<PAGE>
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998
[_] 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 1-13087
BOSTON PROPERTIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2473675
(IRS EMPLOYER ID. NUMBER)
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
8 ARLINGTON STREET BOSTON, 02116
MASSACHUSETTS
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 859-2600
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 the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
COMMON STOCK, PAR VALUE $.01 63,527,552
(CLASS) (OUTSTANDING ON NOVEMBER 16, 1998)
- - -------------------------------------------------------------------------------
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<PAGE>
BOSTON PROPERTIES, INC.
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
-------
<C> <S> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated and Combined Financial Statements:
1. Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997........................................ 1
2. Consolidated and Combined Statements of Operations for
the Company for the nine months ended September 30, 1998
and for the period from June 23, 1997 to
September 30, 1997 and for the Predecessor Group for the
period from January 1, 1997 to June 22, 1997............. 2
3. Consolidated Statements of Operations for the three
months ended September 30, 1998 and September 30, 1997... 3
4. Consolidated and Combined Statements of Cash Flows for
the Company for the nine months ended September 30, 1998
and for the period from June 23, 1997 to
September 30, 1997 and for the Predecessor Group for the
period from January 1, 1997 to June 22, 1997............. 4
5. Notes to the Consolidated and Combined Financial
Statements............................................... 5
ITEM 2. Management's Discussion and Analysis of Financial Conditions
and Results of Operations................................... 10
PART II. OTHER INFORMATION
ITEM 2. Changes in Securities........................................ 19
ITEM 6. Exhibits and Reports on Form 8-K............................. 19
Signatures............................................................. 20
</TABLE>
<PAGE>
BOSTON PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT
SHARE AMOUNTS)
<S> <C> <C>
ASSETS
------
Real estate: $3,562,645 $1,796,500
Less: accumulated depreciation.................... (335,821) (294,218)
---------- ----------
Total real estate............................... 3,226,824 1,502,282
Cash and cash equivalents........................... 15,544 17,560
Escrows............................................. 19,668 14,178
Tenant and other receivables, net................... 33,160 24,458
Accrued rental income, net.......................... 67,692 55,190
Deferred charges, net............................... 41,244 35,485
Prepaid expenses and other assets................... 23,064 20,225
Investment in joint ventures........................ 32,136 3,143
---------- ----------
Total assets.................................... $3,459,332 $1,672,521
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Mortgage notes payable............................ $1,752,430 $1,099,253
Unsecured line of credit.......................... 195,000 233,000
Accounts payable and accrued expenses............. 41,502 23,822
Dividends payable................................. -- 22,539
Accrued interest payable.......................... 4,784 6,581
Other liabilities................................. 26,357 11,642
---------- ----------
Total liabilities............................... 2,020,073 1,396,837
---------- ----------
Commitments and contingencies....................... -- --
---------- ----------
Minority interests.................................. 462,015 100,636
---------- ----------
Stockholders' equity:
Preferred stock, $.01 par value, 50,000,000 shares
authorized, none issued or outstanding........... -- --
Excess stock, $.01 par value, 150,000,000 shares
authorized, none issued or outstanding........... -- --
Common stock, $.01 par value, 250,000,000 shares
authorized, 63,527,552 and 38,694,041 issued and
outstanding, respectively........................ 635 387
Additional paid-in capital........................ 949,972 172,347
Earnings in excess of dividends................... 26,637 2,314
---------- ----------
Total stockholders' equity...................... 977,244 175,048
---------- ----------
Total liabilities and stockholders' equity.... $3,459,332 $1,672,521
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THE PREDECESSOR
THE COMPANY GROUP
--------------------------------------- ---------------
PERIOD FROM PERIOD FROM
NINE MONTHS JUNE 23, 1997 JANUARY 1, 1997
ENDED TO TO
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 JUNE 22, 1997
------------------- ------------------- ---------------
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenue
Rental:
Base rent........... $286,610 $57,892 $ 80,122
Recoveries from
tenants............ 33,027 6,144 10,283
Parking and other... 5,880 217 3,397
-------- ------- --------
Total rental
revenue.......... 325,517 64,253 93,802
Hotel operating....... -- -- 31,185
Development and
management services.. 8,893 2,221 3,685
Interest and other.... 9,410 1,879 1,146
-------- ------- --------
Total revenue..... 343,820 68,353 129,818
-------- ------- --------
Expenses
Rental:
Operating........... 50,444 8,828 13,650
Real estate taxes... 46,744 9,065 13,382
Hotel:
Operating........... -- -- 20,938
Real estate taxes... -- -- 1,514
General and
administrative....... 16,750 3,164 5,116
Interest.............. 81,926 16,091 53,324
Depreciation and
amortization......... 51,212 10,113 17,054
-------- ------- --------
Total expenses.... 247,076 47,261 124,978
-------- ------- --------
Income before minority
interests.............. 96,744 21,092 4,840
Minority interest in
property partnership... (390) (69) (235)
-------- ------- --------
Income before minority
interest in Operating
Partnership............ 96,354 21,023 4,605
Minority interest in
Operating Partnership.. (25,025) (6,169) --
-------- ------- --------
Income before
extraordinary items.... 71,329 14,854 4,605
Extraordinary gain on
early debt
extinguishments, net... 3,564 7,925 --
-------- ------- --------
Net income.............. $ 74,893 $22,779 $ 4,605
======== ======= ========
Basic earnings per
share:
Income before
extraordinary items.. $ 1.19 $ 0.39 --
Extraordinary gain,
net.................. 0.06 0.20 --
-------- -------
Net income............ $ 1.25 $ 0.59 --
======== =======
Weighted average number
of common shares
outstanding............ 60,101 38,694 --
Diluted earnings per
share:
Income before
extraordinary items.. $ 1.17 $ 0.38 --
Extraordinary gain,
net.................. 0.06 0.20 --
-------- -------
Net income............ $ 1.23 $ 0.58 --
======== =======
Weighted average number
of common and common
equivalent shares
outstanding............ 60,744 38,979 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
BOSTON PROPERTIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
(UNAUDITED AND IN
THOUSANDS, EXCEPT FOR PER
SHARE AMOUNTS)
<S> <C> <C>
Revenue
Rental:
Base rent..................................... $119,535 $53,433
Recoveries from tenants....................... 13,665 5,656
Parking and other............................. 3,174 162
-------- -------
Total rental revenue........................ 136,374 59,251
Development and management services............. 2,734 2,105
