square feet for an estimated aggregate development cost of
approximately $200 million. During the first quarter of 1999, the Company
purchased a 50% managing interest in both of the development projects (see
Notes 3 and 13). The Company has the option to purchase The Allen Group's
remaining interest in both projects for a purchase price to be determined upon
completion of the projects. Construction of phase I of both of the office
projects was completed during the third and fourth quarters of 1999.
Construction of phases II and III of the first office project commenced during
the second and third quarters of 1999, respectively, and phase IV is scheduled
to begin during the second quarter of 2000. Construction of phases II and III
of the second office project is scheduled to begin during the first quarters
of 2000 and 2001, respectively. The total presently budgeted investment for
the in process and committed phases of these two office projects discussed
herein is approximately $109 million, of which the Company has spent an
aggregate of $42.3 million as of December 31, 1999.
Litigation--Neither the Company nor any of the Company's properties are
presently subject to any material litigation nor, to the Company's knowledge,
is any material litigation threatened against any of them which if determined
unfavorably to the Company would have a material adverse effect on the
Company's cash flows, financial condition or results of operations. The
Company is party to litigation arising in the ordinary course of business,
none of which if determined unfavorably to the Company is expected to have a
material adverse effect on the Company's cash flows, financial condition or
results of operations.
Environmental Matters--The Company follows the policy of monitoring its
properties for the presence of hazardous or toxic substances. While there can
be no assurance that a material environmental liability does not exist, the
Company is not currently aware of any environmental liability with respect to
the properties that would have a material effect on the Company's financial
condition, results of operations and cash flows. Further, the Company is not
aware of any environmental liability or any unasserted claim or assessment
with respect to an environmental liability that the Company believes would
require additional disclosure or the recording of a loss contingency.
F-23
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
13. Related-Party Transactions
In March 1999, the Company acquired three office buildings in San Diego,
California from entities controlled by Richard S. Allen in exchange for $17.5
million in cash and 168,402 common units of the Operating Partnership valued
at approximately $3.6 million based upon the closing share price of the
Company's common stock as reported on the NYSE at the time the property was
acquired (see Note 3). The office property, which contains approximately
126,000 aggregate rentable square feet and is 100% leased through February
2014, was acquired pursuant to an existing agreement executed by the Company
and The Allen Group in October 1997. In connection with this anticipated
transaction, the Company entered into an agreement in May 1998 to loan
$2.3 million to a limited liability company controlled by Richard S. Allen to
finance tenant improvements to this property. The $2.3 million balance of the
note, which was secured by the pledge of membership interests in the limited
liability company, and the related interest, which accrued at a rate of Prime
plus 1.00%, was repaid to the Company in connection with the acquisition. A
former Executive Vice President of the Company received 98,476 of the total
168,402 common units issued in connection with the acquisition. The
acquisition was based upon terms that the Company believes were comparable to
terms obtainable from third-parties based on arm's-length negotiations.
In February 1999, the Company acquired three acres of undeveloped land in
San Diego, California from entities controlled by Richard S. Allen in exchange
for $0.4 million in cash and 119,460 common limited partnership units of the
Operating Partnership valued at approximately $2.5 million based upon the
closing share price of the Company's common stock as reported on the NYSE at
the time the undeveloped land was acquired (see Note 3). A former Executive
Vice President of the Company received 76,896 of the total 119,460 common
units issued in connection with the acquisition. The acquisition was based
upon terms that the Company believes were comparable to terms obtainable from
third-parties based on arm's-length negotiations.
During the first quarter of 1999, the Company acquired a 50% interest in 55
acres of undeveloped land in San Diego, California in exchange for $16.1
million and 184,172 common limited partnership units of the Operating
Partnership valued at approximately $3.8 million based upon the closing share
price of the Company's common stock as reported on the NYSE at the time the
undeveloped land was acquired (see Note 3). The undeveloped land was acquired
pursuant to an existing agreement executed by the Company and The Allen Group
in October 1997 that provided for the joint development of two office projects
with approximately 1.1 million aggregate rentable square feet over the next
five years. Both the Company and The Allen Group contributed their respective
50% interests in the undeveloped land to the two Development LLCs. In
connection with this anticipated transaction, the Company entered into an
agreement in May 1998 to loan up to $8.5 million to a limited partnership
controlled by Richard S. Allen to finance infrastructure improvements on the
undeveloped land. The $8.5 million balance of the note, which was secured by
the undeveloped land, was assumed by one of the Development LLCs. The related
interest, which accrued at a rate of LIBOR plus 1.85%, was paid to the Company
by the limited partnership. A former Executive Vice President of the Company
received 69,694 of the total 184,172 common units issued in connection with
the acquisition. The acquisition was based upon terms that the Company
believes were comparable to terms obtainable from third-parties based on
arm's-length negotiations.
In March 1999, the Company acquired construction materials for its Kilroy
Airport Center, Long Beach development project from a partnership controlled
by John B. Kilroy Sr. and John B. Kilroy, Jr. for approximately $4.3 million.
The acquisition of the construction materials was based upon terms that the
Company believes were comparable to terms obtainable from third-parties based
on arm's-length negotiations.
During the third and fourth quarters of 1999, 440,000 common limited
partnership units owned by John B. Kilroy, Sr., John B. Kilroy, Jr., and
Kilroy Industries were exchanged into shares of the Company's common stock on
a one-for-one basis (see Notes 8 and 9).
F-24
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
During 1998, the Company issued 703,869 common units of the Operating
Partnership valued at $18.1 million based upon the closing share price of the
Company's common stock as reported on the NYSE at the time of the respective
acquisitions. The common units were issued in connection with the acquisition
of four office buildings located in San Diego, California and one industrial
building located in Reno, Nevada from entities controlled by Richard S. Allen.
A former Executive Vice President of the Company received 303,316 of the total
703,869 common units issued in connection with the acquisitions. The
acquisitions were based upon terms that the Company believes were comparable
to terms obtainable from third-parties based on arm's-length negotiations.
In April 1998, the Company acquired 18 acres of undeveloped land in
Calabasas, California from a partnership controlled by John B. Kilroy, Sr. and
John B. Kilroy, Jr. in exchange for $0.4 million in cash and the issuance of
90,787 common limited partnership units of the Operating Partnership valued at
$2.5 million based upon the closing share price of the Company's common stock
as reported on the NYSE at the time the undeveloped land was acquired. The
land is part of a 66-acre development site in Calabasas, California which is
presently entitled for over 1.0 million rentable square feet of office, retail
and hotel development. The acquisition was based upon terms which the Company
believes were comparable to arm's-length negotiations. In February 1999, the
Company sold eight acres of this 18-acres undeveloped land parcel to the City
of Calabasas for a total sales price of $1.4 million. The Company presently
plans to develop 213,000 rentable square feet of office space on the remaining
ten acres it currently owns. The infrastructure improvements on the land were
financed with public facility bonds which were refinanced in February 1999. In
connection with the refinancing, the portion of the original obligation that
related to the eight acres the Company sold to the City of Calabasas was
defeased. The refinanced bonds, which were sponsored by the City of Calabasas,
currently have a principal balance of $12.5 million and consist of: $5.9
million in serial bonds that mature annually beginning on September 1, 2000
through September 1, 2012 with annual principal payments ranging from $0.4
million to $0.6 million and interest rates ranging from 4.00% to 5.55%; $3.4
million of 5.65% Term Bonds due September 1, 2020; and $3.2 million of 5.75%
Term Bonds due September 1, 2028. Principal and interest on the public
facility bonds are to be charged to the Company and the other property owners
through special property tax bills through 2028. The bonds do not contain
cross-collateralization provisions and therefore if one property owner
defaulted on their special tax payments, the other property owners would not
be obligated to repay the defaulted taxes. Based on the planned development of
the total site, the Company's maximum obligation for its portion of the
development site is currently estimated at $5.5 million, but may decrease
depending on the actual size and number of buildings built. Because the
assessment on each individual property owner is dependent upon the rate of
development of the entire development site and therefore is not fixed and
determinable, the obligation was not recorded by the Company. The periodic
assessments are currently capitalized as development costs and will be charged
to operations upon the completion of construction.
Pursuant to management agreements, the Operating Partnership provided
management and leasing services during 1999, 1998 and 1997, and KSI provided
development services during 1998 and 1997, with respect to two properties,
each of which is beneficially owned by John B. Kilroy, Sr. and John B. Kilroy,
Jr. The Operating Partnership recorded fees of $0.1 million, $0.2 million and
$0.1 million for the years ended December 31, 1999 and 1998 and the eleven
months ended December 31, 1997, respectively, relating to the management and
leasing services. KSI recorded fees of $0.1 million and $0.2 million for the
year ended December 31, 1998 and the eleven months ended December 31, 1997,
respectively, related to the development services.
In October 1997, KSI entered into a management agreement to manage the
development of certain properties owned by entities under the common control
of Richard S. Allen. At December 31, 1999 and 1998, KSI had a receivable
balance of $0.3 million and $0.2 million for management fees earned,
respectively.
F-25
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
14. Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, restricted
cash and accounts payable approximate fair value due to their short-term
maturities. The carrying amounts of the Company's variable rate mortgage debt,
outstanding borrowings on the Credit Facility and $350 million Credit
Facility, and notes receivable from related parties approximate fair value
since the interest rates on these instruments are equivalent to rates
currently offered to the Company.
For fixed rate mortgage debt, the Company estimates fair value by using
discounted cash flow analyses based on borrowing rates for similar types of
borrowing arrangements. The fair value of the Company's fixed rate mortgage
debt was $225 million and $121 million at December 31, 1999 and 1998,
respectively.
For the Series A, Series C, and Series D Preferred units, the Company
estimates fair value by using discounted cash flow analyses based on borrowing
rates for similar types of fixed rate financial instruments. The fair value of
the Series A, Series C and Series D Preferred units was $146 million at
December 31, 1999. The fair value of the Series A and Series C Preferred units
was $99.2 million at December 31, 1998.
For interest rate cap agreements, the carrying amount, which is comprised
of the unamortized premium the Company paid to enter into the agreements,
approximates fair value since at December 31, 1999 and 1998, the cap rates
exceeded the market rate of the contractually specified interest rate indices.
15. Segment Disclosure
The Company's reportable segments consist of the two types of commercial
real estate properties for which management internally evaluates operating
performance and financial results: Office Properties and Industrial
Properties. The Company also has certain corporate level activities including
legal, accounting, finance, and management information systems which are not
considered separate operating segments.
The Company evaluates the performance of its segments based upon net
operating income. Net operating income is defined as operating revenues
(rental income, tenant reimbursements and other property income) less property
and related expenses (property expenses, real estate taxes, and ground leases)
and excludes interest income and expense, depreciation and amortization, and
corporate general and administrative expenses. The accounting policies of the
reportable segments are the same as those described in the Company's summary
of significant accounting policies (see Note 2). There is no intersegment
activity.
F-26
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
The following tables reconcile the Company's segment activity to its
consolidated results of operations and financial position as of and for the
years ended December 31, 1999 and 1998 and the period February 1, 1997 to
December 31, 1997, and reconciles the Kilroy Group's segment activity to its
combined results of operations for the period January 1, 1997 to January 31,
1997.
<TABLE>
<CAPTION>
Kilroy Realty Corporation Kilroy Group
-------------------------------- ------------
February 1, January 1,
Year Ended 1997 to 1997 to
December 31, December 31, January 31,
1999 1998 1997 1997
-------- -------- ------------ ------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues and Expenses
Office Properties:
Operating revenues(1)............ $109,272 $ 96,077 $47,179 $2,555
Property and related expenses.... 26,539 24,163 11,476 752
-------- -------- ------- ------
Net operating income, as
defined......................... 82,733 71,914 35,703 1,803
-------- -------- ------- ------
Industrial Properties:
Operating revenues(1)............ 49,253 39,313 16,530 529
Property and related expenses.... 7,896 6,724 2,431 28
-------- -------- ------- ------
Net operating income, as
defined......................... 41,357 32,589 14,099 501
-------- -------- ------- ------
Total Reportable Segments:
Operating revenues(1),(2)........ 158,525 135,390 63,709 3,084
Property and related expenses.... 34,435 30,887 13,907 780
-------- -------- ------- ------
Net operating income, as
defined......................... 124,090 104,503 49,802 2,304
-------- -------- ------- ------
Reconciliation to Consolidated
Net Income:
Total net operating income, as
defined, for reportable
segments........................ 124,090 104,503 49,802 2,304
Other unallocated revenues:
Interest income................ 1,175 1,698 3,571
Other unallocated expenses:
General and administrative
expenses...................... 9,091 7,739 4,949 78
Other expenses................. 46
Provision for potentially
unrecoverable pre-development
costs......................... 1,700
Interest expense............... 26,309 20,568 9,738 1,895
Depreciation and amortization.. 33,794 26,200 13,236 787
-------- -------- ------- ------
Net income before gains on
dispositions of operating
properties, equity in income of
unconsolidated subsidiary,
minority interests and
extraordinary gains............. 56,071 49,994 25,450 (502)
Gains on dispositions of
operating properties............ 46
Equity in income of
unconsolidated subsidiary....... 17 5 23
Minority interests............... (16,239) (11,177) (3,413)
-------- -------- ------- ------
Net income (loss) before
extraordinary gains............. $ 39,895 $ 38,822 $22,060 $ (502)
======== ======== ======= ======
</TABLE>
- --------
(1) All operating revenues are comprised of amounts received from external
tenants.
(2) Total consolidated revenues equals total operating revenues from
reportable segments plus interest income and development services income.
F-27
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31,
---------------------
1999 1998
---------- ----------
(in thousands)
<S> <C> <C>
Assets:
Office Properties:
Land, buildings and improvements, net.................... $ 684,629 $ 599,771
Undeveloped land and construction in progress, net....... 189,645 79,924
Total assets............................................. 902,015 699,876
Industrial Properties:
Land, buildings and improvements, net.................... 361,536 336,717
Undeveloped land and construction in progress, net....... 32,435
Total assets............................................. 377,179 379,740
Total Reportable Segments:
Land, buildings and improvements, net.................... 1,046,165 936,488
Undeveloped land and construction in progress, net....... 189,645 112,359
Total assets............................................. 1,279,194 1,079,616
Reconciliation to Consolidated Assets:
Total assets for reportable segments..................... 1,279,194 1,079,616
Other unallocated assets:
Cash and cash equivalents.............................. 26,116 6,443
Restricted cash........................................ 6,636 6,896
Notes receivable from related parties.................. 8,798
Deferred financing costs, net.......................... 6,535 4,318
Prepaid expenses and other assets...................... 2,020 3,146
---------- ----------
Total consolidated assets............................ $1,320,501 $1,109,217
========== ==========
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------
1999 1998
-------- --------
(in thousands)
<S> <C> <C>
Capital Expenditures:(1)
Office Properties:
Building acquisitions and expenditures for completed
development................................................ $ 97,139 $177,641
Recurring capital expenditures and tenant improvements...... 15,662 8,347
Industrial Properties:
Building acquisitions and expenditures for completed
development................................................ 47,107 90,722
Recurring capital expenditures and tenant improvements...... 4,298 5,196
Total Reportable Segments:
Building acquisitions and expenditures for completed
development................................................ 144,246 268,363
Recurring capital expenditures and tenant improvements...... $ 19,960 $ 13,543
</TABLE>
- --------
(1) Total consolidated capital expenditures are equal to the same amounts
disclosed for total reportable segments.
F-28
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
16. Earnings Per Share
Basic earnings per share is computed by dividing net income by the
weighted-average number of common shares outstanding for the period. Diluted
earnings per share is computed by dividing net income by the sum of the
weighted-average number of common shares outstanding for the period plus the
assumed exercise of all dilutive securities. The Company does not consider
common units of the Operating Partnership to be dilutive securities since the
exchange of common units into common stock is on a one for one basis and would
not have any effect on diluted earnings per share. The following table
reconciles the numerator and denominator of the basic and diluted per-share
computations for net income for the years ended December 31, 1999 and 1998 and
the eleven months ended December 31, 1997:
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------- ------------------- --------------
(in thousands, except share and per share amounts)
<S> <C> <C> <C>
Basic................... $39,895 27,701,495 $1.44
Effect of dilutive
securities:
Stock options
granted.............. 25,808
------- ---------- -----
Diluted................. $39,895 27,727,303 $1.44
======= ========== =====
<CAPTION>
Year Ended December 31, 1998
-------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------- ------------------- --------------
(in thousands, except share and per share amounts)
<S> <C> <C> <C>
Basic................... $38,822 26,989,422 $1.44
Effect of dilutive
securities:
Stock options
granted.............. 70,566 (.01)
------- ---------- -----
Diluted................. $38,822 27,059,988 $1.43
======= ========== =====
<CAPTION>
Period from February 1, 1997 to December 31, 1997
-------------------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
---------------- ------------------- --------------
(in thousands, except share and per share amounts)
<S> <C> <C> <C>
Basic................... $22,060 18,445,149 $1.20
Effect of dilutive
securities:
Stock options
granted.............. 94,150 (.01)
------- ---------- -----
Diluted................. $22,060 18,539,299 $1.19
======= ========== =====
</TABLE>
F-29
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
17. Tax Treatment of Distributions
The income tax reporting for distributions paid to registered common
stockholders and common limited partnership unitholders during the years ended
December 31, 1999 and 1998 was as follows:
<TABLE>
<CAPTION>
1999 1998
------ ------
(in thousands)
<S> <C> <C>
Distributions for record dates March 31, June 30, and
September 30 reportable in the current year................ $1.260 $1.215
Distributions for record date December 31 reportable in
following year............................................. 0.420 0.405
------ ------
Total distributions per share............................... $1.680 $1.620
====== ======
</TABLE>
The income tax treatment for distributions reportable in 1999 and 1998, as
identified in the table above, was as follows:
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Percent of distributions taxable as ordinary income.......... 90.48% 98.77%
Percent of distributions taxable as unrecaptured section 1250
capital gains............................................... 0.71%
Percent of distributions not taxable as current year return
of capital.................................................. 8.81% 1.23%
</TABLE>
18. Quarterly Financial Information (Unaudited)
Summarized quarterly financial data for the years ended December 31, 1999
and 1998 and the eleven months ended December 31, 1997 was as follows:
<TABLE>
<CAPTION>
1999 Quarter Ended
---------------------------------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total revenues............... $37,550 $39,301 $40,202 $42,647
Income before minority
interests and extraordinary
gains....................... 13,780 14,951 15,109 12,294
Net income................... 9,910 10,796 10,911 8,278
Net income per common share
diluted..................... $ 0.36 $ 0.39 $ 0.39 $ 0.30
</TABLE>
<TABLE>
<CAPTION>
1998 Quarter Ended
--------------------------------------------------
March 31, 1998 June 30, September 30, December 31,
-------------- -------- ------------- ------------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Total revenues.......... $29,353 $33,922 $34,519 $39,294
Income before minority
interests and
extraordinary gains.... 10,789 12,771 12,886 13,553
Net income.............. 8,879 9,785 9,985 10,173
Net income per common
share diluted........... $ 0.35 $ 0.36 $ 0.36 $ 0.37
</TABLE>
F-30
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
19. Subsequent Events
In January 2000, aggregate distributions of $13.5 million were paid to
common stockholders and common unitholders of record on December 31, 1999.
In January 2000, the Company sold two office buildings containing
approximately 45,300 aggregate rentable square feet for a sales price of $3.4
million at a loss of approximately $0.3 million.
In February 2000, the Company entered into an interest rate cap agreement
with a total notional amount of $150 million that begins in February 2000 and
an interest rate swap agreement with a total notional amount of $150 million
that begins in July 2000 (see Note 7).
Through March 10, 2000, the Company repurchased approximately 2.0 million
shares of its common stock in open market transactions for an aggregate
repurchase price of approximately $41.2 million or $20.58 per share.
