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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1998
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-13087
BOSTON PROPERTIES, INC.
(Exact name of Registrant as Specified in its Charter)
04-2473675
Delaware (IRS Employer Id. Number)
(State or Other Jurisdiction
of Incorporation or Organization)
8 Arlington Street 02116
Boston, Massachusetts (Zip Code)
(Address of Principal Executive
Offices)
Registrant's telephone number, including area code: (617) 859-2600
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Exchange on Which
Common Stock, Par Value $.01 Registered
Preferred Stock Purchase Rights New York Stock Exchange
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. [X]
As of March 26, 1999, the aggregate market value of the 60,956,365 Shares
of Common Stock held by non-affiliates of the Registrant was $1,889,647,315
based upon the closing price of $31.00 on the New York Stock Exchange
composite tape on such date. (For this computation, the Registrant has
excluded the market value of all Shares of Common Stock reported as
beneficially owned by executive officers and trustees of the Registrant; such
exclusion shall not be deemed to constitute an admission that any such person
is an affiliate of the Registrant.) As of March 26, 1999, there were
63,540,106 Shares of Common Stock outstanding.
Certain information contained in the Company's Proxy Statement relating to
its Annual Meeting of Stockholders to be held May 5, 1999 are incorporated by
reference in Part III, Items 10, 11, 12 and 13.
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PART I
ITEM 1. Business
General
Boston Properties, Inc. (the "Company") is one of the largest owners and
developers of office properties in the United States, with a significant
presence in Greater Boston; Greater Washington, D.C.; midtown Manhattan;
Greater San Francisco; Princeton/East Brunswick, New Jersey; Baltimore,
Maryland; and Richmond, Virginia. The Company is a fully integrated self-
administered and self-managed real estate company and expects to qualify as a
real estate investment trust ("REIT") for the taxable year ended December 31,
1998. The Company was formed to succeed to the real estate development,
redevelopment, acquisition, management, operating and leasing businesses
associated with the predecessor company founded by Mortimer B. Zuckerman and
Edward H. Linde in 1970. The term "Predecessor Group" or "Predecessor" as used
herein refers to the Company and the entities that owned interests in one or
more properties that were contributed to the Company in connection with the
Company's initial public offering in June 1997 (the "Initial Offering"). The
term "Company" as used herein means Boston Properties, Inc. and its
subsidiaries on a consolidated basis (including Boston Properties Limited
Partnership (the "Operating Partnership") and its subsidiaries) or, where the
context so requires, Boston Properties, Inc., and, as the context may require,
their predecessors.
As of December 31, 1998, the Company's portfolio consisted of 121 properties
("Properties"), including ten properties currently under development by the
Company (the "Development Properties"). The Properties consist of 108 office
properties ("Office Properties"), including 76 Class A office buildings ("Class
A Office Buildings") and 32 properties that support both office and technical
uses ("R&D Properties"); nine industrial properties ("Industrial Properties");
three hotels ("Hotel Properties"); and one parking garage (the "Garage
Property"). Nine of the Office Properties are Development Properties and are
referred to as the "Office Development Properties". One Hotel Property is a
Development Property and is referred to as the "Hotel Development Property".
The Company considers Class A office buildings 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.
The Company has a $500 million unsecured line of credit with BankBoston,
N.A., as agent, which expires in June 2000 (the "Unsecured Line of Credit"). As
of March 26, 1999, $362.0 million was outstanding under the Unsecured Line of
Credit. Reference is made to "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources"
for additional information regarding the Company's Unsecured Line of Credit and
other outstanding indebtedness.
The Company is a full service real estate company, with substantial in-house
expertise and resources in acquisitions, development, financing, construction
management, property management, marketing, leasing, accounting, tax and legal
services. As of December 31, 1998, the Company had 548 employees. The Company's
18 senior officers, together with Mr. Zuckerman, Chairman of the Board, have an
average of 24 years experience in the real estate industry and an average of 16
years tenure with the Company. The Company's headquarters is located at 8
Arlington Street, Boston, Massachusetts 02116 and its telephone number is (617)
859-2600. In addition, the Company has regional offices at the U.S.
International Trade Commission Building at 500 E. Street, SW, Washington, D.C.
20024, 599 Lexington Avenue, New York, New York 10002, Four Embarcadero Center,
San Francisco, California, 94111 and 101 Carnegie Center, Princeton, New Jersey
08540.
The Operating Partnership
Boston Properties Limited Partnership, a Delaware limited partnership, is
the entity through which the Company conducts substantially all of its business
and owns (either directly or through subsidiaries)
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substantially all of its assets. As of March 26, 1999, the Company held
approximately 72.75% of the Operating Partnership's common units of general and
limited partnership interest. This structure is commonly referred to as an
umbrella partnership REIT or UPREIT. The Company's general and limited
partnership interests in the Operating Partnership entitle it to share in cash
distributions from, and in the profits and losses of, the Operating Partnership
in proportion to its percentage interest therein and entitle the Company to
vote on all matters requiring a vote of the limited partners. The other
partners of the Operating Partnership are persons who contributed their direct
or indirect interests in certain properties to the Operating Partnership in
exchange for Common Units of limited partnership interest in the Operating
Partnership ("OP Units") or Preferred Units of limited partnership interest in
the Operating Partnership (the "Preferred Units"). The Operating Partnership is
obligated to redeem each OP Unit at the request of the holder thereof for cash
equal to the fair market value of one share of Common Stock at the time of such
redemption (determined in accordance with the provisions of the Second Amended
and Restated Agreement of Limited Partnership of the Operating Partnership, as
amended (the "Partnership Agreement")), provided that the Company may elect to
acquire any such OP Unit presented for redemption for one share of Common
Stock. The Company currently anticipates that it will elect to issue Common
Stock in connection with each such presentation for redemption rather than
having the Operating Partnership pay cash. With each such redemption, the
Company's percentage ownership in the Operating Partnership will increase. In
addition, whenever the Company issues shares of Common Stock other than to
acquire OP Units, the Company will be obligated to contribute any net proceeds
therefrom to the Operating Partnership and the Operating Partnership will be
obligated to issue an equivalent number of OP Units to the Company.
The Preferred Units have such rights, preferences and other privileges
(including the right to convert into Common Units) as are set forth in
amendments to the Partnership Agreement. The Operating Partnership currently
has three series of Preferred Units. The Series One Preferred Units have an
aggregate liquidation preference of approximately $83 million and bear a
preferred distribution at a rate of 7.25% per annum, payable quarterly. The
Series One Preferred Units are convertible into Common Units at the rate of
$38.25 per Common Unit (i) at the holder's election at any time or (ii) at the
election of the Company on or after June 3, 2003, provided that the shares of
Common Stock at the time of such election by the Company are trading at a
specified price.
The Series Two and Series Three Preferred Units, which together have an
aggregate liquidation preference of approximately $311 million, have, between
each other, similar economic terms. On and after December 31, 2002, such
Preferred Units will be convertible, at the holder's election, into Common
Units at a conversion price of $38.10 per Common Unit. Distributions on these
Preferred Units are payable quarterly and generally accrue at a rate of 5.0%
per annum through March 31, 1999; 5.5% through December 31, 1999; 5.625%
through December 31, 2000; 6.0% through December 31, 2001; 6.5% through
December 31, 2002; 7.0% until May 12, 2009; and 6.0% thereafter. The terms of
these Preferred Units provide that they may be redeemed for cash in six annual
tranches, beginning on May 12, 2009, at the election of the Company or the
holders. The Company also has certain conversion rights during these redemption
periods.
RECENT EVENTS
Recent Property Acquisitions
On January 22, 1998, the Company acquired, for approximately $174.4 million
(including closing costs), Riverfront Plaza, a Class A office building with
approximately 900,000 net rentable square feet located in Richmond, Virginia.
The acquisition was funded by a $52.6 million draw under the Unsecured Line of
Credit and mortgage financing of approximately $121.8 million.
On February 2, 1998, the Company acquired, for approximately $257.8 million
(including closing costs), the Mulligan/Griffin Portfolio, a portfolio of nine
office properties with approximately 1.3 million net rentable square feet and
six parcels of land aggregating 30.7 acres located in Fairfax County, Virginia
and Montgomery
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County, Maryland. The acquisition was funded through the payment of
approximately $88.5 million in cash, the assumption of mortgage debt with a
fair value of approximately $118.3 million, the assumption of other liabilities
of approximately $1.0 million, and the issuance of OP Units valued at
approximately $50.0 million.
On June 1, 1998, the Company acquired Decoverly III for cash of
approximately $11.1 million. Decoverly III, a Class A office building with
approximately 77,040 square feet, is located in Rockville, Maryland.
On June 16, 1998, the Company acquired 7450 Boston Boulevard for cash of
approximately $5.8 million. 7450 Boston Boulevard is a 60,537 square foot,
Class A office building located in Springfield, Virginia.
On June 25, 1998, the Company acquired University Place for cash of
approximately $37.0 million. University Place is a 196,007 square foot, Class A
office building located in Cambridge, Massachusetts.
On June 30, 1998, the Company acquired a portfolio of properties known as
the Carnegie Center Portfolio and Tower Center One for approximately $276.0
million. The portfolio consists of ten office buildings with approximately 1.3
million net rentable square feet located in Princeton and East Brunswick, New
Jersey. The acquisition was funded through the assumption of debt of
approximately $64.4 million, the issuance of 2,442,222 Series One Preferred
Units with an aggregate fair value of $83.0 million, and cash of $128.6
million. The Series One Preferred Units bear a preferred distribution of 7.25%
per annum and are convertible into OP Units at a rate of $38.25 per OP Unit.
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, a retail complex
totaling 486,428 square feet and 2,700 underground parking spaces, 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 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. The development rights consist primarily of rights
to expand the Prudential Center by approximately 991,000 square feet of office
space, 263,000 square feet of retail and community services space and 422,000
square feet of residential space.
On July 10, 1998, the Company acquired Metropolitan Square, an approximately
583,685 square foot, Class A office building 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 building 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 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 building in Washington, D.C.
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 the completion of these renovations.
On November 3, 1998, the Company acquired Reservoir Place, located in
Waltham, Massachusetts. The property, which consists of approximately 529,992
square feet of office space, was acquired for approximately $104.2 million. The
acquisition was funded through the assumption of mortgage debt with a fair
value of $77.1 million and the issuance of 933,085 OP Units valued at
approximately $27.1 million.
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On November 12, 1998, the Company completed the first phase of a two-phase
acquisition of Embarcadero Center in San Francisco. Embarcadero Center is a
six-building portfolio of Class A space consisting of an aggregate of 3.7
million square feet of net rentable office space, 354,000 square feet of retail
space and 2,090 underground parking spaces. The first phase of the acquisition
resulted in 100% ownership of two buildings and an approximate 50% ownership in
the four other buildings. The second phase of the acquisition, in which the
Company acquired the remaining interest in the four other buildings, closed on
February 10, 1999. The Company acquired the entire Embarcadero Center portfolio
for approximately $1.2 billion, which was financed as follows: (i) the
assumption or incurrence of $730.0 million of property related, secured
indebtedness, (ii) a draw down from the Company's Unsecured Line of Credit of
approximately $87.3 million, (iii) issuance of Series Two and Three Preferred
Units having an aggregate value of approximately $286.4 million, and (iv) the
issuance of $100 million of the Company's Series A Convertible Redeemable
Preferred Stock (the "Preferred Stock"). The Series Two and Three Preferred
Units bear a preferred distribution ranging from 5.0% to 7.0% per annum and are
convertible into OP Units at $38.10 per OP Unit on or after December 31, 2002.
On January 21, 1999, the Company entered into a series of binding agreements
with affiliates of The Prudential Insurance Company of America ("Prudential")
giving the Company the right to acquire, at any time until January 2001
(subject to certain deadlines being met and additional deposits being made),
(i) the leasehold interests in the remaining two office development sites in
New York City's Times Square and (ii) the rights to receive an aggregate of
approximately $129.4 million in ground rent credits and other reimbursements.
If acquired, the Company plans to develop two office buildings on the sites
which will have an aggregate of approximately 2.25 million rentable square feet
of office and retail space and a minimum of 31,375 square feet of advertising
signage. The total acquisition price for the leasehold interests in the sites
and the credits and reimbursements would be approximately $312.25 million. In
connection with the signing, the Company delivered a contract deposit of $15
million dollars, and beginning on February 1, 1999, the Company has been making
additional monthly contract deposits of $1.25 million. Under the terms of the
agreements, the Company will forfeit the total contract deposit delivered if it
elects to terminate its rights under the agreements absent a default or other
breach by Prudential. The Company will have no other liability or obligation to
Prudential if it elects not to acquire the sites. Pursuant to the terms of the
agreements, prudential has the right, but not the obligation, to become an
equity participant in the development ventures that will develop the sites,
with an interest of up to one-third, as elected by Prudential.
Recent Financing Activity
On January 30, 1998, the Company completed a public offering of 23,000,000
shares of Common Stock (including 3,000,000 shares issued pursuant to the
exercise of the underwriters' overallotment options) at $35.125 per share,
resulting in gross proceeds of approximately $807.9 million and net proceeds to
the Company of approximately $766.5 million (the "Second Offering").
On July 2, 1998, in connection with the acquisition of the Prudential
Center, the Company sold 1,675,846 shares of Common Stock in a private
placement for approximately $53.8 million.
On July 21, 1998, in connection with the acquisition of the Candler
Building, the Company issued 146,898 shares of Common Stock in a private
placement for approximately $5.0 million.
On February 10, 1999, in connection with the acquisition of Embarcadero
Center, the Company issued 2.0 million shares of the Company's Series A
Convertible Redeemable Preferred Stock for $100.0 million.
BUSINESS AND GROWTH STRATEGIES
Business Strategy
The Company's primary business objective is to maximize growth in net cash
available for distribution and to enhance the value of its portfolio in order
to maximize total return to stockholders. The Company's
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strategy to achieve this objective is: (i) to selectively acquire and develop
properties in the Company's existing markets, adjacent suburban markets and in
new markets that present favorable opportunities; (ii) to maintain high lease
renewal rates at rents that are at the high end of the markets in which the
Properties are located, and to continue to achieve high room rates and
occupancy rates in the Hotel Properties; and (iii) to selectively provide fee-
based development consulting and project management services to third parties.
Growth Strategies
External Growth
The Company believes that it is well positioned to realize significant
growth through external asset development and acquisition. The Company believes
that this development experience and the Company's organizational depth
positions the Company to continue to develop a range of property types, from
single-story suburban office properties to high-rise urban developments, within
budget and on schedule. Other factors that contribute to the Company's
competitive position include: (i) the significant increase in demand for new,
high quality office space in the Company's core market areas; (ii) the
Company's control of sites (including sites under contract or option to
acquire) in its core markets that will support approximately 11.3 million
square feet of new development through fee ownership, contract ownership, and
joint venture relationships; (iii) the Company's reputation gained through the
stability and strength of its existing portfolio of properties; (iv) the
Company's relationships with leading national corporations and public
institutions seeking new facilities and development services; (v) the Company's
relationships with nationally recognized financial institutions that provide
capital to the real estate industry; and (vi) the substantial amount of
commercial real estate owned by domestic and foreign institutions, private
investors, and corporations who are seeking to sell such assets in the
Company's market areas.
The Company has targeted four areas of development and acquisition as
significant opportunities to execute the Company's external growth strategy:
Acquire assets and portfolios of assets from institutions or
individuals. The Company believes that due to its size, management strength
and reputation it will be in an advantageous position to acquire portfolios
of assets or individual properties from institutions or individuals. Some
of these properties may be acquired for cash but the Company believes that
it is particularly well positioned to appeal to sellers wishing to convert
on a tax deferred basis their ownership of property to the ownership of
equity in a diversified real estate operating company that offers liquidity
through access to the public equity markets. In addition, the Company may
pursue mergers with and acquisitions of compatible real estate firms. The
ability to offer OP Units to sellers who would otherwise recognize a gain
upon a sale of assets for cash or Common Stock may facilitate this type of
transaction on a tax-efficient basis.
Acquire existing underperforming assets and portfolios of assets. The
Company has actively pursued and continues to pursue opportunities to
acquire existing buildings that, while currently generating income, are
either underperforming the market due to poor management or are currently
leased at below market rents with anticipated roll-over of space. These
opportunities may include the acquisition of entire portfolios of
properties. The Company believes that because of its in-depth market
knowledge and development experience in each market in which it currently
operates, its national reputation with brokers, financial institutions and
others involved in the real estate market and its access to competitively-
priced capital, the Company is well-positioned to identify and acquire
existing, underperforming properties for competitive prices and to add
significant additional value to such properties through its effective
marketing strategies and responsive property management program.
Pursue development and land acquisitions in selected submarkets. The
Company believes that development of well-positioned office buildings and
R&D properties is currently or will be justified in many of the submarkets
in which the Company has a presence. The Company believes in acquiring land
in response to market conditions that allow for the development of such
land in the relatively near term. Over
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its 28 year history, the Company has established a successful record of
carefully timing land acquisitions in submarkets where the Company can
become one of the market leaders in establishing rent and other business
terms. The Company believes that there are opportunities in its existing
and other markets to acquire land with development potential at key
locations in markets which are experiencing growth.
In the past, the Company has been particularly successful at acquiring
sites or options to purchase sites that need governmental approvals before
the announcement of development. Because of the Company's development
expertise, knowledge of the governmental approval process and reputation
for quality development with local government approval bodies, the Company
generally has been able to secure the permits necessary to allow
development, thereby enabling the Company to profit from the increase in
their value once the necessary permits have been obtained.
Provide third-party development management services. While the primary
objective of the Company has been, and will continue to be, the development
and acquisition of quality, income producing buildings to be held for long
term ownership, a select amount of comprehensive project-level development
management services for third parties will be an element of the continued
growth and strategy of the Company. The Company believes that third-party
development projects permit the Company to: (i) create relationships with
major institutions and corporations that lead to new development
opportunities; (ii) continue to enhance the Company's reputation in its
core markets; (iii) create opportunities to enter new markets; and (iv)
leverage its operating overhead.
Internal Growth
The Company believes that significant opportunities exist to increase cash
flow from its existing Properties because they are high quality properties in
desirable locations in submarkets that, in general, are experiencing rising
rents, low vacancy rates and increasing demand for office and industrial space.
In addition, the Company's Properties are in markets where, in general, supply
is limited by the lack of available sites and the difficulty of receiving the
necessary approvals for development on vacant land. The Company's strategy for
maximizing the benefits from these opportunities is (i) to provide high quality
property management services using its own employees in order to enhance tenant
preferences for renewal, expansion and relocation in the Company's properties,
and (ii) to achieve speed and transaction cost efficiency in replacing
departing tenants through the use of in-house services for marketing, lease
negotiation, and design and construction of tenant improvements. In addition,
the Company believes that the Hotel Properties will add to the Company's
internal growth because of their desirable locations in the downtown Boston and
East Cambridge submarkets, which are experiencing high occupancy rates and
continued growth in room rates, and their effective management by Marriott(R)
International, Inc., which has achieved high guest satisfaction and limitations
on increases in operating costs.
Cultivate existing submarkets. In choosing locations for its properties,
the Company has paid particular attention to transportation and commuting
patterns, physical environment, adjacency to established business centers,
proximity to sources of business growth and other local factors.
Substantially all of the Company's square footage of Office Properties are
located in submarkets in Greater Boston, Greater Washington, D.C., midtown
Manhattan, Greater San Francisco, Princeton/East Brunswick, New Jersey,
Baltimore, Maryland, and Richmond, Virginia.
Many of these submarkets are experiencing increasing rents and as a
result current market rates often exceed the rents being paid by current
tenants in the Properties. The Company expects that leases expiring over
the next three years in these submarkets will be renewed, or space re-let,
at higher rents. Based on leases in place at December 31, 1998, leases with
respect to 6.45% and 7.00% of the Office and Industrial Properties will
expire in calendar years 1999 and 2000, respectively. The actual rental
rates at which available space will be re-let will depend on prevailing
market factors at the time. There can be no assurance that the Company will
re-let such space at an increased, or even at the then current, rental
rate.
Directly manage properties to maximize the potential for tenant
retention. The Company itself provides property management services, rather
than contracting for this service, to achieve awareness of
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and responsiveness to tenant needs. The Company and the Properties also
benefit from cost efficiencies produced by an experienced work force
attentive to preventive maintenance and energy management and from the
Company's continuing programs to assure that its property management
personnel at all levels remain aware of their important role in tenant
relations. The Company has long recognized that renewal of existing tenant
leases, as opposed to tenant replacement, often provides the best operating
results, because renewals minimize transaction costs associated with
marketing, leasing and tenant improvements and avoid interruptions in
rental income during periods of vacancy and renovation of space.