Interest and other.............................. 1,069 1,633
-------- -------
Total revenue............................... 140,177 62,989
-------- -------
Expenses
Rental:
Operating..................................... 23,651 8,071
Real estate taxes............................. 19,604 8,452
General and administrative...................... 6,129 2,917
Interest........................................ 33,183 14,719
Depreciation and amortization................... 21,523 9,268
-------- -------
Total expenses.............................. 104,090 43,427
-------- -------
Income before minority interests.................. 36,087 19,562
Minority interest in property partnership......... (161) (60)
-------- -------
Income before minority interest in Operating
Partnership...................................... 35,926 19,502
Minority interest in Operating Partnership........ (10,585) (5,722)
-------- -------
Income before extraordinary items................. 25,341 13,780
Extraordinary loss on early debt extinguishments,
net.............................................. -- (58)
-------- -------
Net income........................................ $ 25,341 $13,722
======== =======
Basic earnings per share:
Income before extraordinary items............... $ 0.40 $ 0.36
Extraordinary loss, net......................... -- --
-------- -------
Net income...................................... $ 0.40 $ 0.36
======== =======
Weighted average number of common shares
outstanding...................................... 63,468 38,694
Diluted earnings per share:
Income before extraordinary items............... $ 0.40 $ 0.35
Extraordinary loss, net......................... -- --
-------- -------
Net income...................................... $ 0.40 $ 0.35
======== =======
Weighted average number of common and common
equivalent shares outstanding.................... 63,991 38,998
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THE PREDECESSOR
THE COMPANY GROUP
------------------------------------- ---------------
PERIOD FROM PERIOD FROM
JUNE 23, 1997 JANUARY 1, 1997
NINE MONTHS ENDED TO TO
SEPTEMBER 30, 1998 SEPTEMBER 30, 1997 JUNE 22, 1997
------------------ ------------------ ---------------
(UNAUDITED AND IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net income.............. $ 74,893 $ 22,779 $ 4,605
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization........... 51,212 10,113 17,054
Non-cash portion of
interest expense....... 349 173 1,497
Extraordinary gain on
early debt
extinguishments........ (4,641) (11,216) --
Minority interest in
Operating
Partnership............ 24,598 9,463 --
Change in assets and
liabilities:
Tenant and other
receivables............ (8,702) 5,993 (7,114)
Prepaid expenses and
other assets........... (2,839) (3,038) (1,494)
Escrows................. (5,490) -- --
Accrued rental income... (12,502) (881) (291)
Accounts payable and
accrued expenses....... 17,680 (2,138) 5,220
Accrued interest
payable................ (1,797) (8,049) 2,021
Other liabilities....... 14,715 2,731 3,728
----------- --------- --------
Total adjustments..... 72,583 3,151 20,621
----------- --------- --------
Net cash provided by
operating
activities........... 147,476 25,930 25,226
----------- --------- --------
Cash flows from investing
activities:
Acquisitions/additions
to real estate......... (1,168,281) (366,054) (27,721)
Tenant leasing costs.... (12,018) 95 (2,550)
Investment in joint
ventures............... (28,993) (1,345) (2,573)
Cash from contributed
assets................. -- 10,510 --
----------- --------- --------
Net cash used in
investing
activities........... (1,209,292) (356,794) (32,844)
----------- --------- --------
Cash flows from financing
activities:
Net proceeds from sales
of common stock........ 819,326 839,209 --
Owners' contributions... -- -- 9,330
Owners' distributions... -- -- (30,565)
Borrowings on unsecured
line of credit......... 195,000 71,000 --
Repayment of unsecured
line of credit......... (233,000) -- --
Repayments of long term
debt................... (142,327) (708,090) --
Proceeds from long term
debt................... 517,800 220,000 --
Repayments on mortgage
notes.................. (8,161) -- (3,799)
Accounts payable--
affiliate.............. -- (19,983) 17,619
Proceeds from notes
payable--affiliate..... -- (38,833) 16,716
Dividends and
distributions paid..... (88,579) -- --
Escrows................. -- 14,934 (136)
Costs related to debt
extinguishments........ -- (8,512) --
Deferred financing and
other costs............ (259) (12,872) (35)
----------- --------- --------
Net cash provided by
financing
activities........... 1,059,800 356,853 9,130
----------- --------- --------
Net increase (decrease)
in cash................. (2,016) 25,989 1,512
Cash and cash
equivalents, beginning
of period............... 17,560 -- 8,998
----------- --------- --------
Cash and cash
equivalents, end of
period.................. $ 15,544 $ 25,989 $ 10,510
=========== ========= ========
Supplemental disclosures:
Cash paid for interest.. $ 87,186 $ 26,032 $ 50,917
=========== ========= ========
Interest capitalized.... $ 3,812 $ 683 $ 1,111
=========== ========= ========
Non-cash activities:
Operating activity:
Non-cash portion of
interest expense....... $ 349 $ 173 $ 1,497
=========== ========= ========
Investing and Financing
activities:
Fair value of mortgage
notes payable assumed
in connection with
acquisitions........... $ 246,626 -- --
===========
Issuance of minority
interest in connection
with acquisitions ..... $ 305,797 -- --
===========
Common stock issued in
connection with
acquisition............ $ 5,000 -- --
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Boston Properties, Inc. (the "Company"), a Delaware corporation, is a self-
administered and self-managed real estate investment trust ("REIT"). Boston
Properties, Inc. is the sole general partner of Boston Properties Limited
Partnership (the "Operating Partnership") and at September 30, 1998, owned an
approximate 73.53% general and limited partnership interest in the Operating
Partnership. Partnership interests in the operating partnership are
denominated as "common units of partnership interest" (also referred to as "OP
Units") or "preferred units of partnership interest" (also referred to as
"Preferred Units"). A holder of an OP Unit may present such OP Unit to the
Operating Partnership for redemption at any time (subject to agreements upon
the issuance of OP Units to particular holders that may restrict such right
for a period of time, generally one year). Upon presentation of an OP Unit for
redemption, the Operating Partnership must redeem such OP Unit for cash equal
to the then value of a share of common stock, except that the Company may, at
its election, in lieu of a cash redemption, acquire such OP Unit for one share
of common stock of the Company ("Common Stock"). Because the number of shares
of Common Stock outstanding at all times equals the number of OP Units that
the Company owns, one share of Common Stock is generally the economic
equivalent of one OP Unit, and the quarterly distribution that may be paid to
the holder of an OP Unit equals the quarterly dividend that may be paid to the
holder of a share of Common Stock. Each series of Preferred Units bear a
distribution that is set in accordance with an amendment to the partnership
agreement of the Operating Partnership. Preferred Units may also be
convertible into OP Units at the election of the holder thereof or the
Company.