F-31
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
20. Schedule of Rental Property
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------------------
Gross Amounts
Costs at which Carried
Initial Cost Capitalized at Close of Period Net
-------------------- Subsequent to ----------------------- Date of Rentable
Buildings and Acquisition/ Accumulated Acquisition(A)/ Square
Property Location Land Improvements Improvement Land Building Total Depreciation Construction(C)(1) Feet
----------------- ------ ------------- ------------- ------ -------- ------- ------------ ------------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Office Properties:
Kilroy Airport
Center, El Segundo
El Segundo,
California....... $6,141 $69,195 $21,734 $6,141 $90,929 $97,070 $54,358 1983(C) 701,307
Kilroy Airport
Center, Phase I--
Long Beach,
California....... 24,379 24,379 24,379 2,009 1997(A) 225,217
Kilroy Airport
Center, Phase II--
Long Beach,
California....... 47,387 8,784 56,171 56,171 23,165 1989(C) 395,480
La Palma Business
Center
4175 E. La Palma
Avenue
Anaheim,
California....... 1,518 2,612 257 1,518 2,869 4,387 263 1997(A) 42,790
2829 Townsgate Road
Thousand Oaks,
California....... 5,248 8,001 1,208 5,248 9,138 14,457 700 1997(A) 81,158
181/185 S. Douglas
Street
El Segundo,
California....... 525 4,687 1,910 628 6,494 7,122 4,133 1978(C) 60,000
SeaTac Office
Center
Seattle,
Washington....... 25,993 17,367 43,360 43,360 27,007 1977(C) 532,430
23600-23610 Telo
Avenue
Torrance,
California....... 2,636 3,975 292 2,636 4,267 6,903 299 1997(A) 79,967
2100 Colorado
Avenue
Santa Monica,
California....... 5,474 26,087 51 5,476 26,136 31,612 1,865 1997(A) 94,844
5151-5155 Camino
Ruiz
Camarillo,
California....... 4,501 19,710 583 4,501 20,293 24,794 1,469 1997(A) 276,216
111 Pacifica
Irvine,
California....... 5,165 4,653 263 5,166 4,915 10,081 370 1997(A) 67,401
2501 Pullman
Santa Ana,
California....... 6,588 9,050 900 6,588 10,021 16,538 642 1997(A) 124,921
26541 Agoura Road
Calabasas,
California....... 1,979 9,630 2,209 1,979 11,839 13,818 734 1997(A) 90,878
9451 Toledo Way
Irvine,
California....... 869 201 1,070 1,070 65 1997(A) 27,200
1633 26th Street
Santa Monica,
California....... 2,080 6,672 329 2,040 7,041 9,081 556 1997(A) 43,800
4351 Latham Avenue
Riverside,
California....... 307 1,555 172 307 1,727 2,034 121 1997(A) 21,356
4361 Latham Avenue
Riverside,
California....... 764 3,577 78 765 3,654 4,419 237 1997(A) 30,842
601 Valencia Avenue
Brea, California.. 3,518 2,900 99 3,519 2,998 6,517 216 1997(A) 60,891
3750 University
Avenue
Riverside,
California....... 2,909 19,372 403 2,912 19,772 22,684 1,249 1997(A) 124,986
6220 Greenwich
Drive
San Diego,
California....... 4,796 15,863 58 4,805 15,912 20,717 1,109 1997(A) 141,214
</TABLE>
F-32
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------------------
Gross Amounts
Costs at which Carried
Initial Cost Capitalized at Close of Period Net
-------------------- Subsequent to ----------------------- Date of Rentable
Buildings and Acquisition/ Accumulated Acquisition(A)/ Square
Property Location Land Improvements Improvement Land Building Total Depreciation Construction(C)(1) Feet
----------------- ------ ------------- ------------- ------ -------- ------- ------------ ------------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
6055 Lusk Avenue
San Diego,
California....... $3,935 $ 8,008 $ 21 $3,942 $8,022 $11,964 $ 497 1997(A) 93,000
6260 Sequence Drive
San Diego,
California....... 3,206 9,803 23 3,212 9,820 13,032 608 1997(A) 130,000
6290 Sequence Drive
San Diego,
California....... 2,403 7,349 17 2,407 7,362 9,769 456 1997(A) 90,000
8101 Kaiser Blvd.
Anaheim,
California....... 2,369 6,180 82 2,377 6,254 8,631 376 1997(A) 60,177
3130 Wilshire Blvd.
Santa Monica,
California....... 8,921 6,579 3,337 9,188 9,649 18,837 715 1997(A) 88,338
12312 W. Olympic
Blvd.
Los Angeles,
California....... 3,325 12,202 581 3,399 12,709 16,108 599 1997(A) 78,000
Pacific Park Plaza
Aliso Viejo,
California....... 6,281 8,314 122 6,287 8,430 14,717 508 1997(A) 134,667
Anaheim Corporate
Center
Anaheim
California....... 5,305 10,149 570 5,310 10,714 16,024 693 1997(A) 159,222
525 N. Brand Blvd.
Glendale,
California....... 1,360 8,771 101 1,373 8,859 10,232 506 1997(A) 43,647
Kilroy Airport Long
Beach--
Phase III & IV(2)
Long Beach,
California ...... 4,997 4,997 4,997 2,818
Olympic/Bundy
Los Angeles,
California....... 7,628 (7,583) 45 45 110 1998(A) 48,356
Fullerton Business
Center
Fullerton,
California....... 4,155 6,482 339 4,155 6,821 10,976 410 1998(A) 151,975
501 Santa Monica
Blvd.
Santa Monica,
California....... 4,547 12,044 474 4,551 12,514 17,065 727 1998(A) 70,089
1240-1250 Lakeview
Blvd.
Anaheim,
California....... 2,851 4,295 227 2,851 4,522 7,373 241 1998(A) 78,903
5770 Armada Drive
Carlsbad,
California....... 2,626 7,880 2,626 7,880 10,506 394 1998(A) 81,712
6340-6350 Sequence
Drive
San Diego,
California....... 7,375 22,126 2,400 7,386 24,515 31,901 1,297 1998(A) 200,000
4880 Santa Rosa
Road
Camarillo,
California....... 2,389 2,641 2,389 2,641 5,030 136 1998(A) 41,131
15378 Avenue of
Science
San Diego,
California....... 3,565 3,796 3,565 3,796 7,361 181 1998(A) 68,910
10398-10421 Pacific
Center Court
San Diego,
California....... 14,979 39,634 925 14,979 40,559 55,538 1,982 1998(A) 411,402
3990 Ruffin Road
San Diego,
California....... 2,467 3,700 1 2,467 3,701 6,168 167 1998(A) 45,634
2231 Rutherford
Road
Carlsbad,
California....... 1,006 4,155 1 1,007 4,155 5,162 188 1998(A) 40,772
</TABLE>
F-33
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------------------------------------------
Gross Amounts
at which Carried
Initial Cost Costs at Close of Period
--------------------- Capitalized -------------------------- Net
Buildings Subsequent to Date of Rentable
and Acquisition/ Accumulated Acquisition (A)/ Square
Property Location Land Improvements Improvement Land Building Total Depreciation Construction(C)(1) Feet
- ----------------- -------- ------------ ------------- -------- -------- -------- ------------ ------------------ ---------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
9455 Town Center
Drive
San Diego,
California..... $ 3,936 $ 33 $ 3,969 $ 3,969 $ 222 1998(A) 45,195
Carmel Valley
Corporate Center
San Diego,
California ... 3,207 18,176 55 3,213 18,225 21,438 655 1998(A) 115,513
12348 High Bluff
Drive San Diego,
California...... 1,629 3,096 1,119 1,629 4,215 5,844 218 1999(C) 39,336
4690 Executive
Drive San Diego,
California...... 1,623 7,926 1,623 7,926 9,549 94 1999(A) 50,929
LPL Financial
Complex
San Diego,
California...... 4,536 16,554 4,536 16,554 21,090 355 1999(A) 126,000
Sorrento Gateway
San Diego,
California...... 7,106 15,816 7,106 15,816 22,922 259 1999(C) 172,778
3579 Valley
Center Drive
San Diego,
California...... 2,167 6,897 2,167 6,897 9,064 71 1999(C) 52,375
6215 Greenwich
Drive San Diego,
California...... 343 4,997 2,840 343 7,837 8,180 207 1999(C) 71,000
Kilroy Airport
Center--Phase
III
Long Beach,
California..... 20,490 20,490 20,490 309 1999(C) 136,026
-------- -------- -------- -------- -------- -------- -------- ---------
TOTAL OFFICE
PROPERTIES...... $157,825 $550,922 $112,449 $158,317 $662,879 $821,196 $136,566 6,147,985
-------- -------- -------- -------- -------- -------- -------- ---------
Industrial
Properties:
2031 E. Mariposa
Avenue
El Segundo,
California...... $ 132 $ 867 $ 2,698 $ 132 $ 3,565 $ 3,697 $ 3,365 1954(C) 192,053
3340 E. La Palma
Avenue
Anaheim,
California...... 67 1,521 2,830 67 4,351 4,418 4,066 1966(C) 153,320
2260 E. El
Segundo Blvd.
El Segundo,
California..... 1,423 4,194 1,402 1,703 5,316 7,019 3,509 1979(C) 113,820
2265 E. El
Segundo Blvd.
El Segundo,
California..... 1,352 2,028 645 1,571 2,454 4,025 1,757 1978(C) 76,570
1000 E. Ball Road 1956(C)/
Anaheim,
California..... 838 1,984 921 838 2,905 3,743 2,161 1974(A) 100,000
1230 S. Lewis
Road
Anaheim,
California...... 395 1,489 2,058 395 3,547 3,942 2,738 1982(C) 57,730
12681/12691 Pala
Drive
Garden Grove,
California...... 471 2,115 2,688 471 4,803 5,274 3,464 1980(A) 84,700
2270 E. El
Segundo Blvd.
El Segundo,
California..... 361 100 156 419 198 617 87 1977(C) 6,362
5115 N. 27th
Avenue
Phoenix,
Arizona......... 125 1,206 182 125 1,388 1,513 1,168 1962(C) 130,877
12752-12822
Monarch Street
Garden Grove,
California...... 3,975 5,238 329 3,975 5,567 9,542 460 1997(A) 277,037
4155 E. La Palma
Avenue
Anaheim,
California...... 1,148 2,681 113 1,148 2,794 3,942 256 1997(A) 74,618
</TABLE>
F-34
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------------
Gross Amounts
at which Carried at
Initial Cost Costs Close of Period
------------------- Capitalized ----------------------- Net
Buildings Subsequent to Date of Rentable
and Acquisition/ Accumulated Acquisition(A)/ Square
Property Location Land Improvements Improvement Land Building Total Depreciation Construction(C)(1) Feet
----------------- ------ ------------ ------------- ------ -------- ------- ------------ ------------------ --------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
4125 E. La Palma
Avenue
Anaheim,
California......... $1,690 $ 2,604 $ 15 $1,691 $ 2,618 $ 4,309 $ 232 1997(A) 69,472
Brea Industrial
Properties
Brea, California... 1,263 13,927 56 1,263 13,983 15,246 1,030 1997(A) 276,278
Garden Grove
Industrial
Properties
Garden Grove,
California......... 1,868 11,894 340 1,868 12,234 14,102 946 1997(A) 275,971
17150 Von Karman
Irvine,
California......... 4,848 7,342 4,848 7,342 12,190 559 1997(A) 157,458
7421 Orangewood
Avenue
Garden Grove,
California......... 612 3,967 612 3,967 4,579 274 1997(A) 82,602
5325 East Hunter
Avenue
Anaheim,
California......... 1,728 3,555 1,728 3,555 5,283 271 1997(A) 109,449
184-220 Technology
Drive
Irvine,
California......... 7,464 7,621 1,057 7,464 8,678 16,142 908 1997(A) 157,499
9401 Toledo Way
Irvine, California
(3)................ 8,572 7,818 (2,751) 5,665 7,974 13,639 560 1997(A) 244,800
12400 Industry
Street
Garden Grove,
California......... 943 2,110 35 943 2,145 3,088 159 1997(A) 64,200
Walnut Park Business
Center
Diamond Bar,
California......... 2,588 6,090 1,258 2,955 6,981 9,936 415 1997(A) 165,420
2055 S.E. Main
Street
Irvine,
California........ 772 2,343 39 772 2,382 3,154 157 1997(A) 47,583
201 North Sunrise
Avenue
Roseville,
California......... 2,622 11,741 2 2,622 11,743 14,365 783 1997(A) 162,203
14831 Franklin
Avenue
Tustin,
California........ 1,112 1,065 166 1,113 1,230 2,343 71 1997(A) 36,256
6828 Nancy Ridge
Drive
San Diego,
California......... 1,914 1,110 1 1,914 1,111 3,025 74 1997(A) 39,669
1961 Concourse Drive
San Jose,
California......... 5,112 6,549 261 5,112 6,810 11,922 441 1997(A) 110,132
1710 Fortune Drive
San Jose,
California......... 3,362 5,750 313 3,362 6,063 9,425 394 1997(A) 86,000
1675 MacArthur
Costa Mesa,
California......... 2,076 2,114 2,076 2,114 4,190 141 1997(A) 50,842
3130-3150 Miraloma
Anaheim,
California......... 3,335 3,727 25 3,335 3,752 7,087 241 1997(A) 144,000
3125 E. Coronado
Street
Anaheim,
California......... 3,669 4,341 3,669 4,341 8,010 279 1997(A) 144,000
1951 E. Carnegie
Santa Ana,
California......... 1,830 3,630 801 1,844 4,417 6,261 269 1997(A) 100,000
5115 E. La Palma
Avenue
Anaheim,
California......... 2,462 6,675 4,448 2,464 11,121 13,585 549 1997(A) 286,139
3735 Imperial
Highway
Stockton,
California......... 764 10,747 18 764 10,765 11,529 666 1997(A) 164,540
41093 County Center
Drive
Temecula,
California......... 1,709 2,841 7 1,712 2,845 4,557 176 1997(A) 77,582
1840 Aerojet Way
Las Vegas, Nevada.. 727 3,792 8 728 3,799 4,527 235 1997(A) 102,948
</TABLE>
F-35
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------------------------
Gross Amounts
at which Carried at
Initial Cost Costs Close of Period
--------------------- Capitalized ---------------------------- Net
Buildings Subsequent to Date of Rentable
and Acquisition/ Accumulated Acquisition(A)/ Square
Property Location Land Improvements Improvement Land Building Total Depreciation Construction(C)(1) Feet
- ----------------- -------- ------------ ------------- -------- -------- ---------- ------------ ------------------ ----------
(dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1900 Aerojet Way
Las Vegas,
Nevada.......... $ 644 $ 4,093 $ 8 $ 645 $ 4,100 $ 4,745 $ 254 1997(A) 106,717
Dimension
Business Park
Lake Forest,
California...... 1,606 1,945 64 1,608 2,007 3,615 124 1997(A) 45,257
Giltspur Building
Garden Grove,
California...... 854 3,843 1,047 853 4,891 5,744 412 1997(A) 110,220
Alton Business
Center
Irvine,
California...... 5,130 7,465 198 5,130 7,663 12,793 518 1998(A) 143,117
Fortune Business
Center
San Jose,
California...... 9,544 18,424 1,047 9,544 19,471 29,015 1,089 1998(A) 235,251
795 Trademark
Drive
Reno, Nevada.... 1,731 5,193 11 1,734 5,201 6,935 285 1998(A) 75,257
1250 N. Tustin
Avenue
Anaheim,
California...... 2,098 4,158 2,098 4,158 6,256 198 1998(A) 84,185
2911 Dow Avenue
Tustin,
California...... 1,124 2,408 2 1,124 2,410 3,534 109 1998(A) 54,720
5759 Fleet Street
Carlsbad,
California..... 3,112 7,702 24 3,119 7,719 10,838 221 1998(A) 82,923
892/909 Towne
Center Drive
Foothill Ranch,
California...... 3,334 8,243 4,714 4,949 11,342 16,291 730 1998(C) 303,327
3250 E. Carpenter
Avenue
Anaheim,
California...... 2,298 2,298 2,298 112 1998(C) 41,225
925 & 1075
Lambert Road
Brea,
California...... 3,326 7,020 1,783 3,326 8,803 12,129 217 1999(C) 178,811
Anaheim
Technology
Center--Phase I
Anaheim,
California..... 6,682 12,249 1,685 6,682 13,934 20,616 465 1998(C) 113,248
Anaheim
Technology
Center--Phase II
Anaheim,
California..... 3,966 7,972 2,424 3,966 10,396 14,362 266 1999(C) 480,744
-------- -------- -------- -------- -------- ---------- -------- ----------
TOTAL INDUSTRIAL
PROPERTIES..... $116,480 $247,491 $ 35,426 $116,146 $283,251 $ 399,397 $ 37,861 6,477,132
-------- -------- -------- -------- -------- ---------- -------- ----------
TOTAL ALL
PROPERTIES...... $274,305 $798,413 $147,875 $274,463 $946,130 $1,220,593 $174,427 12,625,117
======== ======== ======== ======== ======== ========== ======== ==========
</TABLE>
- -------
(1) Represents date of construction or acquisition by the Company, or the
Company's Predecessor, the Kilroy Group.
(2) These costs represent infrastructure costs incurred in 1989.
(3) During 1999, a portion of vacant land at this project was reclassified
into underdeveloped land and construction in progress as the Company was
actively pursuing development on the land.
The aggregate gross cost of property included above for federal income tax
purposes, approximated $1.1 billion as of December 31, 1999.
F-36
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED
AND KILROY GROUP COMBINED
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--(Continued)
The following table reconciles the historical cost of the total investment
in real estate, net from January 1, 1997 to December 31, 1999:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1999 1998 1997
---------- ---------- --------
(in thousands)
<S> <C> <C> <C>
Land, building and improvements, beginning of
year........................................... $1,081,925 $ 800,019 $227,337
Net additions during period--Acquisition,
improvements, etc. (net of dispositions)..... 138,668 281,906 572,682
---------- ---------- --------
Land, building and improvements, end of year.... 1,220,593 1,081,925 800,019
---------- ---------- --------
Undeveloped land and construction in progress,
net, beginning of year......................... 112,359 34,671
Change in undeveloped land and construction in
progress, net................................ 77,286 77,688 34,671
---------- ---------- --------
Undeveloped land and construction in progress,
net, end of year............................... 189,645 112,359 34,671
---------- ---------- --------
Total investment in real estate, net, end of
year....................................... $1,410,238 $1,194,284 $834,690
========== ========== ========
</TABLE>
The following table reconciles the accumulated depreciation from January 1,
1997 to December 31, 1999:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1999 1998 1997
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Beginning of year................................ $145,347 $121,780 $109,668
Additions during period--Depreciation and
amortization for the year..................... 29,080 23,657 12,112
-------- -------- --------
End of year...................................... $174,427 $145,437 $121,780
======== ======== ========
</TABLE>
F-37
<PAGE>
KILROY REALTY CORPORATION CONSOLIDATED AND KILROY GROUP COMBINED
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
Year Ended December 31, 1999 and 1998 and
Period from February 1, 1997 to December 31, 1997,
Period from January 1, 1997 to January 31,
(in thousands)
<TABLE>
<CAPTION>
Charged to
Costs and
Balance at Expenses Balance
Beginning or Rental at End
of Period Revenue Deductions of Period
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1999--
Allowance for uncollectible tenant
receivables and unbilled deferred
rent.............................. $1,456 $2,158 $ (921) $2,693
====== ====== ======= ======
Year ended December 31, 1998--
Allowance for uncollectible tenant
receivables and unbilled deferred
rent.............................. $1,136 $1,107 $ (787) $1,456
====== ====== ======= ======
February 1, 1997 to December 31,
1997--Allowance for uncollectible
tenant receivables and unbilled
deferred rent..................... $1,675 $1,028 $(1,567) $1,136
====== ====== ======= ======
January 1, 1997 to January 31,
1997--Allowance for uncollectible
tenant receivables and unbilled
deferred rent..................... $1,628 $ 50 $ (3) $1,675
====== ====== ======= ======
Year Ended December 31, 1999--
Allowance for potentially
unrecoverable pre-development
costs............................. $1,700 $ (997) $ 703
====== ======= ======
Year Ended December 31, 1998--
Allowance for potentially
unrecoverable pre-development
costs............................. $1,700 $1,700
====== ======
</TABLE>
F-38
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
<C> <S> <C>
3.1 Articles of Amendment and Restatement of the
Registrant(1)
3.2 Amended and Restated Bylaws of the Registrant(1)
3.3 Form of Certificate for Common Stock of the
Registrant(1)
3.4 Articles Supplementary of the Registrant designating
8.075% Series A Cumulative Redeemable Preferred
Stock(10)
3.5 Articles Supplementary of the Registrant, designating
8.075% Series A Cumulative Redeemable Preferred
Stock(13)
3.6 Articles Supplementary of the Registrant designating
its Series B Junior Participating Preferred Stock (to
be filed by amendment)
3.7 Articles Supplementary of the Registrant designating
its 9.375% Series C Cumulative Redeemable Preferred
Stock(15)
*3.8 Articles Supplementary of the Registrant designating
its 9.250% Series D Cumulative Redeemable Preferred
Stock
4.1 Registration Rights Agreement, dated January 31,
1998(1)
4.2 Registration Rights Agreement, dated February 6,
1999(10)
4.3 Registration Rights Agreement, dated April 20, 1999(13)
4.4 Registration Rights Agreement, dated November 24,
1999(15)
4.5 Registration Rights Agreement, dated as of October 31,
1998(7)
4.6 Rights Agreement, dated as of October 2, 1999 between
Kilroy Realty Corporation and ChaseMellon Shareholder
Services, L.L.C., as Rights Agent, which includes the
form of Articles Supplementary of the Series B Junior
Participating Preferred Stock of Kilroy Realty
Corporation as Exhibit A, the form of Right
Certificate as Exhibit B and the Summary of Rights to
Purchase Preferred Shares as Exhibit C(16)
*4.7 Registration Rights Agreement, dated as of December 9,
1999
10.1 Fourth Amended and Restated Agreement of Limited
Partnership of Kilroy Realty, L.P., dated November 24,
1999(15)
10.2 Omnibus Agreement, dated as of October 30, 1996, by and
among Kilroy Realty, L.P. and the parties named
therein(1)
10.3 Supplemental Representations, Warranties and Indemnity
Agreement by and among Kilroy Realty, L.P. and the
parties named therein(1)
10.4 Pledge Agreement by and among Kilroy Realty, L.P., John
B. Kilroy, Sr., John B. Kilroy, Jr. and Kilroy
Industries(1)
10.5 1998 Stock Option and Incentive Plan of the Registrant
and Kilroy Realty, L.P(1)
10.6 Form of Indemnity Agreement of the Registrant and
Kilroy Realty, L.P. with certain officers and
directors(1)
10.7 Lease Agreement, dated January 24, 1989, by and between
Kilroy Long Beach Associates and the City of Long
Beach for Kilroy Long Beach Phase I(1)
10.8 First Amendment to Lease Agreement, dated December 28,
1990, by and between Kilroy Long Beach Associates and
the City of Long Beach for Kilroy Long Beach Phase I(1)
10.9 Lease Agreement, dated July 17, 1985, by and between
Kilroy Long Beach Associates and the City of Long
Beach for Kilroy Long Beach Phase III(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
<C> <S> <C>
10.10 Lease Agreement, dated April 21, 1988, by and between
Kilroy Long Beach Associates and the Board of Water
Commissioners of the City of Long Beach, acting for
and on behalf of the City of Long Beach, for Long
Beach Phase IV(1)
10.11 Lease Agreement, dated December 30, 1988, by and
between Kilroy Long Beach Associates and City of Long
Beach for Kilroy Long Beach Phase II(1)
10.12 First Amendment to Lease, dated January 24, 1989, by
and between Kilroy Long Beach Associates and the City
of Long Beach for Kilroy Long Beach Phase III(1)
10.13 Second Amendment to Lease Agreement, dated December 28,
1990, by and between Kilroy Long Beach Associates and
the City of Long Beach for Kilroy Long Beach Phase
III(1)
10.14 First Amendment to Lease Agreement, dated December 28,
1990, by and between Kilroy Long Beach Associates and
the City of Long Beach for Kilroy Long Beach Phase
II(1)
10.15 Third Amendment to Lease Agreement, dated October 10,
1994, by and between Kilroy Long Beach Associates and
the City of Long Beach for Kilroy Long Beach Phase
III(1)
10.16 Development Agreement by and between Kilroy Long Beach
Associates and the City of Long Beach(1)
10.17 Amendment No. 1 to Development Agreement by and between
Kilroy Long Beach Associates and the City of Long
Beach(1)
10.18 Ground Lease by and between Frederick Boysen and Ted
Boysen and Kilroy Industries, dated May 15, 1969, for
SeaTac Office Center(1)
10.19 Amendment No. 1 to Ground Lease and Grant of Easement,
dated April 27, 1973, among Frederick Boysen and
Dorothy Boysen, Ted Boysen and Rose Boysen and Sea/Tac
Properties(1)
10.20 Amendment No. 2 to Ground Lease and Grant of Easement,
dated May 17, 1977, among Frederick Boysen and Dorothy
Boysen, Ted Boysen and Rose Boysen and Sea/Tac
Properties(1)
10.21 Airspace Lease, dated July 10, 1980, by and among the
Washington State Department of Transportation, as
lessor, and Sea Tac Properties, Ltd. and Kilroy
Industries, as lessee(1)
10.22 Lease, dated April 1, 1980, by and among Bow Lake,
Inc., as lessor, and Kilroy Industries and SeaTac
Properties, Ltd., as lessees for Sea/Tac Office
Center(1)
10.23 Amendment No. 1 to Ground Lease, dated September 17,
1990, between Bow Lake, Inc., as lessor, and Kilroy
Industries and Sea/Tac Properties, Ltd., as lessee(1)
10.24 Amendment No. 2 to Ground Lease, dated March 21, 1991,
between Bow Lake, Inc., as lessor, and Kilroy
Industries and Sea/Tac Properties, Ltd., as lessee(1)
10.25 Property Management Agreement between Kilroy Realty
Finance Partnership, L.P. and Kilroy Realty, L.P.(1)
10.26 Environmental Indemnity Agreement(1)
10.27 Option Agreement by and between Kilroy Realty, L.P. and
Kilroy Airport Imperial Co.(1)
10.28 Option Agreement by and between Kilroy Realty, L.P. and
Kilroy Calabasas Associates(1)