Replace tenants quickly at best available market terms and lowest
possible transaction costs. The Company believes that it has a competitive
advantage in attracting new tenants and achieving rental rates at the
higher end of its markets as a result of its well-located, well-designed
and well-maintained properties, its reputation for high quality building
services and responsiveness to tenants, and its ability to offer expansion
and relocation alternatives within its submarkets. The Company's objective
throughout this process is to obtain the highest possible rental terms and
to achieve rent commencement for new tenancies as quickly as possible, and
the Company believes that its use of in-house resources for marketing,
leasing and tenant improvements continues to result in lower than average
transaction costs.
THE HOTEL PROPERTIES
To assist the Company in maintaining its status as a REIT, the Company
leases the 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 are the sole member-managers.
Messrs. Zuckerman and Linde have a 9.8% economic interest in such lessee and
one or more unaffiliated 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 has made similar
arrangements with respect to the Hotel Development Property.
ENVIRONMENTAL MATTERS
Some of the Properties are located in urban and industrial areas where fill
or current or historical industrial uses of the areas have caused site
contamination. With respect to all of the Properties, independent environmental
consultants have been retained in the past to conduct or update Phase I
environmental assessments (which generally do not involve invasive techniques
such as soil or ground water sampling) and asbestos surveys on all of the
Properties. These environmental assessments have not revealed any environmental
conditions that the Company believes will have a material adverse effect on its
business, assets or results of operations, and the Company is not aware of any
other environmental condition with respect to any of the Properties which the
Company believes would have such a material adverse effect.
With respect to a property in Massachusetts, the Company received a Notice
of Potential Responsibility from the state regulatory authority on January 9,
1997, related to groundwater contamination. In addition, the Company received a
Notice of Downgradient Property Status Submittal from each of two third parties
concerning alleged contamination at two downgradient properties. On January 15,
1997, the Company notified the state regulatory authority that the Company
would cooperate with and monitor the tenant at the property (which investigated
the matter and undertook remedial actions). That investigation identified the
presence of hazardous substances in and near a catch basin along the property
line. The tenant completed an Immediate Response Action at the site in April
1998. The Company expects the tenant will likewise take any additional
necessary response actions. The lease with the tenant contains a provision
pursuant to which the tenant indemnifies the Company against such liability.
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On January 15, 1992, another property in Massachusetts was listed by the
state regulatory authority as an unclassified Confirmed Disposal Site in
connection with groundwater contamination. The Company has engaged a specially
licensed environmental consultant to perform the necessary investigation and
assessment and to prepare submittals to the state regulatory authority. On
August 1, 1997, such consultant submitted to the state regulatory authority a
Phase I--Limited Site Investigation Report and Downgradient Property Status
Opinion. This Opinion concluded that the property qualifies for Downgradient
Property Status under the state regulatory program, which eliminates certain
deadlines for conducting response actions at a site and may qualify the Company
for liability relief under recent statutory amendments. Although the Company
believes that the current or former owners of the upgradient source properties
may ultimately be responsible for some or all of the costs of such response
actions, the Company will take any necessary further response actions.
An investigation at an additional property in Massachusetts identified
groundwater contamination. We engaged a specially licensed environmental
consultant to perform the necessary investigation and assessment and to prepare
submittals to the state regulatory authority. On March 11, 1998, the consultant
submitted to the state regulatory authority a Release Notification and
Downgradient Property Status Opinion. This Opinion concluded that the property
qualifies for Downgradient Property Status under the state regulatory program,
which eliminates certain deadlines for conducting response actions at a site
and may qualify the Company for liability relief under recent statutory
amendments. Although the Company believes that the current or former owners of
the upgradient source properties may ultimately be responsible for some or all
of the costs of such response actions, the Company will take any necessary
further response actions.
COMPETITION
The Company competes in the leasing of office and industrial space with a
considerable number of other real estate companies some of which may have
greater marketing and financial resources than the Company. In addition, the
Company's in-service Hotel Properties compete for guests with other hotels,
some of which may have greater marketing and financial resources than the
Company and Marriott International, Inc.
8
<PAGE>
SEASONALITY
The Company's two in-service Hotel Properties traditionally have experienced
significant seasonality in their operating income, with average weighted net
operating income by quarter over the three years 1996 through 1998 as follows:
<TABLE>
<CAPTION>
First Quarter Second Quarter Third Quarter Fourth Quarter
------------- -------------- ------------- --------------
<S> <C> <C> <C>
13% 30% 32% 25%
</TABLE>
The Company's Office and Industrial Properties and the Garage Property have
not traditionally experienced significant seasonality.
9
<PAGE>
ITEM 2. Properties
As of December 31, 1998 the Company's portfolio consisted of 121 Properties,
including ten Development Properties. The Properties consist of 108 Office
Properties, including 76 Class A Office Buildings and 32 R&D Properties; nine
Industrial Properties; three Hotel Properties; and one Garage Property. In
addition, the Company owns an additional twenty-one parcels of land for future
development. The following table sets forth information relating to the
Properties currently owned by the Company:
<TABLE>
<CAPTION>
Net
Rentable
Percent Number Square
Property Name Location Ownership of Buildings Feet
- ------------- -------- --------- ------------ ----------
<S> <C> <C> <C> <C>
Office Properties:
Class A Office
Properties:
280 Park Avenue........ New York, NY 100.0% 1 1,198,769
599 Lexington Avenue... New York, NY 100.0% 1 1,000,070
Riverfront Plaza....... Richmond, VA 100.0% 1 899,720
875 Third Avenue....... New York, NY 100.0% 1 681,669
Democracy Center....... Bethesda, MD 100.0% 3 680,000
100 East Pratt Street.. Baltimore, MD 100.0% 1 633,482
Two Independence
Square................ SW, Washington, DC 100.0% 1 579,600
Capital Gallery........ SW, Washington, DC 100.0% 1 399,549
One Independence
Square................ SW, Washington, DC 100.0% 1 337,794
2300 N Street.......... NW, Washington, DC 100.0% 1 280,065
National Imagery and
Mapping Agency
Building.............. Reston, VA 100.0% 1 263,870
Reston Town Center
Office Complex........ Reston, VA 100.0% 2 261,046
Lockheed Martin
Building.............. Reston, VA 100.0% 1 255,244
The U.S. International
Trade Commission Bldg
...................... SW, Washington, DC 100.0% 1 243,998
One Cambridge Center... Cambridge, MA 100.0% 1 215,385
University Place....... Cambridge, MA 100.0% 1 195,931
Newport Office Park.... Quincy, MA 100.0% 1 168,829
Lexington Office Park.. Lexington, MA 100.0% 2 168,500
191 Spring Street...... Lexington, MA 100.0% 1 162,700
Ten Cambridge Center... Cambridge, MA 100.0% 1 152,664
10 & 20 Burlington Mall
Road.................. Burlington, MA 100.0% 2 152,552
Waltham Office Center.. Waltham, MA 100.0% 3 129,658
Montvale Center........ Gaithersburg, MD 75.0% 1 122,157
91 Hartwell Avenue..... Lexington, MA 100.0% 1 122,135
Three Cambridge
Center................ Cambridge, MA 100.0% 1 107,484
201 Spring Street...... Lexington, MA 100.0% 1 102,000
Bedford Business Park.. Bedford, MA 100.0% 1 90,000
Eleven Cambridge
Center................ Cambridge, MA 100.0% 1 79,616
33 Hayden Avenue....... Lexington, MA 100.0% 1 79,564
Decoverly Two.......... Rockville, MD 100.0% 1 77,747
Decoverly Three........ Rockville, MD 100.0% 1 77,040
170 Tracer Lane........ Waltham, MA 100.0% 1 73,258
32 Hartwell Avenue..... Lexington, MA 100.0% 1 69,154
195 West Street........ Waltham, MA 100.0% 1 63,500
100 Hayden Avenue...... Lexington, MA 100.0% 1 55,924
204 Second Avenue...... Waltham, MA 100.0% 1 40,974
92 Hayden Avenue....... Lexington, MA 100.0% 1 30,980
8 Arlington Street..... Boston, MA 100.0% 1 30,526
Carnegie Center/Tower
One................... New Jersey 100.0% 10 1,366,360
Candler................ Baltimore, MD 100.0% 1 518,954
Metropolitan Square.... Washington, DC 100.0% 1 583,685
Prudential Center...... Boston, MA 100.0% 2 1,693,790
Reservoir Place........ Waltham, MA 100.0% 1 529,992
Embarcadero............ San Francisco, CA 100.0% 6 3,655,423
--- ----------
Subtotal for Office Properties............................ 66 18,631,358
--- ----------
Retail Space:
Prudential Center...... Boston, MA 100.0% 1 486,428
Embarcadero Center..... San Francisco, CA 100.0% 354,113
--- ----------
Subtotal for Retail Space................................. 1 840,541
--- ----------
R & D Properties:
Bedford Business Park.. Bedford, MA 100.0% 2 383,704
910 Clopper Road....... Gaithersburg, MD 100.0% 1 180,650
Fullerton Square....... Springfield, VA 100.0% 2 178,841
Virginia #3............ Springfield, VA 100.0% 1 60,537
Hilltop Business
Center................ South San Francisco, CA 35.7% 9 144,479
7435 Boston Boulevard,
Building One.......... Springfield, VA 100.0% 1 105,414
7601 Boston Boulevard,
Building Eight........ Springfield, VA 100.0% 1 103,750
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Net
Rentable
Percent Number Square
Property Name Location Ownership of Buildings Feet
- ------------- -------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
8000 Grainger Court,
Building Five......... Springfield, VA 100.0% 1 90,465
7700 Boston Boulevard,
Building Twelve....... Springfield, VA 100.0% 1 82,224
7500 Boston Boulevard,
Building Six.......... Springfield, VA 100.0% 1 79,971
7501 Boston Boulevard,
Building Seven........ Springfield, VA 100.0% 1 75,756
7600 Boston Boulevard,
Building Nine......... Springfield, VA 100.0% 1 69,832
Fourteen Cambridge
Center................ Cambridge, MA 100.0% 1 67,362
164 Lexington Road..... Billerica, MA 100.0% 1 64,140
930 Clopper Road....... Gaithersburg, MD 100.0% 1 60,056
Sugarland Building
Two................... Herndon, VA 100.0% 1 59,423
7374 Boston Boulevard,
Building Four......... Springfield, VA 100.0% 1 57,321
Sugarland Building
One................... Herndon, VA 100.0% 1 52,797
8000 Corporate Court,
Building Eleven....... Springfield, VA 100.0% 1 52,539
7451 Boston Boulevard,
Building Two.......... Springfield, VA 100.0% 1 47,001
17 Hartwell Avenue..... Lexington, MA 100.0% 1 30,000
7375 Boston Boulevard,
Building Ten.......... Springfield, VA 100.0% 1 26,865
--- ----------
Subtotal for R & D Properties............................. 32 2,073,127
--- ----------
Industrial Properties
2391 West Winton
Avenue................ Hayward, CA 100.0% 1 221,000
40-46 Harvard Street... Westwood, MA 100.0% 1 169,273
38 Cabot Boulevard..... Bucks County, PA 100.0% 1 161,000
6201 Columbia Park
Road, Building Two.... Landover, MD 100.0% 1 99,885
2000 South Club Drive,
Building Three........ Landover, MD 100.0% 1 83,608
25-33 Dartmouth
Street................ Westwood, MA 100.0% 1 78,045
1950 Stanford Court,
Building One.......... Landover, MD 100.0% 1 53,250
560 Forbes Boulevard... South San Francisco, CA 35.7% 1 40,000
430 Rozzi Place........ South San Francisco, CA 35.7% 1 20,000
--- ----------
Subtotal for Industrial Properties........................ 9 926,061
--- ----------
Subtotal for In-service Office and Industrial Properties.. 108 22,471,087
--- ----------
Development Properties
One and Two Reston
Overlook.............. Reston, VA 25.0% 2 444,000
One Freedom Square..... Reston, VA 25.0% 1 406,980
200 West Street........ Waltham, MA 100.0% 1 250,000
Eight Cambridge
Center................ Cambridge, MA 100.0% 1 175,000
The Arboretum.......... Reston, VA 100.0% 1 96,000
Market Square North.... NW, Washington, D.C. 50.0% 1 409,843
1301 New York Ave...... Washington, D.C. 100.0% 1 178,665
181 Spring Street...... Lexington, MA 100.0% 1 52,000
--- ----------
Subtotal for Development Properties....................... 9 2,012,488
--- ----------
Consolidated total for all Properties..................... 117 24,483,575
--- ----------
<CAPTION>
Rooms
-----
<S> <C> <C> <C> <C> <C>
Long Wharf Marriott.... Boston, MA 100.0% 1 420,000 402
Cambridge Center
Marriott.............. Cambridge, MA 100.0% 1 330,400 431
Residence Inn by
Marriott **........... Cambridge, MA 100.0% 1 187,474 221
--- ---------- ----
3 937,874 1054
--- ---------- ----
Garage Properties:
Cambridge Center North
Garage................ Cambridge, MA 100.0% 1 332,442
Structured Parking..... 5,802,711
--- ----------
Subtotal for parking...................................... 6,135,153
Total in-service and development properties............... 121 31,556,602
=== ==========
</TABLE>
- --------
**Under development at December 31, 1998.
11
<PAGE>
ITEM 3. Legal Proceedings
Neither the Company, nor its affiliates, is presently subject to any
material litigation or, to the Company's knowledge, has any litigation been
threatened against it or its affiliates other than routine actions and
administrative proceedings substantially all of which are expected to be
covered by liability or other insurance and in the aggregate are not expected
to have a material adverse effect on the business or financial condition of the
Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the year ended December 31, 1998.
12
<PAGE>
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "BXP". The high and low closing sales prices for the periods
indicated in the table below were:
<TABLE>
<CAPTION>
Quarter Ended High Low Distributions
- ------------- --------- ------- -------------
<S> <C> <C> <C>
December 31, 1998............................... $32 1/2 $26 5/8 $.425(a)
September 30, 1998.............................. 34 11/16 23 7/8 .425
June 30, 1998................................... 35 15/16 32 1/6 .405
March 31, 1998.................................. 35 7/8 32 1/2 .405
December 31, 1997............................... 34 3/8 30 .405
September 30, 1997.............................. 33 1/4 26 5/8 .405
June 30, 1997................................... 27 1/4 26 1/6 .035
</TABLE>
- --------
(a) Paid on January 28, 1999 to stockholders of record on December 30, 1998.
At March 15, 1999, there were approximately 179 shareholders of record. This
does not include beneficial owners for whom Cede & Co. or others act as
nominee.
The Company has adopted a policy of paying regular quarterly distributions
on its Common Stock and cash distributions have been paid on the Company's
Common Stock with respect to the period since its inception.
In order to maintain its qualification as a REIT, the Company must make
annual distributions to its shareholders of at least 95% of its taxable income
(not including net capital gains). Distributions for Federal Income Tax
purposes totaled $1.756 per share in 1998 ($1.4136 of which was declared and
paid during 1998). The Company intends that any dividend paid in respect of its
common stock during the last quarter of each year will, if necessary, be
adjusted to satisfy the REIT requirement that at least 95% of taxable income
for such taxable year be distributed.
On April 8, 1997, the Operating Partnership was formed with Boston
Properties, Inc., a Massachusetts corporation ("BP-Massachusetts"), as general
partner and an affiliate as a limited partner. The sale of the interests in the
Operating Partnership was made in reliance on Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act").
On April 9 and 15, 1997, the Company entered into an Omnibus Option
Agreement (or, in the case of one entity, a similar agreement) with a total of
80 individuals (the "Individuals") and entities (the "Entities") (including
economic or a controlling interest). None of the Entities was formed for the
purpose of entering into the Omnibus Option Agreement and acquiring OP Units.
Such agreement provides that the Operating Partnership can, at its option and
without any further action by such Individuals or Entities, acquire all or any
of the interests of the Individuals or Entities in the 74 Properties
(collectively, the "Interests"). The right of the Operating Partnership to
acquire all or any of the Interests from the Individuals and Entities and to
issue OP Units in exchange therefor is subject only to the fulfillment of
conditions (principally, the completion of the Offering) beyond the control of
the Individuals and Entities. The total number of OP Units that were issued to
the Individuals and Entities will depend on the final offering price of a share
of Common Stock in the Offering. Such agreement was entered into and will be
consummated in reliance on Section 4(2) of, and Regulation D under, the
Securities Act.
On April 11, 1997, BP-Massachusetts and Boston Properties, Inc., a Delaware
corporation ("BP-Delaware"), and the Operating Partnership, entered into a
number of agreements (including a merger
13
<PAGE>
agreement and a contribution agreement) that memorializes (i) the issuance of
Common Stock by BP-Delaware to the stockholders of BP-Massachusetts (Messrs.
Zuckerman and Linde) upon consummation of a reincorporation merger in
connection with the Formation Transactions and (ii) the contribution to the
Operating Partnership of the proceeds of the Offering and the management and
development operations currently held by BP-Massachusetts. Such agreements were
entered into and were consummated in reliance on Section 4(2) of the Securities
Act.
On October 23, 1997, in connection with the Company's acquisition of 100
East Pratt Street, the Company issued 500 shares of Common Stock to
International Business Machines Corporation, one of the sellers of the
Property. Such shares were issued in reliance on Section 4(2) of, and
Regulation D under, the Securities Act.
On November 21, 1997, in connection with the Company's acquisition of 875
Third Avenue, the Company issued 890,869 OP Units to Kenvic Associates, the
contributor of such property. Such OP Units were issued in reliance on Section
4(2) of, and Regulation D under, the Securities Act.
On February 2, 1998, in connection with the Company's acquisition of the
Mulligan/Griffin Portfolio, the Company issued 1,471,456 OP Units to the
contributor of such property. Such OP Units were issued in reliance on Section
4(2) of, and Regulation D under, the Securities Act.
On May 28, 1998, in connection with the Company's acquisition of a parcel of
land known as Tower Oaks, the Company issued 592,916 OP Units to the
contributor of such property. Such OP Units were issued in reliance on Section
4(2) of, and Regulation D under, the Securities Act.
On July 2, 1998, in connection with the Company's acquisition of The
Prudential Center, the Company issued 2,993,414 OP Units and sold 1,675,846
newly issued shares of Common Stock to an affiliate of such contributor. Such
OP Units and shares of Common Stock were issued in reliance on Section 4(2) of,
and Regulation D under, the Securities Act.
On July 10, 1998, in connection with the Company's acquisition of
Metropolitan Square, the Company issued 815,409 OP Units to the contributor of
such property. Such OP Units were issued in reliance on Section 4(2) of, and
Regulation D under, the Securities Act.
On July 21, 1998, in connection with the Company's acquisition of the
Candler Building, the Company issued 146,898 shares of Common Stock to the
contributor of such property. Such OP Units were issued in reliance on Section
4(2) of, and Regulation D under, the Securities Act.
On August 18, 1998, in connection with the Company's acquisition of 1301 New
York Avenue, the Company issued 44,390 OP Units to the contributor of such
property. Such OP Units were issued in reliance on Section 4(2) of, and
Regulation D under, the Securities Act.
On November 3, 1998, in connection with the Company's acquisition of
Reservoir Place, the Company issued 933,085 OP Units to the contributor of such
property. Such OP Units were issued in reliance on Section 4(2) of, and
Regulation D under, the Securities Act.
On November 12, 1998, in connection with the Company's acquisition
Embarcadero Center, the Company issued 6,311,979 Preferred Units to the
contributor of such property. Such Preferred Units were issued in reliance on
Section 4(2) of, and Regulation D under, the Securities Act.
14
<PAGE>
ITEM 6. Selected Financial Data
The following sets forth selected financial and operating data for the
Company on a historical consolidated basis and for the Predecessor on a
historical combined basis. The following data should be read in conjunction
with the financial statements and notes thereto and Management's Discussion and
Analysis of Financial Condition and Results of Operations included elsewhere in
this Form 10-K.
Historical operating results of the Company and the Predecessor, including
net income, may not be comparable to future operating results.