All references to the Company refer to Boston Properties, Inc. and its
subsidiaries, including the Operating Partnership, collectively, unless the
context otherwise requires.
On June 23, 1997, the Company commenced operations after completing an
initial public offering of 36,110,000 common shares (including 4,710,000
shares issued as a result of the exercise of an over-allotment option by the
underwriters). The 36,110,000 shares of Common Stock were issued at a price
per share of $25.00, generating gross proceeds of $902.8 million. The proceeds
to the Company, net of underwriters' discount and offering costs, were
approximately $839.2 million. Upon the completion of such offering, the
Company succeeded to substantially all of the interests of Boston Properties,
Inc., a Massachusetts corporation, and its affiliates (collectively, the
"Predecessor Group") in (i) a portfolio of office, industrial and hotel
properties and (ii) the acquisition, property management, leasing, development
and construction businesses of the Predecessor Group. The acquisition,
property management, leasing, development and construction businesses are
being carried out by the Operating Partnership and the Company's majority-
owned affiliate, Boston Properties Management, Inc.
To assist the Company in maintaining its status as a REIT, the Company
leases its two in-service hotel properties, pursuant to a lease with a
participation in the gross receipts of such hotel properties, to a lessee ("ZL
Hotel LLC") in which Messrs. Zuckerman and Linde, the Chairman of the Board
and Chief Executive Officer, respectively, are the sole member-managers.
Messrs. Zuckerman and Linde have a 9.8% economic interest in such lessee and
one or more unaffiliated public charities have a 90.2% economic interest.
Marriott International, Inc. manages these hotel properties under the Marriott
name pursuant to a management agreement with the lessee. Under the REIT
requirements, revenues from a hotel are not considered to be rental income for
purposes of certain income tests which a REIT must meet. Accordingly, in order
to maintain its qualification as a REIT, the Company has entered into the
participating leases described above to provide revenue which qualifies as
rental income under the REIT requirements. The Company intends to make similar
arrangements with respect to a hotel property under development.
5
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
On January 26, 1998, the Company completed a follow-on public offering of
23,000,000 common shares at a price of $35.125 per share (including 3,000,000
shares issued as a result of the exercise of an over-allotment option by the
underwriters). The proceeds to the Company, net of underwriters' discount and
offering costs were approximately $765.6 million.
As of September 30, 1998, the Company and the Operating Partnership had
63,527,552 and 22,864,913 common shares and OP Units outstanding,
respectively. In addition, the Operating Partnership had 2,442,222 Preferred
Units outstanding. The outstanding Preferred Units at September 30, 1998 were
all of one series and bear a preferred distribution of 7.25% per annum on a
liquidation preference of $34.00 per unit and are convertible into OP Units at
a rate of $38.25 per Preferred Unit.
As of September 30, 1998, the Company owned a portfolio of 114 commercial
real estate properties (82 properties at December 31, 1997) (the "Properties")
aggregating over 25 million square feet (including nine properties currently
under development). The Properties consist of 101 office properties, including
70 Class A office properties and 31 Research and Development properties; nine
industrial properties; three hotels; and one parking garage. The Company
considers Class A office properties to be centrally located buildings that are
professionally managed and maintained, attract high-quality tenants and
command upper-tier rental rates, and that are modern structures or have been
modernized to compete with newer buildings. The Company considers Research and
Development properties to support office, research and development and other
technical uses.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Company include all the
accounts of the Company, its majority-owned Operating Partnership, and its
subsidiaries. The financial statements reflect the properties acquired at
their historical accounting basis to the extent of the acquisition of
interests from the Predecessor Group's owners who continued as investors. The
remaining interests acquired for cash from those owners of the Predecessor
Group who decided to sell their interests have been accounted for as a
purchase and the excess of the purchase price over the related historical cost
basis was allocated to real estate. The combined financial statements of the
Predecessor Group include interests in properties and the third party
commercial real estate development, project management and property management
business. The accompanying combined financial statements for the Predecessor
Group have been presented on a combined basis due to the common ownership and
management of the entities included in the Predecessor Group; therefore, its
combined financial statements are presented for comparative purposes. All
significant intercompany balances and transactions have been eliminated. These
financial statements should be read in conjunction with the Company's
financial statements and notes thereto contained in the Company's annual
report on Form 10-K for its fiscal year ended December 31, 1997.
The accompanying interim financial statements are unaudited; however, the
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and in conjunction
with the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the disclosures required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting solely of normal recurring
matters) necessary for a fair presentation of the financial statements for
these interim periods have been included. The results of operations for the
interim periods are not necessarily indicative of the results to be obtained
for other interim periods or for the full fiscal year.
3. REAL ESTATE ACQUISITIONS DURING THE QUARTER ENDED SEPTEMBER 30, 1998
On July 2, 1998, the Company acquired The Prudential Center, located in
Boston, Massachusetts. The Prudential Center, which consists of two Class A
office towers totaling approximately 1.7 million square feet and a retail
complex totaling approximately 475,000 square feet, was acquired for
approximately $519.0 million. The acquisition was funded through mortgage
financing of $300.0 million, a draw down of $100.0 million from
6
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
the Company's unsecured line of credit, the issuance of 2,993,414 OP Units
valued at approximately $96.2 million and cash of approximately $22.8 million.