10.29 Employment Agreement between the Registrant and John B.
Kilroy, Jr.(1)
10.30 Employment Agreement between the Registrant and Richard
E. Moran Jr.(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
<C> <S> <C>
10.31 Employment Agreement between the Registrant and Jeffrey
C. Hawken(1)
10.32 Employment Agreement between the Registrant and C. Hugh
Greenup(1)
10.33 Noncompetition Agreement by and between the Registrant
and John B. Kilroy, Sr.(1)
10.34 Noncompetition Agreement by and between the Registrant
and John B. Kilroy, Jr.(1)
10.35 License Agreement by and among the Registrant and the
other persons named therein(1)
10.36 Form of Indenture of Mortgage, Deed of Trust, Security
Agreement, Financing Statement, Fixture Filing and
Assignment of Leases, Rents and Security Deposits(1)
10.37 Mortgage Note(1)
10.38 Indemnity Agreement(1)
10.39 Assignment of Leases, Rents and Security Deposits(1)
10.40 Variable Interest Rate Indenture of Mortgage, Deed of
Trust, Security Agreement, Financing Statement,
Fixture Filing and Assignment of Leases and Rents(1)
10.41 Environmental Indemnity Agreement(1)
10.42 Assignment, Rents and Security Deposits(1)
10.43 Form of Mortgage, Deed of Trust, Security Agreement,
Financing Statement, Fixture Filing and Assignment of
Leases and Rents(1)
10.44 Assignment of Leases, Rents and Security Deposits(1)
10.45 Purchase and Sale Agreement and Joint Escrow
Instructions, dated April 30, 1998, by and between
Mission Land Company, Mission-Vacaville, L.P. and
Kilroy Realty, L.P.(2)
10.46 Agreement of Purchase and Sale and Joint Escrow
Instructions, dated April 30, 1998, by and between
Camarillo Partners and Kilroy Realty, L.P.(2)
10.47 Purchase and Sale Agreement and Escrow Instructions,
dated May 5, 1998, by and between Kilroy Realty, L.P.
and Pullman Carnegie Associates(4)
10.48 Amendment to Purchase and Sale Agreement and Escrow
Instructions, dated June 27, 1998, by and between
Pullman Carnegie Associates and Kilroy Realty, L.P.(4)
10.49 Purchase and Sale Agreement, Contribution Agreement and
Joint Escrow Instructions, dated May 12, 1998, by and
between Shidler West Acquisition Company, LLC and
Kilroy Realty, L.P.(3)
10.50 First Amendment to Purchase and Sale Agreement,
Contribution Agreement and Joint Escrow Instructions,
dated June 6, 1998, between Kilroy Realty, L.P. and
Shidler West Acquisition Company, L.L.C. and Kilroy
Realty, L.P.(3)
10.51 Second Amendment to Purchase and Sale Agreement,
Contribution Agreement and Joint Escrow Instructions,
dated June 12, 1998, by and between Shidler West
Acquisition Company, LLC and Kilroy Realty, L.P.(3)
10.52 Agreement of Purchase and Sale and Joint Escrow
Instructions, dated June 12, 1998, by and between
Mazda Motor of America, Inc. and Kilroy Realty, L.P.(4)
10.53 Amendment to Agreement of Purchase and Sale and Joint
Escrow Instructions, dated June 30, 1998, by and
between Mazda Motor of America, Inc. and Kilroy
Realty, L.P.(4)
10.54 Agreement for Purchase and Sale of 2100 Colorado
Avenue, Santa Monica, California, dated June 16, 1998,
by and between Santa Monica Number Seven Associates
L.P. and Kilroy Realty L.P.(4)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
<C> <S> <C>
10.55 Second Amendment to Credit Agreement and First
Amendment to Variable Interest Rate Indenture of
Mortgage, Deed of Trust, Security Agreement, Financing
Statement, Fixture Filing and Assignment of Leases and
Rent dated August 13, 1998(5)
10.56 Purchase and Sale Agreement and Joint Escrow
Instructions, dated July 10, 1998, by and between
Kilroy Realty, L.P. and Mission Square Partners(6)
10.57 First Amendment to the Purchase and Sale Agreement and
Joint Escrow Instructions, dated July 10, 1998, by and
between Kilroy Realty, L.P. and Mission Square
Partners, dated August 22, 1998(6)
10.58 Second Amendment to the Purchase and Sale Agreement and
Joint Escrow Instructions, dated July 10, 1998, by and
between Kilroy Realty, L.P. and Mission Square
Partners, dated September 5, 1998(6)
10.59 Third Amendment to the Purchase and Sale Agreement and
Joint Escrow Instructions, dated July 10, 1998, by and
between Kilroy Realty, L.P. and Mission Square
Partners, dated September 19, 1998(6)
10.60 Fourth Amendment to the Purchase and Sale Agreement and
Joint Escrow Instructions, dated July 10, 1998, by and
between Kilroy Realty, L.P. and Mission Square
Partners, dated September 22, 1998(6)
10.61 Fifth Amendment to the Purchase and Sale Agreement and
Joint Escrow Instructions, dated July 10, 1998, by and
between Kilroy Realty, L.P. and Mission Square
Partners, dated September 23, 1998(6)
10.62 Sixth Amendment to the Purchase and Sale Agreement and
Joint Escrow Instructions, dated July 10, 1998, by and
between Kilroy Realty, L.P. and Mission Square
Partners, dated September 25, 1998(6)
10.63 Seventh Amendment to the Purchase and Sale Agreement
and Joint Escrow Instructions, dated July 10, 1998, by
and between Kilroy Realty, L.P. and Mission Square
Partners, dated September 29, 1998(6)
10.64 Eighth Amendment to the Purchase and Sale Agreement and
Joint Escrow Instructions, dated July 10, 1998, by and
between Kilroy Realty, L.P. and Mission Square
Partners, dated October 2, 1998(6)
10.65 Ninth Amendment to the Purchase and Sale Agreement and
Joint Escrow Instructions, dated July 10, 1998, by and
between Kilroy Realty, L.P. and Mission Square
Partners, dated October 24, 1998(6)
10.66 Contribution Agreement, dated October 21, 1998, by and
between Kilroy Realty, L.P. and Kilroy Realty
Corporation and The Allen Group and the Allens(8)
10.67 Purchase and Sale Agreement and Escrow Instructions,
dated December 11, 1998, by and between Kilroy Realty,
L.P. and Swede-Cal Properties, Inc., Viking Investors
of Southern California, L.P. and Viking Investors of
Southern California II, L.P.(9)
10.68 Amendment to the Contribution Agreement, dated October
14, 1999, by and between Kilroy Realty, L.P. and
Kilroy Realty Corporation and The Allen Group and the
Allens, dated October 21, 1998(15)
10.69 Amended and Restated Revolving Credit Agreement, dated
as of October 8, 1999 among Kilroy Realty, L.P.,
Morgan Guaranty Trust Company of New York, as Bank and
as Lead Agent for the Banks, and the Banks listed
therein.(14)
10.70 Amended and Restated Guaranty of Payment, dated as of
October 8, 1999, between Kilroy Realty Corporation and
Morgan Guaranty Trust Company of New York.(14)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------- ----------- ------------
<C> <S> <C>
10.71 Promissory Notes Aggregating $95.0 Million Payable to
Teachers Insurance and Annuity Association of
America(18)
10.72 Form of Deed of Trust, Assignment of Leases and Rents,
Security Agreement and Fixture Filing Statement
Securing Promissory Notes Payable to Teachers
Insurance and Annuity Association of America(18)
10.73 Second Amended and Restated Revolving Credit Agreement
and Form of Notes Aggregating $400 million(19)
10.74 Second Amended and Restated Guaranty of Payment(19)
10.75 Credit Agreement and Form of Promissory Notes
Aggregating $90.0 million(19)
10.76 Variable Interest Rate Deed of Trust, Leasehold Deed of
Trust, Assignment of Rents, Security Agreement and
Fixture Filing(19)
10.77 Guaranty of Recourse Obligations of Borrowing(19)
*10.78 First Amendment to Fourth Amended and Restated
Agreement of Limited Partnership of Kilroy Realty,
L.P., dated December 9, 1999
21.1 List of Subsidiaries of the Registrant(17)
*23.1 Consent of Deloitte & Touche LLP
*24.1 Power of Attorney (included in the signature page of
this Form 10-K)
*27.1 Financial Data Schedule
</TABLE>
- --------
* Filed herewith
** Previously filed
(1) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) as declared effective in January 28, 1998 and incorporated
herein by reference.
(2) Previously filed as exhibit 10.11 and 10.12, respectively, to the Current
Report on Form 8-K, dated May 22, 1998, and incorporated herein by
reference.
(3) Previously filed as exhibit 10.57, 10.58 and 10.59, respectively, to the
Current Report on Form 8-K, dated June 30, 1998, and incorporated herein
by reference.
(4) Previously filed as exhibit 10.54, 10.59, 10.60, 10.61 and 10.62,
respectively, to the Current Report on Form 8-K, dated June 30, 1998, and
incorporated herein by reference.
(5) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-32261), and incorporated herein by reference.
(6) Previously filed as an exhibit on Form 10-Q, for the quarterly period
ended September 30, 1998, and incorporated herein by reference.
(7) Previously filed as an exhibit to the Current Report on Form 8-K/A, dated
October 29, 1998, and incorporated herein by reference.
(8) Previously filed as exhibit 10.70 and 10.71, respectively, to the Current
Report on Form 8-K, dated November 7, 1998, and incorporated herein by
reference.
(9) Previously filed as exhibit 10.70 to the Current Report on Form 8-K, dated
December 17, 1998, and incorporated herein by reference.
(10) Previously filed as an exhibit to the Registrant's Current Report on Form
8-K dated February 6, 1999 and incorporated herein by reference.
(11) Previously filed as an exhibits to the Current Report on Form 8-K (No. 1-
12675) dated October 2, 1999 and incorporated herein by reference.
<PAGE>
(12) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated October 29, 1998 and incorporated herein by reference.
(13) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated April 20, 1999 and incorporated herein by reference.
(14) Previously filed as an exhibit on Form 10-Q (No. 1-12675) for the
quarterly period ended September 30, 1999 and incorporated herein by
reference.
(15) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated November 24, 1999 and incorporated herein by reference.
(16) Previously filed as an exhibit to the Current Report on Form 8-K (No. 1-
12675) dated October 2, 1999 and incorporated herein by reference.
(17) Previously filed as an exhibit to the Registration Statement on Form S-11
(No. 333-15553) and incorporated herein by reference.
(18) Previously filed as an exhibit on Form 10-Q, for the quarterly period
ended March 31, 1999, and incorporated herein by reference.
(19) Previously filed as an exhibit on Form 10-Q, for the quarterly period
ended September 30, 1999, and incorporated herein by reference.
(b) Reports on Form 8K
The Company filed the Current Report on Form 8-K (No. 1-12675) dated
December 9, 1999 in connection with the announcement of the Company's up to
3.0 million share repurchase program.
<PAGE>
EXHIBIT 3.8
KILROY REALTY CORPORATION
ARTICLES SUPPLEMENTARY
780,000 SHARES OF
9 1/4% SERIES D CUMULATIVE REDEEMABLE PREFERRED STOCK
Kilroy Realty Corporation, a Maryland corporation (the "Company"),
hereby certifies to the State Department of Assessments and Taxation of Maryland
(the "Department") that:
First: Pursuant to the authority expressly vested in the Board of
-----
Directors of the Company by Article IV of the Articles of Amendment and
Restatement of the Company filed with the Department on January 21, 1997, which
comprises, together with the Articles Supplementary (the "Series A Articles
-----------------
Supplementary") filed by the Company on February 6, 1998 and April 20, 1998
- -------------
establishing a class of preferred stock of the Company, par value $0.01
Preferred Stock (the "Preferred Stock"), designated as the "8.073% Series A
---------------
Cumulative Redeemable Preferred Stock" (the "Series A Preferred Stock"), the
------------------------
Articles Supplementary (the "Series B Articles Supplementary") filed by the
-------------------------------
Company on October 15, 1998, establishing a class of Preferred Stock designated
as the Series B Junior Participating Preferred Stock (the "Series B Preferred
------------------
Stock"), the Articles Supplementary (the "Series C Articles Supplementary")
- ----- -------------------------------
filed by the Company on November 25, 1998, establishing a class of Preferred
Stock designated as the "9 3/8% Series C Cumulative Redeemable Preferred Stock"
(the "Series C Preferred Stock") and these Articles Supplementary, the charter
------------------------
(collectively, the "Charter") and Section 2-105 of the Maryland General
-------
Corporation Law (the "MGCL"), the Board of Directors of the Company (the "Board
----
of Directors"), by resolutions duly adopted on October 8, 1999, has classified
up to 1,000,000 shares of the authorized but unissued Preferred Stock as a
separate class of Preferred Stock, authorized the issuance of a maximum of
1,000,000 shares of such class of Preferred Stock, set certain of the
preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends and other distributions, qualifications, terms and
conditions of redemption and other terms and conditions of such class of
Preferred Stock, and pursuant to the powers contained in the Bylaws of the
Company and the MGCL, appointed a committee (the "Committee") of the Board of
---------
Directors and delegated to the Committee, to the fullest extent permitted by the
MGCL and the Charter and Bylaws of the Company, all powers of the Board of
Directors with respect to designating, and setting all other preferences,
conversion and other rights, voting powers, restrictions, limitations as to
dividends and other distributions, qualifications and terms and conditions of
redemption of, such class of Preferred Stock, and determining the number of
shares of such class of Preferred Stock (not in excess of the aforesaid maximum
number) to be issued and the consideration and other terms and conditions upon
which such shares of such class of Preferred Stock are to be issued.
Second: Pursuant to the authority conferred upon the Committee as
------
aforesaid, the Committee has unanimously adopted resolutions designating the
aforesaid class of Preferred Stock as the "9 1/4% Series D Cumulative Redeemable
Preferred Stock," setting the preferences, conversion and other rights, voting
powers, restrictions, limitations as to dividends, qualifications, terms and
conditions of redemption and other terms and conditions of such 9
<PAGE>
1/4% Series D Cumulative Redeemable Preferred Stock (to the extent not set by
the Board of Directors in the resolutions referred to in Article First of these
Articles Supplementary) and authorizing the issuance of up to 780,000 shares of
9 1/4% Series D Cumulative Redeemable Preferred Stock.
Third: The class of Preferred Stock of the Company created by the
-----
resolutions duly adopted by the Board of Directors of the Company and by the
Committee and referred to in Articles First and Second of these Articles
----- ------
Supplementary shall have the following designation, number of shares,
preferences, conversion and other rights, voting powers, restrictions and
limitation as to dividends and other distributions, qualifications, terms and
conditions of redemption and other terms and conditions:
Section 1. Designation and Number. A series of Preferred Stock,
----------------------
designated the "9 1/4% Series D Cumulative Redeemable Preferred Stock" (the
"Series D Preferred Stock") is hereby established. The number of shares of
------------------------
Series D Preferred Stock shall be 780,000.
Section 2. Rank. The Series D Preferred Stock will, with respect to
----
distributions and rights upon voluntary or involuntary liquidation, winding-up
or dissolution of the Company, rank senior to all classes or series of Common
Stock (as defined in the Charter), the Series B Preferred Stock and to all
classes or series of equity securities of the Company now or hereafter
authorized, issued or outstanding, other than the Series A Preferred Stock,
Series C Preferred Stock and any class or series of equity securities of the
Company expressly designated as ranking on a parity with or senior to the Series
D Preferred Stock as to distributions or rights upon voluntary or involuntary
liquidation, winding-up or dissolution of the Company. For purposes of these
Articles Supplementary, the term "Parity Preferred Stock" shall be used to refer
to the Series A Preferred Stock, the Series C Preferred Stock and any class or
series of equity securities of the Company now or hereafter authorized, issued
or outstanding expressly designated by the Company to rank on a parity with
Series D Preferred Stock with respect to distributions or rights upon voluntary
or involuntary liquidation, winding-up or dissolution of the Company, or both,
as the context may require. The term "equity securities" does not include debt
securities, which will rank senior to the Series D Preferred Stock prior to
conversion.
Section 3. Distributions.
-------------
(a) Payment of Distributions. Subject to the rights of holders
------------------------
of Parity Preferred Stock as to the payment of distributions and holders of
equity securities ranking senior to the Series D Preferred Stock as to
payment of distributions, holders of Series D Preferred Stock will be
entitled to receive, when, as and if declared by the Company, out of funds
legally available for the payment of distributions, cumulative preferential
cash distributions at the rate per annum of 9 1/4% of the $50 liquidation
preference per share of Series D Preferred Stock. All distributions shall
be cumulative, shall accrue from the original date of issuance and shall be
payable (i) quarterly (such quarterly periods for purposes of payment and
accrual will be the quarterly periods ending on the dates specified in this
sentence and not calendar quarters) in arrears, on February 15, May 15,
August 15 and November 15 of each year, commencing on the first of such
dates to occur after the original date of issuance and, (ii) in the event
of a redemption, on the redemption
2
<PAGE>
date (each a "Preferred Stock Distribution Payment Date"). The amount of
-----------------------------------------
the distribution payable for any period will be computed based on the ratio
of a 360-day year of twelve 30-day months and for any period shorter than a
full quarterly period for which distributions are computed, the amount of
the distribution payable will be computed on the basis of the actual number
of days elapsed in such a period to ninety (90) days. If any date on which
distributions are to be made on the Series D Preferred Stock is not a
Business Day (as defined herein), then payment of the distribution to be
made on such date will be made on the next succeeding day that is a
Business Day (and without any interest or other payment in respect of any
such delay) except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding
Business Day, in each case with the same force and effect as if made on
such date. Distributions on the Series D Preferred Stock will be made to
the holders of record of the Series D Preferred Stock on the relevant
record dates, which, unless otherwise provided by the Company with respect
to any distribution, will be fifteen (15) Business Days prior to the
relevant Preferred Stock Distribution Payment Date (each a "Distribution
------------
Record Date"). Notwithstanding any provision to the contrary contained
-----------
herein, each outstanding share of Series D Preferred Stock shall be
entitled to receive, and shall receive a dividend with respect to any
Distribution Record Date equal to the dividend paid with respect to each
other share of Series D Preferred Stock which is outstanding on such date.