<TABLE>
<CAPTION>
The Company The Predecessor Group
----------------------------------- -------------------------------------------------
Year June 23, 1997 January 1, 1997
Year ended December 31,
ended to to ---------------------------------
December 31, 1998 December 31, 1997 June 22, 1997 1996 1995 1994
----------------- ----------------- --------------- ---------- ---------- ---------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
information
Total revenues.......... $ 513,847 $ 145,643 $129,818 $ 269,933 $ 248,725 $ 244,083
------------ ---------- -------- ---------- ---------- ---------
Expenses:
Property............... 150,490 40,093 27,032 58,195 55,421 53,239
Hotel.................. -- -- 22,452 46,734 44,018 42,753
General and
administrative........ 22,504 6,689 5,116 10,754 10,372 10,123
Interest............... 124,860 38,264 53,324 109,394 108,793 97,273
Depreciation and
amortization.......... 75,418 21,719 17,054 36,199 33,828 33,112
------------ ---------- -------- ---------- ---------- ---------
Income (loss) before
minority interests.... 140,575 38,878 4,840 8,657 (3,707) 7,583
Minority interests..... (41,982) (11,652) (235) (384) (276) (412)
------------ ---------- -------- ---------- ---------- ---------
Income (loss) before
extraordinary items... 98,593 27,226 4,605 8,273 (3,983) 7,171
Extraordinary gain
(loss) on early debt
extinguishments,
net................... (5,481) 7,925 -- (994) -- --
------------ ---------- -------- ---------- ---------- ---------
Net income (loss)...... $ 93,112 $ 35,151 $ 4,605 $ 7,279 $ (3,983) $7,171
============ ========== ======== ========== ========== =========
Basic earnings per
share:
Income before
extraordinary
items............... $ 1.62 $ 0.70 -- -- -- --
Extraordinary gain
(loss), net......... (0.09) 0.21 -- -- -- --
------------ ----------
Net income........... $ 1.53 $ 0.91 -- -- -- --
------------ ----------
Weighted average
number of common
shares outstanding.. 60,776 38,694 -- -- -- --
Diluted earnings per
share:
Income before
extraordinary
items............... $ 1.61 $ 0.70 -- -- -- --
Extraordinary gain
(loss), net......... (0.09) 0.20 -- -- -- --
------------ ----------
Net income........... $ 1.52 $ 0.90 -- -- -- --
------------ ----------
Weighted average
number of common and
common equivalent
shares outstanding.. 61,308 39,108 -- -- -- --
Balance Sheet
information:
Real estate, gross..... $ 4,917,193 $1,796,500 -- $1,035,571 $1,012,324 $ 984,853
Real estate, net....... 4,559,809 1,502,282 -- 771,660 773,810 770,763
Cash................... 12,166 17,560 -- 8,998 25,867 46,289
Total assets........... 5,235,087 1,672,521 -- 896,511 922,786 940,155
Total indebtedness..... 3,088,724 1,332,253 -- 1,442,476 1,401,408 1,413,331
Stockholders' and
owners' equity
(deficit)............. 948,481 175,048 -- (576,632) (506,653) (502,230)
Other information:
Funds from
Operations............ $ 205,209 $ 60,008 $ 21,450 $ 36,318 $ 29,151 39,568
Funds from Operations
(Company's share)..... 153,045 42,258 -- -- -- --
Dividends per share.... 1.64 1.62a -- -- -- --
Cash flow provided by
operating
activities............ 215,287 46,146 25,090 55,907 29,092 45,624
Cash flow used in
investing
activities............ (2,179,215) (519,743) (32,844) (34,315) (36,844) (18,424)
Cash flow provided by
(used in) financing
activities............ 1,958,534 491,157 9,266 (38,461) (12,670) (31,608)
</TABLE>
- --------
a - annualized
15
<PAGE>
(1) The White Paper of Funds from Operations approved by the Board of
Governors of the National Association of Real Estate Investment Trusts
("NAREIT") in March 1995 defines Funds from Operations as net income (loss)
(computed in accordance with GAAP), excluding gains (or losses) from debt
restructuring and sales of properties, plus real estate related depreciation
and amortization and after adjustments for unconsolidated partnerships and
joint ventures. The Company believes that Funds from Operations is helpful to
investors as a measure of the performance of the equity REIT because, along
with cash flow from operating activities, financing activities and investing
activities, it provides investors with an indication of the ability of the
Company to incur and service debt, to make capital expenditures and to fund
other cash needs. The Company computes Funds from Operations in accordance with
standards established by NAREIT which may not be comparable to Funds from
Operations reported by other REITs that do not define the term in accordance
with the current NAREIT definition or that interpret the current NAREIT
definition differently than the Company. Funds from Operations does not
represent cash generated from operating activities determined in accordance
with GAAP and should not be considered as an alternative to net income
(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 cash distributions.
Funds from Operations for the respective periods is calculated as follows:
<TABLE>
<CAPTION>
The Company The Predecessor Group
---------------------------------- -----------------------------------------
Year June 23, 1997 January 1, 1997
Year ended December 31,
ended to to -------------------------
December 31, 1998 December 31,1997 June 22, 1997 1996 1995 1994
----------------- ---------------- --------------- ------- ------- -------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C>
Income (loss) before
minority interests... $140,575 $38,878 $ 4,840 $ 8,657 $(3,707) $ 7,583
Add:
Real estate deprecia-
tion and amortiza-
tion................. 74,649 21,417 16,808 35,643 33,240 32,509
Less:
Minority property
partnership's share
of Funds from
Operations........... (4,185) (287) (198) (479) (382) (524)
Preferred allocation.. (5,830) -- -- -- -- --
Non-recurring item--
significant lease
termination fee...... -- -- -- (7,503) -- --
-------- ------- ------- ------- ------- -------
Funds from Operations... $205,209 $60,008 $21,450 $36,318 $29,151 $39,568
-------- ------- ------- ------- ------- -------
Company's Funds from
Operations........... $153,045 $42,258 -- -- -- --
-------- ------- ------- ------- ------- -------
Per share--basic...... $ 2.25 $ 1.09 -- -- -- --
-------- ------- ------- ------- ------- -------
Per share--diluted.... $ 2.50 $ 1.08 -- -- -- --
======== ======= ======= ======= ======= =======
</TABLE>
<TABLE>
<S> <C>
Reconciliation to Diluted Funds from Operations:
</TABLE>
<TABLE>
<CAPTION>
For the period from June 23, 1997
For the year ended December 31, 1998 to December 31, 1997
------------------------------------------ -----------------------------------
Income Shares Per Share Income Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- -------------- ---------- ----------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Basic Funds from
Operations per
Share................ $ 153,045 60,776 $2.52 $42,258 38,694 $ 1.09
Minority interest ad-
justment............... 1,053 -- -- -- -- --
Effect of Dilutive
Securities
Convertible Preferred
Units................ 2,117 1,135 (0.01) -- --
Stock Options......... 532 (0.01) -- 414 (0.01)
------------- ----------- ---------- ------- ------ ------
Dilutive Funds from
Operations per
Share................ $156,215 62,443 $ 2.50 $42,258 39,108 $ 1.08
============= =========== ========== ======= ====== ======
</TABLE>
16
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the selected
financial data and the historical consolidated and combined financial
statements and related notes thereto for the Company and the Predecessor,
respectively. The following discussion is based primarily on the consolidated
financial statements of the Company for the period subsequent to formation of
the Company on June 23, 1997 and on the combined financial statements of the
Predecessor for the periods prior to such date. The combined financial
statements of the Predecessor include the results of operations from 82
properties for the periods presented. Historical results and percentage
relationships in the Consolidated and Combined Financial Statements, including
trends which might appear, should not be taken as indicative of future
operations or financial position.
Overview
Certain statements in this Form 10-K, in the Company's press releases, and
in oral statements made by or with the approval of an authorized executive
officer of the Company, constitute "forward-looking statements" as that term is
defined under the Private Securities Litigation Reform Act of 1995 (the "Act")
and releases issued by the Securities and Exchange Commission. The words
"believe," "expect," "anticipate," "intend," "estimate" and other expressions
which are predictions of or indicate future events and trends and which do not
relate to historical matters identify forward-looking statements. Reliance
should not be placed on forward-looking statements because they involve known
and unknown risks, uncertainties and other factors, which 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. Factors that could cause actual results to
differ materially from those set forth in the forward-looking statements
include general economic conditions, local real estate conditions, timely re-
leasing of occupied square footage upon expiration, interest rates,
availability of equity and debt financing and other risks detailed from time to
time in the Company's filings with the Securities and Exchange Commission. The
Company undertakes no obligation to publicly update or revise any forward-
looking statement, whether as a result of new information, future events or
otherwise.
Boston Properties, Inc. (the "Company") is one of the largest owners and
developers of office properties in the United States, with a significant
presence in Greater Boston, Greater Washington, D.C., Greater San Francisco,
midtown Manhattan, Princeton/East Brunswick, New Jersey, Baltimore, Maryland,
and Richmond, Virginia. The Company is a fully integrated self-administered and
self-managed real estate investment trust ("REIT"). The Company was formed to
succeed to the real estate development, redevelopment, acquisition, management,
operating and leasing businesses associated with the predecessor company
founded by Mortimer B. Zuckerman and Edward H. Linde in 1970. The term
"Predecessor Group" or "Predecessor" as used herein refers to the entities that
owned interests in one or more properties that were contributed to the Company
in connection with the Company's initial public offering in June 1997 (the
"Initial Offering"). The term "Company" as used herein includes Boston
Properties, Inc. and its subsidiaries on a consolidated basis (including Boston
Properties Limited Partnership (the "Operating Partnership")).
At December 31, 1998, the Company's portfolio consisted of 121 properties
(the "Properties") totaling approximately 31.6 million square feet, including
ten properties currently under development. The Properties consisted of 108
office properties, including 76 Class A office buildings and 32 properties that
support both office and technical uses; nine industrial properties; three
hotels (including one hotel under development during 1998 which opened on
February 1, 1999)(the "Hotel Properties"); and one parking garage.
In 1998, the Company continued to identify and complete attractive
acquisitions and development transactions. During 1998, the Company added 11.4
million square feet to its portfolio by completing acquisitions totaling
approximately $2.9 billion (the "1998 Acquisitions"). The Company increased its
presence in the Greater San Francisco and Baltimore, Maryland markets. In
addition, the Company entered into new markets in Richmond, Virginia and
Princeton/East Brunswick, New Jersey by completing transactions totaling
approximately $450.4 million and over 2.2 million square feet. As of December
31, 1998, the Company had construction in progress representing an estimated
total investment of approximately $222.3 million and a total of approximately
2.0 million square feet.
17
<PAGE>
The Company is focusing on increasing the cash flow from its existing
portfolio of properties by maintaining high occupancy levels and increasing
effective rents. On the 778,401 square feet of second generation space renewed
or re-leased during the year, new rents were approximately 9.9% higher than the
expiring rents. At December 31, 1998, the Company's office and industrial
portfolio of properties was 98.4% occupied.
The Company also continues to strengthen its balance sheet and to establish
a capital structure designed to allow the Company to take advantage of growth
opportunities. In January 1998, the Company raised more than $807 million in
equity capital by completing a public offering of common stock. In addition,
during 1998, the Operating Partnership has issued more than $565 million of
common and preferred units in the Operating Partnership in exchange for certain
properties.
Results of Operations
The results of operations for the year ended December 31, 1996 include the
operations of the Predecessor. The results of operations for the year ended
December 31, 1997 includes the operations of the Predecessor for the period
January 1, 1997 through June 22, 1997 and the operations of the Company from
June 23, 1997 through December 31, 1997.
Comparison of the year ended December 31, 1998 to the year ended December 31,
1997
Rental revenues increased $254.1 million or 108.9% for the year ended
December 31, 1998 compared to the year ended December 31, 1997 primarily as a
result of (i) the 1998 Acquisitions generating revenues of approximately $149.6
million, (ii) a full year of rental revenues from 280 Park Avenue, 100 East
Pratt Street and 875 Third Avenue (the "1997 Acquisitions") which increased
revenues by approximately $78.5 million, and (iii) an overall increase in
occupancy rates and rental rates.
Hotel revenues decreased $31.2 million or 100.0% for the year ended December
31, 1998 compared to the year ended December 31, 1997 because hotel operating
revenue was only recognized for the period from January 1, 1997 to June 22,
1997 as a result of the Operating Partnership entering into participating
leases at the time of the Initial Offering.
Third party management and development fee income increased $4.9 million or
65.5% for the year ended December 31, 1998 compared to the year ended December
31, 1997 primarily as a result of new fees for development services for
projects which began during 1998 and increased fees on existing projects.
Interest and other income increased $10.5 million or 315.6% primarily due to
an increase in interest income resulting from an increase in average cash
reserves over the year due primarily to the proceeds received from the second
offering.
Property expenses increased $83.4 million or 124.2% for the year ended
December 31, 1998 compared to the year ended December 31, 1997 primarily as a
result of (i) the 1998 Acquisitions which had property expenses totaling $46.7
million, (ii) a full year of property expenses from the 1997 Acquisitions which
increased property expenses by $25.8 million, and (iii) an overall increase in
occupancy.
Hotel expenses decreased $22.5 million or 100.0% for the year ended December
31, 1998 compared to the year ended December 31, 1997 because the Company did
not manage the Hotel Properties but rather leased them under participating
leases.
General and administrative expenses increased $10.7 million or 90.6% for the
year ended December 31, 1998 compared to the year ended December 31, 1997
primarily due to the opening of new regional offices in San Francisco,
California and Princeton, New Jersey, the hiring of additional employees as a
result of the 1997 and 1998 Acquisitions and operating as a public company.
18
<PAGE>
Interest expense increased $33.3 million or 36.3% for the year ended
December 31, 1998 compared to the year ended December 31, 1997 primarily as a
result of interest incurred on assumed mortgages related to certain of the 1998
Acquisitions of $40.0 million and a full year of interest expense related to
the 1997 Acquisitions adding $23.1 million of interest expense. This was offset
by reduced interest resulting from the payoff of certain mortgage indebtedness
during 1997 with proceeds from the Initial Offering.
Depreciation and amortization expense increased $36.6 million or 94.5% for
the year ended December 31, 1998 compared to the year ended December 31, 1997
primarily as a result of the 1998 Acquisitions adding $23.4 million and a full
year of depreciation on the 1997 Acquisitions which increased depreciation by
$9.4 million.
As a result of the foregoing, income before extraordinary items and minority
interests of the Company increased $96.9 million.
Comparison of the year ended December 31, 1997 to the year ended December 31,
1996
Rental revenues increased $38.4 million or 19.7% for the year ended December
31, 1997 compared to the year ended December 31, 1996 primarily as a result of
(i) the 1997 Acquisitions adding approximately $20.4 million in rental
revenues, (ii) the inclusion of revenue of approximately $13.6 million from the
hotel leases entered into in connection with the Initial Offering, and (iii) an
overall increase in average occupancy and rental rates. This was offset by a
decrease due to no lease termination fee received in the year ended
December 31, 1997 compared to a $7.5 million fee received during 1996.
Hotel revenue decreased $34.5 million or 52.5% for the year ended December
31, 1997 compared to the year ended December 31, 1996 primarily because hotel
operating revenue of $31.2 million was only recognized for the period from
January 1, 1997 to June 22, 1997 as a result of the Operating Partnership
entering into a participating lease at the time of the Initial Offering.
Third party management and development fee income increased $1.8 million or
31.1% for the year ended December 31, 1997 compared to the year ended December
31, 1996 primarily as a result of new fees for development services for
projects which began during 1997 and increased fees on existing projects.
Interest and other income decreased approximately $0.2 million or 5.5 %
primarily due to a reduction in interest income resulting from a reduction in
cash reserves.
Property expenses increased $8.9 million or 15.3% for the year ended
December 31, 1997 compared to the year ended December 31, 1996 primarily as a
result of 1997 acquisitions which incurred $ 7.7 million in property expenses
and an overall increases in real estate taxes.
Hotel expenses decreased $24.3 million or 52.0% for the year ended December
31, 1997 compared to the year ended December 31, 1996 because after the Initial
Offering the Company did not manage the Hotel Properties but rather leased them
under participating leases.
Interest expense decreased $17.8 million or 16.3% for the year ended
December 31, 1997 compared to the year ended December 31, 1996 primarily as the
result of the payoff of certain mortgage indebtedness with the proceeds from
the Initial Offering.
As a result of the foregoing, income before extraordinary items and minority
interests of the Company and the Predecessor Group increased $35.1 million.
Liquidity and Capital Resources
Cash and cash equivalents were $12.2 and $17.6 million at December 31, 1998
and December 31, 1997, respectively. The decrease in cash is primarily a result
of cash flows used for investing activities offset by cash provided by
operating activities and financing activities. Net cash provided by operating
activities was $215.3 million for the year ended December 31, 1998 compared to
the $71.2 million for the year ended December 31, 1997.
19
<PAGE>
Net cash used in investing activities increased from $552.6 million for the
year ended December 31, 1997 to $2.2 billion for the year ended December 31,
1998. This increase is due primarily to the following acquisitions of real
estate assets during 1998:
Acquisitions
. On January 22,1998, the Company acquired, approximately $174.4 million
(including closing costs), Riverfront Plaza, a Class A Office building
with approximately 900,000 net rentable square feet located in Richmond,
Virginia. The acquisition was funded by a $52.6 million draw under the
Unsecured Line of Credit and mortgage financing of approximately $121.8
million.
. On February 2, 1998, the Company acquired, for approximately $257.8
million (including closing costs), the Mulligan/Griffin Portfolio, a
portfolio of nine office properties with approximately 1.3 million net
rentable square feet and six parcels of land aggregating 30.7 acres
located in Fairfax County, Virginia and Montgomery County, Maryland. The
acquisition was funded through the payment of approximately $88.5
million in cash, the assumption of mortgage debt with a fair value of
approximately $118.3 million, the assumption of other liabilities of
approximately $984,000, and the issuance OP Units valued at
approximately $50.0 million.
. On June 1, 1998, the Company acquired Decoverly III, for approximately
$11.1 million in cash. Decoverly III, a Class A office building with
approximately 77,040 square feet, is located in Rockville, Maryland.
. On June 16, 1998, the Company acquired 7450 Boston Boulevard for cash of
approximately $5.8 million. 7450 Boston Boulevard is a 60,537 square
foot, Class A office building located in Springfield, Virginia.
. On June 25, 1998, the Company acquired University Place for cash of
approximately $37.0 million. University Place is a 196,007 square foot,
Class A office building located in Cambridge, Massachusetts.
. On June 30, 1998, the Company acquired a portfolio of properties known
as the Carnegie Center Portfolio and Tower Center One for approximately
$276.0 million. The portfolio consists of ten office buildings with
approximately 1.3 million net rentable square feet located in Princeton
and East Brunswick, New Jersey. The acquisition was funded through the
assumption of debt of approximately $64.4 million, the issuance of
2,442,222 Series One Preferred Units with an aggregate value of $83.0
million, and cash of $128.6 million. The Series One Preferred Units bear
a preferred distribution of 7.25% per annum and are convertible into OP
Units at a rate of $38.25 per Series One Preferred Unit.
. 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, a
retail complex totaling 486,428 square feet and 2,700 underground
parking spaces, 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 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 building 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 building in Baltimore,
Maryland, for approximately $61.0 million. The
20
<PAGE>
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 building in
Washington, D.C. 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 the completion of these renovations.
. On November 3, 1998, the Company acquired Reservoir Place, located in
Waltham, Massachusetts. The property, which consists of approximately
529,992 square feet, was acquired for approximately $104.2 million. The
acquisition was funded through the assumption of mortgage debt with a
fair value of $77.1 million and the issuance of approximately $27.1
million of OP Units.
. On November 12, 1998, the Company completed the first phase of a two-
phase acquisition of Embarcadero Center in San Francisco. Embarcadero
Center is a six-building portfolio of Class A space consisting of an
aggregate of 3.7 million square feet of net rentable office space,
354,000 square feet of retail space and 2,090 underground parking
spaces. The first phase of the acquisition resulted in 100% ownership of
two buildings and an approximate 50% ownership in the four other
buildings. The second phase of the acquisition, in which the Company
acquired the remaining interest in the four other buildings, closed on
February 10, 1999. The Company acquired the entire Embarcadero Center
portfolio for approximately $1.2 billion, which was financed as follows:
(i) the assumption or incurrence of $730.0 million of property related,
secured indebtedness, (ii) a draw down from the Company's Unsecured Line
of Credit of approximately $87.3 million, (iii) issuance of Preferred
Units in the Operating Partnership ("the Series Two and Three Preferred
Units") having an aggregate value of approximately $286.4 million, and
(iv) the issuance of $100 million of the Company's Series A Convertible
Redeemable Preferred Stock (the "Preferred Stock"). The Series Two and
Three Preferred Units bear a preferred distribution ranging from 5.0% to
7.0% per annum and are convertible into OP Units at $38.10 per Series
Two and Three Preferred Unit.
. During 1998, the Company acquired land in various existing regions for
potential future developments. The Company acquired these land parcels
for approximately $23.6 million in cash.
. The Company has also funded various development projects. The total cash
invested during 1998 was approximately $67.5 million.
Net cash provided by (used in) financing activities increased from $500.4
million provided for the year ended December 31, 1997 to cash provided of $2.0
billion for the year ended December 31, 1998. This increase in primarily
attributable to the $1.2 billion in proceeds received from new mortgage notes
and the $420.1 million of proceeds from a short term note.