The Company also acquired a 50% interest in development rights for cash of
approximately $27.0 million.
On July 10, 1998, the Company acquired Metropolitan Square, an approximately
583,685 square foot, Class A office property in Washington, D.C., for
approximately $175.0 million. The acquisition was funded through the
assumption of mortgage debt with a fair value of approximately $108.4 million,
the issuance of 815,409 OP Units valued at approximately $27.7 million and
cash of approximately $38.9 million.
On July 21, 1998, the Company acquired The Candler Building, an
approximately 518,954 square foot, Class A office property in Baltimore,
Maryland, for approximately $61.0 million. The acquisition was funded through
a draw down of $30.0 million from the Company's unsecured line of credit, the
issuance of 146,898 shares of the Company's common stock valued at
approximately $5.0 million and cash of $26.0 million.
On August 18, 1998, the Company acquired 1301 New York Avenue, an
approximately 185,000 square foot, Class A office property in Washington, DC
for approximately $28.0 million. The acquisition was funded through mortgage
financing of $20.0 million, cash of $6.5 million and the issuance of 44,390 OP
Units valued at approximately $1.5 million. The Company is in the process of
renovating this property for an estimated cost of $18.2 million. The Company
has entered into a lease with a single tenant pursuant to which this property
will be 100% occupied following completion of these renovations.
4. INVESTMENT IN JOINT VENTURE
On September 28, 1998, the Company entered into a joint venture with an
unrelated third party to develop parcels of land in Washington, D.C. into
Class A office buildings. As of September 30, 1998, the Company has invested
approximately $24.1 million for a 50% interest in the joint venture.
5. MINORITY INTERESTS
Minority interests relate to the interests in the Operating Partnership and
property partnerships that are not owned by the Company. As of September 30,
1998, there were 22,864,913 OP Units and 2,442,222 Preferred Units
outstanding.
6. STOCKHOLDERS' EQUITY
On July 2, 1998, the Company sold 1,675,846 shares of Common Stock in a
private placement for approximately $53.8 million.
On July 21, 1998, the Company issued 146,898 shares of Common Stock in a
private placement in connection with an acquisition.
The Company filed a registration statement, which was declared effective on
August 27, 1998, relating to the sale by certain selling shareholders of
2,678,774 common shares which may be issuable upon redemption of OP Units
previously issued in connection with the initial offering.
The Company filed a registration statement which was declared effective on
September 15, 1998 relating to the sale by a selling shareholder of the
4,669,260 common shares previously issued or which may be issuable upon
redemption of OP Units previously issued in connection with the acquisition of
the Prudential Center.
7
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
7. EARNINGS PER SHARE
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
-----------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
-------------- --------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Basic Earnings Per Share:
Income available to
common shareholders... $ 25,341 63,468 $ 0.40
Effective of Dilutive
Securities:
Convertible OP Units
related to 875 Third
Avenue................ -- 92 --
Stock Options.......... -- 431 --
-------------- ------------- ------------
Diluted Earnings Per
Share:
Income available to
common shareholders... $ 25,341 63,991 $ 0.40
============== ============= ============
</TABLE>
8. UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The accompanying unaudited pro forma information for the nine month period
ended September 30, 1998 and 1997 is presented as if the initial offering and
follow-on offering discussed in Note 1 and the material property acquisitions
since the initial offering had occurred on January 1, 1997. This pro forma
information is based upon the historical consolidated financial statements of
the Company and the Predecessor Group and should be read in conjunction with
the consolidated and combined financial statements and the notes thereto.
This unaudited pro forma condensed information does not purport to represent
what the actual results of operations would have been had the above occurred,
nor do they purport to predict the results of operations for future periods.
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
ENDED 9/30/98 ENDED 9/30/97
------------------ ------------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Total revenue...................... $ 407,433 $ 368,123
Income before extraordinary items.. $ 77,978 $ 64,704
Income per share of common stock
before extraordinary item--basic.. $ 1.23 $ 1.02
Income per share of common stock
before extraordinary item--dilut-
ed................................ $ 1.22 $ 1.01
Weighted average number of common
shares outstanding--basic......... 63,370 63,370
Weighted average number of common
shares outstanding--diluted....... 63,974 63,974
</TABLE>
9. SUBSEQUENT EVENTS
On October 6, 1998, the Company obtained mortgage financing totaling $95.0
million secured by 100 East Pratt Street in Baltimore, Maryland. The proceeds
were used to pay down a portion of the Company's Unsecured Line of Credit.
Such financing bears interest at an average rate of 6.725% and matures on
November 1, 2008.
On October 29, 1998, the Company declared a dividend of $0.425 per share for
the quarter ended September 30, 1998, payable on November 19, 1998 to
shareholders of record on November 9, 1998.
8
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
On November 3, 1998, the Company acquired Reservoir Place, an approximately
531,000 square foot, Class A office property in Waltham, Massachusetts for
approximately $95.4 million. The acquisition was funded by the assumption of
debt of approximately $66.4 million, the issuance of OP Units valued at
approximately $27.1 million and cash of approximately $1.9 million.
On November 12, 1998, the Company closed on the first of two phases of its
acquisition of Embarcadero Center, located in San Francisco, California. The
portfolio consists of six Class A buildings with office and retail space,
totaling approximately 3.66 million square feet of office space, 354,000
square feet of retail space and a 2,290 space underground parking garage. In
the first phase of the acquisition (the "Initial Acquisition"), the Company
acquired all of the interests in two of the six buildings and an approximate
50% interest in the remaining four buildings. Upon the consummation of the
second phase, which the Company expects will close in the first quarter of
1999, the Company will own all of the outstanding interests in the remaining
four buildings, although no assurance can be given in this regard. The total
cost of the acquisition (including both phases) is expected to be
approximately $1.233 billion (including closing costs).
The acquisition, including both phases, will be funded through the
assumption or incurrence of approximately $730.0 million of property related
debt, a draw down of approximately $87.4 million from the Unsecured Line of
Credit, the issuance of series two preferred units having an aggregate
liquidation preference of approximately $306.0 million, the issuance of series
three preferred units having an aggregate liquidation of approximately $9.6
million and the issuance of $100.0 million of series A convertible redeemable
preferred stock.