In addition, notwithstanding anything to the contrary set forth herein,
each share of Series D Preferred Stock shall also continue to accrue all
accrued and unpaid distributions up to the Exchange Date on any Series D
Preference Unit (as defined in the Fourth Amended and Restated Agreement of
Limited Partnership of Kilroy Realty, L.P., dated as of November 24, 1998,
as (i) amended by that certain First Amendment to Fourth Amended and
Restated Agreement of Limited Partnership of Kilroy Realty, L.P., dated as
of the date hereof, and (ii) supplemented by First Supplement dated January
6, 1999; Second Supplement dated February 22, 1999; Third Supplement dated
March 9, 1999; Fourth Supplement dated March 31, 1999; and Fifth Supplement
dated March 26, 1999, as amended and supplemented, the "Partnership
-----------
Agreement"), as amended through the date hereof) validly exchanged into
---------
such share of Series D Preferred Stock in accordance with the provisions of
such Partnership Agreement.
The term "Business Day" shall mean each day, other than a Saturday or
------------
a Sunday, which is not a day on which banking institutions in New York, New York
are authorized or required by law, regulation or executive order to close.
(b) Limitations on Distributions. No distributions on the
----------------------------
Series D Preferred Stock shall be declared or paid or set apart for payment
by the Company at such time as the terms and provisions of any agreement of
the Company, including any agreement relating to its indebtedness,
prohibits such declaration, payment or setting apart for payment or
provides that such declaration, payment or setting apart for payment would
constitute a breach thereof or a default thereunder, or if such
declaration, payment or setting apart for payment shall be restricted or
prohibited by law.
(c) Distributions Cumulative. Notwithstanding the foregoing,
------------------------
distributions on the Series D Preferred Stock will accrue whether or not
declared, whether
3
<PAGE>
or not the terms and provisions set forth in Section 3(b) hereof at any
time prohibit the current payment of distributions, whether or not the
Company has earnings, whether or not there are funds legally available for
the payment of such distributions and whether or not such distributions are
authorized or declared. Accrued but unpaid distributions on the Series D
Preferred Stock will accumulate as of the Preferred Stock Distribution
Payment Date on which they first become payable. Accumulated and unpaid
distributions will not bear interest.
(d) Priority as to Distributions.
----------------------------
(i) So long as any Series D Preferred Stock is
outstanding, no distribution of cash or other property shall be
authorized, declared, paid or set apart for payment on or with respect
to any class or series of Common Stock or any class or series of other
stock of the Company ranking junior as to the payment of distributions
to the Series A Preferred Stock, the Series C Preferred Stock and the
Series D Preferred Stock (such Common Stock or other junior stock,
including, without limitation, the Series B Preferred Stock,
collectively, "Junior Stock"), nor shall any cash or other property be
------------
set aside for or applied to the purchase, redemption or other
acquisition for consideration of any Series D Preferred Stock, any
Parity Preferred Stock as to payment of distributions or any Junior
Stock, unless, in each case, all distributions accumulated on all
Series D Preferred Stock and all classes and series of outstanding
Parity Preferred Stock as to payment of distributions have been paid
in full. Without limiting Section 6(c) hereof, the foregoing sentence
will not prohibit (i) distributions payable solely in Junior Stock,
(ii) the conversion of Junior Stock or Parity Preferred Stock into
Junior Stock, and (iii) purchase by the Company of such Series D
Preferred Stock, Parity Preferred Stock as to payment of distributions
or Junior Stock pursuant to the Charter to the extent required to
preserve the Company's status as a real estate investment trust.
(ii) So long as distributions have not been paid in full
(or a sum sufficient for such full payment is not irrevocably
deposited in trust for immediate payment) upon the Series D Preferred
Stock, all distributions authorized and declared on the Series D
Preferred Stock and all classes or series of outstanding Parity
Preferred Stock (including Series A Preferred Stock and Series C
Preferred Stock) as to payment of distributions shall be authorized
and declared so that the amount of distributions authorized and
declared per share of Series D Preferred Stock and such other classes
or series of Parity Preferred Stock (including Series A Preferred
Stock and Series C Preferred Stock) shall in all cases bear to each
other the same ratio that accrued distributions per share on the
Series D Preferred Stock and such other classes or series of Parity
Preferred Stock (including Series A Preferred Stock and Series C
Preferred Stock) as to payment of distributions (which shall not
include any accumulation in respect of unpaid distributions for prior
distribution periods if such class or series of Parity Preferred Stock
does not have cumulative distribution rights) bear to each other.
4
<PAGE>
(e) No Further Rights. Holders of Series D Preferred Stock
-----------------
shall not be entitled to any distributions, whether payable in cash, other
property or otherwise, in excess of the full cumulative distributions
described herein.
(f) Capital Gain Dividend. If, for any taxable year, the
---------------------
Company elects to designate as a "capital gain dividend" (as defined in
Section 857 of the Internal Revenue Code of 1986, as amended); any portion
(the "Capital Gains Amount") of the dividends paid or made available for
the year to holders of any class or series of stock of the Company, the
portion of the Capital Gains Amount that shall be allocable to holders of
the Series D Preferred Stock shall be the amount that the total dividends
(as determined for federal income tax purposes) paid or made available to
the holders of the Series D Preferred Stock for the year bears to the
aggregate amount of dividends (as determined for federal income tax
purposes) paid or made available to the holders of all classes of series of
stock of the Company for such year.)
Section 4. Liquidation Preference.
----------------------
(a) Payment of Liquidating Distributions. Subject to the rights
------------------------------------
of holders of Parity Preferred Stock with respect to rights upon any
voluntary or involuntary liquidation, dissolution or winding-up of the
Company and subject to equity securities ranking senior to the Series D
Preferred Stock with respect to rights upon any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the holders of
Series D Preferred Stock shall be entitled to receive out of the assets of
the Company legally available for distribution or the proceeds thereof,
after payment or provision for debts and other liabilities of the Company,
but before any payment or distributions of the assets shall be made to
holders of Common Stock or any other class or series of stock of the
Company that ranks junior to the Series D Preferred Stock as to rights upon
liquidation, dissolution or winding-up of the Company, an amount equal to
the sum of (i) a liquidation preference of $50 per share of Series D
Preferred Stock, and (ii) an amount equal to any accumulated and unpaid
distributions thereon, whether or not declared, to the date of payment. In
the event that, upon such voluntary or involuntary liquidation, dissolution
or winding-up, there are insufficient assets to permit full payment of
liquidating distributions to the holders of Series D Preferred Stock and
any Parity Preferred Stock as to rights upon liquidation, dissolution or
winding-up of the Company, all payments of liquidating distributions on the
Series D Preferred Stock and such Parity Preferred Stock shall be made so
that the payments on the Series D Preferred Stock and such Parity Preferred
Stock shall in all cases bear to each other the same ratio that the
respective rights of the Series D Preferred Stock and such other Parity
Preferred Stock (which shall not include any accumulation in respect of
unpaid distributions for prior distribution periods if such Parity
Preferred Stock does not have cumulative distribution rights) upon
liquidation, dissolution or winding-up of the Company bear to each other.
(b) Notice. Written notice of any such voluntary or involuntary
------
liquidation, dissolution or winding-up of the Company, stating the payment
date or dates when, and the place or places where, the amounts
distributable in such circumstances shall be payable, shall be given by (i)
fax and (ii) by first class mail, postage pre-paid, not less than thirty
(30) and not more than sixty (60) days prior to the payment date stated
5
<PAGE>
therein, to each record holder of the Series D Preferred Stock at the
respective addresses of such holders as the same shall appear on the share
transfer records of the Company.
(c) No Further Rights. After payment of the full amount of the
-----------------
liquidating distributions to which they are entitled, the holders of Series
D Preferred Stock will have no right or claim to any of the remaining
assets of the Company.
(d) Consolidation, Merger or Certain Other Transactions. The
---------------------------------------------------
voluntary sale, conveyance, lease, exchange or transfer (for cash, shares
of stock, securities or other consideration) of all or substantially all of
the property or assets of the Company to, or the consolidation or merger or
other business combination of the Company with or into any corporation,
trust or other entity (or of any corporation, trust or other entity with or
into the Company) shall not be deemed to constitute a liquidation,
dissolution or winding-up of the Company.
(e) Permissible Distributions. In determining whether a
-------------------------
distribution (other than upon voluntary or involuntary liquidation) by
dividend, redemption or other acquisition of shares of stock of the Company
or otherwise is permitted under the MGCL, no effect shall be given to
amounts that would be needed, if the Company were to be dissolved at the
time of the distribution, to satisfy the preferential rights upon
dissolution of holders of shares of stock of the Company whose preferential
rights upon dissolution are superior to those receiving the distribution.
Section 5. Optional Redemption.
-------------------
(a) Right of Optional Redemption. Subject to Section 7, the
----------------------------
Series D Preferred Stock may not be redeemed prior to December 9, 2004. On
or after such date, the Company shall have the right to redeem the Series D
Preferred Stock, in whole or in part, at any time or from time to time,
upon not less than thirty (30) nor more than sixty (60) days written
notice, at a redemption price, payable in cash, equal to $50 per share of
Series D Preferred Stock plus accumulated and unpaid distributions, whether
or not declared, to the date of redemption. If fewer than all of the
outstanding shares of Series D Preferred Stock are to be redeemed, the
shares of Series D Preferred Stock to be redeemed shall be selected pro
rata (as nearly as practicable without creating fractional units).
(b) Limitation on Redemption.
------------------------
(i) The redemption price of the Series D Preferred Stock
(other than the portion thereof consisting of accumulated but unpaid
distributions) will be payable solely out of the sale proceeds of
capital stock of the Company and from no other source. For purposes of
the preceding sentence, "capital stock" means any equity securities
(including Common Stock and Preferred Stock), shares, participation or
other ownership interests (however designated) and any rights (other
than debt securities convertible into or exchangeable for equity
securities) or options to purchase any of the foregoing.
6
<PAGE>
(ii) Subject to Section 7 hereof, the Company may not redeem
fewer than all of the outstanding shares of Series D Preferred Stock
unless all accumulated and unpaid distributions have been paid on all
outstanding Series D Preferred Stock for all quarterly distribution
periods terminating on or prior to the date of redemption.
(c) Procedures for Redemption.
-------------------------
(i) Notice of redemption will be (i) faxed, and (ii) mailed
by the Company, postage prepaid, not less than thirty (30) nor more
than sixty (60) days prior to the redemption date, addressed to the
respective holders of record of the Series D Preferred Stock to be
redeemed at their respective addresses as they appear on the transfer
records of the Company. No failure to give or defect in such notice
shall affect the validity of the proceedings for the redemption of any
Series D Preferred Stock except as to the holder to whom such notice
was defective or not given. In addition to any information required by
law or by the applicable rules of any exchange upon which the Series D
Preferred Stock may be listed or admitted to trading, each such notice
shall state: (i) the redemption date, (ii) the redemption price, (iii)
the number of shares of Series D Preferred Stock to be redeemed, (iv)
the place or places where such shares of Series D Preferred Stock are
to be surrendered for payment of the redemption price, (v) that
distributions on the Series D Preferred Stock to be redeemed will
cease to accumulate on such redemption date and (vi) that payment of
the redemption price and any accumulated and unpaid distributions will
be made upon presentation and surrender of such Series D Preferred
Stock. If fewer than all of the shares of Series D Preferred Stock
held by any holder are to be redeemed, the notice mailed to such
holder shall also specify the number of shares of Series D Preferred
Stock held by such holder to be redeemed.
(ii) If the Company gives a notice of redemption in respect
of Series D Preferred Stock (which notice will be irrevocable) then,
by 12:00 noon, New York City time, on the redemption date, the Company
will deposit irrevocably in trust for the benefit of the Series D
Preferred Stock being redeemed funds sufficient to pay the applicable
redemption price, plus any accumulated and unpaid distributions, if
any, on such shares to the date fixed for redemption, without
interest, and will give irrevocable instructions and authority to pay
such redemption price and any accumulated and unpaid distributions,
whether or not declared, if any, on such shares to the holders of the
Series D Preferred Stock upon surrender of the Series D Preferred
Stock by such holders at the place designated in the notice of
redemption. If fewer than all Series D Preferred Stock evidenced by
any certificate is being redeemed, a new certificate shall be issued
upon surrender of the certificate evidencing all Series D Preferred
Stock, evidencing the unredeemed Series D Preferred Stock without cost
to the holder thereof. On and after the date of redemption,
distributions will cease to accumulate on the Series D Preferred Stock
or portions thereof called for redemption, unless the Company defaults
in the payment thereof. If any date fixed for redemption of Series D
Preferred Stock is not a Business Day, then
7
<PAGE>
payment of the redemption price payable on such date
will be made on the next succeeding day that is a Business Day (and without
any interest or other payment in respect of any such delay) except that, if
such Business Day falls in the next calendar year, such payment will be
made on the immediately preceding Business Day, in each case with the same
force and effect as if made on such date fixed for redemption. If payment
of the redemption price or any accumulated or unpaid distributions in
respect of the Series D Preferred Stock is improperly withheld or refused
and not paid by the Company, distributions on such Series D Preferred Stock
will continue to accumulate from the original redemption date to the date
of payment, in which case the actual payment date will be considered the
date fixed for redemption for purposes of calculating the applicable
redemption price and any accumulated and unpaid distributions.
(d) Status of Redeemed Stock. Any Series D Preferred Stock that
------------------------
shall at any time have been redeemed shall after such redemption, have the
status of authorized but unissued Preferred Stock, without designation as to
class or series until such shares are once more designated as part of a
particular class or series by the Board of Directors.
Section 6. Voting Rights.
-------------
(a) General. Holders of the Series D Preferred Stock will not
-------
have any voting rights, except as set forth below.
(b) Right to Elect Directors.
------------------------
(i) If at any time full distributions shall not have been
timely made on any Series D Preferred Stock with respect to any six (6)
prior quarterly distribution periods, whether or not consecutive, (a
"Preferred Distribution Default"), the holders of such Series D Preferred
------------------------------
Stock, voting together as a single class with the holders of each class or
series of Parity Preferred Stock which is on parity with the Series D
Preferred Stock both as to payment of distributions and as to rights upon
voluntary or involuntary liquidation, dissolution or winding-up of the
Company upon which like voting rights have been conferred and are
exercisable, including the Series A Preferred Stock and the Series C
Preferred Stock ("Parity Securities"), will have the right to elect two
-----------------
additional directors to serve on the Company's Board of Directors (the
"Preferred Stock Directors") at a special meeting called in accordance with
-------------------------
Section 6(b)(ii) below or at the next annual meeting of stockholders, and
at each subsequent annual meeting of stockholders or special meeting held
in place thereof, until all such distributions in arrears and distributions
for the current quarterly period on the Series D Preferred Stock and each
such class or series of Parity Preferred Stock, including the Series A
Preferred Stock and the Series C Preferred Stock, have been paid in full.
A distribution in respect of Series D Preferred Stock shall
be considered timely made if made within two (2) Business Days after
the applicable
8
<PAGE>
Preferred Stock Distribution Payment if at the time of such late payment
date there shall not be any prior quarterly distribution periods in respect
of which full distributions were not timely made at the applicable
Preferred Stock Distribution Date.
(ii) At any time when such voting rights shall have vested,
a proper officer of the Company shall call or cause to be called, upon
written request of holders of record of at least 10% of the outstanding
shares of Series D Preferred Stock, a special meeting of the holders of
Series D Preferred Stock and all the series of Parity Securities by mailing
or causing to be mailed to such holders a notice of such special meeting to
be held not less than ten and not more than forty-five (45) days after the
date such notice is given. The record date for determining holders of the
Parity Securities entitled to notice of and to vote at such special meeting
will be the close of business on the third Business Day preceding the day
on which such notice is mailed. At any such special meeting, all of the
holders of the Parity Securities, by plurality vote, voting together as a
single class without regard to series will be entitled to elect two
directors on the basis of one vote per $50 of liquidation preference to
which such Parity Securities are entitled by their terms (excluding amounts
in respect of accumulated and unpaid dividends) and not cumulatively. The
holder or holders of one-third of the Parity Securities then outstanding,
present in person or by proxy, will constitute a quorum for the election of
the Preferred Stock Directors except as otherwise provided by law. Notice
of all meetings at which holders of the Series D Preferred Stock shall be
entitled to vote will be given to such holders at their addresses as they
appear in the transfer records. At any such meeting or adjournment thereof
in the absence of a quorum, subject to the provisions of any applicable
law, a majority of the holders of the Parity Securities present in person
or by proxy shall have the power to adjourn the meeting for the election of
the Preferred Stock Directors, without notice other than an announcement at
the meeting, until a quorum is present. If a Preferred Distribution Default
shall terminate after the notice of a special meeting has been given but
before such special meeting has been held, the Company shall, as soon as
practicable after such termination, mail or cause to be mailed notice of
such termination to holders of the Series D Preferred Stock that would have
been entitled to vote at such special meeting.
(iii) If and when all accumulated distributions and the
distribution for the current distribution period on the Series D Preferred
Stock shall have been paid in full or a sum sufficient for such payment is
irrevocably deposited in trust for payment, the holders of the Series D
Preferred Stock shall be divested of the voting rights set forth in Section
6(b) herein (subject to revesting in the event of each and every Preferred
Distribution Default) and, if all distributions in arrears and the
distributions for the current distribution period have been paid in full or
set aside for payment in full on all other classes or series of Securities,
the term and office of each Preferred Stock Director so elected shall
terminate. Any Preferred Stock Director may be removed at any time with or
without cause by the vote of, and shall not be removed otherwise than by
the vote
9
<PAGE>
of, the holders of record of a majority of the outstanding Series D
Preferred Stock when they have the voting rights set forth in Section 6(b)
(voting separately as a single class with all other classes or series of
Parity Securities). So long as a Preferred Distribution Default shall
continue, any vacancy in the office of a Preferred Stock Director may be
filled by written consent of the Preferred Stock Director remaining in
office, or if none remains in office, by a vote of the holders of record of
a majority of the outstanding Series D Preferred Stock when they have the
voting rights set forth in Section 6(b) (voting separately as a single
class with all other classes or series of Parity Securities). The Preferred
Stock Directors shall each be entitled to one vote per director on any
matter.
(c) Certain Voting Rights. So long as any Series D Preferred
---------------------
Stock remains outstanding, the Company shall not, without the affirmative vote
of the holders of at least two-thirds of the Series D Preferred Stock
outstanding at the time (i) designate or create, or increase the authorized or
issued amount of, any class or series of shares ranking prior to the Series D
Preferred Stock with respect to payment of distributions or rights upon
liquidation, dissolution or winding-up or reclassify any authorized shares of
the Company into any such shares, or create, authorize or issue any obligations
or security convertible into or evidencing the right to purchase any such
shares, (ii) designate or create, or increase the authorized or issued amount
of, any Parity Preferred Stock or reclassify any authorized shares of the
Company into any such shares, or create, authorize or issue any obligations or
security convertible into or evidencing the right to purchase any such shares,
but only to the extent such Parity Preferred Stock is issued to an affiliate of
the Company, or (iii) either (A) consolidate, merge into or with, or convey,
transfer or lease its assets substantially as an entirety, to any corporation or
other entity, or (B) amend, alter or repeal the provisions of the Company's
Charter (including these Articles Supplementary) or Bylaws, whether by merger,
consolidation or otherwise, in each case in such a way that would materially and
adversely affect the powers, special rights, preferences, privileges or voting
power of the Series D Preferred Stock or the holders thereof; provided, however,
that with respect to the occurrence of any event set forth in (iii) above, so
long as (a) the Company is the surviving entity and the Series D Preferred Stock
remains outstanding with the terms thereof unchanged, or (b) the resulting,
surviving or transferee entity is a corporation, business trust or other like
entity organized under the laws of any state and substitutes for the Series D
Preferred Stock other preferred stock having substantially the same terms and
same rights as the Series D Preferred Stock, including with respect to
distributions, voting rights and rights upon liquidation, dissolution or
winding-up, then the occurrence of any such event shall not be deemed to
materially and adversely affect the rights, privileges or voting powers of the
holders of the Series D Preferred Stock and provided further that any increase
in the amount of authorized Preferred Stock or the creation or issuance of any
other class or series of Preferred Stock, or any increase in an amount of
authorized shares of each class or series, in each case ranking either (a)
junior to the Series D Preferred Stock with respect to payment of distributions
and the distribution of assets upon liquidation, dissolution or winding-up, or
(b) on a parity with the Series D Preferred Stock with respect to payment of
distributions or the distribution of assets upon liquidation, dissolution or
winding-up to the extent such Preferred Stock is not issued to an affiliate
10
<PAGE>
of the Company, shall not be deemed to materially and adversely affect such
rights, preferences, privileges or voting powers.
Section 7. Restrictions on Ownership and Transfer to Preserve Tax
------------------------------------------------------
Benefit.
- -------
(a) Definitions. For the purposes of this Section 7 of these
----------
Articles Supplementary, the following terms shall have the following meanings:
"Beneficial Ownership" shall mean ownership of Series D Preferred
--------------------
Stock by a Person who is or would be treated as an owner of such Series D
Preferred 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 Owns" and "Beneficially Owned" shall
have the correlative meanings.