Cash and cash equivalents decreased $5.4 million during the year ended
December 31, 1998 compared to an increase of $8.7 million during the year
ended December 31, 1997. The decrease is due to a $1.5 billion increase in net
cash provided by financing activities and a $144.1 million increase in cash
provided by operating activities, offset by an increase in cash used for
investing activities of approximately $1.6 billion.
Recent Equity Financings
On January 30, 1998, the Company completed the second offering of
23,000,000 shares of Common Stock (including 3,000,000 shares issued pursuant
to the exercise of the underwriters' overallotment options) at $35.125 per
share, resulting in gross proceeds of approximately $807.9 million and net
proceeds to the Company of approximately $766.5 million.
21
<PAGE>
On July 2, 1998, in connection with the acquisition of the Prudential
Center, 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 the acquisition of the Candler Building
valued at approximately $5.0 million.
On February 10, 1999, the Company issued 2.0 million shares of the Company's
Series A Convertible Redeemable Preferred Stock for $100.0 million in
connection with the acquisition of Embarcadero Center.
Capitalization
At December 31, 1998, the Company's total consolidated debt was
approximately $3.1 billion. At December 31, 1998, the Company's outstanding
consolidated debt consisted of approximately $15.0 million under Unsecured Line
of Credit, as amended, approximately $2.7 billion of mortgage indebtedness, and
approximately $420.1 million in notes payable. The weighted average rate of the
Company's consolidated mortgage indebtedness is 6.87% and the weighted average
maturity is approximately 5.6 years.
Based on the Company's total market capitalization of approximately $6.1
billion at December 31, 1998 (at the December 31, 1998 closing Common Stock
price of $30.50 per share and including the 23,797,998 OP Units (excluding OP
Units held by the Company), an aggregate of 10,454,301 Series One, Two and
Three Preferred Units (the "Preferred Units") (assuming all are converted to OP
Units) and the Company's consolidated debt), the Company's consolidated debt
represented approximately 50.88% of its total market capitalization.
The Company utilizes the Unsecured Line of Credit primarily to finance
acquisitions of additional properties, for working capital purposes, and to
fund the development of properties. The Unsecured Line of Credit is a non-
recourse obligation of the Operating Partnership and is guaranteed by the
Company. The Company's ability to borrow under the Unsecured Line of Credit is
subject to the Company's compliance with a number of customary financial and
other covenants on an ongoing basis, including (i) loan-to-value ratio against
the total borrowing base not to exceed 55%, (ii) a loan-to-value ratio against
the total secured borrowing base not to exceed 55%, (iii) debt service coverage
ratio of 1.4 for the borrowing base and 1.50 for the Company as a whole for
full fixed charges, (iv) a leverage ratio not to exceed 60%, (v) limitations on
additional indebtedness and stockholders distributions, and (vi) a minimum net
worth requirement. Amounts drawn under the Unsecured Line of Credit for LIBOR
based loans bear interest at a floating rate based on a spread over LIBOR equal
to 90 to 120 basis points, depending on the Company's applicable leverage
ratio, subject to increase to 140 basis points if the total fixed charge ratio
falls below 1.75 but not lower than 1.50. At December 31, 1998, the Company had
the ability to borrow an additional $257.0 million under the Unsecured Line of
Credit, as $228.0 million was unavailable for 90 days as a result of the
Embarcadero transaction per the terms of the Unsecured Line of Credit
agreement, as amended. As of March 26, 1999 the Company's Unsecured Line of
Credit had a total borrowing capacity of $138.0 million.
22
<PAGE>
The following table sets forth certain information regarding the mortgage
debt at December 31, 1998:
<TABLE>
<CAPTION>
Principal Interest
Properties Amount Rate Maturity
---------- --------- -------- --------
(in thousands)
<S> <C> <C> <C>
Embarcadero Center One and
Two.......................... $ 319,914 6.70% December 10, 2008
The Prudential Center......... 298,686 6.72% July 1, 2008
599 Lexington Avenue.......... 225,000 7.00% July 19, 2005(1)
280 Park Avenue............... 220,000 7.00%(2) September 11, 2002
Embarcadero Center Four....... 159,813 6.79% February 1, 2006
875 Third Avenue.............. 153,807 8.00%(3) December 31, 2002
Embarcadero Center Three...... 150,000 6.40% January 1, 2007
Two Independence Square....... 120,252 8.09%(4) February 27, 2003
Riverfront Plaza.............. 119,992 6.61% January 21, 2008
Metropolitan Square........... 107,386 6.75%(5) June 1, 2000
Embarcadero Center--Tower..... 99,910 6.50% January 1, 2006
100 East Pratt Street......... 94,371 6.73% November 1, 2008
Reservoir Place............... 77,006 6.88%(6) November 1, 2006
One Independence Square....... 76,611 8.12%(4) August 21, 2001
2300 N Street................. 66,000 6.88% August 3, 2003
Capital Gallery............... 59,103 8.24% August 15, 2006
Ten Cambridge Center and North
Garage....................... 40,000 7.57% March 29, 2000
10 and 20 Burlington Mall Road
(7).......................... 37,000 8.33% October 1, 2001
Lockheed Martin Building...... 27,249 6.61% June 1, 2008
Reston Corporate Center....... 25,727 6.56% May 1, 2008
1301 New York Avenue.......... 24,965 6.70% August 15, 2009
191 Spring Street............. 23,430 8.50% September 1, 2006
Bedford Business Park......... 22,667 8.50% December 10, 2008
NIMA Building................. 22,291 6.51% June 1, 2008
212 Carnegie Center........... 20,997 7.25% December 31, 2000
202 Carnegie Center........... 19,528 7.25% December 31, 2000
214 Carnegie Center........... 13,726 8.19%(8) October 31, 2000
101 Carnegie Center........... 8,884 7.66% April 1, 2006
Montvale Center............... 7,792 8.59% December 1, 2006
Newport Office Park........... 6,499 8.13% July 1, 2001
Hilltop Business Center....... 4,417 LIBOR + 1.50% March 15, 1999
201 Carnegie Center........... 558 7.08% February 1, 2010
----------
$2,653,581
==========
</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) Outstanding principal of $213,000 bears interest at a fixed rate of 7.00%.
The remaining $7,000 bears interest at a floating rate equal to LIBOR +
1.00%.
(3) The principal amount and interest rate shown has been adjusted to reflect
the fair value of the note. The actual principal balance at December 31,
1998 was $150,000 and the interest rate was 8.75%.
(4) The principal amount and interest rate shown has been adjusted to reflect
the effective rates on the loans. The actual principal balances at December
31, 1998 were $119,844 and $76,438 respectively. The actual interest rates
are 8.50% and continue at such rate through the loan expiration.
(5) The principal amount and interest rate shown has been adjusted to reflect
the fair value of the note. The actual principal balance at December 31,
1998 was $104,040 and the interest rate was 9.13%.
(6) The principal amount and interest rate shown has been adjusted to reflect
the fair value of the note. The actual principal balance at December 31,
1998 was $66,444 and the interest rate was 9.09%.
(7) Includes outstanding indebtedness secured by 91 Hartwell Avenue and 92 and
100 Hayden Avenue.
(8) The principal amount and interest rate shown has been adjusted to reflect
the effective rate on the loan. The actual principal balance at December
31, 1998 was $13,705 and the interest rate was 9.13%.
23
<PAGE>
The Company has determined that the adequacy of estimated cash flows as well
as expected liquidity sources are adequate to meet its short-term (up to 12
months) liquidity needs. The Company believes that its principal short-term
liquidity needs are to fund normal recurring expenses, debt service
requirements and the minimum distribution required to maintain the Company's
REIT qualifications under the Internal Revenue Code of 1986, as amended. The
Company believes that these needs will be fully funded from cash flows provided
by operating activities.
The Company expects to meet long-term (greater than 12 months) liquidity
requirements for the costs of development, property acquisitions, scheduled
debt maturities, major renovations, expansions and other non-recurring capital
improvements through the issuance of additional OP Units, Preferred Units and
equity securities of the Company and the incurrence of long-term secured and
unsecured indebtedness. In addition, the Company may finance the development,
redevelopment or acquisition of additional properties by using its Unsecured
Line of Credit.
Rental revenues, operating expense reimbursement income from tenants, and
income from the operations of the Company's majority-owned affiliate, Boston
Properties Management, Inc. (the "Development and Management Company") are the
Company's principal sources of capital to pay its operating expenses, debt
service and recurring capital expenditures. The Company seeks to increase
income from its existing Properties by maintaining quality standards for its
Properties that promote high occupancy rates and permit increases in rental
rates while reducing tenant turnover and controlling operating expenses. The
Development and Management Company's sole source of income are fees generated
by its office and industrial real estate management, leasing, development and
construction businesses. Consequently, the Company believes its revenues will
continue to provide the necessary funds for its operating expenses, debt
service and recurring capital expenditures.
Principal sources of funds for acquisitions are expected to include income
from operations, proceeds of offerings, amounts available under the Unsecured
Line of Credit, long-term secured and unsecured indebtedness and sales of real
estate. In addition to funds from the above sources, the Company may acquire
properties or interests therein through the issuance of OP Units.
During the year ended December 31, 1998, the Company paid or declared
quarterly dividends totaling $1.66 per common share (consisting of $.405
related to quarters ended March 31, 1998 and June 30, 1998 and $.425 for the
quarters ended September 30, 1998 and December 31, 1998). The Company intends
to continue paying dividends quarterly. The Company expects to use cash flows
from operating activities to fund dividends to stockholders.
Funds from Operations
The White Paper of Funds from Operations approved by the Board of Governors
of the National Association of Real Estate Investment Trusts ("NAREIT") in
March 1995 defines Funds from Operations as net income (loss) (computed in
accordance with generally accepted accounting principles), excluding gains (or
losses) from debt restructuring and sales of properties, plus real estate
related depreciation and amortization and after adjustments for unconsolidated
partnerships and joint ventures. The Company believes that Funds from
Operations is helpful to investors as a measure of the performance of the
equity REIT because, along with cash flow from operating activities, financing
activities and investing activities, it provides investors with an indication
of the ability of the Company to incur and service debt, to make capital
expenditures and to fund other cash needs. The Company computes Funds from
Operations in accordance with standards established by NAREIT which may not be
comparable to Funds from Operations reported by other REITs that do not define
the term in accordance with the current NAREIT definition or that interpret the
current NAREIT definition differently than the Company. Funds from Operations
does not represent cash generated from operating activities determined in
accordance with GAAP and should not be considered as an alternative to net
income (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 cash distributions.
24
<PAGE>
Environmental Matters
Some of the Properties are located in urban and industrial areas where fill
or current or historical industrial uses of the areas have caused site
contamination. With respect to all of the Properties, independent environmental
consultants have been retained in the past to conduct or update Phase I
environmental assessments (which generally do not involve invasive techniques
such as soil or ground water sampling) and asbestos surveys on all of the
Properties. These environmental assessments have not revealed any environmental
conditions that the Company believes will have a material adverse effect on its
business, assets or results of operations, and the Company is not aware of any
other environmental condition with respect to any of the Properties which the
Company believes would have such a material adverse effect.
With respect to a property in Massachusetts, the Company received a Notice
of Potential Responsibility from the state regulatory authority on January 9,
1997, related to groundwater contamination. In addition, the Company received a
Notice of Downgradient Property Status Submittal from each of two third parties
concerning alleged contamination at two downgradient properties. On January 15,
1997, the Company notified the state regulatory authority that the Company
would cooperate with and monitor the tenant at the property (which investigated
the matter and undertook remedial actions). That investigation identified the
presence of hazardous substances in and near a catch basin along the property
line. The tenant completed an Immediate Response Action at the site in April
1998. The Company expects the tenant will likewise take any additional
necessary response actions. The lease with the tenant contains a provision
pursuant to which the tenant indemnifies the Company against such liability.
On January 15, 1992, another property in Massachusetts was listed by the
state regulatory authority as an unclassified Confirmed Disposal Site in
connection with groundwater contamination. The Company has engaged a specially
licensed environmental consultant to perform the necessary investigation and
assessment and to prepare submittals to the state regulatory authority. On
August 1, 1997, such consultant submitted to the state regulatory authority a
Phase I--Limited Site Investigation Report and Downgradient Property Status
Opinion. This Opinion concluded that the property qualifies for Downgradient
Property Status under the state regulatory program, which eliminates certain
deadlines for conducting response actions at a site and may qualify the Company
for liability relief under recent statutory amendments. Although the Company
believes that the current or former owners of the upgradient source properties
may ultimately be responsible for some or all of the costs of such response
actions, the Company will take any necessary further response actions.
An investigation at an additional property in Massachusetts identified
groundwater contamination. We engaged a specially licensed environmental
consultant to perform the necessary investigation and assessment and to prepare
submittals to the state regulatory authority. On March 11, 1998, the consultant
submitted to the state regulatory authority a Release Notification and
Downgradient Property Status Opinion. This Opinion concluded that the property
qualifies for Downgradient Property Status under the state regulatory program,
which eliminates certain deadlines for conducting response actions at a site
and may qualify the Company for liability relief under recent statutory
amendments. Although the Company believes that the current or former owners of
the upgradient source properties may ultimately be responsible for some or all
of the costs of such response actions, the Company will take any necessary
further response actions.
The Company expects that any resolution of the environmental matters
relating the above will not have a material impact on the financial position,
results of operations or liquidity of the Company.
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 that 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.
25
<PAGE>
In March of 1998, the Company formed a Year 2000 project team that consists
of Company personnel. The team includes a coordinator from 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.
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 over
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 other single tenant
represents more than 5% of its annual revues. Due to the Company's large tenant
base, the success of the Company is not closely tied to one particular tenant.
As a result, the Company does not believe there will be a material adverse
effect on the Company's financial condition and results of operations if a
limited number of the Company's 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. The replacement of an energy
management system at Embarcadero Center in San Francisco will be completed in
August 1999 and represents the only exception to the Company's current
expectation that all remediation work for building systems will be completed by
June 30, 1999.
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 were non-compliant, were upgraded
before the end of 1998 with the exception of work order processing software
that is currently being replaced at several properties.
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 $1.6 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.
26
<PAGE>
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 January 31, 1999, successful tests have been carried out and
documented for critical building systems at many properties throughout the
portfolio.
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 the project team by June 30, 1999 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.
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 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.
Newly Issued Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS 133").
FAS 133 requires the following:
. All derivatives must be carried on the balance sheet at fair value.
. Changes in the fair value of derivatives must be recognized in income
when they occur.
. Companies can use hedge accounting for derivatives that qualify as a
hedge, to eliminate or reduce the income-statement volatility that would
arise from reporting changes in a derivative's fair value in income.
. Extensive disclosure requirements.
The Standard applies to all entities and to all types of derivatives, and is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999.
In November 1998, the FASB issued Statement of Financial Accounting
Standards No. 134, "Accounting for Mortgage-Backed Securities Retained after
the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise" ("FAS 134").
FAS 134 further amends Statement of Financial Accounting Standards No. 65 to
specify that, after the securitization of mortgage loans that are held for
sale, an entity that is engaged in mortgage banking activities must classify
the resulting mortgage-backed securities or other retained interests based on
its ability and intent to sell or hold those investments.
FAS 134 is effective for the first fiscal quarter beginning after December
15, 1998.
In January of 1999, the FASB issued Statement of Financial Accounting
Standards No. 135 ("FAS 135"). FAS 135 rescinds Statement of Financial
Accounting Standards No. 75, "Deferral of the Effective Date of
27
<PAGE>
Certain Accounting Requirements for Pension Plans of State and Local
Governmental Units". This Statement also amends Statement of Financial
Accounting Standards No. 35, "Accounting and Reporting by Defined Benefit
Pension Plans," to exclude from its scope plans that are sponsored by and
provide benefits for the employees of one or more state or local governmental
units. This Statement is effective for financial statements issued for fiscal
years ending after February 15, 1999.
The Company does not believe that the implementation of FAS 133, FAS 134 or
FAS 135 will have a material impact on the Company's financial statements.
Inflation
Substantially all of the office leases provide for separate real estate tax
and operating expense escalations over a base amount. In addition, many of the
leases provide for fixed base rent increases or indexed increases. The Company
believes that inflationary increases may be at least partially offset by the
contractual rent increases described above.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss from adverse changes in market prices and
interest rates. The primary market risk facing the Company is interest rate
risk on its mortgage notes payable. Approximately $2.64 billion of the
Company's mortgage debt bears interest at fixed rates, and therefore the fair
value of these instruments is affected by changes in the market interest rates.
The following table presents principal cash flows (in thousands) based upon
maturity dates of the debt obligations and the related weighted average
interest rates by expected maturity dates for the fixed rate debt. The interest
rate of the variable rate debt as of December 31, 1998 ranged from LIBOR plus
1.00% to LIBOR plus 1.50%.
<TABLE>
<CAPTION>
Mortgage debt, including current portion
------------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
------- ------- ------- ------- ------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Rate.............. $26,940 233,075 146,059 378,394 206,853 2,090,403 $3,081,724 $3,081,724
Average Interest Rate... 7.05% 7.13% 7.89% 7.38% 7.54% 6.83%
Variable Rate........... -- -- -- $ 7,000 -- -- $ 7,000 $ 7,000
</TABLE>
Item 8. Financial Statements and Supplementary Data
See "Index to Financial Statements" on page F-1 of this Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
28
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information concerning Directors and Executive Officers of the
Registrant required by Item 10 shall be included in the Proxy Statement to be
filed relating to the 1999 Annual Meeting of the Registrant's Stockholders and
is incorporated herein by reference.
Item 11. Executive Compensation
The information concerning Executive Compensation required by Item 11 shall
be included in the Proxy Statement to be filed relating to the 1999 Annual
Meeting of the Registrant's Stockholders and is incorporated herein by
reference.
Item 12. Security Ownership of Beneficial Owners and Management
The information concerning Directors and Executive Officers of the
Registrant required by Item 12 shall be included in the Proxy Statement to be
filed relating to the 1999 Annual Meeting of the Registrant's Stockholders and
is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information concerning Directors and Executive Officers of the
Registrant required by Item 13 shall be included in the Proxy Statement to be
filed relating to the 1999 Annual Meeting of the Registrant's Stockholders and
is incorporated herein by reference.
29
<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K
(a) Financial Statements and Financial Statement Schedule
See "Index to Financial Statements" on page F-1 on this Form 10-K.
(b) Reports on Form 8-K
A report on Form 8-K was filed on January 12, 1998 which included
information regarding Item 5. The Form 8-K was filed in connection with the
Company's press release regarding the potential acquisition of The Prudential
Center.
A report on Form 8-K was filed on January 26, 1998 which included
information regarding Item 5. The Form 8-K was filed in connection with the
Company's press release regarding the Company's fourth quarter 1997 earnings.
A report on Form 8-K was filed on February 6, 1998 which included
information regarding Item 2, 5 and 7. Included in Item 7 was pro forma
information and exhibits. The Form 8-K was filed in connection with the
Company's acquisition of Riverfront Plaza and the Mulligan/Griffin Portfolio.
A report on Form 8-K was filed on June 9, 1998 which included information
regarding Item 5. The Form 8-K was filed in connection with information
presented to investors and analysts.
A report on Form 8-K was filed on July 15, 1998 (as amended by Form 8-K/A
filed on August 25, 1998) which included information regarding Item 2, 5 and 7.
Included in Item 7 was pro forma information and exhibits. The Form 8-K was
filed in connection with the Company's acquisition of the Carnegie Center
portfolio.
A report on Form 8-K was filed on July 17, 1998 (as amended by Form 8-K/A
filed on August 25, 1998) which included information regarding Item 2, 5 and 7.
Included in Item 7 was pro forma information and exhibits. The Form 8-K was
filed in connection with the Company's acquisition of The Prudential Center.
A report on Form 8-K was filed on July 27, 1998 (as amended by Form 8-K/A
filed on August 25, 1998) which included information regarding Item 2, 5 and 7.
Included in Item 7 was pro forma information and exhibits. The Form 8-K was
filed in connection with the Company's acquisition of Metropolitan Square.
A report on Form 8-K was filed on October 27, 1998 which included
information regarding Item 5. The Form 8-K was filed in connection with the
Company's press release regarding the Company's third quarter 1998 earnings and
information presented to investors and analysts.
A report on Form 8-K was filed on November 25, 1998 (as amended by Form 8-
K/A filed on January 26, 1999) which included information regarding Item 2, 5
and 7. Included in Item 7 was pro forma information and exhibits. The Form 8-K
was filed in connection with the Company's acquisition of Embarcadero Center.
A report on Form 8-K was filed on January 27, 1999 which included
information regarding Item 5. The Form 8-K was filed in connection with the
Company's press release regarding the Company's fourth quarter 1998 earnings.