Subsequent to the closing, the Company repaid approximately $456.0 million
of property related debt assumed in connection with the Embarcadero
Acquisition and paid a fee of approximately $16.7 million. In addition, the
Company obtained approximately $621.0 million of new mortgage financing.
9
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
(UNAUDITED)
ITEM 2--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto appearing elsewhere in this report. This Report on
Form 10-Q contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Actual results or developments could differ
materially from those projected in such statements as a result of certain
factors set forth in the section below entitled "Certain Factors Affecting
Future Operating Results" and elsewhere in this report.
Results of Operations
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1998 TO THE NINE MONTHS ENDED
SEPTEMBER 30, 1997
For discussion purposes, the results of operations for the nine months ended
September 30, 1998 represent solely the operating results of the Company. The
results of operations for the nine months ended September 30, 1997 combine the
operating results of the Predecessor Group for the period from January 1, 1997
to June 22, 1997 and the operating results of the Company for the period from
June 23, 1997 to September 30, 1997. Consequently, the comparison of the
periods provides only limited information regarding the operations of the
Company.
Rental revenue increased $167.4 million or 105.9% to $325.5 million from
$158.1 million for the nine months ended September 30, 1998 compared to the
nine months ended September 30, 1997. The increase is primarily due to rental
revenue earned totaling approximately $111.6 million on the operations of
properties acquired since the initial offering and from the participating
leases to operate the hotels, which were entered into at the time of the
initial offering, at which time the Company ceased operating its hotel
properties.
Hotel Operating revenue decreased $31.2 million or 100.0% to $0.0 from $31.2
million for the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997. Hotel revenue ceased upon completion of the
initial public offering when the Operating Partnership leased the hotels to
lessees under participating leases.
Development and Management Services revenue increased $3.0 million, or 50.6%
to $8.9 million from $5.9 million, for the nine months ended September 30, 1998
compared to the nine months ended September 30, 1997 primarily as a result of a
leasing commission of $2.1 million earned on a property managed for a third
party.
Interest and Other revenue increased $6.4 million or 211.1% to $9.4 million
from $3.0 million for the nine months ended September 30, 1998 compared to the
nine months ended September 30, 1997 due to interest income earned on the
proceeds from the follow-on offering.
Rental expenses increased $52.3 million or 116.3% to $97.2 million from $44.9
million for the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997 primarily as a result of approximately $34.1
million of expenses related to the operations of acquired properties.
Hotel expenses decreased $22.5 million or 100.0% to $0.0 from $22.5 million
for the nine months ended September 30, 1998 compared to the nine months ended
September 30, 1997. There were no expenses during the nine months ended
September 30, 1998 as a result of the participating leases.
General and Administrative expenses increased $8.5 million or 102.3% to $16.8
million from $8.3 million for the nine months ended September 30, 1998 compared
to the nine months ended September 30, 1997 primarily as a result of increased
payroll costs associated with the operations of acquired properties as well as
increased legal, accounting and administrative costs associated with operating
as a public company.
10
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
(UNAUDITED)
Interest expense increased $12.5 million or 18.0% to $81.9 million from
$69.4 million for the nine months ended September 30, 1998 compared to the
nine months ended September 30, 1997. This was a result of the payoff of
certain mortgage indebtedness totaling approximately $707.0 million with the
proceeds from the initial offering offset by increases in mortgage
indebtedness from property acquisitions resulting in approximately
$31.2 million of interest expense.
Depreciation and Amortization expense increased $24.0 million or 88.5% to
$51.2 million from $27.2 million for the nine months ended September 30, 1998
compared to the nine months ended September 30, 1997. This was primarily
attributed to approximately $16.5 million of depreciation expense related to
the operations of properties acquired since the initial offering.
As a result of the foregoing, net income before minority interests increased
$70.8 million to $96.7 million from $25.9 million for the nine months ended
September 30, 1998 compared to the nine months ended September 30, 1997.
COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1998 TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1997
Rental revenue increased $77.1 million or 130.2% to $136.4 million from
$59.3 million for the three months ended September 30, 1998 compared to the
three months ended September 30, 1997. The increase is primarily due to rental
revenue of approximately $63.2 million earned on the operations of properties
acquired since the initial offering.
Development and Management Services revenue increased $0.6 million or 29.9%
to $2.7 million from $2.1 million for the three months ended September 30,
1998 compared to the three months ended September 30, 1997 primarily as a
result of new development contracts.
Interest and Other revenue decreased $0.5 million or 34.5% to $1.1 million
from $1.6 million for the three months ended September 30, 1998 compared to
the three months ended September 30, 1997 due to interest income earned on the
proceeds from the follow-on offering.
Rental expenses increased $26.8 million or 161.8% to $43.3 million from
$16.5 million for the three months ended September 30, 1998 compared to the
three months ended September 30, 1997 primarily due to rental expenses of
approximately $21.6 million incurred as a result of the operations of acquired
properties.
General and Administrative expenses increased $3.2 million or 110.1% to $6.1
million from $2.9 million for the three months ended September 30, 1998
compared to the three months ended September 30, 1997 primarily as a result of
increased payroll costs associated with the operations of acquired properties
as well as increased legal, accounting and administrative costs associated
with operating as a public company.
Interest expense increased $18.5 million or 125.4% to $33.2 million from
$14.7 million for the three months ended September 30, 1998 compared to the
three months ended September 30, 1997. This was a result of the payoff of
certain mortgage indebtedness totaling approximately $707.0 million with the
proceeds from the initial offering offset by increases in mortgage
indebtedness from property acquisitions resulting in approximately $16.4
million of interest expense.
Depreciation and Amortization expense increased $12.2 million or 132.2% to
$21.5 million from $9.3 million for the three months ended September 30, 1998
compared to the three months ended September 30, 1997. This was primarily
attributed to depreciation expense of $9.4 million related to the operations
of properties acquired since the initial offering.