"Beneficial Ownership Limit" shall mean 7.0% (by value) of the
--------------------------
outstanding shares of capital stock of the Company.
"Charitable Beneficiary" shall mean one or more beneficiaries of a
----------------------
Trust, as determined pursuant to Section 7(c)(vi) of these Articles
Supplementary, each of which shall be an organization described in Sections
170(b)(1)(A), 170(c)(2) and 501(c)(3) of the Code.
"Code" shall mean the Internal Revenue Code of 1986, as amended. All
----
section references to the Code shall include any successor provisions thereof as
may be adopted from time to time.
"Constructive Ownership" shall mean ownership of Series D Preferred
----------------------
Stock by a Person who is or would be treated as an owner of such Series D
Preferred 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 Owns" and "Constructively Owned"
shall have the correlative meanings.
"Constructive Ownership Limit" shall mean 9.8% (by value) of the
----------------------------
outstanding shares of capital stock the Company.
"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 Series D Preferred Stock on the trading day
immediately preceding the relevant date, or if the Series D Preferred Stock is
not then traded on the New York Stock Exchange, the last reported sales price of
the Series D Preferred Stock on the trading day immediately preceding the
relevant date as reported on any exchange or quotation system over which the
Series D Preferred Stock may be traded, or if the Series D Preferred Stock is
not then traded over any exchange or quotation system, the market price of the
Series D Preferred Stock on the relevant date as determined in good faith by the
Board of Directors of the Company.
"Operating Partnership" shall mean Kilroy Realty, L.P., a Delaware
---------------------
limited partnership.
11
<PAGE>
"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 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
Series D Preferred Stock provided that the ownership of such shares of Series D
Preferred Stock by such underwriter would not result in the Company being
"closely held" within the meaning of Section 856(h) of the Code, or otherwise
result in the Company 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 Section 7(b)(ii) of these Articles Supplementary, the Purported
Record Transferee, unless the Purported Record Transferee would have acquired or
owned shares of Series D Preferred Stock for another Person who is the
beneficial transferee or owner of such shares, in which case the Purported
Beneficial Transferee shall be such Person.
"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 Section 7(b)(ii) of these Articles Supplementary, the record holder
of the Series D Preferred Stock if such Transfer had been valid under Section
7(b)(i) of these Articles Supplementary.
"REIT" shall mean a real estate investment trust under Sections 856
----
through 860 of the Code and, for purposes of taxation of the Company under
applicable state law, comparable provisions of the law of such state.
"Restriction Termination Date" shall mean the first day after the date
----------------------------
hereof on which the Board of Directors of the Company determines that it is no
longer in the best interests of the Company to attempt to, or continue to,
qualify as a REIT.
"Transfer" shall mean any sale, transfer, gift, assignment, devise or
--------
other disposition of Series D Preferred Stock, (including (i) the granting of
any option or entering into any agreement for the sale, transfer or other
disposition of Series D Preferred Stock or (ii) the sale, transfer, assignment
or other disposition of any securities (or rights convertible into or
exchangeable for Series D Preferred 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 result in changes in Beneficial or Constructive Ownership of
Series D Preferred Stock), and whether such transfer has occurred by operation
of law or otherwise.
"Trust" shall mean each of the trusts provided for in Section 7(c) of
-----
these Articles Supplementary.
"Trustee" shall mean any Person unaffiliated with the Company, or a
-------
Purported Beneficial Transferee, or a Purported Record Transferee, that is
appointed by the Company to serve as trustee of a Trust.
12
<PAGE>
(b) Restriction on Ownership and Transfers.
--------------------------------------
(i) Prior to the Restriction Termination Date:
(1) except as provided in Section 7(i) of these Articles Supplementary, no
Person shall Beneficially Own Series D Preferred Stock which, taking into
account any other capital stock of the Company Beneficially Owned by such
Person, would cause such ownership to exceed the Beneficial Ownership Limit;
(2) except as provided in Section 7(i) of these Articles Supplementary, no
Person shall Constructively Own Series D Preferred Stock which, taking into
account any other capital stock of the Company Constructively Owned by such
Person, would cause such ownership to exceed the Constructive Ownership Limit;
(3) no Person shall Beneficially or Constructively Own Series D Preferred
Stock which, taking into account any other capital stock of the Company
Beneficially or Constructively Owned by such Person, would result in the Company
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 Beneficial
or Constructive Ownership that would result in the Company 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 Company (either directly
or indirectly through one or more partnerships) from such tenant would cause the
Company to fail to satisfy any of the gross income requirements of Section
856(c) of the Code or comparable provisions of state law).
(ii) If, 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 Series D Preferred Stock in violation of Section
7(b)(i) of these Articles Supplementary, (1) then that number of shares of
Series D Preferred Stock that otherwise would cause such Person to violate
Section 7(b)(i) of these Articles Supplementary (rounded up to the nearest
whole share) shall be automatically transferred to a Trust for the benefit
of a Charitable Beneficiary, as described in Section 7(c), 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 (2) if, for any reason, the
transfer to the Trust described in clause (1) of this sentence is not
automatically effective as provided therein to prevent any Person from
Beneficially or Constructively Owning Series D Preferred Stock in violation
of Section 7(b)(i) of these Articles Supplementary, then the Transfer of
that number of shares of Series D Preferred Stock that otherwise would
cause any Person to violate Section 7(b)(i) shall be void ab initio, and
the Purported Beneficial Transferee shall have no rights in such shares.
(iii) Subject to Section 7(n) of this Article Third and
notwithstanding any other provisions contained herein, prior to the Restriction
13
<PAGE>
Termination Date, any Transfer of Series D Preferred Stock (whether or
not such Transfer is the result of a transaction entered into through
the facilities of the NYSE) that, if effective, would result in the
capital stock of the Company 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 Series D Preferred Stock.
It is expressly intended that the restrictions on ownership and
Transfer described in this Section 7(b) shall apply to the exchange rights
provided in Section 19.9 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 Series D Preferred Stock if the actual or
beneficial or Beneficial or Constructive Ownership of Series D Preferred Stock
would be prohibited under the provisions of this Section 7.
(c) Transfers of Series D Preferred Stock in Trust.
----------------------------------------------
(i) Upon any purported Transfer or other event described in
Section 7(b)(ii) of these Articles Supplementary, such Series D
Preferred 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 Section 7(b)(ii). The Trustee shall
be appointed by the Company and shall be a Person unaffiliated with the
Company, any Purported Beneficial Transferee, or any Purported Record
Transferee. Each Charitable Beneficiary shall be designated by the
Company as provided in Section 7(c)(vi) of these Articles
Supplementary.
(ii) Series D Preferred Stock held by the Trustee shall be
issued and outstanding Series D Preferred Stock of the Company. The
Purported Beneficial Transferee or Purported Record Transferee shall
have no rights in the shares of the Series D Preferred 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 Series D Preferred Stock held in the Trust.
(iii) The Trustee shall have all voting rights and rights to
dividends with respect to Series D Preferred 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 Company that shares of Series D Preferred 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 Series D Preferred
Stock. Any dividends or distributions so paid over to the Trustee shall
be held in trust for the Charitable Beneficiary.
14
<PAGE>
The Purported Record Transferee and Purported Beneficial Transferee
shall have no voting rights with respect to the Series D Preferred Stock held in
the Trust and, subject to Maryland law, effective as of the date the Series D
Preferred 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 Series D Preferred
Stock prior to the discovery by the Company that the Series D Preferred 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 Company has already taken
irreversible corporate action, then the Trustee shall not have the authority to
rescind and recast such vote. Notwithstanding any other provision of these
Articles Supplementary to the contrary, until the Company has received
notification that the Series D Preferred Stock has been transferred into a
Trust, the Company 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.
(iv) Within 20 days of receiving notice from the Company
that shares of Series D Preferred Stock have been transferred to the
Trust, the Trustee of the Trust shall sell the shares of Series D
Preferred Stock held in the Trust to a Person, designated by the
Trustee, whose ownership of the shares of Series D Preferred Stock
will not violate the ownership limitations set forth in Section
7(b)(i). Upon such sale, the interest of the Charitable Beneficiary in
the shares of Series D Preferred 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 Section 7(c)(iv). The Purported Record Transferee shall receive
the lesser of (1) the price paid by the Purported Record Transferee
for the shares of Series D Preferred 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 Series D Preferred Stock at Market Price, the Market
Price of such shares of Series D Preferred Stock on the day of the
event which resulted in the transfer of such shares of Series D
Preferred Stock to the Trust) and (2) 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 Series D Preferred
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 Company
that shares of such Series D Preferred Stock have been transferred to
the Trustee, such shares of Series D Preferred Stock are sold by a
Purported Record Transferee then (i) such shares of Series D Preferred
Stock shall be deemed to have been sold on behalf of the Trust and
(ii) to the extent that the Purported Record Transferee received an
amount for such shares of Series D Preferred Stock that exceeds the
amount that such Purported Record Transferee was entitled to receive
pursuant to this Section 7(c)(iv), such excess shall be paid to the
Trustee upon demand.
15
<PAGE>
(v) Series D Preferred Stock transferred to the Trustee 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 paid by the
Purported Record Transferee for the shares of Series D Preferred 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 Series D Preferred Stock at Market Price, the
Market Price of such shares of Series D Preferred Stock on the day of the
event which resulted in the transfer of such shares of Series D Preferred
Stock to the Trust) 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 Series D
Preferred Stock held in the Trust pursuant to Section 7(c)(iv). Upon such a
sale to the Company, the interest of the Charitable Beneficiary in the
shares of Series D Preferred 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 distributions held by the Trustee
with respect to such Series D Preferred Stock shall thereupon be paid to
the Charitable Beneficiary.
(vi) By written notice to the Trustee, the Company shall
designate one or more nonprofit organizations to be the Charitable
Beneficiary of the interest in the Trust such that the Series D Preferred
Stock held in the Trust would not violate the restrictions set forth in
Section 7(b)(i) in the hands of such Charitable Beneficiary.
(d) 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
Section 7(b) of these Articles Supplementary 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 Series D Preferred Stock of the
Company in violation of Section 7(b) of these Articles Supplementary, 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 Company to
redeem shares of Series D Preferred Stock, refusing to give effect to such
Transfer on the books of the Company 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 Section 7(b)(i) of these Articles Supplementary, shall
automatically result in the transfer to a Trust as described in Section 7(b)(ii)
and any Transfer in violation of Section 7(b)(iii) shall automatically be void
ab initio irrespective of any action (or non-action) by the Board of Directors.
(e) Notice of Restricted Transfer. Any Person who acquires or
-----------------------------
attempts to acquire shares of Series D Preferred Stock in violation of Section
7(b) of these Articles Supplementary, or any Person who is a Purported
Beneficial Transferee such that an automatic transfer to a Trust results under
Section 7(b)(ii) of these Articles Supplementary, shall immediately give written
notice to the Company of such event and
16
<PAGE>
shall provide to the Company such other information as the Company may request
in order to determine the effect, if any of such Transfer or attempted Transfer
on the Company's status as a REIT.
(f) Owners Required To Provide Information. Prior to the
--------------------------------------
Restriction Termination Date each Person who is a beneficial owner or Beneficial
Owner or Constructive Owner of Series D Preferred Stock and each Person
(including the shareholder of record) who is holding Series D Preferred Stock
for a beneficial owner or Beneficial Owner or Constructive Owner shall provide
to the Company such information that the Company may request, in good faith, in
order to determine the Company's status as a REIT.
(g) Remedies Not Limited. Nothing contained in these Articles
--------------------
Supplementary (but subject to Section 7(n) of these Articles Supplementary)
shall limit the authority of the Board of Directors to take such other action as
it deems necessary or advisable to protect the Company and the interests of its
shareholders by preservation of the Company's status as a REIT.
(h) Ambiguity. In the case of an ambiguity in the application of
---------
any of the provisions of this Section 7 of these Articles Supplementary,
including any definition contained in Section 7(a), the Board of Directors shall
have the power to determine the application of the provisions of this Section 7
with respect to any situation based on the facts known to it (subject, however,
to the provisions of Section 7(n) of these Articles Supplementary). In the event
Section 7 requires an action by the Board of Directors and these Articles
Supplementary 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 Section 7. Absent a
decision to the contrary by the Board of Directors (which the Board of Directors
may make in its sole and absolute discretion), if a Person would have (but for
the remedies set forth in Section 7(b)) acquired Beneficial or Constructive
Ownership of Series D Preferred Stock in violation of Section 7(b)(i), such
remedies (as applicable) shall apply first to the shares of Series D Preferred
Stock which, but for such remedies, would have been actually owned by such
Person, and second to shares of Series D Preferred 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 Series D Preferred Stock based upon the relative number of the shares
of Series D Preferred Stock held by each such Person.
(i) Exceptions.
----------
(i) Subject to Section 7(b)(i)(C), the Board of Directors,
in its sole discretion, may exempt a Person from the limitation on a Person
Beneficially Owning shares of Series D Preferred Stock in violation of
Section 7(b)(i)(A) if the Board of Directors obtains such representations
and undertakings from such Person as are reasonably necessary in the
opinion of the Board of Directors to ascertain that no individual's
Beneficial Ownership of such shares of Series D Preferred Stock will
violate Section 7(b)(i)(A) or that any such violation will not
17
<PAGE>
cause the Company to fail to qualify as a REIT under the Code, and agrees
that any violation of such representations or undertakings (or other action
which is contrary to the restrictions contained in Section 7(b) of these
Articles Supplementary) or attempted violation will result in such Series D
Preferred Stock being transferred to a Trust in accordance with Section
7(b)(ii) of the Articles Supplementary.
(ii) Subject to Section 7(b)(i)(C), the Board of Directors,
in its sole discretion, may exempt a Person from the limitation on a Person
Constructively Owning Series D Preferred Stock in violation of Section
7(b)(i)(B), if the Company obtains such representations and undertakings
from such Person as are reasonably necessary in the opinion of the Board of
Directors to ascertain that such Person does not and will not own, actually
or Constructively, an interest in a tenant of the Company (or a tenant of
any entity owned in whole or in part by the Company) that would cause the
Company 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 that any
violation or attempted violation will result in such Series D Preferred
Stock being transferred to a Trust in accordance with Section 7(b)(ii) of
these Articles Supplementary. Notwithstanding the foregoing, the inability
of a Person to make the certification described in this Section 7(i)(ii)
shall not prevent the Board of Directors, in its sole discretion, from
exempting such Person from the limitation on a Person Constructively Owning
Series D Preferred Stock in violation of Section 7(b)(i)(B) 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
Company in any taxable year, after taking into account the effect of this
sentence with respect to all other capital stock of the Company to which
this sentence applies.
(iii) Prior to granting any exception pursuant to Section
7(i)(i) or (ii) of these Articles Supplementary, 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 Company's status as a REIT.
(j) Legends. Each certificate for Series D Preferred Stock shall
-------
bear substantially the following legends in addition to any legends required to
comply with federal and state securities laws:
Class of Stock
"THE COMPANY 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
18
<PAGE>
CLASS OF THE PREFERRED STOCK BEFORE THE ISSUANCE OF SHARES OF SUCH CLASS OF
PREFERRED STOCK. THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO ANY STOCKHOLDER
MAKING A WRITTEN REQUEST THEREFOR, A COPY OF THE COMPANY'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 COMPANY HAS THE AUTHORITY TO ISSUE AND, IF THE
COMPANY 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 COMPANY AT ITS
PRINCIPAL OFFICE."
Restriction on Ownership and Transfer
"THE SHARES OF SERIES D PREFERRED STOCK REPRESENTED BY THIS
CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON BENEFICIAL AND CONSTRUCTIVE OWNERSHIP
AND TRANSFER FOR THE PURPOSE OF THE COMPANY'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 ARTICLES SUPPLEMENTARY FOR THE SERIES D PREFERRED STOCK, (i) NO
PERSON MAY BENEFICIALLY OWN SHARES OF THE COMPANY'S SERIES D PREFERRED STOCK
WHICH, TAKING INTO ACCOUNT ANY OTHER CAPITAL STOCK OF THE COMPANY BENEFICIALLY
OWNED BY SUCH PERSON, WOULD CAUSE SUCH OWNERSHIP TO EXCEED THE BENEFICIAL
OWNERSHIP LIMIT OF 7.0%; (ii) NO PERSON MAY CONSTRUCTIVELY OWN SHARES OF THE
COMPANY'S SERIES D PREFERRED STOCK WHICH, TAKING INTO ACCOUNT ANY OTHER CAPITAL
STOCK OF THE COMPANY CONSTRUCTIVELY OWNED BY SUCH PERSON, WOULD CAUSE SUCH
OWNERSHIP TO EXCEED THE CONSTRUCTIVE OWNERSHIP LIMIT OF 9.8%; (iii) NO PERSON
MAY BENEFICIALLY OR CONSTRUCTIVELY OWN SERIES D PREFERRED STOCK THAT, TAKING
INTO ACCOUNT ANY OTHER CAPITAL STOCK OF THE COMPANY BENEFICIALLY OR
CONSTRUCTIVELY OWNED BY SUCH PERSON, 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 (iv) NO PERSON MAY TRANSFER SERIES D PREFERRED STOCK IF
SUCH TRANSFER WOULD RESULT IN THE CAPITAL STOCK OF THE COMPANY BEING OWNED BY
FEWER THAN 100 PERSONS. ANY PERSON WHO BENEFICIALLY OR CONSTRUCTIVELY OWNS OR
ATTEMPTS TO BENEFICIALLY OR CONSTRUCTIVELY OWN SERIES D PREFERRED STOCK WHICH
CAUSES OR WILL CAUSE A PERSON TO BENEFICIALLY OR CONSTRUCTIVELY OWN SERIES D
PREFERRED STOCK IN EXCESS OF THE ABOVE LIMITATIONS MUST IMMEDIATELY NOTIFY THE
COMPANY. IF ANY OF THE RESTRICTIONS ON TRANSFER OR OWNERSHIP ARE VIOLATED, THE
SERIES D
19
<PAGE>
PREFERRED 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 COMPANY 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 WHICH ARE DEFINED IN THE ARTICLES
SUPPLEMENTARY FOR THE SERIES D PREFERRED STOCK SHALL HAVE THE MEANINGS ASCRIBED
TO THEM IN SUCH ARTICLES SUPPLEMENTARY, 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 SERIES D PREFERRED STOCK ON REQUEST AND
WITHOUT CHARGE. REQUESTS FOR SUCH A COPY MAY BE DIRECTED TO THE SECRETARY OF THE
COMPANY AT ITS PRINCIPAL OFFICE."
(k) Exchange of Series D Preferred Units. So long as the Company
------------------------------------
remains the general partner of the Operating Partnership, the Board of
Directors of the Company is hereby expressly vested with authority (subject
to the restrictions on ownership, transfer and redemption of Series D
Preferred Stock set forth in this Section 7) to issue, and shall issue to
the extent provided in the Partnership Agreement, Series D Preferred Stock
in exchange for Series D Preferred Units (as defined in the Partnership
Agreement) (the "Series D Preferred Units").
------------------------
(l) Reservation of Shares. Pursuant to the obligations of the
---------------------
Company under the Partnership Agreement to issue Series D Preferred Stock
in exchange for Series D Preferred Units, the Board of Directors is hereby
required to reserve and authorize for issuance a number of authorized but
unissued shares of Series D Preferred Stock not less than the number of
Series D Preferred Units issued to permit the Company to issue Series D
Preferred Stock in exchange for Series D Preferred Units that may be
exchanged for or converted into Series D Preferred Stock as provided in the
Partnership Agreement.
(m) Severability. If any provision of this Section 7 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.
(n) NYSE. Nothing in this Section 7 shall preclude the settlement
----
of any transaction entered into through the facilities of the NYSE. The
shares of Series D Preferred Stock that are the subject of such transaction
shall continue to be subject to the provisions of this Section 7 after such
settlement.
(o) Applicability of Section 7. The provisions set forth in this
--------------------------
Section 7 shall apply to the Series D Preferred Stock notwithstanding any
contrary provisions of the Series D Preferred Stock provided for elsewhere
in these Articles Supplementary.
20
<PAGE>
Section 8. No Conversion Rights. The holders of the Series D
--------------------
Preferred Stock shall not have any rights to convert such shares into shares of
any other class or series of stock or into any other securities of, or interest
in, the Company.
Section 9. No Sinking Fund. No sinking fund shall be established
---------------
for the retirement or redemption of Series D Preferred Stock.
Section 10. No Preemptive Rights. No holder of the Series D
--------------------
Preferred Stock of the Company shall, as such holder, have any preemptive rights
to purchase or subscribe for additional shares of stock of the Company or any
other security of the Company which it may issue or sell.
Fourth: The Series D Preferred Stock have been classified and
------
designated by the Board under the authority contained in the Charter.
Fifth: These Articles Supplementary have been approved by the
-----
Board in the manner and by the vote required by law.
Sixth: These Articles Supplementary shall be effective at the
-----
time the State Department of Assessment and Taxation of Maryland accepts these
Articles Supplementary for the record.
Seventh: The undersigned Senior Vice President of the Company
-------
acknowledges these Articles Supplementary to be the corporate act of the Company
and, as to all matters or facts required to be verified under oath, the
undersigned Senior Vice President acknowledges that to the best of his
knowledge, information and belief, these matters and facts are true in all
material respects and that this statement is made under the penalties for
perjury.