30
<PAGE>
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
3.1 Form of Amended and Restated Certificate of Incorporation of the
Company (2)
3.2 Form of Amended and Restated Bylaws of the Company (2)
4.1 Form of Shareholder Rights Agreement dated as of June , 1997
between the Company and BankBoston, N.A., as Rights Agent (2)
4.2 Form of Certificate of Designation for Series E Junior
Participating Cumulative Preferred Stock, par value $.01 per
share (2)
4.3 Form of Certificate of Designations for the Series A Preferred
Stock. (9)
4.4 Form of Common Stock Certificate (2)
10.1 Second Amended and Restated Agreement of Limited Partnership of
the Operating Partnership, dated as of June 29, 1998. (6)
10.2 Certificate of Designations for the Series One Preferred Units,
dated June 30, 1998, constituting an amendment to the Second
Amended and Restated Agreement of Limited Partnership of the
Operating Partnership. (6)
10.3 Certificate of Designations for the Series Two Preferred Units,
dated November 12, 1998, constituting an amendment to the Second
Amendment and Restated Agreement of Limited Partnership of the
Operating Partnership. (9)
10.4 Certificate of Designations for the Series Three Preferred
Units, dated November 12, 1998, constituting an amendment to the
Second Amended and Restated Agreement of Limited Partnership of
the Operating Partnership. (9)
10.5 1997 Stock Option and Incentive Plan (2)
10.6 Form of Noncompetition Agreement between the Company and
Mortimer B. Zuckerman (2)
10.7 Form of Employment and Noncompetition Agreement between the
Company and Edward H. Linde. (2)
10.8 Form of Employment Agreement between the Company and certain
executive officers (2)
10.9 Form of Indemnification Agreement between the Company and each
of its directors and executive officers (2)
10.10 Omnibus Option Agreement by and among the Operating Partnership
and the Grantors named therein dated as of April 9, 1997 (2)
10.11 Revolving Credit Agreement with BankBoston, N.A. (2)
10.12 Form of Registration Rights Agreement among the Company and the
persons named therein (2)
10.13 Form of Lease Agreement dated as of June , 1997 between Edward
H. Linde and Mortimer B. Zuckerman, as Trustees of Downtown
Boston Properties Trust, and ZL Hotel LLC (2)
10.14 Form of Lease Agreement dated as of June , 1997 between Edward
H. Linde and Mortimer B. Zuckerman, as Trustees of Two Cambridge
Center Trust, and ZL Hotel LLC (2)
10.15 Option Agreement between Boston Properties Limited Partnership
and Square 36 Properties Limited Partnership dated April 15,
1997 (2)
10.16 Form of Certificate of Incorporation of Boston Properties
Management, Inc (2)
10.17 Form of By-laws of Boston Properties Management, Inc. (2)
10.18 Form of Limited Liability Agreement of ZL Hotel LLC (2)
10.19 Form of Option Agreement to Acquire the Property known as Sumner
Square(2)
10.20 Loan Modification Agreement between Lexreal Associates and
Mitsui Seimei America Corporation relating to loan secured by
599 Lexington Avenue (2)
10.21 Loan Modification and Extension Agreement by and between
Southwest Market Limited Partnership, a District of Columbia
limited partnership, Mortimer B. Zuckerman and Edward H. Linde
and the Sumitomo Bank, Limited, for One Independence Square,
dated as of September 26, 1994 (2)
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.22 Loan Modification and Extension Agreement by and among Southwest
Market Limited Partnership, a District of Columbia limited
partnership, Mortimer B. Zuckerman and Edward H. Linde and the
Sumitomo Bank, Limited, for Two Independence Square, dated as of
September 26, 1994 (2)
10.23 Construction Loan Agreement by and between the Sumitomo Bank,
Limited and Southwest Market Limited Partnership, dated as of
August 21, 1990 (2)
10.24 Construction Loan Agreement by and between the Sumitomo Bank,
Limited and Southwest Market Limited Partnership for Two
Independence Square, dated as of February 22, 1991 (2)
10.25 Consent and Loan Modification Agreement regarding One
Independence Square between the Sumitomo Bank, Limited and
Southwest Market Limited Partnership dated as of June, 1997 (2)
10.26 Consent and Loan Modification Agreement regarding Two
Independence Square between the Sumitomo Bank, Limited and
Southwest Market Limited Partnership dated as of June, 1997 (2)
10.27 Form of Amended and Restated Loan Agreement between Square 36
Office Joint Venture and the Sanwa Bank Limited dated as of June
, 1997 (2)
10.28 Indemnification Agreement between the Operating Partnership and
Mortimer B. Zuckerman and Edward H. Linde (2)
10.29 Compensation Agreement between the Company and Robert Selsam,
dated as of August 10, 1995 relating to 90 Church Street (2)
10.30 Contribution Agreement dated September 2, 1997 by and among the
Operating Partnership, the Company and Kenvic Associates (5)
10.31 Lock-Up and Registration Rights Agreement dated November 21,
1997 by and among the Operating Partnership, the Company and
Kenvic Associates (1)
10.32 Agreement dated November 21, 1997 by and between the Operating
Partnership, the Company and Kenvic Associates (1)
10.33 Note and Mortgage Modification and Spreader Agreement between
John Hancock, as lender, and the Operating Partnership, as
borrower (1)
10.34 Agreement between Bankers Trust Company, as seller, and the
Operating Partnership, as borrower, dated September 11, 1997 (3)
10.35 Term loan agreement between Chase Manhattan Bank, as lender, and
the Operating Partnership, as borrower, dated September 11, 1997
(4)
10.36 Swap Transaction Agreement between the Chase Manhattan Bank and
the Company dated November 4, 1997 (3)
10.37 Interest Guarantee and Agreement between Chase Manhattan Bank,
as lender, and the Operating Partnership, as borrower, dated
September 11, 1997 (4)
10.38 Net Cash Flow Shortfall Guarantee and Agreement between Chase
Manhattan Bank, as lender, and the Operating Partnership, as
borrower, dated September 11, 1997 (4)
10.39 Hazardous Material Guaranty and Indemnification Agreement
between Chase Manhattan Bank, as lender, and the Operating
Partnership, as borrower, dated September 11, 1997 (4)
10.40 Amended and Restated Real Estate Purchase and Sale Contract
between International Business Machines Corporation, as seller,
and the Operating Partnership, as buyer, dated October 20, 1997
(4)
10.41 First Amendment to Revolving Credit Agreement dated July 29,
1997 by and among the Company, BankBoston, N.A., and the
subsidiaries of the Company and lending institutions named
therein (5)
10.42 Second Amendment to Revolving Credit Agreement dated July 30,
1997 by and among the Company, BankBoston, N.A., and the
subsidiaries of the Company and lending institutions named
therein (5)
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.43 Third Amendment to Revolving Credit Agreement dated September
11, 1997 by and among the Company, BankBoston, N.A., and the
subsidiaries of the Company and lending institutions named
therein (5)
10.44 Fourth Amendment to Revolving Credit Agreement dated October 31,
1997 by and among the Company, BankBoston, N.A., and the
subsidiaries of the Company and lending institutions named
therein (5)
10.45 Environmental Indemnity and Agreement made by the Operating
Partnership in favor of John Hancock Mutual Life Insurance
Company (1)
10.46 Indemnification Agreement made by the Operating Partnership in
favor of John Hancock Mutual Life Insurance Company (1)
10.47 Consolidation, Extension and Modification Agreement dated as of
May 11, 1988 by and between Kenvic Associates and John Hancock
Mutual Life Insurance Company (1)
10.48 Modification Agreement dated as of May 30, 1990 by and between
Kenvic Associates and John Hancock Mutual Life Insurance Company
(1)
10.49 Note and Mortgage Notification Agreement, dated July 23, 1992 by
and between Kenvic Associates and John Hancock Mutual Life
Insurance Company (2)
10.50 Note and Mortgage Modification and Spreader Agreement dated as
of December 29, 1995 by and between Kenvic Associates and John
Hancock Mutual Life Insurance Company (1)
10.51 Contribution Agreement dated November 26, 1997 the Operating
Partnership, Boston Properties LLC and the Contributors named
therein. (1)
10.52 Promissory Note dated January , 1998 between the Operating
Partnership and Metropolitan Life Insurance Company (1)
10.53 Deed of Trust, Security Agreement and Fixture Filing dated
January , 1998 (1)
10.54 Unsecured Indemnity Agreement dated January , 1998 (1)
10.55 Contribution and Conveyance Agreement concerning the Carnegie
Portfolio, dated June 30, 1998 by and among the Company, the
Operating Partnership, and the parties named therein as Landis
Parties. (6)
10.56 Contribution Agreement, dated June 30, 1998, by and among the
Company, the Operating Partnership, and the parties named
therein as Landis Parties. (6)
10.57 Registration Rights and Lock-Up Agreement, dated June 30, 1998
by and among the Company, the Operating Partnership and the
parties named therein as Holders. (6)
10.58 Non-Competition Agreement, dated as of June 30, 1998, by and
between Alan B. Landis and the Company. (6)
10.59 Agreement Regarding Directorship, dated as of June 30, 1998, by
and between the Company and Alan B. Landis. (6)
10.60 Purchase and Sale Agreement, dated May 7, 1998, by and between
Prudential and the Operating Partnership. (7)
10.61 Contribution Agreement, dated as of May 7, 1998, by and between
Prudential and the Operating Partnership. (7)
10.62 Registration Rights Agreement, dated as of July 2, 1998, by and
among the Registrant, Strategic Value Investors II, LLC and
Prudential. (7)
10.63 Contribution Agreement dated June 5, 1998, by and among Boston
Properties Limited Partnership, Boston Properties LLC, Square
224 Associates and the Oliver Carr Company. (8)
10.64 Registration Rights and Lock-up Agreement, dated as of July 9,
1998, by and between Boston Properties, Inc. and Square 224
Associates. (8)
10.65 Purchase and Sale Agreement, dated as of November 12, 1998, by
and between Two Embarcadero Center West and BP OFR LLC. (9)
10.66 Contribution Agreement, dated as of November 12, 1998, by and
among the Company, The Operating Partnership, Embarcadero Center
Investors Partnership ("ECIP") and the partners in ECIP listed
on Exhibit A thereto. (9)
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.67 Contribution Agreement, dated as of November 12, 1998, by and
among the Company, the Operating Partnership, Three Embarcadero
Center West ("Three ECW") and the partners in Three ECW listed
on Exhibit A thereto. (9)
10.68 Three ECW Redemption Agreement, dated as of November 12, 1998,
by and among Three ECW, the Operating Partnership, BP EC West
LLC, Prudential, PIC Realty Corporation ("PIC") and Prudential
Realty Securities II, Inc. ("PRS II").(9)
10.69 Three ECW Property Contribution Agreement, dated as of November
12, 1998, by and among Three ECW, Prudential, PIC, PRS II, the
Operating Partnership, the Company and BP EC West LLC. (9)
10.70 Registration Rights and Lock-Up Agreement, dated November 12,
1998, by and among the Company, the Operating Partnership and
the Holders named therein.(9)
10.71 Third Amended and Restated Partnership Agreement of One
Embarcadero Center Venture, dated as of November 12, 1998, by
and between Boston Properties LLC ("BPLLC"), as managing general
partner, BP EC1 Holdings LLC ("BP EC1 LLC"), as non-managing
general partner, and PIC, as non-managing general partner (9)
10.72 Third Amended and Restated Partnership Agreement of Embarcardero
Center Associates, dated as of November 12, 1998, by and between
BP LLC, as managing general partner, BP EC2 Holdings LLC ("BP
EC2 LLC"), as non-managing general partner, and PIC, as non-
managing general partner. (9)
10.73 Second Amended and Restated Partnership Agreement of Three
Embarcadero Center Venture, dated as of November 12, 1998, by
and between BPLLC, as managing general partner, BP EC3 Holdings
LLC ("BP EC3 LLC"), as non-managing general partner, and
Prudential, as non-managing general partner. (9)
10.74 Second Amended and Restated Partnership Agreement of Four
Embarcadero Center Venture, dated as of November 12, 1998, by
and between BPLLC, as managing general partner, BP EC4 Holdings
LLC ("BP EC4 LLC"), as non-managing general partner, and
Prudential, as non-managing general partner. (9)
10.75 Note Purchase Agreement, dated as of November 12, 1998, by and
between Prudential Realty Securities, Inc. ("PRS") and One
Embarcadero Center Venture. (9)
10.76 Note Purchase Agreement, dated as of November 12, 1998, by and
between PRS and Embarcadero Center Associates. (9)
10.77 Note Purchase Agreement, dated November 12, 1998, by and between
PRS and Three Embarcadero Center Venture. (9)
10.78 Note Purchase Agreement, dated November 12, 1998, by and between
PRS and Four Embarcadero Center Venture. (9)
10.79 Redemption Agreement, dated as of November 12, 1998, by and
among One Embarcadero Center Venture, BPLLC, BP EC1 LLC and PIC.
(9)
10.80 Redemption Agreement, dated as of November 12, 1998, by and
among Embarcadero Center Associates, BPLLC, BP EC2 LLC and PIC.
(9)
10.81 Redemption Agreement, dated as of November 12, 1998, by and
among Three Embarcadero Center Venture, BPLLC, BP EC3 LLC and
Prudential. (9)
10.82 Redemption Agreement, dated as on November 12, 1998, by and
among Four Embarcadero Center Venture, BPLLC, BP EC4 LLC and
Prudential. (9)
10.83 Option and Put Agreement, dated as of November 12, 1998, by and
between One Embarcadero Center Venture and Prudential. (9)
10.84 Option and Put Agreement, dated as of November 12, 1998, by and
between Embarcadero Center Associates and Prudential. (9)
10.85 Option and Put Agreement, dated as of November 12, 1998, by and
between Three Embarcadero Center Venture and Prudential. (9)
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<C> <S>
10.86 Option and Put Agreement, dated as of November 12, 1998, by and
between Four Embarcadero Center Venture and Prudential. (9)
10.87 Stock Purchase Agreement, dated as of September 28, 1998, by and
between the Company and Prudential. (9)
21.1 Schedule of Subsidiaries of the Company (1)
23.1 Consent of PricewaterhouseCoopers LLP, Independent Accountants
27.1 Financial Data Schedule
</TABLE>
- --------
(1) Incorporated herein by reference to the Company's Registration Statement on
Form S-11 (No. 333-41449)
(2) Incorporated herein by reference to the Company's Registration Statement on
Form S-11 (No. 333-25279)
(3) Incorporated herein by reference to the Company's Current Report on Form 8-
K filed on November 25, 1997
(4) Incorporated herein by reference to the Company's Current Report on Form 8-
K/A filed on November 14, 1997
(5) Incorporated herein by reference to the Company's Current Report on Form 8-
K filed on November 26, 1997
(6) Incorporated herein by reference to the Company's Current Report on Form
8-K filed on July 15, 1998.
(7) Incorporated herein by reference to the Company's Current Report on Form 8-
K filed on July 17, 1998.
(8) Incorporated herein by reference to the Company's Current Report on Form 8-
K filed on July 27, 1998.
(9) Incorporated herein by reference to the Company's Current Report on Form 8-
K filed on November 25, 1998.
35
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant, Boston Properties, Inc., has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
BOSTON PROPERTIES, INC.
By: /s/ David G. Gaw
----------------------------------
David G. Gaw
Chief Financial Officer
Date March 31, 1999
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.
March 31, 1998 By: /s/ Mortimer B. Zuckerman
----------------------------------
Mortimer B. Zuckerman
Chairman of the Board of Directors
By: /s/ Edward H. Linde
----------------------------------
Edward H. Linde
President and Chief Executive
Officer
By: /s/ David G. Gaw
----------------------------------
David G. Gaw
Chief Financial Officer
By: /s/ Alan J. Patricof
----------------------------------
Alan J. Patricof
Director
By: /s/ Ivan G. Seidenberg
----------------------------------
Ivan G. Seidenberg
By: /s/ Martin Turchin
----------------------------------
Martin Turchin
Director
By: /s/ Alan B. Landis
----------------------------------
Alan B. Landis
Director
By: /s/ Richard E. Salomon
----------------------------------
Richard E. Salomon
Director
36
<PAGE>
BOSTON PROPERTIES, INC. AND BOSTON PROPERTIES
PREDECESSOR GROUP
INDEX TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants....................................... F-2
Consolidated Balance Sheet of Boston Properties, Inc. (the "Company")
as of December 31, 1998 and December 31, 1997......................... F-3
Consolidated Statement of Operations of the Company for the year ended
December 31, 1998 and for the period from June 23, 1997
(inception of operations) to December 31, 1997and Combined
Statements of Operations for the Predecessor Group for the period
from January 1, 1997 to June 22, 1997 and the year ended
December 31, 1996..................................................... F-4
Consolidated Statement of Changes in Stockholders' Equity of the Company
For the year ended December 31, 1998 and for the period June 23, 1997
(inception of operations) to December 31, 1997 and the Combined
Statement of Changes in Owners' Equity (Deficit) of the Predecessor
Group for the period January 1, 1997 to June 22, 1997 and the year
ended
December 31, 1996..................................................... F-5
Consolidated Statement of Cash Flows of the Company for the year ended
December 31, 1998 and for the period June 23, 1997 (inception of
operations) to December 31, 1997and Combined Statement of Cash
Flows of the Predecessor Group for the period January 1, 1997 to
June 22, 1997 and the year ended December 31, 1996.................... F-6
Notes to Consolidated and Combined Financial Statements................. F-7
Financial Statement Schedule--Schedule III.............................. F-22
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are inapplicable, and therefore
have been omitted.
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Boston Properties, Inc.