11
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
(UNAUDITED)
As a result of the foregoing, net income before minority interests increased
$16.5 million to $36.1 million from $19.6 million for the three months ended
September 30, 1998 compared to the three months ended September 30, 1997.
Liquidity and Capital Resources
The Company's consolidated indebtedness at September 30, 1998 was $1.9
billion at a weighted average interest rate of 7.2%. Based on the Company's
total market capitalization (the principal amount of all Company indebtedness
plus the aggregate value of all outstanding shares of Common Stock, OP Units
and Preferred Units) at September 30, 1998 of approximately $4.5 billion, the
Company's consolidated debt represents approximately 43.6% of its total market
capitalization.
The Company has a $500 million unsecured revolving line credit (the
"Unsecured Line of Credit") with BankBoston, N.A., as agent that expires in
June 2000. The Company uses the Unsecured Line of Credit principally to
facilitate its development and acquisition activities and for working capital
purposes. As of November 13, 1998, the Company had $15.0 million outstanding
under the Unsecured Line of Credit.
12
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
(UNAUDITED)
The following represents the outstanding principal balances due under first
mortgages on the Company's Properties at September 30, 1998:
<TABLE>
<CAPTION>
PROPERTIES INTEREST RATE PRINCIPAL MATURITY DATE
- - ---------- ------------- -------------- --------------------
(IN THOUSANDS)
<S> <C> <C> <C>
The Prudential Center 6.72% $ 299,545 July 1, 2008
599 Lexington Avenue 7.00 225,000 July 19, 2005(1)
280 Park Avenue 7.00 213,000 September 11, 2002
280 Park Avenue LIBOR + 1.00 7,000 September 11, 2002
875 Third Avenue 8.00 154,868 December 31, 2002(2)
Two Independence Square 8.09 120,700 February 27, 2003(3)
Riverfront Plaza 6.61 120,496 January 21, 2008
Metropolitan Square 6.80 107,910 June 1, 2000(4)
One Independence Square 8.12 76,899 August 21, 2001(3)
2300 N Street 6.88 66,000 August 3, 2003
Capital Gallery 8.24 59,324 August 15, 2006
Ten Cambridge Center & North Garage 7.57 40,000 March 29, 2000
10 & 20 Burlington Mall Road 8.33 37,000 October 1, 2001(5)
The Lockheed Martin Building 6.61 27,356 June 1, 2008
Reston Town Center Office Complex 6.56 25,830 May 1, 2008
191 Spring Street 8.50 23,499 September 1, 2006
Bedford Business Park 8.50 22,775 December 10, 2008
The National Imagery & Mapping
Agency Building 6.51 22,380 June 1, 2008
212 Carnegie Center 7.25 21,083 December 31, 2000
1301 New York Avenue 6.70 20,000 August 15, 2009
202 Carnegie Center 7.25 19,608 December 31, 2000
214 Carnegie Center 7.90 13,811 October 31, 2000
101 Carnegie Center 7.66 8,946 April 1, 2006
Montvale Center 8.59 7,819 December 1, 2006
Newport Office Park 8.13 6,565 July 1, 2001
Hilltop Business Center LIBOR + 1.50 4,450 December 15, 1998
201 Carnegie Center 7.08 566 February 1, 2010
----------
Total $1,752,430
==========
</TABLE>
- - --------
(1) At maturity the lender has the option to purchase a 33.33% interest in
this Property in exchange for the cancellation of the loan indebtedness.
(2) The principal amount and interest rate shown has been adjusted to reflect
the fair value of the note. The actual principal balance at September 30,
1998 was $150,000 and the interest rate was 8.75%.
(3) The principal amount and interest rate shown has been adjusted to reflect
the effective rates on the loans. The actual principal balances at
September 30, 1998 were $120,219 and $76,688, respectively. The actual
interest rates on the loans are 8.50%.
(4) The principal amount and interest rate shown has been adjusted to reflect
the fair value of the note. The actual principal balance at September 30,
1998 was $104,040 and the interest rate was 9.13%.
(5) Includes outstanding indebtedness secured by 91 Hartwell Avenue and 92 &
100 Hayden Avenue.
13
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
(UNAUDITED)
The Company expects to meet its short-term liquidity requirements generally
through its existing working capital and net cash provided by operations. The
Company's operating properties and hotels require periodic investments of
capital for tenant-related capital expenditures and for general capital
improvements. For the three months ended September 30, 1998, the Company's
recurring capital expenditures totaled $1,000.
The Company expects to meet its long-term requirements for the funding of
property development, property acquisitions and other non-recurring capital
improvements through long-term secured and unsecured indebtedness (including
the Unsecured Line of Credit) and the issuance of additional equity securities
of the Company.
The Company has development projects currently in process, which require
commitments to fund to completion. Commitments under these arrangements
totaled $224.8 million as of September 30, 1998. The Company expects to fund
these commitments using available cash or the Unsecured Line of Credit. In
addition, the Company has options to acquire land that require minimum
deposits that the Company will fund using available cash or the Unsecured Line
of Credit.
On September 28, 1998, the Company agreed to acquire all of the direct and
indirect interests in a portfolio of Class A office and retail space known
collectively as the "Embarcadero Center" for approximately $1.233 billion,
including closing costs (the "Embarcadero Acquisition"). The Embarcadero
Center is situated on 8.4 acres of waterfront property in San Francisco's
financial district and consists of an aggregate of 3.66 million square feet of
net rentable office space, 354,000 square feet of retail space and 2,290
underground parking spaces. The Embarcadero Center consists of six buildings:
Embarcadero Centers 1, 2, 3 and 4 (collectively, the "EC Buildings"),
Embarcadero Center West Tower (the "Tower") and the Old Federal Reserve
Building. The agreement is by and among (i) Boston Properties, Inc. and
certain of its affiliates (collectively, the "Company"); (ii) certain parties
who are affiliated with, or who have co-invested in the Embarcadero Center
with, David Rockefeller and Associates (collectively, "Rockefeller"); and
(iii) The Prudential Insurance Company of America and certain of its
affiliates (collectively, "Prudential").