(SPACE LEFT INTENTIONALLY BLANK)
21
<PAGE>
In witness whereof, the Company has caused these Articles
Supplementary to be executed under seal in its name and on its behalf by its
Senior Vice President and attested to by its Secretary on this 9 th day of
---
December, 1999.
KILROY REALTY CORPORATION
By: /S/ Tyler H. Rose
-------------------------------
Tyler H. Rose
Senior Vice President
[SEAL]
ATTEST:
/S/ Richard E. Moran Jr.
- -------------------------
Richard E. Moran Jr.
Secretary
22
<PAGE>
EXHIBIT 4.7
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of December 9, 1999 (this
"Agreement"), 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 Montebello Realty Corp.,
---------------------
a Delaware corporation (the "Unit Holder").
-----------
RECITALS
--------
WHEREAS, in connection with the offering of 780,000 9 1/4% Series D
Cumulative Redeemable Preferred Units of the Operating Partnership (the
"Units"), the Unit Holder (the "Contributor"), contributed to the Operating
----- -----------
Partnership cash in return for the Units on terms and conditions set forth in
the Contribution Agreement, dated December 9, 1999 (the "Contribution
------------
Agreement"), by and among the Company, the Operating Partnership and the
Contributor;
WHEREAS, the Unit Holder will receive the Units in exchange for cash
contributed to Operating Partnership;
WHEREAS, pursuant to the Partnership Agreement (as defined below), the
Units owned by the Unit Holder will be redeemable for cash or exchangeable for
shares of the Company's 9 1/4% Series D Cumulative Redeemable Preferred Stock
(the "Preferred Stock") upon the terms and subject to the conditions contained
---------------
therein; and
WHEREAS, in order to induce the Contributor to enter into the
Contribution Agreement, the Company and the Operating Partnership have agreed to
provide the registration rights set forth herein to the Contributor and any
subsequent holder or holders of the Units.
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, shall 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,
whether through the ownership of voting securities, by contract or otherwise;
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
1
<PAGE>
"Agreement" has the meaning given to such term in the recitals hereto.
---------
"Contribution Agreement" means the Contribution Agreement, dated
----------------------
December 9, 1999, by and among the Company, the Operating Partnership and the
Contributor.
"Articles of Incorporation" means the Articles of Amendment and
-------------------------
Restatement of the Company, as the same may be amended, modified or restated
from time to time.
"Articles Supplementary" means the Articles Supplementary of the
----------------------
Company, filed with the Maryland State Department of Assessments and Taxation on
December 9, 1999, designating the 9 1/4% Series D Cumulative Redeemable
Preferred Stock.
"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.
----------
"Company" means Kilroy Realty Corporation, a Maryland corporation.
-------
"Contributor" shall have the meaning given to such term in the
-----------
recitals hereto.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
------------
and the rules and regulations of the Commission promulgated thereunder.
"Exchangeable Units" means Units which may be redeemable for cash
------------------
pursuant to Section 17.4 of the Partnership Agreement or exchangeable for
Preferred Stock or redeemable for cash pursuant to Section 17.7 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 Person 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.
2
<PAGE>
"Indemnified Party" shall have the meaning set forth in Section 2.8
-----------------
hereof.
"Indemnifying Party" shall have the meaning set forth in Section 2.8
------------------
hereof.
"Inspectors" shall have the meaning set forth in Section 2.4(g).
----------
"Operating Partnership" shall have the meaning given to such term in
---------------------
the recitals hereto.
"Ownership Limit Provisions" mean the various provisions of the
--------------------------
Articles Supplementary set forth in Section 7 of Article III thereof restricting
the ownership of Preferred Stock by certain Persons to specified percentages of
the outstanding Preferred Stock.
"Partnership Agreement" means the Fourth Amended and Restated
---------------------
Agreement of Limited Partnership of the Operating Partnership dated as of
November 24, 1998, as supplemented by that First Supplement, dated January 6,
1999; Second Supplement dated February 22, 1999; Third Supplement dated March 9,
1999, Fourth Supplement dated March 31, 1999; and Fifth Supplement, dated March
26, 1999, and as amended by a First Amendment, dated as of the date hereof, and
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" shall have the meaning set forth in Section
-----------------------
2.2 hereof.
"Primary Registration" shall have the meaning set forth in Section 2.2
--------------------
hereof.
"Preferred Stock" shall have the meaning given to such term in the
---------------
recitals hereto.
"REIT" means a real estate investment trust under Section 856 through
----
Section 860 of the Code.
"Registrable Securities" means shares of Preferred Stock at any time
----------------------
owned, either of record or beneficially, by any Holder and no matter how
acquired (including, without limitation, shares of Preferred Stock issued or
issuable upon exchange of Exchangeable Units or issued or issuable by way of
stock dividend or stock split, or in connection with a merger, consolidation,
combination of shares, recapitalization or other reorganization and any other
securities issued pursuant to any other distribution with respect to the
Preferred Shares or in exchange for or replacement of such Preferred Shares)
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
3
<PAGE>
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.
"Registration Expenses" shall have the meaning set forth in Section
---------------------
2.5 hereof.
"Rule 144" means Rule 144 promulgated under the Securities Act, as
--------
such rule may be amended from time to time, or any similar rule (other than Rule
144A) or regulation hereafter adopted by the Commission providing for offers and
sales of securities made in compliance therewith resulting in offers and sales
by subsequent holders that are not affiliates of the Company of such securities
being free of the registration and prospectus delivery requirements of the
Securities Act.
"Rule 144A" means Rule 144A promulgated under the Securities Act, as
---------
such rule may be amended from time to time, or any similar rule (other than Rule
144) or regulation hereafter adopted by the Commission.
"Rule 415" means Rule 415 promulgated under the Securities Act, as
--------
such rule may be amended from time to time, or any similar rule or regulation
hereafter adopted by the Commission.
"Secondary Registration" shall have the meaning set forth in Section
----------------------
2.2 hereof.
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations of the Commission promulgated thereunder.
"Selling Holder" means a Holder who is selling Registrable Securities
--------------
pursuant to a registration statement under the Securities Act pursuant to this
Agreement.
"Shelf Registration" shall have the meaning set forth in Section 2.1
------------------
hereof.
"Shelf Registration Statement" means any registration statement
----------------------------
relating to a Shelf Registration that covers any of the Preferred Stock of the
Company filed with the Commission under the Securities Act, including the
Prospectus, amendments and supplements to such registration statement, including
post-effective amendments, all exhibits and all material incorporated by
reference or deemed to be incorporated by reference in such registration
statement.
"Underwriter" means a securities dealer who purchases any Registrable
-----------
Securities as principal and not as part of such dealer's market-making
activities.
"Unit Holder" shall have the meaning set forth in the recitals hereto.
-----------
"Units" shall have the meaning given to such term in the recitals
-----
hereto.
4
<PAGE>
ARTICLE II
REGISTRATION RIGHTS
-------------------
SECTION 2.1. Shelf Registration.
------------------
The Company shall prepare and file a "shelf" registration statement
(the "Shelf Registration Statement") with respect to the Registrable Securities
----------------------------
covering the resale thereof by the Holders on an appropriate form for an
offering to be made on a continuous or delayed basis pursuant to Rule 415 (the
"Shelf Registration") within 60 days after the date the Exchangeable Units are
- -------------------
exchanged for shares of Preferred Stock and shall use its best efforts to cause
the Shelf Registration Statement to be declared effective within 120 days after
the date of such exchange. The Company shall use its best efforts to keep such
Shelf Registration Statement continuously effective until the earliest of (A) 24
months following the effective date of the Shelf Registration Statement, (B)
such time as all of the Registrable Securities have been sold pursuant to the
Shelf Registration Statement or Rule 144 and (C) the date on which the
Registrable Securities may be sold without volume restrictions in accordance
with Rule 144.
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 of equity securities
for its own account (a "Primary Registration") or for the account of any of its
--------------------
respective securityholders (other than (i) any registration statement filed by
the Company under the Securities Act relating to an offering of capital 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 capital 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 include in such
filing 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
5
<PAGE>
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.
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 any event within the
periods referred to in Section 2.1), and in connection with any such request:
6
<PAGE>
(a) As provided in Section 2.1 hereof, 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 by the Selling Holders of the Registrable Securities to be registered
thereunder in accordance with the intended method of distribution thereof and
which shall comply as to form in all material respects with the requirements of
the applicable form and include or incorporate by reference all financial
statements required by the Commission to be filed therewith, and use its best
efforts to cause such filed registration statement to become and remain
effective.
(b) The Company will, prior to filing a registration statement or
prospectus or any amendment or supplement thereto, notify each Holder of
Registrable Securities that a Shelf Registration Statement is being filed and
advise such Holder that an offering of Registrable Securities will be made in
accordance with the method elected (which method may also include an
underwritten offering) by the Holders of a majority of the Registrable
Securities, furnish to each Selling Holder 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) The Company will notify each Holder of Registrable Securities and
counsel for such Holder promptly and, if requested by such Holder or counsel,
confirm such advice in writing promptly (i) when a registration statement has
become effective and when any post-effective amendments and supplements thereto
become effective, (ii) of any request by the Commission or any state securities
authority for post-effective amendments and supplements to a registration
statement has become effective, (iii) of the issuance by the Commission or any
state securities authority of any stop order suspending the effectiveness of a
registration statement or the initiation of any proceedings for that purpose,
(iv) if, during the period a registration statement is effective, the
representations and warranties of the Company contained in any underwriting
agreement, securities sales agreement or other similar agreement, if any,
relating to such offering cease to be true and correct in all material respects,
(v) of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Registrable Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for such
purpose, and (vi) of any determination by the Company that a post-effective
amendment to a registration statement would be appropriate.
(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
7
<PAGE>
of distribution) requests by the time the registration statement relating
thereto is declared effective by the Commission and (ii) cause such Registrable
Securities to be registered with or approved by such other governmental agencies
or authorities, including the National Association of Securities Dealers
("NASD"), 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 except as may
be required by the Securities Act.
(e) The Company will immediately notify each Selling Holder or
Underwriter 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 and shall file with the Commission such amendments and
supplements to such prospectus and deliver copies of the same to the Selling
Holders or Underwriters, as the case may be, 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 or securities sale agreement, if any, in customary form)
containing such representations and warranties to the Holders of such
Registrable Securities and the Underwriters, if any, in form, substance and
scope as are customarily made by issuers to underwriters in similar underwritten
offerings as may be reasonably requested by them 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 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
8
<PAGE>
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
request.
(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.
(k) The Company will use its best efforts to obtain CUSIP numbers for
the Preferred Stock not later than the effective date of the Shelf Registration
Statement.
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.
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
9
<PAGE>
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 Commission, stock exchange,
---------------------
NASD or other registration and filing fees, (ii) fees and expenses of compliance
with securities or blue sky laws and compliance with the rules of the NASD
(including reasonable fees and disbursements of U.S. and local counsel for any
Underwriters and Holders in connection with blue sky qualifications of the
Registrable Securities), (iii) printing expenses of any persons in preparing and
distributing any Shelf Registration Statement, any prospectus, any amendments or
supplements thereto, any underwriting agreements, securities sales agreements,
certificates representing the Preferred Stock and any other document relating to
the performance of, and compliance with, this Agreement, (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 any
securities exchange, (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 special
audits or comfort letters or costs associated with compliance with such special
audits or 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. Except as expressly provided in the preceding sentence,
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 and agents, and each Person, if any, who controls such
Selling Holder within the
10
<PAGE>
meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act
from and against any and all losses, claims, damages, expenses 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 (i) 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), provided that such Underwriter
received prior notice that such prospectus (or the prospectus as supplemented)
corrected such untrue statement or omission of a material fact; or (ii) such
person received a prospectus at or prior to the confirmation of the sale of such
Registrable Securities to such person during the period when the use of such
prospectus has been suspended in accordance with Section 2.4, provided that such
--------
Underwriter received prior notice of such suspension.
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.
11
<PAGE>
SECTION 2.8. Conduct of Indemnification Proceedings. In case any
--------------------------------------
proceeding (including any governmental investigation) shall be instituted
involving any person in respect of 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 appropriate to reflect the
relative benefits received by the Company and the
12
<PAGE>
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
13
<PAGE>
Selling Holder's obligations to contribute pursuant to this Section 2.9 are
several in the 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 pursuant to Section 2.2 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 "broker's transaction" pursuant to Rule 144, but
excluding any private sale 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
14
<PAGE>
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 in this Section
2.12(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. 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 3.2. 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 3.3. 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:
15
<PAGE>
(1) if to Unit Holder:
Montebello Realty Corp.
800 Scudder's Mill Road
Special Investments, Area 2-G
Plainsboro, NJ 08536
Attention: J. Timothy Ford
Facsimile Number: (609) 282-5401
with a copy to:
Peter Blessing, Esq. (5543-10972)
Shearman & Sterling
599 Lexington Avenue
New York, NY 10022
Facsimile Number: (212) 848-7179
(2) if to the Company or the Operating Partnership:
2250 East Imperial Highway
El Segundo, California 90245
Attention: President and Chief Executive Officer
Facsimile Number: (310) 322-5981
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 3.4. 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 3.5. Counterparts; Facsimile Signatures. 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, which may be an original signature or facsimile thereof.
16
<PAGE>
SECTION 3.6. 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 3.7. 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 3.8. 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 3.9. Headings. The headings in this Agreement are for
--------
convenience of reference only and shall not limit or otherwise affect the
meaning hereof.
SECTION 3.10. 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.
(Signature Page Follows)
17
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date first written above.
KILROY REALTY CORPORATION,
a Maryland corporation
By: /s/ Tyler H. Rose
-------------------------------------------
Tyler H. Rose
Senior Vice President and Treasurer
KILROY REALTY, L.P.,
a Delaware limited partnership
By: KILROY REALTY CORPORATION,
its general partner
By: /s/ Tyler H. Rose
-------------------------------------------
Tyler H. Rose
Senior Vice President and Treasurer
MONTEBELLO REALTY CORP., a Delaware corporation
By: /s/ J. Timothy Ford
-------------------------------------------
Name: J. Timothy Ford
Title: Vice President
S-1
<PAGE>
EXHIBIT 10.78
FIRST AMENDMENT TO
FOURTH AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF KILROY REALTY, L.P.
----------------------
This First Amendment to Fourth Amended and Restated Agreement of Limited
Partnership of Kilroy Realty, L.P. (this "Amendment") is entered into as of
---------
December 9, 1999, by and between Kilroy Realty Corporation ("General Partner"),
---------------
a Maryland corporation, as the general partner of Kilroy Realty, L.P., a
Delaware limited partnership (the "Partnership") and Montebello Realty Corp., a
-----------
Delaware corporation ("Series D Preferred Partner").
--------------------------
RECITALS
--------
Whereas, the signatories hereto desire to amend that certain Fourth Amended
and Restated Agreement of Limited Partnership of Kilroy Realty, L.P., dated as
of November 24, 1998, as supplemented by that First Supplement dated January 6,
1999; Second Supplement dated February 22, 1999; Third Supplement dated March 9,
1999; Fourth Supplement dated March 31, 1999; and Fifth Supplement dated March
26, 1999, (collectively, as supplemented, the "Agreement") as set forth herein;
---------
any terms capitalized herein but not defined herein having the definitions
therefor set forth in the Agreement.
Now, therefore, in consideration of the foregoing, of the mutual promises
set forth herein, and of other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto, intending to
be legally bound, agree to continue the Partnership and amend the Agreement as
follows:
1. Units. As of the date hereof Series D Preferred Partner has
-----
contributed _____[$25-$30 million]_______to the Partnership in exchange for the
-----------------
issuance to Series D Preferred Partner of _____________ Series D Preferred Units
(as defined in the Agreement, as amended hereby). The Series D Preferred Units
issued to the Series D Preferred Partner have been duly issued and fully paid.
The Series D Preferred Partner is hereby admitted to the Partnership, effective
as of December 9, 1999, as an Additional Limited Partner (the information set
forth on Exhibit A attached hereto relating to the interest of the Series D
Preferred Partner in the Partnership is hereby included in Exhibit A to the
Agreement), and by execution of this Amendment the Series D Preferred Partner
has agreed to be bound by all of the terms and conditions of the Agreement, as
amended hereby.
2. Amendments to Definitions.
-------------------------
(a) Junior Units. With respect to the definition of "Junior Units" set
------------ ------------
forth in Section 1.1, the text "and" is deleted after "Series A Preferred
Units" and replaced with a
<PAGE>
comma; and the text "and Series D Preferred Units" is hereby inserted
immediately after the text "Series C Preferred Units".
(b) Parity Preferred Units. With respect to the definition of "Parity
---------------------- ------
Preferred Units" set forth in Section 1.1, the text "and" is deleted after
---------------
"Series A Preferred Units" and replaced with a comma; and the text "and
Series D Preferred Units" is hereby inserted immediately after the text
"Series C Preferred Units".
(c) Preferred Unit. With respect to the definition of "Preferred
-------------- ---------
Unit" set forth in Section 1.1, the text "and" is deleted after "Series A
----
Preferred Units" and replaced with a comma; and the text "and Series D
Preferred Units" is hereby inserted immediately after the text "Series C
Preferred Units".
(d) Net Income/Net Loss. With respect to the definition of ""Net
------------------- ---
Income" or "Net Loss"" set forth in Section 1.1, the text "and" is
------ --------
deleted after "Series A Preferred Units" and replaced with a comma; and the
text "and Series D Preferred Units" is hereby inserted immediately after
the text "and Series C Preferred Units".
(e) Partnership Interest. With respect to the definition of
--------------------
"Partnership Interest" set forth in Section 1.1, the text "and" is
--------------------
deleted after "Series A Preferred Units" and replaced with a comma; and the
text "and Series D Preferred Units" is hereby inserted immediately after
the text "Series C Preferred Units".
(f) Senior Preferred Unit. With respect to the definition of "Senior
--------------------- ------
Preferred Unit" set forth in Section 1.1, the text "and" is deleted after
--------------
"Series A Preferred Units" and replaced with a comma; and the text "and
Series D Preferred Units" is hereby inserted immediately after the text
"Series C Preferred Units" in each instance.
(g) Additional Terms. Section 1.1 of the Agreement is hereby amended
----------------
to include the following definitions:
"REIT Series D Preferred Share" means a share of 9 1/4% Series D
-----------------------------
Cumulative Redeemable Preferred Stock, par value $.01 per share,
liquidation $50 per share, of the General Partner.
"Series D Articles Supplementary" shall have the meaning set
-------------------------------
forth in Section 19.3.C(i).
"Series D Contributor" means Montebello Realty Corp., a Delaware
--------------------
corporation, as a party to that certain Contribution Agreement, dated
December 9, 1999, and any Affiliate to which the Series D Preferred
Units may be assigned in accordance with this Agreement."
<PAGE>
"Series D Exchange Notice" shall have the meaning set forth in
------------------------
Section 19.9.B(i).
"Series D Exchange Price" shall have the meaning set forth in
-----------------------
Section 19.9.A(i).
"Series D Excess Units" shall have the meaning set forth in Section
---------------------
19.9.A(iii).
"Series D Limited Partner" means any Person holding Series D
------------------------
Preferred Units and named as a Series D Limited Partner in Exhibit A
attached hereto, as such Exhibit may be amended from time to time, or
any Substitute Limited Partner, in such Person's capacity as a Series
D Limited Partner in the Partnership.
"Series D Preferred Capital" means a Capital Account balance
--------------------------
equal to the product of (i) the number of Series D Preferred Units
then held by the Series D Limited Partners and/or the General Partner
multiplied by (ii) the sum of $50 and any Preferred Distribution
Shortfall per Series D Preferred Unit.
"Series D Preferred Units" shall have the meaning set forth in
------------------------
Section 19.2.
"Series D Preferred Unit Distribution Payment Date" shall have
-------------------------------------------------
the meaning set forth in Section 19.3.A.
"Series D Preferred Unit Partnership Record Date" shall have the
-----------------------------------------------
meaning set forth in Section 19.3.A.
"Series D Redemption Notice" shall have the meaning set forth in
--------------------------
Section 19.9.B(i).
"Series D Redemption Price" shall have the meaning set forth in
-------------------------
Section 19.6.A.
"Series D Priority Return" shall have the meaning set forth in
------------------------
Section 19.1.
3. Amendments.
----------
(a) Section 3.2. Section 3.2 of the Agreement is hereby amended by
-----------
the insertion of the text "and to the Series D Limited Partners in
accordance with Section 19.3 after the text "to the Series C Limited
Partners in accordance with Section 17.2".
<PAGE>
(b) Section 5.1. Section 5.1 of the Agreement is hereby amended by
-----------
the insertion of the text "or Series D Preferred Units in accordance with
Section 19.3 after the text "Series C Preferred Units in accordance with
Section 17.2,".
(c) Section 5.2. Section 5.2 of the Agreement is hereby amended by
-----------
the insertion of the text "or to the Series D Limited Partners" after the
text "Series C Limited Partners".
(d) Section 6.2.
-----------
(i) Section 6.2.B.1(e) of the Agreement is hereby amended by
deleting the word "and" immediately prior to the text "(ii)" and by
the insertion of the following text at the end of such subsection,
"and (iii) in respect of the Series D Preferred Units, an amount equal
to the cumulative Series D Priority Return to the last day of the
current Partnership Year or to the date of redemption, to the extent
Series D Preferred Units are redeemed during such year, over the
cumulative Net Income allocated to the Holders of such units pursuant
to this Section 6.2.B.1(e) for all prior Partnership Years".