In our opinion, the accompanying consolidated balance sheets, the related
consolidated and combined statements of operations, stockholders' equity and
cash flows, presents fairly, in all material respects, (i) the financial
position of Boston Properties, Inc. (the "Company") at December 31, 1998 and
1997, the results of operations and cash flows for the year ended December 31,
1998 and the period from June 23, 1997 to December 31, 1997, and (ii) as
described in Note 1, the combined statements of operations and cash flows for
the period from January 1, 1997 to June 22, 1997 and for the year ended
December 31, 1996 of the Boston Properties Predecessor Group in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
Boston, Massachusetts
January 24, 1999, except for
Note 16 as to which the date is February 10, 1999
F-2
<PAGE>
BOSTON PROPERTIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1998 1997
------------ ------------
(in thousands, except
share amounts)
<S> <C> <C> <C>
ASSETS
</TABLE>
<TABLE>
<S> <C> <C>
Real estate:
Less: accumulated depreciation........................ $4,917,193 $1,796,500
Total real estate................................... (357,384) (294,218)
---------- ----------
4,559,809 1,502,282
Cash and cash equivalents............................... 12,166 17,560
Notes receivable........................................ 420,143 --
Escrows................................................. 19,014 14,178
Tenant and other receivables, net....................... 40,830 24,458
Accrued rental income, net.............................. 64,251 55,190
Deferred charges, net................................... 46,029 35,485
Prepaid expenses and other assets....................... 26,058 20,225
Investments in joint ventures........................... 46,787 3,143
---------- ----------
Total assets........................................ $5,235,087 $1,672,521
========== ==========
</TABLE>
<TABLE>
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
</TABLE>
<TABLE>
<S> <C> <C>
Liabilities:
Mortgage notes payable................................ $2,653,581 $1,099,253
Notes payable......................................... 420,143 --
Unsecured line of credit.............................. 15,000 233,000
Accounts payable and accrued expenses................. 33,638 23,822
Dividends payable..................................... 40,494 22,539
Accrued interest payable.............................. 7,307 6,581
Other liabilities..................................... 37,209 11,642
---------- ----------
Total liabilities................................... 3,207,372 1,396,837
---------- ----------
Commitments and contingencies........................... -- --
---------- ----------
Minority interests...................................... 1,079,234 100,636
---------- ----------
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,
63,527,819 and 38,694,041 issued and outstanding in
1998 and 1997, respectively.......................... 635 387
Additional paid-in capital............................ 955,711 172,347
Dividends in excess of earnings....................... (7,865) 2,314
---------- ----------
Total stockholders' equity.......................... 948,481 175,048
---------- ----------
Total liabilities and stockholders' equity........ $5,235,087 $1,672,521
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
The Company The Predecessor Group
-------------------------- ----------------------------
Period from
June 23, 1997 Period from
Year ended to January 1, 1997 Year ended
December 31, December 31, to December 31,
1998 1997 June 22, 1997 1996
------------ ------------- --------------- ------------
<S> <C> <C> <C> <C>
Revenue
Rental:
Base rent............ $419,756 $126,401 $ 80,122 $169,420
Recoveries from
tenants............. 48,718 12,564 10,283 22,607
Parking and other.... 19,103 676 3,397 2,979
-------- -------- -------- --------
Total rental
revenue........... 487,577 139,641 93,802 195,006
Hotel................. -- -- 31,185 65,678
Development and
management services.. 12,411 3,813 3,685 5,719
Interest and other.... 13,859 2,189 1,146 3,530
-------- -------- -------- --------
Total revenue...... 513,847 145,643 129,818 269,933
-------- -------- -------- --------
Expenses
Rental:
Operating............ 80,894 19,591 13,650 29,823
Real estate taxes.... 69,596 20,502 13,382 28,372
Hotel:
Operating............ -- -- 20,938 43,634
Real estate taxes.... -- -- 1,514 3,100
General and
administrative....... 22,504 6,689 5,116 10,754
Interest.............. 124,860 38,264 53,324 109,394
Depreciation and
amortization......... 75,418 21,719 17,054 36,199
-------- -------- -------- --------
Total expenses..... 373,272 106,765 124,978 261,276
-------- -------- -------- --------
Income before minority
interests.............. 140,575 38,878 4,840 8,657
Minority interests...... (41,982) (11,652) (235) (384)
-------- -------- -------- --------
Income before
extraordinary items.... 98,593 27,226 4,605 8,273
Extraordinary gain
(loss) from early debt
extinguishments, net... (5,481) 7,925 -- (994)
-------- -------- -------- --------
Net income.............. $ 93,112 $ 35,151 $ 4,605 $ 7,279
======== ======== ======== ========
Basic earnings per
share:
Income before
extraordinary items.. $ 1.62 $ 0.70 -- --
Extraordinary gain
(loss), net.......... (0.09) 0.21 -- --
-------- --------
Net income............ $ 1.53 $ 0.91 -- --
======== ========
Weighted average
number of common
shares outstanding... 60,776 38,694 -- --
Diluted earnings per
share:
Income before
extraordinary items.. $ 1.61 $ 0.70 -- --
Extraordinary gain
(loss), net.......... (0.09) 0.20 -- --
-------- --------
Net income............ $ 1.52 $ 0.90 -- --
======== ========
Weighted average
number of common
shares outstanding... 61,308 39,108 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
BOSTON PROPERTIES, INC. AND BOSTON PROPERTIES PREDECESSOR GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF STOCKHOLDERS" AND OWNER' EQUITY
(DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
Common Stock
-------------
Additional Dividends
Paid-in in excess of Owners' Equity
Shares Amount Capital Earnings (Deficit) Total
------ ------ ---------- ------------ -------------- ---------
<S> <C> <C> <C> <C> <C> <C>
The Predecessor Group:
Balance, January 1,
1996................. $(506,653) $(506,653)
Contributions....... 33,279 33,279
Net income for the
year............... 7,279 7,279
Distributions and
conversion of
equity to note
payable--
affiliate.......... (110,537) (110,537)
--------- ---------
Balance, December 31,
1996................. (576,632) (576,632)
Contributions....... 9,330 9,330
Net income for
period January 1,
1997 through June
22, 1997........... 4,605 4,605
Distributions....... (32,125) (32,125)
--------- ---------
Balance, June 22,
1997................. (594,822) (594,822)
The Company:
Reclassification
adjustment........... ($594,822) 594,822 --
Sale of Common Stock
net of Offering
costs................ 38,694 $387 838,822 839,209
Stock issued in
connection with
property
acquisition.......... 16 16
Allocation of minority
interest in Operating
Partnership.......... (71,669) (71,669)
Net income, June 23,
1997 to December 31,
1997................. $ 35,151 35,151
Dividends declared.... (32,837) (32,837)
------ ---- ---------- ---------- --------- ---------
Stockholders' Equity,
December 31, 1997.... 38,694 387 172,347 2,314 -- 175,048
Sale of Common Stock
net of Offering
costs................ 23,000 230 764,760 764,990
Unregistered Common
Shares issued........ 1,823 18 58,819 58,837
Conversion of
operating partnership
units to common
stock................ 10 -- 250 250
Allocation of minority
interest............. (40,490) (40,490)
Net income for the
year................. 93,112 93,112
Dividends declared.... (103,291) (103,291)
Stock options
exercised............ 1 -- 25 25
------ ---- ---------- ---------- --------- ---------
Stockholders' Equity,
December 31, 1998.... 63,528 $635 $ 955,711 $ (7,865) $ -- $ 948,481
====== ==== ========== ========== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
CONSOLIDATED AND COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
The Company The Predecessor Group
----------------------------------- ---------------------------------
Period from Period from
June 23, 1997 January 1, 1997
Year ended to to Year ended
December 31, 1998 December 31, 1997 June 22, 1997 December 31, 1996
----------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
Cash flows from
operating activities:
Net income............. $ 93,112 $ 35,151 $ 4,605 $ 7,279
Adjustments to
reconcile net income
to net cash provided
by operating
activities:
Depreciation and
amortization......... 75,418 21,719 17,054 36,199
Non-cash portion of
interest expense..... 247 547 1,497 644
Extraordinary loss
(gain) on early debt
extinguishments...... 7,743 (11,216) -- --
Minority interests.... 38,760 7,659 -- --
Change in assets and
liabilities:
Escrows............... (4,836) 11,429 (136) 2,242
Tenant and other
receivables, net..... (16,372) (5,295) (7,114) 2,313
Accrued rental
income............... (9,061) (5,694) (291) 475
Prepaid expenses and
other issues......... (5,833) (14,330) (1,494) 2,777
Accounts payable and
accrued expenses..... 9,816 5,611 5,220 (572)
Accrued interest
payable.............. 726 (5,107) 2,021 579
Other liabilities..... 25,567 5,672 3,728 3,971
----------- --------- -------- ---------
Total adjustments.... 122,175 10,995 20,485 48,628
----------- --------- -------- ---------
Net cash provided by
operating
activities.......... 215,287 46,146 25,090 55,907
----------- --------- -------- ---------
Cash flows from
investing activities:
Acquisitions to real
estate and equipment.. (1,697,449) (526,890) (27,721) (30,238)
Tenant leasing costs... (17,979) (2,793) (2,550) (4,077)
Investments in joint
ventures.............. (43,644) (570) (2,573) --
Notes receivable....... (420,143) -- -- --
Cash from contributed
assets................ -- 10,510 -- --
----------- --------- -------- ---------
Net cash used in
investing
activities.......... (2,179,215) (519,743) (32,844) (34,315)
----------- --------- -------- ---------
Cash flows from
financing activities:
Net proceeds from sales
of common stock....... 819,103 839,209 -- --
Owners' contributions.. -- -- 9,330 33,279
Owners' distributions.. -- -- (32,125) (105,619)
Borrowings on unsecured
line of credit........ 322,000 233,000 -- --
Repayment of unsecured
line of credit........ (540,000) -- -- --
Repayments of mortgage
notes................. (159,714) (712,338) (3,799) (93,695)
Proceeds from mortgage
notes................. 1,226,717 220,000 -- 117,269
Proceeds from notes
payable............... 420,143 -- -- 11,933
Accounts receivable--
affiliate............. -- -- (804) --
Accounts payable--
affiliate............. -- (19,983) 19,983 --
Proceeds from
(repayments of) notes
payable--affiliate.... -- (38,833) 16,716 --
Dividends and
distributions......... (127,307) (17,026) -- --
Deferred financing and
other costs........... (2,408) (12,872) (35) (1,628)
----------- --------- -------- ---------
Net cash provided by
financing
activities.......... 1,958,534 491,157 9,266 (38,461)
----------- --------- -------- ---------
Net increase (decrease)
in cash................ (5,394) 17,560 1,512 (16,869)
Cash and cash
equivalents, beginning
of period.............. 17,560 -- 8,998 25,867
----------- --------- -------- ---------
Cash and cash
equivalents, end of
period................. $ 12,166 $ 17,560 $ 10,510 $ 8,998
=========== ========= ======== =========
Supplemental
disclosures:
Cash paid for
interest.............. $ 46,422 $ 36,783 $ 50,917 $ 107,700
=========== ========= ======== =========
Interest capitalized... $ 6,933 $ 1,168 $ 1,111 $ 366
=========== ========= ======== =========
Non-cash activities:
Operating activity:
Non-cash portion of
interest expense..... $ 247 $ 547 $ 1,497 644
=========== ========= ======== =========
Investing and Financing
activities:
Mortgage notes payable
assumed in connection
with acquisitions.... $ 496,926 -- -- --
===========
Issuance of minority
interest in
connection with
acquisition.......... $ 941,318 -- -- --
===========
Common stock issued in
connection with
acquisition.......... $ 5,000 -- -- --
===========
Dividends and
distributions
declared but not
paid................. $ 40,494 $22,539 -- --
=========== =========
Conversion of owners'
equity to notes
payable--affiliate... -- -- -- $ 4,918
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
1. Organization and Basis of Presentation
Organization
Boston Properties, Inc. (the "Company") is one of the largest owners and
developers of office properties in the United States, with a significant
presence in Greater Boston, Greater Washington, D.C., Greater San Francisco,
Midtown Manhattan, Princeton/East Brunswick, New Jersey, Baltimore, Maryland,
and Richmond, Virginia. The Company is a fully integrated self-administered and
self-managed real estate investment trust ("REIT"). The Company was formed to
succeed to the real estate development, redevelopment, acquisition, management,
operating and leasing businesses association with the predecessor company
founded by Mortimer B. Zuckerman and Edward H. Linde in 1970. The term
"Predecessor Group" or "Predecessor" as used herein refers to the entities that
owned interests in one or more properties that were contributed to the Company
in connection with the Company's initial public offering in June 1997 (the
"Initial Offering"). The term "Company" as used herein includes Boston
Properties, Inc. and its subsidiaries on a consolidated basis (including Boston
Properties Limited Partnership (the "Operating Partnership")).
On June 23, 1997, the Company commenced operations after completing an
initial public offering of 36,110,000 common shares at a price per share of
$25.00 (including 4,710,000 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 $839.2 million.
Upon the completion of such offering, the Company succeeded to substantially
all of the interests of the Predecessor 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.
On January 26, 1998, the Company completed a second 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 $765.0 million.
Properties
At December 31, 1998, the Company owned a portfolio of 121 commercial real
estate properties (82 properties at December 31, 1997) (the "Properties")
aggregating approximately 31.6 million square feet (including ten properties
currently under development). The Properties consist of 108 office properties,
including 76 Class A office properties and 32 Research and Development
properties; nine industrial properties; three hotels; and one parking garage.
In addition, the Company owns 21 parcels of land totaling 300.1 acres (which
will support approximately 6.8 million square feet of development) and
structured parking for 11,427 vehicles containing approximately 5.8 million
square feet. 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.
Basis of Presentation
The consolidated financial statements of the Company include all the
accounts of the Company, Boston Properties Limited Partnership, and its
subsidiaries. The financial statements reflect the properties acquired at
F-7
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
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.
Investments in joint ventures where the Company does not have a controlling
interest are accounted for under the equity method. Under the equity method of
accounting the net equity investment of the Company in the joint ventures is
reflected on the consolidated balance sheets.
2. Significant Accounting Policies
Real Estate
Real estate is stated at depreciated cost. The Company periodically reviews
its properties to determine if its carrying costs will be recovered from
future operating cash flows. Upon determination that an impairment has
occurred, those assets shall be reduced to fair value. No such impairment
losses have been recognized to date.
The cost of buildings and improvements includes the purchase price of
property, legal fees and acquisition costs. The cost of buildings under
development includes the capitalization of interest, property taxes and other
costs incurred during the period of development. Expenditures for repairs and
maintenance are charged to operations as incurred. Significant betterments are
capitalized. When assets are sold or retired, their costs and related
accumulated depreciation are removed from the accounts with the resulting
gains or losses reflected in net income or loss for the period.
Depreciation is computed on the straight-line basis over the estimated
useful lives of the assets as follows:
<TABLE>
<S> <C>
Land improvements..................... 25 to 40 years
Buildings............................. 10 to 40 years
Tenant improvements................... Shorter of useful life or terms of
related lease
Furniture, fixtures, and equipment.... 5 to 7 years
</TABLE>
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on hand and investments with
maturities of three months or less from the date of purchase. The Company's
cash and cash equivalents are held at major commercial banks. The Company has
not experienced any losses to date on its invested cash.
Escrows
Escrows include amounts established pursuant to various agreements for
security deposits, property taxes, insurance and other costs.
F-8
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
Deferred Charges
Deferred charges include leasing costs and financing fees. Fees and costs
incurred in the successful negotiation of leases, including brokerage, legal
and other costs have been deferred and are being amortized on a straight-line
basis over the terms of the respective leases. Fees and costs incurred to
obtain long-term financing have been deferred and are being amortized over the
terms of the respective loans on a basis which approximates the effective
interest method and are included in interest expense. Fully amortized deferred
charges are removed from the books upon the expiration of the lease or maturity
of the debt.
Minority Interests
Minority Interests at December 31, 1998 represent minority interests in
partially owned properties and minority holders' share in the Operating
Partnership.
Offering Costs
Underwriting commissions and offering costs incurred in connection with the
initial public offering and follow-on offering have been reflected as a
reduction of additional paid-in capital.
Dividends
Earnings and profits, which will determine the taxability of dividends to
shareholders, will differ from income reported for financial reporting purposes
due to the differences for federal income tax purposes primarily in the
estimated useful lives used to compute depreciation. Dividends declared
represented approximately 85% and 59% ordinary income for federal income tax
purposes for the year ended December 31, 1998 and the period from June 23, 1997
to December 31, 1997, respectively.
Revenue Recognition
Base rental revenue is reported on a straight-line basis over the terms of
the respective leases. The impact of the straight-line rent adjustment
increased revenues by $18,510 and $5,985 and decreased revenues by $475 for the
years ended December 31, 1998, 1997 and 1996, respectively. Property operating
cost reimbursements due from tenants for common area maintenance, real estate
taxes and other recoverable costs are recognized in the period the expenses are
incurred.
Accrued rental income represents rental income earned in excess of rent
payments received pursuant to the terms of the individual lease agreements, net
of an allowance for doubtful accounts.
Development fees are recognized ratably over the period of development.
Management fees are recognized as revenue as they are earned.
Interest Expense
Interest expense on fixed rate debt with predetermined periodic rate
increases is computed using the effective interest method over the terms of the
respective loans.
Earnings Per Share
Basic earnings per share ("EPS") is computed by dividing net income by the
weighted average number of common shares outstanding during the year. Diluted
EPS reflects the potential dilution that could occur from common shares
issuable through stock-based compensation including stock options and
conversion of the minority interest in the Operating Partnership.
F-9
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
Reclassifications
Certain prior year balances have been reclassified in order to conform to
current year presentation.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, escrows, receivables,
accounts payable, accrued expenses and other assets and liabilities are
reasonable estimates of their fair values because of the short maturities of
these instruments. Mortgage notes payable have aggregate carrying values which
approximate their estimated fair values based upon the remaining maturities for
certain debt and interest rates for debt with similar terms and remaining
maturities. The fair values of these financial instruments were not materially
different from their carrying or contract values.
Income Taxes
The Company has elected to be taxed as a REIT under Sections 856 through 860
of the Internal Revenue Code of 1986, as amended (the "Code"), commencing with
its taxable year ended December 31, 1997. As a result, the Company generally
will not be subject to federal corporate income tax on its taxable income that
is distributed to its shareholders. A REIT is subject to a number of
organizational and operational requirements, including a requirement that it
currently distribute at least 95% of its annual taxable income. Accordingly, no
provision has been made for federal income taxes in the accompanying
consolidated financial statements.
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 ("CEO"), respectively, are the sole member-managers.
Marriott International, Inc. manages these hotel properties under the Marriott
name pursuant to a management agreement with the lessee. The Company has made
similar arrangements with respect to a hotel property under development.
The net difference between the tax basis and the reported amounts of the
Company's assets and liabilities is approximately $987,789 and $149,000 as of
December 31, 1998 and 1997, respectively.
The Predecessor Group was not a legal entity subject to income taxes. No
federal or state income taxes were applicable to the entities that managed and
owned the properties; accordingly, no provision has been made for federal
income taxes in the accompanying combined financial statements.
Certain entities included in the Company's consolidated financial statements
and the Predecessor Group's combined financial statements are subject to
District of Columbia franchise taxes. Franchise taxes are recorded as rental-
operating expenses in the accompanying combined financial statements.
F-10
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
Concentrations of Credit Risk
Management of the Company performs ongoing credit evaluations of the tenants
and may require tenants to provide some form of credit support such as
corporate guarantees and/or other financial guarantees. Although the Company's
properties are geographically diverse and the tenants operate in a variety of
industries, to the extent the Company has a significant concentration of rental
revenues from any single tenant, the inability of that tenant to make its lease
payments could have an adverse effect on the Company.
Segment Reporting
In 1998, the Company adopted Statement of Financial Accounting Standards 131
("FAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." FAS 131 supersedes Statement of Financial Accounting Standards
No. 14, "Financial Reporting for Segments of a Business Enterprise", replacing
the "industry segment' approach with a "management" approach. The management
approach designates the internal organization used by management for making
operating decisions and assessing performance as the source of the Company's
segments. FAS 131 also requires disclosures about product and services,
geographic areas, and major customers. The adoption of FAS 131 did not affect
results of operations or financial position of the Company.
3. Real Estate
Real estate consisted of the following at December 31,:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Land................................................. $ 926,862 $ 403,022
Buildings and improvements........................... 3,628,212 1,223,892
Tenant improvements.................................. 134,973 118,374
Furniture, fixtures and equipment.................... 35,710 33,638
Developments in progress............................. 191,436 17,574
---------- ----------
Total.............................................. 4,917,193 1,796,500
Less: accumulated depreciation....................... (357,384) (294,218)
---------- ----------
$4,559,809 $1,502,282
---------- ----------
</TABLE>
4. Deferred Charges
Deferred charges consisted of the following at December 31,:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Leasing costs............................................ $ 58,803 $ 46,769
Financing costs.......................................... 28,128 29,271
-------- --------
86,931 76,040
Less: accumulated amortization........................... (40,902) (40,555)
-------- --------
$ 46,029 $ 35,485
-------- --------
</TABLE>
5. Investments in Joint Ventures
The investments in joint ventures represent (i) a 25% interest in a joint
venture which is developing two office buildings in Reston, VA, (ii) a 25%
interest in a joint venture which is developing one office building in Reston,
VA and (iii) a 50% interest in a joint venture which is developing an office
building in Washington,
F-11
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
DC. The Company also serves as development manager for these joint ventures.
Under the equity method of accounting the net equity investment is reflected
on the consolidated balance sheets.
The combined summarized balance sheets of the joint ventures are as
follows:
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Balance Sheets:
Land..................................................... $ 43,550 $ 8,167
Developments in progress................................. 128,867 16,748
Other assets............................................. 10,032 1,192
-------- -------
Total Assets........................................... $182,449 $26,107
-------- -------
Construction loans payable............................... $ 55,638 $ 6,969
Other liabilities........................................ 20,595 7,042
Partners' equity......................................... 106,216 12,096
-------- -------
Total Liabilities and Partners' Equity................. $182,449 $26,107
-------- -------
Company's Share of Equity.................................. $ 46,787 $ 3,143
-------- -------
</TABLE>
6. Mortgage Notes Payable
Mortgage notes payable comprise various loans at December 31, 1998 and
1997, each collateralized by a building and related land included in real
estate assets. The mortgage notes payable are generally due in monthly
installments and mature at various dates through February 1, 2010. Interest
rates on fixed rate mortgage notes payable aggregating approximately
$2,623,847 and $1,082,000 at December 31, 1998 and 1997, respectively, range
from 6.40% to 8.59% (averaging 7.05% and 7.55% at December 31, 1998 and 1997,
respectively). Variable rate mortgage notes payable were approximately $11,417
and $11,600 at December 31, 1998 and 1997, respectively, with rates ranging
from 1.0% above the London Interbank Offered Rate ("LIBOR") (5.06% and 5.90%
at December 31, 1998 and 1997, respectively) to 1.5% above the LIBOR rate.
The interest rates related to the mortgage notes payable for three
properties aggregating approximately $209,987 at December 31, 1998 and for two
properties aggregating $198,781 at December 31, 1997 are subject to periodic
scheduled rate increases. Interest expense for these mortgage notes payable is
computed using the effective interest method. Additionally, mortgage notes
payable at December 31, 1998 on three properties in the amount of $320,484 and
a mortgage note payable on one property at December 31, 1997 totaling $185,618
have been accounted for at their fair value. The impact of using these methods
decreased interest expense $2,656 and increased interest expense $547 and
$1,347 for the years ended December 31, 1998, 1997 and 1996 respectively. The
cumulative liability related to these adjustments is $18,317 and $6,430 at
December 31, 1998 and 1997, respectively, and is included in mortgage notes
payable.