On November 12, 1998, the Company closed on the first phase (the "Initial
Closing") of the Embarcadero Acquisition. The Embarcadero Acquisition is
scheduled to close in two phases. Upon the closing of both phases, the Company
expects that the transaction will have been financed as follows: (i) the
assumption or incurrence of approximately $730 million of property related,
secured indebtedness, which has a weighted average maturity of 8.85 years and
a weighted average fixed interest rate of 6.63%: (ii) the incurrence of
approximately $87.3 million of unsecured financing under the Company's
Unsecured Line of Credit; (iii) the issuance of Series Two Preferred Units of
Boston Properties Limited Partnership, the operating partnership subsidiary of
Boston Properties, Inc. (the "Operating Partnership"), having an aggregate
liquidation preference of approximately $305.7 million; (iv) the issuance of
Series Three Preferred Units of the Operating Partnership having an aggregate
liquidation preference of approximately $9.7 million; and (v) the issuance of
$100.0 million of the Company's Series A Convertible Redeemable Preferred
Stock (the "Preferred Stock"). Certain of these amounts may vary due to post-
closing prorations and adjustments that are customary in similar transactions.
Subsequent to the closing, the Company repaid approximately $456.0 million of
property related debt assumed in connection with the Embarcadero Acquisition
and paid a fee of approximately $16.7 million. In addition the Company
obtained approximately $621.0 million of new mortgage financing.
At the consummation of the Initial Closing, (i) the Company acquired all of
the interests in the Old Federal Reserve Building and the Tower, and (ii) the
Company acquired, through its affiliates, interests in, the four general
partnerships (the "EC Partnerships") that own the EC Buildings. Prudential
will be a non-managing general partner of each of the EC Partnerships.
14
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
(UNAUDITED)
Following the Initial Closing, each of Prudential and the Company has the
right to cause the entire interest of Prudential in each of the EC
Partnerships to be redeemed in full in consideration of (i) a distribution by
the EC Partnership to Prudential of certain partnership assets owned by such
EC Partnership and (ii) the assumption by Prudential of certain indebtedness
of such EC Partnership. A full redemption of Prudential from all four EC
Partnerships will require (i) the distribution to Prudential of partnership
assets having a value of approximately $424.0 million and (ii) the assumption
by Prudential of indebtedness of the EC Partnerships having an aggregate
principal face amount of approximately $93.0 million. While there can be no
assurance as to when or if Prudential's interests in the EC Partnerships will
be redeemed, the Company expects that the redemptions will occur during the
first quarter of 1999. Following these redemptions, the Company will own all
of the interests in the EC Buildings.
Funds from Operations
Management believes Funds from Operations is helpful to investors as a
measure of the performance of an equity REIT because, along with cash flows
from operating activities, financing activities and investing activities, it
provides investors with an understanding of the ability of the Company to
incur and service debt and make capital expenditures. The Company computes
Funds from Operations in accordance with standards established by the White
Paper on Funds from Operations approved by the Board of Governors of NAREIT in
1995, which may differ from the methodology for calculating Funds from
Operations utilized by other equity REITs, and accordingly, may not be
comparable to such other REITs. The White Paper defines Funds from Operations
as net income (loss) (computed in accordance with GAAP), excluding gains (or
losses) from debt restructuring and sales of property, plus real estate
related depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. Further, Funds from Operations does not
represent amounts available for management's discretionary use because of
needed capital replacement or expansion, debt service obligations, or other
commitments and uncertainties. Funds from Operations should not be considered
as an alternative to net income (determined in accordance with GAAP) as an
indication of the Company's financial performance or to cash flows from
operating activities (determined in accordance with GAAP) as a measure of the
Company's liquidity, nor is it indicative of funds available to fund the
Company's cash needs, including its ability to make distributions. The Company
believes that in order to facilitate a clear understanding of the combined
historical operating results of the Boston Properties Predecessor Group and
the Company, Funds from Operations should be examined in conjunction with net
income as presented in the consolidated and combined financial statements.
The following table presents the Company's Funds from Operations for the
three months ended September 30, 1998:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
------------------ ------------------
(IN THOUSANDS)
<S> <C> <C>
Income before minority interests..... $36,087 $ 96,744
Add:
Real estate depreciation and
amortization...................... 21,359 50,718
Less:
Preferred allocation............... (1,505) (1,505)
Minority property partnership's
share of Funds from Operations.... (178) (460)
------- --------
Funds from Operations................ $55,763 $145,497
======= ========
Company's share (73.62% and 75.24%).. $41,053 $109,472
======= ========
</TABLE>
15
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
(UNAUDITED)
Certain Factors Affecting Future Operating Results
This Report on Form 10-Q contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, regarding the
Company's business, strategies, revenues, expenditures and operating and
capital requirements. The works "believe," "expect," "anticipate," "intend,"
"estimate," "assume," and other similar expressions which are predictions of
or indicate future events and trends and which do not relate solely to
historical matters identify forward-looking statements. Caution should be
exercised in interpreting such forward-looking statements, and undue reliance
should not be placed on such statements, because they involve known and
unknown risks, uncertainties and other factors , which are in some cases
beyond the control of the Company and may cause the actual results,
performance or achievements of the Company to differ materially from
anticipated future results, performance or achievements expressed or implied
by such forward-looking statements. Such forward-looking statements are
necessarily dependent on assumptions, data or methods that may be incorrect or
imprecise and they may be incapable of being realized. The following factors,
among others, could cause actual results and future events to differ
materially from those set forth or contemplated in the forward-looking
statements made in this report: default under or non-renewal of leases by
tenants, increased interest rates and operating costs, failure to obtain
necessary outside financing, difficulties in identifying properties to acquire
and in effecting acquisitions, failure to successfully integrate into the
Company's operations acquired properties and portfolios of properties, risks
and uncertainties affecting property development and construction (including,
without limitation, construction delays, cost overruns, inability to obtain
necessary permits and public opposition to such activities), failure to
qualify as a real estate investment trust under the Internal Revenue Code of
1986, as amended, environmental uncertainties, risks related to natural
disasters, financial market fluctuation, changes in real estate and zoning
laws and increases in real property tax rates. The Company's success also
depends upon national and regional economic trends generally. The Company
assumes no obligation to update forward-looking statements.