-----------------
(ii) Section 6.2.B.2(a) of the Agreement is hereby amended by
the insertion of the text "and Series D Preferred Capital" immediately
after the text "and Series C Preferred Capital" and the deletion of
the text "and" immediately following the text "Series A Preferred
Capital"and inserting in its place a comma.
(iii) Section 6.2.C of the Agreement is hereby amended by the
insertion of the text "and the Series D Preferred Units" immediately
after the text "and the Series C Preferred Units" and the deletion of
the text "and" immediately following the text "Series A Preferred
Units"and inserting in its place a comma.
(e) Section 7.3.F(iii). Section 7.3.F(iii) of the Agreement is hereby
------------------
amended by deleting the text "or" immediately prior to the text "Article
17" and by the insertion of the text "or Article 19" immediately following
the text "Article 17".
(f) Section 7.3.F(v). Section 7.3.F(v) of the Agreement is hereby
----------------
amended by deleting the text "and" immediately after the text "17.4" and
inserting in its place a comma and by the insertion of the text ", 19.6 and
19.9" immediately following the text "17.7".
(g) Section 7.9.D. Section 7.9.D of the Agreement is hereby amended
-------------
by the insertion of the text "and to the Series D Limited Partners in
accordance with Section 19.3 after the text "and the Series C Limited
Partners in accordance with Sections 16.2 and 17.2".
----------------------
<PAGE>
(h) Section 8.4. Section 8.4 of the Agreement is hereby amended by
-----------
deleting the text "Redemption" immediately following the text "Section 8.6
and the" and by the insertion in its place of the text "redemption"; and
further deleting the text "and" immediately after the text "17.4" and
inserting in its place a comma and by the insertion of the text ", 19.6 and
19.9" immediately following the text "17.7".
(i) Section 11.1.A. Section 11.1.A of the Agreement is hereby amended
--------------
by the insertion of the text "or REIT Series D Preferred Shares pursuant to
Section 19.9 after the text "or Series C Preferred Shares pursuant to
Section 17.7".
(j) Section 11.2.B. Section 11.2.B of the Agreement is hereby amended
--------------
by deleting the text "and" immediately prior to the text "17.5" and
replacing it with a comma; and by the insertion of the text "and "Section
19.7" immediately following the text "17.5".
(k) Section 11.2.C. Section 11.2.C of the Agreement is hereby amended
--------------
by deleting the text "and" immediately prior to the text "17.5" and
replacing it with a comma; and by the insertion of the text "and "Section
19.7" immediately following the text "17.5".
(l) Section 11.3.A. Section 11.3.A of the Agreement is hereby amended
--------------
by deleting the text "16.7 and 17.7" and by the insertion in its place of
the text "16.7, 17.7 and 19.9".
(m) Section 11.3.D.
--------------
(i) Section 11.3.D of the Agreement is hereby amended by the
insertion of the text "19.6 and 19.9" after the text "and 17.7".
(ii) Section 11.3.D of the Agreement is hereby further amended
by the insertion of the text "or Series D Preferred Units" after the
text "or Series C Preferred Units".
(n) Section 11.3.E. Section 11.3.E of the Agreement is hereby amended
--------------
by the insertion of the text "or the specified amount of REIT Series D
Preferred Shares" after the text "or the specified amount of REIT Series C
Preferred Shares".
(o) Section 11.5. Section 11.5 of the Agreement is hereby amended by
------------
the insertion of the text "and the right to exchange for REIT Series D
Preferred Shares pursuant to Section 19.9 after the text "the right to
exchange for REIT Series C Shares pursuant to Section 17.7".
<PAGE>
(p) Section 11.6.A. Section 11.6.A is hereby amended by the insertion
--------------
of the text "or its right of redemption or exchange of all of such Limited
Partner's Series D Preferred Units under Section 19.9" after the text "or
its right of redemption or exchange of all of such Limited Partner's Series
C Preferred Units under Section 17.7."
(q) Section 11.6.B. Section 11.6.B is hereby amended by the insertion
--------------
of the text "or exchange of all of such Limited Partner's Series D
Preferred Units under Section 19.9" after the text "or exchange of all of
such Limited Partner's Series C Preferred Units under Section 17.7".
(r) Section 11.6.D. Section 11.6.D of the Agreement is hereby amended
--------------
by deleting the text "or" immediately following the text "17.4"; and by the
insertion of the text ",19.6 or 19.9" immediately following the text
"17.7".
(s) Section 11.6.E. Section 11.6.E of the Agreement is hereby amended
--------------
by the insertion of the text ", REIT Series C Preferred Shares or REIT
Series D Preferred Shares" immediately following the text "REIT Series A
Preferred Shares"; and by the insertion of the text ", Series C Preferred
Units or Series D Preferred Units" immediately following the text "Series A
Preferred Units"; and in 11.6.E(iv), the deletion of the text "Redemption"
immediately prior to the text "or exchange for" and the insertion of the
text "redemption' in its place and the deletion of the text "and"
immediately following the text "17.4"; and by the insertion of the text
",19.6 or 19.9" immediately following the text "17.7"; and in 11.6.E(v) the
deletion of the text "and" immediately following the text "17.4"; and by
the insertion of the text ",19.6 or 19.9" immediately following the text
"17.7".
(t) Section 11.6.F. Section 11.6.F is hereby amended by the insertion
--------------
of the text "or Series D Preferred Units" after the text "or Series C
Preferred Units".
(u) Section 13.1.G. Section 13.1.G is hereby amended by the insertion
--------------
of the text "or REIT Series D Preferred Shares" after the text "or REIT
Series C Preferred Shares".
(v) Section 14.1.B. Section 14.1.B is hereby amended by the insertion
--------------
of the text "and the Series D Limited Partners" after the text "and the
Series C Limited Partners".
4. Article 19. The following new Article 19 is inserted in the Agreement
----------
after Article 18 thereof:
"ARTICLE 19.
SERIES D PREFERRED UNITS
<PAGE>
Section 19.1. Definition. The term "Series D Priority Return" shall
---------- ------------------------
mean, an amount equal to 9 1/4% per annum, determined on the basis of a 360
day year of twelve 30 day months (and for any period shorter than a full
quarterly period for which distributions are computed, the amount of the
distribution payable will be computed based on the ratio of the actual
number of days elapsed in such period to ninety (90) days), cumulative to
the extent not distributed for any given distribution period pursuant to
Sections 5.1 and 19.3 of the Partnership Agreement, of the stated value of
$50 per Series D Preferred Unit, commencing on the date of issuance of such
Series D Preferred Unit. Capitalized terms used herein and not otherwise
defined herein shall have the meanings ascribed to them in the Partnership
Agreement.
Section 19.2. Designation and Number. A series of Partnership Units
----------------------
in the Partnership designated as the "9 1/4% Series D Cumulative Redeemable
Preferred Units" (the "Series D Preferred Units") is hereby established.
------------------------
The number of Series D Preferred Units shall be __________.
Section 19.3. Distributions.
-------------
A. Payment of Distributions. Subject to the rights of Holders
------------------------
of Parity Preferred Units as to the payment of distributions, pursuant
to Section 5.1 hereof, Holders of Series D Preferred Units shall be
entitled to receive, when, as and if declared by the Partnership
acting through the General Partner, out of Available Cash, cumulative
preferential cash distributions at the rate per annum of 9 1/4% of the
original Capital Contribution per Series D Preferred Unit. All
distributions shall be cumulative, shall accrue from the original date
of issuance and will be payable (i) quarterly (such quarterly periods
for purposes of payment and accrual will be the quarterly periods
ending on the dates specified in this sentence and not calendar year
quarters) in arrears, on February 15, May 15, August 15 and November
15, of each year commencing on the first such payment dates to occur
following their original date of issuance, and, (ii), in the event of
(A) an exchange of Series D Preferred Units into REIT Series D
Preferred Shares, or (B) a redemption of Series D Preferred Units, on
the exchange date or redemption date, as applicable (each a "Series D
--------
Preferred Unit Distribution Payment Date"). The amount of the
----------------------------------------
distribution payable for any period will be computed on the basis of a
360-day year of twelve 30-day months and for any period shorter than a
full quarterly period for which distributions are computed, the amount
of the distribution payable will be computed based on the ratio of the
actual number of days elapsed in such period to ninety (90) days. If
any date on which distributions are to be made on the Series D
Preferred Units is not a Business Day (as defined herein), then
payment of the distribution to be made on such date will be made on
the next succeeding day that is a Business Day (and without any
interest or other payment in respect of any such delay) except that,
if such Business Day is in the next succeeding calendar year, such
payment shall be
<PAGE>
made on the immediately preceding Business Day, in each case with the
same force and effect as if made on such date. Distributions on the
Series D Preferred Units will be made to the Holders of record of the
Series D Preferred Units on the relevant record dates to be fixed by
the Partnership acting through the General Partner, which record dates
shall in no event exceed fifteen (15) Business Days prior to the
relevant Series D Preferred Unit Distribution Payment Date (the
"Series D Preferred Unit Partnership Record Date").
-----------------------------------------------
B. Distributions Cumulative. Distributions on the Series D
------------------------
Preferred Units will accrue whether or not the terms and provisions of
any agreement of the Partnership, including any agreement relating to
its indebtedness at any time prohibit the declaration, setting aside
for payment or current payment of distributions, whether or not the
Partnership has earnings, whether or not there are funds legally
available for the payment of such distributions and whether or not
such distributions are authorized. Accrued but unpaid distributions
on the Series D Preferred Units will accumulate as of the Series D
Preferred Unit Distribution Payment Date on which they first become
payable. Distributions on account of arrears for any past
distribution periods may be declared and paid at any time, without
reference to a regular Series D Preferred Unit Distribution Payment
Date to Holders of record of the Series D Preferred Units on the
record date fixed by the Partnership acting through the General
Partner which date shall not exceed fifteen (15) Business Days prior
to the payment date. Accumulated and unpaid distributions will not
bear interest.
C. Priority as to Distributions.
----------------------------
(i) So long as any Series D Preferred Units are outstanding,
no distribution of cash or other property shall be authorized,
declared, paid or set apart for payment on or with respect to any
Junior Unit, nor shall any cash or other property (other than
capital stock of the General Partner which corresponds in ranking
to the Partnership Interests being acquired) be set aside for or
applied to the purchase, redemption or other acquisition for
consideration of any Series D Preferred Units, any Parity
Preferred Units (including the Series A Preferred Units or Series
C Preferred Units) with respect to distributions or any Junior
Units, unless, in each case, all distributions accumulated on all
Series D Preferred Units and all classes and series of
outstanding Parity Preferred Units as to the payment of
distributions have been paid in full. The foregoing sentence
will not prohibit (a) distributions payable solely in Junior
Units, (b) the exchange of Junior Units or Parity Preferred Units
(including the Series A Preferred Units or Series C Preferred
Units) into Junior Units, or (c) the redemption of Partnership
Interests corresponding to any REIT Series D Preferred Shares (as
hereinafter defined), Parity Preferred Shares (as defined in the
<PAGE>
Series D Articles Supplementary to the Charter (as defined below)
establishing the REIT Series D Preferred Shares (the "Series D
--------
Articles Supplementary") with respect to distributions or Junior
----------------------
Stock (as defined in the Series D Articles Supplementary) to be
purchased by the General Partner pursuant to the Charter to
preserve the General Partner's status as a real estate investment
trust, provided that such redemption shall be upon the same terms
as the corresponding stock purchase pursuant to the Charter.
(ii) So long as distributions have not been paid in full
(or a sum sufficient for such full payment is not irrevocably
deposited in trust for immediate payment) upon the Series D
Preferred Units, all distributions authorized and declared on the
Series D Preferred Units and all classes or series of outstanding
Parity Preferred Units (including the Series A Preferred Units or
Series C Preferred Units) with respect to payment of
distributions shall be authorized and declared so that the amount
of distributions authorized and declared per Series D Preferred
Unit and such other classes or series of Parity Preferred Units
(including the Series A Preferred Units or Series C Preferred
Units) shall in all cases bear to each other the same ratio that
accrued distributions per Series D Preferred Unit and such other
classes or series of Parity Preferred Units (which shall not
include any accumulation in respect of unpaid distributions for
prior distribution periods if such class or series of Parity
Preferred Units do not have cumulative distribution rights) bear
to each other.
(iii) Notwithstanding anything to the contrary set forth
herein, distributions on Partnership Interests held by either (a)
the General Partner or (b) any other Holder of Partnership
Interest in the Partnership, in each case ranking junior to or on
parity with the Series D Preferred Units may be made, without
preserving the priority of distributions described in Sections
19.3.C(i) and (ii), but only to the extent such distributions are
required to preserve the real estate investment trust status of
the General Partner and in the case of any Holder other than the
General Partner only to the extent required by the Partnership
Agreement.
D. No Further Rights. Holders of Series D Preferred Units shall
-----------------
not be entitled to any distributions, whether payable in cash, other
property or otherwise, in excess of the full cumulative distributions
described herein.
Section 19.4. Intentionally Omitted.
---------------------
<PAGE>
Section 19. 5. Liquidation Proceeds.
--------------------
A. Upon any voluntary or involuntary liquidation, dissolution
or winding-up of the affairs of the Partnership, distributions on the
Series D Preferred Units shall be made in accordance with Article 13
of the Partnership Agreement.
B. Notice. Written notice of any such voluntary or involuntary
------
liquidation, dissolution or winding-up of the Partnership, stating the
payment date or dates when, and the place or places where, the amounts
distributable in such circumstances shall be payable, shall be given
by (i) fax and (ii) by first class mail, postage pre-paid, not less
than thirty (30) and not more than sixty (60) days prior to the
payment date stated therein, to each record Holder of the Series D
Preferred Units at the respective addresses of such Holders as the
same shall appear on the transfer records of the Partnership.
C. No Further Rights. After payment of the full amount of the
-----------------
liquidating distributions to which they are entitled, the Holders of
Series D Preferred Units will have no right or claim to any of the
remaining assets of the Partnership.
D. Consolidation, Merger or Certain Other Transactions. The
---------------------------------------------------
consolidation or merger or other business combination of the
Partnership with or into, any corporation, trust, or other entity (or
of any corporation, trust, or other entity with or into the
Partnership) shall not be deemed to constitute a liquidation,
dissolution or winding-up of the Partnership.
Section 19.6. Optional Redemption.
--------------------
A. Right of Optional Redemption. The Series D Preferred Units
----------------------------
may not be redeemed prior to the fifth (5th) anniversary of the
issuance date. On or after such date, the Partnership shall have the
right to redeem the Series D Preferred Units, in whole or in part, at
any time or from time to time, upon not less than thirty (30) nor more
than sixty (60) days written notice, at a redemption price, payable in
cash, equal to the Capital Account balance of the Holders of Series D
Preferred Units (the "Series D Redemption Price"); provided, however,
------------------------- -------- -------
that no redemption pursuant to this Section 19.6 will be permitted if
the Series D Redemption Price does not equal or exceed the original
Capital Contribution of such Holder plus the cumulative Series D
Priority Return, to the redemption date to the extent not previously
distributed. If fewer than all of the outstanding Series D Preferred
Units are to be redeemed, the Series D Preferred Units to be redeemed
<PAGE>
shall be selected pro rata (as nearly as practicable without creating
fractional units).
B. Limitation on Redemption.
------------------------
(i) The Series D Redemption Price of the Series D
Preferred Units (other than the portion thereof consisting of
accumulated but unpaid distributions) will be payable solely out
of the sale proceeds of capital stock of the General Partner,
which will be contributed by the General Partner to the
Partnership as an additional capital contribution, or out of the
sale of limited partner interests in the Partnership and from no
other source. For purposes of the preceding sentence, "capital
stock" means any equity securities (including Common Stock and
Preferred Stock (as such terms are defined in the Charter)),
shares, participation or other ownership interests (however
designated) and any rights (other than debt securities
convertible into or exchangeable for equity securities) or
options to purchase any of the foregoing.
(ii) The Partnership may not redeem fewer than all of the
outstanding Series D Preferred Units unless all accumulated and
unpaid distributions have been paid on all Series D Preferred
Units for all quarterly distribution periods terminating on or
prior to the date of redemption.
C. Procedures for Redemption.
-------------------------
(i) Notice of redemption will be (A) faxed, and (B) mailed
by the Partnership, by certified mail, postage prepaid, not less
than thirty (30) nor more than sixty (60) days prior to the
redemption date, addressed to the respective Holders of record of
the Series D Preferred Units at their respective addresses as
they appear on the records of the Partnership. No failure to
give or defect in such notice shall affect the validity of the
proceedings for the redemption of any Series D Preferred Units
except as to the Holder to whom such notice was defective or not
given. In addition to any information required by law, each such
notice shall state: (1) the redemption date, (2) the Series D
Redemption Price, (3) the aggregate number of Series D Preferred
Units to be redeemed and if fewer than all of the outstanding
Series D Preferred Units are to be redeemed, the number of Series
D Preferred Units to be redeemed held by such Holder, which
number shall equal such Holder's pro rata share (based on the
percentage of the aggregate number of outstanding Series D
Preferred Units the total number of Series D Preferred Units held
by such Holder represents) of the aggregate number of Series D
Preferred Units to be redeemed, (4) the
<PAGE>
place or places where the Series D Preferred Units are to be
surrendered for payment of the Series D Redemption Price, (5)
that distributions on the Series D Preferred Units to be redeemed
will cease to accumulate on such redemption date and (6) that
payment of the Series D Redemption Price will be made upon
presentation and surrender of such Series D Preferred Units.
(ii) If the Partnership gives a notice of redemption in
respect of Series D Preferred Units (which notice will be
irrevocable) then, by 12:00 noon, New York City time, on the
redemption date, the Partnership will deposit irrevocably in
trust for the benefit of the Series D Preferred Units being
redeemed funds sufficient to pay the applicable Series D
Redemption Price and will give irrevocable instructions and
authority to pay such Series D Redemption Price to the Holders of
the Series D Preferred Units upon surrender of the Series D
Preferred Units by such Holders at the place designated in the
notice of redemption. If the Series D Preferred Units are
evidenced by a certificate and if fewer than all Series D
Preferred Units evidenced by any certificate are being redeemed,
a new certificate shall be issued upon surrender of the
certificate evidencing all Series D Preferred Units, evidencing
the unredeemed Series D Preferred Units without cost to the
Holder thereof. On and after the date of redemption,
distributions will cease to accumulate on the Series D Preferred
Units or portions thereof called for redemption, unless the
Partnership defaults in the payment thereof. If any date fixed
for redemption of Series D Preferred Units is not a Business Day,
then payment of the Series D Redemption Price payable on such
date will be made on the next succeeding day that is a Business
Day (and without any interest or other payment in respect of any
such delay) except that, if such Business Day falls in the next
calendar year, such payment will be made on the immediately
preceding Business Day, in each case with the same force and
effect as if made on such date fixed for redemption. If payment
of the Series D Redemption Price is improperly withheld or
refused and not paid by the Partnership, distributions on such
Series D Preferred Units will continue to accumulate from the
original redemption date to the date of payment, in which case
the actual payment date will be considered the date fixed for
redemption for purposes of calculating the applicable Series D
Redemption Price.
Section 19.7. Voting Rights.
-------------
A. General. Holders of the Series D Preferred Units will not
-------
have any voting rights or right to consent to any matter requiring the
consent or
<PAGE>
approval of the Limited Partners, except as set forth in below and in
Section 7.3.F.
B. Certain Voting Rights. So long as any Series D Preferred
---------------------
Units remain outstanding, the Partnership shall not, without the
affirmative vote of the Holders of at least two-thirds of the Series D
Preferred Units outstanding at the time (i) (A) authorize or create,
or increase the authorized or issued amount of, any class or series of
Partnership Interests ranking prior to the Series D Preferred Units
with respect to payment of distributions or rights upon liquidation,
dissolution or winding-up, or (B) reclassify any Partnership Interests
of the Partnership into any such senior Partnership Interest, or (c)
create, authorize or issue any obligations or security convertible
into or evidencing the right to purchase any such senior Partnership
Interests, (ii) (A) authorize or create, or increase the authorized or
issued amount of any Parity Preferred Units, or (B) reclassify any
Partnership Interest into any such Partnership Interest or (c) create,
authorize or issue any obligations or security convertible into or
evidencing the right to purchase any such Partnership Interests but
only to the extent such Parity Preferred Units are issued to an
Affiliate of the Partnership, other than the General Partner to the
extent the issuance of such interests was to allow the General Partner
to issue corresponding preferred stock to Persons who are not
Affiliates of the Partnership, or (iii) either (A) consolidate, merge
into or with, or convey, transfer or lease its assets substantially as
an entirety to, any corporation or other entity or (B) amend, alter or
repeal the provisions of the Partnership Agreement (including, without
limitation, this Article 19), whether by merger, consolidation or
otherwise, in each case in a manner that would materially and
adversely affect the powers, special rights, preferences, privileges
or voting power of the Series D Preferred Units or the Holders
thereof; provided, however, that with respect to the occurrence of any
event set forth in (iii) above, so long as (1) the Partnership is the
surviving entity and the Series D Preferred Units remain outstanding
with the terms thereof unchanged, or (2) the resulting, surviving or
transferee entity is a partnership, limited liability company or other
pass-through entity organized under the laws of any state and
substitutes the Series D Preferred Units for other interests in such
entity having substantially the same terms and rights as the Series D
Preferred Units, including with respect to distributions, voting
rights and rights upon liquidation, dissolution or winding-up, then
the occurrence of any such event shall not be deemed to materially and
adversely affect such rights, privileges or voting powers of the
Holders of the Series D Preferred Units; and provided further that any
increase in the amount of Partnership Interests or the creation or
issuance of any other class or series of Partnership Interests, in
each case ranking (y) junior to the Series D Preferred Units with
respect to payment of distributions and the distribution of assets
upon liquidation, dissolution or winding-up, or (z) on a parity to the
Series D Preferred Units with respect to payment of distributions and
the distribution of assets upon liquidation, dissolution or winding up
to the extent such Partnership Interests are not issued to an
Affiliate of the Partnership, other
<PAGE>
than the General Partner to the extent the issuance of such interests
was to allow the General Partner to issue corresponding preferred
stock to persons who are not Affiliates of the Partnership, shall not
be deemed to materially and adversely affect such rights, preferences,
privileges or voting powers.