Combined aggregate principal payments of mortgage notes payable at December
31, 1998 are as follows:
<TABLE>
<S> <C>
1999................................ $ 26,940
2000................................ 233,075
2001................................ 146,059
2002................................ 385,394
2003................................ 206,853
</TABLE>
Certain mortgage indebtedness aggregating approximately $707.1 million was
repaid in conjunction with the initial public offering. These repayments,
along with (i) the payment of certain related repayment penalties,
F-12
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
(ii) the write-off of the related previously capitalized deferred financing
costs and (iii) the extinguishment of the excess of the mortgage not payable
balance over the principal payment necessitated by an increasing rate loan
being accounted for using the effective interest method, generated a gain of
approximately $7.9 million (net of minority interest share of approximately
$3.3 million), which has been reflected as an extraordinary gain during the
period from June 23, 1997 through December 31, 1997 in the financial
statements.
During 1998, the Company incurred an extraordinary loss primarily related
to fees incurred in connection with the repayment of certain mortgages payable
in connection with the Embarcadero Center acquisition.
7. Unsecured Line of Credit
As of December 31, 1998, the Company has an agreement for a $500,000
unsecured revolving credit facility (the "Unsecured Line of Credit") maturing
in June 2000. Outstanding balances under the Unsecured Line of Credit
currently bear interest at a floating rate based on an increase over LIBOR
from 90 to 120 basis points, depending upon the Company's applicable leverage
ratio, or the lender's prime rate. The Unsecured Line of Credit requires
monthly payments of interest only.
The outstanding balance of the Unsecured Line of Credit was $15,000 and
$233,000 at December 31, 1998 and 1997, respectively. The weighted average
balance outstanding was approximately $68,293 and $117,000 during the year
ended December 31, 1998 and the period from June 23, 1997 through December 31,
1997, respectively. The weighted average interest rate on amounts outstanding
was approximately 6.64% and 6.82% during the year ended December 31, 1998 and
the period from June 23, 1997 through December 31, 1997. The applicable
interest rate under the Unsecured Line of Credit at December 31, 1998 was
6.73%.
The Company's ability to borrow under the Unsecured Line of Credit is
subject to the Company's ongoing compliance with a number of financial and
other covenants, including, but not limited to, maintaining a certain ratio of
secured indebtedness to total asset value, as defined.
8. Leasing Activity
Future minimum lease payments (excluding operating expense reimbursements)
as of December 31, 1998, under non-cancelable operating leases, which expire
on various dates through 2029, are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
-------------------------
<S> <C>
1999............................... $ 547,576
2000............................... 511,158
2001............................... 471,238
2002............................... 411,966
2003............................... 334,378
Thereafter......................... 1,234,584
</TABLE>
The geographic concentration of the future minimum lease payments to be
received is detailed as follows:
<TABLE>
<CAPTION>
Location
--------
<S> <C>
Greater Boston.................... $ 584,318
Greater Washington D.C............ 1,273,401
Midtown Manhattan................. 913,636
Greater San Francisco............. 631,611
New Jersey and Pennsylvania....... 107,934
</TABLE>
F-13
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
No one tenant represented more than 10% of the Company's total rental income
for the year ended December 31, 1998. One tenant represented 13.3% of the
Company's total rental income for the year ended December 31, 1997.
9. Segment Reporting
The Company has determined that its segments are those that are based on the
Company's method of internal reporting, which classifies its operations by both
geographic area and property type. The Company's segments by geographic area
are: Greater Boston, Greater Washington D.C., midtown Manhattan, Greater San
Francisco, and New Jersey and Pennsylvania. Segments by property type include:
Class A Office, R&D, Industrial, Hotel, and Garage.
Asset information by segment is not reported, since the Company does not use
this measure to assess performance; therefore, the depreciation and
amortization expenses are not allocated among segments. Interest income,
management and development services, interest expense, and general and
administrative expenses are not included in net operating, as the internal
reporting addresses these on a corporate level.
Information by Geographic Area and Property Type:
For the year ended December 31, 1998:
<TABLE>
<CAPTION>
Greater Greater New Jersey
Greater Washington, Midtown San and Grand
Boston D.C. Manhattan Francisco Pennsylvania Totals
-------- ----------- --------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Rental Revenues:
Class A Office........ $ 94,284 $ 169,882 $ 129,644 $ 18,914 $17,407 $430,131
R&D................... 5,955 17,121 -- 1,502 -- 24,578
Industrial............ 1,611 1,431 -- 1,349 789 5,180
Hotels................ 25,944 -- -- -- -- 25,944
Garage................ 1,744 -- -- -- -- 1,744
-------- --------- --------- -------- ------- --------
Total............... 129,538 188,434 129,644 21,765 18,196 487,577
-------- --------- --------- -------- ------- --------
% of Grand Totals....... 26.57% 38.65% 26.59% 4.46% 3.73% 100.00%
-------- --------- --------- -------- ------- --------
Rental Expenses:
Class A Office........ 36,591 45,156 44,787 7,099 5,663 139,296
R&D 1,808 3,644 -- 395 -- 5,847
Industrial............ 525 316 -- 305 107 1,253
Hotels................ 3,562 -- -- -- -- 3,562
Garage................ 532 -- -- -- -- 532
-------- --------- --------- -------- ------- --------
Total............... 43,018 49,116 44,787 7,799 5,770 150,490
-------- --------- --------- -------- ------- --------
% of Grand Totals....... 28.59% 32.64% 29.76% 5.18% 3.83% 100.00%
-------- --------- --------- -------- ------- --------
Net Operating Income.... $86,520 $139,318 $84,857 $13,966 $12,426 $337,087
======== ========= ========= ======== ======= ========
% of Grand Totals....... 25.67% 41.33% 25.17% 4.14% 3.69% 100.00%
======== ========= ========= ======== ======= ========
</TABLE>
F-14
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
For the year ended December 31, 1997 (includes operations of the Company and
the Predecessor):
<TABLE>
<CAPTION>
Greater Greater New Jersey
Greater Washington, Midtown San and Grand
Boston D.C. Manhattan Francisco Pennsylvania Totals
------- ----------- --------- --------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Rental Revenues:
Class A Office........ $42,082 $87,688 $67,350 -- -- $197,120
R&D................... 5,420 7,848 -- $1,314 -- 14,582
Industrial............ 1,685 1,450 -- 1,082 $829 5,046
Hotels................ 14,611 -- -- -- -- 14,611
Garage................ 2,084 -- -- -- -- 2,084
Hotel Revenues.......... 31,185 -- -- -- -- 31,185
------- ------- ------- ------ ---- --------
Total................. 97,067 96,986 67,350 2,396 829 264,628
------- ------- ------- ------ ---- --------
% of Grand Totals....... 36.68% 36.65% 25.45% 0.91% 0.31% 100.00%
------- ------- ------- ------ ---- --------
Operating Expenses:
Class A Office........ 13,445 23,659 23,341 -- -- 60,445
R&D................... 1,398 1,415 -- 452 -- 3,265
Industrial............ 531 324 -- 183 105 1,143
Hotels................ 1,737 -- -- -- -- 1,737
Garage................ 535 -- -- -- -- 535
Hotel Expenses.......... 22,452 -- -- -- -- 22,452
------- ------- ------- ------ ---- --------
Total................. 40,098 25,398 23,341 635 105 89,577
------- ------- ------- ------ ---- --------
% of Grand Totals....... 44.76% 28.35% 26.06% 0.71% 0.12% 100%
------- ------- ------- ------ ---- --------
Net Operating Income.... $56,969 $71,588 $44,009 $1,761 $724 $175,051
======= ======= ======= ====== ==== ========
% of Grand Totals....... 32.54% 40.90% 25.14% 1.01% 0.41% 100.00%
======= ======= ======= ====== ==== ========
</TABLE>
The following is a reconciliation of net operating income to income before
minority interests:
<TABLE>
<CAPTION>
1998 1997(/1/)
-------- ---------
<S> <C> <C>
Net operating income....................................... $337,087 $175,051
Add:
Development and management services...................... 12,411 7,498
Interest income.......................................... 13,859 3,335
Less:
General and administrative............................... (22,504) (11,805)
Interest expense......................................... (124,860) (91,588)
Depreciation and amortization............................ (75,418) (38,773)
-------- --------
Income before minority interests........................... $140,575 $43,718
======== ========
</TABLE>
- --------
(1) Includes operations of the Company and the Predecessor.
10. Employee Benefit Plan
Effective January 1, 1985, the Predecessor Group adopted a 401(k) Savings
Plan (the "Plan") for its employees. Under the Plan, as amended, employees, as
defined, are eligible to participate in the Plan after they
F-15
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
have completed three months of service. In addition, participants may elect to
make an after-tax contribution of up to 10% of their wages. Upon formation, the
Company adopted the Plan and the terms of the Plan.
The Plan provides that matching employer contributions are to be determined
at the discretion of the Company. The Company matches 200% of the first 2% of
pay (utilizing pay that is not in excess of $100). The cost to the Company and
the Predecessor of this matching contribution for the year ended December 31,
1998, 1997 and 1996 was $583, $403 and $359, respectively.
Participants are immediately vested in their pre-tax and after-tax
contributions. Participants vest in the Company's and the Predecessor Group's
matching contributions and earnings thereon over a five-year period.
11. Stock Option and Incentive Plan
The Company has established a stock option and incentive plan for the
purpose of attracting and retaining qualified directors, officers and employees
and rewarding them for superior performance in achieving the Company's business
goals and enhancing stockholder value. In conjunction with the Initial
Offering, the Company granted options with respect to 2,290,000 common shares
to directors, officers and employees. All of such options were issued at an
exercise price of $25.00 per share. The term of each of option is 10 years from
the date of grant. In general, one-third of each of the options granted to
officers and the chairman of the board (the "Chairman") are exercisable on each
of the third, fourth and fifth anniversary of the date of grant, respectively.
One-third of the options granted to employees who are not officers will be
exercisable on each of the first, second and third anniversary of the date of
grant, respectively. Other than the options granted to the Chairman, one-half
of the options granted to non-employee directors will be exercisable on each of
the first and second anniversary of the date of grant, respectively.
The Company sponsors a share-based incentive compensation. The Company
applies Accounting Principles Bulletin Opinion No. 25 ("APB 25") and related
Interpretations in accounting for its plan. Statement of Financial Accounting
Standards No.123 ("SFAS 123") was issued by the Financial Accounting Standards
Board in 1995 and, if fully adopted, changes the methods for recognition of
cost on plans similar to that of the Company. Adoption of FAS 123 is optional;
however, pro forma disclosure as if the Company adopted the cost recognition
requirements under FAS 123 are presented below. The Company did not record any
expense under APB 25.
A summary of the status of the Company's stock options as of December 31,
1998 and 1997 and changes during the years ended December 31, 1998 and 1997 are
presented below:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at June 23, 1997..................... 2,290,000 $25.00
Granted.......................................... -- --
Exercised........................................ -- --
Cancelled........................................ (5,900) $25.00
--------- ------
Outstanding at December 31, 1997................. 2,284,100 $25.00
Granted.......................................... 3,621,663 $34.13
Exercised........................................ (1,034) $25.00
Cancelled........................................ (66,779) $31.61
--------- ------
Outstanding at December 31, 1998................. 5,837,950 $30.58
========= ======
</TABLE>
F-16
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
As of December 31, 1998, there were 9,127,602 shares authorized under the
plan. The weighted average fair value of options granted during the year was
$5.49 and $3.81 for the years ended December 31, 1998 and 1997, respectively.
The fair value of each share option granted is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-
average assumptions for grants in 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Dividend yield........................................... 4.80% 6.26%
Expected life of option.................................. 6 years 6 years
Risk-free interest rate.................................. 5.58% 6.32%
Expected stock price volatility.......................... 20% 20%
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- --------------------------
Number Weighted Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices at 12/31/98 Contractual Life Exercise Price at 12/31/98 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$25.00--
$34.75 5,837,950 9.66 $30.58 495,261 $25.00
</TABLE>
The compensation cost under SFAS 123 for the stock performance-based plan
would have been $6,847 and $999 in 1998 and 1997, respectively. Had
compensation cost for the Company's 1997 grants for stock-based compensation
plans been determined consistent with FAS 123, the Company's net income, and
net income per common share for 1998 would approximate the pro forma amounts
below:
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Net income............................................... $86,265 $34,152
Net income per common share--basic....................... $ 1.42 $ 0.88
Net income per common share--diluted..................... $ 1.41 $ 0.87
</TABLE>
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts. FAS 123 does not apply to future anticipated
awards.
12. Commitments and Contingencies
Legal Matters
The Company is subject to various legal proceedings and claims that arise in
the ordinary course of business. These matters are generally covered by
insurance. Management believes that the final outcome of such matters will not
have a material adverse effect on the financial position, results of operations
or liquidity of the Company.
Environmental Matters
Some of the Properties are located in urban and industrial areas where fill
or current or historical industrial uses of the areas have caused site
contamination. With respect to all of the Properties, independent environmental
consultants have been retained in the past to conduct or update Phase I
environmental assessments (which generally do not involve invasive techniques
such as soil or ground water sampling) and
F-17
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
asbestos surveys on all of the Properties. These environmental assessments have
not revealed any environmental conditions that the Company believes will have a
material adverse effect on its business, assets or results of operations, and
the Company is not aware of any other environmental condition with respect to
any of the Properties which the Company believes would have such a material
adverse effect.
With respect to a property in Massachusetts, the Company received a Notice
of Potential Responsibility from the state regulatory authority on January 9,
1997, related to groundwater contamination. In addition, the Company received a
Notice of Downgradient Property Status Submittal from each of two third parties
concerning alleged contamination at two downgradient properties. On January 15,
1997, the Company notified the state regulatory authority that the Company
would cooperate with and monitor the tenant at the property (which investigated
the matter and undertook remedial actions). That investigation identified the
presence of hazardous substances in and near a catch basin along the property
line. The tenant completed an Immediate Response Action at the site in April
1998. The Company expects the tenant will likewise take any additional
necessary response actions. The lease with the tenant contains a provision
pursuant to which the tenant indemnifies the Company against such liability.
On January 15, 1992, another property in Massachusetts was listed by the
state regulatory authority as an unclassified Confirmed Disposal Site in
connection with groundwater contamination. The Company has engaged a specially
licensed environmental consultant to perform the necessary investigation and
assessment and to prepare submittals to the state regulatory authority. On
August 1, 1997, such consultant submitted to the state regulatory authority a
Phase I--Limited Site Investigation Report and Downgradient Property Status
Opinion. This Opinion concluded that the property qualifies for Downgradient
Property Status under the state regulatory program, which eliminates certain
deadlines for conducting response actions at a site and may qualify the Company
for liability relief under recent statutory amendments. Although the Company
believes that the current or former owners of the upgradient source properties
may ultimately be responsible for some or all of the costs of such response
actions, the Company will take any necessary further response actions.
An investigation at an additional property in Massachusetts identified
groundwater contamination. The Company engaged a specially licensed
environmental consultant to perform the necessary investigation and assessment
and to prepare submittals to the state regulatory authority. On March 11, 1998,
the consultant submitted to the state regulatory authority a Release
Notification and Downgradient Property Status Opinion. This Opinion concluded
that the property qualifies for Downgradient Property Status under the state
regulatory program, which eliminates certain deadlines for conducting response
actions at a site and may qualify the Company for liability relief under recent
statutory amendments. Although the Company believes that the current or former
owners of the upgradient source properties may ultimately be responsible for
some or all of the costs of such response actions, the Company will take any
necessary further response actions.
The Company expects that any resolution of the environmental matters
relating the above will not have a material impact on the financial position,
results of operations or liquidity of the Company.
Development
The Company has entered into contracts for the construction and renovation
of properties currently under development. Commitments under these arrangements
totaled approximately $94,300 and $106,100 at December 31, 1998 and 1997,
respectively.
F-18
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
Sale of Property
The Operating Partnership agreement provides that, until June 23, 2007, the
Operating Partnership may not sell or otherwise transfer four designated
properties in a taxable transaction without the prior written consent of the
Chairman and the CEO. In connection with the acquisition or contribution of 31
other Properties, the Company entered into similar agreements for the benefit
of the selling or contributing parties which specifically state the Company
will not sell or otherwise transfer the Properties in a taxable transaction
until a period ranging from June 2002 to November 2008. The Operating
Partnership is not required to obtain the consent from a party protected
thereby if such party does not continue to hold at least a specified percentage
of such party's original Operating Partnership units.
13. Earnings Per Share
Earnings per share is computed as follows:
<TABLE>
<CAPTION>
For the year ended December 31,
1998
-----------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------ ---------
<S> <C> <C> <C>
Basic Earnings:
Income available to common shareholders... $93,112 60,776 $1.53
Effect of Dilutive Securities:
Stock Options............................. 532 (.01)
------- ------ -----
Diluted Earnings:
Income available to common shareholders... $93,112 61,308 $1.52
======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
For the period from June 23, 1997 to
December 31, 1997
-------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- ----------
<S> <C> <C> <C>
Basic Earnings:
Income available to common
shareholders.................. $ 35,151 38,694 $ .91
Effect of Dilutive Securities:
Stock Options.................. 414 (.01)
------------- ------------ ----------
Diluted Earnings:
Income available to common
shareholders.................. $ 35,151 39,108 $ .90
============= ============ ==========
</TABLE>
14. Selected Interim Financial Information (unaudited)
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
March 31, June 30, September 30, December 31,
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues................ $95,603 $108,041 $140,177 $170,026
Income before minority
interests.............. 26,228 34,430 36,087 43,830
Income before
extraordinary item..... 19,631 26,357 25,341 27,271
Per share income before
extraordinary item..... .36 .42 .40 .43
Net income.............. 19,631 29,921 25,341 18,226
Basic earnings per
share.................. .36 .48 .40 .29
</TABLE>
F-19
<PAGE>
BOSTON PROPERTIES, INC. AND
BOSTON PROPERTIES PREDECESSOR GROUP
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS--continued
(dollars in thousands, except per share amounts)
15. Pro Forma Financial Information
The following Pro Forma Condensed Statements of Income for the years ended
December 31, 1998 and 1997 are presented as if the Initial Offering, the
related formation transactions and the material property acquisitions
subsequent to the Initial Offering had occurred on January 1, 1997. The pro
forma information is based upon historical information and does not purport to
present what actual results would have been had such transactions, in fact,
occurred at January 1, 1997, or to project results for any future period.
Pro Forma Condensed Statements of Income:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Revenues...................................... $ 704,012 $ 638,548
Expenses...................................... $ 535,825 $ 522,700
Net income before extraordinary items......... $ 105,864 $ 61,323
Basic earnings per share (before extra-
ordinary items............................... $ 1.67 $ .97
Diluted earnings per share (before extra-
ordinary items).............................. $ 1.65 $ .96
</TABLE>
16. Subsequent Events
On January 21, 1999, the Company entered into a binding agreement to acquire
the leasehold interest in the remaining two development sites in New York
City's Times Square for approximately $312.25 million. The sites will support
more than 2 million square feet of development.
On February 10, 1999, the Company closed on phase two of its acquisition of
Embarcadero Center. As a result, the Company owns 100% of the six buildings
comprising the Embarcadero Center. The total purchase price (including both
phases one and two) of approximately $1.2 billion was funded through the
assumption or incurrence of $730.0 million of mortgage financing, the issuance
of Preferred Units having an aggregate value of approximately $286.4 million,
cash of $100.0 million from the proceeds from the sale of the Company's Series
A Convertible Redeemable Preferred Stock, and a draw down of approximately
$97.3 million on the Company's Unsecured Line of Credit.
In connection with the acquisition of Embarcadero Center, the proceeds from
the notes receivable of $420.1 million were used to discharge the notes
payable.
F-20
<PAGE>
BOSTON PROPERTIES, INC.