Inflation
The majority of the Company's tenant leases require tenants to pay most
operating expenses, including real estate taxes and insurance, and increases
in common area maintenance expenses, which reduces the Company's exposure to
increases in costs and operating expenses resulting from inflation.
Year 2000 Compliance
The Year 2000 issue relates to how computer systems and programs will
recognize and process dates after the year 1999. Most computer systems and
programs, which use two digits to specify a year, if not modified prior to the
year 2000, will be unable to distinguish between the year 1900 and the year
2000. This could result in system failures or miscalculations which could
result in disruptions of normal business operations. The Year 2000 issue can
also affect embedded technology systems and programs of a building such as
elevator, security, energy, fire and safety systems. The Year 2000 issue
affects virtually all companies and organizations.
In March of 1998, the Company formed a Year 2000 project team consisting of
Company personnel. The team included a coordinator for Property Management in
each of its regions and a representative from Legal, Risk Management and
Information Systems. The project team conducts monthly meetings to coordinate
a common work plan, to share information and to review the progress of
activities in each region.
The Year 2000 Project encompasses a review of compliance risks for the
Company's computer information and building systems and is divided into two
phases.
16
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
(UNAUDITED)
Phase I targets the discovery of issues, an inventory of all building and
internal systems, and an initial assessment of risks. Correspondence has been
sent to vendors, including equipment manufacturers, service providers,
maintenance and utility companies, requesting letters regarding Year 2000
compliance for specific systems. To date responses have been received from 95%
of the vendors with the remaining responses due mostly from vendors doing
business with the Company's most recently acquired properties.
In Phase I, correspondence has been sent to tenants highlighting the Year
2000 issue and providing a general statement of the Company's progress. The
Company has decided not to survey its tenant base, other than its largest
tenant (the General Services Administration), as no single tenant represents
more than 5% of its annual revenues. Due to our large tenant base, the success
of our Company is not closely tied to one particular tenant. As a result, the
Company does not believe there should be a material adverse effect on the
Company's financial condition and results of operations if any one of its
tenants were unable to pay rent on a timely basis due to Year 2000 related
problems.
All work related to Phase I has been performed by current employees of the
Company. No third parties have been used during this process nor has the
Company hired an employee specifically for Year 2000 issues, and as a result,
the costs incurred to date relate only to internal payroll costs, which at
this time are not material.
Phase II began in September 1998 and is expected to continue through June
1999. It consists of the following:
. Continued assessment of risks, including follow up with vendor responses
deemed inadequate (if any)
. Remediation of identified compliance problems by June 30, 1999
. Testing of building systems
. Development of contingency plans for all systems deemed critical to the
operation of buildings
The Company expects building-card access, energy management and garage
access systems to commonly require remediation. Recent upgrades to desktop
computers and internal networks throughout the organization combined with the
replacement of the electronic mail and the accounting systems during 1998 will
address Year 2000 compliance issues with core operating systems. All ancillary
software packages that support isolated functions, including tax reporting,
and are non-compliant, are expected to be upgraded before the end of 1998.
The total costs associated with the Year 2000 issue are not expected to be
material to the company's financial position. The estimated cost of
remediation efforts is approximately $1.5 million, which excludes costs for
all internal personnel working on the project. In most cases, the upgrade of
non-compliant systems will represent an acceleration of a planned replacement
date.
The Year 2000 project team has adopted a test protocol and procedure.
Property managers, working with service vendors, will conduct tests of
building systems. As of October 31, 1998, successful tests have been carried
out and documented at several properties.
The Company currently does not have a contingency plan in place. The Company
is, however, working with service vendors, and expects that contingency plans
will be developed by June 30, 1999 by the project team for all systems deemed
critical to the operation of buildings. Most systems supporting the operation
of a building can revert to manual operation if necessary.
17
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
(UNAUDITED)
The discussion above regarding the Company's Year 2000 Project contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of
1934, as amended. The Company's assessment of the impact of the Year 2000
issue may prove to be inaccurate due to a number of factors which cannot be
determined with certainty, including the receipt of inaccurate compliance
certification from third party vendors, inaccurate testing or assessments by
Company personnel or independent auditors of Company equipment or systems, and
inaccurate projections by the Company of the cost of remediation and/or
replacement of affected equipment and systems. A failure by the Company to
adequately remediate or replace affected equipment or systems due to the
factors cited above or for other reasons, a material increase in the actual
cost of such remediation or replacement, or a failure by a third party vendor
to remediate Year 2000 problems in systems that are vital to the operation of
the Company's properties or financial systems, could cause a material
disruption to the Company's business and adversely affect its results of
operations and financial condition.
18
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
(UNAUDITED)
PART II. OTHER INFORMATION
ITEM 2--CHANGES IN SECURITIES
On July 2, 1998, the Company acquired The Prudential Center for
consideration that included the issuance of 2,993,414 OP Units. Such OP Units
were issued to one accredited investor in a transaction that was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) of such
Act.
On July 2, 1998, the Company sold 1,675,846 shares of common stock to one
accredited investor in a transaction that was exempt from registration under
the Securities Act of 1933 pursuant to Section 4(2) of such Act.
On July 10, 1998, the Company acquired Metropolitan Square for consideration
that included the issuance of 815,409 OP Units. Such OP Units were issued to
one accredited investor in a transaction that was exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2) of such Act.
On July 21, 1998, the Company acquired the Candler Building for
consideration that included the issuance of 146,898 shares of common stock to
two accredited investors in a transaction that was exempt from registration
under the Securities Act of 1933 pursuant to Section 4(2) of such Act.
On August 18, 1998, the Company acquired 1301 New York Avenue for
consideration that included the issuance of 44,390 OP Units. Such OP Units
were issued to one accredited investors in a transaction that was exempt from
registration under the Securities Act of 1933 pursuant to Section 4(2) of such
Act.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------------------
<S> <C>
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
A Form 8-K dated October 26, 1998 was filed with the Securities and Exchange
Commission to report under Item 5 of such report the information to be
presented to investors and analysts and the Company's press release for the
quarter ended September 30, 1998.
19
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<PAGE>
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0
0
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