Section 19.8. Transfer Restrictions. The Series D Preferred Units
---------------------
shall be subject to the provisions of Article 11 hereof; provided, however,
-------- -------
that the Series D Preferred Units shall not be subject to the right of
first refusal of the General Partner as described in Section 11.3 hereof
and any Affiliate of the Series D Contributor to whom the Series D
Preferred Units are assigned (in whole or in part) in accordance with this
Partnership Agreement (other than the right of first refusal) shall be
admitted to the Partnership as a Substitute Limited Partner. No transfer
of Series D Preferred Units is permitted, without the consent of the
General Partner which consent may be given or withheld in its sole and
absolute discretion, if such transfer would result in more than four
partners holding all outstanding Series D Preferred Units within the
meaning of Treasury Regulation Section 1.7704-1(h)(3)(i); provided,
--------
however, that the General Partner's consent may not be unreasonably
-------
withheld if (a) such transfer would not result in more than ten partners
holding all outstanding Series D Preferred Units within the meaning of
Treasury Regulation Section 1.7704-1(h)(3)(i) and (b) the General Partner
is relying on a provision other than Treasury Regulation Section 1.7704-
1(h) to avoid classification of Operating Partnership as a PTP. In
addition, no transfer may be made to any person if such transfer would
cause the exchange of the Series D Preferred Units for REIT Series D
Preferred Shares, as provided herein, to be required to be registered under
the Securities Act of 1933, as amended, or any state securities laws.
Section 19.9. Exchange Rights.
---------------
(a) Right to Exchange.
-----------------
(i) Series D Preferred Units will be exchangeable in whole
but not in part unless expressly otherwise provided herein at
anytime on or after the tenth (10th) anniversary of the date of
issuance, at the option of 51% of the Holders of all outstanding
Series D Preferred Units, for authorized but previously unissued
REIT Series D Preferred Shares at an exchange rate of one REIT
Series D Preferred Shares from the General Partner for one Series
D Preferred Unit, subject to adjustment as described below (the
"Series D Exchange Price"), provided that the Series D Preferred
------------------------ --------
Units will become exchangeable at any time, in whole but not in
part unless expressly otherwise provided herein, at the option of
51% of the Holders of all outstanding Series D Preferred Units
for REIT Series D Preferred Shares if (x) at any time full
distributions shall not have been timely made on any Series D
Preferred Unit with respect to six (6) prior quarterly
distribution periods, whether or not consecutive, provided,
--------
<PAGE>
however, that a distribution in respect of Series D Preferred
-------
Units shall be considered timely made if made within two (2)
Business Days after the applicable Series D Preferred Unit
Distribution Payment Date if at the time of such late payment
there shall not be any prior quarterly distribution periods in
respect of which full distributions were not timely made or (y)
upon receipt by a Holder or Holders of Series D Preferred Units
of (1) notice from the General Partner that the General Partner
or a Subsidiary of the General Partner has taken the position
that the Partnership is, or upon the occurrence of a defined
event in the immediate future will be, a PTP and (2) an opinion
rendered by an outside nationally recognized independent counsel
familiar with such matters addressed to a Holder or Holders of
Series D Preferred Units, that the Partnership is or likely is,
or upon the occurrence of a defined event in the immediate future
will be or likely will be, a PTP. In addition, the Series D
Preferred Units may be exchanged for REIT Series D Preferred
Shares, in whole but not in part unless expressly otherwise
provided herein, at the option of 51% of the Holders of all
outstanding Series D Preferred Units prior to the tenth (10th)
anniversary of the issuance date and after the third (3rd)
anniversary of the issuance date thereof if such Holder of a
Series D Preferred Unit shall deliver to the General Partner
either (i) a private letter ruling addressed to such Holder of
Series D Preferred Units or (ii) an opinion of independent
counsel reasonably acceptable to the General Partner based on the
enactment of temporary or final Treasury Regulations or the
publication of a Revenue Ruling, in either case to the effect
that an exchange of the Series D Preferred Units at such earlier
time would not cause the Series D Preferred Units to be
considered "stock and securities" within the meaning of Section
351(e) of the Code for purposes of determining whether the Holder
of such Series D Preferred Units is an "investment company" under
section 721(b) of the Code if an exchange is permitted at such
earlier date. Furthermore, if the Series D Contributor holding
51% of all outstanding Series D Preferred Units so determines,
all outstanding Series D Preferred Units held by all Holders
(regardless of whether held by the Series D Contributor) shall be
exchanged in whole but not in part for REIT Series D Preferred
Shares (but only if the exchange in whole may be accomplished
consistently with the ownership limitations set forth under the
Series D Articles Supplementary (as defined herein), taking into
account exceptions thereto) if either (A) any Holder thereof is a
real estate investment trust within the meaning of Sections 856
through 859 of the Code and (i) the Partnership reasonably
determines that the assets and income of the Partnership for a
taxable year after 1999 would not satisfy the income and assets
tests of Section 856 of the Code for such taxable year if the
Partnership were a real estate investment trust within the
meaning of the Code or (ii) any such Holder of Series D Preferred
<PAGE>
Units shall deliver to the Partnership and the General Partner an
opinion of independent counsel reasonably acceptable to the
General Partner to the effect that, based on the assets and
income of the Partnership for a taxable year after 1999, the
Partnership would not satisfy the income and assets tests of
Section 856 of the Code for such taxable year if the Partnership
were a real estate investment trust within the meaning of the
Code and that such failure would create a meaningful risk that a
Holder of the Series D Preferred Units would fail to maintain
qualification as a real estate investment trust, or (B) any
Holder of the Series D Preferred Units is an entity other than a
real estate investment trust within the meaning of Sections 856
through 859 of the Code, and both (I) such Holder concludes based
on results or projected results that there exists (in the
reasonable judgment of the Holder) an imminent and substantial
risk that the Holder's interest in the Partnership does or will
represent more than 19.5% of the total profits or capital
interests in the Partnership (determined in accordance with
Treasury Regulations Section 1.731-2(e)(4)) for a taxable year,
and (II) the Holder delivers to the General Partner an opinion of
nationally recognized independent counsel to the effect that
there is an imminent and substantial risk that the Holder's
interest in the Partnership does or will represent more than
19.5% of the total profits or capital interests in the
Partnership (determined in accordance with Treasury Regulations
Section 1.731-2(e)(4)) for a taxable year.
(ii) Notwithstanding anything to the contrary set forth in
Section 19.9.A(i) hereof, if a Series D Exchange Notice (as
defined herein) has been delivered to the General Partner, then
the General Partner may, at its option, within ten (10) Business
Days after receipt of the Series D Exchange Notice, elect to
cause the Partnership to redeem all or a portion of the
outstanding Series D Preferred Units for cash in an amount equal
to the original Capital Contribution per Series D Preferred Unit
plus all accrued and unpaid distributions thereon to the date of
redemption. If the General Partner elects to redeem fewer than
all of the outstanding Series D Preferred Units, the number of
Series D Preferred Units held by each Holder to be redeemed shall
equal such Holder's pro rata share (based on the percentage of
the aggregate number of outstanding Series D Preferred Units that
the total number of Series D Preferred Units held by such Holder
represents) of the number of Series D Preferred Units being
redeemed.
(iii) In the event an exchange of all or a portion of
Series D Preferred Units pursuant to Section 19.9.A(i) hereof
would violate the provisions on ownership limitation of the
General Partner set forth in Section 7 of Article Third of the
Series D Articles Supplementary to the
<PAGE>
Charter with respect to the REIT Series D Preferred Shares, each
Holder of the Series D Preferred Units shall be entitled to
exchange, pursuant to the provisions of Section 19.9.B a number
of Series D Preferred Units which would comply with the
provisions on the ownership limitation of the General Partner set
forth in such Section 7 of Article Third of the Series D Articles
Supplementary, with respect to such Holder, and any Series D
Preferred Units not so exchanged (the "Series D Excess Units")
---------------------
shall be redeemed by the Partnership for cash in an amount equal
to the original Capital Contribution per Excess Unit, plus any
accrued and unpaid distributions thereon, whether or not
declared, to the date of redemption subject to any restriction
therein contained in any debt instrument or agreement of the
Partnership. In the event an exchange would result in Series D
Excess Units, as a condition to such exchange, each Holder of
such units agrees to provide representations and covenants
reasonably requested by the General Partner relating to (1) the
widely held nature of the interests in such Holder, sufficient to
assure the General Partner that the Holder's ownership of stock
of the General Partner (without regard to the limits described
above) will not cause any individual to own in excess of 6.2% of
the stock of the General Partner, and (2) to the extent such
Holder can so represent and covenant without obtaining
information from its owners (other than one or more direct or
indirect parent corporations, limited liability companies or
partnerships and not the holders of any interests in any such
parent), the Holder's ownership of tenants of the Partnership and
its Affiliates. For purposes of determining the number of Series
D Excess Units under this Section 19.9(A)(iii), the "Beneficial
Ownership Limit" and "Constructive Ownership Limit" set forth in
the Series D Articles Supplementary shall be deemed to be 0.8
percentage points less than the limits set forth in the Series D
Articles Supplementary. To the extent the General Partner would
not be able to pay the cash set forth above in exchange for the
Series D Excess Units, and to the extent consistent with the
Charter, the General Partner agrees that it will grant to the
Holders of the Series D Preferred Units exceptions to the
Beneficial Ownership Limit and Constructive Ownership Limit set
forth in the Series D Articles Supplementary sufficient to allow
such Holders to exchange all of their Series D Preferred Units
for REIT Series D Preferred Shares, provided such Holders furnish
to the General Partner representations acceptable to the General
Partner in its sole and absolute discretion which assure the
General Partner that such exceptions will not jeopardize the
General Partner's tax status as a REIT for purposes of federal
and applicable state law. Notwithstanding any provision of this
Partnership Agreement to the contrary, no Series D Limited
Partner shall be entitled to effect an exchange of Series D
Preferred Units for REIT Series D Preferred Shares to the extent
that ownership or right to acquire such
<PAGE>
shares would cause the Partner or any other Person or, in the
opinion of counsel selected by the General Partner, may cause the
Partner or any other Person, to violate the restrictions on
ownership and transfer of REIT Series D Preferred Shares set
forth in the Charter. To the extent any such attempted exchange
for REIT Series D Preferred Shares would be in violation of the
previous sentence, it shall be void ab initio and such Series D
Limited Partner shall not acquire any rights or economic interest
in the REIT Series D Preferred Shares otherwise issuable upon
such exchange.
(iv) The redemption of Series D Preferred Units described in
Section 19.9.A(ii) and (iii) shall be subject to the provisions
of Section 19.6.B(i) and Section 19.6.C(ii); provided, however,
-------- -------
that the term "Series D Redemption Price" in such Section shall
be read to mean the original Capital Contribution per Series D
Preferred Unit being redeemed plus all accrued and unpaid
distributions to the redemption date.
(b) Procedure for Exchange.
----------------------
(i) Any exchange shall be exercised pursuant to a notice of
exchange (the "Series D Exchange Notice") delivered to the
------------------------
General Partner by the Partners representing at least 51% of the
outstanding Series D Preferred Units (or by the Series D
Contributor in the case of an exchange pursuant to the last
sentence of Section 19.9.A(i) hereof), by (A) fax and (B) by
certified mail postage prepaid. The General Partner may effect
any exchange of Series D Preferred Units, or exercise its option
to cause the Partnership to redeem any portion of the Series D
Preferred Units for cash pursuant to Section 19.9.A(ii) or redeem
Series D Excess Units pursuant to Section 19.9.A(iii), by
delivering to each Holder of record of Series D Preferred Units,
within ten (10) Business Days following receipt of the Series D
Exchange Notice, (a) if the General Partner elects to cause the
Partnership to acquire any of the Series D Preferred Units then
outstanding, (1) certificates representing the REIT Series D
Preferred Shares being issued in exchange for the Series D
Preferred Units of such Holder being exchanged and (2) a written
notice (a "Series D Redemption Notice") stating (A) the
--------------------------
redemption date, which may be the date of such Series D
Redemption Notice or any other date which is not later than sixty
(60) days following the receipt of the Series D Exchange Notice,
(B) the redemption price, (C) the place or places where the
Series D Preferred Units are to be surrendered and (D) that
distributions on the Series D Preferred Units will cease to
accrue on such redemption date, or (b) if the General Partner
elects to cause the Partnership to redeem all of the Series D
Preferred Units then outstanding in exchange for cash, a Series D
Redemption Notice. Series D Preferred
<PAGE>
Units shall be deemed canceled (and any corresponding Partnership
Interest represented thereby deemed terminated) on the redemption
date. Holders of Series D Preferred Units shall deliver any
canceled certificates representing Series D Preferred Units which
have been exchanged or redeemed to the office of General Partner
(which currently is located at 2250 E. Imperial Highway, El
Segundo, CA 90245) within ten (10) Business Days of the exchange
or redemption with respect thereto. Notwithstanding anything to
the contrary contained herein, any and all Series D Preferred
Units to be exchanged for REIT Series D Preferred Shares pursuant
to this Section 19.9 shall be so exchanged in a single
transaction at one time. As a condition to exchange, the General
Partner may require the Holders of Series D Preferred Units to
make such representations as may be reasonably necessary for the
General Partner to establish that the issuance of REIT Series D
Preferred Shares pursuant to the exchange shall not be required
to be registered under the Securities Act or any state securities
laws. Any REIT Series D Preferred Shares issued pursuant to this
Section 19.9 shall be delivered as shares which are duly
authorized, validly issued, fully paid and nonassessable, free of
any pledge, lien, encumbrance or restriction other than those
provided in the Charter, the Bylaws of the General Partner, the
Securities Act and relevant state securities or blue sky laws.
The certificates representing the REIT Series D Preferred
Shares issued upon exchange of the Series D Preferred Units shall
contain the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT
BE TRANSFERRED, SOLD, ASSIGNED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF EXCEPT (A) PURSUANT TO AN EFFECTIVE
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "ACT") AND STATE SECURITIES LAWS OR (B) IF THE
CORPORATION HAS BEEN FURNISHED WITH A SATISFACTORY OPINION
OF COUNSEL FOR THE HOLDER OF THE SHARES REPRESENTED HEREBY,
OR OTHER EVIDENCE SATISFACTORY TO THE CORPORATION, THAT SUCH
TRANSFER, SALE, ASSIGNMENT, PLEDGE, HYPOTHECATION OR OTHER
DISPOSITION IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF
THE ACT AND STATE SECURITIES
<PAGE>
LAWS AND THE RULES AND REGULATIONS THEREUNDER.
(ii) In the event of an exchange of Series D Preferred
Units for REIT Series D Preferred Shares, an amount equal to the
accrued and unpaid distributions, whether or not declared, to the
date of exchange on any Series D Preferred Units tendered for
exchange shall (A) accrue on the REIT Series D Preferred Shares
into which such Series D Preferred Units are exchanged, and (B)
continue to accrue on such Series D Preferred Units, which shall
remain outstanding following such exchange, with the General
Partner as the Holder of such Series D Preferred Units.
Notwithstanding anything to the contrary set forth herein, in no
event shall a Holder of a Series D Preferred Unit that was
validly exchanged into REIT Series D Preferred Shares pursuant to
this section (other than the General Partner now holding such
Series D Preferred Unit), receive a cash distribution out of
Available Cash of the Partnership, if such Holder, after
exchange, is entitled to receive a distribution out of Available
Cash with respect to the share of REIT Series D Preferred Shares
for which such Series D Preferred Unit was exchanged or redeemed.
Further for purposes of the foregoing, in the event of an
exchange of Series D Preferred Units for REIT Series D Preferred
Shares, if the accrued and unpaid distributions per Series D
Preferred Unit is not the same for each Series D Preferred Unit,
the accrued and unpaid distributions per Series D Preferred Unit
for each such Series D Preferred Unit shall be equal to the
greatest amount of such accrued and unpaid distributions per
Series D Preferred Unit on any such unit.
(iii) Fractional shares of REIT Series D Preferred Shares
are not to be issued upon exchange but, in lieu thereof, the
General Partner will pay a cash adjustment based upon the fair
market value of the Series D Preferred Stock on the day prior to
the exchange date as determined in good faith by the Board of
Directors of the General Partner.
(c) Adjustment of Series D Exchange Price.
-------------------------------------
In case the General Partner shall be a party to any
transaction (including, without limitation, a merger,
consolidation, statutory share exchange, tender offer for all or
substantially all of the General Partner's capital stock or sale
of all or substantially all of the General Partner's assets), in
each case as a result of which the REIT Series D Preferred Shares
will be converted into the right to receive shares of capital
stock, other securities or other property (including cash or any
combination thereof), each Series D Preferred Unit will
thereafter be exchangeable into
<PAGE>
the kind and amount of shares of capital stock and other
securities and property receivable (including cash or any
combination thereof) upon the consummation of such transaction by
a Holder of that number of REIT Series D Preferred Shares or
fraction thereof into which one Series D Preferred Unit was
exchangeable immediately prior to such transaction. The General
Partner may not become a party to any such transaction unless the
terms thereof are consistent with the foregoing.
Section 19.10. No Exchange Rights. The Holders of the Series D
------------------
Preferred Units shall not have any rights to exchange such units into
shares of any other class or series of stock or into any other
securities of, or interest in, the Partnership.
Section 19.11. No Sinking Fund. No sinking fund shall be
---------------
established for the retirement or redemption of Series D Preferred
Units."
5. Governing Law. This Amendment shall be interpreted and enforced
-------------
according to the laws of the State of Delaware.
6. Full Force and Effect. Except as amended by the provisions hereof,
---------------------
the Agreement, as previously amended, shall remain in full force and effect in
accordance with its terms and is hereby ratified, confirmed and reaffirmed by
the undersigned for all purposes and in all respects.
7. Successors/Assigns. This Amendment shall be binding upon and shall
------------------
inure to the benefit of the parties hereto, their respective legal
representatives, successors and assigns.
8. Counterparts. This Amendment 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.
(signatures appear on next page)
<PAGE>
IN WITNESS WHEREOF, the undersigned has executed this Amendment as of the
day and year first above written.
GENERAL PARTNER
---------------
KILROY REALTY CORPORATION
By /s/ Tyler H. Rose
----------------------------------------------
Name: Tyler H. Rose
Title: Senior Vice President and Treasurer
(signatures continue on next page)
<PAGE>
NEW LIMITED PARTNER
-------------------
MONTEBELLO REALTY CORP.,
a Delaware corporation
By: /s/ J. Timothy Ford
--------------------------------
Name: J. Timothy Ford
---------------------------
Title: Vice President
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-72229 of Kilroy Realty Corporation on Form S-3, Amendment No. 1 to
Registration Statement No. 333-45097 of Kilroy Realty Corporation on Form S-3
and Registration Statement No. 333-43227 of Kilroy Realty Corporation on Form
S-8 of our report dated March 10, 2000, appearing in this Annual Report on Form
10-K of Kilroy Realty Corporation for the year ended December 31, 1999.
/s/ Deloitte and Touche LLP
Los Angeles, California
March 20, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 26,116 6,443
<SECURITIES> 0 0
<RECEIVABLES> 24,771 20,375
<ALLOWANCES> (2,693) (1,456)
<INVENTORY> 0 0
<CURRENT-ASSETS> 0 0
<PP&E> 1,410,238 1,194,284
<DEPRECIATION> (174,427) (145,437)
<TOTAL-ASSETS> 1,320,501 1,109,217
<CURRENT-LIABILITIES> 0 0
<BONDS> 553,516 405,383
0 0
0 0
<COMMON> 278 276
<OTHER-SE> 472,651 475,623
<TOTAL-LIABILITY-AND-EQUITY> 1,320,501 1,109,217
<SALES> 0 0
<TOTAL-REVENUES> 159,700 137,088
<CGS> 0 0
<TOTAL-COSTS> 75,162 65,419
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 2,158 1,107
<INTEREST-EXPENSE> 26,309 20,568
<INCOME-PRETAX> 39,849 38,822
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 39,849 38,822
<DISCONTINUED> 46 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 39,895<F1> 38,822<F2>
<EPS-BASIC> 1.44 1.44
<EPS-DILUTED> 1.44 1.43
<FN>
<F1>Net income is after equity in income of unconsolidated subsidiary of $17 and
minority interests of ($16,239)
<F2>Net income is after equity in income of unconsolidated subsidiary of $5 and
minority interests of ($11,177).
</FN>
</TABLE>