SCHEDULE 3--REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Costs
Capitalized Development
Subsequent and
to Land and Building and Construction
Property Name Type Location Encumbrances Land Building Acquisition Improvements Improvements in Progress Total
------------- ------ ---------------- ------------ ------- -------- ----------- ------------ ------------ ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
280 Park
Avenue.......... Office New York, NY 220,000 125,288 201,115 12,346 125,288 213,461 -- 338,749
599 Lexington
Avenue.......... Office New York, NY 225,000 81,040 100,507 72,144 81,040 172,651 -- 253,691
Riverfront
Plaza........... Office Richmond, VA 119,992 18,000 156,733 587 18,000 157,320 -- 175,320
875 Third
Avenue.......... Office New York, NY 153,807 74,880 139,151 844 74,880 139,995 -- 214,875
Democracy
Center.......... Office Bethesda, MD -- 12,550 50,015 20,278 13,695 69,148 -- 82,843
100 East Pratt
Street.......... Office Baltimore, MD 94,371 27,562 109,662 1,032 27,562 110,694 -- 138,256
Two Independence
Square.......... Office Washington, DC 120,252 14,053 59,883 9,016 15,039 67,913 -- 82,952
Capital
Gallery......... Office Washington, DC 59,103 4,725 29,560 12,417 4,730 41,972 -- 46,702
One Independence
Square.......... Office Washington, DC 76,611 9,356 33,701 17,475 9,634 50,898 -- 60,532
2300 N Street... Office Washington, DC 66,000 16,509 22,415 12,820 16,509 35,235 -- 51,744
NIMA Building... Office Reston, VA 22,291 10,567 67,431 2 10,567 67,433 -- 78,000
Reston Corporate
Center.......... Office Reston, VA 25,727 9,135 41,398 184 9,135 41,582 -- 50,717
Lockheed Martin
Building........ Office Reston, VA 27,249 10,210 58,884 0 10,210 58,884 -- 69,094
500 E Street.... Office Washington, DC -- 109 22,420 11,027 1,569 31,987 -- 33,556
One Cambridge
Center.......... Office Cambridge, MA -- 134 25,110 3,462 134 28,572 -- 28,706
University
Place........... Office Cambridge, MA -- -- 37,091 -- -- 37,091 -- 37,091
Newport Office
Park............ Office Quincy, MA 6,499 3,500 18,208 2 3,500 18,210 -- 21,710
Lexington Office
Park............ Office Lexington, MA -- 998 1,426 10,368 1,072 11,720 -- 12,792
191 Spring
Street.......... Office Lexington, MA 23,430 4,213 27,166 16,453 2,850 44,982 -- 47,832
Ten Cambridge
Center.......... Office Cambridge, MA 40,000 1,299 12,943 4,428 1,868 16,802 -- 18,670
10 and 20
Burlington Mall
Road............ Office Burlington, MA 16,613 930 6,928 8,371 939 15,290 -- 16,229
Waltham Office
Center.......... Office Waltham, MA -- 422 2,719 3,214 425 5,930 -- 6,355
Montvale
Center.......... Office Gaithersburg, MD 7,792 1,574 9,786 3,881 2,399 12,842 -- 15,241
91 Hartwell
Avenue.......... Office Lexington, MA 11,322 784 6,464 2,410 784 8,874 -- 9,658
Three Cambridge
Center.......... Office Cambridge, MA -- 174 12,200 803 174 13,003 -- 13,177
201 Spring
Street.......... Office Lexington, MA -- 2,695 11,712 2,632 2,695 14,344 -- 17,039
Bedford Business
Park............ Office Bedford, MA 22,667 534 3,403 12,936 534 16,339 -- 16,873
Eleven Cambridge
Center.......... Office Cambridge, MA -- 121 5,535 504 121 6,039 -- 6,160
33 Hayden
Avenue.......... Office Lexington, MA -- 266 3,234 76 266 3,310 -- 3,576
Decoverly Two... Office Rockville, MD -- 1,994 8,814 46 1,994 8,860 -- 10,854
Decoverly
Three........... Office Rockville, MD -- 2,220 9,044 0 2,220 9,044 -- 11,264
170 Tracer
Lane............ Office Waltham, MA -- 398 4,601 1,288 418 5,869 -- 6,287
32 Hartwell
Avenue.......... Office Lexington, MA -- 168 1,943 2,724 168 4,667 -- 4,835
<CAPTION>
Accumulated Year (s) Built/ Depreciable
Property Name Depreciation Renovated Lives (Years)
------------- ------------ --------------- -------------
<S> <C> <C> <C>
280 Park
Avenue.......... 7,113 1968/95-96 (1)
599 Lexington
Avenue.......... 69,706 1986 (1)
Riverfront
Plaza........... 3,679 1990 (1)
875 Third
Avenue.......... 3,768 1982 (1)
Democracy
Center.......... 23,628 1985-88/94-96 (1)
100 East Pratt
Street.......... 3,474 1975/1991 (1)
Two Independence
Square.......... 12,990 1992 (1)
Capital
Gallery......... 17,246 1981 (1)
One Independence
Square.......... 13,277 1991 (1)
2300 N Street... 10,932 1986 (1)
NIMA Building... 1,545 1987/1988 (1)
Reston Corporate
Center.......... 948 1984 (1)
Lockheed Martin
Building........ 1,349 1987/1988 (1)
500 E Street.... 13,038 1987 (1)
One Cambridge
Center.......... 9,940 1987 (1)
University
Place........... 479 1985 (1)
Newport Office
Park............ 683 1988 (1)
Lexington Office
Park............ 4,541 1982 (1)
191 Spring
Street.......... 11,905 1971/1995 (1)
Ten Cambridge
Center.......... 6,324 1990 (1)
10 and 20
Burlington Mall
Road............ 5,567 1984-1989/95-96 (1)
Waltham Office
Center.......... 3,044 1968-1970/87-88 (1)
Montvale
Center.......... 3,465 1987 (1)
91 Hartwell
Avenue.......... 3,029 1985 (1)
Three Cambridge
Center.......... 3,887 1987 (1)
201 Spring
Street.......... 414 1997 (1)
Bedford Business
Park............ 7,166 1980 (1)
Eleven Cambridge
Center.......... 2,430 1984 (1)
33 Hayden
Avenue.......... 1,531 1979 (1)
Decoverly Two... 202 1987 (1)
Decoverly
Three........... -- 1989 (1)
170 Tracer
Lane............ 2,804 1980 (1)
32 Hartwell
Avenue.......... 2,845 1968-1979/1987 (1)
</TABLE>
F-21
<PAGE>
BOSTON PROPERTIES, INC.
SCHEDULE 3--REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Costs
Capitalized Development
Subsequent and
to Land and Building and Construction
Property Name Type Location Encumbrances Land Building Acquisition Improvements Improvements in Progress
------------- ------ ----------------- ------------ ------- -------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
195 West
Street.......... Office Waltham, MA -- 1,611 6,652 621 1,611 7,273 --
92-100 Hayden
Avenue.......... Office Lexington, MA 9,065 594 6,748 880 595 7,627 --
204 Second
Avenue.......... Office Waltham, MA -- 37 2,402 632 37 3,034 --
8 Arlington
Street.......... Office Boston, MA -- 90 1,988 61 90 2,049 --
Carnegie
Center/Tower
One............. Office New Jersey 63,693 70,146 216,061 43 70,146 216,104 --
Candler
Building........ Office Baltimore, MD -- 12,500 48,734 4 12,500 48,738 --
Metropolitan
Square.......... Office Washington, DC 107,386 35,000 151,709 424 35,000 152,133 --
Prudential
Center.......... Office Boston, MA 298,686 131,850 443,180 9,083 131,850 449,584 2,679
Reservoir
Place........... Office Waltham, MA 77,006 18,207 88,018 3 18,207 88,021 --
Embarcadero
Center.......... Office San Francisco, CA 729,637 211,297 996,442 -- 211,297 996,422 --
910 Clopper
Road............ Office Gaithersburg, MD -- 2,000 15,448 -- 2,000 15,448 --
Fullerton
Square.......... Office Springfield, VA -- 3,045 11,522 -- 3,045 11,522 --
7450 Boston
Boulevard,
Building Three.. Office Springfield, VA -- 1,165 4,681 27 1,165 4,708 --
Hilltop Business
Center.......... Office San Francisco, CA 4,417 53 492 381 53 873 --
7435 Boston
Boulevard,
Building One.... Office Springfield, VA -- 392 3,822 1,973 486 5,701 --
7601 Boston
Boulevard,
Building Eight.. Office Springfield, VA -- 200 878 3,505 378 4,205 --
8000 Grainger
Court, Building
Five............ Office Springfield, VA -- 366 4,282 966 453 5,161 --
7700 Boston
Boulevard,
Building
Twelve.......... Office Springfield, VA -- 1,105 1,042 8,046 1,105 9,088 --
7500 Boston
Boulevard,
Building Six.... Office Springfield, VA -- 138 3,749 244 273 3,858 --
7501 Boston
Boulevard,
Building Seven.. Office Springfield, VA -- 665 878 8,407 665 9,285 --
7600 Boston
Boulevard,
Building Nine... Office Springfield, VA -- 127 2,839 1,540 189 4,317 --
Fourteen
Cambridge
Center.......... Office Cambridge, MA -- 110 4,483 569 110 5,052 --
164 Lexington
Road............ Office Billerica, MA -- 592 1,370 131 592 1,501 --
930 Clopper
Road............ Office Gaithersburg, MD -- 1,200 6,506 -- 1,200 6,506 --
Sugarland
Building Two.... Office Herndon, VA -- 834 3,216 1,463 834 4,679 --
7374 Boston
Boulevard,
Building Four... Office Springfield, VA -- 241 1,605 423 303 1,966 --
Sugarland
Building One.... Office Herndon, VA -- 735 2,739 2,577 735 5,316 --
8000 Corporate
Court, Building
Eleven.......... Office Springfield, VA -- 136 3,071 109 214 3,096 6
7451 Boston
Boulevard,
Building Two.... Office Springfield, VA -- 249 1,542 1,430 535 2,686 --
17 Hartwell
Avenue.......... Office Lexington, MA -- 26 150 596 26 746 --
<CAPTION>
Accumulated Year(s) Built/ Depreciable
Property Name Total Depreciation Renovated Lives (Years)
------------- --------- ------------ -------------- -------------
<S> <C> <C> <C> <C>
195 West
Street.......... 8,884 1,692 1990 (1)
92-100 Hayden
Avenue.......... 8,222 2,946 1985 (1)
204 Second
Avenue.......... 3,071 1,431 1981/1993 (1)
8 Arlington
Street.......... 2,139 2,032 1860-1920/1989 (1)
Carnegie
Center/Tower
One............. 286,250 2,700 1983-1998 (1)
Candler
Building........ 61,238 545 1911/1990 (1)
Metropolitan
Square.......... 187,133 1,813 1982/1986 (1)
Prudential
Center.......... 584,113 5,537 1965/1993 (1)
Reservoir
Place........... 106,228 379 1955/1987 (1)
Embarcadero
Center.......... 1,207,719 3,436 1924/1989 (1)
910 Clopper
Road............ 17,448 354 1982 (1)
Fullerton
Square.......... 14,567 264 1987 (1)
7450 Boston
Boulevard,
Building Three.. 5,873 63 1987 (1)
Hilltop Business
Center.......... 926 1,305 early 1970's (1)
7435 Boston
Boulevard,
Building One.... 6,187 2,075 1982 (1)
7601 Boston
Boulevard,
Building Eight.. 4,583 1,491 1986 (1)
8000 Grainger
Court, Building
Five............ 5,614 1,735 1984 (1)
7700 Boston
Boulevard,
Building
Twelve.......... 10,193 273 1997 (1)
7500 Boston
Boulevard,
Building Six.... 4,131 1,383 1985 (1)
7501 Boston
Boulevard,
Building Seven.. 9,950 319 1997 (1)
7600 Boston
Boulevard,
Building Nine... 4,506 1,572 1987 (1)
Fourteen
Cambridge
Center.......... 5,162 1,814 1983 (1)
164 Lexington
Road............ 2,093 115 1982 (1)
930 Clopper
Road............ 7,706 149 1989 (1)
Sugarland
Building Two.... 5,513 162 1986/1997 (1)
7374 Boston
Boulevard,
Building Four... 2,269 768 1984 (1)
Sugarland
Building One.... 6,051 321 1985/1997 (1)
8000 Corporate
Court, Building
Eleven.......... 3,316 825 1989 (1)
7451 Boston
Boulevard,
Building Two.... 3,221 1,717 1982 (1)
17 Hartwell
Avenue.......... 772 463 1968 (1)
</TABLE>
F-22
<PAGE>
BOSTON PROPERTIES,INC.
SCHEDULE 3--REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Costs
Capitalized Development
Subsequent and
to Land and Building and Construction
Property Name Type Location Encumbrances Land Building Acquisition Improvements Improvements in Progress
------------- ----------- ----------------- ------------ ----- -------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
7375 Boston
Boulevard,
Building Ten.... Office Springfield, VA -- 23 2,685 627 47 3,288 --
2391 West Winton
Avenue.......... Industrial Hayward, CA -- 182 1,217 606 182 1,823 --
40-46 Harvard
Street.......... Industrial Westwood, MA -- 351 1,782 1,327 351 3,109 --
38 Cabot
Boulevard....... Industrial Bucks County, PA -- 329 1,238 2,037 329 3,275 --
6201 Columbia
Park Road,
Building Two.... Industrial Landover, MD -- 505 2,746 1,146 960 3,437 --
2000 South Club
Drive, Building
Three........... Industrial Landover, MD -- 465 2,125 729 859 2,460 --
25-33 Dartmouth
Street.......... Industrial Westwood, MA -- 273 1,596 495 273 2,091 --
1950 Stanford
Court, Building
One............. Industrial Landover, MD -- 269 1,554 196 350 1,669 --
560 Forbes
Boulevard....... Industrial San Francisco, CA -- 48 435 287 48 722 --
430 Rozzi
Place........... Industrial San Francisco, CA -- 24 217 144 24 361 --
Long Wharf
Marriott........ Hotel Boston, MA -- 1,752 31,904 8,535 1,752 40,439 --
Cambridge Center
Marriott........ Hotel Cambridge, MA -- 478 37,918 4,018 478 41,936 --
Cambridge Center
North Garage.... Garage Cambridge, MA -- 1,163 11,633 8 1,163 11,641 --
1301 New York
Ave............. Development Washington, DC 24,965 9,250 18,750 4,155 9,250 18,750 4,155
Cambridge Master
Plan............ Development Cambridge, MA -- -- -- 3,542 1,117 4 2,421
Virginia Master
Plan............ Development Springfield, VA -- -- -- 1,520 655 175 690
Maryland Master
Plan............ Development Landover, MD -- -- -- 506 464 -- 42
Cambridge Center
Eight........... Development Cambridge, MA -- -- -- 15,937 1,046 -- 14,891
181 Spring
Street.......... Development Lexington, MA -- -- -- 9,000 1,685 -- 7,315
Residence Inn by
Marriott........ Development Cambridge, MA -- -- -- 22,243 816 -- 21,427
Andover Tech
Center.......... Development Andover, MA -- -- -- 5,299 4,300 -- 999
200 West
Street.......... Development Waltham, MA -- -- -- 26,278 13,119 -- 13,159
Decoverly Four.. Development Rockville, MD -- -- -- 1,749 1,650 -- 99
Decoverly Five.. Development Rockville, MD -- -- -- 1,706 1,665 -- 41
Decoverly Six... Development Rockville, MD -- -- -- 2,028 1,979 -- 49
Decoverly
Seven........... Development Rockville, MD -- -- -- 5,067 4,521 -- 546
12050 Sunset
Hills Road...... Development Reston, VA -- -- -- 5,415 4,714 -- 701
12280 Sunrise
Valley Drive.... Development Reston, VA -- -- -- 3,824 3,593 -- 231
Arboretum....... Development Reston, VA -- -- -- 10,369 2,850 -- 7,519
Tower Oaks...... Development Rockville, MD -- -- -- 26,403 24,652 -- 1,751
Washingtonian
North........... Development Gaithersburg, MD -- -- -- 16,834 11,770 -- 5,064
Broad Run
Business Park... Development Loudon County, VA -- -- -- 5,641 5,457 -- 184
<CAPTION>
Accumulated Year(s)Built/ Depreciable
Property Name Total Depreciation Renovated Lives (Years)
------------- ------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
7375 Boston
Boulevard,
Building Ten.... 3,335 1,039 1988 (1)
2391 West Winton
Avenue.......... 2,005 972 1974 (1)
40-46 Harvard
Street.......... 3,460 2,724 1967/1996 (1)
38 Cabot
Boulevard....... 3,604 2,410 1972/1984 (1)
6201 Columbia
Park Road,
Building Two.... 4,397 981 1986 (1)
2000 South Club
Drive, Building
Three........... 3,319 848 1988 (1)
25-33 Dartmouth
Street.......... 2,364 1,343 1966/1996 (1)
1950 Stanford
Court, Building
One............. 2,019 537 1986 (1)
560 Forbes
Boulevard....... 770 874 early 1970's (1)
430 Rozzi
Place........... 385 69 early 1970's (1)
Long Wharf
Marriott........ 42,191 16,685 1982 (1)
Cambridge Center
Marriott........ 42,414 12,240 1986 (1)
Cambridge Center
North Garage.... 12,804 2,638 1990 (1)
1301 New York
Ave............. 32,155 -- 1983/1998 N/A
Cambridge Master
Plan............ 3,542 2 Various N/A
Virginia Master
Plan............ 1,520 175 Various N/A
Maryland Master
Plan............ 506 -- Various N/A
Cambridge Center
Eight........... 15,937 -- Various N/A
181 Spring
Street.......... 9,000 -- Various N/A
Residence Inn by
Marriott........ 22,243 -- 1999 (1)
Andover Tech
Center.......... 5,299 -- Various N/A
200 West
Street.......... 26,278 -- Various N/A
Decoverly Four.. 1,749 -- Various N/A
Decoverly Five.. 1,706 -- Various N/A
Decoverly Six... 2,028 -- Various N/A
Decoverly
Seven........... 5,067 -- Various N/A
12050 Sunset
Hills Road...... 5,415 -- Various N/A
12280 Sunrise
Valley Drive.... 3,824 -- Various N/A
Arboretum....... 10,369 -- Various N/A
Tower Oaks...... 26,403 -- Various N/A
Washingtonian
North........... 16,834 -- Various N/A
Broad Run
Business Park... 5,641 -- Various N/A
</TABLE>
F-23
<PAGE>
BOSTON PROPERTIES, INC.
SCHEDULE 3--REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(dollars in thousands)
<TABLE>
<CAPTION>
Costs Development
Capitalized and
Subsequent to Land and Building and Construction
Property Name Type Location Encumbrances Land Building Acquisition Improvements Improvements in Progress
------------- ----------- ----------- ------------ -------- ---------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
New Dominion
Tech Park....... Development Herndon, VA -- -- -- 7,830 7,396 -- 434
$2,653,581 $946,231 $3,453,231 $483,409 $1,045,628 $3,752,840 $84,403
========== ======== ========== ======== ========== ========== =======
<CAPTION>
Accumulated Year (s) Built/ Depreciable
Property Name Total Depreciation Renovated Lives (Years)
------------- ---------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
New Dominion
Tech Park....... 7,830 -- Various N/A
$4,882,871 $336,165
========== ============
</TABLE>
- -----
(1) Depreciation of the buildings and improvements are calculated over lives
ranging from the life of the lease to 40 years.
(2) The aggregate cost and accumulated depreciation for tax purposes was
approximately $8,509,000 and $767,000, respectively.
F-24
<PAGE>
BOSTON PROPERTIES, INC.
REAL ESTATE AND ACCUMULATED DEPRECIATION
December 31, 1998
(dollars in thousands)
A summary of activity for real estate and accumulated depreciation is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Real Estate:
Balance at the beginning of the year..... $1,754,780 $1,001,537 $ 979,493
Additions to and improvements of real
estate................................ 3,130,509 754,185 28,110
Write-off of fully depreciated assets.. (2,418) (942) (6,066)
---------- ---------- ----------
Balance at the end of the year........... $4,882,871 $1,754,780 $1,001,537
========== ========== ==========
Accumulated Depreciation:
Balance at the beginning of the year..... $ 266,987 $ 238,469 $ 215,303
Depreciation expense................... 71,596 29,460 29,232
Write-off of fully depreciated assets.. (2,418) (942) (6,066)
---------- ---------- ----------
Balance at the end of the year........... $ 336,165 $ 266,987 $ 238,469
========== ========== ==========
</TABLE>
F-25
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statements of
Boston Properties, Inc. on Forms S-3 (File Numbers, 333-60219, 333-61799,
333-68379, 333-69375 and 333-70765) of our report dated January 24, 1999, except
for Note 16, for which the date is February 10, 1999, on our audits of the
consolidated financial statements of Boston Properties, Inc. as of December
31, 1998 and 1997, and for the year ended December 31, 1998 and the period from
June 23, 1997 to December 31, 1997 and our audits of the combined financial
statements of the Boston Properties Predecessor Group for the period from
january 1, 1997 to June 22, 1997 and for the year ended December 31, 1996, which
is included in the Annual Report on Form 10-K.
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,166
<SECURITIES> 0
<RECEIVABLES> 40,830
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 4,917,193
<DEPRECIATION> 75,418
<TOTAL-ASSETS> 5,235,087
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 635
<OTHER-SE> 947,846
<TOTAL-LIABILITY-AND-EQUITY> 5,235,087
<SALES> 487,577
<TOTAL-REVENUES> 513,847
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 124,860
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 98,593
<DISCONTINUED> 0
<EXTRAORDINARY> (5,481)
<CHANGES> 0
<NET-INCOME> 93,112
<EPS-PRIMARY> 1.53
<EPS-DILUTED> 1.52
</TABLE>
